<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1998
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.6%
Belgium 0.7%
Denmark 0.7%
Finland 4.1%
France 7.0%
Germany 8.4%
Hong Kong 1.3%
Ireland 1.8%
Italy 5.2%
Japan 18.8%
Malaysia 0.1%
Netherlands 3.2%
New Zealand 0.1%
Norway 1.3%
Singapore 0.3%
Spain 3.1%
Sweden 4.0%
Switzerland 8.9%
United Kingdom 16.7%
Other 12.7%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL
<TABLE>
<CAPTION>
INTERNATIONAL (MSCI) EAFE INDEX(1)
- ------------------------------------
TOTAL RETURNS(2)
-----------------------------
AVERAGE ANNUAL
ONE SINCE
YEAR INCEPTION(3)
---------- -----------------
<S> <C> <C>
PORTFOLIO........... 8.97% 8.16%
INDEX............... 20.00% 11.10%
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Australia, Japan, New Zealand, most nations located in Western Europe, and
certain developed countries in Asia (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.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------------ ------------ -------------
<S> <C> <C>
Nestle Switzerland 2.1%
Telecom Italia S.p.A. Di Risp Italy 2.0%
Cie Financiere Richemont AG,
Class A Switzerland 1.9%
Iberdrola Spain 1.5%
Holderbank Financiere Glarus
AG, Class B Switzerland 1.3%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------- --------------- -------------
<S> <C> <C>
Capital Equipment $ 10,358 23.5%
Finance 7,490 17.0%
Consumer Products 6,921 15.7%
Materials 5,160 11.7%
Services 3,764 8.5%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL MAGNUM PORTFOLIO MSCI EAFE INDEX(1)
<S> <C> <C>
1/2/97* $10,000 $10,000
12/31/97 $10,731 $10,280
12/31/98 $11,694 $12,336
</TABLE>
* Commencement of operations.
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and
all dividends and distributions were reinvested.
CERTAIN INFORMATION APPEARING IN THIS NVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY
AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
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 the Portfolio's Adviser. The EAFE
countries in which the Portfolio will invest are those comprising the Morgan
Stanley Capital International (MSCI) EAFE Index (the "Index") which includes
Australia, Japan, New Zealand, most nations located in Western Europe, and
certain developed countries in Asia.
For the year ended December 31, 1998, the Portfolio had a total return of 8.97%
compared to 20.00% for the Index. For the period from inception on January 2,
1997 to December 31, 1998, the Portfolio had an average annual total return of
8.16% compared to 11.10% for the Index.
1998 was a challenging year for the international markets and the International
Magnum Portfolio. Although the Index ended the year up 20.00%, most of the gains
were attributable to a strong performance in Europe, which comprises 73% of the
Index. After rallying early in the year, global
1
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
markets corrected sharply in August and September, sparked by the Russian debt
default and near collapse of a U.S. hedge fund. The markets then settled down in
the final quarter of the year, posting a modest recovery helped by interest rate
cuts and ample liquidity. Against this backdrop, the Portfolio underperformed
the Index, due primarily to our stock selection in Europe, where value and small
and mid cap stocks lagged behind large and mega cap growth stocks. On the
positive side, stock selection in Japan and Asia contributed positively to
performance as did our regional allocation policy, in which we were overweight
or neutral in Europe and underweight in Japan and Asia virtually all year.
The European markets rose 18.7% for the quarter and 28.5% for the year, buoyed
by "Euro-phoria" ahead of the January 1, 1999 start of EMU. However, the strong
returns disguised a wide range of returns across both countries and sectors.
Finland (+121%), Italy (+52%) and Spain (+50%) were the strongest performers of
the year, with Finland reflecting the strength of Nokia, the cellular phone
manufacturer which rose over 200% for the year, and Italy and Spain benefiting
from sharply lower interest rates due to EMU convergence. In contrast, Norway
fell 30% for the year as oil prices reached their lowest point in real terms
since 1972, while Sweden rose 14% and the UK nearly 18%. There was also a large
disparity among sectors, with telecommunications, insurance and beverages and
tobacco all posting better than 35% returns, while energy, commodities, textiles
and transportation all posted negative returns for the year.
The Portfolio's European holdings underperformed the European index for the
fourth quarter, second half of the year and the year. While companies like
Telecom Italia, Nestle, Imperial Tobacco and France Telecom were strong
performers for the year, the Portfolio was hurt by holdings in oil (Premier Oil
and Total) as well as by weak stock selection especially in the UK. The
Portfolio also suffered as large and mega cap growth stocks were unstoppable,
making 1998 one of the worst years on record for value investors. Furthermore,
the valuation gap between small/mid sized companies and their larger peers
reached the widest point in over thirteen years. Attracted by their quality
franchises and cheap multiples, the Portfolio has increased exposure over the
last 18 months to small/mid cap companies. In the recent flight to liquidity,
however, these small/mid cap names were shunned by investors, often for reasons
unrelated to fundamentals. This has been the principal cause for our recent
underperformance.
While we are disappointed by these European results, we believe that with
valuation gaps so extreme and earnings expectations still very rosy, our
European stocks are well positioned to navigate the choppy waters ahead. We
remain cautiously optimistic about the outlook for Europe in 1999, as we expect
demand for equities to continue to rise and merger and restructuring activity to
remain brisk. However, risks include the new Euro currency which has shown signs
of possible strengthening versus the U.S. dollar and would hurt the exporters
which have led the European recovery. Furthermore, there are signs of a more
dramatic than expected economic slowing in Europe, which would put further
pressure on already high unemployment rates. Finally, valuations, particularly
in the largest companies, are at stratospheric levels, making them extremely
vulnerable to earnings disappointments which have become increasingly likely in
this volatile global financial environment. To combat these risks, in our stock
research, we spend a great deal of time conducting due diligence and testing our
assumptions for cash flow growth under various scenarios. Experience tells us
that owning a portfolio of cheap companies (i.e. low price/cash flow) builds in
a margin of safety for those periods when markets fall on tough times.
Turning to Asia ex-Japan, the markets there finally found a bottom in the third
quarter and rebounded in the final quarter of the year. However, with the
exception of Australia, they still ended the year with negative returns. The
Asian markets have been suffering for well over a year, with emerging market
nations of South Korea, Thailand and Indonesia so dire they were forced to adopt
austere monetary and fiscal policies under IMF guidance. These three nations
(which are not in our investment universe), led an Asian fourth quarter rally
just as they had led the downturn in late 1997. They have been helped by
stronger currencies and lower interest rates, and recent data points to
increasing economic activity. These factors have contributed to increasing
stability and should benefit the region as a whole in the new year. We remain
cautious, however, about the outlook for China and Hong Kong. China has seen
several corporate defaults in recent weeks and the recent volatility in Latin
America raises questions about the strength of the renminbi and the
sustainability of the Hong Kong dollar peg.
A significant change occurred when Malaysia was removed from the Index in
December 1998, narrowing our Asia ex-Japan investment universe to four
countries: Hong Kong, Singapore, Australia and New Zealand. The Index change was
made following the government's decision to implement capital controls in
September. Shifting securities regulations have severely limited the ability of
most foreign investors to trade over the past few months. We had a very small
position in Malaysia when the controls were implemented, and chose to remain
invested in a small number of defensive, consumer stocks rather than hold a
currency position that could not be converted to dollars for a year. The
Malaysian government has signaled it may lift these controls sometime in 1999,
and we will monitor the situation accordingly.
2
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
Overall, we maintained a defensive portfolio in Asia during the year, and
although our holdings outperformed relative to the region, most positions were
still down for the year. However, the Portfolio was helped by the fact that our
Asian holdings were a small (LESS THAN5%) portion of the Portfolio in absolute
terms, and underweight versus the Index on a relative basis. The only bright
spot in the region was Australia, which rose 6% for the year as the domestic
economy exhibited strong economic fundamentals -- low inflation, sound monetary
policy, a budget surplus and a healthy banking system. Additionally, many
Australian companies are well managed with an eye towards increasing
profitability. Telstra, the telecommunications company, Fosters, the beer
manufacturer, and National Australia Bank were all strong performers for the
quarter and year.
Finally, despite a new prime minister and a series of economic stimulus and bank
bailout packages, the Japanese economy and stock market continued to languish,
with conditions exacerbated by year end gyrations in the value of the yen. The
story in Japan has changed little from a year ago; consumer and business
sentiment remain at depressed levels while the nation's credit crunch and
deflationary spiral have continued to worsen. In July, Japanese voters flocked
to the polls to replace Prime Minister Hashimoto with a new leader, Mr. Obuchi.
Obuchi declared a 60 trillion yen bank rescue package in October, doubling the
efforts of his predecessor including a new scheme to nationalize troubled banks.
Late in the year, both Long Term Credit Bank and Nippon Credit Bank were
nationalized, the first in post WWII history for Japan. Although these changes
are positive at the margin, significant structural problems remain and the
government thus far has been unable or unwilling to implement the critical
structural changes needed to revive the economy.
Our strategy of focusing on blue chip exporters and avoiding banks and more
domestically oriented stocks contributed to relative outperformance of our
Japanese stocks, although as in Asia, the market was down for the year. We also
actively hedged our yen exposure during the year, which was helpful as the yen
fell to 147 yen/dollar during the first half of the year, but slightly hurtful
as the yen jumped back to 110 yen/dollar in September. Japanese equities fell to
12 year lows in 1998 and sentiment became increasingly negative on the future
for the Japanese economy.
1999 should be another difficult year for Japan, with GDP growth flat to
negative. Further bank failures are likely and the credit crunch should continue
as a result. While Prime Minister Obuchi has provided a platform for significant
tax cuts and economic stimulus packages to support Japan on a macro level,
adjustments to over-capacity and over-employment and de-leveraging on the micro
level will probably become the dominant themes for investors in 1999. As Japan
increasingly gravitates to "international" accounting standards, corporate
sector restructuring should ensue, challenging the traditional full employment
socialist system and further dampening consumer sentiment as unemployment rises.
Japan also remains vulnerable to any global economic slowdown as well as a
stronger yen and higher domestic interest rates.
We will remain highly selective in our stock selection, favoring personal
computers, semiconductor, service, pharmaceutical and select domestic sectors
such as housing and housing related securities. As we enter 1999, we are
cautiously optimistic that this year will become a true inflection point in
which the private sector will finally foster real structural changes in areas
such as wages, employment efficiencies and shareholder value (e.g., focus on
return on equity). After 10 years of economic stagnation, Japan has entered the
final phase for real change, making this an important time for long term
investors in Japanese equities.
We believe 1999 will be an interesting year in the international equity markets
overall. We have remained close to market weight in Europe and underweight in
Japan and Asia relative to the Index for much of the past year, and maintained a
small cash position. Overall, we will remain vigilant to find the best
opportunities to put money to work, and adjust the Portfolio accordingly.
January 1999
3
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
COMMON STOCKS (85.3%)
AUSTRALIA (1.6%)
2,250 Brambles Industries Ltd.......................... $ 55
18,200 Colonial Ltd..................................... 62
4,100 Commonwealth Bank of Australia................... 58
24,100 Fosters Brewing Group Ltd........................ 65
2,600 Lend Lease Corp., Ltd............................ 35
5,130 National Australia Bank Ltd...................... 77
9,800 News Corp., Ltd.................................. 65
20,800 Oil Search Ltd................................... 21
5,650 Rio Tinto Ltd.................................... 67
(a)19,400 Telstra Corp., Ltd............................... 91
4,800 Westpac Banking Corp., Ltd....................... 32
9,150 WMC Ltd.......................................... 28
10,200 Woolworths Ltd................................... 35
-------
691
-------
BELGIUM(0.7%)
6,135 G.I.B. Group..................................... 321
-------
DENMARK(0.7%)
3,610 Unidanmark A/S, Class A (Registered)............. 326
-------
FINLAND(4.1%)
4,120 KCI Konecranes International plc................. 187
2,990 Kone Oyj, Class B................................ 348
62,150 Merita plc, Class A.............................. 395
13,360 Metra Oyj, Class B............................... 232
20,600 Rauma Oyj........................................ 301
9,050 Sampo Insurance Co., Ltd., Class A............... 346
1,160 Valmet Oyj....................................... 16
-------
1,825
-------
FRANCE(7.0%)
(a)14,400 Bull SA.......................................... 108
3,265 Cie de Saint Gobain.............................. 461
(a)9,850 CNP Assurances................................... 299
3,640 Elf Aquitaine.................................... 421
975 Groupe Danone.................................... 279
1,510 Lafarge.......................................... 143
7,790 Michelin (C.G.D.E.), Class B..................... 312
8,300 Rhone-Poulence, Class A.......................... 427
3,010 Total, Class B................................... 305
2,333 Union des Assurances Federales................... 310
-------
3,065
-------
GERMANY(6.4%)
11,720 BASF AG.......................................... 447
3,510 Bayer AG......................................... 147
4,970 Bayer Vereinsbank AG............................. 393
1,050 Buderus AG....................................... 388
3,012 Philipp Holzmann AG.............................. 470
1,422 Plettac AG....................................... 113
6,050 VEBA AG.......................................... 358
318 Viag AG.......................................... 188
4,270 Volkswagen AG.................................... 345
-------
2,849
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
HONG KONG (1.3%)
16,000 China Telecom Ltd................................ $ 28
7,000 CLP Holdings Ltd................................. 35
19,000 Dairy Farm International Holdings Ltd............ 22
20,400 Hong Kong & China Gas Co., Ltd................... 26
7,500 Hong Kong Electric Holdings Ltd.................. 23
19,200 Hong Kong Telecommunications Ltd................. 33
3,300 HSBC Holdings plc................................ 82
17,000 Hutchison Whampoa Ltd............................ 120
10,600 Li & Fung Ltd.................................... 22
8,000 SmarTone Telecommunications Holdings Ltd......... 22
15,000 Sun Hung Kai Properties Ltd...................... 109
10,000 Swire Pacific Ltd., Class A...................... 45
5,000 Television Broadcasts Ltd........................ 13
3,000 VTech Holdings Ltd............................... 13
-------
593
-------
IRELAND(1.8%)
20,462 Bank of Ireland.................................. 456
67,700 Greencore Group plc.............................. 313
-------
769
-------
ITALY(5.2%)
6,830 Banca Popolare di Bergamo S.p.A.................. 166
40,940 Magneti Marelli S.p.A............................ 71
33,600 Marzotto (Gaetano) & Figli S.p.A................. 371
68,000 Mediaset S.p.A................................... 552
100,550 Sogefi S.p.A..................................... 274
138,574 Telecom Italia S.p.A. Di Risp (NCS).............. 873
-------
2,307
-------
JAPAN(18.8%)
2,000 Aiwa Co., Ltd.................................... 53
15,000 Amada Co., Ltd................................... 73
1,200 Autobacs Seven Co., Ltd.......................... 40
10,000 Canon, Inc....................................... 214
14,000 Casio Computer Co., Ltd.......................... 103
10,000 Dai Nippon Printing Co., Ltd..................... 160
32,000 Daicel Chemical Industries Ltd................... 95
23,000 Daifuku Co., Ltd................................. 123
16,000 Daikin Industries Ltd............................ 159
1,500 Family Mart Co., Ltd............................. 75
7,000 Fuji Machine Manufacturing Co.................... 221
7,000 Fuji Photo Film Ltd.............................. 261
14,000 Fujitec Co., Ltd................................. 90
22,000 Fujitsu Ltd...................................... 293
29,000 Furukawa Electric Co............................. 99
8,200 Hitachi Credit Corp.............................. 182
38,000 Hitachi Ltd...................................... 236
5,000 Inabata & Co..................................... 13
24,000 Kaneka Corp...................................... 180
8,000 Kurita Water Industries Ltd...................... 118
3,100 Kyocera Corp..................................... 164
11,000 Kyudenko Co., Ltd................................ 75
7,000 Lintec Corp...................................... 65
14,000 Matsushita Electric Industrial Co., Ltd.......... 248
7,000 Minebea Co., Ltd................................. 80
</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.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
38,000 Mitsubishi Chemical Corp......................... $ 80
14,000 Mitsubishi Estate Co., Ltd....................... 126
37,000 Mitsubishi Heavy Industries Ltd.................. 144
10,000 Mitsumi Electric Co., Ltd........................ 212
4,000 Murata Manufacturing Co., Ltd.................... 166
27,000 NEC Corp......................................... 249
12,000 Nifco, Inc....................................... 97
3,000 Nintendo Corp., Ltd.............................. 291
30 Nippon Telegraph & Telephone Corp................ 232
52,000 Nissan Motor Co.................................. 159
8,000 Nissha Printing Co., Ltd......................... 49
16 NTT Data Corp.................................... 80
4,000 Ono Pharmaceutical Co., Ltd...................... 125
26,000 Ricoh Co., Ltd................................... 240
4,600 Rinnai Corp...................................... 81
1,000 Rohm Co., Ltd.................................... 91
5,000 Ryosan Co., Ltd.................................. 80
2,000 Sangetsu Co., Ltd................................ 30
10,000 Sankyo Co., Ltd.................................. 219
18,000 Sanwa Shutter Corp............................... 79
15,000 Sekisui Chemical Co.............................. 101
8,000 Sekisui House Co., Ltd........................... 85
13,000 Shin-Etsu Polymer Co., Ltd....................... 68
3,600 Sony Corp........................................ 263
4,000 Sumitomo Marine & Fire Insurance Co.............. 25
11,000 Suzuki Motor Co., Ltd............................ 131
3,000 TDK Corp......................................... 275
4,000 Tokyo Electron Ltd............................... 152
44,000 Toshiba Corp..................................... 262
7,000 Toyota Motor Corp................................ 190
36,000 Tsubakimoto Chain Co............................. 77
9,000 Yamaha Corp...................................... 93
9,000 Yamanouchi Pharmaceutical Co..................... 290
-------
8,262
-------
MALAYSIA(0.1%)
(d)3,000 Carlsberg Brewery Bhd............................ 6
(d)6,000 Guiness Anchor Bhd............................... 4
(d)1,000 Nestle Bhd....................................... 3
(d)4,000 R.J. Reynolds Bhd................................ 3
(d)3,000 Rothmans of Pall Mall Bhd........................ 13
-------
29
-------
NETHERLANDS(3.2%)
12,860 ABN Amro Holdings N.V............................ 271
8,560 Akzo Nobel N.V................................... 390
3,635 Hollandsche Beton Groep N.V...................... 45
8,690 ING Groep N.V.................................... 530
2,450 Philips Electronics N.V.......................... 164
-------
1,400
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
NEW ZEALAND(0.1%)
4,300 Telecom Corp. of New Zealand Ltd................. $ 19
2,000 Telecom Corp. of New Zealand Ltd. (Installment
Receipts-Final Installment of NZD 4.15/Share
due 3/31/99)................................... 4
-------
23
-------
NORWAY(1.3%)
12,600 Saga Petroleum ASA............................... 115
22,799 Sparebanken NOR.................................. 444
-------
559
-------
SINGAPORE(0.3%)
5,000 City Developments Ltd............................ 22
8,000 Natsteel Electronics Ltd......................... 20
3,000 Singapore Airlines Ltd........................... 22
18,000 Singapore Technologies Engineering Ltd........... 17
6,000 United Overseas Bank Ltd. (Foreign).............. 38
5,000 Venture Manufacturing Ltd........................ 19
-------
138
-------
SPAIN(3.1%)
18,650 Banco Bilbao Vizcaya............................. 293
35,300 Iberdrola........................................ 661
4,068 Telefonica de Espana............................. 181
21,590 Uralita.......................................... 241
-------
1,376
-------
SWEDEN(4.0%)
10,000 Autoliv, Inc., Swedish Depositary Receipt........ 359
16,615 BT Industries AB................................. 242
76,430 Nordbanken Holding AB............................ 491
21,110 Svedala Industri AB.............................. 308
8,610 Svenska Handelsbanken, Class A................... 364
-------
1,764
-------
SWITZERLAND(8.9%)
202 Bobst AG (Bearer)................................ 250
590 Cie Financiere Richemont AG, Class A............. 836
425 Forbo Holding AG (Registered).................... 186
498 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 590
421 Nestle (Registered).............................. 918
170 Schindler Holding AG (Registered)................ 290
244 SIG-Schweizerische Industrie-Gesellschaft
Holdings AG (Registered)....................... 144
(a)810 Swisscom AG (Registered)......................... 340
(a)295 UBS AG (Registered).............................. 91
1,093 Valora Holding AG (Registered)................... 296
-------
3,941
-------
UNITED KINGDOM(16.7%)
151,300 Aegis Group plc.................................. 219
6,300 Allied Domecq plc................................ 58
(a)12,200 Allied Zurich plc................................ 182
37,048 Bank of Scotland................................. 442
38,175 BG plc........................................... 241
20,970 British Telecommunications plc................... 316
</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.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
19,220 Bunzl plc........................................ $ 75
30,427 Burmah Castrol plc............................... 435
48,350 Capital Radio plc................................ 471
44,810 Charter plc...................................... 246
103,200 Devro plc........................................ 297
29,501 Diageo plc....................................... 336
34,420 Great Universal Stores plc....................... 363
164,500 Halma plc........................................ 331
26,650 IMI plc.......................................... 105
45,350 Imperial Tobacco Group plc....................... 486
28,450 Lonrho plc....................................... 156
59,300 Morgan Crucible Co. plc.......................... 272
59,000 Premier Farnell plc.............................. 157
564,050 Premier Oil plc.................................. 150
40,769 Reckitt & Colman plc............................. 540
23,110 RMC Group plc.................................... 316
41,847 Royal & Sun Alliance Insurance Group plc......... 342
(d)65,500 Scapa Group plc.................................. 107
13,100 Scottish Media Group plc......................... 153
10,400 Williams plc..................................... 59
84,240 WPP Group plc.................................... 513
-------
7,368
-------
TOTAL COMMON STOCKS (COST $37,873)............................ 37,606
-------
PREFERRED STOCKS (2.0%)
GERMANY (2.0%)
997 Dyckerhoff AG.................................... 278
780 Fresenius AG..................................... 164
465 Hornbach Holding AG.............................. 28
910 Suedzucker AG.................................... 412
-------
TOTAL PREFERRED STOCKS (COST $991)............................ 882
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHTS(0.0%)
SPAIN(0.0%)
(a)4,068 Telefonica S.A., expiring 1/30/99 (COST $0)...... 4
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS(0.0%)
HONG KONG (0.0%)
(a)1,200 Hong Kong & China Gas Co., Ltd.,
expiring 9/30/99 (COST $0)..................... --
-------
TOTAL FOREIGN SECURITIES (87.3%) (COST $38,864)............... 38,492
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
SHORT-TERM INVESTMENT (11.7%)
REPURCHASE AGREEMENT (11.7%)
$5,157 Chase Securities, Inc. 4.45%, dated 12/31/98, due
1/4/99, to be repurchased at $5,160,
collateralized by U.S. Treasury Bonds, 10.375%,
due 11/15/12, valued at $5,211 (COST $5,157)... $ 5,157
-------
</TABLE>
<TABLE>
<C> <S> <C>
FOREIGN CURRENCY (0.0%)
HKD 7 Hong Kong Dollar................................. 1
MYR (d)2 Malaysian Ringgit................................ --
ESP 4 Spanish Peseta................................... --
-------
TOTAL FOREIGN CURRENCY (COST $0).............................. 1
-------
TOTAL INVESTMENTS (99.0%) (COST $44,021)...................... 43,650
-------
OTHER ASSETS (1.5%)
Due from Broker................................................ $ 366
Receivable for Daily Variation on Futures Contracts............ 155
Dividends Receivable........................................... 74
Foreign Withholding Tax Reclaim Receivable..................... 26
Receivable for Portfolio Shares Sold........................... 22
Interest Receivable............................................ 1
Other Assets................................................... 1 645
---------
LIABILITIES (-0.5%)
Unrealized Loss on Foreign Currency Exchange Contracts......... (126)
Professional Fees Payable...................................... (34)
Investment Advisory Fees Payable............................... (22)
Custodian Fees Payable......................................... (17)
Administrative Fees Payable.................................... (11)
Payable for Portfolio Shares Redeemed.......................... (10)
Other Liabilities.............................................. (13) (233)
--------- ---------
NET ASSETS (100%)........................................................... $ 44,062
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,922,808 outstanding $0.001 par value shares (authorized
500,000,000 shares)....................................................... $ 11.23
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital............................................................. $ 44,094
Undistributed Net Investment Income......................................... 91
Accumulated Net Realized Gain............................................... 202
Unrealized Depreciation on Investments, Foreign
Currency Translations and Futures Contracts.............................. (325)
---------
NET ASSETS.................................................................. $ 44,062
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1998
- ---------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1998, the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars 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>
FRF 592 $ 106 1/13/99 U.S.$ 106 $ 106 $ --
DEM 474 284 1/13/99 U.S.$ 285 285 1
ITL 325,342 197 1/13/99 U.S.$ 198 198 1
JPY 100,434 891 1/13/99 U.S.$ 835 835 (56)
JPY 92,917 825 1/13/99 U.S.$ 781 781 (44)
JPY 35,806 318 1/13/99 U.S.$ 310 310 (8)
GBP 230 383 1/13/99 U.S.$ 387 387 4
U.S.$ 103 103 1/13/99 FRF 590 105 2
U.S.$ 446 446 1/13/99 FRF 2,506 449 3
U.S.$ 858 858 1/13/99 DEM 1,448 869 11
U.S.$ 358 358 1/13/99 ITL 599,046 363 5
U.S.$ 1,996 1,996 1/13/99 JPY 229,157 2,034 38
U.S.$ 391 391 1/13/99 GBP 236 393 2
U.S.$ 463 463 1/13/99 GBP 275 457 (6)
JPY 47,007 418 1/19/99 U.S.$ 392 392 (26)
U.S.$ 407 407 1/19/99 JPY 47,007 417 10
U.S.$ 684 684 1/19/99 GBP 409 680 (4)
JPY 184,943 1,645 1/27/99 U.S.$ 1,541 1,541 (104)
U.S.$ 1,600 1,600 1/27/99 JPY 184,943 1,645 45
--------- --------- -----
$ 12,373 $ 12,247 $ (126)
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
NCS -- Non Convertible Shares
DEM -- German Mark
FRF -- French Franc
GBP -- British Pound
ITL -- Italian Lira
JPY -- Japanese Yen
NZD -- New Zealand Dollar
- ----------------------------------------------------------------
FUTURES CONTRACTS:
At December 31, 1998, the following futures contracts were open:
<TABLE>
<CAPTION>
AGGREGATE UNREALIZED
NUMBER OF FACE VALUE EXPIRATION APPRECIATION
CONTRACTS (000) DATE (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
LONG:
Dax Index.......................... 2 U.S.$ 607 Mar-99 U.S.$ 51
MIB 30 Index....................... 1 210 Mar-99 17
CAC 40 Index....................... 15 530 Mar-99 29
FTSE 100 Index..................... 13 1,268 Mar-99 46
------------
U.S.$ 143
------------
------------
</TABLE>
- ----------------------------------------------------------------
At December 31, 1998, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments (excluding foreign currency) of
the Portfolio were:
<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
(000) (000) (000) (000)
- --------- ------------- --------------- ---------------
<S> <C> <C> <C>
$ 44,047 $ 3,305 $ (3,703) $ (398)
</TABLE>
- ----------------------------------------------------------------
For the year ended December 31, 1998, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $32,146,000 and $10,577,000,
respectively. There were no purchases and sales of U.S. Government securities
for the year ended December 31, 1998.
- ----------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SECTOR DIVERSIFICATION (000) NET ASSETS
- ------------------------------------------- --------- -------------
<S> <C> <C>
Advertising Service........................ $ 219 0.5%
Capital Equipment.......................... 10,358 23.5
Capital Goods.............................. 1,435 3.2
Consumer Products.......................... 6,921 15.7
Consumer Staples........................... 846 1.9
Multi-Industry............................. 248 0.6
Energy..................................... 1,920 4.4
Finance.................................... 7,490 17.0
Materials.................................. 5,160 11.7
Technology................................. 131 0.3
Services................................... 3,764 8.5
--------- ---
Total Foreign Securities................... $ 38,492 87.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
(000)
<S> <C>
- ----------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 632
Interest 254
Less: Foreign Taxes Withheld (79)
------
Total Income 807
------
EXPENSES:
Investment Advisory Fees 271
Less: Fees Waived (220)
------
Net Investment Advisory Fees 51
Administrative Fees 106
Custodian Fees 93
Shareholder Reports 77
Professional Fees 57
Directors' Fees and Expenses 2
Other 5
------
Net Expenses 391
------
Net Investment Income 416
------
NET REALIZED GAIN/LOSS ON:
Investments Sold 373
Foreign Currency Transactions (239)
Futures Contracts 50
------
Net Realized Gain 184
------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 26
Foreign Currency Translations (95)
Futures Contracts (17)
------
Change in Unrealized
Appreciation/Depreciation (86)
------
Net Realized Gain and Change in Unrealized
Appreciation/Depreciation 98
------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 514
------
------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 2, 1997* TO
DECEMBER 31, 1998 DECEMBER 31, 1997
(000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 416 $ 207
Net Realized Gain 184 329
Change in Unrealized
Appreciation/Depreciation (86) (239)
-------- -------
Net Increase in Net Assets Resulting from
Operations 514 297
-------- -------
DISTRIBUTIONS:
Net Investment Income (141) (544)
In Excess of Net Investment Income -- (16)
Net Realized Gain (155) (37)
-------- -------
Total Distributions (296) (597)
-------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 41,614 28,522
Distributions Reinvested 296 546
Redeemed (16,921) (9,913)
-------- -------
Net Increase in Net Assets Resulting from
Capital Share Transactions 24,989 19,155
-------- -------
Total Increase in Net Assets 25,207 18,855
NET ASSETS:
Beginning of Period 18,855 --
-------- -------
End of Period (Including undistributed
(distribution in excess of) net
investment income of
$91 and $(16), respectively) $ 44,062 $ 18,855
-------- -------
-------- -------
- ----------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,567 2,663
Shares Issued on Distributions
Reinvested 26 54
Shares Redeemed (1,488) (900)
-------- -------
Net Increase in Capital Shares
Outstanding 2,105 1,817
-------- -------
-------- -------
- ----------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 2, 1997*
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1998 TO DECEMBER 31, 1997
<S> <C> <C>
- ------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.38 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.12 0.13
Net Realized and Unrealized Gain 0.81 0.59
------- -------
Total From Investment Operations 0.93 0.72
------- -------
DISTRIBUTIONS
Net Investment Income (0.04) (0.32)
Net Realized Gain (0.04) (0.02)
------- -------
Total Distributions (0.08) (0.34)
------- -------
NET ASSET VALUE, END OF PERIOD $ 11.23 $ 10.38
------- -------
------- -------
TOTAL RETURN 8.97% 7.31%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $44,062 $18,855
Ratio of Expenses to Average Net
Assets 1.15% 1.16%**
Ratio of Expenses to Average Net
Assets Excluding Interest Expense N/A 1.15%**
Ratio of Net Investment Income to
Average Net Assets 1.22% 1.43%**
Portfolio Turnover Rate 36% 41%
- ------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.06 $ 0.15
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.80% 2.78%**
Net Investment Income (Loss) to
Average Net Assets 0.58% (0.19)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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. Effective January 6, 1999, the Fund's name changed to the Morgan
Stanley Dean Witter Universal Funds, Inc. As of December 31, 1998, the Fund was
comprised of eleven separate active portfolios (individually referred to as a
"Portfolio", collectively as the "Portfolios"). An additional Portfolio, the
Money Market Portfolio, commenced operations on January 5, 1999.
The accompanying financial statements relate to the International Magnum
Portfolio. Please refer to the Portfolio's Investment Overview for the
Portfolio's investment objectives.
The Fund is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date, for which market quotations are readily available, are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service. The prices provided by a pricing service are determined without
regard to bid or last sale prices, but take into account institutional size
trading in similar groups of securities and any developments related to the
specific securities. Debt securities purchased with remaining maturities of 60
days or less are valued at amortized cost, if it approximates market value. All
other securities and assets for which market values are not readily available,
including restricted securities, are valued at fair value as determined in good
faith by the Board of Directors, although the actual calculations may be done by
others.
2. INCOME TAXES: It is each Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable and tax-exempt income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
A Portfolio 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 transactions in foreign currency and are accrued
based on the value of investments denominated in such currency.
3. REPURCHASE AGREEMENTS: The Portfolios of the Fund may enter into repurchase
agreements under which the Portfolio lends excess cash and takes possession of
securities with an agreement that the counterparty will repurchase such
securities. In connection with transactions in repurchase agreements, a bank as
custodian for the Fund takes possession of the underlying securities which are
held as collateral, with a market value at least equal to the amount of the
repurchase transaction, including principal and accrued interest. To the extent
that any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy of the
collateral. In the event of default on the obligation to repurchase, the Fund
has the right to liquidate the collateral and apply the proceeds in satisfaction
of the obligation. In the event of default or bankruptcy by the counterparty to
the agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S.
10
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from foreign currency exchange contracts,
disposition of foreign currencies, currency gains or losses realized between the
trade and settlement dates on securities transactions, and the difference
between the amount of investment income and foreign withholding taxes recorded
on the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are reflected as
a component of unrealized appreciation (depreciation) on the Statement of Net
Assets. The change in net unrealized currency gains (losses) for the period is
reflected on the Statement of Operations.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investments
in domestic companies may be subject to limitation in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Statement of Net Assets) may be created and offered for investment. The
"local" and "foreign" shares' market values may differ. In the absence of
trading of the foreign shares in such markets, the Fund values the foreign
shares at the closing exchange price of the local shares. Such securities are
identified as fair valued in the Statement of Net Assets.
The investment techniques of the Fund described in the following notes (5-12)
are applicable to certain, but not all, of the Portfolios of the Fund.
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts generally to attempt to protect securities
and related receivables and payables against changes in future foreign currency
exchange rates 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 Portfolio as unrealized gain or loss. The Portfolio records
realized gains or losses when the contract is closed equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their contracts and
is generally limited to the amount of the unrealized gain on the contracts, if
any, at the date of default. Risks may also arise from unanticipated movements
in the value of a foreign currency relative to the U.S. dollar.
6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Certain
Portfolios may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place up to 120 days after the date of the
transaction. Additionally, a Portfolio may purchase securities on a when-issued
or delayed delivery basis. Securities purchased on a when-issued or delayed
delivery basis are purchased for delivery beyond the normal settlement date at a
stated price and yield, and no income accrues to the Portfolio on such
securities prior to delivery. When a 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. A Portfolio's investments
in Loans may be in the form of participations in Loans ("Participations") or
assignments of all or a portion of Loans ("Assignments") from third parties. A
Portfolio's investment in Participations typically results in the Portfolio
having a contractual relationship with only the Lender and not with the
borrower. A Portfolio has the right to receive payments of principal, interest
and any fees to which it is entitled only upon receipt by the Lender of the
payments from the borrower. A Portfolio generally has no right to enforce
compliance by the borrower with the terms of the loan agreement. As a result,
the Portfolio may be subject to the credit risk of both the borrower and the
Lender that is selling the Participation. When a Portfolio purchases Assignments
from Lenders, it typically acquires direct rights against the borrower on the
Loan. Because Assignments are arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations
11
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
acquired by the Portfolio as the purchaser of an Assignment may differ from, and
be more limited than, those held by the assigning Lender.
8. SHORT SALES: Certain Portfolios may sell securities short. A short sale is a
transaction in which the Portfolio sells securities it may or may not own, but
has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolio is obligated to replace the borrowed securities at the
market price at the time of replacement. The Portfolio 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 purchased securities cannot exceed the total
amount invested.
9. FUTURES: Certain Portfolios may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party of a
specified amount of a specified security, index, instrument or basket of
instruments. Futures contracts (secured by cash or government securities
deposited with brokers or custodians as "initial margin") are valued based upon
their quoted daily settlement prices; changes in initial settlement value
(represented by cash paid to or received from brokers as "variation margin") are
accounted for as unrealized appreciation (depreciation). When futures contracts
are closed, the difference between the opening value at the date of purchase and
the value at closing is recorded as realized gains or losses in the Statement of
Operations.
Certain Portfolios may use futures contracts in order to manage exposure to the
stock and bond markets, to hedge against unfavorable changes in the value of
securities or to remain fully invested and to reduce transaction costs. Futures
contracts involve market risk in excess of the amounts recognized in the
Statement of Net Assets. Risks arise from the possible movements in security
values underlying these instruments. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which may
not correlate with the change in value of the hedged investments. In addition,
there is the risk that a Portfolio may not be able to enter into a closing
transaction because of an illiquid secondary market.
10. SWAP AGREEMENTS: The Portfolios may enter into swap agreements to exchange
one return or cash flow for another return or cash flow in order to hedge
against unfavorable changes in the value of securities or to remain fully
invested and to reduce transaction costs. The following summarizes swaps which
may be entered into by the Portfolios.
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of commitments to
pay and receive interest based on a notional principal amount. Net periodic
interest payments to be received or paid are accrued daily and are recorded in
the Statement of Operations as an adjustment to interest income. Interest rate
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest in
exchange for a market-linked return based on a notional amount. To the extent
the total return of the security, instrument or basket of instruments underlying
the transaction exceeds or falls short of the offsetting interest obligation,
the Portfolio will receive a payment from or make a payment to the counterparty,
respectively. Total return swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as unrealized
gains or losses in the Statement of Operations. Periodic payments received or
made at the end of each measurement period are recorded as realized gains or
losses in the Statement of Operations. Realized gains or losses on maturity or
termination of interest rate and total return swaps are presented in the
Statement of Operations.
Because there is no organized market for these swap agreements, the value of
open swaps reported in the Statement of Net Assets may differ from that which
would be realized in the event the Portfolio terminated its position in the
agreement. Risks may arise upon entering into these agreements from the
potential inability of the counterparties to meet the terms of the agreements
and are generally limited to the amount of net interest payments to be received
and/or favorable movements in the value of the underlying security, instrument
or basket of instruments, if any, at the date of default.
11. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on portfolio securities and other financial instruments. Premiums
are received and are recorded as liabilities. The liabilities are subsequently
adjusted to reflect the current value of the options written. Premiums received
from writing options which 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
12
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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. A Portfolio may purchase call options to protect
against an increase in the price of the security or financial instrument it
anticipates purchasing. Each Portfolio may purchase put options on securities
which it holds or other financial instrument to protect against a decline in the
value of the security or financial instrument or to close out covered written
put positions. Risks may arise from an imperfect correlation between the change
in market value of the securities held by the Portfolio and the prices of
options relating to the securities purchased or sold by the Portfolio and from
the possible lack of a liquid secondary market for an option. The maximum
exposure to loss for any purchased option is limited to the premium initially
paid for the option.
12. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends that
may be recorded as soon as the Fund is informed of such dividends) net of
applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased (other
than mortgage-backed securities) are amortized according to the effective yield
method over their respective lives. Most expenses of the Fund can be directly
attributed to a particular Portfolio. Expenses which cannot be directly
attributed are apportioned among the Portfolios based upon relative net assets.
Distributions from the Portfolios are recorded on the ex-distribution date.
The amount and character of income and capital gain distributions to be paid by
Portfolios of the Fund are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing book and tax treatments for the
character and timing of the recognition of gains or losses on securities and
foreign currency exchange contracts, the timing of the deductibility of certain
foreign taxes and dividends received from real estate investment trusts.
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications among undistributed net investment income
(loss), accumulated net realized gain (loss) and paid in capital.
Permanent book and tax differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income/accumulated net
investment loss for the purpose of calculating net investment income (loss) per
share in the Financial Highlights.
Settlement and registration of foreign securities transactions may be subject to
significant risks not normally associated with investments in the United States.
In certain markets, including Russia, ownership of shares is defined according
to entries in the issuer's share register. In Russia, there currently exists no
central registration system and the share registrars may not be subject to
effective state supervision. It is possible that a Portfolio holding these
securities could lose its share registration through fraud, negligence or even
mere oversight. In addition, shares being delivered for sales and cash being
paid for purchases may be delivered before the exchange is complete. This may
subject a Portfolio to further risk of loss in the event of a failure to
complete the transaction by the counterparty.
B. ADVISER: Morgan Stanley Dean Witter Investment Management Inc. ("MSDW
Investment Management"), a wholly-owned subsidiary of Morgan Stanley Dean Witter
& Co., provides the Portfolio with investment advisory services for a fee, paid
quarterly, at the annual rate based on average daily net assets as follows:
<TABLE>
<CAPTION>
FROM MORE
FIRST $500 MILLION TO THAN
$500 MILLION $1 BILLION $1 BILLION
- ------------------ --------------- -------------
<S> <C> <C>
0.80% 0.75% 0.70%
</TABLE>
MSDW Investment Management has agreed to reduce fees payable to it and to
reimburse the Portfolio, if necessary, to the extent that the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratio of 1.15%.
C. ADMINISTRATOR: MSDW Investment Management (the "Administrator") also provides
the Portfolio with administrative services pursuant to an administrative
agreement for a monthly fee which on an annual basis equals 0.25% of the average
daily net assets of the Portfolio, plus reimbursement of out-of-pocket expenses.
Under an agreement between the Administrator and Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank ("Chase"),
CGFSC provides certain administrative services to the Fund. For such services,
the Administrator pays CGFSC a portion of the fee the Administrator receives
from the Fund. Certain employees of CGFSC are officers of the Fund. In addition,
the fund incurs local administration fees in connection with doing business in
certain emerging market countries.
D. CUSTODIAN: The Chase Manhattan Bank and its affiliates serve as custodian for
the Fund. The Fund's assets held outside the United States have been held by
Morgan Stanley Trust Company ("MSTC"), which was an affiliate of the Adviser
prior to October 1, 1998. On October 1, 1998, MSTC was acquired by the Chase
Manhattan Bank. Custody fees are payable monthly based on assets held in
custody,
13
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
investment purchase and sales activity, an account maintenance fee, plus
reimbursement for certain out-of-pocket expenses. Through September 30, 1998,
the Fund paid MSTC fees of approximately $64,000.
E. OTHER: For the year ended December 31, 1998, the Portfolio paid brokerage
commissions to Morgan Stanley & Co., Incorporated, an affiliated broker/dealer,
of approximately $9,000.
At December 31, 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.
14
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Morgan Stanley Dean Witter Universal Funds, Inc.
(formerly, Morgan Stanley Universal Funds, Inc.)--
International Magnum Portfolio
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Morgan Stanley Dean Witter Universal Funds, Inc.--International Magnum Portfolio
(hereafter referred to as the "Fund") at December 31, 1998, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for the year then ended and for the period January 2, 1997
(commencement of operations) through December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 8, 1999
15
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FEDERAL TAX INFORMATION (UNAUDITED)
For the year ended December 31, 1998, the Portfolio has designated a 20%
long-term capital gain of approximately $199,000.
For the year ended December 31, 1998, the Portfolio intends to pass through to
shareholders a foreign tax credit of approximately $79,000 and has derived gross
income from sources within foreign countries in the amount of approximately
$632,000.
16
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley Dean Witter Investment
Management Inc. and Morgan Stanley Dean Witter Investment
Management Limited; Managing Director, Morgan Stanley & Co.
Incorporated
Michael F. Klein
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Dean Witter Investment Management
Inc. and Morgan Stanley & Co. Incorporated
John D. Barrett II
Chairman and Director,
Barrett Associates, Inc.
Gerard E. Jones
Partner, Richards & O'Neil LLP
Andrew McNally IV
River Road Partners
Samuel T. Reeves
Chairman of the Board and 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 Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, NY 10020
CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, NY 11245
OFFICERS
Stefanie V. Chang
VICE PRESIDENT
James A. Gallo
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Lorraine Truten
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
Karl O. Hartmann
ASSISTANT SECRETARY
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY
THE PROSPECTUS OF THE MORGAN STANLEY UNIVERSAL FUNDS, INC. WHICH DESCRIBES IN
DETAIL EACH INVESTMENT PORTFOLIO'S INVESTMENT POLICIES, FEES AND EXPENSES.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
17
