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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, 2005
Date of reporting period: December 31, 2005
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 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.
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FUND REPORT
For the year ended December 31, 2005
MARKET CONDITIONS
During the annual period ended December 31, 2005, the economy continued to grow
at a good pace, despite soaring oil prices and the Gulf Coast hurricanes. Gains
in employment were respectable, and consumer confidence and spending remained
largely intact. Against this backdrop, the Federal Open Market Committee (the
"Fed") continued to raise the federal funds target rate. Through a series of
eight increases of 25 basis points each, the Fed brought the target rate to 4.25
percent at the end of the period.
Despite the Fed's steady course, yields in the tax-free money markets fluctuated
during the period, with shorter-term variable rate demand obligations (VRDOs)
demonstrating greater volatility than one-year notes. For the overall period,
however, yields across the municipal money market sector ended sharply higher.
The State of California enjoyed improving economic, fiscal and credit conditions
throughout the period. Unemployment declined and the defense and high technology
sectors experienced steady growth. These economic improvements helped to boost
stronger state revenues. California also made progress in resolving some of its
structural budget imbalances, spurring further investor interest in its
municipal debt market. The State remained the leading issuer of debt, as
financing for public infrastructure remained on the upswing under Governor
Schwarzenegger.
PERFORMANCE ANALYSIS
As of December 31, 2005, Morgan Stanley California Tax-Free Daily Income Trust
had net assets of approximately $171 million and an average portfolio maturity
of 35 days. For the 12-month period ended December 31, 2005, the Fund provided a
total return of 1.80 percent. For the seven-day period ended December 31, 2005,
the Fund provided an effective annualized yield of 2.75 percent and a current
yield of 2.71 percent, while its 30-day moving average yield for December was
2.46 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Throughout the period, we managed the portfolio according to our long-standing
conservative discipline. Based on our view that short-term rates would continue
to rise, we invested primarily in VRDOs. These securities offer daily or weekly
reset features, which allowed the Fund to quickly benefit from rising short-term
rates. To help offset the potential volatility associated with VRDOs without
committing to the uncertainty of longer-dated municipal notes, we invested in
fixed-rate tax-exempt commercial paper in the one- to three-month range. This
strategy afforded us with the flexibility to invest in higher-yielding
securities as they came to market.
We used our research-intensive approach to seek out investments that would add
value while meeting our conservative, risk-conscious criteria. These included
financings for rural schools with attractive debt characteristics and the issues
of certain smaller municipalities. Additionally, we were able to increase the
Fund's yield by taking advantage of seasonal imbalances in supply and demand.
Generally, we favored notes with
2
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maturities in the three- to six-month range, while paring exposure to notes in
the one-year range.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN THE FUTURE.
PORTFOLIO COMPOSITION
<Table>
Variable Rate Municipal Obligations 78.8%
Municipal Notes & Bonds 11.9
Tax-Exempt Commercial Paper 9.3
</Table>
MATURITY SCHEDULE
<Table>
1 - 30 Days 86.6%
31 - 60 Days 2.9
61 - 90 Days --
91 - 120 Days --
121+ Days 10.5
</Table>
DATA AS OF DECEMBER 31, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR
PORTFOLIO COMPOSITION AND MATURITY SCHEDULE ARE AS A PERCENTAGE OF TOTAL
INVESTMENTS. THESE DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN
STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND
BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND
FINANCIAL ADVISORY SERVICES.
INVESTMENT STRATEGY
The Fund will normally invest at least 80 percent of its net assets in high
quality, short-term securities that are 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 by filing the schedule electronically with the
Securities and Exchange Commission (SEC). The semiannual reports are filed on
Form N-CSRS and the annual reports are filed on Form N-CSR. Morgan Stanley also
delivers the semiannual and annual reports to fund shareholders and makes these
reports available on its public Web site, www.morganstanley.com. Each Morgan
Stanley fund also files a complete schedule of portfolio holdings with the SEC
for the fund's first and third fiscal quarters on Form N-Q. Morgan Stanley does
not deliver the reports for the first and third fiscal quarters to shareholders,
nor are the reports posted to
3
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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
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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 07/01/05 - 12/31/05.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.
<Table>
<Caption>
EXPENSES PAID
BEGINNING ENDING DURING PERIOD *
ACCOUNT VALUE ACCOUNT VALUE ---------------
------------- ------------- 07/01/05 -
07/01/05 12/31/05 12/31/05
------------- ------------- ----------------
Actual (1.02% return) $ 1,000.00 $ 1,010.20 $ 3.08
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,022.07 $ 3.10
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.61%
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
183/364 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF THE FUND HAD BORNE ALL OF
ITS EXPENSES, THE ANNUALIZED EXPENSE RATIO WOULD HAVE BEEN 0.74%.
5
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MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT SHORT-TERM VARIABLE RATE
MUNICIPAL OBLIGATIONS (80.0%)
ABAG Finance Authority for Nonprofit Corporations,
$ 2,000 Computer History Museum Ser 2002 4.40% 01/09/06 $ 2,000,000
4,500 Episcopal Homes Foundation Ser 2000 COPs 3.53 01/09/06 4,500,000
California,
1,150 Economic Recovery Ser 2004 C-4 3.53 01/09/06 1,150,000
3,000 Economic Recovery Ser 2004 C-14 (XLCA) 3.34 01/09/06 3,000,000
4,900 California, Ser 2004 A-9 3.50 01/09/06 4,900,000
2,800 California, Ser 2005B Subser B-1 3.10 01/25/06 2,800,000
1,000 California Department of WaterResources, Power Supply
Ser 2002 B Subser B-6 3.62 01/03/06 1,000,000
California Educational Facilities Authority,
6,000 California Institute of Technology Ser 1994 3.45 01/09/06 6,000,000
3,000 University of San Francisco Ser 2003 3.45 01/09/06 3,000,000
California Statewide Communities Development Authority,
1,800 Chabad of California Ser 2004 3.52 01/09/06 1,800,000
2,600 Masters College Ser 2002 3.50 01/09/06 2,600,000
3,000 University of San Diego Ser 2005 3.47 01/09/06 3,000,000
3,770 California Transit Finance Authority, Ser 1997 (FSA) 3.50 01/09/06 3,770,000
5,000 East Bay Municipal Utility District, Wastewater
Sub Ser 2005 3.43 01/09/06 5,000,000
7,000 Fresno, Sewer System Sublien Ser 2000 A (FGIC) 3.34 01/09/06 7,000,000
2,100 Hillsborough, Refg Ser 2000 A COPs 3.55 01/09/06 2,100,000
3,700 Los Angeles County Metropolitan Transportation
Authority, Prop C Sales Tax 2nd Ser 2004-A Eagle
#20040046 (MBIA) 3.55 01/09/06 3,700,000
4,400 Los Angeles Department of Water & Power,
Power System 2002 Ser A Subser A-8 3.50 01/09/06 4,400,000
8,100 Metropolitan Water District of Southern California,
Waterworks 2002 Ser A 3.53 01/09/06 8,100,000
5,000 Mountain View, Villa Mariposa Multifamily 1985 Ser A 3.51 01/09/06 5,000,000
9,600 Oakland-Alameda County Coliseum Authority, Oakland
Coliseum 2000 Refg Ser C-2 3.50 01/09/06 9,600,000
1,500 Orange County Sanitation District, Ser 2000 B COPs 3.62 01/03/06 1,500,000
5,000 Pasadena, City Hall & Park Improvement Ser 2003
COPs (Ambac) 3.47 01/09/06 5,000,000
1,000 Perris Unified High School District, COPs Ser 2004 3.34 01/09/06 1,000,000
3,900 Pittsburg Redevelopment Agency, Los Medanos Community
Development Sub 2004 Ser A (Ambac) 3.75 01/03/06 3,900,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
6
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<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 7,000 Pomona Redevelopment Agency, Park & Plaza
Apartments Ser 1998 A 3.48% 01/09/06 $ 7,000,000
3,800 Poway Unified School District, Ser 2004 COPs
(FSA) 3.34 01/09/06 3,800,000
4,000 Rancho Water District Financing Authority,
Ser 2001 B (FGIC) 3.31 01/09/06 4,000,000
2,500 Roaring Fork Municipal Products, California
Economic Recovery Class A Certificates Ser
2004-4 (FGIC) 3.51 01/09/06 2,500,000
3,000 Sacramento County Water Financing Authority,
Water Agency Zones 40 & 41 P-FLOATs
PT-1176 (Ambac) 3.53 01/09/06 3,000,000
6,000 San Francisco City & County Redevelopment
Agency, Bayside Village Multifamily Ser
1985 A 3.45 01/09/06 6,000,000
2,305 San Jacinto Unified School District, Ser 1998
COPs (FSA) 3.34 01/09/06 2,305,000
3,000 Santa Clara Valley Transportation Authority,
Sales Tax Ser 2005 B (Ambac) 3.44 01/09/06 3,000,000
2,200 Snowline Joint Unified School District, Ser
2005 COPs (FSA) 3.34 01/09/06 2,200,000
4,110 Turlock Irrigation District, Ser 1988 A 3.55 01/09/06 4,110,000
3,515 Yucaipa Valley Water District, Water System
Ser 2004 COPs ROCs II-R Ser 2130 (MBIA) 3.55 01/09/06 3,515,000
-------------
TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM
VARIABLE RATE MUNICIPAL OBLIGATIONS (COST $137,250,000) 137,250,000
-------------
<Caption>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
------ -------- ----------
CALIFORNIA TAX-EXEMPT COMMERCIAL PAPER (9.5%)
2,200 Riverside County, Teeter Obligation 2005 Ser B-1 3.04% 01/23/06 3.04% 2,200,000
3,001 Riverside County Transportation Commission, Ser B 3.13 01/27/06 3.13 3,001,000
5,000 San Diego County Water Authority, Ser 1 3.18 02/14/06 3.18 5,000,000
3,000 San Francisco City & County Public Utilities
Commission, Water Ser 2001 2.87 01/18/06 2.87 3,000,000
3,000 University of California Regents, Ser A 2.78 01/11/06 2.78 3,000,000
-------------
TOTAL CALIFORNIA TAX-EXEMPT COMMERCIAL PAPER
(COST $16,201,000) 16,201,000
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
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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 &
BONDS (12.1%)
$ 1,000 Bassett Unified School District, Ser 2005 BANs, dtd
09/01/05 4.20% 09/01/06 2.85% $ 1,008,771
2,000 California School Cash Reserve Program Authority,
2005 Pool Ser A, dtd 07/06/05 4.00 07/06/06 2.60 2,012,419
1,500 Contra Costa County, Ser 2005 TRANs, dtd 12/02/05 4.50 12/07/06 3.30 1,516,273
1,500 Kern County, Ser 2005 TRANs, dtd 07/05/05 4.00 06/30/06 3.03 1,506,810
5,000 Los Angeles Unified School District, Ser 2005 A
TRANs, dtd 10/19/05 4.50 10/18/06 2.91 5,061,558
1,270 Placentia, Ser 2005 TRANs, dtd 07/01/05 3.75 06/30/06 2.80 1,275,816
2,090 Santa Clara County Financing Authority, Measure B
Transportation Improvement Ser 2003, dtd 02/15/03 4.00 08/01/06 2.80 2,104,332
2,500 San Diego Metropolitan Transit Development Board,
2004-05 RANs, dtd 01/13/05 3.50 01/04/06 2.80 2,500,169
750 Selma, Ser 2005 TRANs, dtd 07/01/05 4.00 06/30/06 2.80 754,341
1,500 South Coast Local Education Agencies, Pooled TRANs
Ser 2005 A, dtd 12/02/05 4.00 06/30/06 3.21 1,505,391
1,500 University of California Regents, Ser 1998 F, dtd
06/15/98 5.00 09/01/06# 3.04 1,533,914
-------------
TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL
NOTES & BONDS (COST $20,779,794) 20,779,794
-------------
TOTAL INVESTMENTS (COST $174,230,794) (A) 101.6% 174,230,794
LIABILITIES IN EXCESS OF OTHER ASSETS (1.6) (2,732,438)
------- -------------
NET ASSETS 100.0% $ 171,498,356
======= =============
</Table>
- ----------
BANs BOND ANTICIPATION NOTES.
COPs CERTIFICATES OF PARTICIPATION.
P-FLOATS PUTTABLE FLOATING OPTION TAX-EXEMPT RECEIPTS.
RANs REVENUE ANTICIPATION NOTES.
ROCs RESET OPTION CERTIFICATES.
TRANs TAX AND REVENUE ANTICIPATION NOTES.
+ RATE SHOWN IS THE RATE IN EFFECT AT DECEMBER 31, 2005.
* DATE ON WHICH THE PRINCIPAL AMOUNT CAN BE RECOVERED THROUGH DEMAND.
# PREREFUNDED TO CALL DATE SHOWN.
(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.
XLCA XL CAPITAL ASSURANCE INC.
SEE NOTES TO FINANCIAL STATEMENTS
8
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MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005
<Table>
ASSETS:
Investments in securities, at value (cost $174,230,794) $ 174,230,794
Cash 252,646
Interest receivable 895,821
Prepaid expenses and other assets 20,589
-------------
TOTAL ASSETS 175,399,850
-------------
LIABILITIES:
Payable for:
Investments purchased 3,000,274
Shares of beneficial interest redeemed 726,812
Investment advisory fee 47,449
Distribution fee 14,321
Administration fee 7,161
Transfer agent fee 1,514
Accrued expenses and other payables 103,963
-------------
TOTAL LIABILITIES 3,901,494
-------------
NET ASSETS $ 171,498,356
=============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 171,496,341
Accumulated undistributed net investment income 2,015
-------------
NET ASSETS $ 171,498,356
=============
NET ASSET VALUE PER SHARE
171,488,507 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE) $ 1.00
=============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
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STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
<Table>
NET INVESTMENT INCOME:
Interest Income $ 4,350,271
-------------
EXPENSES
Investment advisory fee 825,144
Distribution fee 183,365
Administration fee 91,683
Transfer agent fees and expenses 87,513
Professional fees 66,719
Shareholder reports and notices 51,429
Custodian fees 11,420
Trustees' fees and expenses 9,562
Registration fees 8,116
Other 14,502
-------------
TOTAL EXPENSES 1,349,453
Less: amounts waived (238,317)
Less: expense offset (10,945)
-------------
NET EXPENSES 1,100,191
-------------
NET INVESTMENT INCOME $ 3,250,080
=============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
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STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
---------------------- -----------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 3,250,080 $ 1,219,055
Dividends to shareholders from net
investment income (3,249,928) (1,219,176)
Net decrease from transactions in shares of
beneficial interest (24,070,987) (53,926,597)
----------------- -----------------
NET DECREASE (24,070,835) (53,926,718)
NET ASSETS:
Beginning of period 195,569,191 249,495,909
----------------- -----------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME OF $2,015 AND $1,863, RESPECTIVELY) $ 171,498,356 $ 195,569,191
================= =================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
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MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
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 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 Fund's net assets 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
12
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of the daily net assets exceeding $2 billion but not 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.
Pusuant 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.
The Investment Adviser has agreed to cap the Fund's operating expenses by
assuming the Fund's "other expenses" and/or waiving the Fund's advisory fees,
and the Administrator has agreed to waive the Fund's administrative fees, to the
extent that such operating expenses exceed 0.60% of the average daily net assets
of the Fund on an annualized basis.
3. PLAN OF DISTRIBUTION
Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the
Investment Adviser and Administrator, is the distributor of the Fund's shares
and in accordance with a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Act, finances certain expenses in connection with the promotion
of sales of Fund shares.
Reimbursements for these expenses are made in monthly payments by the Fund to
the Distributor, which will in no event exceed an amount equal to a payment at
the annual rate of 0.15% of the Fund's average daily net assets during the
month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal
year will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year. For the year ended December 31, 2005, the distribution
fee was accrued at the annual rate of 0.10%.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities of portfolio securities
for the year ended December 31, 2005, aggregated $422,143,792 and $445,998,000,
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 year ended December 31, 2005, included in Trustees' fees
and expenses in the Statement of
13
<Page>
Operations amounted to $7,356. At December 31, 2005, the Fund had an accrued
pension liability of $63,307 which is included in accrued expenses in the
Statement of Assets and Liabilities.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he receives for serving on the Board of Trustees. Each eligible Trustee
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan Stanley funds that are offered as
investment options under the Compensation Plan. Appreciation/depreciation and
distributions received from these investments are recorded with an offsetting
increase/decrease in the deferred compensation obligation and do not affect the
net asset value of the Fund.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
Shares sold 303,089,677 378,819,047
Shares issued in reinvestment of dividends 3,249,928 1,219,176
------------ ------------
306,339,605 380,038,223
Shares redeemed (330,410,592) (433,964,820)
------------ ------------
Net decrease in shares outstanding (24,070,987) (53,926,597)
============ ============
</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 Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, filed in the United States District
Court Southern District of New York on April 16, 2004, generally alleges that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Adviser and certain affiliates of the Investment Adviser allegedly offered
economic incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds
14
<Page>
managed by other companies, and (ii) that the funds advised by the Investment
Adviser or its affiliates, including the Fund, allegedly paid excessive
commissions to brokers in return for their efforts to recommend these funds to
investors. The complaint seeks, among other things, unspecified compensatory
damages, rescissionary damages, fees and costs. The defendants have moved to
dismiss the action and intend to otherwise vigorously defend it. On March 9,
2005, Plaintiffs sought leave to supplement their complaint to assert claims on
behalf of other investors. While the Fund and Adviser believe that each has
meritorious defenses, the ultimate outcome of this matter is not presently
determinable at this stage of the litigation, and no provision has been made in
the Fund's financial statements for the effect, if any, of this matter.
15
<Page>
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,
----------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------
Net income from investment
operations 0.018 0.006 0.003 0.007 0.017
Less dividends from net investment
income (0.018) (0.006) (0.003) (0.007) (0.017)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============ ============
TOTAL RETURN 1.80% 0.58% 0.33% 0.71% 1.76%
RATIOS TO AVERAGE NET ASSETS:
Expenses (before expense offset) 0.61%(1)(2) 0.64%(2) 0.70%(1) 0.69% 0.69%
Net investment income 1.77%(2) 0.55%(2) 0.33% 0.70% 1.72%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 171,498 $ 195,569 $ 249,496 $ 275,271 $ 275,985
</Table>
- ----------
(1) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%.
(2) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET
INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
---------------- -------------- ------------------
DECEMBER 31, 2005 0.74% 1.64%
DECEMBER 31, 2004 0.72 0.47
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005, and the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2005, by correspondence with the
custodian and brokers. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley California Tax-Free Daily Income Trust as of December 31, 2005, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended, in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
FEBRUARY 17, 2006
17
<Page>
MORGAN STANLEY CALIFORNIA TAX-FREE DAILY INCOME TRUST
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF COMPLEX
POSITION(S) OFFICE AND OVERSEEN
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) BY OTHER DIRECTORSHIPS HELD
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** TRUSTEE*** BY TRUSTEE
- ------------------------ ------------- ------------- ---------------------------- ------------ ---------------------------
Michael Bozic (64) Trustee Since Private Investor; Director 197 Director of various
c/o Kramer Levin April 1994 or Trustee of the Retail business organizations.
Naftalis & Frankel LLP Funds (since April 1994)
Counsel to the and the Institutional Funds
Independent Trustees (since July 2003); formerly
1177 Avenue of the Vice Chairman of Kmart
Americas Corporation (December
New York, NY 10036 1998-October 2000),
Chairman and Chief
Executive Officer of Levitz
Furniture Corporation
(November 1995-November
1998) and President and
Chief Executive Officer of
Hills Department Stores
(May 1991-July 1995);
formerly variously
Chairman, Chief Executive
Officer, President and
Chief Operating Officer
(1987-1991) of the Sears
Merchandise Group of Sears,
Roebuck & Co.
Edwin J. Garn (73) Trustee Since Consultant; Director or 197 Director of Franklin Covey
1031 N. Chartwell Court January 1993 Trustee of the Retail Funds (time management systems),
Salt Lake City, UT 84103 (since January 1993) and BMW Bank of North America,
the Institutional Funds Inc. (industrial loan
(since July 2003); member corporation), Escrow Bank
of the Utah Regional USA (industrial loan
Advisory Board of Pacific corporation), United Space
Corp. (utility company); Alliance (joint venture
formerly Managing Director between Lockheed Martin
of Summit Ventures LLC and the Boeing Company)
(2000-2004) (lobbying and and Nuskin Asia Pacific
consulting firm); United (multilevel marketing);
States Senator (R-Utah) member of the board of
(1974-1992) and Chairman, various civic and
Senate Banking Committee charitable organizations.
(1980-1986), Mayor of Salt
Lake City, Utah
(1971-1974), Astronaut,
Space Shuttle Discovery
(April 12-19, 1985), and
Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (71) Trustee Since Retired; Director or 197 Director of The PMI Group
c/o Kramer Levin September 1997 Trustee of the Retail Funds Inc. (private mortgage
Naftalis & Frankel LLP (since September 1997) and insurance); Trustee and
Counsel to the the Institutional Funds Vice Chairman of The Field
Independent Trustees (since July 2003); formerly Museum of Natural History;
1177 Avenue of the associated with the director of various other
Americas Allstate Companies business and charitable
New York, NY 10036 (1966-1994), most recently organizations.
as Chairman of The Allstate
Corporation (March
1993-December 1994) and
Chairman and Chief
Executive Officer of its
wholly-owned subsidiary,
Allstate Insurance Company
(July 1989-December 1994).
</Table>
18
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF COMPLEX
POSITION(S) OFFICE AND OVERSEEN
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) BY OTHER DIRECTORSHIPS HELD
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** TRUSTEE*** BY TRUSTEE
- ------------------------ ------------- ------------- ---------------------------- ------------ ---------------------------
Dr. Manuel H. Johnson Trustee Since Senior Partner, Johnson 197 Director of NVR, Inc.
(56) July 1991 Smick International, Inc., (home construction);
c/o Johnson Smick Group, a consulting firm; Chairman Director of KFX Energy;
Inc. of the Audit Committee and Director of RBS Greenwich
888 16th Street, NW Director or Trustee of the Capital Holdings
Suite 740 Retail Funds (since July (financial holding
Washington, D.C. 20006 1991) and the Institutional company).
Funds (since July 2003);
Co-Chairman and a founder
of the Group of Seven
Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and
Assistant Secretary of the
U.S. Treasury.
Joseph J. Kearns (63) Trustee Since President, Kearns & 198 Director of Electro Rent
c/o Kearns & Associates July 2003 Associates LLC (investment Corporation (equipment
LLC consulting); Deputy leasing), The Ford Family
PMB754 Chairman of the Audit Foundation, and the UCLA
23852 Pacific Coast Committee and Director or Foundation.
Highway Trustee of the Retail Funds
Malibu, CA 90265 (since July 2003) and the
Institutional Funds (since
August 1994); previously
Chairman of the Audit
Committee of the
Institutional Funds
(October 2001-July 2003);
formerly CFO of the J. Paul
Getty Trust.
Michael E. Nugent (69) Trustee Since General Partner of Triumph 197 None.
c/o Triumph Capital, July 1991 Capital, L.P., a private
L.P. investment partnership;
445 Park Avenue Chairman of the Insurance
New York, NY 10022 Committee and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (73) Trustee Since Chairman of Lumelite 198 Trustee and Director of
c/o Lumelite Plastics July 2003 Plastics Corporation; certain investment
Corporation Chairman of the Governance companies in the JPMorgan
85 Charles Colman Blvd. Committee and Director or Funds complex managed by
Pawling, NY 12564 Trustee of the Retail Funds J.P. Morgan Investment
(since July 2003) and the Management Inc.
Institutional Funds (since
June 1992).
</Table>
19
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF COMPLEX
POSITION(S) OFFICE AND OVERSEEN
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) BY OTHER DIRECTORSHIPS HELD
INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** TRUSTEE*** BY TRUSTEE
- ------------------------ ------------- ------------- ---------------------------- ------------ ---------------------------
Charles A. Fiumefreddo Chairman of Since Chairman and Director or 197 None.
(72) the Board July 1991 Trustee of the Retail Funds
c/o Morgan Stanley Trust and Trustee (since July 1991) and the
Harborside Financial Institutional Funds (since
Center, July 2003); formerly Chief
Plaza Two, Executive Officer of the
Jersey City, NJ 07311 Retail Funds (until
September 2002).
James F. Higgins (57) Trustee Since Director or Trustee of the 197 Director of AXA Financial,
c/o Morgan Stanley Trust June 2000 Retail Funds (since June Inc. and The Equitable
Harborside Financial 2000) and the Institutional Life Assurance Society of
Center, Funds (since July 2003); the United States
Plaza Two, Senior Advisor of Morgan (financial services).
Jersey City, NJ 07311 Stanley (since August
2000); Director of the
Distributor and Dean Witter
Realty Inc.; previously
President and Chief
Operating Officer of the
Private Client Group of
Morgan Stanley (May
1999-August 2000), and
President and Chief
Operating Officer of
Individual Securities of
Morgan Stanley (February
1997-May 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT
MANAGEMENT INC.).
20
<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**
- -------------------------- ----------------- ----------------- ----------------------------------------------------------
Ronald E. Robison (66) President and Since May 2003 President (since September 2005) and Principal Executive
1221 Avenue of the Principal Officer of funds in the Fund Complex (since May 2003);
Americas Executive Officer Managing Director of Morgan Stanley & Co. Incorporated
New York, NY 10020 and Morgan Stanley; Managing Director and Director of
Morgan Stanley Investment Management Inc., Morgan Stanley
Distribution Inc. and Morgan Stanley Distributors Inc.;
Managing Director, Chief Administrative Officer and
Director of Morgan Stanley Investment Advisors Inc. and
Morgan Stanley Services Company Inc.; Chief Executive
Officer and Director of Morgan Stanley Trust; Director of
Morgan Stanley SICAV (since May 2004); President (since
September 2005) and Principal Executive Officer (since
May 2003) of the Van Kampen Funds; previously, Executive
Vice President (July 2003-September 2005) of funds in the
Fund Complex and the Van Kampen Funds. He was also
previously President and Director of the Institutional
Funds (March 2001-July 2003), Chief Global Operations
Officer of Morgan Stanley Investment Management Inc. and
Chief Executive Officer and Chairman of Van Kampen
Investor Services.
J. David Germany (51) Vice President Since Managing Director and Chief Investment Officer - Global
25 Cabot Square, February 2006 Fixed Income of Morgan Stanley Investment Management
Canary Wharf, London, Inc., Morgan Stanley Investment Advisors Inc. and Van
United Kingdom E144QA Kampen Asset Management. Managing Director and Director
of Morgan Stanley Investment Management Ltd. Vice
President (since February 2006) of the Morgan Stanley
Retail Funds and Morgan Stanley Institutional Funds.
Dennis F. Shea (52) Vice President Since Managing Director and Chief Investment Officer - Global
1221 Avenue of the February 2006 Equity of Morgan Stanley Investment Advisors Inc., Morgan
Americas Stanley Investment Management Inc. and Van Kampen Asset
New York, NY 10020 Management. Vice President (since February 2006) of the
Morgan Stanley Retail Funds and Morgan Stanley
Institutional Funds. Previously, Managing Director and
Director of Global Equity Research at Morgan Stanley.
Barry Fink (50) Vice President Since General Counsel (since May 2000) and Managing Director
1221 Avenue of the February 1997 (since December 2000) of Morgan Stanley Investment
Americas Management; Managing Director (since December 2000) of
New York, NY 10020 the Investment Adviser and the Administrator; Vice
President of the Retail Funds; Assistant Secretary of
Morgan Stanley DW; Vice President of the Institutional
Funds (since July 2003); Managing Director, Secretary and
Director of the Distributor; previously Secretary
(February 1997-July 2003) and General Counsel (February
1997-April 2004) of the Retail Funds; previously
Secretary (1997-2006) and Director (1997-2005) of the
Investment Adviser and the Administrator; and Secretary
and Director of the Distributor (1997-2005).
Amy R. Doberman (43) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Management; Managing Director (since July 2004) and
Americas Secretary (since February 2006) of Morgan Stanley
New York, NY 10020 Investment Management Inc. and the Investment Adviser,
Managing Director and Secretary of the Distributor (since
February 2006); Managing Director (since February 2005)
and Secretary (since February 2006) of the Administrator;
Vice President of the Institutional and Retail Funds
(since July 2004); various positions with the Van Kampen
Funds and certain of their service providers; previously,
Managing Director and General Counsel - Americas, UBS
Global Asset Management (July 2000-July 2004).
</Table>
21
<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**
- -------------------------- ----------------- ----------------- ----------------------------------------------------------
Carsten Otto (42) Chief Compliance Since October Managing Director and U.S. Director of Compliance for
1221 Avenue of the Officer 2004 Morgan Stanley Investment Management Inc. (since October
Americas 2004); Managing Director of the Investment Adviser and
New York, NY 10020 Morgan Stanley Investment Management Inc.; formerly
Assistant Secretary and Assistant General Counsel of the
Morgan Stanley Retail Funds.
Stefanie V. Chang (39) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Morgan Stanley Investment Management Inc. and the
Americas Investment Adviser; Vice President of the Institutional
New York, NY 10020 Funds (since December 1997) and the Retail Funds (since
July 2003); various positions with the Van Kampen Funds;
formerly practiced law with the New York law firm of
Rogers & Wells (now Clifford Chance US LLP).
Francis J. Smith (40) Treasurer and Treasurer since Executive Director of the Investment Adviser and the
c/o Morgan Stanley Trust Chief Financial July 2003 and Administration (since December 2001); previously, Vice
Harborside Financial Officer Chief Financial President of the Retail Funds (September 2002-July 2003);
Center, Officer since Vice President of the Investment Adviser and the
Plaza Two, September 2002 Administrator (August 2000-November 2001).
Jersey City, NJ 07311
Thomas F. Caloia (59) Vice President Since July 2003 Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust Treasurer of the Investment Adviser, the Distributor and
Harborside Financial the Administrator; previously Treasurer of the Retail
Center, Funds (April 1989-July 2003); formerly First Vice
Plaza Two, President of the Investment Adviser, the Distributor and
Jersey City, NJ 07311 the Administrator.
Mary E. Mullin (38) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Morgan Stanley Investment Management Inc. and the
Americas Investment Adviser; Secretary of the Institutional Funds
New York, NY 10020 (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.
2005 FEDERAL TAX NOTICE (UNAUDITED)
For the year ended December 31, 2005, all of the Fund's
dividends from net investment income were exempt interest
dividends, excludable from gross income for Federal income
tax purposes.
22
<Page>
(This page has been left blank intentionally.)
<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
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
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
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD
(C) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
38555RPT-RA06-00119P-Y12/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
CALIFORNIA TAX-FREE
DAILY INCOME TRUST
ANNUAL REPORT
DECEMBER 31, 2005
[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) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
Additionally, Exhibit B was amended to remove Mitchell M. Merin as a covered
officer.
(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:
<Table>
<Caption>
2005
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 26,938 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540 (2) $ (2)
TAX FEES $ 4,985 (3) $ (4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 5,525 $
TOTAL $ 32,463 $
<Caption>
2004
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 25,660 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452 (2) $ 3,746,495 (2)
TAX FEES $ 5,227 (3) $ 79,800 (4)
ALL OTHER FEES $ - $ - (5)
TOTAL NON-AUDIT FEES $ 5,679 $ 3,826,295
TOTAL $ 31,339 $ 3,826,295
</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.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004 (1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
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(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
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The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
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not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
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rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
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MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
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Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
<Page>
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 9, 2006
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, 2006
/s/ Francis Smith
Francis Smith
Principal Financial Officer
February 9, 2006