-----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, OMSZIy5MV69CbDMk4F35CLCI82mlyRR9JDx+2/++vmQylqWYBdAw0W1VW3KI6UU/ 3EUBhnhVTQJT3VgAK9dx5g== 0001047469-04-015107.txt : 20040503 0001047469-04-015107.hdr.sgml : 20040503 20040503121430 ACCESSION NUMBER: 0001047469-04-015107 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040229 FILED AS OF DATE: 20040503 EFFECTIVENESS DATE: 20040503 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-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-05654 FILM NUMBER: 04772362 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-CSRS 1 a2134530zn-csrs.txt N-CSRS 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, 2004 Date of reporting period: February 29, 2004 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 semiannual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the 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 market values of securities owned by the Fund will decline and, therefore, the value of the Fund's shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. FUND REPORT For the six-month period ended February 29, 2004 TOTAL RETURN FOR THE SIX MONTHS ENDED FEBRUARY 29, 2004
LEHMAN BROTHERS INTERMEDIATE LIPPER U.S. GOVERNMENT/ BBB RATED CLASS A CLASS B CLASS C CLASS D CREDIT INDEX(1) FUNDS INDEX(2) 5.74% 5.45% 5.33% 5.80% 4.32% 6.77%
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR MORE UP-TO-DATE INFORMATION, INCLUDING MONTH-END PERFORMANCE FIGURES, PLEASE VISIT MORGANSTANLEY.COM OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE FUND'S TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE INFORMATION. MARKET CONDITIONS The markets during this review period saw a substantial amount of data indicating a stronger economy, including reports of 8.2 percent GDP growth in the third quarter and 4.1 percent in the fourth. While such robust growth might typically lead to higher interest rates, rates instead fell during the review period, primarily reflecting indications from the Federal Reserve Bank Open Market Committee (the Fed) that it planned to keep the federal funds rate at low levels "for a considerable period." The Fed remained concerned by a lack of job growth, and investors remained deeply concerned about terrorism and other potentially deflationary forces. Against this backdrop, sector performance varied considerably. Falling interest rates were most clearly expressed in the Treasury market, which saw a significant rally, especially in September. A combination of improving economic conditions, broad-based profit growth and increased liquidity buoyed the credit markets, which saw yield spreads over Treasuries compress during the six-month period. Investors' increasing appetite for risk led to substantial outperformance by lower-rated issues, with BBB-rated debt outpacing the highest-quality bonds by more than 300 basis points. The mortgage-backed securities (MBS) market lagged during the period as falling interest rates and continued high levels of homeowner refinancing undercut the sector's performance. PERFORMANCE ANALYSIS Morgan Stanley Quality Income Trust outperformed its primary benchmark, the Lehman Brothers Intermediate U.S. Government/Credit Index (the "Lehman Index"), but underperformed the Lipper BBB Rated Funds Index (the "Lipper Index"). The Fund's corporate bond holdings contributed positively to performance relative to the Lehman Index. However, relative to the Lipper Index, the fund, on average, tends to invest in somewhat higher quality debt securities which did not perform as well as lower rated debt securities. Both sector and issue selection also benefited the Fund's performance. We used our quantitative risk model and fundamental research to initiate several new positions to increase the credit sensitivity of the Fund. During the period, the Fund benefited from a strong position in the insurance sector, which we felt to be one of the few high-quality areas of the market that still offered good value. We also deemphasized the banking and food and beverage sectors, both of which underperformed the market during the period. The Fund's MBS holdings proved less beneficial to performance. Our analysis indicated that higher-coupon MBSs were being unfairly penalized because of unrealistically high prepayment expectations. As a result, we focused the Fund's MBS holdings in such securities, only to see them lose ground in the Treasury rally as investors priced in expectations for even faster prepayments. While these securities did prepay quickly, 2 they did not do so as quickly as the market had expected, and we maintained our position throughout the period. Based on our analysis of the economy and the yield curve, we chose to maintain a relatively low level of interest-rate sensitivity in anticipation of higher rates once job growth materializes. We implemented this strategy by deemphasizing the five-year portion of the yield curve. This stance limited the Fund's interest-rate sensitivity during a period of generally falling rates, causing it to miss much of the rally in the five-year section of the curve. PORTFOLIO COMPOSITION Corporate Debt 78.8% Mortgage-Backed Securities 12.7 Short Term Investments 6.3 Foreign Government Obligations 2.1 U.S. Government Agencies 0.1
LONG-TERM CREDIT ANALYSIS AAA 4.2% AA 7.2 A 34.0 BBB 40.4 BB 0.3
DATA AS OF FEBRUARY 29, 2004. SUBJECT TO CHANGE DAILY. PORTFOLIO COMPOSITION IS A PERCENTAGE OF TOTAL INVESTMENTS AND LONG-TERM CREDIT ANALYSIS IS A PERCENTAGE OF TOTAL LONG-TERM INVESTMENTS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80% OF ITS ASSETS IN INVESTMENT GRADE FIXED INCOME SECURITIES. THESE SECURITIES MAY INCLUDE CORPORATE DEBT SECURITIES, PREFERRED STOCKS, U.S. GOVERNMENT SECURITIES, MORTGAGE-BACKED SECURITIES, INCLUDING COLLATERALIZED MORTGAGE OBLIGATIONS, ASSET-BACKED SECURITIES AND SECURITIES ISSUED BY FOREIGN GOVERNMENTS OR CORPORATIONS. IN DECIDING WHICH SECURITIES TO BUY, HOLD OR SELL, THE FUND'S "INVESTMENT MANAGER," MORGAN STANLEY INVESTMENT ADVISORS INC., CONSIDERS DOMESTIC AND INTERNATIONAL ECONOMIC DEVELOPMENTS, INTEREST RATE TRENDS, BOND RATINGS AND OTHER FACTORS RELATING TO THE ISSUERS. 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 WEB SITE AT http://www.sec.gov. 3 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED FEBRUARY 29, 2004
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ (SINCE 07/28/97) (SINCE 05/03/89) (SINCE 07/28/97) (SINCE 07/28/97) SYMBOL IISAX IISBX IISCX IISDX 1 YEAR 4.72%(3) 4.08%(3) 4.07%(3) 4.85%(3) 0.27(4) (0.92)(4) 3.07(4) -- 5 YEARS 5.24(3) 4.38(3) 4.40(3) 5.18(3) 4.33(4) 4.04(4) 4.40(4) -- 10 YEARS -- 4.74(3) -- -- -- 4.74(4) -- -- SINCE INCEPTION 5.29(3) 5.71(3) 4.51(3) 5.32(3) 4.60(4) 5.71(4) 4.51(4) --
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 TABLE DOES 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. 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 BBB Rated Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper BBB Rated 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. 4 MORGAN STANLEY QUALITY INCOME TRUST PORTFOLIO OF INVESTMENTS - FEBRUARY 29, 2004 (UNAUDITED)
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (83.9%) AEROSPACE & DEFENSE (1.5%) $ 335 Lockheed Martin Corp. 8.50% 12/01/29 $ 449,259 400 Raytheon Co. 4.85 01/15/11 412,687 55 Raytheon Co. 6.75 08/15/07 61,661 100 Raytheon Co. 8.30 03/01/10 121,661 589 Systems 2001 Asset Trust - 144A* 6.664 09/15/13 662,807 --------------- 1,708,075 --------------- AIR FREIGHT/COURIERS (0.3%) 280 FedEx Corp. 7.25 02/15/11 325,209 --------------- AIRLINES (1.2%) 257 American West Airlines 7.10 04/02/21 284,795 346 Continental Airlines, Inc. 6.545 02/02/19 349,539 238 Continental Airlines, Inc. 6.648 09/15/17 238,434 450 Southwest Airlines Co. 5.496 11/01/06 483,519 --------------- 1,356,287 --------------- AUTO PARTS: O.E.M. (0.6%) 365 Delphi Automotive Systems Corp. 6.125 05/01/04 367,408 265 Johnson Controls, Inc. 5.00 11/15/06 283,432 --------------- 650,840 --------------- BEVERAGES: ALCOHOLIC (0.5%) 570 Miller Brewing Co. - 144A* 4.25 08/15/08 588,059 --------------- BROADCASTING (0.5%) 490 Clear Channel Communications, Inc. 7.65 09/15/10 582,994 --------------- BUILDING PRODUCTS (0.1%) 160 Masco Corp. 4.625 08/15/07 168,828 --------------- CABLE/SATELLITE TV (1.2%) 1,040 Comcast Corp. 6.50 01/15/15 1,152,540 225 TCI Communications, Inc. 8.00 08/01/05 243,847 --------------- 1,396,387 --------------- CHEMICALS: MAJOR DIVERSIFIED (0.3%) 345 ICI Wilmington Inc. 4.375 12/01/08 351,191 --------------- CONTAINERS/PACKAGING (0.5%) 540 Sealed Air Corp - 144A* 5.625 07/15/13 563,525 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 5
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------- DEPARTMENT STORES (2.3%) $ 720 Federated Department Stores, Inc. 7.00 % 02/15/28 $ 812,331 200 Federated Department Stores, Inc. 8.50 06/01/10 245,771 1,045 May Department Stores Co., Inc. 5.95 11/01/08 1,143,571 170 May Department Stores Co., Inc. 6.70 09/15/28 185,166 130 May Department Stores Co., Inc. 6.875 11/01/05 139,814 125 May Department Stores Co., Inc. 6.90 01/15/32 139,874 --------------- 2,666,527 --------------- DRUGSTORE CHAINS (1.0%) 425 CVS Corp. 5.625 03/15/06 455,413 599 CVS Corp. - 144A* 5.789 01/10/26 613,784 55 CVS Corp. - 144A* 6.204 10/10/25 57,869 --------------- 1,127,066 --------------- ELECTRIC UTILITIES (5.6%) 350 Appalachian Power Co. (Series H) 5.95 05/15/33 349,379 755 Carolina Power & Light Co. 5.125 09/15/13 782,056 105 Cincinnati Gas & Electric Co. 5.70 09/15/12 112,557 260 Cincinnati Gas & Electric Co. (Series A) 5.40 06/15/33 245,713 500 Cincinnati Gas & Electric Co. (Series B) 5.375 06/15/33 470,773 525 Columbus Southern Power Co. 6.60 03/01/33 580,833 410 Constellation Energy Group, Inc. 7.60 04/01/32 493,652 470 Consolidated Natural Gas Co. 5.375 11/01/06 503,671 55 Detroit Edison Co. 6.125 10/01/10 61,336 200 Detroit Edison Co. 6.35 10/15/32 215,963 535 Duke Energy Corp. 4.50 04/01/10 550,688 285 Entergy Gulf States, Inc. - 144A* 3.60 06/01/08 278,168 510 Exelon Corp. 6.75 05/01/11 581,755 130 Public Service Electric & Gas Co. 5.00 01/01/13 134,168 260 South Carolina Electric & Gas Co. 5.30 05/15/33 247,921 110 Southern California Edison Co. 5.00 01/15/14 112,105 430 TXU Energy Co. 7.00 03/15/13 489,743 235 Wisconsin Electric Power Co. 5.625 05/15/33 235,280 --------------- 6,445,761 --------------- ELECTRICAL PRODUCTS (0.4%) 450 Cooper Industries Inc. 5.25 07/01/07 485,128 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 6
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES (1.1%) $ 544 USA Waste Services, Inc. 7.00% 07/15/28 $ 604,531 310 USA Waste Services, Inc. 7.125 10/01/07 351,760 255 Waste Management, Inc. 6.875 05/15/09 290,757 --------------- 1,247,048 --------------- FINANCE/RENTAL/LEASING (8.0%) 510 CIT Group Inc. 2.875 09/29/06 515,101 1,245 Countrywide Home Loans, Inc. 3.25 05/21/08 1,241,998 2,885 Ford Motor Credit Co. 7.25 10/25/11 3,130,118 800 Ford Motor Credit Co. 7.375 10/28/09 881,103 70 Household Finance Corp. 6.375 10/15/11 79,048 675 Household Finance Corp. 6.75 05/15/11 769,819 1,110 MBNA Corp. 6.125 03/01/13 1,221,945 745 SLM Corp. 5.00 10/01/13 759,582 525 Toyota Motor Credit Corp. 5.65 01/15/07 571,579 --------------- 9,170,293 --------------- FINANCIAL CONGLOMERATES (10.0%) 735 Chase Manhattan Corp. 6.00 02/15/09 817,027 165 Chase Manhattan Corp. 7.00 11/15/09 193,316 500 Citicorp 6.375 11/15/08 560,263 465 Citigroup Inc. 5.50 08/09/06 500,879 100 Citigroup Inc. 5.625 08/27/12 108,338 265 Citigroup Inc. 6.00 02/21/12 294,703 660 General Electric Capital Corp. 5.375 03/15/07 714,365 1,195 General Electric Capital Corp. 6.75 03/15/32 1,374,177 385 General Motors Acceptance Corp. 4.50 07/15/06 397,846 2,000 General Motors Acceptance Corp. 6.875 09/15/11 2,160,210 1,080 General Motors Acceptance Corp. 8.00 11/01/31 1,193,341 905 John Hancock Financial Services, Inc. 5.625 12/01/08 989,188 475 John Hancock Global Funding II - 144A* 7.90 07/02/10 573,448 410 Prudential Funding LLC (Series MTN) - 144A* 6.60 05/15/08 461,166 575 Prudential Holdings, LLC (Series C) - 144A* 8.695 12/18/23 731,713 360 Prudential Holdings, LLC (Series B) (FSA) - 144A* 7.245 12/18/23 422,604 --------------- 11,492,584 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 7
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------- FOOD RETAIL (1.3%) $ 395 Albertson's, Inc. 7.50% 02/15/11 $ 462,299 475 Kroger Co. 6.80 04/01/11 541,735 300 Kroger Co. 7.50 04/01/31 358,246 160 Safeway Inc. 6.15 03/01/06 171,779 --------------- 1,534,059 --------------- FOOD: MEAT/FISH/DAIRY (0.2%) 230 Conagra Foods, Inc. 6.00 09/15/06 249,685 --------------- FOREST PRODUCTS (1.3%) 150 Weyerhaeuser Co. 6.00 08/01/06 162,012 1,150 Weyerhaeuser Co. 6.75 03/15/12 1,292,664 --------------- 1,454,676 --------------- GAS DISTRIBUTORS (0.3%) 46 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A* (Qatar) 7.628 09/15/06 49,270 215 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A* (Qatar) 8.294 03/15/14 254,775 --------------- 304,045 --------------- HOME BUILDING (0.6%) 135 Centex Corp. 7.875 02/01/11 161,120 375 Pulte Homes, Inc. 6.375 05/15/33 372,008 115 Pulte Homes, Inc. 7.875 08/01/11 137,291 --------------- 670,419 --------------- HOME FURNISHINGS (0.2%) 110 Mohawk Industries, Inc. 7.20 04/15/12 127,047 130 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 143,412 --------------- 270,459 --------------- HOME IMPROVEMENT CHAINS (0.6%) 295 Lowe's Companies, Inc. 6.50 03/15/29 328,990 71 Lowe's Companies, Inc. 6.875 02/15/28 82,814 300 Lowe's Companies, Inc. 7.50 12/15/05 329,570 --------------- 741,374 --------------- HOSPITAL/NURSING MANAGEMENT (0.8%) 335 HCA Inc. 7.125 06/01/06 363,928 460 Manor Care, Inc. 8.00 03/01/08 532,450 --------------- 896,378 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 8
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------- HOTELS/RESORTS/CRUISELINES (1.3%) $ 695 Hyatt Equities LLC - 144A* 6.875% 06/15/07 $ 752,158 195 Marriott International, Inc. (Series D) 8.125 04/01/05 208,015 265 Marriott International, Inc. (Series E) 7.00 01/15/08 301,196 195 Starwood Hotels & Resorts Inc. 7.375 05/01/07 212,062 --------------- 1,473,431 --------------- INDUSTRIAL CONGLOMERATES (1.8%) 515 Honeywell International, Inc. 5.125 11/01/06 551,855 550 Honeywell International, Inc. 7.50 03/01/10 656,330 315 Hutchison Whampoa International Ltd. - 144A* (Virgin Islands) 5.45 11/24/10 324,363 515 Hutchison Whampoa International Ltd. - 144A* (Virgin Islands) 6.50 02/13/13 545,607 --------------- 2,078,155 --------------- INFORMATION TECHNOLOGY SERVICES (0.6%) 470 Electronic Data Systems Corp. 6.00 08/01/13 454,128 260 Electronic Data Systems Corp. 7.125 10/15/09 275,666 --------------- 729,794 --------------- INSURANCE BROKERS/SERVICES (1.8%) 1,335 Farmers Exchange Capital - 144A* 7.05 07/15/28 1,348,079 250 Farmers Insurance Exchange - 144A* 8.50 08/01/04 254,418 410 Marsh & McLennan Companies Inc. 5.375 03/15/07 442,886 --------------- 2,045,383 --------------- INTEGRATED OIL (2.4%) 510 Amerada Hess Corp. 7.875 10/01/29 588,016 305 Conoco Inc. 5.90 04/15/04 306,682 895 Conoco Inc. 6.95 04/15/29 1,044,019 225 ConocoPhillips 8.50 05/25/05 243,746 40 Petro-Canada (Canada) 4.00 07/15/13 37,740 525 Petro-Canada (Canada) 5.35 07/15/33 486,543 --------------- 2,706,746 --------------- INVESTMENT BANKS/BROKERS (1.1%) 500 Goldman Sachs Group Inc. 5.25 10/15/13 513,761 90 Goldman Sachs Group Inc. 6.60 01/15/12 102,299 580 Goldman Sachs Group Inc. 6.875 01/15/11 670,098 --------------- 1,286,158 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 9
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------ INVESTMENT MANAGERS (0.7%) $ 735 TIAA Global Markets - 144A* 5.00% 03/01/07 $ 787,909 --------------- LIFE/HEALTH INSURANCE (1.1%) 875 Mantis Reef Ltd. - 144A* (Australia) 4.692 11/14/08 890,551 335 Monumental Global Funding II - 144A* 6.05 01/19/06 360,670 --------------- 1,251,221 --------------- MAJOR BANKS (2.5%) 1,170 Bank of America Corp. 3.375 02/17/09 1,167,686 250 Bank of New York (The) 5.20 07/01/07 270,584 305 Bank One Corp. 6.00 02/17/09 339,330 480 Huntington National Bank 2.75 10/16/06 489,381 475 Wachovia Bank N.A. (Series BKNT) 7.80 08/18/10 581,109 --------------- 2,848,090 --------------- MAJOR TELECOMMUNICATIONS (5.8%) 185 AT&T Corp. 8.05 11/15/11 215,859 790 AT&T Corp. 8.75 11/15/31 934,223 390 AT&T Wireless Services, Inc. 7.875 03/01/11 459,678 150 Deutsche Telekom International Finance Corp. (Netherlands) 8.50 06/15/10 182,708 585 Deutsche Telekom International Finance Corp. (Netherlands) 8.75 06/15/30 756,338 350 France Telecom S.A. (France) 9.75 03/01/31 464,429 240 Sprint Capital Corp. 8.75 03/15/32 298,752 480 Telecom Italia Capital SpA - 144A* (Italy) 4.00 11/15/08 485,746 80 Verizon Communications, Inc. 6.36 04/15/06 86,838 165 Verizon Global Funding Corp. 7.25 12/01/10 193,041 1,910 Verizon Global Funding Corp. 7.75 12/01/30 2,297,944 235 Verizon New England Inc. 6.50 09/15/11 263,724 --------------- 6,639,280 --------------- MANAGED HEALTH CARE (3.0%) 290 Aetna, Inc. 7.875 03/01/11 349,755 60 Anthem, Inc. 6.80 08/01/12 69,128 885 Anthem Insurance Companies, Inc. - 144A* 9.125 04/01/10 1,132,123 1,115 Health Net, Inc. 8.375 04/15/11 1,360,168 270 UnitedHealth Group Inc. 7.50 11/15/05 295,161 175 Wellpoint Health Network, Inc. 6.375 06/15/06 190,866 --------------- 3,397,201 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 10
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------ MEDIA CONGLOMERATES (3.3%) $ 185 AOL Time Warner Inc. 6.75% 04/15/11 $ 208,370 500 AOL Time Warner Inc. 7.625 04/15/31 583,651 195 AOL Time Warner Inc. 7.70 05/01/32 230,287 900 News America Holdings, Inc. 7.28 06/30/28 1,031,737 600 News America Holdings, Inc. 7.75 02/01/24 704,057 50 News America Holdings, Inc. 8.875 04/26/23 65,357 65 News America Inc. 4.75 03/15/10 67,060 250 News America Inc. 6.625 01/09/08 279,668 530 Time Warner Co., Inc. 7.57 02/01/24 611,279 --------------- 3,781,466 --------------- MOTOR VEHICLES (1.7%) 795 DaimlerChrysler North American Holdings Co. 7.30 01/15/12 906,345 215 DaimlerChrysler North American Holdings Co. 8.00 06/15/10 251,633 610 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 742,826 --------------- 1,900,804 --------------- MULTI-LINE INSURANCE (3.7%) 1,200 AIG SunAmerica Global Finance VI - 144A* 6.30 05/10/11 1,346,567 565 American General Finance Corp. 4.625 09/01/10 582,748 625 American General Finance Corp. 5.875 07/14/06 676,071 365 Equitable Life Assurance Society - 144A* 6.95 12/01/05 396,399 135 Hartford Financial Services Group, Inc. 2.375 06/01/06 135,282 500 Hartford Financial Services Group, Inc. 7.75 06/15/05 538,357 500 Nationwide Mutual Insurance Co. - 144A* 7.50 02/15/24 517,452 --------------- 4,192,876 --------------- OIL & GAS PIPELINES (0.2%) 235 Texas Eastern Transmission, L.P. 7.00 07/15/32 264,552 --------------- OIL & GAS PRODUCTION (2.9%) 410 Kerr-McGee Corp. 5.875 09/15/06 442,266 460 Kerr-McGee Corp. 7.875 09/15/31 556,567 485 Nexen Inc. (Canada) 5.05 11/20/13 490,758 155 PEMEX Project Funding Master Trust 7.375 12/15/14 170,345 210 PEMEX Project Funding Master Trust 7.875 02/01/09 240,660 1,170 PEMEX Project Funding Master Trust 8.00 11/15/11 1,348,425 90 PEMEX Project Funding Master Trust 9.125 10/13/10 109,800 --------------- 3,358,821 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 11
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------ OIL REFINING/MARKETING (0.6%) $ 140 Ashland Inc. 7.83% 08/15/05 $ 150,751 120 Marathon Oil Corp. 6.00 07/01/12 131,427 300 Marathon Oil Corp. 6.80 03/15/32 334,343 --------------- 616,521 --------------- OTHER CONSUMER SERVICES (0.8%) 810 Cendant Corp. 7.375 01/15/13 944,149 --------------- OTHER METALS/MINERALS (1.2%) 800 Inco Ltd. (Canada) 7.20 09/15/32 926,095 395 Inco Ltd. (Canada) 7.75 05/15/12 476,307 --------------- 1,402,402 --------------- PHARMACEUTICALS: MAJOR (0.3%) 295 Schering-Plough Corp. 5.30 12/01/13 307,423 --------------- PULP & PAPER (1.0%) 105 Abitibi-Consolidated Inc. (Canada) 8.55 08/01/10 116,955 470 International Paper Co. 4.25 01/15/09 479,381 460 Sappi Papier Holding AG - 144A* (Austria) 6.75 06/15/12 516,194 --------------- 1,112,530 --------------- RAILROADS (0.3%) 395 Union Pacific Corp. 5.84 05/25/04 398,581 --------------- REAL ESTATE DEVELOPMENT (0.9%) 384 World Financial Properties - 144A* 6.91 09/01/13 432,126 568 World Financial Properties - 144A* 6.95 09/01/13 639,477 --------------- 1,071,603 --------------- REAL ESTATE INVESTMENT TRUSTS (2.3%) 290 EOP Operating L.P. 6.763 06/15/07 324,250 770 EOP Operating L.P. 7.875 07/15/31 931,209 135 Rouse Co. (The) 5.375 11/26/13 137,837 645 Simon Property Group L.P. 6.35 08/28/12 717,319 50 Simon Property Group L.P. 6.375 11/15/07 55,847 440 Vornado Realty Trust 5.625 06/15/07 476,363 --------------- 2,642,825 --------------- REGIONAL BANKS (0.2%) 175 US Bancorp 5.10 07/15/07 188,673 --------------- SAVINGS BANKS (0.6%) 685 Washington Mutual Bank 5.50 01/15/13 722,036 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------ TOBACCO (1.4%) $ 305 Altria Group, Inc. 7.00% 11/04/13 $ 335,188 535 Altria Group, Inc. 7.75 01/15/27 595,973 505 Kraft Foods Inc. 5.625 11/01/11 542,555 115 Kraft Foods Inc. 6.25 06/01/12 127,763 --------------- 1,601,479 --------------- TOTAL CORPORATE BONDS (COST $93,190,050) 96,197,006 --------------- FOREIGN GOVERNMENT OBLIGATIONS (2.2%) 820 United Mexican States Corp. (Mexico) 8.30 08/15/31 955,300 75 United Mexican States Corp. (Mexico) 8.375 01/14/11 90,187 315 United Mexican States Corp. (Mexico) 8.625 03/12/08 373,748 860 United Mexican States Corp. (Mexico) 9.875 02/01/10 1,096,930 --------------- TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST $2,459,483) 2,516,165 --------------- U.S. GOVERNMENT AGENCY OBLIGATION (0.2%) 180 Private Export Funding Corp. (COST $180,073) 6.86 04/30/04 181,582 --------------- MORTGAGE-BACKED SECURITIES (13.5%) 56 Federal Home Loan Mortgage Corp. 7.50 09/01/30 59,724 Federal National Mortgage Assoc. 7,750 6.50 ** 8,135,078 3,863 6.50 05/01/32 4,065,236 1,524 7.00 01/01/30 - 05/01/32 1,618,739 1,478 7.50 09/01/29 - 07/01/32 1,584,060 --------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $15,381,067) 15,462,837 --------------- SHORT-TERM INVESTMENTS (6.7%) U.S. GOVERNMENT OBLIGATION (a) (0.2%) 300 U.S. Treasury Bill*** (COST $299,783) 1.00 03/25/04 299,783 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------ REPURCHASE AGREEMENT (6.5%) $ 7,426 Joint repurchase agreement account (dated 02/27/04, proceeds $7,426,637) (b) (COST $7,426,000) 1.03% 03/01/04 $ 7,426,000 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $7,725,783) 7,725,783 --------------- TOTAL INVESTMENTS (COST $118,936,456) (c)(d) 106.5% 122,083,373 LIABILITIES IN EXCESS OF OTHER ASSETS (6.5) (7,463,263) ------- --------------- NET ASSETS 100.0% $ 114,620,110 ======== ===============
- ---------- * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATEAL INVESTORS. PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNTAL INVESTORS. AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT. *** ALL OF THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $299,783. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TOSTORS. 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 $35,701,366 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS AND OPEN FUTURES CONTRACTS. (d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $3,739,087 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $592,170, RESULTING IN NET UNREALIZED APPRECIATION OF $3,146,917. BOND INSURANCE: FSA Financial Security Assurance. FUTURES CONTRACTS OPEN AT FEBRUARY 29, 2004:
NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE UNREALIZED CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION - ----------------------------------------------------------------------------------------------------------- 4 Short U.S. Treasury Notes 5 year, March/2004 $ (455,063) $ (10,472) 53 Short U.S. Treasury Bonds 20 year, June/2004 (5,959,188) (65,380) 26 Short U.S. Treasury Notes 5 year, June/2004 (2,922,563) (20,205) 87 Short U.S. Treasury Notes 2 year, June/2004 (18,664,220) (57,477) ------------- Total unrealized depreciation $ (153,534) =============
SEE NOTES TO FINANCIAL STATEMENTS 14 MORGAN STANLEY QUALITY INCOME TRUST FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 29, 2004 (UNAUDITED) ASSETS: Investments in securities, at value (cost $118,936,456) $ 122,083,373 Cash 5,123 Receivable for: Investments sold 8,497,811 Interest 1,712,574 Shares of beneficial interest sold 172,361 Prepaid expenses and other assets 69,743 --------------- TOTAL ASSETS 132,540,985 --------------- LIABILITIES: Payable for: Investments purchased 17,376,637 Shares of beneficial interest redeemed 154,771 Variation margin 77,329 Distribution fee 71,619 Investment management fee 56,880 Dividends and distributions to shareholders 23,563 Accrued expenses and other payables 160,076 --------------- TOTAL LIABILITIES 17,920,875 --------------- NET ASSETS $ 114,620,110 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 120,859,719 Net unrealized appreciation 2,993,383 Dividends in excess of net investment income (694,268) Accumulated net realized loss (8,538,724) --------------- NET ASSETS $ 114,620,110 =============== CLASS A SHARES: Net Assets $ 8,069,448 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 829,619 NET ASSET VALUE PER SHARE $ 9.73 =============== MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 10.16 =============== CLASS B SHARES: Net Assets $ 90,687,419 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 9,399,988 NET ASSET VALUE PER SHARE $ 9.65 =============== CLASS C SHARES: Net Assets $ 8,695,393 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 899,719 NET ASSET VALUE PER SHARE $ 9.66 =============== CLASS D SHARES: Net Assets $ 7,167,850 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 745,520 NET ASSET VALUE PER SHARE $ 9.61 ===============
SEE NOTES TO FINANCIAL STATEMENTS 15 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED FEBRUARY 29, 2004 (UNAUDITED) NET INVESTMENT INCOME: Interest Income $ 2,902,479 --------------- EXPENSES Distribution fee (Class A shares) 9,498 Distribution fee (Class B shares) 404,115 Distribution fee (Class C shares) 38,274 Investment management fee 356,515 Transfer agent fees and expenses 137,725 Shareholder reports and notices 50,779 Registration fees 42,629 Professional fees 29,653 Custodian fees 13,136 Trustees' fees and expenses 4,207 Other 10,463 --------------- TOTAL EXPENSES 1,096,994 --------------- NET INVESTMENT INCOME 1,805,485 NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN/LOSS ON: Investments 814,051 Futures contracts (726,037) --------------- NET REALIZED GAIN 88,014 --------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments 4,851,743 Futures contracts (325,299) --------------- NET APPRECIATION 4,526,444 --------------- NET GAIN 4,614,458 --------------- NET INCREASE $ 6,419,943 ===============
SEE NOTES TO FINANCIAL STATEMENTS 16 STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED FEBRUARY 29, 2004 AUGUST 31, 2003 -------------------- -------------------- (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 1,805,485 $ 2,110,561 Net realized gain 88,014 1,830,654 Net change in unrealized appreciation/depreciation 4,526,444 (1,748,491) -------------------- -------------------- NET INCREASE 6,419,943 2,192,724 -------------------- -------------------- DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: Class A shares (163,625) (316,276) Class B shares (1,758,975) (3,155,485) Class C shares (166,565) (264,530) Class D shares (161,707) (356,548) -------------------- -------------------- TOTAL DIVIDENDS (2,250,872) (4,092,839) -------------------- -------------------- Net decrease from transactions in shares of beneficial interest (16,381,904) (3,592,687) -------------------- -------------------- NET DECREASE (12,212,833) (5,492,802) NET ASSETS: Beginning of period 126,832,943 132,325,745 -------------------- -------------------- END OF PERIOD (INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $694,268 AND $248,881, RESPECTIVELY) $ 114,620,110 $ 126,832,943 ==================== ====================
SEE NOTES TO FINANCIAL STATEMENTs 17 MORGAN STANLEY QUALITY INCOME TRUST NOTES TO FINANCIAL STATEMENTS - FEBRUARY 29, 2004 (UNAUDITED) 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley Quality Income Trust (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is high current income consistent with safety of principal. The Fund seeks to achieve its objective by investing at least 80% of its assets in 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) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; (2) portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price; (3) 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; 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 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 18 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. 19 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 $5,337,949 at February 29, 2004. 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 six months ended February 29, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 0.85%, respectively. The Distributor has informed the Fund that for the six months ended February 29, 2004, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $16,411, $100,470 and $3,484, respectively and received $14,516 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. 20 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 six months ended February 29, 2004, aggregated $162,196,829, and $193,525,584, respectively. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At February 29, 2004, the Fund had transfer agent fees and expenses payable of approximately $57,000. The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. Aggregate pension costs for the six months ended February 29, 2004 included in Trustees' fees and expenses in the Statement of Operations amounted to $3,598. At February 29, 2004, the Fund had an accrued pension liability of $60,051 which is included in accrued expenses in the Statement of Assets and Liabilities. On December 2, 2003, the Trustees voted to close the plan to new participants, eliminate the future benefits growth due to increases to compensation after July 31, 2003 and effective April 1, 2004, establish an unfunded deferred compensation plan which allows each independent Trustee to defer payment of all or a portion of the fees he receives for serving on the Board of Trustees throughout the year. 5. FEDERAL INCOME TAX STATUS The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. As of 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. 21 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. 6. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED FEBRUARY 29, 2004 AUGUST 31, 2003 ---------------------------------- ---------------------------------- (UNAUDITED) SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- CLASS A SHARES Sold 545,733 $ 5,183,543 7,230,344 $ 69,757,478 Reinvestment of dividends 11,395 109,752 23,096 221,263 Redeemed (753,638) (7,160,954) (7,352,712) (70,908,969) --------------- --------------- --------------- --------------- Net decrease -- Class A (196,510) (1,867,659) (99,272) (930,228) --------------- --------------- --------------- --------------- CLASS B SHARES Sold 546,022 5,190,483 5,576,141 53,136,588 Reinvestment of dividends 121,980 1,164,445 224,794 2,137,809 Redeemed (1,964,144) (18,678,186) (6,031,461) (57,282,326) --------------- --------------- --------------- --------------- Net decrease -- Class B (1,296,142) (12,323,258) (230,526) (2,007,929) --------------- --------------- --------------- --------------- CLASS C SHARES Sold 97,473 927,820 1,825,800 17,330,693 Reinvestment of dividends 12,806 122,492 20,602 196,212 Redeemed (323,257) (3,047,233) (1,411,756) (13,429,508) --------------- --------------- --------------- --------------- Net increase (decrease) -- Class C (212,978) (1,996,921) 434,646 4,097,397 --------------- --------------- --------------- --------------- CLASS D SHARES Sold 177,361 1,681,927 1,942,485 18,431,785 Reinvestment of dividends 11,809 112,350 22,745 215,756 Redeemed (209,163) (1,988,343) (2,466,593) (23,399,468) --------------- --------------- --------------- --------------- Net decrease -- Class D (19,993) (194,066) (501,363) (4,751,927) --------------- --------------- --------------- --------------- Net decrease in Fund (1,725,623) $ (16,381,904) (396,515) $ (3,592,687) =============== =============== =============== ===============
22 7. PURPOSES OF 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 the 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. 8. LEGAL MATTERS The Investment Manager, certain affiliates of the Investment Manager, certain officers of such affiliates and certain investment companies advised by the Investment Manager or its affiliates, including the Fund, are named as defendants in a number of similar class action complaints which were recently consolidated. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Manager and certain affiliates of the Investment Manager allegedly offered economic incentives to brokers and others to recommend to the funds advised by the Investment Manager or its affiliates rather than funds managed by other companies, and (ii) that the funds advised by the Investment Manager or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants intend to move to dismiss the action and otherwise vigorously to defend it. While the Fund believes that it has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 23 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 SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ------------------------------------------------------------------- FEBRUARY 29, 2004 2003 2002 2001 2000 1999 -------------------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) CLASS A SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.39 $ 9.53 $ 9.35 $ 8.97 $ 9.30 $ 9.71 -------------------- ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.17 0.20 0.37 0.52 0.55 0.55 Net realized and unrealized gain (loss) 0.38 0.01 0.19 0.38 (0.33) (0.41) -------------------- ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.55 0.21 0.56 0.90 0.22 0.14 -------------------- ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.21) (0.35) (0.38) (0.52) (0.55) (0.55) -------------------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.73 $ 9.39 $ 9.53 $ 9.35 $ 8.97 $ 9.30 ==================== ========== ========== ========== ========== ========== TOTAL RETURN+ 5.74%(1) 2.17% 6.17% 10.34% 2.49% 1.39% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.34%(2) 1.14% 1.04% 1.21% 1.10% 1.08% Net investment income 3.54%(2) 2.14% 4.03% 5.71% 6.02% 5.67% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 8,069 $ 9,636 $ 10,730 $ 4,177 $ 4,196 $ 3,557 Portfolio turnover rate 127%(1) 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 24
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ------------------------------------------------------------------- FEBRUARY 29, 2004 2003 2002 2001 2000 1999 -------------------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) CLASS B SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.32 $ 9.45 $ 9.35 $ 8.98 $ 9.31 $ 9.70 -------------------- ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.14 0.14 0.31 0.47 0.49 0.49 Net realized and unrealized gain (loss) 0.37 0.02 0.10 0.37 (0.33) (0.39) -------------------- ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.51 0.16 0.41 0.84 0.16 0.10 -------------------- ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.18) (0.29) (0.31) (0.47) (0.49) (0.49) -------------------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.65 $ 9.32 $ 9.45 $ 9.35 $ 8.98 $ 9.31 ==================== ========== ========== ========== ========== ========== TOTAL RETURN+ 5.45%(1) 1.63% 4.58% 9.55% 1.80% 0.92% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.94%(2) 1.79% 1.72% 1.84% 1.77% 1.75% Net investment income 2.94%(2) 1.49% 3.35% 5.08% 5.35% 5.00% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 90,687 $ 99,695 $ 103,238 $ 97,452 $ 82,964 $ 120,843 Portfolio turnover rate 127%(1) 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 25
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ------------------------------------------------------------------ FEBRUARY 29, 2004 2003 2002 2001 2000 1999 -------------------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) CLASS C SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.34 $ 9.46 $ 9.36 $ 8.99 $ 9.32 $ 9.71 -------------------- ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.14 0.14 0.31 0.47 0.49 0.49 Net realized and unrealized gain (loss) 0.36 0.03 0.10 0.37 (0.33) (0.39) -------------------- ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.50 0.17 0.41 0.84 0.16 0.10 -------------------- ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.18) (0.29) (0.31) (0.47) (0.49) (0.49) -------------------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.66 $ 9.34 $ 9.46 $ 9.36 $ 8.99 $ 9.32 ==================== ========== ========== ========== ========== ========== TOTAL RETURN+ 5.33%(1) 1.74% 4.57% 9.54% 1.80% 0.91% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.94%(2) 1.79% 1.72% 1.84% 1.77% 1.75% Net investment income 2.94%(2) 1.49% 3.35% 5.08% 5.35% 5.00% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 8,695 $ 10,389 $ 6,415 $ 4,226 $ 1,738 $ 1,759 Portfolio turnover rate 127%(1) 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 26
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, MONTHS ENDED ------------------------------------------------------------------ FEBRUARY 29, 2004 2003 2002 2001 2000 1999 -------------------- ---------- ---------- ---------- ---------- ---------- (unaudited) CLASS D SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.29 $ 9.43 $ 9.35 $ 8.98 $ 9.31 $ 9.70 -------------------- ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.17 0.22 0.38 0.55 0.57 0.57 Net realized and unrealized gain (loss) 0.36 0.01 0.09 0.37 (0.33) (0.39) -------------------- ---------- ---------- ---------- ---------- ---------- Total income from investment operations 0.53 0.23 0.47 0.92 0.24 0.18 -------------------- ---------- ---------- ---------- ---------- ---------- Less dividends from net investment income (0.21) (0.37) (0.39) (0.55) (0.57) (0.57) -------------------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.61 $ 9.29 $ 9.43 $ 9.35 $ 8.98 $ 9.31 ==================== ========== ========== ========== ========== ========== TOTAL RETURN+ 5.80%(1) 2.39% 5.23% 10.48% 2.67% 1.79% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.09%(2) 0.94% 0.87% 0.99% 0.92% 0.90% Net investment income 3.79%(2) 2.34% 4.20% 5.93% 6.20% 5.85% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 7,168 $ 7,113 $ 11,943 $ 3,018 $ 6,834 $ 7,493 Portfolio turnover rate 127%(1) 429% 400% 358% 114% 99%
- ---------- + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 27 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent 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 J. Smith TREASURER AND CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. 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) 2004 Morgan Stanley [MORGAN STANLEY LOGO] 38557RPT-RA04-00022P-A02/04 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY QUALITY INCOME TRUST SEMIANNUAL REPORT FEBRUARY 29, 2004 [MORGAN STANLEY LOGO] Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. [Reserved.] Item 9 - Controls and Procedures (a) The 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) Code of Ethics - Not applicable for semiannual reports. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. 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 April 20, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer April 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer April 20, 2004 EX-99.CERT 2 a2134530zex-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: April 20, 2004 /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: April 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer EX-99.906CERT 3 a2134530zex-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 February 29, 2004 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: April 20, 2004 /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 February 29, 2004 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: April 20, 2004 /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-----