N-30D 1 file001.txt ANNUAL REPORT Morgan Stanley Hawaii Municipal Trust LETTER TO THE SHAREHOLDERS o NOVEMBER 30, 2002 Dear Shareholder: During the 12 months ended November 30, 2002, U.S. economic indicators fluctuated between stronger and weaker growth. The economy continued to recover from recession and the aftermath of September 11. Real gross domestic product (GDP) accelerated to an annual growth rate of 5.0 percent in the first quarter of 2002. In the spring, the economy began to send mixed signals and the recovery lost momentum. Weakness in manufacturing and capital spending combined with corporate-accounting scandals and geopolitical turmoil to slow GDP to a 1.3 percent annual growth rate in the second quarter. The strongest consumer spending of the year and the restocking of inventories led to 4.0 percent annual GDP growth in the third quarter. We expect the choppiness in the recovery pattern to continue. As the economy gained strength in the first few months of 2002, a general consensus developed that the Federal Reserve Board would begin to tighten monetary policy and raise short-term interest rates. The bond market reacted to these concerns in March and yields rose. By late spring, however, the consensus shifted to favoring bonds as labor market and capital-spending indicators remained soft and new disclosures concerning corporate ethics spurred a flight to quality. Most importantly, the Federal Reserve changed its monetary policy bias from neutral toward one of easing. The market's expectations of eventual rate hikes were scaled back and bonds rallied. A mid-October surge in the equity markets created a downdraft in bonds, but renewed concerns about the economy helped bond prices improve by month-end. On November 6, 2002, the Federal Reserve lowered the federal funds rate from 1.75 to 1.25 percent. This marked the first change by the central bank in nearly one year. Municipal Market Conditions The economic environment and unsettled equity markets lowered municipal yields to levels last seen in the 1960s. During the first 11 months of 2002, the yield on the 30-year insured municipal bond index ranged from a high of 5.43 percent in March to a low of 4.74 percent in September. The index yield stood at 5.10 percent at the end of November 2002. Yields on Hawaii exempt bonds were at or near national levels. The ratio of municipal yields as a percentage of U.S. Treasury yields is used as a gauge of the relative value of municipals. A rising yield ratio indicates weaker relative performance by municipals. The ratio of 30-year insured municipal bond yields to 30-year Treasuries fell from 98 percent in December 2001 to 94 percent in March. As municipals lagged the summer rally in Treasuries, the ratio jumped to 102 percent in September. The ratio remained above 100 percent during October and November. These levels imply that municipals are cheap relative to Treasuries. State and local governments took advantage of lower interest rates to refinance outstanding debt in a manner similar to homeowners refinancing their mortgages. Refinancing activity contributed to a surge in Morgan Stanley Hawaii Municipal Trust LETTER TO THE SHAREHOLDERS o NOVEMBER 30, 2002 continued municipal bond underwriting, and long-term volume increased 27 percent to a record $328 billion in the first eleven months of 2002. Refunding issues represented almost one-quarter of the total. Issuance is on track to raise calendar year 2002's volume to $350 billion. Hawaii issuance, however, declined 16 percent and represented only 0.4 percent of total volume. The limited number of Hawaii issuers also created a scarcity of credits for diversification purposes. 30-Year Bond Yields 1997-2002
Date Insured Municipal Yields U.S. Treasury Yields Insured Municipal Yields/U.S. Treasury Yields (Ratio) -------------------------------------------------------------------------------------------------------------------------------- 12/31/96 5.60 6.63 84.46% 01/31/97 5.70 6.79 83.95% 02/28/97 5.65 6.80 83.09% 03/31/97 5.90 7.10 83.10% 04/30/97 5.75 6.94 82.85% 05/30/97 5.65 6.91 81.77% 06/30/97 5.60 6.78 82.60% 07/30/97 5.25 6.29 83.47% 08/31/97 5.48 6.61 82.90% 09/30/97 5.40 6.40 84.38% 10/31/97 5.35 6.15 86.99% 11/30/97 5.30 6.05 87.60% 12/31/97 5.15 5.92 86.99% 01/31/98 5.15 5.80 88.79% 02/28/98 5.20 5.92 87.84% 03/31/98 5.25 5.93 88.53% 04/30/98 5.35 5.95 89.92% 05/29/98 5.20 5.80 89.66% 06/30/98 5.20 5.65 92.04% 07/31/98 5.18 5.71 90.72% 08/31/98 5.03 5.27 95.45% 09/30/98 4.95 5.00 99.00% 10/31/98 5.05 5.16 97.87% 11/30/98 5.00 5.06 98.81% 12/31/98 5.05 5.10 99.02% 01/31/99 5.00 5.09 98.23% 02/28/99 5.10 5.58 91.40% 03/31/99 5.15 5.63 91.47% 04/30/99 5.20 5.66 91.87% 05/31/99 5.30 5.83 90.91% 06/30/99 5.47 5.96 91.78% 07/31/99 5.55 6.10 90.98% 08/31/99 5.75 6.06 94.88% 09/30/99 5.85 6.05 96.69% 10/31/99 6.03 6.16 97.89% 11/30/99 6.00 6.29 95.39% 12/31/99 5.97 6.48 92.13% 01/31/00 6.18 6.49 95.22% 02/29/00 6.04 6.14 98.37% 03/31/00 5.82 5.83 99.83% 04/30/00 5.91 5.96 99.16% 05/31/00 5.91 6.01 98.34% 06/30/00 5.84 5.90 98.98% 07/31/00 5.73 5.78 99.13% 08/31/00 5.62 5.67 99.12% 09/30/00 5.74 5.89 97.45% 10/31/00 5.65 5.79 97.58% 11/30/00 5.55 5.61 98.93% 12/31/00 5.27 5.46 96.52% 01/31/01 5.30 5.50 96.36% 02/28/01 5.27 5.31 99.25% 03/31/01 5.26 5.44 96.69% 04/30/01 5.45 5.79 94.13% 05/31/01 5.40 5.75 93.91% 06/30/01 5.35 5.76 92.88% 07/31/01 5.16 5.52 93.48% 08/31/01 5.07 5.37 94.41% 09/30/01 5.20 5.42 95.94% 10/31/01 5.04 4.87 103.49% 11/30/01 5.17 5.29 97.73% 12/31/01 5.36 5.47 97.99% 01/31/02 5.22 5.43 96.13% 02/28/02 5.14 5.42 94.83% 03/31/02 5.43 5.80 93.62% 04/30/02 5.30 5.59 94.81% 05/31/02 5.29 5.62 94.13% 06/30/02 5.27 5.51 95.64% 07/31/02 5.12 5.30 96.60% 08/31/02 5.00 4.93 101.42% 09/30/02 4.74 4.67 101.50% 10/31/02 5.01 4.99 100.40% 11/30/02 5.10 5.04 101.19%
Source: Municipal Market Data - A Division of Thomson Financial Municipal Group and Bloomberg L.P. Performance For the fiscal year ended November 30, 2002, the net asset value (NAV) of Morgan Stanley Hawaii Municipal Trust increased from $10.17 per share on November 30, 2001, to $10.33 per share on November 30, 2002. Based on this change, plus a reinvestment of tax-free dividends totaling $0.43 per share, the Fund's total return was 5.92 percent. Total return figures assume the reinvestment of all dividends and distributions. For the same time period, the Lehman Brothers Municipal Bond Index (Lehman Index) returned 6.32 percent. The Lehman Index is more heavily weighted with short and 2 Morgan Stanley Hawaii Municipal Trust LETTER TO THE SHAREHOLDERS o NOVEMBER 30, 2002 continued intermediate securities than the Fund and does not include expenses. The accompanying chart compares the Fund's performance to that of the Lehman Index. Portfolio Structure The Fund's net assets of $12.5 million were diversified among 12 long-term sectors and 24 credits. At the end of November, the portfolio's average maturity was 18 years. Average duration, a measure of sensitivity to interest-rate changes, was 5.9 years. The accompanying charts provide current information on the portfolio's credit ratings, maturity distribution and sector concentrations. Optional call provisions by year and their respective cost (book) yields are also shown. Looking Ahead The Federal Reserve Board's cautious approach toward an economic recovery helped stabilize the fixed-income markets earlier this year. In fact, the Fed's current willingness to be accommodative resulted in a major bond rally during the second and third calendar quarters. We believe that the yields on tax-exempt securities continue to favor municipal bonds as an attractive choice for tax-conscious investors. For many investors, the taxable equivalent yields available on municipal bonds may offer a significant advantage. We appreciate your ongoing support of Morgan Stanley Hawaii Municipal Trust and look forward to continuing to serve your investment needs. Very truly yours, /s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin Charles A. Fiumefreddo Mitchell M. Merin Chairman of the Board President and CEO 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 (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. 3 Morgan Stanley Hawaii Municipal Trust LETTER TO THE SHAREHOLDERS o NOVEMBER 30, 2002 continued LARGEST SECTORS AS OF NOVEMBER 30, 2002 (% OF NET ASSETS) GENERAL OBLIGATION 23% TRANSPORTATION 15% MORTGAGE 12% EDUCATION 7% IDR/PCR* 7% HOSPITAL 6% WATER & SEWER 6% * INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE. PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. CREDIT RATINGS AS OF NOVEMBER 30, 2002 (% OF LONG-TERM PORTFOLIO) Aaa or AAA 82% Aa or AA 2% A or A 12% Baa or BBB 4% AS MEASURED BY MOODY'S INVESTORS SERVICE, INC. OR STANDARD & POOR'S CORP. PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. DISTRIBUTION BY MATURITY (% OF LONG-TERM PORTFOLIO) 1-5 YEARS 1.0% 5-10 YEARS 7.1% 10-15 YEARS 22.3% 15-20 YEARS 48.4% 20-30 YEARS 12.0% 30 + YEARS 9.2% WEIGHTED AVERAGE MATURITY: 18 YEARS PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. 4 Morgan Stanley Hawaii Municipal Trust LETTER TO THE SHAREHOLDERS o NOVEMBER 30, 2002 continued CALL AND COST (BOOK) YIELD STRUCTURE (BASED ON LONG-TERM PORTFOLIO) NOVEMBER 30, 2002 WEIGHTED AVERAGE CALL PROTECTION: 7 YEARS PERCENT CALLABLE 2004 7% 2005 9% 2006 5% 2007 3% 2008 9% 2009 13% 2010 11% 2011 23% 2012+ 20% YEARS BONDS CALLABLE WEIGHTED AVERAGE BOOK YIELD: 5.3% COST (BOOK) YIELD* 2004 5.7% 2005 5.7% 2006 6.2% 2007 5.3% 2008 5.2% 2009 5.4% 2010 5.7% 2011 5.2% 2012+ 4.7% * COST OR "BOOK" YIELD IS THE ANNUAL INCOME EARNED ON A PORTFOLIO INVESTMENT BASED ON ITS ORIGINAL PURCHASE PRICE BEFORE THE FUND'S OPERATING EXPENSES. FOR EXAMPLE, THE FUND IS EARNING A BOOK YIELD OF 5.7% ON 7% OF THE LONG-TERM PORTFOLIO THAT IS CALLABLE IN 2004. PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. 5 Morgan Stanley Hawaii Municipal Trust FUND PERFORMANCE o NOVEMBER 30, 2002 GROWTH OF $10,000 ($ in Thousands) DATE FUND LEHMAN ---- ---- ------ June 16, 1995 9,700 10,000 August 31, 1995 9,659 10,223 November 30, 1995 10,108 10,610 February 29, 1996 10,192 10,720 May 31, 1996 9,997 10,549 August 31, 1996 10,195 10,758 November 30, 1996 10,678 11,234 February 28, 1997 10,696 11,311 May 31, 1997 10,836 11,423 August 31, 1997 11,126 11,753 November 30, 1997 11,418 12,039 February 28, 1998 11,733 12,344 May 31, 1998 11,852 12,494 August 31, 1998 12,131 12,769 November 30, 1998 12,317 12,973 February 28, 1999 12,355 13,103 May 31, 1999 12,313 13,078 August 31, 1999 11,935 12,833 November 30, 1999 11,799 12,834 February 29, 2000 11,791 12,831 May 31, 2000 11,870 12,966 August 31, 2000 12,604 13,702 November 30, 2000 12,774 13,884 February 28, 2001 13,234 14,414 May 31, 2001 13,298 14,540 August 31, 2001 13,946 15,099 November 30, 2001 13,875 15,099 February 28, 2002 14,135 15,399 May 31, 2002 14,208 15,486 August 31, 2002 14,749 16,042 November 30, 2002 14,697(3) 16,054 --- FUND --- LEHMAN (4) PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. Average Annual Total Returns ----------------------------
PERIOD ENDED NOVEMBER 30, 2002 ------------------------------------------------------------- 1 Year 5.92%(1) 2.74%(2) 5 Years 5.18%(1) 4.54%(2) Since Inception (6/16/95) 5.73%(1) 5.30%(2)
------------ (1) Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. (2) 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. (3) Closing value including the deduction of a 3% front-end sales charge assuming a complete redemption on November 30, 2002. (4) The Lehman Brothers Municipal Bond Index tracks the performance of municipal bonds rated at least Baa or BBB by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively and with maturities of 2 years or greater. The Index does not include any expenses, fees or charges. The Index is unmanaged and should not be considered an investment. 6 Morgan Stanley Hawaii Municipal Trust PORTFOLIO OF INVESTMENTS o NOVEMBER 30, 2002
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------- ------------ ---------- -------------- Hawaii Tax-Exempt Municipal Bonds* (86.0%) General Obligation (22.6%) $ 500 Hawaii, Ser 2002 CY (FSA) ........................................ 5.75 % 02/01/15 $ 567,610 Hawaii County, 300 1999 Ser A (FSA) ............................................... 5.50 05/15/17 319,416 150 Ser 2001 A (FGIC) .............................................. 5.00 07/15/19 152,091 500 Honolulu City & County, Ser 2001 A (FSA) ......................... 5.125 09/01/21 505,480 Maui County, 400 Ser 2002 B (MBIA) .............................................. 5.375 09/01/13 438,620 300 Ser 2002 A (MBIA) .............................................. 5.25 03/01/18 313,620 200 2001 Ser A (FGIC) .............................................. 5.00 03/01/21 199,748 300 Puerto Rico, Public Improvement Refg Ser 2001 A (MBIA) ........... 5.50 07/01/21 328,734 --------- ----------- 2,650 2,825,319 --------- ----------- Educational Facilities Revenue (6.8%) 500 University of Hawaii, Refg Ser 2001 B (FSA) ...................... 5.25 10/01/17 525,205 300 University of Puerto Rico, Ser O (MBIA) .......................... 5.75 06/01/19 325,848 --------- ----------- 800 851,053 --------- ----------- Electric Revenue (3.6%) Puerto Rico Electric Power Authority, 300 Power Ser DD (FSA) ............................................. 4.50 07/01/19 295,167 150 Power Ser X .................................................... 5.50 07/01/25 155,812 --------- ----------- 450 450,979 --------- ----------- Hospital Revenue (6.3%) Hawaii Department of Budget & Finance, 200 Kapiolani Health Care Ser 1996 ................................. 6.25 07/01/21 203,136 100 Queens Health 1996 Ser A ....................................... 5.875 07/01/11 105,800 500 Wilcox Memorial Hospital Ser 1998 .............................. 5.35 07/01/18 478,820 --------- ----------- 800 787,756 --------- ----------- Industrial Development/Pollution Control Revenue (6.9%) Hawaii Department of Budget & Finance, 500 Hawaiian Electric Co Ser 1999 B (AMT) (Ambac) .................. 5.75 12/01/18 531,265 100 Hawaiian Electric Co Ser 1995 A (AMT) (MBIA) ................... 6.60 01/01/25 108,404 200 Hawaiian Electric Co Ser 1996 A (AMT) (MBIA) ................... 6.20 05/01/26 218,582 --------- ----------- 800 858,251 --------- ----------- Mortgage Revenue - Multi-Family (9.3%) 125 Hawaii Housing Finance & Development Corporation, University of Hawaii Faculty Ser 1995 (Ambac) ................................ 5.65 10/01/16 134,515 500 Honolulu City & County, Smith-Beretania Apartments FHA Insured Ser 2002 A ..................................................... 5.45 01/01/25 500,610 500 Honolulu, Waipahu Towers GNMA Collateralized 1995 Ser A (AMT) .... 6.90 06/20/35 522,855 --------- ----------- 1,125 1,157,980 --------- -----------
See Notes to Financial Statements 7 Morgan Stanley Hawaii Municipal Trust PORTFOLIO OF INVESTMENTS o NOVEMBER 30, 2002 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------- ------------ -------------- -------------- Mortgage Revenue - Single Family (2.5%) $ 300 Hawaii Housing Finance & Development Corporation, Purchase --------- 1994 Ser B (MBIA) ............................................... 5.90 % 07/01/27 $ 307,548 ----------- Public Facilities Revenue (2.0%) 250 Hawaii, Kapolei State Office Building 1998 Ser A COPs (Ambac) ..... 5.00 05/01/18 254,573 --------- ----------- Transportation Facilities Revenue (14.6%) Hawaii, 200 Airports Refg Ser 2001 (AMT) (FGIC) ............................. 5.25 07/01/21 200,676 100 Harbor Ser 2002 A (Ambac) ....................................... 5.00 07/01/07 109,005 200 Harbor Ser 1997 (AMT) (MBIA) .................................... 5.75 07/01/17 214,982 500 Highway Ser 2000 (FSA) .......................................... 5.375 07/01/18 525,875 300 Highway Ser 2001 (FSA) .......................................... 5.375 07/01/20 311,370 500 Puerto Rico Highway & Transportation Authority, Ser 1998 A ........ 4.75 07/01/38 465,965 --------- ----------- 1,800 1,827,873 --------- ----------- Water & Sewer Revenue (6.2%) 300 Honolulu Board of Water Supply, Ser 2001 (FSA) .................... 5.125 07/01/21 303,456 Honolulu City and County, 200 Wastewater Jr Ser 1998 (FGIC) ................................... 5.25 07/01/17 209,676 250 Wastewater Sr Ser 2001 (Ambac) .................................. 5.50 07/01/18 265,623 --------- ----------- 750 778,755 --------- ----------- Other Revenue (2.4%) 300 Hawaiian Department of Home Lands, Refg Ser 1999 .................. 4.45 07/01/11 300,678 --------- ----------- Refunded (2.8%) 300 Kauai County, Ser 2000 A (FGIC) ................................... 6.25 08/01/10+ 353,304 --------- ----------- $ 10,325 Total Hawaii Tax-Exempt Municipal Bonds (Cost $10,396,172) (a) ............... 86.0% 10,754,069 ========= Other Assets in Excess of Liabilities ........................................ 14.0 1,755,645 ------ ----------- Net Assets ................................................................... 100.0% $12,509,714 ====== ===========
------------ AMT Alternative Minimum Tax. COPs Certificates of Participation. * Puerto Rico issues represent 13% of net assets. + Prerefunded to call date shown. (a) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $380,442 and the aggregate gross unrealized depreciation is $22,545, resulting in net unrealized appreciation of $357,897. Bond Insurance: Ambac Ambac Assurance Corporation. FGIC Financial Guaranty Insurance Company. FSA Financial Security Assurance Inc. MBIA Municipal Bond Investors Assurance Corporation. See Notes to Financial Statements 8 Morgan Stanley Hawaii Municipal Trust FINANCIAL STATEMENTS Statement of Assets and Liabilities November 30, 2002
Assets: Investments in securities, at value (cost $10,396,172)............................. $10,754,069 Cash ............................................ 1,550,556 Receivable for: Interest ................................... 200,835 Shares of beneficial interest sold ......... 22,310 Receivable from affiliate ....................... 13,088 Prepaid expenses and other assets ............... 5,429 ----------- Total Assets ................................. 12,546,287 ----------- Liabilities: Payable for: Dividends to shareholders .................. 3,948 Distribution fee ........................... 2,006 Accrued expenses ................................ 30,619 ----------- Total Liabilities ............................ 36,573 ----------- Net Assets ................................... $12,509,714 =========== Composition of Net Assets: Paid-in-capital ................................. $12,191,415 Net unrealized appreciation ..................... 357,897 Accumulated undistributed net investment income ............................. 1,530 Accumulated net realized loss ................... (41,128) ----------- Net Assets ................................... $12,509,714 =========== Net Asset Value Per Share, 1,210,657 shares outstanding (unlimited shares authorized of $.01 par value) .......................................... $10.33 ====== Maximum Offering Price Per Share, (net asset value plus 3.09% of net asset value) .......................................... $10.65 ======
Statement of Operations For the year ended November 30, 2002
Net Investment Income: Interest Income ............................... $531,470 -------- Expenses Professional fees ............................. 52,503 Shareholder reports and notices ............... 40,211 Investment management fee ..................... 39,169 Distribution fee .............................. 22,078 Trustees' fees and expenses ................... 12,819 Transfer agent fees and expenses .............. 3,934 Custodian fees ................................ 861 Other ......................................... 7,296 -------- Total Expenses ............................. 178,871 Less: amounts waived/reimbursed ............... (116,193) Less: expense offset .......................... (860) -------- Net Expenses ............................... 61,818 -------- Net Investment Income ...................... 469,652 -------- Net Realized and Unrealized Gain: Net realized gain ............................. 33,352 Net change in unrealized appreciation ......... 138,031 -------- Net Gain ................................... 171,383 -------- Net Increase .................................. $641,035 ========
See Notes to Financial Statements 9 Morgan Stanley Hawaii Municipal Trust FINANCIAL STATEMENTS continued Statement of Changes in Net Assets
FOR THE YEAR FOR THE YEAR ENDED ENDED NOVEMBER 30, 2002 NOVEMBER 30, 2001 ------------------- ------------------ Increase (Decrease) in Net Assets: Operations: Net investment income .......................................................... $ 469,652 $ 398,080 Net realized gain .............................................................. 33,352 29,687 Net change in unrealized appreciation .......................................... 138,031 278,984 ----------- ----------- Net Increase ................................................................. 641,035 706,751 Dividends to shareholders from net investment income ........................... (468,484) (398,050) Net increase from transactions in shares of beneficial interest ................ 1,851,886 2,978,838 ----------- ----------- Net Increase ................................................................. 2,024,437 3,287,539 Net Assets: Beginning of period ............................................................ 10,485,277 7,197,738 ----------- ----------- End of Period (Including accumulated undistributed net investment income of $1,530 and $30, respectively) .................................................................. $12,509,714 $10,485,277 =========== ===========
See Notes to Financial Statements 10 Morgan Stanley Hawaii Municipal Trust NOTES TO FINANCIAL STATEMENTS o NOVEMBER 30, 2002 1. Organization and Accounting Policies Morgan Stanley Hawaii Municipal Trust (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a non-diversified, open-end management investment company. The Fund's investment objective is to provide a high level of current income which is exempt from both federal and State of Hawaii income taxes consistent with the preservation of capital. The Fund was organized as a Massachusetts business trust on March 14, 1995 and commenced operations on June 16, 1995. The following is a summary of significant accounting policies: A. Valuation of Investments - Portfolio securities are valued by an outside independent pricing service approved by the Trustees. The pricing service uses both a computerized matrix of tax-exempt securities and evaluations by its staff, in each case based on information concerning market transactions and quotations from dealers which reflect the bid side of the market each day. The portfolio securities are thus valued by reference to a combination of transactions and quotations for the same or other securities believed to be comparable in quality, coupon, maturity, type of issue, call provisions, trading characteristics and other features deemed to be relevant. 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. 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 and nontaxable income to its shareholders. Accordingly, no federal income tax provision is required. D. Dividends and Distributions to Shareholders - Dividends and distributions to shareholders are recorded on the ex-dividend date. 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 11 Morgan Stanley Hawaii Municipal Trust NOTES TO FINANCIAL STATEMENTS o NOVEMBER 30, 2002 continued differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains. To the extent they exceed net investment income and net realized capital gains for tax purposes, they are reported as distributions of paid-in-capital. E. Use of Estimates - The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. Investment Management Agreement Pursuant to an Investment Management Agreement with Morgan Stanley Investment Advisors Inc. (the "Investment Manager"), the Fund pays a management fee, calculated daily and payable monthly, by applying the annual rate of 0.35% to the Fund's daily net assets. For the year ended November 30, 2002 and through December 31, 2003, the Investment Manager has agreed to assume all operating expenses to the extent that such expenses on an annualized basis exceed 0.55% of the daily net assets of the Fund. At November 30, 2002, included in the Statement of Assets and Liabilities is a receivable from affiliate which represents expense reimbursements due to the Fund. 3. Plan of Distribution Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager, is the distributor of the Fund's shares and in accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act, finances certain expenses in connection with the promotion of sales of Fund shares. Reimbursements for these expenses are made in monthly payments by the Fund to the Distributor, which will in no event exceed an amount equal to a payment at the annual rate of 0.20% of the Fund's average daily net assets during the month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal year will not be reimbursed by the Fund through payments accrued in any subsequent fiscal year. For the year ended November 30, 2002, the distribution fee was accrued at the annual rate of 0.20%. The Distributor has informed the Fund that for the year ended November 30, 2002, it received $63,400 in commissions from the sale of shares of the Fund's beneficial interest. Such commissions are deducted from the proceeds of the shares and 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 year ended November 30, 2002 aggregated $2,419,664 and $1,288,793, respectively. 12 Morgan Stanley Hawaii Municipal Trust NOTES TO FINANCIAL STATEMENTS o NOVEMBER 30, 2002 continued Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At November 30, 2002, the Fund had transfer agent fees and expenses payable of approximately $100. 5. Federal Income Tax Status During the year ended November 30, 2002, the Fund utilized approximately $33,000 of its net capital loss carryover. At November 30, 2002, the Fund had a net capital loss carryover of approximately $41,000 which will be available through November 30, 2008 to offset future capital gains to the extent provided by regulations. 6. Shares of Beneficial Interest Transactions in shares of beneficial interest were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED NOVEMBER 30, 2002 NOVEMBER 30, 2001 ------------------------------ ---------------------------- SHARES AMOUNT SHARES AMOUNT ------------ --------------- ------------ ------------- Sold .............................. 412,371 $ 4,272,006 374,437 $3,776,682 Reinvestment of dividends ......... 18,464 189,521 15,010 151,480 ------- ------------ ------- ---------- 430,835 4,461,527 389,447 3,928,162 Redeemed .......................... (251,032) (2,609,641) (94,248) (949,324) -------- ------------ ------- ---------- Net increase ...................... 179,803 $ 1,851,886 295,199 $2,978,838 ======== ============ ======= ==========
7. Expense Offset The expense offset represents a reduction of the custodian fees for earnings on cash balances maintained by the Fund. 8. Risks Relating to Certain Financial Instruments The Fund may invest a portion of its assets in residual interest bonds, which are inverse floating rate municipal obligations. The prices of these securities are subject to greater market fluctuations during periods of changing prevailing interest rates than are comparable fixed rate obligations. At November 30, 2002, the Fund did not hold positions in residual interest bonds. 9. Change in Accounting Policy Effective December 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, related to premiums and discounts on debt securities. The cumulative effect of this accounting change had no impact on the net assets of the Fund. 13 Morgan Stanley Hawaii Municipal Trust FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED NOVEMBER 30 --------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ----------- ----------- ----------- Selected Per Share Data: Net asset value, beginning of period ................... $10.17 $ 9.78 $9.47 $10.41 $10.12 ------ ------- ----- ------ ------ Income (loss) from investments operations: Net investment income ................................. 0.43 0.44 0.45 0.46 0.49 Net realized and unrealized gain (loss) ............... 0.16 0.39 0.31 (0.88) 0.29 ------ ------- ----- ------ ------ Total income (loss) from investment operations ......... 0.59 0.83 0.76 (0.42) 0.78 ------ ------- ----- ------ ------ Less dividends and distributions from: Net investment income ................................. (0.43) (0.44) (0.45) (0.46) (0.49) Net realized gain ..................................... -- -- -- (0.06) -- ------ ------ ----- ------ ------ Total dividends and distributions ...................... (0.43) (0.44) (0.45) (0.52) (0.49) ------ ------ ----- ------ ------ Net asset value, end of period ......................... $10.33 $10.17 $9.78 $ 9.47 $10.41 ====== ====== ===== ====== ====== Total Return+ ......................................... 5.92% 8.62% 8.26% (4.20)% 7.87% Ratios to Average Net Assets(1): Expenses (before expense offset) ....................... 0.56% 0.56% 0.56% 0.52% 0.20% Net investment income .................................. 4.20% 4.33% 4.70% 4.54% 4.72% Supplemental Data: Net assets, end of period, in thousands ................ $12,510 $10,485 $7,198 $7,257 $6,998 Portfolio turnover rate ................................ 13% 12% 19% 18% 26%
------------ + 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) If the Investment Manager had not assumed expenses and waived its investment management fee, the expense and net investment income ratios would have been as follows, which do not reflect the effect of expense offsets as follows:
EXPENSE NET INVESTMENT EXPENSE PERIOD ENDED: RATIO INCOME RATIO OFFSET ------------------------------ --------- ---------------- ---------- November 30, 2002 ......... 1.60% 3.16% 0.01% November 30, 2001 ......... 1.85 3.04 0.01 November 30, 2000 ......... 2.37 2.89 0.01 November 30, 1999 ......... 2.45 2.61 0.01 November 30, 1998 ......... 2.42 2.50 0.01
See Notes to Financial Statements 14 Morgan Stanley Hawaii Municipal Trust INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Trustees of Morgan Stanley Hawaii Municipal Trust: We have audited the accompanying statement of assets and liabilities of Morgan Stanley Hawaii Municipal Trust (the "Fund"), including the portfolio of investments, as of November 30, 2002, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of November 30, 2002, by correspondence with the custodian. 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 Hawaii Municipal Trust as of November 30, 2002, 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 January 9, 2003 2002 Federal Tax Notice (unaudited) For the year ended November 30, 2002, all of the Fund's dividends from net investment income were exempt interest dividends, excludable from gross income for Federal income tax purposes. 15 Morgan Stanley Hawaii Municipal Trust TRUSTEE AND OFFICER INFORMATION Independent Trustees:
NUMBER OF TERM OF PORTFOLIOS OFFICE AND IN FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT SERVED* DURING PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE ----------------------------- ------------- -------------- --------------------------- ------------ ------------------------- Michael Bozic (61) Trustee Since Retired; Director or Trustee 129 Director of Weirton Steel c/o Mayer, Brown, Rowe & Maw April 1994 of the Morgan Stanley Funds Corporation. Counsel to the and the TCW/DW Term Trusts; Independent Trustees formerly Vice Chairman of 1675 Broadway Kmart Corporation (December New York, NY 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); formerly variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. Edwin J. Garn (70) Trustee Since Director or Trustee of the 129 Director of Franklin Covey c/o Summit Ventures LLC January 1993 Morgan Stanley Funds and the (time management systems), 1 Utah Center TCW/DW Term Trusts; formerly BMW Bank of North America, 201 S. Main Street United States Senator Inc. (industrial loan Salt Lake City, UT (R-Utah) (1974-1992) and corporation), United Space Chairman, Senate Banking Alliance (joint venture Committee (1980-1986); between Lockheed Martin and formerly Mayor of Salt Lake the Boeing Company) and City, Utah (1971-1974); Nuskin Asia Pacific formerly Astronaut, Space (multilevel marketing); Shuttle Discovery (April member of the board of 12-19, 1985); Vice Chairman, various civic and Huntsman Corporation charitable organizations. (chemical company); member of the Utah Regional Advisory Board of Pacific Corp. Wayne E. Hedien (68) Trustee Since Retired; Director or Trustee 129 Director of The PMI Group c/o Mayer, Brown, Rowe & Maw September 1997 of the Morgan Stanley Funds Inc. (private mortgage Counsel to the and the TCW/DW Term Trusts; insurance); Trustee and Independent Trustees formerly associated with the Vice Chairman of The Field 1675 Broadway Allstate Companies Museum of Natural History; New York, NY (1966-1994), most recently director of various other as Chairman of The Allstate business and charitable Corporation (March organizations. 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994).
16 Morgan Stanley Hawaii Municipal Trust TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF TERM OF PORTFOLIOS OFFICE AND IN FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT SERVED* DURING PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE ----------------------------- ------------- -------------- --------------------------- ------------ ------------------------- Dr. Manuel H. Johnson (53) Trustee Since Chairman of the Audit 129 Director of NVR, Inc. (home c/o Johnson Smick July 1991 Committee and Director or construction); Chairman and International, Inc. Trustee of the Morgan Trustee of the Financial 1133 Connecticut Avenue, N.W. Stanley Funds and the Accounting Foundation Washington, D.C. TCW/DW Term Trusts; Senior (oversight organization of Partner, Johnson Smick the Financial Accounting International, Inc., a Standards Board). consulting firm; Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. Michael E. Nugent (66) Trustee Since Chairman of the Insurance 207 Director of various c/o Triumph Capital, L.P. July 1991 Committee and Director or business organizations. 237 Park Avenue Trustee of the Morgan New York, NY Stanley Funds and the TCW/DW Term Trusts; director/ trustee of various investment companies managed by Morgan Stanley Investment Management Inc. and Morgan Stanley Investments LP (since July 2001); General Partner, Triumph Capital, L.P., a private investment partnership; formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988).
17 Morgan Stanley Hawaii Municipal Trust TRUSTEE AND OFFICER INFORMATION continued Interested Trustees:
NUMBER OF TERM OF PORTFOLIOS OFFICE AND IN FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT SERVED* DURING PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE ----------------------------- ------------- -------------- --------------------------- ------------ ------------------------- Charles A. Fiumefreddo (69) Chairman of Since Chairman and Director or 129 None c/o Morgan Stanley Trust the Board July 1991 Trustee of the Morgan Harborside Financial Center, and Trustee Stanley Funds and the Plaza Two, TCW/DW Term Trusts; Jersey City, NJ formerly Chairman, Chief Executive Officer and Director of the Investment Manager, the Distributor and Morgan Stanley Services, Executive Vice President and Director of Morgan Stanley DW, Chairman and Director of the Transfer Agent, and Director and/or officer of various Morgan Stanley subsidiaries (until June 1998) and Chief Executive Officer of the Morgan Stanley Funds and the TCW/DW Term Trusts (until September 2002). James F. Higgins (54) Trustee Since Senior Advisor of Morgan 129 None c/o Morgan Stanley Trust June 2000 Stanley (since August Harborside Financial Center, 2000); Director of the Plaza Two, Distributor and Dean Witter Jersey City, NJ Realty Inc.; Director or Trustee of the Morgan Stanley Funds and the TCW/DW Term Trusts (since June 2000); previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999). Philip J. Purcell (59) Trustee Since Director or Trustee of the 129 Director of American 1585 Broadway April 1994 Morgan Stanley Funds and Airlines, Inc. and its New York, NY the TCW/DW Term Trusts; parent company, AMR Chairman of the Board of Corporation. Directors and Chief Executive Officer of Morgan Stanley and Morgan Stanley DW; Director of the Distributor; Chairman of the Board of Directors and Chief Executive Officer of Novus Credit Services Inc.; Director and/or officer of various Morgan Stanley subsidiaries.
------------ * Each Trustee serves an indefinite term, until his or her successor is elected. ** The Fund Complex includes all open and closed-end funds (including all of their portfolios) advised by Morgan Stanley Investment Advisors Inc. and any funds that have an investment advisor that is an affiliated person of Morgan Stanley Investment Advisors Inc. (including but not limited to, Morgan Stanley Investment Management Inc., Morgan Stanley Investments LP and Van Kampen Asset Management Inc.). 18 Morgan Stanley Hawaii Municipal Trust TRUSTEE AND OFFICER INFORMATION continued Officers:
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) EXECUTIVE OFFICER REGISTRANT SERVED* DURING PAST 5 YEARS ------------------------------ ------------------- ----------------- --------------------------------------- Mitchell M. Merin (49) President and President since President and Chief Operating Officer of 1221 Avenue of the Americas Chief Executive May 1999 and Morgan Stanley Investment Management New York, NY Officer Chief Executive (since December 1998); President, Officer since Director (since April 1997) and Chief September 2002 Executive Officer (since June 1998) of the Investment Manager and Morgan Stanley Services; Chairman, Chief Executive Officer and Director of the Distributor (since June 1998); Chairman (since June 1998) and Director (since January 1998) of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President (since May 1999) and Chief Executive Officer (since September 2002) of the Morgan Stanley Funds and TCW/DW Term Trusts; Trustee of various Van Kampen investment companies (since December 1999); previously Chief Strategic Officer of the Investment Manager and Morgan Stanley Services and Executive Vice President of the Distributor (April 1997-June 1998), Vice President of the Morgan Stanley Funds (May 1997-April 1999), and Executive Vice President of Morgan Stanley. Barry Fink (47) Vice President, Since General Counsel (since May 2000) and 1221 Avenue of the Americas Secretary and February 1997 Managing Director (since December 2000) New York, NY General Counsel of Morgan Stanley Investment Management; Managing Director (since December 2000), and Secretary and General Counsel (since February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; Assistant Secretary of Morgan Stanley DW; Vice President, Secretary and General Counsel of the Morgan Stanley Funds and TCW/DW Term Trusts (since February 1997); Vice President and Secretary of the Distributor; previously, Senior Vice President, Assistant Secretary and Assistant General Counsel of the Investment Manager and Morgan Stanley Services. Thomas F. Caloia (56) Treasurer Since Executive Director (since December 2002) c/o Morgan Stanley Trust April 1989 and Assistant Treasurer of the Harborside Financial Center, Investment Manager, the Distributor and Plaza Two Morgan Stanley Services; previously Jersey City, NJ First Vice President of the Investment Manager, the Distributor and Morgan Stanley Services; Treasurer of the Morgan Stanley Funds. Ronald E. Robison (63) Vice President Since Managing Director, Chief Administrative 1221 Avenue of the Americas October 1998 Officer and Director (since February New York, NY 1999) of the Investment Manager and Morgan Stanley Services and Chief Executive Officer and Director of the Transfer Agent; previously Managing Director of the TCW Group Inc. Joseph J. McAlinden (59) Vice President Since Managing Director and Chief Investment 1221 Avenue of the Americas July 1995 Officer of the Investment Manager, New York, NY Morgan Stanley Investment Management Inc. and Morgan Stanley Investments LP; Director of the Transfer Agent; Chief Investment Officer of the Van Kampen Funds. Francis Smith (37) Vice President Since Vice President and Chief Financial c/o Morgan Stanley Trust and Chief September 2002 Officer of the Morgan Stanley Funds and Harborside Financial Center, Financial Officer the TCW/DW Term Trusts (since September Plaza Two, 2002); Executive Director of the Jersey City, NJ Investment Manager and Morgan Stanley Services (since December 2001); previously, Vice President of the Investment Manager and Morgan Stanley Services (August 2000-November 2001), Senior Manager at PricewaterhouseCoopers LLP (January 1998-August 2000) and Associate-Fund Administration at BlackRock Financial Management (July 1996-December 1997).
------------ * Each Officer serves an indefinite term, until his or her successor is elected. 19 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Michael E. Nugent Philip J. Purcell OFFICERS Charles A. Fiumefreddo Chairman of the Board Mitchell M. Merin President and Chief Executive Officer Barry Fink Vice President, Secretary and General Counsel Joseph J. McAlinden Vice President Ronald E. Robison Vice President Thomas F. Caloia Treasurer Francis Smith Vice President and Chief Financial Officer TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center-Plaza Two Jersey City, New Jersey 07311 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Read the prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Funds are distributed by Morgan Stanley Distributors Inc. Morgan Stanley Distributors Inc., member NASD. [MORGAN STANLEY LOGO] [MORGAN STANLEY LOGO] [GRAPHIC OMITTED] Morgan Stanley Hawaii Municipal Trust Annual Report November 30, 2002 37876RPT-9377L02-AP-12/02