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, 2004
Date of reporting period: April 30, 2004
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Insured
California Municipal Securities performed during the semiannual period. We will
provide an overview of the market conditions, and discuss some of the factors
that affected performance during the reporting period. In addition, this report
includes the Trust's financial statements and a list of Trust investments.
Market forecasts provided in this report may not necessarily come to pass. There
is no assurance that the Trust will achieve its investment objective. The Trust
is subject to market risk, which is the possibility that market values of
securities owned by the Trust will decline and, therefore, the value of the
Trust's shares may be less than what you paid for them. Accordingly, you can
lose money investing in this Trust.
FUND REPORT
For the six-month period ended April 30, 2004
MARKET CONDITIONS
The U.S. economy continued to show improvement over the six-month period under
review. On the positive side, gross domestic product growth topped 4 percent in
both quarters. While strength in output has historically led to higher interest
rates, yields remained stubbornly low across the curve. These yields reflected
low levels of observed inflation in the economy and gradual improvement in
employment. The Federal Open Market Committee maintained its accommodative
monetary policy.
Surprising job growth in March, combined with escalating oil prices, led
investors to anticipate that the Fed would raise interest rates sooner rather
than later. Yet at its April meeting, the Federal Reserve did not change its
short-term lending rate but did signal a prospective shift in policy. As a
result, bond yields spiked across sectors and maturities.
The supply of new municipal bonds in calendar 2003 reached record levels as
municipalities took advantage of historically low interest rates. Many cities
and states reduced expenditures by refinancing existing debt at lower yields. In
other cases, municipalities attempted to meet budget needs by issuing additional
debt. Then in the first months of 2004, bond sales began to slow.
Low interest rates also had an impact on the demand for municipal bonds. Retail
and mutual fund activity slowed as holders of municipal bonds saw little reason
to sell bonds purchased at higher yields and reinvest at historically low
yields. However, insurance companies and hedge funds purchased municipal bonds
based on their attractiveness relative to taxable securities. Additionally,
investors stretched for yield by buying lower-rated bonds, causing credit
spreads to tighten.
California remained in the municipal credit market spotlight during this period.
In March, voters approved a referendum authorizing the sale of up to $15 billion
of economic recovery bonds to refinance the state's accumulated budget deficit.
This led the major ratings agencies to improve the outlook but not the rating
for the state's beleaguered bonds. S&P shifted its stance from a stable to a
positive outlook and Moody's changed from a negative to a stable outlook.
PERFORMANCE ANALYSIS
The net asset value (NAV) of Morgan Stanley Insured California Municipal
Securities (ICS) decreased from $15.24 to $14.91 per share for the six-month
period ended April 30, 2004. Based on this change plus reinvestment of tax-free
dividends totaling $0.315 per share, short-term capital gains of $0.004 per
share and long-term capital gains of $0.199 per share, the Trust's total NAV
return was 1.49 percent. The Trust's value on the New York Stock Exchange (NYSE)
decreased from $13.83 to $13.42 per share during the same period. Based on this
change plus reinvestment of dividends and distributions, the Trust's total
market return was 0.66 percent. On April 30, 2004, ICS's NYSE market price was
at a 9.99 percent discount to its NAV. Past performance is no guarantee of
future results.
Monthly dividends for the second quarter of 2004, declared in March, were
unchanged at $0.0525 per share. The dividend reflects the level of the Trust's
2
undistributed net investment income and projected earnings power. The Trust's
level of undistributed net investment income was $0.133 per share on April 30,
2004, versus $0.112 per share six months earlier.
The Trust's duration* was targeted to be shorter than its benchmark index. The
duration adjusted for leverage was 8.2 years. Treasury futures were sold to
reduce interest-rate exposure without raising the level of cash in the
portfolio. We maintained an average tax-exempt bond maturity objective of 20
years to take advantage of the steepness of the municipal yield curve. Revenue
bonds in sectors with reliable income streams from essential services such as
municipal electric, transportation and water and sewer systems were emphasized.
The Trust's net assets of nearly $56 million were diversified across 31 credits
in 11 long-term sectors.
The Trust's procedure for reinvesting all dividends and distributions in 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, whichever is
lower at the time of purchase.
----------------------------------------------------
* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates.
The longer a bond's duration, the greater the effect of interest-rate
movements on its price. Typically, Trusts with shorter durations perform
better in rising-interest-rate environments, while Trusts with longer
durations perform better when rates decline.
LARGEST SECTORS
Water & Sewer 21.4%
General Obligation 17.2%
Tax Allocation 15.3%
Mortgage 9.9%
Transportation 9.4%
CREDIT ENHANCEMENTS
Ambac 35.7%
FGIC 23.5%
FSA 22.8%
MBIA 13.1%
Connie Lee 2.9%
U.S. Government Backed 2.0%
Data as of April 30, 2004. Subject to change daily. All percentages are as a
percentage of long-term investments. Provided for informational purposes only
and should not be deemed as a recommendation to buy or sell the securities
mentioned. Morgan Stanley is a full-service securities firm engaged in
securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services.
3
DISTRIBUTION BY MATURITY
(% of Long-Term Portfolio) As of April 30, 2004
WEIGHTED AVERAGE MATURITY: 19 YEARS
[BAR CHART]
1-5 0
5-10 7
10-20 54
20-30 39
30+ 0
Portfolio structure is subject to change.
4
CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of April 30, 2004
YEARS BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS
[BAR CHARTS]
2004(a) 30
2005 1
2006 3
2007 0
2008 0
2009 4
2010 2
2011 19
2012 14
2013 23
2014+ 4
COST (BOOK) YIELD(B) -- WEIGHTED AVERAGE BOOK YIELD: 5.5%
2004(a) 6.30
2005 6.20
2006 6.30
2007 0.00
2008 0.00
2009 5.90
2010 5.60
2011 5.20
2012 4.90
2013 4.90
2014+ 4.80
(a) May include issues callable in previous years.
(b) Cost or "book" yield is the annual income earned on a portfolio investment
based on its original purchase price before the Trust's operating expenses.
For example, the Trust is earning a book yield of 6.3% on 30% of the
long-term portfolio that is callable in 2004.
Portfolio structure is subject to change.
5
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
California Tax-Exempt Municipal Bonds (96.5%)
General Obligation (16.6%)
$ 3,000 California, Various Purpose Dtd 03/01/94 (FSA)............. 5.50 % 03/01/20 $ 3,087,870
2,000 Los Angeles Community College District, 2001 Ser A
(MBIA)................................................... 5.00 06/01/26 2,005,880
San Diego Unified School District,
1,000 2002 Ser D (FGIC)........................................ 5.25 07/01/24 1,041,120
1,000 2003 Ser E (FSA)......................................... 5.00 07/01/28 1,001,750
1,000 Tahoe Truckee Unified School District, District #1 2001
Refg (MBIA).............................................. 5.50 08/01/18 1,118,300
1,000 Upland School District, 2000 Ser 2001 B (FSA).............. 5.125 08/01/25 1,019,110
-------- -----------
9,000 9,274,030
-------- -----------
Educational Facilities Revenue (6.4%)
1,500 California Educational Facilities Authority, National
University Ser 1994 (Connie Lee)......................... 6.20 05/01/21 1,535,430
University of California,
1,000 Ser 2003 B (Ambac)....................................... 5.00 05/15/21 1,028,180
1,000 Ser 2003 A (Ambac)....................................... 5.00 05/15/33 997,690
-------- -----------
3,500 3,561,300
-------- -----------
Electric Revenue (8.3%)
1,000 Anaheim Public Financing Authority, Generation Refg Ser
2002-B (FSA)............................................. 5.25 10/01/18 1,059,590
1,400 California Department of Water Resources, Power Supply Ser
2002 A (Ambac)........................................... 5.375 05/01/18 1,500,030
1,000 Los Angeles Department of Water & Power, 2001 Ser A
(FSA).................................................... 5.25 07/01/21 1,047,460
1,000 Southern California Public Power Authority, Transmission
Refg Ser 2002 A (FSA).................................... 5.25 07/01/18 1,058,870
-------- -----------
4,400 4,665,950
-------- -----------
Mortgage Revenue -- Multi-Family (5.2%)
2,840 Los Angeles Community Redevelopment Agency, 1994 Ser A
-------- (Ambac).................................................. 6.45 07/01/17 2,910,517
-----------
Mortgage Revenue - Single Family (4.3%)
2,000 California Department of Veterans Affairs, Home Purchase
2002 Ser A (Ambac)....................................... 5.35 12/01/27 2,053,020
375 California Housing Financing Agency, 1995 Ser B (AMT)
(Ambac).................................................. 6.25 08/01/14 387,821
-------- -----------
2,375 2,440,841
-------- -----------
Public Facilities Revenue (1.8%)
1,000 MidPeninsula Regional Open Space District Financing
Authority,
-------- Ser 2004 (Ambac)......................................... 5.00 09/01/34 989,300
-----------
6
See Notes to Financial Statements
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2004 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Resource Recovery Revenue (3.9%)
$ 2,000 Sacramento Financing Authority, 1999 Solid Waste & Redev
(Ambac).................................................. 5.75 % 12/01/22 $ 2,189,820
-------- -----------
Tax Allocation Revenue (14.7%)
2,000 Bay Area Government Association, Pool 1994 Ser A (FSA)..... 6.00 12/15/24 2,088,940
3,000 Corona Redevelopment Agency, Area A 1994 Refg Ser A
(FGIC)................................................... 6.25 09/01/13 3,105,180
1,000 Long Beach Bond Finance Authority, Downtown, North Long
Beach, Poly High and West Beach 2002 Ser A (Ambac)....... 5.375 08/01/21 1,057,930
2,000 Poway Redevelopment Agency, Paguay Redev Ser 2003 A
(MBIA)................................................... 5.00 06/15/28 1,992,940
-------- -----------
8,000 8,244,990
-------- -----------
Transportation Facilities Revenue (9.0%)
2,000 California Infrastructure & Economic Development Bank, Bay
Area Toll Bridges Seismic Retrofit First Lien Ser 2003 A
(FGIC)................................................... 5.00 07/01/29 2,002,040
2,000 Orange County Transportation Authority, Toll Bridges
Express Lanes Ser A (Ambac).............................. 5.00 08/15/20 2,066,680
1,000 San Jose, Airport Ser 2001 A (FGIC)........................ 5.00 03/01/25 1,001,940
-------- -----------
5,000 5,070,660
-------- -----------
Water & Sewer Revenue (20.7%)
1,500 California Department of Water Resources, Central Valley
Ser Y (FGIC)............................................. 5.25 12/01/19 1,594,005
2,000 East Bay Municipal Utility District, Water Ser 2001
(MBIA)................................................... 5.00 06/01/26 2,008,800
2,900 Garden Grove Public Finance Authority, Water Capital Impr
Ser 1993 (FGIC).......................................... 5.50 12/15/23 2,964,931
1,000 Metropolitan Waterworks District of Southern California
2003 Ser B- 2 (FGIC)..................................... 5.00 10/01/27 1,003,310
2,000 Sacramento Financing Authority, Water & Capital Improvement
2001 Ser A (Ambac)....................................... 5.00 12/01/26 2,008,800
2,000 San Francisco Public Utilities Commission, Water Refg Ser A
2001 (FSA)............................................... 5.00 11/01/31 2,000,620
-------- -----------
11,400 11,580,466
-------- -----------
Refunded (5.6%)
2,000 Anaheim, Anaheim Memorial Hospital Assn COPs (Ambac)
(ETM).................................................... 5.125 05/15/20 2,044,360
1,000 Puerto Rico Infrastructure Financing Authority, 2000 Ser A
(ETM).................................................... 5.50 10/01/32 1,069,910
-------- -----------
3,000 3,114,270
-------- -----------
52,515 Total California Tax-Exempt Municipal Bonds (Cost $51,838,389)................ 54,042,144
-------- -----------
7
See Notes to Financial Statements
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2004 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
California Short-Term Tax-Exempt Municipal Obligation (1.9%)
$ 1,030 Newport Beach, Hoag Memorial/Presbyterian Hospital Ser 1992
(Demand 05/03/04) (Cost $1,030,000)...................... 1.04*% 10/01/22 $ 1,030,000
-------- -----------
$ 53,545 Total Investments (Cost $52,868,389) (a)........................... 98.4% 55,072,144
========
Other Assets in Excess of Liabilities.............................. 1.6 909,418
----- -----------
Net Assets Applicable to Common Shareholders....................... 100.0% $55,981,562
===== ===========
---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
* Current coupon of variable rate demand obligation.
(a) The aggregate cost for federal income tax purposes is
$52,757,547. The aggregate gross unrealized appreciation is
$2,373,808 and the aggregate gross unrealized depreciation
is $59,211, resulting in net unrealized appreciation of
$2,314,597.
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.
8
See Notes to Financial Statements
Morgan Stanley Insured California Municipal Securities
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
April 30, 2004 (unaudited)
Assets:
Investments in securities, at value
(cost $52,868,389)................. $55,072,144
Cash................................. 22,416
Interest receivable.................. 954,730
Prepaid expenses and other assets.... 10,911
-----------
Total Assets..................... 56,060,201
-----------
Liabilities:
Payable for:
Common shares of beneficial
interest repurchased........... 24,393
Investment management fee........ 19,113
Accrued expenses and other
payables........................... 35,133
-----------
Total Liabilities................ 78,639
-----------
Preferred shares of beneficial
interest (1,000,000 shares
authorized of non-participating
$.01 par value, none issued)....... --
-----------
Net Assets Applicable to Common
Shareholders................... $55,981,562
===========
Composition of Net Assets Applicable
to Common Shareholders:
Common shares of beneficial interest
(unlimited shares authorized of
$.01
par value, 3,753,813 shares
outstanding)....................... $53,251,325
Net unrealized appreciation.......... 2,203,755
Accumulated undistributed net
investment income.................. 499,103
Accumulated undistributed net
realized gain...................... 27,379
-----------
Total Net Assets Applicable to
Common Shareholders............ $55,981,562
===========
Net Asset Value Per Common Share,
($55,981,562 divided by 3,753,813
common shares outstanding)........... $14.91
===========
Statement of Operations
For the six months ended April 30, 2004 (unaudited)
Net Investment Income:
Interest Income....................... $1,430,989
----------
Expenses
Investment management fee............. 100,817
Professional fees..................... 28,179
Transfer agent fees and expenses...... 13,457
Shareholder reports and notices....... 10,255
Registration fees..................... 7,976
Custodian fees........................ 2,702
Trustees' fees and expenses........... 380
Other................................. 3,838
----------
Total Expenses.................... 167,604
Less: expense offset.................. (2,666)
----------
Net Expenses...................... 164,938
----------
Net Investment Income............. 1,266,051
----------
Net Realized and Unrealized Gain
(Loss):
Net Realized Gain (Loss) on:
Investments........................... 46,490
Futures contracts..................... (4,117)
----------
Net Realized Gain................. 42,373
----------
Net Change in Unrealized
Appreciation/Depreciation on:
Investments........................... (643,474)
Futures contracts..................... (597)
----------
Net Depreciation.................. (644,071)
----------
Net Loss.......................... (601,698)
----------
Net Increase.......................... $ 664,353
==========
9
See Notes to Financial Statements
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, 2004 OCTOBER 31, 2003
-------------- ----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 1,266,051 $ 2,675,423
Net realized gain........................................... 42,373 737,514
Net change in unrealized appreciation/depreciation.......... (644,071) (1,077,676)
----------- -----------
Net Increase............................................ 664,353 2,335,261
----------- -----------
Dividends and Distributions to Common Shareholders from:
Net investment income....................................... (1,190,996) (2,736,792)
Net realized gain........................................... (769,127) (974,718)
----------- -----------
Total Dividends and Distributions....................... (1,960,123) (3,711,510)
----------- -----------
Decrease from transactions in common shares of beneficial
interest.................................................. (645,204) (1,563,653)
----------- -----------
Net Decrease............................................ (1,940,974) (2,939,902)
Net Assets Applicable to Common Shareholders:
Beginning of period......................................... 57,922,536 60,862,438
----------- -----------
End of Period
(Including accumulated undistributed net investment income
of $499,103 and $424,048, respectively)..................... $55,981,562 $57,922,536
=========== ===========
10
See Notes to Financial Statements
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2004 (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 mean between the last reported bid and
asked price. 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.
The Trustees believe that timely and reliable market quotations are generally
not readily available for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service are more likely to approximate the
fair value of such securities; (2) futures are valued at the latest sale price
on the commodities exchange on which they trade unless it is determined 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
receive from or pay to the
11
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2004 (UNAUDITED) continued
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.
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.
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, 2004 aggregated
$3,119,180 and $5,385,280, respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager, is the Trust's
transfer agent. At April 30, 2004, the Trust had transfer agent fees and
expenses payable of approximately $1,800.
Effective April 1, 2004, the Trust began 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
Trust.
12
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2004 (UNAUDITED) continued
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, 2004, there were no preferred shares outstanding.
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, 2002................................... 3,911,313 $39,113 $55,421,069
Treasury shares purchased and retired (weighted average
discount 8.44%)*.......................................... (111,400) (1,114) (1,562,539)
--------- ------- -----------
Balance, October 31, 2003................................... 3,799,913 37,999 53,858,530
Treasury shares purchased and retired (weighted average
discount 8.00%)*.......................................... (46,100) (461) (644,743)
--------- ------- -----------
Balance, April 30, 2004..................................... 3,753,813 $37,538 $53,213,787
========= ======= ===========
---------------------
* The Trustees have voted to retire the shares purchased.
13
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2004 (UNAUDITED) continued
6. Dividends to Common Shareholders
On March 30, 2004, the Trust declared the following dividends from net
investment income:
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
--------- ------------ -------------
$0.0525 May 7, 2004 May 21, 2004
$0.0525 June 4, 2004 June 18, 2004
7. Expense Offset
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Trust.
8. 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.
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. Risks may
also arise upon entering into these contracts from the potential inability of
the counterparties to meet the terms of their contracts.
9. Federal Income Tax Status
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 tax purposes are reported as distributions of paid-in-capital.
As of October 31, 2003, the Trust had temporary book/tax differences primarily
attributable to book amortization of discounts on debt securities and
mark-to-market of open futures contracts.
14
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, 2004 2003 2002 2001 2000 1999
-------------- ------- ------- ------- ------- -------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of period..... $15.24 $15.56 $16.00 $15.24 $14.42 $16.00
------ ------ ------ ------- ------- -------
Income (loss) from investment operations:
Net investment income*............... 0.33 0.67 0.69 0.78 0.76 0.74
Net realized and unrealized gain
(loss)... (0.15) (0.07) (0.01) 0.71 0.77 (1.43)
------ ------ ------ ------- ------- -------
Total income (loss) from investment
operations.............................. 0.18 0.60 0.68 1.49 1.53 (0.69)
------ ------ ------ ------- ------- -------
Less dividends and distributions from:
Net investment income................ (0.32) (0.71) (0.72) (0.75) (0.75) (0.75)
Net realized gain.................... (0.20) (0.25) (0.41) -- -- (0.16)
------ ------ ------ ------- ------- -------
Total dividends and distributions........ (0.52) (0.96) (1.13) (0.75) (0.75) (0.91)
------ ------ ------ ------- ------- -------
Anti-dilutive effect of acquiring
treasury shares*........................ 0.01 0.04 0.01 0.02 0.04 0.02
------ ------ ------ ------- ------- -------
Net asset value, end of period........... $14.91 $15.24 $15.56 $16.00 $15.24 $14.42
====== ====== ====== ======= ======= =======
Market value, end of period.............. $13.42 $13.83 $14.15 $15.29 $13.375 $12.938
====== ====== ====== ======= ======= =======
Total Return+............................ 0.66 %(1) 4.57% (0.14)% 20.34% 9.34% (9.83)%
Ratios to Average Net Assets:
Total expenses (before expense offset)... 0.58 %(2)(3) 0.55%(3) 0.55%(3) 0.57%(3) 0.56%(3) 0.58%(3)
Net investment income.................... 4.40 %(2) 4.50% 4.68% 5.01% 5.18% 4.80%
Supplemental Data:
Net assets, end of period, in
thousands............................... $55,982 $57,923 $60,862 $63,150 $61,360 $59,774
Portfolio turnover rate.................. 6 %(1) 31% 19% 22% 14% 9%
---------------------
* 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%.
15
See Notes to Financial Statements
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
Barry Fink
Vice President
Joseph J. McAlinden
Vice President
Stefanie V. Chang
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Thomas F. Caloia
Vice President
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
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.
(c) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Insured California
Municipal Securities
Semiannual Report
April 30, 2004
[MORGAN STANLEY LOGO]
38622RPT-RA04-00253P-Y04/04
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. [Reserved.]
Item 9 - Controls and Procedures
(a) The Trust's principal executive officer and principal 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
significant 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.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10 Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Insured California Municipal Securities
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
June 22, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
June 22, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
June 22, 2004
3