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: 811-07111
Morgan Stanley Insured California Municipal Securities
(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: October 31, 2003
Date of reporting period: April 30, 2003
Item 1. Report to Stockholders.
Morgan Stanley Insured California Municipal Securities
LETTER TO THE SHAREHOLDERS - APRIL 30, 2003
Dear Shareholder:
During the six-month period ended April 30, 2003, U.S. economic growth was
positive but disappointing. The pattern of the recovery remained uneven with
many indicators fluctuating between strength and weakness. The military conflict
in Iraq and the ongoing war against terrorism cast a shadow over the economy and
the financial markets. The sluggish economy and uncertain geopolitical outlook
generally favored bonds and led to lower interest rates throughout the period.
Consumer spending was the best-performing sector of the economy last year.
Mortgage refinancing and low auto loan rates helped keep Americans buying. By
year-end a growing apprehension about Iraq began to dominate investor sentiment
and consumer confidence waned. The most noticeable impact of the evolving war
risk was a spike in oil prices that had a dampening effect similar to a tax
increase. Confidence was also shaken when unemployment reached an eight-year
high. To guard against further downside risks, the Federal Reserve Board lowered
the federal funds rate from 1.75 to 1.25 percent in early November. This marked
the first change by the central bank in almost a year. Early in 2003, the Bush
administration proposed several tax relief measures to bolster the economy.
Uncertainty prior to the invasion of Iraq slowed economic activity in March.
However, resolution of the conflict prompted the financial markets again to
focus on the economic outlook.
Municipal Market Conditions
The yield on the 30-year insured municipal bond index continued to trend lower
over the six-month period ended April 30, 2003. The yield declined from a high
of 5.10 percent in November 2002 to a low of 4.70 percent in April. Throughout
the period, the municipal yield curve was at or near its steepest level in 25
years. The pickup along the yield curve for extending maturities from one to 30
years was 350 basis points on April 30, 2003.
The ratio of municipal yields as a percentage of U.S. Treasury yields is used to
gauge the relative value of municipals. In October 2002 the ratio of 30-year
insured municipal bond yields to 30-year Treasuries moved above 100 percent,
remaining there through the first quarter of 2003. In April the ratio fell to 99
percent as the Treasury flight-to-quality rally subsided. This still-high ratio
indicated that municipals were relatively cheaper than Treasuries.
The President's tax proposals, which included elimination of taxation on
dividend income and acceleration of a reduction in tax brackets, affected the
municipal market. The tax-exempt bond
Morgan Stanley Insured California Municipal Securities
LETTER TO THE SHAREHOLDERS - APRIL 30, 2003 continued
market reacted to potential tax-reform risk by adjusting the relationship of
tax-exempt issues to taxables.
Long-term municipal volume, as reported in The Bond Buyer, increased to a record
$357 billion in 2002 as state and local governments took advantage of lower
interest rates to meet cash flow needs and refinance outstanding debt. In the
first four months of 2003, new-issue volume reached a record $113 billion, 21
percent above last year's level. We expect this pace to continue throughout the
year as budgetary problems force states and municipalities to borrow.
California's share of national volume increased to 19 percent.
Performance
The net asset value (NAV) of Morgan Stanley Insured California Municipal
Securities (ICS) decreased from $15.56 to $15.47 per share for the six months
ended April 30, 2003. Based on this change, plus the reinvestment of tax-free
dividends totaling $0.345 per share, a short-term capital gain distribution of
$0.041 per share and a long-term capital gain distribution of $0.231 per share,
the Trust's total NAV return was 3.83 percent. ICS's price on the New York Stock
Exchange (NYSE) decreased from $14.15 to $13.92 per share during the same
period. Based on this change plus reinvestment of dividends and distributions,
ICS's total market value return was 2.73 percent. On April 30, 2003, ICS's
market price was at a 10.02 percent discount to its NAV.
Monthly dividends for the second quarter of 2003, declared in March, were
unchanged at $0.0575 per share. The dividend reflects the level of the Trust's
undistributed net investment income and projected earnings. The Trust's level of
undistributed net investment income was $0.113 per share on April 30, 2003,
versus $0.128 per share six months earlier. Past performance is no guarantee of
future results.
Portfolio Structure
The Trust's net assets of $59 million were diversified among 12 long-term
sectors and 33 credits. Issues in three essential service sectors: general
obligation, water and sewer and municipal electric accounted for 48 percent of
the long-term portfolio.
Importantly, the Trust has avoided bonds secured by tobacco settlement payments.
Many states including California have issued bonds backed by their entitlement
to revenues from the Master Settlement Agreement with tobacco companies. A class
action judgment against Philip Morris, a major participant in the agreement, has
created uncertainty about the company's ability to meet its obligations.
2
Morgan Stanley Insured California Municipal Securities
LETTER TO THE SHAREHOLDERS - APRIL 30, 2003 continued
At the end of April the portfolio's average maturity was 19 years. ICS's
duration, a measure of sensitivity to interest rate changes, was 6.9 years. The
accompanying charts provide current information on the portfolio's credit
enhancements, maturity distribution and sector concentrations. Optional
redemption provisions by year of the call and respective cost (book) yields are
also charted.
The Trust's procedure for reinvestment of all dividends and distributions on
common shares is through purchases in the open market. This method helps support
the market value of the Trust's shares. In addition, we would like to remind you
that the Trustees have approved a procedure whereby the Trust may, when
appropriate, purchase shares in the open market or in privately negotiated
transactions at a price not above market value or net asset value, which ever is
lower at the time of purchase. During the six-month period ended April 30, 2003
the Trust purchased and retired 40,600 shares of common stock at a weighted
average market discount of 8.87 percent.
We appreciate your ongoing support of Morgan Stanley Insured California
Municipal Securities and look forward to continuing to serve your investment
needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
Charles A. Fiumefreddo Mitchell M. Merin
Chairman of the Board President
3
Morgan Stanley Insured California Municipal Securities
LETTER TO THE SHAREHOLDERS - APRIL 30, 2003 continued
[LARGEST SECTORS BAR GRAPH]
LARGEST SECTORS AS OF APRIL 30, 2003
(% OF LONG-TERM PORTFOLIO)
Tax Allocation 20%
General Obligation 19%
Water & Sewer 19%
Electric 10%
Mortgage 10%
Refunded 6%
Education 5%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
[CREDIT RATINGS PIE CHART]
CREDIT ENHANCEMENTS AS OF APRIL 30, 2003
(% OF LONG-TERM PORTFOLIO)
AMBAC 31%
FGIC 19%
FSA 23%
US GOVT BACKED 2%
MBIA 22%
CONNIE LEE 3%
AS MEASURED BY MOODY'S INVESTORS SERVICE, INC. OR STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
[DISTRIBUTION BY MATURITY BAR CHART]
DISTRIBUTION BY MATURITY
(% OF LONG-TERM PORTFOLIO)
WEIGHTED AVERAGE
MATURITY: 19 YEARS
1-5 YEARS 0%
5-10 YEARS 5%
10-20 YEARS 56%
20-30 YEARS 39%
30+ YEARS 0%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
4
Morgan Stanley Insured California Municipal Securities
LETTER TO THE SHAREHOLDERS - APRIL 30, 2003 continued
[CALL AND COST (BOOK) YIELD STRUCTURE CHARTS]
CALL AND COST (BOOK) YIELD STRUCTURE
(BASED ON LONG-TERM PORTFOLIO)
APRIL 30, 2003
WEIGHTED AVERAGE
CALL PROTECTION: 6 YEARS
PERCENT CALLABLE
2003 11.0%
2004 32.0%
2005 2.0%
2006 0.0%
2007 0.0%
2008 0.0%
2009 4.0%
2010 2.0%
2011 18.0%
2012 17.0%
2013+ 14.0%
YEARS BONDS CALLABLE
WEIGHTED AVERAGE
BOOK YIELD: 5.6%
COST (BOOK) YIELD*
2003 6.1%
2004 6.3%
2005 6.2%
2006 --
2007 --
2008 --
2009 5.9%
2010 5.6%
2011 5.2%
2012 4.9%
2013+ 4.6%
* COST OR "BOOK" YIELD IS THE ANNUAL INCOME EARNED ON A PORTFOLIO INVESTMENT
BASED ON ITS ORIGINAL PURCHASE PRICE BEFORE TRUST OPERATING EXPENSES. FOR
EXAMPLE, THE TRUST IS EARNING A BOOK YIELD OF 6.1% ON 11% OF THE LONG-TERM
PORTFOLIO THAT IS CALLABLE IN 2003.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
5
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2003 (UNAUDITED)
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------
California Tax-Exempt Municipal Bonds (96.0%)
General Obligation (18.3%)
$ 3,000 California, Various Purpose Dtd 03/01/94 (FSA)............. 5.50% 03/01/20 $ 3,146,580
2,000 Los Angeles Community College District, Election 2001 Ser A
(MBIA)................................................... 5.00 06/01/26 2,055,660
Los Angeles Unified School District,
1,000 2003 Ser A (MBIA)........................................ 5.25 07/01/19 1,094,790
1,000 2003 Ser A (MBIA)........................................ 5.00 01/01/28 1,030,500
1,000 San Diego Unified School District, 2002 Ser D (FGIC)....... 5.25 07/01/24 1,067,090
1,000 Tahoe Truckee Unified School District, District No 1 2001
Refg (MBIA).............................................. 5.50 08/01/18 1,160,000
1,375 Upland School District, Election of 2000 Ser 2001 B
(FSA).................................................... 0.00+ 08/01/25 1,397,743
------- -----------
10,375 10,952,363
------- -----------
Educational Facilities Revenue (4.4%)
California Educational Facilities Authority,
1,500 National University Ser 1994 (Connie Lee)................ 6.20 05/01/21 1,595,070
1,000 Pepperdine University Refg Ser 2003 A (FGIC) (WI)........ 5.00 09/01/33 1,026,960
------- -----------
2,500 2,622,030
------- -----------
Electric Revenue (9.7%)
1,000 Anaheim Public Financing Authority, Generation Refg Ser
2002-B (FSA)............................................. 5.25 10/01/18 1,094,800
1,400 California State Department of Water Resources, Power
Supply Ser 2002 A (Ambac)................................ 5.375 05/01/18 1,546,300
1,000 Los Angeles Department of Water & Power, 2001 Ser A
(FSA).................................................... 5.25 07/01/21 1,069,780
1,000 Modesto Irrigation District, Ser 2001 A COPs (FSA)......... 5.00 07/01/31 1,023,960
1,000 Southern California Public Power Authority, Transmission
Refg Ser 2002 A (FSA).................................... 5.25 07/01/18 1,092,700
------- -----------
5,400 5,827,540
------- -----------
Hospital Revenue (3.6%)
2,000 California Statewide Communities Development Authority,
------- Sharp Health Care COPs (MBIA)............................ 6.00 08/15/24 2,144,440
-----------
Mortgage Revenue - Multi-Family (5.0%)
2,840 Los Angeles Community Redevelopment Agency, 1994 Ser A
------- (Ambac).................................................. 6.45 07/01/17 3,009,889
-----------
See Notes to Financial Statements
6
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2003 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------
Mortgage Revenue - Single Family (4.9%)
$ 2,000 California Department of Veterans Affairs, Home Purchase
2002 Ser A (Ambac)....................................... 5.35% 12/01/27 $ 2,090,620
805 California Housing Financing Agency, 1995 Ser B (AMT)
(Ambac).................................................. 6.25 08/01/14 858,219
------- -----------
2,805 2,948,839
------- -----------
Public Facilities Revenue (1.8%)
1,000 Glendale Unified School District, 1994 Ser A COPs
------- (Ambac).................................................. 6.00 03/01/19 1,053,940
-----------
Resource Recovery Revenue (3.8%)
2,000 Sacramento Financing Authority, 1999 Solid Waste & Redev
------- (Ambac).................................................. 5.75 12/01/22 2,250,320
-----------
Tax Allocation Revenue (19.4%)
2,000 Bay Area Government Association, Pool 1994 Ser A (FSA)..... 6.00 12/15/24 2,171,720
2,000 Brea Redevelopment Agency, 1993 Refg Ser AB (MBIA)......... 5.75 08/01/23 2,060,840
1,800 Burbank Public Financing Authority, Golden State
Redevelopment 2003 Ser A (Ambac)......................... 5.25 12/01/14 2,047,554
3,000 Corona Redevelopment Agency, Area A 1994 Refg Ser A
(FGIC)................................................... 6.25 09/01/13 3,236,879
1,000 Long Beach Bond Finance Authority, Downtown, North Long
Beach, Poly High and West Beach Areas 2002 Ser A
(Ambac).................................................. 5.375 08/01/21 1,089,250
1,000 South Orange County Public Financing District #88-1, 1994
Ser A (MBIA)............................................. 6.00 09/01/18 1,034,860
------- -----------
10,800 11,641,103
------- -----------
Transportation Facilities Revenue (1.7%)
1,000 San Jose, Airport Ser 2001 A (FGIC)........................ 5.00 03/01/25 1,027,990
------- -----------
Water & Sewer Revenue (18.1%)
1,500 California Department of Water Resources, Central Valley
Ser Y (FGIC)............................................. 5.25 12/01/19 1,641,270
2,000 East Bay Municipal Utility District, Water Ser 2001
(MBIA)................................................... 5.00 06/01/26 2,054,800
2,900 Garden Grove Public Finance Authority, Water Ser 1993
(FGIC)................................................... 5.50 12/15/23 3,028,180
2,000 Sacramento Financing Authority, Water & Capital Improvement
2001 Ser A (Ambac)....................................... 5.00 12/01/26 2,054,800
2,000 San Francisco Public Utilities Commission, Water Refg Ser A
2001 (FSA)............................................... 5.00 11/01/31 2,050,120
------- -----------
10,400 10,829,170
------- -----------
See Notes to Financial Statements
7
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2003 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------
Refunded (5.3%)
$ 2,000 Anaheim, Anaheim Memorial Hospital Assn COPs (Ambac)
(ETM).................................................... 5.125% 05/15/20 $ 2,101,560
1,000 Puerto Rico Infrastructure Financing Authority, 2000 Ser A
(ETM).................................................... 5.50 10/01/32 1,099,580
------- -----------
3,000 3,201,140
------- -----------
54,120 Total California Tax-Exempt Municipal Bonds (Cost $53,458,468)................. 57,508,764
------- -----------
California Short-Term Tax-Exempt Municipal Obligation (2.5%)
1,500 California Health Facilities Financing Authority, Adventist
------- Health/West 1998 Ser B (MBIA) (Demand 05/01/03)
(Cost $1,500,000)........................................ 1.30* 09/01/28 1,500,000
-----------
$55,620 Total Investments (Cost $54,958,468) (a) (b)......................... 98.5% 59,008,764
=======
Other Assets in Excess of Liabilities................................ 1.5 870,254
----- -----------
Net Assets Applicable to Common Shareholders......................... 100.0% $59,879,018
===== ===========
---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
WI Security purchased on a when-issued basis.
+ Currently a zero coupon security; will convert to 5.125% on
August 1, 2003.
* Current coupon of variable rate demand obligation.
(a) Securities have been designated as collateral in an amount
equal to $1,026,960 in connection with the purchase of
when-issued securities.
(b) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross and net unrealized appreciation is
$4,050,296.
Bond Insurance:
---------------
Ambac Ambac Assurance Corporation.
Connie Lee Connie Lee Insurance Company - A wholly owned subsidiary of
Ambac Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
See Notes to Financial Statements
8
Morgan Stanley Insured California Municipal Securities
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
April 30, 2003 (unaudited)
Assets:
Investments in securities, at value
(cost $54,958,468)........................................ $59,008,764
Cash........................................................ 64,589
Interest receivable......................................... 854,698
Prepaid expenses............................................ 11,920
-----------
Total Assets............................................ 59,939,971
-----------
Liabilities:
Payable for:
Investment management fee............................... 18,894
Common shares of beneficial interest repurchased........ 4,176
Accrued expenses............................................ 37,883
-----------
Total Liabilities....................................... 60,953
-----------
Preferred shares of beneficial interest (1,000,000 shares
authorized of non-participating $.01 par value, none
issued)................................................... --
-----------
Net Assets Applicable to Common Shareholders............ $59,879,018
===========
Composition of Net Assets Applicable to Common Shareholders:
Common shares of beneficial interest (unlimited shares
authorized of $.01 par value, 3,870,713 shares
outstanding).............................................. $54,891,640
Net unrealized appreciation................................. 4,050,296
Accumulated undistributed net investment income............. 437,034
Accumulated undistributed net realized gain................. 500,048
-----------
Net Assets Applicable to Common Shareholders............ $59,879,018
===========
Net Asset Value Per Common Share,
($59,879,018 divided by 3,870,713 common shares
outstanding).............................................. $15.47
===========
See Notes to Financial Statements
9
Morgan Stanley Insured California Municipal Securities
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended April 30, 2003 (unaudited)
Net Investment Income:
Interest Income............................................. $1,525,575
----------
Expenses
Investment management fee................................... 104,149
Professional fees........................................... 24,828
Transfer agent fees and expenses............................ 9,022
Shareholder reports and notices............................. 8,334
Registration fees........................................... 5,333
Trustees' fees and expenses................................. 5,041
Custodian fees.............................................. 2,413
Other....................................................... 2,883
----------
Total Expenses.......................................... 162,003
Less: expense offset........................................ (2,408)
----------
Net Expenses............................................ 159,595
----------
Net Investment Income................................... 1,365,980
----------
Net Realized and Unrealized Gain:
Net realized gain........................................... 500,049
Net change in unrealized appreciation....................... 124,794
----------
Net Gain................................................ 624,843
----------
Net Increase................................................ $1,990,823
==========
See Notes to Financial Statements
10
Morgan Stanley Insured California Municipal Securities
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2003 OCTOBER 31, 2002
-------------- ----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 1,365,980 $ 2,849,517
Net realized gain........................................... 500,049 1,023,964
Net change in unrealized appreciation....................... 124,794 (1,235,447)
----------- -----------
Net Increase............................................ 1,990,823 2,638,034
----------- -----------
Dividends and Distributions to Common Shareholders from:
Net investment income....................................... (1,430,983) (2,963,583)
Net realized gain........................................... (974,718) (1,459,019)
----------- -----------
Total Dividends and Distributions....................... (2,405,701) (4,422,602)
----------- -----------
Decrease from transactions in common shares of beneficial
interest.................................................. (568,542) (503,028)
----------- -----------
Net Decrease............................................ (983,420) (2,287,596)
Net Assets:
Beginning of period......................................... 60,862,438 63,150,034
----------- -----------
End of Period
(Including accumulated undistributed net investment income
of $437,034 and $502,037, respectively)..................... $59,879,018 $60,862,438
=========== ===========
See Notes to Financial Statements
11
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2003 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Insured California Municipal Securities (the "Trust") is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The Trust's investment
objective is to provide current income which is exempt from both federal and
California income taxes. The Trust was organized as a Massachusetts business
trust on October 14, 1993 and commenced operations on February 28, 1994.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized grid matrix of tax-exempt securities and evaluations by its
staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant; (2) futures are valued
at the latest sale price on the commodities exchange on which they trade unless
the Trustees determine that such price does not reflect their market value, in
which case they will be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees; and
(3) short-term debt securities having a maturity date of more than sixty days at
time of purchase are valued on a mark-to-market basis until sixty days prior to
maturity and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are 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. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Trust is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Trust agrees to
12
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2003 (UNAUDITED) continued
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Trust as unrealized gains and losses. Upon
closing of the contract, the Trust realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
D. Federal Income Tax Policy -- It is the Trust'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.
E. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date. The amount of dividends and
distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
F. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. Investment Management Agreement
Pursuant to an Investment Management Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Manager"), the Trust pays the Investment Manager
a management fee, calculated weekly and payable monthly, by applying the annual
rate of 0.35% to the Trust's weekly net assets applicable to common
shareholders.
13
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2003 (UNAUDITED) continued
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended April 30, 2003 aggregated
$6,584,800 and $9,110,965, respectively. Included in the aforementioned are
sales of $1,013,650 with Morgan Stanley California Insured Municipal Income
Trust, an affiliate of the Investment Manager.
Morgan Stanley Trust, an affiliate of the Investment Manager, is the Trust's
transfer agent. At April 30, 2003, the Trust had transfer agent fees and
expenses payable of approximately $3,300.
4. Preferred Shares of Beneficial Interest
The Trust is authorized to issue up to 1,000,000 non-participating preferred
shares of beneficial interest having a par value of $.01 per share, in one or
more series, with rights as determined by the Trustees, without approval of the
common shareholders. The preferred shares have a liquidation value of $50,000
per share plus the redemption premium, if any, plus accumulated but unpaid
dividends, whether or not declared, thereon to the date of distribution. The
Trust may redeem such shares, in whole or in part, at the original purchase
price of $50,000 per share plus accumulated but unpaid dividends, whether or not
declared, thereon to the date of redemption.
Upon issuance, the Trust will be subject to certain restrictions relating to the
preferred shares. Failure to comply with these restrictions could preclude the
Trust from declaring any distributions to common shareholders or purchasing
common shares and/or could trigger the mandatory redemption of preferred shares
at liquidation value.
The preferred shares, entitled to one vote per share, generally vote with the
common shares but vote separately as a class to elect two Trustees and on any
matters affecting the rights of the preferred shares.
As of April 30, 2003, there were no preferred shares outstanding.
14
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2003 (UNAUDITED) continued
5. Common Shares of Beneficial Interest
Transactions in common shares of beneficial interest were as follows:
CAPITAL
PAID IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
--------- --------- -----------
Balance, October 31, 2001................................... 3,946,013 $39,460 $55,923,535
Treasury shares purchased and retired (weighted average
discount 6.18%)*.......................................... (34,700) (347) (502,681)
Reclassification due to permanent book/tax differences...... -- -- 215
--------- ------- -----------
Balance, October 31, 2002................................... 3,911,313 39,113 55,421,069
Treasury shares purchased and retired (weighted average
discount 8.87%)*.......................................... (40,600) (406) (568,136)
--------- ------- -----------
Balance, April 30, 2003..................................... 3,870,713 $38,707 $54,852,933
========= ======= ===========
---------------------
* The Trustees have voted to retire the shares purchased.
6. Federal Income Tax Status
As of October 31, 2002, the Trust had temporary book/tax differences
attributable to book amortization of discount on debt securities.
7. Dividends To Common Shareholders
On March 25, 2003, the Trust declared the following dividends from net
investment income:
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
--------- ------------ -------------
$0.0575 May 9, 2003 May 23, 2003
$0.0575 June 6, 2003 June 20, 2003
8. Expense Offset
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Trust.
9. Risks Relating to Certain Financial Instruments
The Trust may invest a portion of its assets in residual interest bonds, which
are inverse floating rate municipal obligations. The prices of these securities
are subject to greater market fluctuations during periods of changing prevailing
interest rates than are comparable fixed rate obligations.
At April 30, 2003, the Trust did not hold positions in residual interest bonds.
15
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2003 (UNAUDITED) continued
To hedge against adverse interest rate changes, the Trust may invest in
financial futures contracts or municipal bond index futures contracts ("futures
contracts").
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Trust bears the risk
of an unfavorable change in the value of the underlying securities.
At April 30, 2003, the Trust had no outstanding futures contracts.
16
Morgan Stanley Insured California Municipal Securities
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a common share of beneficial interest
outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31
MONTHS ENDED ----------------------------------------------------------------
APRIL 30, 2003 2002 2001 2000 1999 1998
-------------- -------- -------- -------- -------- --------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of
period.............................. $15.56 $16.00 $15.24 $ 14.42 $ 16.00 $15.50
------ ------ ------ ------- ------- ------
Income (loss) from investment
operations:
Net investment income*............ 0.33 0.69 0.78 0.76 0.74 0.76
Net realized and unrealized gain
(loss).......................... 0.19 (0.01) 0.71 0.77 (1.43) 0.52
------ ------ ------ ------- ------- ------
Total income (loss) from investment
operations.......................... 0.52 0.68 1.49 1.53 (0.69) 1.28
------ ------ ------ ------- ------- ------
Less dividends and distributions from:
Net investment income............. (0.35) (0.72) (0.75) (0.75) (0.75) (0.78)
Net realized gain................. (0.27) (0.41) -- -- (0.16) --
------ ------ ------ ------- ------- ------
Total dividends and distributions..... (0.62) (1.13) (0.75) (0.75) (0.91) (0.78)
------ ------ ------ ------- ------- ------
Anti-dilutive effect of acquiring
treasury shares*.................... 0.01 0.01 0.02 0.04 0.02 --
------ ------ ------ ------- ------- ------
Net asset value, end of period........ $15.47 $15.56 $16.00 $ 15.24 $ 14.42 $16.00
====== ====== ====== ======= ======= ======
Market value, end of period........... $13.92 $14.15 $15.29 $13.375 $12.938 $15.25
====== ====== ====== ======= ======= ======
Total Return+......................... 2.73%(1) (0.14)% 20.34% 9.34% (9.83)% 11.71%
Ratios to Average Net Assets:
Total expenses (before expense
offset)............................. 0.54%(2)(3) 0.55%(3) 0.57%(3) 0.56%(3) 0.58%(3) 0.58%(3)
Net investment income................. 4.59%(2) 4.68% 5.01% 5.18% 4.80% 4.84%
Supplemental Data:
Net assets, end of period, in
thousands............................ $59,879 $60,862 $63,150 $61,360 $59,774 $67,178
Portfolio turnover rate............... 11%(1) 19% 22% 14% 9% 12%
---------------------
* The per share amounts were computed using an average number
of shares outstanding during the period.
+ Total return is based upon the current market value on the
last day of each period reported. Dividends and
distributions are assumed to be reinvested at the prices
obtained under the Trust's dividend reinvestment plan. Total
return does not reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
See Notes to Financial Statements
17
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TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Joseph J. McAlinden
Vice President
Francis Smith
Vice President and Chief Financial Officer
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Trust without examination by the independent auditors and accordingly they
do not express an opinion thereon.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
[MORGAN STANLEY LOGO]
MORGAN STANLEY
INSURED CALIFORNIA
MUNICIPAL SECURITIES
Semiannual Report
April 30, 2003
38622RPT-11144E03-AS-5/03
Item 9 - Controls and Procedures
The Trust's chief executive officer and chief financial officer have concluded
that the Trust's disclosure controls and procedures are sufficient to ensure
that information required to be disclosed by the Trust in this Form N-CSR was
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, based upon such
officers' evaluation of these controls and procedures as of a date within 90
days of the filing date of the report.
There were no significant changes or corrective actions with regard to
siginficant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation.
Item 10b Exhibits
A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
Items 2 - 8 and Item 10a are not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Insured California Municipal Securities
Ronald E. Robison
Principal Executive Officer
June 20, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Ronald E. Robison
Principal Executive Officer
June 20, 2003
Francis Smith
Principal Financial Officer
June 20, 2003
2