<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
SEMI-ANNUAL REPORT
JUNE 30, 1998
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.2%
Austria 0.6%
Belgium 0.9%
Denmark 1.6%
Finland 4.6%
France 10.7%
Germany 11.9%
Hong Kong 0.6%
Ireland 0.6%
Italy 4.1%
Japan 9.6%
Malaysia 0.1%
Netherlands 5.0%
Norway 1.4%
Singapore 0.2%
Spain 3.4%
Sweden 6.6%
Switzerland 8.3%
United Kingdom 19.0%
Other 9.6%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL
INTERNATIONAL (MSCI) EAFE INDEX(1)
- ------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------
AVERAGE ANNUAL
ONE SINCE
YTD YEAR INCEPTION(3)
---------- ---------- -----------------
<S> <C> <C> <C>
PORTFOLIO.... 18.21% 8.70% 17.30%
INDEX........ 15.93% 6.10% 12.49%
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends net of withholding
taxes).
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 January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
0,0
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------------ ------------ -------------
<S> <C> <C>
Nestle Switzerland 2.0%
Holderbank Financiere Glarus
AG, Class B Switzerland 1.6%
ING Groep N.V. Netherlands 1.6%
Total, Class B France 1.5%
Nordbanken Holding AB Sweden 1.4%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------ ------------ -------------
<S> <C> <C>
Capital Equipment $7,962 20.1%
Finance 6,348 16.0%
Consumer Products 5,647 14.3%
Materials 5,374 13.6%
Services 4,069 10.3%
</TABLE>
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. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
The International Magnum Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance with
the EAFE country weightings determined by Morgan Stanley Asset Management. The
EAFE countries in which the Portfolio will invest are those comprising the
Morgan Stanley Capital International (MSCI) EAFE Index, which includes
Australia, Japan, New Zealand, most nations located in Western Europe, and
certain developed countries in Asia.
For the six months ended June 30, 1998, the Portfolio had a total return of
18.21% compared to 15.93% for the Morgan Stanley Capital International (MSCI)
EAFE Index (the "Index"). For the one year period ended June 30, 1998, the
Portfolio had a total return of 8.70% compared to 6.10% for the Index. From
inception on January 2,, 1997 to June 30, 1998, the Portfolio had an average
annual total return of 17.30% compared to 12.49% for the Index.
After an extraordinary start in the first quarter, international equity markets
slowed somewhat in the second quarter. The tone for the second quarter was set
by European markets, which had set records in the first quarter, but were less
impressive in the second. The drag on performance came from the Far East where
Asia ex-Japan suffered through another round of the "Asian flu" and Japan
experienced its own bout of currency weakness. In the midst of this turmoil, the
Portfolio was able to produce a 3.72% return for the second quarter in dollar
terms which brought its year-to-date return to 18.21%.
Following a dramatic rise in the first quarter, the European markets eased but
nonetheless posted healthy gains, rising by 5.1% in U.S. dollar terms for the
three months ended June 30, 1998. Year-to-date, the European markets have
climbed an impressive 26.5% in U.S. dollar terms. The European markets continue
to benefit from the stability of their markets and their favorable economic
prospects. Optimism about the European Monetary Union (EMU) is also helping as
EMU took another step closer to reality with the finalization of the 11 initial
EMU participants in May.
The European markets were led by strong performances for the quarter and
year-to-date in Germany (+16.7% and 36.5%, respectively), Finland (+23.5% and
+65.6%, respectively) and Belgium (+21.6% and +43.3%, respectively). Germany has
been helped by EMU euphoria
1
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
and improving economic fundamentals including lower unemployment rates and
benign inflation, while the gains in Finland largely reflect the strong
performance of Nokia (+125%), which comprises over half the index. Belgium
thrived on the strength of the banking sector, as consolidation in European
financial services has boosted the sector throughout the continent. Portugal and
Italy, two of the markets that were the strongest during the first quarter,
succumbed to profit taking during the second quarter, both falling over 2%. The
United Kingdom is one of the weakest markets year-to-date, falling 2.0% for the
quarter and rising only 15.7% year-to-date, with much of the rise attributable
to the strength of the pound. Tight monetary policy has threatened to drive the
U.K. into a recession, while the strength of the currency has hurt exporters.
Investors in Japanese equities endured another difficult quarter in the second
quarter of 1998 as the MSCI Japan index posted a -4.5% return in U.S. dollar
terms for the quarter (bringing the year-to-date U.S. dollar return to -2.5%).
Market participants' disappointment at the lack of leadership on the part of
Japanese policy-makers prompted the selling of both the Japanese equity market
and the currency. For most of this decade the Japanese economy has been hampered
by the dual burdens of billions of dollars of bad bank loans and the lack of a
coherent and stimulative fiscal policy. An RTC-like institution to fix the
banking sector and permanent tax cuts could help solve these problems and get
the Japanese economy moving in the right direction again. Thus the ruling
party's confounding unwillingness to confront the nation's problems in a
meaningful way led to a loss of confidence on the part of investors which
resulted in a run on the yen during the quarter that saw the Japanese currency
depreciate by over 13% versus the U.S. dollar. During that same period the
Nikkei 225 index of Japanese stocks fell 11%. In mid-June, during the most
panic-filled moments of the sell-off in Japan, the U.S. Fed intervened in the
currency markets along with the Bank of Japan to support the yen. This show of
solidarity gave yen-selling speculators pause and the markets stabilized, though
the quarter ended without a clearly defined policy response from the Japanese,
so there is still cause for concern in the second half of the year.
The markets of Asia-ex Japan were off 22.6% for the quarter which leaves them
down 17.4% year-to-date in U.S. dollar terms. Clearly, the price gains
experienced during the first quarter have evaporated and a cure for the Asian
contagion has not yet been found. The main culprit this time in what amounts to
the second major downturn in Asian markets in a year was Japan. Fears that a
free-fall in the Japanese currency would lead to another round of currency
devaluations throughout the region frightened investors. First came the
recognition that no policy change would be implemented in the near term to
improve Japan's stalled economy. This led to a rapid sell-off in the yen which
in turn led investors to fear an imminent devaluation in the Chinese yuan and
perhaps then the Hong Kong dollar as well. Such a series of events would leave
the other countries in the region in as poor a competitive position as they were
before the first round of devaluations last summer.
The dramatic fall-off in economic activity throughout Asia has been another
factor which has contributed to poor equity returns in the region. As predicted,
growth has fallen off substantially in the aftermath of last year's currency
devaluations: Singapore, where the market fell 35.2% in the second quarter of
1998, has experienced a credit contraction for the first time in a decade (bank
loan growth -3%) and the government is calling for only a 0.5% growth in gross
domestic product (down from a prediction of approximately 5% at the beginning of
the year); in Hong Kong (down 26.9% in the second quarter of 1998) authorities
have gone to the unprecedented measure of postponing the real estate auctions
which give the government most of its revenues to support real estate prices but
real estate prices are still down by half from their highs. The story is the
same throughout Asia; until the engine of growth, Japan, revives, the region
will not experience significant economic expansion.
Our regional allocation has us underweight Asia and Japan. This helped
performance, while being roughly neutral versus Europe also helped performance,
though a heavier commitment to Europe would have helped more. Sector selection
was negative, particularly in Europe as we were underweight the bank and
insurance sectors which were among the stronger performers. Style hurt
performance badly as growth stocks outperformed our Portfolio's value stocks by
a rather wide margin, particularly in Europe. Currency hedging, where we hedged
exposure to the yen and the deutschemark, both of which depreciated during the
quarter, added to performance.
During the second quarter we continued to increase our exposure to Europe based
on the belief that fears of an Asian induced slowdown there were overdone and
that European Monetary Union would enhance growth prospects for the region. We
moved from slightly underweight to a neutral position such that European
holdings now make up 73% of the Portfolio versus 74% for the index. In Japan we
remain underweight with a 10% position versus 21% for the index. In Asia, we
have an underweight position as well with a 3% holding versus 5% for the index.
This allocation leaves us with a 14% unallocated cash position which we believe
is appropriate given current market volatility.
Going forward, Europe still appears to offer the most attractive investment
potential and we anticipate going overweight there. We will maintain our
underweight positions in Japan and Asia pending the implementation of the proper
government policies necessary to bolster regional economic growth.
July 1998
2
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
COMMON STOCKS (88.1%)
AUSTRALIA (1.2%)
9,100 Australia & New Zealand Banking Group Ltd........ $ 63
2,300 Brambles Industries Ltd.......................... 45
4,600 Commonwealth Bank of Australia................... 54
2,050 Lend Lease Corp., Ltd............................ 41
3,930 National Australia Bank Ltd...................... 52
10,800 News Corp., Ltd.................................. 88
14,000 Seven Network Ltd................................ 42
30,500 Telstra Corp., Ltd. (Installment Receipts --
Final Installment of AUD 1.35/Share due
11/17/98)...................................... 78
-------
463
-------
AUSTRIA (0.6%)
3,500 Boehler-Uddeholm AG.............................. 231
-------
BELGIUM (0.9%)
6,135 G.I.B. Group..................................... 346
-------
DENMARK (1.6%)
5,650 BG Bank A/S...................................... 350
3,250 Unidanmark A/S, Class A (Registered)............. 292
-------
642
-------
FINLAND (4.6%)
2,990 Kone Oyj, Class B................................ 420
36,400 Merita Ltd., Class A............................. 240
10,860 Metra Oyj, Class B............................... 357
4,850 Partek Oyj Abp................................... 84
17,940 Rautaruukki Oyj.................................. 137
4,050 Sampo Insurance Co., Ltd., Class A............... 192
11,540 The Rauma Group.................................. 237
8,910 Valmet Oyj....................................... 154
-------
1,821
-------
FRANCE (10.7%)
570 Alcatel Alsthom.................................. 116
160 Bongrain......................................... 80
2,115 Cie de Saint Gobain.............................. 392
3,640 Elf Aquitaine.................................... 512
3,410 France Telecom................................... 235
1,840 Groupe Danone.................................... 507
3,770 Lafarge.......................................... 390
7,980 Legris Industries................................ 373
2,020 Michelin (C.G.D.E.), Class B..................... 117
4,900 Rhone-Poulence, Class A.......................... 276
(a)2,400 SGS-Thomson Microelectronics N.V................. 170
2,520 Scor............................................. 160
4,680 Total, Class B................................... 608
1,010 Union des Assurances Federales................... 159
9,270 Usinor Sacilor................................... 143
-------
4,238
-------
GERMANY (9.6%)
11,720 BASF AG.......................................... 556
4,610 Bayer AG......................................... 238
4,900 Bayer Vereinsbank AG............................. 417
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
1,050 Buderus AG....................................... $ 524
7,240 Gerresheimer Glas AG............................. 109
2,484 Metro AG......................................... 151
(a)1,348 Philipp Holzmann AG.............................. 323
2,218 Plettac AG....................................... 310
6,050 VEBA AG.......................................... 413
578 Viag AG.......................................... 391
389 Volkswagen AG.................................... 374
-------
3,806
-------
HONG KONG (0.6%)
7,500 CLP Holdings Ltd................................. 34
1,300 HSBC Holdings plc................................ 32
33,400 Hong Kong & China Gas Co., Ltd................... 38
14,000 Hong Kong Electric Holdings Ltd.................. 43
18,400 Hong Kong Telecommunications Ltd................. 35
6,000 Hutchison Whampoa Ltd............................ 32
12,600 Li & Fung Ltd.................................... 20
7,000 Television Broadcasts Ltd........................ 18
-------
252
-------
IRELAND (0.6%)
11,808 Bank of Ireland.................................. 242
-------
ITALY (4.1%)
67,640 Magneti Marelli S.p.A............................ 148
18,300 Marzotto (Gaetano) & Figli S.p.A................. 279
68,000 Mediaset S.p.A................................... 434
100,550 Sogefi S.p.A..................................... 337
84,024 Telecom Italia S.p.A. Di Risp (NCS).............. 407
-------
1,605
-------
JAPAN (9.6%)
11,000 Amada Co., Ltd................................... 54
1,000 Autobacs Seven Co., Ltd.......................... 29
5,000 Canon, Inc....................................... 114
7,000 Casio Computer Co., Ltd.......................... 65
6,000 Dai Nippon Printing Co., Ltd..................... 96
21,000 Daicel Chemical Industries Ltd................... 45
10,000 Daifuku Co., Ltd................................. 37
10,000 Daikin Industries Ltd............................ 64
1,200 Family Mart Co., Ltd............................. 46
4,000 Fuji Machine Manufacturing Co.................... 106
3,000 Fuji Photo Film Ltd.............................. 105
7,000 Fujitec Co., Ltd................................. 42
11,000 Fujitsu Ltd...................................... 116
16,000 Furukawa Electric Co............................. 54
3,000 Hitachi Credit Corp.............................. 51
17,000 Hitachi Ltd...................................... 111
5,000 Inabata & Co..................................... 15
11,000 Kaneka Corp...................................... 58
4,000 Kurita Water Industries Ltd...................... 47
2,000 Kyocera Corp..................................... 98
4,000 Kyudenko Co., Ltd................................ 26
4,000 Lintec Corp...................................... 35
8,000 Matsushita Electric Industrial Co., Ltd.......... 129
23,000 Mitsubishi Chemical Corp......................... 42
7,000 Mitsubishi Estate Co., Ltd....................... 62
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
20,000 Mitsubishi Heavy Industries Ltd.................. $ 76
5,000 Mitsumi Electric Co., Ltd........................ 88
2,000 Murata Manufacturing Co., Ltd.................... 65
11,000 NEC Corp......................................... 103
3,000 Nifco, Inc....................................... 24
1,500 Nintendo Corp., Ltd.............................. 139
13 Nippon Telegraph & Telephone Corp................ 108
22,000 Nissan Motor Co.................................. 69
5,000 Nissha Printing Co., Ltd......................... 31
2,000 Ono Pharmaceutical Co., Ltd...................... 48
12,000 Ricoh Co., Ltd................................... 126
3,000 Rinnai Corp...................................... 45
2,000 Sangetsu Co., Ltd................................ 26
5,000 Sankyo Co., Ltd.................................. 114
8,000 Sanwa Shutter Corp............................... 35
6,000 Sekisui Chemical Co.............................. 31
6,000 Sekisui House Co., Ltd........................... 47
2,000 Shimamura Co., Ltd............................... 54
8,000 Shin-Etsu Polymer Co., Ltd....................... 32
1,700 Sony Corp........................................ 147
4,000 Sumitomo Marine & Fire Insurance Co.............. 22
6,000 Suzuki Motor Co., Ltd............................ 55
2,000 TDK Corp......................................... 148
3,000 Tokyo Electron Ltd............................... 92
28,000 Toshiba Corp..................................... 115
5,000 Toyota Motor Corp................................ 129
15,000 Tsubakimoto Chain Co............................. 50
5,000 Yamaha Corp...................................... 49
5,000 Yamanouchi Pharmaceutical Co..................... 104
-------
3,819
-------
MALAYSIA (0.1%)
1,000 Carlsberg Brewery Malaysia Bhd................... 3
6,000 Guiness Anchor Bhd............................... 6
2,000 Nestle (Malaysia) Bhd............................ 9
2,000 Rothmans of Pall Mall (Malaysia) Bhd............. 14
-------
32
-------
NETHERLANDS (5.0%)
9,760 ABN Amro Holdings N.V............................ 228
2,140 Akzo Nobel N.V................................... 476
4,600 Hollandsche Beton Groep N.V...................... 96
9,890 ING Groep N.V.................................... 648
1,100 Koninklijke Bijenkorf Beheer N.V................. 77
9,010 Koninklijke KNP BT N.V........................... 233
2,400 Philips Electronics N.V.......................... 202
-------
1,960
-------
NEW ZEALAND (0.0%)
(a)13,000 AMP NZ Office Trust.............................. 6
2,200 Telecom Corp. of New Zealand Ltd................. 9
2,000 Telecom Corp. of New Zealand Ltd. (Installment
Receipts -- Final Installment of NZD 4.15/Share
due 3/31/99)................................... 4
-------
19
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
NORWAY (1.4%)
21,600 Saga Petroleum ASA, Class B...................... $ 306
9,130 Sparebanken NOR.................................. 262
-------
568
-------
SINGAPORE (0.2%)
(a)1,450 Creative Technology Ltd.......................... 18
11,000 Natsteel Electronics Ltd......................... 18
6,000 United Overseas Bank Ltd. (Foreign).............. 19
7,000 Venture Manufacturing Ltd........................ 13
-------
68
-------
SPAIN (3.4%)
6,380 Banco Bilbao Vizcaya............................. 327
33,400 Iberdrola........................................ 542
3,418 Telefonica de Espana............................. 158
21,590 Uralita.......................................... 308
-------
1,335
-------
SWEDEN (6.6%)
10,000 Autoliv, Inc., Swedish Depositary Receipt........ 320
(a)9,600 BT Industries AB................................. 194
13,105 Esselte AB, Class B.............................. 304
(a)446 Fastighets AB Balder............................. 4
76,430 Nordbanken Holding AB............................ 561
9,800 PLM AB........................................... 155
5,690 Pharmacia & Upjohn, Inc.......................... 262
720 S.K.F. AB, Class B............................... 13
6,310 Spectra-Physics AB, Class A...................... 101
16,810 Svedala Industri AB.............................. 390
6,860 Svenska Handelsbanken, Class A................... 318
-------
2,622
-------
SWITZERLAND (8.3%)
15 Ascom Holdings AG (Bearer)....................... 28
202 Bobst AG (Bearer)................................ 372
385 Cie Financiere Richemont AG, Class A............. 504
425 Forbo Holding AG (Registered).................... 216
498 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 634
366 Nestle (Registered).............................. 784
170 Schindler Holding AG (Registered)................ 264
244 SIG-Schweizerische Industrie-Gesellschaft
Holdings AG (Registered)....................... 199
1,093 Valora Holding AG (Registered)................... 288
-------
3,289
-------
UNITED KINGDOM (19.0%)
74,400 Aegis Group plc.................................. 121
(a)34,100 BTR plc.......................................... 97
4,600 Bank of Ireland.................................. 94
33,003 Bank of Scotland................................. 370
87,746 BG plc........................................... 508
35,420 British Telecommunications plc................... 438
19,220 Bunzl plc........................................ 90
18,240 Burmah Castrol plc............................... 326
23,600 Capital Radio plc................................ 280
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
44,810 Charter plc...................................... $ 468
6,630 Commercial Union plc............................. 124
700 Danka Business Systems plc....................... 2
26,701 Diageo plc....................................... 317
19,900 Glynwed International plc........................ 82
27,870 Great Universal Stores plc....................... 368
8,000 Halma plc........................................ 16
54,150 Imperial Tobacco Group plc....................... 400
23,867 John Mowlem & Co. plc............................ 58
(a)14,350 Lonrho Africa plc................................ 17
28,450 Lonrho plc....................................... 133
103,300 Medeva plc....................................... 293
6,390 Peninsular & Oriental Steam Navigation Co........ 92
59,000 Premier Farnell plc.............................. 300
564,050 Premier Oil plc.................................. 398
3,800 RMC Group plc.................................... 66
25,619 Reckitt & Colman plc............................. 489
40,930 Royal & Sun Alliance Insurance Group plc......... 423
26,300 SIG plc.......................................... 99
115,500 Scapa Group plc.................................. 366
8,723 Tate & Lyle plc.................................. 69
7,600 Unilever plc..................................... 81
76,740 WPP Group plc.................................... 503
8,370 Westminster Health Care Holdings plc............. 44
-------
7,532
-------
TOTAL COMMON STOCKS (COST $32,555)............................ 34,890
-------
PREFERRED STOCKS (2.3%)
GERMANY (2.3%)
800 Dyckerhoff AG.................................... 318
1,300 Hornbach Holding AG.............................. 119
760 Suedzucker AG.................................... 462
-------
TOTAL PREFERRED STOCKS (COST $769)............................ 899
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHT (0.0%)
GERMANY (0.0%)
(a)2,484 Metro AG, (COST $0).............................. --
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANT (0.0%)
HONG KONG (0.0%)
(a)1,200 Hong Kong & China Gas Co., Ltd.,
expiring 9/30/99 (COST $0)..................... --
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
CONVERTIBLE BOND (0.0%)
NEW ZEALAND (0.0%)
NZD 13 AMP NZ Office Trust 7.50%, 6/30/03 (COST $8)..... $ 6
-------
TOTAL FOREIGN SECURITIES (90.4%) (COST $33,332)............... 35,795
-------
SHORT-TERM INVESTMENT (13.6%)
REPURCHASE AGREEMENT (13.6%)
$5,390 Chase Securities, Inc. 5.40%, dated 6/30/98 due
7/1/98, to be repurchased at $5,391,
collateralized by U.S. Treasury Bonds, 8.875%,
due 2/15/19, valued at $5.515 (COST $5,390).... 5,390
-------
</TABLE>
<TABLE>
<C> <S> <C>
FOREIGN CURRENCY (0.3%)
BEF 209 Belgian Franc.................................... 6
GBP 1 British Pound.................................... 2
DKK 1 Danish Krone..................................... --
DEM 10 German Mark...................................... 6
FIM 235 Finnish Markka................................... 43
FRF 28 French Franc..................................... 5
HKD 162 Hong Kong Dollar................................. 21
ITL 15,457 Italian Lira..................................... 9
JPY 2,281 Japanese Yen..................................... 16
MYR 2 Malaysian Ringgit................................ 1
NLG 1 Netherland Guilder............................... --
NZD 1 New Zealand Dollar............................... --
SGD 1 Singapore Dollar................................. --
ESP 32 Spanish Peseta................................... --
CHF 13 Swiss Franc...................................... 9
-------
TOTAL FOREIGN CURRENCY (COST $118)............................ 118
-------
TOTAL INVESTMENTS (104.3%) (COST $38,840)..................... 41,303
-------
OTHER ASSETS (0.7%)
Cash........................................................... $ 1
Receivable for Investments Sold................................ 94
Dividends Receivable........................................... 77
Net Unrealized Gain on Foreign Currency Exchange Contracts..... 61
Receivable for Portfolio Shares Sold........................... 32
Foreign Withholding Tax Reclaim Receivable..................... 28
Interest Receivable............................................ 1 294
---------
LIABILITIES (-5.0%)
Payable for Investments Purchased.............................. (1,798)
Payable for Portfolio Shares Redeemed.......................... (104)
Custodian Fees Payable......................................... (49)
Professional Fees Payable...................................... (29)
Administrative Fees Payable.................................... (11)
Investment Advisory Fees Payable............................... (4)
Directors' Fees and Expenses Payable........................... (1)
Other Liabilities.............................................. (15) (2,011)
--------- ---------
NET ASSETS (100%)........................................................... $ 39,586
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,227,563 outstanding $0.001 par value shares (authorized
400,000,000 shares)....................................................... $ 12.27
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AMOUNT
(000)
<C> <S> <C>
- -----------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $36,161
Undistributed Net Investment Income........................... 292
Accumulated Net Realized Gain................................. 617
Unrealized Appreciation on Investments and Foreign
Currency Translations........................................ 2,516
-------
NET ASSETS.................................................... $39,586
-------
-------
</TABLE>
- ---------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE NET UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
--------------- --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
U.S.$ 26 $ 26 7/1/98 FIM 144 $ 26 $ --
U.S.$ 172 172 7/1/98 DEM 311 172 --
U.S.$ 24 24 7/1/98 SEK 188 24 --
U.S.$ 79 79 7/2/98 DKK 545 79 --
U.S.$ 7 7 7/2/98 MYR 27 7 --
U.S.$ 78 78 7/2/98 NLG 159 78 --
BEF 209 6 7/2/98 U.S.$ 6 6 --
HKD 162 21 7/2/98 U.S.$ 21 21 --
U.S.$ 66 66 7/7/98 SGD 113 67 1
SGD 113 67 7/7/98 U.S.$ 64 64 (3)
DEM 399 221 7/14/98 U.S.$ 219 219 (2)
U.S.$ 397 397 7/16/98 JPY 54,559 395 (2)
JPY 54,559 394 7/16/98 U.S.$ 426 426 32
CHF 299 198 7/21/98 U.S.$ 202 202 4
U.S.$ 553 553 7/29/98 JPY 75,855 550 (3)
JPY 75,855 549 7/29/98 U.S.$ 590 590 41
DEM 399 222 8/14/98 U.S.$ 226 226 4
U.S.$ 131 131 8/19/98 JPY 17,887 130 (1)
JPY 63,055 458 8/19/98 U.S.$ 477 477 19
JPY 84,938 619 9/10/98 U.S.$ 622 622 3
DEM 51 28 9/14/98 U.S.$ 28 28 --
DEM 705 393 9/14/98 U.S.$ 391 391 (2)
JPY 90,847 664 9/28/98 U.S.$ 667 667 3
JPY 122,543 900 10/26/98 U.S.$ 867 867 (33)
--------- --------- -----
$ 6,273 $ 6,334 $ 61
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
(a) -- Non-income producing security
AUD -- Australian Dollar
NCS -- Non Convertible Shares
SEK -- Swedish Krona
- ----------------------------------------------------------------
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) APPRECIATION
(000) (000) (000) (000)
- --------- ------------- --------------- -------------
<S> <C> <C> <C>
$ 38,722 $ 4,206 $ (1,743) $ 2,463
</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 $19,061,000 and $3,126,000,
respectively. There were no purchases and sales of U.S. Government securities
for the six months ended June 30, 1998.
- ----------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE % OF
SECTOR DIVERSIFICATION (000) NET ASSETS
- ------------------------------------------- --------- -------------
<S> <C> <C>
Capital Equipment.......................... $ 7,962 20.1%
Capital Goods -- Construction.............. 1,337 3.4
Consumer Cyclical.......................... 465 1.2
Consumer Products.......................... 5,647 14.3
Consumer Staples........................... 595 1.5
Energy..................................... 2,944 7.4
Finance.................................... 6,348 16.0
Materials.................................. 5,374 13.6
Multi-Industry............................. 976 2.4
Technology................................. 78 0.2
Services................................... 4,069 10.3
--------- -----
Total Foreign Securities................... $ 35,795 90.4%
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
(UNAUDITED)
(000)
<S> <C>
- --------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 402
Interest 109
Less: Foreign Taxes Withheld (50)
------
Total Income 461
------
EXPENSES:
Investment Advisory Fees 106
Less: Fees Waived (88)
------
Net Investment Advisory Fees 18
Custodian Fees 46
Administrative Fees 43
Shareholder Reports 27
Professional Fees 17
Directors' Fees and Expenses 1
Other 1
------
Net Expenses 153
------
Net Investment Income 308
------
NET REALIZED GAIN ON:
Investments Sold 430
Foreign Currency Transactions 232
------
Net Realized Gain 662
------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 2,861
Foreign Currency Translations (106)
------
Change in Unrealized Appreciation/Depreciation 2,755
------
Net Realized Gain and Change in Unrealized
Appreciation/Depreciation 3,417
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,725
------
------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD FROM
JUNE 30, 1998 JANUARY 2, 1997*
(UNAUDITED) TO DECEMBER 31, 1997
(000) (000)
<S> <C> <C>
- --------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 308 $ 207
Net Realized Gain 662 329
Change in Unrealized
Appreciation/Depreciation 2,755 (239)
------- -------
Net Increase in Net Assets
Resulting from Operations 3,725 297
------- -------
DISTRIBUTIONS:
Net Investment Income -- (544)
In Excess of Net Investment Income -- (16)
Net Realized Gain -- (37)
------- -------
Total Distributions -- (597)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 23,697 28,522
Distributions Reinvested -- 546
Redeemed (6,691) (9,913)
------- -------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 17,006 19,155
------- -------
Total Increase in Net Assets 20,731 18,855
NET ASSETS:
Beginning of Period 18,855 --
------- -------
End of Period (Including
undistributed (overdistributed)
net investment income of
$292 and $(16), respectively) $39,586 $18,855
------- -------
------- -------
- --------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,975 2,663
Shares Issued on Distributions
Reinvested -- 54
Shares Redeemed (564) (900)
------- -------
Net Increase in Capital Shares
Outstanding 1,411 1,817
------- -------
------- -------
- --------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD FROM
JUNE 30, 1998 JANUARY 2, 1997*
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) TO DECEMBER 31, 1997
<S> <C> <C>
- ------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.38 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.10 0.13
Net Realized and Unrealized Gain 1.79 0.59
------- -------
Total From Investment Operations 1.89 0.72
------- -------
DISTRIBUTIONS
Net Investment Income -- (0.32)
Net Realized Gain -- (0.02)
------- -------
Total Distributions -- (0.34)
------- -------
NET ASSET VALUE, END OF PERIOD $ 12.27 $ 10.38
------- -------
------- -------
TOTAL RETURN 18.21% 7.31%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $39,586 $18,855
Ratio of Expenses to Average Net
Assets 1.15%** 1.16%**
Ratio of Expenses to Average Net
Assets Excluding Interest Expense 1.15%** 1.15%**
Ratio of Net Investment Income to
Average Net Assets 2.30%** 1.43%**
Portfolio Turnover Rate 13% 41%
- ------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.15
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.81%** 2.78%**
Net Investment Income (Loss) to
Average Net Assets 1.64%** (0.19)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
The accompanying notes are an integral part of the financial statements.
8
<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 International Magnum
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.
9
<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
10
<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
11
<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 International
Magnum 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>
International Magnum...... 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 1.15%.
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.
12
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MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
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D. CUSTODIANS: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley Dean Witter & 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 $44,000 and had amounts payable to MSTC at June 30, 1998 of
approximately $44,000.
E. OTHER: During the six months ended June 30, 1998, the Portfolio paid
brokerage commissions to Morgan Stanley & Co., Incorporated, an affiliated
broker/dealer, of approximately $8,000.
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.
13
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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.
14
