<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST TWO WORLD TRADE CENTER,
NEW YORK, NEW YORK
10048
LETTER TO THE SHAREHOLDERS OCTOBER 31, 1997
DEAR SHAREHOLDER:
This year began with employment expanding, personal income climbing and consumer
confidence rising. As a result, the possibility of a Federal Reserve Board rate
increase continued to permeate the bond markets. On March 25, 1997, rates were
raised by 25 basis points (0.25 percent), as had been widely anticipated.
Although this move initially sent stock and bond prices lower, many economists
applauded the action. This decision was viewed as a necessary strike against
inflation, designed to prolong economic expansion. It first appeared that the
Federal Reserve Board was poised for a series of rate increases. But a slight
cooling of economic data, subdued inflation during the second and third quarters
and a balanced budget agreement prevented any action. In response, interest
rates declined.
Interest rates on long-term U.S. Treasuries were highly volatile over the course
of the past twelve months, with 30-year U.S. Treasury yields ranging between
6.13 percent and 7.17 percent. On October 31, 1997, the 30-year Treasury bond
was yielding 6.15 percent compared to the year-earlier 6.87 percent.
PERFORMANCE
For the fiscal year ended October 31, 1997, Dean Witter Federal Securities Trust
had net assets in excess of $625 million. The Fund's Class B shares' total
return for the twelve-month period was 7.89 percent compared to a return of 8.04
percent for the Lipper Analytical Services General U.S. Government Funds Index
and 8.66 percent for the Lehman Brothers General U.S. Government Index. The
Fund's Class B shares performance includes income distributions totaling
approximately $0.59 per share and a change in net asset value from $9.25 per
share on October 31, 1996, to $9.36 per share on October 31, 1997. The
accompanying chart illustrates the performance of a $10,000 investment in the
Fund from inception through the fiscal year ended October 31, 1997, versus the
performance of hypothetical investments
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
LETTER TO THE SHAREHOLDERS OCTOBER 31, 1997, CONTINUED
in the issues that comprise the unmanaged Lehman Brothers General U.S.
Government and the Lipper General U.S. Government Funds Indices.
The Fund's positive performance for the period under review was the result of
the Fund's ability to take advantage of some of the volatility in the bond
market and the generally lower interest-rate environment in 1997. The Fund's
average maturity was maintained at slightly less than eight years. While this
strategy proved successful in 1997, adjustments to the Fund's average maturity
in the months ahead will be made as conditions warrant and as attractive
investment opportunities become available.
THE PORTFOLIO
As of October 31, 1997, the portfolio continued to be heavily weighted in U.S.
Treasury notes and bonds with 66 percent of the portfolio maturing in 7 to 20
years, 2 percent maturing in one to seven
years and 4 percent maturing in under
one year. Approximately 25 percent of
the Fund's net assets were invested in
mortgage-backed securities issued
primarily by the Government National
Mortgage Association (GNMA). The
balance of the portfolio consisted of
U.S. agency obligations and short-term
money market investments. In the months
to come, accrued income and the
proceeds from sales or maturities may
be invested in mortgage-backed
securities, which we believe continue
to offer significant long-term value as
well as an incremental yield incentive
over U.S. Treasury securities of
similar maturities and the potential
for higher total returns.
On July 28, 1997, the Fund began
offering four classes of shares: A, B,
C and D, each with its own sales charge
and distribution fee structure. A
revised prospectus, which includes
complete details regarding the Fund's
conversion to multiple classes of
shares, was mailed to shareholders in
mid-summer.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Growth of $10,000 - Class B
Shares
($ in Thousands)
Fund Lehman(4) Lipper(5)
<S> <C> <C> <C>
October-1987 $10,000 $10,000 $10,000
October-1988 $10,921 $10,973 $11,000
October-1989 $12,266 $12,293 $12,096
October-1990 $12,713 $13,022 $12,698
October-1991 $14,653 $14,923 $14,553
October-1992 $15,907 $16,465 $15,818
October-1993 $17,821 $18,627 $17,510
October-1994 $16,588 $17,794 $16,514
October-1995 $19,223 $20,531 $18,862
October-1996 $19,952 $21,582 $19,662
$21,528
October-1997 (3) $23,451 $21,243
Average Annual Total Returns
(Fund)
1 Year 5 Years 10 Years
7.89% (1) 6.24% (1) 7.97% (1)
2.89% (2) 5.93% (2) 7.97% (2)
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS.
(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 contingent deferred sales charge (CDSC) (1 year-5%, 5
years-2%, 10 years-0%). See the Fund's current prospectus for complete
details on fees and sales charges.
(3) Closing Value assuming a complete redemption on October 31, 1997.
(4) The Lehman Brothers General U.S. Government Index is a broad-based measure
of all U.S. Government and U.S. Treasury securities. The Index's total
return does not include fees, expenses or charges. The Index is unmanaged
and should not be considered an investment.
(5) The Lipper General U.S. Government Funds Index is an equally-weighted
performance index of the largest-qualifying funds (based on net assets) in
the Lipper General U.S. Government Funds objective. The Index, which is
adjusted for capital gains distributions and income dividends, is unmanaged
and should not be considered an investment. There are currently 30 funds
represented in this index.
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
LETTER TO THE SHAREHOLDERS OCTOBER 31, 1997, CONTINUED
LOOKING AHEAD
For the balance of 1997 and early into 1998, we expect U.S. economic growth to
remain healthy. The Federal Reserve Board is likely to look for confirmation of
inordinately strong economic trends, rising inflationary pressures and stability
in Southeast Asian markets before considering another increase in the federal
funds rate.
We appreciate your ongoing support of Dean Witter Federal Securities Trust and
look forward to continuing to serve your investment objectives in the months and
years to come.
Very truly yours,
[/S/ CHARLES A. FIUMEFREDDO]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
RESULTS OF SPECIAL MEETING (UNAUDITED)
On May 21, 1997, a special meeting of the Fund's shareholders was held to vote
on four separate matters, the results of which were as follows:
(1) APPROVAL OF A NEW INVESTMENT MANAGEMENT AGREEMENT BETWEEN THE FUND AND DEAN
WITTER INTERCAPITAL INC. IN CONNECTION WITH THE MERGER OF MORGAN STANLEY
GROUP INC. WITH DEAN WITTER, DISCOVER & CO.:
<TABLE>
<CAPTION>
VOTE NO. OF SHARES
- -------------------------------------------------- -------------------
<S> <C>
For............................................... 36,715,690
Against........................................... 1,151,955
Abstain........................................... 3,170,174
</TABLE>
(2) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Michael Bozic
For............................................... 38,870,174
Withheld.......................................... 2,167,645
Charles A. Fiumefreddo
For............................................... 38,891,282
Withheld.......................................... 2,146,537
Edwin J. Garn
For............................................... 38,872,200
Withheld.......................................... 2,165,619
John R. Haire
For............................................... 38,852,873
Withheld.......................................... 2,184,946
Wayne E. Hedien
For............................................... 38,899,379
Withheld.......................................... 2,138,440
Dr. Manuel H. Johnson
For............................................... 38,878,842
Withheld.......................................... 2,158,977
Michael E. Nugent
For............................................... 38,882,535
Withheld.......................................... 2,155,284
Philip J. Purcell
For............................................... 38,861,643
Withheld.......................................... 2,176,176
John L. Schroeder
For............................................... 38,901,303
Withheld.......................................... 2,136,516
</TABLE>
(3) APPROVAL OF A NEW INVESTMENT POLICY WITH RESPECT TO INVESTMENTS IN CERTAIN
OTHER INVESTMENT COMPANIES:
<TABLE>
<CAPTION>
VOTE NO. OF SHARES
- -------------------------------------------------- -------------------
<S> <C>
For............................................... 34,844,993
Against........................................... 2,087,431
Abstain........................................... 4,105,395
</TABLE>
(4) RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS THE FUND'S
INDEPENDENT ACCOUNTANTS:
<TABLE>
<CAPTION>
VOTE NO. OF SHARES
- -------------------------------------------------- -------------------
<S> <C>
For............................................... 37,879,460
Against........................................... 633,123
Abstain........................................... 2,525,236
</TABLE>
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (73.0%)
U.S. Government Agencies (2.7%)
$ 12,000 Federal Home Loan Bank 07/02/12........................................................ 0.00% $ 3,919,920
20,000 Resolution Funding Strip 04/15/05...................................................... 0.00 12,883,200
------------
16,803,120
------------
U.S. Treasury Bonds (64.4%)
20,000 11/15/15............................................................................... 9.875 27,985,400
22,000 11/15/12............................................................................... 10.375 29,085,100
188,600 08/15/13*.............................................................................. 12.00 276,366,896
45,000 11/15/11............................................................................... 14.00 69,898,050
------------
403,335,446
------------
U.S. Treasury Notes (5.9%)
10,000 01/31/99............................................................................... 5.00 9,925,800
5,000 09/30/02............................................................................... 5.875 5,029,000
21,900 11/15/97............................................................................... 7.375 21,908,541
------------
36,863,341
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(IDENTIFIED COST $424,983,329)................................................................. 457,001,907
------------
MORTGAGE-BACKED SECURITIES (24.7%)
Federal Home Loan Mortgage Corp. (5.7%)
21,869 10/01/10 - 02/01/20.................................................................... 9.50 23,338,798
9,332 09/01/15 - 10/01/19.................................................................... 10.00 10,096,236
2,018 01/01/16 - 10/01/18.................................................................... 10.50 2,213,312
------------
35,648,346
------------
Federal National Mortgage Assoc. (7.3%)
16,547 10/01/23 - 12/01/23.................................................................... 6.50 16,257,456
4,789 06/01/26 - 12/01/26.................................................................... 7.50 4,889,754
14,178 05/01/24 - 06/01/25.................................................................... 8.00 14,683,176
7,678 01/01/22 - 04/01/25.................................................................... 8.50 8,030,689
1,540 09/01/16 - 05/01/20.................................................................... 9.50 1,651,555
182 03/01/16 - 02/01/18.................................................................... 9.75 196,162
------------
45,708,792
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Government National Mortgage Assoc. (11.7%)
$ 30,957 12/15/22 - 05/15/24.................................................................... 7.00% $ 31,112,181
24,690 06/15/17 - 10/15/26.................................................................... 7.50 25,237,885
14,580 10/15/19 - 10/15/24.................................................................... 8.50 15,277,406
1,058 05/15/16 - 11/15/20.................................................................... 10.00 1,158,639
203 09/15/18............................................................................... 11.00 225,279
------------
73,011,390
------------
TOTAL MORTGAGE-BACKED SECURITIES
(IDENTIFIED COST $149,630,756)................................................................. 154,368,528
------------
SHORT-TERM INVESTMENTS (0.6%)
U.S. GOVERNMENT OBLIGATION (a) (0.5%)
3,000 U.S. Treasury Bill 12/11/97 (AMORTIZED COST $2,984,500)................................ 4.65 2,984,500
------------
REPURCHASE AGREEMENT (0.1%)
669 The Bank of New York due 11/03/97 (dated 10/31/97; proceeds $669,318) (b) (IDENTIFIED
COST $669,012)....................................................................... 5.50 669,012
------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $3,653,512)................................................................... 3,653,512
------------
TOTAL INVESTMENTS
(IDENTIFIED COST $578,267,597)................................................................. 615,023,947
------------
</TABLE>
<TABLE>
<C> <S> <C>
<CAPTION>
DESCRIPTION,
NUMBER OF EXPIRATION DATE,
CONTRACTS AND STRIKE PRICE
- --------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
WRITTEN OPTIONS (c) (0.1%)
200 Call options on Treasury bond futures December/1997/116 (PREMIUMS RECEIVED $95,642)............. (543,750)**
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
DESCRIPTION,
NUMBER OF DELIVERY YEAR,
CONTRACTS AND MONTH VALUE
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
FINANCIAL FUTURES (d) (0.0%)
SHORT POSITIONS
95 U. S. Treasury Bonds December/1997.............................................................. $ (29,688)**
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $578,267,597) (e)................................................................ 98.3 % 615,023,947
TOTAL WRITTEN OPTIONS OUTSTANDING................................................................. (0.1) (543,750)
TOTAL FINANCIAL FUTURES OUTSTANDING............................................................... (0.0) (29,688)
OTHER ASSETS IN EXCESS OF LIABILITIES............................................................. 1.8 11,439,705
------ -------------
NET ASSETS........................................................................................ 100.0 % $ 625,890,214
------ -------------
------ -------------
</TABLE>
- ---------------------
* Some of these securities are segregated in connection with open written
options and open futures contracts.
** The market value of U.S. Treasury securities pledged to cover written
options on futures and open futures contracts is $95,248,400.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $669,662 Federal National Mortgage Assoc. 6.60% due
09/20/02 valued at $682,392.
(c) Options expire one month prior to the expiration date indicated for the
Treasury bond futures.
(d) Value represents variation margin on open futures contracts on October 31,
1997. The market value of these futures contracts is $11,254,531 and the
unrealized depreciation is $270,503.
(e) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $37,758,109 and the
aggregate gross unrealized depreciation is $1,001,759, resulting in net
unrealized appreciation of $36,756,350.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $578,267,597).............................................................. $615,023,947
Receivable for:
Interest.................................................................................. 11,846,802
Principal paydowns........................................................................ 756,197
Shares of beneficial interest sold........................................................ 233,701
Prepaid expenses and other assets............................................................. 35,194
------------
TOTAL ASSETS............................................................................. 627,895,841
------------
LIABILITIES:
Written call options outstanding, at value (premiums received $95,642)........................ 543,750
Payable for:
Plan of distribution fee.................................................................. 447,598
Shares of beneficial interest repurchased................................................. 328,532
Investment management fee................................................................. 290,294
Dividends to shareholders................................................................. 212,452
Variation margin on futures contracts..................................................... 29,688
Accrued expenses and other payables........................................................... 153,313
------------
TOTAL LIABILITIES........................................................................ 2,005,627
------------
NET ASSETS............................................................................... $625,890,214
------------
------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $643,138,969
Net unrealized appreciation................................................................... 36,037,739
Accumulated net realized loss................................................................. (53,286,494)
------------
NET ASSETS............................................................................... $625,890,214
------------
------------
CLASS A SHARES:
Net Assets.................................................................................... $2,051,451
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 217,137
NET ASSET VALUE PER SHARE................................................................ $9.45
------------
------------
MAXIMUM OFFERING PRICE PER SHARE
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE)......................................... $9.87
------------
------------
CLASS B SHARES:
Net Assets.................................................................................... $623,048,694
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 66,543,208
NET ASSET VALUE PER SHARE................................................................ $9.36
------------
------------
CLASS C SHARES:
Net Assets.................................................................................... $720,681
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 76,358
NET ASSET VALUE PER SHARE................................................................ $9.44
------------
------------
CLASS D SHARES:
Net Assets.................................................................................... $69,388
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 7,437
NET ASSET VALUE PER SHARE................................................................ $9.33
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997*
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME................................................................................ $52,248,247
-----------
EXPENSES
Plan of distribution fee (Class A shares)...................................................... 1,083
Plan of distribution fee (Class B shares)...................................................... 5,584,880
Plan of distribution fee (Class C shares)...................................................... 650
Investment management fee...................................................................... 3,616,570
Transfer agent fees and expenses............................................................... 537,464
Custodian fees................................................................................. 84,195
Registration fees.............................................................................. 80,823
Professional fees.............................................................................. 79,621
Shareholder reports and notices................................................................ 62,854
Trustees' fees and expenses.................................................................... 16,335
Other.......................................................................................... 15,726
-----------
TOTAL EXPENSES............................................................................ 10,080,201
-----------
NET INVESTMENT INCOME..................................................................... 42,168,046
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................ 1,169,373
Futures contracts.......................................................................... (1,855,258)
Options written............................................................................ 1,376,161
-----------
NET GAIN.................................................................................. 690,276
-----------
NET CHANGE IN UNREALIZED APPRECIATION..................................................... 5,646,142
-----------
NET GAIN.................................................................................. 6,336,418
-----------
NET INCREASE................................................................................... $48,504,464
-----------
-----------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1997* OCTOBER 31, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................................. $ 42,168,046 $ 48,692,397
Net realized gain...................................................... 690,276 5,776,103
Net change in unrealized appreciation.................................. 5,646,142 (27,386,862)
----------------- ----------------
NET INCREASE...................................................... 48,504,464 27,081,638
----------------- ----------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME
Class A shares......................................................... (28,596) --
Class B shares......................................................... (42,134,728) (48,174,964)
Class C shares......................................................... (4,477) --
Class D shares......................................................... (245) --
----------------- ----------------
TOTAL DIVIDENDS................................................... (42,168,046) (48,174,964)
----------------- ----------------
Net decrease from transactions in shares of beneficial interest........ (100,380,918) (88,216,435)
----------------- ----------------
NET DECREASE...................................................... (94,044,500) (109,309,761)
----------------- ----------------
NET ASSETS:
Beginning of period.................................................... 719,934,714 829,244,475
----------------- ----------------
END OF PERIOD..................................................... $ 625,890,214 $ 719,934,714
----------------- ----------------
----------------- ----------------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Federal Securities 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 to
earn a high level of current income. The Fund commenced operations on March 31,
1987. On July 28, 1997, the Fund commenced offering three additional classes of
shares, with the then current shares designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase, some Class
A shares, and most Class B shares and Class C shares are subject to a contingent
deferred sales charge imposed on shares redeemed within one year, six years and
one year, respectively. Class D shares are not subject to a sales charge.
Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) all 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; (2) listed options
are valued at the latest sale price on the exchange on which they are listed
unless no sales of such options have taken place that day, in which case they
are valued at the mean between their latest bid and asked price; (3) futures
contracts are valued at the latest sale price as of the close of the commodities
exchange on which they trade unless the Trustees determine that such price does
not reflect their market value, in which case they will be valued at fair value
as determined by the Trustees; (4) when market quotations are not readily
available, including circumstances under which it is determined by Dean Witter
InterCapital Inc. (the "Investment Manager") that the 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); and (5) short-term debt
securities having a maturity date of more than sixty days at
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
the 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. OPTIONS AND FUTURES -- (1) Written options on debt obligations: When the Fund
writes a call or put option, an amount equal to the premium received is included
in the Fund's Statement of Assets and Liabilities as a liability which is
subsequently marked-to-market to reflect the current market value. If a written
option either expires or the Fund enters into a closing purchase transaction,
the Fund realizes a gain or loss without regard to any unrealized gain or loss
on the underlying security and the liability related to such option is
extinguished. If a written call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security and the proceeds from such sale
are increased by the premium originally received. If a written put option is
exercised, the amount of the premium originally received reduces the cost of the
security which the Fund purchases upon exercise of the option; (2) Purchased
options on debt obligations: When the Fund purchases a call or put option, the
premium paid is recorded as an investment which is subsequently marked-to-market
to reflect the current market value. If a purchased option expires, the Fund
will realize a loss to the extent of the premium paid. If the Fund enters into a
closing sale transaction, a gain or loss is realized for the difference between
the proceeds from the sale and the cost of the option. If a put option is
exercised, the cost of the security sold upon exercise will be increased by the
premium originally paid. If a call option is exercised, the cost of the security
purchased upon exercise will be increased by the premium originally paid; (3)
Option on futures contracts: The Fund is required to deposit cash, U.S.
Government securities or other liquid portfolio securities as "initial margin"
and "variation margin" with respect to written call and put options on futures
contracts. If a written option expires, the Fund realizes a gain. If a written
call or put option is exercised, the premium received will decrease or increase
the unrealized loss or gain on the futures contract. If the Fund enters into a
closing purchase transaction, the Fund realizes a gain or loss without regard to
any
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
unrealized gain or loss on the underlying futures contract and the liability
related to such option is extinguished; (4) Futures contracts: A futures
contract is an agreement between two parties to buy and sell financial
instruments at a set price on a future date. Upon entering into such a contract,
the Fund is required to pledge to the broker cash, U.S. Government securities or
other liquid portfolio securities equal to the minimum initial margin
requirements of the applicable futures exchange. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in the value of the contract. Such receipts or payments known
as variation margin are recorded by the Fund as unrealized gains or losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
E. 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.
F. 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.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager the
Fund pays a management fee, accrued daily and payable monthly, by applying the
following annual rates to the Fund's net assets determined at the close of each
business day: 0.55% to the portion of daily net assets not exceeding $1 billion;
0.525% to the portion of daily net assets exceeding $1 billion but not exceeding
$1.5 billion; 0.50% to the portion of daily net assets exceeding $1.5 billion
but not exceeding $2 billion; 0.475% to the portion of daily net assets
exceeding $2 billion but not exceeding
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
$2.5 billion; 0.45% to the portion of daily net assets exceeding $2.5 billion
but not exceeding $5 billion; 0.425% to the portion of daily net assets
exceeding $5 billion but not exceeding $7.5 billion; 0.40% to the portion of
daily net assets exceeding $7.5 billion but not exceeding $10 billion; 0.375% to
the portion of daily net assets exceeding $10 billion but not exceeding $12.5
billion; and 0.35% to the portion of daily net assets exceeding $12.5 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- 0.85% of the lesser of: (a)
the average daily aggregate gross sales of the Class B shares since the
inception of the Fund (not including reinvestment of dividend or capital gain
distributions) less the average daily aggregate net asset value of the Class B
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived; or (b) the average daily net assets of
Class B; and (iii) Class C -- up to 0.85% of the average daily net assets of
Class C. In the case of Class A shares, amounts paid under the Plan are paid to
the Distributor for services provided. In the case of Class B and Class C
shares, amounts paid under the Plan are paid to the Distributor for services
provided and the expenses borne by it and others in the distribution of the
shares of these Classes, including the payment of commissions for sales of these
Classes and incentive compensation to, and expenses of, the account executives
of Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and
Distributor, and others who engage in or support distribution of the shares or
who service shareholder accounts, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of these shares to other than current shareholders; and
preparation, printing and distribution of sales literature and advertising
materials. In addition, the Distributor may utilize fees paid pursuant to the
Plan, in the case of Class B shares,
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
to compensate DWR and other selected broker-dealers for their opportunity costs
in advancing such amounts, which compensation would be in the form of a carrying
charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts, including
carrying charges, totaled $24,491,266 at October 31, 1997.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to account executives may be reimbursed in the subsequent
calendar year. For the period ended October 31, 1997, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.25% and
0.85%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 1997,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares of $601,408 and received approximately $22,000 in
front-end sales charges from sales of the Fund's Class A shares. The respective
shareholders pay such charges which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
Purchases and sales/prepayments of portfolio securities, excluding short-term
investments, for the year ended October 31, 1997 were $77,405,959 and
$179,994,898, respectively.
Transactions in written options for the year ended October 31, 1997 were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUMS
----------- --------------
<S> <C> <C>
Option contracts written, outstanding at beginning of the
period.......................................................... 397 $ 319,426
Options written.................................................. 11,100 5,993,853
Options closed................................................... (9,702) (5,268,882)
Options exercised................................................ (1,495) (918,122)
Options expired.................................................. (100) (30,633)
----------- --------------
Option contracts written, outstanding at end of the period....... 200 $ 95,642
----------- --------------
----------- --------------
</TABLE>
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
For the year ended October 31, 1997, the Fund incurred brokerage commissions
with DWR for transactions executed and for clearing options and futures
transactions, on behalf of the Fund in the amount of $9,506 and $56,029,
respectively.
Dean Witter Trust FSB, an affiliate of the Investment Manager and Distributor,
is the Fund's transfer agent. At October 31, 1997, the Fund had transfer agent
fees and expenses payable of approximately $6,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 1997 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$2,764. At October 31, 1997, the Fund had an accrued pension liability of
$48,664 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES*
Sold............................................................. 227,350 $ 2,100,734 -- --
Reinvestment of dividends........................................ 2,813 26,335 -- --
Redeemed......................................................... (13,026) (121,600) -- --
----------- -------------- ----------- ------------
Net increase--Class A............................................ 217,137 2,005,469 -- --
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 5,820,412 53,293,625 7,874,713 $ 73,758,124
Reinvestment of dividends........................................ 2,488,705 22,774,438 2,866,940 26,598,740
Redeemed......................................................... (19,576,326) (179,236,735) (20,297,114) (188,573,299)
----------- -------------- ----------- ------------
Net decrease--Class B............................................ (11,267,209) (103,168,672) (9,555,461) (88,216,435)
----------- -------------- ----------- ------------
CLASS C SHARES*
Sold............................................................. 80,710 753,751 -- --
Reinvestment of dividends........................................ 270 2,532 -- --
Redeemed......................................................... (4,622) (42,939) -- --
----------- -------------- ----------- ------------
Net increase--Class C............................................ 76,358 713,344 -- --
----------- -------------- ----------- ------------
CLASS D SHARES*
Sold............................................................. 7,413 68,718 -- --
Reinvestment of dividends........................................ 24 223 -- --
----------- -------------- ----------- ------------
Net increase--Class D............................................ 7,437 68,941 -- --
----------- -------------- ----------- ------------
Net decrease in Fund............................................. (10,966,277) $ (100,380,918) (9,555,461) $(88,216,435)
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
- ---------------------
* For the period July 28, 1997 (issue date) through October 31, 1997.
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
6. FEDERAL INCOME TAX STATUS
During the year ended October 31, 1997, the Fund utilized approximately $644,000
of its net capital loss carryover. At October 31, 1997, the Fund had an
approximate net capital loss carryover of $42,534,000, 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>
AMOUNTS IN THOUSANDS
-----------------------------------------------------
1998 2000 2002 2004
----------- ----------- ----------- -----------
<S> <C> <C> <C>
$6,866 $ 3,854 $ 31,124 $ 690
----------- ----------- ----------- -----
----------- ----------- ----------- -----
</TABLE>
At October 31, 1997, the Fund was required for Federal income tax purposes to
defer approximately $10,411,000 of realized losses on certain closed options and
futures contracts.
At October 31, 1997, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on straddles and permanent book/tax
differences attributable to an expired capital loss carryover. To reflect
reclassifications arising from the permanent differences, paid-in-capital was
charged and accumulated net realized loss was credited $15,028,414.
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
To hedge against adverse interest rate and market risks on portfolio positions
or anticipated positions in U.S. Government securities, or in the case of
written options, to close out long or short positions in futures contracts, the
Fund may enter into written options on interest rate futures and interest rate
futures contracts ("derivative instruments").
These 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 value of the underlying securities or
currencies.
At October 31, 1997, the Fund had outstanding written options on interest rate
futures and interest rate futures used to manage interest rate and market
exposure on portfolio positions or anticipated positions in U.S. Government
securities.
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31
------------------------------------------------------------------------------------
1997* 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $9.25 $9.49 $8.74 $10.03 $ 9.57 $9.46 $8.87 $9.27 $9.13 $9.27
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
Net investment income.... 0.59 0.59 0.59 0.60 0.65 0.68 0.72 0.72 0.71 0.74
Net realized and
unrealized gain
(loss).................. 0.11 (0.25) 0.75 (1.28) 0.46 0.11 0.59 (0.40) 0.34 0.08
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.............. 0.70 0.34 1.34 (0.68) 1.11 0.79 1.31 0.32 1.05 0.82
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions from:
Net investment
income................ (0.59) (0.58) (0.59) (0.61) (0.65) (0.68) (0.72) (0.72) (0.71) (0.74)
Paid-in-capital....... -- -- -- -- -- -- -- -- (0.20) (0.22)
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions........... (0.59) (0.58) (0.59) (0.61) (0.65) (0.68) (0.72) (0.72) (0.91) (0.96)
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period.................. $9.36 $9.25 $9.49 $ 8.74 $10.03 $9.57 $9.46 $8.87 $9.27 $9.13
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
TOTAL INVESTMENT
RETURN+.................. 7.89% 3.79% 15.89% (6.92)% 12.03% 8.56% 15.26% 3.64% 12.32% 9.21%
RATIOS TO AVERAGE NET
ASSETS:
Expenses................. 1.53% 1.53% 1.52% 1.52% 1.50% 1.48% 1.50% 1.54% 1.47% 1.50%
Net investment income.... 6.41% 6.31% 6.53% 6.56% 6.59% 7.18% 7.79% 7.92% 7.90% 8.04%
SUPPLEMENTAL DATA:
Net assets, end of
period, in millions..... $623 $720 $829 $841 $1,128 $1,171 $1,252 $1,397 $1,824 $2,122
Portfolio turnover
rate.................... 12% 10% 7% 18% 7% 6% -- (1) 5% 19% 44%
</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.
+ 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) Less than 0.5%.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31, 1997
- ----------------------------------------------------------------------------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 9.26
-----
Net investment income................................................. 0.16
Net realized and unrealized gain...................................... 0.19
-----
Total from investment operations...................................... 0.35
-----
Less dividends from net investment income............................. (0.16)
-----
Net asset value, end of period........................................ $ 9.45
-----
-----
TOTAL INVESTMENT RETURN+.............................................. 3.78%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.92%(2)
Net investment income................................................. 6.60%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $2,051
Portfolio turnover rate............................................... 12%
</TABLE>
<TABLE>
<S> <C>
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 9.26
-----
Net investment income................................................. 0.15
Net realized and unrealized gain...................................... 0.18
-----
Total from investment operations...................................... 0.33
-----
Less dividends from net investment income............................. (0.15)
-----
Net asset value, end of period........................................ $ 9.44
-----
-----
TOTAL INVESTMENT RETURN+.............................................. 3.54%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.52%(2)
Net investment income................................................. 5.86%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $721
Portfolio turnover rate............................................... 12%
</TABLE>
- ---------------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31, 1997
- ----------------------------------------------------------------------------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 9.26
-----
Net investment income................................................. 0.17
Net realized and unrealized gain...................................... 0.07
-----
Total from investment operations...................................... 0.24
-----
Less dividends from net investment income............................. (0.17)
-----
Net asset value, end of period........................................ $ 9.33
-----
-----
TOTAL INVESTMENT RETURN+.............................................. 2.62%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.63%(2)
Net investment income................................................. 6.40%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $69
Portfolio turnover rate............................................... 12%
</TABLE>
- ---------------------
* The date shares were first issued.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER FEDERAL SECURITIES TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dean Witter Federal Securities
Trust (the "Fund") at October 31, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1997 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
DECEMBER 5, 1997
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
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
Barry Fink
Vice President, Secretary and General Counsel
Rajesh K. Gupta
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of the
Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
DEAN WITTER FEDERAL SECURITIES TRUST
[GRAPHIC]
ANNUAL REPORT
OCTOBER 31, 1997
