<PAGE>
MITCHELL HUTCHINS SERIES TRUST -- STRATEGIC INCOME PORTFOLIO ANNUAL REPORT
February 16, 1999
Dear Contract Owner,
We are pleased to present you with the first annual report for the Mitchell
Hutchins Series Trust -- Strategic Income Portfolio, covering the period from
commencement of operations on September 28, 1998 through December 31, 1998.
MARKET REVIEW
- ----------------------------------------------------------------------------
The "flight to quality" that had dominated the bond markets in 1998
partially reversed itself toward year-end as the markets stabilized. To
head off a threatening global financial
[BARS ICON]
crisis, the Federal Reserve cut the short-term interest rate by 0.25% in
September,
October and November, lowering it from 5.50% to 4.75%. Cuts in short-term
rates by several European central banks in preparation for the January 1,
1999 debut of the euro currency reinforced the Federal Reserve action.
After eight weeks of a nearly dead new-issue market (late August through
mid-October), signs of life began to appear in shorter-maturity debt, and
selling longer maturities became possible in issues and sectors perceived to be
less risky. Investors returned to the capital markets in search of bargains,
boosting the corporate and mortgage-backed sectors. In August, corporate bonds
had posted their worst monthly return since 1973; in November they posted their
best monthly return for the same period.
OUTLOOK
Fixed income investors will most likely take their 1998 experience
with risk to heart and invest cautiously in 1999. Despite continuing
strong U.S. economic growth
[ARROW ICON]
and the stock market's record levels, spreads and liquidity premiums in
fixed income securities remain high. Yield spreads may tighten a bit in
1999, which we believe will
boost the performance of corporate bonds and mortgage securities.
Bond market liquidity has improved but may worsen again if one or more
potential problems arise: Brazil's economic condition deteriorates further, the
U.S. stock market weakens or Asia's crisis spreads further. We expect the
economy to grow more slowly in 1999, with inflation remaining low. We do not
believe a recession is likely.
PORTFOLIO REVIEW
- ----------------------------------------------------------------------------
The Portfolio allocates assets among three main sectors of the global bond
market -- U.S. government/investment grade bonds, U.S. high-yield bonds and
non-U.S. bonds -- and shifts emphasis among them as conditions warrant. The
Portfolio commenced operations on September 28, 1998, beginning with an asset
allocation of 39.6% in U.S. government and investment-grade corporate bonds,
38.8% in U.S. high-yield bonds, 12.2% in non-U.S. bonds and 9.4% in cash and
cash equivalents.
1
<PAGE>
ANNUAL REPORT
U.S. HIGH-YIELD SECTOR
The Portfolio commenced operations very near the low point of the high-yield
market slump. As a result, we were able to construct the Portfolio at lower
prices. As the market began to recover the Portfolio benefited. The Portfolio's
overweighting in communications (25.2)(1) helped performance as that sector
outperformed the rest of the high-yield market for the period.
U.S. GOVERNMENT AND INVESTMENT GRADE SECTOR
The Portfolio's initial focus was on enhancing yield, and it held fairly high
weightings in mortgage-backed and government agency securities. We kept the
Portfolio's exposure to the sector about the same through period-end on December
31, 1998. We believe investors have become more cautious about credit risk and
will find mortgage securities attractive because of their high credit quality
and historically low prices.
GLOBAL SECTOR
Our low weighting of non-U.S. bonds helped protect the Portfolio from
volatility that persisted even as foreign markets began to recover toward the
end of 1998. The Portfolio remained underweighted in Europe, concentrating its
holdings in the intermediate maturities of Germany, Holland and the United
Kingdom. Within the emerging markets allocation we shifted exposure away from
Latin America in favor of Europe and Asia.
SECTOR ALLOCATION(1)
<TABLE>
<S> <C>
- -------------------------------------------
U.S. Gov't/Investment-Grade
Corp. 54.6%
U.S. High Yield 36.1
Foreign/Emerging Markets 6.8
Cash/Cash Equivalents 2.5
- -------------------------------------------
</TABLE>
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support
and welcome any comments or questions you may have.
Sincerely,
[LOGO]
MARGO ALEXANDER
President
Mitchell Hutchins Asset Management Inc.
(1) All weightings represent percentages of portfolio assets as of December 31,
1998. The Portfolio is actively managed and all weightings are subject to
change.
2
<PAGE>
MITCHELL HUTCHINS SERIES TRUST -- STRATEGIC INCOME PORTFOLIO ANNUAL REPORT
PERFORMANCE AT A GLANCE
- ----------------------------------------------------------------------------
Comparison of change in value of a $10,000 investment in the Strategic Income
Portfolio and the Lehman Brothers Aggregate Bond Index, the Merrill Lynch High
Yield Master Index and the Salomon Brothers World Government Bond Index
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
9/30/98 Strategic Income Portfolio Lehman Aggregate Bond Index ML High Yield Master Index SB World Govt Bond Index
<S> <C> <C> <C> <C>
10/31/98 $10,000 $10,000 $10,000 $10,000
11/30/98 $10,058 $9,947 $9,836 $10,296
12/31/98 $10,333 $10,004 $10,284 $10,151
$10,284 $10,034 $10,287 $10,355
</TABLE>
The graph depicts the performance of the Strategic Income Portfolio versus
the Lehman Brothers Aggregate Bond Index, the Merrill Lynch High Yield Master
Index and the Salomon Brothers World Government Bond Index, from September 30,
1998 through December 31, 1998. It is important to note that the Strategic
Income Portfolio is a professionally managed mutual fund while the Indices are
not available for investment and are unmanaged. The comparison is shown for
illustrative purposes only.
TOTAL RETURN, PERIOD ENDED 12/31/98
<TABLE>
<S> <C>
- ------------------------
Life* 2.84%
- ------------------------
</TABLE>
* Life = return since commencement of operations on 9/28/98.
Past performance does not guarantee future performance. Figures assume
reinvestment of all dividends and capital gain distributions, if any, at net
asset value on the payable dates and do not include sales charges. Performance
relates to the Portfolio and does not reflect separate account charges
applicable to variable annuity contracts.
The return and principal value of an investment will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Sources: Lipper Inc. and PaineWebber Inc.
3
<PAGE>
MITCHELL HUTCHINS SERIES TRUST -- STRATEGIC INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
- ------------- -------------------- ----------------- -------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS--36.53%
U.S. GOVERNMENT OBLIGATIONS--1.73%
$155 U.S. Treasury Bonds
(cost--$180,337)............ 08/15/27 6.375% $ 178,250
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--34.80%
600 FNMA.......................... 05/15/08 6.000 633,103
3,000 FNMA 30 Year TBA.............. TBA 6.000 2,961,267
-------------
Total Federal National Mortgage Association
Certificates (cost--$3,591,441).............. 3,594,370
-------------
Total U.S. Government and Agency Obligations
(cost--$3,771,778)........................... 3,772,620
-------------
GLOBAL DEBT SECURITIES--8.69%
BRAZIL--0.71%
124 Federal Republic of Brazil
(c)......................... 04/15/14 8.000 73,108
GERMANY--2.99%
450* Federal Republic of Germany... 01/04/07 6.000 308,460
GREECE--2.20%
60,000* Hellenic Republic............. 03/21/02 to 03/26/08 8.600 to 9.200 227,240
POLAND--0.86%
135 Republic of Poland, PAR....... 10/27/24 3.000(a) 89,438
UNITED KINGDOM--1.93%
100* United Kingdom Gilt........... 12/07/06 7.500 199,635
-------------
Total Global Debt Securities
(cost--$883,507)............................. 897,881
-------------
HIGH YIELD SECURITIES--46.50%
CORPORATE BONDS--43.30%
AIRLINES--1.27%
125 Airplane Pass Through Trust... 03/15/19 10.875 131,250
-------------
CABLE--1.28%
250 UIH Australia Pacific
Incorporated................ 05/15/06 14.000+ 132,500
-------------
COMMUNICATIONS--15.54%
125 Allegiance Telecom,
Incorporated................ 05/15/08 12.875 122,500
250 Flag Limited.................. 01/30/08 8.250 245,000
125 Global Crossings Holdings
Limited..................... 05/15/08 9.625 131,250
125 GST Equipment Funding
Incorporated................ 05/01/07 13.250 123,125
250 Metromedia Fiber Network
Incorporated**.............. 11/15/08 10.000 256,250
250 MetroNet Communications
Corporation................. 06/15/08 9.950+ 150,000
125 Nextel Communications
Incorporated................ 02/15/08 9.950+ 75,000
125 Northeast Optic Network....... 08/15/08 12.750 122,500
125 Orange PLC.................... 08/01/08 8.000 126,250
125 PSI Net Incorporated.......... 02/15/05 10.000 122,500
125 Time Warner Telecom LLC....... 07/15/08 9.750 130,625
-------------
1,605,000
-------------
</TABLE>
4
<PAGE>
MITCHELL HUTCHINS SERIES TRUST -- STRATEGIC INCOME PORTFOLIO
CORPORATE BONDS--(CONCLUDED)
COMMUNICATIONS--(CONCLUDED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
- ------------- -------------------- ----------------- -------------
<C> <S> <C> <C> <C>
CONSUMER MANUFACTURING--2.68%
$ 125 Phillips Van-Heusen
Corporation................. 05/01/08 9.500% $ 125,000
150 Westpoint Stevens
Incorporated................ 06/15/08 7.875 151,875
-------------
276,875
-------------
ENERGY--2.20%
250 GulfMark Offshore
Incorporated................ 06/01/08 8.750 227,500
-------------
FINANCE--1.01%
125 Signet Capital Trust I........ 08/15/27 9.500 103,750
-------------
GENERAL INDUSTRIAL--5.61%
250 Coltec Industries
Incorporated................ 04/15/08 7.500 265,000
125 Fairchild Semiconductor
Corporation................. 03/15/07 10.125 125,000
125 Goss Graphic Systems
Incorporated................ 10/15/06 12.000 68,750
125 Roller Bearing Company America
Incorporated................ 06/15/07 9.625 120,000
-------------
578,750
-------------
HEALTHCARE--4.85%
125 Fresenius Medical Care Capital
Trust....................... 02/01/08 7.875 123,750
125 InSight Health Services
Corporation................. 06/15/08 9.625 121,250
250 Tenet Healthcare
Corporation**............... 12/01/08 8.125 256,250
-------------
501,250
-------------
HOTELS & LODGING--1.03%
125 Silverleaf Resorts
Incorporated................ 04/01/08 10.500 106,250
-------------
RESTAURANTS--1.09%
125 American Restaurant Group
Incorporated................ 02/15/03 11.500 112,500
-------------
RETAIL--2.37%
250 Tuesday Morning Corporation... 12/15/07 11.000 245,000
-------------
TRANSPORTATION NON-AIR--3.08%
125 American Reefer Company
Limited..................... 03/01/08 10.250 78,750
250 Stena AB...................... 06/15/07 8.750 239,375
-------------
318,125
-------------
UTILITY--ELECTRIC--1.29%
125 Calenergy Incorporated........ 09/15/08 7.520 132,656
-------------
Total Corporate Bonds (cost--$4,334,260)....... 4,471,406
-------------
CONVERTIBLE BONDS--1.19%
GAMING--1.19%
125 Argosy Gaming Corp.
(cost--$113,285)............ 06/01/01 12.000 122,969
-------------
</TABLE>
5
<PAGE>
MITCHELL HUTCHINS SERIES TRUST -- STRATEGIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- -------------
<C> <S> <C> <C> <C>
PREFERRED STOCK (B)--2.01%
200,000 Centaur Funding** (cost--$200,000)....................................... $ 207,630
-------------
4,802,005
Total High Yield Securities (cost--$4,447,545)............................................
-------------
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES
- ------------- -------------------- -----------------
<C> <S> <C> <C> <C>
SHORT TERM INVESTMENTS--33.81%
$ 3,500 United States Treasury Bills
(cost--$3,491,422).......... 01/21/99 4.340 to 4.440%@ 3,491,422
-------------
REPURCHASE AGREEMENT--3.24%
$ 335 Repurchase Agreement dated
12/31/98 with State Street
Bank collateralized by
$331,226 U.S. Treasury Note
6.000% due 8/15/99
(value--$341,991); proceeds:
$335,149 (cost--$335,000)... 01/04/99 4.00 335,000
-------------
Total Investments
(cost--$13,129,252)--128.77%................. 13,298,928
Liabilities in excess of other
assets--(28.77)%............................... (2,970,929)
-------------
Net Assets--100.00%............................ $ 10,327,999
-------------
-------------
</TABLE>
- ---------------
<TABLE>
<S> <C>
* Stated in local currency.
** Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified institutional buyers.
+ Denotes a step-up bond or a zero coupon bond that converts to the notes fixed rated at a designated future date.
(a) Reflects rate at December 31, 1998, on step coupon rate instruments.
(b) Non-income producing
(c) Capitalization Bond
PAR Par Bond
TBA (To Be Assigned) Securities are purchased on a forward commitment basis with approximately (generaly +/-1.0%) principal
amount and generally stated maturity date. The actual principal amount and maturity date will be determined upon a
settlement when the specific mortgage pools are assigned.
@ Interest rates shown are discount rates at date of purchase.
</TABLE>
<TABLE>
<CAPTION>
FORWARD FOREIGN CURRENCY CONTRACTS
IN UNREALIZED
CONTRACT TO EXCHANGE MATURITY APPRECIATION
DELIVER FOR DATE (DEPRECIATION)
----------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
01/04/99 to
British Pounds............................... 230,000 US$ 381,518 02/04/99 $ (361)
01/04/99 to
Deutsche Marks............................... 902,022 US$ 541,818 02/12/99 (81)
U.S. Dollars................................. 192,223 GBP 115,000 01/04/99 (1,187)
U.S. Dollars................................. 8,060 DEM 13,500 02/12/99 57
-----------
$ (1,572)
-----------
-----------
</TABLE>
- -----------------
Currency Type Abbreviation
DEM--Deutsche Marks
GBP--British Pounds
See accompanying notes to financial statements
6
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost--$13,129,252)............................................... $13,298,928
Cash (including cash denominated in foreign currencies)............................................... 1,588
Interest receivable................................................................................... 127,946
Unrealized appreciation of forward foreign currency contracts......................................... 57
Other assets.......................................................................................... 228
-----------
Total assets.......................................................................................... 13,428,747
-----------
LIABILITIES
Payable for investments purchased..................................................................... 2,956,875
Dividends payable..................................................................................... 128,109
Payable to investment adviser and administrator....................................................... 6,642
Unrealized depreciation of forward foreign currency contracts......................................... 1,629
Accrued expenses and other liabilities................................................................ 7,493
-----------
Total liabilities..................................................................................... 3,100,748
-----------
NET ASSETS
Beneficial interest shares of $0.001 par value outstanding--847,283 shares (unlimited amount
authorized)......................................................................................... 10,169,819
Distributions in excess of net investment income...................................................... (3,387)
Accumulated net realized losses from investment transactions.......................................... (6,600)
Net unrealized appreciation/depreciation of investments, other assets, liabilities and forward
contracts denominated in foreign currencies......................................................... 168,167
-----------
Net assets............................................................................................ $10,327,999
-----------
-----------
Net asset value, offering price and redemption value per share........................................ $12.19
-----------
-----------
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 28,
1998+ THROUGH
DECEMBER 31, 1998
-------------------
<S> <C>
INVESTMENT INCOME:
Interest...................................................................................................... $ 149,150
----------
EXPENSES:
Investment advisory and administration........................................................................ 16,271
Legal and audit............................................................................................... 9,835
Trustees' fees................................................................................................ 1,875
Reports and notices to shareholders........................................................................... 1,848
Custody and accounting........................................................................................ 1,401
Transfer agency fees and related service expenses............................................................. 336
Other expenses................................................................................................ 1,989
----------
33,555
----------
Net investment income......................................................................................... 115,595
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS:
Net realized gains (losses) from:
Investments............................................................................................... 93
Foreign currency transactions............................................................................. 2,434
Net change in unrealized appreciation/depreciation of:
Investments............................................................................................... 169,676
Other assets, liabilities and forward contracts denominated in foreign currencies......................... (1,509)
----------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES.................................................. 170,694
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......................................................... $ 286,289
----------
----------
</TABLE>
- ---------------
+ Commencement of operations
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 28,
1998+ THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
FROM OPERATIONS:
Net investment income.......................................................................................... $ 115,595
Net realized gains (losses) from investments and foreign currency transactions................................. 2,527
Net change in unrealized appreciation/depreciation of investments, other assets, liabilities and forward
contracts denominated in foreign currencies.................................................................. 168,167
-----------------
Net increase in net assets resulting from operations........................................................... 286,289
-----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.......................................................................................... (121,416)
Net realized gains from investments............................................................................ (6,693)
-----------------
(128,109)
-----------------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from the sale of shares........................................................................... 10,170,507
Cost of shares repurchased..................................................................................... (688)
-----------------
Net increase in net assets from beneficial interest transactions............................................... 10,169,819
-----------------
Net increase in net assets..................................................................................... 10,327,999
NET ASSETS:
Beginning of period............................................................................................ --
-----------------
End of period.................................................................................................. $ 10,327,999
-----------------
-----------------
</TABLE>
- ---------------
+ Commencement of operations
See accompanying notes to financial statements
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mitchell Hutchins Series Trust--Strategic Income Portfolio (the "Portfolio")
is a diversified Portfolio of Mitchell Hutchins Series Trust (the "Fund"), which
is organized under Massachusetts law by a Declaration of Trust dated November
21, 1986 and is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Fund operates as a series company currently offering thirteen
Portfolios. Shares of each Portfolio are offered only to insurance company
separate accounts which fund certain variable contracts.
The Fund accounts separately for the assets, liabilities and operations for
each Portfolio. Expenses directly attributable to each Portfolio are charged to
that Portfolio's operations; expenses which are applicable to all Portfolios are
allocated among them on a pro rated basis.
Prior to the commencement of operations on September 28, 1998, the Portfolio
had no activity other than the sale of one share for a total amount of $12.00 to
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber") and
investment adviser and administrator of the Portfolio.
The preparation of financial statements in accordance with generally accepted
accounting principles requires the Fund's management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies:
VALUATION OF INVESTMENTS--Securities that are listed on U.S. and foreign stock
exchanges are valued at the last sale price on the day the securities are being
valued or, lacking any sales on such day, at the last available bid price. In
cases where securities are traded on more than one exchange, the securities are
generally valued on the exchange designated by Mitchell Hutchins as the primary
market. Securities traded in the over-the-counter ("OTC") market and listed on
The Nasdaq Stock Market, Inc. ("Nasdaq") are valued at the last available sale
price, or last bid price available if no sale occurs, on Nasdaq prior to the
time of valuation; other OTC securities (other than short-term debt securities
described below) are valued at the last available bid price prior to the time of
valuation. When market quotations are unavailable, securities are valued based
upon appraisals received from a pricing service using a computerized matrix
system or appraisals derived from information concerning the security or similar
securities received from recognized dealers in those securities. The amortized
cost method of valuation, which approximates market value, is used to value
short-term debt obligations with sixty days or less remaining to maturity,
unless the Fund's board of trustees determines that this does not represent fair
value. Securities and assets for which market quotations are not readily
available (including restricted securities subject to limitations as to their
sale) are valued at fair value as determined in good faith by or under the
direction of the Fund's board of trustees.
All investments quoted in foreign currencies are valued daily in U.S. dollars
on the basis of the foreign currency exchange rate prevailing at the time such
valuation is determined by the Portfolio's custodians, unless the board of
trustees determines that this does not represent fair value. Foreign currency
exchange rates are generally determined prior to the close of the New York Stock
Exchange ("NYSE"). Occasionally, events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of the NYSE,
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
which will not be reflected in a computation of the Portfolio's net asset
values. If events materially affecting the value of such investments or currency
exchange rates occur during such time period, the securities may be valued at
their fair value as determined in good faith by or under the direction of the
Fund's board of trustees.
REPURCHASE AGREEMENTS--The Portfolio's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Portfolio has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/ or retention of the
collateral may be subject to legal proceedings. The Portfolio may participate in
joint repurchase agreement transactions with other funds managed by Mitchell
Hutchins.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost basis. Dividend income and
other distributions are recorded on the ex-dividend date ("ex-date"). Interest
income is recorded on an accrual basis. Premiums are amortized and discounts are
accreted as adjustments to interest income and the identified cost of
investments.
FOREIGN CURRENCY TRANSLATION--The books and records of the Portfolio is
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities and other assets and liabilities stated in foreign
currencies are translated at the exchange rates prevailing at the end of the
period; and (2) purchases, sales, income and expenses are translated at the rate
of exchange prevailing on the respective dates of such transactions. The
resulting exchange gains and losses are included in the Statement of Operations.
Although the net assets and the market values of the Portfolio's securities
are presented at the foreign exchange rates at the end of the period, the
Portfolio does not generally isolate the effect of fluctuations in foreign
exchange rates from the effects of fluctuations in the market price of
securities. However, the Portfolio does isolate the effect of fluctuations in
foreign exchange rates when determining the realized gain or loss upon the sale
or maturity of foreign currency-denominated debt obligations pursuant to federal
income tax regulations. Certain foreign exchange gains and losses included in
realized and unrealized gains and losses are included in or are a reduction of
ordinary income for income tax reporting purposes. Net realized foreign currency
gain (loss) is treated as ordinary income for income tax reporting purposes.
Gains/losses from translating foreign currency-denominated assets and
liabilities at the year-end exchange rates are included in the change in
unrealized appreciation/depreciation of other assets and liabilities denominated
in foreign currencies.
FORWARD FOREIGN CURRENCY CONTRACTS--The Portfolio may enter into forward
foreign currency exchange contracts ("forward contracts") in connection with
planned purchases or sales of securities or to hedge the U.S. dollar value of
portfolio securities denominated in a particular currency. The Portfolio may
also engage in cross-hedging by using forward contracts in one currency to hedge
fluctuations in the value of securities denominated in a different currency if
Mitchell Hutchins anticipates that there is a correlation between the two
currencies. Forward contracts may also be used to shift the Portfolio's exposure
to foreign currency fluctuations from one country to another.
The Portfolio has no specific limitation on the percentage of assets which may
be committed to such contracts; however, the value of all forward contracts will
not exceed the total market value of the Portfolio's total assets. The Portfolio
may enter into forward contracts or maintain a net exposure to forward contracts
only if (1) the consummation
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
of the contracts would not obligate the Portfolio to deliver an amount of
foreign currency in excess of the value of the positions being hedged by such
contracts or (2) the Portfolio maintains cash or liquid securities in a
segregated account in an amount not less than the value of the Portfolio's total
assets committed to the consummation of the forward contracts and not covered as
provided in (1) above, as marked-to-market daily.
Risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts and from
unanticipated movements in the value of foreign currencies relative to the U.S.
dollar.
Fluctuations in the value of forward contracts are recorded for financial
reporting purposes as unrealized gains or losses by the Portfolio. Realized
gains and losses include net gains or losses recognized by the Portfolio on
contracts which have matured.
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions to shareholders are
recorded on the ex-date. The amount of dividends and distributions are
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification.
CONCENTRATION OF RISK
Investing in securities of foreign issuers and currency transactions may
involve certain considerations and risks not typically associated with
investments in the United States. These risks include revaluation of currencies,
adverse fluctuations in foreign currency values and possible adverse political,
social and economic developments, including those particular to a specific
industry, country or region, which could cause the securities and their markets
to be less liquid and prices more volatile than those of comparable U.S.
companies and U.S. government securities. These risks are greater with respect
to securities of issuers located in emerging market countries in which the
Portfolio is authorized to invest. The ability of the issuers of debt securities
held by the Portfolio to meet their obligations may be affected by economic and
political developments particular to a specific industry, country or region.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's board of trustees has approved an investment advisory and
administration contract with Mitchell Hutchins, under which Mitchell Hutchins
serves as investment adviser and administrator of the Portfolio. In accordance
with the Advisory Contract, the Portfolio pays Mitchell Hutchins an investment
advisory and administration fee, which is computed daily and payable monthly, at
the annual rate of 0.75% of the Portfolio's average daily net assets.
BANK LINE OF CREDIT
The Portfolio may participate with other funds managed by Mitchell Hutchins in
a $200 million committed credit facility ("Facility") to be utilized for
temporary financing until the settlement of sales or purchases of portfolio
securities, the repurchase or redemption of shares of the Portfolio at the
request of the shareholders and other temporary or emergency purposes. In
connection therewith, the Portfolio has agreed to pay commitment fees, pro rata,
based on the relative asset size of the funds in the Facility. Interest is
charged to the Portfolio at rates based on prevailing market rates in effect at
the time of borrowings. For the period September 28, 1998 (commencement of
operations) through December 31, 1998, the Portfolio did not borrow under the
Facility.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at December 31,
1998 was substantially the same as the cost of securities for financial
statement purposes.
At December 31, 1998, the components of net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost)....................... $ 246,710
Gross depreciation (investments having an excess of cost over value)....................... (77,034)
-----------
Net unrealized appreciation of investments................................................. $ 169,676
-----------
</TABLE>
For the period September 28, 1998 (commencement of operations) through
December 31, 1998, aggregate purchases and sales of portfolio securities,
excluding short-term securities, were $16,697,790 and $7,406,784, respectively.
FEDERAL TAX STATUS
The Portfolio intends to distribute all of its taxable income and to comply
with the other requirements of the Internal Revenue Code applicable to regulated
investment companies. Accordingly, no provision for federal income taxes is
required.
To reflect reclassifications arising from permanent "book/tax" differences for
the period September 28, 1998 (commencement of operations) through December 31,
1998, the Portfolio's distributions in excess of net investment income was
increased by $2,434 and the accumulated net realized losses were reduced by
$2,434.
SHARES OF BENEFICIAL INTEREST
There are an unlimited amount of $0.001 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 28, 1998+
THROUGH
DECEMBER 31, 1998
-------------------
<S> <C>
Shares sold..................................................................................... 847,339
Shares redeemed................................................................................. (56)
--------
Net increase.................................................................................... 847,283
--------
--------
</TABLE>
- ---------------
+ Commencement of operations
13
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period is presented below:
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 28,
1998+ THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
Net asset value, beginning of period........................................................................... $ 12.00
--------
Net investment income.......................................................................................... 0.14
Net realized and unrealized gains from investments and foreign currency........................................ 0.20
--------
Net increase from investment operations........................................................................ 0.34
--------
Dividends from net investment income........................................................................... (0.14)
Distributions from net realized gains from investments......................................................... (0.01)
--------
Total dividends and distributions.............................................................................. (0.15)
--------
Net asset value, end of period................................................................................. $ 12.19
--------
--------
Total investment return (1).................................................................................... 2.84%
--------
--------
Ratios/Supplemental data:
Net assets, end of period (000's).............................................................................. $ 10,328
Expenses to average net assets................................................................................. 1.44%*
Net investment income to average net assets.................................................................... 5.09%*
Portfolio turnover rate........................................................................................ 81%
</TABLE>
- ---------------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of the period reported. The figures do not
include additional contract level charges; results would be lower if such
charges were included. Total investment return for the period has not been
annualized.
14
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Mitchell Hutchins Series Trust -- Strategic Income Portfolio
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Mitchell Hutchins Series Trust --
Strategic Income Portfolio, (the "Portfolio") (one of the Portfolios
constituting Mitchell Hutchins Series Trust) (the "Fund") as of December 31,
1998, and the related statement of operations, the statement of changes in net
assets and the financial highlights for the period September 28, 1998
(commencement of operations) through December 31, 1998. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned as of December 31, 1998, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Mitchell Hutchins Series Trust -- Strategic Income Portfolio at December 31,
1998, the results of its operations, the changes in its net assets and the
financial highlights for the period September 28, 1998 through December 31,
1998, in conformity with generally accepted accounting principles.
[ERNST & YOUNG SIGNATURE]
New York, New York
February 11, 1999
15
