<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST Two World Trade Center,
LETTER TO THE SHAREHOLDERS April 30, 1999 New York, New York 10048
DEAR SHAREHOLDER:
During the six months ended April 30, 1999, the U.S. economy continued to
display signs of robust expansion as employment grew, income climbed and
consumers remained resilient. Despite strong economic growth, however,
inflation did not materialize, due largely to the lingering effects of Asian
and Russian economic turmoil and signs of distress in the Latin American
economies. During the fall, on three separate occasions the Federal Reserve
Board cut the federal-funds rate. The central bank's action served to provide
stability to a marketplace rocked by one financial crisis after another.
During this period, interest rates on intermediate-term U.S. Treasuries were
highly volatile. The yield on the five-year U.S. Treasury note ranged from 4.23
percent to 5.31 percent. On April 30, 1999, this note was yielding 5.21 percent
compared to 4.23 percent on October 31, 1998.
HIGH-YIELD BOND MARKET OVERVIEW
The six-month period ended April 30, 1999, was a difficult one for the
high-yield bond market. During the latter stages of 1998, serious concerns
began to emerge over the rapidly escalating foreign market crisis, raising
questions about the possible extent of its impact on the U.S. economy and
corporate earnings. This trend resulted in a sharp correction in the high-yield
bond market during the second half of 1998, causing high-yield bond prices to
decline by as much as 15 percent in many cases and driving up yields from their
first-half of 1998 range of 9 percent to the 12 percent area. The high-yield
market itself experienced a flight to quality, with the middle tier of the
market (B-rated issues) significantly underperforming the upper tier (BB-rated
issues), which was again attributable to investors' severe aversion to risk. As
a result, high-yield market yields began 1999 near their highest level in
relation to U.S. Treasuries in nearly 10 years.
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS April 30, 1999, continued
GLOBAL BOND MARKET OVERVIEW
During the period under review, the global bond markets posted mixed results.
European bond yields initially moved lower as it became evident that growth in
the major European economies was slowing. To support its local markets, the
European Central Bank initiated a 0.50 percent cut in official interest rates
in early April. This platform allowed yields on three-year German securities to
decline by 0.79 percent despite the deterioration of the U.S. bond market.
Elsewhere in Europe, the U.K. gilt, eurosterling, Danish and Norwegian markets
posted better returns as yields dropped by about 0.82 percent in the U.K.
markets and by just under 1 percent in the Danish and Norwegian markets. The
dollar-bloc markets of New Zealand, Australia and Canada posted comparatively
better returns than the United States and the emerging markets bounced back
especially strongly following their mid 1998 debacle.
As the U.S. economy continued to surprise investors with stronger than expected
growth, the U.S. dollar recovered from its earlier decline against core
European currencies to surge by almost 12 percent, to within a fraction of the
highest levels seen in almost a decade. Commodity-related currencies fared
somewhat better with the New Zealand dollar, for example, rising by more than 5
percent during the period. The European commodity currencies -- the Norwegian
and Swedish kroner and the U.K. pound -- fell by 3 to 6 percent relative to the
dollar, with their declines being blunted by the salutary effects of rising
commodity prices.
PERFORMANCE AND PORTFOLIO
For the six-month period ended April 30, 1999, Morgan Stanley Dean Witter
Diversified Income Trust's Class B shares posted a total return of 0.45
percent, compared to 0.51 percent for the Lehman Brothers Mutual Fund
Government/Corporate Intermediate Bond Index and 6.13 for the Lipper
Multi-Sector Income Funds Average. For the same period, the Fund's Class A, C
and D shares had total returns of 0.80 percent, 0.46 percent and 0.88 percent,
respectively. The performance of the Fund's four share classes varies because
of differing expenses.
The underperformance of the Fund relative to its Lipper peer group was
primarily due to the fact that most of the funds in this Lipper category
include emerging-market investments, which rebounded sharply during the period
under review. Emerging-market investments are not within the investment-grade
mandate of the Fund's global short-term bond component. It should also be noted
that, by eschewing emerging-market investments, the Fund escaped the negative
returns on those investments during the prior six-month period and generally
has enjoyed commensurately lower volatility.
Global Short-Term Bond Component. Throughout this period the Fund continued its
strategy of investing in the most attractive markets within its
investment-grade mandate. Consequently, its investment
2
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS April 30, 1999, continued
allocations generally mirrored the best-performing markets within its universe.
The primary non-U.S. allocations as of April 30, 1999, were the United Kingdom
(29 percent), Norway (22 percent), Denmark (20 percent) and New Zealand (16
percent). These markets enjoyed both the highest income levels available and
the best price performance potential.
In the months ahead for the Fund's global third, we anticipate a continuation
of the strategy of emphasizing the previously noted non-U.S. bond markets
because we believe that these still offer the highest incomes and the best
prospective returns. We expect the global portion of the Fund to benefit from
rising non-U.S. currency exchange rates, particularly so with respect to the
Fund's European investments. As the U.S. economy slows and the European
economies gather momentum, the outsized $300 billion U.S. current-account
deficit is expected to produce a significant improvement in the relative
attractiveness of the European currencies.
U.S. Government/Mortgage Component. During the period under review, the Fund
increased its exposure to mortgage-backed securities. This shift can be
attributed to ongoing optimism regarding continued economic growth in the
United States. As a result, U.S. Treasury yields rose while the economic
concerns in Asia, Russia and Latin America and their effect on the U.S. economy
proved minimal.
On April 30, 1999, approximately 59 percent of this component's net assets were
invested in mortgage-backed securities, with 6 to 8.5 percent coupons, issued
by the Federal National Mortgage Association (FNMA), Government National
Mortgage Association (GNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
Approximately 9 percent of the portfolio was invested in U.S. Treasury
securities, with the balance in U.S. agency securities.
High-Yield Component. During the period under review, the high-yield bond
component maintained a substantial position in the more defensive,
higher-quality end of the fixed-income market, which held up well in an
extremely volatile environment. Despite these defensive holdings, however, the
component's more significant, long-term core position in the B-rated sector of
the market was sharply affected by the market's late 1998 correction described
above.
In an effort to minimize the effect of an eventual slowdown in the economy, we
continue to concentrate on sectors that have historically proven to be more
predictable, recession resistant and growth oriented, such as cable television,
cellular, foods and beverages, media and telecommunications. We believe that
these industry groups are poised to perform well over the next year despite the
slowing of many of the world's markets. In addition, we expect to see continued
consolidation and merger activity within these industries, which should lead to
improved credit quality. We continue to focus primarily on domestic companies,
given the more favorable outlook for the U.S. economy, and are avoiding the
emerging foreign high-yield markets because of the higher degree of uncertainty
associated with many of these markets.
3
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS April 30, 1999, continued
Despite the high-yield market's recent weakness, we consider today's
substantially higher yields and significantly discounted bond prices an
investment opportunity. Assuming a soft landing in the economy with growth
continuing on into 1999, we expect the high-yield market to follow the lead of
the equity markets and rebound to more normal levels relative to U.S. Treasury
securities.
LOOKING AHEAD
In the months ahead, U.S. economic growth is likely to moderate as inflation
remains contained. Should our economy show signs of inordinately strong growth
coupled with unacceptably high levels of inflation, the Federal Reserve might
need to reassess its current complacent stance on monetary policy.
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley
Dean Witter Funds. Mr. Merin is also the President and Chief Operating Officer
of Asset Management of Morgan Stanley Dean Witter & Co. and President, Chief
Executive Officer and Director of Morgan Stanley Dean Witter Advisors Inc., the
Fund's Investment Manager. He also serves as Chairman, Chief Executive Officer
and Director of the Fund's distributor and transfer agent.
We appreciate your ongoing support of Morgan Stanley Dean Witter Diversified
Income Trust 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
4
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (94.2%)
FOREIGN (22.0%)
AUSTRALIA (0.0%)
Cable Television
$ 12,468 Australis Holdings Property Ltd. (a) ......... 15.00++% 11/01/02 $ 249,360
90 Australis Media Ltd. (a) ..................... 15.75++ 05/15/03 452
4,700 Australis Media Ltd. (Units)*** (a) .......... 15.75++ 05/15/03 23,500
--------------
273,312
--------------
CANADA (1.5%)
Beverages -- Non-Alcoholic (0.4%)
5,500 Sparkling Spring Water ....................... 11.50 11/15/07 4,235,000
--------------
Consumer/Business Services (0.2%)
1,800 MDC Communications Corp. ..................... 10.50 12/01/06 1,872,000
--------------
Government & Agencies (0.2%)
GBP 1,141 Ontario (Province of) ........................ 11.125 02/14/01 1,992,657
--------------
Industrial Specialties (0.2%)
$ 12,061 International Semi-Tech Microelectronics...... 11.50++ 08/15/03 1,809,150
--------------
Other Telecommunications (0.3%)
3,000 MetroNet Communications Corp. ................ 12.00 08/15/07 3,600,000
--------------
Wireless Communications (0.2%)
1,800 Clearnet Communications Inc. ................. 14.75++ 12/15/05 1,692,000
--------------
TOTAL CANADA 15,200,807
--------------
DENMARK (4.5%)
Government Obligation
DKK 290,000 Kingdom of Denmark (b) ....................... 8.00 11/15/01 46,050,226
--------------
NETHERLANDS (0.2%)
Other Telecommunications
$ 1,800 Versatel Telecom ............................. 13.25 05/15/08 1,953,000
--------------
NEW ZEALAND (3.4%)
Extra Governmental Institutions --
Banking
NZD 33,950 International Bank for Reconstruction &
Development (b) .............................. 7.00 09/18/00 19,448,630
27,000 International Bank for Reconstruction &
Development (b) .............................. 7.25 04/09/01 15,600,985
--------------
35,049,615
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NORWAY (5.0%)
Contract Drilling (0.1%)
$ 2,800 Northern Offshore ASA -- 144A* ............... 10.00% 05/15/05 $ 1,260,000
--------------
Government Obligation (4.9%)
NOK 375,100 Norway Government Bond (b) ................... 7.00 05/31/01 50,205,352
--------------
TOTAL NORWAY 51,465,352
--------------
SWEDEN (1.3%)
Government Obligation
SEK 105,500 Swedish Government Bond ...................... 5.50 04/12/02 13,337,123
--------------
UNITED KINGDOM (6.1%)
Government Obligations (4.9%)
GBP 20,000 U.K. Treasury Bond (b) ....................... 10.00 02/26/01 34,920,535
9,500 U.K. Treasury Bond (b) ....................... 7.00 11/06/01 15,960,743
--------------
50,881,278
--------------
International Banks (0.9%)
5,600 Abbey National Treasury Service (b) .......... 7.125 03/14/01 9,235,781
--------------
Other Telecommunications (0.3%)
$ 2,700 Esprit Telecom Group PLC ..................... 10.875 06/15/08 2,909,250
--------------
TOTAL UNITED KINGDOM 63,026,309
--------------
TOTAL FOREIGN (Identified Cost $242,247,747) 226,355,744
--------------
UNITED STATES (72.2%)
CORPORATE BONDS (30.6%)
Advertising (0.3%)
$ 3,200 Interep National Radio Sales ................. 10.00 07/01/08 3,328,000
--------------
Aerospace (0.2%)
2,700 Sabreliner Corp. -- 144A* .................... 11.00 06/15/08 2,376,000
--------------
Beverages -- Non-Alcoholic (0.5%)
5,000 Pepsico, Inc. ................................ 15.00 08/06/99 5,125,200
--------------
Books/Magazines (0.3%)
3,000 American Media Operations, Inc. .............. 11.625 11/15/04 3,240,000
--------------
Broadcasting (1.2%)
1,800 Paxson Communications Corp. .................. 11.625 10/01/02 1,876,500
5,000 Spanish Broadcasting System, Inc. ............ 12.50 06/15/02 5,625,000
4,800 Tri-State Outdoor Media Group, Inc. .......... 11.00 05/15/08 4,944,000
--------------
12,445,500
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cable Television (0.5%)
$ 575 James Cable Partners L.P. .................. 10.75% 08/15/04 $ 618,125
3,000 Knology Holdings Inc. ...................... 11.875++ 10/15/07 1,830,000
2,700 Optel, Inc. (Series B) ..................... 11.50 07/01/08 2,538,000
--------------
4,986,125
--------------
Casino/Gambling (1.6%)
12,740 Aladdin Gaming/Capital Corp. LLC ........... 13.50++ 03/01/10 5,350,800
3,250 Argosy Gaming Co. .......................... 13.25 06/01/04 3,672,500
2,700 Aztar Corp. ................................ 13.75 10/01/04 2,963,250
8,900 Fitzgeralds Gaming Corp. (Series B) ........ 12.25 12/15/04 4,005,000
3,250 Stuart Entertainment, Inc. (Series B) ...... 12.50 11/15/04 780,000
--------------
16,771,550
--------------
Cellular Telephone (1.4%)
1,800 American Cellular Corp. .................... 10.50 05/15/08 1,944,000
1,800 Dobson/Sygnet Communications
-- 144A* ................................... 12.25 12/15/08 1,993,500
7,300 McCaw International Ltd. ................... 13.00++ 04/15/07 4,726,750
3,629 Price Communication Cellular Holdings ...... 11.25+ 08/15/08 3,719,789
3,000 Triton Communications LLC .................. 11.00++ 05/01/08 1,890,000
--------------
14,274,039
--------------
Construction/Agricultural
Equipment/Trucks (0.3%)
2,800 J.B. Poindexter & Co., Inc. ................ 12.50 05/15/04 2,660,000
--------------
Consumer/Business Services (1.9%)
5,000 Anacomp, Inc. (Series B) ................... 10.875 04/01/04 5,250,000
600 Anacomp, Inc. (Series D) ................... 10.875 04/01/04 630,000
4,500 CEX Holdings, Inc. (Series B) .............. 9.625 06/01/08 4,297,500
6,750 Comforce Operating, Inc. ................... 12.00 12/01/07 6,412,500
4,500 Entex Information Services, Inc. ........... 12.50 08/01/06 3,195,000
--------------
19,785,000
--------------
Consumer Electronics/Appliances (0.3%)
2,700 Windmere-Durable Holdings Inc. ............. 10.00 07/31/08 2,578,500
--------------
Consumer Specialties (0.4%)
5,800 Samsonite Corp. ............................ 10.75 06/15/08 4,350,000
--------------
Containers/Packaging (0.9%)
5,650 Envirodyne Industries, Inc. ................ 10.25 12/01/01 4,124,500
1,800 Impac Group Inc. (Series B) ................ 10.125 03/15/08 1,800,000
3,500 Packaging Resources, Inc. .................. 11.625 05/01/03 3,666,250
--------------
9,590,750
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Diversified Electronic Products (0.3%)
$ 2,700 High Voltage Engineering, Inc. ............... 10.50% 08/15/04 $ 2,565,000
--------------
Diversified Manufacturing (0.5%)
1,800 Eagle-Picher Industries, Inc. ................ 9.375 03/01/08 1,773,000
2,588 Jordan Industries, Inc. (Series B) ........... 11.75++ 04/01/09 1,656,320
1,800 Jordan Industries, Inc. -- 144A* ............. 10.375 08/01/07 1,845,000
--------------
5,274,320
--------------
Electronic Data Processing (0.2%)
1,800 Unisys Corp. (Series B) ...................... 12.00 04/15/03 1,989,000
--------------
Electronic Distributors (0.4%)
5,600 CHS Electronics, Inc. ........................ 9.875 04/15/05 3,920,000
--------------
Finance Companies (0.7%)
GBP 4,200 General Electric Capital Corp. (b) ........... 6.625 03/16/01 6,875,175
--------------
Food Chains (1.0%)
$ 3,750 Big V Supermarkets, Inc. (Series B) .......... 11.00 02/15/04 3,881,250
1,000 Eagle Food Centers, Inc. ..................... 8.625 04/15/00 970,000
5,000 Pueblo Xtra International, Inc.
(Series C) ................................... 9.50 08/01/03 4,950,000
--------------
9,801,250
--------------
Food Distributors (0.6%)
2,700 Fleming Companies, Inc. (Series B) ........... 10.625 07/31/07 2,612,250
24,225 Specialty Foods Acquisition Corp.
(Series B) ................................... 13.00++ 08/15/05 3,876,000
--------------
6,488,250
--------------
Hotels/Resorts (0.9%)
2,700 Epic Resorts LLC ............................. 13.00 06/15/05 2,497,500
6,231 Motels of America, Inc. (Series B) ........... 12.00 04/15/04 3,925,530
3,666 Resort At Summerlin .......................... 13.00+ 12/15/07 3,336,060
--------------
9,759,090
--------------
Industrial Specialties (0.5%)
3,200 International Wire Group, Inc.
(Series B) ................................... 11.75 06/01/05 3,384,000
2,250 Outsourcing Services Group, Inc.
(Series B) ................................... 10.875 03/01/06 2,244,375
--------------
5,628,375
--------------
Media Conglomerates (1.0%)
9,800 Walt Disney Co. .............................. 13.50 03/10/00 10,499,426
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medical/Nursing Services (0.5%)
$ 5,250 Pediatric Services of America, Inc.
(Series A) .................................... 10.00% 04/15/08 $ 3,045,000
7,350 Unison Healthcare Corp. -- 144A* (c) .......... 12.25 11/01/06 1,837,500
2,700 Vencor Operating Inc. ......................... 9.875 05/01/05 459,000
--------------
5,341,500
--------------
Medical Specialties (0.8%)
3,600 Mediq Inc./PRN Life Support Services
Inc. .......................................... 11.00 06/01/08 3,114,000
2,700 Universal Hospital Services Inc. .............. 10.25 03/01/08 2,558,250
2,700 Universal Hospital Services Inc.
-- 144A* ...................................... 10.25 03/01/08 2,416,500
--------------
8,088,750
--------------
Military/Gov't/Technical (0.2%)
1,800 Loral Space & Communications Ltd.
-- 144A* ...................................... 9.50 01/15/06 1,746,000
--------------
Oil Refining/Marketing (0.3%)
6,700 Transamerican Refining Corp. (c) .............. 16.00 06/30/03 3,182,500
--------------
Office Equipment/Supplies (0.3%)
4,230 Mosler, Inc. .................................. 11.00 04/15/03 3,510,900
--------------
Other Consumer Services (0.2%)
1,800 Volume Services of America Inc.
-- 144A* ...................................... 11.25 03/01/09 1,908,000
--------------
Other Telecommunications (0.5%)
1,800 CapRock Communications Corp.
(Series B) .................................... 12.00 07/15/08 1,903,500
1,800 Covad Communications Group -- 144A* ........... 12.50 02/15/09 1,818,000
1,800 Rhythms Netconnections -- 144A* ............... 12.75 04/15/09 1,791,000
--------------
5,512,500
--------------
Packaged Goods/Cosmetics (0.3%)
2,500 J.B. Williams Holdings, Inc. .................. 12.00 03/01/04 2,587,500
--------------
Printing/Forms (0.3%)
2,700 Premier Graphics Inc. -- 144A* ................ 11.50 12/01/05 2,673,000
--------------
Restaurants (2.4%)
48,756 American Restaurant Group Holdings,
Inc. -- 144A* (d) ............................. 0.00 12/15/05 16,577,006
4,000 FRD Acquisition Corp. (Series B) .............. 12.50 07/15/04 4,120,000
1,800 Friendly Ice Cream Corp. ...................... 10.50 12/01/07 1,665,000
10,100 Planet Hollywood International, Inc. (c) ...... 12.00 04/01/05 2,575,500
--------------
24,937,506
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Services to the Health Industry (0.2%)
$ 1,800 Unilab Corp. .................................. 11.00% 04/01/06 $ 1,921,500
--------------
Telecommunications Equipment (0.2%)
10,500 FWT, Inc. (c) ................................. 9.875 11/15/07 1,575,000
--------------
Telecommunications (4.8%)
5,600 21st Century Telecom Group, Inc. .............. 12.25++ 02/15/08 2,632,000
2,800 Birch Telecom Inc. ............................ 14.00 06/15/08 2,632,000
5,400 e. Spire Communications, Inc. ................. 13.75 07/15/07 5,211,000
6,400 Facilicom International, Inc. (Series B) ...... 10.50 01/15/08 4,992,000
16,300 Firstworld Communications, Inc. ............... 13.00++ 04/15/08 9,128,000
2,700 Focal Communications Corp. .................... 12.125++ 02/15/08 1,552,500
3,100 GST Equipment Funding Corp. ................... 13.25 05/01/07 3,410,000
2,300 GST Equipment Funding Corp.
-- 144A* ...................................... 10.50++ 05/01/08 1,437,500
1,800 Hyperion Telecommunication, Inc.
(Series B) .................................... 12.25 09/01/04 1,957,500
28,500 In-Flight Phone Corp. (Series B) (e) .......... 14.00 05/15/02 3,562,500
1,800 Level 3 Communications, Inc. .................. 9.125 05/01/08 1,836,000
1,800 NextLink Communications LLC ................... 12.50 04/15/06 1,984,500
2,700 Pac-West Telecomm Inc. -- 144A* ............... 13.50 02/01/09 2,760,750
3,500 Primus Telecommunications Group, Inc. ......... 11.75 08/01/04 3,640,000
2,700 Primus Telecommunications Group, Inc. ......... 9.875 05/15/08 2,646,000
--------------
49,382,250
--------------
Wireless Communications (3.7%)
11,300 Advanced Radio Telecom Corp. .................. 14.00 02/15/07 9,718,000
900 Arch Escrow Corp. -- 144A* .................... 13.75 04/15/08 855,000
21,800 CellNet Data Systems Inc. ..................... 14.00++ 10/01/07 8,284,000
3,750 Globalstar LP/Capital Corp. ................... 11.375 02/15/04 2,737,500
1,850 Globalstar LP/Capital Corp. ................... 11.50 06/01/05 1,304,250
1,800 Orbcomm Global LP/Capital Corp. ............... 14.00 08/15/04 1,890,000
1,800 Paging Network, Inc. .......................... 10.125 08/01/07 1,458,000
1,800 Paging Network, Inc. .......................... 10.00 10/15/08 1,440,000
5,850 USA Mobile Communications
Holdings, Inc. ................................ 14.00 11/01/04 5,967,000
1,000 Winstar Communications, Inc. .................. 14.00++ 10/15/05 860,000
3,250 Winstar Equipment Corp. ....................... 12.50 03/15/04 3,380,000
--------------
37,893,750
--------------
TOTAL CORPORATE BONDS
(Identified Cost $366,671,400) ....................................... 314,571,206
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES (24.4%)
Federal Home Loan Mortgage Corp. (0.3%)
$ 2,225 .......................................... 7.00% 04/01/04--
06/01/04 $ 2,272,674
1,171 .......................................... 8.00 10/01/24--
06/01/25 1,217,986
------------
3,490,660
------------
Federal National Mortgage Assoc. (12.5%)
39,550 .......................................... 6.00 02/01/11--
02/01/29 39,010,504
39,006 .......................................... 6.50 10/01/08--
04/01/29 39,025,131
25,898 .......................................... 7.00 08/01/08--
03/01/27 26,260,148
10,938 .......................................... 7.50 02/01/22--
01/01/27 11,242,615
4,425 .......................................... 8.00 09/01/01--
06/01/26 4,572,792
8,137 .......................................... 8.50 07/01/17--
05/01/25 8,554,498
------------
128,665,688
------------
Government National Mortgage Assoc. (11.6%)
23,519 .......................................... 6.00 10/15/23--
12/15/28 22,798,802
35,852 .......................................... 6.50 11/20/23 --
06/15/28 35,628,264
5,000 .......................................... 6.50 ** 4,971,875
23,479 .......................................... 7.00 12/15/22--
11/20/27 23,819,606
25,053 .......................................... 7.50 05/15/17--
11/15/26 25,809,707
4,530 .......................................... 8.00 01/15/22--
10/15/24 4,721,424
1,662 .......................................... 8.50 08/15/22--
12/15/24 1,756,521
------------
119,506,199
------------
TOTAL MORTGAGE-BACKED SECURITIES
(Identified Cost $248,192,826) ................................... 251,662,547
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (17.2%)
Federal Home Loan Banks (b) (1.3%)
$ 5,000 .......................................... 0.00% 07/02/12 $ 1,782,950
5,000 .......................................... 6.37 09/25/07 5,108,600
5,000 .......................................... 6.385 10/23/07 5,114,400
2,000 .......................................... 5.45 01/12/09 1,914,860
--------------
13,920,810
--------------
10,000 Federal Home Loan Mortgage Corp. (0.8%) 0.00 08/15/02 8,350,700
--------------
Federal National Mortgage Assoc. (b) (3.5%)
NZD 54,430 .......................................... 7.00 09/26/00 31,178,509
$ 6,000 Principal Strips .......................... 0.00 02/12/04--
02/01/05 4,378,870
--------------
35,557,379
--------------
13,475 Financing Corp. (0.9%) .................... 0.00 03/07/05--
04/06/06 9,374,304
--------------
3,000 Freddie Mac (0.3%) ........................ 5.75 04/15/08 2,961,720
--------------
22,232 Resolution Funding Corp. (1.5%) ........... 0.00 04/15/05--
10/15/07 15,543,236
--------------
2,320 Tennesee Valley Authority (0.2%) .......... 0.00 01/15/03 1,881,079
--------------
U.S. Treasury Notes (b) (8.7%)
16,000 .......................................... 5.625 02/15/06--
05/15/08 16,217,650
13,000 .......................................... 6.125 08/15/07 13,583,700
45,000 .......................................... 6.25 01/31/02 46,227,150
13,000 .......................................... 6.375 09/30/01 13,356,590
--------------
89,385,090
--------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Identified Cost $174,046,583) ................................... 176,974,318
--------------
TOTAL UNITED STATES
(Identified Cost $788,910,809) ................................... 743,208,071
--------------
TOTAL GOVERNMENT & CORPORATE BONDS
(Identified Cost $1,031,158,556) ................................. 969,563,815
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (f) (0.1%)
Casino/Gambling (0.0%)
10,773 Fitzgeralds Gaming Corp. (Class D) ......................... $ 108
--------------
Clothing/Shoe/Accessory Stores (0.1%)
1,310,596 County Seat Stores, Inc. (d) ............................... 589,768
--------------
Food Distributors (0.0%)
198,750 Specialty Foods Acquisition Corp. -- 144A* ................. 99,375
--------------
Hotels/Resorts (0.0%)
2,000 Motels of America, Inc. -- 144A* ........................... 2,000
--------------
Other Telecommunications (0.0%)
5,143 MetroNet Communications Corp. (Class B) (Canada)
(Non-Voting) ............................................... 285,437
--------------
Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. -- 144A* .......... 60
--------------
Textiles (0.0%)
298,462 United States Leather, Inc. (d) ............................ 410,385
--------------
TOTAL COMMON STOCKS
(Identified Cost $11,873,342)............................... 1,387,133
--------------
PREFERRED STOCKS (0.2%)
Oil & Gas Production (0.0%)
717 XCL Ltd (Conv.)+ -- 144A* .................................. 34,812
5,000 XCL Ltd. (Units)*** (Conv.)+ -- 144A* ...................... 242,500
--------------
277,312
--------------
Oil Refining/Marketing (0.0%)
11,760 TCR Holding Corp. (Class B) (Conv.) (Non-Voting) ........... 706
6,468 TCR Holding Corp. (Class C) (Conv.) (Non-Voting) ........... 388
17,052 TCR Holding Corp. (Class D) (Conv.) (Non-Voting) ........... 1,023
35,280 TCR Holding Corp. (Class E) (Conv.) (Non-Voting) ........... 2,117
--------------
4,234
--------------
Restaurants (0.2%)
1,680 American Restaurant Group Holdings, Inc.+ .................. 1,680,000
--------------
TOTAL PREFERRED STOCKS
(Identified Cost $2,684,685)................................ 1,961,546
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WARRANTS (f) (0.1%)
Aerospace (0.0%)
1,000 Sabreliner Corp. -- 144A* .............................. 04/15/03 $ 10,000
--------------
Broadcasting (0.0%)
4,000 Uih Australia/Pacific Inc. ............................. 05/15/06 40
--------------
Casino/Gambling (0.0%)
68,000 Aladdin Gaming Enterprises -- 144A* .................... 03/01/10 680
--------------
Cellular Telephone (0.0%)
5,300 McCaw International Ltd. -- 144A* ...................... 04/15/07 13,250
--------------
Hotels/Resorts (0.0%)
2,700 Epic Resorts LLC/Capital -- 144A* ...................... 06/15/05 27
3,250 Resort At Summerlin -- 144A* ........................... 12/15/07 33
--------------
60
--------------
Oil Refining/Marketing (0.0%)
4,700 Transamerican Refining Corp. -- 144A* .................. 06/30/03 47
2,000 Transamerican Refining Corp. -- 144A* .................. 06/30/03 20
--------------
67
--------------
Other Telecommunications (0.0%)
2,800 Versatel Telecom -- 144A* (Netherlands) ................ 05/15/08 196,000
--------------
Restaurants (0.0%)
1,500 American Restaurant Group Holdings, Inc. -- 144A* ...... 08/15/08 15
--------------
Telecommunications (0.1%)
2,800 Birch Telecom .......................................... 06/15/08 14,000
16,300 Firstworld Communications -- 144A* ..................... 04/15/08 815,000
--------------
829,000
--------------
TOTAL WARRANTS
(Identified Cost $13,064).......................................... 1,049,112
--------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ---- ----
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (4.5%)
UNITED STATES
TIME DEPOSIT (g) (3.1%)
EUR 29,685 Chase Manhattan Bank
(Identified Cost $31,442,352).......... 2.40% 05/06/99 31,406,730
-------------
GOVERNMENT AGENCY (h) (1.3%)
$ 13,700 Student Loan Marketing Assoc.
(Amortized Cost $13,696,347) .......... 4.80 05/03/99 13,696,347
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT (0.1%)
$ 854 The Bank of New York (dated 04/30/99;
proceeds $853,961) (i)
(Identified Cost $853,614)........... 4.875% 05/03/99 $ 853,614
--------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $45,992,313) 45,956,691
--------------
TOTAL INVESTMENTS
(Identified Cost $1,091,721,960) (j).......... 99.1% 1,019,918,297
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES 0.9 9,759,362
----- --------------
NET ASSETS ................................... 100.0% $1,029,677,659
===== ==============
</TABLE>
- ---------------------
* 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 warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at a
future date.
(a) Issuer in bankruptcy.
(b) Some or all of these securities are segregated in connection with open
forward foreign currency contracts and securities purchased on a forward
commitment basis.
(c) Non-income producing security; bond in default.
(d) Acquired through exchange offer.
(e) Non-income producing security; issuer in bankruptcy.
(f) Non-income producing securities.
(g) Subject to withdrawal restrictions until maturity.
(h) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(i) Collateralized by $577,642 U.S. Treasury Bond 10.625% due 08/15/15 valued
at $878,199.
(j) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $23,181,987 and the
aggregate gross unrealized depreciation is $94,985,650, resulting in net
unrealized depreciation of $71,803,663.
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT APRIL 30, 1999:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS IN EXCHANGE DELIVERY APPRECIATION
TO DELIVER FOR DATE (DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 31,510,628 EUR 29,685,000 05/03/99 $ (103,897)
JPY 414,131,000 $ 3,464,198 05/06/99 (4,178)
NZD 17,980,000 $ 9,646,450 05/06/99 (405,089)
GBP 9,900,000 $ 15,939,000 05/12/99 17,226
GBP 6,613,000 $ 10,646,930 05/12/99 11,507
NZD 29,420,000 $ 15,626,433 05/12/99 (821,701)
GBP 6,950,000 $ 11,210,350 05/14/99 33,221
GBP 3,551,000 $ 5,724,212 05/17/99 13,636
GBP 4,920,000 $ 7,940,880 05/19/99 28,930
EUR 8,926,000 $ 9,541,001 05/20/99 84,797
EUR 2,323,400 $ 2,471,633 05/20/99 10,223
EUR 6,950,000 $ 7,448,315 05/21/99 84,998
NZD 22,715,000 $ 11,963,991 05/24/99 (737,329)
JPY 838,312,000 $ 7,030,990 05/26/99 (9,192)
NZD 32,681,000 $ 17,452,961 05/26/99 (821,382)
NZD 16,423,000 $ 8,676,271 06/02/99 (507,799)
EUR 15,750,000 $ 16,723,193 06/04/99 20,842
$ 21,887,250 EUR 19,250,000 09/20/99 (1,324,657)
------------
Net unrealized depreciation $ (4,429,844)
============
</TABLE>
Currency Abbreviations:
- -----------------------
GBP British Pound.
DKK Danish Krone.
EUR Euro.
JPY Japanese Yen.
NZD New Zealand Dollar.
NOK Norwegian Krone.
SEK Swedish Krona.
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $1,091,721,960) ....................................... $1,019,918,297
Unrealized appreciation on open forward foreign currency contracts ....... 305,380
Cash (including $10,806 in foreign currency) ............................. 33,612,712
Receivable for:
Interest .............................................................. 18,793,265
Investments sold ...................................................... 2,221,300
Shares of beneficial interest sold .................................... 2,211,011
Compensated forward foreign currency contracts ........................ 1,281,534
Prepaid expenses and other assets ........................................ 142,033
--------------
TOTAL ASSETS .......................................................... 1,078,485,532
--------------
LIABILITIES:
Unrealized depreciation on open forward foreign currency contracts ....... 4,735,224
Payable for:
Investments purchased ................................................. 37,160,576
Compensated forward foreign currency contracts ........................ 3,904,641
Shares of beneficial interest repurchased ............................. 1,088,405
Dividends to shareholders ............................................. 716,162
Plan of distribution fee .............................................. 709,871
Investment management fee ............................................. 338,963
Accrued expenses and other payables ...................................... 154,031
--------------
TOTAL LIABILITIES ..................................................... 48,807,873
--------------
NET ASSETS ............................................................ $1,029,677,659
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital .......................................................... $1,140,129,821
Net unrealized depreciation .............................................. (76,343,518)
Accumulated undistributed net investment income .......................... 252,119
Accumulated net realized loss ............................................ (34,360,763)
--------------
NET ASSETS ............................................................ $1,029,677,659
==============
CLASS A SHARES:
Net Assets ............................................................... $20,247,045
Shares Outstanding (unlimited authorized, $.01 par value) ................ 2,324,043
NET ASSET VALUE PER SHARE ............................................. $8.71
=====
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ..................... $9.10
=====
CLASS B SHARES:
Net Assets ............................................................... $987,950,837
Shares Outstanding (unlimited authorized, $.01 par value) ................ 113,389,353
NET ASSET VALUE PER SHARE ............................................. $8.71
=====
CLASS C SHARES:
Net Assets ............................................................... $20,618,176
Shares Outstanding (unlimited authorized, $.01 par value) ................ 2,369,504
NET ASSET VALUE PER SHARE ............................................. $8.70
=====
CLASS D SHARES:
Net Assets ............................................................... $861,601
Shares Outstanding (unlimited authorized, $.01 par value) ................ 98,941
NET ASSET VALUE PER SHARE ............................................. $8.71
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended April 30, 1999 (unaudited)
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ...................................................... $ 47,900,887
-------------
EXPENSES
Plan of distribution fee (Class A shares) ............................ 12,938
Plan of distribution fee (Class B shares) ............................ 4,292,401
Plan of distribution fee (Class C shares) ............................ 75,600
Investment management fee ............................................ 2,092,129
Transfer agent fees and expenses ..................................... 359,854
Custodian fees ....................................................... 135,276
Registration fees .................................................... 61,217
Shareholder reports and notices ...................................... 53,571
Professional fees .................................................... 41,419
Trustees' fees and expenses .......................................... 7,802
Other ................................................................ 11,337
-------------
TOTAL EXPENSES .................................................... 7,143,544
-------------
NET INVESTMENT INCOME ............................................. 40,757,343
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on:
Investments ....................................................... (11,891,605)
Foreign exchange transactions ..................................... (3,168,851)
-------------
NET LOSS .......................................................... (15,060,456)
-------------
Net change in unrealized appreciation/depreciation on:
Investments ....................................................... (17,625,580)
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies ................... (3,880,348)
-------------
NET DEPRECIATION .................................................. (21,505,928)
-------------
NET LOSS .......................................................... (36,566,384)
-------------
NET INCREASE ......................................................... $ 4,190,959
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 1999 OCTOBER 31, 1998
- -----------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .................................... $ 40,757,343 $ 74,016,906
Net realized loss ........................................ (15,060,456) (8,648,510)
Net change in unrealized depreciation .................... (21,505,928) (43,833,349)
-------------- --------------
NET INCREASE .......................................... 4,190,959 21,535,047
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A shares ........................................ (732,679) (841,473)
Class B shares ........................................ (37,831,262) (68,434,466)
Class C shares ........................................ (678,554) (726,141)
Class D shares ........................................ (32,432) (29,053)
Paid-in-capital:
Class A shares ........................................ -- (31,733)
Class B shares ........................................ -- (2,580,756)
Class C shares ........................................ -- (27,384)
Class D shares ........................................ -- (1,096)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ..................... (39,274,927) (72,672,102)
-------------- --------------
Net increase from transactions in shares of beneficial
interest ............................................... 9,210,949 181,982,946
-------------- --------------
NET INCREASE (DECREASE) ............................... (25,873,019) 130,845,891
NET ASSETS:
Beginning of period ...................................... 1,055,550,678 924,704,787
-------------- --------------
END OF PERIOD
(Including accumulated undistributed net investment
income of $252,119 and dividends in excess of net
investment income of $1,230,297, respectively) ........ $1,029,677,659 $1,055,550,678
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley 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 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 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; (4) certain portfolio
securities may be valued by an outside pricing service approved by the
Trustees. The pricing service may utilize a matrix system incorporating
security quality, maturity and coupon as the evaluation model parameters,
and/or research and evaluations by its staff, including review of broker-dealer
market price quotations, if available, in determining what it believes is the
fair valuation of the portfolio securities valued by such pricing service; and
(5) short-term debt securities having a
20
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
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.
21
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) 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.
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 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 -- 0.85% of
the lesser of: (a) the average daily aggregate gross sales of the Class B
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
22
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
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.
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 $16,672,821 at April 30, 1999.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 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 Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the six months ended April 30, 1999, the distribution fee
was accrued for Class A shares and Class C shares at the annual rate of 0.15%
and 0.85%, respectively.
The Distributor has informed the Fund that for the six months ended April 30,
1999, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $918,881 and $8,402,
respectively and received $39,513 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.
23
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the six months ended April 30, 1999
aggregated $447,622,598 and $489,286,862, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$153,577,525 and $159,248,519, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At April 30, 1999, the Fund had
transfer agent fees and expenses payable of approximately $1,000.
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 six months ended April 30, 1999
included in Trustees' fees and expenses in the Statement of Operations amounted
to $2,640. At April 30, 1999, the Fund had an accrued pension liability of
$38,301 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At October 31, 1998, the Fund had an approximate net capital loss carryover of
$19,547,000, 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 2006
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$3,024 $3,677 $2,482 $7,131 $3,233
====== ====== ====== ====== ======
</TABLE>
As of October 31, 1998, 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, capital
loss deferrals on wash sales and interest on bonds in default.
The Investment Manager has determined that distribution from paid-in-capital is
likely to occur for the fiscal year ended October 31, 1999.
24
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 1999 OCTOBER 31, 1998
---------------------------------- ----------------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................ 809,033 $ 7,169,413 1,401,139 $ 13,091,543
Reinvestment of dividends and distributions ......... 28,752 253,831 27,410 253,604
Redeemed ............................................ (193,707) (1,711,859) (270,021) (2,522,912)
-------- -------------- --------- --------------
Net increase -- Class A ............................. 644,078 5,711,385 1,158,528 10,822,235
-------- -------------- --------- --------------
CLASS B SHARES
Sold ................................................ 27,078,672 240,764,946 62,883,534 586,332,969
Reinvestment of dividends and distributions ......... 1,901,389 16,807,805 3,352,666 31,127,964
Redeemed ............................................ (29,291,498) (259,779,997) (49,343,181) (459,483,799)
----------- -------------- ----------- --------------
Net increase (decrease) -- Class B .................. (311,437) (2,207,246) 16,893,019 157,977,134
----------- -------------- ----------- --------------
CLASS C SHARES
Sold ................................................ 888,443 7,862,606 1,498,137 13,967,448
Reinvestment of dividends and distributions ......... 42,858 377,910 46,283 427,613
Redeemed ............................................ (302,547) (2,681,843) (202,794) (1,873,959)
----------- -------------- ----------- --------------
Net increase -- Class C ............................. 628,754 5,558,673 1,341,626 12,521,102
----------- -------------- ----------- --------------
CLASS D SHARES
Sold ................................................ 23,136 205,121 76,565 707,582
Reinvestment of dividends and distributions ......... 2,270 20,041 1,631 15,003
Redeemed ............................................ (8,643) (77,025) (6,535) (60,110)
----------- -------------- ----------- --------------
Net increase -- Class D ............................. 16,763 148,137 71,661 662,475
----------- -------------- ----------- --------------
Net increase in Fund ................................ 978,158 $ 9,210,949 19,464,834 $ 181,982,946
=========== ============== =========== ==============
</TABLE>
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.
25
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
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 April 30, 1999, there were outstanding forward contracts used to facilitate
settlement of foreign currency denominated portfolio transactions and manage
foreign currency exposure.
26
<PAGE>
MORGAN STANLEY 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 SIX FOR THE YEAR ENDED OCTOBER 31
MONTHS ENDED -----------------------------------------------------
APRIL 30, 1999++ 1998++ 1997*++ 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ........... $9.01 $9.46 $9.78 $9.62 $9.37 $10.20
----- ----- ----- ----- ----- ------
Income (loss) from investment operations:
Net investment income ......................... 0.34 0.68 0.74 0.78 0.77 0.74
Net realized and unrealized gain (loss) ....... (0.31) (0.46) (0.15) 0.10 0.20 (0.80)
----- ----- ----- ----- ----- ------
Total income (loss) from investment operations . 0.03 0.22 0.59 0.88 0.97 (0.06)
----- ----- ----- ----- ----- ------
Less dividends and distributions from:
Net investment income ......................... (0.33) (0.65) (0.91) (0.72) (0.72) (0.64)
Net realized gain ............................. -- -- -- -- -- (0.01)
Paid-in-capital ............................... -- (0.02) -- -- -- (0.12)
----- ----- ----- ----- ----- ------
Total dividends and distributions .............. (0.33) (0.67) (0.91) (0.72) (0.72) (0.77)
----- ----- ----- ----- ----- ------
Net asset value, end of period ................. $8.71 $9.01 $9.46 $9.78 $9.62 $9.37
===== ===== ===== ===== ===== =====
TOTAL RETURN+ .................................. 0.45%(1) 2.23% 6.46% 9.49% 10.76% (0.69)%
RATIOS TO AVERAGE NET ASSETS:
Expenses ....................................... 1.38%(2)(3) 1.38%(3) 1.40% 1.42% 1.44% 1.51%
Net investment income .......................... 7.78%(2)(3) 7.33%(3) 7.90% 8.38% 8.30% 7.91%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........ $987,951 $1,024,021 $915,899 $745,581 $542,544 $407,038
Portfolio turnover rate ........................ 44%(1) 130% 104% 82% 87% 60%
</TABLE>
- -------------
* 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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
27
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
APRIL 30, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............. $9.01 $9.46 $9.40
----- ----- -----
Income (loss) from investment operations:
Net investment income ........................... 0.37 0.74 0.22
Net realized and unrealized gain (loss) ......... (0.31) (0.46) 0.04
----- ----- -----
Total income from investment operations .......... 0.06 0.28 0.26
----- ----- -----
Less dividends and distributions from:
Net investment income ........................... (0.36) (0.70) (0.20)
Paid-in-capital ................................. -- (0.03) --
----- ----- -----
Total dividends and distributions ................ (0.36) (0.73) (0.20)
----- ----- -----
Net asset value, end of period ................... $8.71 $9.01 $9.46
===== ===== =====
TOTAL RETURN+ .................................... 0.80%(1) 2.86% 2.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 0.68%(2)(3) 0.77%(3) 0.85%(2)
Net investment income ............................ 8.48%(2)(3) 7.94%(3) 8.98%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $20,247 $15,130 $4,933
Portfolio turnover rate .......................... 44%(1) 130% 104%
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............. $9.00 $9.45 $9.40
----- ----- -----
Income (loss) from investment operations:
Net investment income ........................... 0.34 0.68 0.20
Net realized and unrealized gain (loss) ......... (0.31) (0.46) 0.04
----- ----- -----
Total income from investment operations .......... 0.03 0.22 0.24
----- ----- -----
Less dividends and distributions from:
Net investment income ........................... (0.33) (0.65) (0.19)
Paid-in-capital ................................. -- (0.02) --
----- ----- -----
Total dividends and distributions ................ (0.33) (0.67) (0.19)
----- ----- -----
Net asset value, end of period ................... $8.70 $9.00 $9.45
===== ===== =====
TOTAL RETURN+ .................................... 0.46%(1) 2.26% 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 1.38%(2)(3) 1.38%(3) 1.44%(2)
Net investment income ............................ 7.78%(2)(3) 7.33%(3) 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $20,618 $15,659 $3,773
Portfolio turnover rate .......................... 44%(1) 130% 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.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
28
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
APRIL 30, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............. $9.00 $9.45 $9.40
----- ----- -----
Income (loss) from investment operations:
Net investment income ........................... 0.38 0.76 0.23
Net realized and unrealized gain (loss) ......... (0.30) (0.46) 0.02
----- ----- -----
Total income from investment operations .......... 0.08 0.30 0.25
----- ----- -----
Less dividends and distributions from:
Net investment income ........................... (0.37) (0.72) (0.20)
Paid-in-capital ................................. -- (0.03) --
----- ----- -----
Total dividends and distributions ................ (0.37) (0.75) (0.20)
----- ----- -----
Net asset value, end of period ................... $8.71 $9.00 $9.45
===== ===== =====
TOTAL RETURN+ .................................... 0.88%(1) 3.21% 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 0.53%(2)(3) 0.53%(3) 0.59%(2)
Net investment income ............................ 8.63%(2)(3) 8.18%(3) 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $862 $740 $99
Portfolio turnover rate .......................... 44%(1) 130% 104%
</TABLE>
- --------------
* The date shares were first issued.
+ Calculated based on the net asset value as of the last business day of the
period.
++ The per share amounts were computed using an average number of shares
outstanding during 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
29
<PAGE>
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<PAGE>
(This page has been left blank intentionally.)
<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
Peter M. Avelar
Vice President
Rajesh K. Gupta
Vice President
Anne Pickrell
Vice President
Peter J. Seeley
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of
the Fund without examination by the independent accountants and accordingly
they do not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus
of the Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY
DEAN WITTER
DIVERSIFIED
INCOME TRUST
[Graphic]
SEMIANNUAL REPORT
APRIL 30, 1999
