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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: 811-05554
Morgan Stanley California Tax-Free Daily Income 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: December 31, 2003
Date of reporting period: December 31, 2003
Item 1 - Report to Shareholders
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Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
California Tax-Free Daily Income Trust performed during the annual period. We
will provide an overview of the market conditions, and discuss some of the
factors that affected performance during the reporting period. In addition, this
report includes the Fund's financial statements and a list of Fund
investments.
This material must be preceded or accompanied by a prospectus for
the fund being offered. Market forecasts provided in this report may not
necessarily come to pass. There is no assurance that the Fund will achieve its
investment objective. The Fund is subject to market risk, which is the
possibility that market values of securities owned by the Fund will decline and,
therefore, the value of the Fund's shares may be less than what you paid for
them. Accordingly, you can lose money investing in this Fund.
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FUND REPORT
For the year ended December 31, 2003
MARKET CONDITIONS
The 12 months ended December 31, 2003, was a period of record low yields in the
municipal money market. After its latest cut in the federal funds rate target on
June 25, the Federal Reserve Open Market Committee (the "Fed") indicated that it
intended to remain in an accommodative stance for a considerable period in an
attempt to get the economy back onto a solid footing. The short end of the
tax-free money market yield curve was largely flat through much of the year,
though it inverted in the last quarter as seasonal redemptions pushed yields for
the shortest maturities higher. Yields on municipal money market paper were
highly attractive relative to taxable instruments. Among one-year maturities the
ratio of municipals to taxable yields exceeded 90 percent for much of the year
and for overnight paper the ratio at times rose above 100 percent.
The accommodative monetary policy appeared to be having a positive effect as
corporate profits and overall GDP growth began to show signs of life. As the
year drew to a close, these improvements were reflected in better prospects for
most municipalities, with tax receipts on the rise and the general trend toward
widespread credit downgrades slowing. Many states worked to close budget gaps
through a combination of increased fees and service cuts as well as one-time
measures such as tobacco bond receipts and long-term refinancing. New York and
California continued to lead the country in both issuance and deficits, with
California experiencing downgrades in its general obligation bond ratings from
both Standard & Poor's and Moody's.
Against this backdrop, the issuance of traditional notes rose considerably in
2003. Rising deficits led many issuers to turn to the capital markets for
temporary borrowing to meet shortfalls in cash flow. Long-term bond issuance
also rose as many states and local issuers moved to lock in low financing rates
for capital expenditures and to refinance higher-cost debt. Overall municipal
issuance for calendar year 2003 exceeded the record levels of 2002, setting a
new all-time high.
PERFORMANCE ANALYSIS
As of December 31, 2003, Morgan Stanley California Tax-Free Daily Income Trust
had net assets of more than $249 million. For the twelve-month period ended
December 31, 2003, the Fund provided a total return of 0.33 percent. For the
seven-day period ended December 31, 2003, the Fund provided an effective
annualized yield of 0.45 percent and a current yield of 0.45 percent, while its
30-day moving average yield for December was 0.35 percent. PAST PERFORMANCE IS
NO GUARANTEE OF FUTURE RESULTS.
The general shape of the yield curve and the very low level of interest rates
reduced incentives for extending the portfolio's maturity structure. As a
result, Morgan Stanley California Tax-Free Daily Income Trust spent the period
with an emphasis on the short-to-intermediate maturity range within the
municipal money market. This approach had the added benefit of positioning the
Fund defensively against any potential increases in interest rates at the short
end of the curve. The uncertain state of the economy also made us largely
unwilling to introduce added interest-rate risk into the Fund's portfolio.
2
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Our general caution was reflected in the Fund's composition. By the end of the
period, the portfolio was comprised of 75 percent short-term variable rate
paper, with the remainder in short-term tax-exempt commercial paper and
fixed-rate notes. As always, we remained highly selective in our security
selection and thoroughly screened potential purchases to ensure that they met
the Fund's credit criteria. We were especially cautious in our purchases of
longer fixed-rate paper, given California's ongoing budgetary difficulties.
<Table>
PORTFOLIO COMPOSITION
Variable Rate Municipal Obligations 75.3%
Commercial Paper 15.4
Municipal Notes 9.3
MATURITY SCHEDULE
1 - 30 Days 82.8%
31 - 60 Days 2.4
61 - 90 Days --
91 - 120 Days --
121 + Days 14.8
</Table>
SUBJECT TO CHANGE DAILY. ALL PERCENTAGES ARE AS A PERCENTAGE OF TOTAL
INVESTMENTS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED
AS 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.
STRATEGY
1) THE FUND WILL NORMALLY INVEST AT LEAST 80% OF ITS NET ASSETS IN HIGH QUALITY
SHORT-TERM SECURITIES THAT ARE MUNICIPAL OBLIGATIONS THAT PAY INTEREST EXEMPT
FROM FEDERAL AND CALIFORNIA INCOME TAXES.
2) IN SELECTING INVESTMENTS, THE FUND'S "INVESTMENT MANAGER," 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.*
ANNUAL 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.
* AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH MONEY MARKET FUNDS SEEK TO PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THIS FUND.
3
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MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ---------------------------------------------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT SHORT-TERM VARIABLE RATE MUNICIPAL
OBLIGATIONS (75.5%)
ABAG Finance Authority for Nonprofit Corporations,
$ 3,300 Computer History Museum Ser 2002 1.18% 01/08/04 $ 3,300,000
4,700 Episcopal Homes Foundation Ser 2000 COPs 1.28 01/08/04 4,700,000
5,000 Antelope Valley Union High School District,
School Facility Bridge Funding 2002 Ser C (FSA) 1.04 01/08/04 5,000,000
2,500 Bay Area Toll Authority, San Francisco Bay Area
Toll Bridge Ser B (Ambac) 1.16 01/08/04 2,500,000
3,000 California Department of Water Resources,
Power Supply Ser B Subser B-6 1.27 01/02/04 3,000,000
California Educational Facilities Authority,
6,000 California Institute of Technology Ser 1994 1.10 01/08/04 6,000,000
8,275 Stanford University Ser L-2 1.05 01/08/04 8,275,000
California Health Facilities Financing Authority,
8,995 Adventist Health System/West
1998 Ser A & B (MBIA) 1.27 01/02/04 8,995,000
4,500 Scripps Memorial Hospital Ser 1991 B (MBIA) 1.11 01/08/04 4,500,000
5,000 California Pollution Control Financing Authority,
Chevron USA Inc Ser 1984 B 1.10 06/15/04 5,000,203
7,370 California Transit Finance Authority, Ser 1997 (FSA) 1.25 01/08/04 7,370,000
12,000 Fresno, Sewer System Sub Lien
Ser 2000 A (FGIC) 1.10 01/08/04 12,000,000
10,000 Los Angeles, Multifamily 1985 Ser K 1.20 01/08/04 10,000,000
5,000 Los Angeles, Wastewater System Ser 2001 B (FGIC) 1.15 12/09/04 5,000,000
5,000 Los Angeles Community Redevelopment Agency,
Grand Promenade Ser 2002 1.20 01/08/04 5,000,000
3,895 Los Angeles Convention and Exhibition Center
Authority, Ser 2003 F (Ambac) 0.97 06/16/04 3,895,000
Los Angeles Department of Water & Power,
8,000 Power System 2001 Ser B Subser B-1 1.20 01/08/04 8,000,000
5,500 Power System 2001 Ser B Subser B-6 1.27 01/02/04 5,500,000
5,000 Water System 2001 Ser B Subser B-1 1.25 01/08/04 5,000,000
Metropolitan Water District of Southern California,
1,700 Water 2000 Ser B-1 1.27 01/02/04 1,700,000
2,000 Water 2000 Ser B-3 1.26 01/02/04 2,000,000
4,500 Newport Beach, Hoag Memorial Hospital
Presbyterian 1996 Ser C 1.30 01/02/04 4,500,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
4
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<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ---------------------------------------------------------------------------------------------------------
$ 9,600 Oakland-Alameda County Coliseum Authority,
Oakland Coliseum 2000 Refg Ser C-2 1.10% 01/08/04 $ 9,600,000
7,000 Orange County Housing Authority, Oasis Martinique
Refg 1998 Issue I 1.24 01/08/04 7,000,000
9,100 Orange County Sanitation District,
Ser 2000 B COPs 1.27 01/02/04 9,100,000
5,000 Pasadena, City Hall & Park Improvement
Ser 2003 COPs (Ambac) 1.20 01/08/04 5,000,000
7,000 Pomona Redevelopment Agency, Park & Plaza
Apartments Ser 1998 A 1.20 01/08/04 7,000,000
10,735 Sacramento County, Administration Center &
Courthouse Ser 1990 COPs 1.25 01/08/04 10,735,000
3,500 San Francisco City & County Finance Corporation,
Moscone Center Ser 2001 (Ambac) 1.25 01/08/04 3,500,000
5,000 San Francisco City & County Redevelopment Agency,
Bayside Village Multifamily Ser 1985 A 1.22 01/08/04 5,000,000
4,940 Turlock Irrigation District, Ser 1988 A 1.12 01/08/04 4,940,000
PUERTO RICO
5,200 Puerto Rico Highway & Transportation Authority,
Transportation 1998 Ser A (Ambac) 1.10 01/08/04 5,200,000
------------
TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM VARIABLE
RATE MUNICIPAL OBLIGATIONS
(COST $188,310,203) 188,310,203
------------
<Caption>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
------ -------- ----------
CALIFORNIA TAX-EXEMPT COMMERCIAL
PAPER (15.4%)
10,000 California Infrastructure & Economic
Development Bank, Salvation Army Western
Territory Ser 2001 1.08% 01/28/04 1.08% 10,000,000
5,000 East Bay Municipal Utility District,
Water Ser 1997 1.05 01/14/04 1.05 5,000,000
10,000 Los Angeles County Metropolitan Transportation
Authority, 2nd Sub Sales Tax Ser A 0.90 01/13/04 0.90 10,000,000
San Diego County Water Authority,
7,500 Ser 1 0.96 01/27/04 0.96 7,500,000
6,000 Ser 1 1.01 02/10/04 1.01 6,000,000
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TOTAL CALIFORNIA TAX-EXEMPT COMMERCIAL PAPER
(COST $38,500,000) 38,500,000
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
5
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<Table>
<Caption>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ---------------------------------------------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT SHORT-TERM
MUNICIPAL NOTES (9.3%)
$ 10,000 California School Cash Reserve Program
Authority, 2003 Ser A (Ambac), dtd 07/03/03 2.00% 07/06/04 0.90% $ 10,055,796
5,000 California Statewide Communities Development
Authority, 2003-2004 TRANs, dtd 07/01/03 2.00 06/30/04 0.88 5,027,448
5,000 Santa Cruz County, 2003-2004
TRANs, dtd 07/02/03 2.00 07/01/04 0.91 5,026,851
PUERTO RICO
3,000 Puerto Rico, Ser 2003 TRANs, dtd 10/15/03 2.00 07/30/04 1.00 3,017,194
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TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM
MUNICIPAL NOTES
(COST $23,127,289) 23,127,289
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TOTAL INVESTMENTS
(COST $249,937,492) (a) 100.2% 249,937,492
LIABILITIES IN EXCESS OF OTHER ASSETS (0.2) (441,583)
---------- -------------
NET ASSETS 100.0% $ 249,495,909
========== =============
</Table>
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COPs CERTIFICATES OF PARTICIPATION.
TRANs TAX AND REVENUE ANTICIPATION NOTES.
+ RATE SHOWN IS THE RATE IN EFFECT AT DECEMBER 31, 2003.
* DATE ON WHICH THE PRINCIPAL AMOUNT CAN BE RECOVERED THROUGH
DEMAND.
(a) 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.
SEE NOTES TO FINANCIAL STATEMENTS
6
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MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
<Table>
ASSETS:
Investments in securities, at value (cost $249,937,492) $ 249,937,492
Cash 248,020
Interest receivable 495,647
Prepaid expenses and other assets 14,158
---------------
TOTAL ASSETS 250,695,317
---------------
LIABILITIES:
Payable for:
Shares of beneficial interest redeemed 970,103
Investment management fee 111,740
Distribution fee 22,348
Accrued expenses 95,217
---------------
TOTAL LIABILITIES 1,199,408
---------------
NET ASSETS $ 249,495,909
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 249,493,925
Accumulated undistributed net investment income 1,984
---------------
NET ASSETS $ 249,495,909
===============
NET ASSET VALUE PER SHARE,
249,486,091 shares outstanding (UNLIMITED SHARES AUTHORIZED OF
$.01 PAR VALUE) $ 1.00
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
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STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 2,556,759
---------------
EXPENSES
Investment management fee 1,257,654
Distribution fee 247,169
Transfer agent fees and expenses 108,333
Shareholder reports and notices 48,611
Professional fees 43,981
Trustees' fees and expenses 17,221
Custodian fees 13,115
Registration fees 9,218
Other 9,313
---------------
Total Expenses 1,754,615
---------------
Less: expense offset (13,070)
Less: amounts waived (5,087)
---------------
NET EXPENSES 1,736,458
---------------
NET INVESTMENT INCOME $ 820,301
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
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STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 820,301 $ 1,897,718
Dividends to shareholders from net investment income (820,367) (1,897,542)
Net decrease from transactions in shares of beneficial interest (25,775,139) (714,253)
------------- -------------
NET DECREASE (25,775,205) (714,077)
NET ASSETS:
Beginning of period 275,271,114 275,985,191
------------- -------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF
$1,984 AND $2,050, RESPECTIVELY) $ 249,495,909 $ 275,271,114
============= =============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
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MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2003
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley California Tax-Free Daily Income 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 April 25,
1988, and commenced operations on July 22, 1988.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued at amortized
cost, which approximates market value.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to shareholders as of the close of each business day.
E. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT 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 net assets of the Fund determined as of the close of each
business day: 0.50% to the portion of the daily net assets not exceeding $500
million; 0.425% to the portion of the daily net assets exceeding $500 million
but not exceeding $750 million; 0.375% to the portion of the daily net assets
exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of the
daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.325% to
the portion of the daily net assets exceeding $1.5 billion but not exceeding $2
billion; 0.30% to the portion
10
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of the daily net assets exceeding $2 billion but not exceeding $2.5 billion;
0.275% to the portion of the daily net assets exceeding $2.5 billion but not
exceeding $3 billion; and 0.25% to the portion of the daily net assets exceeding
$3 billion.
For the year ended December 31, 2003, the Investment Manager voluntarily waived
$5,087 of its fee.
3. PLAN OF DISTRIBUTION
Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, is the distributor of the Fund's shares and in accordance
with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act,
finances certain expenses in connection with the promotion of sales of Fund
shares.
Reimbursements for these expenses are made in monthly payments by the Fund to
the Distributor, which will in no event exceed an amount equal to a payment at
the annual rate of 0.15% of the Fund's average daily net assets during the
month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal
year will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year. For the year ended December 31, 2003, the distribution
fee was accrued at the annual rate of 0.10%.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities of portfolio securities
for the year ended December 31, 2003, aggregated $575,750,850 and $601,322,000,
respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At December 31, 2003, the Fund had transfer agent
fees and expenses payable of approximately $900.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation.
Aggregate pension costs for the year ended December 31, 2003, included in
Trustees' fees and expenses in the Statement of Operations amounted to $7,264.
At December 31, 2003, the Fund had an accrued pension liability of $60,294 which
is included in accrued expenses in the Statement of Assets and Liabilities.
On December 2, 2003, the Trustees voted to close the plan to new participants,
eliminate the future benefits growth due to increases to compensation after July
31, 2003, and effective April 1, 2004, establish an unfunded deferred
compensation plan which allows each independent Trustee to defer payment of all
or a portion of the fees he receives for serving on the Board of Trustees
throughout the year.
11
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5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Shares sold 387,832,372 477,774,441
Shares issued in reinvestment of dividends 820,367 1,897,542
------------- -------------
388,652,739 479,671,983
Shares redeemed (414,427,878) (480,386,236)
------------- -------------
Net decrease in shares outstanding (25,775,139) (714,253)
============= =============
</Table>
6. EXPENSE OFFSET
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.
7. LEGAL MATTERS
The Investment Manager, certain affiliates of the Investment Manager and certain
investment companies advised by the Investment Manager or its affiliates,
including the Fund, are named as defendants in a number of recently filed,
similar class action complaints. These complaints generally allege that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Manager and certain affiliates of the Investment Manager allegedly offered
economic incentives to brokers and others to steer investors to the funds
advised by the Investment Manager or its affiliates rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Manager or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their alleged efforts to steer investors to these funds.
The complaints seek, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants intend to move to dismiss
these actions and otherwise vigorously to defend them. While the Fund believes
that it has meritorious defenses, the ultimate outcome of these matters is not
presently determinable at this early stage of the litigation, and no provision
has been made in the Fund's financial statements for the effect, if any, of
these matters.
12
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MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ----------- ---------- ----------
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- --------- --------- ---------
Net income from investment operations 0.003 0.007 0.017 0.028 0.023
Less dividends from net investment income (0.003) (0.007) (0.017) (0.028) (0.023)
---------- ---------- --------- --------- ---------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========= ========= =========
TOTAL RETURN 0.33% 0.71% 1.76% 2.86% 2.28%
RATIOS TO AVERAGE NET ASSETS:
Expenses (before expense offset) 0.70%(1)(2) 0.69% 0.69% 0.69% 0.72%(1)
Net investment income 0.33%(2) 0.70% 1.72% 2.81% 2.25%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 249,496 $ 275,271 $ 275,985 $ 272,990 $ 281,541
</Table>
- ----------
(1) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%.
(2) DURING THE YEAR ENDED DECEMBER 31, 2003, THE INVESTMENT MANAGER WAIVED A
PORTION OF ITS FEE. THE FEE WAIVER DID NOT CHANGE THE EXPENSE OR NET
INVESTMENT INCOME RATIOS.
SEE NOTES TO FINANCIAL STATEMENTS
13
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MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley California Tax-Free Daily Income Trust (the "Fund"), including the
portfolio of investments, as of December 31, 2003, and the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley California Tax-Free Daily Income Trust as of December 31, 2003, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended, in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
FEBRUARY 11, 2004
2003 FEDERAL TAX NOTICE (UNAUDITED)
For the year ended December 31, 2003, all of the Fund's
dividends from net investment income were exempt interest
dividends, excludable from gross income for Federal income
tax purposes.
14
<Page>
MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING PAST OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ---------------------------- ----------- ------------ ------------------------------------- ------------- ---------------------
Michael Bozic (62) Trustee Since Retired; Director or Trustee of the 216 Director of Weirton
c/o Mayer, Brown, April 1994 Retail Funds (since April 1994) and Steel Corporation.
Rowe & Maw LLP the Institutional Funds (since July
Counsel to the Independent 2003); formerly Vice Chairman of
Directors Kmart Corporation (December
1675 Broadway 1998-October 2000), Chairman and
New York, NY Chief Executive Officer of Levitz
Furniture Corporation (November
1995-November 1998) and President and
Chief Executive Officer of Hills
Department Stores (May 1991-July
1995); formerly variously Chairman,
Chief Executive Officer, President
and Chief Operating Officer
(1987-1991) of the Sears Merchandise
Group of Sears, Roebuck & Co.
Edwin J. Garn (71) Trustee Since Director or Trustee of the Retail 216 Director of Franklin
c/o Summit Ventures LLC January 1993 Funds (since January 1993) and the Covey (time
1 Utah Center Institutional Funds (since July management systems),
201 S. Main Street 2003); member of the Utah Regional BMW Bank of North
Salt Lake City, UT Advisory Board of Pacific Corp.; America, Inc.
formerly United States Senator (industrial loan
(R-Utah) (1974-1992) and Chairman, corporation), United
Senate Banking Committee (1980-1986), Space Alliance (joint
Mayor of Salt Lake City, Utah venture between
(1971-1974), Astronaut, Space Shuttle Lockheed Martin and
Discovery (April 12-19, 1985), and the Boeing Company)
Vice Chairman, Huntsman Corporation and Nuskin Asia
(chemical company). Pacific (multilevel
marketing); member of
the board of various
civic and charitable
organizations.
Wayne E. Hedien (69) Trustee Since Retired; Director or Trustee of the 216 Director of The PMI
c/o Mayer, Brown, Rowe & Maw September Retail Funds (since September 1997) Group Inc. (private
LLP 1997 and the Institutional Funds (since mortgage insurance);
Counsel to the Independent July 2003); formerly associated with Trustee and Vice
Directors the Allstate Companies (1966-1994), Chairman of The Field
1675 Broadway most recently as Chairman of The Museum of Natural
New York, NY Allstate Corporation (March History; director of
1993-December 1994) and Chairman and various other
Chief Executive Officer of its business and
wholly-owned subsidiary, Allstate charitable
Insurance Company (July 1989-December organizations.
1994).
</Table>
15
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING PAST OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ---------------------------- ----------- ------------ ------------------------------------- ------------- ---------------------
Dr. Manuel H. Johnson (54) Trustee Since Chairman of the Audit Committee and 216 Director of NVR, Inc.
c/o Johnson Smick July 1991 Director or Trustee of the Retail (home construction);
International, Inc. Funds (since July 1991) and the Chairman and Trustee
2099 Pennsylvania Avenue, Institutional Funds (since July 2003); of the Financial
N.W. Suite 950 Senior Partner, Johnson Smick Accounting Foundation
Washington, D.C. International, Inc., a consulting (oversight
firm; Co-Chairman and a founder of organization of the
the Group of Seven Council (G7C), an Financial Accounting
international economic commission; Standards Board);
formerly Vice Chairman of the Board Director of RBS
of Governors of the Federal Reserve Greenwich Capital
System and Assistant Secretary of the Holdings (financial
U.S. Treasury. holding company).
Joseph J. Kearns (61) Trustee Since Deputy Chairman of the Audit 217 Director of Electro
PMB 754 July 2003 Committee and Director or Trustee of Rent Corporation
23852 Pacific Coast Highway the Retail Funds (since July 2003) and (equipment leasing),
Malibu, CA the Institutional Funds (since The Ford Family
August 1994);previously Chairman of Foundation, and the
the Audit Committee of the UCLA Foundation.
Institutional Funds
(October 2001-July 2003); President,
Kearns & Associates LLC (investment
consulting); formerly CFO of the
J. Paul Getty Trust.
Michael E. Nugent (67) Trustee Since Chairman of the Insurance Committee 216 Director of various
c/o Triumph Capital, L.P. July 1991 and Director or Trustee of the Retail business
445 Park Avenue Funds (since July 1991) and the organizations.
New York, NY Institutional Funds (since July 2001);
General Partner of Triumph Capital,
L.P., a private investment
partnership; formerly Vice President,
Bankers Trust Company and BT Capital
Corporation (1984-1988).
Fergus Reid (71) Trustee Since Chairman of the Governance Committee 217 Trustee and Director
85 Charles Colman Blvd. July 2003 and Director or Trustee of the Retail of certain investment
Pawling, NY Funds (since July 2003) and the companies in the
Institutional Funds (since June 1992); JPMorgan Funds
Chairman of Lumelite Plastics complex managed by JP
Corporation. Morgan Investment
Management Inc.
</Table>
16
<Page>
INTERESTED TRUSTEES
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING PAST OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ---------------------------- ----------- ------------ ------------------------------------- ------------- ---------------------
Charles A. Fiumefreddo (70) Chairman of Since Chairman and Director or Trustee of 216 None
c/o Morgan Stanley Trust the Board July 1991 the Retail Funds (since July 1991)
Harborside Financial Center, and Trustee and the Institutional Funds (since
Plaza Two, July 2003); formerly Chief Executive
Jersey City, NJ Officer of the Retail Funds (until
September 2002).
James F. Higgins (55) Trustee Since Director or Trustee of the Retail 216 Director of AXA
c/o Morgan Stanley Trust June 2000 Funds (since June 2000) and the Financial, Inc. and
Harborside Financial Center, Institutional Funds (since July 2003); The Equitable Life
Plaza Two, Senior Advisor of Morgan Stanley Assurance Society of
Jersey City, NJ (since August 2000); Director of the the United States
Distributor and Dean Witter Realty (financial services).
Inc.; previously President and Chief
Operating Officer of the Private
Client Group of Morgan Stanley
(May 1999-August 2000), and President
and Chief Operating Officer of
Individual Securities of Morgan
Stanley (February 1997-May 1999).
Philip J. Purcell (60) Trustee Since Director or Trustee of the Retail 216 Director of American
1585 Broadway April 1994 Funds (since April 1994) and the Airlines, Inc. and
New York, NY Institutional Funds (since July 2003); its parent company,
Chairman of the Board of Directors AMR Corporation.
and Chief Executive Officer of Morgan
Stanley and Morgan Stanley DW Inc.;
Director of the Distributor; Chairman
of the Board of Directors and Chief
Executive Officer of Novus Credit
Services Inc.; Director and/or
officer of various Morgan Stanley
subsidiaries.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER ") (THE
"RETAIL FUNDS ").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC., MORGAN STANLEY INVESTMENTS LP AND MORGAN
STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE
DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS
APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT
INC. AND MORGAN STANLEY INVESTMENTS LP).
17
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ----------------------------------------- ---------------- ----------------- ----------------------------------------------------
Mitchell M. Merin (50) President Since May 1999 President and Chief Operating Officer of Morgan
1221 Avenue of the Americas Stanley Investment Management Inc.; President,
New York, NY Director and Chief Executive Officer of the
Investment Manager and Morgan Stanley Services;
Chairman, Chief Executive Officer and Director of
the Distributor; Chairman and Director of the
Transfer Agent; Director of various Morgan Stanley
subsidiaries; President Morgan Stanley Investments
LP (since February 2003); President of the
Institutional Funds (since July 2003) and President
of the Retail Funds (since May 1999); Trustee (since
July 2003) and President (since December 2002) of
the Van Kampen Closed-End Funds; Trustee (since
May 1999) and President (since October 2002) of the
Van Kampen Open-End Funds.
Ronald E. Robison (64) Executive Vice Since Chief Global Operations Officer and Managing
1221 Avenue of the Americas President and April 2003 Director of Morgan Stanley Investment Management
New York, NY Principal Inc.; Managing DIrector of Morgan Stanley & Co.
Executive Incorporated; Managing DIrector of Morgan Stanley;
Officer Managing Director, Chief Administrative Officer and
Director of the Investment Manager and Morgan
Stanley Services; Chief Executive Officer and
Director of the Transfer Agent; Managing Director
and Director of the Distributor; Executive Vice
President and Principal Executive Officer of the
Institutional Funds (since July 2003); previously
President of the Institutional Funds
(March 2001-July 2003) and Director of the
Institutional Funds (March 2001-July 2003).
Barry Fink (48) Vice President Since General Counsel (since May 2000) and Managing
1221 Avenue of the Americas and General February 1997 Director (since December 2000) of Morgan Stanley
New York, NY Counsel Investment Management; Managing Director (since
December 2000), Secretary (since February 1997) and
Director (since July 1998) of the Investment Manager
and Morgan Stanley Services; Assistant Secretary of
Morgan Stanley DW; Chief Legal Officer of Morgan
Stanley Investments LP (since July 2002); Vice
President of the Institutional Funds (since
July 2003); Vice President and Secretary of the
Distributor; previously Secretary of the Retail
Funds (February 1997-July 2003); previously Vice
President and Assistant General Counsel of the
Investment Manager and Morgan Stanley Services
(February 1997-December 2001).
Joseph J. McAlinden (60) Vice President Since July 1995 Managing Director and Chief Investment Officer of
1221 Avenue of the Americas the Investment Manager, Morgan Stanley Investment
New York, NY Management Inc. and Morgan Stanley Investments LP;
Director of the Transfer Agent, Chief Investment
Officer of the Van Kampen Funds; Vice President of
the Institutional Funds (since July 2003) and the
Retail Funds (since July 1995).
Stefanie V. Chang (37) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. and
1221 Avenue of the Americas Morgan Stanley Investment Management Inc. and Vice
New York, NY President of the Institutional Funds (since
December 1997) and the Retail Funds (since
July 2003); formerly practiced law with the New York
law firm of Rogers & Wells (now Clifford Chance
LLP).
</Table>
18
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ----------------------------------------- ---------------- ----------------- ----------------------------------------------------
Francis J. Smith (38) Treasurer and Treasurer since Executive Director of the Investment Manager and
c/o Morgan Stanley Trust Chief Financial July 2003 and Morgan Stanley Services (since December 2001);
Harborside Financial Center, Officer Chief Financial previously Vice President of the Retail Funds
Plaza Two, Officer since (September 2002-July 2003); previously Vice
Jersey City, NJ September 2002 President of the Investment Manager and Morgan
Stanley Services (August 2000-November 2001) and
Senior Manager at PricewaterhouseCoopers LLP
(January 1998-August 2000).
Thomas F. Caloia (57) Vice President Since July 2003 Executive Director (since December 2002) and
c/o Morgan Stanley Trust Assistant Treasurer of the Investment Manager, the
Harborside Financial Center, Distributor and Morgan Stanley Services; previously
Plaza Two, Treasurer of the Retail Funds (April 1989-July
Jersey City, NJ 2003); formerly First Vice President of the
Investment Manager, the Distributor and Morgan
Stanley Services.
Mary E. Mullin (36) Secretary Since July 2003 Vice President of Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas and Morgan Stanley Investment Management Inc.;
New York, NY Secretary of the Institutional Funds (since
June 1999) and the Retail Funds (since July 2003);
formerly practiced law with the New York law firms
of McDermott, Will & Emery and Skadden, Arps, Slate,
Meagher & Flom LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE OFFICER
BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
19
<Page>
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 J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT 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
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2003 Morgan Stanley
[MORGAN STANLEY LOGO]
38555RPT-00-13681B04-AP-2/04
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
ANNUAL REPORT
DECEMBER 31, 2003
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2003
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 24,750 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 684(2) $ 2,847,161(2)
TAX FEES $ 4,428(3) $ 736,810(4)
ALL OTHER FEES $ 0 $ 0
TOTAL NON-AUDIT FEES $ 5,112 $ 3,583,971
TOTAL $ 29,862 $ 3,583,971
</Table>
2002
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 22,600 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 657(2) $ 2,818,115(2)
TAX FEES $ 4,804(3) $ 365,427(4)
ALL OTHER FEES $ 0 $ 501,166(5)
TOTAL NON-AUDIT FEES $ 5,461 $ 3,684,708
TOTAL $ 28,061 $ 3,684,708
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and
any entity controlling, controlled by or under common control with
the Adviser that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically data
verification and agreed-upon procedures related to asset
securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review
of the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered
Entities' tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
2
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED JULY 31, 2003(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an
independent auditor may not provide to its audit client, as well as the audit
committee's administration of the engagement of the independent auditor. The
SEC's rules establish two different approaches to pre-approving services, which
the SEC considers to be equally valid. Proposed services either: may be
pre-approved without consideration of specific case-by-case services by the
Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval
of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit
Committee believes that the combination of these two approaches in this Policy
will result in an effective and efficient procedure to pre-approve services
performed by the Independent Auditors. As set forth in this Policy, unless a
type of service has received general pre-approval, it will require specific
pre-approval by the Audit Committee (or by any member of the Audit Committee to
which pre-approval authority has been delegated) if it is to be provided by the
Independent Auditors. Any proposed services exceeding pre-approved cost levels
or budgeted amounts will also require specific pre-approval by the Audit
Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and
All Other services that have the general pre-approval of the Audit Committee.
The term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supercedes and
replaces all prior versions that may have been adopted from time to time.
3
<Page>
The purpose of this Policy is to set forth the policy and procedures by
which the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may
delegate either type of pre-approval authority to one or more of its members.
The member to whom such authority is delegated must report, for informational
purposes only, any pre-approval decisions to the Audit Committee at its next
scheduled meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the
specific pre-approval of the Audit Committee. Audit services include the annual
financial statement audit and other procedures required to be performed by the
Independent Auditors to be able to form an opinion on the Fund's financial
statements. These other procedures include information systems and procedural
reviews and testing performed in order to understand and place reliance on the
systems of internal control, and consultations relating to the audit. The Audit
Committee will approve, if necessary, any changes in terms, conditions and fees
resulting from changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1.
All other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
4
<Page>
Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements and, to the extent they are Covered Services, the Covered
Entities or that are traditionally performed by the Independent Auditors.
Because the Audit Committee believes that the provision of Audit-related
services does not impair the independence of the auditor and is consistent with
the SEC's rules on auditor independence, the Audit Committee may grant general
pre-approval to Audit-related services. Audit-related services include, among
others, accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "Audit services"; assistance with
understanding and implementing new accounting and financial reporting guidance
from rulemaking authorities; agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters; and assistance with
internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix
B.2. All other Audit-related services not listed in Appendix B.2 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved
the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
5
<Page>
The Audit Committee has pre-approved the All Other services in Appendix
B.4. Permissible All Other services not listed in Appendix B.4 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided
by the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be rendered. The Fund's Chief Financial Officer
will determine whether such services are included within the list of services
that have received the general pre-approval of the Audit Committee. The Audit
Committee will be informed on a timely basis of any such services rendered by
the Independent Auditors. Requests or applications to provide services that
require specific approval by the Audit Committee will be submitted to the Audit
Committee by both the Independent Auditors and the Fund's Chief Financial
Officer, and must include a joint statement as to whether, in their view, the
request or application is consistent with the SEC's rules on auditor
independence.
The Audit Committee has designated the Fund's Chief Financial Officer to
monitor the performance of all services provided by the Independent Auditors and
to determine whether such services are in compliance with this Policy. The
Fund's Chief Financial Officer will report to the Audit Committee on a periodic
basis on the results of its monitoring. Both the Fund's Chief Financial Officer
and management will immediately report to the chairman of the Audit Committee
any breach of this Policy that comes to the attention of the Fund's Chief
Financial Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No.
6
<Page>
1, and discussing with the Independent Auditors its methods and procedures for
ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management
Morgan Stanley Investments LP
Van Kampen Asset Management Inc.
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investments LP
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after
May 6, 2003, the audit committee also is required to pre-approve services to
Covered Entities to the extent that the services are determined to have a
direct impact on the operations or financial reporting of the Registrant.
100% of such services were pre-approved by the audit committee pursuant to
the Audit Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
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Item 5. Audit Committee of Listed Registrants.
Applicable only for reports covering periods ending on or after the earlier of
(i) the first annual shareholder meeting after January 15, 2004 or (ii) October
31, 2004.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 8. [Reserved.]
Item 9 - 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.
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.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10 Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
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(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley California Tax-Free Daily Income Trust
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
February 18, 2004
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 18, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
February 18, 2004
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