-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JBbtwrD+Uvu6/pqgcKC4xIKkqM9W50o2CgdC7biM1FO1UX1og9oe4NZY6nWJRzK2 ruEhhjA+nDpGB+Yeqxo/Zw== 0001047469-03-041220.txt : 20031217 0001047469-03-041220.hdr.sgml : 20031217 20031217125945 ACCESSION NUMBER: 0001047469-03-041220 CONFORMED SUBMISSION TYPE: N-CSR/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030831 FILED AS OF DATE: 20031217 EFFECTIVENESS DATE: 20031217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY QUALITY INCOME TRUST CENTRAL INDEX KEY: 0000839302 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSR/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-05654 FILM NUMBER: 031059453 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY INTERMEDIATE INCOME SECURITIES DATE OF NAME CHANGE: 20010618 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES DATE OF NAME CHANGE: 19980622 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN INTERMEDIATE INCOME SECURITIES DATE OF NAME CHANGE: 19920703 N-CSR/A 1 a2124374zn-csra.txt N-CSR/A 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: 811-05654 Morgan Stanley Quality Income Trust (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: August 31, 2003 Date of reporting period: August 31, 2003 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Quality Income Trust performed during the annual period. We will provide an overview of the market conditions and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund's financial statements and a list of Fund investments. This material must be preceded or accompanied by a prospectus for the Fund being offered. Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and, therefore, the value of the Fund shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. Fund Report For the year ended August 31, 2003 AVERAGE ANNUAL TOTAL RETURN FOR THE 12 MONTHS ENDED AUGUST 31, 2003
LEHMAN BROTHERS LIPPER INTERMEDIATE INTERMEDIATE U.S. GOVERNMENT/ INVESTMENT CREDIT GRADE DEBT CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2) 2.17% 1.63% 1.74% 2.39% 5.25% 5.38%
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE TOTAL RETURN FIGURES SHOWN ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS, BUT DO NO REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES. IF SALES CHARGES WERE INCLUDED, RETURNS WOULD BE LOWER. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE INFORMATION. MARKET CONDITIONS The 12-month period ended August 31, 2003, was a remarkable period for the fixed-income markets. Driven by a combination of accommodative Federal Reserve Bank policy and volatile equity markets, bonds enjoyed a rally that took interest rates across the curve to record or near-record lows. Some segments of the yield curve reached levels not seen in more than four decades. The bond bull market ended when yields reversed course in June. Investors became more attuned to signs of growth in the economy and the equity market, and their departure from bonds (coupled with selling activity by mortgage investors) helped to drive interest rates up rapidly. In July, the 10-year Treasury bond experienced its worst one-month performance in more than 20 years. The environment for U.S. investment-grade corporate bonds was largely constructive during the period. Corporate bonds entered the period with unusually wide yield spreads following a series of accounting scandals and several quarters of weak corporate financial results. These low valuations, along with expectations of economic recovery and signs of improved corporate profits, drew investors to the corporate market. Spreads had narrowed considerably by the end of the period, though they remained somewhat wide by historical standards. The strongest returns were earned by sectors that were most heavily out of favor during the preceding year. Similarly, lower-quality bonds generally outperformed their more conservative peers. PERFORMANCE ANALYSIS On April 22, 2003, the Fund changed its name from Morgan Stanley Intermediate Income Securities to Morgan Stanley Quality Income Trust, reflecting a repositioning of its focus to corporate debt securities with a wide range of maturities. Prior to May, the Fund was invested across the various short- and intermediate-term investment-grade sectors of the fixed income market. This transition was a key driver of the Fund's performance during the period. The Fund's diversified sector exposure prior to its changeover limited its participation in the corporate sector's strong performance, though it did benefit from greater exposure after May. With rates at historically low levels, our analysis indicated that the Treasury yield curve appeared to be priced as if the U.S. economy would remain well below full employment level for five years, and somewhat below full employment for a decade. We believed this assessment to be unduly pessimistic in light of the potential for the economy's return to positive growth. Given that such a return would be likely to result in 2 interest rates rising, we kept the Fund's interest-rate sensitivity below that of its benchmark. We retained this stance through the Fund's transition to its new focus. PORTFOLIO COMPOSITION CORPORATE BONDS 67.5% U.S. GOVERNMENT AGENCIES 36.5 SHORT TERM 17.9 ASSET BACKED 4.8 FOREIGN GOVERNMENT BONDS 1.9
LONG-TERM CREDIT ANALYSIS Aaa/AAA 37.1% Aa/AA 5.2 A/A 28.1 Baa/BBB 39.9 Ba/BB 0.4
DATA AS OF AUGUST 31, 2003. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES ARE AS A PERCENTAGE OF NET ASSETS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED AS A RECOMMENDATION TO BUY 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 1. THE FUND INVESTS IN A PORTFOLIO OF CORPORATE DEBT SECURITIES, PREFERRED STOCKS, U.S. GOVERNMENT SECURITIES, MORTGAGE-BACKED SECURITIES, INCLUDING COLLATERALIZED MORTGAGE BACKED SECURITIES ISSUED BY FOREIGN GOVERNMENTS OR CORPORATIONS. 2. IN DECIDING WHICH SECURITIES TO BUY, HOLD OR SELL, THE TEAM CONSIDERS DOMESTIC AND INTERNATIONAL ECONOMIC DEVELOPMENTS, INTEREST RATE TRENDS, BOND RATINGS AND OTHER FACTORS RELATING TO THE ISSUERS. 3. LASTLY, THE FUND'S MANAGERS SEEK TO MAINTAIN BROAD DIVERSIFICATION ACROSS A WIDE RANGE OF COMPANIES, INDUSTRIES, COUPONS AND MATURITIES. ANNUAL HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS TO INVESTORS WITH THE SAME LAST NAME AND 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 AM TO 8:00 PM, ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT http://www.sec.gov. RESULTS OF SPECIAL SHAREHOLDER MEETING ON APRIL 22, 2003, A SPECIAL MEETING OF THE FUND'S SHAREHOLDERS WAS HELD FOR THE PURPOSE OF APPROVING AMENDMENTS TO THE FUND'S INVESTMENT RESTRICTIONS TO ENABLE THE FUND TO INVEST IN FINANCIAL FUTURES CONTRACTS AND RELATED OPTIONS THEREON. THE RESULTS WERE AS FOLLOWS: FOR 5,817,330 - --------------------------------------------------- AGAINST 378,724 - --------------------------------------------------- ABSTAIN 673,279 - ---------------------------------------------------
3 Performance Summary [CHART] PERFORMANCE OF A $10,000 INVESTMENT--CLASS B
FUND LEHMAN(1) LIPPER(2) Aug-1993 $ 10,000 $ 10,000 $ 10,000 Aug-1994 $ 9,850 $ 9,967 $ 9,820 Aug-1995 $ 10,693 $ 10,911 $ 10,822 Aug-1996 $ 10,969 $ 11,395 $ 11,248 Aug-1997 $ 11,838 $ 12,357 $ 12,326 Aug-1998 $ 12,611 $ 13,466 $ 13,497 Aug-1999 $ 12,727 $ 13,763 $ 13,557 Aug-2000 $ 12,956 $ 14,626 $ 14,449 Aug-2001 $ 14,194 $ 16,423 $ 16,228 Aug-2002 $ 14,844 $ 17,695 $ 17,172 Aug-2003 $ 15,086@ $ 18,624 $ 18,096
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES. 4 AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2003
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ 07/28/97 05/03/89 07/28/97 07/28/97 SYMBOL IISAX IISBX IISCX IISDX 1 YEAR 2.17%(3) 1.63%(3) 1.74%(3) 2.39%(3) (2.17)(4) (3.30)(4) 0.75(4) 5 YEARS 4.46(3) 3.65(3) 3.67(3) 4.46(3) 3.56(4) 3.31(4) 3.67(4) 10 YEARS 4.20(3) 4.20(4) SINCE INCEPTION 4.77(3) 5.52(3) 4.00(3) 4.80(3) 4.03(4) 5.52(4) 4.00(4)
- ---------- Notes on Performance (1) THE LEHMAN BROTHERS INTERMEDIATE U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF U.S. GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES, AND CORPORATE AND YANKEE BONDS WITH MATURITIES OF 1 TO 10 YEARS. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (2) THE LIPPER INTERMEDIATE INVESTMENT GRADE DEBT FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER INTERMEDIATE INVESTMENT GRADE DEBT FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. (3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. * THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%. ** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%. THE CDSC DECLINES TO 0% AFTER SIX YEARS. + THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES REDEEMED WITHIN ONE YEAR OF PURCHASE. ++ CLASS D HAS NO SALES CHARGE. @ CLOSING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2003. 5 Morgan Stanley Quality Income Trust Portfolio of Investments - August 31, 2003
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- Corporate Bonds (67.5%) AEROSPACE & DEFENSE (1.5%) $ 305 Goodrich Corp. 7.625% 12/15/12 $ 332,807 870 Lockheed Martin Corp. 8.50 12/01/29 1,104,646 55 Raytheon Co. 6.75 08/15/07 60,989 60 Raytheon Co. 8.30 03/01/10 70,781 362 Systems 2001 Asset Trust - 144A* 6.664 09/15/13 394,986 ----------- 1,964,209 ----------- AIR FREIGHT/COURIERS (0.2%) 280 FedEx Corp. 7.25 02/15/11 312,963 ----------- AIRLINES (0.6%) 356 Continental Airlines, Inc. (Series 991A) 6.545 02/02/19 333,032 370 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 394,681 ----------- 727,713 ----------- AUTO PARTS: O.E.M. (0.5%) 365 Delphi Automotive Systems Corp. 6.125 05/01/04 372,285 265 Johnson Controls, Inc. 5.00 11/15/06 280,273 ----------- 652,558 ----------- BEVERAGES: ALCOHOLIC (0.4%) 570 Miller Brewing Co. - 144A* 4.25 08/15/08 568,225 ----------- BROADCASTING (0.6%) 125 Clear Channel Communications, Inc. 7.25 09/15/03 125,207 600 Clear Channel Communications, Inc. 7.65 09/15/10 684,340 ----------- 809,547 ----------- BUILDING PRODUCTS (0.3%) 280 Celulosa Arauco Constitution S.A. - 144A* (Chile) 5.125 07/09/13 263,745 160 Masco Corp. 4.625 08/15/07 162,615 ----------- 426,360 ----------- CABLE/SATELLITE TV (1.9%) 1,280 Comcast Corp. 6.50 01/15/15 1,342,391 695 Cox Communications, Inc. 7.125 10/01/12 773,225 225 TCI Communications, Inc. 8.00 08/01/05 246,010 ----------- 2,361,626 ----------- CASINO/GAMING (0.3%) 290 Harrah's Operating Co., Inc. 8.00 02/01/11 331,771 ----------- CONTAINERS/PACKAGING (0.4%) 540 Sealed Air Corp - 144A* 5.625 07/15/13 521,126 -----------
SEE NOTES TO FINANCIAL STATEMENTS 6
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- DEPARTMENT STORES (2.0%) $ 720 Federated Department Stores, Inc. 7.00% 02/15/28 $ 756,479 200 Federated Department Stores, Inc. 8.50 06/01/10 238,428 1,045 May Department Stores Co., Inc. 5.95 11/01/08 1,096,931 170 May Department Stores Co., Inc. 6.70 09/15/28 169,780 130 May Department Stores Co., Inc. 6.875 11/01/05 140,375 125 May Department Stores Co., Inc. 6.90 01/15/32 127,759 ----------- 2,529,752 ----------- DRUGSTORE CHAINS (0.4%) 425 CVS Corp. 5.625 03/15/06 455,680 ----------- ELECTRIC UTILITIES (3.1%) 430 Appalachian Power Co. (Series H) 5.95 05/15/33 384,712 105 Cincinnati Gas & Electric Co. 5.70 09/15/12 107,520 500 Cincinnati Gas & Electric Co. (Series B) 5.375 06/15/33 430,490 260 Cincinnati Gas & Electric Co. (Series A) 5.40 06/15/33 224,712 525 Columbus Southern Power Co. - 144A* 6.60 03/01/33 526,690 640 Constellation Energy Group, Inc. 7.60 04/01/32 705,835 55 Detroit Edison Co. 6.125 10/01/10 58,979 365 Detroit Edison Co. 6.35 10/15/32 368,853 535 Duke Energy Corp. 4.50 04/01/10 530,094 50 Florida Power & Light Co. 4.85 02/01/13 49,414 130 Public Service Electric & Gas Co. 5.00 01/01/13 127,991 260 South Carolina Electric & Gas Co. 5.30 05/15/33 232,894 235 Wisconsin Electric Power Co. 5.625 05/15/33 220,928 ----------- 3,969,112 ----------- ELECTRICAL PRODUCTS (0.4%) 450 Cooper Industries Inc. 5.25 07/01/07 472,774 ----------- ENVIRONMENTAL SERVICES (0.7%) 544 USA Waste Services, Inc. 7.00 07/15/28 561,553 310 USA Waste Services, Inc. 7.125 10/01/07 341,308 ----------- 902,861 ----------- FINANCE/RENTAL/LEASING (6.2%) 625 American General Finance Corp. (Series MTNF) 5.875 07/14/06 675,575 1,245 Countrywide Home Loans, Inc. 3.25 05/21/08 1,188,661 2,885 Ford Motor Credit Co. 7.25 10/25/11 2,915,203 800 Ford Motor Credit Co. 7.375 10/28/09 825,958 70 Household Finance Corp. 6.375 10/15/11 74,926 675 Household Finance Corp. 6.75 05/15/11 740,677
SEE NOTES TO FINANCIAL STATEMENTS 7
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- $ 835 MBNA CORP. 6.125% 03/01/13 $ 859,776 525 Toyota Motor Credit Corp. (Series MTN) 5.65 01/15/07 569,046 ----------- 7,849,822 ----------- FINANCIAL CONGLOMERATES (8.1%) 1,340 Boeing Capital Corp. 6.10 03/01/11 1,390,849 40 Boeing Capital Corp. 6.50 02/15/12 42,139 630 Chase Manhattan Corp. 6.00 02/15/09 673,333 145 Chase Manhattan Corp. 7.00 11/15/09 160,064 100 Citigroup Inc. 5.625 08/27/12 103,238 265 Citigroup Inc. 6.00 02/21/12 282,388 660 General Electric Capital Corp. (Series MTNA) 5.375 03/15/07 704,297 1,195 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 1,277,381 385 General Motors Acceptance Corp. 4.50 07/15/06 385,761 1,000 General Motors Acceptance Corp. 6.875 09/15/11 1,000,370 1,080 General Motors Acceptance Corp. 8.00 11/01/31 1,039,062 905 John Hancock Financial Services, Inc. 5.625 12/01/08 959,041 410 Prudential Funding, LLC (Series MTN) - 144A* 6.60 05/15/08 453,494 1,200 Prudential Holdings, LLC (Series C) - 144A* 8.695 12/18/23 1,420,272 360 Prudential Holdings, LLC (Series B) (FSA) - 144A* 7.245 12/18/23 391,648 ----------- 10,283,337 ----------- FOOD RETAIL (2.1%) 530 Albertson's, Inc. 7.45 08/01/29 556,327 425 Albertson's, Inc. 7.50 02/15/11 474,032 475 Kroger Co. 6.80 04/01/11 519,230 910 Kroger Co. 7.50 04/01/31 1,004,621 160 Safeway Inc. 6.15 03/01/06 170,422 ----------- 2,724,632 ----------- FOOD: MAJOR DIVERSIFIED (0.5%) 505 Kraft Foods Inc. 5.625 11/01/11 507,745 115 Kraft Foods Inc. 6.25 06/01/12 120,019 ----------- 627,764 ----------- FOOD: MEAT/FISH/DAIRY (0.2%) 230 Conagra Foods, Inc. 6.00 09/15/06 248,910 ----------- FOREST PRODUCTS (0.8%) 940 Weyerhaeuser Co. 6.75 03/15/12 1,002,954 ----------- GAS DISTRIBUTORS (0.8%) 470 Consolidated Natural Gas Co. 5.375 11/01/06 498,073 215 Consolidated Natural Gas Co. 6.25 11/01/11 230,445
SEE NOTES TO FINANCIAL STATEMENTS 8
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- $ 54 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A* (Qatar) 7.628% 09/15/06 $ 57,137 215 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A* (Qatar) 8.294 03/15/14 242,434 ----------- 1,028,089 ----------- HOME BUILDING (0.5%) 135 Centex Corp. 7.875 02/01/11 154,755 375 Pulte Homes, Inc. 6.375 05/15/33 336,408 115 Pulte Homes, Inc. 7.875 08/01/11 130,814 ----------- 621,977 ----------- HOME FURNISHINGS (0.1%) 130 Mohawk Industries, Inc. (Series C) 6.50 04/15/07 141,747 ----------- HOME IMPROVEMENT CHAINS (0.6%) 295 Lowe's Companies, Inc. 6.50 03/15/29 307,214 71 Lowe's Companies, Inc. 6.875 02/15/28 76,707 300 Lowe's Companies, Inc. 7.50 12/15/05 333,767 ----------- 717,688 ----------- HOSPITAL/NURSING MANAGEMENT (0.7%) 335 HCA Inc. 7.125 06/01/06 355,510 460 Manor Care, Inc. 8.00 03/01/08 496,800 ----------- 852,310 ----------- HOTELS/RESORTS/CRUISELINES (1.1%) 630 Hyatt Equities LLC - 144A* 6.875 06/15/07 650,413 265 Marriott International, Inc. (Series E) 7.00 01/15/08 291,076 195 Marriott International, Inc. (Series D) 8.125 04/01/05 212,036 195 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 204,263 ----------- 1,357,788 ----------- INDUSTRIAL CONGLOMERATES (0.8%) 515 Honeywell International, Inc. 5.125 11/01/06 548,499 515 Hutchinson Whampoa International Ltd. - 144A* (Virgin Islands) 6.50 02/13/13 509,341 ----------- 1,057,840 ----------- INFORMATION TECHNOLOGY SERVICES (0.6%) 260 Electronic Data Systems Corp. 7.125 10/15/09 267,800 470 Electronic Data Systems Corp. - 144A* 6.00 08/01/13 436,651 ----------- 704,451 -----------
SEE NOTES TO FINANCIAL STATEMENTS 9
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- INSURANCE BROKERS/SERVICES (0.3%) $ 410 Marsh & McLennan Companies, Inc. 5.375% 03/15/07 $ 437,373 ----------- INTEGRATED OIL (2.1%) 1,025 Amerada Hess Corp. 7.875 10/01/29 1,125,161 305 Conoco Inc. 5.90 04/15/04 313,484 895 Conoco Inc. 6.95 04/15/29 981,746 225 ConocoPhillips 8.50 05/25/05 249,228 ----------- 2,669,619 ----------- INVESTMENT BANKS/BROKERS (1.1%) 600 Goldman Sachs Group Inc 6.125 02/15/33 580,949 165 Goldman Sachs Group Inc. 6.60 01/15/12 179,638 580 Goldman Sachs Group Inc. 6.875 01/15/11 644,732 ----------- 1,405,319 ----------- INVESTMENT MANAGERS (0.6%) 735 TIAA Global Markets - 144A* 5.00 03/01/07 776,784 ----------- LIFE/HEALTH INSURANCE (2.1%) 365 Equitable Life Assurance Society - 144A* 6.95 12/01/05 398,611 570 Hartford Life, Inc. 7.375 03/01/31 631,931 150 Hartford Life, Inc. 7.65 06/15/27 170,917 475 John Hancock Global Funding II - 144A* 7.90 07/02/10 555,081 500 Metropolitan Life Insurance Co. - 144A* 6.30 11/01/03 503,955 335 Monumental Global Funding II - 144A* 6.05 01/19/06 362,320 ----------- 2,622,815 ----------- MAJOR BANKS (1.2%) 305 Bank One Corp. (Series MTNA) 6.00 02/17/09 329,307 670 UFJ Finance Aruba AEC (Aruba) 6.75 07/15/13 663,179 475 Wachovia Bank N.A. (Series BKNT) 7.80 08/18/10 561,127 ----------- 1,553,613 ----------- MAJOR TELECOMMUNICATIONS (4.2%) 185 AT&T Corp. 7.80 11/15/11 207,124 960 AT&T Corp. 8.50 11/15/31 1,083,142 150 Deutsche Telekom International Finance Corp. (Netherlands) 8.50 06/15/10 176,519 725 Deutsche Telekom International Finance Corp. (Netherlands) 8.75 06/15/30 870,642 80 Verizon Communications 6.36 04/15/06 87,026 165 Verizon Global Funding Corp. 7.25 12/01/10 186,942 1,910 Verizon Global Funding Corp. 7.75 12/01/30 2,191,908
SEE NOTES TO FINANCIAL STATEMENTS 10
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- $ 480 Verizon New England Inc. 6.50% 09/15/11 $ 522,039 ----------- 5,325,342 ----------- MANAGED HEALTH CARE (1.8%) 340 Aetna, Inc. 7.875 03/01/11 392,027 60 Anthem, Inc. 6.80 08/01/12 65,764 1,115 Health Net, Inc. 8.375 04/15/11 1,283,765 270 UnitedHealth Group Inc. 7.50 11/15/05 299,346 175 Wellpoint Health Network, Inc. 6.375 06/15/06 190,648 ----------- 2,231,550 ----------- MEDIA CONGLOMERATES (2.8%) 185 AOL Time Warner Inc. 6.75 04/15/11 200,361 500 AOL Time Warner Inc. 7.625 04/15/31 541,338 195 AOL Time Warner Inc. 7.70 05/01/32 213,902 600 News America Holdings, Inc. 7.75 02/01/24 668,681 50 News America Holdings, Inc. 8.875 04/26/23 61,479 250 News America Inc. 6.625 01/09/08 275,010 65 News America Inc. - 144A* 4.75 03/15/10 64,602 900 News America Inc. 7.28 06/30/28 959,203 530 Time Warner Co., Inc. 7.57 02/01/24 568,705 ----------- 3,553,281 ----------- MOTOR VEHICLES (1.9%) 215 DaimlerChrysler North American Holdings Co. 8.00 06/15/10 242,400 665 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 747,668 400 Ford Motor Co. 7.45 07/16/31 355,385 1,000 General Motors Corp. 7.20 01/15/11 1,018,972 ----------- 2,364,425 ----------- MULTI-LINE INSURANCE (1.4%) 545 AIG SunAmerica Global Finance VI - 144A* 6.30 05/10/11 589,973 250 Farmers Insurance Exchange - 144A* 8.50 08/01/04 252,696 135 Hartford Financial Services Group, Inc. 2.375 06/01/06 132,596 500 Hartford Financial Services Group, Inc. 7.75 06/15/05 546,946 200 Nationwide Mutual Insurance - 144A* 6.50 02/15/04 204,386 ----------- 1,726,597 ----------- OIL & GAS PRODUCTION (2.0%) 35 Devon Financing Corp. 6.875 09/30/11 38,667 410 Kerr-McGee Corp. 5.875 09/15/06 436,008 210 Pemex Project Funding Master Trust 7.875 02/01/09 232,050 1,170 Pemex Project Funding Master Trust 8.00 11/15/11 1,275,300
SEE NOTES TO FINANCIAL STATEMENTS 11
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- $ 90 Pemex Project Funding Master Trust 9.125% 10/13/10 $ 104,850 40 Petro-Canada (Canada) 4.00 07/15/13 35,975 525 Petro-Canada (Canada) 5.35 07/15/33 456,505 ----------- 2,579,355 ----------- OIL REFINING/MARKETING (0.5%) 140 Ashland Inc. 7.83 08/15/05 150,692 120 Marathon Oil Corp. 6.00 07/01/12 125,859 380 Marathon Oil Corp. 6.80 03/15/32 391,685 ----------- 668,236 ----------- OTHER CONSUMER SERVICES (1.0%) 130 Cendant Corp. 6.25 03/15/10 136,069 1,020 Cendant Corp. 7.375 01/15/13 1,124,331 ----------- 1,260,400 ----------- OTHER METALS/MINERALS (1.1%) 125 BHP Finance USA Ltd. (Australia) 4.80 04/15/13 121,200 800 Inco Ltd. (Canada) 7.20 09/15/32 811,731 395 Inco Ltd. (Canada) 7.75 05/15/12 439,561 ----------- 1,372,492 ----------- PULP & PAPER (1.5%) 105 Abitibi-Consolidated Inc. (Canada) 8.55 08/01/10 111,405 130 International Paper Co. 5.30 04/01/15 122,787 1,075 International Paper Co. 5.85 10/30/12 1,095,496 105 MeadWestVaco Corp. 6.85 04/01/12 113,866 460 Sappi Papier Holding AG - 144A* (Austria) 6.75 06/15/12 490,205 ----------- 1,933,759 ----------- RAILROADS (0.8%) 535 Norfolk Southern Corp. 7.875 02/15/04 550,390 395 Union Pacific Corp. 5.84 05/25/04 405,774 ----------- 956,164 ----------- REAL ESTATE DEVELOPMENT (0.8%) 398 World Financial Properties - 144A* 6.91 09/01/13 434,557 588 World Financial Properties - 144A* 6.95 09/01/13 643,561 ----------- 1,078,118 ----------- REAL ESTATE INVESTMENT TRUSTS (2.1%) 290 EOP Operating L.P. 6.763 06/15/07 317,609 65 EOP Operating L.P. 7.50 04/19/29 69,000 770 EOP Operating L.P. 7.875 07/15/31 854,034
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ----------------------------------------------------------------------------------------------------------------- $ 980 Simon Property Group L.P. 6.35% 08/28/12 $ 1,031,319 220 Simon Property Group L.P. 6.375 11/15/07 238,078 115 Vornado Realty Trust 5.625 06/15/07 119,678 ----------- 2,629,718 ----------- SAVINGS BANKS (0.2%) 290 Washington Mutual Bank 5.50 01/15/13 291,373 ----------- SERVICES TO THE HEALTH INDUSTRY (1.2%) 235 Anthem Insurance - 144A* 9.00 04/01/27 288,638 885 Anthem Insurance - 144A* 9.125 04/01/10 1,060,616 165 Omnicare, Inc. 6.125 06/01/13 157,575 ----------- 1,506,829 ----------- TOBACCO (0.4%) 535 Altria Group, Inc. 7.75 01/15/27 504,692 ----------- Total Corporate Bonds (COST $87,471,889) 85,673,440 ----------- FOREIGN GOVERNMENT OBLIGATIONS (1.9%) 820 United Mexican States Corp. (Mexico) 8.30 08/15/31 877,400 75 United Mexican States Corp. (Mexico) 8.375 01/14/11 86,325 315 United Mexican States Corp. (Mexico) 8.625 03/12/08 366,503 860 United Mexican States Corp. (Mexico) 9.875 02/01/10 1,064,680 ----------- Total Foreign Government Obligations (COST $2,478,948) 2,394,908 ----------- U.S. GOVERNMENT AGENCY OBLIGATION (0.3%) 360 Private Export Funding Corp. (Cost $360,201) 6.86 04/30/04 372,895 ----------- MORTGAGE-BACKED SECURITIES (36.2%) Federal Home Loan Mortgage Corp. 10,000 6.50 ** 10,343,750 109 7.50 09/01/30 115,665 1,945 8.00 08/01/29 - 06/01/31 2,081,765
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ----------------------------------------------------------------------------------------------------------------- Federal National Mortgage Assoc. $ 8,750 6.50% ** $ 9,045,313 8,250 7.00 ** 8,688,281 2,322 7.00 02/01/30 - 05/01/32 2,445,599 9,000 7.50 ** 9,565,308 2,752 7.50 09/01/29 - 07/01/32 2,925,324 700 8.00 10/01/29 - 09/01/31 751,124 ----------- Total Mortgage-Backed Securities (Cost $45,949,552) 45,962,129 ----------- Asset-Backed Securities (4.8%) 700 BMW Vehicle Owner Trust (Series 2002-A) (Class A4) 4.46 05/25/07 729,299 700 Chase Manhattan Auto Owner Trust (Series 2002-A) (Class A4) 4.24 09/15/08 726,237 650 Citibank Credit Card Issurance Trust (Series 2003-A2) (Class A2) 2.70 01/15/08 651,948 700 Citibank Credit Card Issurance Trust (Series 2001-A8) (Class A8) 4.10 12/07/06 720,996 225 Ford Credit Auto Owner Trust (Series 2002-B) (Class A4) 4.75 08/15/06 235,199 500 Harley-Davidson Motorcycle Trust (Series 2003-1) (Class A2) 2.63 11/15/10 501,099 600 Harley-Davidson Motorcycle Trust (series 2002-2) (Class A2) 3.09 06/15/10 610,080 700 Harley-Davidson Motorcycle Trust (Series 2002-1) (Class A2) 4.50 01/15/10 727,257 500 Honda Auto Receivables Owner Trust (Series 2002-4) (Class A4) 2.70 03/17/08 500,505 600 Northstrom Private Label Credit Card Master (Series 2001-1A) (Class A) - 144A* 4.82 04/15/10 625,863 ----------- Total Asset-Backed Securities (COST $5,876,073) 6,028,483 ----------- Short-Term Investments (17.9%) U.S. Government Obligation (a) (0.2%) 300 U.S. Treasury Bill*** (Cost $299,781) 1.095 09/25/03 299,763 -----------
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------ Repurchase Agreement (17.7%) $ 22,424 Joint repurchase agreement account (dated 08/29/03, proceeds $22,426,616) (b) (Cost $22,424,000) 1.05% 09/02/03 $ 22,424,000 ------------- Total Short-Term Investments (COST $22,723,781) 22,723,763 ------------- Total Investments (COST $164,860,444) (c) (d) 128.6% 163,155,618 Liabilities in Excess of Other Assets (28.6) (36,322,675) ---------- ------------- Net Assets 100.0% $ 126,832,943 ========== =============
- ---------- * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT. *** ALL OF THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS. (c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN A AMOUNT EQUAL TO $69,569,704 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS AND OPEN FUTURES CONTRACTS. (d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $165,130,583. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $1,874,411 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $3,849,376, RESULTING IN NET UNREALIZED DEPRECIATION OF $1,974,965. BOND INSURANCE: FSA Financial Security Assurance. FUTURES CONTRACTS OPEN AT AUGUST 31, 2003:
UNREALIZED NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE APPRECIATION CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION) - ---------------------------------------------------------------------------------------------------------------- 43 Short U.S. Treasury Notes 2 year, September/2003 $ (9,227,532) $ 85,697 32 Short U.S. Treasury Notes 5 year, September/2003 (3,567,500) 114,118 59 Short U.S. Treasury Notes 2 year, December/2003 (12,569,766) (17,850) 3 Short U.S. Treasury Notes 5 year, December/2003 (329,578) 493 41 Short U.S. Treasury Bonds, September/2003 (4,403,656) (12,394) 12 Short U.S. Treasury Bonds, December/2003 (1,272,000) 1,701 --------- Net unrealized appreciation $ 171,765 =========
SEE NOTES TO FINANCIAL STATEMENTS 15 Morgan Stanley Quality Income Trust FINANCIAL STATEMENTS Statement of Assets and Liabilities AUGUST 31, 2003 Assets: Investments in securities, at value (including a repurchase agreement of $22,424,000) (cost $164,860,444) $ 163,155,618 Receivable for: Interest 1,719,165 Investments sold 364,378 Shares of beneficial interest sold 214,584 Prepaid expenses and other assets 124,851 --------------- Total Assets 165,578,596 --------------- Liabilities: Payable for: Investments purchased 37,813,253 Shares of beneficial interest redeemed 639,338 Distribution fee 81,766 Investment management fee 64,701 Accrued expenses and other payables 146,595 --------------- Total Liabilities 38,745,653 --------------- Net Assets $ 126,832,943 =============== Composition of Net Assets: Paid-in-capital $ 137,241,623 Net unrealized depreciation (1,533,061) Dividends in excess of net investment income (248,881) Accumulated net realized loss (8,626,738) --------------- Net Assets $ 126,832,943 =============== Class A Shares: Net Assets $ 9,635,572 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,026,129 Net Asset Value Per Share $ 9.39 =============== Maximum Offering Price Per Share, (NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 9.81 =============== Class B Shares: Net Assets $ 99,695,005 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 10,696,130 Net Asset Value Per Share $ 9.32 =============== Class C Shares: Net Assets $ 10,389,148 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,112,697 Net Asset Value Per Share $ 9.34 =============== Class D Shares: Net Assets $ 7,113,218 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 765,513 Net Asset Value Per Share $ 9.29 ===============
SEE NOTES TO FINANCIAL STATEMENTS 16 Statement of Operations FOR THE YEAR ENDED AUGUST 31, 2003 Net Investment Income: Interest Income $ 4,335,311 --------------- Expenses Distribution fee (Class A shares) 17,867 Distribution fee (Class B shares) 894,013 Distribution fee (Class C shares) 75,251 Investment management fee 792,713 Transfer agent fees and expenses 215,136 Shareholder reports and notices 69,434 Registration fees 67,347 Professional fees 51,541 Trustees' fees and expenses 19,984 Other 21,464 --------------- Total Expenses 2,224,750 --------------- Net Investment Income 2,110,561 --------------- Net Realized and Unrealized Gain (Loss): Net Realized Gain on: Investments 1,635,580 Futures contracts 195,074 --------------- Net Realized Gain 1,830,654 --------------- Net Change in Unrealized Appreciation/Depreciation on: Investments (1,920,256) Futures contracts 171,765 --------------- Net Depreciation (1,748,491) --------------- Net Gain 82,163 --------------- Net Increase $ 2,192,724 ===============
SEE NOTES TO FINANCIAL STATEMENTS 17 Statement of Changes in Net Assets
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2003 AUGUST 31, 2002 --------------- --------------- Increase (Decrease) in Net Assets: Operations: Net investment income $ 2,110,561 $ 3,829,987 Net realized gain 1,830,654 2,245,051 Net change in unrealized depreciation (1,748,491) (1,010,383) --------------- --------------- Net Increase 2,192,724 5,064,655 --------------- --------------- Dividends to Shareholders from Net Investment Income: Class A shares (316,276) (179,929) Class B shares (3,155,485) (3,265,862) Class C shares (264,530) (155,164) Class D shares (356,548) (218,659) --------------- --------------- Total Dividends (4,092,839) (3,819,614) --------------- --------------- Net increase (decrease) from transactions in shares of beneficial interest (3,592,687) 22,208,366 --------------- --------------- Net Increase (Decrease) (5,492,802) 23,453,407 Net Assets: Beginning of period 132,325,745 108,872,338 --------------- --------------- End of Period (INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $248,881 AND ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $481,946, RESPECTIVELY) $ 126,832,943 $ 132,325,745 =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS 18 Morgan Stanley Quality Income Trust NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 1. Organization and Accounting Policies Morgan Stanley Quality Income Trust (the "Fund"), formerly Morgan Stanley Intermediate Income Securities, 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 high current income consistent with safety of principal. The Fund will seek to achieve its objective by investing at least 80% of its assets in investment grade fixed income securities. Prior to April 22, 2003, the Fund sought to achieve its objective by investing at least 80% of its assets in intermediate term, investment grade fixed income securities. The Fund was organized as a Massachusetts business trust on September 1, 1988 and commenced operations on May 3, 1989. On July 28, 1997, the Fund converted to a multiple class share structure. The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within one year, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. The following is a summary of significant accounting policies: A. Valuation of Investments -- (1) portfolio securities for which over-the-counter market quotations are readily available are valued at the latest bid price prior to the time of valuation; (2) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") determines that the market quotations are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees; (3) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and (4) 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. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Manager, may 19 transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest. D. Multiple Class Allocations -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. 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 Fund 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 Fund agrees to 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 Fund as unrealized gains and losses. Upon closing of the contract, the Fund 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. F. 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 income to its shareholders. Accordingly, no federal income tax provision is required. G. Dividends and Distributions to Shareholders -- Dividends and distributions to shareholders are recorded on the ex-dividend date. H. 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 , the Fund pays the Investment Manager a management fee, calculated 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: 0.60% to the portion of daily net assets not exceeding $500 million; 0.50% to the portion of daily net assets exceeding $500 million but not exceeding $750 million; 0.40% to the portion of the daily net assets exceeding $750 million but not exceeding $1 billion; and 0.30% to the portion of the daily net asset exceeding $1 billion. 20 3. Plan of Distribution Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B - 0.85% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up to 0.85% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $5,664,859 at August 31, 2003. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the year ended August 31, 2003, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.20% and 0.85%, respectively. The Distributor has informed the Fund that for the year ended August 31, 2003, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $21,975, $269,673 and $6,194, respectively, and received $92,496 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. Security Transactions and Transactions with Affiliates The cost of purchases and proceeds from sales/prepayments of portfolio securities, excluding short-term investments, for the year ended August 31, 2003, aggregated $594,680,723, and 21 $567,118,909, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities of $74,892,362 and $101,942,047, respectively. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At August 31, 2003, the Fund had transfer agent fees and expenses payable of approximately $10,000. The Fund has an unfunded noncontributory defined benefit pension plan covering all 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 years of service and compensation during the last five years of service. Aggregate pension costs for the year ended August 31, 2003 included in Trustees' fees and expenses in the Statement of Operations amounted to $7,163. At August 31, 2003, the Fund had an accrued pension liability of $59,375 which is included in accrued expenses in the Statement of Assets and Liabilities. 5. Shares of Beneficial Interest Transactions in shares of beneficial interest were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2003 AUGUST 31, 2002 ---------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ CLASS A SHARES Sold 7,230,344 $ 69,757,478 4,601,318 $ 43,662,281 Reinvestment of dividends 23,096 221,263 16,108 151,661 Redeemed (7,352,712) (70,908,969) (3,938,770) (37,318,849) ------------ ------------ ------------ ------------ Net increase (decrease) -- Class A (99,272) (930,228) 678,656 6,495,093 ------------ ------------ ------------ ------------ CLASS B SHARES Sold 5,576,141 53,136,588 8,301,113 77,663,399 Reinvestment of dividends 224,794 2,137,809 229,053 2,136,654 Redeemed (6,031,461) (57,282,326) (8,023,847) (75,013,877) ------------ ------------ ------------ ------------ Net increase (decrease) -- Class B (230,526) (2,007,929) 506,319 4,786,176 ------------ ------------ ------------ ------------ CLASS C SHARES Sold 1,825,800 17,330,693 1,056,702 9,887,000 Reinvestment of dividends 20,602 196,212 13,255 123,842 Redeemed (1,411,756) (13,429,508) (843,310) (7,894,423) ------------ ------------ ------------ ------------ Net increase -- Class C 434,646 4,097,397 226,647 2,116,419 ------------ ------------ ------------ ------------ CLASS D SHARES Sold 1,942,485 18,431,785 1,856,116 17,358,806 Reinvestment of dividends 22,745 215,756 14,251 132,783 Redeemed (2,466,593) (23,399,468) (926,421) (8,680,911) ------------ ------------ ------------ ------------ Net increase (decrease) -- Class D (501,363) (4,751,927) 943,946 8,810,678 ------------ ------------ ------------ ------------ Net increase (decrease) in Fund (396,515) $ (3,592,687) 2,355,568 $ 22,208,366 ============ ============ ============ ============
22 6. 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. The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2003 AUGUST 31, 2002 --------------- --------------- Ordinary Income $ 4,092,676 $ 3,879,314
As of August 31, 2003, the tax-basis components of accumulated losses were as follows: Undistributed ordinary income $ 101,079 Undistributed long-term gains -- --------------- Net accumulated earnings 101,079 Capital loss carryforward* (7,215,096) Post-October losses (1,239,877) Temporary differences (79,821) Net unrealized depreciation (1,974,965) --------------- Total accumulated losses $ (10,408,680) ===============
* As of August 31, 2003, the Fund had a net capital loss carryforward of $7,215,096 of which $312,541 will expire on August 31, 2004, $2,351,266 will expire on August 31, 2005, $199,882 will expire on August 31, 2006, $1,146,203 will expire on August 31, 2008, $2,891,735 will expire on August 31, 2009 and $313,469 will expire on August 31, 2010 to offset future capital gains to the extent provided by regulations. As of August 31, 2003, the Fund had temporary book/tax differences primarily attributable to post-October losses (capital losses incurred after October 31 within the taxable year which are deemed to arise on the first business day of the Fund's next taxable year), mark-to-market of open futures contracts and book amortization of premiums on debt securities and permanent book/tax differences attributable to losses on paydowns, tax adjustments on debt securities sold by the Fund and an expired capital loss carryforward. To reflect reclassifications arising from the permanent differences, paid-in-capital was charged $5,189,389, dividends in excess of net investment income was credited $1,251,451 and accumulated net realized loss was credited $3,937,938. 23 7. Purposes of and Risks Relating to Certain Financial Instruments The Fund may enter into forward contracts to facilitate settlement of foreign currency denominated portfolio transactions or to manage foreign currency exposure associated with foreign currency denominated securities. To hedge against adverse interest rate, foreign currency and market risks, the Fund may purchase and sell interest rate, currency and index futures contracts ("futures contracts"). Forward contracts and futures contracts involve elements of market risk in excess of the amounts reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in foreign exchange rates underlying the forward contracts. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. At August 31, 2003, the Fund had outstanding futures contracts and had no outstanding forward contracts. 24 Morgan Stanley Quality Income Trust FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED AUGUST 31, ---------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- Class A Shares: Selected Per Share Data: Net asset value, beginning of period $ 9.53 $ 9.35 $ 8.97 $ 9.30 $ 9.71 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.20 0.37 0.52 0.55 0.55 Net realized and unrealized gain (loss) 0.01 0.19 0.38 (0.33) (0.41) ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.21 0.56 0.90 0.22 0.14 ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.35) (0.38) (0.52) (0.55) (0.55) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.39 $ 9.53 $ 9.35 $ 8.97 $ 9.30 ========== ========== ========== ========== ========== Total Return+ 2.17% 6.17% 10.34% 2.49% 1.39% Ratios to Average Net Assets(1): Expenses 1.14% 1.04% 1.21% 1.10% 1.08% Net investment income 2.14% 4.03% 5.71% 6.02% 5.67% Supplemental Data: Net assets, end of period, in thousands $ 9,636 $ 10,730 $ 4,177 $ 4,196 $ 3,557 Portfolio turnover rate 429% 400% 358% 114% 99%
- ---------- + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 25
FOR THE YEAR ENDED AUGUST 31, ---------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- Class B Shares: Selected Per Share Data: Net asset value, beginning of period $ 9.45 $ 9.35 $ 8.98 $ 9.31 $ 9.70 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.14 0.31 0.47 0.49 0.49 Net realized and unrealized gain (loss) 0.02 0.10 0.37 (0.33) (0.39) ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.16 0.41 0.84 0.16 0.10 ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.29) (0.31) (0.47) (0.49) (0.49) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.32 $ 9.45 $ 9.35 $ 8.98 $ 9.31 ========== ========== ========== ========== ========== Total Return+ 1.63% 4.58% 9.55% 1.80% 0.92% Ratios to Average Net Assets(1): Expenses 1.79% 1.72% 1.84% 1.77% 1.75% Net investment income 1.49% 3.35% 5.08% 5.35% 5.00% Supplemental Data: Net assets, end of period, in thousands $ 99,695 $ 103,238 $ 97,452 $ 82,964 $ 120,843 Portfolio turnover rate 429% 400% 358% 114% 99%
- ---------- + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 26
FOR THE YEAR ENDED AUGUST 31, ---------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- Class C Shares: Selected Per Share Data: Net asset value, beginning of period $ 9.46 $ 9.36 $ 8.99 $ 9.32 $ 9.71 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.14 0.31 0.47 0.49 0.49 Net realized and unrealized gain (loss) 0.03 0.10 0.37 (0.33) (0.39) ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.17 0.41 0.84 0.16 0.10 ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.29) (0.31) (0.47) (0.49) (0.49) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.34 $ 9.46 $ 9.36 $ 8.99 $ 9.32 ========== ========== ========== ========== ========== Total Return+ 1.74% 4.57% 9.54% 1.80% 0.91% Ratios to Average Net Assets(1): Expenses 1.79% 1.72% 1.84% 1.77% 1.75% Net investment income 1.49% 3.35% 5.08% 5.35% 5.00% Supplemental Data: Net assets, end of period, in thousands $ 10,389 $ 6,415 $ 4,226 $ 1,738 $ 1,759 Portfolio turnover rate 429% 400% 358% 114% 99%
- ---------- + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 27
FOR THE YEAR ENDED AUGUST 31, ---------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- Class D Shares: Selected Per Share Data: Net asset value, beginning of period $ 9.43 $ 9.35 $ 8.98 $ 9.31 $ 9.70 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.22 0.38 0.55 0.57 0.57 Net realized and unrealized gain (loss) 0.01 0.09 0.37 (0.33) (0.39) ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.23 0.47 0.92 0.24 0.18 ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.37) (0.39) (0.55) (0.57) (0.57) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.29 $ 9.43 $ 9.35 $ 8.98 $ 9.31 ========== ========== ========== ========== ========== Total Return+ 2.39% 5.23% 10.48% 2.67% 1.79% Ratios to Average Net Assets(1): Expenses 0.94% 0.87% 0.99% 0.92% 0.90% Net investment income 2.34% 4.20% 5.93% 6.20% 5.85% Supplemental Data: Net assets, end of period, in thousands $ 7,113 $ 11,943 $ 3,018 $ 6,834 $ 7,493 Portfolio turnover rate 429% 400% 358% 114% 99%
- ---------- + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 28 Morgan Stanley Quality Income Trust INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Trustees of Morgan Stanley Quality Income Trust: We have audited the accompanying statement of assets and liabilities of Morgan Stanley Quality Income Trust (the "Fund"), formerly Morgan Stanley Intermediate Income Securities, including the portfolio of investments, as of August 31, 2003, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2003, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Quality Income Trust as of August 31, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP NEW YORK, NEW YORK OCTOBER 15, 2003 2003 FEDERAL TAX NOTICE (UNAUDITED) Of the Fund's ordinary income dividends paid during the fiscal year ended August 31, 2003, 19.15% was attributable to qualifying Federal obligations. Please consult your tax advisor to determine if any portion of the dividends you received is exempt from state income tax. 29 Morgan Stanley Quality Income Trust TRUSTEE AND OFFICER INFORMATION Independent Trustees:
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - -------------------------------------- ----------- ------------- --------------------------------------------- Michael Bozic (62) Trustee Since Retired; Director or Trustee of the Retail c/o Mayer, Brown, Rowe & Maw LLP April 1994 Funds and TCW/DW Term Trust 2003 (since April Counsel to the Independent Directors 1994) and the Institutional Funds (since July 1675 Broadway 2003); formerly Vice Chairman of Kmart New York, NY 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 (70) Trustee Since Director or Trustee of the Retail Funds and c/o Summit Ventures LLC January 1993 TCW/DW Term Trust 2003 (since January 1993) 1 Utah Center and the Institutional Funds (since July 201 S. Main Street 2003); member of the Utah Regional Advisory Salt Lake City, UT Board of Pacific Corp.; formerly United States Senator (R-Utah) (1974-1992) and Chairman, Senate 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 (69) Trustee Since Retired; Director or Trustee of the Retail c/o Mayer, Brown, Rowe & Maw LLP September Funds and TCW/DW Term Trust 2003; (Since Counsel to the Independent Directors 1997 September 1997) and the Institutional Funds 1675 Broadway (since July 2003); formerly associated with New York, NY the Allstate Companies (1966-1994), most recently as Chairman of The Allstate Corporation (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994). NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, AGE AND ADDRESS OF OVERSEEN INDEPENDENT TRUSTEE BY TRUSTEE*** OTHER DIRECTORSHIPS HELD BY TRUSTEE - -------------------------------------- ------------- ---------------------------------------- Michael Bozic (62) 216 Director of Weirton Steel Corporation. c/o Mayer, Brown, Rowe & Maw LLP Counsel to the Independent Directors 1675 Broadway New York, NY Edwin J. Garn (70) 216 Director of Franklin Covey (time c/o Summit Ventures LLC management systems), BMW Bank of North 1 Utah Center America, Inc. (industrial loan 201 S. Main Street corporation), United Space Alliance Salt Lake City, UT (joint venture between Lockheed Martin and the Boeing Company) and Nuskin Asia Pacific (multilevel marketing); member of the board of various civic and charitable organizations. Wayne E. Hedien (69) 216 Director of The PMI Group Inc. (private c/o Mayer, Brown, Rowe & Maw LLP mortgage insurance); Trustee and Vice Counsel to the Independent Directors Chairman of The Field Museum of Natural 1675 Broadway History; director of various other New York, NY business and charitable organizations.
30
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - -------------------------------------- ----------- ------------- --------------------------------------------- Dr. Manuel H. Johnson (54) Trustee Since Chairman of the Audit Committee and Director c/o Johnson Smick International, Inc. July 1991 or Trustee of the Retail Funds and TCW/DW 2099 Pennsylvania Avenue, N.W. Term Trust 2003 (since July 1991) and the Suite 950 Institutional Funds (since July 2003); Senior Washington, D.C. Partner, Johnson Smick International, Inc., a consulting firm; 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 (61) Trustee Since Deputy Chairman of the Audit Committee and PMB754 July 2003 Director or Trustee of the Retail Funds and 23852 Pacific Coast Highway TCW/DW Term Trust 2003 (since July 2003) and Malibu, CA the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); President, Kearns & Associates LLC (investment consulting); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (67) Trustee Since Chairman of the Insurance Committee and c/o Triumph Capital, L.P. July 1991 Director or Trustee of the Retail Funds and 445 Park Avenue TCW/DW Term Trust 2003 (since July 1991) and New York, NY the Institutional Funds (since July 2001); General Partner of Triumph Capital, L.P., a private investment partnership; formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (71) Trustee Since Chairman of the Governance Committee and 85 Charles Colman Blvd. July 2003 Director or Trustee of the Retail Funds and Pawling, NY TCW/DW Term Trust 2003 (since July 2003) and the Institutional Funds (since June 1992); Chairman of Lumelite Plastics Corporation. NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, AGE AND ADDRESS OF OVERSEEN INDEPENDENT TRUSTEE BY TRUSTEE*** OTHER DIRECTORSHIPS HELD BY TRUSTEE - -------------------------------------- ------------- ---------------------------------------- Dr. Manuel H. Johnson (54) 216 Director of NVR, Inc. (home c/o Johnson Smick International, Inc. construction); Chairman and Trustee of 2099 Pennsylvania Avenue, N.W. the Financial Accounting Foundation Suite 950 (oversight organization of the Financial Washington, D.C. Accounting Standards Board); Director of RBS Greenwich Capital Holdings (financial holding company). Joseph J. Kearns (61) 217 Director of Electro Rent Corporation PMB754 (equipment leasing), The Ford Family 23852 Pacific Coast Highway Foundation, and the UCLA Foundation. Malibu, CA Michael E. Nugent (67) 216 Director of various business c/o Triumph Capital, L.P. organizations. 445 Park Avenue New York, NY Fergus Reid (71) 217 Trustee and Director of certain 85 Charles Colman Blvd. investment companies in the JPMorgan Pawling, NY Funds complex managed by JP Morgan Investment Management Inc.
31 Interested Trustees:
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - -------------------------------------- ----------- ------------- --------------------------------------------- Charles A. Fiumefreddo (70) Chairman of Since Chairman and Director or Trustee of the c/o Morgan Stanley Trust the Board July 1991 Retail Funds and TCW/DW Term Trust 2003 Harborside Financial Center, and Trustee (since July 1991) and the Institutional Funds Plaza Two, (since July 2003); formerly Chief Executive Jersey City, NJ Officer of the Retail Funds and the TCW/DW Term Trust 2003 (until September 2002). James F. Higgins (55) Trustee Since Director or Trustee of the Retail Funds and c/o Morgan Stanley Trust June 2000 TCW/DW Term Trust 2003 (since June 2000) and Harborside Financial Center, the Institutional Funds (since July 2003); Plaza Two, Senior Advisor of Morgan Stanley (since Jersey City, NJ 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). Philip J. Purcell (59) Trustee Since Director or Trustee of the Retail Funds and 1585 Broadway April 1994 TCW/DW Term Trust 2003 (since April 1994) and New York, NY the Institutional Funds (since July 2003); Chairman of the Board of Directors and Chief Executive Officer of Morgan Stanley and Morgan Stanley DW Inc.; Director of the Distributor; Chairman of the Board of Directors and Chief Executive Officer of Novus Credit Services Inc.; Director and/or officer of various Morgan Stanley subsidiaries. NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, AGE AND ADDRESS OF OVERSEEN INDEPENDENT TRUSTEE BY TRUSTEE*** OTHER DIRECTORSHIPS HELD BY TRUSTEE - -------------------------------------- ------------- ---------------------------------------- Charles A. Fiumefreddo (70) 216 None c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ James F. Higgins (55) 216 Director of AXA Financial, Inc. and The c/o Morgan Stanley Trust Equitable Life Assurance Society of the Harborside Financial Center, United States (financial services). Plaza Two, Jersey City, NJ Philip J. Purcell (59) 216 Director of American Airlines, Inc. and 1585 Broadway its parent company, AMR Corporation. New York, NY
- -------------------- * THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER") (THE "RETAIL FUNDS"). ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT MANAGEMENT INC., MORGAN STANLEY INVESTMENTS LP AND MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE. *** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY INVESTMENTS LP). 32 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 (50) 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 Executive Officer of the Investment Manager and Morgan Stanley Services; Chairman, Chief Executive Officer and Director of the Distributor; Chairman and Director of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President Morgan Stanley Investments LP (since February 2003); President of the Institutional Funds (since July 2003) and President of the Retail Funds and TCW/DW Term Trust 2003 (since May 1999); Trustee (since July 2003) and President (since December 2002) of the Van Kampen Closed-End Funds; Trustee (since May 1999) and President (since October 2002) of the Van Kampen Open-End Funds. Ronald E. Robison (64) Executive Vice Since Chief Global Operations Officer and Managing Director of 1221 Avenue of the Americas President and April 2003 Morgan Stanley Investment Management Inc.; Managing New York, NY Principal DIrector of Morgan Stanley & Co. Incorporated; Managing Executive DIrector of Morgan Stanley; Managing Director, Chief Officer Administrative Officer and Director of the Investment Manager and Morgan Stanley Services; Chief Executive Officer and Director of the Transfer Agent; Executive Vice President and Principal Executive Officer of the Institutional Funds (since July 2003); and the TCW/DW Term Trust 2003 (since April 2003); previously President of the Institutional Funds (March 2001-July 2003) and Director of the Institutional Funds (March 2001-July 2003). Barry Fink (48) Vice President Since General Counsel (since May 2000) and Managing Director 1221 Avenue of the Americas and General February 1997 (since December 2000) of Morgan Stanley Investment New York, NY Counsel Management; Managing Director (since December 2000), Secretary (since February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; Assistant Secretary of Morgan Stanley DW; Chief Legal Officer of Morgan Stanley Investments LP (since July 2002); Vice President of the Institutional Funds (since July 2003); Vice President and Secretary of the Distributor; previously Secretary of the Retail Funds (February 1997-July 2003); previously Vice President and Assistant General Counsel of the Investment Manager and Morgan Stanley Services (February 1997-December 2001). Joseph J. McAlinden (60) Vice President Since July 1995 Managing Director and Chief Investment Officer of the 1221 Avenue of the Americas Investment Manager, Morgan Stanley Investment Management New York, NY Inc. and Morgan Stanley Investments LP; Director of the Transfer Agent, Chief Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). Stefanie V. Chang (36) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. and Morgan 1221 Avenue of the Americas Stanley Investment Management Inc. and Vice President of New York, NY the Institutional Funds (since December 1997) and the Retail Funds (since July 2003); formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance LLP).
33
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - -------------------------------------- --------------- --------------- ----------------------------------------------------------- Francis Smith (38) Treasurer and Treasurer since Executive Director of the Investment Manager and Morgan c/o Morgan Stanley Trust Chief Financial July 2003 and Stanley Services (since December 2001); previously Vice Harborside Financial Center, Officer Chief Financial President of the Retail Funds (September 2002-July 2003); Plaza Two, Officer since previously Vice President of the Investment Manager and Jersey City, NJ September 2002 Morgan Stanley Services (August 2000-November 2001) and Senior Manager at PricewaterhouseCoopers LLP (January 1998-August 2000). Thomas F. Caloia (57) Vice President Since July 2003 Executive Director (since December 2002) and Assistant c/o Morgan Stanley Trust Treasurer of the Investment Manager, the Distributor and Harborside Financial Center, Morgan Stanley Services; previously Treasurer of the Retail Plaza Two, Funds (April 1989-July 2003); formerly First Vice President Jersey City, NJ of the Investment Manager, the Distributor and Morgan Stanley Services. Mary E. Mullin (36) Secretary Since July 2003 Vice President of Morgan Stanley & Co. Incorporated and 1221 Avenue of the Americas Morgan Stanley Investment Management Inc.; Secretary of the New York, NY 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. 34 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Philip J. Purcell Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER Barry Fink VICE PRESIDENT and GENERAL COUNSEL Joseph J. McAlinden VICE PRESIDENT Stefanie V. Chang VICE PRESIDENT Francis Smith TREASURER and CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C) 2003 Morgan Stanley [MORGAN STANLEY LOGO] 38557RPT-12363J03-ANP-10/03 [MORGAN STANLEY FUNDS LOGO] MORGAN STANLEY QUALITY INCOME TRUST ANNUAL REPORT AUGUST 31, 2003 [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) Not applicable. (d) Not applicable. (e) Not applicable. (f) (1) The Fund's Code of Ethics is attached hereto as Exhibit A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Trustees has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services Applicable only for reports covering fiscal years ending on or after December 15, 2003. Item 5. Audit Committee of Listed Registrants. Applicable only for reports covering periods ending on or after the earlier of (i) the first annual shareholder meeting after January 15, 2004 or (ii) October 31, 2004. Item 6. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Applicable only to annual reports filed by closed-end funds. Item 8. [Reserved.] Item 9 - Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Fund's internal controls or in other factors that could significantly affect the Fund's internal controls subsequent to the date of their evaluation. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 10 Exhibits (a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Quality Income Trust /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer October 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. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer October 20, 2003 /s/ Francis Smith Francis Smith Principal Financial Officer October 20, 2003 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 Quality Income Trust /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer December 8, 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. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer December 8, 2003 /s/ Francis Smith Francis Smith Principal Financial Officer December 8, 2003 EX-99.CODEETH 3 a2124374zex-99_codeeth.txt EX-99.CODEETH EXHIBIT 10 A CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED JULY 31, 2003 I. This Code of Ethics (the "Code") for the investment companies within the Morgan Stanley complex identified in Exhibit A (collectively, "Funds" and each, a "Fund") applies to each Fund's Principal Executive Officer, President, Principal Financial Officer and Treasurer (or persons performing similar functions) ("Covered Officers" each of whom are set forth in Exhibit B) for the purpose of promoting: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. - full, fair, accurate, timely and understandable disclosure in reports and documents that a company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; - compliance with applicable laws and governmental rules and regulations; - prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. Any question about the application of the Code should be referred to the General Counsel or his/her designee (who is set forth in Exhibit C). II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes, or appears to interfere, with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" (as defined in the Investment Company Act) of the Fund. The Fund's and its investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameters of this Code, unless or until the General Counsel determines that any violation of such programs and procedures is also a violation of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the investment adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the Fund and its investment adviser. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors/Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must not: - use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly) to the detriment of the Fund; - cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or - use material non-public knowledge of portfolio transactions made or contemplated for, or actions proposed to be taken by, the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. Each Covered Officer must, at the time of signing this Code, report to the General Counsel all affiliations or significant business relationships outside the Morgan Stanley complex and must update the report annually. Conflict of interest situations should always be approved by the General Counsel and communicated to the relevant Fund or Fund's Board. Any activity or relationship that would present such a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if an immediate member of the Covered Officer's family living in the same household engages in such an activity or has such a relationship. Examples of these include: - service or significant business relationships as a director on the board of any public or private company; - accepting directly or indirectly, anything of value, including gifts and gratuities in excess of $100 per year from any person or entity with which the Fund has current or prospective business dealings, not including occasional meals or tickets for theatre or sporting events or other similar entertainment; provided it is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; - any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, principal underwriter, or any affiliated person thereof; and - a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE - Each Covered Officer should familiarize himself/herself with the disclosure and compliance requirements generally applicable to the Funds; - each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund's Directors/Trustees and auditors, or to governmental regulators and self-regulatory organizations; - each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and their investment advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and - it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - upon adoption of the Code (thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he has received, read and understands the Code; - annually thereafter affirm to the Boards that he has complied with the requirements of the Code; - not retaliate against any other Covered Officer, other officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and - notify the General Counsel promptly if he/she knows or suspects of any violation of this Code. Failure to do so is itself a violation of this Code. The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any waivers(1) sought by a Covered Officer must be considered by the Board of the relevant Fund or Funds. The Funds will follow these procedures in investigating and enforcing this Code: - the General Counsel will take all appropriate action to investigate any potential violations reported to him; - ---------- (1) Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics." - if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; - any matter that the General Counsel believes is a violation will be reported to the relevant Fund's Audit Committee; - if the directors/trustees/managing general partners who are not "interested persons" as defined by the Investment Company Act (the "Independent Directors/Trustees/Managing General Partners") of the relevant Fund concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer or other appropriate disciplinary actions; - the Independent Directors/Trustees/Managing General Partners of the relevant Fund will be responsible for granting waivers of this Code, as appropriate; and - any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code unless any provision of this Code conflicts with any applicable federal or state law, in which case the requirements of such law will govern. The Funds' and their investment advisers' and principal underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act and Morgan Stanley's Code of Ethics are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibits A, B or C, must be approved or ratified by a majority vote of the Board of each Fund, including a majority of Independent Directors/Trustees/Managing General Partners. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Independent Directors/Trustees/Managing General Partners of the relevant Fund or Funds and their counsel, the relevant Fund or Funds and their counsel and the relevant investment adviser and its counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion I have read and understand the terms of the above Code. I recognize the responsibilities and obligations incurred by me as a result of my being subject to the Code. I hereby agree to abide by the above Code. - ------------------------- Date: -------------------- EXHIBIT B INSTITUTIONAL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer James W. Garrett - Chief Financial Officer and Treasurer RETAIL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer Frank Smith - Chief Financial Officer and Treasurer EXHIBIT C GENERAL COUNSEL Barry Fink EX-99.CERT 4 a2124374zex-99_cert.txt EX-99.CERT EXHIBIT 10 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Quality Income Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change 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; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 20, 2003 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer EXHIBIT 10 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 6. I have reviewed this report on Form N-CSR of Morgan Stanley Quality Income Trust; 7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 8. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 9. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: b) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] e) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and f) disclosed in this report any change 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; and 10. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): c) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 20, 2003 /s/ Francis Smith Francis Smith Principal Financial Officer EXHIBIT 10 B3 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Quality Income Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change 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; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: December 8, 2003 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer EXHIBIT 10 B4 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 6. I have reviewed this report on Form N-CSR of Morgan Stanley Quality Income Trust; 7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 8. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 9. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: b) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] e) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and f) disclosed in this report any change 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; and 10. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): c) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: December 8, 2003 /s/ Francis Smith Francis Smith Principal Financial Officer EX-99.906CERT 5 a2124374zex-99_906cert.txt EX-99.906CERT SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Quality Income Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 31, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: October 20, 2003 /s/ Ronald E. Robison --------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Quality Income Trust and will be retained by Morgan Stanley Quality Income Trust and furnished to the Securities and Exchange Commission or its staff upon request. SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Quality Income Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 31, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: October 20, 2003 /s/ Francis Smith ------------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Quality Income Trust and will be retained by Morgan Stanley Quality Income Trust and furnished to the Securities and Exchange Commission or its staff upon request. SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Quality Income Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 31, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: December 8, 2003 /s/ Ronald E. Robison --------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Quality Income Trust and will be retained by Morgan Stanley Quality Income Trust and furnished to the Securities and Exchange Commission or its staff upon request. SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Quality Income Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 31, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: December 8, 2003 /s/ Francis Smith ------------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Quality Income Trust and will be retained by Morgan Stanley Quality Income Trust and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----