<PAGE> 1
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND Two World Trade Center, New
York, New York 10048
LETTER TO THE SHAREHOLDERS July 31, 1998
DEAR SHAREHOLDER:
The fiscal six months ended July 31, 1998, began with strong economic growth,
but this strength diminished somewhat during the last three months of the
period. The Federal Reserve Board expressed continuing concern throughout this
period over the possibility of a resurgence of inflation because of the
continued strength of the economy and employment growth. However, due in large
part to the turmoil in the Southeast Asian and emerging markets, the Federal
Reserve Board left rates unchanged. We believe that the deflationary trend of
those economies could be beneficial in holding inflation in check in the United
States.
Interest rates on intermediate-term Treasuries were highly volatile over the
past six months, with five-year Treasuries ranging in yield from 5.38 percent to
5.79 percent. At the end of the period, the five-year Treasury note was yielding
5.50 percent, compared to 5.38 percent six months earlier.
Overall, the equity market advanced, reflecting an environment of increasing
corporate profits and low inflation.
PERFORMANCE
For the six months ended July 31, 1998, Morgan Stanley Dean Witter Balanced
Income Fund's Class C shares produced a total return of 3.63 percent, compared
to 15.18 percent for the Standard & Poor's 500 Composite Stock Price Index (S&P
500), 2.81 percent for the Lehman Brothers Government/Corporate Bond Index and
4.26 percent for the Lipper Income Funds Index. For the same period the Fund's
Class A, B and D shares had total returns of 3.88 percent, 3.51 percent and 3.98
percent, respectively. The performance of the Fund's four share classes varies
because of differing expenses. Since inception (March 28, 1995) the Fund's Class
C shares have produced a cumulative total return of 49.49 percent and an average
annual total return of 12.78 percent.
<PAGE> 2
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
LETTER TO THE SHAREHOLDERS July 31, 1998, continued
PORTFOLIO
Morgan Stanley Dean Witter Balanced Income Fund maintains an asset mix of 65
percent fixed-income securities and 35 percent equities. During the period under
review, the Fund's net assets grew from just over $65.3 million to more than $81
million.
During the six-month period, the Fund's fixed-income sector allocation changed
because of the addition of corporate obligations. As cash flows permitted, we
also increased the Fund's exposure to both U.S. Treasury and U.S. agency
obligations. As of July 31, 1998, the Fund's fixed-income assets were invested
64 percent in mortgage-backed securities, 4 percent in U.S. corporate
obligations, 11 percent in U.S. Treasuries and 21 percent in U.S. agency
obligations.
During this period, we initiated one new common stock position in the equity
portion of the portfolio: Procter & Gamble. Additionally, the portfolio acquired
shares of Associates First Capital through a common stock distribution following
the company's spinoff from Ford Motor Co. We have subsequently built these
shares into a full portfolio position. During the period we eliminated the
portfolio's holdings in Fortune Brands, Gallaher Group PLC ADRs and Tricon
Global Restaurants.
LOOKING AHEAD
Following the Fund's reporting period, the stock market became increasingly
volatile, and major market indices experienced extreme swings on several trading
days in August and September. It is likely that this volatility will
characterize the market over the near term. While these ups and downs may be
unsettling, such an environment underscores the potential benefits of the asset
diversification that Morgan Stanley Dean Witter Balanced Income Fund provides.
We appreciate your ongoing support of Morgan Stanley Dean Witter Balanced Income
Fund and look forward to continuing to serve your investment needs and
objectives.
Very truly yours,
/S/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
PORTFOLIO OF INVESTMENTS July 31, 1998 (unaudited)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (34.0%)
Aerospace & Defense (1.3%)
19,600 Raytheon Co. (Class B)........ $ 1,084,125
-----------
Aluminum (1.3%)
15,100 Aluminum Co. of America....... 1,046,619
-----------
Automotive (2.7%)
19,000 Ford Motor Co. ............... 1,081,813
15,000 General Motors Corp. ......... 1,084,687
-----------
2,166,500
-----------
Banking (2.6%)
20,500 Banc One Corp. ............... 1,059,594
11,900 BankAmerica Corp. ............ 1,068,025
-----------
2,127,619
-----------
Beverages - Soft Drinks (1.3%)
28,500 PepsiCo, Inc. ................ 1,106,156
-----------
Chemicals (1.3%)
17,500 Du Pont (E.I.) de Nemours &
Co., Inc. ................... 1,085,000
-----------
Computer Equipment (1.4%)
8,700 International Business
Machines Corp. .............. 1,152,750
-----------
Conglomerates (1.3%)
30,000 Tenneco, Inc. ................ 1,087,500
-----------
Drugs & Healthcare (1.3%)
9,100 Bristol-Myers Squibb Co. ..... 1,036,831
-----------
Electric - Major (1.3%)
12,000 General Electric Co. ......... 1,071,750
-----------
Financial Miscellaneous (1.3%)
13,400 Associates First Capital Corp.
(Class A).................... 1,041,013
-----------
Foods (1.3%)
41,200 ConAgra, Inc. ................ 1,066,050
-----------
Machinery - Agricultural
(1.3%)
25,500 Deere & Co. .................. 1,024,781
-----------
Natural Gas (1.3%)
20,000 ENRON Corp. .................. 1,058,750
-----------
Oil - Domestic (1.3%)
15,400 Atlantic Richfield Co. ....... 1,043,350
-----------
Paper & Forest Products (1.3%)
25,000 Weyerhaeuser Co. ............. 1,050,000
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------
Railroads (1.3%)
26,000 CSX Corp. .................... $ 1,051,375
-----------
Retail (1.3%)
22,000 Dayton Hudson Corp. .......... 1,051,875
-----------
Retail - Department Stores (1.3%)
16,800 May Department Stores Co. .... 1,078,350
-----------
Soap & Household Products (1.3%)
13,000 Procter & Gamble Co. ......... 1,031,875
-----------
Steel (1.3%)
45,200 Timken Co. ................... 1,065,025
-----------
Telecommunications (1.3%)
14,800 Sprint Corp. ................. 1,036,000
-----------
Utilities - Electric (2.6%)
30,000 GPU, Inc. .................... 1,072,500
30,500 Unicom Corp. ................. 1,054,156
-----------
2,126,656
-----------
TOTAL COMMON STOCKS
(Identified Cost
$23,759,895).................. 27,689,950
-----------
PRINCIPAL
AMOUNT IN
THOUSANDS
-------
<C> <S> <C>
CORPORATE BONDS (2.8%)
Auto - Finance (1.2%)
$ 1,000 Ford Motor Credit Corp. 6.00%
due 01/14/03................. 996,210
-----------
Financial Miscellaneous (0.6%)
500 Associates Corp. of North
America 6.01% due 02/07/03... 497,300
-----------
Telephones (1.0%)
800 U.S. West Capital Funding,
Inc. 6.25% due 07/15/05...... 796,336
-----------
TOTAL CORPORATE BONDS
(Identified Cost
$2,293,512)................... 2,289,846
-----------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (20.6%)
Federal Farm Credit Banks
1,000 5.90% due 01/10/05............ 1,003,750
900 5.92% due 12/29/04............ 904,338
-----------
1,908,088
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
PORTFOLIO OF INVESTMENTS July 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -------------------------------------------------------
<S> <C> <C>
Federal Home Loan Banks
$ 1,000 0.00% due 02/25/04............ $ 727,890
2,000 0.00% due 07/02/12............ 686,620
1,200 5.96% due 02/05/08............ 1,201,752
-----------
2,616,262
-----------
Federal National Mortgage Assoc.
1,000 6.55% due 11/21/07............ 1,010,020
500 6.75% due 07/30/07............ 510,800
-----------
1,520,820
-----------
Resolution Funding Corp.
(Coupon Strips)
2,500 0.00% due 04/15/04............ 1,815,375
1,300 0.00% due 01/15/06............ 851,214
3,000 0.00% due 01/15/08............ 1,738,710
-----------
4,405,299
-----------
Tennessee Valley Authority
740 0.00% due 10/15/04............ 519,339
-----------
U.S. Treasury Notes
1,500 5.625% due 02/15/06........... 1,504,350
500 5.75% due 11/30/02............ 503,475
800 5.875% due 06/30/00........... 805,424
700 5.875% due 09/30/02........... 707,994
500 6.25% due 02/15/07............ 522,110
500 6.875% due 03/31/00........... 510,670
200 7.125% due 02/29/00........... 204,796
-----------
4,758,819
-----------
U.S. Treasury Strip
1,500 0.00% due 11/15/04............ 1,060,650
-----------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS
(Identified Cost
$16,524,752).................. 16,789,277
-----------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(41.8%)
Federal National Mortgage Assoc.
1,522 6.00% due 10/01/00............ 1,517,091
1,804 6.00% due 02/01/11-04/01/13... 1,782,827
3,513 6.50% due 03/01/11-06/01/13... 3,532,579
1,009 6.50% due 04/01/28-06/01/28... 1,004,053
2,447 7.00% due 07/01/11-07/01/12... 2,493,254
4,454 7.00% due 08/01/25-11/01/27... 4,516,789
4,894 7.50% due 08/01/23-05/01/27... 5,024,008
1,113 8.00% due 05/01/24-07/01/26... 1,153,319
-----------
21,023,920
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -------------------------------------------------------
<S> <C> <C>
Government National Mortgage
Assoc. I
$ 990 6.00% due 06/15/28............ $ 965,870
1,640 7.00% due 09/15/23-08/15/25... 1,665,229
3,341 7.50% due 08/15/25-10/15/26... 3,438,097
1,221 8.00% due 06/15/26-07/15/26... 1,266,428
-----------
7,335,624
-----------
Government National Mortgage
Assoc. II
3,001 6.50% due 04/20/28-05/20/28... 2,981,401
2,679 7.00% due 02/20/26-06/20/27... 2,709,411
-----------
5,690,812
-----------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Identified Cost
$33,441,867).................. 34,050,356
-----------
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT
110 The Bank of New York 5.50% due
08/03/98 (dated 07/31/98;
proceeds $110,239)(a)
(Identified Cost $110,189).... 110,189
-----------
TOTAL INVESTMENTS
(Identified Cost $76,130,215)(b).. 99.4% 80,929,618
OTHER ASSETS IN EXCESS OF
LIABILITIES ...................... 0.6 522,021
------ -----------
NET ASSETS........................ 100.0% $81,451,639
====== ===========
</TABLE>
- ---------------------
(a) Collateralized by $90,949 U.S. Treasury Bond 10.75% due 05/15/03 valued at
$112,392.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $5,718,614 and the
aggregate gross unrealized depreciation is $919,211, resulting in net
unrealized appreciation of $4,799,403.
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $76,130,215)............ $80,929,618
Receivable for:
Interest.............................. 359,767
Shares of beneficial interest sold.... 358,671
Dividends............................. 64,970
Investments sold...................... 26,089
Deferred organizational expenses.......... 56,312
Prepaid expenses and other assets......... 79,122
-----------
TOTAL ASSETS.......................... 81,874,549
-----------
LIABILITIES:
Payable for:
Investments purchased................. 258,115
Plan of distribution fee.............. 68,557
Investment management fee............. 41,839
Shares of beneficial interest
repurchased.......................... 10,299
Accrued expenses.......................... 44,100
-----------
TOTAL LIABILITIES..................... 422,910
-----------
NET ASSETS............................ $81,451,639
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital........................... $74,254,240
Net unrealized appreciation............... 4,799,403
Accumulated undistributed net investment
income................................... 260,874
Accumulated undistributed net realized
gain..................................... 2,137,122
-----------
NET ASSETS............................ $81,451,639
===========
CLASS A SHARES:
Net Assets................................ $1,852,877
Shares Outstanding (unlimited authorized,
$.01 par value).......................... 147,272
NET ASSET VALUE PER SHARE............. $12.58
===========
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net
asset value)......................... $13.28
===========
CLASS B SHARES:
Net Assets................................ $45,389,946
Shares Outstanding (unlimited authorized,
$.01 par value).......................... 3,610,081
NET ASSET VALUE PER SHARE............. $12.57
===========
CLASS C SHARES:
Net Assets................................ $34,197,904
Shares Outstanding (unlimited authorized,
$.01 par value).......................... 2,719,356
NET ASSET VALUE PER SHARE............. $12.58
===========
CLASS D SHARES:
Net Assets................................ $10,912
Shares Outstanding (unlimited authorized,
$.01 par value).......................... 867
NET ASSET VALUE PER SHARE............. $12.59
===========
</TABLE>
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended July 31, 1998 (unaudited)
NET INVESTMENT INCOME:
INCOME
Interest.................................. $ 1,586,865
Dividends................................. 286,544
-----------
TOTAL INCOME.......................... 1,873,409
-----------
EXPENSES
Investment management fee................. 222,593
Plan of distribution fee (Class A
shares).................................. 1,560
Plan of distribution fee (Class B
shares).................................. 198,847
Plan of distribution fee (Class C
shares).................................. 149,503
Registration fees......................... 41,792
Transfer agent fees and expenses.......... 27,671
Professional fees......................... 26,754
Shareholder reports and notices........... 20,439
Organizational expenses................... 16,864
Custodian fees............................ 9,806
Trustees' fees and expenses............... 6,863
Other..................................... 1,978
-----------
TOTAL EXPENSES........................ 724,670
-----------
NET INVESTMENT INCOME................. 1,148,739
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain......................... 2,151,902
Net change in unrealized appreciation..... (1,110,243)
-----------
NET GAIN.............................. 1,041,659
-----------
NET INCREASE.............................. $ 2,190,398
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE YEAR
JULY 31, ENDED
1998 JANUARY 31, 1998*
- ---------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $ 1,148,739 $ 1,842,253
Net realized gain.................................... 2,151,902 2,080,032
Net change in unrealized appreciation................ (1,110,243) 3,537,079
----------- -----------
NET INCREASE..................................... 2,190,398 7,459,364
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares................................... (25,127) (12,978)
Class B shares................................... (587,347) (536,334)
Class C shares................................... (498,528) (1,293,004)
Class D shares................................... (208) (219)
Net realized gain
Class A shares................................... (11,027) (16,524)
Class B shares................................... (282,100) (810,058)
Class C shares................................... (223,136) (1,161,126)
Class D shares................................... (71) (259)
----------- -----------
TOTAL DIVIDENDS AND DISTRIBUTIONS................ (1,627,544) (3,830,502)
----------- -----------
Net increase from transactions in shares of
beneficial interest................................. 15,551,867 13,424,115
----------- -----------
NET INCREASE..................................... 16,114,721 17,052,977
NET ASSETS:
Beginning of period.................................. 65,336,918 48,283,941
----------- -----------
END OF PERIOD
(Including undistributed net investment income of
$260,874 and $223,345, respectively)............. $81,451,639 $65,336,918
=========== ===========
</TABLE>
- ---------------------
* Class A, Class B and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Balanced Income Fund (the "Fund"), formerly Dean
Witter Balanced Income 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 to provide current income and
moderate capital growth. The Fund seeks to achieve its objective by investing in
investment grade fixed income securities and, to a lesser extent, common stock
of companies which have a record of paying dividends and have the potential for
increasing dividends and securities convertible into common stock. The Fund was
organized as a Massachusetts business trust on November 23, 1994 and commenced
operations on March 28, 1995. On July 28, 1997, the Fund commenced offering
three additional classes of shares, with the then current shares, other than
shares which were acquired in exchange for shares of Funds for which Morgan
Stanley Dean Witter Advisors Inc. serves as Investment Manager ("Morgan Stanley
Dean Witter Funds") offered with either a front-end sales charge or a contingent
deferred sales charge ("CDSC") and shares acquired through reinvestment of
dividends and distributions thereon, designated Class C shares. Shares held
prior to July 28, 1997 which were acquired in exchange for shares of a Morgan
Stanley Dean Witter Fund sold with a front-end sales charge, including shares
acquired through reinvestment of dividends and distributions thereon, have been
designated Class A shares and shares held prior to July 28, 1997 which were
acquired in exchange for shares of a Morgan Stanley Dean Witter Fund sold with a
CDSC, including shares acquired through reinvestment of dividends and
distributions thereon, have been designated Class B shares.
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, 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 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.
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998 (unaudited) continued
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), formerly Dean Witter InterCapital Inc., that sale or bid prices 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 Trustees (valuation of debt securities for
which market quotations are not readily available may be based upon current
market prices of securities which are comparable in coupon, rating and maturity
or an appropriate matrix utilizing similar factors); (4) certain portfolio
securities may be valued by an outside pricing service approved by the Trustees.
The pricing service may utilize a matrix system incorporating security quality,
maturity and coupon as the evaluation model parameters, and/or research and
evaluations by its staff, including review of broker-dealer market price
quotations, if available, in determining what it believes is the fair valuation
of the securities valued by such pricing service; and (5) 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 over the life of the respective securities. Dividend
income and other distributions are recorded on the ex-dividend date. Interest
income is accrued daily.
C. 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.
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998 (unaudited) continued
D. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders 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 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.
F. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $170,000 of which
approximately $136,000 have been reimbursed. The balance has been absorbed by
the Investment Manager. Such expenses have been deferred and are being amortized
on the straight-line method over a period not to exceed five years from the
commencement of operations.
2. INVESTMENT MANAGEMENT AGREEMENT
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 0.60% to the net assets of the Fund determined as of the close of
each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998 (unaudited) continued
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter 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 -- 1.0% of the
average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the
average daily net assets of Class C. In the case of Class A shares, amounts paid
under the Plan are paid to the Distributor for services provided. In the case of
Class B and Class C shares, amounts paid under the Plan are paid to the
Distributor for services provided and the expenses borne by it and others in the
distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, Morgan Stanley Dean Witter Financial Advisors and others who engage
in or support distribution of the shares or who service shareholder accounts,
including overhead and telephone expenses; printing and distribution of
prospectuses and reports used in connection with the offering of these shares to
other than current shareholders; and preparation, printing and distribution of
sales literature and advertising materials. In addition, the Distributor may
utilize fees paid pursuant to the Plan, in the case of Class B shares, to
compensate Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment
Manager and Distributor, and other selected broker-dealers for their opportunity
costs in advancing such amounts, which compensation would be in the form of a
carrying charge on any unreimbursed expenses.
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, including
carrying charges, totaled $956,912 at July 31, 1998.
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 1.0% 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
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998 (unaudited) continued
expenses representing a gross sales credit to account executives may be
reimbursed in the subsequent calendar year. For the six months ended July 31,
1998, the distribution fee was accrued for Class A shares and Class C shares at
the annual rate of 0.25% and 0.90%, respectively.
The Distributor has informed the Fund that for the six months ended July 31,
1998, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $19,629 and $7,079, respectively
and received $22,463 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/maturities/prepayments of
portfolio securities, excluding short-term investments, for the six months ended
July 31, 1998 aggregated $25,899,849 and $10,855,266, respectively. Included in
the aforementioned are purchases and sales/maturities/prepayments of U.S.
Government securities of $14,646,269 and $5,587,615, respectively.
For the six months ended July 31, 1998, the Fund incurred brokerage commissions
of $5,674 with DWR for portfolio transactions executed on behalf of the Fund. At
July 31, 1998, the Fund's payable for investments purchased included unsettled
trades with DWR of $148,641.
For the six months ended July 31, 1998, the Fund incurred brokerage commissions
of $1,250 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At July 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $500.
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998 (unaudited) continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JULY 31, 1998 JANUARY 31, 1998+*
----------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold........................................................ 91,653 $ 1,180,704 65,442 $ 811,302
Reinvestment of dividends and distributions................. 2,044 26,119 1,562 19,338
Redeemed.................................................... (19,190) (245,370) (30,968) (392,193)
--------- ----------- ---------- ------------
Net increase - Class A...................................... 74,507 961,453 36,036 438,447
--------- ----------- ---------- ------------
CLASS B SHARES
Sold........................................................ 1,242,170 15,948,464 833,271 10,407,565
Reinvestment of dividends and distributions................. 38,476 491,658 64,208 794,863
Redeemed.................................................... (413,057) (5,289,266) (564,931) (7,045,845)
--------- ----------- ---------- ------------
Net increase - Class B...................................... 867,589 11,150,856 332,548 4,156,583
--------- ----------- ---------- ------------
CLASS C SHARES
Sold........................................................ 535,561 6,858,949 1,852,659 22,297,952
Reinvestment of dividends and distributions................. 49,780 636,627 173,390 2,105,205
Redeemed.................................................... (316,716) (4,056,297) (1,300,934) (15,584,565)
--------- ----------- ---------- ------------
Net increase - Class C...................................... 268,625 3,439,279 725,115 8,818,592
--------- ----------- ---------- ------------
CLASS D SHARES
Sold........................................................ -- -- 806 10,015
Reinvestment of dividends and distributions................. 22 279 39 478
--------- ----------- ---------- ------------
Net increase - Class D...................................... 22 279 845 10,493
--------- ----------- ---------- ------------
Net increase in Fund........................................ 1,210,743 $15,551,867 1,094,544 $ 13,424,115
========= =========== ========== ============
</TABLE>
- ---------------------
+ On July 28, 1997, 36,729 shares representing $456,174 were transferred to
Class A and 2,409,944 shares representing $29,931,505 were transferred to
Class B.
* For Class A, B and D shares, for the period July 28, 1997 (issued date)
through January 31, 1998.
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR MARCH 28,1995*
MONTHS ENDED ENDED ENDED THROUGH
JULY 31, 1998++ JANUARY 31, 1998**++ JANUARY 31, 1997 JANUARY 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $12.41 $11.57 $11.34 $10.00
------ ------ ------ ------
Net investment income.............................. 0.20 0.42 0.36 0.38
Net realized and unrealized gain................... 0.24 1.23 0.50 1.30
------ ------ ------ ------
Total from investment operations................... 0.44 1.65 0.86 1.68
------ ------ ------ ------
Less dividends and distributions from:
Net investment income............................. (0.19) (0.40) (0.38) (0.33)
Net realized gain................................. (0.08) (0.41) (0.25) (0.01)
------ ------ ------ ------
Total dividends and distributions.................. (0.27) (0.81) (0.63) (0.34)
------ ------ ------ ------
Net asset value, end of period..................... $12.58 $12.41 $11.57 $11.34
====== ====== ====== ======
TOTAL INVESTMENT RETURN+........................... 3.63%(1) 14.42% 7.82% 16.93%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... 1.91%(2) 2.07% 1.88%(3) --(2)(3)
Net investment income.............................. 3.14%(2) 3.30% 3.49%(3) 5.27%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............ $34,198 $30,402 $48,284 $31,252
Portfolio turnover rate............................ 15%(1) 21% 21% 3%(1)
</TABLE>
- ---------------------
* Commencement of operations.
** Prior to July 28, 1997, the fund issued one class of shares. All shares of
the Fund held prior to that date, other than shares which were acquired in
exchange for shares of Funds for which Morgan Stanley Dean Witter Advisors
Inc. serves as Investment Manager ("Morgan Stanley Dean Witter Funds")
offered with either a front-end sales charge or a contingent deferred sales
charge ("CDSC") and shares acquired through reinvestment of dividends and
distributions thereon, have been designated Class C shares. Shares held
prior to July 28, 1997 which were acquired in exchange for shares of a
Morgan Stanley Dean Witter Fund sold with a front-end sales charge,
including shares acquired through reinvestment of dividends and
distributions thereon, have been designated Class A shares and shares held
prior to July 28, 1997 which were acquired in exchange for shares of a
Morgan Stanley Dean Witter Fund sold with a CDSC, including shares acquired
through reinvestment of dividends and distributions thereon, have been
designated Class B shares.
++ 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) If the Investment Manager had not reimbursed expenses and waived the
management fee, the annualized expense and net investment income ratios
would have been 2.19% and 3.18%, respectively, for the year ended January
31, 1997 and 2.69% and 2.58%, respectively, for the period ended January 31,
1996.
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX JULY 28, 1997*
MONTHS ENDED THROUGH
JULY 31, 1998++ JANUARY 31, 1998++
- --------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $12.41 $12.42
------ ------
Net investment income....................................... 0.24 0.25
Net realized and unrealized gain............................ 0.24 0.32
------ ------
Total from investment operations............................ 0.48 0.57
------ ------
Less dividends and distributions from:
Net investment income...................................... (0.23) (0.26)
Net realized gain.......................................... (0.08) (0.32)
------ ------
Total dividends and distributions........................... (0.31) (0.58)
------ ------
Net asset value, end of period.............................. $12.58 $12.41
====== ======
TOTAL INVESTMENT RETURN+.................................... 3.88%(1) 4.60%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.25%(2) 1.43%(2)
Net investment income....................................... 3.78%(2) 3.92%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $1,853 $903
Portfolio turnover rate..................................... 15% (1) 21%
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $12.41 $12.42
------ ------
Net investment income....................................... 0.19 0.20
Net realized and unrealized gain............................ 0.24 0.33
------ ------
Total from investment operations............................ 0.43 0.53
------ ------
Less dividends and distributions from:
Net investment income...................................... (0.19) (0.22)
Net realized gain.......................................... (0.08) (0.32)
------ ------
Total dividends and distributions........................... (0.27) (0.54)
------ ------
Net asset value, end of period.............................. $12.57 $12.41
====== ======
TOTAL INVESTMENT RETURN+.................................... 3.51%(1) 4.19%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 2.01%(2) 2.16%(2)
Net investment income....................................... 3.04%(2) 3.15%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $45,390 $34,021
Portfolio turnover rate..................................... 15%(1) 21%
</TABLE>
- ---------------------
* The date shares were first issued. Shareholders who held shares of the Fund
prior to July 28, 1997 (the date the Fund converted to a multiple class
share structure) should refer to the Financial Highlights of Class C to
obtain the historical per share data and ratio information of their shares.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX JULY 28, 1997*
MONTHS ENDED THROUGH
JULY 31, 1998++ JANUARY 31, 1998++
- --------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $12.42 $12.42
------ ------
Net investment income....................................... 0.26 0.26
Net realized and unrealized gain............................ 0.24 0.33
------ ------
Total from investment operations............................ 0.50 0.59
------ ------
Less dividends and distributions from:
Net investment income...................................... (0.25) (0.27)
Net realized gain.......................................... (0.08) (0.32)
------ ------
Total dividends and distributions........................... (0.33) (0.59)
------ ------
Net asset value, end of period.............................. $12.59 $12.42
====== ======
TOTAL INVESTMENT RETURN+.................................... 3.98%(1) 4.79%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.01%(2) 1.16%(2)
Net investment income....................................... 4.05%(2) 4.15%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $11 $10
Portfolio turnover rate..................................... 15%(1) 21%
</TABLE>
- ---------------------
* The date shares were first issued.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE> 16
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Paul D. Vance
Vice President
Rajesh K. Gupta
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of
the Fund without examination by the independent accountants and accordingly
they do not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and
trustees, fees, expenses and other pertinent information, please see the
prospectus of the Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY
DEAN WITTER
BALANCED
INCOME FUND
[GRAPHIC]
SEMIANNUAL REPORT
JULY 31, 1998
