<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND Two World Trade Center,
LETTER TO THE SHAREHOLDERS July 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
During the six-month period ended July 31, 1999, the fixed-income markets were
negatively affected by renewed concern that the Federal Reserve Board would
attempt to slow domestic economic growth by raising short-term interest rates.
These concerns proved to be justified in June when the Fed raised rates by 25
basis points, offsetting one of the three 25-basis-point cuts that had occurred
just eight months earlier.
Interest rates on intermediate-term U.S. Treasuries were highly volatile during
the period. Five-year Treasuries ranged in yield between 4.55 percent and 5.92
percent. On July 31, the five-year Treasury note was yielding 5.79 percent,
compared to 4.55 percent six months earlier.
During the first quarter of 1999, spreads on mortgage-backed securities
tightened from their historically wide levels of late 1998, but by July 1999
these spreads had widened again. Accordingly, as cash flows permitted, we
purchased current-coupon mortgages at very attractive levels, thereby enhancing
the Fund's prospects for higher total returns.
The U.S. equity market experienced a change in leadership during the period.
Mega-cap market leaders, particularly in the technology and pharmaceutical
sectors, which had dominated the market's performance in 1998, experienced
lower returns. Large-cap multinationals also faltered as concerns over
inflation and global economic crises surfaced. In contrast to the rocky road
endured by large-cap stocks, mid- and small-cap issues had a much smoother
ride. Strong performance was evident in the technology sector and in cyclical
stocks. This change in leadership was reflected in the individual performance
of the stocks in the S&P 500 Composite Stock Price Index (S&P 500). The largest
50 stocks were outperformed by the remaining 450 during the first half of 1999,
indicating a shift in sentiment toward small- and mid-cap stocks as well as
cyclicals.
PERFORMANCE AND PORTFOLIO STRATEGY
For the period under review, Morgan Stanley Dean Witter Balanced Income Fund's
Class C shares produced a total return of -0.10 percent, compared
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
LETTER TO THE SHAREHOLDERS July 31, 1999, continued
to 1.57 percent for the Lipper Income Funds Index, 4.50 percent for the
Standard & Poor's 500 Composite Stock Price Index (S&P 500), and -3.24 percent
for the Lehman Brothers Government/Corporate Bond Index. For the same period,
the Fund's Class A, B and D shares earned 0.31 percent, -0.16 percent and 0.41
percent, respectively. The performance of the Fund's four share classes varies
because of differing expenses.
At period end, the Fund's net assets exceeded $103 million, up from slightly
more than $99 million at the start of the period. The Portfolio mix of the Fund
is 66 percent fixed-income instruments and 34 percent equities. As of July 31,
1999, the Fund's fixed-income portfolio was invested as follows: 64 percent in
mortgage-backed securities, 19 percent in U.S. Treasuries, 11 percent in U.S.
agency obligations, 4 percent in U.S. corporate obligations and the balance in
cash equivalents. The Fund's equity component remained fully invested during
the period under review.
LOOKING AHEAD
While inflation seems poised to remain low, we do not believe that the economy
will weaken any time soon. As a result, we expect that the Fed may further
tighten short-term interest rates in the near future. Accordingly, adjustments
to the maturity structure and composition of the Fund will be made as
conditions warrant and attractive opportunities become available.
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley Dean
Witter Funds. Mr. Merin is the President and Chief Operating Officer of Asset
Management for Morgan Stanley Dean Witter & Co. and President, Chief Executive
Officer and Director of Morgan Stanley Dean Witter Advisors Inc., the Fund's
investment manager. He also serves as Chairman, Chief Executive Officer and
Director of the Fund's distributor and transfer agent.
We appreciate your ongoing support of Morgan Stanley Dean Witter Balanced
Income Fund and look forward to continuing to serve your investment objectives.
Very truly yours,
/s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin
- ---------------------------------- --------------------------------
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
2
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FUND PERFORMANCE July 31, 1999
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS.
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES*
- ----------------------------------------------------------
PERIOD ENDED 7/31/99
- --------------------------
<S> <C> <C>
1 year 7.29%(1) 1.65%(2)
From Inception (7/28/97) 7.94%(1) 5.08%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES+
- ----------------------------------------------------------
PERIOD ENDED 7/31/99
- --------------------------
<S> <C> <C>
1 year 6.40%(1) 1.50%%(2)
From Inception (7/28/97) 7.10%(1) 5.70%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES++
- ----------------------------------------------------------
PERIOD ENDED 7/31/99
- --------------------------
<S> <C> <C>
1 year 6.36%(1) 5.37%(2)
From Inception (3/28/95) 11.27%(1) 11.27%(2)
</TABLE>
<TABLE>
<CAPTION>
+
CLASS D SHARES+
- ----------------------------------------------------------
PERIOD ENDED 7/31/99
- --------------------------
<S> <C>
1 year 7.44%(1)
From Inception (7/28/97) 8.17%(1)
</TABLE>
- ---------------
(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.
* The maximum front-end sales charge for Class A is 5.25%.
+ The maximum CDSC for Class B is 5.0%. The CDSC declines to 0% after six
years.
++ The maximum CDSC for Class C shares is 1% for shares redeemed within one
year of purchase.
+ Class D shares have no sales charge. CLASS B SHARES+
+
3
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
PORTFOLIO OF INVESTMENTS July 31, 1999 (unaudited)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (34.1%)
Aluminum (1.3%)
22,000 Alcoa Inc. ......................... $ 1,317,250
------------
Auto Parts: O.E.M. (1.2%)
70,000 Delphi Automotive Systems Corp...... 1,260,000
------------
Beverages - Non-Alcoholic (1.4%)
36,500 PepsiCo, Inc. ...................... 1,428,062
------------
Computer Hardware (1.3%)
10,700 International Business Machines
Corp. .............................. 1,344,856
------------
Construction/Agricultural
Equipment/Trucks (1.4%)
37,000 Deere & Co. ........................ 1,415,250
------------
Department Stores (1.2%)
32,000 May Department Stores Co. .......... 1,238,000
------------
Discount Chains (1.2%)
19,900 Dayton-Hudson Corp. ................ 1,287,281
------------
Electric Utilities (2.4%)
32,000 GPU, Inc. .......................... 1,228,000
33,000 Unicom Corp. ....................... 1,295,250
------------
2,523,250
------------
Finance Companies (1.2%)
33,500 Associates First Capital Corp.
(Class A) .......................... 1,283,469
------------
Forest Products (1.3%)
20,500 Weyerhaeuser Co. ................... 1,326,094
------------
Integrated Oil Companies (1.4%)
15,800 Atlantic Richfield Co. ............. 1,422,987
------------
Major Banks (2.4%)
23,500 Bank One Corp. ..................... 1,282,219
18,400 BankAmerica Corp. .................. 1,221,300
------------
2,503,519
------------
Major Chemicals (1.4%)
19,400 Du Pont (E.I.) de Nemours & Co.,
Inc. ............................... 1,398,013
------------
Major Pharmaceuticals (1.2%)
19,100 Bristol-Myers Squibb Co. ........... 1,270,150
------------
Major U.S. Telecommunications (1.2%)
23,700 AT&T Corp. ......................... 1,230,919
------------
Meat/Poultry/Fish (1.3%)
51,700 ConAgra, Inc. ...................... 1,321,581
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------
<S> <C> <C>
Metals Fabrications (1.2%)
77,000 Timken Co. (The) ................... $ 1,270,500
------------
Military/Gov't/Technical (1.3%)
19,200 Raytheon Co. (Class B) ............. 1,350,000
------------
Motor Vehicles (2.4%)
25,000 Ford Motor Co. ..................... 1,215,625
20,500 General Motors Corp. ............... 1,249,219
------------
2,464,844
------------
Multi-Sector Companies (2.5%)
11,800 General Electric Co. ............... 1,286,200
55,400 Tenneco, Inc. ...................... 1,263,813
------------
2,550,013
------------
Oil/Gas Transmission (1.3%)
16,000 Enron Corp. ........................ 1,363,000
------------
Package Goods/Cosmetics (1.3%)
15,300 Procter & Gamble Co. ............... 1,384,650
------------
Railroads (1.3%)
27,500 CSX Corp. .......................... 1,332,031
------------
TOTAL COMMON STOCKS
(Identified Cost $29,419,511)....... 35,285,719
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
<S> <C> <C>
CORPORATE BONDS (2.7%)
Finance Companies (1.9%)
$ 500 Associates Corp. of North America
6.01% due 02/07/03 .................. 485,325
500 Associates Corp. of North America
6.25% due 11/01/08 .................. 467,990
1,000 Ford Motor Credit Corp.
6.00% due 01/14/03 .................. 973,200
-------
1,926,515
---------
Major Chemicals (0.4%)
500 Monsanto Co. - 144A*
5.875% due 12/01/08 ................. 452,700
---------
Telecommunications (0.4%)
400 MCI Worldcom, Inc.
6.40% due 08/15/05 .................. 388,848
---------
TOTAL CORPORATE BONDS
(Identified Cost $2,920,700).......... 2,768,063
---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
PORTFOLIO OF INVESTMENTS July 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (19.5%)
Federal Farm Credit Banks
$ 1,000 5.90% due 01/10/05 .................... $ 972,800
900 5.92% due 12/29/04 .................... 874,440
------------
1,847,240
------------
Federal Home Loan Banks
1,000 0.00% due 02/25/04 .................... 749,910
2,000 0.00% due 07/02/12 .................... 724,400
1,000 5.88% due 11/25/08 .................... 926,080
1,200 5.96% due 02/05/08 .................... 1,133,544
------------
3,533,934
------------
Federal National Mortgage Assoc.
1,000 6.55% due 11/21/07 .................... 968,370
500 6.75% due 07/30/07 .................... 489,245
------------
1,457,615
------------
Resolution Funding Corp.
(Coupon Strips)
2,500 0.00% due 04/15/04 .................... 1,878,000
1,500 0.00% due 10/15/04 .................... 1,092,450
1,300 0.00% due 01/15/06 .................... 870,285
3,000 0.00% due 01/15/08 .................... 1,756,020
------------
5,596,755
------------
Tennessee Valley Authority
740 0.00% due 10/15/04 .................... 532,341
------------
U.S. Treasury Notes
500 5.50% due 01/31/03 .................... 494,765
1,300 5.50% due 05/31/03 .................... 1,283,659
1,500 5.625% due 02/15/06 ................... 1,468,050
500 5.75% due 11/30/02 .................... 498,820
1,000 6.125% due 08/15/07 ................... 1,002,290
500 6.25% due 02/15/07 .................... 505,245
100 7.125% due 02/29/00 ................... 101,111
------------
5,353,940
------------
U.S. Treasury Strips
1,500 0.00% due 11/15/04 .................... 1,093,425
1,000 0.00% due 02/15/05 .................... 716,920
------------
1,810,345
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS (Identified
Cost $20,771,134)...................... $ 20,132,170
------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES (41.9%)
Federal National Mortgage Assoc.
$ 2,350 6.00% due 10/01/00-04/01/06 ........... 2,275,703
1,551 6.00% due 02/01/11-04/01/13 ........... 1,484,318
999 6.00% due 10/01/28 .................... 925,282
2,974 6.50% due 02/01/11-06/01/13 ........... 2,904,779
925 6.50% due 04/01/28-06/01/28 ........... 881,243
1,781 7.00% due 07/01/11-07/01/12 ........... 1,774,408
4,169 7.00% due 08/01/25-02/01/29 ........... 4,074,030
2,678 7.50% due 08/01/23-05/01/27 ........... 2,677,365
641 8.00% due 05/01/24-07/01/26 ........... 654,832
------------
17,651,960
------------
Government National Mortgage
Assoc. I
4,942 6.00% due 06/15/28-12/15/28 ........... 4,554,636
7,893 6.50% due 10/15/25-05/15/29 ........... 7,496,267
2,329 7.00% due 09/15/23-06/15/29 ........... 2,269,403
2,492 7.50% due 08/15/25-10/15/26 ........... 2,488,616
559 8.00% due 06/15/26-07/15/26 ........... 570,470
------------
17,379,392
------------
Government National Mortgage
Assoc. II
6,741 6.50% due 04/20/28-03/20/29 ........... 6,374,254
2,026 7.00% due 02/20/26-06/20/27 ........... 1,969,695
------------
8,343,949
------------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Identified Cost $44,815,093).......... 43,375,301
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
PORTFOLIO OF INVESTMENTS July 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (1.4%)
REPURCHASE AGREEMENT
$ 1,464 The Bank of New York 5.00% due
08/02/99 (dated 07/30/99;
proceeds $1,464,669) (a)
(Identified Cost $1,464,059).......... $ 1,464,059
------------
TOTAL INVESTMENTS
(Identified Cost
$99,390,497) (b)........... 99.6% 103,025,312
LIABILITIES IN EXCESS
OF OTHER ASSETS ........... 0.4 437,347
----- -----------
NET ASSETS ................ 100.0% $103,462,659
===== ============
</TABLE>
- --------------------------------
* Resale is restricted to qualified institutional investors.
(a) Collateralized by $1,267,667 U.S. Treasury Bond 10.75% due 05/15/03 valued
at $1,496,854.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $6,736,640 and the
aggregate gross unrealized depreciation is $3,101,825, resulting in net
unrealized appreciation of $3,634,815.
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $99,390,497)................................... $ 103,025,312
Receivable for:
Interest ...................................................... 467,944
Shares of beneficial interest sold ............................ 177,250
Dividends ..................................................... 82,393
Deferred organizational expenses ................................. 22,306
Prepaid expenses ................................................. 84,609
-------------
TOTAL ASSETS .................................................. 103,859,814
-------------
LIABILITIES:
Payable for:
Investments purchased ......................................... 152,138
Plan of distribution fee ...................................... 86,995
Shares of beneficial interest repurchased ..................... 60,301
Investment management fee ..................................... 53,812
Accrued expenses and other payables .............................. 43,909
-------------
TOTAL LIABILITIES ............................................. 397,155
-------------
NET ASSETS .................................................... $ 103,462,659
=============
COMPOSITION OF NET ASSETS:
Paid-in-capital .................................................. $ 97,995,834
Net unrealized appreciation ...................................... 3,634,815
Accumulated undistributed net investment income .................. 249,757
Accumulated undistributed net realized gain ...................... 1,582,253
-------------
NET ASSETS .................................................... $ 103,462,659
=============
CLASS A SHARES:
Net Assets ....................................................... $ 2,040,265
Shares Outstanding (unlimited authorized, $.01 par value)......... 164,925
NET ASSET VALUE PER SHARE ..................................... $ 12.37
=============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ............. $ 13.06
=============
CLASS B SHARES:
Net Assets ....................................................... $ 64,860,412
Shares Outstanding (unlimited authorized, $.01 par value)......... 5,255,055
NET ASSET VALUE PER SHARE ..................................... $ 12.34
=============
CLASS C SHARES:
Net Assets ....................................................... $ 34,955,708
Shares Outstanding (unlimited authorized, $.01 par value)......... 2,830,217
NET ASSET VALUE PER SHARE ..................................... $ 12.35
=============
CLASS D SHARES:
Net Assets ....................................................... $ 1,606,274
Shares Outstanding (unlimited authorized, $.01 par value)......... 129,956
NET ASSET VALUE PER SHARE ..................................... $ 12.36
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended July 31, 1999 (unaudited)
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Interest .......................................... $ 2,131,216
Dividends ......................................... 416,904
------------
TOTAL INCOME ................................... 2,548,120
------------
EXPENSES
Plan of distribution fee (Class A shares) ......... 4,945
Plan of distribution fee (Class B shares) ......... 312,513
Plan of distribution fee (Class C shares) ......... 176,034
Investment management fee ......................... 309,940
Transfer agent fees and expenses .................. 42,519
Professional fees ................................. 38,460
Registration fees ................................. 36,759
Shareholder reports and notices ................... 24,288
Organizational expenses ........................... 16,863
Custodian fees .................................... 9,915
Trustees' fees and expenses ....................... 6,401
Other ............................................. 808
------------
TOTAL EXPENSES ................................. 979,445
------------
NET INVESTMENT INCOME .......................... 1,568,675
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain ................................. 1,807,404
Net change in unrealized appreciation ............. (3,433,400)
------------
NET LOSS ....................................... (1,625,996)
------------
NET DECREASE ...................................... $ (57,321)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JULY 31, 1999 JANUARY 31, 1999
--------------- -----------------
<S> <C> <C>
(unaudited)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 1,568,675 $ 2,485,963
Net realized gain .................................... 1,807,404 4,548,195
Net change in unrealized appreciation ................ (3,433,400) 1,158,569
------------ ------------
NET INCREASE (DECREASE) ........................... (57,321) 8,192,727
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares .................................... (68,477) (90,042)
Class B shares .................................... (953,731) (1,360,747)
Class C shares .................................... (530,854) (991,558)
Class D shares .................................... (32,426) (34,394)
Net realized gain
Class A shares .................................... (29,695) (188,753)
Class B shares .................................... (980,374) (2,103,741)
Class C shares .................................... (521,819) (1,368,093)
Class D shares .................................... (23,792) (58,637)
------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ................. (3,141,168) (6,195,965)
------------ ------------
Net increase from transactions in shares of beneficial
interest ........................................... 7,324,445 32,003,023
------------ ------------
NET INCREASE ...................................... 4,125,956 33,999,785
NET ASSETS:
Beginning of period .................................. 99,336,703 65,336,918
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$249,757 and $266,570, respectively)............... $103,462,659 $ 99,336,703
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Balanced Income Fund (the "Fund"), is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund's investment
objective is 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 converted to a multiple class share
structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The 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.
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"), 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
10
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1999 (unaudited) continued
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.
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 $146,000 have been reimbursed. The
11
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1999 (unaudited) continued
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.
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 (1) 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; (2) printing and
distribution of prospectuses and reports used in connection with the offering
of these shares to other than current shareholders; and
(3) 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.
12
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1999 (unaudited) continued
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 $2,269,579 at July 31, 1999.
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 expenses representing
a gross sales credit to account executives may be reimbursed in the subsequent
calendar year. For the six months ended July 31, 1999, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.25% and
1.0%, respectively.
The Distributor has informed the Fund that for the six months ended July 31,
1999, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $31,200,
$71,472 and $7,370, respectively and received $8,177 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, 1999, aggregated $19,623,928 and $13,280,632, respectively.
Included in the aforementioned are purchases and sales/maturities/prepayments
of U.S. Government securities of $13,412,030 and $5,102,730, respectively.
For the six months ended July 31, 1999, the Fund incurred brokerage commissions
of $7,203 with DWR for portfolio transactions executed on behalf of the Fund.
Included at July 31, 1999, in the payable for investments purchased was
$152,138 for unsettled trades with DWR.
For the six months ended July 31, 1999, the Fund incurred brokerage commissions
of $3,010 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager and Distributor, for portfolio transactions executed on behalf of the
Fund.
13
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1999 (unaudited) continued
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At July 31, 1999, the Fund had
transfer agent fees and expenses payable of approximately $500.
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, JANUARY 31,
1999 1999
---------------- -------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................ 29,548 $ 375,300 443,674 $ 5,539,418
Reinvestment of dividends and distributions ......... 4,039 50,292 7,895 98,394
Redeemed ............................................ (295,894) (3,815,791) (97,102) (1,234,884)
-------- ------------- ------- -------------
Net increase (decrease) -- Class A .................. (262,307) (3,390,199) 354,467 4,402,928
-------- ------------- ------- -------------
CLASS B SHARES
Sold ................................................ 1,499,737 19,072,784 2,624,083 33,324,855
Reinvestment of dividends and distributions ......... 110,565 1,373,865 169,821 2,113,831
Redeemed ............................................ (824,048) (10,466,825) (1,067,595) (13,526,589)
--------- ------------- ---------- -------------
Net increase -- Class B ............................. 786,254 9,979,824 1,726,309 21,912,097
--------- ------------- ---------- -------------
CLASS C SHARES
Sold ................................................ 371,996 4,732,367 929,718 11,808,519
Reinvestment of dividends and distributions ......... 75,545 939,730 169,885 2,120,074
Redeemed ............................................ (386,645) (4,913,530) (781,013) (9,857,608)
--------- ------------- ---------- -------------
Net increase -- Class C ............................. 60,896 758,567 318,590 4,070,985
--------- ------------- ---------- -------------
CLASS D SHARES
Sold ................................................ 4,744 59,864 135,950 1,684,078
Reinvestment of dividends and distributions ......... 4,521 56,217 7,529 93,031
Redeemed ............................................ (10,968) (139,828) (12,665) (160,096)
--------- ------------- ---------- -------------
Net increase (decrease) -- Class D .................. (1,703) (23,747) 130,814 1,617,013
--------- ------------- ---------- -------------
Net increase in Fund ................................ 583,140 $ 7,324,445 2,530,180 $ 32,003,023
========= ============= ========== =============
</TABLE>
6. FEDERAL INCOME TAX STATUS
As of January 31, 1999, the Fund had temporary book/tax differences
attributable to capital loss deferrals on wash sales.
14
<PAGE>
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 JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
JULY 31, 1999 JANUARY 31, 1999 JANUARY 31, 1998
---------------------- ------------------ ---------------------
(unaudited)
<S> <C> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............. $12.75 $12.41 $12.42
------ ------ ------
Income (loss) from investment operations:
Net investment income ........................... 0.23 0.46 0.25
Net realized and unrealized gain (loss) ......... (0.19) 0.87 0.32
------ ------ ------
Total income from investment operations .......... 0.04 1.33 0.57
------ ------ ------
Less dividends and distributions from:
Net investment income ........................... (0.23) (0.47) (0.26)
Net realized gain ............................... (0.19) (0.52) (0.32)
------ ------ ------
Total dividends and distributions ................ (0.42) (0.99) (0.58)
------ ------ ------
Net asset value, end of period ................... $12.37 $12.75 $12.41
====== ====== ======
TOTAL RETURN+ .................................... 0.31%(1) 11.11% 4.60%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 1.19%(2)(3) 1.23%(3) 1.43%(2)
Net investment income ............................ 3.74%(2)(3) 3.73%(3) 3.92%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $2,040 $5,448 $903
Portfolio turnover rate .......................... 13%(1) 32% 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.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
JULY 31, 1999 JANUARY 31, 1999 JANUARY 31, 1998
------------------------ ------------------ -----------------
(unaudited)
<S> <C> <C> <C>
CLASS B SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $12.74 $12.41 $12.42
------ ------ ------
Income (loss) from investment operations:
Net investment income ................................. 0.18 0.38 0.20
Net realized and unrealized gain (loss) ............... (0.20) 0.85 0.33
------ ------ ------
Total income (loss) from investment operations ......... (0.02) 1.23 0.53
------ ------ ------
Less dividends and distributions from:
Net investment income ................................. (0.19) (0.38) (0.22)
Net realized gain ..................................... (0.19) (0.52) (0.32)
------ ------ ------
Total dividends and distributions ...................... (0.38) (0.90) (0.54)
------ ------ ------
Net asset value, end of period ......................... $12.34 $12.74 $12.41
====== ====== ======
TOTAL RETURN+ .......................................... (0.16)%(1) 10.32% 4.19%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.94%(2)(3) 1.99%(3) 2.16%(2)
Net investment income .................................. 2.99%(2)(3) 2.97%(3) 3.15%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $64,860 $56,919 $34,021
Portfolio turnover rate ................................ 13%(1) 32% 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.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR ENDED JANUARY 31 MARCH 28, 1995*
MONTHS ENDED ---------------------------------------- THROUGH
JULY 31, 1999 ++ 1999++ 1998**++ 1997 JANUARY 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period .......... $12.74 $12.41 $11.57 $11.34 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income ........................ 0.18 0.38 0.42 0.36 0.38
Net realized and unrealized gain (loss) ...... (0.19) 0.85 1.23 0.50 1.30
------ ------ ------ ------ ------
Total income (loss) from investment
operations ................................... (0.01) 1.23 1.65 0.86 1.68
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income ........................ (0.19) (0.38) (0.40) (0.38) (0.33)
Net realized gain ............................ (0.19) (0.52) (0.41) (0.25) (0.01)
------ ------ ------ ------ ------
Total dividends and distributions ............. (0.38) (0.90) (0.81) (0.63) (0.34)
------ ------ ------ ------ ------
Net asset value, end of period ................ $12.35 $12.74 $12.41 $11.57 $11.34
====== ====== ====== ====== ======
TOTAL RETURN+ ................................. (0.10)%(1) 10.32% 14.42% 7.82% 16.93%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ...................................... 1.94%(2)(4) 1.94%(4) 2.07% 1.88%(3) --%(2)(3)
Net investment income ......................... 2.99%(2)(4) 3.02%(4) 3.30% 3.49%(3) 5.27%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ....... $34,956 $35,291 $30,402 $48,284 $31,252
Portfolio turnover rate ....................... 13%(1) 32% 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.
(4) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
JULY 31, 1999 JANUARY 31, 1999 JANUARY 31, 1998
---------------------- ------------------ -----------------
(unaudited)
<S> <C> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............. $12.75 $12.42 $12.42
------ ------ ------
Income (loss) from investment operations:
Net investment income ........................... 0.25 0.48 0.26
Net realized and unrealized gain (loss) ......... (0.20) 0.87 0.33
------ ------ ------
Total income from investment operations .......... 0.05 1.35 0.59
------ ------ ------
Less dividends and distributions from:
Net investment income ........................... (0.25) (0.50) (0.27)
Net realized gain ............................... (0.19) (0.52) (0.32)
------ ------ ------
Total dividends and distributions ................ (0.44) (1.02) (0.59)
------ ------ ------
Net asset value, end of period ................... $12.36 $12.75 $12.42
====== ====== ======
TOTAL RETURN + ................................... 0.41%(1) 11.27% 4.79%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 0.94%(2)(3) 0.99%(3) 1.16%(2)
Net investment income ............................ 3.99%(2)(3) 3.97%(3) 4.15%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $1,606 $1,679 $10
Portfolio turnover rate .......................... 13%(1) 32% 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.
(3) Reflects overall Fund ratios for investment income and non-class
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
SEMIANNUAL REPORT
JULY 31, 1999
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
Mitchell M. Merin
President
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. Read the
prospectus carefully before investing.
