<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
SEMI-ANNUAL REPORT
JUNE 30, 1998
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Hong Kong 28.8%
India 6.6%
Indonesia 1.3%
Korea 5.1%
Malaysia 8.7%
Pakistan 1.3%
Philippines 4.2%
Singapore 8.8%
Taiwan 19.2%
Thailand 3.8%
Other 12.2%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI)
ALL-COUNTRY FAR EAST FREE EX-JAPAN INDEX(1)
- ------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------------
<S> <C> <C> <C>
AVERAGE ANNUAL
ONE SINCE
YTD YEAR INCEPTION(3)
---------- ---------- ----------------
PORTFOLIO... -23.40% -59.42% -46.84%
INDEX..... -26.85% -60.20% -50.55%
</TABLE>
1. The MSCI All-Country Far East Free ex-Japan Index is an unmanaged index of
common stocks and includes Indonesia, Hong Kong, Malaysia, the Philippines,
Korea, Singapore, Taiwan and Thailand (includes 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.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ---------------------------------- ------------ -------------
<S> <C> <C>
CLP Holdings Ltd. Hong Kong 6.3%
Asustek Computer, Inc. Taiwan 5.5%
Hong Kong Telecommunications Ltd. Hong Kong 4.7%
Hutchison Whampoa Ltd. Hong Kong 4.3%
HSBC Holdings plc Hong Kong 3.9%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------- --------- -------------
<S> <C> <C>
Technology $ 2,076 19.2%
Capital Equipment 1,810 16.7%
Consumer Products 1,615 14.9%
Finance 867 8.0%
Energy 855 7.9%
</TABLE>
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
ALL-COUNTRY FAR EAST FREE EX-JAPAN INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY
AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
The investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Asian
issuers (excluding Japan). The Portfolio intends to invest in equity securities
that are traded on recognized stock exchanges of countries in Asia and in equity
securities of companies organized under the laws of an Asian country whose
business is conducted principally in Asia.
For the six months ended June 30, 1998, the Portfolio had a total return of
- -23.40% compared to -26.85% for the Morgan Stanley Capital International (MSCI)
All-Country Far East Free ex-Japan Index (the "Index"). For the one year period
ended June 30, 1998, the Portfolio had a total return of -59.42% compared to
- -60.20% for the Index. From inception on March 3, 1997 to June 30, 1998, the
Portfolio had an average annual total return of -46.84% compared to -50.55% for
the Index.
The performance of the Portfolio's holdings in Hong Kong contributed to much of
the outperformance. The continued slide in the yen forced additional pressure on
the Hong Kong/U.S. dollar peg throughout the second quarter, pressure which
directly translated into higher interest rates in Hong Kong. The Hong Kong stock
market is dominated by interest rate sensitive issues such as property and
banking shares, which led the decline of the overall market. The Portfolio has
avoided such stocks since the start of the year, concentrating its attention on
companies with low financial gearing and stable cash flows. Key Portfolio
holdings such as China Light and Power (CLP Holdings), Hong Kong
Telecommunications and Hong Kong & China Gas all held up in the weak market. The
one significant banking share the Portfolio does hold, HSBC, derives an
increasing amount of its revenue stream from outside Hong Kong and as such has
earnings insulated from Hong Kong's economy.
Security selection in Malaysia also made a significant impact on the Portfolio's
outperformance. The Portfolio was concentrated in consumer oriented stocks such
as Rothman's and Nestle, which have
1
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
dominant market share and the ability to pass along price increases directly to
the consumer. The markets decline was led by companies with highly leveraged
balance sheets and uncertain cash flows, as well as the banks which had made the
loans to those same companies. The Portfolio avoided companies with either of
those criteria in the first half of 1998.
Security selection in the Philippines made the largest negative contribution to
Portfolio's performance. This was largely due to the steep decline in the
Portfolio's large holding in Music Semicon, a designer of content addressable
memory chips for computer networks. Delays in its next generation of products
forced the stock down, as did the indefinite postponement of its NASDAQ listing.
The +9.8% rally in the Asian markets in the first quarter of 1998 proved
short-lived as the Index fell -32.4% in the second quarter of 1998. This sharp
decline has led to a deterioration in the year-to-date performance to -26.85%,
and marks the lowest level the index has reached since early 1991.
Individual country performance proved to be similarly negative, as eight of the
nine component countries of the Index posted losses. The best performing markets
were Korea, which managed a 5.6% return year-to-date, and the Philippines with a
- -4.1% fall in that same period. The most severe declines were registered in
Indonesia, China and Singapore, which fell -57.9%, -35.3% and -33.8%,
respectively.
The inability of the Japanese government to address the looming disaster in its
financial sector and the corresponding depreciation of the yen against the U.S.
dollar weighed heavily on the Asian markets in the second quarter. Aside from
the obvious impact of decreased competitiveness on international markets against
Japanese goods for Asian exports, the depreciation combined with the timid
Japanese consumer have sharply curtailed Japanese imports of Asian goods.
Furthermore, the Japanese banks which had built up enormous exposure to Asian
corporate debt over the last decade have begun calling in their loans at a rapid
level, further contributing to the liquidity crunch haunting the region.
On a country by country basis there are a number of situations which are
worthwhile examining in closer detail. Although we retain the view that the
Chinese government will not devalue the yuan (and consequently the Hong Kong
dollar) in the short-term, there are increasing pressures building up in China
which will escalate the costs this decision makes on the Chinese economy. The
competitiveness of Chinese exports has been seriously undermined by the regional
currency depreciations, with forthcoming consequences for both the level of
exports and the profitability of the export sector. Equally, if not more
important, imports in China have gained significant ground at the expense of
domestic companies. This slowdown comes at a time when the Chinese leadership
desperately needs growth throughout the economy to soak up redundant employees
from the restructuring of the state owned enterprises. Furthermore, inward
Foreign Direct Investment is also likely to decline sharply as flows from Hong
Kong and Japan evaporate. The impact of a yuan devaluation in the near-term
would be negative for Asia, most likely resulting in the Hong Kong/U.S. dollar
peg breaking and a further round of devaluation throughout the region.
A slowing Chinese economy is just one factor that is likely to force a further
deterioration of the Hong Kong economy. Reported GDP growth in the first quarter
of 1998 was -2%, and with further negative growth probable in the second quarter
of 1998 Hong Kong could be entering into a full blown recession. Unemployment
jumped to 3.5%, very high by Hong Kong standards, and the overnight rate hit 10%
by mid-June, showing further doubt in the Hong Kong dollar/U.S. dollar currency
peg. The destruction of wealth in property and equities, as well as the steep
decline in tourism, have forced retail sales down over 10% in the first quarter
of 1998. This deflation, combined with high interest rates, is a lethal mixture
for the property sector, which has fallen 40% already, yet still remains
ridiculously expensive by world standards. The impact on the economy will
continue to be severe.
Accurate forecasts of Indonesia's growth have become even more difficult since
the departure of long term leader Suharto. His appointee, Vice President B.J.
Habibie, originally seen as merely a caretaker, continues to solidify his power
with the ruling Golkar party in Jakarta. Although the riots and demonstrations
which forced Suharto from power have subsided, distrust of the government
remains simmering just below the surface. Equally serious, the depreciation of
the rupiah, combined with a drought brought on by El Nino, indicate that simply
feeding the 200 million people of this country could prove to be difficult. The
situation is exacerbated by the flight of many of the ethnic Chinese who
dominated the Indonesian economy but were targeted for racial attacks during the
riots earlier this year. Without their capital and commercial expertise,
distribution of even simple products will remain extremely difficult in the
rural areas. Inflation is also becoming a serious problem, to add to the
country's ills. Despite extremely cheap valuations, almost ridiculous in U.S.
dollar terms, the macroeconomic and political risks in Indonesia remain immense.
Korea on the other hand has taken the lead in confronting its problems and
trying to work through its version of the Asian financial crisis. Its Financial
Supervisory Commission, composed of a mixture of leaders from the public and
private sector, has
2
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
set an aggressive timetable for dealing with financial sector reform and
corporate restructuring. Furthermore, the Korea Asset Management Corporation
(KAMC) is in the final stages of formation, a government owned entity which will
be charged with acquiring the bad debt from the banking sector in exchange for
bonds drawn on the KAMC. The government has also built up over U.S.$40 billion
in foreign reserves, while the Korean current account surplus has reached
U.S.$23 billion. Though immense problems remain in the economy, the first steps
have been taken to address them.
In order for there to be a true end to this financial crisis the countries of
the region must address directly the failures in their own economies. Although
the problems in Japan have proved to be the most recent catalyst, it is
important to note that the situation in Asia, and the seeds of its eventual
recovery are based within the countries themselves. The International Monetary
Fund has instituted an initial cleansing of the banking systems in the countries
under its care, but a great deal of work domestically needs to be accomplished.
The capability and desire of banks to make loans on an economic basis, and the
regulatory framework for such an environment have to occur fundamentally at the
local level. A plan has to be made and followed about how each individual
country can address the upwards of 20% non-performing loans in their system. On
the non-financial side, manufacturing over-capacity must be shuttered and demand
stimulated at the domestic level for products. And finally, corporations must be
restructured to place a greater emphasis on shareholders' return for the region
to attract the capital and expertise essential to the rebuilding process.
July 1998
3
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
COMMON STOCKS (87.8%)
HONG KONG (28.8%)
149,000 CLP Holdings Ltd................................. $ 679
17,200 HSBC Holdings plc................................ 421
336,120 Hong Kong & China Gas Co., Ltd................... 382
111,000 Hong Kong Electric Holdings Ltd.................. 344
272,000 Hong Kong Telecommunications Ltd................. 511
88,000 Hutchison Whampoa Ltd............................ 465
64,000 Li & Fung Ltd.................................... 103
6,000 Ng Fung Hong Ltd................................. 4
78,000 Television Broadcasts Ltd........................ 206
-------
3,115
-------
INDIA (6.6%)
34,400 Ashok Leyland Ltd. GDR........................... 76
21,100 ITC Ltd. GDR..................................... 370
7,900 State Bank of India GDR.......................... 94
(a)53,700 Tata Engineering & Locomotive Co., Ltd. GDR...... 174
-------
714
-------
INDONESIA (1.3%)
8,500 B.A.T. Indonesia................................. 15
61,500 Gudang Garam..................................... 36
96,000 Indofood Sukses Makmur........................... 10
402,500 Mayora Indah..................................... 16
34,500 Unilever Indonesia............................... 65
-------
142
-------
KOREA (5.1%)
1,300 Hankuk Glass Industry Co., Ltd................... 14
(a)3,210 Nong Shim Co., Ltd............................... 139
(d)2,360 Pohang Iron & Steel Co., Ltd..................... 77
660 S1 Corp.......................................... 67
6,266 Samsung Electronics Co........................... 194
(e)72 Samsung Electronics Co. GDR...................... 1
(d)120 SK Telecom Co., Ltd.............................. 54
-------
546
-------
MALAYSIA (8.7%)
46,000 Amway (Malaysia) Holdings Bhd.................... 75
56,000 Carlsberg Brewery Malaysia Bhd................... 170
87,000 Guiness Anchor Bhd............................... 92
74,000 Hap Seng Consolidated Bhd........................ 39
36,000 Nestle (Malaysia) Bhd............................ 163
49,000 Petronas Gas Bhd................................. 91
92,000 R.J. Reynolds Bhd................................ 127
15,000 Rothmans of Pall Mall (Malaysia) Bhd............. 104
28,000 Sime Darby Bhd................................... 19
38,000 Telekom Malaysia Bhd............................. 64
-------
944
-------
PAKISTAN (1.3%)
5,500 Lever Brothers Pakistan Ltd...................... 104
11,700 Shell Pakistan Ltd............................... 38
-------
142
-------
PHILIPPINES (4.2%)
135,150 La Tondena Distillers, Inc....................... 68
(a)446,700 Music Corp....................................... 40
3,970 Philippine Long Distance Telephone Co............ 90
722,960 SM Prime Holdings, Inc........................... 114
103,700 San Miguel Corp., Class B........................ 137
-------
449
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
SINGAPORE (8.8%)
(a)10,250 Creative Technology Ltd.......................... $ 127
152,000 NatSteel Electronics Ltd......................... 255
30,000 Parkway Holdings Ltd............................. 52
185,000 Singapore Technologies Engineering Ltd........... 130
92,000 Singapore Telecommunications Ltd................. 131
27,000 United Overseas Bank Ltd. (Foreign).............. 84
93,000 Venture Manufacturing (Singapore) Ltd............ 176
-------
955
-------
TAIWAN (19.2%)
(a)43,750 Asustek Computer, Inc............................ 358
(a)30,965 Asustek Computer, Inc. GDR....................... 233
(a)13,000 China Development Corp........................... 30
(a)118,561 Compal Electronics............................... 319
(a)11,340 Compeq Manufacturing Co., Ltd.................... 60
(a)95,000 Delpha Construction Co., Ltd..................... 125
309,842 Far East Textile Ltd............................. 240
(a)67,000 Hon Hai Precision Industry....................... 339
(a)37,500 Kuoyang Construction............................. 59
(a)65,552 Siliconware Precision Industries Co.............. 95
(a)13,872 Siliconware Precision Industries Co. GDR......... 112
(a)52,200 Taiwan Semiconductor Manufacturing Co............ 108
-------
2,078
-------
THAILAND (3.8%)
7,200 Advanced Info Service PCL (Foreign).............. 31
22,000 BEC World PCL (Foreign).......................... 84
6,000 Delta Electronics (Thailand) PCL (Foreign)....... 34
(d)76,300 Eastern Water Resources Development & Management
PCL (Foreign).................................. 105
(d)13,200 Grammy Entertainment PCL (Foreign)............... 31
(a,d)24,000 GSS Array Technology PCL (Foreign)............... 57
82,300 Thai Farmers Bank PCL (Foreign).................. 73
-------
415
-------
TOTAL COMMON STOCKS (COST $11,835)............................ 9,500
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHT (0.0%)
KOREA (0.0%)
(a,d)1 Samsung Electronics Co. (COST $0)................ --
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANT (0.0%)
HONG KONG (0.0%)
(a)18,960 Hong Kong & China Gas Co., Ltd.,
expiring 9/30/99 (COST $0)..................... 1
-------
TOTAL FOREIGN SECURITIES (87.8%) (COST $11,835)............... 9,501
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (12.8%)
REPURCHASE AGREEMENT (12.8%)
$1,381 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/1/98, to be repurchased at $1,381,
collateralized by U.S. Treasury Bonds, 8.875%,
due 2/15/19, valued at $1,417
(COST $1,381).................................. 1,381
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------
<C> <S> <C>
FOREIGN CURRENCY (0.5%)
HKD 239 Hong Kong Dollar................................. $ 31
MYR 48 Malaysian Ringgit................................ 12
PKR 47 Pakistani Rupee.................................. 1
PHP 33 Philippines Peso................................. 1
SGD 3 Singapore Dollar................................. 1
TWD 35 Taiwan Dollar.................................... 9
THB 42 Thai Baht........................................ 1
-------
TOTAL FOREIGN CURRENCY (COST $57)............................. 56
-------
TOTAL INVESTMENTS (101.1%) (COST $13,273)..................... 10,938
-------
OTHER ASSETS (3.8%)
Cash........................................... $ 1
Receivable for Portfolio Shares Sold........... 284
Receivable for Investments Sold................ 62
Due from Adviser............................... 39
Dividends Receivable........................... 25
Foreign Withholding Tax Reclaim Receivable..... 1 412
------
LIABILITIES (-4.9%)
Payable for Investments Purchased.............. (295)
Payable for Portfolio Shares Redeemed.......... (140)
Custodian Fees Payable......................... (66)
Professional Fees Payable...................... (21)
Administrative Fees Payable.................... (3)
Payable for Foreign Taxes...................... (2)
Directors' Fees and Expenses Payable........... (1)
Other Liabilities.............................. (3) (531)
------ --------
NET ASSETS (100%)........................................ $10,819
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,506,509 outstanding $0.001 par value
shares (authorized 500,000,000 shares)................. $ 4.32
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital.......................................... $19,154
Undistributed Net Investment Income...................... 172
Accumulated Net Realized Loss............................ (6,168)
Unrealized Depreciation on Investments and Foreign
Currency Translations (Net of foreign taxes of $2)..... (2,339)
--------
NET ASSETS............................................... $10,819
--------
--------
</TABLE>
- ---------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver U.S. Dollars in exchange for foreign
currency as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE NET UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ---------- ----- ----------- ----------- ----- -----------------
<S> <C> <C> <C> <C> <C>
U.S.$ 40 $ 40 7/01/98 SGD 68 $ 40 $ --
34 34 7/01/98 PHP 1,434 34 --
48 48 7/02/98 MYR 198 48 --
----- ----- -----
$ 122 $ 122 $ --
----- ----- -----
----- ----- -----
</TABLE>
- ---------------
(a) -- Non-income producing security
(d) -- Security valued at fair value--See Note A-1 to financial statements.
(e) -- 144A Security-certain conditions for public sale may exist.
GDR -- Global Depositary Receipt
PCL -- Public Company Limited
- ---------------
At June 30, 1998, 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>
$ 13,216 $ 423 $ (2,757) $ (2,334)
</TABLE>
- ---------------
For the six months ended June 30, 1998, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $7,756,000 and $6,743,000,
respectively. There were no purchases and sales of U.S. Government securities
for the six months ended June 30, 1998.
- ---------------
At June 30, 1998, the Portfolio had available capital loss carryforwards to
offset future net capital gains, to the extent provided by regulations, through
December 31, 2005 of approximately $1,501,000. To the extent that capital loss
carryforwards are used to offset any future net capital gains realized during
the carryforward period as provided by U.S. Federal income tax regulations, no
capital gains tax liability will be incurred by a Portfolio for gains realized
and not distributed. To the extent that capital
gains are so offset, such gains will not be distributed to shareholders.
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
% OF
VALUE NET
SECTOR DIVERSIFICATION (000) ASSETS
- ---------------------------------------- ------- ---------
<S> <C> <C>
Capital Equipment....................... $ 1,810 16.7%
Capital Goods........................... 844 7.8
Consumer Cyclical....................... 76 0.7
Consumer Products....................... 1,615 14.9
Consumer Staples........................ 497 4.6
Energy.................................. 855 7.9
Finance................................. 867 8.0
Materials............................... 92 0.9
Multi-Industry.......................... 484 4.5
Services................................ 285 2.6
Technology.............................. 2,076 19.2
------- ---
Total Foreign Securities................ $ 9,501 87.8%
------- ---
------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
(UNAUDITED)
(000)
<S> <C>
- ------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 148
Interest 36
Less: Foreign Taxes Withheld (11)
-------
Total Income 173
-------
EXPENSES:
Investment Advisory Fees 49
Less: Fees Waived (49)
-------
Net Investment Advisory Fees --
Custodian Fees 72
Administrative Fees 20
Shareholder Reports 14
Professional Fees 11
Directors' Fees and Expenses 1
Other 2
Expenses Reimbursed by Adviser (46)
-------
Net Expenses 74
-------
Net Investment Income 99
-------
NET REALIZED LOSS ON:
Investments Sold (3,639)
Foreign Currency Transactions (75)
-------
Net Realized Loss (3,714)
-------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (Net of foreign taxes of $2 on unrealized appreciation) 506
Foreign Currency Translations (9)
-------
Change in Unrealized Appreciation/Depreciation 497
-------
Net Realized Loss and Change in Unrealized Appreciation/Depreciation (3,217)
-------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(3,118)
-------
-------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD FROM
JUNE 30, 1998 MARCH 3, 1997* TO
(UNAUDITED) DECEMBER 31, 1997
(000) (000)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 99 $ 27
Net Realized Loss (3,714) (2,392)
Change in Unrealized Appreciation/Depreciation 497 (2,836)
------- -------
Net Decrease in Net Assets Resulting from Operations (3,118) (5,201)
------- -------
DISTRIBUTIONS:
Net Investment Income -- (16)
------- -------
Total Distributions -- (16)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 6,985 18,447
Distributions Reinvested -- 9
Redeemed (5,619) (668)
------- -------
Net Increase in Net Assets Resulting from Capital
Share Transactions 1,366 17,788
------- -------
Total Increase (Decrease) in Net Assets (1,752) 12,571
NET ASSETS:
Beginning of Period 12,571 --
------- -------
End of Period (Including undistributed net investment
income of $172 and $73, respectively) $10,819 $12,571
------- -------
------- -------
- ------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,348 2,333
Shares Issued on Distributions Reinvested -- 2
Shares Redeemed (1,071) (105)
------- -------
Net Increase in Capital Shares Outstanding 277 2,230
------- -------
------- -------
- ------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD FROM
JUNE 30, 1998 MARCH 3, 1997*
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) TO DECEMBER 31, 1997
<S> <C> <C>
- -------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.64 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04 0.01
Net Realized and Unrealized Loss (1.36) (4.36)
------- -------
Total From Investment Operations (1.32) (4.35)
------- -------
DISTRIBUTIONS
Net Investment Income -- (0.01)
------- -------
Total Distributions -- (0.01)
------- -------
NET ASSET VALUE, END OF PERIOD $ 4.32 $ 5.64
------- -------
------- -------
TOTAL RETURN (23.40)% (43.52)%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $10,819 $12,571
Ratio of Expenses to Average Net
Assets 1.20%** 1.35%**
Ratio of Expenses to Average Net
Assets Excluding
Interest Expense and Foreign Tax
Expense 1.20%** 1.20%**
Ratio of Net Investment Income to
Average Net Assets 1.63%** 0.32%**
Portfolio Turnover Rate 61% 130%
- -------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.76%** 3.10%**
Net Investment Income (Loss) to
Average Net Assets 0.08%** (1.43)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
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, 1998, the Fund was comprised of eleven separate active
portfolios (individually referred to as a "Portfolio", collectively as the
"Portfolios").
The accompanying financial statements cover only the Asian Equity Portfolio.
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 which are based primarily on institutional size trading in
similar groups of securities. 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 they
invest. 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 the movement of 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.
8
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (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.
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 and, in certain situations, to gain exposure to foreign
currencies. 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 Portfolios as unrealized gain or loss. The Portfolios record
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: The
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 a month or more (not to exceed 120 days) after
the date of the transaction. Additionally, the 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 custodian's records for the
Portfolio's regular custody account. 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. The 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. The
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. The 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 the 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. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the commencement of operations. Morgan Stanley Asset Management Inc. has
9
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
agreed that in the event any of its initial shares which comprised the Fund at
inception are redeemed, the proceeds on redemption will be reduced by the
pro-rata portion of any unamortized organizational costs in the same proportion
as the number of shares redeemed bears to the initial shares held at time of
redemption.
9. SHORT SALES: Certain Portfolios may sell securities short. A short sale is a
transaction in which the Portfolio sells securities it may or may not own, but
has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolio is obligated to replace the borrowed securities at the
market price at the time of replacement. The Portfolio may have to pay a premium
to borrow the securities as well as pay any dividends or interest payable on the
securities until they are replaced. The Portfolio's obligation to replace the
securities borrowed in connection with a short sale will generally be secured by
collateral deposited with the broker that consists of cash, U.S. government
securities or other liquid, high grade debt obligations. In addition, the
Portfolio will either designate on the custodian records in its regular custody
account or place in a segregated account with its Custodian an amount of cash,
U.S. government securities or other liquid high grade debt obligations equal to
the difference, if any, between (1) the market value of the securities sold and
(2) any cash, U.S. government securities or other liquid high grade debt
obligations deposited as collateral with the broker in connection with the short
sale. Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases cannot exceed the total amount
invested.
10. 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 the Portfolios may not be able to enter into a closing
transaction because of an illiquid secondary market.
11. 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 unrealized
gains or losses in the Statement of Operations. Periodic payments received or
made at the end of each measurement period, but prior to termination, 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.
12. 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
10
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
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 portfolio securities or
other financial instruments. The 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.
13. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends which
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 a Portfolio to further risk of loss in the event of a failure to
complete the transaction by the counterparty.
B. ADVISER: Morgan Stanley Asset Management Inc. ("MSAM"), a wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co., provides the Asian Equity
Portfolio with investment advisory services for a fee, paid quarterly, at the
annual rate based on average daily net assets as follows:
<TABLE>
<CAPTION>
FROM MORE
FIRST $500 MILLION TO THAN
PORTFOLIO $500 MILLION $1 BILLION $1 BILLION
- -------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
Asian Equity.............. 0.80% 0.75% 0.70%
</TABLE>
MSAM has agreed to reduce fees payable to it and to reimburse the Portfolio, if
necessary, to the extent that the annual operating expenses, as defined,
expressed as a percentage of average daily net assets, exceed the maximum ratio
of 1.20%.
C. ADMINISTRATOR: MSAM (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. CUSTODIANS: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley Dean Witter &
11
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
Co., acts as custodian for the Fund's assets held outside the United States in
accordance with a custodian agreement. Chase serves as custodian for the Fund's
U.S. assets in accordance with a separate custodian agreement. Custodian fees
are computed and payable monthly based on assets held, investment purchases and
sales activity, an account maintenance fee, plus reimbursement for certain
out-of-pocket expenses. For the six months ended June 30, 1998, the Portfolio
incurred custody fees with MSTC of approximately $69,000 and had amounts payable
to MSTC at June 30, 1998 of approximately $62,000.
E. OTHER: During the six months ended June 30, 1998, the Portfolio paid
brokerage commissions to Morgan Stanley & Co., an affiliate broker/dealer, of
approximately $1,000.
At June 30, 1998, 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 UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley Asset Management Inc.
and Morgan Stanley Asset Management Limited;
Managing Director, Morgan Stanley & Co. Incorporated
Michael F. Klein
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset 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 CEO,
Pinacle 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 Asset 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
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
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
Lorraine Truten
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Rene J. Feuerman
ASSISTANT TREASURER
Karl O. Hartmann
ASSISTANT SECRETARY
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
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
