-----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, DJ4ic2CSgj65w8L8R1wsoNVRu3NEkuOllIZTexSmbhmVtPY7B5bc0VIQK4nYEtv7 9ofUl1EOWfbvtrBX3qguMg== 0001047469-05-000740.txt : 20050112 0001047469-05-000740.hdr.sgml : 20050112 20050112163143 ACCESSION NUMBER: 0001047469-05-000740 CONFORMED SUBMISSION TYPE: N-CSR/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040831 FILED AS OF DATE: 20050112 DATE AS OF CHANGE: 20050112 EFFECTIVENESS DATE: 20050112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY QUALITY INCOME TRUST CENTRAL INDEX KEY: 0000839302 IRS NUMBER: 000000000 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: 05526139 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 a2149615zn-csra.txt N-CSR/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR/A 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: August 31, 2004 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Quality Income Trust Fund 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 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 year ended August 31, 2004 TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED AUGUST 31, 2004
CLASS A CLASS B CLASS C CLASS D 6.57% 5.78% 5.77% 6.68%
LEHMAN LIPPER BROTHERS LIPPER INTERMEDIATE INTERMEDIATE CORPORATE INVESTMENT U.S. DEBT GRADE DEBT GOVERNMENT/ FUNDS BBB-RATED FUNDS CREDIT INDEX(1) INDEX(2) INDEX(3) 5.07% 7.82% 6.14%
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. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE INFORMATION. MARKET CONDITIONS The review period was marked by a substantial amount of data indicating a stronger economy. While robust growth has historically led to higher interest rates, rates actually fell during the first half of the review period, primarily because of indications that the Federal Reserve Open Market Committee (the "Fed") intended to keep the federal funds rate at low levels. At the time, the Fed was concerned by a lack of employment growth, and investors remained concerned about terrorism and other potentially deflationary forces. This environment changed in April 2004. Rates rose abruptly with the publication of strong March employment figures as well as upward revisions from prior months. This report, along with higher oil prices and other price pressures, led investors to the conclusion that the Fed would raise interest rates sooner than had been anticipated. In fact, during this period the Fed affirmed its intent to raise rates at a measured pace from multidecade lows. As expected, the Fed raised the federal funds rate by 25 basis points (0.25 percent) at the end of June and again at the beginning of August. Performance by sectors varied during the period. Corporate bonds outperformed government securities as investors sought out higher yields. Additionally, a rising appetite for risk among investors led to the outperformance of lower-rated issues, which outpaced higher-quality bonds by more than 200 basis points over the 12-month period. Government securities largely underperformed other sectors of the bond market because of their high sensitivity to changes in interest rates as well as their lack of yield relative to other sectors. Mortgage-backed securities (MBSs) also lagged during the period. While this sector outperformed as rates rose in the second half of the period, this was not enough to make up for their underperformance resulting from falling interest rates and high prepayment expectations in the first half. PERFORMANCE ANALYSIS Morgan Stanley Quality Income Trust outperformed the Lehman Brothers Intermediate U.S. Government/Credit Index and underperformed the Lipper Corporate Debt Funds BBB-Rated Index. The Fund's Class A and D shares outperformed the Lipper Intermediate Investment Grade Debt Funds Index, while its Class B 2 and C shares underperformed that benchmark. The Fund's performance over the period was driven largely by its interest-rate strategy. Our analysis of the economy at the beginning of the period indicated that the next major movement in interest rates was likely to be upward once employment growth materialized. Accordingly, we moved to limit the impact of potential rate increases by deemphasizing the five-year portion of the yield curve. This stance limited the Fund's interest-rate sensitivity, a posture that became a drag on performance when rates fell early in the period but ultimately contributed strongly to returns when rates rose sharply in the second half of the Fund's fiscal year. The Fund's corporate holdings also contributed positively to its performance relative to the benchmark. We maintained our focus on corporate securities with an overweighted position in the sector relative to the Lehman Brothers Intermediate U.S. Government/Credit Index. This overweighting boosted the Fund's returns by enhancing its exposure to outperforming corporate bonds. Our strategy during the period was to emphasize bonds in the BBB-rating range, with a focus on the industrial, paper and energy sectors. While this benefited performance relative to the Lehman Index, an underweighting in lower-quality corporates detracted from performance relative to the Lipper peer group. [SIDENOTE] INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN INVESTMENT-GRADE FIXED-INCOME SECURITIES. THESE SECURITIES MAY INCLUDE CORPORATE DEBT SECURITIES, PREFERRED STOCKS, U.S. GOVERNMENT SECURITIES, AND 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. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS, AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, 3 PORTFOLIO COMPOSITION* Corporate Bonds 90.7% Asset-Backed Securities 4.0 Short-Term Investments 3.0 Foreign Government Obligations 2.2 Mortgage-Backed Securities 0.1
LONG-TERM CREDIT ANALYSIS Aaa/AAA 7.7% Aa/AA 5.8 A/A 35.0 Baa/BBB 46.0 Ba/BB 5.5
DATA AS OF AUGUST 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS AND ALL PERCENTAGES FOR LONG-TERM CREDIT ANALYSIS ARE AS 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. * THE FUND HAS OUTSTANDING SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $20,566,391 WITH UNREALIZED DEPRECIATION OF $317,431. [SIDENOTE] http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT 1-800-SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT 1-800-869-NEWS. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES AND (2) HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT 12-MONTH PERIOD ENDED AUGUST 31 IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING 1-800-869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov. 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 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 1-800-350-6414, 8:00 A.M. TO 8:00 P.M. ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 4 (This page has been left blank intentionally.) 5 Performance Summary [CHART] PERFORMANCE OF A $10,000 INVESTMENT--CLASS B
($ IN THOUSANDS) CLASS B@ LEHMAN(1) LIPPER CORPORATE(2) LIPPER INTERMEDIATE(3) August 31, 1994 $ 10,000 $ 10,000 $ 10,000 $ 10,000 August 31, 1995 $ 10,856 $ 10,947 $ 11,179 $ 11,020 August 31, 1996 $ 11,136 $ 11,433 $ 11,673 $ 11,454 August 31, 1997 $ 12,019 $ 12,398 $ 13,039 $ 12,552 August 31, 1998 $ 12,803 $ 13,511 $ 14,019 $ 13,744 August 31, 1999 $ 12,922 $ 13,809 $ 14,106 $ 13,805 August 31, 2000 $ 13,154 $ 14,675 $ 14,938 $ 14,714 August 31, 2001 $ 14,410 $ 16,478 $ 16,536 $ 16,526 August 31, 2002 $ 15,070 $ 17,754 $ 17,042 $ 17,487 August 31, 2003 $ 15,316 $ 18,686 $ 18,544 $ 18,428 August 31, 2004 $ 16,201 $ 19,633 $ 19,995 $ 19,559
6 AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 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 6.57%(4) 5.78%(4) 5.77%(4) 6.68%(4) 2.04(5) 0.78(5) 4.77(5) -- 5 YEARS 5.51(4) 4.63(4) 4.65(4) 5.45(4) 4.59(5) 4.29(5) 4.65(5) -- 10 YEARS -- 4.94(4) -- -- -- 4.94(5) -- -- SINCE INCEPTION 5.02(4) 5.54(4) 4.24(4) 5.06(4) 4.38(5) 5.54(5) 4.24(5) --
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR MOST RECENT 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 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. * 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. (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 CORPORATE DEBT FUNDS BBB-RATED INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER CORPORATE DEBT FUNDS BBB-RATED 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. AS OF THE DATE OF THIS REPORT, THE FUND IS IN THE LIPPER CORPORATE DEBT FUNDS BBB-RATED CLASSIFICATION. (3) 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. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (5) 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. @ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2004. 7 Expense Example As a shareholder of the Fund, you incur ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 03/01/04 - 08/31/04. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds that have transactional costs, such as sales charges (loads), and redemption fees, or exchange fees.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * --------------- --------------- --------------- 03/01/04 - 03/01/04 08/31/04 08/31/04 --------------- --------------- --------------- CLASS A Actual (0.79% return) $ 1,000.00 $ 1,007.90 $ 5.25 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,019.91 $ 5.28 CLASS B Actual (0.31% return) $ 1,000.00 $ 1,003.10 $ 8.81 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,016.34 $ 8.87 CLASS C Actual (0.42% return) $ 1,000.00 $ 1,004.20 $ 8.82 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,016.34 $ 8.87 CLASS D Actual (0.84% return) $ 1,000.00 $ 1,008.40 $ 4.54 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,020.61 $ 4.57
- ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.04%, 1.75%, 1.75% AND 0.90% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD). THESE RATIOS REFLECT AN EXPENSE CAP THAT TOOK EFFECT MAY 1, 2004. IF THE FUND HAD BORNE ALL OF ITS EXPENSES, THE ANNUALIZED EXPENSE RATIOS WOULD HAVE BEEN 1.13%, 1.85%, 1.85% AND 1.00%, RESPECTIVELY. 8 MORGAN STANLEY QUALITY INCOME TRUST PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (89.7%) ADVERTISING/MARKETING SERVICES (0.6%) $ 595 WPP Finance (UK) Corp. - 144A* 5.875% 06/15/14 $ 610,531 ------------ AEROSPACE & DEFENSE (2.2%) 160 Lockheed Martin Corp. 7.70 06/15/08 182,980 325 Northrop Grumman Corp. 7.125 02/15/11 374,147 365 Raytheon Co. 4.50 11/15/07 378,053 300 Raytheon Co. 4.85 01/15/11 308,445 55 Raytheon Co. 6.75 08/15/07 60,379 100 Raytheon Co. 8.30 03/01/10 119,853 557 Systems 2001 Asset Trust - 144A* 6.664 09/15/13 620,947 ------------ 2,044,804 ------------ AIR FREIGHT/COURIERS (0.5%) 125 FedEx Corp. 2.65 04/01/07 123,418 280 FedEx Corp. 7.25 02/15/11 321,390 ------------ 444,808 ------------ AIRLINES (1.0%) 249 American West Airlines 7.10 04/02/21 268,299 234 Continental Airlines, Inc. 6.648 09/15/17 218,859 455 Continental Airlines, Inc. (Series 991A) 6.545 02/02/19 430,821 ------------ 917,979 ------------ AUTO PARTS: O.E.M. (0.3%) 265 Johnson Controls, Inc. 5.00 11/15/06 276,957 ------------ BEVERAGES: ALCOHOLIC (0.5%) 450 Miller Brewing Co. - 144A* 4.25 08/15/08 458,211 ------------ BROADCASTING (0.4%) 340 Clear Channel Communications, Inc. 7.65 09/15/10 389,638 ------------ BUILDING PRODUCTS (0.2%) 160 Masco Corp. 4.625 08/15/07 165,776 ------------ CABLE/SATELLITE TV (1.6%) 1,040 Comcast Corp. 6.50 01/15/15 1,122,025 395 Echostar DBS Corp. 6.375 10/01/11 397,962 ------------ 1,519,987 ------------ CASINO/GAMING (1.8%) 1,075 Harrah's Operating Co., Inc. - 144A* 5.50 07/01/10 1,102,082 540 MGM Mirage Inc. 8.50 09/15/10 610,200 ------------ 1,712,282 ------------
SEE NOTES TO FINANCIAL STATEMENTS 9
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------------------------- CHEMICALS: MAJOR DIVERSIFIED (0.4%) $ 345 ICI Wilmington Inc. 4.375% 12/01/08 $ 348,040 ------------ CONTAINERS/PACKAGING (0.9%) 290 Packaging Corp. of America 5.75 08/01/13 298,018 540 Sealed Air Corp - 144A* 5.625 07/15/13 553,979 ------------ 851,997 ------------ DEPARTMENT STORES (2.3%) 720 Federated Department Stores, Inc. 7.00 02/15/28 794,958 1,045 May Department Stores Co., Inc. 5.95 11/01/08 1,116,137 170 May Department Stores Co., Inc. 6.70 09/15/28 177,377 130 May Department Stores Co., Inc. 6.875 11/01/05 136,119 ------------ 2,224,591 ------------ DRUGSTORE CHAINS (1.2%) 425 CVS Corp. 5.625 03/15/06 444,123 592 CVS Corp. - 144A* 5.789 01/10/26 600,078 54 CVS Corp. - 144A* 6.204 10/10/25 56,889 ------------ 1,101,090 ------------ ELECTRIC UTILITIES (7.2%) 215 Appalachian Power Co. (Series H) 5.95 05/15/33 210,376 560 Arizona Public Service Co. 5.80 06/30/14 587,702 105 Cincinnati Gas & Electric Co. 5.70 09/15/12 111,085 260 Cincinnati Gas & Electric Co. (Series A) 5.40 06/15/33 236,769 500 Cincinnati Gas & Electric Co. (Series B) 5.375 06/15/33 453,632 525 Columbus Southern Power Co. (Series D) 6.60 03/01/33 567,076 55 Detroit Edison Co. 6.125 10/01/10 60,221 535 Duke Energy Corp. 4.50 04/01/10 544,276 285 Entergy Gulf States, Inc. 3.60 06/01/08 282,019 795 Exelon Corp. 6.75 05/01/11 887,654 315 Jersey Central Power & Light Co. - 144A* 5.625 05/01/16 327,943 515 Pacific Gas & Electric Co. 6.05 03/01/34 518,610 130 Public Service Electric & Gas Co. 5.00 01/01/13 133,095 260 South Carolina Electric & Gas Co. 5.30 05/15/33 246,455 110 Southern California Edison Co. 5.00 01/15/14 112,045 235 Texas Eastern Transmission, L.P. 7.00 07/15/32 264,350 180 Texas-New Mexico Power Co. 6.25 01/15/09 190,559 430 TXU Energy Co. 7.00 03/15/13 482,755
SEE NOTES TO FINANCIAL STATEMENTS 10
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------------------------- $ 345 Westar Energy Inc. 6.00% 07/01/14 $ 367,887 235 Wisconsin Electric Power Co. 5.625 05/15/33 232,862 ------------ 6,817,371 ------------ ELECTRICAL PRODUCTS (0.5%) 480 Cooper Industries Inc. 5.25 07/01/07 506,054 ------------ ELECTRONIC EQUIPMENT/INSTRUMENTS (0.7%) 585 Xerox Corp. 7.125 06/15/10 623,025 ------------ ENVIRONMENTAL SERVICES (1.0%) 544 USA Waste Services, Inc. 7.00 07/15/28 596,709 310 USA Waste Services, Inc. 7.125 10/01/07 343,848 ------------ 940,557 ------------ FINANCE/RENTAL/LEASING (6.4%) 510 CIT Group Inc. 2.875 09/29/06 508,808 320 CIT Group Inc. 7.375 04/02/07 353,100 960 Countrywide Home Loans, Inc. 3.25 05/21/08 945,486 1,020 Ford Motor Credit Co. 7.25 10/25/11 1,100,585 800 Ford Motor Credit Co. 7.375 10/28/09 876,543 870 MBNA Corp. 6.125 03/01/13 931,163 745 SLM Corp. 5.00 10/01/13 746,181 525 Toyota Motor Credit Corp. (Series MTN) 5.65 01/15/07 556,201 ------------ 6,018,067 ------------ FINANCIAL CONGLOMERATES (6.6%) 735 Chase Manhattan Corp. 6.00 02/15/09 796,032 500 Citicorp 6.375 11/15/08 551,468 100 Citigroup Inc. 5.625 08/27/12 106,891 265 Citigroup Inc. 6.00 02/21/12 291,316 385 General Motors Acceptance Corp. 4.50 07/15/06 393,207 2,000 General Motors Acceptance Corp. 6.875 09/15/11 2,096,814 1,080 General Motors Acceptance Corp. 8.00 11/01/31 1,122,170 410 Prudential Funding LLC (Series MTN) - 144A* 6.60 05/15/08 456,700 170 Prudential Holdings, LLC (Series B) (FSA) - 144A* 7.245 12/18/23 199,378 200 Prudential Holdings, LLC (Series C) - 144A* 8.695 12/18/23 253,427 ------------ 6,267,403 ------------ FOOD RETAIL (1.5%) 340 Albertson's, Inc. 7.50 02/15/11 394,548 475 Kroger Co. 6.80 04/01/11 532,244 300 Kroger Co. 7.50 04/01/31 348,505 160 Safeway Inc. 6.15 03/01/06 167,666 ------------ 1,442,963 ------------
SEE NOTES TO FINANCIAL STATEMENTS 11
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------------------------- FOOD: MAJOR DIVERSIFIED (1.2%) $ 1,085 Kraft Foods Inc. 5.625% 11/01/11 $ 1,150,290 ------------ FOOD: MEAT/FISH/DAIRY (0.3%) 230 Conagra Foods, Inc. 6.00 09/15/06 243,244 ------------ FOREST PRODUCTS (1.4%) 150 Weyerhaeuser Co. 6.00 08/01/06 158,274 1,055 Weyerhaeuser Co. 6.75 03/15/12 1,182,222 ------------ 1,340,496 ------------ GAS DISTRIBUTORS (0.7%) 95 Northwest Pipeline Corp. 8.125 03/01/10 107,469 140 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 136,573 39 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A* (Qatar) 7.628 09/15/06 40,621 335 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A* (Qatar) 8.294 03/15/14 395,920 ------------ 680,583 ------------ HOME FURNISHINGS (0.3%) 130 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 139,820 110 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 126,705 ------------ 266,525 ------------ HOME IMPROVEMENT CHAINS (0.8%) 295 Lowe's Companies, Inc. 6.50 03/15/29 325,343 71 Lowe's Companies, Inc. 6.875 02/15/28 81,526 300 Lowe's Companies, Inc. 7.50 12/15/05 319,446 ------------ 726,315 ------------ HOSPITAL/NURSING MANAGEMENT (0.7%) 625 HCA Inc. 6.30 10/01/12 648,766 ------------ HOTELS/RESORTS/CRUISELINES (2.4%) 725 Hilton Hotels Corp. 7.625 12/01/12 831,938 695 Hyatt Equities LLC - 144A* 6.875 06/15/07 745,869 195 Marriott International, Inc. (Series D) 8.125 04/01/05 201,195 265 Marriott International, Inc. (Series E) 7.00 01/15/08 291,129 195 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 209,625 ------------ 2,279,756 ------------ INDUSTRIAL CONGLOMERATES (3.3%) 925 General Electric Capital Corp. 6.75 03/15/32 1,054,172 515 Honeywell International, Inc. 5.125 11/01/06 538,865 550 Honeywell International, Inc. 7.50 03/01/10 641,621
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------------------------- $ 315 Hutchison Whampoa International Ltd. - 144A* (Virgin Islands) 5.45% 11/24/10 $ 324,395 515 Hutchison Whampoa International Ltd. - 144A* (Virgin Islands) 6.50 02/13/13 544,551 ------------ 3,103,604 ------------ INFORMATION TECHNOLOGY SERVICES (0.6%) 260 Electronic Data Systems Corp. 7.125 10/15/09 277,502 330 Electronic Data Systems Corp. (Series B) 6.50 08/01/13 327,101 ------------ 604,603 ------------ INSURANCE BROKERS/SERVICES (1.4%) 1,335 Farmers Exchange Capital - 144A* 7.05 07/15/28 1,360,496 ------------ INTEGRATED OIL (1.8%) 750 Amerada Hess Corp. 7.875 10/01/29 857,779 345 Conoco Funding Co. 6.35 10/15/11 385,485 40 Petro-Canada (Canada) 4.00 07/15/13 37,295 415 Petro-Canada (Canada) 5.35 07/15/33 373,517 ------------ 1,654,076 ------------ INVESTMENT BANKS/BROKERS (1.1%) 400 Goldman Sachs Group Inc. 5.25 10/15/13 407,050 90 Goldman Sachs Group Inc. 6.60 01/15/12 100,490 480 Goldman Sachs Group Inc. 6.875 01/15/11 542,512 ------------ 1,050,052 ------------ LIFE/HEALTH INSURANCE (0.6%) 475 John Hancock Global Funding II - 144A* 7.90 07/02/10 562,347 ------------ MAJOR BANKS (2.4%) 980 Bank of America Corp. 3.375 02/17/09 966,510 250 Bank of New York (The) 5.20 07/01/07 263,426 475 First Union National Bank (Series BKNT) 7.80 08/18/10 560,649 480 Huntington National Bank 2.75 10/16/06 481,127 ------------ 2,271,712 ------------ MAJOR TELECOMMUNICATIONS (5.2%) 420 AT&T Corp. 8.75 11/15/31 443,100 150 Deutsche Telekom International Finance Corp. (Netherlands) 8.50 06/15/10 180,145
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------------------------- $ 455 Deutsche Telekom International Finance Corp. (Netherlands) 8.75% 06/15/30 $ 584,973 305 France Telecom S.A. (France) 9.50 03/01/31 402,667 80 GTE Corp. 6.36 04/15/06 84,468 240 Sprint Capital Corp. 8.75 03/15/32 304,760 480 Telecom Italia Capital SpA - 144A* (Italy) 4.00 11/15/08 482,523 165 Verizon Global Funding Corp. 7.25 12/01/10 189,631 1,910 Verizon Global Funding Corp. 7.75 12/01/30 2,268,849 ------------ 4,941,116 ------------ MANAGED HEALTH CARE (4.0%) 1,000 Aetna, Inc. 7.875 03/01/11 1,179,688 885 Anthem Insurance - 144A* 9.125 04/01/10 1,099,038 60 Anthem, Inc. 6.80 08/01/12 67,702 790 Health Net, Inc. 8.375 04/15/11 949,464 270 UnitedHealth Group Inc. 7.50 11/15/05 285,816 175 Wellpoint Health Network, Inc. 6.375 06/15/06 185,274 ------------ 3,766,982 ------------ MEDIA CONGLOMERATES (3.4%) 600 News America Holdings, Inc. 7.75 02/01/24 701,539 50 News America Holdings, Inc. 8.875 04/26/23 64,706 65 News America, Inc. 4.75 03/15/10 66,414 730 News America, Inc. 7.28 06/30/28 823,755 530 Time Warner Co., Inc. 7.57 02/01/24 599,662 500 Time Warner Inc. 7.625 04/15/31 572,182 295 Time Warner Inc. 7.70 05/01/32 341,026 ------------ 3,169,284 ------------ MEDICAL SPECIALTIES (0.2%) 190 Fisher Scientific International Inc. - 144A* 6.75 08/15/14 197,125 ------------ MOTOR VEHICLES (1.3%) 345 DaimlerChrysler North American Holdings Co. 7.30 01/15/12 390,350 215 DaimlerChrysler North American Holdings Co. 8.00 06/15/10 250,021 490 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 599,490 ------------ 1,239,861 ------------ MULTI-LINE INSURANCE (3.0%) 505 AIG Sun America Global Finance VI - 144A* 6.30 05/10/11 557,374 565 American General Finance Corp. 4.625 09/01/10 572,363
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------------------------- $ 625 American General Finance Corp. 5.875% 07/14/06 $ 659,501 365 Equitable Life Assurance Society - 144A* 6.95 12/01/05 384,668 135 Hartford Financial Services Group, Inc. 2.375 06/01/06 133,835 500 Hartford Financial Services Group, Inc. 7.75 06/15/05 520,178 ------------ 2,827,919 ------------ OIL & GAS PIPELINES (0.8%) 525 GulfTerra Energy Partners, L.P. 6.25 06/01/10 580,781 120 Transcontinental Gas Pipe Line Corp. (Series B) 8.875 07/15/12 146,100 ------------ 726,881 ------------ OIL & GAS PRODUCTION (4.9%) 470 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 491,601 410 Kerr-McGee Corp. 5.875 09/15/06 431,445 230 Kerr-McGee Corp. 6.625 10/15/07 250,073 330 Kerr-McGee Corp. 7.875 09/15/31 384,818 485 Nexen Inc. (Canada) 5.05 11/20/13 483,162 605 Occidental Peteroleum Corp. 8.45 02/15/29 804,801 155 Pemex Project Funding Master Trust 7.375 12/15/14 170,345 210 Pemex Project Funding Master Trust 7.875 02/01/09 236,775 1,170 Pemex Project Funding Master Trust 8.00 11/15/11 1,336,725 ------------ 4,589,745 ------------ OIL REFINING/MARKETING (0.6%) 140 Ashland Inc. 7.83 08/15/05 145,949 300 Marathon Oil Corp. 5.375 06/01/07 316,155 120 Marathon Oil Corp. 6.00 07/01/12 129,445 ------------ 591,549 ------------ OTHER METALS/MINERALS (0.9%) 365 Inco Ltd. (Canada) 7.20 09/15/32 407,187 395 Inco Ltd. (Canada) 7.75 05/15/12 462,420 ------------ 869,607 ------------ PROPERTY - CASUALTY INSURERS (0.9%) 875 Mantis Reef Ltd. - 144A* 4.692 11/14/08 886,585 ------------ PULP & PAPER (2.2%) 590 Abitibi-Consolidated Inc. (Canada) 8.55 08/01/10 637,200 505 Bowater Canada Finance (Canada) 7.95 11/15/11 537,842 390 International Paper Co. 4.25 01/15/09 392,689 130 International Paper Co. 5.85 10/30/12 137,274 370 Sappi Papier Holding AG - 144A* (Austria) 6.75 06/15/12 403,299 ------------ 2,108,304 ------------
SEE NOTES TO FINANCIAL STATEMENTS 15
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------------------------- REAL ESTATE DEVELOPMENT (0.8%) $ 370 World Financial Properties - 144A* 6.91 % 09/01/13 $ 413,324 273 World Financial Properties - 144A* 6.95 09/01/13 305,924 ------------ 719,248 ------------ REAL ESTATE INVESTMENT TRUSTS (0.5%) 100 EOP Operating L.P. 4.75 03/15/14 95,689 270 Rouse Co. (The) 3.625 03/15/09 252,520 135 Rouse Co. (The) 5.375 11/26/13 127,201 ------------ 475,410 ------------ REGIONAL BANKS (0.2%) 175 US Bancorp 5.10 07/15/07 183,918 ------------ RESTAURANTS (0.4%) 310 Tricon Global Restaurants, Inc. 8.875 04/15/11 384,457 ------------ SAVINGS BANKS (1.7%) 70 Household Finance Corp. 6.375 10/15/11 77,266 675 Household Finance Corp. 6.75 05/15/11 759,349 685 Washington Mutual Bank 5.50 01/15/13 710,748 20 Washington Mutual Inc. 8.25 04/01/10 23,762 ------------ 1,571,125 ------------ SPECIALTY STORES (0.5%) 185 Autonation, Inc. 9.00 08/01/08 212,287 290 Toys "R" Us 7.875 04/15/13 288,187 ------------ 500,474 ------------ TOBACCO (0.9%) 305 Altria Group, Inc. 7.00 11/04/13 322,047 535 Altria Group, Inc. 7.75 01/15/27 567,243 ------------ 889,290 ------------ WIRELESS TELECOMMUNICATIONS (0.5%) 390 AT&T Wireless Services, Inc. 7.875 03/01/11 460,264 ------------ TOTAL CORPORATE BONDS (COST $83,277,779) 84,724,140 ------------ ASSET-BACKED SECURITIES (4.0%) FINANCE/RENTAL/LEASING (4.0%) 550 Chase Manhattan Auto Owners Trust 2004-A A4 2.83 09/15/10 545,458 350 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 351,250 550 Daimler Chrysler Auto Trust 2003-B A4 2.86 03/09/09 549,288 450 Harley-Davidson Motorcycle Trust 2004-2 A2 3.56 02/15/12 455,691
SEE NOTES TO FINANCIAL STATEMENTS 16
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------------------------- $ 550 Honda Auto Receivables Owner Trust 2004-1 A4 3.06 % 10/21/09 $ 549,595 800 MBNA Credit Card Master Trust 2004-A4 A4 2.70 09/15/09 794,178 500 TXU Electric Delivery Transition Bond Company LLC 2004-1 A2 4.81 11/15/12 515,898 ------------ TOTAL ASSET-BACKED SECURITIES (COST $3,763,305) 3,761,358 ------------ FOREIGN GOVERNMENT OBLIGATIONS (2.1%) 820 United Mexican States Corp. (Mexico) 8.30 08/15/31 942,180 860 United Mexican States Corp. (Mexico) 9.875 02/01/10 1,069,410 ------------ TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST $2,019,765) 2,011,590 ------------ U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (0.1%) 34 Federal Home Loan Mortgage Corp. 7.50 09/01/30 36,689 Federal National Mortgage Association 2 7.00 01/01/30 2,424 79 7.50 09/01/29 - 04/01/32 85,346 ------------ TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (COST $122,033) 124,459 ------------ SHORT-TERM INVESTMENTS (3.0%) U.S. GOVERNMENT OBLIGATION (a) (0.3%) 300 U.S. Treasury Bill ** (COST $299,820) 0.98 09/23/04 299,820 ------------ REPURCHASE AGREEMENT (2.7%) 2,487 Joint repurchase agreement account (dated 08/31/04; proceeds $2,487,108) (b) (COST $2,487,000) 1.57 09/01/04 2,487,000 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $2,786,820) 2,786,820 ------------ TOTAL INVESTMENTS (COST $91,969,702) (c) (d) 98.9% 93,408,367 OTHER ASSETS IN EXCESS OF LIABILITIES 1.1 1,030,673 ----- ------------ NET ASSETS 100.0% $ 94,439,040 ===== ============
SEE NOTES TO FINANCIAL STATEMENTS 17 - ---------- * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** A PORTION OF THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $128,850. (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 $20,040,269 IN CONNECTION WITH OPEN FUTURES CONTRACTS. (d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $92,513,002. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $1,585,155 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $689,790, RESULTING IN NET UNREALIZED APPRECIATION OF $895,365. BOND INSURANCE: - ---------- FSA FINANCIAL SECURITY ASSURANCE. FUTURES CONTRACTS OPEN AT AUGUST 31, 2004:
NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE UNREALIZED CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION - ----------------------------------------------------------------------------------------------------------- 25 Short U.S. Treasury Bond 20 Year, September 2004 $ (2,813,281) $ (214,431) 15 Short U.S. Treasury Bond 20 Year, December 2004 (1,669,688) (8,488) 1 Short U.S. Treasury Notes 10 Year, September 2004 (113,469) (3,003) 24 Short U.S. Treasury Notes 10 Year, December 2004 (2,695,500) (30,170) 30 Short U.S. Treasury Notes 5 Year, December 2004 (3,320,156) (29,678) 6 Short U.S. Treasury Notes 2 Year, September 2004 (1,275,750) (15,485) 41 Short U.S. Treasury Notes 2 Year, December 2004 (8,678,547) (16,176) ------------ Total unrealized depreciation $ (317,431) ============
SEE NOTES TO FINANCIAL STATEMENTS 18 MORGAN STANLEY QUALITY INCOME TRUST FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 2004 ASSETS: Investments in securities, at value (cost $91,969,702) $ 93,408,367 Receivable for: Interest 1,477,407 Investments sold 178,456 Shares of beneficial interest sold 7,530 Prepaid expenses and other assets 18,630 --------------- TOTAL ASSETS 95,090,390 --------------- LIABILITIES: Payable for: Shares of beneficial interest redeemed 290,221 Distribution fee 61,880 Variation margin 60,454 Investment management fee 44,417 Dividends and distributions to shareholders 43,601 Payable to bank 11,876 Accrued expenses and other payables 138,901 --------------- TOTAL LIABILITIES 651,350 --------------- NET ASSETS $ 94,439,040 --------------- COMPOSITION OF NET ASSETS: Paid-in-capital $ 102,630,425 Net unrealized appreciation 1,121,234 Dividends in excess of net investment income (549,749) Accumulated net realized loss (8,762,870) --------------- NET ASSETS $ 94,439,040 =============== CLASS A SHARES: Net Assets $ 7,627,752 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 797,479 NET ASSET VALUE PER SHARE $ 9.56 =============== MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 9.98 =============== CLASS B SHARES: Net Assets $ 73,650,223 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 7,768,218 NET ASSET VALUE PER SHARE $ 9.48 =============== CLASS C SHARES: Net Assets $ 7,473,801 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 786,769 NET ASSET VALUE PER SHARE $ 9.50 =============== CLASS D SHARES: Net Assets $ 5,687,264 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 601,882 NET ASSET VALUE PER SHARE $ 9.45 ===============
SEE NOTES TO FINANCIAL STATEMENTS 19 STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2004 NET INVESTMENT INCOME: INTEREST INCOME $ 5,601,273 EXPENSES Distribution fee (Class A shares) 14,495 Distribution fee (Class B shares) 748,335 Distribution fee (Class C shares) 72,080 Investment management fee 665,388 Transfer agent fees and expenses 172,898 Shareholder reports and notices 107,585 Registration fees 81,148 Professional fees 76,630 Custodian fees 26,016 Trustees' fees and expenses 8,615 Other 20,725 --------------- TOTAL EXPENSES 1,993,915 --------------- Less: amounts waived/reimbursed (48,253) --------------- NET EXPENSES 1,945,662 --------------- NET INVESTMENT INCOME 3,655,611 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN/LOSS ON: Investments 674,815 Futures contracts (612,741) --------------- NET REALIZED GAIN 62,074 --------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments 3,143,491 Futures contracts (489,196) --------------- NET APPRECIATION 2,654,295 --------------- NET GAIN 2,716,369 --------------- NET INCREASE $ 6,371,980 ===============
SEE NOTES TO FINANCIAL STATEMENTS 20 STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2004 AUGUST 31, 2003 --------------- --------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 3,655,611 $ 2,110,561 Net realized gain 62,074 1,830,654 Net change in unrealized depreciation 2,654,295 (1,748,491) --------------- --------------- NET INCREASE 6,371,980 2,192,724 --------------- --------------- DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: Class A shares (350,990) (316,276) Class B shares (3,453,039) (3,155,485) Class C shares (332,476) (264,530) Class D shares (321,400) (356,548) --------------- --------------- TOTAL DIVIDENDS (4,457,905) (4,092,839) --------------- --------------- Net decrease from transactions in shares of beneficial interest (34,307,978) (3,592,687) --------------- --------------- NET DECREASE (32,393,903) (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 $549,749 AND $248,881, RESPECTIVELY) $ 94,439,040 $ 126,832,943 =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS 21 MORGAN STANLEY QUALITY INCOME TRUST NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 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 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 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. 22 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. Effective May 1, 2004, the Investment Manager agreed to assume all operating expenses (except distribution fees) and to waive the compensation provided for in its Investment Management Agreement to the extent that such expenses and compensation on an annualized basis exceed 0.80% of the daily net assets of the Fund. 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 23 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 -- up to 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 $5,020,042 at August 31, 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 year ended August 31, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.19% and 0.85%, respectively. The Distributor has informed the Fund that for the year ended August 31, 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 $18,869, $182,612 and $4,542, respectively and received $26,350 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, 2004, aggregated $188,259,208, and $241,145,215, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities of $142,905,302 and $185,147,192, respectively. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At August 31, 2004, the Fund had transfer agent fees and expenses payable of approximately $21,000. 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 year ended August 31, 2004 included in Trustees' fees and expenses 24 in the Statement of Operations amounted to $7,311. At August 31, 2004, the Fund had an accrued pension liability of $60,842 which is included in accrued expenses in the Statement of Assets and Liabilities. On December 2, 2003, the Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 5. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2004 AUGUST 31, 2003 ---------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ------------ ------------- ----------- ------------- CLASS A SHARES Sold 704,453 $ 6,705,247 7,230,344 $ 69,757,478 Reinvestment of dividends 24,923 237,640 23,096 221,263 Redeemed (958,026) (9,092,170) (7,352,712) (70,908,969) ------------ ------------- ----------- ------------- Net decrease -- Class A (228,650) (2,149,283) (99,272) (930,228) ------------ ------------- ----------- ------------- CLASS B SHARES Sold 923,982 8,779,096 5,576,141 53,136,588 Reinvestment of dividends 238,171 2,253,505 224,794 2,137,809 Redeemed (4,090,065) (38,614,692) (6,031,461) (57,282,326) ------------ ------------- ----------- ------------- Net decrease -- Class B (2,927,912) (27,582,091) (230,526) (2,007,929) ------------ ------------- ----------- ------------- CLASS C SHARES Sold 195,232 1,846,576 1,825,800 17,330,693 Reinvestment of dividends 25,345 240,274 20,602 196,212 Redeemed (546,505) (5,137,914) (1,411,756) (13,429,508) ------------ ------------- ----------- ------------- Net increase (decrease) -- Class C (325,928) (3,051,064) 434,646 4,097,397 ------------ ------------- ----------- ------------- CLASS D SHARES Sold 279,178 2,647,709 1,942,485 18,431,785 Reinvestment of dividends 23,723 223,653 22,745 215,756 Redeemed (466,532) (4,396,902) (2,466,593) (23,399,468) ------------ ------------- ----------- ------------- Net decrease -- Class D (163,631) (1,525,540) (501,363) (4,751,927) ------------ ------------- ----------- ------------- Net decrease in Fund (3,646,121) $ (34,307,978) (396,515) $ (3,592,687) ============ ============= =========== =============
25 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, 2004 AUGUST 31, 2003 ---------------- --------------- Ordinary income $ 4,434,750 $ 4,092,676 ============= ============
As of August 31, 2004, the tax-basis components of accumulated losses were as follows: Undistributed ordinary income $ 97,891 Undistributed long-term gains -- ------------ Net accumulated earnings 97,891 Capital loss carryforward* (8,415,827) Post-October losses (664,371) Temporary differences (104,443) Net unrealized appreciation 895,365 ------------ Total accumulated losses $ (8,191,385) ============
*As of August 31, 2004, the Fund had a net capital loss carryforward of $8,415,827 of which $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, $313,469 will expire on August 31, 2010 and $1,513,272 will expire on August 31, 2012 to offset future capital gains to the extent provided by regulations. As of August 31, 2004, 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 primarily 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, 26 paid-in-capital was charged $303,220, accumulated net realized loss was charged $198,206 and dividends in excess of net investment income was credited $501,426. 7. PURPOSES OF RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS 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"). 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 value of the underlying securities. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. 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 the funds advised by the Investment Manager or its affiliates to investors 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 have moved to dismiss the action and intend to otherwise vigorously 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. 27 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, ---------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- --------- --------- ---------- --------- CLASS A SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.39 $ 9.53 $ 9.35 $ 8.97 $ 9.30 ---------- --------- --------- ---------- --------- Income (loss) from investment operations: Net investment income 0.35 0.20 0.37 0.52 0.55 Net realized and unrealized gain (loss) 0.26 0.01 0.19 0.38 (0.33) ---------- --------- --------- ---------- --------- Total income from investment operations 0.61 0.21 0.56 0.90 0.22 ---------- --------- --------- ---------- --------- Less dividends from net investment income (0.44) (0.35) (0.38) (0.52) (0.55) ---------- --------- --------- ---------- --------- Net asset value, end of period $ 9.56 $ 9.39 $ 9.53 $ 9.35 $ 8.97 ========== ========= ========= ========== ========= TOTAL RETURN+ 6.57% 2.17% 6.17% 10.34% 2.49% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.19%(2) 1.14% 1.04% 1.21% 1.10% Net investment income 3.86%(2) 2.14% 4.03% 5.71% 6.02% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 7,628 $ 9,636 $ 10,730 $ 4,177 $ 4,196 Portfolio turnover rate 164% 429% 400% 358% 114%
- ---------- + 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. (2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN 1.24% AND 3.81%, RESPECTIVELY. SEE NOTES TO FINANCIAL STATEMENTS 28
FOR THE YEAR ENDED AUGUST 31, ---------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- --------- --------- ---------- --------- CLASS B SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.32 $ 9.45 $ 9.35 $ 8.98 $ 9.31 ---------- --------- --------- ---------- --------- Income (loss) from investment operations: Net investment income 0.29 0.14 0.31 0.47 0.49 Net realized and unrealized gain (loss) 0.24 0.02 0.10 0.37 (0.33) ---------- --------- --------- ---------- --------- Total income from investment operations 0.53 0.16 0.41 0.84 0.16 ---------- --------- --------- ---------- --------- Less dividends from net investment income (0.37) (0.29) (0.31) (0.47) (0.49) ---------- --------- --------- ---------- --------- Net asset value, end of period $ 9.48 $ 9.32 $ 9.45 $ 9.35 $ 8.98 ========== ========= ========= ========== ========= TOTAL RETURN+ 5.78% 1.63% 4.58% 9.55% 1.80% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.85%(2) 1.79% 1.72% 1.84% 1.77% Net investment income 3.20%(2) 1.49% 3.35% 5.08% 5.35% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 73,650 $ 99,695 $ 103,238 $ 97,452 $ 82,964 Portfolio turnover rate 164% 429% 400% 358% 114%
- ---------- + 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. (2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN 1.90% AND 3.15%, RESPECTIVELY. SEE NOTES TO FINANCIAL STATEMENTS 29
FOR THE YEAR ENDED AUGUST 31, ---------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- --------- --------- ---------- --------- CLASS C SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.34 $ 9.46 $ 9.36 $ 8.99 $ 9.32 ---------- --------- --------- ---------- --------- Income (loss) from investment operations: Net investment income 0.29 0.14 0.31 0.47 0.49 Net realized and unrealized gain (loss) 0.24 0.03 0.10 0.37 (0.33) ---------- --------- --------- ---------- --------- Total income from investment operations 0.53 0.17 0.41 0.84 0.16 ---------- --------- --------- ---------- --------- Less dividends from net investment income (0.37) (0.29) (0.31) (0.47) (0.49) ---------- --------- --------- ---------- --------- Net asset value, end of period $ 9.50 $ 9.34 $ 9.46 $ 9.36 $ 8.99 ========== ========= ========= ========== ========= TOTAL RETURN+ 5.77% 1.74% 4.57% 9.54% 1.80% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.85%(2) 1.79% 1.72% 1.84% 1.77% Net investment income 3.20%(2) 1.49% 3.35% 5.08% 5.35% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 7,474 $ 10,389 $ 6,415 $ 4,226 $ 1,738 Portfolio turnover rate 164% 429% 400% 358% 114%
- ---------- + 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. (2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN 1.90% AND 3.15%, RESPECTIVELY. SEE NOTES TO FINANCIAL STATEMENTS 30
FOR THE YEAR ENDED AUGUST 31, ---------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- --------- --------- ---------- --------- CLASS D SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 9.29 $ 9.43 $ 9.35 $ 8.98 $ 9.31 ---------- --------- --------- ---------- --------- Income (loss) from investment operations: Net investment income 0.37 0.22 0.38 0.55 0.57 Net realized and unrealized gain (loss) 0.24 0.01 0.09 0.37 (0.33) ---------- --------- --------- ---------- --------- Total income from investment operations 0.61 0.23 0.47 0.92 0.24 ---------- --------- --------- ---------- --------- Less dividends from net investment income (0.45) (0.37) (0.39) (0.55) (0.57) ---------- --------- --------- ---------- --------- Net asset value, end of period $ 9.45 $ 9.29 $ 9.43 $ 9.35 $ 8.98 ========== ========= ========= ========== ========= TOTAL RETURN+ 6.68% 2.39% 5.23% 10.48% 2.67% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.00%(2) 0.94% 0.87% 0.99% 0.92% Net investment income 4.05%(2) 2.34% 4.20% 5.93% 6.20% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 5,687 $ 7,113 $ 11,943 $ 3,018 $ 6,834 Portfolio turnover rate 164% 429% 400% 358% 114%
- ---------- + 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. (2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE WAIVED BY THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN 1.05% AND 4.00%, RESPECTIVELY. SEE NOTES TO FINANCIAL STATEMENTS 31 MORGAN STANLEY QUALITY INCOME TRUST REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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"), including the portfolio of investments, as of August 31, 2004, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. 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, 2004, 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, 2004, 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 18, 2004 2004 FEDERAL TAX NOTICE (UNAUDITED) Of the Fund's ordinary income dividends paid during the fiscal year ended August 31, 2004, 0.05% 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. 32 MORGAN STANLEY QUALITY INCOME TRUST TRUSTEE AND OFFICER INFORMATION INDEPENDENT TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE - ------------------------- ----------- ------------ ----------------------------------- ------------- -------------------- Michael Bozic (63) Trustee Since Private Investor; Director or 208 Director of Weirton c/o Kramer Levin Naftalis April 1994 Trustee of the Retail Funds (since Steel Corporation. & Frankel LLP April 1994) and the Institutional Counsel to the Funds (since July 2003); formerly Independent Trustees Vice Chairman of Kmart Corporation 919 Third Avenue (December 1998-October 2000), New York, NY 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 (71) Trustee Since Managing Director of Summit 208 Director of Franklin c/o Summit Ventures LLC January 1993 Ventures LLC; Director or Trustee Covey (time 1 Utah Center of the Retail Funds (since January management systems), 201 S. Main Street 1993) and the Institutional Funds BMW Bank of North Salt Lake City, UT (since July 2003); member of the America, Inc. Utah Regional Advisory Board of (industrial loan Pacific Corp.; formerly United corporation), United States Senator (R-Utah) (1974-1992) Space Alliance and Chairman, Senate Banking (joint venture Committee (1980-1986), Mayor of between Lockheed Salt Lake City, Utah (1971-1974), Martin and the Astronaut, Space Shuttle Discovery Boeing Company) and (April 12-19, 1985), and Vice Nuskin Asia Pacific Chairman, Huntsman Corporation (multilevel (chemical company). marketing); member of the board of various civic and charitable organizations. Wayne E. Hedien (70) Trustee Since Retired; Director or Trustee of the 208 Director of The PMI c/o Kramer Levin Naftalis September Retail Funds (since September 1997) Group Inc. (private & Frankel LLP 1997 and the Institutional Funds (since mortgage insurance); Counsel to the July 2003); formerly associated Trustee and Vice Independent Trustees with the Allstate Companies Chairman of The 919 Third Avenue (1966-1994), most recently as Field Museum of New York, NY Chairman of The Allstate Natural History; Corporation (March 1993-December director of various 1994) and Chairman and Chief other business and Executive Officer of its charitable wholly-owned subsidiary, Allstate organizations. Insurance Company (July 1989-December 1994).
33
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE - ------------------------- ----------- ------------ ----------------------------------- ------------- -------------------- Dr. Manuel H. Johnson Trustee Since Senior Partner, Johnson Smick 208 Director of NVR, (55) July 1991 International, Inc., a consulting Inc. (home c/o Johnson Smick firm; Chairman of the Audit construction); International, Inc. Committee and Director or Trustee Chairman and Trustee 2099 Pennsylvania Avenue, of the Retail Funds (since July of the Financial N.W. 1991) and the Institutional Funds Accounting Suite 950 (since July 2003); Co-Chairman and Foundation Washington, D.C. a founder of the Group of Seven (oversight Council (G7C), an international organization of the economic commission; formerly Vice Financial Accounting Chairman of the Board of Governors Standards Board); of the Federal Reserve System and Director of RBS Assistant Secretary of the U.S. Greenwich Capital Treasury. Holdings (financial holding company). Joseph J. Kearns (62) Trustee Since President, Kearns & Associates LLC 209 Director of Electro PMB754 July 2003 (investment consulting); Deputy Rent Corporation 23852 Pacific Coast Chairman of the Audit Committee and (equipment leasing), Highway Director or Trustee of the Retail The Ford Family Malibu, CA Funds (since July 2003) and the Foundation, and the Institutional Funds (since August UCLA Foundation. 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001- July 2003); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (68) Trustee Since General Partner of Triumph Capital, 208 Director of various c/o Triumph Capital, L.P. July 1991 L.P., a private investment business 445 Park Avenue partnership; Chairman of the organizations. New York, NY Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (72) Trustee Since Chairman of Lumelite Plastics 209 Trustee and Director c/o Lumelite Plastics July 2003 Corporation; Chairman of the of certain Corporation Governance Committee and Director investment companies 85 Charles Colman Blvd. or Trustee of the Retail Funds in the JPMorgan Pawling, NY (since July 2003) and the Funds complex Institutional Funds (since June managed by J.P. 1992). Morgan Investment Management Inc.
34 INTERESTED TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE - ------------------------- ----------- ------------ ----------------------------------- ------------- -------------------- Charles A. Fiumefreddo Chairman Since Chairman and Director or Trustee of 208 None (71) of the July 1991 the Retail Funds (since July 1991) c/o Morgan Stanley Trust Board and and the Institutional Funds (since Harborside Financial Trustee July 2003); formerly Chief Center, Executive Officer of the Retail Plaza Two, Funds (until September 2002). Jersey City, NJ James F. Higgins (56) Trustee Since Director or Trustee of the Retail 208 Director of AXA c/o Morgan Stanley Trust June 2000 Funds (since June 2000) and the Financial, Inc. and Harborside Financial Institutional Funds (since July The Equitable Life Center, 2003); Senior Advisor of Morgan Assurance Society of Plaza Two, Stanley (since August 2000); the United States Jersey City, NJ Director of the Distributor and (financial Dean Witter Realty Inc.; previously services). President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), and President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999).
- ---------- * THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT 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. 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.). 35 OFFICERS:
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - ------------------------- ----------- ------------ ------------------------------------------------------ Mitchell M. Merin (51) President Since President and Chief Operating Officer of Morgan 1221 Avenue of the May 1999 Stanley Investment Management Inc.; President, Americas Director and Chief Executive Officer of the Investment New York, NY Manager and Morgan Stanley Services; Chairman and Director of the Distributor; Chairman and Director of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President of the Institutional Funds (since July 2003) and President of the Retail Funds (since May 1999); Trustee (since July 2003) and President (since December 2002) of the Van Kampen Closed-End Funds; Trustee (since May 1999) and President (since October 2002) of the Van Kampen Open-End Funds. Barry Fink (49) Vice Since General Counsel (since May 2000) and Managing Director 1221 Avenue of the President February (since December 2000) of Morgan Stanley Investment Americas 1997 Management; Managing Director (since December 2000), New York, NY Secretary (since February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; Vice President of the Retail Funds; Assistant Secretary of Morgan Stanley DW; Vice President of the Institutional Funds (since July 2003); Managing Director, Secretary and Director of the Distributor; previously Secretary (February 1997-July 2003) and General Counsel (February 1997-April 2004) of the Retail Funds; Vice President and Assistant General Counsel of the Investment Manager and Morgan Stanley Services (February 1997-December 2001). Ronald E. Robison (65) Executive Since Principal Executive Officer-Office of the Funds (since 1221 Avenue of the Vice April 2003 November 2003); Managing Director of Morgan Stanley & Americas President Co. Incorporated, Managing Director of Morgan Stanley; New York, NY and Managing Director, Chief Administrative Officer and Principal Director of the Investment Manager and Morgan Stanley Executive Services; Chief Executive Officer and Director of the Officer Transfer Agent; Managing Director and Director of the Distributor; Executive Vice President and Principal Executive Officer of the Institutional Funds (since July 2003) and the Retail Funds (since April 2003); Director of Morgan Stanley SICAV (since May 2004); previously President and Director of the Retail Funds (March 2001-July 2003) and Chief Global Operations Officer and Managing Director of Morgan Stanley Investment Management Inc. Joseph J. McAlinden (61) Vice Since Managing Director and Chief Investment Officer of the 1221 Avenue of the President July 1995 Investment Manager and Morgan Stanley Investment Americas Management Inc., Director of the Transfer Agent, Chief New York, NY Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). Amy R. Doberman (42) Vice Since Managing Director and General Counsel, U.S. Investment 1221 Avenue of the President July 2004 Management; Managing Director of Morgan Stanley Americas Investment Management Inc. and the Investment Manager, New York, NY Vice President of the Institutional and Retail Funds (since July 2004); previously, Managing Director and General Counsel - Americas, UBS Global Asset Management (July 2000 - July 2004) and General Counsel, Aeltus Investment Management, Inc. (January 1997 - July 2000). Stefanie V. Chang (37) Vice Since Executive Director of Morgan Stanley & Co. 1221 Avenue of the President July 2003 Incorporated, Morgan Stanley Investment Management Americas Inc., and the Investment Manager; 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 US LLP).
36
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 J. Smith (39) Treasurer Treasurer Executive Director of the Investment Manager and c/o Morgan Stanley Trust and Chief since July Morgan Stanley Services (since December 2001); Harborside Financial Financial 2003 and previously, Vice President of the Retail Funds Center, Officer Chief (September 2002-July 2003), and Vice President of the Plaza Two, Financial Investment Manager and Morgan Stanley Services (August Jersey City, NJ Officer 2000-November 2001) and Senior Manager at since PricewaterhouseCoopers LLP (January 1998-August 2000). September 2002 Thomas F. Caloia (58) Vice Since Executive Director (since December 2002) and Assistant c/o Morgan Stanley Trust President July 2003 Treasurer of the Investment Manager, the Distributor Harborside Financial and Morgan Stanley Services; previously Treasurer of Center, the Retail Funds (April 1989-July 2003); formerly Plaza Two, First Vice President of the Investment Manager, the Jersey City, NJ Distributor and Morgan Stanley Services. Mary E. Mullin (37) Secretary Since Executive Director of Morgan Stanley & Co. 1221 Avenue of the July 2003 Incorporated, Morgan Stanley Investment Management Americas Inc. and the Investment Manager; 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. 37 (This page has been left blank intentionally.) (This page has been left blank intentionally.) TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER Barry Fink VICE PRESIDENT Joseph J. McAlinden VICE PRESIDENT Amy R. Doberman 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 REGISTERED PUBLIC ACCOUNTING FIRM 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)2004 Morgan Stanley [MORGAN STANLEY LOGO] 38557RPT-RA04-00643P-Y08/04 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY QUALITY INCOME TRUST ANNUAL REPORT AUGUST 31, 2004 [MORGAN STANLEY LOGO] Item 2. Code of Ethics. (a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) The Fund has amended its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto to delete from the end of the following paragraph on page 2 of the Code the phrase "to the detriment of the Fund.": "Each Covered Officer must not use his personal influence or personal relationship improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly)." (d) Not applicable. (e) Not applicable. (f) (1) The Fund's Code of Ethics is attached hereto as Exhibit A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Trustees has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services. (a)(b)(c)(d) and (g). Based on fees billed for the periods shown: 2004
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 31,830 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 452(2) $ 5,067,400(2) TAX FEES $ 5,598(3) $ 545,053(4) ALL OTHER FEES $ - $ - TOTAL NON-AUDIT FEES $ 6,050 $ 5,612,453 TOTAL $ 37,880 $ 5,612,453
2003
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 31,150 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 684(2) $ 1,086,576(2) TAX FEES $ 5,205(3) $ 252,500(4) ALL OTHER FEES $ - $ -(5) TOTAL NON-AUDIT FEES $ 5,889 $ 1,339,076 TOTAL $ 37,039 $ 1,339,076
N/A- Not applicable, as not required by Item 4. (1) Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant. (2) Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities' and funds advised by the Adviser or its affiliates, specifically data verification and agreed-upon procedures related to asset securitizations and agreed-upon procedures engagements. (3) Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the preparation and review of the Registrant's tax returns. (4) Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the review of Covered Entities' tax returns. (5) All other fees represent project management for future business applications and improving business and operational processes. (e)(1) The audit committee's pre-approval policies and procedures are as follows: APPENDIX A AUDIT COMMITTEE AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY AND PROCEDURES OF THE MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS AS ADOPTED AND AMENDED JULY 23, 2004,(1) 1. STATEMENT OF PRINCIPLES The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor's independence from the Fund. The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee's administration of the engagement of the independent auditor. The SEC's rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee. The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations. - ---------- (1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the "POLICY"), adopted as of the date above, supersedes and replaces all prior versions that may have been adopted from time to time. The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee's responsibilities to pre-approve services performed by the Independent Auditors to management. The Fund's Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors' independence. 2. DELEGATION As provided in the Act and the SEC's rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting. 3. AUDIT SERVICES The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund's financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items. In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings. The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 4. AUDIT-RELATED SERVICES Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund's financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC's rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters not classified as "Audit services"; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR. The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 5. TAX SERVICES The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor's independence, and the SEC has stated that the Independent Auditors may provide such services. Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 6. ALL OTHER SERVICES The Audit Committee believes, based on the SEC's rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC's rules on auditor independence. The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services. 8. PROCEDURES All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund's Chief Financial Officer and must include a detailed description of the services to be rendered. The Fund's Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund's Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC's rules on auditor independence. The Audit Committee has designated the Fund's Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund's Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund's Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund's Chief Financial Officer or any member of management. 9. ADDITIONAL REQUIREMENTS The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor's independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence. 10. COVERED ENTITIES Covered Entities include the Fund's investment adviser(s) and any entity controlling, controlled by or under common control with the Fund's investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund's audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include: MORGAN STANLEY RETAIL FUNDS Morgan Stanley Investment Advisors Inc. Morgan Stanley & Co. Incorporated Morgan Stanley DW Inc. Morgan Stanley Investment Management Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Van Kampen Asset Management Morgan Stanley Services Company, Inc. Morgan Stanley Distributors Inc. Morgan Stanley Trust FSB MORGAN STANLEY INSTITUTIONAL FUNDS Morgan Stanley Investment Management Inc. Morgan Stanley Investment Advisors Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Morgan Stanley & Co. Incorporated Morgan Stanley Distribution, Inc. Morgan Stanley AIP GP LP Morgan Stanley Alternative Investment Partners LP (e)(2) Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee's pre-approval policies and procedures (attached hereto). (f) Not applicable. (g) See table above. (h) The audit committee of the Board of Trustees has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors' independence in performing audit services. Item 5. Audit Committee of Listed Registrants. (a) The Fund has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are: Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J. Kearns, Michael Nugent and Fergus Reid. (b) Not applicable. Item 6. Schedule of Investments Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Applicable only to annual reports filed by closed-end funds. Item 8. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 9. Submission of Matters to a Vote of Security Holders Not applicable. Item 10 - Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 11 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, 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 October 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer October 20, 2004 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 January 3, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer January 3, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer January 3, 2005 EX-99.CODEETH 2 a2149615zex-99_codeeth.txt EX-99.CODEETH Exhibit 99.Code-eth EXHIBIT 11 A CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED SEPTEMBER 28, 2004 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); - 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 waivers2 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; - 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 - ---------- (2) 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." 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 3 a2149615zex-99_cert.txt EXHIBIT 99.CERT Exhibit 99.Cert EXHIBIT 11 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, 2004 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer EXHIBIT 11 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, 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, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer EXHIBIT 11 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: January 3, 2005 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer EXHIBIT 11 B4 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, 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 25 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: January 3, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer 26 EX-99.906CERT 4 a2149615zex-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, 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: October 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 August 31, 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: October 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. 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, 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: January 3, 2005 /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, 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: January 3, 2005 /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-----