<PAGE> 1
<TABLE>
<S> <C>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS July 31, 2000
</TABLE>
DEAR SHAREHOLDER:
The six-month period ended July 31, 2000 was a turbulent one for the U.S.
markets. As evidence grew that the economy was on the verge of overheating, the
Federal Reserve Board raised interest rates by a total of 100 basis points.
Interest rates on intermediate-term Treasuries were highly volatile during the
period, as were spreads on mortgage-backed securities. Spreads are differences
in yield between types of fixed-income securities, in this case, Treasuries and
mortgage-backed securities. Five-year Treasuries ranged in yield between 6.81
percent and 6.08 percent. On July 31, 2000, the five-year Treasury note was
yielding 6.15 percent, compared to 6.68 percent six months earlier.
During the first quarter of 2000, spreads on mortgage-backed securities widened
from where they stood in late 1999. In May and June these spreads began to
narrow, but by July they had widened again. These spread movements were
indicative of reactions to the changes in the federal funds rate and
anticipation of possible future actions by the Fed. The effect was less
pronounced for long-term Treasuries, which benefited from the federal
government's program of buying back outstanding debt and a reduction in U.S.
government debt issuance due to the budget surplus. The subsequent reduction in
supply of long-term Treasuries resulted in an inverted yield curve, on which
short-term Treasury yields are higher than those of longer-term Treasuries.
The Department of Justice moved against Microsoft, and President Clinton spoke
of potential controls on the patenting of biotechnology. This combination of
events caused concerns about a possible slowdown in the deployment of new
technology, which in turn led to a sharp correction in the Nasdaq.
<PAGE> 2
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
LETTER TO THE SHAREHOLDERS July 31, 2000, continued
The markets rebounded toward the end of the second quarter, as inflation data
became more benign and the economy began to slow. The best-performing sectors
for the period were those that would benefit from a soft landing, including
financial services, real estate and utilities, as well as steady growth sectors
such as consumer staples and pharmaceuticals.
PERFORMANCE AND PORTFOLIO
For the period under review, Morgan Stanley Dean Witter Balanced Income Fund's
Class C shares produced a total return of 0.52 percent, compared to 3.20 percent
for the Standard & Poor's 500 Stock Index (S&P 500)(1) and 5.31 percent for the
Lehman Brothers Government/Credit Index.(2) For the same period the Fund's Class
A, B and D shares earned 0.85 percent, 0.53 percent and 0.98 percent
respectively. The performance of the Fund's four share classes varies because of
differing expenses. The total return figures given assume the reinvestment of
all distributions and do not reflect the deduction of any applicable sales
charges.
The Fund's underperformance relative to the S&P 500 can be attributed primarily
to its equity portion's value-oriented methodology, because value investing in
general was out of favor during the period. The fixed-income component
underperformed the Lehman index as a result of its underweighting in longer-term
U.S. Treasuries.
As of July 31, 2000, the Fund's net assets totaled more than $69 million. The
Fund's portfolio mix is 65 percent fixed-income instruments and 35 percent
equities. As of July 31, 2000, the Fund's fixed-income portfolio was invested as
follows: 64 percent in mortgage-backed securities, 23 percent in U.S. agency
obligations, 7 percent in U.S. Treasuries, 3 percent in U.S. corporate
obligations and the balance in cash equivalents. Over the course of the period,
the Fund's cash equivalent reserves were drawn down as cash flows warranted.
This action, coupled with some minor rebalancing of the portfolio, enabled us to
increase the Fund's exposure to both U.S. agency obligations and U.S. Treasuries
while reducing its exposure to mortgage-backed securities.
---------------------
(1)The Standard & Poor's 500 Index (S&P 500) is a broad-based index the
performance of which is based on the performance of 500 widely held common
stocks chosen for market size, liquidity and industry group representation.
The Index does not include any expenses, fees or charges. The Index is
unmanaged and should not be considered an investment.
(2)The Lehman Brothers U.S. Government/Credit Index (formerly Lehman Brothers
Government/Corporate Index) tracks the performance of government and
corporate obligations, including U.S. government agency and Treasury
securities and corporate and Yankee bonds. The Index does not include any
expenses, fees or charges. The Index is unmanaged and should not be
considered an investment.
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
LETTER TO THE SHAREHOLDERS July 31, 2000, continued
Since late last year, the Fund's equity component has shifted its emphasis
toward traditional companies that have made serious commitments to e-commerce.
Consequently, the Fund took steps to restructure its portfolio during the
period, initiating positions in Electronic Data Systems, Quaker Oats and Sears.
LOOKING AHEAD
We continue to believe that the outlook for the financial markets and the
economy is favorable. As inflation seems poised to remain low, we believe that
the strength in the economy has finally begun to slow as well. As a result, it
is becoming increasingly less likely that we will see any further interest-rate
tightening in the near future. Adjustments to the maturity structure and
composition of the Fund will be made as conditions warrant and attractive
opportunities become available.
We appreciate your support of Morgan Stanley Dean Witter Balanced Income Fund
and look forward to continuing to serve your investment needs.
<TABLE>
<S> <C>
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
</TABLE>
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FUND PERFORMANCE July 31, 2000
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES*
----------------------------------------------
<S> <C> <C>
PERIOD ENDED 7/31/00
-------------------------
1 Year (1.31)%(1) (6.49)%(2)
Since Inception (7/28/97) 4.77 %(1) 2.91 %(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES**
----------------------------------------------
<S> <C> <C>
PERIOD ENDED 7/31/00
-------------------------
1 Year (2.02)%(1) (6.61)%(2)
Since Inception (7/28/97) 3.97 %(1) 3.41 %(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES+
----------------------------------------------
<S> <C> <C>
PERIOD ENDED 7/31/00
-------------------------
1 Year (2.02)%(1) (2.94)%(2)
5 Years 7.78 %(1) 7.78 %(2)
Since Inception (3/28/95) 8.65 %(1) 8.65 %(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS D SHARES++
----------------------------------------------
<S> <C> <C>
PERIOD ENDED 7/31/00
-------------------------
1 Year (1.06)%(1)
Since Inception (7/28/97) 5.01 %(1)
</TABLE>
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.
---------------------
(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 contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of purchase.
++ Class D shares have no sales charge.
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
PORTFOLIO OF INVESTMENTS July 31, 2000 (unaudited)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (35.3%)
Aerospace (1.3%)
15,500 United Technologies Corp. .... $ 904,813
-----------
Aluminum (1.2%)
29,000 Alcoa, Inc. .................. 877,250
-----------
Auto Parts: O.E.M. (1.2%)
57,000 Delphi Automotive Systems
Corp. ....................... 844,313
-----------
Beverages - Non-Alcoholic (1.3%)
20,500 PepsiCo, Inc. ................ 939,156
-----------
Construction/Agricultural
Equipment/ Trucks (1.3%)
23,000 Deere & Co. .................. 886,938
-----------
Department Stores (1.2%)
27,500 Sears, Roebuck & Co. ......... 821,562
-----------
Discount Chains (1.3%)
30,000 Target Corp. ................. 870,000
-----------
Diversified Manufacturing (1.4%)
10,500 Minnesota Mining &
Manufacturing Co. ........... 945,656
-----------
E.D.P. Services (1.3%)
21,000 Electronic Data Systems
Corp. ....................... 903,000
-----------
Electric Utilities (2.5%)
31,500 GPU, Inc. .................... 834,750
21,500 Unicom Corp. ................. 882,843
-----------
1,717,593
-----------
Electronic Data Processing (1.3%)
8,000 International Business
Machines Corp. .............. 899,500
-----------
Finance Companies (1.3%)
34,500 Associates First Capital Corp.
(Class A).................... 903,469
-----------
Forest Products (1.3%)
19,500 Weyerhaeuser Co. ............. 890,906
-----------
Major Banks (2.5%)
18,500 Bank of America Corp. ........ 876,437
48,000 KeyCorp....................... 843,000
-----------
1,719,437
-----------
Major Chemicals (1.2%)
19,000 Du Pont (E.I.) de Nemours &
Co., Inc. ................... 860,938
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------
<C> <S> <C>
Major Pharmaceuticals (1.2%)
17,500 Bristol-Myers Squibb Co. ..... $ 868,438
-----------
Major U.S. Telecommunications (1.2%)
26,500 AT&T Corp. ................... 819,844
-----------
Motor Vehicles (2.4%)
18,500 Ford Motor Co. ............... 861,405
14,000 General Motors Corp. ......... 797,125
-----------
1,658,530
-----------
Multi-Sector Companies (1.3%)
17,500 General Electric Co. ......... 900,156
-----------
Oil/Gas Transmission (1.3%)
12,000 Enron Corp. .................. 883,500
-----------
Other Metals/Minerals (1.3%)
22,000 Phelps Dodge Corp. ........... 895,125
-----------
Package Goods/Cosmetics (1.3%)
15,500 Procter & Gamble Co. ......... 881,563
-----------
Packaged Foods (1.2%)
12,000 Quaker Oats Company (The)..... 807,000
-----------
Railroads (1.3%)
36,000 CSX Corp. .................... 893,250
-----------
Semiconductors (1.2%)
13,000 Intel Corp. .................. 867,750
-----------
TOTAL COMMON STOCKS
(Cost $23,254,777)............ 24,459,687
-----------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
---------
<C> <S> <C>
CORPORATE BONDS (1.9%)
Finance Companies (1.3%)
Associates Corp. of North America
$ 500 6.01% due 02/07/03........... 480,420
500 6.25% due 11/01/08........... 450,355
-----------
930,775
-----------
Major U.S. Telecommunications (0.6%)
MCI WorldCom, Inc.
400 6.40% due 08/15/05........... 381,704
-----------
TOTAL CORPORATE BONDS
(Cost $1,428,100)............. 1,312,479
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
PORTFOLIO OF INVESTMENTS July 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
-------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (19.9%)
Federal Farm Credit Banks
$ 900 5.92% due 12/29/04........... $ 862,182
-----------
Federal Home Loan Banks
1,000 0.00% due 02/25/04........... 782,980
2,000 0.00% due 07/02/12........... 745,760
1,000 5.88% due 11/25/08........... 908,380
1,200 5.96% due 02/05/08........... 1,110,888
-----------
3,548,008
-----------
Federal National Mortgage
Assoc.
1,000 6.55% due 11/21/07........... 956,260
500 6.75% due 07/30/07........... 479,510
-----------
1,435,770
-----------
Resolution Funding Corp.
(Coupon Strips)
1,500 0.00% due 10/15/04........... 1,143,075
1,300 0.00% due 01/15/06........... 916,604
3,000 0.00% due 01/15/08........... 1,869,960
-----------
3,929,639
-----------
Tennessee Valley Authority
740 0.00% due 10/15/04........... 554,734
-----------
U.S. Treasury Notes
1,200 5.625% due 02/15/06.......... 1,167,732
1,000 6.125% due 08/15/07.......... 996,840
500 6.25% due 02/15/07........... 501,835
-----------
2,666,407
-----------
U.S. Treasury Strips
1,000 0.00% due 02/15/05........... 758,130
-----------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS
(Cost $14,470,108)............ 13,754,870
-----------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES (42.4%)
Federal National Mortgage Assoc.
940 6.00% due 10/01/28........... 862,109
1,369 6.00% due 02/01/11-04/01/13.. 1,295,623
1,487 6.50% due 01/01/13-06/01/13.. 1,435,307
868 6.50% due 04/01/28-06/01/28.. 819,732
2,178 7.00% due 08/01/25-02/01/29.. 2,103,072
991 7.00% due 07/01/11-06/01/12.. 972,649
2,059 7.50% due 01/01/23-05/01/27.. 2,028,619
523 8.00% due 05/01/24-07/01/26.. 524,968
-----------
10,042,079
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
-------------------------------------------------------
<C> <S> <C>
Government National Mortgage Assoc. I
$4,684 6.00% due 06/15/28-12/15/28.. $ 4,315,467
5,106 6.50% due 08/15/27-05/15/29.. 4,840,763
1,086 7.00% due 04/15/24-06/15/29.. 1,054,020
1,066 7.50% due 08/15/25-10/15/26.. 1,055,218
459 8.00% due 06/15/26-07/15/26.. 462,292
-----------
11,727,760
-----------
Government National Mortgage Assoc. II
6,225 6.50% due 04/20/28-03/20/29.. 5,873,317
1,788 7.00% due 02/20/26-06/20/27.. 1,725,789
-----------
7,599,106
-----------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $30,669,691)............ 29,368,945
-----------
SHORT-TERM INVESTMENT (1.7%)
REPURCHASE AGREEMENT
1,177 The Bank of New York 6.50% due
08/01/00 (dated 07/31/00;
proceeds $1,177,569) (a)
(Cost $1,177,357)............ 1,177,357
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(Cost $71,000,033) (b).......... 101.2% 70,073,338
LIABILITIES IN EXCESS OF
OTHER ASSETS................... (1.2) (832,668)
----- -----------
NET ASSETS...................... 100.0% $69,240,670
===== ===========
</TABLE>
---------------------
(a) Collateralized by $1,167,709 U.S. Treasury Note 6.50% due 02/28/02 valued
at $1,200,908.
(b) The aggregate cost for federal income tax purposes approximates the
aggregated cost for book purposes. The aggregate gross unrealized
appreciation is $3,724,881 and the aggregate gross unrealized depreciation
is $4,651,576, resulting in net unrealized depreciation of $926,695.
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2000 (unaudited)
ASSETS:
Investments in securities, at value (cost $71,000,033)...... $70,073,338
Receivable for:
Interest................................................ 335,270
Investments sold........................................ 155,360
Dividends............................................... 66,387
Shares of beneficial interest sold...................... 17,993
Prepaid expenses............................................ 66,090
-----------
TOTAL ASSETS............................................ 70,714,438
-----------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased............... 1,339,307
Plan of distribution fee................................ 58,563
Investment management fee............................... 36,561
Accrued expenses............................................ 39,337
-----------
TOTAL LIABILITIES....................................... 1,473,768
-----------
NET ASSETS.............................................. $69,240,670
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $71,434,644
Net unrealized depreciation................................. (926,695)
Accumulated undistributed net investment income............. 334,129
Accumulated net realized loss............................... (1,601,408)
-----------
NET ASSETS.............................................. $69,240,670
===========
CLASS A SHARES:
Net Assets.................................................. $2,038,151
Shares Outstanding (unlimited authorized, $.01 par value)... 179,744
NET ASSET VALUE PER SHARE............................... $11.34
===========
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value)........ $11.97
===========
CLASS B SHARES:
Net Assets.................................................. $43,545,080
Shares Outstanding (unlimited authorized, $.01 par value)... 3,847,524
NET ASSET VALUE PER SHARE............................... $11.32
===========
CLASS C SHARES:
Net Assets.................................................. $23,577,387
Shares Outstanding (unlimited authorized, $.01 par value)... 2,081,888
NET ASSET VALUE PER SHARE............................... $11.33
===========
CLASS D SHARES:
Net Assets.................................................. $80,052
Shares Outstanding (unlimited authorized, $.01 par value)... 7,067
NET ASSET VALUE PER SHARE............................... $11.33
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended July 31, 2000 (unaudited)
NET INVESTMENT INCOME:
INCOME
Interest.................................................... $ 1,744,144
Dividends................................................... 343,585
-----------
TOTAL INCOME............................................ 2,087,729
-----------
EXPENSES
Plan of distribution fee (Class A shares)................... 2,668
Plan of distribution fee (Class B shares)................... 246,241
Plan of distribution fee (Class C shares)................... 129,997
Investment management fee................................... 236,372
Transfer agent fees and expenses............................ 37,234
Registration fees........................................... 36,381
Professional fees........................................... 34,076
Shareholder reports and notices............................. 18,669
Custodian fees.............................................. 9,222
Trustees' fees and expenses................................. 6,010
Organizational expenses..................................... 5,169
Other....................................................... 1,207
-----------
TOTAL EXPENSES.......................................... 763,246
-----------
NET INVESTMENT INCOME................................... 1,324,483
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss........................................... (1,371,095)
Net change in unrealized depreciation....................... 306,626
-----------
NET LOSS................................................ (1,064,469)
-----------
NET INCREASE................................................ $ 260,014
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
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
2000 JANUARY 31, 2000
---------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................. $ 1,324,483 $ 3,165,143
Net realized gain (loss).............................. (1,371,095) 2,544,939
Net change in unrealized appreciation/depreciation.... 306,626 (8,301,536)
------------ -----------
NET INCREASE (DECREASE)........................... 260,014 (2,591,454)
------------ -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares.................................... (43,581) (110,360)
Class B shares.................................... (790,902) (1,941,697)
Class C shares.................................... (418,434) (1,045,865)
Class D shares.................................... (30,377) (64,587)
Net realized gain
Class A shares.................................... (56,866) (43,576)
Class B shares.................................... (1,253,186) (1,326,124)
Class C shares.................................... (665,326) (704,451)
Class D shares.................................... (34,043) (32,473)
------------ -----------
TOTAL DIVIDENDS AND DISTRIBUTIONS................. (3,292,715) (5,269,133)
------------ -----------
Net decrease from transactions in shares of beneficial
interest............................................. (17,822,638) (1,380,107)
------------ -----------
NET DECREASE...................................... (20,855,339) (9,240,694)
NET ASSETS:
Beginning of period................................... 90,096,009 99,336,703
------------ -----------
END OF PERIOD
(Including undistributed net investment income of
$334,129 and $292,940, respectively).............. $69,240,670 $90,096,009
============ ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 2000 (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 portfolio security listed or traded
on the New York or American Stock Exchange, NASDAQ, or other exchange is valued
at its latest sale price, 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 a security is traded on more than one exchange, the security is valued on
the exchange designated as the primary market pursuant to procedures adopted by
the Trustees); and (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest available bid
price; (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
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 2000 (unaudited) continued
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.
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
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 2000 (unaudited) continued
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 were fully
amortized as of March 27, 2000.
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.
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 B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $3,001,111
at July 31, 2000.
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
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 2000 (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,
2000, 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,
2000, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $105,698 and $5,711,
respectively and received $3,089 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which are
not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/prepayments of portfolio
securities, excluding short-term investments, for the six months ended July 31,
2000, aggregated $8,852,625 and $29,029,465, respectively. Included in the
aforementioned are purchases and sales/prepayments of U.S. Government securities
of $1,116,393, and $16,128,541, respectively.
For the six months ended July 31, 2000, the Fund incurred brokerage commissions
of $10,348 with Dean Witter Reynolds Inc. ("DWR"), an affiliate of the
Investment Manager and Distributor, for portfolio transactions executed on
behalf of the Fund. At July 31, 2000, included in the receivable for investments
sold were $78,992 for unsettled trades with DWR.
For the six months ended July 31, 2000, the Fund incurred brokerage commissions
of $1,995 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager and Distributor, 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, 2000, the Fund had
transfer agent fees and expenses payable of approximately $800.
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS July 31, 2000 (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, 2000 JANUARY 31, 2000
------------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold........................................................ 232,745 $ 2,675,218 107,231 $ 1,318,540
Reinvestment of dividends and distributions................. 7,009 79,144 7,646 93,149
Redeemed.................................................... (245,422) (2,806,797) (356,697) (4,549,197)
---------- ------------ ---------- ------------
Net decrease - Class A...................................... (5,668) (52,435) (241,820) (3,137,508)
---------- ------------ ---------- ------------
CLASS B SHARES
Sold........................................................ 1,395,587 16,385,729 2,279,128 28,517,998
Reinvestment of dividends and distributions................. 127,666 1,438,383 188,825 2,303,538
Redeemed.................................................... (2,503,531) (29,198,982) (2,108,952) (25,938,796)
---------- ------------ ---------- ------------
Net increase (decrease) - Class B........................... (980,278) (11,374,870) 359,001 4,882,740
---------- ------------ ---------- ------------
CLASS C SHARES
Sold........................................................ 77,943 917,408 550,764 6,896,497
Reinvestment of dividends and distributions................. 86,075 970,468 127,098 1,552,569
Redeemed.................................................... (589,727) (6,864,176) (939,586) (11,563,893)
---------- ------------ ---------- ------------
Net decrease - Class C...................................... (425,709) (4,976,300) (261,724) (3,114,827)
---------- ------------ ---------- ------------
CLASS D SHARES
Sold........................................................ 7,392 86,435 11,547 141,011
Reinvestment of dividends and distributions................. 5,543 62,677 7,958 97,060
Redeemed.................................................... (137,024) (1,568,145) (20,008) (248,583)
---------- ------------ ---------- ------------
Net decrease - Class D...................................... (124,089) (1,419,033) (503) (10,512)
---------- ------------ ---------- ------------
Net decrease in Fund........................................ (1,535,744) $(17,822,638) (145,046) $ (1,380,107)
========== ============ ========== ============
</TABLE>
6. FEDERAL INCOME TAX STATUS
As of January 31, 2000, the Fund had temporary book/tax differences attributable
to capital loss deferrals on wash sales.
14
<PAGE> 15
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 JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
JULY 31, 2000 JANUARY 31, 2000 JANUARY 31, 1999 JANUARY 31, 1998
---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period..................... $11.80 $12.75 $12.41 $12.42
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income................................... 0.23 0.47 0.46 0.25
Net realized and unrealized gain (loss)................. (0.13) (0.69) 0.87 0.32
------ ------ ------ ------
Total income (loss) from investment operations........... 0.10 (0.22) 1.33 0.57
------ ------ ------ ------
Less dividends and distributions from:
Net investment income................................... (0.24) (0.47) (0.47) (0.26)
Net realized gain....................................... (0.32) (0.26) (0.52) (0.32)
------ ------ ------ ------
Total dividends and distributions........................ (0.56) (0.73) (0.99) (0.58)
------ ------ ------ ------
Net asset value, end of period........................... $11.34 $11.80 $12.75 $12.41
====== ====== ====== ======
TOTAL RETURN+............................................ 0.85%(1) (1.84)% 11.11% 4.60%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................. 1.22%(2)(3) 1.20 %(3) 1.23%(3) 1.43%(2)
Net investment income.................................... 4.06%(2)(3) 3.82 %(3) 3.73%(3) 3.92%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.................. $2,038 $2,187 $5,448 $903
Portfolio turnover rate.................................. 11%(1) 35 % 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> 16
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
JULY 31, 2000 JANUARY 31, 2000 JANUARY 31, 1999 JANUARY 31, 1998
-------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
CLASS B SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of
period.............................. $11.77 $12.74 $12.41 $12.42
------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income............... 0.19 0.38 0.38 0.20
Net realized and unrealized gain
(loss)............................ (0.13) (0.71) 0.85 0.33
------ ------ ------ ------
Total income (loss) from investment
operations.......................... 0.06 (0.33) 1.23 0.53
------ ------ ------ ------
Less dividends and distributions
from:
Net investment income............... (0.19) (0.38) (0.38) (0.22)
Net realized gain................... (0.32) (0.26) (0.52) (0.32)
------ ------ ------ ------
Total dividends and distributions.... (0.51) (0.64) (0.90) (0.54)
------ ------ ------ ------
Net asset value, end of period....... $11.32 $11.77 $12.74 $12.41
====== ====== ====== ======
TOTAL RETURN+........................ 0.53%(1) (2.69)% 10.32% 4.19%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. 1.97%(2)(3) 1.95 %(3) 1.99%(3) 2.16%(2)
Net investment income................ 3.31%(2)(3) 3.07 %(3) 2.97%(3) 3.15%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands........................... $43,545 $56,827 $56,919 $34,021
Portfolio turnover rate.............. 11%(1) 35 % 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> 17
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, 2000++ 2000++ 1999++ 1998**++ 1997 JANUARY 31, 1996
---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period....... $11.78 $12.74 $12.41 $11.57 $11.34 $10.00
------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income..................... 0.19 0.38 0.38 0.42 0.36 0.38
Net realized and unrealized gain (loss)... (0.13) (0.70) 0.85 1.23 0.50 1.30
------- ------- ------- ------- ------- -------
Total income (loss) from investment
operations................................ 0.06 (0.32) 1.23 1.65 0.86 1.68
------- ------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income..................... (0.19) (0.38) (0.38) (0.40) (0.38) (0.33)
Net realized gain......................... (0.32) (0.26) (0.52) (0.41) (0.25) (0.01)
------- ------- ------- ------- ------- -------
Total dividends and distributions.......... (0.51) (0.64) (0.90) (0.81) (0.63) (0.34)
------- ------- ------- ------- ------- -------
Net asset value, end of period............. $11.33 $11.78 $12.74 $12.41 $11.57 $11.34
======= ======= ======= ======= ======= =======
TOTAL RETURN+.............................. 0.52%(1) (2.62)% 10.32% 14.42% 7.82% 16.93%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses................................... 1.97%(2)(4) 1.95%(4) 1.94%(4) 2.07% 1.88%(3) --%(2)(3)
Net investment income...................... 3.31%(2)(4) 3.07%(4) 3.02%(4) 3.30% 3.49%(3) 5.27%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.... $23,577 $29,535 $35,291 $30,402 $48,284 $31,252
Portfolio turnover rate.................... 11%(1) 35% 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> 18
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
JULY 31, 2000 JANUARY 31, 2000 JANUARY 31, 1999 JANUARY 31, 1998
------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................. $11.79 $12.75 $12.42 $12.42
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income................................ 0.25 0.50 0.48 0.26
Net realized and unrealized gain (loss).............. (0.14) (0.70) 0.87 0.33
------ ------ ------ ------
Total income (loss) from investment operations........ 0.11 (0.20) 1.35 0.59
------ ------ ------ ------
Less dividends and distributions from:
Net investment income................................ (0.25) (0.50) (0.50) (0.27)
Net realized gain.................................... (0.32) (0.26) (0.52) (0.32)
------ ------ ------ ------
Total dividends and distributions..................... (0.57) (0.76) (1.02) (0.59)
------ ------ ------ ------
Net asset value, end of period........................ $11.33 $11.79 $12.75 $12.42
====== ====== ====== ======
TOTAL RETURN+......................................... 0.98%(1) (1.63)% 11.27% 4.79%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................. 0.97%(2)(3) 0.95%(3) 0.99%(3) 1.16%(2)
Net investment income................................. 4.31%(2)(3) 4.07%(3) 3.97%(3) 4.15%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............... $80 $1,546 $1,679 $10
Portfolio turnover rate............................... 11%(1) 35% 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 specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
19
<PAGE> 20
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
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
----------------------------------
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
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.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
MORGAN STANLEY
DEAN WITTER
BALANCED
INCOME FUND
Semiannual Report
July 31, 2000
[PHOTO]
