<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund Two World Trade Center,
Letter to the Shareholders January 31, 2000 New York, New York 10048
DEAR SHAREHOLDER:
The economy continued its path of robust growth over the 12-month period ended
January 31, 2000. In fact, as the current expansion enters its ninth year it
will soon surpass the longest-running growth phase in history, the 106-month
expansion of the 1960s. With renewed strength in the world economy and the
threat of domestic inflation looming, the Federal Reserve Board raised the
federal funds rate in three steps, from 4.75 percent to 5.50 percent, between
June and November 1999, taking back all the 75 basis points it cut in 1998.
Subsequently, on February 2, 2000, the federal funds rate was raised an
additional 25 basis points.
Interest rates on intermediate-term U.S. Treasuries were highly volatile during
the period. Yields on five-year Treasuries ranged from 4.64 percent to 6.68
percent. On January 31, 2000, the five-year Treasury note was yielding 6.68
percent compared to 4.64 percent one year earlier.
The U.S. stock market reached new highs during the second half of 1999 before
pulling back in late January and early February of 2000. Technology stocks,
particularly those related to information processing, telecommunications and
semiconductors, led the equity market during this period. Consumer staples also
performed well in the period, rising nearly 30 percent. Lagging the broad market
were pollution control, auto parts, energy and aerospace.
PERFORMANCE
For the twelve-month period ended January 31, 2000, Morgan Stanley Dean Witter
Balanced Income Fund's Class C shares produced a total return of -2.62 percent,
compared to -2.87 percent for the Lehman Brothers Government/Corporate Bond
Index and 10.35 percent for the Standard & Poor's 500 Composite Stock Price
Index (S&P 500). For the same period, the Fund's Class A, B and D shares
produced a total return of -1.84 percent, -2.69 percent and -1.63 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 accompanying chart compares the Fund's performance to that of the
S&P 500 and Lehman indexes.
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Letter to the Shareholders January 31, 2000, continued
PORTFOLIO
At the end of the fiscal year, the Fund's net assets totaled more than $90
million. The Fund's portfolio mix is 66 percent fixed-income securities and 34
percent equities. As of January 31, 2000, the Fund's fixed-income portfolio was
invested as follows: 68 percent in mortgage-backed securities, 19 percent in
U.S. agency obligations, 6 percent in U.S. Treasuries, 4 percent in U.S.
corporate obligations and the balance in cash equivalents. The Fund's
fixed-income component was overweighted in mortgaged-backed securities, which
helped mitigate the negative effects of 1999's bear market in Treasuries.
Narrower spreads, along with a diminished supply of mortgage-backed securities,
helped the mortgage-backed market outperform both the Treasury and agency
markets as strong sponsorship continued for most of the year from banks and
investors.
During the period the Fund initiated positions in Keycorp, Minnesota Mining &
Manufacturing, Phelps Dodge, and United Technologies and liquidated its holdings
in Banc One, Raytheon, Tenneco and Timken. Currently the Fund maintains
investments in 27 equity securities.
LOOKING AHEAD
Many in the financial community believe that the Fed will find it necessary to
raise interest rates as the year progresses if the economy continues to grow as
anticipated. If rate increases are implemented, this will be a precautionary
measure taken to help keep economic growth and inflation under control. Going
forward, we believe that the outlook for the financial markets and the economy
is favorable. Accordingly, adjustments to the maturity structure and composition
of the Fund will be made as conditions warrant and attractive opportunities
become available.
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 January 31, 2000
GROWTH OF $10,000 - Class C
($ in Thousands)
Date Total S&P 500 Lehman
- ----------------------------------------------------------------------
March 28, 1995 $10,000 $10,000 $10,000
- ----------------------------------------------------------------------
January 31, 1996 $11,693 $12,912 $11,429
- ----------------------------------------------------------------------
January 31, 1997 $12,608 $16,305 $11,702
- ----------------------------------------------------------------------
January 31, 1998 $14,426 $20,691 $13,009
- ----------------------------------------------------------------------
January 31, 1999 $15,914 $27,412 $14,144
- ----------------------------------------------------------------------
January 31, 2000 $15,497(3) $30,248 $13,738
- ----------------------------------------------------------------------
-- Fund -- S&P 500(4) -- Lehman Index(5)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. PERFORMANCE FOR CLASS A,
CLASS B AND CLASS D SHARES WILL VARY FROM THE PERFORMANCE OF CLASS C SHARES
SHOWN ABOVE DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
CLASS C SHARES*
- -----------------------------------------------------------------
PERIOD ENDED 1/31/00
- --------------------
1 Year -2.62%(1) -3.55%(2)
Since Inception (3/28/95) 9.46%(1) 9.46%(2)
CLASS B SHARES++
- -----------------------------------------------------------------
PERIOD ENDED 1/31/00
- --------------------
1 Year -2.69%(1) -7.31%(2)
Since Inception (7/28/97) 4.56%(1) 3.49%(2)
CLASS A SHARES+
- -----------------------------------------------------------------
PERIOD ENDED 1/31/00
- --------------------
1 Year -1.84%(1) -6.99%(2)
Since Inception (7/28/97) 5.39%(1) 3.15%(2)
CLASS D SHARES#
- -----------------------------------------------------------------
PERIOD ENDED 1/31/00
- --------------------
1 Year -1.63%(1)
Since Inception (7/28/97) 5.62%(1)
- ---------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value assuming a complete redemption on January 31, 2000.
(4) The Standard and Poor's 500 Stock Index (S&P 500) is a broad-based index,
the performance of which is based on the average performance of 500 widely
held common stocks. The Index does not include any expenses, fees or
charges. The Index is unmanaged and should not be considered an investment.
(5) The Lehman Brothers Government/Corporate Bond Index tracks the performance
of government and corporate obligations, including U.S. government agency
and U.S. treasury securities and corporate and yankee bonds with maturities
of one to ten years. The performance of the Index does not include any
expenses, fees or charges. The Index is unmanaged and should not be
considered an investment.
* The maximum CDSC for Class C shares is 1% for shares redeemed within one
year of purchase.
+ 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.
# Class D shares have no sales charge.
3
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Portfolio of Investments January 31, 2000
NUMBER OF
SHARES VALUE
- ---------- ------------
COMMON STOCKS (34.4%)
Aerospace (1.2%)
20,500 United Technologies Corp. ........... $ 1,085,219
Aluminum (1.2%)
15,200 Alcoa, Inc. ......................... 1,059,250
------------
Auto Parts: O.E.M. (1.3%)
66,500 Delphi Automotive Systems Corp....... 1,151,281
------------
Beverages - Non-Alcoholic (1.2%)
32,500 PepsiCo, Inc. ....................... 1,109,063
------------
Construction/Agricultural
Equipment/Trucks (1.3%)
26,000 Deere & Co. ......................... 1,135,875
------------
Department Stores (1.3%)
37,500 May Department Stores Co. ........... 1,167,188
------------
Discount Chains (1.3%)
17,000 Target Corp. ........................ 1,123,062
------------
Diversified Manufacturing (1.3%)
12,100 Minnesota Mining &
Manufacturing Co. ................. 1,132,862
------------
Electric Utilities (2.7%)
39,500 GPU, Inc. ........................... 1,145,500
33,000 Unicom Corp. ........................ 1,291,125
------------
2,436,625
------------
Electronic Data Processing (1.2%)
10,000 International Business Machines
Corp. ............................. 1,121,875
------------
Finance Companies (1.2%)
53,000 Associates First Capital Corp.
(Class A) ......................... 1,060,000
------------
Forest Products (1.2%)
19,000 Weyerhaeuser Co. .................... 1,090,125
------------
Major Banks (2.7%)
25,500 BankAmerica Corp. ................... 1,235,156
57,000 KeyCorp. ............................ 1,197,000
------------
2,432,156
------------
Major Chemicals (1.2%)
18,700 Du Pont (E.I.) de Nemours & Co.,
Inc. .............................. 1,103,300
------------
Major Pharmaceuticals (1.3%)
18,000 Bristol-Myers Squibb Co. ............ 1,188,000
------------
Major U.S. Telecommunications (1.3%)
22,500 AT&T Corp. .......................... 1,186,875
------------
Meat/Poultry/Fish (1.3%)
52,700 ConAgra, Inc. ....................... 1,126,463
------------
NUMBER OF
SHARES VALUE
- ---------- ------------
Motor Vehicles (2.6%)
23,000 Ford Motor Co. ...................... $ 1,144,250
15,000 General Motors Corp. ................ 1,206,562
------------
2,350,812
------------
Multi-Sector Companies (1.2%)
8,000 General Electric Co. ................ 1,067,000
------------
Oil/Gas Transmission (1.3%)
17,800 Enron Corp. ......................... 1,200,388
------------
Other Metals/Minerals (1.2%)
19,200 Phelps Dodge Corp. .................. 1,116,000
------------
Package Goods/Cosmetics (1.3%)
11,500 Procter & Gamble Co. ................ 1,160,063
------------
Railroads (1.2%)
37,800 CSX Corp. ........................... 1,105,650
------------
<PAGE>
Semiconductors (1.4%)
12,500 Intel Corp. ......................... 1,235,937
------------
TOTAL COMMON STOCKS
(Identified Cost $28,470,413)........ 30,945,069
------------
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
CORPORATE BONDS (2.5%)
Finance Companies (2.1%)
$ 500 Associates Corp. of North America
6.01% due 02/07/03 ................. 479,250
500 Associates Corp. of North America
6.25% due 11/01/08 ................. 451,800
1,000 Ford Motor Credit Corp.
6.00% due 01/14/03 ................. 961,720
------------
1,892,770
------------
Major U.S. Telecommunications (0.4%)
400 MCI WorldCom, Inc.
6.40% due 08/15/05 ................. 379,040
------------
TOTAL CORPORATE BONDS
(Identified Cost $2,422,110).......... 2,271,810
------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (17.1%)
Federal Farm Credit Banks
1,000 5.90% due 01/10/05 ................... 942,400
900 5.92% due 12/29/04 ................... 849,492
------------
1,791,892
------------
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Portfolio of Investments January 31, 2000, continued
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------- -----------
Federal Home Loan Banks
$ 1,000 0.00% due 02/25/04 .................. $ 743,630
2,000 0.00% due 07/02/12 .................. 725,120
1,000 5.88% due 11/25/08 .................. 898,880
1,200 5.96% due 02/05/08 .................. 1,090,308
-----------
3,457,938
-----------
Federal National Mortgage Assoc.
1,000 6.55% due 11/21/07 .................. 941,290
500 6.75% due 07/30/07 .................. 476,285
-----------
1,417,575
-----------
Resolution Funding Corp.
(Coupon Strips)
1,300 0.00% due 04/15/04 .................. 966,745
1,500 0.00% due 10/15/04 .................. 1,086,720
1,300 0.00% due 01/15/06 .................. 853,203
3,000 0.00% due 01/15/08+ ................. 1,737,000
-----------
4,643,668
-----------
Tennessee Valley Authority
740 0.00% due 10/15/04 .................. 527,694
-----------
U.S. Treasury Notes
1,500 5.625% due 02/15/06+ ................ 1,418,850
1,000 6.125% due 08/15/07 ................. 964,150
500 6.25% due 02/15/07 .................. 486,485
-----------
2,869,485
-----------
U.S. Treasury Strips
1,000 0.00% due 02/15/05 .................. 714,470
-----------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Identified Cost $16,557,202).......... 15,422,722
-----------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES (45.8%)
Federal National Mortgage Assoc.
1,317 6.00% due 04/01/06 .................. 1,249,037
1,451 6.00% due 02/01/11-04/01/13 ......... 1,353,642
990 6.00% due 10/01/28 .................. 890,514
2,744 6.50% due 03/01/11-06/01/13 ......... 2,617,770
890 6.50% due 04/01/28-06/01/28 ......... 825,791
1,612 7.00% due 07/01/11-07/01/12 ......... 1,572,198
3,822 7.00% due 08/01/25-02/01/29 ......... 3,639,163
2,507 7.50% due 08/01/23-05/01/27 ......... 2,444,973
563 8.00% due 05/01/24-07/01/26 ......... 561,582
2,000 8.00%* .............................. 1,988,750
-----------
17,143,420
-----------
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------- -----------
Government National Mortgage
Assoc. I
$ 4,833 6.00% due 06/15/28-12/15/28 ......... $ 4,317,581
7,713 6.50% due 10/15/25-05/15/29 ......... 7,122,898
2,202 7.00% due 09/15/23-06/15/29 ......... 2,094,431
2,334 7.50% due 08/15/25-10/15/26 ......... 2,274,307
504 8.00% due 06/15/26-07/15/26 ......... 502,398
-----------
16,311,615
-----------
Government National Mortgage
Assoc. II
6,511 6.50% due 04/20/28-03/20/29 ......... 5,996,198
1,899 7.00% due 02/20/26-06/20/27 ......... 1,799,023
-----------
7,795,221
-----------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Identified Cost $43,673,453).......... 41,250,256
-----------
SHORT-TERM INVESTMENT (2.2%)
REPURCHASE AGREEMENT
2,003 The Bank of New York 5.75%
due 02/01/00 (dated 01/31/00;
proceeds $2,003,557) (a)
(Identified Cost $2,003,237)......... 2,003,237
-----------
TOTAL INVESTMENTS
(Identified Cost $93,126,415) (b)......... 102.0% 91,893,094
LIABILITIES IN EXCESS OF OTHER
ASSETS ................................... (2.0) (1,797,085)
---- -----------
NET ASSETS ............................... 100.0% $90,096,009
====== ===========
- --------------------------------
* Security was purchased on a forward commitment basis with an approximate
principal amount and no definite maturity date; the actual principal amount
and maturity date will be determined upon settlement.
+ Some or all of these securities are segregated in connection with
securities purchased on a forward commitment basis.
(a) Collateralized by $2,022,302 U.S. Treasury Note 6.50% due 05/31/01 valued
at $2,043,305.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $4,734,739 and the
aggregate gross unrealized depreciation is $5,968,060, resulting in net
unrealized depreciation of $1,233,321.
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
January 31, 2000
ASSETS:
Investments in securities, at value
(identified cost $93,126,415)................................... $91,893,094
Receivable for:
Interest ...................................................... 418,840
Shares of beneficial interest sold ............................ 366,374
Dividends ..................................................... 87,005
Deferred organizational expenses ................................. 5,169
Prepaid expenses ................................................. 39,897
-----------
TOTAL ASSETS .................................................. 92,810,379
-----------
LIABILITIES:
Payable for:
Investments purchased ......................................... 2,340,550
Shares of beneficial interest repurchased ..................... 196,125
Plan of distribution fee ...................................... 75,918
Investment management fee ..................................... 47,249
Accrued expenses ................................................. 54,528
-----------
TOTAL LIABILITIES ............................................. 2,714,370
-----------
NET ASSETS .................................................... $90,096,009
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital .................................................. $89,257,282
Net unrealized depreciation ...................................... (1,233,321)
Accumulated undistributed net investment income .................. 292,940
Accumulated undistributed net realized gain ...................... 1,779,108
-----------
NET ASSETS .................................................... $90,096,009
===========
CLASS A SHARES:
Net Assets ....................................................... $2,187,426
Shares Outstanding (unlimited authorized, $.01 par value)......... 185,412
NET ASSET VALUE PER SHARE ..................................... $11.80
======
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ............... $12.45
======
CLASS B SHARES:
Net Assets ....................................................... $56,827,480
Shares Outstanding (unlimited authorized, $.01 par value)......... 4,827,802
NET ASSET VALUE PER SHARE ..................................... $11.77
======
CLASS C SHARES:
Net Assets ....................................................... $29,535,272
Shares Outstanding (unlimited authorized, $.01 par value)......... 2,507,597
NET ASSET VALUE PER SHARE ..................................... $11.78
======
CLASS D SHARES:
Net Assets ....................................................... $1,545,831
Shares Outstanding (unlimited authorized, $.01 par value)......... 131,156
NET ASSET VALUE PER SHARE ..................................... $11.79
======
See Notes to Financial Statements
6
s<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Financial Statements, continued
STATEMENT OF OPERATIONS
For the year ended January 31, 2000
NET INVESTMENT INCOME:
INCOME
Interest .......................................... $ 4,282,349
Dividends ......................................... 825,197
-----------
TOTAL INCOME ................................... 5,107,546
-----------
EXPENSES
Plan of distribution fee (Class A shares) ......... 7,480
Plan of distribution fee (Class B shares) ......... 629,376
Plan of distribution fee (Class C shares) ......... 341,789
Investment management fee ......................... 610,586
Professional fees ................................. 87,953
Transfer agent fees and expenses .................. 84,184
Registration fees ................................. 69,386
Shareholder reports and notices ................... 45,086
Organizational expenses ........................... 34,000
Custodian fees .................................... 18,199
Trustees' fees and expenses ....................... 10,940
Other ............................................. 3,424
-----------
TOTAL EXPENSES ................................. 1,942,403
-----------
NET INVESTMENT INCOME .......................... 3,165,143
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain ................................. 2,544,939
Net change in unrealized appreciation ............. (8,301,536)
-----------
NET LOSS ....................................... (5,756,597)
-----------
NET DECREASE ...................................... $(2,591,454)
===========
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Financial Statements, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JANUARY 31, 2000 JANUARY 31, 1999
------------------ -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 3,165,143 $ 2,485,963
Net realized gain .................................... 2,544,939 4,548,195
Net change in unrealized appreciation ................ (8,301,536) 1,158,569
----------- ------------
NET INCREASE (DECREASE) ........................... (2,591,454) 8,192,727
----------- ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares .................................... (110,360) (90,042)
Class B shares .................................... (1,941,697) (1,360,747)
Class C shares .................................... (1,045,865) (991,558)
Class D shares .................................... (64,587) (34,394)
Net realized gain
Class A shares .................................... (43,576) (188,753)
Class B shares .................................... (1,326,124) (2,103,741)
Class C shares .................................... (704,451) (1,368,093)
Class D shares .................................... (32,473) (58,637)
----------- ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ................. (5,269,133) (6,195,965)
----------- ------------
Net increase (decrease) from transactions in shares of
beneficial interest ................................ (1,380,107) 32,003,023
----------- ------------
NET INCREASE (DECREASE) ........................... (9,240,694) 33,999,785
NET ASSETS:
Beginning of period .................................. 99,336,703 65,336,918
----------- ------------
END OF PERIOD
(Including undistributed net investment income of
$292,940 and $266,570, respectively)............... $90,096,009 $99,336,703
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Notes to Financial Statements January 31, 2000
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
9
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Notes to Financial Statements January 31, 2000, 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 $136,000 have been reimbursed. The
10
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Notes to Financial Statements January 31, 2000, 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.
11
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Notes to Financial Statements January 31, 2000, 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 $2,673,321 at January 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 expenses representing
a gross sales credit to account executives may be reimbursed in the subsequent
calendar year. For the year ended January 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 year ended January 31, 2000,
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, $160,587
and $14,634, respectively and received $21,746 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 year ended January 31,
2000, aggregated $34,837,199 and $36,321,309, respectively. Included in the
aforementioned are purchases and sales/prepayments of U.S. Government securities
of $15,914,764 and $13,119,969, respectively.
For the year ended January 31, 2000, the Fund incurred brokerage commissions of
$18,588 with DWR for portfolio transactions executed on behalf of the Fund. At
January 31, 2000, in the payable for investments purchased was $211,999 for
unsettled trades with DWR.
For the year ended January 31, 2000, the Fund incurred brokerage commissions of
$4,285 with Morgan Stanley & Co., Inc., an affiliate of the Investment Manager
and Distributor, for portfolio transactions executed on behalf of the Fund.
12
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Notes to Financial Statements January 31, 2000, continued
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At January 31, 2000, 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 YEAR FOR THE YEAR
ENDED ENDED
JANUARY 31, 2000 JANUARY 31, 1999
--------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................ 107,231 $ 1,318,540 443,674 $ 5,539,418
Reinvestment of dividends and distributions ......... 7,646 93,149 7,895 98,394
Redeemed ............................................ (356,697) (4,549,197) (97,102) (1,234,884)
-------- ------------ ------- ------------
Net increase (decrease) - Class A ................... (241,820) (3,137,508) 354,467 4,402,928
-------- ------------ ------- ------------
CLASS B SHARES
Sold ................................................ 2,279,128 28,517,998 2,624,083 33,324,855
Reinvestment of dividends and distributions ......... 188,825 2,303,538 169,821 2,113,831
Redeemed ............................................ (2,108,952) (25,938,796) (1,067,595) (13,526,589)
---------- ------------ ---------- ------------
Net increase - Class B .............................. 359,001 4,882,740 1,726,309 21,912,097
---------- ------------ ---------- ------------
CLASS C SHARES
Sold ................................................ 550,764 6,896,497 929,718 11,808,519
Reinvestment of dividends and distributions ......... 127,098 1,552,569 169,885 2,120,074
Redeemed ............................................ (939,586) (11,563,893) (781,013) (9,857,608)
---------- ------------ ---------- ------------
Net increase (decrease) - Class C ................... (261,724) (3,114,827) 318,590 4,070,985
---------- ------------ ---------- ------------
CLASS D SHARES
Sold ................................................ 11,547 141,011 135,950 1,684,078
Reinvestment of dividends and distributions ......... 7,958 97,060 7,529 93,031
Redeemed ............................................ (20,008) (248,583) (12,665) (160,096)
---------- ------------ ---------- ------------
Net increase (decrease) - Class D ................... (503) (10,512) 130,814 1,617,013
---------- ------------ ---------- ------------
Net increase (decrease) in Fund ..................... (145,046) $ (1,380,107) 2,530,180 $ 32,003,023
========== ============ ========== ============
</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 and permanent book/tax differences
primarily attributable to nondeductible organizational expenses. To reflect
reclassifications arising from the permanent differences, paid-in-capital was
charged $34,000, accumulated undistributed net realized gain was credited
$10,264 and accumulated undistributed net investment income was credited
$23,736.
13
<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 YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
JANUARY 31, 2000 JANUARY 31, 1999 JANUARY 31, 1998
-------------------- ------------------ -----------------
CLASS A SHARES^
<S> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $12.75 $12.41 $12.42
------ ------ ------
Income (loss) from investment operations:
Net investment income ................................. 0.47 0.46 0.25
Net realized and unrealized gain (loss) ............... (0.69) 0.87 0.32
------ ------ ------
Total income (loss) from investment operations ......... (0.22) 1.33 0.57
------ ------ ------
Less dividends and distributions from:
Net investment income ................................. (0.47) (0.47) (0.26)
Net realized gain ..................................... (0.26) (0.52) (0.32)
------ ------ ------
Total dividends and distributions ...................... (0.73) (0.99) (0.58)
------ ------ ------
Net asset value, end of period ......................... $11.80 $12.75 $12.41
====== ====== ======
TOTAL RETURN + ......................................... (1.84)% 11.11% 4.60%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.20 %(3) 1.23%(3) 1.43%(2)
Net investment income .................................. 3.82 %(3) 3.73%(3) 3.92%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $2,187 $5,448 $903
Portfolio turnover rate ................................ 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
14
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Financial Highlights, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
JANUARY 31, 2000 JANUARY 31, 1999 JANUARY 31, 1998
---------------------- ---------------------- --------------------
CLASS B SHARES^
<S> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $12.74 $12.41 $12.42
------ ------ ------
Income (loss) from investment operations:
Net investment income ................................. 0.38 0.38 0.20
Net realized and unrealized gain (loss) ............... (0.71) 0.85 0.33
------ ------ ------
Total income (loss) from investment operations ......... (0.33) 1.23 0.53
------ ------ ------
Less dividends and distributions from:
Net investment income ................................. (0.38) (0.38) (0.22)
Net realized gain ..................................... (0.26) (0.52) (0.32)
------ ------ ------
Total dividends and distributions ...................... (0.64) (0.90) (0.54)
------ ------ ------
Net asset value, end of period ......................... $11.77 $12.74 $12.41
====== ====== ======
TOTAL RETURN + ......................................... (2.69)% 10.32% 4.19%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.95 %(3) 1.99%(3) 2.16%(2)
Net investment income .................................. 3.07 %(3) 2.97%(3) 3.15%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $56,827 $56,919 $34,021
Portfolio turnover rate ................................ 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 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 YEAR ENDED JANUARY 31 MARCH 28, 1995*
-------------------------------------------------------- THROUGH
2000^ 1999^ 1998**^ 1997 JANUARY 31, 1996
---------------------------------------------------------------------------
<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 .............................. 0.38 0.38 0.42 0.36 0.38
Net realized and unrealized gain (loss) ............ (0.70) 0.85 1.23 0.50 1.30
------ ------ ------ ------ ------
Total income (loss) from investment operations ...... (0.32) 1.23 1.65 0.86 1.68
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income .............................. (0.38) (0.38) (0.40) (0.38) (0.33)
Net realized gain .................................. (0.26) (0.52) (0.41) (0.25) (0.01)
------ ------ ------ ------ ------
Total dividends and distributions ................... (0.64) (0.90) (0.81) (0.63) (0.34)
------ ------ ------ ------ ------
Net asset value, end of period ...................... $11.78 $12.74 $12.41 $11.57 $11.34
====== ====== ====== ====== ======
TOTAL RETURN + ...................................... (2.62)% 10.32% 14.42% 7.82% 16.93%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................ 1.95 %(4) 1.94%(4) 2.07% 1.88%(3) -%(2)(3)
Net investment income ............................... 3.07 %(4) 3.02%(4) 3.30% 3.49%(3) 5.27%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............. $29,535 $35,291 $30,402 $48,284 $31,252
Portfolio turnover rate ............................. 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
16
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Financial Highlights, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
JANUARY 31, 2000 JANUARY 31, 1999 JANUARY 31, 1998
------------------ ------------------ -----------------
CLASS D SHARES^
<S> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $12.75 $12.42 $12.42
------ ------ ------
Income (loss) from investment operations:
Net investment income ................................. 0.50 0.48 0.26
Net realized and unrealized gain (loss) ............... (0.70) 0.87 0.33
------ ------ ------
Total income (loss) from investment operations ......... (0.20) 1.35 0.59
------ ------ ------
Less dividends and distributions from:
Net investment income ................................. (0.50) (0.50) (0.27)
Net realized gain ..................................... (0.26) (0.52) (0.32)
------ ------ ------
Total dividends and distributions ...................... (0.76) (1.02) (0.59)
------ ------ ------
Net asset value, end of period ......................... $11.79 $12.75 $12.42
====== ====== ======
TOTAL RETURN +.......................................... (1.63)% 11.27% 4.79%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.95 %(3) 0.99%(3) 1.16%(2)
Net investment income .................................. 4.07 %(3) 3.97%(3) 4.15%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $1,546 $1,679 $10
Portfolio turnover rate ................................ 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
17
<PAGE>
Morgan Stanley Dean Witter Balanced Income Fund
Report of Independent Accountants
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Morgan Stanley Dean Witter Balanced
Income Fund (the "Fund") at January 31, 2000, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the periods
indicated, in conformity with accounting principles generally accepted in the
United States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at January 31, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
March 13, 2000
2000 FEDERAL TAX NOTICE (unaudited)
During the year ended January 31, 2000, the Fund paid to its shareholders
$0.24 per share from long-term capital gains. For such period, 23.65% of
the income paid qualified for the dividends received deduction available
to corporations.
18
<PAGE>
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
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
BALANCED
INCOME FUND
[GRAPHIC OMITTED]
ANNUAL REPORT
January 31, 2000
