<PAGE>
Morgan Stanley Dean Witter Financial Services Trust Two World Trade Center,
Letter to the Shareholders May 31, 2000 New York, New York 10048
DEAR SHAREHOLDER:
During the 12-month period ended May 31, 2000, the U.S. equity markets reached
new heights amid episodes of heightened volatility. Strong global economic
growth, rising crude oil prices and a tight labor market fueled concerns about
inflation. The Federal Reserve Board raised the federal funds rate by a total
of 175 basis points (1.75 percent) during the period, negatively affecting
expectations for earnings growth and the profitability of old-economy stocks.
However, new-economy stocks shrugged off the higher rates until April, when a
correction in the Nasdaq refocused investors on such traditional valuation
measures as earnings, cash flow and financial flexibility.
Financials posted negative returns in this period, as did other sectors,
including basic materials, communications services, consumer staples, consumer
cyclicals and transportation. Only two sectors represented in the Standard &
Poor's Composite Stock Price Index (S&P 500) - technology and capital goods -
had double-digit positive returns during the period.
PERFORMANCE
For the 12-month period ended May 31, 2000, Morgan Stanley Dean Witter
Financial Services Trust's Class B shares produced a total return of -8.35
percent compared with a 10.47 percent gain for the S&P 500. For the same
period, the Fund's Class A, C and D shares posted total returns of -7.66
percent, -8.35 percent and -7.46 percent, respectively. The performance of the
Fund's four share classes varies because each class has different expenses. The
total return figures given assume the reinvestment of all distributions but do
not reflect the deduction of any applicable sales charges. The accompanying
chart compares the Fund's performance to that of the S&P 500.
The Fund seeks to capitalize on changes in the market by overweighting sectors
of the financial services industry we consider best positioned to show
above-average earnings growth relative to the S&P financials index. The Fund's
underperformance relative to its benchmark can be attributed
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Letter to the Shareholders May 31, 2000, continued
primarily to its rotation out of sectors with strong growth trends into
value-oriented financials. After a decade of economic expansion, we were
cautious about moving into interest-rate and credit-sensitive financials,
because financial stocks have not historically proven to be good late-cycle
investments. Typically, as the economic cycle matures, banks tighten credit,
loan demand weakens and credit quality deteriorates. We added positions in
these sectors selectively, as their fundamentals remain under pressure.
PORTFOLIO STRATEGY
For most of the fiscal year, more than half the Fund's assets were invested in
market-sensitive companies, including brokerage firms, asset managers and banks
focused on processing investment transactions. The Fund's holdings benefited
from robust global capital markets, strong trading volumes and increased merger
and acquisition activity. The Fund also added exposure to selected financial
technology names that have significant market share in nascent but potentially
large markets. However, when the technology sector collapsed in April, the
Fund's market-sensitive financials and financial technology holdings mirrored
the Nasdaq's decline. Conversely, bank and insurance company shares, which had
previously been beaten down on earnings disappointments and deteriorating
fundamentals, rallied toward the end of the period.
Brokerage shares were also negatively affected by the market's sharp decline as
investors grew concerned about earnings risk because of slower underwriting
calendars and decreased trading volumes. During this period, we reduced the
Fund's exposure to brokers and other capital-market-sensitive players.
Furthermore, we eliminated our exposure in Japanese banks and brokers as
Japanese equity markets weakened in line with those in the United States. We
also removed the Fund's exposure to financial names in technology and the
Internet.
With signs that the economy might be slowing and interest rates peaking, we
added some interest-rate-sensitive sectors to the Fund's portfolio, including
selected banks, credit card companies and mortgage-market participants. We also
added some property and casualty insurance stocks, because pricing trends for
those issues appear to be improving. We continue to favor financial processors,
which currently make up approximately 10 percent of the Fund's holdings.
LOOKING AHEAD
We expect U.S. and global growth to slow in the coming year. Given that the
U.S. economy is now entering its tenth year of expansion, we believe that
earnings growth has likely peaked for the domestic financial services sector in
this economic cycle. Thus, we are targeting financial institutions that have
diverse global franchises and less credit-sensitive business lines.
2
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Letter to the Shareholders May 31, 2000, continued
Going forward, we will continue to overweight segments of the financial
services industry that we believe offer the potential for above-average
relative earnings growth as well as those best positioned to benefit from
industry consolidation, deregulation and technology.
We appreciate your ongoing support of Morgan Stanley Dean Witter Financial
Services Trust and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin
---------------------------- ------------------------
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
3
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Fund Performance May 31, 2000
GROWTH OF $10,000 -- CLASS B
Date Total S&P 500
February 26, 1997 10,000 10,000
May 31, 1997 10,050 10,602
May 31, 1998 14,597 13,853
May 31, 1999 17,326 16,767
May 31, 2000 15,679(3) 18,522
---- Fund ---- S&P 500(4)
Past performance is not predictive of future returns. Investment return and
principal value will fluctuate. When you sell fund shares, they may be worth
more or less than their original cost. Performance for Class A, Class C, and
Class D shares will vary from the performance of Class B shares shown above due
to differences in sales charges and expenses.
Average Annual Total Returns
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares*
--------------------------------------------------------------------
Period Ended 5/31/00
---------------------------
<S> <C> <C>
1 Year (7.66)%(1) (12.50)%(2)
Since Inception (7/28/97) 12.88 %(1) 10.76 %(2)
</TABLE>
<TABLE>
<CAPTION>
Class C Shares+
-------------------------------------------------------------------
Period Ended 5/31/00
---------------------------
<S> <C> <C>
1 Year (8.35)%(1) (9.04)%(2)
Since Inception (7/28/97) 12.03 %(1) 12.03 %(2)
</TABLE>
<TABLE>
<CAPTION>
Class B Shares**
--------------------------------------------------------------------
Period Ended 5/31/00
---------------------------
<S> <C> <C>
1 Year (8.35)%(1) (11.81)%(2)
Since Inception (2/26/97) 15.25 %(1) 14.80 %(2)
</TABLE>
<TABLE>
<CAPTION>
Class D Shares++
-------------------------------------------------
Period Ended 5/31/00
---------------------------
<S> <C>
1 Year (7.46)%(1)
Since Inception (7/28/97) 12.91 %(1)
</TABLE>
---------------
(1) Figure shown assumes reinvestment of all distributions and does not
reflect the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction
of the maximum applicable sales charge. See the Fund's current
prospectus for complete details on fees and sales charges.
(3) Closing value after the deduction of a 2% CDSC, assuming a complete
redemption on May 31, 2000.
(4) The Standard & Poor's 500 Composite Stock Price Index (S&P 500) is a
broad-based index, the performance of which is based on the average
performance of 500 widely held common stocks. The performance of the
index does not include any expenses, fees or charges. The Index is
unmanaged and should not be considered an investment.
* The maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of purchase.
++ Class D shares have no sales charge.
4
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Portfolio of Investments May 31, 2000
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
----------------- --------------
<S> <C> <C>
COMMON STOCKS (87.0%)
Diversified Commercial
Services (1.6%)
174,000 Paychex, Inc. ............................ $ 6,090,000
------------
Diversified Financial
Services (11.4%)
132,000 American Express Co. ..................... 7,103,250
342,000 Citigroup, Inc. .......................... 21,268,125
165,000 Hancock (John) Financial
Services * ............................... 3,681,562
70,800 ING Groep NV (Netherlands) ............... 4,251,670
86,000 Providian Financial Corp. ................ 7,648,625
------------
43,953,232
------------
E.D.P. Services (6.8%)
70,000 Automatic Data Processing, Inc. .......... 3,845,625
25,000 DST Systems, Inc.* ....................... 1,876,562
368,000 First Data Corp. ......................... 20,631,000
------------
26,353,187
------------
Finance Companies (11.7%)
160,000 Associates First Capital Corp.
(Class A) ................................ 4,390,000
80,000 Capital One Financial Corp. .............. 3,780,000
257,000 Freddie Mac .............................. 11,436,500
416,000 Household International, Inc. ............ 19,552,000
220,000 MBNA Corp. ............................... 6,132,500
------------
45,291,000
------------
Insurance Brokers/Services (2.0%)
110,000 AON Corp. ................................ 3,863,750
34,000 Marsh & McLennan Companies,
Inc. ..................................... 3,742,125
------------
7,605,875
------------
International Banks (1.0%)
20,800 Credit Suisse Group (Registered
Shares) (Switzerland) .................... 3,894,437
------------
Investment Bankers/Brokers/
Services (5.2%)
54,000 Legg Mason, Inc. ......................... 2,382,750
75,000 Lehman Brothers Holdings, Inc. ........... 5,789,062
110,000 Merrill Lynch & Co., Inc. ................ 10,848,750
26,000 Paine Webber Group, Inc. ................. 1,168,375
------------
20,188,937
------------
Investment Managers (7.1%)
886,000 Amvescap PLC (United Kingdom)............. 11,643,675
125,000 BlackRock, Inc.* ......................... 3,007,812
425,000 Federated Investors, Inc. (Class B)....... 12,882,812
------------
27,534,299
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
----------------- --------------
<S> <C> <C>
Life Insurance (1.3%)
96,000 Aegon N.V. (ARS) (Netherlands) ........... $ 3,468,000
41,480 Aegon N.V. (Netherlands) ................. 1,502,108
------------
4,970,108
------------
Major Banks (11.4%)
70,000 Bank of America Corp. .................... 3,889,375
412,300 Bank of New York Co., Inc. ............... 19,352,331
78,000 Comerica, Inc. ........................... 3,948,750
225,000 Mellon Financial Corp. ................... 8,676,562
39,000 State Street Corp. ....................... 4,348,500
84,000 Wells Fargo & Co. ........................ 3,801,000
------------
44,016,518
------------
Mid-Sized Banks (6.1%)
120,000 Fifth Third Bancorp ...................... 8,160,000
323,400 Firstar Corp. ............................ 8,266,913
105,200 Northern Trust Corp. ..................... 6,916,900
------------
23,343,813
------------
Multi-Line Insurance (6.6%)
129,800 Allstate Corp. ........................... 3,439,700
73,000 American International Group,
Inc. ..................................... 8,217,063
52,500 AXA (France) ............................. 7,769,927
102,000 Hartford Financial Services
Group, Inc. .............................. 6,030,750
------------
25,457,440
------------
Multi-Sector Companies (4.5%)
330,000 General Electric Co. ..................... 17,366,250
------------
Newspapers (0.9%)
50,000 Dow Jones & Co., Inc. .................... 3,400,000
------------
Property - Casualty Insurers (5.2%)
63,000 Allmerica Financial Corp. ................ 3,634,313
148,000 Chubb Corp. .............................. 10,360,000
22,800 Progressive Corp. ........................ 2,140,350
105,000 St. Paul Companies, Inc. ................. 3,937,500
------------
20,072,163
------------
Savings & Loan
Associations (2.4%)
220,000 Golden West Financial Corp. .............. 9,185,000
------------
Specialty Insurers (1.8%)
75,000 PMI Group, Inc. .......................... 3,806,250
60,000 Radian Group, Inc. ....................... 3,300,000
------------
7,106,250
------------
TOTAL COMMON STOCKS
(Identified Cost $304,366,113) ........... 335,828,509
------------
</TABLE>
See Notes to Financial Statements
5
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Portfolio of Investments May 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
----------- ---------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (14.8%)
U.S. GOVERNMENT AGENCY (a) (14.6%)
$ 56,400 Federal Home Loan Banks
6.30% due 06/01/00
(Amortized Cost $56,400,000)........ $ 56,400,000
------------
REPURCHASE AGREEMENT (0.2%)
692 The Bank of New York 6.75%
due 06/01/00 (dated 05/31/00;
proceeds $692,550) (b)
(Identified Cost $692,420) ......... 692,420
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $57,092,420) ...... 57,092,420
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $361,458,533) (c) ......... 101.8 % 392,920,929
LIABILITIES IN EXCESS OF OTHER
ASSETS ..................................... (1.8) (6,920,879)
---- ------------
NET ASSETS ................................. 100.0 % $386,000,050
===== ============
</TABLE>
--------------------------------
ARS American Registered Shares.
* Non-income producing security.
(a) Purchased on a discount basis. The interest rate shown has been
adjusted to reflect a money market equivalent yield.
(b) Collateralized by $648,965 Federal Home Loan Banks 6.38% due
10/06/08 valued at $601,419 and $105,426 Federal Home Loan Banks
6.75% due 05/01/02 valued at $104,849.
(c) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$35,974,324 and the aggregate gross unrealized depreciation is
$4,511,928, resulting in net unrealized appreciation of
$31,462,396.
See Notes to Financial Statements
6
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
May 31, 2000
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $361,458,533) .................................. $392,920,929
Receivable for:
Investments sold ............................................... 6,424,240
Shares of beneficial interest sold ............................. 861,923
Dividends ...................................................... 242,420
Foreign withholding taxes reclaimed ............................ 51,692
Deferred organizational expenses .................................. 21,255
Prepaid expenses and other assets ................................. 34,101
------------
TOTAL ASSETS ................................................... 400,556,560
------------
LIABILITIES:
Payable for:
Investments purchased .......................................... 13,435,074
Shares of beneficial interest repurchased ...................... 449,294
Plan of distribution fee ....................................... 336,707
Investment management fee ...................................... 255,411
Accrued expenses and other payables ............................... 80,024
------------
TOTAL LIABILITIES .............................................. 14,556,510
------------
NET ASSETS ........................................................ $386,000,050
============
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................................... $416,169,866
Net unrealized appreciation ....................................... 31,463,210
Accumulated net investment loss ................................... (3,089)
Accumulated net realized loss ..................................... (61,629,937)
------------
NET ASSETS ..................................................... $386,000,050
============
CLASS A SHARES:
Net Assets ........................................................ $ 5,253,268
Shares Outstanding (unlimited authorized, $.01 par value) ......... 481,131
NET ASSET VALUE PER SHARE ...................................... $ 10.92
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ................. $ 11.52
============
CLASS B SHARES:
Net Assets ........................................................ $369,228,788
Shares Outstanding (unlimited authorized, $.01 par value) ......... 34,707,417
NET ASSET VALUE PER SHARE ...................................... $ 10.64
============
CLASS C SHARES:
Net Assets ........................................................ $ 9,887,881
Shares Outstanding (unlimited authorized, $.01 par value) ......... 929,516
NET ASSET VALUE PER SHARE ...................................... $ 10.64
============
CLASS D SHARES:
Net Assets ........................................................ $ 1,630,113
Shares Outstanding (unlimited authorized, $.01 par value) ......... 149,387
NET ASSET VALUE PER SHARE ...................................... $ 10.91
============
</TABLE>
See Notes to Financial Statements
7
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Financial Statements, continued
STATEMENT OF OPERATIONS
For the year ended May 31, 2000
<TABLE>
<S> <C>
NET INVESTMENT LOSS:
INCOME
Dividends (net of $78,964 foreign withholding tax) .................. $ 4,316,776
Interest ............................................................ 2,511,653
-------------
TOTAL INCOME ..................................................... 6,828,429
-------------
EXPENSES
Plan of distribution fee (Class A shares) ........................... 11,399
Plan of distribution fee (Class B shares) ........................... 4,194,524
Plan of distribution fee (Class C shares) ........................... 100,736
Investment management fee ........................................... 3,262,715
Transfer agent fees and expenses .................................... 577,099
Registration fees ................................................... 97,822
Shareholder reports and notices ..................................... 80,750
Professional fees ................................................... 76,980
Custodian fees ...................................................... 50,176
Organizational expenses ............................................. 12,246
Trustees' fees and expenses ......................................... 11,713
Other ............................................................... 10,921
-------------
TOTAL EXPENSES ................................................... 8,487,081
-------------
NET INVESTMENT LOSS .............................................. (1,658,652)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on:
Investments ....................................................... (56,643,782)
Foreign exchange transactions ..................................... (4,872)
-------------
NET LOSS ......................................................... (56,648,654)
-------------
Net change in unrealized appreciation/depreciation on:
Investments ....................................................... 18,918,506
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies .................... 3,124
-------------
NET APPRECIATION ................................................. 18,921,630
-------------
NET LOSS ......................................................... (37,727,024)
-------------
NET DECREASE ........................................................ $ (39,385,676)
=============
</TABLE>
See Notes to Financial Statements
8
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Financial Statements, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2000 MAY 31, 1999
-------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss .................................. $ (1,658,652) $ (1,653,821)
Net realized gain (loss) ............................. (56,648,654) 118,351,450
Net change in unrealized appreciation ................ 18,921,630 (44,598,390)
------------ ------------
NET INCREASE (DECREASE) ........................... (39,385,676) 72,099,239
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A shares ....................................... (1,236,780) (303,641)
Class B shares ....................................... (107,772,751) (37,658,512)
Class C shares ....................................... (2,566,350) (730,844)
Class D shares ....................................... (24,429) (152,943)
------------ ------------
TOTAL DISTRIBUTIONS ............................... (111,600,310) (38,845,940)
------------ ------------
Net increase from transactions in shares of beneficial
interest ........................................... 45,843,140 80,095,593
------------ ------------
NET INCREASE (DECREASE) ........................... (105,142,846) 113,348,892
NET ASSETS:
Beginning of period .................................. 491,142,896 377,794,004
------------ ------------
END OF PERIOD
(Including accumulated net investment losses of
$3,089 and $190, respectively) .................... $386,000,050 $491,142,896
============ ============
</TABLE>
See Notes to Financial Statements
9
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Notes to Financial Statements May 31, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Financial Services 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 investment
objective is long-term capital appreciation. The Fund seeks to achieve its
objective by investing at least 65% of its total assets in the equity
securities of companies in the financial services and financial services
related industries. The Fund was organized as a Massachusetts business trust on
November 8, 1996 and commenced operations on February 26, 1997. 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 security
is valued on the exchange designated as the primary market pursuant to
procedures adopted by the Trustees); (2) all other portfolio securities for
which over-the-counter market quotations are readily available are valued at
the latest available bid price prior to the time of valuation; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager") that sale or bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in
good faith under procedures established by and under the general supervision of
the Trustees (valuation of debt securities for which market quotations are not
readily available may be based upon current market prices of securities which
are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors); (4) certain portfolio securities may be valued by
an outside pricing service approved by the Trustees. The pricing service may
10
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Notes to Financial Statements May 31, 2000, continued
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
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.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends on foreign securities which are recorded as soon
as the Fund is informed after the ex-dividend date. 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 gain/loss on foreign exchange
transactions. 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.
11
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Notes to Financial Statements May 31, 2000, continued
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.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
H. ORGANIZATIONAL EXPENSES - The Investment Manager incurred the organizational
expenses of the Fund in the amount of approximately $61,100 which have been
reimbursed for the full amount thereof. Such expenses have been deferred and
are being amortized on the straight-line method over a period not to exceed
five years from the commencement of operations.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.75% to the net assets of the Fund determined at the close of
each business day.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A - up
to 0.25% of the average daily net assets of Class A; (ii) Class B - 1.0% of the
average daily net assets of Class B; and (iii) Class C - up to 1.0% of the
average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees
12
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Notes to Financial Statements May 31, 2000, continued
from the Fund pursuant to the Plan and contingent deferred sales charges paid
by investors upon redemption of Class B shares. Although there is no legal
obligation for the Fund to pay expenses incurred in excess of payments made to
the Distributor under the Plan and the proceeds of contingent deferred sales
charges paid by investors upon redemption of shares, if for any reason the Plan
is terminated, the Trustees will consider at that time the manner in which to
treat such expenses. The Distributor has advised the Fund that such excess
amounts totaled $14,656,177 at May 31, 2000.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended May 31, 2000, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
1.0%, respectively.
The Distributor has informed the Fund that for the year ended May 31, 2000, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $6,583, $1,172,010,
and $12,007, respectively and received $48,959 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 May 31, 2000 aggregated
$1,035,659,564 and $1,111,940,874, respectively. Included in the aforementioned
are purchases and sales of U.S. Government securities of $27,109,233 and
$25,657,370, respectively.
For the year ended May 31, 2000, the Fund incurred brokerage commissions of
$76,345 with Dean Witter Reynolds Inc., an affiliate of the Investment Manager
and Distributor, for portfolio transactions executed on behalf of the Fund.
For the year ended May 31, 2000, the Fund incurred brokerage commissions of
$138,689 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager and Distributor, for portfolio transactions executed on behalf of the
Fund.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent.
13
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Notes to Financial Statements May 31, 2000, continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2000 MAY 31, 1999
------------------------------------ ------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold .................................. 652,653 $ 8,760,831 518,207 $ 7,673,522
Reinvestment of distributions ......... 98,750 1,147,481 23,457 299,079
Repurchased ........................... (585,387) (7,839,778) (382,320) (5,646,484)
-------- -------------- -------- --------------
Net increase - Class A ................ 166,016 2,068,534 159,344 2,326,117
-------- -------------- -------- --------------
CLASS B SHARES
Sold .................................. 8,388,455 106,337,695 12,534,942 184,965,257
Reinvestment of distributions ......... 8,718,423 99,041,281 2,805,603 35,434,745
Repurchased ........................... (13,281,479) (164,947,515) (10,197,768) (148,220,180)
----------- -------------- ----------- --------------
Net increase - Class B ................ 3,825,399 40,431,461 5,142,777 72,179,822
----------- -------------- ----------- --------------
CLASS C SHARES
Sold .................................. 573,692 6,989,298 519,816 7,705,724
Reinvestment of distributions ......... 216,980 2,464,894 56,557 714,314
Repurchased ........................... (531,755) (6,414,073) (273,320) (4,012,407)
----------- -------------- ----------- --------------
Net increase - Class C ................ 258,917 3,040,119 303,053 4,407,631
----------- -------------- ----------- --------------
CLASS D SHARES
Sold .................................. 1,277,209 15,937,242 435,918 6,435,748
Reinvestment of distributions ......... 1,329 15,411 572 7,257
Repurchased ........................... (1,218,312) (15,649,627) (352,926) (5,260,982)
----------- -------------- ----------- --------------
Net increase - Class D ................ 60,226 303,026 83,564 1,182,023
----------- -------------- ----------- --------------
Net increase in Fund .................. 4,310,558 $ 45,843,140 5,688,738 $ 80,095,593
=========== ============== =========== ==============
</TABLE>
6. FEDERAL INCOME TAX STATUS
At May 31, 2000, the Fund had a net capital loss carryover of approximately
$50,018,000 which will be available through May 31, 2008 to offset future
capital gains to the extent provided by regulations.
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $6,625,000 during fiscal 2000.
As of May 31, 2000, the Fund had temporary book/tax differences primarily
attributable to post-October losses and capital loss deferrals on wash sales
and permanent book/tax differences primarily attributable
14
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Notes to Financial Statements May 31, 2000, continued
to a net operating loss. To reflect reclassifications arising from the
permanent differences, paid-in-capital was charged $1,660,639, accumulated net
realized loss was credited $4,886 and accumulated net investment loss was
credited $1,655,753.
7. PURPOSES 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 foreign currency exposure associated with foreign
currency denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
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 May 31, 2000, there were no outstanding forward contracts.
15
<PAGE>
Morgan Stanley Dean Witter Financial Services 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 FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
MAY 31, 2000 MAY 31, 1999 MAY 31, 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 15.57 $ 14.44 $ 11.51
------- ------- -------
Income (loss) from investment operations:
Net investment income ................................. 0.05 0.05 0.04
Net realized and unrealized gain (loss) ............... (1.02) 2.48 3.13
------- ------- -------
Total income (loss) from investment operations ......... (0.97) 2.53 3.17
------- ------- -------
Less dividends and distributions from:
Net investment income ................................. - - (0.06)
Net realized gain ..................................... (3.68) (1.40) (0.18)
------- ------- -------
Total dividends and distributions ...................... (3.68) (1.40) (0.24)
------- ------- -------
Net asset value, end of period ......................... $ 10.92 $ 15.57 $ 14.44
======= ======= =======
TOTAL RETURN+ .......................................... (7.66)% 19.63% 27.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.20%(3) 1.20%(3) 1.23%(2)
Net investment income .................................. 0.37%(3) 0.37%(3) 0.34%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $5,253 $4,905 $2,249
Portfolio turnover rate ................................ 264% 295% 99%
</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
16
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Financial Highlights, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED MAY 31 FEBRUARY 26, 1997*
--------------------------------------------------- THROUGH
2000++ 1999++ 1998**++ MAY 31, 1997
------------------ ------------------ ------------- -------------------
<S> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 15.37 $ 14.38 $ 10.05 $ 10.00
-------- -------- -------- --------
Income (loss) from investment operations:
Net investment income (loss) .......................... (0.05) (0.06) (0.05) 0.01
Net realized and unrealized gain (loss) ............... (1.00) 2.45 4.58 0.04
-------- -------- -------- --------
Total income (loss) from investment operations ......... (1.05) 2.39 4.53 0.05
-------- -------- -------- --------
Less dividends and distributions from:
Net investment income ................................. - - (0.02) -
Net realized gain ..................................... (3.68) (1.40) (0.18) -
-------- -------- -------- --------
Total dividends and distributions ...................... (3.68) (1.40) (0.20) -
-------- -------- -------- --------
Net asset value, end of period ......................... $ 10.64 $ 15.37 $ 14.38 $ 10.05
======== ======== ======== ========
TOTAL RETURN+ .......................................... (8.35)% 18.69 % 45.25 % 0.50%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.96 %(3) 1.97 %(3) 1.98 % 2.23%(2)
Net investment income (loss) ........................... (0.39)%(3) (0.40)%(3) (0.38)% 0.64%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $369,229 $474,549 $370,181 $176,651
Portfolio turnover rate ................................ 264 % 295 % 99 % 17%(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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
17
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Financial Highlights, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
MAY 31, 2000 MAY 31, 1999 MAY 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 15.37 $ 14.38 $ 11.51
------- ------- -------
Income (loss) from investment operations:
Net investment loss ................................... (0.05) (0.05) (0.05)
Net realized and unrealized gain (loss) ............... (1.00) 2.44 3.13
------- ------- -------
Total income (loss) from investment operations ......... (1.05) 2.39 3.08
------- ------- -------
Less dividends and distributions from:
Net investment income ................................. - - (0.03)
Net realized gain ..................................... (3.68) (1.40) (0.18)
------- ------- -------
Total dividends and distributions ...................... (3.68) (1.40) (0.21)
------- ------- -------
Net asset value, end of period ......................... $ 10.64 $ 15.37 $ 14.38
======= ======= =======
TOTAL RETURN+ .......................................... (8.35)% 18.69 % 26.95 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.96 %(3) 1.91 %(3) 1.96 %(2)
Net investment loss .................................... (0.39)%(3) (0.34)%(3) (0.42)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $9,888 $10,305 $5,284
Portfolio turnover rate ................................ 264 % 295 % 99 %
</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
18
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Financial Highlights, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
MAY 31, 2000 MAY 31, 1999 MAY 31, 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 15.53 $ 14.35 $ 11.51
------- ------- -------
Income (loss) from investment operations:
Net investment income ................................. 0.06 0.04 0.08
Net realized and unrealized gain (loss) ............... (1.00) 2.54 3.01
------- ------- -------
Total income (loss) from investment operations ......... (0.94) 2.58 3.09
------- ------- -------
Less dividends and distributions from:
Net investment income ................................. - - (0.07)
Net realized gain ..................................... (3.68) (1.40) (0.18)
------- ------- -------
Total dividends and distributions ...................... (3.68) (1.40) (0.25)
------- ------- -------
Net asset value, end of period ......................... $ 10.91 $ 15.53 $ 14.35
======= ======= =======
TOTAL RETURN+ .......................................... (7.46)% 20.12 % 27.03 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.96 %(3) 0.97 %(3) 0.94 %(2)
Net investment income .................................. 0.61 %(3) 0.60 %(3) 0.63 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $1,630 $1,385 $ 80
Portfolio turnover rate ................................ 264 % 295 % 99 %
</TABLE>
--------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
19
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Report of Independent Accountants
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES 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 Morgan Stanley Dean Witter
Financial Services Trust (the "Fund") at May 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the periods indicated, in conformity with accounting principles generally
accepted in the United States. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at May 31, 2000 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
June 30, 2000
2000 FEDERAL TAX NOTICE (unaudited)
During the year ended May 31, 2000, the Fund paid to its shareholders
$0.55 per share from long-term capital gains. For such period, 3.53% of
the income paid qualified for the dividends received deduction
available to corporations.
20
<PAGE>
Morgan Stanley Dean Witter Financial Services Trust
Change in Independent Accountants
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to
make reference thereto in their report on the financial statements for such
years.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
21
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
Michelle Kaufman
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders
of the Fund. For more detailed information about the Fund, its officers
and trustees, fees, expenses and other pertinent information, please see
the prospectus of the Fund.
This report is not authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an effective prospectus.
Read the prospectus carefully before investing.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
MORGAN STANLEY
DEAN WITTER
FINANCIAL SERVICES
TRUST
[GRAPHIC OMITTED]
ANNUAL REPORT
MAY 31, 2000