<PAGE>
EXHIBIT 17(e)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO
ANNUAL REPORT
December 31, 1999
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
U.s. Real Estate Portfolio
Investment Overview
Composition of Net Assets (at December 31, 1999)
-------------------------------------------------
<TABLE>
<S> <C>
Diversified (7.3%)
Health Care (0.6%)
Industrial (4.2%)
Lodging/Resorts (5.5%)
Office/Industrial Mixed (1.5%)
Office (28.9%)
Residential Apartments (22.0%)
Residential Manufactured Homes (6.6%)
Retail Regional Malls (9.2%)
Retail Strip Centers (6.1%)
Shelf Storage (4.2%)
Other (3.9%)
</TABLE>
Top Five Holdings
<TABLE>
<CAPTION>
Percent Of
Security Industry Net Assets
-------- ---------------------- ----------
<S> <C> <C>
Equity Office Properties Trust Office 5.8%
Arden Realty Group, Inc. Office 5.4%
Equity Residential Properties Trust Residential Apartments 5.1%
Avalonbay Communities, Inc. Residential Apartments 5.0%
Brookfield Properties Corp. Office 5.0%
</TABLE>
Performance Compared to the National Association of Real Estate Investment
Trusts (NAREIT) Equity Index/1/
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Returns/2/
-------------------------
One Average Annual
Year Since Inception/3/
---- -------------------
<S> <C>
Portfolio............................ -1.47% 1.27%
Index................................ -4.62% -2.25%
</TABLE>
1. The NAREIT Equity Index is an unmanaged market weighted index of tax
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System (including dividends).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on March 3, 1997.
Past Performance Is Not Predictive Of Future Performance.
Comparison of the Change in Value of a $10,000 Investment
--------------------------------------------------------------------------------
3/3/97* 12/31/97 12/31/98 12/31/99
U.S. Real Estate Portfolio $10,000 ------ ------ $10,363
National Association of Real
Estate Investment Trusts
(NAREIT) Equity Index $10,000 ------ ------ $ 9,378
* Commencement of Operations
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
Certain information appearing in this investment overview is unaudited.
Accordingly, the report of independent accountants appearing elsewhere in this
report does not extend to this information. The information contained in this
overview regarding specific securities is for informational purposes only and
should not be construed as a recommendation to purchase or sell the securities
mentioned. The performance results provided are for informational purposes only
and should not be construed as a guarantee of the Portfolio's future
performance. Past performance shown is not predictive of future performance.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The U.S. Real Estate Portfolio seeks to provide above-average current income and
long-term capital appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real estate investment
trusts ("REITS").
For the year ended December 31, 1999, the Portfolio had a total return of -1.47%
compared to -4.62% for the National Association of Real Estate Investment Trusts
(NAREIT) Equity Index (the "Index"). For the period from inception on March 3,
1997 through December 31, 1999, the Portfolio had an average annual total return
of 1.27% compared to -2.25% for the Index.
Performance of the REIT market in the fourth quarter of 1999 resembled the
pattern established for much of the previous six quarters, featuring persistent
downward pressure with intermittent rallies. Despite declining through mid-
December to its 52-week low (a level last witnessed in November 1996), due to a
lack of interest by non-dedicated investors and tax loss selling, the sector
rallied 9% in the last half of December as value investors appeared to gain a
renewed interest. The Index fell by 1% in the fourth quarter and provided a
year-to-date loss of 4.62%. REIT share prices are now trading at more than a 15%
1
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
U.S. Real Estate Portfolio
Investment Overview (cont.)
discount to the underlying Net Asset Value ("NAV") of their assets. Despite the
attractive arbitrage between valuations in the public versus the private real
estate markets, there was very little interest by non-dedicated institutional
investors in the sector this past year. (We define real estate arbitrage as the
pricing disparity between prices of actual properties in the private real estate
market versus the implied pricing of properties owned by public companies based
on their share price).
As stated in earlier reports, our investment perspective is that over the medium
and long-term the largest determinant of the value of real estate stocks will be
underlying real estate fundamentals. We measure the sector based on the Price to
Net Asset Value per share ratio ("P/NAV"). Given the large and active private
real estate market, we believe that there are limits as to the level of premium
or discount at which the sector can trade relative to its NAV. These limits can
be viewed as the point at which the arbitrage opportunity between owning real
estate in the private versus public markets becomes compelling (allowing for the
notion that the public market has a tendency to over-shoot both on the upside
and downside). The current pricing causes us to return to the same fundamental
question: is the public market valuation accurately predicting a decline in real
estate values or is the public market simply oversold? Although we retain a
healthy respect for the predicting power of the public markets, our bias is to
support the opinion that the market is oversold.
The REIT industry hosted its annual conference in Los Angeles at the end of
October and the tone was more upbeat than we had expected in spite of the weak
share prices. Two general themes relayed by the companies were the continued
strong performance in the physical property markets and their acceptance that
the sector may trade at a discount to NAV for a substantial period. As a result,
companies generally have reoriented their thinking to focus on the growth of NAV
per share as opposed to absolute growth. They are also attempting to become
self-funding, which will require the implementation of asset sales, joint
ventures and more judicious use of free cash flow. In fact, many companies have
developed our recommended model of comparing any development or acquisition
activity to buying back their stock.
At year-end we can point to five completed or agreed-to LBO transactions in the
industry. These transactions provide the best evidence of both the existence of
the arbitrage opportunity between the valuation of public and private real
estate as well as the availability of equity investors. It is interesting to
note that the participants in the LBOs discussed below include a number of the
most sophisticated real estate opportunity funds. These investors, who typically
invest in the private real estate marketplace, took advantage of the arbitrage
opportunity to purchase public companies trading at significant discounts to
asset value. Generally, given an average leverage ratio approaching 50% of total
capital, a company trading at an NAV discount of 15% to 25% allows an investor
to buy the assets at an attractive price and provides existing shareholders
handsome return potential.
Further evidence of the favorable real estate arbitrage is the pervasive
adoption of share buyback programs. Instead of buying or developing properties,
companies are utilizing retained cashflow to fund share buybacks, effectively to
purchase real estate in the cheapest manner (by buying their stock that trades
at a discount to private real estate value). The most recent decline in prices
served to increase the number of share buyback programs. We have been strong
advocates for companies to perform the analysis of this strategy. For many
companies, their stock is the best investment that they can identify in this
competitive market for real estate. Due to the large required dividend payout of
the REIT structure, companies in the sector can only generate modest levels of
free cashflow to buyback shares. However, we applaud the companies that have
sold assets (at par) and redeployed that capital into share repurchases (at a
discount). Through the third quarter, more than 50 companies authorized share
buyback programs and had purchased in excess of $1 billion of stock,
representing more than 2% of their equity capitalization.
Companies have taken greater steps in developing business plans that do not
require equity issuance. These plans place an emphasis on managing the existing
portfolio and external growth, if planned, is funded by asset sales or is
accomplished within a joint venture structure. These approaches provide
variations on a theme of self-funding. We support the strategy of growing NAV
per share as opposed to a strategy based simply on growing. We believe that
investors remain concerned that any improvement in pricing will cause REITs to
issue equity, thereby placing a ceiling on the price of the stocks. There were
no
2
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
U.S. Real Estate Portfolio
Investment Overview (cont.)
equity offerings completed in the fourth quarter. We expect the calendar to
remain dormant as a result of weak pricing, the lack of significant demand from
institutional buyers, and the propensity for investors to pummel companies that
issue equity.
The fourth quarter featured a number of exciting joint venture transactions. The
most notable was the joint venture established by Equity Office Properties. The
company sold interests in seven office buildings to Lend Lease Real Estate (one
of the most respected global real estate investors) for $540 million at an
attractive blended cashflow multiple. In addition, Equity will retain the
management and leasing of the assets and concurrently announced a $250 million
share buyback program. In a similar transaction, Prime Group Realty sold a 50%
interest in their best downtown Chicago office asset for approximately $300
million to a large state pension plan. Prime also retained management and
leasing and subsequently announced a share buyback program. Note that this
marked the highest sale price ($300 per square foot) achieved in this market.
The REIT Modernization Act, first proposed in the spring, has been passed. The
key feature is the ability for REITs to engage in service businesses that are
complementary to real estate through 100% ownership of a taxable REIT subsidiary
("TRS"), without jeopardizing their tax status. Many of the larger REITs have
successfully identified additional revenue sources by taking advantage of
ancillary businesses that access their existing client base. This is being
accomplished in all sectors. In multifamily, Equity Residential earns income
through relationships with service providers to their apartment residents (e.g.,
cable television providers, long distance carriers, and insurance companies). In
the mall sector, Simon Property Group, through its Simon Brand Ventures
subsidiary, has developed relationships with companies including Microsoft (to
sell its Internet service) and Turner Broadcasting (to air TBS programming in
Simon malls) and has developed its own rewards program to generate income.
Finally, many of the office REITs generate income through relationships with
providers of broadband services to their tenants.
Real Estate Market
We have continued to caution investors that there remain threats of over-supply
but strong demand is serving to mute any serious concern at this time.
Generally, there continues to be evidence of a maturing real estate market as
the improvement in fundamentals have begun to plateau. The following presents an
outline of our views.
Similar to last quarter, the data reported from the Census Bureau for the fourth
quarter demonstrated a modest level of risk to over-supply in the market for
apartments. Permits exceeded 350,000 units (annual pace on a seasonally adjusted
basis), for each of the last two reported months (October and November). Starts
barely exceeded 300,000 units in September and were 280,000 and below in October
and November. With net demand estimates in the 300,000 to 320,000 unit range, we
are monitoring this data for signs of further acceleration. Based on projections
by F.W. Dodge, prospective supply is running about 1.1% higher than prospective
demand for the next two-year period. This would result in overall vacancy
increasing from 7.1% towards 8% over this period.
Rebounding from a slump in the summer and fall, consumer confidence rose in the
fourth quarter and ended December at its highest level since its all-time high
in October 1968. Despite earlier concerns, mall sales for the holiday shopping
season rose 7.7% over 1998 rates according to the International Council for
Shopping Centers. Landlords continue to point to a strong leasing environment as
retailers commit to new stores and expansions. It is noteworthy that this proved
to be a difficult period for certain e-commerce retailers as the web sites of
the traditional retailers gained market share based upon both the greater brand
name recognition of the traditional retailers and their superior logistics and
delivery systems. Despite the unexpected strong performance over Christmas, the
risk of e-commerce remains the key mitigating factor that tempers enthusiasm for
the sector.
The near-term trends remain similar in both the office and industrial markets.
While significant amounts of space continue to come on-line, demand continues to
remain strong, almost keeping pace with new supply on the national level.
According to data from Torto Wheaton, national office vacancy rose a modest 0.2%
to 9.8% in the third quarter. The downtown markets experienced a slight
improvement of 0.2% as vacancies declined to 8.7% while vacancies in the
suburban markets moved
3
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
U.S. Real Estate Portfolio
Investment Overview (cont.)
above 10%. The industrial market, which featured a modest increase of 0.1% in
vacancy rates in the second quarter, reported an equally modest increase of 0.1%
for the third quarter. The national industrial vacancy rate now stands at 7.5%.
Despite a strong economy and relatively easy comps versus last year, the hotel
market demonstrated only modest revenue per available room ("RevPar") growth in
the fourth quarter. It is clear that the large supply of product continues to
put pressure on the market. Smith Travel Research reported full-year RevPar
growth of 3.2% and most public companies have provided similar annual RevPar
projections for 2000.
Portfolio
We have continued to shape the Portfolio with companies offering attractive
fundamental valuations relative to their underlying real estate value.
Throughout the year, we were encouraged by the strength of the U.S. economy.
Current economic consensus for strong GDP growth in 2000 causes us to remain
constructive with regard to the likelihood that real estate fundamentals will
remain favorable. The top-down weightings in the Portfolio remain similar to
last quarter, with a modest bias toward central business district and Southern
California office properties and away from grocery-anchored shopping centers. We
maintain an overweight position to markets with greater barriers to entry,
including West Coast apartments and downtown office buildings. We continue to
take advantage of the relative similarity in pricing of companies to upgrade the
Portfolio, measured both in terms of the quality of properties held by companies
and the management teams at the companies.
January 2000
4
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
U.S. Real Estate Portfolio
Statements of Net Assets
December 31, 1999
<TABLE>
<CAPTION>
Value
Shares (000)
----------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (96.3%)
Diversified (7.3%)
23,700 Pacific Gulf Properties, Inc. REIT..................................... $ 480
8,300 Pennsylvania REIT...................................................... 121
5,600 Rouse Co............................................................... 119
6,600 Vornado Realty Trust REIT.............................................. 214
(a)27,607 Wellsford Real Properties, Inc......................................... 235
-------
1,169
-------
Health Care (0.6%)
16,400 Meditrust Corp. Paired Stock........................................... 90
Industrial (4.2%)
1,600 Eastgroup Properties................................................... 30
19,200 Prime Group Realty Trust REIT.......................................... 292
18,100 Prologis Trust......................................................... 348
-------
670
-------
Lodging/Resorts (5.5%)
1,019 Hilton Hotels Corp..................................................... 10
20,856 Host Marriott Corp..................................................... 172
(a)13 Interstate Hotels Corp................................................. --@
29,433 Starwood Hotels & Resorts Worldwide, Inc............................... 692
(a)1,900 Wyndham International, Inc............................................. 5
-------
879
-------
Office/Industrial Mixed (1.5%)
2,100 Duke Realty Investment, Inc. REIT...................................... 41
2,600 PS Business Parks...................................................... 59
3,700 Spieker Properties, Inc. REIT.......................................... 135
-------
235
-------
Office (28.9%)
43,100 Arden Realty Group, Inc................................................ 865
8,200 Boston Properties, Inc................................................. 255
22,500 Brandywine Realty Trust REIT........................................... 368
76,100 Brookfield Properties Corp............................................. 798
22,500 CarrAmerica Realty Corp. REIT.......................................... 475
37,387 Equity Office Properties Trust REIT.................................... 921
29,400 Great Lakes, Inc. REIT................................................. 423
1,200 Mack-Cali Realty Corp.................................................. 31
400 Prentiss Properties Trust REIT......................................... 8
28,000 Trizec Hahn Corp....................................................... 473
-------
4,617
-------
Residential Apartments (22.0%)
7,400 Amli Residential Properties Trust REIT................................. 149
100 Apartment Investment & Management Co.
REIT................................................................... 4
21,683 Archstone Communities Trust REIT....................................... 445
23,300 Avalonbay Communities, Inc. REIT....................................... 800
19,149 Equity Residential Properties Trust REIT............................... 817
18,100 Essex Property Trust, Inc. REIT........................................ 615
19,100 Smith (Charles E.) Residential Realty, Inc.
REIT................................................................... 676
-------
3,506
-------
Residential Manufactured Homes (6.6%)
27,700 Chateau Properties, Inc. REIT.......................................... 718
7,700 Manufactured Home Communities, Inc. REIT .............................. $ 187
4,400 Sun Communities, Inc. REIT............................................. 142
-------
1,047
-------
Retail Regional Malls (9.2%)
20,700 Simon Property Group, Inc.............................................. 475
49,100 Tauban Centers, Inc. REIT.............................................. 528
17,300 Urban Shopping Centers, Inc. REIT...................................... 469
-------
1,472
-------
Retail Strip Centers (6.1%)
38,300 Burnham Pacific Property Trust REIT.................................... 359
17,100 Federal Realty Investment Trust REIT................................... 322
8,800 Pan Pacific Retail Properties, Inc. REIT............................... 144
100 Ramco-Gershenson Properties Trust REIT................................. 1
7,600 Regency Realty Corp.................................................... 152
-------
978
-------
Self Storage (4.2%)
25,232 Public Storage, Inc. REIT.............................................. 572
4,400 Shurgard Storage Centers, Inc., Series A REIT.......................... 102
-------
674
-------
Other (0.2%)
(a)10,848 Atlantic Gulf Communities Corp......................................... 1
(a)865 Merry Land Properties, Inc............................................. 5
(a)2,200 Security Capital Group-Class B......................................... 27
-------
33
-------
Total Common Stocks (Cost $17,403)................................................. 15,370
-------
Preferred Stock (0.0%)
Other (0.0%)
(a)1,401 Atlantic Gulf Communities Corp. (COST $14) ........................... 8
-------
Convertible Preferred Stock (0.1%)
Other (0.1%)
(a)2,003 Atlantic Gulf Communities Corp. (COST $20) ........................... 12
-------
No. of
Warrants
-----------
Warrants (0.0%)
Other
(a)(b)2,812 Atlantic Gulf Communities Corp., Class A,
expiring 6/23/04.................................................... --@
(a)(b)2,812 Atlantic Gulf Communities Corp., Class B,
expiring 6/23/04.................................................... --@
(a)(b)2,812 Atlantic Gulf Communities Corp., Class C,
expiring 6/23/04.................................................... --@
-------
Total Warrants (Cost $0).......................................................... --@
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
U.S. Real Estate Portfolio
Statement of Net Assets (cont.)
December 31, 1999
Face
Amount Value
(000) (000)
-------------------------------------------------------------------------------
Short-term Investment (2.9%)
Repurchase Agreement (2.9%)
$ 459 Chase Securities, Inc., 2.60%, dated 12/31/99,
due 1/3/00, to be repurchased at $459,
collateralized by U.S. Treasury Notes,
6.125%, due 12/31/01, valued at $469
(Cost $459)......................................... $ 459
----------
Total Investments (99.3%) (Cost $17,896)......... 15,849
----------
Other Assets (1.3%)
Cash........................................... $ 8
Dividends Receivable........................... 138
Receivable for Portfolio Shares Sold........... 59
Due from Adviser............................... 9
Other.......................................... 1 215
----------
LIabilities (-0.6%)
Payable for Portfolio Shares Redeemed.......... (34)
Shareholder Reporting Expense Payable.......... (32)
Professional Fees Payable...................... (19)
Custodian Fees Payable......................... (9)
Administrative Fees Payable.................... (4) (98)
---------- ----------
NET ASSETS (100%).............................................. $ 15,966
==========
Net Asset Value, Offering And Redemption
Price Per Share
Applicable to 1,751,924 outstanding $0.001 par value
shares (authorized 500,000,000 shares)....................... $ 9.11
==========
Net Assets Consist Of:
Paid in Capital................................................ $ 18,497
Undistributed Net Investment Income............................ 129
Accumulated Net Realized Loss.................................. (613)
Unrealized Depreciation on Investments......................... (2,047)
----------
Net Assets..................................................... $ 15,966
==========
(a) -- Non-income producing security
(b) -- Includes 1,878 restricted warrants.
@ -- Value is less than $500
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
U.S. Real Estate Portfolio
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
(000)
------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends $ 906
Interest 24
--------
Total Income 930
--------
Expenses:
Investment Advisory Fees 121
Less: Fees Waived (121)
--------
Net Investment Advisory Fees -
Shareholder Reports 81
Administrative Fees 42
Professional Fees 28
Custodian Fees 12
Directors' Fees and Expenses 1
Other 3
--------
Net Expenses 167
--------
Net Investment Income 763
--------
Net Realized Loss on:
Investments Sold (191)
--------
Change in Unrealized Appreciation/Depreciation on:
Investments (1,047)
--------
Net Realized Loss and Change in Unrealized
Appreciation/Depreciation (1,238)
--------
Net Decrease in Net Assets Resulting from Operations $ (475)
========
<CAPTION>
------------------------------------------------------------------------------
Statement of Changes in Net Assets
Year Ended Year Ended
December 31, 1999 December 31, 1998
(000) (000)
------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) In Net Assets
Operations:
Net Investment Income $ 763 $ 602
Net Realized Loss (191) (484)
Change in Unrealized Appreciation/
Depreciation (1,047) (1,853)
-------- --------
Net Decrease in Net Assets Resulting (475) (1,735)
from Operations -------- --------
Distributions:
Net Investment Income (870) (421)
Net Realized Gain - (124)
-------- --------
Total Distributions (870) (545)
-------- --------
Capital Share Transactions (1):
Subscribed 13,268 11,443
Distributions Reinvested 870 402
Redeemed (11,961) (7,486)
Net Increase in Net Assets Resulting from -------- --------
Capital Share Transactions 2,177 4,359
-------- --------
Total Increase in Net Assets 832 2,079
Net Assets:
Beginning of Period 15,134 13,055
-------- --------
End of Period (Including undistributed net
investment income of $129 and $130,
respectively) $ 15,966 $ 15,134
======== ========
------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,342 1,090
Shares Issued on Distributions Reinvested 98 40
Shares Redeemed (1,233) (730)
-------- --------
Net Increase in Capital Shares Outstanding 207 400
======== ========
------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
U.S. Real Estate Portfolio
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31, Period From
----------------------- March 3,1997* to
1999 1998 December 31, 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.80 $ 11.41 $ 10.00
Income From Investment Operations
Net Investment Income 0.43 0.40 0.17
Net Realized and Unrealized Gain (Loss) (0.59) (1.63) 1.61
Total from Investment Operations (0.16) (1.23) 1.78
Distributions
Net Investment Income (0.53) (0.29) (0.17)
Net Realized Gain -- (0.09) (0.20)
Total Distributions (0.53) (0.38) (0.37)
Net Asset Value, End Of Period $ 9.11 $ 9.80 $ 11.41
Total Return (1.47)% (10.86)% 17.99%
Ratios And Supplemental Data:
Net Assets, End of Period (000's) $15,966 $ 15,134 $ 13,055
Ratio of Expenses to Average Net Assets 1.10% 1.10% 1.10%**
Ratio of Net Investment Income to Average Net Assets 5.03% 4.14% 3.14%**
Portfolio Turnover Rate 40% 100% 114%
________________
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.07 $ 0.06 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.90% 1.73% 2.32%**
Net Investment Income to Average Net Assets 4.23% 3.51% 1.92%**
--------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
Notes To Financial Statements
December 31, 1999
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
December 31, 1999, the Fund was comprised of fifteen separate active,
diversified and non-diversified portfolios (individually referred to as a
"Portfolio", collectively as the "Portfolios").
The accompanying financial statements relate to the U.S. Real Estate
Portfolio.The Portfolio seeks to provide above-average current income and long-
term capital appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real estate investment
trusts ("REITS").
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. 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.
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 counter-party to
the agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
4. 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
dividends received from real estate investment trusts.
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications among
9
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
Notes To Financial Statements (Cont.)
December 31, 1999
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.
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:
From
First $ 500 More
$ 500 million to than
Portfolio million $1 billion $1 billion
--------- ------- ---------- ----------
U.S. Real Estate.................. 0.80% 0.75% 0.70%
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 expressed as a percentage of average daily net assets, exceed the
maximum ratio of 1.10%.
C. Administrator: MSDW Investment Management (the "Administrator") also provides
the Portfolio with administrative services pursuant to an administrative
agreement for a monthly fee which on an annual basis equals 0.25% of the average
daily net assets of the Portfolio, plus reimbursement of out-of-pocket expenses.
Under an agreement between the Administrator and Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank ("Chase"),
CGFSC provides certain administrative services to the Fund. For such services,
the Administrator pays CGFSC a portion of the fee the Administrator receives
from the Fund. Certain employees of CGFSC are officers of the Fund. In addition,
the Fund incurs local administration fees in connection with doing business in
certain emerging market countries.
D. Custodian: The Chase Manhattan Bank serves as custodian for the Fund in
accordance with a custodian agreement.
E. Credit Facility: During December 1999, the Fund, along with an affiliated
open-end fund (collectively the "Funds"), entered into a 364-day Credit
Agreement with a bank group comprised of major money center banks. Under the
terms of the Agreement, the Funds are provided with a revolving credit facility
(the "Facility") allowing the Funds to borrow, subject to the limitations set
forth in each Fund's registration statement, amounts that, in the aggregate for
the Funds, will not exceed $235 million. The Funds pay a commitment fee on the
unused portion of the Facility at an annual rate of 0.09%. Fees incurred in
connection with the arrangement of the Facility totaled approximately $225,000.
The commitment fee and the arrangement fee are allocated to the Funds based on
an estimate of the potential amount available to each Fund under their
respective limitations. Such allocated costs are further allocated to the
Portfolios based on their net assets. Amounts drawn down on the Facility bear
interest at the annual rate equal to the then prevailing Federal Funds rate plus
0.50% which is borne by the respective borrowing Portfolio. For the year ended
December 31, 1999, there were no amounts drawn down on the Facility.
F. Other: At December 31, 1999, cost and unrealized appreciation (depreciation)
for U.S. Federal income tax purposes of the investments of the Portfolio were:
Net
Cost Appreciation Depreciation Depreciation
(000) (000) (000) (000)
---- --- ---- ----
$18,141 $ 127 $(2,419) $(2,292)
For the year ended December 31, 1999, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $8,617,531 and $5,900,750,
respectively. There were no purchases and sales of U.S. Government securities
for the year ended December 31, 1999.
At December 31, 1999, the Portfolio had available capital loss carryforwards to
offset future net capital gains, to the extent provided by regulations, through
December 31, 2006 and December 31, 2007 of approximately $236,000 and $164,000,
respectively. To the extent that capital loss carry-forwards are used to offset
any future net capital gains realized during the carryforward period as provided
by U.S. tax regulations, no capital gains tax liability will be incurred by the
Portfolio for gains realized and not distributed. To the extent that capital
gains are so offset, such gains will not be distributed to shareholders.
For the year ended December 31, 1999, the Portfolio intends to defer to January
1, 2000, for U.S. Federal income tax purposes, post-October capital losses of
$57,000.
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.
10
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Morgan Stanley Dean Witter Universal Funds, Inc.--
U.S. Real Estate Portfolio
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Morgan Stanley Dean Witter Universal Funds, Inc.--U.S. Real Estate Portfolio
(the "Portfolio") at December 31, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the two years in the
period then ended and for the period March 3, 1997 (commencement of operations)
through December 31, 1997, in conformity with accounting principles generally
accepted in the United States. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 11, 2000
11
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
Federal Tax Information (Unaudited)
For the year ended December 31, 1999, the percentage of distributions taxable as
ordinary income for the Portfolio, as reported on Form 1099-DIV, that qualify
for the dividends received deduction for corporations is 2.20%.
12
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
<TABLE>
<CAPTION>
Directors Officers
<S> <C>
Barton M. Biggs Stefanie V. Chang
Chairman of the Board Vice President
Chairman and Director, Morgan Stanley Dean Witter
Investment Management Inc. and Morgan Stanley Dean Witter
Investment Management Limited; Managing James A. Gallo
Director, Morgan Stanley & Co. Incorporated Vice President
Michael F. Klein
Director and President Harold J. Schaaff, Jr.
Managing Director, Morgan Stanley Dean Witter Investment Vice President
Management Inc. and Morgan Stanley & Co.
Incorporated
John D. Barrett II Richard J. Shoch
Chairman and Director, Vice President
Barrett Associates, Inc.
Gerard E. Jones
Partner, Richards & O'Neil LLP Jospeh P. Shoch
Vice President
Andrew McNally IV
River Road Partners
Samuel T. Reeves Mary E. Mullin
Chairman of the Board and Chief Executive Officer Secretary
Pinnacle Trading L.L.C
Fergus Reid
Chairman and Chief Executive Officer, Karl O. Hartmann
LumeLite Plastics Corporation Assistant Secretary
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin & Boehm, P.C. Belinda A. Brady
Treasurer
Investment Adviser and Administrator Robin L. Conkey
Morgan Stanley Dean Witter Investment Management Inc. Assistant Treasurer
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, New York 10020
Custodian
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
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
</TABLE>
This report is authorized for distribution only when preceded or accompanied by
the prospectus of the Morgan Stanley Dean Witter 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.
For additional information, including information regarding the investments
comprising the Portfolio, please visit our website at
www.msdw.com\institutional\investmentmanagement.
13
