<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST TWO WORLD TRADE CENTER,
LETTER TO THE SHAREHOLDERS OCTOBER 31, 2000 NEW YORK, NEW YORK 10048
DEAR SHAREHOLDER:
During the fiscal year ended October 31, 2000, the U.S. economy experienced
strong growth with moderate inflation early in the period, although potentially
inflationary pressures loomed throughout much of the year. Attempting to reduce
the inflation threat preemptively, the Federal Reserve Board raised the federal
funds rate a total of 125 basis points, from 5.25 percent to 6.50 percent. As
the economy began to slow in early summer, the Fed halted its rate raises. As
measured by the two-year U.S. Treasury note, short-term interest rates rose,
peaking at 6.91 percent in May. The effect of these interest-rate increases was
less pronounced for long-term Treasuries, which benefited from a federal
government program of buying back outstanding debt. The subsequent reduction in
the supply of long-term Treasuries created an inverted yield curve, meaning that
short-term Treasury yields were atypically higher than those of longer-term
Treasuries.
By May, signs of more-moderate economic growth had begun to appear. Higher
interest rates, a stagnated stock market and high energy prices all contributed
to expectations of slower economic growth. The fixed-income market rallied on
hopes that the Fed's restrictive policy might be nearing an end. On October 31
the 30-year Treasury note was yielding 5.78 percent, down more than 100 basis
points from its fiscal-year peak of 6.81 percent.
PERFORMANCE AND PORTFOLIO STRATEGY
For the 12-month period ended October 31, 2000, Morgan Stanley Dean Witter
Federal Securities Trust's Class B shares produced a total return of 6.26
percent versus 8.04 percent for the Lehman Brothers U.S. Government Index.
During the same period, the Fund's Class A, C and D shares posted total returns
of 6.97 percent, 6.26 percent and 7.17 percent, respectively. The performance of
the Fund's four share classes varies because each has different expenses. The
total return figures given assume the reinvestment of all distributions but do
not reflect the deduction of any applicable sales charges. The accompanying
chart compares the Fund's performance to that of the Lehman index.
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
LETTER TO THE SHAREHOLDERS OCTOBER 31, 2000, CONTINUED
The Fund's heavy weighting in long-dated Treasuries was a major contributor to
its performance. Early in the period, however, the Fund's shorter duration
prevented it from participating fully in the Treasury rally that followed the
announcement of the buyback program for long-dated Treasuries, hindering its
performance somewhat.
The Fund ended the fiscal year with net assets exceeding $475.8 million and a
weighted average maturity of approximately 10 years. On October 31, 2000, the
portfolio held 45 percent of its assets in U.S. Treasury notes and bonds
maturing in seven to 20 years, 17 percent in U.S. Treasury bonds maturing in
more than 20 years, 23 percent in mortgage-backed securities, 10 percent in U.S.
agency obligations and the balance in short-term money-market securities.
LOOKING AHEAD
We believe that economic growth will moderate while inflation will remain at
acceptable levels. However, should growth strengthen and inflation rise, the Fed
may feel the need to raise interest rates further. Adjustments to the Fund's
maturity and portfolio composition will be made as conditions warrant and
attractive opportunities become available.
We appreciate your ongoing support of Morgan Stanley Dean Witter Federal
Securities Trust and look forward to continuing to serve your investment needs.
Very truly yours,
[/S/ CHARLES A. FIUMEFREDDO] [/S/ MITCHELL M. MERIN]
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
CHAIRMAN OF THE BOARD PRESIDENT
2
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FUND PERFORMANCE OCTOBER 31, 2000
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF $10,000 -- CLASS B SHARES
($ in Thousands)
<TABLE>
<CAPTION>
FUND LEHMAN(4)
OCTOBER 1990 $10,000 $10,000
OCTOBER 1991 $11,526 $11,460
OCTOBER 1992 $12,512 $12,644
<S> <C> <C> <C>
October 1993 $14,018 $14,305
October 1994 $13,048 $13,665
October 1995 $15,121 $15,767
October 1996 $15,695 $16,574
October 1997 $16,934 $18,009
October 1998 $18,687 $20,041
October 1999 $18,109 $19,799
October 2000 $19,243 (3) $21,390
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS A, CLASS C, AND
CLASS D SHARES WILL VARY FROM THE PERFORMANCE OF CLASS B SHARES SHOWN ABOVE
DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------------------------------------------------------------------------
CLASS A SHARES* CLASS B SHARES**
-------------------------------------------- ---------------------------------------------
PERIOD ENDED 10/31/00 PERIOD ENDED 10/31/00
------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1 Year 6.97%(1) 2.42%(2) 1 Year 6.26%(1) 1.27%(2)
Since Inception (7/28/97) 6.00%(1) 4.60%(2) 5 Years 4.94%(1) 4.63%(2)
10 Years 6.76%(1) 6.76%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES+ CLASS D SHARES++
--------------------------------------------- ---------------------------------------------
PERIOD ENDED 10/31/00 PERIOD ENDED 10/31/00
------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1 Year 6.26%(1) 5.26%(2) 1 Year 7.17%(1)
Since Inception (7/28/97) 5.12%(1) 5.12%(2) Since Inception (7/28/97) 5.71%(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, 2000.
(4) The Lehman Brothers U.S. Government Index is a broad-based measure of all
U.S. government and Treasury securities. The Index does not include any
expenses, fees or charges. The Index is unmanaged and should not be
considered an investment.
* The maximum front-end sales charge for Class A is 4.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of purchase.
++ Class D shares have no sales charge.
3
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (75.7%)
U.S. Government Agencies (10.4%)
$12,000 Federal Home Loan Banks 07/02/12....................................................... 0.00% $ 4,697,880
4,400 Federal National Mortgage Assoc. 09/25/07.............................................. 6.85 4,322,428
5,000 Federal National Mortgage Assoc. 12/24/07.............................................. 6.48 4,847,850
58,000 Resolution Funding Strip 07/15/08 - 01/15/09........................................... 0.00 35,578,280
------------
49,446,438
------------
U.S. Treasury Bonds (62.7%)
50,000 11/15/27 - 08/15/29.................................................................... 6.125 51,408,500
30,000 05/15/30............................................................................... 6.25 31,950,000
20,000 11/15/15*.............................................................................. 9.875 27,613,200
15,000 11/15/12............................................................................... 10.375 18,692,550
92,600 08/15/13............................................................................... 12.00 126,589,756
30,000 11/15/11............................................................................... 14.00 42,003,900
------------
298,257,906
------------
U.S. Treasury Notes (2.6%)
5,000 11/15/08............................................................................... 4.75 4,655,150
8,000 02/15/01............................................................................... 7.75 8,022,960
------------
12,678,110
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $362,766,573)............................................................................ 360,382,454
------------
MORTGAGE-BACKED SECURITIES (23.5%)
Federal Home Loan Mortgage Corp. (2.9%)
9,083 10/01/10 - 02/01/20.................................................................... 9.50 9,400,589
3,273 09/01/15 - 10/01/19.................................................................... 10.00 3,390,449
784 02/01/16 - 10/01/18.................................................................... 10.50 837,780
------------
13,628,818
------------
Federal National Mortgage Assoc. (5.5%)
8,365 03/01/28 - 08/01/28.................................................................... 6.00 7,841,878
1,445 06/01/26 - 12/01/26.................................................................... 7.50 1,442,559
14,056 05/01/24 - 09/01/30.................................................................... 8.00 14,227,588
1,946 01/01/22 - 04/01/25.................................................................... 8.50 1,987,457
644 09/01/16 - 05/01/20.................................................................... 9.50 667,663
67 03/01/16 - 02/01/18.................................................................... 9.75 70,558
------------
26,237,703
------------
Government National Mortgage Assoc. (8.9%)
17,394 08/15/25 - 05/15/29.................................................................... 6.50 16,790,545
19,201 12/15/22 - 05/15/24.................................................................... 7.00 18,930,851
538 01/15/29 - 08/15/29.................................................................... 7.50 539,579
5,468 10/15/19 - 10/15/24.................................................................... 8.50 5,608,314
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$ 396 05/15/16 - 11/15/20.................................................................... 10.00% $ 415,154
38 09/15/18............................................................................... 11.00 41,174
------------
42,325,617
------------
Government National Mortgage Assoc. I I (6.2%)
8,962 01/20/29 - 02/20/29.................................................................... 6.50 8,617,450
17,992 12/20/28 - 06/20/29.................................................................... 7.00 17,649,142
3,099 05/20/30............................................................................... 8.00 3,131,856
------------
29,398,448
------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $112,740,508)............................................................................ 111,590,586
------------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
SHORT-TERM INVESTMENT (0.6%)
REPURCHASE AGREEMENT
2,973 The Bank of New York (dated 10/31/00; proceeds $2,973,854) (a) (COST $2,973,322).............. 2,973,322
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $478,480,403) (b)................................................................... 99.8% 474,946,362
OTHER ASSETS IN EXCESS OF LIABILITIES..................................................... 0.2 862,013
----- -------------
NET ASSETS................................................................................ 100.0% $ 475,808,375
----- -------------
----- -------------
</TABLE>
---------------------
* A portion of this security is segregated in connection with open futures
contracts.
(a) Collateralized by $2,976,066 U.S. Treasury Note 6.25% due 07/31/02 valued
at $3,032,796.
(b) The aggregate cost for federal income tax purposes approximates the
aggregate cost for book purposes. The aggregate gross unrealized
appreciation is $7,032,773 and the aggregate gross unrealized depreciation
is $10,566,814, resulting in net unrealized depreciation of $3,534,041.
FUTURES CONTRACTS OPEN AT OCTOBER 31, 2000:
<TABLE>
<CAPTION>
DESCRIPTION, UNDERLYING
NUMBER OF DELIVERY MONTH, FACE AMOUNT UNREALIZED
CONTRACTS AND YEAR AT VALUE DEPRECIATION
------------------------------------------------------------------------
<S> <C> <C> <C>
375 U.S. Treasury Bonds $ 37,441,406 $ 517,775
December/2000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(cost $478,480,403)......................................................................... $474,946,362
Cash.......................................................................................... 23,438
Receivable for:
Interest.................................................................................. 9,092,313
Shares of beneficial interest sold........................................................ 1,044,793
Variation margin on future contracts...................................................... 187,500
Principal paydowns........................................................................ 144,361
Prepaid expenses and other assets............................................................. 50,229
------------
TOTAL ASSETS............................................................................. 485,488,996
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased................................................. 8,351,732
Plan of distribution fee.................................................................. 354,296
Dividends and distributions to shareholders............................................... 300,728
Investment management fee................................................................. 233,193
Accrued expenses and other payables........................................................... 440,672
------------
TOTAL LIABILITIES........................................................................ 9,680,621
------------
NET ASSETS............................................................................... $475,808,375
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $519,199,097
Net unrealized depreciation................................................................... (4,051,816)
Accumulated net realized loss................................................................. (39,338,906)
------------
NET ASSETS............................................................................... $475,808,375
============
CLASS A SHARES:
Net Assets.................................................................................... $ 4,821,183
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 536,908
NET ASSET VALUE PER SHARE................................................................ $8.98
============
MAXIMUM OFFERING PRICE PER SHARE
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE)........................................ $9.38
============
CLASS B SHARES:
Net Assets.................................................................................... $456,417,554
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 51,556,289
NET ASSET VALUE PER SHARE................................................................ $8.85
============
CLASS C SHARES:
Net Assets.................................................................................... $ 10,191,213
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 1,141,467
NET ASSET VALUE PER SHARE................................................................ $8.93
============
CLASS D SHARES:
Net Assets.................................................................................... $ 4,378,425
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 495,550
NET ASSET VALUE PER SHARE................................................................ $8.84
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME................................................................................ $39,600,874
-----------
EXPENSES
Plan of distribution fee (Class A shares)...................................................... 4,534
Plan of distribution fee (Class B shares)...................................................... 4,111,164
Plan of distribution fee (Class C shares)...................................................... 86,720
Investment management fee...................................................................... 2,765,873
Transfer agent fees and expenses............................................................... 456,054
Registration fees.............................................................................. 97,305
Shareholder reports and notices................................................................ 83,570
Professional fees.............................................................................. 80,283
Custodian fees................................................................................. 78,880
Trustees' fees and expenses.................................................................... 17,356
Other.......................................................................................... 16,943
-----------
TOTAL EXPENSES............................................................................ 7,798,682
-----------
NET INVESTMENT INCOME..................................................................... 31,802,192
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/loss on:
Investments................................................................................ 4,085,081
Futures contracts.......................................................................... (3,995,104)
Options written............................................................................ 1,341,115
-----------
NET GAIN.................................................................................. 1,431,092
-----------
Net change in unrealized appreciation.......................................................... (4,503,807)
-----------
NET LOSS.................................................................................. (3,072,715)
-----------
NET INCREASE................................................................................... $28,729,477
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................................................ $ 31,802,192 $ 36,412,647
Net realized gain.................................................................... 1,431,092 2,435,567
Net change in unrealized appreciation/depreciation................................... (4,503,807) (58,286,121)
------------ ------------
NET INCREASE (DECREASE)......................................................... 28,729,477 (19,437,907)
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares....................................................................... (334,672) (328,982)
Class B shares....................................................................... (30,522,209) (35,383,489)
Class C shares....................................................................... (641,985) (502,451)
Class D shares....................................................................... (303,326) (197,725)
------------ ------------
TOTAL DIVIDENDS................................................................. (31,802,192) (36,412,647)
------------ ------------
Net decrease from transactions in shares of beneficial interest...................... (82,892,591) (35,642,483)
------------ ------------
NET DECREASE.................................................................... (85,965,306) (91,493,037)
NET ASSETS:
Beginning of period.................................................................. 561,773,681 653,266,718
------------ ------------
END OF PERIOD................................................................... $475,808,375 $561,773,681
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000
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
9
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, 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
10
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, 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 tax purposes are reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
following annual rates to the Fund's net assets determined at the close of each
business day: 0.55% to the portion of daily net assets not exceeding $1 billion;
0.525% to the portion of daily net assets exceeding $1 billion but not exceeding
$1.5 billion; 0.50% to the portion of daily net assets exceeding $1.5 billion
but not exceeding $2 billion; 0.475% to the portion of daily net assets
exceeding $2 billion but not exceeding $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
11
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
$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.
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 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 totaled
$19,444,031 at October 31, 2000.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 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, 2000, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.10% and
0.85%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 2000,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B
12
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
shares and Class C shares of $2,432, $390,423 and $7,871, respectively and
received $9,869 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, 2000 were $304,196,567 and
$394,462,710, respectively.
Transactions in written options for the year ended October 31, 2000 were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUMS
----------- --------------
<S> <C> <C>
Option contracts written, outstanding at beginning of the
period.......................................................... 500 $ 194,541
Options written.................................................. 9,900 5,972,574
Options closed................................................... (7,417) (4,561,723)
Options exercised................................................ (2,523) (1,462,580)
Options expired.................................................. (460) (142,812)
---------- -------------
Option contracts written, outstanding at end of the period....... 0 $ 0
========== =============
</TABLE>
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 2000, the Fund had
transfer agent fees and expenses payable of approximately $3,100.
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, 2000 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$5,845. At October 31, 2000, the Fund had an accrued pension liability of
$53,427 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At October 31, 2000, the Fund had a net capital loss carryover of approximately
$34,797,000, 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>
<S> <C> <C> <C>
AMOUNT IN THOUSANDS
----------------------------------------
2002 2004 2007 2008
------- ---- ------ ----
$31,124 $690 $2,381 $602
======= ==== ====== ====
</TABLE>
13
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
At October 31, 2000, the Fund was required for Federal income tax purposes to
defer approximately $4,758,000 of realized losses on certain closed options and
futures contracts.
As of October 31, 2000, 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 $3,854,214.
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, 2000 OCTOBER 31, 1999
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 6,489,634 $ 57,621,601 763,352 $ 7,174,821
Reinvestment of dividends........................................ 27,856 246,613 28,765 269,255
Redeemed......................................................... (6,454,550) (57,263,299) (817,775) (7,604,223)
----------- ------------- ----------- -------------
Net increase (decrease) -- Class A............................... 62,940 604,915 (25,658) (160,147)
----------- ------------- ----------- -------------
CLASS B SHARES
Sold............................................................. 28,272,528 246,845,233 11,015,098 101,346,580
Reinvestment of dividends........................................ 1,998,950 17,421,227 2,189,665 20,178,753
Redeemed......................................................... (39,670,884) (345,885,470) (17,981,486) (165,348,233)
----------- ------------- ----------- -------------
Net decrease -- Class B.......................................... (9,399,406) (81,619,010) (4,776,723) (43,822,900)
----------- ------------- ----------- -------------
CLASS C SHARES
Sold............................................................. 1,907,176 16,921,690 1,002,507 9,285,620
Reinvestment of dividends........................................ 45,607 401,053 38,573 357,523
Redeemed......................................................... (2,039,464) (18,041,761) (548,291) (5,132,935)
----------- ------------- ----------- -------------
Net increase (decrease) -- Class C............................... (86,681) (719,018) 492,789 4,510,208
----------- ------------- ----------- -------------
CLASS D SHARES
Sold............................................................. 6,061,166 52,868,442 1,612,081 14,224,809
Reinvestment of dividends........................................ 25,877 225,055 17,692 161,340
Redeemed......................................................... (6,222,581) (54,252,975) (1,200,596) (10,555,793)
----------- ------------- ----------- -------------
Net increase (decrease) -- Class D............................... (135,538) (1,159,478) 429,177 3,830,356
----------- ------------- ----------- -------------
Net decrease in Fund............................................. (9,558,685) $ (82,892,591) (3,880,415) $ (35,642,483)
=========== ============= =========== =============
</TABLE>
14
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
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.
At October 31, 2000, the Fund had outstanding interest rate futures.
15
<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 ENDED OCTOBER 31 JULY 28, 1997*
----------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period...................... $ 9.01 $ 9.79 $ 9.45 $ 9.26
-------- -------- -------- ---------
Income (loss) from investment operations:
Net investment income.................................. 0.63 0.62 0.64 0.16
Net realized and unrealized gain (loss)................ (0.03) (0.78) 0.34 0.19
-------- -------- -------- ---------
Total income (loss) from investment operations............ 0.60 (0.16) 0.98 0.35
-------- -------- -------- ---------
Less dividends from net investment income................. (0.63) (0.62) (0.64) (0.16)
-------- -------- -------- ---------
Net asset value, end of period............................ $ 8.98 $ 9.01 $ 9.79 $ 9.45
======== ======== ======== =========
TOTAL RETURN+............................................. 6.97% (1.66)% 10.75% 3.78%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................. 0.82%(3) 0.91 %(3) 0.93%(3) 0.92%(2)
Net investment income..................................... 7.05%(3) 6.65 %(3) 6.70%(3) 6.60%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands................... $4,821 $4,272 $4,894 $2,051
Portfolio turnover rate................................... 64% 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
16
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31
---------------------------------------------------------------------------------
2000 1999 1998 1997* 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period........... $ 8.87 $ 9.72 $ 9.36 $ 9.25 $ 9.49
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income....................... 0.55 0.55 0.58 0.59 0.59
Net realized and unrealized gain (loss)..... (0.02) (0.85) 0.36 0.11 (0.25)
-------- -------- -------- -------- --------
Total income (loss) from investment
operations.................................... 0.53 (0.30) 0.94 0.70 0.34
-------- -------- -------- -------- --------
Less dividends from net investment income...... (0.55) (0.55) (0.58) (0.59) (0.58)
-------- -------- -------- -------- --------
Net asset value, end of period................. $ 8.85 $ 8.87 $ 9.72 $ 9.36 $ 9.25
======== ======== ======== ======== ========
TOTAL RETURN+.................................. 6.26% (3.09)% 10.35% 7.89% 3.79%
RATIOS TO AVERAGE NET ASSETS:
Expenses....................................... 1.57%(1) 1.55 %(1) 1.54%(1) 1.53% 1.53%
Net investment income.......................... 6.30%(1) 6.01 %(1) 6.09%(1) 6.41% 6.31%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands........ $456,418 $540,916 $639,212 $623,049 $719,935
Portfolio turnover rate........................ 64% 17 % 13% 12% 10%
</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
17
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 JULY 28, 1997*
----------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period...................... $ 8.95 $ 9.80 $ 9.44 $ 9.26
-------- -------- -------- --------
Income (loss) from investment operations:
Net investment income.................................. 0.56 0.56 0.58 0.15
Net realized and unrealized gain (loss)................ (0.02) (0.85) 0.36 0.18
-------- -------- -------- --------
Total income (loss) from investment operations............ 0.54 (0.29) 0.94 0.33
-------- -------- -------- --------
Less dividends from net investment income................. (0.56) (0.56) (0.58) (0.15)
-------- -------- -------- --------
Net asset value, end of period............................ $ 8.93 $ 8.95 $ 9.80 $ 9.44
======== ======== ======== ========
TOTAL RETURN+............................................. 6.26% (3.03)% 10.30% 3.54%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................. 1.57%(3) 1.55 %(3) 1.54%(3) 1.52%(2)
Net investment income..................................... 6.30%(3) 6.01 %(3) 6.09%(3) 5.86%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands................... $10,191 $10,995 $7,204 $721
Portfolio turnover rate................................... 64% 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
18
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 JULY 28, 1997*
----------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period...................... $ 8.86 $ 9.69 $ 9.33 $ 9.26
-------- -------- -------- --------
Income (loss) from investment operations:
Net investment income.................................. 0.63 0.63 0.66 0.17
Net realized and unrealized gain (loss)................ (0.02) (0.83) 0.36 0.07
-------- -------- -------- --------
Total income (loss) from investment operations............ 0.61 (0.20) 1.02 0.24
-------- -------- -------- --------
Less dividends from net investment income................. (0.63) (0.63) (0.66) (0.17)
-------- -------- -------- --------
Net asset value, end of period............................ $ 8.84 $ 8.86 $ 9.69 $ 9.33
======== ======== ======== ========
TOTAL RETURN+............................................. 7.17% (2.08)% 11.30% 2.62%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................. 0.72%(3) 0.70 %(3) 0.69%(3) 0.63%(2)
Net investment income..................................... 7.15%(3) 6.86 %(3) 6.94%(3) 6.40%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands................... $4,378 $5,590 $1,956 $69
Portfolio turnover rate................................... 64% 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
19
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND TRUSTEES OF
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter Federal Securities Trust (the "Fund"), including the
portfolio of investments, as of October 31, 2000, and the related statements of
operations and changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended October 31,
1999 and the financial highlights for each of the respective stated periods
ended October 31, 1999 were audited by other independent accountants whose
report, dated December 8, 1999, expressed an unqualified opinion on that
statement and financial highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2000, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Dean Witter Federal Securities Trust as of October 31, 2000, the results
of its operations, the changes in its net assets, and the financial highlights
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
DECEMBER 11, 2000
2000 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary income dividends paid during the fiscal
year ended October 31, 2000, 75.28% was attributable to qualifying
Federal obligations. Please consult your tax advisor to determine
if any portion of the dividends you received is exempt from state
income tax.
20
<PAGE>
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000, PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such year.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent auditors as of July 1,
2000.
21
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
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 AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and
trustees, fees, expenses and other pertinent information, please see the
prospectus of the Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus. Read the
prospectus carefully before investing.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
MORGAN STANLEY
DEAN WITTER
FEDERAL
SECURITIES TRUST
ANNUAL REPORT
OCTOBER 31, 2000
