<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS October 31, 1997
DEAR SHAREHOLDER:
The fiscal year ended October 31, 1997 began with the U.S. economy exhibiting
signs of renewed strength. This trend continued into early 1997 as employment
expanded, personal income climbed and consumer confidence rose. However,
fears that the economy might be overheated and that the Federal Reserve Board
would raise short-term interest rates began to permeate the fixed-income
markets.
On March 25, 1997, in a decision that was viewed as a necessary preemptive
strike against inflation, the central bank raised the federal-funds rate by
25 basis points (0.25 percent). Although this action initially sent stock and
bond prices lower, many economists applauded the move. At first the Federal
Reserve appeared poised for a series of interest-rate increases, however a
slight cooling of economic data during the second and third quarters of 1997
and a balanced budget agreement prevented such action. As a result, interest
rates declined across the maturity spectrum. During the fiscal year, yields
on 5-year Treasuries fluctuated between 5.69 percent and 6.86 percent, ending
the period at 5.69 percent.
STRENGTH IN THE HIGH-YIELD SECTOR
The high-yield market, benefiting from a healthy economy, improved credit
quality and a relatively favorable interest-rate environment, posted strong
returns during the fiscal year. This sector's overall vitality came despite
some market weakness in April following the Federal Reserve Board's rate hike
on March 25th.
Continued strength in the economy has resulted in solid earnings improvements
on the part of many high-yield companies during the first three quarters of
1997 and has provided the fuel for the sharp equity market advance
experienced over the past year. Many high-yield companies have taken
advantage of higher equity valuations to raise equity and strengthen their
individual balance sheets. The resulting credit quality improvement has
helped keep the high-yield market's performance strong relative to many of
the other fixed-income markets.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 1997, continued
MIXED PERFORMANCE ABROAD
Meanwhile, European bond markets fluctuated within a wide range, partly in
sympathy with the U.S. market. These markets were further buffeted by
interest-rate increases in the United Kingdom and calls from the Bundesbank
for rate increases in Germany. In the end, the prospect of a timely launch of
the European Monetary Union in January 1999, and continued fiscal restraint,
helped European bond yields drift lower during the second half of the year.
Thus, while German bonds registered an increase of 41 basis points (0.41
percent), three-year Italian bond yields fell by 153 basis points. Throughout
the fiscal year, however, developments in the global bond markets were
overshadowed by a substantial strengthening of the U.S. dollar against many
of the world's major currencies.
PERFORMANCE
On July 28, 1997, Dean Witter Diversified Income Trust began offering four
classes of shares -- A, B, C and D -each with its own sales charge and
distribution fee structure. A revised prospectus, which includes complete
details regarding the Fund's conversion to multiple classes of shares, was
mailed to shareholders in mid-summer.
For the twelve-month period ended October 31, 1997, the Fund's Class B shares
posted a total return of 6.46 percent, compared to returns of 9.83 percent
for the Lipper Multi-Sector Income Funds Average (Lipper Average) and 7.49
percent for the Lehman Brothers Mutual Fund Government/Corporate Intermediate
Bond Index (Lehman Index). The accompanying chart illustrates the growth of a
$10,000 investment in the Fund from inception (April 9, 1992) through the
fiscal year ended October 31, 1997, versus the performance of a similar
investment in the issues that comprise the Lehman Index and the Lipper
Average.
GROWTH OF $10,000 - CLASS B
- ------------------------------------------------------------------------------
($ IN THOUSANDS)
April 9, 1992 10,000 10,000 10,000
October 31, 1992 10,373 10,620 10,388
October 31, 1993 11,410 11,679 12,048
October 31, 1994 11,332 11,454 11,696
October 31, 1995 12,551 12,888 13,106
October 31, 1996 13,742 13,637 14,716
October 31, 1997 14,534 14,658 16,163
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS.
(1) Figure shown assumes reinvestment of all distribution 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 contingent deferred sales charge (CDSC) (1 year-5%
5 years-2%, since inception-1%). See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value after the deduction of 1% CDSC, assuming a complete
redemption on October 31, 1997
(4) The Lehman Brothers Mutual Fund Government/Corporate Intermediate Bond
Index tracks the performance of government and corporate bonds, including
U.S. Government agency and U.S. Treasury securities and corporate and
yankee bonds with maturities of 1 to 10 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.
(5) The Lipper Multi-Sector Income Funds Average tracks the performance of the
funds which seek current income by allocating assets among several
different fixed-income securities sectors (with no more than 65% in any
one sector except for defensive purposes), including U.S. Government and
foreign governments, with a significant portion of assets in securities
rated below investment grade, as reported by Lipper Analytical Services.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 1997, continued
PORTFOLIO STRATEGY
As of October 31, 1997, the Fund's portfolio was divided equally among
high-quality shorter-term global securities (principally U.S. and foreign
government securities), intermediate-term U.S. government and agency
mortgage-backed securities and longer-term, lower-rated and higher yielding
corporate bonds.
Global short-term securities component. Against a background of uncertainty
in the global bond markets, the average maturity of the Fund's global bond
component was maintained at about one and one-half years, thus minimizing
this component's exposure to fluctuations in the interest-rate markets. More
importantly, the currency risks of the European positions were effectively
hedged away, safeguarding these investments from the impact of the rising
U.S. dollar. The global bond component also decreased its investments in
Australia and New Zealand as the yields in these markets were deemed no
longer attractive. The resulting proceeds from these transactions were
shifted to the U.S. market. In August, as the dollar began to move lower,
most of the component's currency hedges were removed, allowing the Fund to
participate in the values of its foreign currency holdings.
Going forward, we anticipate a continuation of the global bond component's
strategy of global diversification, while favoring markets that exhibit
improving inflation outlooks and fiscal discipline. In addition, we will
place an emphasis on securities and markets that offer compelling values and
low relative risks.
Intermediate-term U.S. government securities component. As of October 31,
1997, this component of the Fund was primarily invested in mortgage-backed
securities issued by the Federal National Mortgage Association (FNMA), the
Government National Mortgage Association (GNMA) and the Federal Home Loan
Mortgage Corporation (FHLMC). U.S. agency securities and U.S. Treasury
securities accounted for 27 percent and 6 percent of the portfolio,
respectively.
We believe that mortgage-backed securities continue to provide significant
long-term value and, in the current investment environment, offer not only an
incremental yield incentive over U.S. Treasury securities of similar maturity
but also the potential for total return.
Long-term high-yield securities component. As the economy has continued to
expand over the past few years, the high-yield component has tended to
concentrate on B-rated issues. In a growing economy one can generally find
undervalued upgrade candidates in this sector of the market that provide
attractive yields as well as appreciation potential. We continue to feel that
many of these issues are very attractive long-term investments. However,
given the lower market yields available today and the potential for added
market volatility down the road, we have taken some defensive steps with the
portfolio. These include increasing our allocation to the higher-quality end
of the market (BB-rated issues or higher). We feel that
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 1997, continued
these holdings will better protect shareholders during a potentially nervous
market environment as well as provide the liquidity and portfolio flexibility
needed to take advantage of future opportunities. In addition, the high-yield
component continues to limit its exposure to cyclical industries and remains
focused on more-predictable, recession-resistant growth sectors of the
economy, such as broadcast media, cable & telecommunications and foods &
beverages. In some of these sectors, such as broadcast media and cable &
telecommunications, we expect to see continued consolidation, which should
bode well for many of the high-yield component's individual holdings.
The one-to two-year outlook for the high-yield market remains favorable,
given our expectations for continued growth in the economy and generally
improving credit quality in the high-yield marketplace. We caution, however,
that during this period the possibility exists for another round of investor
nervousness given the potential for Federal Reserve Board moves. As discussed
above, this component of the Fund is well positioned to take advantage of any
potential market disruptions given its more conservative positioning today.
Assuming the longer-term market outlook remains unchanged, these market
disruptions may be viewed as buying opportunities, allowing the high-yield
component to lock in attractive yields and prices for its shareholders.
LOOKING AHEAD
For the balance of 1997, and early into 1998, we expect U.S. economic growth
to remain healthy. The Federal Reserve Board is likely to look for a
confirmation of unusually strong economic trends, rising inflationary
pressures and stability in southeast Asian markets before considering another
increase in the federal-funds rate.
We appreciate your support of Dean Witter Diversified Income Trust and look
forward to continuing to serve your investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
RESULTS OF SPECIAL MEETING (unaudited)
On May 21, 1997, a special meeting of the Fund's shareholders was held for
the purpose of voting on four separate matters, the results of which are as
follows:
(1) APPROVAL OF A NEW INVESTMENT MANAGEMENT AGREEMENT BETWEEN THE FUND AND
DEAN WITTER INTERCAPITAL INC. IN CONNECTION WITH THE MERGER OF MORGAN
STANLEY GROUP INC. WITH DEAN WITTER, DISCOVER & CO.:
<TABLE>
<CAPTION>
<S> <C>
For ....... 48,058,451
Against .. 893,849
Abstain .. 4,520,616
</TABLE>
(2) ELECTION OF TRUSTEES:
<TABLE>
<CAPTION>
<S> <C>
Michael Bozic
For .............. 50,808,736
Withheld ......... 2,664,180
Charles A. Fiumefreddo
For .............. 50,839,158
Withheld ......... 2,633,758
Edwin J. Garn
For .............. 50,875,468
Withheld ......... 2,597,448
John R. Haire
For .............. 50,809,023
Withheld ......... 2,663,893
Wayne E. Hedien
For .............. 50,850,027
Withheld ......... 2,622,889
Dr. Manuel H. Johnson
For .............. 50,930,427
Withheld ......... 2,542,489
Michael E. Nugent
For .............. 50,945,111
Withheld ......... 2,527,805
Philip J. Purcell
For .............. 50,887,890
Withheld ......... 2,585,026
John L. Schroeder
For .............. 50,889,086
Withheld ......... 2,583,830
</TABLE>
(3) APPROVAL OF A NEW INVESTMENT POLICY WITH RESPECT TO INVESTMENTS IN
CERTAIN OTHER INVESTMENT COMPANIES:
<TABLE>
<CAPTION>
<S> <C>
For ..... 46,416,579
Against . 1,518,217
Abstain . 5,538,120
</TABLE>
(4) RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS THE FUND'S
INDEPENDENT ACCOUNTANTS:
<TABLE>
<CAPTION>
<S> <C>
For ..... 48,901,339
Against . 508,419
Abstain . 4,063,158
</TABLE>
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (90.3%)
DENMARK (a)(3.2%)
Government Obligation
DKr 183,277 Denmark Treasury Note .......................................... 9.00% 11/15/98 $29,175,789
--------------
FRANCE (a)(0.4%)
Government Obligation
FRF 19,830 France Treasury Note ............................................ 7.75 04/12/00 3,682,665
--------------
ITALY (a)(1.4%)
Government Obligations
ITL 19,070 M Italy Treasury Bond ............................................ 10.50 07/15/98 11,581,884
1,725 Italy Treasury Bond ............................................ 10.50 04/01/00 1,125,922
--------------
TOTAL ITALY .......................................................................... 12,707,806
--------------
NETHERLANDS (a)(0.0%)
Banks
ITL 160,000 Rabobank Nederland .............................................. 11.00 02/01/98 95,355
--------------
NEW ZEALAND (a)(1.2%)
Government Obligations
NZ$ 2,220 New Zealand Treasury Bond ....................................... 8.00 07/15/98 1,385,321
16,308 New Zealand Treasury Bond ...................................... 6.50 02/15/00 10,066,868
--------------
TOTAL NEW ZEALAND .................................................................... 11,452,189
--------------
SPAIN (a)(2.3%)
Government Obligations
ESP 2,009 M Spain Treasury Bond ............................................ 9.90 10/31/98 14,425,039
990 M Spain Treasury Bond ............................................ 9.40 04/30/99 7,216,429
--------------
TOTAL SPAIN .......................................................................... 21,641,468
--------------
SWEDEN (a)(2.8%)
Government Obligation
SEK 180,800 Sweden Treasury Bond ........................................... 11.00 01/21/99 25,721,743
--------------
UNITED KINGDOM (a)(1.9%)
Government Obligations
pounds
sterling7,435 United Kingdom Treasury Bond ................................... 15.50 09/30/98 13,336,678
2,270 United Kingdom Treasury Bond (Conv.) ............................ 9.00 03/03/00 3,962,673
--------------
TOTAL UNITED KINGDOM ................................................................. 17,299,351
--------------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
UNITED STATES (77.1%)
Aerospace (0.3%)
$ 3,000 Sabreliner Corp. (Series B) ..................................... 12.50 % 04/15/03 $ 3,150,000
--------------
Automotive (0.4%)
3,000 Toyota Motor Credit Corp. ...................................... 15.00 09/25/98 3,241,080
--------------
Broadcast Media (2.6%)
45 Australis Media Ltd. ........................................... 15.75 ++ 05/15/03 34,180
5,500 Australis Media Ltd. (Units)++ .................................. 15.75 ++ 05/15/03 4,180,000
3,200 Digital Television Services -144A* .............................. 12.50 08/01/07 3,440,000
3,100 Echostar DBS Corp. -144A* ....................................... 12.50 07/01/02 3,286,000
3,000 Paxson Communications Corp. ..................................... 11.625 10/01/02 3,240,000
4,000 Spanish Broadcasting System, Inc. ............................... 12.50 06/15/02 4,620,000
8,700 TCI Satellite Entertainment Corp. -144A* ........................ 12.25 ++ 02/15/07 5,568,000
--------------
24,368,180
--------------
Business Services (0.8%)
5,000 Anacomp, Inc. (Series B) ........................................ 10.875 04/01/04 5,150,000
2,000 Xerox Credit Corp. .............................................. 15.00 06/26/98 2,119,760
--------------
7,269,760
--------------
Cable & Telecommunications (10.6%)
4,000 Adelphia Communications Corp.
-144A* ......................................................... 9.25 10/01/02 3,980,000
5,675 Advanced Radio Telecommunication ................................ 14.00 02/15/07 5,221,000
4,000 American Communications Services, Inc. -144A* ................... 13.75 07/15/07 4,600,000
6,500 Clearnet Communications Inc. .................................... 14.75 ++ 12/15/05 4,810,000
3,850 FrontierVision LP/Capital ....................................... 11.00 10/15/06 4,158,000
7,000 Hyperion Telecommunication, Inc. (Series B) ..................... 13.00 ++ 04/15/03 4,795,000
28,500 In-Flight Phone Corp. (Series B)(b) ............................ 14.00 ++ 05/15/02 3,135,000
3,000 IXC Communications, Inc.
(Series B) ..................................................... 12.50 10/01/05 3,397,500
7,300 McCaw International Ltd. ........................................ 13.00 ++ 04/15/07 4,307,000
3,000 Metronet Communications (Units)++ -144A* ........................ 12.00 08/15/07 3,337,500
8,500 Nextel Communications -144A* .................................... 10.65 ++ 09/15/07 4,823,750
3,350 Nextlink Communications LLC ..................................... 12.50 04/15/06 3,777,125
4,000 Orbcomm Global LP/Capital ...................................... 14.00 08/15/04 4,220,000
4,000 Paging Network, Inc. ............................................ 10.125 08/01/07 4,090,000
6,000 Peoples Telephone Co., Inc. ..................................... 12.25 07/15/02 6,360,000
10,000 Price Communications Cellular Holdings -144A* ................... 13.50 ++ 08/01/07 5,700,000
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
$3,500 Primus Telecommunications Group (Units)++ ....................... 11.75 % 08/01/04 $ 3,815,000
5,000 Source Media Inc. -144A* ........................................ 12.00 11/01/04 5,000,000
4,000 Transtel Pass-Thru Trust -144A* ................................. 12.50 11/01/07 3,800,000
4,000 UIH Australia/Pacific (Series B) ................................ 14.00 ++ 05/15/06 2,820,000
4,000 USA Mobile Communications Holdings, Inc. ....................... 14.00 11/01/04 4,500,000
5,000 Winstar Communications ......................................... 14.00 ++ 10/15/05 3,650,000
3,250 Winstar Equipment Corp. ......................................... 12.50 03/15/04 3,542,500
--------------
97,839,375
--------------
Computer Equipment (0.3%)
2,500 IBM Credit Corp. ................................................ 15.00 03/04/98 2,576,100
--------------
Consumer Products (1.1%)
2,500 J.B. Williams Holdings, Inc. .................................... 12.00 03/01/04 2,575,000
3,500 North Atlantic Trading -144A* ................................... 11.00 06/15/04 3,570,000
4,000 Renaissance Cosmetics, Inc. ..................................... 11.75 02/15/04 3,950,000
--------------
10,095,000
--------------
Electrical & Alarm Systems (0.4%)
4,980 Mosler, Inc. ................................................... 11.00 04/15/03 3,436,200
--------------
Entertainment/Gaming & Lodging (4.2%)
3,800 101 Main Street Ltd. -144A* ..................................... 13.00 08/15/00 3,857,000
3,250 Argosy Gaming Co. ............................................... 13.25 06/01/04 3,315,000
2,700 Aztar Corp. .................................................... 13.75 10/01/04 3,105,000
5,400 Fitzgeralds Gaming Corp. (Units)++ .............................. 13.00 12/31/02 5,346,000
4,000 Lady Luck Gaming Finance Corp. .................................. 11.875 03/01/01 4,050,000
5,670 Motels of America, Inc. (Series B) .............................. 12.00 04/15/04 5,443,200
3,000 Players International, Inc. ..................................... 10.875 04/15/05 3,210,000
5,000 PRT Funding Corp. ............................................... 11.625 04/15/04 4,100,000
4,800 Stuart Entertainment, Inc.
(Series B) ..................................................... 12.50 11/15/04 4,032,000
3,000 Trump Castle Funding, Inc. ...................................... 11.75 11/15/03 2,835,000
--------------
39,293,200
--------------
Finance (1.4%)
3,500 Cityscape Financial Corp.
(Series A) ..................................................... 12.75 06/01/04 2,450,000
3,000 Household Finance Corp. ......................................... 15.00 09/25/98 3,243,810
3,750 Olympic Financial Ltd. (Units)++ ................................ 11.50 03/15/07 3,778,125
3,000 Wilshire Financial Services -144A* .............................. 13.00 08/15/04 3,082,500
--------------
12,554,435
--------------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
Foods & Beverages (1.8%)
$4,050 Envirodyne Industries, Inc. ..................................... 10.25 % 12/01/01 $4,009,500
3,000 Pepsico Inc. .................................................... 15.00 08/06/98 3,210,090
4,500 Specialty Foods Acquisition Corp. (Series B) .................... 11.25 08/15/03 4,286,250
12,125 Specialty Foods Acquisition Corp. (Series B) .................... 13.00 ++ 08/15/05 5,153,125
--------------
16,658,965
--------------
HealthCare (1.5%)
2,800 Imagyn Medical Technologies -144A* .............................. 12.50 04/01/04 2,716,000
4,000 Physician Resource Group -144A* (Conv) .......................... 6.00 12/01/01 3,457,960
4,000 Unilab Corp. .................................................... 11.00 04/01/06 4,100,000
4,350 Unison Healthcare Corp. -144A* .................................. 12.25 11/01/06 3,654,000
--------------
13,927,960
--------------
Manufacturing (0.4%)
3,011 International Semi-Tech Microelectronics ........................ 11.50 ++ 08/15/03 1,400,115
2,500 John Deere Capital Corp. ........................................ 15.00 02/24/98 2,570,100
--------------
3,970,215
--------------
Manufacturing -Diversified (0.9%)
5,000 Interlake Corp. ................................................. 12.00 11/15/01 5,525,000
2,800 J.B. Poindexter & Co., Inc. ..................................... 12.50 05/15/04 2,856,000
--------------
8,381,000
--------------
Metals & Mining (1.3%)
4,700 Gulf States Steel -Alabama
(Series B) ..................................................... 13.50 04/15/03 4,829,250
4,750 Murrin Murrin Holdings -144A* ................................... 9.375 08/31/07 4,856,875
2,706 Weirton Steel Corp. ............................................. 11.50 03/01/98 2,735,793
--------------
12,421,918
--------------
Publishing (0.3%)
2,500 United States Banknote Corp. (Series B) ......................... 10.375 06/01/02 2,606,250
--------------
Restaurants (1.0%)
28 American Restaurant Group Holdings, Inc. ....................... 13.00 09/15/98 26,766
6,000 American Restaurant Group Holdings, Inc. ....................... 14.00 ++ 12/15/05 1,965,000
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
$13,500 Boston Chicken, Inc. (Conv.) .................................... 0.00 % 06/01/15 $2,683,125
4,000 FRD Acquisition Corp. (Series B) ................................ 12.50 07/15/04 4,300,000
--------------
8,974,891
--------------
Retail (0.6%)
10,450 County Seat Stores Co. (c) ...................................... 12.00 10/01/02 5,486,250
--------------
Retail -Food Chains (0.8%)
3,750 Big V Supermarkets, Inc. (Series B) ............................. 11.00 02/15/04 3,909,375
500 Pathmark Stores, Inc. ........................................... 11.625 06/15/02 492,500
3,000 Pathmark Stores, Inc. ........................................... 9.625 05/01/03 2,835,000
--------------
7,236,875
--------------
Textiles -Apparel Manufacturers (0.5%)
2,850 Apparel Ventures, Inc. (Series B) ............................... 12.25 12/31/00 2,679,000
4,000 U.S. Leather, Inc. .............................................. 10.25 07/31/03 2,120,000
--------------
4,799,000
--------------
Utilities (0.3%)
2,800 Panda Global Energy Co. ........................................ 12.50 04/15/04 2,604,000
--------------
U.S. Government & Agency Obligations (45.6%)
Federal Home Loan Banks (1.8%)
5,000 ................................................................ 0.00 07/02/12 1,633,300
5,000 ................................................................ 6.295 08/15/07 5,046,650
5,000 ................................................................ 6.37 09/25/07 5,073,100
5,000 ................................................................ 6.385 10/23/07 5,078,250
--------------
16,831,300
--------------
Federal Home Loan Mortgage Corp. (1.6%)
10,000 ................................................................ 0.00 08/15/02 7,586,800
3,867 ................................................................ 7.00 04/01/04-
06/01/04 3,920,397
3,160 ................................................................ 8.00 10/01/24-
06/01/25 3,274,217
--------------
14,781,414
--------------
Federal National Mortgage Assoc. (a) (15.4%)
6,000 Principal Strip ................................................ 0.00 02/12/04-
02/01/05 3,918,420
5,000 ................................................................ 5.80 02/22/06 4,905,550
3,565 ................................................................ 6.00 02/01/11-
03/01/11 3,502,696
34,495 ................................................................ 6.50 10/01/08-
03/01/27 34,195,883
37,455 ................................................................ 7.00 08/01/08-
03/01/27 37,585,618
5,000 ................................................................ 7.00 ** 5,014,063
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
$20,617 ................................................................ 7.50 % 02/01/22-
01/01/27 $21,049,083
12,332 ................................................................ 8.00 09/01/01-
06/01/26 12,722,965
18,682 ................................................................ 8.50 07/01/17-
05/01/25 19,540,103
--------------
142,434,381
--------------
Government National Mortgage Assoc. (a) (9.8%)
9,649 ................................................................ 6.50 11/20/23-
02/15/27 9,516,487
24,331 ................................................................ 7.00 12/15/22-
10/15/26 24,430,383
5,000 ................................................................ 7.00 ** 5,001,562
39,726 ................................................................ 7.50 05/15/17-
11/15/26 40,590,659
7,185 ................................................................ 8.00 01/15/22-
10/15/24 7,454,456
3,118 ................................................................ 8.50 08/15/22-
12/15/24 3,267,185
--------------
90,260,732
--------------
Resolution Funding Corp. (a)(2.6%)
37,232 ................................................................ 0.00 10/15/04-
01/15/07 23,798,312
--------------
U.S. Treasury Notes (a)(14.4%)
500 ................................................................ 5.50 11/15/98 499,530
44,500 ................................................................ 6.00 06/30/99-
07/31/02 44,873,915
84,900 ................................................................ 6.375 05/15/00 86,254,155
2,000 ................................................................ 6.25 08/31/00 2,028,040
--------------
133,655,640
--------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS ........................................... 421,761,779
--------------
TOTAL UNITED STATES .................................................................. 712,652,433
--------------
TOTAL GOVERNMENT & CORPORATE BONDS
(Identified Cost $847,574,354) ........................................................ 834,428,799
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (d)(0.8%)
Entertainment/Gaming & Lodging (0.0%)
12,455 Cobblestone Holdings, Inc. -144A* .......................................................$ 311,375
2,000 Motels of America, Inc. -144A* .......................................................... 30,000
-------------
341,375
-------------
Foods & Beverages (0.0%)
198,750 Specialty Foods Acquisition Corp. -144A* ................................................ 198,750
-------------
Healthcare (0.2%)
390,000 Unigene Laboratories, Inc. .............................................................. 1,340,625
-------------
Manufacturing -Diversified (0.5%)
158,000 Thermadyne Holdings Corp. (e) ........................................................... 4,621,500
-------------
Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. -144A* ......................................... 6,000
-------------
Textiles (0.1%)
230,000 Ithaca Industries, Inc. ................................................................. 1,150,000
-------------
TOTAL COMMON STOCKS
(Identified Cost $6,373,947) ............................................................ 7,658,250
-------------
PREFERRED STOCKS (0.4%)
Entertainment/Gaming & Lodging (d) (0.3%)
80,000 Fitzgeralds Gaming Corp. (Units)++ ..................................................... 2,640,000
-------------
Oil & Gas (0.1%)
5,000 XCL Ltd (Units) ++ (Conv.)+ 144A* ...................................................... 1,000,000
-------------
TOTAL PREFERRED STOCKS
(Identified Cost $3,000,000) ............................................................ 3,640,000
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- ----------- ---------------------------------------------------------------- ------------ --------------
<S> <C> <C>
WARRANTS (d)(0.1%)
Aerospace (0.0%)
1,000 Sabreliner Corp. -144A* ...................................... 04/15/03 $ 10,000
--------------
Cable & Telecommunications (0.1%)
9,000 Hyperion Telecommunication, Inc.
(Series B ) - 144A* ......................................... 04/01/01 900,000
5,300 McCaw International Ltd. - 144A* .............................. 04/15/07 53
34,000 Price Communications Corp. - 144A* ............................ 08/01/07 344
--------------
900,397
--------------
Containers (0.0%)
2,000 Crown Packaging Holdings, Ltd. (Canada) - 144A* ............... 11/01/03 20
--------------
Entertainment/Gaming & Lodging (0.0%)
10,773 Fitzgeralds Gaming Corp. ...................................... 12/19/98 10,773
3,500 Fitzgeralds South Inc. - 144A* ................................ 03/15/99 35
--------------
10,808
--------------
Healthcare (0.0%)
2,800 Imagyn Medical Technologies - 144A* ........................... 04/10/04 28
--------------
Manufacturing (0.0%)
47,300 Uniroyal Technology Corp. ..................................... 06/01/03 124,162
--------------
Retail (0.0%)
1,500 County Seat Holdings Co. ...................................... 10/15/98 15
--------------
TOTAL WARRANTS
(Identified Cost $325,243) ................................................... 1,045,430
--------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- ------------- ------------------------------------------------------------------ ----------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (7.4%)
TIME DEPOSITS (f)(4.2%)
CANADA (0.7%)
Banking -International
Ca$ 8,460 Chase Manhattan Bank ..................................... 3.438% 11/06/97 6,006,816
-------------
ITALY (2.7%)
Banking -International
ITL 43,211 M Chase Manhattan Bank ..................................... 6.625 11/10/97 25,528,728
-------------
SPAIN (0.8%)
Banking -International
ESP 1,088 M Chase Manhattan Bank ..................................... 4.875 11/10/97 7,464,451
-------------
TOTAL TIME DEPOSITS
(Identified Cost $39,155,294) ............................................... 38,999,995
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
<S> <C> <C> <C> <C>
- ------------- ---------------------------------------------------------------- -------- ---------- -------------
GOVERNMENT & AGENCY
OBLIGATIONS (g)(3.1%)
GERMANY (2.4%)
DEM 39,000 German Treasury Bill ............................................ 3.23% 01/16/98 $22,462,010
-------------
UNITED STATES (0.7%)
$6,000 Federal Home Loan Mortgage Corp. ................................ 5.65 11/03/97 5,998,117
-------------
TOTAL GOVERNMENT & AGENCY
OBLIGATIONS
(Amortized Cost $27,800,404) ....................................................... 28,460,127
-------------
REPURCHASE AGREEMENT (0.1%)
927 The Bank of New York (dated 10/31/97; proceeds $927,122)(h)
(Identified Cost $926,697) .....................................5.50 11/03/97 926,697
-------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $67,882,395) ............................................ 68,386,819
-------------
TOTAL INVESTMENTS
(Identified Cost $925,155,939)(i) ........................................ 99.0 % 915,159,298
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES .......................... 1.0 9,545,489
-------- -------------
NET ASSETS .............................................................. 100.0 % $924,704,787
======== =============
</TABLE>
- ------------
M In millions.
* Resale is restricted to qualified institutional investors.
** Security 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.
++ Consists of one or more class of securities traded together as a unit;
stocks or bonds with attached stocks or warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at
a future specified date.
(a) Some or all of these securities are segregated in connection with open
forward foreign currency contracts and securities purchased on a
forward commitment basis.
(b) Non-income producing security; issuer in bankruptcy.
(c) Non-income producing security; issuer in default.
(d) Non-income producing securities.
(e) Acquired through exchange offer.
(f) Subject to withdrawal restrictions until maturity.
(g) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(h) Collateralized by $927,598 Federal National Mortgage Association 6.60%
due 09/20/02 valued at $945,231.
(i) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$23,900,558 and the aggregate gross unrealized depreciation is
$33,897,199, resulting in net unrealized depreciation of $9,996,641.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 1997:
<TABLE>
<CAPTION>
CONTRACTS IN EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE DEPRECIATION
- ---------------- ------------- ---------- --------------
<S> <C> <C> <C>
IEP 4,286,582 $ 6,423,014 11/03/97 $ (14,146)
DEM 46,000,000 $26,797,157 01/30/98 (364,629)
NLG 59,744,250 $30,877,177 01/30/98 (536,329)
pounds sterling
10,800,000 $17,401,230 04/14/98 (561,632)
--------------
Unrealized depreciation ............... $(1,476,736)
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value (identified cost
$925,155,939).................................................... $915,159,298
Cash (including $1,365,883 in foreign currency)................... 5,080,884
Receivable for:
Investments sold................................................ 45,645,791
Interest........................................................ 16,838,761
Shares of beneficial interest sold ............................. 4,179,477
Compensated forward foreign currency contracts.................. 3,859,211
Prepaid expenses and other assets................................. 72,401
--------------
TOTAL ASSETS ................................................... 990,835,823
--------------
LIABILITIES:
Unrealized depreciation on open forward foreign currency
contracts........................................................ 1,476,736
Payable for:
Investments purchased........................................... 53,710,532
Shares of beneficial interest repurchased....................... 5,492,143
Compensated forward foreign currency contracts.................. 3,293,932
Dividends to shareholders....................................... 857,120
Plan of distribution fee........................................ 660,792
Investment management fee....................................... 311,986
Accrued expenses and other payables .............................. 327,795
--------------
TOTAL LIABILITIES .............................................. 66,131,036
--------------
NET ASSETS...................................................... $924,704,787
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital................................................... $951,576,895
Net unrealized depreciation....................................... (11,004,241)
Accumulated undistributed net investment income .................. 278,119
Accumulated net realized loss..................................... (16,145,986)
--------------
NET ASSETS...................................................... $924,704,787
==============
CLASS A SHARES:
Net Assets........................................................ $4,933,238
Shares Outstanding (unlimited authorized, $.01 par value) ........ 521,437
NET ASSET VALUE PER SHARE....................................... $9.46
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value)................ $9.88
==============
CLASS B SHARES:
Net Assets........................................................ $915,899,370
Shares Outstanding (unlimited authorized, $.01 par value) ........ 96,807,771
NET ASSET VALUE PER SHARE....................................... $9.46
==============
CLASS C SHARES:
Net Assets........................................................ $3,772,746
Shares Outstanding (unlimited authorized, $.01 par value) ........ 399,124
NET ASSET VALUE PER SHARE....................................... $9.45
==============
CLASS D SHARES:
Net Assets........................................................ $99,433
Shares Outstanding (unlimited authorized, $.01 par value) ........ 10,517
NET ASSET VALUE PER SHARE....................................... $9.45
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended October 31, 1997*
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME (net of $78,100 foreign withholding tax) ...... $ 77,859,573
--------------
EXPENSES
Plan of distribution fee (Class A shares)...................... 1,658
Plan of distribution fee (Class B shares)...................... 7,104,223
Plan of distribution fee (Class C shares)...................... 3,998
Investment management fee...................................... 3,347,731
Transfer agent fees and expenses............................... 509,942
Custodian fees................................................. 419,471
Registration fees.............................................. 122,807
Professional fees.............................................. 81,427
Shareholder reports and notices................................ 73,426
Trustees' fees and expenses.................................... 20,501
Organizational expenses........................................ 13,153
Other.......................................................... 19,702
--------------
TOTAL EXPENSES............................................... 11,718,039
--------------
NET INVESTMENT INCOME........................................ 66,141,534
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ................................................. (25,552,286)
Foreign exchange transactions................................ 17,508,514
--------------
NET LOSS .................................................... (8,043,772)
--------------
Net change in unrealized depreciation on:
Investments ................................................. (1,303,373)
Translation of forward foreign currency contracts, other
assets and liabilities denominated in foreign currencies ... (2,639,652)
--------------
NET DEPRECIATION............................................. (3,943,025)
--------------
NET LOSS .................................................... (11,986,797)
--------------
NET INCREASE .................................................. $ 54,154,737
==============
</TABLE>
- ------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1997* OCTOBER 31, 1996
- ---------------------------------------------- ----------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ......................... $ 66,141,534 $ 53,062,338
Net realized gain (loss)....................... (8,043,772) 4,908,105
Net change in unrealized depreciation ......... (3,943,025) (59,346)
----------------- ----------------
NET INCREASE................................. 54,154,737 57,911,097
----------------- ----------------
DIVIDENDS TO SHAREHOLDERS FROM NET
INVESTMENT INCOME
Class A shares................................. (58,752) --
Class B shares................................. (79,103,939) (47,280,275)
Class C shares................................. (41,777) --
Class D shares................................. (882) --
----------------- ----------------
TOTAL DIVIDENDS ............................. (79,205,350) (47,280,275)
----------------- ----------------
Net increase from transactions in shares of
beneficial interest........................... 204,174,498 192,406,387
----------------- ----------------
NET INCREASE................................. 179,123,885 203,037,209
NET ASSETS:
Beginning of period............................ 745,580,902 542,543,693
----------------- ----------------
END OF PERIOD
(Including undistributed net investment
income of $278,119 and $12,819,524,
respectively)................................ $924,704,787 $745,580,902
================= ================
</TABLE>
- ------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Diversified Income Trust (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 primary investment
objective is to provide a high level of current income and, as a secondary
objective, seeks to maximize total return, but only when consistent with its
primary objective. The Fund was organized as a Massachusetts business trust
on December 20, 1991 and commenced operations on April 9, 1992. On July 28,
1997, the Fund commenced offering three classes of shares, with the then
current shares designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase, some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a
sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
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 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
Dean Witter InterCapital 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; (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
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
of the portfolio 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.
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. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value
of investment securities, other assets and liabilities and forward foreign
currency contracts are translated at the exchange rates prevailing at the end
of the period; and (2) purchases, sales, income and expenses are translated
at the exchange rates prevailing on the respective dates of such
transactions. The resultant exchange gains and losses are included in the
Statement of Operations as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. Federal income tax regulations,
certain foreign exchange gains/losses included in realized and unrealized
gain/loss are included in or are a reduction of ordinary income for federal
income tax purposes. The Fund does not isolate that portion of the results of
operations arising as a result of changes in the foreign exchange rates from
the changes in the market prices of the securities.
E. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currency gain or loss. The Fund
records realized gains or losses on delivery of the currency or at the time
the forward contract is extinguished (compensated) by entering into a closing
transaction prior to delivery.
F. 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.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record 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.
H. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $151,000 which have been
reimbursed for the full amount thereof. Such expenses have been deferred and
were fully amortized on the straight-line method from the commencement of
operations through April 8, 1997.
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 0.40% 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 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 -0.85% of
the lesser of: (a) the average daily aggregate gross sales of the Class B
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
shares since inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average net asset value of the Class B
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived; or (b) the average daily net assets
of Class B; and (iii) Class C -up to 0.85% of the average daily net assets of
Class C. In the case of Class A shares, amounts paid under the Plan are paid
to the Distributor for services provided. In the case of Class B and Class C
shares, amounts paid under the Plan are paid to the Distributor for services
provided and the expenses borne by it and others in the distribution of the
shares of these Classes, including the payment of commissions for sales of
these Classes and incentive compensation to, and expenses of, the account
executives of Dean Witter Reynolds Inc. ("DWR"), an affiliate of the
Investment Manager and Distributor, and others who engage in or support
distribution of the shares or who service shareholder accounts, including
overhead and telephone expenses; printing and distribution of prospectuses
and reports used in connection with the offering of these shares to other
than current shareholders; and preparation, printing and distribution of
sales literature and advertising materials. In addition, the Distributor may
utilize fees paid pursuant to the Plan, in the case of Class B shares, to
compensate DWR and other selected broker-dealers for their opportunity costs
in advancing such amounts, which compensation would be in the form of a
carrying charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect,
any cumulative expenses incurred by the Distributor but not yet recovered may
be recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the
Distributor under the Plan and the proceeds of contingent deferred sales
charges paid by investors upon redemption of shares, if for any reason the
Plan is terminated, the Trustees will consider at that time the manner in
which to treat such expenses. The Distributor has advised the Fund that such
excess amounts, including carrying charges, totaled $14,622,156 at October
31, 1997.
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 0.85% 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 period ended October 31, 1997, the
distribution fee was accrued for Class A shares and Class C shares at the
annual rate of 0.25% and 0.85%, respectively.
The Distributor has informed the Fund that for the year ended October 31,
1997, it received contingent deferred sales charges from certain redemptions
of the Fund's Class B shares and Class C shares of
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
$1,414,909, and $630, respectively and received approximately $39,000 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 of portfolio securities,
excluding short-term investments, for the year ended October 31, 1997
aggregated $979,183,403 and $828,572,899, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$408,062,350 and $217,120,322, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 1997, the Fund had
transfer agent fees and expenses payable of approximately $2,000.
The Fund has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Fund who will have served as
independent Trustees for at least five years at the time of retirement.
Benefits under this plan are based on years of service and compensation
during the last five years of service. Aggregate pension costs for the year
ended October 31, 1997 included in Trustees' fees and expenses in the
Statement of Operations amounted to $5,793. At October 31, 1997, the Fund had
an accrued pension liability of $32,400 which is included in accrued expenses
in the Statement of Assets and Liabilities.
5. FEDERAL INCOME TAX STATUS
At October 31, 1997, the Fund had an approximate net capital loss carryover
of $16,314,000, which may be used to offset future capital gains to the
extent provided by regulations, which is available through October 31 of the
following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- -------------------------------------
2002 2003 2004 2005
- -------- -------- -------- --------
<S> <C> <C> <C>
$3,024 $3,677 $2,482 $7,131
======== ======== ======== ========
</TABLE>
As of October 31, 1997, the Fund had temporary book/tax differences primarily
attributable to the mark-to-market of open forward foreign currency exchange
contracts and compensated forward foreign currency exchange contracts and
permanent book/tax differences primarily attributable to foreign currency
gains. To reflect reclassifications arising from the permanent differences,
accumulated net realized loss was charged and accumulated undistributed net
investment income was credited $522,411.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
CLASS A SHARES*
Sold...................... 558,411 $ 5,262,008 -- --
Reinvestment of
dividends................ 1,750 16,494 -- --
Redeemed.................. (38,724) (367,538) -- --
-------------- --------------- -------------- ---------------
Net increase -Class A .... 521,437 4,910,964 -- --
-------------- --------------- -------------- ---------------
CLASS B SHARES
Sold...................... 55,563,733 525,362,254 36,480,365 $ 353,997,564
Reinvestment of
dividends................ 3,620,754 34,158,956 2,052,285 19,859,631
Redeemed.................. (38,605,240) (364,124,514) (18,707,218) (181,450,808)
-------------- --------------- -------------- ---------------
Net increase -Class B .... 20,579,247 195,396,696 19,825,432 192,406,387
-------------- --------------- -------------- ---------------
CLASS C SHARES*
Sold ..................... 404,022 3,813,369 -- --
Reinvestment of
dividends................ 2,302 21,713 -- --
Redeemed.................. (7,200) (68,099) -- --
-------------- --------------- -------------- ---------------
Net increase -Class C .... 399,124 3,766,983 -- --
-------------- --------------- -------------- ---------------
CLASS D SHARES*
Sold...................... 10,494 99,638 -- --
Reinvestment of
dividends................ 23 217 -- --
-------------- --------------- -------------- ---------------
Net increase -Class D .... 10,517 99,855 -- --
-------------- --------------- -------------- ---------------
Net increase in Fund ..... 21,510,325 $ 204,174,498 19,825,432 $ 192,406,387
============== =============== ============== ===============
</TABLE>
- ------------
* For the period July 28, 1997 (issue date) through October 31, 1997.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
7. PURPOSE OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated
portfolio transactions or to manage its foreign currency exposure or to sell,
for a fixed amount of U.S. dollars or other currency, the amount of foreign
currency approximating the value of some or all of its holdings denominated
in such foreign currency or an amount of foreign currency other than the
currency in which the securities to be hedged are denominated approximating
the value of some or all of its holdings to be hedged. Additionally, when the
Investment Manager anticipates purchasing securities at some time in the
future, the Fund may enter into a forward contract to purchase an amount of
currency equal to some or all the value of the anticipated purchase for a
fixed amount of U.S. dollars or other currency.
To hedge against adverse interest rate, foreign currency and market risks,
the Fund may enter into written options on interest rate futures and interest
rate futures contracts ("derivative investments").
Forward contracts and derivative instruments involve elements of market risk
in excess of the amount reflected in the Statement of Assets and Liabilities.
The Fund bears the risk of an unfavorable change in the foreign exchange
rates underlying the forward contracts. Risks may also arise upon entering
into these contracts from the potential inability of the counterparties to
meet the terms of their contracts.
At October 31, 1997, there were outstanding forward contracts used to
facilitate settlement of foreign currency denominated portfolio transactions
and manage foreign currency exposure.
At October 31, 1997, the Fund's cash balance consisted principally of
interest bearing deposits with Chase Manhattan Bank N.A., the Fund's
custodian.
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
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 ENDED OCTOBER 31 APRIL 9, 1992*
-------------------------------------------------------------- THROUGH
1997** ++ 1996 1995 1994 1993 OCTOBER 31, 1992
- --------------------------------------- ----------- ----------- ----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ... $ 9.78 $ 9.62 $ 9.37 $10.20 $10.01 $10.00
----------- ----------- ----------- ----------- ----------- ----------------
Net investment income................... 0.74 0.78 0.77 0.74 0.77 0.37
Net realized and unrealized gain
(loss)................................. (0.15) 0.10 0.20 (0.80) 0.20 --
----------- ----------- ----------- ----------- ----------- ----------------
Total from investment operations ....... 0.59 0.88 0.97 (0.06) 0.97 0.37
----------- ----------- ----------- ----------- ----------- ----------------
Less dividends and distributions from:
Net inivestment income................. (0.91) (0.72) (0.72) (0.64) (0.73) (0.36)
Net realized gain ..................... -- -- -- (0.01) (0.05) --
Paid-in-capital........................ -- -- -- (0.12) -- --
----------- ----------- ----------- ----------- ----------- ----------------
Total dividends and distributions ...... (0.91) (0.72) (0.72) (0.77) (0.78) (0.36)
----------- ----------- ----------- ----------- ----------- ----------------
Net asset value, end of period.......... $ 9.46 $ 9.78 $ 9.62 $ 9.37 $10.20 $10.01
=========== =========== =========== =========== =========== ================
TOTAL INVESTMENT RETURN+................ 6.46% 9.49% 10.76% (0.69)% 10.00% 3.73%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 1.40% 1.42% 1.44% 1.51% 1.58% (4) 0.85%(2)(3)
Net investment income................... 7.90% 8.38% 8.30% 7.91% 7.92% (4) 7.86%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands............................... $915,899 $745,581 $542,544 $407,038 $167,137 $55,297
Portfolio turnover rate ................ 104% 82% 87% 60% 117% 37%(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 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 Fund had borne all expenses that were assumed or waived by the
Investment Manager, the annualized expense and net investment income
ratios would have been 2.08% and 6.63%, respectively.
(4) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the annualized expense and net investment income
ratios would have been 1.66% and 7.84%, respectively.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31,
1997++
- ----------------------------------------- -----------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 9.40
-----------------
Net investment income..................... 0.22
Net realized and unrealized gain.......... 0.04
-----------------
Total from investment operations.......... 0.26
-----------------
Less dividends from net investment
income................................... (0.20)
-----------------
Net asset value, end of period............ $ 9.46
=================
TOTAL INVESTMENT RETURN+.................. 2.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 0.85%(2)
Net investment income..................... 8.98%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $4,933
Portfolio turnover rate................... 104%
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 9.40
-----------------
Net investment income..................... 0.20
Net realized and unrealized gain.......... 0.04
-----------------
Total from investment operations.......... 0.24
-----------------
Less dividends from net investment
income................................... (0.19)
-----------------
Net asset value, end of period............ $ 9.45
=================
TOTAL INVESTMENT RETURN+.................. 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 1.44%(2)
Net investment income..................... 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $3,773
Portfolio turnover rate................... 104%
</TABLE>
- ------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on
the net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31,
1997++
- ----------------------------------------- -----------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 9.40
-----------------
Net investment income .................... 0.23
Net realized and unrealized gain ........ 0.02
-----------------
Total from investment operations ........ 0.25
-----------------
Less dividends from net investment
income................................... (0.20)
-----------------
Net asset value, end of period ........... $ 9.45
=================
TOTAL INVESTMENT RETURN+.................. 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 0.59%(2)
Net investment income .................... 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands . $ 99
Portfolio turnover rate .................. 104%
</TABLE>
- ------------
* The date the shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day
of the period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER DIVERSIFIED INCOME TRUST
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 Dean Witter
Diversified Income Trust (the "Fund") at October 31, 1997, 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 presented, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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 October 31, 1997 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 17, 1997
<PAGE>
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<PAGE>
(This page has been left blank intentionally.
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Peter M. Avelar
Vice President
Rajesh K. Gupta
Vice President
Vinh Q. Tran
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital 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.
DEAN WITTER
DIVERSIFIED
INCOME TRUST
ANNUAL REPORT
OCTOBER 31, 1997
