<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (JUNE 30, 1999)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Diversified 8.0%
Healthcare 0.1%
Lodging/Resorts 6.6%
Office/Industrial 32.4%
Residential 26.8%
Retail 19.2%
Self Storage 4.3%
Other 2.6%
</TABLE>
PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT
TRUSTS (NAREIT) EQUITY INDEX(1)
- ------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
---------- ---------- --------------------
<S> <C> <C> <C>
PORTFOLIO... 8.47% 1.49% 5.83%
INDEX...... 4.78 -8.98 1.29
</TABLE>
1. The NAREIT Equity Index is an unmanaged market weighted index of tax
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market Systems (including dividends).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- -------------------------------------------------- ----------------- ----------
<S> <C> <C>
Brookfield Properties, Inc. Office/Industrial 5.2%
Chateau Communities, Inc. Residential 4.8
Arden Realty Group, Inc. Office/Industrial 4.6
Equity Office Properties Trust Office/Industrial 4.5
Avalonbay Communities, Inc. Residential 4.0
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------------- --------- -------------
<S> <C> <C>
Office/Industrial $ 5,545 32.4%
Residential 4,587 26.8
Retail 3,298 19.2
Diversified 1,364 8.0
Lodging/Resorts 1,127 6.6
</TABLE>
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED. THE PERFORMANCE RESULTS PROVIDED ARE
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF
THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
The U.S. Real Estate Portfolio seeks to provide above-average current income and
long-term capital appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real estate investment
trusts ("REITS").
For the six months ended June 30, 1999, the Portfolio had a total return of
8.47% compared to 4.78% for the National Association of Real Estate Investment
Trusts (NAREIT) Equity Index (the "Index"). For the one year ended June 30,
1999, the Portfolio had a total return of 1.49% compared to -8.98% for the
Index. For the period since inception on March 3, 1997 through June 30, 1999,
the Portfolio had a total return of 5.83% compared to 1.29% for the Index.
After a difficult first quarter, which appeared to be a continuation of a
terrible 1998, at last, the REIT market experienced a sustained recovery. The
Index rose 10.09% in the second quarter and has provided a year-to-date return
of 4.78%. The vast majority of the gain was achieved from mid-April to mid-May
when the sector gained 15%. Although there were a number of catalysts, this
recovery coincided with a dramatic change in leadership in the equity markets.
The quarter featured a shift in preferences of equity investors as they turned
to the beaten-down cyclical and value stocks in place of the richly valued large
cap growth and internet stocks. This was primarily the result of a change in
economic consensus that the global economy has recovered and entered a phase of
economic growth. The continued exit of the non-dedicated investors had pushed
the sector to valuation levels well below liquidation value in the first
quarter. It appeared that the REIT market benefited from the return of
non-dedicated investors during the rally. Note that the sector modestly
retrenched in the latter part of the quarter primarily over fears of a Fed
tightening. Unlike prior rallies, it is interesting to note that the REIT
recovery was broad-based, lifting stocks in all sectors. Even after a more
constructive quarter, REITs are now trading at a slight discount to the
underlying Net Asset Value ("NAV") of their assets, which means that it is at
least as attractive to buy real estate on Wall Street, through the purchase of
securities, than on Main Street, through the direct purchase of properties.
1
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
In the past, we had raised the issue of whether the public markets are betting
on a deterioration in NAV or are the securities mispriced as a result of the
selling pressure by non-dedicated investors; we believe the latter. Our
investment perspective is that over the medium and long-term the largest
determinant of the value of real estate stocks will be underlying real estate
fundamentals. We measure the sector based on the Price to Net Asset Value per
share ratio ("P/NAV"). Given the large and active private real estate market, we
believe that there are limits as to the level of premium or discount at which
the sector can trade relative to its NAV. These limits can be viewed as the
point at which the arbitrage opportunity between owning real estate in the
private versus public markets becomes compelling. This analytical framework gave
us the conviction to call the real estate securities market mispriced last
quarter. Indeed, when REITs moved to a 90% P/NAV valuation level in the second
quarter, investors that typically focus in the private real estate market
invested in REITs both by buying stocks as an alternative to buying assets and
in taking public companies private by providing financing for leveraged
buy-outs. Since the modern REIT era is still in an early phase, the rally was
necessary to demonstrate to investors that a floor valuation level exists for
the sector. In fact, the recovery has caused a number of investors, dedicated
and non-dedicated, to take a fresh look at the sector.
In contrast to the current environment, it is interesting to note that in 1997
the arbitrage was reversed, as the sector traded in excess of a 25% premium to
NAV. Although many talented private companies utilized the opportunity to go
public, the valuation environment encouraged entrepreneurs to take advantage of
the arbitrage opportunity in which real estate was valued by the public markets
at a premium to private real estate valuation. Private owners of real estate
assembled assets (by definition at par or 100% P/NAV) and completed initial
public offerings at 10% to 20% premiums to NAV (which represented discounts to
their set of comparable companies). They profited by retaining stock
representing the difference between this valuation (110-120% P/NAV) less the
cost of assembling the assets (100% P/NAV) and transaction costs (7% P/NAV).
Above we discussed the broad change in sentiment in the equity markets as a key
catalyst for the REIT recovery. In addition to the compelling valuation for the
sector, there were a number of other contributing factors. They include:
(1) Management led buyouts: There were Board approved management-led buyouts
at Irvine Apartment Communities and Berkshire Realty and a proposed
buyout at Sunstone Hotels. The latter two are being partially funded by
well-respected private real estate opportunity funds, which is
consistent with our thesis that private real estate investors take
advantage of opportunities in the public real estate markets when
valuations are compelling.
(2) Warren Buffett investment: Filings were released that indicated Warren
Buffett had purchased greater than a 5% position in two REITs (Tanger
Factory Outlet and Town and Country Trust) for his personal account and
increased his position in MGI Properties.
(3) Pension Plan Buy Program: On a single day in mid-April, a domestic
pension plan invested almost $400 million in the REIT market in a
broad-based buy program.
(4) Insider Buying: Managements added to significant existing personal
positions in their stock with open market purchases (in addition to a
number of company share repurchase programs).
We have previously commented on the continued outflow from dedicated mutual
funds. These funds control almost $10 billion of assets (approximately 6% of the
sector), down from a peak level in excess of $12 billion in early 1998. Net
flows for the second quarter were virtually flat, which is a significant
accomplishment after $2 billion in redemptions in the previous twelve months. In
fact, were it not for the first week of the quarter, in which over $150 million
was redeemed, the sector would have experienced its first positive quarter since
the first quarter of 1998.
The industry held its annual institutional investor forum in New York in June
and the consensus description was one of stability, bordering on boredom. We
were encouraged by this general sentiment and prefer it to the unsustainable
euphoria of earlier conferences and the depression of the most recent
conferences. This new mood was the result of two key factors. First, most
companies have developed more focused business plans that do not require equity
issuance in 1999. Generally, these business plans place an emphasis on managing
the existing portfolio and external growth, if planned, is limited to existing
core competencies. Although REIT managements were pleased with the recovery in
their share prices, they were not in a rush to issue new equity at these prices
and embark on new external growth plans. Second, we had recently finished the
first quarter earnings season in which companies reported strong internal cash
flow as a result of favorable property fundamentals. Since fundamentals remain
intact, discussions regarding companies' core portfolios were similar to
recently reported results and there is not any expectation of significant
variation in the upcoming results for the second quarter.
2
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
We understand that boring may not attract the day traders; however, we believe
it may attract dedicated real estate investors looking for returns correlated
with real estate fundamentals and non-dedicated investors searching for
stability. Since domestic pension funds target, on average, 5% to the real
estate asset class, we continue to believe that public real estate can be used
to fulfill these investors' allocations to core real estate exposure. We
understand that the recent volatility (upside in 1995-1997 with an average
annual return of 23.5% and downside in 1998 when the Index fell 17.5%) has
caused investors to question this thesis. As a result we believe that a return
to trend returns on an annual basis, not just on average (note the Index
provided a 13.5% average annual return 1995-1998), would serve to calm current
investors and attract new investors looking for core real estate exposure. It
may also attract non-dedicated investors looking for a more stable return that
offers only a modest correlation to the broad equity markets. Thus, we believe
that stable and boring low-teen total returns over the next couple of years
would add to the industry's credibility.
Perhaps a negative side-effect of the recent rally is that it may have shelved a
number of discussions involving companies that were prepared to consider placing
themselves for sale. Consolidation represents a natural progression for the
sector as it matures. Following the large waves of IPOs and follow-on offerings
in the mid-1990s, it is typical for an industry to undergo a period of mergers.
In addition, we feel that the industry has reached a level of sophistication to
distinguish between better companies and the lesser companies. The latter will
continue to trade at a discount to NAV as a sign the public markets do not have
confidence in the management team's ability to add value. Since most of the
recent merger activity has resulted in the target company being sold at or
around their NAV, if a company cannot convince the market to buy its stock at a
price at least equivalent to its NAV, then it has an obligation to consider
placing the company for sale. As discussed earlier, a number of the IPOs were
more the result of entrepreneurs taking advantage of an arbitrage opportunity
than a true desire to operate as a public company. As the stock prices remained
at a premium to NAV, all managements were able to issue equity and grow their
businesses. However, the price decline of 1998 cut off the growth engine and
caused a number of managements to question their desire for operating in the
public markets. We believe that the executives at a number of the "targets" were
coming to the realization that the public markets were not going to push the
share price high enough to allow them to grow their businesses and as a result,
albeit reluctantly, were considering selling. Some now believe they have a
second chance.
Although real estate cycles tend to move at a slow pace, the U.S. real estate
market has typically featured boom and bust cycles. Given the increasing size of
the public markets for real estate equity and debt, there appears to be the
opportunity for a muting of those cycles as the scrutiny and attention on the
potential for over-supplied markets has increased. At the end of this quarter,
the U.S. real estate market remains in a mature phase of its cycle as the
markets are generally in equilibrium. We have continued to caution investors
that there remain threats of over-supply but robust levels of demand are serving
to mute any serious threat of over-supply. The following presents an outline of
our views of the risks of over-supply (or under-demand) in the real estate
markets. Generally, there were two themes in the market as fundamentals in the
apartment and retail markets appeared to firm and the commercial markets showed
continuing evidence that the dramatic improvement in fundamentals have begun to
plateau.
In contrast to concerns of the potential for over-supply earlier in the year,
the data reported from the Census Bureau in the quarter continued to demonstrate
improvements for apartments. Data reported for April showed that permits fell to
296,000 units (annual pace on a seasonally adjusted basis), the first time that
permits fell below 300,000 units since December 1997. This was followed by the
report for May providing even more favorable data as permits remained below
300,000 and starts fell to 238,000 units. This marked the fourth consecutive
month for starts to decline and the lowest level since January 1997. Starts are
currently occurring at a pace that is below the consensus view on national
demand for apartment units. However, certain markets appear headed for trouble
including Dallas, Houston and Orlando. In each of these markets, over the next
two years, new supply represents between 6% and 10% of existing supply and in
each case is projected to exceed demand, thereby impeding future rental growth
and increasing vacancies.
Soaring consumer confidence, which rose for a record seventh straight month, led
to strong consumer spending evidenced by sales growth of almost 6% in May. The
annual International Council of Shopping Centers Convention held in May in Las
Vegas featured a robust leasing environment as retailers are continuing to
commit to new stores and expansions. It is noteworthy that many of these
retailers are also capitalizing on e-commerce opportunities. As a result of this
environment it appears that occupancies in retail properties will increase from
cyclical high levels. There are mitigating factors that may temper enthusiasm
for the sector. They include the risk of e-commerce taking a larger market share
of retail sales from store-based retailers, the risk of a decline in consumer
confidence (possibly triggered by a decline in the stock market), a reversal in
the nation's negative savings rate, and a buoyant supply pipeline.
3
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
The commercial sectors have made a dramatic recovery since the beginning of the
decade and appear to have plateaued. According to data from Torto Wheaton,
vacancy in the national office market increased modestly from 8.9% to 9.5% in
the first quarter after declining for 27 consecutive quarters from its peak of
19.1%. It is interesting to note that landlords may be more responsible for the
occupancy decline than short-term fundamentals. As market vacancy tightens,
landlords have aggressively raised rents on remaining space and it appears that
tenants may be facing a certain degree of sticker shock causing them to delay
leasing decisions. Similarly, the industrial market featured flat vacancy of 7%
in the first quarter. This marked the first time that vacancy failed to decline
since the 1991 recession when vacancy peaked at 10.9%.
Despite a strong economy, the hotel market has demonstrated only modest revenue
per available room ("RevPar") growth throughout the year as a large supply of
product comes on-line and difficult previous years' comps prove hard to exceed.
Smith Travel Research reported May RevPar growth of 2.2% and year-to-date RevPar
growth is 3.0%. This growth may truly be even weaker given that some of it is
attributed to last year's newly developed properties stabilizing at higher
occupancies.
We have continued to shape the Portfolio with companies we believe offer
attractive fundamental valuations relative to their underlying real estate
value. Throughout the year, we have been encouraged by the undeniable strength
of the U.S. economy and have become more constructive with regard to the
likelihood that real estate fundamentals will remain favorable. As a result, we
have become comfortable with the less defensive posture developed last quarter.
While the top-down weightings remain very similar, we have been more willing to
take opportunistic positions in certain assets, including hotels. Generally, we
utilized the rally to upgrade the Portfolio, measured both in terms of the
quality of properties held by the companies and the management teams at the
companies. This is evident in all sectors, most notably in the office sector
where we added Equity Office Properties and Trizec Hahn Corp.
July 1999
4
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
COMMON STOCK (97.5%)
DIVERSIFIED (8.0%)
7,800 Crescent Real Estate Equities Co. REIT........... $ 185
23,700 Pacific Gulf Properties, Inc. REIT............... 536
10,900 Pennsylvania REIT................................ 228
1,300 Rouse Co......................................... 33
2,400 Vornado Realty Trust REIT........................ 85
(a)27,607 Wellsford Real Properties, Inc................... 297
-------
1,364
-------
HEALTHCARE (0.1%)
1,400 Meditrust Corp. Paired Stock..................... 18
-------
LODGING/RESORTS (6.6%)
(a)770 Crestline Capital Corp. REIT..................... 13
29,156 Host Marriott Corp............................... 346
(a)13 Interstate Hotels Corp........................... --
(a)9,900 Promus Hotel Corp................................ 307
14,787 Starwood Hotels & Resorts Worldwide, Inc......... 452
100 Sunstone Hotel Investors......................... 1
1,900 Wyndham International, Inc....................... 8
-------
1,127
-------
OFFICE/INDUSTRIAL (32.4%)
INDUSTRIAL (2.9%)
1,800 Eastgroup Properties............................. 36
19,200 Prime Group Realty Trust REIT.................... 330
6,700 Prologis Trust................................... 136
-------
502
-------
OFFICE (28.5%)
31,700 Arden Realty Group, Inc.......................... 781
21,000 Boston Properties, Inc........................... 75
23,800 Brandywine Realty Trust REIT..................... 472
69,000 Brookfield Properties Corp....................... 896
20,700 CarrAmerica Realty Corp. REIT.................... 518
15,900 Cornerstone Properties, Inc...................... 252
30,287 Equity Office Properties Trust REIT.............. 776
29,400 Great Lakes, Inc. REIT........................... 478
6,100 Prentiss Properties Trust REIT................... 143
600 SL Green Realty Corp. REIT....................... 12
23,500 Trizec Hahn Corp................................. 479
-------
4,882
-------
OFFICE/INDUSTRIAL--MIXED (1.0%)
9,000 Bedford Property Investors, Inc. REIT ........... 161
-------
TOTAL OFFICE/INDUSTRIAL...................................... 5,545
-------
OTHER (0.1%)
(a)10,848 Atlantic Gulf Communities Corp................... 7
(a)1,165 Merry Land Properties, Inc....................... 6
-------
13
-------
RESIDENTIAL (26.8%)
RESIDENTIAL APARTMENTS (20.2%)
5,800 Amli Residential Properties Trust REIT........... 130
4,000 Apartment Investment & Management Co. REIT....... 171
18,483 Archstone Communities Trust REIT................. 406
18,600 Avalonbay Communities, Inc. REIT................. 688
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
9,900 Berkshire Realty Co.............................. $ 114
12,049 Equity Residential Properties Trust REIT......... 543
18,300 Essex Property Trust, Inc. REIT.................. 647
1,100 Gables Residential Trust REIT.................... 27
17,800 Smith (Charles E.) Residential Realty, Inc.
REIT........................................... 604
6,800 Summit Properties, Inc........................... 134
-------
3,464
-------
RESIDENTIAL MANUFACTURED HOMES (6.6%)
27,600 Chateau Properties, Inc. REIT.................... 826
4,300 Manufactured Home Communities, Inc. REIT......... 112
5,200 Sun Communities, Inc. REIT....................... 185
-------
1,123
-------
TOTAL RESIDENTIAL............................................ 4,587
-------
RETAIL (19.2%)
RETAIL REGIONAL MALLS (9.4%)
16,300 Simon Property Group, Inc........................ 414
48,500 Taubman Centers, Inc. REIT....................... 639
17,900 Urban Shopping Centers, Inc. REIT................ 564
-------
1,617
-------
RETAIL STRIP CENTERS (9.8%)
38,300 Burnham Pacific Property Trust REIT.............. 471
24,100 Federal Realty Investment Trust REIT............. 553
3,461 First Washington Realty Trust, Inc............... 81
8,200 Pan Pacific Retail Properties, Inc. REIT......... 159
100 Ramco-Gershenson Properties Trust REIT........... 2
18,900 Regency Realty Corp.............................. 415
-------
1,681
-------
TOTAL RETAIL................................................. 3,298
-------
SELF STORAGE (4.3%)
21,432 Public Storage, Inc. REIT........................ 600
5,300 Shurgard Storage Centers, Inc., Series A REIT.... 144
-------
744
-------
TOTAL COMMON STOCK (COST $16,799)............................ 16,696
-------
</TABLE>
<TABLE>
<C> <S> <C>
PREFERRED STOCK (0.1%)
OTHER (0.1%)
(a)1,401 Atlantic Gulf Communities Corp. (COST $14)....... 10
-------
CONVERTIBLE PREFERRED STOCK (0.1%)
OTHER (0.1%)
(a)2,003 Atlantic Gulf Communities Corp. (COST $20)....... 14
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------
WARRANTS (0.0%)
OTHER (0.0%)
(a)2,812 Atlantic Gulf Communities Corp., Class A,
expiring 6/23/04............................... 1
(a)2,812 Atlantic Gulf Communities Corp., Class B,
expiring 6/23/04............................... 1
(a)2,812 Atlantic Gulf Communities Corp., Class C,
expiring 6/23/04............................... 1
-------
TOTAL WARRANTS (COST $0)....................................... 3
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.5%)
REPURCHASE AGREEMENT (3.5%)
$603 Chase Securities, Inc. 4.55% dated 6/30/99, due
7/1/99, to be repurchased at $603,
collateralized by U.S. Treasury Notes, 11.125%,
due 8/15/03, valued at $623
(COST $603).................................... $ 603
-------
TOTAL INVESTMENTS (101.2%) (COST $17,436)...................... 17,326
--------
OTHER ASSETS (1.4%)
Cash................................................ $ 5
Dividends Receivable................................ 141
Receivable for Investments Sold..................... 37
Receivable for Portfolio Shares Sold................ 20
Due from Adviser.................................... 13 216
-------
LIABILITIES (-2.6%)
Payable for Portfolio Shares Redeemed............... (287)
Payable for Investments Purchased................... (102)
Professional Fees Payable........................... (12)
Administrative Fees Payable......................... (5)
Custodian Fees Payable.............................. (2)
Other Liabilities................................... (9) (417)
------- --------
NET ASSETS (100%)..................................... $17,125
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,611,575 outstanding $0.001 par value shares
(authorized 500,000,000 shares).............................. $ 10.63
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital................................................ $17,376
Undistributed Net Investment Income............................ 440
Accumulated Net Realized Loss.................................. (581)
Unrealized Depreciation on Investments......................... (110)
--------
NET ASSETS..................................................... $17,125
--------
--------
</TABLE>
- ----------------------------------------------------------------
(a) -- Non-income producing security
REIT -- Real Estate Investment Trust
- ----------------------------------------------------------------
At June 30, 1999, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:
<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
(000) (000) (000) (000)
- --------- --------------- --------------- ---------------
<S> <C> <C> <C>
$ 17,436 $ 431 $ (541) $ (110)
</TABLE>
- ----------------------------------------------------------------
For the six months ended June 30, 1999, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $4,800,000 and $2,831,000,
respectively. There were no purchases and sales of U.S. Government securities
for the six months ended June 30, 1999.
- ----------------------------------------------------------------
At December 31, 1998, the Portfolio had available capital loss carryforwards to
offset future net capital gains, to the extent provided by regulations, through
December 31, 2006 of approximately $259,000. To the extent that capital loss
carryforwards are used to offset any future net capital gains realized during
the carryforward period as provided by U.S. Federal income tax regulations, no
capital gains tax liability will be incurred by a Portfolio for gains realized
and not distributed. To the extent that capital gains are so offset, such gains
will not be distributed to shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1998 to December 31, 1998,
the Portfolio incurred, and elected to defer until January 1, 1999 for U.S.
Federal income tax purposes, net capital losses of approximately $87,000.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
(UNAUDITED)
(000)
<S> <C>
- -------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 376
Interest 12
------
Total Income 388
------
EXPENSES:
Investment Advisory Fees 56
Less: Fees Waived (50)
------
Net Investment Advisory Fees 6
Shareholder Reports 32
Administrative Fees 20
Professional Fees 15
Custodian Fees 3
Other 2
------
Net Expenses 78
------
Net Investment Income 310
------
NET REALIZED LOSS ON:
Investments Sold (89)
------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 890
------
Net Realized Loss and Change in
Unrealized
Appreciation/Depreciation 801
------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,111
------
------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1998
(000) (000)
<S> <C> <C>
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 310 $ 602
Net Realized Loss (89) (484)
Change in Unrealized
Appreciation/Depreciation 890 (1,853)
------- -------
Net Increase (Decrease) in Net
Assets Resulting from Operations 1,111 (1,735)
------- -------
DISTRIBUTIONS:
Net Investment Income -- (421)
Net Realized Gain -- (124)
------- -------
Total Distributions -- (545)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 8,091 11,443
Distributions Reinvested -- 402
Redeemed (7,211) (7,486)
------- -------
Net Increase in Net Assets Resulting
from Capital Share Transactions 880 4,359
------- -------
Total Increase in Net Assets 1,991 2,079
NET ASSETS:
Beginning of Period 15,134 13,055
------- -------
End of Period (Including
undistributed net investment
income of $440 and $130,
respectively) $ 17,125 $ 15,134
------- -------
------- -------
- ------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 798 1,090
Shares Issued on Distributions
Reinvested -- 40
Shares Redeemed (731) (730)
------- -------
Net Increase in Capital Shares
Outstanding 67 400
------- -------
------- -------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD FROM
JUNE 30, 1999 YEAR ENDED MARCH 3, 1997*
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) DECEMBER 31, 1998 TO DECEMBER 31, 1997
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.80 $ 11.41 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.19 0.40 0.17
Net Realized and Unrealized Gain
(Loss) 0.64 (1.63) 1.61
------- ------- -------
Total From Investment Operations 0.83 (1.23) 1.78
------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.29) (0.17)
Net Realized Gain -- (0.09) (0.20)
------- ------- -------
Total Distributions -- (0.38) (0.37)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 10.63 $ 9.80 $ 11.41
------- ------- -------
------- ------- -------
TOTAL RETURN 8.47% (10.86)% 17.99%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 17,125 $ 15,134 $ 13,055
Ratio of Expenses to Average Net
Assets 1.10%** 1.10% 1.10%**
Ratio of Net Investment Income to
Average Net Assets 4.38%** 4.14% 3.14%**
Portfolio Turnover Rate 20% 100% 114%
- ------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.06 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.81%** 1.73% 2.32%**
Net Investment Income to Average
Net Assets 3.67%** 3.51% 1.92%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter Universal Funds, Inc., formerly Morgan Stanley
Universal Funds, Inc., (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company. As of
June 30, 1999, the Fund was comprised of twelve separate active portfolios
(individually referred to as a "Portfolio", collectively as the "Portfolios").
The accompanying financial statements relate to the U.S. Real Estate Portfolio.
Please refer to the Investment Overview for the Portfolio's investment
objectives.
The Fund is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date, for which market quotations are readily available, are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service. The prices provided by a pricing service are determined without
regard to bid or last sale prices, but take into account institutional size
trading in similar groups of securities and any developments related to the
specific securities. Debt securities purchased with remaining maturities of 60
days or less are valued at amortized cost, if it approximates market value. All
other securities and assets for which market values are not readily available,
including restricted securities, are valued at fair value as determined in good
faith by the Board of Directors, although the actual calculations may be done by
others.
2. INCOME TAXES: It is each Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable and tax-exempt income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
Certain Portfolios may be subject to taxes imposed by countries in which it
invests. Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as these amounts are earned.
Taxes may also be based on transactions in foreign currency and are accrued
based on the value of investments denominated in such currency.
3. REPURCHASE AGREEMENTS: The Portfolios of the Fund may enter into repurchase
agreements under which the Portfolio lends excess cash and takes possession of
securities with an agreement that the counterparty will repurchase such
securities. In connection with transactions in repurchase agreements, a bank as
custodian for the Fund takes possession of the underlying securities which are
held as collateral, with a market value at least equal to the amount of the
repurchase transaction, including principal and accrued interest. To the extent
that any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy of the
collateral. In the event of default on the obligation to repurchase, the Fund
has the right to liquidate the collateral and apply the proceeds in satisfaction
of the obligation. In the event of default or bankruptcy by the counterparty to
the agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions and
the foreign currency
9
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
portion of gains and losses realized on sales and maturities of foreign
denominated debt securities are treated as ordinary income for U.S. Federal
income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from foreign currency exchange contracts,
disposition of foreign currencies, currency gains or losses realized between the
trade and settlement dates on securities transactions, and the difference
between the amount of investment income and foreign withholding taxes recorded
on the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are reflected as
a component of unrealized appreciation (depreciation) on the Statement of Net
Assets. The change in net unrealized currency gains (losses) for the period is
reflected on the Statement of Operations.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investments
in domestic companies may be subject to limitation in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Statement of Net Assets) may be created and offered for investment. The
"local" and "foreign" shares' market values may differ. In the absence of
trading of the foreign shares in such markets, the Fund values the foreign
shares at the closing exchange price of the local shares. Such securities are
identified as fair valued in the Statement of Net Assets.
The investment techniques of the Fund described in the following notes (5-11)
are applicable to certain, but not all, of the Portfolios of the Fund.
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts generally to attempt to protect securities
and related receivables and payables against changes in future foreign currency
exchange rates. A foreign currency exchange contract is an agreement between two
parties to buy or sell currency at a set price on a future date. The market
value of the contract will fluctuate with changes in currency exchange rates.
The contract is marked-to-market daily and the change in market value is
recorded by the Portfolio as unrealized gain or loss. The Portfolio records
realized gains or losses when the contract is closed 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. Risk may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their contracts and
is generally limited to the amount of the unrealized gain on the contracts, if
any, at the date of default. Risks may also arise from unanticipated movements
in the value of a foreign currency relative to the U.S. dollar.
6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Certain
Portfolios may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place up to 120 days after the date of the
transaction. Additionally, a Portfolio may purchase securities on a when-issued
or delayed delivery basis. Securities purchased on a when-issued or delayed
delivery basis are purchased for delivery beyond the normal settlement date at a
stated price and yield, and no income accrues to the Portfolio on such
securities prior to delivery. When the Portfolio enters into a purchase
transaction on a when-issued or delayed delivery basis, it establishes either a
segregated account in which it maintains liquid assets in an amount at least
equal in value to the Portfolio's commitments to purchase such securities or
designates such assets as segregated on the records of the Portfolio. Purchasing
securities on a forward commitment or when-issued or delayed-delivery basis may
involve a risk that the market price at the time of delivery may be lower than
the agreed upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
7. LOAN AGREEMENTS: Certain Portfolios may invest in fixed and floating rate
loans ("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions ("Lenders")
deemed to be creditworthy by the investment adviser. A Portfolio's investments
in Loans may be in the form of participations in Loans ("Participations") or
assignments of all or a portion of Loans ("Assignments") from third parties. A
Portfolio's investment in Participations typically results in the Portfolio
having a contractual relationship with only the Lender and not with the
borrower. The Portfolio has the right to receive payments of principal, interest
and any fees to which it is entitled only upon receipt by the Lender of the
payments from the borrower. A Portfolio generally has no right to enforce
compliance by the borrower with the terms of the loan agreement. As a result,
the Portfolio may be subject to the credit risk of both the borrower and the
Lender that is selling the Participation. When a Portfolio purchases Assignments
from Lenders, it typically acquires direct rights against the borrower on the
Loan. Because Assignments are arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by the Portfolio as the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning Lender.
10
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
8. SHORT SALES: Certain Portfolios may sell securities short. A short sale is a
transaction in which the Portfolio sells securities it may or may not own, but
has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolio is obligated to replace the borrowed securities at the
market price at the time of replacement. The Portfolio may have to pay a premium
to borrow the securities as well as pay any dividends or interest payable on the
securities until they are replaced. The Portfolio's obligation to replace the
securities borrowed in connection with a short sale will generally be secured by
collateral deposited with the broker that consists of cash, U.S. government
securities or other liquid, high grade debt obligations. In addition, the
Portfolio will either designate on the custodian records in its regular custody
account or place in a segregated account with its Custodian an amount of cash,
U.S. government securities or other liquid high grade debt obligations equal to
the difference, if any, between (1) the market value of the securities sold and
(2) any cash, U.S. government securities or other liquid high grade debt
obligations deposited as collateral with the broker in connection with the short
sale. Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases cannot exceed the total amount
invested.
9. FUTURES: Certain Portfolios may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party of a
specified amount of a specified security, index, instrument or basket of
instruments. Futures contracts (secured by cash or government securities
deposited with brokers or custodians as "initial margin") are valued based upon
their quoted daily settlement prices; changes in initial settlement value
(represented by cash paid to or received from brokers as "variation margin") are
accounted for as unrealized appreciation (depreciation). When futures contracts
are closed, the difference between the opening value at the date of purchase and
the value at closing is recorded as realized gains or losses in the Statement of
Operations.
Certain Portfolios may use futures contracts in order to manage exposure to the
stock and bond markets, to hedge against unfavorable changes in the value of
securities or to remain fully invested and to reduce transaction costs. Futures
contracts involve market risk in excess of the amounts recognized in the
Statement of Net Assets. Risks arise from the possible movements in security
values underlying these instruments. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which may
not correlate with the change in value of the hedged investments. In addition,
there is the risk that a Portfolio may not be able to enter into a closing
transaction because of an illiquid secondary market.
10. SWAP AGREEMENTS: The Portfolios may enter into swap agreements to exchange
one return or cash flow for another return or cash flow in order to hedge
against unfavorable changes in the value of securities or to remain fully
invested and to reduce transaction costs. The following summarizes swaps which
may be entered into by the Portfolios.
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of commitments to
pay and receive interest based on a notional principal amount. Net periodic
interest payments to be received or paid are accrued daily and are recorded in
the Statement of Operations as an adjustment to interest income. Interest rate
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest in
exchange for a market-linked return based on a notional amount. To the extent
the total return of the security, instrument or basket of instruments underlying
the transaction exceeds or falls short of the offsetting interest obligation,
the Portfolio will receive a payment from or make a payment to the counterparty,
respectively. Total return swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
appreciation or depreciation in the Statement of Operations. Periodic payments
received or made at the end of each measurement period are recorded as realized
gains or losses in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and total
return swaps are presented in the Statement of Operations.
Because there is no organized market for these swap agreements, the value of
open swaps reported in the Statement of Net Assets may differ from that which
would be realized in the event the Portfolio terminated its position in the
agreement. Risks may arise upon entering into these agreements from the
potential inability of the counterparties to meet the terms of the agreements
and are generally limited to the amount of net interest payments to be received
and/or favorable movements in the value of the underlying security, instrument
or basket of instruments, if any, at the date of default.
11. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on portfolio securities and other financial instruments. Premiums
are received and are recorded as liabilities. The liabilities are subsequently
adjusted to reflect the current value of the options written. Premiums received
from writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or are closed are added to or
offset against the proceeds or amount paid on the transaction to determine the
net realized gain or loss. By writing a covered call option, a Portfolio, in
exchange for the premium,
11
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
foregoes the opportunity for capital appreciation above the exercise price
should the market price of the underlying security increase. By writing a
covered put option, a Portfolio, in exchange for the premium, accepts the risk
of a decline in the market value of the underlying security below the exercise
price.
Certain Portfolios may purchase call and put options on their portfolio
securities or other financial instruments. A Portfolio may purchase call options
to protect against an increase in the price of the security or financial
instrument it anticipates purchasing. Each Portfolio may purchase put options on
securities which it holds or other financial instruments to protect against a
decline in the value of the security or financial instrument or to close out
covered written put positions. Risks may arise from an imperfect correlation
between the change in market value of the securities held by the Portfolio and
the prices of options relating to the securities purchased or sold by the
Portfolio and from the possible lack of a liquid secondary market for an option.
The maximum exposure to loss for any purchased option is limited to the premium
initially paid for the option.
12. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends that
may be recorded as soon as the Fund is informed of such dividends) net of
applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased (other
than mortgage-backed securities) are amortized according to the effective yield
method over their respective lives. Most expenses of the Fund can be directly
attributed to a particular Portfolio. Expenses which cannot be directly
attributed are apportioned among the Portfolios based upon relative net assets.
Distributions from the Portfolios are recorded on the ex-distribution date.
The U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year are
estimated to be a return of capital and is recorded as a reduction of their
cost.
The amount and character of income and capital gain distributions to be paid by
Portfolios of the Fund are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing book and tax treatments for the
character and timing of the recognition of gains or losses on securities and
foreign currency exchange contracts, the timing of the deductibility of certain
foreign taxes and dividends received from real estate investment trusts.
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications among undistributed net investment income
(loss), accumulated net realized gain (loss) and paid in capital.
Permanent book and tax differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income/accumulated net
investment loss for the purpose of calculating net investment income (loss) per
share in the Financial Highlights.
Settlement and registration of foreign securities transactions may be subject to
significant risks not normally associated with investments in the United States.
In certain markets, including Russia, ownership of shares is defined according
to entries in the issuer's share register. In Russia, there currently exists no
central registration system and the share registrars may not be subject to
effective state supervision. It is possible that a Portfolio holding these
securities could lose its share registration through fraud, negligence or even
mere oversight. In addition, shares being delivered for sales and cash being
paid for purchases may be delivered before the exchange is complete. This may
subject the Portfolio to further risk of loss in the event of a failure to
complete the transaction by the counterparty.
B. ADVISER: Morgan Stanley Dean Witter Investment Management Inc. ("MSDW
Investment Management"), a wholly-owned subsidiary of Morgan Stanley Dean Witter
& Co., provides the Portfolio with investment advisory services for a fee, paid
quarterly, at the annual rate based on average daily net assets as follows:
<TABLE>
<CAPTION>
FROM MORE
FIRST $500 MILLION TO THAN
PORTFOLIO $500 MILLION $1 BILLION $1 BILLION
- -------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
U.S. Real Estate 0.80% 0.75% 0.70%
</TABLE>
MSDW Investment Management has agreed to reduce fees payable to it and to
reimburse the Portfolio, if necessary, to the extent that the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratio of 1.10%.
C. ADMINISTRATOR: MSDW Investment Management (the "Administrator") also provides
the Portfolio with administrative services pursuant to an administrative
agreement for a monthly fee which on an annual basis equals 0.25% of the average
daily net assets of the Portfolio, plus reimbursement of out-of-pocket expenses.
Under an agreement between the Administrator and Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank ("Chase"),
CGFSC provides certain administrative services to the Fund. For such services,
the Administrator pays CGFSC a portion of the fee the Administrator receives
from the Fund. Certain employees of CGFSC are officers of the Fund. In addition,
the Fund incurs local administration fees in connection with doing business in
certain emerging market countries.
12
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
D. CUSTODIAN: The Chase Manhattan Bank serves as custodian for the Fund in
accordance with a custodian agreement.
E. OTHER: At June 30, 1999, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency. Changes
in currency exchange rates will affect the U.S. dollar value of and investment
income from such securities.
From time to time, a Portfolio may have shareholders that hold a significant
portion of the Portfolio's outstanding shares. Investment activities of these
shareholders could have a material impact on those Portfolios.
13
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley Dean Witter Investment Management Inc.
and Morgan Stanley Dean Witter
Investment Management Limited;
Managing Director, Morgan Stanley & Co. Incorporated
Michael F. Klein
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Dean Witter Investment Management Inc. and Morgan
Stanley & Co. Incorporated
John D. Barrett II
Chairman and Director,
Barrett Associates, Inc.
Gerard E. Jones
Partner, Richards & O'Neil LLP
Andrew McNally IV
River Road Partners
Samuel T. Reeves
Chairman of the Board and Chief Executive Officer,
Pinnacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer,
LumeLite Plastics Corporation
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin & Boehm, P.C.
INVESTMENT ADVISERS AND ADMINISTRATORS
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, NY 10020
CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, NY 11245
OFFICERS
Stefanie V. Chang
VICE PRESIDENT
James A. Gallo
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Richard J. Shoch
VICE PRESIDENT
Mary E. Mullin
SECRETARY
Karl O. Hartmann
ASSISTANT SECRETARY
Belinda A. Brady
ASSISTANT TREASURER
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY
THE PROSPECTUS OF THE MORGAN STANLEY UNIVERSAL FUNDS, INC. WHICH DESCRIBES IN
DETAIL EACH INVESTMENT PORTFOLIO'S INVESTMENT POLICIES, FEES AND EXPENSES.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
14
