<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1998
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Basic Materials 6.3%
Capital Goods 1.7%
Communication Services 2.2%
Consumer Cyclicals 10.2%
Consumer Staples 14.8%
Energy 0.8%
Financial 20.0%
Health Care 8.1%
Technology 19.3%
Transportation 1.5%
Utilities 6.3%
Other 8.8%
100%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ----------------------------------- --------------- ----------------
<S> <C> <C>
Southdown, Inc. Basic Materials 3.1%
Seagate Technology, Inc. Technology 3.0%
3Com Corp. Technology 2.5%
Allmerica Financial Corp. Financial 2.3%
Valassis Communications, Inc. Consumer 2.3%
Staples
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------- ------ ------------
<S> <C> <C>
Financial $ 6,286 20.0%
Technology 6,054 19.3%
Consumer Staples 4,630 14.8%
Consumer Cyclicals 3,193 10.2%
Health Care 2,530 8.1%
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE COMPARED TO THE S&P MID CAP 400 INDEX(1)
- ------------------------------------ TOTAL RETURNS(2)
--------------------------
AVERAGE
ANNUAL
ONE SINCE
YEAR INCEPTION(3)
----------- ------------
<S> <C> <C>
PORTFOLIO.......................... 15.85% 27.86%
INDEX.............................. 19.12% 26.45%
</TABLE>
1. The S&P Mid Cap 400 Index is a value weighted index of companies that
generally have market values between $500 million and $6 billion, depending
upon current equity market valuations, and represent a broad range of
industry segments within the U.S. economy.
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.
COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MID CAP VALUE PORTFOLIO S&P MID CAP 400 INDEX(1)
<S> <C> <C>
1/2/97* $10,000 $10,000
12/31/97 $14,093 $13,405
12/31/98 $16,327 $15,968
* Commencement of operations
</TABLE>
In accordance with SEC regulations,
Portfolio performance shown assumes that
all recurring fees (including management
fees) were deducted and all dividends
and distributions were reinvested.
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY
AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The Mid Cap Value Portfolio seeks long-term capital growth by investing
primarily in common stocks and other equity securities of issuers with equity
capitalizations in the range of the companies represented in the Standard &
Poor's ("S&P") Mid Cap 400 Index (the "Index"). Such range is generally $500
million to $6 billion but the range fluctuates over time with changes in the
equity market.
For the year ended December 31, 1998, the Portfolio had a total return of 15.85%
compared to 19.12% 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
27.86% compared to 26.45% for the Index.
For the three months ended December 31, 1998, the Portfolio had a total return
of 22.12% compared to 28.19% for the Index. Mid cap stocks traded substantially
higher in the fourth quarter ignited by a series of Federal Reserve interest
rate cuts and a stabilization of worldwide financial markets. Meanwhile,
internet stocks continued to defy historical valuation metrics. America Online
moved into the S&P 500 at the start of 1999, after adding a full 6% to the
performance of the S&P Mid Cap 400 Index. America Online's market value was over
$70 billion at year end, surpassing the value of companies like Hewlett Packard,
Compaq, Ford Motor, Mobil and Disney. If the Federal Reserve continues to add
liquidity, the market may go higher regardless of valuation. The down side
1
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
risk for all stocks remains an ever tightening labor market and the eventual
return of commodity inflation. There is an old saying that nothing cures low oil
prices like low oil prices. Ultimately, lower prices limit supply and supply
shortages lead to higher prices. Cash levels remain slightly above normal but
well below ten percent.
Sector and stock selection added to the Portfolio's performance for basic
materials and health care. The largest drags on the performance of the Portfolio
were stock selections in technology and financial services and cash. We have
slightly reduced our underweighted positions in two commodity sectors--energy
and basic materials. Energy stocks are bottoming while steel stocks'
fundamentals are improving. We are adding to our technology weighting with
stocks that provide data and telecommunications infrastructure, while
maintaining overweight positions in financial and consumer services. As value
investors we continue to search for companies with low valuations and better
than average growth prospects.
Individual stocks that added to performance included, Acclaim Entertainment
(92%), Suiza Foods (63%), Novell (48%) and Martin Marietta Materials (44%).
Underperforming stocks included Cabletron (-26%), Interstate Bakeries (-15%) and
Lear (-12%).
Mid Cap stocks outperformed large cap stocks in the fourth quarter, modestly
reducing the valuation gap. Nonetheless, Mid Cap stocks represent an excellent
value compared to large cap stocks.
January 1999
2
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------
COMMON STOCKS (91.2%)
BASIC MATERIALS (6.3%)
AGRICULTURAL PRODUCTS (0.0%)
100 Universal Corp................................... $ 4
-------
CHEMICALS (1.3%)
1,300 IMC Global, Inc.................................. 28
16,600 Solutia, Inc..................................... 371
-------
399
-------
CHEMICALS (SPECIALTY) (0.4%)
1,100 M.A. Hanna Co.................................... 14
5,900 Witco Corp....................................... 94
-------
108
-------
CONSTRUCTION (CEMENT & AGGREGATES) (3.8%)
2,700 Martin Marietta Materials, Inc................... 168
16,300 Southdown, Inc................................... 964
500 Vulcan Materials Co.............................. 66
-------
1,198
-------
IRON & STEEL (0.6%)
8,000 AK Steel Holding Corp............................ 188
300 National Steel Corp, Class B..................... 2
-------
190
-------
PAPER & FOREST (0.2%)
3,200 Georgia-Pacific Corp. (Timber Group)............. 76
-------
TOTAL BASIC MATERIALS....................................... 1,975
-------
CAPITAL GOODS (1.7%)
AEROSPACE/DEFENSE (0.3%)
1,500 Precision Castparts Corp......................... 67
(a)600 Triumph Group, Inc............................... 19
-------
86
-------
MACHINERY (DIVERSIFIED) (0.1%)
1,400 Case Corp........................................ 30
-------
MANUFACTURING (DIVERSIFIED) (0.3%)
2,300 Trinity Industries, Inc.......................... 89
-------
MANUFACTURING (SPECIALIZED) (0.0%)
(a)200 SPS Technologies, Inc............................ 11
-------
METAL FABRICATORS (0.3%)
(a)3,600 Tower Automotive, Inc............................ 90
-------
OFFICE EQUIPMENT & SUPPLIES (0.7%)
8,100 Miller (Herman), Inc............................. 218
-------
TOTAL CAPITAL GOODS......................................... 524
-------
COMMUNICATION SERVICES (2.2%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (0.2%)
1,900 Comsat Corp...................................... 68
-------
TELEPHONE (2.0%)
9,400 Century Telephone Enterprises, Inc............... 635
-------
TOTAL COMMUNICATION SERVICES................................ 703
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------
CONSUMER CYCLICALS(10.2%)
AUTO PARTS & EQUIPMENT(2.2%)
2,200 Arvin Industries, Inc............................ $ 92
1,100 Dana Corp........................................ 45
2,300 Federal-Mogul Corp............................... 137
(a)9,900 Lear Corp........................................ 381
1,900 Meritor Automotive, Inc.......................... 40
-------
695
-------
BUILDING MATERIALS(0.1%)
600 Armstrong World Industries, Inc.................. 36
-------
CONSUMER (JEWELRY, NOVELTIES & GIFTS) (0.1%)
1,700 Russ Berrie & Co., Inc........................... 40
-------
DISTRUBUTORS (DURABLES) (0.1%)
(a)900 Aviation Sales Co................................ 36
-------
LEISURE TIME PRODUCTS (0.4%)
(a)9,200 Acclaim Entertainment, Inc....................... 113
-------
LODGING--HOTELS(0.2%)
(a)2,100 Promus Hotel Corp................................ 68
-------
PUBLISHING (NEWSPAPERS) (0.7%)
(a)2,100 Journal Register Co.............................. 32
300 Washington Post Co., Class B..................... 173
-------
205
-------
RETAIL (DISCOUNTERS)(1.3%)
(a)1,100 Dress Barn (The), Inc............................ 17
5,200 Family Dollar Stores, Inc........................ 114
6,700 Ross Stores, Inc................................. 264
-------
395
-------
RETAIL (GENERAL MERCHANDISE) (0.9%)
(a)6,100 BJ's Wholesale Club, Inc......................... 282
-------
RETAIL (SPECIALTY) (1.2%)
(a)2,700 Ann Taylor Stores, Inc........................... 107
9,600 TJX Cos., Inc.................................... 278
-------
385
-------
RETAIL (SPECIALTY/APPAREL)(0.4%)
(a)3,700 Office Depot, Inc................................ 137
-------
RETAILS (COMPUTERS & ELECTRONICS) (0.3%)
(a)2,100 Technical Data Corp.............................. 84
-------
SERVICES (ADVERTISING/MARKETING) (0.2%)
(a)1,600 ACNielsen Corp................................... 45
-------
SERVICES (COMMERCIAL & CONSUMER) (1.7%)
(a)8,100 Modis Professional Services, Inc................. 117
(a)3,700 Romac International, Inc......................... 82
2,700 Viad Corp........................................ 82
4,000 Waste Management, Inc............................ 187
(a)4,000 Weatherford International, Inc................... 78
-------
546
-------
TEXTILES (APPAREL)(0.4%)
(a)5,700 Jones Apparel Group, Inc......................... 126
-------
TOTAL CONSUMER CYCLICALS.................................... 3,193
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------
<C> <S> <C>
CONSUMER STAPLES (14.8%)
DISTRIBUTORS (FOOD & HEALTH) (0.9%)
3,500 McKesson Corp.................................... $ 277
-------
FOODS (6.0%)
1,100 Dean Foods Co.................................... 45
8,000 Earthgrains Co. (The)............................ 247
(a)27,000 Fresh Del Monte Produce, Inc..................... 586
8,400 Interstate Bakeries Corp......................... 222
8,700 Michael Foods, Inc............................... 261
2,600 Quaker Oats Co. (The)............................ 155
(a)5,400 Suiza Foods Corp................................. 275
5,100 Tyson Foods, Inc., Class A....................... 108
-------
1,899
-------
HOUSEHOLD PRODUCTS (NON-DURABLES) (0.3%)
2,800 Dial Corp........................................ 81
-------
HOUSEWARES (0.3%)
2,600 Newell Co........................................ 107
-------
RETAIL (DRUG STORES) (1.2%)
5,558 CVS Corp......................................... 306
1,600 Rite Aid Corp.................................... 79
-------
385
-------
RETAIL (FOOD CHAINS) (2.3%)
2,600 Albertson's, Inc................................. 166
(a)9,000 Kroger Co........................................ 544
-------
710
-------
SERVICES (EMPLOYMENT) (1.5%)
(a)600 CDI Corp......................................... 12
(a)16,300 Interim Services, Inc............................ 381
7,800 Loewen Group, Inc................................ 66
-------
459
-------
SPECIALTY PRINTING (2.3%)
(a)13,800 Valassis Communications, Inc..................... 712
-------
TOTAL CONSUMER STAPLES...................................... 4,630
-------
ENERGY (0.8%)
OIL & GAS (DRILLING) (0.6%)
(a)100 Global Industries Ltd............................ 1
(a)4,900 Nabors Industries, Inc........................... 66
800 Santa Fe International Corp...................... 12
(a)2,600 Smith International, Inc......................... 65
1,700 Transocean Offshore, Inc......................... 46
-------
190
-------
OIL & GAS (EXPLORATION & DRILLING) (0.2%)
800 Burlington Resources, Inc........................ 28
(a)6,960 Ocean Energy, Inc................................ 44
-------
72
-------
TOTAL ENERGY................................................ 262
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------
FINANCIAL(20.0%)
BANKS (MAJOR REGIONAL)(2.5%)
4,300 Comerica, Inc.................................... $ 293
5,700 First American Corp. of Tennessee................ 253
4,300 PNC Bank Corp.................................... 233
-------
779
-------
BANKS (REGIONAL)(4.5%)
1,400 City National Corp............................... 58
1,800 Community First Bankshares, Inc.................. 38
2,500 Crestar Financial Corp........................... 180
3,800 First Tennessee National Corp.................... 145
5,900 Mercantile Bankshares Corp....................... 227
1,400 National Commerce Bancorp........................ 27
4,000 North Fork Bancorp., Inc......................... 96
6,100 Regions Financial Corp........................... 246
10,400 Southtrust Corp.................................. 384
500 Wilmington Trust Corp............................ 31
-------
1,432
-------
CONSUMER FINANCE(1.3%)
900 Capital One Financial Corp....................... 103
2,800 CIT Group, Inc., Class A......................... 89
7,000 Heller Financial, Inc............................ 206
-------
398
-------
FINANCIAL (DIVERSIFIED)(1.4%)
1,300 Ambac Financial Group, Inc....................... 78
(a)5,300 Brinker International, Inc....................... 153
9,200 Crescent Real Estate Equities Co................. 212
-------
443
-------
INSURANCE (LIFE & HEALTH)(0.4%)
1,300 ReliaStar Financial Corp......................... 60
(a)5,700 Scottish Annuity & Life Holdings Ltd............. 78
-------
138
-------
INSURANCE (MULTI-LINE)(0.9%)
4,300 Aflac, Inc....................................... 189
1,800 Nationwide Financial Services, Inc., Class A..... 93
-------
282
-------
INSURANCE (PROPERTY - CASUALTY)(3.0%)
12,400 Allmerica Financial Corp......................... 718
600 EXEL Ltd., Class A............................... 45
3,950 Old Republic International Corp.................. 89
2,600 Travelers Property Casualty Corp., Class A....... 80
-------
932
-------
INVESTMENT BANKING & BROKERAGE(2.3%)
11,400 Bear Stearns Co., Inc............................ 426
(a)900 Hambrecht & Quist Group.......................... 21
200 Investors Financial Services Corp................ 12
2,300 Lehman Brothers Holdings, Inc.................... 101
4,200 Paine Webber Group, Inc.......................... 162
-------
722
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------
<C> <S> <C>
INVESTMENT MANAGEMENT(2.7%)
5,200 Price (T. Rowe) Associates, Inc.................. $ 178
7,300 S & P 400 Mid-Cap................................ 531
5,800 Waddell & Reed Financial, Inc.................... 138
-------
847
-------
SAVINGS & LOANS(1.0%)
2,000 Dime Bancorp, Inc................................ 53
7,400 Greenpoint Financial Corp........................ 260
-------
313
-------
TOTAL FINANCIAL............................................. 6,286
-------
HEALTH CARE (8.1%)
HEALTH CARE (DIVERSIFIED) (0.4%)
2,900 Teva Pharmaceutical Industries Ltd. ADR.......... 118
-------
HEALTH CARE (DRUGS - GENERIC & OTHERS)(2.8%)
4,100 Alpharma, Inc., Class A.......................... 145
15,800 Mylan Laboratories, Inc.......................... 498
(a)3,900 Watson Pharmaceuticals, Inc...................... 245
-------
888
-------
HEALTH CARE (HOSPITAL MANAGEMENT)(0.7%)
(a)9,400 Health Management Associates, Inc., Class A...... 203
-------
HEALTH CARE (LONG-TERM CARE)(0.6%)
(a)12,200 HEALTHSOUTH Rehabilitation Corp.................. 188
-------
HEALTH CARE (MANAGED CARE)(0.9%)
(a)7,900 Trigon Healthcare, Inc........................... 295
-------
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES)(0.8%)
(a)8,900 Sybron International Corp........................ 242
-------
HEALTH CARE (SPECIALIZED SERVICES)(1.9%)
(a)14,700 Lincare Holdings, Inc............................ 596
-------
TOTAL HEALTH CARE........................................... 2,530
-------
TECHNOLOGY(19.3%)
COMMUNICATION EQUIPMENT(1.3%)
(a)8,100 ADC Telecommunications, Inc...................... 282
(a)2,700 BioChem Pharmaceutical, Inc...................... 77
1,300 ECI Telecommunications Ltd....................... 46
-------
405
-------
COMPUTERS (HARDWARE)(0.2%)
(a)1,500 NCR Corp......................................... 63
-------
COMPUTERS (NETWORKING)(3.8%)
(a)17,800 3Com Corp........................................ 798
(a)27,500 Cabletron Systems................................ 230
(a)3,100 Infoseek Corp.................................... 153
-------
1,181
-------
COMPUTERS (PERIPHERALS)(3.7%)
(a)1,800 Lexmark International Group, Inc................. 181
(a)31,000 Seagate Technology, Inc.......................... 938
(a)1,200 Storage Technology Corp.......................... 42
-------
1,161
-------
COMPUTERS (SOFTWARE & SERVICES)(6.3%)
1,600 America Online, Inc.............................. 256
(a)13,800 Cadence Design Systems, Inc...................... 411
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------
(a)3,200 Electronic Arts, Inc............................. $ 180
5,900 HBO & Co......................................... 169
(a)23,700 Informix Corp.................................... 233
(a)3,100 Network Associates, Inc.......................... 206
(a)14,200 Sterling Software, Inc........................... 384
(a)3,500 Sybase, Inc...................................... 26
(a)5,800 Symantec Corp.................................... 126
-------
1,991
-------
ELECTRONICS (INSTRUMENTATION)(0.1%)
800 Tektronix, Inc................................... 24
-------
ELECTRONICS (SEMICONDUCTORS)(1.7%)
(a)3,300 Analog Devices, Inc.............................. 104
2,100 Linear Technology Corp........................... 188
(a)3,800 Xilinx, Inc...................................... 247
-------
539
-------
SERVICES (DATA PROCESSING)(2.2%)
(a)3,600 Cambridge Technology Partners, Inc............... 80
(a)2,900 Computer Horizons Corp........................... 77
5,300 First Data Corp.................................. 168
(a)7,100 Fiserv, Inc...................................... 365
-------
690
-------
TOTAL TECHNOLOGY............................................ 6,054
-------
TRANSPORTATION(1.5%)
AIR FREIGHT(0.9%)
600 Airborne Freight Corp............................ 22
6,800 CNF Transportation, Inc.......................... 255
-------
277
-------
AIRLINES(0.4%)
(a)900 Continental Airlines, Class B.................... 30
2,400 Southwest Airlines Co............................ 54
(a)1,000 U.S. Airways Group, Inc.......................... 52
-------
136
-------
RAILROADS(0.1%)
600 Canadian National Railway Co..................... 31
-------
TRUCKERS(0.1%)
2,300 Teekay Shipping Corp............................. 43
-------
TOTAL TRANSPORTATION........................................ 487
-------
UTILITIES(6.3%)
ELECTRIC COMPANIES(5.2%)
3,600 Allegheny Energy, Inc............................ 124
1,350 Black Hills Corp................................. 36
1,300 CMS Energy Corp.................................. 63
2,300 Energy East Corp................................. 130
2,900 Florida Progress Corp............................ 130
2,900 Illinova Corp.................................... 73
1,200 IPALCO Enterprises, Inc.......................... 67
4,000 Kansas City Power & Light........................ 118
4,000 LG&E Energy Corp................................. 113
1,400 Montana Power Co................................. 79
2,400 New Century Energies, Inc........................ 117
1,400 NIPSCO Industries, Inc........................... 43
2,200 Pinnacle West Capital Corp....................... 93
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------
<C> <S> <C>
</TABLE>
ELECTRIC COMPANIES (CONT.)
<TABLE>
<C> <S> <C>
2,800 Public Service Enterprise Group, Inc............. $ 112
7,200 Texas Utilities Co............................... 336
-------
1,634
-------
NATURAL GAS(1.1%)
5,800 Columbia Energy Group............................ 335
-------
TOTAL UTILITIES............................................. 1,969
-------
TOTAL COMMON STOCKS (COST $25,427).......................... 28,613
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- --------
WARRANTS(0.0%)
FINANCIAL(0.0%)
SAVINGS & LOANS(0.0%)
(a)3,000 Golden State Bancorp, Inc., expiring 1/1/01 (COST
$15)........................................... 14
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------
SHORT-TERM INVESTMENT(10.6%)
REPURCHASE AGREEMENT(10.6%)
$3,323 Chase Securities, Inc. 4.45%, dated 12/31/98, due
1/4/99, to be repurchased at $3,325,
collateralized by U.S. Treasury Bonds, 10.375%
due 11/15/12, valued at $3,358 (COST $3,323)... 3,323
-------
TOTAL INVESTMENTS (101.8%) (COST $28,765)................... 31,950
-------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ----------------------------------------------------------------
OTHER ASSETS (5.2%)
Cash....................................... $ 1
Receivable for Investments Sold............ 1,476
Receivable for Portfolio Shares Sold....... 123
Dividends Receivable....................... 27
Due from Adviser........................... 9
Other Assets............................... 1
-------
$ 1,637
LIABILITIES (-7.0%)
Payable for Investments Purchased.......... (2,165)
Professional Fees Payable.................. (14)
Custodian Fees Payable..................... (8)
Administrative Fees Payable................ (7)
Payable for Portfolio Shares Redeemed...... (1)
Other Liabilities.......................... (11) (2,206)
------- --------
NET ASSETS (100%)..................................... $ 31,381
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,103,168 outstanding $0.001 par value
shares (authorized 500,000,000 shares).............. $ 14.92
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital....................................... $ 27,645
Accumulated Net Realized Gain......................... 551
Unrealized Appreciation on Investments................ 3,185
--------
NET ASSETS............................................ $ 31,381
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
- ---------------
At December 31, 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>
$ 29,266 $ 3,556 $ (872) $ 2,684
</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 $53,698,000 and $39,551,000,
respectively. There were no purchases and sales of U.S. Government securities
for the year ended December 31, 1998.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
(000)
<S> <C>
- --------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 177
Interest 104
------
Total Income 281
------
EXPENSES:
Investment Advisory Fees 143
Less: Fees Waived (99)
------
Net Investment Advisory Fees 44
Administrative Fees 57
Shareholder Reports 36
Professional Fees 30
Custodian Fees 25
Directors' Fees and Expenses 4
Other 5
------
Net Expenses 201
------
Net Investment Income 80
------
NET REALIZED GAIN ON:
Investments Sold 1,141
------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 2,157
------
Net Realized Gain and Change in Unrealized
Appreciation/Depreciation 3,298
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,378
------
------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 2, 1997*
DECEMBER 31, 1998 TO DECEMBER 31, 1997
(000) (000)
<S> <C> <C>
- --------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 80 $ 13
Net Realized Gain 1,141 778
Change in Unrealized
Appreciation/Depreciation 2,157 1,028
------- -------
Net Increase in Net Assets
Resulting from Operations 3,378 1,819
------- -------
DISTRIBUTIONS:
Net Investment Income (70) (12)
Net Realized Gain (779) (600)
------- -------
Total Distributions (849) (612)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 23,813 9,968
Distributions Reinvested 849 388
Redeemed (7,271) (102)
------- -------
Net Increase in Net Assets Resulting
from Capital Share Transactions 17,391 10,254
------- -------
Total Increase in Net Assets 19,920 11,461
NET ASSETS:
Beginning of Period 11,461 --
------- -------
End of Period (Including
undistributed net investment
income of $0 and $1,
respectively) $31,381 $11,461
------- -------
------- -------
- --------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,700 838
Shares Issued on Distributions
Reinvested 60 30
Shares Redeemed (518) (7)
------- -------
Net Increase in Capital Shares
Outstanding 1,242 861
------- -------
------- -------
- --------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE 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 $ 13.32 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04 0.02
Net Realized and Unrealized Gain 2.04 4.05
------- -------
Total From Investment Operations 2.08 4.07
------- -------
DISTRIBUTIONS
Net Investment Income (0.03) (0.02)
Net Realized Gain (0.45) (0.73)
------- -------
Total Distributions (0.48) (0.75)
------- -------
NET ASSET VALUE, END OF PERIOD $ 14.92 $ 13.32
------- -------
------- -------
TOTAL RETURN 15.85% 40.93%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $31,381 $11,461
Ratio of Expenses to Average Net
Assets 1.05% 1.05%**
Ratio of Net Investment Income to
Average Net Assets 0.42% 0.19%**
Portfolio Turnover Rate 228% 141%
- ------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.05 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.57% 2.13%**
Net Investment Loss to Average Net
Assets (0.10)% (0.89)%**
</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
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 Mid Cap Value Portfolio.
Please refer to the Investment Overview for the Portfolio's investment
objectives.
The Fund is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date, for which market quotations are readily available, are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service. The prices provided by a pricing service are determined without
regard to bid or last sale prices, but take into account institutional size
trading in similar groups of securities and any developments related to the
specific securities. Debt securities purchased with remaining maturities of 60
days or less are valued at amortized cost, if it approximates market value. All
other securities and assets for which market values are not readily available,
including restricted securities, are valued at fair value as determined in good
faith by the Board of Directors, although the actual calculations may be done by
others.
2. INCOME TAXES: It is each Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable and tax-exempt income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
A Portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as these amounts are earned.
Taxes may also be based on transactions in foreign currency and are accrued
based on the value of investments denominated in such currency.
3. REPURCHASE AGREEMENTS: The Portfolios of the Fund may enter into repurchase
agreements under which the Portfolio lends excess cash and takes possession of
securities with an agreement that the counterparty will repurchase such
securities. In connection with transactions in repurchase agreements, a bank as
custodian for the Fund takes possession of the underlying securities which are
held as collateral, with a market value at least equal to the amount of the
repurchase transaction, including principal and accrued interest. To the extent
that any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy of the
collateral. In the event of default on the obligation to repurchase, the Fund
has the right to liquidate the collateral and apply the proceeds in satisfaction
of the obligation. In the event of default or bankruptcy by the counterparty to
the agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions and
the foreign currency
9
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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 (5-11)
are applicable to certain, but not all, of the Portfolios of the Fund.
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts generally to attempt to protect securities
and related receivables and payables against changes in future foreign currency
exchange rates 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 acquired
by the Portfolio as the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning Lender.
10
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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: Certain 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, instruments 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 and total return swaps are presented in the
Statement of Operations.
Because there is no organized market for these swap agreements, the value of
open swaps reported in the Statement of Net Assets may differ from that which
would be realized in the event the Portfolio terminated its position in the
agreement. Risks may arise upon entering into these agreements from the
potential inability of the counterparties to meet the terms of the agreements
and are generally limited to the amount of net interest payments to be received
and/or favorable movements in the value of the underlying security, instrument
or basket of instruments, if any, at the date of default.
11. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on portfolio securities and other financial instruments. Premiums
are received and are recorded as liabilities. The liabilities are subsequently
adjusted to reflect the current value of the options written. Premiums received
from writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or are closed are added to or
offset against the proceeds or amount paid on the transaction to determine the
net realized gain or loss. By writing a covered call option, a Portfolio, in
exchange for the premium, foregoes the opportunity for capital appreciation
above the exercise price
11
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
should the market price of the underlying security increase. By writing a
covered put option, a Portfolio, in exchange for the premium, accepts the risk
of a decline in the market value of the underlying security below the exercise
price.
Certain Portfolios may purchase call and put options on their portfolio
securities or other financial instruments. A Portfolio may purchase call options
to protect against an increase in the price of the security or financial
instruments 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 instruments 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 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.
B. ADVISER: Miller Anderson & Sherrerd, LLP ("MAS"), a wholly-owned subsidiary
of Morgan Stanley Dean Witter & Co., provides the Portfolio with investment
advisory services for a fee, paid quarterly, at the annual rate based on average
daily net assets as follows:
<TABLE>
<CAPTION>
FROM MORE
FIRST $500 MILLION THAN
$500 MILLION TO $1 BILLION $1 BILLION
- --------------- --------------- -------------
<S> <C> <C>
0.75% 0.70% 0.65%
</TABLE>
MAS has agreed to reduce fees payable to it and to reimburse the Portfolio, if
necessary, to the extent that the annual operating expenses, as defined,
expressed as a percentage of average daily net assets, exceed the maximum ratio
of 1.05%.
C. ADMINISTRATOR: Morgan Stanley Dean Witter Investment Management Inc. (the
"Administrator"), a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co.,
provides the Portfolio with administrative services pursuant to an
administrative agreement for a monthly fee which on an annual basis equals 0.25%
of the average daily net assets of the Portfolio, plus reimbursement of
out-of-pocket expenses. Under an agreement between the Administrator and Chase
Global Funds Services Company ("CGFSC"), a corporate affiliate of The Chase
Manhattan Bank ("Chase"), CGFSC provides certain administrative services to the
Fund. For such services, the Administrator pays CGFSC a portion of the fee the
Administrator receives from the Fund. Certain employees of CGFSC are officers of
the Fund. 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, investment purchase and sales activity, an account maintenance fee,
plus reimbursement for certain out-of-pocket expenses.
E. OTHER: At December 31, 1998, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency. Changes
in foreign currency exchange rates will affect the U.S. dollar value of and
investment income from such securities.
From time to time, a Portfolio may have shareholders that hold a significant
portion of the Portfolio's outstanding shares. Investment activities of these
shareholders could have a material impact on those Portfolios.
12
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
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.)--
Mid Cap Value 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.--Mid Cap Value 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
13
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the year ended December 31, 1998, the percentage of distributions taxable as
ordinary income for the Portfolio, as reported on Form 1099-DIV, that qualify
for the dividends received deduction for corporations is 9.3%.
For the year ended December 31, 1998, the Portfolio has designated a 20%
long-term capital gain of approximately $238,000.
14
<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.
15
