<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC FIXED INCOME PORTFOLIO
SEMIANNUAL REPORT
Dear Contract Owner, August 15, 2000
We are pleased to present you with the semiannual report for Mitchell
Hutchins Series Trust--Strategic Fixed Income Portfolio (the "Portfolio") for
the six-month period ended June 30, 2000.
MARKET REVIEW
------------------------------------------------------------------------------
[GRAPHIC]
The 30-year U.S. Treasury bond had its best six-month period since 1995 due
to the Treasury Department's buyback program, which reduced supply, and an
apparent slowing of the U.S. economy. The release of benign economic
statistics and the Federal Reserve Board's (the "Fed") decision not to raise
the Fed Funds rate on June 28 support the hypothesis that the U.S. economy is
in fact slowing. In its press release, the Fed noted that growth is moving
towards a sustainable pace, but that risk of inflation remains--a position
that had the secondary effect of dramatically reducing volatility in the
equity markets. As the perceived risk in equity markets declined, investors
became more willing to take risk in other sectors such as corporate bonds. As
a result, liquidity increased and corporate spreads narrowed. Mortgages also
performed well because of favorable technical factors including light
issuance (low supply) and strong agency growth objectives (high demand).
Signs of growth in Europe and Asia (outside Japan) have eased fears that
tightening U.S. monetary policy (through increasing the Fed Funds rate) and
the resulting slowdown in the U.S. economy will cause a global financial
crisis. During the Asian financial crisis in mid-1997, American demand for
foreign goods helped keep many economies afloat. Thus, a significant decline
in U.S. consumption could have significant implications for other economies.
Now that Europe and most of Asia are growing as fast or faster than the
United States, this no longer seems to be a concern.
PORTFOLIO REVIEW
------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS, PERIODS ENDED 6/30/00
<TABLE>
<CAPTION>
6 Months 1 Year 5 Years 10 Years Inception*
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class H 4.88% 4.90% 6.27% 7.54% 7.24%
LB Mortgage Bond Index 3.67 5.03 6.56 7.57 8.12
----------------------------------------------------------------------------------------
</TABLE>
* Inception: since commencement of issuance on July 5, 1989 for Class H
shares.
The investment return and the principal value of an investment in the
Portfolio will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Returns for periods of less than
one year are not annualized. Past performance is no guarantee of future
performance. Figures assume reinvestment of all dividends and capital gains
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.
1
<PAGE>
SEMIANNUAL REPORT
PORTFOLIO HIGHLIGHTS
During the period, the Portfolio outperformed its benchmark, the Lehman
Brothers Mortgage Bond Index. The Portfolio's duration, or sensitivity to
interest rate changes, was near the benchmark and hence had little effect on
performance. The yield curve inverted due to the Treasury Department's
buyback program and as a result our curve position had a positive impact.
The Portfolio shifted from mortgages into long Treasurys early in the year to
take advantage of the yield curve inversion. Near the end of the second
quarter, assets were shifted back into mortgages, with a focus on GNMAs that
have the same "full faith and credit" backing as Treasury bonds. Although
different sectors within the mortgage market had mixed returns, the broad
mortgage sector outperformed Treasurys due to higher yields. A modest
allocation to emerging markets was positive because of increasing commodity
prices and reduced concerns about political instability in these countries.
International holdings as a whole were negative, as strategies designed to
benefit from higher relative economic growth rates in Europe underperformed
due to a falling euro.
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
SECTOR ALLOCATION* 6/30/00 12/31/99
------------------------------------------------------------------------------------
<S> <C> <C>
Mortgages 74.5% 60.4%
Corporates/Convertibles 20.8 39.6
Treasurys/Munis 9.3 10.0
Int'l/Emerging Markets 2.5 3.0
Cash & Equivalents 4.2 2.7
Liabilities in excess of other assets -11.3 -15.7
------------------------------------------------------------------------------------
Total 100.0 100.0
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS* 6/30/00 12/31/99
------------------------------------------------------------------------------------
<S> <C> <C>
Weighted Average Life 8.17 yrs 11.23 yrs
Weighted Average Duration 5.01 yrs 5.54 yrs
Credit Quality AA AA
Weighted Average Coupon 7.25% 7.60%
Net Assets ($mm) $4.65 $6.25
------------------------------------------------------------------------------------
</TABLE>
* Weightings represent percentages of net assets as of the dates indicated.
The Portfolio is actively managed and its composition will vary over time.
2
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC FIXED INCOME PORTFOLIO
SEMIANNUAL REPORT
OUTLOOK
We intend to target duration near the benchmark; yield curve structure will
be dependent upon our sector analysis. Exposure to the long end of the curve
will likely continue to be through Treasurys. Corporate, high-yield and
emerging-market exposures, if any, are likely to consist of shorter
maturities because of the uncertainty of long-term cash flows. We intend to
distribute the Portfolio's mortgage exposure evenly along the yield curve.
Assets may be shifted from Treasurys to mortgages to take advantage of the
substantial yield premium in mortgages. In addition, we expect to focus on
high coupon mortgages because we feel that the risk of prepayment is
relatively low.
Any allocation to emerging markets will most likely be modest, focused on the
higher quality countries such as Mexico and Korea. We feel that the less
stable countries are at risk if the Fed tightens monetary policy too much.
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,
/s/ Margo Alexander /s/ Brian M. Storms
MARGO ALEXANDER BRIAN M. STORMS
Chairman and President and
Chief Executive Officer Chief Operating Officer
Mitchell Hutchins Mitchell Hutchins
Asset Management Inc. Asset Management Inc.
This letter is intended to assist shareholders in understanding how the
Portfolio performed during the six-month period ended June 30, 2000, and
reflects our views at the time of its writing. Of course, these views may
change in response to changing circumstances.
3
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- -------- -----------
<S> <C> <C> <C>
U. S. GOVERNMENT OBLIGATIONS--7.42%
$320 U.S. Treasury Inflation Index Notes ................ 07/15/02 to 01/15/08 3.625% $ 315,141
30 U.S. Treasury Notes++ .............................. 08/31/00 5.125 29,944
-----------
Total U. S. Government Obligations (cost--$341,951) 345,085
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--25.87%
130 GNMA ARM ........................................... 05/20/25 to 06/20/25 6.375 130,500
92 GNMA ARM ........................................... 09/20/25 6.750 92,138
283 GNMA ARM ........................................... 11/20/21 7.125 283,511
192 GNMA ARM ........................................... 02/25/25 7.375 193,194
100 GNMA TBA ........................................... TBA 7.500 99,250
300 GNMA TBA ........................................... TBA 8.000 303,094
100 GNMA TBA ........................................... TBA 8.500 102,187
-----------
Total Government National Mortgage Association Certificates
(cost--$1,216,689) ......................................... 1,203,874
-----------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES--6.63%
350 FHLMC TBA (cost--$307,973) ......................... TBA 5.500 308,763
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS--41.48%
30 Copelco Capital Funding Corporation II, Series
1996-A, Class A .................................... 07/20/04 6.340 29,676
188 FHLMC REMIC, Series 1614, Class QZ ................. 11/15/23 6.500 167,074
216 FHLMC REMIC, Series 1628, Class KZ ................. 12/15/23 6.250 183,295
164 FHLMC REMIC, Series 2106, Class ZD ................. 12/15/28 6.000 124,008
197 FHLMC REMIC, Series 2210, Class F, ARM ............. 07/15/28 6.873 195,524
176 FNMA REMIC, Series 1991-57, Class Z ................ 05/25/21 6.500 170,397
196 FNMA REMIC, Series 1993-96, Class PZ ............... 06/25/23 7.000 181,162
250 FNMA REMIC, Series 2000-12, Class PG ............... 04/25/30 7.500 246,967
235 FNMA REMIC, Series G93-16, Class K ................. 04/25/23 5.000 181,023
8 Greenwich Capital Acceptance Inc., Series
1991-B, Class A1, ARM .............................. 01/25/22 7.619 7,694
59 Greenwich Capital Acceptance Inc., Series
1992-LB6, Class A1, ARM ............................ 10/25/22 7.506 58,755
373 Merrill Lynch Mortgage Investors Inc.,
Series 1993-I, Class A3, ARM ....................... 11/15/23 7.120 375,271
5 Prudential Home Mortgage Security, Series
1994-15, Class A1 .................................. 05/25/24 8.000 4,804
5 Prudential Home Mortgage Security, Series
1994-15, Class A2 .................................. 05/25/24 6.000 4,986
-----------
Total Collateralized Mortgage Obligations (cost--$1,930,979) . 1,930,636
-----------
STRIPPED MORTGAGE-BACKED SECURITIES--0.49%
35 FNMA REMIC, Series 1993-235, Class G*(2)
(cost--$22,657) .................................... 09/25/23 7.999+ 22,648
-----------
</TABLE>
4
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- -------- -----------
<S> <C> <C> <C>
CORPORATE BONDS--20.81%
AIRLINES--13.14%
$ 50 Northwest Airlines Inc. ............................ 04/07/04 8.520% $ 47,519
500 United Airlines Inc. ............................... 02/19/15 10.850 564,265
-----------
611,784
-----------
CABLE--5.51%
250 Tele-Communications Inc. ........................... 01/15/03 8.250 256,559
-----------
YANKEE--2.16%
100 Nacional Financiera ................................ 05/08/03 8.575(1) 100,308
-----------
Total Corporate Bonds (cost--$1,040,371) ..................... 968,651
-----------
MUNICIPAL SECURITIES--1.91%
100 New York State Thruway Authority (cost--$88,408) ... 01/01/25 5.000 88,651
-----------
INTERNATIONAL GOVERNMENT OBLIGATIONS--2.46%
10 Republic of Germany ................................ 01/04/30 6.250 10,672
100 United Mexican States .............................. 04/07/04 10.021 104,000
-----------
Total International Government Obligations (cost--$108,828) .. 114,672
-----------
COMMERCIAL PAPER--4.24%
100 General Motors Acceptance Corp. .................... 09/07/00 6.620 98,763
100 Reseau Ferre De France ............................. 09/13/00 6.550 98,651
-----------
Total Commercial Paper (cost--$197,414) ...................... 197,414
-----------
Total Investments (cost--$5,255,270)--111.31% ................ 5,180,394
Liabilities in excess of other assets--(11.31)% .............. (526,300)
-----------
Net Assets--100.00% .......................................... $4,654,094
===========
</TABLE>
----------------
* Principal Only Security--This security entitles the holder to receive
principal payments from an underlying pool of mortgages. High
prepayments return principal faster than expected and cause yield to
increase. Low prepayments return principal more slowly than expected
and cause the yield to decrease.
+ Estimated yield to maturity at June 30, 2000.
++ Entire amount pledged as collateral for futures transations.
ARM Adjustable Rate Mortgage--The interest rates shown are the current rates
as of June 30, 2000.
REMIC Real Estate Mortgage Investment Conduit
TBA To Be Assigned--Securities are purchased on a forward commitment with an
approximate principal account (generally +/- 1.0%) and no defined
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
(1) Floating Rate Securities--The interest rates shown are the current rates
as of June 30, 2000.
(2) Illiquid securities representing 0.49% of net assets.
See accompanying notes to financial statements
5
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC FIXED INCOME PORTFOLIO
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO IN MATURITY APPRECIATION
DELIVER EXCHANGE FOR DATES (DEPRECIATION)
------------ ------------ -------- --------------
<S> <C> <C> <C> <C>
Euro Dollars ...................................... 973,000 $929,745 07/13/00 $(14,638)
Euro Dollars ...................................... 973,000 929,745 07/13/00 16,888
Euro Dollars ...................................... 160,000 153,043 07/28/00 (1,596)
Euro Dollars ...................................... 300,000 287,160 08/10/00 3,300
--------
$ 3,954
========
</TABLE>
FUTURES CONTRACTS
<TABLE>
<CAPTION>
NUMBER OF IN EXPIRATION UNREALIZED
CONTRACTS CONTRACTS TO RECEIVE EXCHANGE FOR DATE APPRECIATION
----------- -------------------------------------------------------- ------------ -------------- -------------
<S> <C> <C> <C>
1 10 Year Eurobond ....................................... $104,750 September 2000 $ 298
4 90 Day Eurodollar ...................................... 926,450 March 2001 2,500
------
$2,798
======
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2000 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost--$5,255,270) ............................................................... $5,180,394
Cash (including cash denominated in foreign currencies at value with a cost of $241,832) ............... 240,501
Receivable for investments sold ........................................................................ 3,698,141
Interest receivable .................................................................................... 57,130
Unrealized appreciation of interest rate swaps ......................................................... 1,361
Unrealized appreciation of forward currency contracts .................................................. 20,188
Other assets ........................................................................................... 992
----------
Total assets ........................................................................................... 9,198,707
----------
LIABILITIES
Payable for investments purchased ...................................................................... 4,485,068
Payable for variation margin ........................................................................... 370
Unrealized depreciation of forward currency contracts .................................................. 16,234
Payable to investment adviser and administrator ........................................................ 1,941
Accrued expenses and other liabilities ................................................................. 41,000
----------
Total liabilities ...................................................................................... 4,544,613
----------
NET ASSETS
Beneficial interest shares of $0.001 par value outstanding--461,521 (unlimited amount authorized) ...... 4,758,571
Undistributed net investment income .................................................................... 147,725
Accumulated net realized losses from investment transactions ........................................... (183,465)
Net unrealized depreciation of investments, futures, interest rate swaps,
other assets and liabilities and forward contracts denominated in foreign currencies ................. (68,737)
----------
Net assets ............................................................................................. $4,654,094
==========
Net asset value, offering price and redemption value per share ......................................... $10.08
======
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, 2000
(UNAUDITED)
-------------
<S> <C>
INVESTMENT INCOME:
Interest ....................................................................................... $210,590
--------
EXPENSES:
Legal and audit ................................................................................ 19,303
Reports and notices to shareholders ............................................................ 17,336
Investment advisory and administration ......................................................... 13,378
Interest expense ............................................................................... 4,357
Trustees' fees ................................................................................. 3,750
Custody and accounting fees .................................................................... 2,605
Transfer agency and service fees ............................................................... 750
Other expenses ................................................................................. 1,373
--------
62,852
--------
Net investment income .......................................................................... 147,738
--------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS:
Net realized gains (losses) from:
Investment transactions .................................................................... 68,184
Futures .................................................................................... (26,967)
Options written ............................................................................ (27,578)
Foreign currency transactions .............................................................. (10,711)
Net change in unrealized appreciation/depreciation of:
Investments ................................................................................ 66,940
Futures .................................................................................... 14,471
Options written ............................................................................ 1,491
Interest rate swaps ........................................................................ 1,361
Other assets, liabilities and forward contracts denominated in foreign currencies .......... 2,365
--------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES ................................... 89,556
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................................... $237,294
========
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC FIXED INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEAR
JUNE 30, 2000 ENDED
(UNAUDITED) DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ..................................................................... $ 147,738 $ 430,701
Net realized gains (losses) from:
Investments, futures and option transactions .......................................... 13,639 (216,685)
Foreign currency transactions ......................................................... (10,711) (272)
Net change in unrealized appreciation/depreciation of:
Investments, futures, options and interest rate swaps ................................. 84,263 (513,614)
Other assets, liabilities and forward contracts denominated in foreign currencies ..... 2,365 (238)
----------- -----------
Net increase (decrease) in net assets resulting from operations ........................... 237,294 (300,108)
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ..................................................................... (424,352) --
Net realized gains from investments ....................................................... -- (1,445)
----------- -----------
(424,352) (1,445)
----------- -----------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from the sale of shares of beneficial interest ............................... 110,006 628,666
Cost of shares of beneficial interest repurchased ......................................... (1,943,222) (4,228,943)
Proceeds from dividends reinvested ........................................................ 424,352 683,039
----------- -----------
Net decrease in net assets from beneficial interest transactions .......................... (1,408,864) (2,917,238)
----------- -----------
Net decrease in net assets ................................................................ (1,595,922) (3,218,791)
NET ASSETS:
Beginning of period ....................................................................... 6,250,016 9,468,807
----------- -----------
End of period (including undistributed net investment income
of $147,725 and $424,339, respectively) ................................................. $4,654,094 $6,250,016
=========== ===========
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mitchell Hutchins Series Trust--Strategic Fixed Income Portfolio (the
"Portfolio") is a nondiversified 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 the Portfolio are
offered to insurance company separate accounts which fund certain variable
contracts.
The Fund accounts separately for the assets, liabilities and operations of
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 rata basis.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States 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--The Portfolio calculates its net asset value
based on the current market value for its portfolio securities. The Portfolio
normally obtains market values for its securities from independent pricing
sources. Independent pricing sources may use reported last sale prices,
current market quotations or valuations from computerized "matrix" systems
that derive values based on comparable securities. Securities traded in the
over-the-counter ("OTC") market and listed on The Nasdaq Stock Market, Inc.
("Nasdaq") normally are valued at the last sale price on Nasdaq prior to
valuation. Other OTC securities are valued at the last bid price available
prior to valuation. Securities which are listed on U.S. and foreign stock
exchanges normally are valued at the last sale price on the day the
securities are 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 valued on the exchange designated as the primary
market by Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a
wholly owned asset management subsidiary of PaineWebber Incorporated
("PaineWebber"), a wholly owned subsidiary of Paine Webber Group Inc. ("PW
Group") and investment adviser and administrator of the Portfolio, or by the
Portfolio's sub-adviser, Pacific Investment Management Company ("PIMCO"). If
a market value is not available from an independent pricing source for a
particular security, that security is valued at fair value as determined in
good faith by or under the direction of the Fund's board of trustees (the
"board"). The amortized cost method of valuation, which approximates market
value, generally is used to value short-term debt instruments with sixty days
or less remaining to maturity, unless the board determines that this does not
represent fair value. All investments quoted in foreign currencies are valued
daily in U.S. dollars on the basis of the foreign currency exchange rates
prevailing at the time such valuation is determined by the Portfolio's
custodian.
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, which will not
be reflected in the computation of the Portfolio's net asset value. If events
materially affecting the value of such securities or currency exchange rates
occur during such time periods, the securities will be valued at their fair
value as determined in good faith by or under the direction of the board.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 method. 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 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
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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.
OPTION WRITING--When the Portfolio writes a call or a put option, an
amount equal to the premium received by the Portfolio is included in the
Portfolio's Statement of Assets and Liabilities as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. If an option which
the Portfolio has written either expires on its stipulated expiration date or
the Portfolio enters into a closing purchase transaction, the Portfolio
realizes a gain (or loss if the cost of a closing purchase transaction
exceeds the premium received when the option was written) without regard to
any unrealized gain or loss on the underlying security, and the liability
related to such option is extinguished. If a call option which the Portfolio
has written is exercised, the Portfolio realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from the
sale are increased by the premium originally received. If a put option which
the Portfolio has written is exercised, the amount of the premium originally
received reduces the cost of the security which the Portfolio purchases upon
exercise of the option.
FUTURES CONTRACTS--Upon entering into a financial futures contract, the
Portfolio is required to pledge to a broker an amount of cash and/or U.S.
government securities equal to a certain percentage of the contract amount.
This amount is known as the "initial margin." Subsequent payments, known as
"variation margin," are made or received by the Portfolio each day, depending
on the daily fluctuations in the value of the underlying financial futures
contracts. Such variation margin is recorded for financial statement purposes
on a daily basis as an unrealized gain or loss until the financial futures
contract is closed, at which time the net gain or loss is reclassified to
realized.
Using financial futures contracts involves various market risks. The
maximum amount at risk from the purchase of a futures contract is the
contract value. The Portfolio primarily uses financial futures contracts for
hedging purposes or to manage the average duration of the Portfolio and not
for leverage. However, imperfect correlations between futures contracts and
the portfolio securities being hedged, or market disruptions, do not normally
permit full control of these risks at all times.
REVERSE REPURCHASE AGREEMENTS--The Portfolio may enter into reverse
repurchase agreements with qualified third party broker-dealers as determined
by, and under the direction of the board. Interest on the value of reverse
repurchase agreements issued and outstanding is based upon competitive market
rates at the time of issuance. At the time the Portfolio enters into a
reverse repurchase agreement, it establishes and maintains a segregated
account with the Portfolio's custodian containing liquid securities having a
value not less than the repurchase price, including accrued interest, of the
reverse repurchase agreement.
For the six months ended June 30, 2000, the Portfolio engaged in reverse
repurchase agreements. The average balance of reverse repurchase agreements
outstanding during the six months ended June 30, 2000 was $150,242 at a
weighted average interest rate of 5.82%.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions to shareholders
are recorded on the ex-dividend 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.
INTEREST RATE SWAP AGREEMENT
The Portfolio entered into an interest rate swap to protect itself from
interest rate fluctuations on a portion of its borrowings. A swap is an
agreement that obligates two parties to exchange a series of cash flows at
specified intervals based upon or calculated by reference to interest rated
for a specified amount. The payment flows are usually netted against each
other, with the difference being paid by one party to the other.
Risks may arise as a result of the failure of the counterparty to the swap
contract to comply with the terms of the contract. The loss incurred by the
failure of a counterparty is generally limited to the net interest payment to
be received by the Portfolio. Therefore, the Portfolio considers the
creditworthiness of the counterparty to a swap contract in evaluating
potential credit risk.
The Portfolio records a net receivable or payable on a daily basis for the
net interest income or expense expected to be received or paid in the
interest period. Net interest received or paid on these contracts is recorded
as interest income (or as an offset to interest income). Fluctuations in the
value of swap contracts are recorded for financial statement purposes as
unrealized appreciation or depreciation of investments.
At June 30, 2000, the Portfolio had an outstanding interest rate swap
contract with the following terms:
<TABLE>
<CAPTION>
RATE TYPE
---------------------------------------
NOTIONAL TERMINATION PAYMENTS MADE PAYMENTS RECEIVED UNREALIZED
AMOUNT DATE BY THE FUND BY THE FUND APPRECIATION
-------- ----------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
$100,000 09/15/00 7.000% 7.000%+ $1,361
</TABLE>
------------
+ Rate based on LIBOR (London Interbank Offered Rate).
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, including
mortgage-and-asset-backed securities held by the Portfolio, to meet their
obligations may be affected by economic developments, including those
particular to a specific industry or region. Mortgage-and-asset-backed
securities may decrease in value as a result of increases in interest rates
and may benefit less than other fixed income securities from declining
interest rates because of the risk of prepayment.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
WRITTEN OPTION ACTIVITY
Written option activity for the six months ended June 30, 2000 for the
Strategic Fixed Income Portfolio was as follows:
<TABLE>
<CAPTION>
NUMBER OF AMOUNT OF
OPTIONS PREMIUMS
--------- ---------
<S> <C> <C>
Options outstanding at December 31, 1999 ........................ 3 $ 2,934
Options written ................................................. 30 14,025
Options terminated in closing purchase transactions ............. (26) (44,197)
Options expired prior to exercise ............................... (7) 27,238
--------- ---------
Options outstanding at June 30, 2000 ............................ 0 $ 0
========= =========
</TABLE>
INVESTMENT ADVISER AND ADMINISTRATOR
The board 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 accrued at an annual rate 0.50% of the
Portfolio's average daily net assets.
Under a separate contract, Mitchell Hutchins pays PIMCO to serve as the
sub-adviser of the Portfolio. Mitchell Hutchins (not the Portfolio) pays the
sub-adviser a fee, computed daily and paid monthly, at an annual rate of
0.25% of Portfolio's average daily net assets.
On July 12, 2000, PW Group and UBS AG ("UBS") announced that they had
entered into an agreement and plan of merger under which PW Group will merge
into a wholly owned subsidiary of UBS. If all required approvals are obtained
and the required conditions are satisfied, PW Group and UBS expect to
complete the transaction in the fourth quarter of 2000. UBS, with
headquarters in Zurich, Switzerland, is an internationally diversified
organization with operations in many areas of the financial services industry.
SECURITIES LENDING
The Portfolio may lend securities up to 33 1/3% of its total assets to
qualified institutions. The loans are secured at all times by cash or U.S.
government securities in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends, determined on a daily
basis and adjusted accordingly. The Portfolio will regain record ownership of
loaned securities to exercise certain beneficial rights; however, the
Portfolio may bear the risk of delay in recovery of, or even loss of rights
in, the securities loaned should the borrower fail financially. The Portfolio
receives compensation, which is included in interest income, for lending its
securities from interest earned on the cash or U.S. government securities
held as collateral, net of fee rebates paid to the borrower plus reasonable
administrative and custody fees. PaineWebber is the Portfolio's lending
agent. For the six months ended June 30, 2000, the Portfolio had no security
lending activity.
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 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
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
market rates in effect at the time of borrowing. For the six months ended
June 30, 2000, the Portfolio did not borrow under the Facility.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at June 30,
2000 was substantially the same as the cost of securities for financial
statement purposes.
At June 30, 2000, the components of net unrealized depreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost) ............ $ 56,155
Gross depreciation (investments having an excess of cost over value) ............ (131,031)
---------
Net unrealized depreciation of investments ...................................... $ (74,876)
=========
</TABLE>
For the six months ended June 30, 2000, total aggregate purchases and
sales of portfolio securities, excluding short-term securities, were
$21,838,191 and $24,061,959, respectively.
FEDERAL TAX STATUS
The Portfolio intends to distribute all of its taxable income and to
comply with the requirements of the Internal Revenue Code applicable to
regulated investment companies. Accordingly, no provision for federal income
taxes is required.
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 for the
Portfolio was as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Shares sold .................................................... 10,758 59,765
Shares redeemed ................................................ (192,797) (401,715)
Dividends reinvested ........................................... 43,569 63,485
-------- --------
Net decrease ................................................... (138,470) (278,465)
======== ========
</TABLE>
15
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31,
JUNE 30, 2000 ----------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
------------- ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............................ $ 10.42 $10.78 $10.64 $10.21 $ 10.61 $ 10.34
------- ------ ------ ------ ------- -------
Net investment income ........................................... 0.43 0.72 0.70 0.69 0.70 0.88
Net realized and unrealized gains (losses) from investments,
futures, options and foreign currency transactions ............ 0.05 (1.08) 0.21 0.44 (0.31) 1.03
------- ------ ------ ------ ------- -------
Net increase (decrease) from investment operations .............. 0.48 (0.36) 0.91 1.13 0.39 1.91
------- ------ ------ ------ ------- -------
Dividends from net investment income ............................ (0.82) -- (0.68) (0.70) (0.70) (0.88)
Distributions from net realized gains on investments ............ -- 0.00++ (0.09) -- (0.09) (0.76)
------- ------ ------ ------ ------- -------
Total dividends and distributions ............................... (0.82) 0.00 (0.77) (0.70) (0.79) (1.64)
------- ------ ------ ------ ------- -------
Net asset value, end of period .................................. $ 10.08 $10.42 $10.78 $10.64 $ 10.21 $ 10.61
======= ====== ====== ====== ======= =======
Total investment return(1) ...................................... 4.88% (3.32)% 8.62% 11.00% 3.79% 18.51%
======= ====== ====== ====== ======= =======
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................... $ 4,654 $6,250 $9,469 $9,891 $10,689 $13,741
Expenses to average net assets .................................. 2.35*+ 1.82%+ 1.10%+ 1.00% 1.52% 0.99%
Net investment income to average net assets ..................... 5.52* 5.34% 5.88% 6.04% 5.88% 6.35%
Portfolio turnover .............................................. 358% 503% 245% 175% 317% 234%
</TABLE>
------------
+ Includes 0.16%, 0.10% and 0.14% of interest expense related to the reverse
repurchase agreements entered into during the periods ended June 30, 2000,
December 31, 1999 and December 31, 1998, respectively.
++ The Fund paid a distribution of less than $0.005 for the year ended
December 31, 1999.
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each year reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment return for periods of less
than one year has not been annualized.
16
<PAGE>
MITCHELL
HUTCHINS SERIES
TRUST
STRATEGIC FIXED
INCOME PORTFOLIO
JUNE 30, 2000
SEMIANNUAL REPORT
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