<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO SEMIANNUAL REPORT
August 15, 2000
Dear Contract Owner,
We are pleased to present you with the semiannual report for Mitchell Hutchins
Series Trust--Strategic Income Portfolio (the "Portfolio") for the six-month
period ended June 30, 2000.
MARKET REVIEW
--------------------------------------------------------------------------------
[GRAPHIC]
During the six-month period ending June 30, 2000, the Federal Reserve (the
"Fed") raised the Federal Funds rate one percent in response to a strong
economy, falling unemployment and inflation fears. Rising interest rates created
difficult conditions for all sectors of the fixed income market. U.S. Treasurys
fared the best, gaining 4.97%, as measured by the Lehman Brothers Government
Bond Index. The broad market, as measured by the Lehman Brothers Aggregate Bond
Index, gained 3.99% for the period. The high-yield sector fared less well,
losing 1.19% for the period as measured by the Merrill Lynch High Yield Master
Index. Global bonds, as measured by the Salomon Smith Barney World Government
Bond Index, were essentially flat for the period with a return of 0.03%.
In mid-January, the U.S. Treasury announced final plans to buy back Treasury
debt in response to a current fiscal year surplus of about $200 billion. The
size of the buyback--about $30 billion in calendar year 2000--surprised market
participants. Moreover, remarks by Treasury officials indicated that they
intended to reduce the supply of 30-year bonds and make the 10-year Treasury
note the new long-maturity bellwether. The resulting surge in demand for 30-year
Treasurys caused a drastic yield curve inversion, in which 10-year notes yielded
more than 30-year bonds.
The market illiquidity engendered by January's yield-curve inversion plagued the
spread sectors. (Spread sectors include high-yield bonds, investment-grade
corporate bonds and mortgage-backed securities. Yields on these instruments are
gauged by their relationship, or spread, to U.S. Treasurys.) Trading volume
remained low, while investors reduced overweightings in spread sectors and
displayed a marked preference for higher credit quality. This quest for credit
quality became the theme for the period, and higher-rate debt outperformed
lower-rated debt.
Bearish market sentiment began to lift toward the end of the period, as evidence
mounted that the economy may be slowing. Market participants saw this as a sign
that the Federal Reserve might be approaching the end of the current cycle of
interest-rate increases.
1
<PAGE>
SEMIANNUAL REPORT
PORTFOLIO REVIEW
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS, PERIOD ENDED 6/30/00
<TABLE>
<CAPTION>
6 Months 1 Year Inception*
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class H -0.17% 0.32% 2.60%
Class I -0.26 0.22 0.92
LB Aggregate 3.99 4.56 1.97
ML High Yield Master -1.19 -1.37 1.84
SSB WGBI 0.03 3.16 -0.48
-------------------------------------------------------------------------------------
</TABLE>
* Inception: since commencement of issuance on September 28, 1998 for Class H
shares and January 5, 1999 for Class I shares. Index performance is shown as of
inception of oldest share class.
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. In
addition, for the fiscal year ended December 31, 1999, and for the period from
January 1, 2000 through February 29, 2000 the Portfolio's adviser voluntarily
waived payment of certain fees for Class I shares. Without this waiver
performance would have been lower. Performance relates to the Portfolio and does
not reflect separate account charges applicable to variable annuity contracts.
PORTFOLIO HIGHLIGHTS
The Portfolio trailed its benchmarks for the six-month period ended June 30,
2000. This underperformance was due to the Portfolio's high exposure in two
areas--to spread sectors in the United States and to the euro within its global
allocation. We had weighted the Portfolio heavily toward high-yield bonds early
in the reporting period in anticipation of a first-quarter rally. This rally is
a generally predictable occurrence but did not occur this year, and the
Portfolio's high-yield exposure detracted from overall performance.
The Portfolio's exposure to the euro also hurt absolute performance over the
six-month period. Prospects for euro appreciation looked good to us last fall.
We believed the euro would appreciate based on the prospects for accelerating
cyclical growth in Europe, a deteriorating U.S. current-account deficit, and
increasing volatility in the U.S. equity markets. Although each of these trends
did develop in the first quarter, the euro still weakened.
We expect pressures on the euro to ease. Cyclically, Europe is recovering--its
economy doesn't appear vulnerable to financial shocks nor does it have a
current-account deficit. Based on many traditional measures, the euro is
undervalued and we believe it will recover.
2
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO SEMIANNUAL REPORT
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
SECTOR ALLOCATION* 6/30/00 12/31/99
--------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government & Investment Grade 45.7% 38.1%
U.S. High Yield 34.0 43.0
Cash & Cash Equivalents 23.8 22.6
Foreign & Emerging Markets 10.8 11.8
Liabilities in Excess of Other Assets -14.3 -15.5
--------------------------------------------------------------------------------------
Total 100.0 100.0
<CAPTION>
CHARACTERISTICS* 6/30/00 12/31/99
--------------------------------------------------------------------------------------
Net Assets ($mm) $14.0 $12.8
Weighted Average Duration 5.1 yrs 5.7 yrs
Weighted Average Maturity 11.8 yrs 8.6 yrs
--------------------------------------------------------------------------------------
</TABLE>
OUTLOOK
--------------------------------------------------------------------------------
Although the Fed did not raise rates at its meeting on June 28, it did note that
inflation remained a concern. The economy appears to be slowing, although it is
unclear whether the slowdown will be sufficient to prevent another rate
increase. However, we believe that any further Fed action will have a greater
impact on equities than on bonds. While we think the economy will slow, we do
not expect it to slip into recession. In this environment we believe the spread
sectors stand a good chance to recover.
Looking ahead, we believe the next big opportunity for the Portfolio may be in
the global markets, where we expect rates to rise and become more attractive
relative to rates in the U.S. If this does occur, we anticipate increasing our
global allocation. We believe that, over time, the euro will strengthen against
the dollar. For now, we are keeping the Portfolio's exposure to the euro about
the same.
* Weightings represent percentages of net assets as of the dates indicated. The
Portfolio is actively managed and its composition will vary over time.
3
<PAGE>
SEMIANNUAL REPORT
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.
4
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS JUNE 30, 2000(UNAUDITED)
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- --------- -------- -------
<S> <C> <C> <C>
U.S. GOVERNMENT AND INVESTMENT GRADE OBLIGATIONS--45.73%
U. S. GOVERNMENT OBLIGATIONS---12.25%
$ 240 U.S. Treasury Bonds ............................... 08/15/21 8.125% $ 292,650
1,400 U.S. Treasury Notes ............................... 05/31/02 to 02/15/10 6.500 to 6.625 1,422,529
----------
Total U. S. Government Obligations (cost--$1,706,848) ........ 1,715,179
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES--6.73%
975 FHLMC 30 Year TBA (cost--$935,391) ................ TBA 7.000 941,484
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--22.62%
2,015 FNMA .............................................. 08/15/04 to 04/29/09 5.250 to 6.500 1,904,937
1,360 FNMA 30 Year TBA .................................. TBA 6.000 to 7.000 1,261,663
----------
Total Federal National Mortgage Association Certificates
(cost--$3,247,510)........................................ 3,166,600
----------
CORPORATE OBLIGATIONS--4.13%
BANKS--1.31%
200 BCI US Funding Trust One** ........................ 07/15/08(b) 8.010 182,723
----------
INSURANCE--1.40%
200 Principal Financial Group** ....................... 08/15/09 8.200 196,529
----------
TELECOMMUNICATIONS--1.42%
200 Centaur Funding** ................................. 04/21/20 9.080 198,562
----------
Total Corporate Obligations (cost--$580,012) ................. 577,814
----------
Total U.S. Government and Investment Grade Obligations (cost--$6,469,761) 6,401,077
----------
GLOBAL DEBT SECURITIES--10.77%
BRAZIL--1.33%
226 Federal Republic of Brazil ........................ 01/15/20 to 05/15/27 10.125 to 12.750 188,300
----------
CANADA--2.11%
415* Government of Canada .............................. 12/01/06 7.000 295,884
----------
GERMANY--1.66%
230* Federal Republic of Germany ....................... 07/15/04 6.750 232,207
----------
MALAYSIA--0.64%
104 Petroliam Nasional Berhad ......................... 10/15/26 7.625 89,367
----------
PANAMA--0.38%
55 Republic of Panama ................................ 04/01/29 9.375 52,800
----------
POLAND--0.58%
425* Republic of Poland ................................ 06/12/04 10.000 81,693
----------
QATAR--0.99%
140 State of Qatar .................................... 06/15/30 9.750 138,040
----------
</TABLE>
5
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- --------- -------- -------
<S> <C> <C> <C>
GLOBAL DEBT SECURITIES--(CONCLUDED)
TRINIDAD AND TOBAGO--1.36%
$ 100 Republic of Trinidad & Tobago ..................... 10/01/09 9.875% $ 102,500
90 Republic of Trinidad & Tobago++.................... 07/01/20 9.750 87,885
----------
190,385
----------
TURKEY--0.45%
60 Republic of Turkey ................................ 11/05/04 11.875 62,370
----------
UNITED KINGDOM--1.27%
115* United Kingdom Gilt ............................... 12/07/03 6.500 177,243
----------
Total Global Debt Securities (cost--$1,591,648) .............. 1,508,289
----------
HIGH YIELD SECURITIES--34.02%
CORPORATE BONDS--34.02%
AUTOMOTIVE--1.84%
150 J.L. French Automotive Castings ................... 06/01/09 11.500 139,500
125 Lear Corporation .................................. 05/15/05 7.960 117,497
----------
256,997
----------
CABLE--3.25%
200 Knology Holdings Incorporated ..................... 10/15/07 11.875+ 106,000
250 UIH Australia Pacific Incorporated ................ 05/15/06 14.000+ 227,500
250 United Pan Europe Communications N.V.** ........... 11/01/09 13.375+ 120,625
----------
454,125
----------
CHEMICALS--3.54%
125 Avecia Group PLC .................................. 07/01/09 11.000 122,500
125 Huntsman ICI Chemicals LLC ........................ 07/01/09 10.125 125,937
250 Lyondell Chemical Company ......................... 05/01/07 9.875 247,500
----------
495,937
----------
COMMUNICATIONS - FIXED--8.60%
125 Allegiance Telecom Incorporated ................... 05/15/08 12.875 135,312
125 Global Crossing Holdings Limited .................. 11/15/09 9.500 120,625
250 GlobeNet Communications Group ..................... 07/15/07 13.000 252,500
250 KMC Telecom Holdings Incorporated ................. 05/15/09 13.500 210,000
250 Metromedia Fiber Network Incorporated ............. 11/15/08 10.000 246,875
125 NorthEast Optic Network Incorporated .............. 08/15/08 12.750 116,250
125 Williams Communications Group ..................... 10/01/09 10.875 122,500
----------
1,204,062
----------
COMMUNICATIONS - MOBILE--3.02%
125 Nextel Communications Incorporated ................ 02/15/08 9.950+ 92,188
125 Spectrasite Holdings Incorporated ................. 04/15/09 11.250+ 72,500
250 Voicestream Wireless Corporation .................. 11/15/09 10.375 257,500
----------
422,188
----------
</TABLE>
6
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- --------- -------- -------
<S> <C> <C> <C>
HIGH YIELD SECURITIES--(CONCLUDED)
CORPORATE BONDS--(CONCLUDED)
ENERGY--1.77%
$ 125 Pioneer Natural Resources Company ................. 04/01/10 9.625% $ 128,750
125 Tesoro Petroleum Corporation ...................... 07/01/08 9.000 119,062
----------
247,812
----------
FINANCE--0.71%
123 Airplanes Pass-Through Trust ...................... 03/15/19 10.875 99,387
----------
GAMING--2.65%
250 MGM Grand Incorporated ............................ 06/01/07 9.750 253,750
125 Park Place Entertainment Corporation .............. 12/15/05 7.875 117,500
----------
371,250
----------
HEALTHCARE--0.65%
100 Tenet Healthcare Corporation ...................... 12/01/08 8.125 91,250
----------
HOTELS & LODGING--0.84%
125 Host Marriott L.P. ................................ 02/15/06 8.375 117,500
----------
PAPER & PACKAGING--0.86%
125 Tembec Industry Incorporated ...................... 06/30/09 8.625 120,000
----------
REAL ESTATE--0.77%
125 D.R. Horton Incorporated .......................... 02/01/09 8.000 107,500
----------
RETAIL--1.17%
200 Advance Stores Company Incorporated ............... 04/15/08 10.250 164,000
----------
SERVICE--0.75%
125 Allied Waste North America Incorporated ........... 08/01/09 10.000 105,625
----------
TECHNOLOGY--1.64%
125 Fairchild Semiconductor Corporation ............... 03/15/07 10.125 125,938
125 Globix Corporation ................................ 02/01/10 12.500 103,750
----------
229,688
----------
TRANSPORTATION--1.09%
175 Stena AB .......................................... 06/15/07 8.750 152,250
----------
UTILITY - ELECTRIC--0.87%
125 AES Corporation ................................... 06/01/09 9.500 122,500
----------
Total High Yield Securities (cost--$4,917,393) ............... 4,762,071
----------
</TABLE>
7
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- --------- -------- -------
<S> <C> <C> <C>
SHORT-TERM U.S. AGENCY [email protected]%
$ 342 Federal Farm Credit Bank Discount Notes ........... 07/03/00 6.570% $ 341,875
3,000 Federal Home Loan Bank Discount Notes ............. 07/21/00 6.440 2,989,267
-----------
Total Short-Term U.S. Agency Obligations (cost--$3,331,142) .. 3,331,142
-----------
Total Investments (cost--$16,309,944)--114.31% ............... 16,002,579
Liabilities in excess of other assets--(14.31)% .............. (2,003,692)
-----------
Net Assets--100.00% .......................................... $13,998,887
===========
</TABLE>
--------------
* Stated in local currency.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Denotes a step-up bond or a zero coupon bond that converts to the noted
fixed rate at a designated future date.
++ Illiquid security representing 0.63% of net assets.
(b) Maturity date shown is the callable date for perpetual rewriting security.
TBA (To Be Assigned) Securities are purchased on a forward commitment basis
with an approximate principal amount (generally +/- 1.0%) and generally
stated maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
@ Interest rate shown is discount rate at date of purchase.
8
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
FORWARD FOREIGN CURRENCY CONTRACTS
UNREALIZED
CONTRACT TO MATURITY APPRECIATION
DELIVER IN EXCHANGE FOR DATES (DEPRECIATION)
----------- --------------- -------- --------------
<S> <C> <C> <C> <C>
British Pounds ..................................... 110,000 US$ 163,082 08/30/00 $ (3,548)
Euro ............................................... 329,000 US$ 310,214 08/01/00 (4,542)
Polish Zloties ..................................... 300,000 US$ 68,120 07/10/00 (548)
U.S. Dollars ....................................... 506,669 EUR 530,000 07/14/00 (196)
U.S. Dollars ....................................... 994,833 EUR1,071,000 08/01/00 29,797
U.S. Dollars ....................................... 67,626 GBP 45,000 08/30/00 541
--------
$ 21,504
========
</TABLE>
--------------
CURRENCY TYPE ABBREVIATION:
EUR--Euro
GBP--British Pounds
US$--United States Dollars
See accompanying notes to financial statements
9
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2000 (UNAUDITED)
<S> <C>
ASSETS
Investments in securities, at value (cost--$16,309,944) .......................................... $16,002,579
Interest receivable .............................................................................. 208,759
Cash ............................................................................................. 960
Unrealized appreciation on forward foreign currency contracts .................................... 30,338
Other assets ..................................................................................... 69
-----------
Total assets ..................................................................................... 16,242,705
-----------
LIABILITIES
Payable for investments purchased ................................................................ 2,189,403
Payable to investment adviser and administrator .................................................. 10,024
Unrealized depreciation on forward foreign currency contracts .................................... 8,834
Accrued expenses and other liabilities ........................................................... 35,557
-----------
Total liabilities ................................................................................ 2,243,818
-----------
NET ASSETS
Beneficial interest--$0.001 par value (unlimited amount authorized) .............................. 14,351,634
Undistributed net investment income .............................................................. 401,398
Accumulated net realized losses from investments, futures contracts and foreign currency transactions (467,316)
Net unrealized depreciation of investments, other assets, liabilities and forward contracts
denominated in foreign currencies ............................................................ (286,829)
-----------
Net assets ....................................................................................... $13,998,887
===========
CLASS H:
Net assets ....................................................................................... $11,900,213
-----------
Shares outstanding ............................................................................... 1,016,034
-----------
Net asset value, offering price and redemption value per share ................................... $11.71
======
CLASS I:
Net assets ....................................................................................... $ 2,098,674
-----------
Shares outstanding ............................................................................... 179,303
-----------
Net asset value, offering price and redemption value per share ................................... $11.70
======
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, 2000
(UNAUDITED)
--------------
<S> <C>
INVESTMENT INCOME:
Interest ......................................................................................... $ 552,519
-----------
EXPENSES:
Investment advisory and administration ........................................................... 49,245
Legal and audit .................................................................................. 18,960
Reports and notices to shareholders .............................................................. 11,482
Custody and accounting ........................................................................... 3,939
Trustees' fees ................................................................................... 3,750
Distribution fee--Class I ........................................................................ 2,172
Transfer agency fees and related service expenses ................................................ 1,500
Other expenses ................................................................................... 23,484
-----------
114,532
Less: Fee waiver from adviser .................................................................... (618)
-----------
Net expenses ..................................................................................... 113,914
-----------
Net investment income ............................................................................ 438,605
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gains (losses) from:
Investments .................................................................................. (202,913)
Futures contracts ............................................................................ 27,790
Foreign currency transactions ................................................................ (152,295)
Net change in unrealized appreciation/depreciation of:
Investments .................................................................................. (164,524)
Futures contracts ............................................................................ 5,156
Other assets, liabilities and forward contracts denominated in foreign currencies ............ 38,769
-----------
NET REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES .................................... (448,017)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................................. $ (9,412)
===========
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE
JUNE 30, 2000 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ...................................................... $ 438,605 $ 720,417
Net realized losses from investments, futures contracts and
foreign currency transactions .......................................... (327,418) (189,554)
Net change in unrealized appreciation/depreciation of investments,
futures contracts, other assets, liabilities and forward contracts
denominated in foreign currencies ...................................... (120,599) (334,397)
----------- ------------
Net increase (decrease) in net assets resulting from operations ............ (9,412) 196,466
----------- ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income--Class H ............................................. -- (625,615)
Net investment income--Class I ............................................. -- (72,408)
From paid in capital--Class H .............................................. -- (10,406)
From paid in capital--Class I .............................................. -- (1,204)
----------- ------------
Total dividends and distributions to shareholders .......................... -- (709,633)
----------- ------------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from the sale of shares ....................................... 1,551,896 2,263,661
Cost of shares repurchased ................................................. (302,316) (157,516)
Proceeds from dividends reinvested ......................................... -- 837,742
----------- ------------
Net increase in net assets from beneficial interest transactions ........... 1,249,580 2,943,887
----------- ------------
Net increase in net assets ................................................. 1,240,168 2,430,720
NET ASSETS:
Beginning of period ........................................................ 12,758,719 10,327,999
----------- ------------
End of period (including undistributed net
investment income of $401,398 at June 30, 2000) ........................ $13,998,887 $ 12,758,719
=========== ============
-------------
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 the Portfolio are offered to insurance company separate
accounts which fund certain variable contracts.
Currently, the Portfolio offers Class H and Class I shares. Each class
represents interests in the same assets of the Portfolio, and the classes are
identical except for differences in their distribution charges. Both classes
have equal voting privileges except that Class I has exclusive voting rights
with respect to its distribution plan. Class H has no distribution plan.
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 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. 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 will be 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
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 Fund's board.
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.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares (or the value of
dividend-eligible shares, as appropriate) of each class at the beginning of the
day (after adjusting for current capital share activity of the respective
classes). Class-specific expenses are charged directly to the applicable class
of shares.
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
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 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 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 computed daily and payable monthly, at the annual
rate of 0.75% of the Portfolio's average daily net assets. At June 30, 2000, the
Portfolio owed Mitchell Hutchins $8,467 in investment advisory and
administration fees.
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.
15
<PAGE>
#NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
DISTRIBUTION PLAN
Class I shares are offered to insurance company separate accounts where the
related insurance companies receive payments for their services in connection
with the distribution of the Portfolio's Class I shares. Under the plan of
distribution, the Portfolio pays Mitchell Hutchins a monthly distribution fee at
the annual rate of 0.25% of the average daily net assets of Class I shares.
Mitchell Hutchins pays the entire distribution fee to the insurance companies.
For the period January 1, 2000 to February 29, 2000, Mitchell Hutchins
voluntarilyagreed to waive $618 of the distribution fees on Class I shares. At
June 30, 2000, the Portfolio owed Mitchell Hutchins $1,557 in distribution fees.
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 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) ....... $ 165,944
Gross depreciation (investments having an excess of cost over value) ....... (473,309)
---------
Net unrealized depreciation of investments ................................. $(307,365)
=========
</TABLE>
For the six months ended June 30, 2000, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $19,339,963 and
$18,187,350, respectively.
SECURITIES LENDING
The Portfolio may lend securities up to 331/3% 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 securities lending
activity.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS(UNAUDITED)
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.
At December 31, 1999, the portfolio had a net capital loss carryforward of
$123,581, which will expire by December 31, 2007. To the extent such losses are
used, as provided in the regulations, to offset future net realized capital
gains, it is probable these gains will not be distributed.
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>
CLASS H CLASS I
---------------------------------------- ----------------------------------------
FOR THE PERIOD
FOR THE FOR THE FOR THE JANUARY 5, 1999++
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED THROUGH
JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 2000 DECEMBER 31, 1999
------------------ ------------------ ---------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold ......... 53,792 $ 624,745 66,416 $ 823,999 79,797 $ 927,151 115,823 $1,439,662
Shares repurchased .. (11,697) (135,985) (4,419) (54,836) (14,328) (166,331) (8,243) (102,680)
Reinvestment of dividends -- -- 64,659 764,130 -- -- 6,254 73,612
------- --------- ------- ---------- ------ --------- ------- ----------
Net increase ........ 42,095 $ 488,760 126,656 $1,533,293 65,469 $ 760,820 113,834 $1,410,594
======= ========= ======= ========== ====== ========= ======= ==========
</TABLE>
-----------------
++ Commencement of issuance of shares.
17
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--STRATEGIC INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
CLASS H CLASS I
------------------------------------- ------------------------------------------
FOR THE FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 28, 1998+ SIX MONTHS ENDED JANUARY 5, 1999++
JUNE 30, 2000 DECEMBER 31 THROUGH JUNE 30, 2000 THROUGH
(UNAUDITED) 1999 DECEMBER 31, 1998 (UNAUDITED) DECEMBER 31, 1999
---------------- ----------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............. $ 11.73 $ 12.19 $ 12.00 $ 11.73 $ 12.22
-------- -------- -------- -------- --------
Net investment income ............................ 0.39@ 0.77@ 0.14 0.36@ 0.76@
Net realized and unrealized gains (losses) from
investments, foreign currency and futures
contracts ...................................... (0.41)@ (0.54)@ 0.20 (0.39)@ (0.56)@
-------- -------- -------- -------- --------
Net increase (decrease) from investment operations (0.02) 0.23 0.34 (0.03) 0.20
-------- -------- -------- -------- --------
Dividends from net investment income ............. -- (0.68) (0.14) -- (0.68)
Distributions from net realized gains from
investments ................................... -- -- (0.01) -- --
Distributions from paid in capital ............... -- (0.01) -- -- (0.01)
Total dividends and distributions to shareholders -- (0.69) (0.15) -- (0.69)
-------- -------- -------- -------- --------
Net asset value, end of period ................... $ 11.71 $ 11.73 $ 12.19 $ 11.70 $ 11.73
======== ======== ======== ======== ========
Total investment return(1) ....................... (0.17)% 1.89% 2.84% (0.26)% 1.63%
======== ======== ======== ======== ========
Ratios/Supplemental data:
Net assets, end of period (000's) ................ $ 11,900 $ 11,423 $ 10,328 $2,099 $1,335
Expenses to average net assets,
before waiver from adviser ..................... 1.71%* 1.62% 1.44%* 1.96%* 1.87%*
Expenses to average net assets,
after waiver from adviser ...................... 1.71%* 1.62% 1.44%* 1.89%* 1.62%*
Net investment income to average net assets,
before waiver from adviser ..................... 6.70%* 6.20% 5.09%* 6.46%* 5.75%*
Net investment income to average net assets,
after waiver from adviser ...................... 6.70%* 6.20% 5.09%* 6.53%* 6.00%*
Portfolio turnover rate .......................... 155% 403% 81% 155% 403%
</TABLE>
-------------------
+ Commencement of operations.
++ Commencement of issuance of shares.
* Annualized
@ Calculated using the average daily shares outstanding for the period.
(1)Total investment return is calculated assuming a $1,000 investment on the
first day of each 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 each period 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.
18
<PAGE>
MITCHELL
HUTCHINS SERIES
TRUST
SEMIANNUAL REPORT
STRATEGIC
INCOME
PORTFOLIO
JUNE 30, 2000
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