transactions. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery.
Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the annual rate of 0.40% to the net assets of the Fund determined as of the close of each business day.
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A – up to 0.25% of the average daily net assets of Class A; (ii) Class B – 0.85% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B; and (iii) Class C – up to 0.85% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of
Morgan Stanley Flexible Income Trust
Notes to Financial Statements 
April 30, 2004 (unaudited) continued
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 $16,787,031 at April 30, 2004.
In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the six months ended April 30, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.12% and 0.85%, respectively.
The Distributor has informed the Fund that for the six months ended April 30, 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 $4, $224,302 and $3,293, respectively and received $52,309 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 of portfolio securities, excluding short-term investments, for the six months ended April 30, 2004 aggregated $621,736,785 and $683,955,852, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities of $547,626,786 and $575,919,160, respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At April 30, 2004, the Fund had transfer agent fees and expenses payable of approximately $31,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. Aggregate pension costs for the six months ended April 30, 2004 included in Trustees' fees and expenses in the Statement of Operations amounted to $5,992. At April 30, 2004, the Fund had an accrued pension liability of $93,781 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
39
Morgan Stanley Flexible Income Trust
Notes to Financial Statements April 30, 2004 (unaudited) continued
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. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital.
As of October 31, 2003, the Fund had a net capital loss carryforward of $239,667,979 of which $2,953,217 will expire on October 31, 2004, $7,130,711 will expire on October 31, 2005, $7,532,322 will expire on October 31, 2006, $10,929,321 will expire on October 31, 2007, $18,698,270 will expire on October 31, 2008, $39,097,864 will expire on October 31, 2009, $58,593,426 will expire on October 31, 2010 and $94,732,848 will expire on October 31, 2011 to offset future capital gains to the extent provided by regulations.
As of October 31, 2003, the Fund had temporary book/tax differences primarily attributable to book amortization of premiums on debt securities, mark-to-market of open futures and forward foreign currency exchange contracts, interest on bonds in default and capital loss deferrals on straddles.
6. Purpose of and Risks Relating to Certain Financial Instruments
The Fund may enter into forward contracts to facilitate settlement of foreign currency denominated portfolio transactions or to manage its foreign currency exposure or to sell, for a fixed amount of U.S. dollars or other currency, the amount of foreign currency approximating the value of some or all of its holdings denominated in such foreign currency or an amount of foreign currency other than the currency in which the securities to be hedged are denominated approximating the value of some or all of its holdings to be hedged. Additionally, when the Investment Manager anticipates purchasing securities at some time in the future, the Fund may enter into a forward contract to purchase an amount of currency equal to some or all the value of the anticipated purchase for a fixed amount of U.S. dollars or other currency.
40
Morgan Stanley Flexible Income Trust
Notes to Financial Statements April 30, 2004 (unaudited) continued
To hedge against adverse interest rate, foreign currency and market risks, the Fund may enter into interest rate futures contracts ("futures contracts").
Forward contracts and futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities or in the foreign exchange rates underlying the forward contracts. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
7. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
| | | | | | | | | | | | | | | | | | |
| | | FOR THE SIX
MONTHS ENDED
APRIL 30, 2004 | | FOR THE YEAR
ENDED
OCTOBER 31, 2003 | |
| | | (unaudited) | | | | | |
| | | SHARES | | AMOUNT | | SHARES | | AMOUNT |
| CLASS A SHARES | | | | | | | | | | | | | | | | |
| Sold | | | 929,118 | | | $ | 5,930,094 | | | | 11,763,766 | | | $ | 73,458,374 | |
| Reinvestment of dividends | | | 105,559 | | | | 667,755 | | | | 122,145 | | | | 758,699 | |
| Redeemed | | | (1,202,119 | ) | | | (7,662,145 | ) | | | (11,837,121 | ) | | | (74,077,578 | ) |
| Net increase (decrease) – Class A | | | (167,442 | ) | | | (1,064,296 | ) | | | 48,790 | | | | 139,495 | |
| CLASS B SHARES | | | | | | | | | | | | | | | | |
| Sold | | | 3,169,314 | | | | 20,234,395 | | | | 11,288,953 | | | | 70,368,240 | |
| Reinvestment of dividends | | | 1,256,917 | | | | 7,959,059 | | | | 1,239,387 | | | | 7,701,707 | |
| Redeemed | | | (7,298,423 | ) | | | (46,520,271 | ) | | | (17,491,492 | ) | | | (108,722,767 | ) |
| Net decrease – Class B | | | (2,872,192 | ) | | | (18,326,817 | ) | | | (4,963,152 | ) | | | (30,652,820 | ) |
| CLASS C SHARES | | | | | | | | | | | | | | | | |
| Sold | | | 525,162 | | | | 3,353,448 | | | | 1,816,091 | | | | 11,349,040 | |
| Reinvestment of dividends | | | 75,202 | | | | 475,419 | | | | 69,313 | | | | 431,075 | |
| Redeemed | | | (354,204 | ) | | | (2,260,496 | ) | | | (1,436,591 | ) | | | (8,965,206 | ) |
| Net increase – Class C | | | 246,160 | | | | 1,568,371 | | | | 448,813 | | | | 2,814,909 | |
| CLASS D SHARES | | | | | | | | | | | | | | | | |
| Sold | | | 526,844 | | | | 3,393,064 | | | | 2,740,065 | | | | 16,917,655 | |
| Reinvestment of dividends | | | 139,488 | | | | 884,846 | | | | 130,603 | | | | 814,806 | |
| Redeemed | | | (748,759 | ) | | | (4,775,058 | ) | | | (2,223,257 | ) | | | (13,717,969 | ) |
| Net increase (decrease) – Class D | | | (82,427 | ) | | | (497,148 | ) | | | 647,411 | | | | 4,014,492 | |
| Net decrease in Fund | | | (2,875,901 | ) | | $ | (18,319,890 | ) | | | (3,818,138 | ) | | $ | (23,683,924 | ) |
|
41
Morgan Stanley Flexible Income Trust
Notes to Financial Statements April 30, 2004 (unaudited) continued
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 intend to move to dismiss the action and otherwise vigorously to defend it. While the Fund believes that it has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter.
42
Morgan Stanley Flexible Income Trust
Financial Highlights
Selected ratios and per share data for a share of beneficial interest outstanding throughout each period.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | FOR THE YEAR ENDED OCTOBER 31, | |
| | | FOR THE SIX
MONTHS ENDED
APRIL 30, 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | 1999 |
| | | (unaudited) |
| Class A Shares |
| Selected Per Share Data: |
| Net asset value, beginning of period | | $ | 6.38 | | | $ | 5.95 | | | $ | 6.10 | | | $ | 6.97 | | | $ | 8.16 | | | $ | 9.01 | |
| Income (loss) from investment operations: |
| Net investment income‡ | | | 0.15 | | | | 0.23 | | | | 0.42 | | | | 0.56 | | | | 0.72 | | | | 0.74 | |
| Net realized and unrealized gain (loss) | | | 0.04 | | | | 0.56 | | | | (0.18 | ) | | | (0.88 | ) | | | (1.23 | ) | | | (0.87 | ) |
| Total income (loss) from investment operations | | | 0.19 | | | | 0.79 | | | | 0.24 | | | | (0.32 | ) | | | (0.51 | ) | | | (0.13 | ) |
| Less dividends and distributions from: |
| Net investment income | | | (0.36 | ) | | | (0.36 | ) | | | (0.38 | ) | | | (0.32 | ) | | | (0.62 | ) | | | (0.63 | ) |
| Paid-in-capital | | | 0.00 | | | | 0.00 | | | | (0.01 | ) | | | (0.23 | ) | | | (0.06 | ) | | | (0.09 | ) |
| Total dividends and distributions | | | (0.36 | ) | | | (0.36 | ) | | | (0.39 | ) | | | (0.55 | ) | | | (0.68 | ) | | | (0.72 | ) |
| Net asset value, end of period | | $ | 6.21 | | | $ | 6.38 | | | $ | 5.95 | | | $ | 6.10 | | | $ | 6.97 | | | $ | 8.16 | |
| Total Return† | | | 3.05 | % (1) | | | 13.65 | % | | | 4.25 | % | | | (4.62 | )% | | | (6.66 | )% | | | (1.61 | )% |
| Ratios to Average Net Assets(3): |
| Expenses | | | 0.77 | % (2) | | | 0.84 | % | | | 0.81 | % | | | 0.76 | %(4) | | | 0.73 | % | | | 0.72 | % |
| Net investment income | | | 4.58 | % (2) | | | 3.71 | % | | | 7.13 | % | | | 8.78 | %(4) | | | 9.28 | % | | | 8.56 | % |
| Supplemental Data: |
| Net assets, end of period, in thousands | | | $30,275 | | | | $32,166 | | | | $29,701 | | | | $29,769 | | | | $13,318 | | | | $21,828 | |
| Portfolio turnover rate | | | 146 | % (1) | | | 309 | % | | | 82 | % | | | 110 | % | | | 40 | % | | | 71 | % |
|
|
| ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
| † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
| (1) | Not annualized. |
| (2) | Annualized. |
| (3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
| (4) | If the Fund had borne all expenses that were waived by the Investment Manager, the expense and net investment income ratios would have been 0.78% and 6.76%, respectively. |
See Notes to Financial Statements
43
Morgan Stanley Flexible Income Trust
Financial Highlights continued
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | FOR THE YEAR ENDED OCTOBER 31, | |
| | | FOR THE SIX
MONTHS ENDED
APRIL 30, 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | 1999 |
| | | (unaudited) |
| Class B Shares |
| Selected Per Share Data: |
| Net asset value, beginning of period | | $ | 6.39 | | | $ | 5.96 | | | $ | 6.10 | | | $ | 6.98 | | | $ | 8.16 | | | $ | 9.01 | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income‡ | | | 0.12 | | | | 0.19 | | | | 0.38 | | | | 0.53 | | | | 0.67 | | | | 0.68 | |
| Net realized and unrealized gain (loss) | | | 0.05 | | | | 0.56 | | | | (0.17 | ) | | | (0.90 | ) | | | (1.22 | ) | | | (0.87 | ) |
| Total income (loss) from investment operations | | | 0.17 | | | | 0.75 | | | | 0.21 | | | | (0.37 | ) | | | (0.55 | ) | | | (0.19 | ) |
| Less dividends and distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | (0.34 | ) | | | (0.32 | ) | | | (0.34 | ) | | | (0.30 | ) | | | (0.58 | ) | | | (0.58 | ) |
| Paid-in-capital | | | 0.00 | | | | 0.00 | | | | (0.01 | ) | | | (0.21 | ) | | | (0.05 | ) | | | (0.08 | ) |
| Total dividends and distributions | | | (0.34 | ) | | | (0.32 | ) | | | (0.35 | ) | | | (0.51 | ) | | | (0.63 | ) | | | (0.66 | ) |
| Net asset value, end of period | | $ | 6.22 | | | $ | 6.39 | | | $ | 5.96 | | | $ | 6.10 | | | $ | 6.98 | | | $ | 8.16 | |
| Total Return† | | | 2.67 | % (1) | | | 12.89 | % | | | 3.73 | % | | | (5.37 | )% | | | (7.24 | )% | | | (2.14 | )% |
| Ratios to Average Net Assets(3): | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses | | | 1.50 | % (2) | | | 1.50 | % | | | 1.47 | % | | | 1.41 | %(4) | | | 1.38 | % | | | 1.38 | % |
| Net investment income | | | 3.85 | % (2) | | | 3.06 | % | | | 6.47 | % | | | 8.13 | %(4) | | | 8.63 | % | | | 7.90 | % |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net assets, end of period, in thousands | | | $322,303 | | | | $349,392 | | | | $355,329 | | | | $454,883 | | | | $565,493 | | | | $859,553 | |
| Portfolio turnover rate | | | 146 | % (1) | | | 309 | % | | | 82 | % | | | 110 | % | | | 40 | % | | | 71 | % |
|
|
| ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
| † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
| (1) | Not annualized. |
| (2) | Annualized. |
| (3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
| (4) | If the Fund had borne all expenses that were waived by the Investment Manager, the expense and net investment income ratios would have been 1.43% and 8.11%, respectively. |
See Notes to Financial Statements
44
Morgan Stanley Flexible Income Trust
Financial Highlights continued
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | FOR THE YEAR ENDED OCTOBER 31, | |
| | | FOR THE SIX
MONTHS ENDED
APRIL 30, 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | 1999 |
| | | (unaudited) |
| Class C Shares |
| Selected Per Share Data: |
| Net asset value, beginning of period | | $ | 6.38 | | | $ | 5.95 | | | $ | 6.09 | | | $ | 6.97 | | | $ | 8.15 | | | $ | 9.00 | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income‡ | | | 0.12 | | | | 0.19 | | | | 0.38 | | | | 0.53 | | | | 0.67 | | | | 0.68 | |
| Net realized and unrealized gain (loss) | | | 0.05 | | | | 0.56 | | | | (0.17 | ) | | | (0.90 | ) | | | (1.22 | ) | | | (0.87 | ) |
| Total income (loss) from investment operations | | | 0.17 | | | | 0.75 | | | | 0.21 | | | | (0.37 | ) | | | (0.55 | ) | | | (0.19 | ) |
| Less dividends and distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | (0.34 | ) | | | (0.32 | ) | | | (0.34 | ) | | | (0.30 | ) | | | (0.58 | ) | | | (0.58 | ) |
| Paid-in-capital | | | 0.00 | | | | 0.00 | | | | (0.01 | ) | | | (0.21 | ) | | | (0.05 | ) | | | (0.08 | ) |
| Total dividends and distributions | | | (0.34 | ) | | | (0.32 | ) | | | (0.35 | ) | | | (0.51 | ) | | | (0.63 | ) | | | (0.66 | ) |
| Net asset value, end of period | | $ | 6.21 | | | $ | 6.38 | | | $ | 5.95 | | | $ | 6.09 | | | $ | 6.97 | | | $ | 8.15 | |
| Total Return† | | | 2.68 | % (1) | | | 12.92 | % | | | 3.74 | % | | | (5.38 | )% | | | (7.12 | )% | | | (2.25 | )% |
| Ratios to Average Net Assets(3): | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses | | | 1.50 | % (2) | | | 1.50 | % | | | 1.47 | % | | | 1.35 | %(4) | | | 1.38 | % | | | 1.38 | % |
| Net investment income | | | 3.85 | % (2) | | | 3.06 | % | | | 6.47 | % | | | 8.19 | %(4) | | | 8.63 | % | | | 7.90 | % |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net assets, end of period, in thousands | | | $17,390 | | | | $16,293 | | | | $12,524 | | | | $12,754 | | | | $14,313 | | | | $19,450 | |
| Portfolio turnover rate | | | 146 | % (1) | | | 309 | % | | | 82 | % | | | 110 | % | | | 40 | % | | | 71 | % |
|
|
| ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
| † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
| (1) | Not annualized. |
| (2) | Annualized. |
| (3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
| (4) | If the Fund had borne all expenses that were waived by the Investment Manager, the expense and net investment income ratios would have been 1.37% and 8.17%, respectively. |
See Notes to Financial Statements
45
Morgan Stanley Flexible Income Trust
Financial Highlights continued
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | FOR THE YEAR ENDED OCTOBER 31, | |
| | | FOR THE SIX
MONTHS ENDED
APRIL 30, 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | 1999 |
| | | (unaudited) |
| Class D Shares |
| Selected Per Share Data: |
| Net asset value, beginning of period | | $ | 6.40 | | | $ | 5.97 | | | $ | 6.11 | | | $ | 6.99 | | | $ | 8.15 | | | $ | 9.00 | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income‡ | | | 0.16 | | | | 0.24 | | | | 0.41 | | | | 0.56 | | | | 0.72 | | | | 0.76 | |
| Net realized and unrealized gain (loss) | | | 0.04 | | | | 0.56 | | | | (0.15 | ) | | | (0.87 | ) | | | (1.19 | ) | | | (0.88 | ) |
| Total income (loss) from investment operations | | | 0.20 | | | | 0.80 | | | | 0.26 | | | | (0.31 | ) | | | (0.47 | ) | | | (0.12 | ) |
| Less dividends and distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | (0.37 | ) | | | (0.37 | ) | | | (0.39 | ) | | | (0.33 | ) | | | (0.63 | ) | | | (0.64 | ) |
| Paid-in-capital | | | 0.00 | | | | 0.00 | | | | (0.01 | ) | | | (0.24 | ) | | | (0.06 | ) | | | (0.09 | ) |
| Total dividends and distributions | | | (0.37 | ) | | | (0.37 | ) | | | (0.40 | ) | | | (0.57 | ) | | | (0.69 | ) | | | (0.73 | ) |
| Net asset value, end of period | | $ | 6.23 | | | $ | 6.40 | | | $ | 5.97 | | | $ | 6.11 | | | $ | 6.99 | | | $ | 8.15 | |
| Total Return† | | | 3.10 | % (1) | | | 13.82 | % | | | 4.61 | % | | | (4.56 | )% | | | (6.20 | )% | | | (1.42 | )% |
| Ratios to Average Net Assets(3): | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses | | | 0.65 | % (2) | | | 0.65 | % | | | 0.62 | % | | | 0.56 | %(4) | | | 0.53 | % | | | 0.53 | % |
| Net investment income | | | 4.70 | % (2) | | | 3.91 | % | | | 7.32 | % | | | 8.98 | %(4) | | | 9.48 | % | | | 8.75 | % |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net assets, end of period, in thousands | | | $19,684 | | | | $20,743 | | | | $15,474 | | | | $7,049 | | | | $1,493 | | | | $1,046 | |
| Portfolio turnover rate | | | 146 | % (1) | | | 309 | % | | | 82 | % | | | 110 | % | | | 40 | % | | | 71 | % |
|
|
| ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
| † | Calculated based on the net asset value as of the last business day of the period. |
| (1) | Not annualized. |
| (2) | Annualized. |
| (3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
| (4) | If the Fund had borne all expenses that were waived by the Investment Manager, the expense and net investment income ratios would have been 0.58% and 8.96%, respectively. |
See Notes to Financial Statements
46
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| | |
Trustees Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid Officers Charles A. Fiumefreddo
Chairman of the Board Mitchell M. Merin
President Ronald E. Robison
Executive Vice President and Principal Executive Officer Barry Fink
Vice President Joseph J. McAlinden
Vice President Stefanie V. Chang
Vice President Francis J. Smith
Treasurer and Chief Financial Officer Thomas F. Caloia
Vice President Mary E. Mullin
Secretary Transfer Agent Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311 Independent Auditors Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281 Investment Manager Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. © 2004 Morgan Stanley 
37937RPT-RA04-00249P-Y04/04 | | MORGAN STANLEY FUNDS |
Morgan Stanley
Flexible Income Trust
Semiannual Report
April 30, 2004
|
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Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. [Reserved.]
Item 9 - Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10 Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Flexible Income Trust
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
June 22, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
June 22, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
June 22, 2004
3
EXHIBIT 10 B1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
CERTIFICATIONS
I, Ronald E. Robison, certify that:
1. I have reviewed this report on Form N-CSR of Morgan Stanley Flexible 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):
4
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: June 22, 2004
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
5
EXHIBIT 10 B2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
CERTIFICATIONS
I, Francis Smith, certify that:
6. I have reviewed this report on Form N-CSR of Morgan Stanley Flexible Income
Trust;
7. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
8. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, changes in net
assets, and cash flows (if the financial statements are required to include
a statement of cash flows) of the registrant as of, and for, the periods
presented in this report;
9. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940) for the
registrant and have:
b) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
[b) Omitted.]
e) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of a date
within 90 days prior to the filing date of this report based on such
evaluation; and
f) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal half-year (the registrant's second fiscal half-year in the case of
an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
10. The registrant's other certifying officer(s) and I have disclosed to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
c) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize, and report financial information; and
6
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls
over financial reporting.
Date: June 22, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
7
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 Flexible Income Trust
In connection with the Report on Form N-CSR (the "Report") of the
above-named issuer for the period ended April 30, 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: June 22, 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 Flexible Income Trust and will be retained by Morgan
Stanley Flexible Income Trust and furnished to the Securities and Exchange
Commission or its staff upon request.
8
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 Flexible Income Trust
In connection with the Report on Form N-CSR (the "Report") of the
above-named issuer for the period ended April 30, 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: June 22, 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 Flexible Income Trust and will be retained by Morgan
Stanley Flexible Income Trust and furnished to the Securities and Exchange
Commission or its staff upon request.
9
