<PAGE>
<TABLE>
<S> <C>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TWO WORLD TRADE CENTER,
TRUST NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS OCTOBER 31, 1999
</TABLE>
DEAR SHAREHOLDER:
During the twelve-month period ended October 31, 1999, the U.S. economy
continued its path of strength propelled by a rising stock market, low
unemployment, continued consumer confidence and increased liquidity provided by
the Federal Reserve Board. Prior to the start of the fiscal year in the fall of
1998, the Fed reduced the federal-funds rate in three steps, from 5.50 percent
to 4.75 percent, thereby diminishing concerns about illiquidity arising from
international banks' exposure to Asia and Russia. As 1999 began, interest rates
started their steady climb while investors displayed renewed confidence and
appeared less risk averse. With renewed strength in the world economy and the
threat of domestic inflation looming, the Federal Reserve raised the
federal-funds rate twice in the third quarter, to 5.25 percent. Following the
close of the fiscal year, the Fed again raised the federal-funds rate by 25
basis points, to 5.50 percent.
Interest rates on long-term U.S. Treasuries were highly volatile over the course
of the fiscal year, with 30-year Treasuries ranging in yield between
4.96 percent and 6.38 percent. On October 31, 1999, the 30-year Treasury note
was yielding 6.16 percent compared to 5.24 percent a year earlier.
PERFORMANCE AND INVESTMENT STRATEGY
For the twelve-month period ended October 31, 1999, Morgan Stanley Dean Witter
Federal Securities Trust's Class B shares posted a total return of
- -3.09 percent compared with -1.21 percent for the Lehman Brothers General U.S.
Government Index and -1.43 percent for the Lipper General U.S. Government Funds
Index. For the same period, the Fund's Class A, C, and D shares posted total
returns of -1.66 percent, -3.03 percent and -2.08 percent, respectively.
Performance of the Fund's four share classes varies because of differing
expenses. (The total return figures shown assume the reinvestment of all
distributions and do not reflect the deduction of any applicable sales charges.)
The accompanying chart compares the Fund's performance to that of the Lipper and
Lehman indexes.
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
LETTER TO THE SHAREHOLDERS OCTOBER 31, 1999, CONTINUED
The steady rise in interest rates during most of 1999 negatively affected the
Fund's performance. The prices of bonds generally move inversely to changes in
interest rates; accordingly, these higher rates resulted in significantly lower
bond prices. The Fund underperformed its benchmark indexes because of its
slightly longer duration. (The longer a fund's duration, the greater the
negative effect of rising interest rates.) During the fiscal year the Fund
increased its exposure to mortgage-backed securities, which helped mitigate the
negative impact of this year's bear market in U.S. Treasuries.
The Fund ended the fiscal year with net assets in excess of $561 million and a
weighted average maturity of approximately 8 years. It held 63 percent of its
portfolio in U.S. Treasury notes and bonds maturing in 7 to 20 years,
24 percent in mortgage-backed securities issued primarily by the Government
National Mortgage Association (GNMA), 12 percent in U.S. agency obligations and
the balance in short-term money-market securities.
LOOKING AHEAD
We believe the U.S. economy will keep growing in the months ahead as low
unemployment and increased productivity will likely continue to challenge
tried-and-true economic models. However, should our economy continue to show
signs of inordinately strong growth along with increasing inflationary
pressures, the Federal Reserve may need to maintain its path of tighter monetary
policy, possibly resulting in further interest-rate hikes. The Fund will
continue to monitor market conditions and look for attractive investment
opportunities as they 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,
<TABLE>
<S> <C>
/s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
CHAIRMAN OF THE BOARD PRESIDENT
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES
TRUST
FUND PERFORMANCE OCTOBER 31, 1999
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GROWTH OF $10,000 CLASS B TOTAL LEHMAN BROTHERS LIPPER GENERAL U.S.
($ IN THOUSANDS)
<S> <C> <C> <C>
U.S. Govt Index Govt Funds Index
October-1989 $10,000 $10,000 $10,000
October-1990 $10,364 $10,593 $10,498
October-1991 $11,946 $12,140 $12,032
October-1992 $12,968 $13,394 $13,077
October-1993 $14,528 $15,152 $14,477
October-1994 $13,523 $14,475 $13,653
October-1995 $15,672 $16,701 $15,594
October-1996 $16,267 $17,556 $16,265
October-1997 $17,551 $19,077 $17,631
October-1998 $19,367 $21,228 $19,181
October-1999 $18,768(3) $20,973 $18,908
</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 10/31/99 PERIOD ENDED 10/31/99
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year (3.09)%(1) (7.66)%(2) 1 Year (1.66)%(1) (5.84)%(2)
5 Years 6.77 (1) 6.46 (2) Since Inception (7/28/97) 5.58 (1) 3.57 (2)
10 Years 6.50 (1) 6.50 (2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES++ CLASS D SHARES#
----------------------------------------------------------- -----------------------------------------------------------
PERIOD ENDED 10/31/99 PERIOD ENDED 10/31/99
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year (3.03)%(1) (3.94)%(2) 1 Year (2.08)%(1)
Since Inception (7/28/97) 4.62 (1) 4.62 (2) Since Inception (7/28/97) 5.08 (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, 1999.
(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, 1999
<TABLE>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (74.0%)
U.S. Government Agencies (12.4%)
$ 12,000 Federal Home Loan Banks 07/02/12....................................................... 0.00 % $ 4,395,360
4,400 Federal National Mortgage Assoc. 09/25/07.............................................. 6.85 4,294,532
5,000 Federal National Mortgage Assoc. 12/24/07.............................................. 6.48 4,811,700
100,000 Resolution Funding Strip 07/15/07-10/15/09............................................. 0.00 56,141,530
------------
69,643,122
------------
U.S. Treasury Bonds (60.2%)
20,000 11/15/15*.............................................................................. 9.875 26,689,200
22,000 11/15/12............................................................................... 10.375 27,410,460
176,100 08/15/13............................................................................... 12.00 241,332,723
30,000 11/15/11............................................................................... 14.00 42,887,100
------------
338,319,483
------------
U.S. Treasury Note (0.8%)
5,000 11/15/08............................................................................... 4.75 4,525,250
------------
U.S. Treasury Strip (0.6%)
5,000 02/15/07............................................................................... 0.00 3,175,350
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(IDENTIFIED COST $414,010,343)................................................................. 415,663,205
------------
MORTGAGE-BACKED SECURITIES (24.0%)
Federal Home Loan Mortgage Corp. (3.1%)
11,137 10/01/10 - 02/01/20.................................................................... 9.50 11,812,520
4,249 07/01/09 - 10/01/19.................................................................... 10.00 4,573,401
971 02/01/16 - 10/01/18.................................................................... 10.50 1,059,844
------------
17,445,765
------------
Federal National Mortgage Assoc. (3.4%)
9,366 03/01/28 - 08/01/28.................................................................... 6.00 8,722,338
1,847 06/01/26 - 12/01/26.................................................................... 7.50 1,850,445
5,034 05/01/22 - 07/01/25.................................................................... 8.00 5,128,576
2,279 07/01/05 - 04/01/25.................................................................... 8.50 2,358,131
771 09/01/19 - 05/01/20.................................................................... 9.50 819,952
114 03/01/16 - 01/01/18.................................................................... 9.75 122,562
------------
19,002,004
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1999, CONTINUED
<TABLE>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Government National Mortgage Assoc. (12.5%)
$ 18,652 08/15/25 - 05/15/29.................................................................... 6.50% $ 17,818,021
22,138 12/15/22 - 05/15/24.................................................................... 7.00 21,708,681
23,413 06/15/17 - 08/15/29.................................................................... 7.50 23,464,343
6,409 10/15/19 - 10/15/24.................................................................... 8.50 6,663,922
512 05/15/16 - 11/15/20.................................................................... 10.00 557,856
66 09/15/18............................................................................... 11.00 73,041
------------
70,285,864
------------
Government National Mortgage Assoc. II (5.0%)
9,691 01/20/29 - 02/20/29.................................................................... 6.50 9,224,324
19,564 12/20/28 - 06/20/29.................................................................... 7.00 19,117,469
------------
28,341,793
------------
TOTAL MORTGAGE-BACKED SECURITIES
(IDENTIFIED COST $136,119,276)................................................................. 135,075,426
------------
SHORT-TERM INVESTMENT (0.1%)
REPURCHASE AGREEMENT
471 The Bank of New York due 11/01/99
(dated 10/29/99; proceeds $470,870) (a)
(IDENTIFIED COST $470,666)........................................................... 5.19 470,666
------------
TOTAL INVESTMENTS
(IDENTIFIED COST $550,600,285)................................................................. 551,209,297
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION,
OF EXPIRATION DATE,
CONTRACTS AND STRIKE PRICE
- --------- -----------------------------------------------------------------------------------------
<C> <S> <C>
WRITTEN OPTIONS (b) (0.0%)
Call options on Treasury bond futures
100 December/1999/113 (117,187)
300 December/1999/114 (201,563)
100 December/1999/115 (32,812)
---------------
TOTAL WRITTEN OPTIONS
(PREMIUMS RECEIVED $194,541) (351,562)**
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1999, CONTINUED
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $550,600,285) (c)........................................................ 98.1% 551,209,297
TOTAL WRITTEN OPTIONS OUTSTANDING......................................................... (0.0) (351,562)
OTHER ASSETS IN EXCESS OF LIABILITIES..................................................... 1.9 10,915,946
----- -------------
NET ASSETS................................................................................ 100.0% $ 561,773,681
----- -------------
----- -------------
</TABLE>
- ---------------------
* A portion of this security is segregated in connection with open written
options.
** The market value of U.S. Treasury securities pledged to cover written
options on futures contracts is $1,136,865.
(a) Collateralized by $174,444 U.S. Treasury Bond 11.875% due 11/15/03 valued
at $219,306 and $262,547 U.S. Treasury Bond 6.125% due 11/15/27 valued at
$260,773.
(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 $13,072,622 and the
aggregate gross unrealized depreciation is $12,463,610, resulting in net
unrealized appreciation of $609,012.
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $550,600,285).............................................................. $551,209,297
Receivable for:
Interest.................................................................................. 9,617,908
Shares of beneficial interest sold........................................................ 2,478,979
Principal paydowns........................................................................ 436,398
Written options........................................................................... 133,024
Prepaid expenses and other assets............................................................. 55,087
------------
TOTAL ASSETS............................................................................. 563,930,693
------------
LIABILITIES:
Written call options outstanding, at value (premiums received $194,541)....................... 351,562
Payable for:
Shares of beneficial interest repurchased................................................. 612,431
Plan of distribution fee.................................................................. 398,300
Dividends to shareholders................................................................. 381,613
Investment management fee................................................................. 261,155
Accrued expenses and other payables........................................................... 151,951
------------
TOTAL LIABILITIES........................................................................ 2,157,012
------------
NET ASSETS............................................................................... $561,773,681
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $605,945,902
Net unrealized appreciation................................................................... 451,991
Accumulated net realized loss................................................................. (44,624,212)
------------
NET ASSETS............................................................................... $561,773,681
============
CLASS A SHARES:
Net Assets.................................................................................... $4,271,641
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 473,968
NET ASSET VALUE PER SHARE................................................................ $9.01
============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE)........................................ $9.41
============
CLASS B SHARES:
Net Assets.................................................................................... $540,916,493
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 60,955,695
NET ASSET VALUE PER SHARE................................................................ $8.87
============
CLASS C SHARES:
Net Assets.................................................................................... $10,995,082
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 1,228,148
NET ASSET VALUE PER SHARE................................................................ $8.95
============
CLASS D SHARES:
Net Assets.................................................................................... $5,590,465
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 631,088
NET ASSET VALUE PER SHARE................................................................ $8.86
============
</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, 1999
<TABLE>
<S> <C>
NET INVESTMENT INCOME
INTEREST INCOME............................................................................... $ 45,737,529
------------
EXPENSES
Plan of distribution fee (Class A shares)..................................................... 10,713
Plan of distribution fee (Class B shares)..................................................... 5,005,765
Plan of distribution fee (Class C shares)..................................................... 71,525
Investment management fee..................................................................... 3,328,750
Transfer agent fees and expenses.............................................................. 529,294
Professional fees............................................................................. 101,728
Custodian fees................................................................................ 82,887
Shareholder reports and notices............................................................... 82,703
Registration fees............................................................................. 71,742
Trustees' fees and expenses................................................................... 19,033
Other......................................................................................... 23,821
------------
TOTAL EXPENSES........................................................................... 9,327,961
Less: expense offset.......................................................................... (3,079)
------------
NET EXPENSES............................................................................. 9,324,882
------------
NET INVESTMENT INCOME.................................................................... 36,412,647
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/loss on:
Investments............................................................................... 886,975
Futures contracts......................................................................... (754,445)
Options written........................................................................... 2,303,037
------------
NET GAIN................................................................................. 2,435,567
Net change in unrealized appreciation......................................................... (58,286,121)
------------
NET LOSS................................................................................. (55,850,554)
------------
NET DECREASE.................................................................................. $(19,437,907)
============
</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>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................................... $ 36,412,647 $ 37,720,641
Net realized gain....................................................... 2,435,567 706,711
Net change in unrealized appreciation................................... (58,286,121) 22,700,373
------------ ------------
NET INCREASE (DECREASE)............................................ (19,437,907) 61,127,725
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares.......................................................... (328,982) (189,298)
Class B shares.......................................................... (35,383,489) (37,280,239)
Class C shares.......................................................... (502,451) (191,250)
Class D shares.......................................................... (197,725) (59,854)
------------ ------------
TOTAL DIVIDENDS.................................................... (36,412,647) (37,720,641)
------------ ------------
Net increase (decrease) from transactions in shares of beneficial
interest.............................................................. (35,642,483) 3,969,420
------------ ------------
NET INCREASE (DECREASE)............................................ (91,493,037) 27,376,504
------------ ------------
NET ASSETS:
Beginning of period..................................................... 653,266,718 625,890,214
------------ ------------
END OF PERIOD...................................................... $561,773,681 $653,266,718
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1999
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
10
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1999, CONTINUED
the time of purchase are valued on a mark-to-market basis until sixty days prior
to maturity and thereafter at amortized cost based on their value on the 61st
day. Short-term debt securities having a maturity date of sixty days or less at
the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. OPTIONS AND FUTURES -- (1) Written options on debt obligations: When the Fund
writes a call or put option, an amount equal to the premium received is included
in the Fund's Statement of Assets and Liabilities as a liability which is
subsequently marked-to-market to reflect the current market value. If a written
option either expires or the Fund enters into a closing purchase transaction,
the Fund realizes a gain or loss without regard to any unrealized gain or loss
on the underlying security and the liability related to such option is
extinguished. If a written call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security and the proceeds from such sale
are increased by the premium originally received. If a written put option is
exercised, the amount of the premium originally received reduces the cost of the
security which the Fund purchases upon exercise of the option; (2) Purchased
options on debt obligations: When the Fund purchases a call or put option, the
premium paid is recorded as an investment which is subsequently marked-to-market
to reflect the current market value. If a purchased option expires, the Fund
will realize a loss to the extent of the premium paid. If the Fund enters into a
closing sale transaction, a gain or loss is realized for the difference between
the proceeds from the sale and the cost of the option. If a put option is
exercised, the cost of the security sold upon exercise will be increased by the
premium originally paid. If a call option is exercised, the cost of the security
purchased upon exercise will be increased by the premium originally paid; (3)
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
11
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1999, CONTINUED
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 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
12
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1999, CONTINUED
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 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
13
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1999, CONTINUED
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 $20,818,005 at October 31, 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 year ended October 31, 1999, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.21% and
0.85%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 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 $21,568, $498,611
and $15,032, respectively and received $18,264 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, 1999 were $119,047,314 and
$95,986,286, respectively.
14
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1999, CONTINUED
Transactions in written options for the year ended October 31, 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.................................................. 12,510 6,883,175
Options closed................................................... (11,309 ) (6,509,205)
Options exercised................................................ (379 ) (235,131)
Options expired.................................................. (622 ) (150,261)
------- -----------
Option contracts written, outstanding at end of the period....... 500 $ 194,541
======= ===========
</TABLE>
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 1999, the Fund had
transfer agent fees and expenses payable of approximately $5,500.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 1999 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$5,816. At October 31, 1999, the Fund had an accrued pension liability of
$52,586 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At October 31, 1999, the Fund had a net capital loss carryover of approximately
$38,054,000 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 2007
- ------ -------- -------- --------
<S> <C> <C> <C>
$3,854 $31,124 $690 $2,386
====== ======= ==== ======
</TABLE>
At October 31, 1999, the Fund was required for Federal income tax purposes to
defer approximately $6,247,000 of realized losses on certain closed options and
futures contracts.
As of October 31, 1999, 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 $404,609.
15
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1999, CONTINUED
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, 1999 OCTOBER 31, 1998
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 763,352 $ 7,174,821 494,041 $ 4,730,315
Reinvestment of dividends........................................ 28,765 269,255 17,202 164,344
Redeemed......................................................... (817,775) (7,604,223) (228,754) (2,193,283)
----------- ------------- ----------- -------------
Net increase (decrease) - Class A................................ (25,658) (160,147) 282,489 2,701,376
----------- ------------- ----------- -------------
CLASS B SHARES
Sold............................................................. 11,015,098 101,346,580 11,059,549 105,850,540
Reinvestment of dividends........................................ 2,189,665 20,178,753 2,135,874 20,213,190
Redeemed......................................................... (17,981,486) (165,348,233) (14,006,213) (132,953,963)
----------- ------------- ----------- -------------
Net decrease - Class B........................................... (4,776,723) (43,822,900) (810,790) (6,890,233)
----------- ------------- ----------- -------------
CLASS C SHARES
Sold............................................................. 1,002,507 9,285,620 698,033 6,700,213
Reinvestment of dividends........................................ 38,573 357,523 14,425 138,550
Redeemed......................................................... (548,291) (5,132,935) (53,457) (517,787)
----------- ------------- ----------- -------------
Net increase - Class C........................................... 492,789 4,510,208 659,001 6,320,976
----------- ------------- ----------- -------------
CLASS D SHARES
Sold............................................................. 1,612,081 14,224,809 203,672 1,924,311
Reinvestment of dividends........................................ 17,692 161,340 5,200 49,434
Redeemed......................................................... (1,200,596) (10,555,793) (14,398) (136,444)
----------- ------------- ----------- -------------
Net increase - Class D........................................... 429,177 3,830,356 194,474 1,837,301
----------- ------------- ----------- -------------
Net increase (decrease) in Fund.................................. (3,880,415) $ (35,642,483) 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").
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, 1999, the Fund had outstanding written options on interest rate
futures used to manage interest rate and market exposure on portfolio positions
or anticipated positions in U.S. Government securities.
16
<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 PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
<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.............................................. 0.62 0.64 0.16
Net realized and unrealized gain (loss)............................ (0.78) 0.34 0.19
------- ------- -------
Total income (loss) from investment operations........................ (0.16) 0.98 0.35
------- ------- -------
Less dividends from net investment income............................. (0.62) (0.64) (0.16)
------- ------- -------
Net asset value, end of period........................................ $ 9.01 $ 9.79 $ 9.45
======= ======= =======
TOTAL RETURN+......................................................... (1.66)% 10.75% 3.78%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.91%(3) 0.93%(3) 0.92%(2)
Net investment income................................................. 6.65%(3) 6.70%(3) 6.60%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $4,272 $4,894 $2,051
Portfolio turnover rate............................................... 17% 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
17
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------------------
1999 1998 1997* 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <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
-------- ------- ------- ------- --------
Income (loss) from investment operations:
Net investment income.................................... 0.55 0.58 0.59 0.59 0.59
Net realized and unrealized gain (loss).................. (0.85) 0.36 0.11 (0.25) 0.75
-------- ------- ------- ------- --------
Total income (loss) from investment operations.............. (0.30) 0.94 0.70 0.34 1.34
-------- ------- ------- ------- --------
Less dividends from net investment income................... (0.55) (0.58) (0.59) (0.58) (0.59)
-------- ------- ------- ------- --------
Net asset value, end of period.............................. $ 8.87 $ 9.72 $ 9.36 $ 9.25 $ 9.49
======== ======= ======= ======= ========
TOTAL RETURN+............................................... (3.09)% 10.35% 7.89% 3.79% 15.89%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.55%(1) 1.54%(1) 1.53% 1.53% 1.52%
Net investment income....................................... 6.01%(1) 6.09%(1) 6.41% 6.31% 6.53%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $540,916 $639,212 $623,049 $719,935 $829,244
Portfolio turnover rate..................................... 17% 13% 12% 10% 7%
</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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
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 FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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.............................................. 0.56 0.58 0.15
Net realized and unrealized gain (loss)............................ (0.85) 0.36 0.18
------- ------- -------
Total income (loss) from investment operations........................ (0.29) 0.94 0.33
------- ------- -------
Less dividends from net investment income............................. (0.56) (0.58) (0.15)
------- ------- -------
Net asset value, end of period........................................ $ 8.95 $ 9.80 $ 9.44
======= ======= =======
TOTAL RETURN+......................................................... (3.03)% 10.30% 3.54%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.55%(3) 1.54%(3) 1.52%(2)
Net investment income................................................. 6.01%(3) 6.09%(3) 5.86%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $10,995 $7,204 $721
Portfolio turnover rate............................................... 17% 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
19
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
<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.............................................. 0.63 0.66 0.17
Net realized and unrealized gain (loss)............................ (0.83) 0.36 0.07
------- ------- -------
Total income (loss) from investment operations........................ (0.20) 1.02 0.24
------- ------- -------
Less dividends from net investment income............................. (0.63) (0.66) (0.17)
------- ------- -------
Net asset value, end of period........................................ $ 8.86 $ 9.69 $ 9.33
======= ======= =======
TOTAL RETURN+......................................................... (2.08)% 11.30% 2.62%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.70%(3) 0.69%(3) 0.63%(2)
Net investment income................................................. 6.86%(3) 6.94%(3) 6.40%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $5,590 $1,956 $69
Portfolio turnover rate............................................... 17% 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
20
<PAGE>
<TABLE>
<S> <C>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES
TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
</TABLE>
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") at October 31, 1999, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended and the financial highlights for each of the periods
indicated, in conformity with 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, 1999
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 8, 1999
21
