<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
EMERGING MARKETS EQUITY PORTFOLIO
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPARISION OF NET ASSETS (AT JUNE 30, 1999)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 0.7%
Brazil 10.5%
Chile 0.5%
China 0.7%
Czech Republic 0.6%
Egypt 0.6%
Greece 1.9%
Hungary 0.8%
India 8.6%
Indonesia 4.4%
Israel 2.6%
South Korea 16.7%
Malaysia 1.0%
Mexico 12.8%
Pakistan 0.4%
Philippines 1.0%
Poland 2.3%
Russia 2.9%
South Africa 6.7%
Taiwan 10.7%
Thailand 3.3%
Turkey 3.8%
Other 6.5%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING
MARKETS FREE INDEX(1) AND THE IFC GLOBAL TOTAL RETURN INDEX(2)
- ------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(3)
------------------------------------
AVERAGE
ANNUAL
ONE SINCE
YTD YEAR INCEPTION
---------- ---------- ------------
<S> <C> <C> <C>
PORTFOLIO............. 38.12% 23.75% 1.05%
MSCI EMERGING MARKETS
FREE INDEX............ 39.87 28.71 -3.20
IFC GLOBAL TOTAL
RETURN COMPOSITE
INDEX................. 38.27 29.66 -3.19
</TABLE>
1. The Morgan Stanley Capital International (MSCI) Emerging Markets Free Index
is a market capitalization weighted index composed of companies that are
representative of the market structure of the developing countries: in Latin
America, Asia, Eastern Europe, the Middle East and Africa.
2. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (includes dividends).
3. 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 COUNTRY NET ASSETS
- ----------------------------------- ------------- ------------
<S> <C> <C>
Korea Telecom Corp. South Korea 4.0%
Telmex Mexico 3.5
Grupo Televisa S.A. Mexico 2.7
Samsung Electronics Co. South Korea 2.7
Korea Electric Power Corp. South Korea 2.6
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
PERCENT
OF
VALUE NET
SECTOR (000) ASSETS
- ----------------------------------- ------- ---------
<S> <C> <C>
Services $26,841 29.1%
Finance 15,853 17.2
Consumer Goods 12,032 13.0
Capital Equipment 11,959 13.0
Materials 8,804 9.5
</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 COUNTRY SPECIFIC PERFORMANCE
RESULTS PROVIDED IN THIS OVERVIEW ARE AS MEASURED BY THE IFC GLOBAL TOTAL RETURN
COMPOSITE INDEX AND THE MSCI EMERGING MARKETS FREE INDEX 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. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
The Emerging Markets Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of issuers in emerging market
countries.
For the six months ended June 30, 1999, the Portfolio had a total return of
38.12% compared to 39.87% for the Morgan Stanley Capital International (MSCI)
Emerging Markets Free Index (the "Index"). For the one year period ended June
30, 1999, the Portfolio had a total return of 23.75% compared to 28.71% for the
Index. For the period since inception on October 1, 1996 through June 30, 1999,
the Portfolio had an average annual total return of 1.05% compared to -3.20% for
the Index.
Relative underperformance of the Portfolio compared to the Index resulted from
disappointing country allocations such as our overweight positions in Brazil
(+12.5%) and Egypt (+6.8%). Poor stock selection in Greece, Indonesia and South
Korea also detracted from performance. Stock selection in Indonesia and South
Korea had strong absolute returns of 72% and 40%, respectively, yet these gains
lagged the Index returns. On a positive note, our overweight positions in
Indonesia (+121.6%), Russia (+43.2%) and South Korea (+64.4%) coupled with our
underweight positions in Chile (+10.7%), Colombia (-3.6%), Greece (+9.4%) and
South Africa (+15.1%) helped performance.
1
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
With few exceptions, the emerging markets performed well during the first half
of 1999, supported by an amalgam of endogenous and global factors. Positive
signs of growth in Japan and increasingly resilient macro numbers from Western
Europe emerged. The powerful recovery in selected commodity prices (e.g. oil and
copper) engendered a strong rally in the share prices of many commodity-related
and deep cyclical companies. Brazil's ability to quickly recover from its
currency devaluation resulted in improved investor sentiment. Finally, a widely
anticipated interest rate hike by the Fed at the end of June relieved many
anxieties regarding U.S. inflation and interest rate tightening. These factors
have provided the emerging markets with a benign environment for future growth.
The Latin American region gained 31.0% during the first half of 1999. The most
notable market event throughout all the emerging markets was the devaluation of
the Brazilian currency, the real. The currency plunged 40% in January, then
retraced some of its decline to end the first quarter down 30%. Most emerging
markets investors anticipated the devaluation, but few, if any, expected the
Brazilian equity market to recover so quickly. By the end of March, the equity
market had gained 5.5% in U.S. dollars and by June month-end, it had appreciated
18.7%. Fueling the market was the unexpected appointment of Arminio Fraga, the
former portfolio manager of George Soros' Quantum Emerging Markets Growth Fund,
as head of the Central Bank. Fraga offers financial market expertise and
shareholder focus, which has aided market sentiment.
We were underweight Brazil going into the devaluation and then quickly moved to
a neutral weight after the devaluation, which was favorable for performance. We
continued to add to our Brazilian positions and are now modestly overweight the
Index. We anticipate lower inflation and better than expected economic
performance to allow for continued interest rate reductions and, in turn, for a
contraction in the country risk premium. The expected reduction in real interest
rates is requisite for controlling the fiscal deficit and for stemming the
growth in the stock of public sector debt. We continue to focus on the
telecommunications industry in Brazil, where the privatization of the sector
last year has allowed for the introduction of many new efficiencies, fostering
margin expansion under new managements. Additionally, the inelasticity of the
telecommunication sector to a weak economy coupled with pent-up demand for
telecommunication services should allow for strong top-line growth.
Mexico (+52.3%) is our favorite Latin American market based on good economic
management and attractive stock opportunities. A stronger Peso coupled with
better than expected consumer demand should allow for positive U.S. dollar
earnings surprises from domestic consumer plays (e.g. beverages, cement, media,
retail). We have increased our overweight and are focusing on consumer-related
stocks, which should benefit from both a recovery in domestic demand as well as
continued strong U.S. economic growth (more than 80% of Mexico's exports are
absorbed by the U.S.).
Asia, gaining 55.4%, led the emerging markets during the first half of the year.
Liquidity from local participants, as well as from foreign investors seeking to
participate in the broadening Asian recovery, helped drive the markets.
Fundamental factors contributing to the stellar gains of many of the Asian
markets include: current account and fiscal surpluses, strong FDI (foreign
direct investment), micro-level reforms (e.g. bankruptcy laws), declining
interest rates (below pre-crisis levels in some countries) and lower costs of
capital. Indonesia was the star performer, rising 110.9%. Government
recapitalization plans, lower inflation and a successful, nonviolent election in
June fueled Indonesian equities. We added to our position during the second
quarter and are now overweight Indonesia.
Taiwan (+42.3%) has shown acceleration in exports and is best positioned within
Asia to benefit from increased outsourcing from Japan. The increasing cyclical
upturn and trend in outsourcing various computer components augurs well for
Portfolio holdings such as Compal Electronics, Hon Hai Precision, Quanta
Computer and Taiwan Semiconductor. During the second quarter, we reduced some of
our strong overweights in the electronic components and instruments industry,
taking advantage of significant price appreciation.
Our favorite market in Asia is South Korea, which gained 77.9% during the first
half of the year on the back of an improving macroeconomic scenario and
continued progress with financial and chaebol (large conglomerates)
restructuring. Strong domestic liquidity and declining interest rates have also
buoyed the market. We added to our South Korean overweight, favoring stocks such
as Korea Telecom (an attractively valued telecom stock with a well-developed
network and a promising tariff rebalancing), LG Chemical and Samsung Electronics
(restructuring chaebol opportunities).
India (+36.9%) has performed respectably given political uncertainties and
heightened tensions on the border with Pakistan. Most recently, India has
witnessed a sharp inflow of foreign funds and the outperformance of cyclical
sectors. For example, petrochemicals, refineries, auto and cement were revived
in part by cheap valuations and positive news on volumes and/or prices. We have
added to our overweight position in India based on these attractive valuations
coupled with signs of an economic recovery and what we perceive as appealing
(return on investment focused) corporate governance. We are adding stocks such
as State Bank of India (SBI), India's largest bank, which should benefit from a
turnaround in the economic cycle.
2
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
Emerging Europe and the Middle East gained 28.4%, posting more modest returns
than the other regions. Russia (+133.7%) was the star performer in the region.
Turkey (+45.2%) and Poland (+30.9%) also performed well. We added to and are now
overweight Russia. Despite the devaluation of the ruble last year, the Russian
economy has performed better than expected. In May, monthly industrial
production, boosted by domestic consumption, showed signs of growth. Russian
equities have been extremely strong based in part on the recovery in global
commodity prices, which particularly helps the Russian export sector. We are
concentrating on stocks in the oil sector such as Lukoil and Surgutneftegaz,
which stand to benefit from both a weaker exchange rate (due to predominantly
ruble-based costs with larger volumes of export sales) and higher crude prices.
Turkey, while appreciating 45.2% during the first half of the year, fell 3.5%
during the second quarter due to politics. The elections on April 18th
eventually resulted in the newly formed majority coalition government that
finally received a vote of confidence in June, ending the political uncertainty.
The coalition has promised immediate action to reduce inflation to single digits
including passing difficult structural reform laws (e.g. the new banking law,
and social security and agricultural subsidy reforms). Key legislation may also
soon be passed which would facilitate the privatization of state-owned
utilities. We are overweight the banking sector as we expect real interest rates
to decline markedly in the near future. We expect the equity market to react
positively if negotiations with the International Monetary Fund conclude
favorably.
We maintain our overweight position in Poland to which we recently added. The
Polish economy continues to recover from the Western European induced slowdown.
Support from the nascent recovery in Germany, Poland's largest export market,
should accelerate economic growth. Excise taxes were increased to help raise
revenues in light of the growing budget deficit. The Polish equities market
continues to derive strength from consolidation and successful privatizations.
We particularly like Telekomunikacja Polska, which we feel is undervalued
relative to other telecommunication companies in the region, and should benefit
from the planned strategic sale of a 25-35% government stake by year-end.
We continued to trim Greece, which returned 19.5%, and maintain our market
underweight. Despite recent positive inflation numbers and a marginal decline in
the rate of private sector credit expansion, an imminent reduction in Greek
interest rates seems unlikely. We do not expect Greek interest rates to be
lowered until the fourth quarter of 1999, as the Greek government wants to
contain inflation to below 2% in accordance with European Union standards. Greek
equities have become expensively valued and we find other markets more
attractively valued in the near term.
We lightened our position in Israel (+25.5%) during the second quarter, and are
now underweight. A new Israeli government led by Ehud Barak was elected in June.
We expect interest rate reductions later in the third quarter, after the new
government has been formed and its policies have been announced. We reduced our
exposure to certain stocks which had performed well and were close to being
fully valued, and re-deployed the funds in sectors such as banking, which we
feel should perform particularly well if interest rate cuts take place.
South Africa, which had its second all-race presidential elections, rose 30.2%.
We added to our South African holdings and will continue to increase our
weighting while maintaining an underweight position. Thabo Mbeki's election as
President, enhancing expectations of a continuance in economic policies, is
likely to accelerate privatization and deregulation of the labor market.
Continued interest rate reductions, made possible by the stabilization of
emerging markets, falling inflation, good fiscal discipline and a slightly
looser monetary stance by the Reserve Bank, will help stimulate the economy.
However, the economy is still very anemic. A recovery in commodity prices,
especially base metals, should also provide a boost to exports and the economy
as a whole.
July 1999
3
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
COMMON STOCKS (92.8%)
ARGENTINA (0.7%)
21,731 Telecom Argentina ADR....................................... $ 581
2,407 Telefonica Argentina ADR.................................... 76
-------
657
-------
BRAZIL (10.5%)
261,600 Brahma (Preferred).......................................... 147
7,300 Brahma (Preferred) ADR...................................... 83
(a)2,772,791 Celular Crt................................................. 376
32,595,136 CEMIG (Preferred)........................................... 685
7,692 CEMIG ADR................................................... 163
34,973 CIA Vale do Rio Doce (Preferred), Class A................... 692
1,375 Compahia Paranaense de Energia-Copel ADR.................... 11
287,200 Coteminas................................................... 15
(e,d)2,700 Coteminas ADR............................................... 7
(a)2,863,350 CRT (Preferred)............................................. 702
12,698 CVRD ADR.................................................... 252
1,224,940 Eletrobras.................................................. 23
13,915 Eletrobras ADR.............................................. 140
5,041,598 Eletrobras, Class B (Preferred)............................. 102
7,107,936 Embratel Participacoes S.A. (Preferred)..................... 98
15,402 Embratel Participacoes S.A., ADR............................ 214
(a)2,311,000 Lojas Arapua (Preferred).................................... --
(a,e)1,305 Lojas Arapua (Preferred) ADR................................ --
2,542 Pao de Acucar (Preferred) ADR............................... 47
5,287,000 Petrobras (Preferred)....................................... 819
2,730 Petrobras ADR............................................... 42
37,586,736 Tele Celular Sul Participacoes S.A. (Preferred)............. 79
1,495 Tele Celular Sul Participacoes S.A. ADR..................... 32
30,323,163 Tele Centro Sul Participacoes S.A. (Preferred).............. 336
1,551 Tele Centro Sul Participacoes S.A. ADR...................... 86
30,813,936 Tele Nordeste Celular Participacoes S.A. (Preferred)........ 41
375 Tele Nordeste Celulare Participacoes S.A. ADR............... 10
12,219,936 Tele Norte Leste Participacoes S.A. (Preferred)............. 221
5,847 Tele Norte Leste Participacoes S.A. ADR..................... 108
29,723,275 Tele Sudeste Celular Participacoes S.A. (Preferred)......... 168
3,264 Tele Sudeste Celular Participacoes S.A. ADR................. 95
1,101,839 Telecentro Oeste Celular.................................... 1
5,454,800 Telecomunicacoes Brasileiras S.A. (Preferred)............... 488
9,289 Telecomunicacoes Brasileiras S.A. (Preferred) ADR........... 838
39,710,936 Telemig Celular Participacoes S.A. (Preferred).............. 50
470 Telemig Celular Participacoes S.A. ADR...................... 12
1,318,000 Telerj Celular S.A. (Preferred) Class B..................... 43
28,403,936 Telesp Celular Participacoes S.A. (Preferred)............... 294
(a)12,587 Telesp Celular Participacoes S.A. ADR....................... 337
6,917,836 Telesp Celular S.A. (Preferred) Class B..................... 360
5,339,936 Telesp Participacoes S.A. (Preferred)....................... 122
5,670 Telesp Participacoes S.A. ADR............................... 130
47,669 Unibanco (Preferred) GDR.................................... 1,147
2,005 USIMINAS ADR................................................ 7
(a)35,930 USIMINAS (Preferred)........................................ 121
-------
9,744
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
CHILE (0.5%)
5,044 CCU S.A. ADR................................................ $ 144
2,104 Chilectra S.A............................................... 44
1,104 Distribucion y Servicio ADR................................. 21
5,950 Endesa ADR.................................................. 72
7,155 Enersis ADR................................................. 164
(a)993 Santa Isabel ADR............................................ 10
-------
455
-------
CHINA (0.7%)
10,465 Huaneng Power International, Inc. ADR....................... 179
12,583 Yanzhou Coal Mining Co. ADR................................. 223
922,500 Zhenhai Refining and Chemical Co., Ltd., Class H............ 279
-------
681
-------
COLOMBIA (0.0%)
2,661 Bancolombia S.A. (Preferred)................................ 4
-------
CZECH REPUBLIC (0.6%)
27,215 SPT Telecom a.s............................................. 439
(a)8,540 SPT Telecom a.s. GDR........................................ 138
-------
577
-------
EGYPT (0.6%)
(a)4,255 Al-Ahram Beverages Co. GDR.................................. 121
7,616 Eastern Tobacco............................................. 185
925 Egypt Gas Co................................................ 38
6,888 Egyptian Co................................................. 155
1,635 Industrial & Engineering.................................... 13
373 Industrial & Engineering Enterprises Co..................... 3
-------
515
-------
GREECE (1.9%)
381 Commerical Bank of Greece, S.A.............................. 27
44,208 Hellenic Telecommunication Organization S.A................. 949
72,981 Hellenic Telecommunication Organization S.A., ADR........... 807
-------
1,783
-------
HUNGARY (0.8%)
14,759 Magyar Tavkozlesi Rt ADR.................................... 406
17,479 Matav Rt.................................................... 95
1,880 MOL Magyar Olaj-es Gazipari Rt. GDR (Registered)............ 45
3,890 Otp Bank Rt................................................. 162
-------
708
-------
INDIA (8.6%)
118,000 Bharat Heavy Electricals Ltd................................ 669
77,700 Container Corp. of India Ltd................................ 326
17,500 Gujarat Ambuja Cements Ltd.................................. 129
35,884 Hero Honda Motors, Ltd...................................... 893
12,050 Hindustan Lever Ltd......................................... 661
4,120 Housing Development Finance Corp. Ltd....................... 211
18,000 Infosys Technologies Ltd.................................... 1,504
21,000 ITC Ltd..................................................... 530
51,722 Larson & Toubro Ltd......................................... 341
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
INDIA (CONT.)
<TABLE>
<C> <S> <C>
70,400 Mahanagar Telephone Nigam Ltd............................... $ 302
(a,g)35,500 Morgan Stanley India Investment Fund, Inc................... 344
8,500 NIIT Ltd.................................................... 398
19,500 Satyam Computer Services Ltd................................ 570
77,200 State Bank of India......................................... 421
37,250 Tata Engineering & Locomotive Co. Ltd....................... 176
7,100 Videsh Sanchar Nigam Ltd.................................... 91
(a)12,500 Zee Telefilms Ltd........................................... 419
-------
7,985
-------
INDONESIA (4.4%)
(a)88,085 Asia Pulp & Paper Co. Ltd. ADR.............................. 848
428,616 Gudang Garam................................................ 1,164
914,400 Indah Kiat Pulp & Paper Corp................................ 425
173,500 PT Semen Fresik............................................. 378
96,665 Telekomunikasi Indonesia ADR................................ 1,202
-------
4,017
-------
ISRAEL (2.6%)
14,400 Amdocs Ltd.................................................. 328
(a)1,460 Backweb Technologies Ltd.................................... 40
69,734 Bank Hapoalim Ltd........................................... 179
91,876 Bank Leumi Le-Israel........................................ 174
(a)1,573 Comverse Technology, Inc.................................... 119
11,867 ECI Telecommunications Ltd.................................. 394
1 Elbit Systems Ltd........................................... --
(a)7,460 Gilat Satellite Networks Ltd................................ 392
2,076 Koor Industries Ltd......................................... 239
(a)596 NICE-Systems Ltd............................................ 16
(a)4,074 NICE-Systems Ltd. ADR....................................... 112
(a)3,836 Orbotech Ltd................................................ 200
4,810 Teva Pharmaceutical Industrial Ltd. ADR..................... 236
-------
2,429
-------
MALAYSIA (1.0%)
43,000 Commerce Asset Holding Bhd.................................. 106
57,200 Malayan Banking Bhd......................................... 172
15,000 Nestle (Malaysia) Bhd....................................... 59
38,000 Public Bank Bhd............................................. 29
22,200 Rothmans of Pall Mall (Malaysia) Bhd........................ 168
82,000 Telekom Malaysia Bhd........................................ 306
33,000 Tenaga Nasional Bhd......................................... 76
-------
916
-------
MEXICO (12.8%)
51,947 Alfa, S.A. de C.V., Class A................................. 216
208,571 Banacci, O Shares........................................... 527
169,706 Cemex CPO................................................... 839
37,611 Cemex CPO ADR............................................... 357
54,651 Cemex, Class B.............................................. 271
33,299 Cemex, Class B ADR.......................................... 329
(a)75,188 Cifra S.A., Class C......................................... 138
(a)127,911 Cifra S.A., Class V......................................... 248
(a)10,896 Cifra S.A., Class V ADR..................................... 209
17,934 Fomento Economico Mexicano, S.A. de C.V. ADR................ 715
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
308,255 Fomento Exonomico Mexicano, S.A. de C.V.-UBD................ $ 1,233
(a)52,714 Grupo Carso S.A. de C.V., Class A1.......................... 244
(e)9,575 Grupo Financiero Bancomer ADS............................... 69
(a)576,032 Grupo Financiero Bancomer, S.A. de C.V., O Shares........... 208
29,480 Grupo Financiero Banortes S.A. de C.V., O Shares............ 43
(a)56,264 Grupo Televisa S.A. GDR..................................... 2,514
92,753 Kimberly-Clark Corp., Class A............................... 382
28,147 Telmex, Class L ADR......................................... 2,275
12,085 Telmex, Class L ADR......................................... 979
-------
11,796
-------
PAKISTAN (0.4%)
136,000 Fauji Fertilizer Co., Ltd................................... 106
23,553 Pakistan State Oil Co., Ltd................................. 41
570,100 Pakistan Telecommunications Corp., Class A.................. 216
(a)15,680 Sui Northern Gas Pipelines Ltd.............................. 2
-------
365
-------
PHILIPPINES (1.0%)
66,960 Manila Electric Co., Class B................................ 242
199,538 San Miguel Corp., Class B................................... 436
1,163,600 SM Prime Holdings, Inc...................................... 264
-------
942
-------
POLAND (2.3%)
3,942 Bank Polska Kasa Opieki Grupa Pekao S.A..................... 46
2 Debica...................................................... --
23,778 Elektrim.................................................... 336
1,955 Powszechny Bank Kredytowy S.A............................... 47
488 Powszechny Bank Kredytowy S.A., Class C..................... 9
10,699 Prokom Software GDR......................................... 175
(a)205,878 Telekomunikacja Polska S.A. GDR............................. 1,451
8,881 Wielkopolski Bank Kredytowy S.A............................. 52
-------
2,116
-------
RUSSIA (2.8%)
1,800 AO Tatneft ADR.............................................. 6
22,449 Lukoil Holding ADR.......................................... 918
(a,d)554,047 Mustcom..................................................... 116
1,600 RAO Unified Engery System ADR............................... 16
(a)15,800 Rostelecom ADR.............................................. 155
98,532 Surgutneftegaz ADR.......................................... 831
(d)37,360 Unified Energy Systems ADR.................................. 362
(a)6,870 Vimpel-Communications ADR................................... 159
-------
2,563
-------
SOUTH AFRICA (6.7%)
75,019 ABSA Group Ltd.............................................. 425
(a)88 Anglo American plc ADR...................................... 4
(a)2,300 Anglo American plc.......................................... 109
(a)12,310 Anglo American plc.......................................... 575
607,914 B.O.E. Corp. Ltd., Class N.................................. 484
93,220 Bidvest Group Ltd........................................... 779
54,200 Billiton plc................................................ 187
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SOUTH AFRICA (CONT.)
<TABLE>
<C> <S> <C>
2,300 Billiton plc................................................ $ 8
50,923 BOE Ltd..................................................... 51
2,430 De Beers ADR................................................ 58
8,342 De Beers Centenary AG....................................... 200
94,400 Education Investment Corp. (The) Ltd........................ 89
38,466 Ellerine Holdings Ltd....................................... 153
451,310 FirstRand Ltd............................................... 516
6,939 Liberty International plc................................... 46
14,891 Liberty Life Association of Africa Ltd...................... 191
(g)1,865 Morgan Stanley Dean Witter Africa Investment Fund, Inc...... 19
17,298 Nedcor Ltd.................................................. 397
(a)266,970 New Africa Investments Ltd., Class N........................ 157
17,407 Persetel Holdings Ltd....................................... 110
15,500 Primedia Ltd., N Shares..................................... 23
61,865 Rembrandt Group Ltd......................................... 516
(a)258,300 Sanlam Ltd.................................................. 306
12,400 Sasol Ltd................................................... 88
66,751 South African Breweries plc................................. 572
(a)12,020 South African Breweries plc................................. 104
-------
6,167
-------
SOUTH KOREA (16.6%)
13,900 Daewoo Securities Co........................................ 270
54,960 Good Morning Securities Co. Ltd............................. 339
26,120 Hana Bank................................................... 384
6,880 Hankuk Glass Industry Co., Ltd.............................. 184
29,490 Housing & Commercial Bank, Korea............................ 930
51,110 Kookmin Bank................................................ 1,038
820 Kookmin Bank GDR............................................ 17
26,050 Koram Bank.................................................. 326
26,890 Korea Electric Power Corp................................... 1,117
64,876 Korea Electric Power Corp. ADR.............................. 1,330
64,990 Korea Exchange Bank......................................... 365
(d)29,680 Korea Telecom Corp.......................................... 1,969
(a)42,970 Korea Telecom Corp. ADR..................................... 1,719
9,870 L.G. Chemical Ltd........................................... 269
3,500 L.G. Securities Co.......................................... 59
(d)11,792 Pohang Iron & Steel Co., Ltd................................ 1,452
7,586 Samsung Electro-Mechanics Company........................... 262
20,051 Samsung Electronics Co...................................... 2,200
27,930 Shinhan Bank................................................ 314
(d)395 SK Telecom Co., Ltd......................................... 542
14,287 SK Telecom Co., Ltd. ADR.................................... 243
-------
15,329
-------
TAIWAN (10.7%)
(a)103,000 Acer, Inc................................................... 261
(a)135,000 Advanced Semiconductor Engineering, Inc..................... 456
145,542 Asustek Computer, Inc....................................... 1,640
307,000 Bank Sinopac................................................ 214
83,000 Cathay Life Insurance Co., Ltd.............................. 298
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
90,000 Chang Hwa Commerical Bank................................... $ 135
(a)35,000 China Development Corp...................................... 87
505,150 China Steel Corp............................................ 382
(a)236,000 Chinatrust Commercial Bank.................................. 283
111,668 Compal Electronics, Inc..................................... 439
(a)128,000 E. Sun Commercial Bank...................................... 71
416,000 Far Eastern Textile Ltd..................................... 618
83,000 First Commercial Bank....................................... 158
158,000 Formosa Plastics Corp....................................... 333
(a)85,800 Hon Hai Precision Industry.................................. 776
99,000 Hua Nan Commercial Bank..................................... 196
191,000 International Commercial Bank of China...................... 247
205,000 Nan Ya Plastic Corp......................................... 340
(a)47,000 President Chain Store Corp.................................. 159
18,080 Quanta Computer Inc......................................... 217
(a)163,334 Siliconware Precision Industries Co......................... 311
(a)344,000 Taishin International Bank.................................. 256
(a)15,179 Taiwan Semiconductor Manufacturing Co., Ltd. ADR............ 516
(a)372,510 Taiwan Semiconductor Manufacturing Co., Ltd................. 1,424
57,000 United World Chinese Commercial Bank........................ 88
-------
9,905
-------
THAILAND (2.8%)
67,600 Advanced Info Service PCL (Foreign)......................... 916
58,100 BEC World PCL (Foreign)..................................... 362
31,815 Delta Electronics PCL (Foreign)............................. 267
98,100 Shinawatra Computer Co. PCL (Foreign)....................... 457
129,200 Siam Cement PCL (Foreign)................................... 532
21,000 Thai Farmers Bank PCL (Foreign)............................. 65
-------
2,599
-------
TURKEY (3.8%)
23,001,500 Akbank T.A.S................................................ 338
(e)1,790 Akbank T.A.S. ADR........................................... 5
32,735,000 Dogan Sirketler Grubu Holdings A.S.......................... 435
2,569,000 Ege Biracilik............................................... 192
2,114,800 Erciyas Biracilik........................................... 49
2,020,000 KOC Holdings A.S............................................ 127
113,700 Migros Turk T.A.S........................................... 142
7,592,000 Saci Omer Sabanci Holdings A.S.............................. 169
(a)28,484,000 Turkiye Garanti Bankasi A.S. ADR............................ 213
9,008,400 Turkiye Is Bankasi, Class C................................. 160
1,394,000 Turpras-Turkiye Petrol Rafinerileri A.S..................... 93
(a)3,280,346 Vestel Elektronik Sanayi Ve Ticaret A.S..................... 358
84,703,713 Yapi Ve Kredi Bankasi A.S................................... 1,225
-------
3,506
-------
TOTAL COMMON STOCKS (COST $75,194)............................................ 85,759
-------
PREFERRED STOCK (0.2%)
THAILAND (0.2%)
149,500 Siam Commercial Bank PCL (COST $116)........................ 213
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
RIGHTS (0.4%)
BRAZIL (0.0%)
(a)1,000,668 Celular Crt................................................. $ --
-------
KOREA (0.1%)
(a)425 SK Telecom Co. Ltd., expiring 7/27/99....................... 53
-------
THAILAND (0.3%)
(a)369,000 Siam Commerical Bank PCL, expiring 5/10/02.................. 238
-------
TOTAL RIGHTS (COST $0)........................................................ 291
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.0%)
THAILAND (0.0%)
(a,d)8,833 Siam Commerical Bank PCL, expiring 12/31/02 (COST $0)....... --
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
CONVERTIBLE NOTES (0.1%)
RUSSIA (0.1%)
$ 325 Svyaz Finance 17.60%, 8/11/99............................... 80
-------
TOTAL FOREIGN & U.S. SECURITIES (93.5%) (COST $75,310)........................ 86,343
-------
SHORT-TERM INVESTMENT (5.6%)
REPURCHASE AGREEMENT (5.6%)
5,182 Chase Securities, Inc. 4.55%, dated 6/30/99, due 7/1/99, to
be repurchased at $5,183, collateralized by U.S. Treasury
Notes, 11.125%, due 8/15/03, valued at $5,321 (COST
$5,182)................................................... 5,182
-------
FOREIGN CURRENCY (1.5%)
INR 36,899 Indian Rupee................................................ 850
IDR 320,942 Indonesia Rupiah............................................ 47
ISS 69 Israeli Shekel.............................................. 17
MYR 5 Malaysian Ringgit........................................... 1
MXP 541 Mexican Peso................................................ 57
PKR 84 Pakistan Rupees............................................. 2
KRW 393 Republic of Korea........................................... --
ZAR 478 South African Rand.......................................... 79
TWD 10,516 Taiwan Dollar............................................... 326
THB 883 Thai Baht................................................... 24
-------
TOTAL FOREIGN CURRENCY (COST $1,407).......................................... 1,403
-------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%) (COST $81,899)........................................... $ 92,928
--------
OTHER ASSETS (3.9%)
Cash.................................................................... $ 1,668
Receivable for Investments Sold......................................... 1,515
Deferred Organization Costs............................................. 231
Dividends Receivable.................................................... 229
Interest Receivable..................................................... 50 3,693
-------- --------
LIABILITIES (-4.5%)
Payable for Investments Purchased....................................... (3,426)
Payable for Foreign Taxes............................................... (368)
Custodian Fees Payable.................................................. (167)
Investment Advisory Fees Payable........................................ (94)
Professional Fees Payable............................................... (42)
Administrative Fees Payable............................................. (20)
Other Liabilities....................................................... (46) (4,163)
-------- --------
NET ASSETS (100%)................................................................... $ 92,458
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,412,986 outstanding $0.001 par value shares (authorized 500,000,000
shares)........................................................................... $ 9.82
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital..................................................................... $ 89,972
Undistributed Net Investment Income................................................. 100
Accumulated Net Realized Loss....................................................... (8,300)
Unrealized Appreciation on Investments and Foreign Currency Translations (Net of
foreign taxes of $349)............................................................ 10,686
--------
NET ASSETS.......................................................................... $ 92,458
--------
--------
</TABLE>
- ---------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1999, the
Portfolio is obligated to deliver or is to receive foreign currency in exchange
for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- ----- ---------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
ISS 198 $ 48 7/1/99 U.S.$ 48 $ 48 $ --
U.S.$ 61 61 7/1/99 EGP 207 61 --
U.S.$ 184 184 7/1/99 INR 8,000 184 --
ISS 79 19 7/2/99 U.S.$ 19 19 --
THB 2,837 77 7/2/99 U.S.$ 77 77 --
U.S.$ 8 8 7/6/99 HKD 63 8 --
----- ----- -----
$397 $397 $ --
----- ----- -----
----- ----- -----
</TABLE>
- ---------------------------------------------------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1999
(UNAUDITED)
- ---------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities (totaling $4,448 or 4.8% of net asset at June 30, 1999)
were valued at fair value-see note A-1 to financial statements.
(e) -- 144A Security-certain conditions for public sale may exist.
(g) -- The Fund is advised by an affiliate.
ADR -- American Depositary Receipt
ADS -- American Depositary Shares
EGP -- Egyptian Pound
GDR -- Global Depositary Receipt
HKD -- Hong Kong Dollar
PCL -- Public Company Limited
- ----------------------------------------------------------------
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) APPRECIATION
(000) (000) (000) (000)
- --------- ------------- --------------- -------------
<S> <C> <C> <C>
$ 80,492 $ 16,142 $ (5,109) $ 11,033
</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 $69,716,000 and $33,071,000,
respectively. There were no purchases and sales of U.S. Government securities
for the six months ended June 30, 1999.
- ----------------------------------------------------------------
For the six months ended June 30, 1999, the Portfolio owned shares of affiliated
funds for which the Portfolio earned realized losses on sales of these shares of
approximately $16,000.
- ----------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
MARKET % OF
VALUE NET
SECTOR DIVERSIFICATION (000) ASSETS
- ---------------------------------------- --------- ---------
<S> <C> <C>
Capital Equipment....................... $ 11,959 13.0%
Consumer Goods.......................... 12,032 13.0
Energy.................................. 8,065 8.7
Finance................................. 15,853 17.2
Materials............................... 8,804 9.5
Multi-Industry.......................... 2,789 3.0
Services................................ 26,841 29.1
--------- ---
Total Foreign and Securities............ $ 86,343 93.5%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1999
(UNAUDITED)
(000)
<S> <C>
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 596
Interest 89
Less: Foreign Taxes Withheld (26)
---------------
Total Income 659
---------------
EXPENSES:
Investment Advisory Fees 324
Less: Fees Waived (261)
---------------
Net Investment Advisory Fees 63
Custodian Fees 182
Administrative Fees 72
Amortization of Organizational Costs 51
Shareholder Reports 39
Professional Fees 39
Interest Expense 6
Directors' Fees and Expenses 1
Other 5
---------------
Net Expenses 458
---------------
Net Investment Income 201
---------------
NET REALIZED GAIN (LOSS) ON:
Investments Sold (includes realized losses from affiliated
funds of $16) 1,380
Foreign Currency Transactions (59)
Swap Agreements (15)
---------------
Net Realized Gain 1,306
---------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (Net of foreign taxes of $349 on unrealized
appreciation) 16,289
Foreign Currency Translations (223)
Swap Agreements (10)
---------------
Change in Unrealized Appreciation/Depreciation 16,056
---------------
Net Realized Gain and Change in Unrealized
Appreciation/Depreciation 17,362
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 17,563
---------------
---------------
</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 $ 201 $ 299
Net Realized Gain (Loss) 1,306 (8,981)
Change in Unrealized
Appreciation/Depreciation 16,056 (1,534)
---------- ----------
Net Increase (Drecrease) in Net
Assets Resulting from Operations 17,563 (10,216)
---------- ----------
DISTRIBUTIONS:
Net Investment Income -- (198)
---------- ----------
Total Distributions -- (198)
---------- ----------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 60,138 29,230
Distributions Reinvested -- 197
Redeemed (21,556) (16,798)
---------- ----------
Net Increase in Net Assets Resulting
from Capital Share Transactions 38,582 12,629
---------- ----------
Total Increase in Net Assets 56,145 2,215
NET ASSETS:
Beginning of Period 36,313 34,098
---------- ----------
End of Period (Including
undistributed (overdistibuted)
net investment income of $100 and
$(101), respectively) $ 92,458 $ 36,313
---------- ----------
---------- ----------
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,783 3,556
Shares Issued on Distributions
Reinvested -- 28
Shares Redeemed (2,477) (2,088)
---------- ----------
Net Increase in Capital Shares
Outstanding 4,306 1,496
---------- ----------
---------- ----------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER PERIOD FROM
SIX MONTHS ENDED 31, OCTOBER 1, 1996*
JUNE 30, 1999 --------------------- TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) 1998 1997 1996
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.11 $ 9.45 $ 9.78 $ 10.00
------- --------- --------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03 0.06 0.04 0.01
Net Realized and Unrealized Gain (Loss) 2.68 (2.36) -- (0.21)
------- --------- --------- -------
Total From Investment Operations 2.71 (2.30) 0.04 (0.20)
------- --------- --------- -------
DISTRIBUTIONS
Net Investment Income -- (0.04) (0.07) (0.02)
Net Realized Gain -- -- (0.02) --
In Excess of Net Realized Gain -- -- (0.28) --
------- --------- --------- -------
Total Distributions -- (0.04) (0.37) (0.02)
------- --------- --------- -------
NET ASSET VALUE, END OF PERIOD $ 9.82 $ 7.11 $ 9.45 $ 9.78
------- --------- --------- -------
------- --------- --------- -------
TOTAL RETURN 38.12% (24.34)% 0.52% (2.03)%
------- --------- --------- -------
------- --------- --------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $92,458 $ 36,313 $ 34,098 $11,789
Ratio of Expenses to Average Net Assets 1.75%** 1.95% 1.80% 1.79%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense and Foreign Tax
Expense 1.74%** 1.75% 1.75% 1.75%**
Ratio of Net Investment Income to Average Net
Assets 0.77%** 0.83% 0.47% 0.32%**
Portfolio Turnover Rate 65% 100% 87% 9%
- ------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period:
Per Share Benefit to Net Investment Income $ 0.03 $ 0.11 $ 0.17 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.75%** 3.45% 4.12% 6.17%**
Net Investment Loss to Average Net Assets (0.23)%** (0.66)% (1.84)% (4.06)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
The accompanying notes are an integral part of the financial statements.
10
<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 Emerging Markets Equity
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
11
<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 (5-12)
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.
12
<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,
13
<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. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the commencement of operations. Morgan Stanley Dean Witter Investment Management
Inc. has agreed that in the event any of its initial shares which comprised the
Fund at inception are redeemed, the proceeds on redemption will be reduced by
the pro-rata portion of any unamortized organizational costs in the same
proportion as the number of shares redeemed bears to the initial shares held at
time of redemption.
13. 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 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>
Emerging Markets Equity... 1.25% 1.20% 1.15%
</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 1.75%.
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
14
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
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.
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.
15
<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.
16
