N-CSR 1 a2161646zn-csr.txt N-CSR 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: 811-06530 Active Assets California Tax-Free Trust (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: June 30, 2005 Date of reporting period: June 30, 2005 Item 1 - Report to Shareholders WELCOME, SHAREHOLDER: IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST PERFORMED DURING THE 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. FUND REPORT FOR THE YEAR ENDED JUNE 30, 2005 MARKET CONDITIONS Against the backdrop of economic improvement and rising oil prices, the Federal Open Market Committee (the "Fed") raised the federal funds target rate in each of its meetings during the 12-month reporting period. Through this "measured" series of eight 25 basis point increases, the Fed brought the target rate from 1.25 percent at the start of the reporting to 3.25 percent at the close. The yields of short-term instruments rose in response to the Fed's actions. Within the municipal money market, variable-rate securities performed particularly well. Variable-rate securities quickly adjust their yields in response to changes in interest rates, a desirable characteristic in a rising-rate environment. The State of California continued to show signs of improvement. Unemployment moved downward, while residential real estate markets strengthened. The California government's measures to stem budget deficits have been met with approval by investors while growth in personal and corporate income taxes has also contributed to a more stable credit outlook. However, the State still faces many challenges to achieving fiscal balance. For example, tax reforms could curtail revenues and the prospect of steep future Medicaid outlays cast a shadow. PERFORMANCE ANALYSIS As of June 30, 2005, Active Assets California Tax-Free Trust had net assets of approximately $704 million and an average portfolio maturity of 15 days. For the 12-month period ended June 30, 2005, the Fund provided a total return of 1.17 percent. For the seven-day period ended June 30, 2005, the Fund provided an effective annualized yield of 1.78 percent and a current yield of 1.76 percent, while its 30-day moving average yield for June was 1.71 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. We continued to manage the Fund conservatively in anticipation of continued interest-rate increases. We favored securities with daily or weekly rate reset features; this strategy positioned the Fund to benefit speedily as rates increased. Additionally, within the Fund's fixed-rate portfolio, we emphasized commercial paper with maturities of one to three months and to a lesser extent, municipal notes and bonds in the six-to-nine month range. Meanwhile, we decreased exposure to notes with one-year maturities, to avoid hindering the Fund's ability to redeploy assets in higher yielding securities as they came to market. We sought opportunities in financings for smaller municipalities whose issues often offer more attractive yields than those of larger municipal government entities. 2 PORTFOLIO COMPOSITION Variable Rate Municipal Obligations 82.8% Tax-Exempt Commercial Paper 9.5 Municipal Notes 7.7
MATURITY SCHEDULE 1 - 30 Days 95.4% 31 - 60 Days 2.2 61 - 90 Days -- 91 - 120 Days 0.6 121 + Days 1.8
DATA AS OF JUNE 30, 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 INVESTS IN HIGH QUALITY, SHORT-TERM SECURITIES THAT ARE NORMALLY MUNICIPAL OBLIGATIONS THAT PAY INTEREST EXEMPT FROM FEDERAL AND CALIFORNIA INCOME TAXES. THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., SEEKS TO MAINTAIN THE FUND'S SHARE PRICE AT $1.00. THE SHARE PRICE REMAINING STABLE AT $1.00 MEANS THAT THE FUND WOULD PRESERVE THE PRINCIPAL VALUE OF YOUR INVESTMENT. AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS 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 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 3 ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 4 EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including management 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 01/01/05 - 06/30/05. 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.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 01/01/05 - 01/01/05 06/30/05 06/30/05 ------------- ------------- --------------- Actual (0.76% return) $ 1,000.00 $ 1,007.60 $ 3.09 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.72 $ 3.11
---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.62% MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). 5 INVESTMENT ADVISORY AGREEMENT APPROVAL NATURE, EXTENT AND QUALITY OF SERVICES The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser under the Advisory Agreement, including portfolio management, investment research and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Fund's Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities. (The Investment Adviser and the Administrator together are referred to as the "Adviser" and the Advisory and Administration Agreements together are referred to as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper"). The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and investment advisory services to the Fund. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory. PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the Fund's performance for the one-, three- and five-year periods ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper Reports"), compared to the performance of comparable funds selected by Lipper (the "performance peer group"), and noted that the Fund's performance was lower than its performance peer group average for all three periods. The Board considered that the Fund's performance, relative to its performance peer group, has improved, as the gap between the Fund's performance and the average of its performance peer group has narrowed from the five- to the three- to the one-year period. The Board also considered that the range of performance of all the funds in the performance peer group is very narrow. The Board concluded that the Fund's performance was improving and can reasonably be expected to be competitive with that of its performance peer group. FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT STRATEGIES The Board reviewed the advisory and administrative fees (together, the "management fee") paid by the Fund under the Management Agreement. The Board noted that the rate was comparable to the management fee rates charged by the Adviser to any other funds it manages with investment strategies comparable to those of the Fund. 6 FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the management fee rate and total expense ratio of the Fund. The Board noted that: (i) the Fund's management fee rate was higher than the average management fee rate for funds, selected by Lipper (the "expense peer group"), managed by other advisers, with investment strategies comparable to those of the Fund, as shown in the Lipper Report for this Fund; but (ii) the Fund's total expense ratio was lower than the average total expense ratio of the funds included in the Fund's expense peer group. The Board concluded that the management fee rate was competitive in light of the fact that the Adviser managed the Fund so that the total expense ratio of the Fund was less than the total expense ratio of the funds in the expense peer group. BREAKPOINTS AND ECONOMIES OF SCALE The Board reviewed the structure of the Fund's management fee schedule under the Management Agreement and noted that it includes breakpoints. The Board also reviewed the level of the Fund's management fee and noted that the fee, as a percentage of the Fund's net assets, would decrease as net assets increase because the management fee includes breakpoints. The Board concluded that the Fund's management fee would reflect economies of scale as assets increase. PROFITABILITY OF ADVISER AND AFFILIATES The Board considered and reviewed information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last two years from their relationship with the Fund and the Morgan Stanley Fund Complex and reviewed with the Controller of the Adviser the cost allocation methodology used to determine the Adviser's profitability. Based on their review of the information they received, the Board concluded that the profits earned by the Adviser and its affiliates were not excessive in light of the advisory, administrative and other services provided to the Fund. FALL-OUT BENEFITS The Board considered so-called "fall-out benefits" derived by the Adviser and its affiliates from their relationship with the Fund and the Morgan Stanley Fund Complex, such as "float" benefits derived from handling of checks for purchases and redemptions of Fund shares through a broker-dealer affiliate of the Adviser. The Board also considered that a broker-dealer affiliate of the Adviser receives from the Fund 12b-1 fees for shareholder services. The Board concluded that the float benefits were relatively small and that the 12b-1 fees were competitive with those of other broker-dealer affiliates of investment advisers. SOFT DOLLAR BENEFITS The Board considered whether the Adviser realizes any benefits from commissions paid to brokers who execute securities transactions for the Fund ("soft dollars"). The Board noted that the Fund invests only in fixed income securities, which do not generate soft dollars. 7 ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board noted that the Adviser's operations remain profitable, although increased expenses in recent years have reduced the Adviser's profitability. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement. HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER The Board also reviewed and considered the historical relationship between the Fund and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Fund's operations and the Board's confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that it is beneficial for the Fund to continue its relationship with the Adviser. OTHER FACTORS AND CURRENT TRENDS The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund's Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Fund's business. GENERAL CONCLUSION After considering and weighing all of the above factors, the Board concluded it would be in the best interest of the Fund and its shareholders to approve renewal of the Management Agreement for another year. 8 ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST PORTFOLIO OF INVESTMENTS - JUNE 30, 2005
PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE --------------------------------------------------------------------------------------------------------------- California Tax-Exempt Short-Term Variable Rate Municipal Obligations (87.6%) ABAG Finance Authority for Nonprofit Corporations, $ 8,000 Episcopal Homes Foundation Ser 2000 COPs 2.38% 07/08/05 $ 8,000,000 5,000 Lease Purchase 2003 Ser A 2.40 07/08/05 5,000,000 13,980 Anaheim Public Finance Authority, Distribution System ROCs II-R Ser 6021 (MBIA) 2.31 07/08/05 13,980,000 20,000 Big Bear Lake, Southwest Gas Corp 1993 Ser A (AMT) 2.28 07/08/05 20,000,000 2,670 Cabrillo Community College District, 2004 Ser A ROCs II-R 300 (MBIA) 2.31 07/08/05 2,670,000 California, 2,400 Economic Recovery Ser 2004 C-3 2.30 07/01/05 2,400,000 3,000 Economic Recovery Ser 2004 C- 4 2.22 07/01/05 3,000,000 5,000 Economic Recovery Ser 2004 C-13 (XLCA) 2.30 07/08/05 5,000,000 15,700 Economic Recovery Ser 2004 C-18 (XLCA) 2.50 07/08/05 15,700,000 5,900 Economic Recovery Ser 2004 C-21 (XLCA) 2.28 07/08/05 5,900,000 California, 10,020 Ser 2003 C-1 2.25 07/08/05 10,020,000 6,300 Ser 2004 A-9 2.27 07/08/05 6,300,000 36,200 Ser 2004 B-2 2.15 07/01/05 36,200,000 11,970 California Alternative Energy Source Finance Authority, General Electric Capital Corp-Arroyo Energy 1993 Ser B (AMT) 2.25 07/08/05 11,970,000 California Department of Water Resources, 9,200 Power Supply Ser 2002 B Subser B-1 2.22 07/01/05 9,200,000 3,950 Power Supply Ser 2002 C-3 2.25 07/08/05 3,950,000 10,000 Power Supply Ser 2002 C Subser C-16 2.27 07/08/05 10,000,000 6,000 Power Supply Ser 2002 C Subser C-18 2.25 07/08/05 6,000,000 California Educational Facilities Authority, 5,000 California Institute of Technology Ser 1994 2.25 07/08/05 5,000,000 5,465 California Lutheran University Ser 2004 A 2.28 07/08/05 5,465,000 15,165 Stanford University Ser L-5 2.15 07/08/05 15,165,000 7,000 University of San Francisco Ser 2003 2.30 07/08/05 7,000,000 California Health Facilities Financing Authority, 6,900 Adventist Health System/West 1998 Ser A (MBIA) & B (MBIA) 2.22 07/01/05 6,900,000 17,700 Northern California Presbyterian Homes & Services Ser 2004 2.20 07/08/05 17,700,000 1,000 Sisters of Charity of Leavenworth Health System Ser 2003 2.30 07/08/05 1,000,000
SEE NOTES TO FINANCIAL STATEMENTS 9
PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE --------------------------------------------------------------------------------------------------------------- $ 3,480 California Infrastructure & Economic Development Bank, Bay Area Toll Bridges Ser 2005 SGB-56 (Ambac). 2.31% 07/08/05 $ 3,480,000 California Statewide Communities Development Authority, 6,000 Chabad of California Ser 2004 2.23 07/08/05 6,000,000 7,000 Coventry Place Apartments 2002 Ser JJ (AMT) 2.20 07/08/05 7,000,000 4,200 Kaiser Permanente Ser 2004 L 2.26 07/08/05 4,200,000 8,240 Multifamily Housing Martin Luther Tower 2005 Ser D (AMT) 2.45 07/20/05 8,240,000 3,500 University Retirement Community at Davis Inc Ser 2003 (Radian) 2.23 07/01/05 3,500,000 17,955 California Transit Finance Authority, Ser 1997 (FSA) 2.35 07/08/05 17,955,000 15,000 East Bay Municipal Utility District, Wastewater Sub Ser 2005 2.23 07/08/05 15,000,000 7,345 Fresno, Multifamily Housing Heron Pointe Apartments 2001 Ser A 2.22 07/08/05 7,345,000 18,000 Fresno, Sewer System Sub Lien Ser 2000 A (FGIC) 2.20 07/08/05 18,000,000 Irvine Assessment District, 1,645 No 93-14 Improvement Bond Act 1915 2.30 07/01/05 1,645,000 2,750 No 03-19 Improvement Bond Act 1915 Ser A 2.20 07/01/05 2,750,000 9,745 Long Beach, Harbor PUTTERs Ser 444 (MBIA) (AMT) 2.31 07/08/05 9,745,000 22,700 Los Angeles Community Redevelopment Agency, Grand Promenade Ser 2002 2.22 07/08/05 22,700,000 6,000 Los Angeles County Metropolitan Transportation Authority, Prop C Sales Tax 2nd Ser 2004-A Eagle #20040046 (MBIA) 2.31 07/08/05 6,000,000 Los Angeles Department of Water & Power, 1,600 Power System 2001 Ser B Subser B-6 2.21 07/01/05 1,600,000 8,000 Power System 2002 Ser A Subser A-8 2.27 07/08/05 8,000,000 5,500 Water System 2001 Ser B Subser B-1 2.25 07/08/05 5,500,000 16,875 Los Angeles Housing Authority, Multi-Family 2004 Ser A 2.26 07/08/05 16,875,000 11,000 Los Angeles Unified School District, P-FLOATs PT-1855 (FSA) 2.30 07/08/05 11,000,000 Metropolitan Water District of Southern California, 8,000 Water 1999 Ser C 2.25 07/08/05 8,000,000 14,400 Waterworks 2002 Ser A 2.22 07/08/05 14,400,000 15,100 Monterey Peninsula Water Management District, Wastewater Ser 1992 COPs 2.30 07/08/05 15,100,000
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PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE --------------------------------------------------------------------------------------------------------------- $ 13,300 Mountain View, Villa Mariposa Multifamily 1985 Ser A 2.29% 07/08/05 $ 13,300,000 5,655 Newport Beach, Hoag Memorial Hospital Presbyterian 1996 Ser B 2.23 07/01/05 5,655,000 1,800 Orange County, Irvine Coast Assessment District No 88-1 2.22 07/01/05 1,800,000 3,000 Orange County Housing Authority, Oasis Martinique Refg 1998 Issue I 2.23 07/08/05 3,000,000 2,075 Orange County Sanitation District, Ser 2000 B COPs 2.20 07/01/05 2,075,000 7,000 Pasadena, City Hall & Park Improvement Ser 2003 COPs (Ambac) 2.27 07/08/05 7,000,000 10,850 Pleasanton, Greenbriar Bernal Apartments Ser 2001 A (AMT) 2.24 07/08/05 10,850,000 4,500 Pomona Redevelopment Agency, Park & Plaza Apartments Ser 1998 A 2.22 07/08/05 4,500,000 14,600 Poway Unified School District, Ser 2004 COPs (FSA) 2.20 07/08/05 14,600,000 13,200 Rancho Water District Financing Authority, Ser 2001 B (FGIC) 2.17 07/08/05 13,200,000 6,750 Redlands, Orange Village Apartments 1988 Ser A (AMT) 2.35 07/08/05 6,750,000 9,640 Riverside County, 2005 Ser A & B, COPs P-FLOATs PT-2704 (FGIC) 2.30 07/08/05 9,640,000 7,875 Roaring Fork Municipal Products, California Economic Recovery Class A Certificates Ser 2004-4 (FGIC) 2.26 07/08/05 7,875,000 3,500 Sacramento County Housing Authority, Seasons at Winter 2004 Ser C-2 2.20 07/08/05 3,500,000 1,745 San Diego Unified School District, 1998 Ser E-1 ROCs II-R Ser 1067 (MBIA) 2.31 07/08/05 1,745,000 11,275 San Francisco City & County, Folsom-Dore Apartments Ser 2002 A (AMT) 2.59 07/08/05 11,275,000 San Francisco City & County Redevelopment Agency, 21,000 Bayside Village Multifamily Ser 1985 A 2.24 07/08/05 21,000,000 6,000 Mercy Terrace Ser 2005 A 2.20 07/08/05 6,000,000 2,000 San Jose, Multifamily Almaden Lake Village Apartments Ser 2000 A (AMT) 2.30 07/08/05 2,000,000 12,400 Santa Clara, Multifamily Briarwood Apartments Ser 1996 B 2.20 07/08/05 12,400,000
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PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE --------------------------------------------------------------------------------------------------------------- $ 4,705 Turlock Irrigation District, Ser 1988 A 2.30% 07/08/05 $ 4,705,000 6,165 Ventura County, 2003 COPs PUTTERs Ser 474 (FSA) 2.31 07/08/05 6,165,000 ------------- Total California Tax-Exempt Short-Term Variable Rate Municipal Obligations (COST $616,590,000) 616,590,000 ------------- YIELD TO MATURITY COUPON MATURITY ON DATE OF RATE DATE PURCHASE ------ --------- ---------- California Tax-Exempt Commercial Paper (10.1%) 1,809 California Department of Water Resources, Ser 1 2.78% 07/19/05 2.78% 1,809,000 California Infrastructure & Economic Development Bank, 3,300 Bay Area Toll Seismic Retrofit Ser 2005 2.37 07/21/05 2.37 3,300,000 6,000 Bay Area Toll Seismic Retrofit Ser 2005 2.35 08/04/05 2.35 6,000,000 10,000 California Statewide Communities Development Authority, Kaiser Permanente Ser 2004 K 2.82 07/14/05 2.82 10,000,000 4,400 San Diego County Regional Airport Authority, Lindberg Field Ser B 2.50 10/06/05 2.50 4,400,000 10,000 San Diego County Water Authority, Ser 1 2.73 08/29/05 2.73 10,000,000 10,000 San Francisco City & County Public Utilities Commission, Water Ser 2001 2.68 07/26/05 2.68 10,000,000 4,000 San Francisco County Transportation Authority, 2004 Ser A 2.40 07/21/05 2.40 4,000,000 San Gabriel Valley Council of Governments, 6,400 Alameda Corridor-East GANs 2.37 07/12/05 2.37 6,400,000 15,000 Alameda Corridor-East GANs 2.45 07/12/05 2.45 15,000,000 ------------- Total California Tax-Exempt Commercial Paper (COST $70,909,000) 70,909,000 ------------- California Tax-Exempt Short-Term Municipal Notes (8.1%) California School Cash Reserve Program Authority, 19,000 2004 Pool Ser A, dtd 07/06/04 3.00 07/06/05 1.60 19,003,584 6,000 2005 Pool Ser A, dtd 07/06/05 (WI) 4.00 07/06/06 2.60 6,081,840 1,950 Mt Diablo Unified School District, Ser 2004 TRANs, dtd 11/10/04 3.00 11/09/05 2.20 1,955,387 3,700 Placentia, Ser 2005 TRANs, dtd 07/01/05 (WI) 3.75 06/30/06 2.80 3,734,077
SEE NOTES TO FINANCIAL STATEMENTS 12
YIELD TO PRINCIPAL MATURITY AMOUNT IN COUPON MATURITY ON DATE OF THOUSANDS RATE DATE PURCHASE VALUE --------------------------------------------------------------------------------------------------------------- $ 13,000 Sacramento County, 2004 Ser A TRANs, dtd 07/01/04 3.00% 07/11/05 1.65% $ 13,004,729 7,000 Santa Cruz County, 2004-2005 A TRANs, dtd 07/07/04 3.00 07/06/05 1.62 7,001,302 1,750 Selma, Ser 2005 TRANs, dtd 07/01/05 (WI) 4.00 06/30/06 2.80 1,770,370 4,750 Victor Valley Joint Union High School District, Ser 2004 TRANs, dtd 07/22/04 2.75 07/21/05 1.65 4,752,816 ------------- Total California Tax-Exempt Short-Term Municipal Notes (COST $57,304,105) 57,304,105 ------------- Total Investments (COST $744,803,105) (a) (b) 105.8% 744,803,105 Liabilities In Excess of Other Assets (5.8) (40,512,003) ----- ------------- Net Assets 100.0% $ 704,291,102 ===== =============
---------- AMT ALTERNATIVE MINIMUM TAX. COPS CERTIFICATES OF PARTICIPATION. GANS GRANT ANTICIPATION NOTES. P-FLOATS PUTTABLE FLOATING OPTION TAX-EXEMPT RECEIPTS. PUTTERS PUTTABLE TAX-EXEMPT RECEIPTS. ROCS RESET OPTION CERTIFICATES. TRANS TAX AND REVENUE ANTICIPATION NOTES. WI SECURITY PURCHASED ON A WHEN-ISSUED BASIS. + RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2005. * DATE ON WHICH THE PRINCIPAL AMOUNT CAN BE RECOVERED THROUGH DEMAND. (a) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO $11,586,287 IN CONNECTION WITH THE PURCHASE OF WHEN-ISSUED SECURITIES. (b) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES. BOND INSURANCE: AMBAC AMBAC ASSURANCE CORPORATION. FGIC FINANCIAL GUARANTY INSURANCE COMPANY. FSA FINANCIAL SECURITY ASSURANCE INC. MBIA MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION. RADIAN RADIAN ASSET ASSURANCE INC. XLCA XL CAPITAL ASSURANCE INC. SEE NOTES TO FINANCIAL STATEMENTS 13 ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2005 ASSETS: Investments in securities, at value (cost $744,803,105) $ 744,803,105 Cash 80,041 Interest receivable 3,144,702 Prepaid expenses and other assets 29,333 --------------- TOTAL ASSETS 748,057,181 --------------- LIABILITIES: Payable for: Investments purchased 43,314,824 Investment advisory fee 255,025 Distribution fee 59,788 Administration fee 29,894 Accrued expenses and other payables 106,548 --------------- TOTAL LIABILITIES 43,766,079 --------------- NET ASSETS $ 704,291,102 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 704,286,145 Accumulated undistributed net investment income 4,957 --------------- NET ASSETS $ 704,291,102 =============== NET ASSET VALUE PER SHARE, 704,266,819 shares outstanding (unlimited shares authorized of $.01 par value) $ 1.00 ===============
SEE NOTES TO FINANCIAL STATEMENTS 14 STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2005 NET INVESTMENT INCOME: INTEREST INCOME $ 12,596,959 --------------- EXPENSES Investment advisory fee 3,157,024 Distribution fee 709,565 Administration fee 233,626 Transfer agent fees and expenses 96,554 Professional fees 64,515 Shareholder reports and notices 34,213 Custodian fees 34,118 Trustees' fees and expenses 15,565 Registration fees 14,280 Other 36,536 --------------- TOTAL EXPENSES 4,395,996 LESS: EXPENSE OFFSET (33,362) --------------- NET EXPENSES 4,362,634 --------------- NET INVESTMENT INCOME $ 8,234,325 ===============
SEE NOTES TO FINANCIAL STATEMENTS 15 STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED JUNE 30, 2005 JUNE 30, 2004 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 8,234,325 $ 2,590,346 Dividends to shareholders from net investment income (8,234,061) (2,590,218) Net increase (decrease) from transactions in shares of beneficial interest 16,490,532 (74,647,531) ------------- ------------- NET INCREASE (DECREASE) 16,490,796 (74,647,403) NET ASSETS: Beginning of period 687,800,306 762,447,709 ------------- ------------- END OF PERIOD (INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $4,957 AND $4,693, RESPECTIVELY) $ 704,291,102 $ 687,800,306 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS 16 ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2005 1. ORGANIZATION AND ACCOUNTING POLICIES Active Assets California Tax-Free Trust (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is to provide a high level of daily income which is exempt from federal and California income tax consistent with stability of principal and liquidity. The Fund was organized as a Massachusetts business trust on July 10, 1991 and commenced operations on November 12, 1991. The following is a summary of significant accounting policies: A. VALUATION OF INVESTMENTS -- Portfolio securities are valued at amortized cost, which approximates market value. 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 Effective November 1, 2004, pursuant to an Investment Advisory Agreement with Morgan Stanley Investment Advisors Inc. (the "Investment Adviser"), the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.45% to the portion of the daily net assets not exceeding $500 million; 0.375% to the portion of the daily net assets exceeding $500 million but not exceeding $750 million; 0.325% to the portion of the daily net assets exceeding $750 million but not exceeding $1 billion; 0.30% to the portion of the daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.275% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.25% to the portion of the daily net assets exceeding $2 billion but not 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. 17 Effective November 1, 2004, pursuant to 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. Prior to November 1, 2004, the Fund had retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement pursuant to which the Fund paid the Investment Adviser a monthly management fee, accrued daily and payable monthly, by applying the 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 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. 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 June 30, 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 June 30, 2005, aggregated $1,917,675,208 and $1,930,202,000, respectively. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. 18 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 June 30, 2005, included in Trustees' fees and expenses in the Statement of Operations amounted to $6,588. At June 30, 2005, the Fund had an accrued pension liability of $55,006 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 and eliminate the future benefits growth due to increases to compensation after July 31, 2003. 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:
FOR THE YEAR FOR THE YEAR ENDED ENDED JUNE 30, 2005 JUNE 30, 2004 -------------- -------------- Shares sold 2,680,347,592 2,395,182,645 Shares issued in reinvestment of dividends 8,234,061 2,590,218 -------------- -------------- 2,688,581,653 2,397,772,863 Shares redeemed (2,672,091,121) (2,472,420,394) -------------- -------------- Net increase (decrease) in shares outstanding 16,490,532 (74,647,531) ============== ==============
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 generally alleges that defendants, including the Fund, violated their statutory 19 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 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 10, 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 early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 20 ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED JUNE 30, ----------------------------------------------------------------------------------- 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 0.012 0.003 0.006 0.011 0.026 Less dividends from net investment income (0.012) (0.003) (0.006) (0.011) (0.026) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ============ ============ ============ ============ ============ TOTAL RETURN 1.17% 0.35% 0.63% 1.15% 2.68% RATIOS TO AVERAGE NET ASSETS: Expenses (before expense offset) 0.62%(1) 0.61% 0.60% 0.60% 0.59% Net investment income 1.16% 0.35% 0.63% 1.14% 2.64% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 704,291 $ 687,800 $ 762,448 $ 762,656 $ 759,089
---------- (1) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%. SEE NOTES TO FINANCIAL STATEMENTS 21 ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST: We have audited the accompanying statement of assets and liabilities of Active Assets California Tax-Free Trust (the "Fund"), including the portfolio of investments, as of June 30, 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 June 30, 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 Active Assets California Tax-Free Trust as of June 30, 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 AUGUST 15, 2005 22 ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST TRUSTEE AND OFFICER INFORMATION INDEPENDENT TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE --------------------------------------- ----------- ------------ ----------------------- ------------- ----------------------- Michael Bozic (64) Trustee Since Private Investor; 197 Director of various c/o Kramer Levin Naftalis & Frankel LLP April 1994 Director or Trustee of business organizations. Counsel to the Independent Trustees the Retail Funds (since 1177 Avenue of the Americas April 1994) and the New York, NY 10036 Institutional Funds (since July 2003); formerly Vice Chairman of Kmart Corporation (December 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 (72) Trustee Since Consultant; Director or 197 Director of Franklin 1031 N. Chartwell Court January 1993 Trustee of the Retail Covey (time management Salt Lake City, UT 84103 Funds (since systems), BMW Bank of January 1993) and the North America, Inc. Institutional Funds (industrial loan (since July 2003); corporation), Escrow member of the Utah Bank USA (industrial Regional Advisory Board loan corporation), of Pacific Corp. United Space Alliance (Utility Company); (joint venture between formerly Managing Lockheed Martin and the Director of Summit Boeing Company) and Ventures LLC Nuskin Asia Pacific (Lobbying and Consulting (multilevel marketing); Firm) (2000-2004); member of the board of United States Senator various civic and (R-Utah) (1974-1992) charitable and Chairman, Senate organizations. Banking Committee (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 c/o Kramer Levin Naftalis & Frankel LLP September Trustee of the Retail Group Inc. (private Counsel to the Independent Trustees 1997 Funds (since mortgage insurance); 1177 Avenue of the Americas September 1997) and the Trustee and Vice New York, NY 10036 Institutional Funds Chairman of The Field (since July 2003); Museum of Natural formerly associated History; director of with the Allstate various other business Companies (1966-1994), and charitable most recently as organizations. 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).
23
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE --------------------------------------- ----------- ------------ ----------------------- ------------- ----------------------- Dr. Manuel H. Johnson (56) Trustee Since Senior Partner, Johnson 197 Director of NVR, Inc. c/o Johnson Smick Group, Inc. July 1991 Smick International, (home construction); 888 16th Street, NW Inc., a consulting Director of KFX Energy; Suite 740 firm; Chairman of the Director of RBS Washington, D.C. 20006 Audit Committee and Greenwich Capital Director or Trustee of Holdings (financial the Retail Funds (since holding company). July 1991) and the Institutional 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 (62) Trustee Since President, Kearns & 198 Director of Electro c/o Kearns & Associates LLC July 2003 Associates LLC Rent Corporation PMB754 (investment (equipment leasing), 23852 Pacific Coast Highway consulting); Deputy The Ford Family Malibu, CA 90265 Chairman of the Audit Foundation, and the Committee and Director UCLA Foundation. or Trustee of the Retail Funds (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 197 Director of various c/o Triumph Capital, L.P. July 1991 Triumph Capital, L.P., business organizations. 445 Park Avenue a private investment New York, NY 10022 partnership; Chairman of the Insurance 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 (72) Trustee Since Chairman of Lumelite 198 Trustee and Director of c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; certain investment 85 Charles Colman Blvd. Chairman of the companies in the Pawling, NY 12564 Governance Committee JPMorgan Funds complex and Director or Trustee managed by J.P. Morgan of the Retail Funds Investment Management (since July 2003) and Inc. the Institutional Funds (since June 1992).
24 INTERESTED TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE --------------------------------------- ----------- ------------ ----------------------- ------------- ----------------------- Charles A. Fiumefreddo (72) Chairman of Since Chairman and Director 197 None. c/o Morgan Stanley Trust the Board July 1991 or Trustee of the Harborside Financial Center, and Trustee Retail Funds (since Plaza Two, July 1991) and the Jersey City, NJ 07311 Institutional Funds (since July 2003); formerly Chief Executive Officer of the Retail Funds (until September 2002). James F. Higgins (57) Trustee Since Director or Trustee of 197 Director of AXA c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and The Harborside Financial Center, June 2000) and the Equitable Life Assurance Plaza Two, Institutional Funds Society of the United Jersey City, NJ 07311 (since July 2003); States (financial Senior Advisor of services). Morgan 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).
---------- * 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.). 25 OFFICERS:
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 (51) President Since May 1999 President and Chief Operating Officer of Morgan Stanley 1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief New York, NY 10020 Executive Officer of the Investment Adviser and the Administrator; Chairman and Director of the Distributor; Chairman and Director of the Transfer Agent; Director of various Morgan Stanley subsidiaries; 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 and President (since October 2002) of the Van Kampen Open-End Funds. Ronald E. Robison (66) Executive Vice Since Principal Executive Officer of Funds in the Fund Complex 1221 Avenue of the Americas President and April 2003 (since May 2003); Managing Director of Morgan Stanley & Co. New York, NY 10020 Principal Incorporated, Morgan Stanley Investment Management Inc. and Executive Morgan Stanley; Managing Director, Chief Administrative Officer Officer and Director of the Investment Adviser and the Administrator; 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) and the Retail Funds (since April 2003); Director of Morgan Stanley SICAV (since May 2004); previously, President and Director of the Institutional Funds (March 2001-July 2003) and Chief Global Operations Officer and Managing Director of Morgan Stanley Investment Management Inc. Joseph J. McAlinden (62) Vice President Since July 1995 Managing Director and Chief Investment Officer of the 1221 Avenue of the Americas Investment Adviser and Morgan Stanley Investment Management New York, NY 10020 Inc.; Chief Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). Barry Fink (50) Vice President Since General Counsel (since May 2000) and Managing Director 1221 Avenue of the Americas February 1997 (since December 2000) of Morgan Stanley Investment New York, NY 10020 Management; Managing Director (since December 2000), Secretary (since February 1997) and Director of 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; Vice President and Assistant General Counsel of the Investment Adviser and the Administrator (February 1997- December 2001). Amy R. Doberman (43) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment 1221 Avenue of the Americas Management; Managing Director of Morgan Stanley Investment New York, NY 10020 Management Inc. and the Investment Adviser, Vice President of the Institutional and Retail Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); previously, Managing Director and General Counsel - Americas, UBS Global Asset Management (July 2000-July 2004) and General Counsel, Aeltus Investment Management, Inc. (January 1997-July 2000). Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for 1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since October 2004); New York, NY 10020 Officer Executive Director of the Investment Adviser and Morgan Stanley Investment Management Inc.; formerly Assistant Secretary and Assistant General Counsel of the Morgan Stanley Retail Funds.
26
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** ---------------------------- --------------- --------------- ------------------------------------------------------------ Stefanie V. Chang (38) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated, 1221 Avenue of the Americas Morgan Stanley Investment Management Inc. and the Investment New York, NY 10020 Adviser; Vice 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 US LLP). Francis J. Smith (39) 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 Center, Officer Chief Financial President of the Retail Funds (September 2002-July 2003); Plaza Two, Officer since Vice President of the Investment Adviser and the Jersey City, NJ 07311 September 2002 Administrator (August 2000-November 2001) and Senior Manager at PricewaterhouseCoopers LLP (January 1998-August 2000). 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 the Harborside Financial Center, Administrator; previously Treasurer of the Retail Funds Plaza Two, (April 1989-July 2003); formerly First Vice President of the Jersey City, NJ 07311 Investment Adviser, the Distributor and the Administrator. Mary E. Mullin (38) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated, 1221 Avenue of the Americas Morgan Stanley Investment Management Inc. and the Investment New York, NY 10020 Adviser; 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.
---------- * 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 June 30, 2005 all of the Fund's dividends from net investment income were exempt interest dividends, excludable from gross income for Federal income tax purposes. 27 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 Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER Joseph J. McAlinden 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] RA05-00634P-Y06/05 [GRAPHIC] MORGAN STANLEY FUNDS ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST ANNUAL REPORT JUNE 30,2005 [MORGAN STANLEY LOGO] 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)." (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. Item 4. Principal Accountant Fees and Services. (a)(b)(c)(d) and (g). Based on fees billed for the periods shown: 2005
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 28,105 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 540 (2) $ 3,215,745 (2) TAX FEES $ 5,227 (3) $ 24,000 (4) ALL OTHER FEES $ - $ - TOTAL NON-AUDIT FEES $ 5,767 $ 3,239,745 TOTAL $ 33,872 $ 3,239,745
2004
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 26,761 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 452 (2) $ 3,225,276 (2) TAX FEES $ 4,929 (3) $ 610,053 (4) ALL OTHER FEES $ - $ - (5) TOTAL NON-AUDIT FEES $ 5,381 $ 3,835,329 TOTAL $ 32,142 $ 3,835,329
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. (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. ---------- (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. 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 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 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 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. 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. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Active Assets California Tax-Free Trust /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer August 23, 2005 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 August 23, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer August 23, 2005