<PAGE> 1
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST Two World Trade Center
LETTER TO THE SHAREHOLDERS April 30, 1999 New York, New York 10048
DEAR SHAREHOLDER:
During the six months ended April 30, 1999, the U.S. economy continued to
display signs of robust expansion as employment grew, income climbed and
consumers remained resilient. Despite strong economic growth, however, inflation
did not materialize, due largely to the lingering effects of Asian and Russian
economic turmoil and signs of distress in the Latin American economies. During
the fall, on three separate occasions the Federal Reserve Board cut the federal
funds rate. The central bank's action served to provide stability to a
marketplace rocked by one financial crisis after another.
Interest rates on long-term Treasuries were highly volatile during this period.
Thirty-year Treasuries ranged in yield between 4.96 percent and 5.70 percent. On
April 30, 1999, the 30-year Treasury bond was yielding 5.66 percent, compared to
5.16 percent six months earlier.
PERFORMANCE
For the six-month period ending April 30, 1999, Morgan Stanley Dean Witter
Federal Securities Trust's Class B shares produced a total return of -1.51
percent versus -0.95 percent for the Lehman Brothers General U.S. Government
Index and -0.35 percent for the Lipper General U.S. Government Funds Index.
During the same period, the Fund's Class A, C and D shares posted total returns
of -1.05 percent, -1.58 percent and -1.11 percent, respectively. The performance
of the Fund's four share classes varies because of differing expenses. For the
period under review, the rising-interest-rate environment negatively affected
the Fund's performance.
PORTFOLIO STRATEGY
In response to the overwhelming strength of the U.S. economy and the calming of
the global markets, the Fund's average duration was decreased to approximately
5.3 years as of April 30, 1999. As this year progresses, however, the average
duration of the portfolio may be
<PAGE> 2
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
LETTER TO THE SHAREHOLDERS April 30, 1999, continued
increased significantly as market conditions offer an incentive to enhance the
portfolio's income and its potential for total return. These investments may
include additional mortgage-backed securities, which continue to offer not only
an incremental yield incentive over U.S. Treasury securities of similar
maturity, but also the potential for attractive total returns.
On April 30, 1999, the Fund had net assets in excess of $614 million. The
majority of the portfolio continued to be invested in Treasury notes and bonds.
At the end of the period, 62 percent of the Fund's portfolio was invested in
U.S. Treasury notes and bonds with seven- to twenty-year maturities, 19 percent
in mortgage-backed securities and 14 percent in U.S. government agency
obligations. The balance of the portfolio consisted of short-term money-market
investments.
LOOKING AHEAD
In the months ahead, U.S. economic growth is likely to slow as inflation remains
contained. Should our economy continue to show signs of inordinately strong
growth and begin to register high levels of inflation, the Federal Reserve might
need to reassess its current stance on monetary policy. Accordingly, adjustments
to the Fund's maturity and portfolio composition may be made as conditions
warrant and attractive opportunities become available. However, we believe that
the deflationary trend evident in the Asian and emerging-market economies is
likely to help keep inflation in check in the United States well into 2000,
despite the sharp rise in oil prices thus far in 1999.
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley Dean
Witter Funds. Mr. Merin is also the President and Chief Operating Officer of
Asset Management of Morgan Stanley Dean Witter & Co. and President, Chief
Executive Officer and Director of Morgan Stanley Dean Witter Advisors Inc., the
Fund's Investment Manager. He also serves as Chairman, Chief Executive Officer
and Director of the Fund's distributor and transfer agent.
We appreciate your ongoing support of Morgan Stanley Dean Witter Federal
Securities Trust and look forward to continuing to serve your investment needs.
Very truly yours,
/S/ CHARLES A. FIUMEFREDDO /S/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (75.3%)
U.S. Government Agencies (13.9%)
$ 10,000 Federal Farm Credit Bank 12/20/04............... 6.55 % $ 10,038,000
12,000 Federal Home Loan Banks 07/02/12................ 0.00 4,279,080
4,400 Federal National Mortgage Assoc. 09/25/07....... 6.85 4,430,976
5,000 Federal National Mortgage Assoc. 12/24/07....... 6.48 5,022,600
100,000 Resolution Funding Strip 04/15/05 - 01/15/09.... 0.00 61,659,890
------------
85,430,546
------------
U.S. Treasury Bonds (60.9%)
20,000 11/15/15*....................................... 9.875 28,375,600
22,000 11/15/12........................................ 10.375 28,964,320
186,600 08/15/13*....................................... 12.00 271,081,284
30,000 11/15/11........................................ 14.00 45,367,800
------------
373,789,004
------------
U.S. Treasury Strip (0.5%)
5,000 02/15/07........................................ 0.00 3,265,650
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Identified Cost $434,636,061)............................ 462,485,200
------------
MORTGAGE-BACKED SECURITIES (19.0%)
Federal Home Loan Mortgage Corp. (3.5%)
13,713 10/01/10........................................ 9.50 14,569,703
5,342 10/01/19........................................ 10.00 5,763,192
1,255 02/01/16........................................ 10.50 1,369,236
------------
21,702,131
------------
Federal National Mortgage Assoc. (3.6%)
9,691 04/01/28........................................ 6.00 9,396,901
2,230 12/01/26........................................ 7.50 2,292,289
5,928 11/01/24........................................ 8.00 6,164,893
3,047 03/01/22........................................ 8.50 3,203,170
900 02/01/20........................................ 9.50 960,900
121 03/01/16........................................ 9.75 129,917
------------
22,148,070
------------
Government National Mortgage Assoc. (10.3%)
14,000 +............................................... 6.50 13,921,250
24,087 12/15/22........................................ 7.00 24,455,810
15,485 06/15/17........................................ 7.50 15,959,689
7,719 12/15/20........................................ 8.50 8,158,151
624 05/15/16........................................ 10.00 682,160
67 09/15/18........................................ 11.00 74,447
------------
63,251,507
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
Government National Mortgage Assoc. II (1.6%)
$ 9,950 01/20/29........................................ 6.50 % $ 9,862,639
------------
TOTAL MORTGAGE-BACKED SECURITIES
(Identified Cost $114,052,947)............................ 116,964,347
------------
SHORT-TERM INVESTMENTS (4.3%)
U.S. GOVERNMENT AGENCY OBLIGATIONS (a) (4.2%)
5,000 Federal Home Loan Mortgage Corp. 05/07/99....... 4.67 4,996,100
20,800 Student Loan Marketing Assoc. 05/03/99.......... 4.80 20,794,453
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Amortized Cost $25,790,553).............................. 25,790,553
------------
REPURCHASE AGREEMENT (0.1%)
398 The Bank of New York due 05/03/99
(dated 04/30/99; proceeds $398,712) (b)
(Identified Cost $398,551)..................... 4.875 398,551
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $26,189,104)............................. 26,189,104
------------
TOTAL INVESTMENTS (Identified Cost $574,878,112).......... $605,638,651
------------
</TABLE>
<TABLE>
<CAPTION>
DESCRIPTION,
NUMBER OF EXPIRATION DATE,
CONTRACTS AND STRIKE PRICE
- --------- ----------------
<C> <S> <C> <C>
WRITTEN OPTIONS (c) (0.0%)
Call options on Treasury bond futures
100 June/1999/123............................................... (20,313)
200 June/1999/124............................................... (21,875)
-----------
TOTAL WRITTEN OPTIONS (Premiums Received $154,400).......... (42,188)**
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $574,878,112) (d).............. 98.6% $605,638,651
TOTAL WRITTEN OPTIONS OUTSTANDING............... (0.0) (42,188)
OTHER ASSETS IN EXCESS OF LIABILITIES........... 1.4 8,840,207
----- ------------
NET ASSETS...................................... 100.0% $614,436,670
===== ============
</TABLE>
- ---------------------
<TABLE>
<C> <S>
* A portion 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 $492,188.
+ Securities purchased on a forward commitment basis with an
approximate principal amount and no definite maturity date;
the actual principal amount and maturity date will be
determined upon settlement.
(a) Securities were purchased on a discount basis. The interest
rates shown have been adjusted to reflect a money market
equivalent yield.
(b) Collateralized by $269,999 U.S. Treasury Bond 10.625% due
08/15/15 valued at $410,029.
(c) Options expire one month prior to the expiration date
indicated for Treasury bond futures.
(d) The aggregate cost for federal income tax purposes
approximates identified cost. The aggregate gross unrealized
appreciation is $33,923,110 and the aggregate gross
unrealized depreciation is $3,162,571, resulting in net
unrealized appreciation of $30,760,539.
</TABLE>
FUTURES CONTRACTS OPEN AT APRIL 30, 1999:
<TABLE>
<CAPTION>
UNDERLYING
NUMBER OF FACE AMOUNT UNREALIZED
CONTRACTS DESCRIPTION, DELIVERY MONTH, AND YEAR AT VALUE GAIN
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
100 U.S. Treasury Bonds June/1999................ $12,018,750 $224,635
=========== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1999 (unaudited)
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $574,878,112)............................. $605,638,651
Receivable for:
Interest................................................ 9,831,562
Principal paydowns...................................... 689,762
Shares of beneficial interest sold...................... 660,680
Variation margin........................................ 203,125
Written options......................................... 5,016
Prepaid expenses and other assets........................... 66,759
------------
TOTAL ASSETS............................................ 617,095,555
------------
LIABILITIES:
Written call options outstanding, at value
(premiums received $154,400)............................... 42,188
Payable for:
Shares of beneficial interest repurchased............... 902,753
Investments purchased................................... 656,804
Plan of distribution fee................................ 428,745
Investment management fee............................... 280,268
Dividends to shareholders............................... 200,957
Accrued expenses............................................ 147,170
------------
TOTAL LIABILITIES....................................... 2,658,885
------------
NET ASSETS.............................................. $614,436,670
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $631,527,712
Net unrealized appreciation................................. 31,097,386
Accumulated net realized loss............................... (48,188,428)
------------
NET ASSETS.............................................. $614,436,670
============
CLASS A SHARES:
Net Assets.................................................. $4,965,167
Shares Outstanding (unlimited authorized, $.01 par value)... 529,294
NET ASSET VALUE PER SHARE............................... $9.38
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value)........ $9.80
============
CLASS B SHARES:
Net Assets.................................................. $598,511,799
Shares Outstanding (unlimited authorized, $.01 par value)... 64,369,723
NET ASSET VALUE PER SHARE............................... $9.30
============
CLASS C SHARES:
Net Assets.................................................. $8,050,314
Shares Outstanding (unlimited authorized, $.01 par value)... 858,907
NET ASSET VALUE PER SHARE............................... $9.37
============
CLASS D SHARES:
Net Assets.................................................. $2,909,390
Shares Outstanding (unlimited authorized, $.01 par value)... 313,962
NET ASSET VALUE PER SHARE............................... $9.27
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the six months ended April 30, 1999 (unaudited)
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 23,047,224
------------
EXPENSES
Plan of distribution fee (Class A shares)................... 4,858
Plan of distribution fee (Class B shares)................... 2,604,385
Plan of distribution fee (Class C shares)................... 32,591
Investment management fee................................... 1,727,475
Transfer agent fees and expenses............................ 275,830
Professional fees........................................... 49,199
Custodian fees.............................................. 39,229
Shareholder reports and notices............................. 38,861
Registration fees........................................... 24,923
Trustees' fees and expenses................................. 9,576
Other....................................................... 12,081
------------
TOTAL EXPENSES.......................................... 4,819,008
------------
NET INVESTMENT INCOME................................... 18,228,216
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/loss on:
Futures contracts....................................... (1,637,378)
Options written......................................... 913,338
------------
NET LOSS................................................ (724,040)
Net change in unrealized appreciation....................... (27,640,726)
------------
NET LOSS................................................ (28,364,766)
------------
NET DECREASE................................................ $(10,136,550)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 1999 OCTOBER 31, 1998
- --------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $18,228,216 $ 37,720,641
Net realized gain (loss)............................. (724,040) 706,711
Net change in unrealized appreciation................ (27,640,726) 22,700,373
------------ ------------
NET INCREASE (DECREASE).......................... (10,136,550) 61,127,725
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM
NET INVESTMENT INCOME:
Class A shares....................................... (171,806) (189,298)
Class B shares....................................... (17,758,306) (37,280,239)
Class C shares....................................... (220,379) (191,250)
Class D shares....................................... (77,725) (59,854)
------------ ------------
TOTAL DIVIDENDS.................................. (18,228,216) (37,720,641)
------------ ------------
Net increase (decrease) from transactions in shares
of beneficial interest.............................. (10,465,282) 3,969,420
------------ ------------
NET INCREASE (DECREASE).......................... (38,830,048) 27,376,504
NET ASSETS:
Beginning of period.................................. 653,266,718 625,890,214
------------ ------------
END OF PERIOD.................................... $614,436,670 $653,266,718
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley 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 converted to a multiple
class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) 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"), 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 the
time of purchase are valued on a mark-to-market basis until sixty
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
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 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
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
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 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
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
$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 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.
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
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 $21,875,427 at April 30, 1999.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the six months ended April 30, 1999, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.18% and
0.85%, respectively.
The Distributor has informed the Fund that for the six months ended April 30,
1999, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $1,992, $247,044
and $13,068, respectively and received $8,342 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 six months ended April 30, 1999 were $63,785,192 and
$26,004,857, respectively.
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
Transactions in written options for the six months ended April 30, 1999 were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUMS
--------- -----------
<S> <C> <C>
Option contracts written, outstanding at beginning of the
period..................................................... 300 $ 205,963
Options written............................................. 5,460 2,959,778
Options closed.............................................. (5,159) (2,890,041)
Options exercised........................................... (201) (104,729)
Options expired............................................. (100) (16,571)
------ -----------
Option contracts written, outstanding at end of the
period..................................................... 300 $ 154,400
====== ===========
</TABLE>
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At April 30, 1999, the Fund had
transfer agent fees and expenses payable of approximately $2,200.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended April 30, 1999
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,013. At April 30, 1999, the Fund had an accrued pension liability of $
52,285 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At October 31, 1998, the Fund had 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 in 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.
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
As of October 31, 1998, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on straddles.
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 1999 OCTOBER 31, 1998
------------------------- ---------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold........................................................ 216,005 $ 2,090,640 494,041 $ 4,730,315
Reinvestment of dividends................................... 16,446 157,226 17,202 164,344
Redeemed.................................................... (202,783) (1,924,047) (228,754) (2,193,283)
---------- ------------ ----------- -------------
Net increase - Class A...................................... 29,668 323,819 282,489 2,701,376
---------- ------------ ----------- -------------
CLASS B SHARES
Sold........................................................ 5,192,754 49,306,700 11,059,549 105,850,540
Reinvestment of dividends................................... 1,068,713 10,135,881 2,135,874 20,213,190
Redeemed.................................................... (7,624,162) (72,472,307) (14,006,213) (132,953,963)
---------- ------------ ----------- -------------
Net decrease - Class B...................................... (1,362,695) (13,029,726) (810,790) (6,890,233)
---------- ------------ ----------- -------------
CLASS C SHARES
Sold........................................................ 412,321 3,952,876 698,033 6,700,213
Reinvestment of dividends................................... 17,384 166,154 14,425 138,550
Redeemed.................................................... (306,157) (2,936,503) (53,457) (517,787)
---------- ------------ ----------- -------------
Net increase - Class C...................................... 123,548 1,182,527 659,001 6,320,976
---------- ------------ ----------- -------------
CLASS D SHARES
Sold........................................................ 129,393 1,221,161 203,672 1,924,311
Reinvestment of dividends................................... 6,891 64,993 5,200 49,434
Redeemed.................................................... (24,233) (228,056) (14,398) (136,444)
---------- ------------ ----------- -------------
Net increase - Class D...................................... 112,051 1,058,098 194,474 1,837,301
---------- ------------ ----------- -------------
Net increase (decrease) in Fund............................. (1,097,428) $(10,465,282) 325,174 $ 3,969,420
========== ============ =========== =============
</TABLE>
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").
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) 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 April 30, 1999, 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.
16
<PAGE> 17
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 SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ----------------------------------------------------
APRIL 30, 1999 1998 1997* 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period................... $ 9.72 $ 9.36 $ 9.25 $ 9.49 $ 8.74 $10.03
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income................................. 0.28 0.58 0.59 0.59 0.59 0.60
Net realized and unrealized gain (loss)............... (0.42) 0.36 0.11 (0.25) 0.75 (1.28)
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations......... (0.14) 0.94 0.70 0.34 1.34 (0.68)
------ ------ ------ ------ ------ ------
Less dividends from net investment income.............. (0.28) (0.58) (0.59) (0.58) (0.59) (0.61)
------ ------ ------ ------ ------ ------
Net asset value, end of period......................... $ 9.30 $ 9.72 $ 9.36 $ 9.25 $ 9.49 $ 8.74
====== ====== ====== ====== ====== ======
TOTAL RETURN+.......................................... (1.51)%(1) 10.35% 7.89% 3.79% 15.89% (6.92)%
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................... 1.54%(2)(3) 1.54%(3) 1.53% 1.53% 1.52% 1.52%
Net investment income.................................. 5.80%(2)(3) 6.09%(3) 6.41% 6.31% 6.53% 6.56%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions................. $599 $639 $623 $720 $829 $841
Portfolio turnover rate................................ 4% 13% 12% 10% 7% 18%
</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) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
APRIL 30, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 9.79 $ 9.45 $ 9.26
------ ------ ------
Income (loss) from investment operations:
Net investment income...................................... 0.31 0.64 0.16
Net realized and unrealized gain (loss).................... (0.41) 0.34 0.19
------ ------ ------
Total income (loss) from investment operations.............. (0.10) 0.98 0.35
------ ------ ------
Less dividends from net investment income................... (0.31) (0.64) (0.16)
------ ------ ------
Net asset value, end of period.............................. $ 9.38 $ 9.79 $ 9.45
====== ====== ======
TOTAL RETURN+............................................... (1.05)%(1) 10.75% 3.78%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.87%(2)(3) 0.93%(3) 0.92%(2)
Net investment income....................................... 6.47%(2)(3) 6.70%(3) 6.60%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $4,965 $4,894 $2,051
Portfolio turnover rate..................................... 4% 13% 12%
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 9.80 $ 9.44 $ 9.26
------ ------ ------
Income (loss) from investment operations:
Net investment income...................................... 0.28 0.58 0.15
Net realized and unrealized gain (loss).................... (0.43) 0.36 0.18
------ ------ ------
Total income (loss) from investment operations.............. (0.15) 0.94 0.33
------ ------ ------
Less dividends from net investment income................... (0.28) (0.58) (0.15)
------ ------ ------
Net asset value, end of period.............................. $ 9.37 $ 9.80 $ 9.44
====== ====== ======
TOTAL RETURN+............................................... (1.58)%(1) 10.30% 3.54%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.54%(2)(3) 1.54%(3) 1.52%(2)
Net investment income....................................... 5.80%(2)(3) 6.09%(3) 5.86%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $8,050 $7,204 $721
Portfolio turnover rate..................................... 4% 13% 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.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
APRIL 30, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 9.69 $ 9.33 $ 9.26
------ ------ ------
Income (loss) from investment operations:
Net investment income...................................... 0.31 0.66 0.17
Net realized and unrealized gain (loss).................... (0.42) 0.36 0.07
------ ------ ------
Total income (loss) from investment operations.............. (0.11) 1.02 0.24
------ ------ ------
Less dividends from net investment income................... (0.31) (0.66) (0.17)
------ ------ ------
Net asset value, end of period.............................. $ 9.27 $ 9.69 $ 9.33
====== ====== ======
TOTAL RETURN+............................................... (1.11)%(1) 11.30% 2.62%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.69%(2)(3) 0.69%(3) 0.63%(2)
Net investment income....................................... 6.65%(2)(3) 6.94%(3) 6.40%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $2,909 $1,956 $69
Portfolio turnover rate..................................... 4% 13% 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.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE> 20
TRUSTEES
- ------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- ------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
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
- ------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- ------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of the
Fund without examination by the independent accountants and accordingly they do
not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of the
Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY
DEAN WITTER
FEDERAL
SECURITIES TRUST
[MORGAN STANLEY PHOTO]
Semiannual Report
April 30, 1999
