<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT JUNE 30, 1999)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Cable 7.7%
Chemicals 2.7%
Communications 22.9%
Energy 2.0%
Financial 0.8%
Food & Beverage 0.9%
Gaming 7.0%
Healthcare 6.6%
Hotels & Lodging 3.7%
Industrials 3.4%
Media & Entertainment 3.7%
Metals 2.4%
Packaging 2.7%
Real Estate 1.6%
Real Estate/Building 0.8%
Retail 6.2%
Sovereign & Emerging Markets 10.1%
Supermarkets/Drugs 0.8%
Transportation 0.8%
U.S. Treasury Securities 1.7%
Utilities 2.1%
Other 9.4%
</TABLE>
PERFORMANCE COMPARED TO THE SALOMON HIGH-YIELD MARKET INDEX(1)
- ------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
<S> <C> <C> <C>
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ---------- -------------------
PORTFOLIO.... 3.29% 4.12% 8.63%
INDEX........ 1.77 0.28 7.50
</TABLE>
1. The Salomon High-Yield Market Index includes public, non-convertible
corporate bond issues with at least one year remaining to maturity and $50
million in par amount outstanding which carry a below investment grade
quality rating from either Standard & Poor's or Moody's rating services.
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
<S> <C> <C>
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- -------------------- ----------------- -------------
Columbia/HCA
Healthcare Corp. Healthcare 3.9%
Nextel
Communications,
Inc. Communications 3.0%
DR Securitized Lease
Trust Retail 2.2%
Chancellor Media Media &
Corp. Entertainment 1.9%
Tenet Healthcare
Corp. Healthcare 1.9%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
<S> <C> <C>
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------- --------- -------------
Communications $ 11,501 22.9%
Sovereign &
Emerging Markets 5,067 10.1
Cable 3,846 7.7
Gaming 3,517 7.0
Healthcare 3,326 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. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.
The objective of the High Yield Portfolio is to achieve above-average total
return over a market cycle of three to five years by investing primarily in a
diversified portfolio of high yield, fixed income securities. High yield
securities are rated below investment grade and are commonly referred to as
"junk bonds". The Portfolio's average weighted maturity will ordinarily exceed
five years.
For the six months ended June 30, 1999, the Portfolio had a total return of
3.29% compared to 1.77% for the Salomon High-Yield Market Index (the "Index").
For the one year ended June 30, 1999, the Portfolio had a total return of 4.12%
compared to 0.28% for the Index. For the period since inception on January 2,
1997 through June 30, 1999, the Portfolio had an average annual total return of
8.63% compared to 7.50% for the Index. At June 30, 1999, the Portfolio had a SEC
30-day yield of 8.76%.
Initially, in the second quarter, high yield bonds performed well, supported by
merger and investment activity in the telecommunications and cable industries,
and positive fund flows. By May, liquidity concerns, technical conditions, and
rising rates contributed to lower prices. Exposure to non-U.S. issues and
telecommunications and cable sectors had the largest positive impact on results.
Holdings in healthcare, retail and gaming sectors also helped performance.
Underweighting in the commodity and cyclical sectors, which performed well, and
security selection detracted from returns. The Portfolio continued to benefit
from merger and investment activities in telecommunications and cable sectors
that have been generally favorable for credit quality. Prices of many issues not
directly involved in transactions have also benefited.
1
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
The Portfolio remains overweighted in the telecommunications and cable sectors,
where we continue to find value. We continue to selectively add to commodity and
cyclical issues, where we remain underweighted, and are finding value in the
gaming sector. The Portfolio remains overweighted in healthcare and retail, and
maintains exposure to non-U.S. issues.
We expect economic growth to moderate and inflation to remain close to current
levels, which should be an attractive environment for high yield bonds. We
continue to believe that high yield bonds offer attractive value on a
risk-adjusted expected return basis.
July 1999
2
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
FIXED INCOME SECURITIES (88.3%)
CABLE (7.7%)
Adelphia Communications Corp.
$ 405 8.375%, 2/1/08................................... $ 390
60 9.875%, 3/1/07................................... 62
110 7.50%, 1/15/04................................... 105
CSC Holdings, Inc.
295 7.25%, 7/15/08................................... 279
400 7.875%, 12/15/07................................. 394
Lenfest Communications, Inc.
175 7.625%, 2/15/08.................................. 180
435 8.375%, 11/1/05.................................. 461
GBP (n)525 NTL, Inc. 0.00%, 4/1/08.......................... 560
Rogers Cablesystems Ltd., Series B
$ 600 10.00%, 3/15/05.................................. 647
150 10.125%, 9/1/12.................................. 162
100 Rogers Communications, Inc. 9.125%, 1/15/06...... 102
GBP (e,n)500 Telewest PLC 0.00%, 4/15/09...................... 504
-------
3,846
-------
CHEMICALS (2.7%)
Huntsman ICI
EUR (e)250 10.125%, 7/1/09.................................. 251
$ (e)250 10.125%, 7/1/09.................................. 259
555 ISP Holdings, Inc., Series B, 9.00%, 10/15/03.... 553
(e)280 Lyondell Chemical Co., 9.625%, 5/1/107........... 285
-------
1,348
-------
COMMUNICATIONS (21.3%)
345 American Cellular Corp. 10.50%, 5/15/08.......... 354
200 AMSC Acquisition Co., Inc., Series B 12.25%,
4/1/08......................................... 153
(e)330 Centennial Cellular Operating Co. 10.75%,
12/15/08....................................... 341
50 Dial Call Communications, Inc. 10.25%,
12/15/05....................................... 51
240 Dobson Communications Corp. 11.75%, 4/15/07...... 252
Dolphin Telecommunications
(e,n)375 0.00%, 5/15/09................................... 181
EUR (n)370 0.00%, 6/1/08.................................... 191
$ (e)450 Echostar DBS Corp. 9.375%, 2/1/09................ 457
EUR 307 Esprit Telecom Group plc 11.00%, 6/15/08......... 338
$ 340 Global Crossing Holdings, Ltd. 9.625%, 5/15/08... 359
320 Globalstar LP/Capital 11.375%, 2/15/04........... 211
Hermes Europe Railtel
175 10.375%, 1/15/09................................. 178
260 11.50%, 8/15/07.................................. 273
(n)555 Hyperion Telecommunications, Inc. 0.00%,
4/15/03........................................ 459
Intermedia Communications, Inc., Series B
(n)805 0.00%, 7/15/07................................... 575
235 8.50%, 1/15/08................................... 215
465 Iridium LLC/Capital Corp., Series A, 13.00%,
7/15/05........................................ 93
130 IXC Communications, Inc. 9.00%, 4/15/08.......... 125
235 Metromedia Fiber Network, Inc. 10.00%,
11/15/08....................................... 242
Nextel Communications, Inc
(n)1,380 0.00%, 9/15/07................................... 1,008
(n)250 0.00%, 2/15/08................................... 172
(j)300 9.75%, 8/15/04................................... 304
NEXTLINK Communications Co.
(n)660 0.00%, 4/15/08................................... 394
140 10.75%, 11/15/08................................. 143
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
$ (e)135 OnePoint Communications Corp. 14.50%, 6/1/08..... $ 73
Primus Telecommunications Group, Inc.
285 Series B 9.875%, 5/15/08......................... 270
(e)170 11.25%, 1/15/09.................................. 172
210 PSINet, Inc., Series B, 10.00%, 2/15/05.......... 209
RCN Corp.
(n)580 0.00%, 10/15/07.................................. 389
(n)150 Series B, 0.00%, 2/15/08......................... 93
(n)345 Rhythms NetConnections, Inc., Series B, 0.00%,
5/15/08........................................ 182
375 Rogers Cantel, Inc. 8.30%, 10/1/07............... 370
100 Rogers Communications, Inc. 8.875%, 7/15/07...... 101
RSL Communications plc
(n)400 0.00%, 3/1/08.................................... 240
EUR (n)384 0.00%, 6/15/08................................... 244
$ 350 9.125%, 3/1/08................................... 321
90 12.00%, 11/1/08.................................. 95
18 12.25%, 11/15/06................................. 19
EUR (e)335 Tele1 Europe B.V. 13.00%, 5/15/09................ 358
$ (n)430 Viatel, Inc. 0.00%, 4/15/08...................... 276
(n)350 Wam!Net, Inc. 0.00%, 3/1/05...................... 206
-------
10,687
-------
ENERGY (2.0%)
(n)220 Husky Oil Ltd. 8.90%, 8/15/28.................... 212
535 Snyder Oil Corp. 8.75%, 6/15/07.................. 527
Vintage Petroleum, Inc.
150 8.625%, 2/1/09................................... 143
125 9.75%, 6/30/09................................... 128
-------
1,010
-------
FINANCIAL (0.8%)
(e,n)290 Fuji JGB Investments LLC, Series A, 9.87%,
12/31/49....................................... 254
(n)140 SB Treasury Co., LLC, Series A, 9.40%,
12/29/49....................................... 136
-------
390
-------
FOOD & BEVERAGE (0.9%)
500 Smithfield Foods, Inc. 7.625%, 2/15/08........... 455
-------
GAMING (7.0%)
775 Harrahs Operating Co., Inc. 7.875%, 12/15/05..... 752
(e)530 Horshoe Gaming Holding, 8.652%, 5/15/09.......... 513
(e)690 International Game Technology,
8.375%, 5/15/09................................ 683
715 Park Place Entertainment 7.875%, 12/15/05........ 679
Station Casinos, Inc.
200 9.75%, 4/15/07................................... 204
300 10.125%, 3/15/06................................. 309
385 8.875%, 12/1/08.................................. 377
-------
3,517
-------
HEALTHCARE (6.6%)
Columbia/HCA Healthcare Corp.
710 6.91%, 6/15/05................................... 657
225 7.00%, 7/1/07.................................... 203
300 7.15%, 3/30/04................................... 283
250 7.69%, 6/15/25................................... 207
100 8.13%, 8/4/03.................................... 99
490 8.85%, 1/1/07.................................... 493
330 Fresenius Medical Capital Trust II 7.875%,
2/1/08......................................... 310
EUR (e)118 Sirona Dental Systems 9.125%, 7/15/08............ 111
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
HEALTHCARE (CONT.)
<TABLE>
<C> <S> <C>
Tenet Healthcare Corp.
$ 840 8.625%, 1/15/07.................................. $ 821
150 Series B, 8.125%, 12/1/08........................ 142
-------
3,326
-------
HOTEL & LODGING (3.7%)
560 Hilton Hotels Corp. 7.95%, 4/15/07............... 567
955 HMH Properties, Series A, 7.875%, 8/1/05......... 903
375 Host Marriott Travel Plaza 9.50%, 5/15/05........ 385
-------
1,855
-------
INDUSTRIALS (3.4%)
220 Allied Waste of North America, Series B, 7.875%,
1/1/09......................................... 204
225 Applied Power, Inc. 8.75%, 4/1/09................ 218
105 Axia, Inc. 10.75%, 7/15/08....................... 103
EUR 89 Geberit International S.A. 10.125%, 4/15/07...... 107
$ (e)500 Hayes Lemmerz International, Inc.
8.25%, 12/15/08................................ 475
(n)560 Norcal Waste Systems, Inc. 13.50%, 11/15/05...... 619
-------
1,726
-------
MEDIA & ENTERTAINMENT (3.1%)
Chancellor Media Corp.
475 9.00%, 10/1/08................................... 482
505 Series B, 8.125%, 12/15/07....................... 490
530 Outdoor Systems, Inc. 8.875%, 6/15/07............ 553
-------
1,525
-------
METALS (2.4%)
310 Glencore Nickel Property Ltd. 9.00%, 12/1/14..... 267
EUR 345 Impress Metal Packaging Holdings 9.875%,
5/29/07........................................ 394
$ 220 Murrin Murrin Holdings Ltd. 9.375%, 8/31/07...... 193
355 National Steel Corp., Series D, 9.875%, 3/1/09... 360
-------
1,214
-------
PACKAGING (2.7%)
555 Norampac, Inc. 9.50%, 2/1/08..................... 568
(e)455 Pacifica Papers, Inc. 10.00%, 3/15/09............ 469
150 SD Warren Co. 12.00%, 12/15/04................... 160
175 Tembec Industries, Inc. 8.625%, 6/30/09.......... 174
-------
1,371
-------
REAL ESTATE (1.6%)
EUR 340 American Standard Cos. 7.125%, 6/1/06............ 353
$ (e)465 Nortek, Inc. 8.875%, 8/1/08...................... 458
-------
811
-------
REAL ESTATE/BUILDING (0.8%)
405 D. R. Horton, Inc. 8.00%, 2/1/09................. 381
-------
RETAIL (6.2%)
265 CEX Holdings, Inc., Series B, 9.625%, 6/1/08..... 249
DR Structured Finance, Series:
225 93-K1 A1 6.66%, 8/15/10.......................... 209
75 94-K1 A1 7.60%, 8/15/07.......................... 74
810 94-K1 A2 8.375%, 8/15/15......................... 800
35 94-K2 A2 9.35%, 8/15/19.......................... 35
HMV Media Group plc
200 10.25%, 5/15/08.................................. 201
GBP 235 Series B, 10.875%, 5/15/08....................... 384
$ 550 Kmart Funding Corp., Series F, 8.80%, 7/1/10..... 564
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
Musicland Group, Inc.
$ 120 9.00%, 6/15/03................................... $ 116
470 Series B, 9.875%, 3/15/08........................ 461
-------
3,093
-------
SOVEREIGN & EMERGING MARKETS (10.0%)
100 Asia Pulp & Paper Co., Ltd., Series A, 12.00%,
2/15/04........................................ 66
(e)115 AST Research, Inc. 7.45%, 10/1/02................ 110
(e)215 Cablevision S.A. 13.75%, 5/1/09.................. 198
(e,n)100 CESP 9.125%, 6/26/07............................. 83
(n)475 CTI Holdings S.A. 0.00%, 4/15/08................. 237
850 Indah Kiat Finance Mauritius 10.00%, 7/1/07...... 586
300 Multicanal S.A. 10.50%, 2/1/07................... 247
EUR (e)350 Netia Holdings 13.50%, 6/15/09................... 371
$ (n)600 Occidente y Caribe Cellular 0.00%, 3/15/04....... 402
Phillipine Long Distance Telephone Co.
150 9.25%, 6/30/06................................... 140
320 Series E, 7.85%, 3/6/07.......................... 274
200 Pindo Deli Financial Mauritius 10.75%, 10/1/07... 138
(n)350 PTC International Finance B.V. 0.00%, 7/1/07..... 259
539 Republic of Argentina, Series L (Floating Rate),
5.938%, 3/31/05................................ 460
(e)260 Samsung Electronics America 9.75%, 5/1/03........ 270
(e)125 Samsung Electronics Co. 7.45%, 10/1/02........... 121
350 Satelites Mexicanos S.A., Series B, 10.125%,
11/1/04........................................ 282
760 TV Azteca S.A., Series B, 10.50%, 2/15/07........ 572
285 United Mexican States Par Bond, Series A, 6.25%,
12/31/19....................................... 211
-------
5,027
-------
SUPERMARKETS/DRUGS (0.8%)
400 Fred Meyer, Inc. 7.375%, 3/1/05.................. 405
-------
TRANSPORTATION (0.8%)
67 ALPS, Series 96-1 DX, 12.75%, 6/15/06............ 67
325 American Commercial Lines LLC, Series B, 10.25%,
6/30/08........................................ 326
-------
393
-------
U.S. TREASURY SECURITIES (1.7%)
800 U. S. Treasury Note 6.50%, 10/15/06.............. 826
-------
UTILITIES (2.1%)
380 AES Corp. 8.50%, 11/1/07......................... 358
540 CMS Energy Corp. 7.50%, 1/15/09.................. 506
(e)200 Ras Laffan Liquefied Natural Gas Co. 8.294%,
3/15/14........................................ 183
-------
1,047
-------
TOTAL FIXED INCOME SECURITIES (COST $45,503)...................... 44,253
-------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- --------------
PREFERRED STOCK (1.8%)
COMMUNICATIONS (1.2%)
(a)1,550 Concentric Network Corp., Series B, PIK,
13.50%......................................... 146
(a,e)2,250 Dobson Communications, PIK, 13.00%............... 217
(a)228 IXC Communications, Inc., Series B, PIK,
12.50%......................................... 221
-------
584
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
MEDIA & ENTERTAINMENT (0.6%)
Paxson Communications Corp. PIK
2,836 13.25%........................................... $ 255
(a,e)431 9.75%............................................ 43
-------
298
-------
TOTAL PREFERRED STOCK (COST $866)................................. 882
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- --------------
WARRANTS (0.5%)
COMMUNICATIONS (0.4%)
(a,e)2,000 American Mobile Satellite Corp., expiring
4/1/08......................................... 7
(a,e)1,350 OnePoint Communications Corp., expiring 6/1/08... --
(a,e)13,800 Rhythms NetConnections, Inc., expiring 5/15/08... 199
(a,e)10,500 Wam!Net, Inc., expiring 3/1/05................... 24
-------
230
-------
MEDIA & ENTERTAINMENT (0.0%)
(a,e)128 Paxson Communication Corp., expiring 6/30/03..... --
-------
SOVEREIGN & EMERGING MARKETS (0.1%)
(a)2,400 Occidente y Caribe Cellular, expiring 3/15/04.... 40
-------
TOTAL WARRANTS (COST $36)......................................... 270
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------------
SHORT-TERM INVESTMENT (7.3%)
REPURCHASE AGREEMENT (7.3%)
$ 3,666 Chase Securities, Inc. 4.55%, dated 6/30/99, due
7/1/99, to be repurchased at $3,666,
collateralized by U.S. Treasury Notes, 11.125%,
due 8/15/03, valued at $3,765 (COST $3,666).... 3,666
-------
FOREIGN CURRENCY (0.1%)
GBP 18 British Pound (COST $29)......................... 29
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
TOTAL INVESTMENTS (98.0%) (COST $50,100).......................... $49,100
-------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- --------------------------------------------------------------------------
OTHER ASSETS (2.5%)
Cash.................................. $ 1
Interest Receivable................... 871
Receivable for Investments Sold....... 276
Unrealized Gain on Foreign Currency
Exchange Contracts................... 100
Receivable for Portfolio Shares
Sold................................. 29 1,277
-----
LIABILITIES (-0.5%)
Payable for Investments Purchased..... (206)
Payable for Portfolio Shares
Redeemed............................. (25)
Investment Advisory Fees Payable...... (11)
Administrative Fees Payable........... (9)
Professional Fees Payable............. (7)
Custodian Fees Payable................ (2)
Other Liabilities..................... (16) (276)
----- -------
NET ASSETS (100%)........................................ $ 50,101
-------
-------
</TABLE>
<TABLE>
<S> <C> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,687,531 outstanding
$0.001 par value shares (authorized
500,000,000 shares)................... $ 10.69
-------
-------
NET ASSETS CONSIST OF:
Paid in Capital.......................................... $ 49,692
Undistributed Net Investment Income...................... 1,671
Accumulated Net Realized Loss............................ (379 )
Unrealized Depreciation on Investments, Foreign Currency
Translations and Futures Contracts..................... (883 )
-------
NET ASSETS.............................. $ 50,101
-------
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1999
(UNAUDITED)
- ---------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign exchange currency contracts open at June 30, 1999,
the Portfolio is obligated to deliver 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>
EUR 350 $ 362 7/26/99 U.S.$ 362 $ 362 $ --
EUR 935 966 7/27/99 U.S.$1,000 1,000 34
EUR 45 47 7/27/99 U.S.$ 48 48 1
EUR 340 351 7/27/99 U.S.$ 360 360 9
EUR 250 258 7/27/99 U.S.$ 259 259 1
EUR 165 170 7/30/99 U.S.$ 176 176 6
GBP 50 79 8/9/99 U.S.$ 80 80 1
EUR 70 72 8/10/99 U.S.$ 76 76 4
EUR 50 52 8/20/99 U.S.$ 54 54 2
EUR 465 481 8/20/99 U.S.$ 494 494 13
GBP 850 1,340 9/3/99 U.S.$1,369 1,369 29
--------- --------- ---
$ 4,178 $ 4,278 $ 100
--------- --------- ---
--------- --------- ---
</TABLE>
- ----------------------------------------------------------------
(a) -- Non-income producing security
(e) -- 144A Security -- certain conditions for public sale may exist.
(j) -- Security was pledged to cover margin requirements for futures
contracts.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1999. Maturity date disclosed is the
ultimate maturity date.
EUR -- Euro
PIK -- Payment-In-Kind. Income may be paid in additional securities or in
cash at the discretion of the issuer.
Floating Rate -- Interest rate changes on these instruments are based upon a
designated base rate. The rates shown are those in effect at June 30,
1999.
- ----------------------------------------------------------------
FUTURES CONTRACTS:
At June 30, 1999, the following futures contracts were open:
<TABLE>
<CAPTION>
NUMBER AGGREGATE UNREALIZED
OF FACE VALUE EXPIRATION APPRECIATION
CONTRACTS (000) DATE (DEPRECIATION)
--------------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Short:
Long Gilt 7 U.S.$1,254 Sept. 99 U.S.$ 17
</TABLE>
- ----------------------------------------------------------------
- ----------------------------------------------------------------
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>
$ 50,071 $ 805 $ (1,805) $ (1,000)
</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 $20,359,000 and $4,731,000,
respectively. There were no purchases and sales of U.S. Government securities
for the six months ended June 30, 1999.
- ----------------------------------------------------------------
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 and net currency losses of
approximately $56,000 and $11,000, respectively.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
(UNAUDITED)
(000)
<S> <C>
- -------------------------------------------------------
INVESTMENT INCOME:
Interest $ 1,856
------
Total Income 1,856
------
EXPENSES:
Investment Advisory Fees 104
Less: Fees Waived (58 )
------
Net Investment Advisory Fees 46
Administrative Fees 53
Shareholder Reports 29
Professional Fees 22
Directors' Fees and Expenses 6
Custodian Fees 5
Other 5
------
Net Expenses 166
------
Net Investment Income 1,690
------
NET REALIZED GAIN (LOSS) ON:
Investments Sold (506 )
Foreign Currency Transactions 143
Futures Contracts 40
------
Net Realized Loss (323 )
------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments (374 )
Futures 27
Foreign Currency Translations 105
------
Change in Unrealized
Appreciation/Depreciation (242 )
------
Net Realized Loss and Change in
Unrealized
Appreciation/Depreciation (565 )
------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,125
------
------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,690 $ 1,876
Net Realized Gain (Loss) (323) 135
Change in Unrealized Appreciation/Depreciation (242) (973)
------- --------
Net Increase in Net Assets Resulting from
Operations 1,125 1,038
------- --------
DISTRIBUTIONS:
Net Investment Income -- (1,838)
Net Realized Gain -- (207)
In Excess of Net Realized Gain -- (86)
------- --------
Total Distributions -- (2,131)
------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 22,925 33,087
Distributions Reinvested -- 2,117
Redeemed (7,008) (13,542)
------- --------
Net Increase in Net Assets Resulting from Capital
Share Transactions 15,917 21,662
------- --------
Total Increase in Net Assets 17,042 20,569
NET ASSETS:
Beginning of Period 33,059 12,490
------- --------
End of Period (Including undistributed
(overdistributed) net investment income of
$1,671 and $(19), respectively) $ 50,101 $ 33,059
------- --------
------- --------
- -----------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,155 3,060
Shares Issued on Distributions Reinvested -- 205
Shares Redeemed (661) (1,252)
------- --------
Net Increase in Capital Shares Outstanding 1,494 2,013
------- --------
------- --------
- -----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED JANUARY 2, 1997*
JUNE 30, 1999 YEAR ENDED TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) DECEMBER 31, 1998 1997
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.35 $ 10.59 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.36 0.63 0.63
Net Realized and Unrealized Gain
(Loss) (0.02) (0.13) 0.72
------- ------- -------
Total From Investment Operations 0.34 0.50 1.35
------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.62) (0.63)
Net Realized Gain -- (0.08) (0.13)
In Excess of Net Realized Gain -- (0.04) --
------- ------- -------
Total Distributions -- (0.74) (0.76)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 10.69 $ 10.35 $ 10.59
------- ------- -------
------- ------- -------
TOTAL RETURN 3.29% 4.80% 13.53%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $50,101 $33,059 $12,490
Ratio of Expenses to Average Net
Assets 0.80%** 0.80% 0.81%**
Ratio of Expenses to Average Net
Assets
Excluding Interest Expense N/A N/A 0.80%**
Ratio of Net Investment Income to
Average Net Assets 8.12%** 8.42% 7.41%**
Portfolio Turnover Rate 13% 48% 78%
- ------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net
Investment Income $ 0.01 $ 0.03 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.08%** 1.15% 1.68%**
Net Investment Income to Average
Net Assets 7.85%** 8.07% 6.53%**
</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 High Yield 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 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.
9
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
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.
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
10
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
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, 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
11
<PAGE>
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
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 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: Miller Anderson & Sherrerd, LLP ("MAS"), 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 THAN
PORTFOLIO $500 MILLION TO $1 BILLION $1 BILLION
- ---------- --------------- --------------- -------------
<S> <C> <C> <C>
High Yield 0.50% 0.45% 0.40%
</TABLE>
MAS 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 0.80%.
C. ADMINISTRATOR: Morgan Stanley Dean Witter Investment Management Inc. (the
"Administrator"), a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co.,
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.
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.
12
<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.
13
