<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TWO WORLD TRADE CENTER,
TRUST NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS OCTOBER 31, 1998
DEAR SHAREHOLDER:
The U.S. economy continued to expand throughout 1998, albeit not as rapidly as
in 1997. During this period employment expanded, income climbed and consumer
spending remained resilient. Despite strong economic growth, however, inflation
did not materialize, because of turmoil in the Asian and emerging market
economies. As a result, the U.S. central bank left interest rates unchanged
until late September. We believe that the deflationary trend of Asian and
emerging-market economies is likely to help keep inflation in check in the
United States well into 1999.
The current inflation environment remains favorable. Members of the Federal Open
Market Committee voted to reduce rates in late September and in mid-October;
they are expected to do so again to ensure continued economic growth. We will
continue to monitor the situation closely.
During the past twelve months, interest rates on long-term U.S. Treasuries were
highly volatile, with 30-year bonds ranging in yield between 4.72 percent and
6.25 percent. On October 31, 1998, the 30-year Treasury bond was yielding 5.16
percent, down almost one full percentage point from a year earlier.
PERFORMANCE AND PORTFOLIO
The Fund's performance for the fiscal year ended October 31, 1998, was enhanced
by both the declining interest rate environment and late summer's flight to
quality into U.S. Treasuries. For the 12-month period the Fund's Class A, B, C
and D shares had total returns of 10.75 percent, 10.35 percent, 10.30 percent
and 11.30 percent, respectively, versus 11.28 percent for the Lehman Brothers
General U.S. Government Index and 8.79 percent for the Lipper General U.S.
Government Funds Index. The performance of the Fund's four share classes varies
due to differing expense ratios.
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
LETTER TO THE SHAREHOLDERS OCTOBER 31, 1998, CONTINUED
The Fund ended its fiscal year with net assets in excess of $653 million and a
weighted average maturity of approximately 7.8 years. The portfolio continued to
be heavily invested in U.S. Treasury notes and bonds with 61 percent of its
holdings maturing in 7 to 20 years, and 1 percent maturing in under one year.
Approximately 20 percent of the Fund's net assets were invested in
mortgage-backed securities issued primarily by the Government National Mortgage
Association (GNMA). Eight percent of the portfolio was invested in U.S. agency
obligations, with the balance in short-term money market investments.
The accompanying chart illustrates the growth of a hypothetical $10,000
investment in the Fund's Class B shares for the 10-year period ended October 31,
1998, versus similar investments in the issues that comprise the Lehman Brothers
General U.S. Government Index and the Lipper General U.S. Government Funds
Index.
LOOKING AHEAD
The current investment strategy for the Fund has proven successful in 1998. U.S.
economic growth is showing signs of slowing as we look forward to 1999. In the
months ahead, adjustments to both the Fund's weighted average maturity and its
portfolio composition will be made as conditions warrant and as attractive
investment opportunities become available.
We appreciate your ongoing support of Morgan Stanley Dean Witter Federal
Securities Trust and look forward to continuing to serve your investment needs.
Very truly yours,
[SIGNATURE]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
2
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES
TRUST
FUND PERFORMANCE OCTOBER 31, 1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GROWTH OF $10,000--CLASS B
($ in Thousands)
Fund Lehman(4) Lipper(5)
<S> <C> <C> <C>
October 31, 1988 $10,000 $10,000 $10,000
October 31, 1989 $11,232 $11,203 $10,996
October 31, 1990 $11,841 $11,868 $11,544
October 31, 1991 $13,418 $13,600 $13,230
October 31, 1992 $14,566 $15,005 $14,380
October 31, 1993 $16,319 $16,976 $15,919
October 31, 1994 $15,190 $16,217 $15,013
October 31, 1995 $17,603 $18,712 $17,148
October 31, 1996 $18,271 $19,669 $17,888
October 31, 1997 $19,713 $21,372 $19,388
October 31, 1998 $21,753(3) $23,783 $21,093
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. 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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
- ----------------------------------------------------------------------------------------------------
CLASS B SHARES* CLASS A SHARES**
- ----------------------------------------------- -----------------------------------------------
PERIOD ENDED 10/31/98 PERIOD ENDED 10/31/98
- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1 Year 10.35%(1) 5.35%(2) 1 Year 10.75%(1) 6.05%(2)
5 Years 5.92(1) 5.61(2) Since Inception (7/28/97) 11.69(1) 7.91(2)
10 Years 8.08(1) 8.08(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES+ CLASS D SHARES++
- ----------------------------------------------- -----------------------------------------------
PERIOD ENDED 10/31/98 PERIOD ENDED 10/31/98
- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1 Year 10.30%(1) 9.30%(2) 1 Year 11.30%(1)
Since Inception (7/28/97) 11.12(1) 11.12(2) Since Inception (7/28/97) 11.13(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 assuming a complete redemption on October 31, 1998.
(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.
* The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The
CDSC declines to 0% after six years.
** The maximum front-end sales charge for Class A is 4.25%.
+ The maximum CDSC for Class C shares is 1% for shares redeemed within one year
of purchase.
++ Class D shares have no sales charge.
3
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (69.5%)
U.S. Government Agencies (8.2%)
$ 10,000 Federal Farm Credit Bank 12/20/04.................................. 6.55% $ 10,200,900
12,000 Federal Home Loan Banks 07/02/12................................... 0.00 4,205,280
4,400 Federal National Mortgage Assoc. 09/25/07.......................... 6.85 4,550,216
5,000 Federal National Mortgage Assoc. 12/24/07.......................... 6.48 5,168,750
42,000 Resolution Funding Strip 04/15/05-10/15/07......................... 0.00 29,242,740
------------
53,367,886
------------
U.S. Treasury Bonds (60.8%)
20,000 11/15/15*.......................................................... 9.875 30,268,200
22,000 11/15/12........................................................... 10.375 30,733,780
186,600 08/15/13*.......................................................... 12.00 288,108,534
30,000 11/15/11........................................................... 14.00 48,160,200
------------
397,270,714
------------
U.S. Treasury Strip (0.5%)
5,000 02/15/07........................................................... 0.00 3,366,200
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(IDENTIFIED COST $398,239,720)............................................. 454,004,800
------------
MORTGAGE-BACKED SECURITIES (19.6%)
Federal Home Loan Mortgage Corp. (4.0%)
16,495 10/01/10........................................................... 9.50 17,515,495
6,570 10/01/19........................................................... 10.00 7,080,767
1,657 10/01/18........................................................... 10.50 1,807,777
------------
26,404,039
------------
Federal National Mortgage Assoc. (6.5%)
10,000 11/01/28+.......................................................... 6.00 9,875,000
14,639 12/01/23........................................................... 6.50 14,744,237
3,165 12/01/26........................................................... 7.50 3,244,631
8,262 06/01/25........................................................... 8.00 8,541,118
4,476 03/01/22........................................................... 8.50 4,659,045
1,103 02/01/20........................................................... 9.50 1,176,443
127 03/01/16........................................................... 9.75 136,386
------------
42,376,860
------------
Government National Mortgage Assoc. (9.1%)
27,062 12/15/22........................................................... 7.00 27,679,649
20,031 06/15/17........................................................... 7.50 20,638,520
9,932 12/15/20........................................................... 8.50 10,490,937
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$ 757 05/15/16........................................................... 10.00% $ 826,238
94 09/15/18........................................................... 11.00 103,970
------------
59,739,314
------------
TOTAL MORTGAGE-BACKED SECURITIES
(IDENTIFIED COST $124,317,460)............................................. 128,520,213
------------
SHORT-TERM INVESTMENTS (a) (10.8%)
U.S. GOVERNMENT & AGENCY OBLIGATIONS
29,270 Federal Home Loan Mortgage Corp.
11/02/98-11/12/98................................................ 5.10-5.42 29,231,936
18,000 Federal National Mortgage Assoc. 11/06/98.......................... 4.75 17,988,125
20,000 Tennessee Valley Authority 11/02/98................................ 4.75 19,997,363
3,000 U.S. Treasury Bill 11/12/98........................................ 5.258 2,995,355
------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $70,212,604).............................................. 70,212,779
------------
TOTAL INVESTMENTS
(IDENTIFIED COST $592,769,784)............................................. 652,737,792
------------
</TABLE>
<TABLE>
<CAPTION>
DESCRIPTION,
NUMBER OF EXPIRATION DATE,
CONTRACTS AND STRIKE PRICE
- --------- ----------------
<C> <S> <C> <C> <C>
</TABLE>
<TABLE>
<C> <S> <C>
WRITTEN OPTIONS (b) (0.1%)
Call options on Treasury bond futures
200 December/1998/126......................................................... (650,000)
100 December/1998/133......................................................... (18,750)
----------------
TOTAL WRITTEN OPTIONS (PREMIUMS RECEIVED $205,963)........................ (668,750)**
----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998, CONTINUED
<TABLE>
<CAPTION>
VALUE
- --------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $592,769,784) (c)........................................................ 99.9% $ 652,737,792
TOTAL WRITTEN OPTIONS OUTSTANDING......................................................... (0.1) (668,750)
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................ 0.2 1,197,676
------- --------------
NET ASSETS................................................................................ 100.0% $ 653,266,718
------- --------------
------- --------------
</TABLE>
- ---------------------
* Some of these securities are segregated in connection with open written
options, open futures contracts and securities purchased on a forward
commitment basis.
** The market value of U.S. Treasury securities pledged to cover written
options on futures contracts is $1,118,750.
+ Security purchased on a forward commitment basis with an approximate
principal amount. The actual principal will be determined upon settlement.
(a) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(b) Options expire one month prior to the expiration date indicated for
Treasury bond futures.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $60,056,443 and the
aggregate gross unrealized depreciation is $88,435, resulting in net
unrealized depreciation of $59,968,008.
FUTURES CONTRACTS OPEN AT OCTOBER 31, 1998:
<TABLE>
<CAPTION>
UNDERLYING
NUMBER OF DESCRIPTION, DELIVERY MONTH, FACE AMOUNT UNREALIZED
CONTRACTS AND YEAR AT VALUE LOSS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
400 U.S. Treasury Bonds December/1998........................ $ 51,562,500 $ (362,500)
-------------- ------------
-------------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $592,769,784).............................................................. $652,737,792
Cash.......................................................................................... 205,519
Receivable for:
Interest.................................................................................. 10,017,532
Shares of beneficial interest sold........................................................ 2,366,200
Principal paydowns........................................................................ 560,970
Prepaid expenses and other assets............................................................. 68,365
------------
TOTAL ASSETS............................................................................. 665,956,378
------------
LIABILITIES:
Written call options outstanding, at value (premiums received $205,963)....................... 668,750
Payable for:
Investments purchased..................................................................... 9,876,145
Shares of beneficial interest repurchased................................................. 547,815
Plan of distribution fee.................................................................. 469,162
Variation margin on futures contracts..................................................... 337,500
Investment management fee................................................................. 305,756
Dividends to shareholders................................................................. 300,229
Options purchased......................................................................... 24,055
Accrued expenses and other payables........................................................... 160,248
------------
TOTAL LIABILITIES........................................................................ 12,689,660
------------
NET ASSETS............................................................................... $653,266,718
------------
------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $641,992,994
Net unrealized appreciation................................................................... 58,738,112
Accumulated net realized loss................................................................. (47,464,388)
------------
NET ASSETS............................................................................... $653,266,718
------------
------------
CLASS A SHARES:
Net Assets.................................................................................... $4,893,727
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 499,626
NET ASSET VALUE PER SHARE................................................................ $9.79
------------
------------
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE)........................................ $10.22
------------
------------
CLASS B SHARES:
Net Assets.................................................................................... $639,212,484
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 65,732,418
NET ASSET VALUE PER SHARE................................................................ $9.72
------------
------------
CLASS C SHARES:
Net Assets.................................................................................... $7,204,246
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 735,359
NET ASSET VALUE PER SHARE................................................................ $9.80
------------
------------
CLASS D SHARES:
Net Assets.................................................................................... $1,956,261
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 201,911
NET ASSET VALUE PER SHARE................................................................ $9.69
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME................................................................................ $47,209,827
-----------
EXPENSES
Plan of distribution fee (Class A shares)...................................................... 6,915
Plan of distribution fee (Class B shares)...................................................... 5,200,730
Plan of distribution fee (Class C shares)...................................................... 27,553
Investment management fee...................................................................... 3,403,780
Transfer agent fees and expenses............................................................... 527,283
Custodian fees................................................................................. 81,956
Shareholder reports and notices................................................................ 72,434
Professional fees.............................................................................. 70,006
Registration fees.............................................................................. 56,791
Trustees' fees and expenses.................................................................... 18,983
Other.......................................................................................... 22,755
-----------
TOTAL EXPENSES............................................................................ 9,489,186
-----------
NET INVESTMENT INCOME..................................................................... 37,720,641
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/loss on:
Investments................................................................................ 140,594
Futures contracts.......................................................................... (1,128,069)
Options written............................................................................ 1,694,186
-----------
NET GAIN.................................................................................. 706,711
Net change in unrealized appreciation.......................................................... 22,700,373
-----------
NET GAIN.................................................................................. 23,407,084
-----------
NET INCREASE................................................................................... $61,127,725
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY 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 31,1998 OCTOBER 31, 1997*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................... $ 37,720,641 $ 42,168,046
Net realized gain............................................................... 706,711 690,276
Net change in unrealized appreciation........................................... 22,700,373 5,646,142
------------------ ------------------
NET INCREASE............................................................... 61,127,725 48,504,464
------------------ ------------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares.................................................................. (189,298) (28,596)
Class B shares.................................................................. (37,280,239) (42,134,728)
Class C shares.................................................................. (191,250) (4,477)
Class D shares.................................................................. (59,854) (245)
------------------ ------------------
TOTAL DIVIDENDS............................................................ (37,720,641) (42,168,046)
------------------ ------------------
Net increase (decrease) from transactions in shares of beneficial interest...... 3,969,420 (100,380,918)
------------------ ------------------
NET INCREASE (DECREASE).................................................... 27,376,504 (94,044,500)
NET ASSETS:
Beginning of period............................................................. 625,890,214 719,934,714
------------------ ------------------
END OF PERIOD.............................................................. $ 653,266,718 $ 625,890,214
------------------ ------------------
------------------ ------------------
</TABLE>
- ---------------------
* Class A, Class B and Class C shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Federal Securities Trust (the "Fund"), formerly Dean
Witter Federal Securities Trust, 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 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) 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 it trades unless the Trustees determine that such price does
not reflect their market value, in which case it 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 Morgan
Stanley Dean Witter Advisors Inc. (the "Investment Manager"), formerly Dean
Witter InterCapital Inc., 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
10
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
appropriate matrix utilizing similar factors); and (5) short-term debt
securities having a maturity date of more than sixty days at 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)
Options 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
11
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
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 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
12
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
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 $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 Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 0.85% of
the lesser of: (a) the average daily aggregate gross sales of the Class B shares
since 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 (1)
services provided and the expenses borne by it and others in the distribution of
the shares of these Classes, including the payment of commissions for sales of
these Classes and incentive compensation to, and expenses of, Morgan Stanley
Dean Witter Financial Advisors and others who engage in or support distribution
of the shares or who service shareholder accounts, including overhead and
telephone
13
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
expenses; (2) printing and distribution of prospectuses and reports used in
connection with the offering of these shares to other than current shareholders;
and (3) preparation, printing and distribution of sales literature and
advertising materials. In addition, the Distributor may utilize fees paid
pursuant to the Plan, in the case of Class B shares, to compensate Dean Witter
Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and Distributor,
and other selected broker-dealers for their opportunity costs in advancing such
amounts, which compensation would be in the form of a carrying charge on any
unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts, including
carrying charges, totaled $22,724,037 at October 31, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended October 31, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
0.85%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 1998,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $13,094, $473,113
and $2,026, respectively and received $25,619 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, 1998 were $77,082,599 and
$109,372,764, respectively.
14
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
Transactions in written options for the year ended October 31, 1998 were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUMS
----------- -----------
<S> <C> <C>
Option contracts written, outstanding at beginning of the
period.......................................................... 200 $ 95,642
Options written.................................................. 11,551 6,454,664
Options closed................................................... (10,001) (5,785,302)
Options exercised................................................ (850) (448,508)
Options expired.................................................. (600) (110,533)
----------- -----------
Option contracts written, outstanding at end of the period....... 300 $ 205,963
----------- -----------
----------- -----------
</TABLE>
For the year ended October 31, 1998, 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 $450 and $4,339,
respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $3,800.
The Fund has 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, 1998 included in
Trustees' fees and expenses in the Statement of Operations amounted to $5,657.
At October 31, 1998, the Fund had an accrued pension liability of $51,159 which
is included in accrued expenses in the Statement of Assets and Liabilities.
5. FEDERAL INCOME TAX STATUS
During the year ended October 31, 1998, the Fund utilized approximately
$1,750,000 of its net capital loss carryover. At October 31, 1998, the Fund had
a net capital loss carryover of approximately $35,668,000, which may be used to
offset future capital gains to the extent provided by regulations, which is
available through October 31 of the following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- ---------------------------------
2000 2002 2004
- --------- ----------- ---------
<S> <C> <C>
$ 3,854 $ 31,124 $ 690
- --------- ----------- ---------
- --------- ----------- ---------
</TABLE>
At October 31, 1998, the Fund was required for Federal income tax purposes to
defer approximately $11,816,000 of realized losses on certain closed options and
futures contracts.
15
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
As of October 31, 1998, 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 $5,115,395.
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997*
---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 494,041 $ 4,730,315 227,350 $ 2,100,734
Reinvestment of dividends........................................ 17,202 164,344 2,813 26,335
Redeemed......................................................... (228,754) (2,193,283) (13,026) (121,600)
----------- -------------- ----------- -------------
Net increase - Class A........................................... 282,489 2,701,376 217,137 2,005,469
----------- -------------- ----------- -------------
CLASS B SHARES
Sold............................................................. 11,059,549 105,850,540 5,820,412 53,293,625
Reinvestment of dividends........................................ 2,135,874 20,213,190 2,488,705 22,774,438
Redeemed......................................................... (14,006,213) (132,953,963) (19,576,326) (179,236,735)
----------- -------------- ----------- -------------
Net decrease - Class B........................................... (810,790) (6,890,233) (11,267,209) (103,168,672)
----------- -------------- ----------- -------------
CLASS C SHARES
Sold............................................................. 698,033 6,700,213 80,710 753,751
Reinvestment of dividends........................................ 14,425 138,550 270 2,532
Redeemed......................................................... (53,457) (517,787) (4,622) (42,939)
----------- -------------- ----------- -------------
Net increase - Class C........................................... 659,001 6,320,976 76,358 713,344
----------- -------------- ----------- -------------
CLASS D SHARES
Sold............................................................. 203,672 1,924,311 7,413 68,718
Reinvestment of dividends........................................ 5,200 49,434 24 223
Redeemed......................................................... (14,398) (136,444) -- --
----------- -------------- ----------- -------------
Net increase - Class D........................................... 194,474 1,837,301 7,437 68,941
----------- -------------- ----------- -------------
Net increase (decrease) in Fund.................................. 325,174 $ 3,969,420 (10,966,277) $(100,380,918)
----------- -------------- ----------- -------------
----------- -------------- ----------- -------------
</TABLE>
- ---------------------
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through October 31, 1997.
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").
16
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
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, 1998, 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.
17
<PAGE>
MORGAN STANLEY 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,
-----------------------------------------------------------
1998 1997* 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period........... $ 9.36 $ 9.25 $ 9.49 $ 8.74 $ 10.03
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income....................... 0.58 0.59 0.59 0.59 0.60
Net realized and unrealized gain (loss)..... 0.36 0.11 (0.25) 0.75 (1.28)
------- ------- ------- ------- -------
Total income (loss) from investment
operations.................................... 0.94 0.70 0.34 1.34 (0.68)
------- ------- ------- ------- -------
Less dividends from net investment income...... (0.58) (0.59) (0.58) (0.59) (0.61)
------- ------- ------- ------- -------
Net asset value, end of period................. $ 9.72 $ 9.36 $ 9.25 $ 9.49 $ 8.74
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN+.................................. 10.35% 7.89% 3.79% 15.89% (6.92)%
RATIOS TO AVERAGE NET ASSETS:
Expenses....................................... 1.54%(1) 1.53% 1.53% 1.52% 1.52%
Net investment income.......................... 6.09%(1) 6.41% 6.31% 6.53% 6.56%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions......... $639 $623 $720 $829 $841
Portfolio turnover rate........................ 13% 12% 10% 7% 18%
</TABLE>
- ---------------------
<TABLE>
<C> <S>
* 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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
OCTOBER 31, 1998 OCTOBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 9.45 $ 9.26
----- -----
Income from investment operations:
Net investment income.............................................. 0.64 0.16
Net realized and unrealized gain................................... 0.34 0.19
----- -----
Total income from investment operations............................... 0.98 0.35
----- -----
Less dividends from net investment income............................. (0.64) (0.16)
----- -----
Net asset value, end of period........................................ $ 9.79 $ 9.45
----- -----
----- -----
TOTAL RETURN+......................................................... 10.75% 3.78%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.93%(3) 0.92%(2)
Net investment income................................................. 6.70%(3) 6.60%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $4,894 $2,051
Portfolio turnover rate............................................... 13% 12%
</TABLE>
<TABLE>
<S> <C> <C>
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 9.44 $ 9.26
----- -----
Income from investment operations:
Net investment income.............................................. 0.58 0.15
Net realized and unrealized gain................................... 0.36 0.18
----- -----
Total income from investment operations............................... 0.94 0.33
----- -----
Less dividends from net investment income............................. (0.58) (0.15)
----- -----
Net asset value, end of period........................................ $ 9.80 $ 9.44
----- -----
----- -----
TOTAL RETURN+......................................................... 10.30% 3.54%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.54%(3) 1.52%(2)
Net investment income................................................. 6.09%(3) 5.86%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $7,204 $721
Portfolio turnover rate............................................... 13% 12%
</TABLE>
- ---------------------
<TABLE>
<C> <S>
* 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.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
OCTOBER 31, 1998 OCTOBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 9.33 $ 9.26
----- -----
Income from investment operations:
Net investment income.............................................. 0.66 0.17
Net realized and unrealized gain................................... 0.36 0.07
----- -----
Total income from investment operations............................... 1.02 0.24
----- -----
Less dividends from net investment income............................. (0.66) (0.17)
----- -----
Net asset value, end of period........................................ $ 9.69 $ 9.33
----- -----
----- -----
TOTAL RETURN+......................................................... 11.30% 2.62%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.69%(3) 0.63%(2)
Net investment income................................................. 6.94%(3) 6.40%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,956 $69
Portfolio turnover rate............................................... 13% 12%
</TABLE>
- ---------------------
<TABLE>
<C> <S>
* 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.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES
TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY 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 Morgan Stanley Dean Witter Federal
Securities Trust (the "Fund"), formerly Dean Witter Federal Securities Trust, at
October 31, 1998, 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, 1998 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
DECEMBER 7, 1998
21
<PAGE>
TRUSTEES Morgan Stanley Dean Witter
Federal
Michael Bozic Securities Trust
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 [PHOTO]
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
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS ANNUAL REPORT
OCTOBER 31, 1998
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.
