<PAGE>
MITCHELL HUTCHINS SERIES TRUST--SMALL CAP PORTFOLIO ANNUAL REPORT
PERFORMANCE AT A GLANCE
- --------------------------------------------------------------------------------
Comparison of the change of a $10,000 investment in Mitchell Hutchins Series
Trust--Small Cap Portfolio (Class H), the S&P 600 Index and the Russell 2000
Index, from September 28, 1998 through December 31, 1999
<TABLE>
<CAPTION>
PAINEWEBBER SMALL
CAP PORTFOLIO (H) S&P 600 INDEX RUSSELL 2000 INDEX
----------------- -------------- ------------------
<S> <C> <C> <C>
9/98 $10,000 $10,000 $10,000
10/98 $11,708 $10,464 $10,408
11/98 $12,575 $11,053 $10,953
12/98 $13,036 $11,758 $11,631
1/99 $12,756 $11,611 $11,786
2/99 $11,688 $10,565 $10,831
3/99 $11,015 $10,701 $11,000
4/99 $11,785 $11,409 $11,986
5/99 $12,336 $11,686 $12,161
6/99 $12,721 $10,001 $10,001
7/99 $12,992 $9,913 $9,727
8/99 $12,213 $9,477 $9,367
9/99 $11,878 $9,517 $9,369
10/99 $11,711 $9,493 $9,406
11/99 $12,823 $9,892 $9,968
12/99 $13,835 $10,703 $11,096
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (%), PERIODS ENDED 12/31/99
- -------------------------------------------------------
6 Months 1 Year Inception*
<S> <C> <C> <C>
Class H 8.76 6.13 29.45
Class I N/A N/A 7.51
S&P 600 Index 7.02 12.41 25.01
Russell 2000 Index 10.95 21.26 31.66
</TABLE>
* Inception: since commencement of issuance on September 28, 1998 for Class H
shares and July 6, 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 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 1999, the Portfolio's adviser voluntarily
waived payment of certain fees (including the distribution fee payable by
Class I Shares). Absent this waiver, performance would have been lower.
Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity contracts.
[Sidenote]
The graph depicts the performance of Mitchell Hutchins Series Trust--Small Cap
Portfolio (Class H), the S&P 600 Index and the Russell 2000 Index. Fees and
expenses of Class I Shares are higher than those of Class H Shares and the
performance of Class I Shares will differ from the performance of Class H
Shares. It is important to note the Small Cap Portfolio is a professionally
managed mutual fund while the Indices are not available for investment and are
unmanaged. The comparison is shown for illustrative purposes only.
1
<PAGE>
ANNUAL REPORT
Dear Contract Owner, February 15, 2000
We are pleased to present you with the annual report for the Mitchell Hutchins
Series Trust--Small Cap Portfolio (the "Portfolio") for the fiscal year ended
December 31, 1999.
MARKET REVIEW
- --------------------------------------------------------------------------------
[ICON] All of the major equity markets gained during the year but none more than
the NASDAQ Composite, which, propelled by technology stocks, rocketed up 85.59%.
The Dow Jones Industrial Average (Dow) and Standard and Poor's 500 Index (S&P
500) saw strong gains of 27.29% and 21.03%, respectively. Throughout the fiscal
year, a relatively small number of stocks led the charge, and market breadth
fell to a three-year low. In ever-greater numbers, investors chased technology
stocks, where earnings growth and positive earnings surprises have been strong.
Small-capitalization stocks, as measured by the S&P 600 Index, achieved a modest
gain of 12.41% for the fiscal year.
OUTLOOK
Earnings momentum in the technology sector is likely to continue in 2000 as
ongoing domestic demand extends overseas. High valuations, however, leave little
room for disappointment, and 1999's success will make for difficult earnings
comparisons in 2000. This could make careful stock selection more important than
ever. We believe that the U.S. equity market should fare reasonably well in
2000, with earnings expected to grow approximately 10-12% or more in an
expanding global economy. This positive scenario assumes that the market can
absorb an interest-rate increase of limited magnitude.
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
Small cap stocks generally kept pace with large cap stocks during the second
half of 1999. The S&P 600 Index, a widely recognized small cap benchmark, rose
7.02% during the period, besting the 5.65% return posted by the Dow and nearly
matching the 7.70% gain posted by the S&P 500. The Portfolio's Class H shares
returned 8.76% for the period, outperforming both the S&P 600 Index and the Dow.
Performance was helped by refinements made to the Portfolio's investment
process near the end of the second quarter. In May of 1999, the maximum
allowable market capitalization for securities held in the Portfolio was raised
from $1.0 billion to $1.5 billion, and the minimum required market
capitalization was set at $100 million. These moves allowed the Portfolio to
increase exposure to the relatively larger capitalization segment of the overall
small cap universe (where performance has been strongest), and to reduce
exposure to the smallest capitalization segment (where underperformance has been
chronic in recent years, despite this sector's ongoing relative undervaluation
by all historical standards).
2
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--SMALL CAP PORTFOLIO ANNUAL REPORT
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS VS. S&P 600 INDEX*
Portfolio Index
- --------------------------------------------------------------------------------
<S> <C> <C>
No. of Securities 85 600
Average Market Cap. (equal-weighted) $659 mm $621 mm
Price/Earnings Ratio(1) 16.3x 16.9x
Price/Book Ratio 3.6x 3.3x
Dividend Yield 0.2% 1.0%
Long-Term Projected EPS Growth(2) 21.7% 18.1%
Beta 1.03 1.00
- --------------------------------------------------------------------------------
</TABLE>
Because the Portfolio primarily employs a value-investing style in pursuit of
long-term capital appreciation, it did slightly underperform the Russell 2000
(up 10.95% during the latter half of 1999) which contains a relatively larger
fraction of growth companies than does the Portfolio. However, the Portfolio's
30.4% weighting in the strongly performing technology sector allowed it to
outperform most strict small cap value funds during the latter half of the year.
Such funds generally cannot invest in the growth companies that comprise that
sector.
<TABLE>
<CAPTION>
ASSET ALLOCATION*
Portfolio % 12/31/99 Portfolio % 6/30/99
- --------------------------------------------------------------------------------
<S> <C> <C>
Equities 91.1 91.5
Cash & Equivalents 8.9 8.5
- --------------------------------------------------------------------------------
Total 100.0 100.0
</TABLE>
<TABLE>
<CAPTION>
TOP TEN STOCKS*
Portfolio % 12/31/99 Portfolio % 6/30/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Orbotech Ltd. 3.4 Wackenhut Corp. 3.6
Piercing Pagoda, Inc. 3.2 DSP Group Inc. 3.1
Metris Companies Inc. 3.1 Cornell Corrections Inc. 2.5
Intertan Inc. 2.9 First Cash, Inc. 2.4
DSP Group Inc. 2.8 Oshap Technologies Ltd. 2.4
First Cash, Inc. 2.8 Quadramed Corp. 2.4
Stericycle Inc. 2.4 Orbotech Ltd. 2.2
Viatel, Inc. 2.3 J. Jill Group Inc. 2.0
Quadramed Corp. 2.3 DII Group Inc. 1.9
AHL Services, Inc. 2.3 Fresh America Corp. 1.9
- --------------------------------------------------------------------------------
Total 27.5 Total 24.4
</TABLE>
* Weightings represent percentages of portfolio assets as of December 31,
1999, unless indicated otherwise. The Portfolio is actively managed and
its composition will vary over time.
(1) Based on estimated 2000 earnings per share.
(2) Sources: I/B/E/S and Mitchell Hutchins. I/B/E/S determines the mean values
of brokerage analysts' earnings-per-share estimates and projected three- to
five-year earnings-per-share growth rates. The investment advisor
calculates the Portfolio's projected earnings-per-share growth by taking
the simple average of the I/B/E/S means for the Portfolio's holdings.
3
<PAGE>
ANNUAL REPORT
The refinements to our investing style are evident in the rise in the average
market capitalization of the equities held in the Portfolio, from $281 million
in March 1999 to $659 million at year-end. As we adjusted the Portfolio to a
higher market cap, we also began to reduce the number of holdings. At the
beginning of the year we held around 150 companies, by June 30, 1999 the number
had fallen to 120, and by year-end the Portfolio held only 85 companies.
<TABLE>
<CAPTION>
TOP FIVE SECTORS*
Portfolio % 12/31/99 Portfolio % 6/30/99
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Technology 30.4 Technology 31.9
Consumer Cyclical 29.3 Consumer Cyclical 30.4
Healthcare 9.1 Healthcare 9.0
Financial 6.8 Financial 7.5
Basic Materials 5.4 Capital Goods 7.0
- -----------------------------------------------------------------------
Total 81.0 Total 85.8
</TABLE>
During the second half of the year there was little material change to the
sector weightings within the Portfolio. Technology (30.4%) remained our largest
sector holding, followed by consumer cyclicals (29.3%), healthcare (9.1%) and
financial services (6.8%).* This order also remained unchanged from the end of
the second quarter.
Looking forward, we continue to believe that attractively valued stocks
exist at both the upper and lower ends of our capitalization range. We intend to
pursue our strategy of guiding the Portfolio so that average market cap does not
deviate too far from the S&P 600's median market cap ($621 million at year-end
1999). During January 2000, we began to de-emphasize technology stocks because
of their extremely high valuations. We expect to underweight the Portfolio's
technology holdings relative to the S&P 600 Index, and to increase the
Portfolio's weightings in basic materials, capital goods and energy.
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.
* Weightings represent percentages of portfolio assets as of December 31, 1999,
unless indicated otherwise. The Portfolio is actively managed and its
composition will vary over time.
4
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--SMALL CAP PORTFOLIO
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1999
<TABLE>
<CAPTION>
Number of
Shares Value
- --------- ------------
<S> <C>
COMMON STOCKS--92.02%
AGRICULTURE, FOOD & BEVERAGE--0.43%
900 Performance Food Group Co.* .............. $ 21,938
-------------
APPAREL, RETAIL--3.74%
3,900 Childrens Place Retail Stores, Inc.*(1) .. 64,106
1,036 Pacific Sunwear of California, Inc.* ..... 33,022
5,007 Wilsons The Leather Experts Inc.* ........ 92,317
-------------
189,445
-------------
APPAREL, TEXTILES--0.46%
8,213 Florsheim Group, Inc.* ................... 23,099
-------------
BANKS--0.51%
1,000 Cullen Frost Bankers Inc. ................ 25,750
-------------
CHEMICALS--1.72%
2,700 Spartech Corp. ........................... 87,075
-------------
COMPUTER HARDWARE--0.53%
450 Kronos, Inc.* ............................ 27,000
-------------
COMPUTER SOFTWARE--5.80%
1,200 AVT Corp.* ............................... 56,400
3,882 Caere Corp.* ............................. 28,387
13,271 Quadramed Corp.* ......................... 115,707
3,252 Tecnomatix Technologies Ltd.* ............ 93,495
-------------
293,989
-------------
CONSTRUCTION--1.22%
2,059 Elcor Corp. .............................. 62,027
-------------
DIVERSIFIED RETAIL--1.23%
2,718 Shopko Stores, Inc.* ..................... 62,514
-------------
DRUGS & MEDICINE--4.75%
1,300 Alpharma, Inc. ........................... 39,975
1,700 Amerisource Health Corp.* ................ 25,819
1,500 Cephalon Inc.* ........................... 51,844
4,629 Noven Pharmaceuticals Inc.* .............. 83,901
1,700 Polymedica Industries Corp.* ............. 39,312
-------------
240,851
-------------
ELECTRIC UTILITIES--1.89%
1,500 Calpine Corp.* ........................... 96,000
-------------
ELECTRICAL EQUIPMENT--10.85%
400 CTS Corp. ................................ 30,150
1,539 DSP Group Inc.* .......................... 143,127
2,217 Orbotech Ltd.* ........................... 171,817
600 Pinnacle Systems, Inc.* .................. 24,413
1,456 Polycom, Inc.* ........................... 92,729
1,168 Xircom, Inc.* ............................ 87,600
-------------
549,836
-------------
ELECTRICAL POWER--0.46%
1,075 Hughes Supply Inc. ....................... 23,180
-------------
ENERGY RESERVES & PRODUCTION--0.41%
1,000 Triton Energy Ltd.* ...................... $ 20,625
-------------
ENTERTAINMENT--0.65%
2,950 Funco, Inc.* ............................. 33,003
-------------
ENVIRONMENTAL SERVICES--2.74%
6,645 Stericycle Inc. * ........................ 125,009
5,098 Thermatrix Inc. * ........................ 4,461
1,800 Thermo Ecotek Corp.* ..................... 9,562
-------------
139,032
-------------
FINANCIAL SERVICES--6.68%
2,200 Americredit Corp.* ....................... 40,700
17,107 First Cash, Inc.* ........................ 141,133
4,400 Metris Companies Inc. .................... 157,025
-------------
338,858
-------------
HEAVY MACHINERY--0.20%
303 Manitowoc Company Inc. ................... 10,302
-------------
HUMAN RESOURCES--2.26%
5,500 AHLServices, Inc.* ....................... 114,812
-------------
INDUSTRIAL PARTS--0.57%
4,229 Powell Industries Inc.* .................. 29,074
-------------
INDUSTRIAL SERVICES & SUPPLIES--4.55%
9,789 Cornell Corrections Inc. * ............... 81,983
1,732 Correctional Services Corp.* ............. 7,578
1,819 Greif Brothers Corp. Class A ............. 54,115
8,413 Wackenhut Corp. .......................... 86,759
-------------
230,435
-------------
INFORMATION & COMPUTER SERVICES--7.01%
3,600 4Front Technologies, Inc.* ............... 48,150
2,000 Health Management Systems, Inc.* ......... 12,625
3,131 Maximus, Inc.* ........................... 106,258
7,224 Pomeroy Computer Resources, Inc* ......... 95,718
1,562 Right Management Consultants, Inc.* ...... 17,963
3,136 SunGard Data Systems Inc.* ............... 74,480
-------------
355,194
-------------
LEISURE--1.38%
500 Activision, Inc.* ........................ 7,656
2,193 Meade Instruments Corp.* ................. 62,501
-------------
70,157
-------------
LONG DISTANCE & PHONE COMPANIES--2.51%
2,200 Viatel, Inc.* ............................ 117,975
225 Z-Tel Technologies, Inc.* ................ 9,084
-------------
127,059
-------------
5
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--SMALL CAP PORTFOLIO
<CAPTION>
Number of
Shares Value
- --------- ------------
<S> <C>
COMMON STOCKS--(CONCLUDED)
MEDICAL PRODUCTS--3.36%
2,929 American Science & Engineering, Inc.* .... $ 21,235
2,800 Biomatrix Inc.*(1) ....................... 53,900
1,686 Chronimed Inc.* .......................... 12,961
2,700 Pharmaceutical Product
Development, Inc.* ....................... 32,063
4,200 Theragenics Corp.* ....................... 38,062
843 Young Innovations Inc.* .................. 12,224
-------------
170,445
-------------
MEDICAL PROVIDERS--2.81%
12,480 Counsel Corp. * .......................... 24,960
3,832 Hooper Holmes Inc. ....................... 98,674
800 Renal Care Group Inc.* ................... 18,700
-------------
142,334
-------------
MINING & METALS--1.72%
500 Ball Corp. ............................... 19,688
1,586 Texas Industries Inc. .................... 67,504
-------------
87,192
-------------
MOTOR VEHICLES--1.22%
1,200 Borg Warner Automotive, Inc. ............. 48,600
2,224 Keystone Automotive Industries Inc.* ..... 13,066
-------------
61,666
-------------
OIL REFINING--2.04%
900 Equitable Resources Inc. ................. 30,037
11,775 Kaneb Services Inc.* ..................... 51,516
1,900 Tesoro Petroleum Corp. ................... 21,969
-------------
103,522
-------------
OIL SERVICES--1.05%
4,100 Patterson Energy Inc.* ................... $ 53,300
-------------
REAL PROPERTY--1.81%
3,600 Cameron Ashley Building
Products, Inc.* .......................... 36,000
5,247 Nobility Homes Inc.* ..................... 27,547
296 NVRInc.* ................................. 14,134
911 Schottenstein Homes Inc. ................. 14,177
-------------
91,858
-------------
RESTAURANTS--1.42%
1,400 Applebees International, Inc. ............ 41,300
1,472 Jack in the Box Inc.* .................... 30,452
-------------
71,752
-------------
SECURITIES & ASSET MANAGEMENT--0.73%
1,981 Raymond James Financial, Inc. ............ 37,020
-------------
SEMICONDUCTOR--1.32%
1,168 Alpha Industries, Inc.* .................. 66,941
-------------
SPECIALTY RETAIL--11.99%
5,683 Intertan Inc.* ........................... 148,468
1,355 Movado Group Inc. ........................ 29,556
7,745 Musicland Stores Inc.* ................... 65,348
1,000 PC Connection, Inc.* ..................... 34,500
10,784 Piercing Pagoda, Inc.* ................... 163,108
2,428 REX Stores Corp.* ........................ 84,980
1,827 Whitehall Jewellers, Inc.* ............... 67,371
300 Zale Corp.* .............................. 14,513
-------------
607,844
-------------
Total Common Stocks (cost--$4,060,840) .................. 4,665,129
-------------
<CAPTION>
PRINCIPAL
AMOUNT
(000) MATURITY DATE INTEREST RATE VALUE
- --------- --------------- --------------- ----------
<S> <C> <C> <C>
U.S. AGENCY [email protected]%
$ 456 Federal Home Loan Bank Discount Note (cost--$455,962) ...... 01/03/00 1.500% 455,962
----------
Total Investments (cost--$4,516,802)--101.01% ........................... 5,121,091
Liabilities in excess of other assets--(1.01)% .......................... (51,246)
----------
Net Assets--100.00% ..................................................... $5,069,845
----------
----------
</TABLE>
- ------------
* Non-income producing security.
@ Interest rate shown is a discount rate at date of purchase.
(1) Security, or portion thereof was on loan at December 31, 1999.
6
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--SMALL CAP PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (cost--$4,516,802) ......................... $ 5,121,091
Investment of cash collateral received for securities
loaned, at value (cost--$58,900) ................................ 58,900
Cash ............................................................. 621
Dividends and interest receivable ................................ 1,006
Other assets ..................................................... 10
-----------
Total assets ..................................................... 5,181,628
-----------
LIABILITIES
Collateral for securities loaned ................................. 58,900
Payable to affiliates ............................................ 4,109
Accrued expenses and other liabilities ........................... 48,774
-----------
Total liabilities ................................................ 111,783
-----------
NET ASSETS
Beneficial interest shares of $0.001 par value
outstanding (unlimited amount authorized) ....................... 4,175,100
Accumulated net realized gains from investment transactions ...... 290,456
Net unrealized appreciation of investments ....................... 604,289
-----------
Net assets ....................................................... $ 5,069,845
-----------
-----------
CLASS H
Net assets ....................................................... $ 4,768,559
-----------
Shares outstanding ............................................... 312,421
-----------
Net asset value, offering price and redemption value per share ... $15.26
------
------
CLASS I
Net assets ....................................................... $ 301,286
-----------
Shares outstanding ............................................... 19,752
-----------
Net asset value, offering price and redemption value per share ... $15.25
------
------
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--SMALL CAP PORTFOLIO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
INVESTMENT INCOME:
Interest .................................................................. $ 16,273
Dividends (net of foreign withholding taxes of $1,605) .................... 16,084
----------
32,357
----------
EXPENSES:
Legal and audit ........................................................... 65,904
Investment advisory and administration .................................... 41,972
Reports and notices to shareholders ....................................... 30,530
Trustees' fees ............................................................ 7,500
Custody and accounting .................................................... 3,993
Transfer agency fees and related service expenses ......................... 2,500
Distribution fees--Class I ................................................ 181
Other expenses ............................................................ 9,627
----------
162,207
Less: Fee waivers and reinbursements from investment adviser .............. (195)
----------
Net expenses .............................................................. 162,012
----------
Net investment loss ....................................................... (129,655)
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS:
Net realized gains from investments ....................................... 592,722
Net change in unrealized appreciation/depreciation of investments ......... (148,635)
----------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT TRANSACTIONS ............ 444,087
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................... $ 314,432
----------
----------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--SMALL CAP PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SEPTEMBER 28, 1998+
YEAR ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment loss .......................................................... $ (129,655) $ (11,003)
Net realized gains from investments .......................................... 592,722 212,891
Net change in unrealized appreciation/depreciation of investments ............ (148,635) 752,924
---------- ----------
Net increase in net assets resulting from operations ......................... 314,432 954,812
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain from investment transactions--Class H ...................... (164,581) (199,842)
Net realized gain from investment transactions--Class I ...................... (10,076) --
---------- ----------
Total distributions to shareholders .......................................... (174,657) (199,842)
---------- ----------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from the sale of shares ......................................... 638,653 3,305,568
Cost of shares repurchased ................................................... (140,251) (3,369)
Proceeds from dividends reinvested ........................................... 374,499 --
---------- ----------
Net increase in net assets from beneficial interest transactions ............. 872,901 3,302,199
---------- ----------
Net increase in net assets ................................................... 1,012,676 4,057,169
NET ASSETS:
Beginning of period .......................................................... 4,057,169 --
---------- ----------
End of period ................................................................ $5,069,845 $4,057,169
---------- ----------
---------- ----------
</TABLE>
- ---------------
+ Commencement of operations.
See accompanying notes to financial statements
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mitchell Hutchins Series Trust--Small Cap 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 benefits under certain variable contracts.
Currently, the Portfolio offers Class H and Class I shares. Each class
represents interests in the 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 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. 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.
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 and dividend income is recorded on the ex-dividend
date. 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
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
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
Small cap companies may be more vulnerable than larger companies to adverse
business or economic developments. Small cap companies may also have limited
product lines, markets or financial resources, and may be dependent on a
relatively small management group. Securities of such companies may be less
liquid and more volatile than securities of larger companies or the market
averages in general and therefore may involve greater risk than investing in
larger companies. In addition, small cap companies may not be well-known to the
investing public, may not have institutional ownership and may have only
cyclical, static or moderate growth prospects.
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 of 1.00% of the
Portfolio's average daily net assets.
At December 31, 1999, the Fund owed Mitchell Hutchins $4,044 in investment
advisory and administration fees. Mitchell Hutchins waived a portion of its
investment advisory and administration fees in connection with the Fund's
investment of cash collateral from securities lending transactions in the
Mitchell Hutchins Private Money Market Fund LLC. For the year ended December 31,
1999, Mitchell Hutchins waived $14.
For the year ended December 31, 1999, the Portfolio paid $8,737 in
brokerage commissions to PaineWebber for the transactions executed on behalf of
the Portfolio.
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 July 6, 1999 (commencement of issuance of Class I shares) to
December 31, 1999, Mitchell Hutchins agreed to waive the $181 distribution fee.
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
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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. For the
year ended December 31, 1999, PaineWebber earned $164 in compensation as the
Fund's lending agent and the Portfolio earned compensation of $500 net of fees,
rebates and expenses. At December 31, 1999, the Fund owed PaineWebber $65 for
security lending fees. PaineWebber also has been approved as a borrower under
the Portfolio's securities lending program.
As of December 31, 1999, the Fund's custodian held debt securities having
an aggregate value of $58,900 as collateral for portfolio securities loaned
having a market value of $54,612 which was invested in the following money
market funds:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ---------
<S> <C> <C>
38,234 Liquid Assets Portfolio ....................................................... $38,234
19,681 Mitchell Hutchins Private Money Market Fund LLC ............................... 19,681
985 Prime Portfolio ............................................................... 985
-------
Total investments of cash collateral for securities on loan (cost--$58,900) ... $58,900
-------
-------
</TABLE>
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 a commitment fee, 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 year ended December 31, 1999, the Portfolio did not
borrow under the Facility.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at December
31, 1999 was substantially the same as the cost of securities for financial
statement purposes.
At December 31, 1999, the components of net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost) ......... $1,168,586
Gross depreciation (investments having an excess of cost over value) ......... (564,297)
----------
Net unrealized appreciation of investments ................................... $ 604,289
----------
----------
</TABLE>
For the year ended December 31, 1999, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $4,136,381 and
$3,847,975, 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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
To reflect reclassifications arising from permanent "book/tax" differences
for the year ended December 31, 1999, the Portfolio's net investment loss was
reduced by $129,655 and accumulated net realized gains were reduced by $129,655.
Permanent book/taxes differences are primarily attributable to net operating
losses.
SHARES OF BENEFICIAL INTEREST
There was 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 PERIOD
FOR THE SEPTEMBER 28, 1998+ JULY 6, 1999+
YEAR ENDED THROUGH THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1999
---------------------- ---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ --------- ------ ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Shares sold .......................... 24,686 $ 347,797 272,563 $3,305,568 19,994 $ 290,856
Shares repurchased ................... (9,124) (126,800) (225) (3,369) (912) (13,451)
Dividends reinvested ................. 24,521 364,424 -- -- 670 10,075
------ --------- ------- ---------- ------ ---------
Net increase ......................... 40,083 $ 585,421 272,338 $3,302,199 19,752 $ 287,480
------ --------- ------- ---------- ------ ---------
------ --------- ------- ---------- ------ ---------
</TABLE>
- -----------------
+ Commencement of issuance of shares.
13
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--SMALL CAP 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 PERIOD FOR THE PERIOD
FOR THE SEPTEMBER 28, 1998+ JULY 6, 1999+
YEAR ENDED THROUGH THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ------------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period ............................ $14.90 $12.00 $14.70
------ ------ ------
Net investment loss ............................................. (0.41) (0.04) (0.12)
Net realized and unrealized gains (losses) from investments ..... 1.32 3.67 1.22
------ ------ ------
Net increase (decrease) from investment operations .............. 0.91 3.63 1.10
------ ------ ------
Distributions from net realized gains from investments .......... (0.55) (0.73) (0.55)
------ ------ ------
Net asset value, end of period .................................. $15.26 $14.90 $15.25
------ ------ ------
------ ------ ------
Total investment return(1) ...................................... 6.13% 30.36% 7.51%
------ ------ ------
------ ------ ------
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................... $4,769 $4,057 $ 301
Expenses to average net assets, net of waivers(2) ............... 3.86%(2) 1.94%* 3.80%*
Net investment loss to average net assets, net of waivers(3) .... (3.09)%(3) (1.27)%* (3.13)%*
Portfolio turnover rate ......................................... 98% 17% 98%
</TABLE>
- ------------------
+ Commencement of issuance of shares.
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period 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 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.
(2) During the period ended December 31, 1999 Mitchell Hutchins waived a
portion of its fees. The ratios excluding the waiver would have been 3.86%
and 4.05% for Class H and Class I, respectively.
(3) During the period ended December 31, 1999 Mitchell Hutchins waived a
portion of its fees. The ratios excluding the waiver would have been
(3.09)% and (3.38)% for Class H and Class I, respectively.
14
<PAGE>
MITCHELL HUTCHINS SERIES TRUST--SMALL CAP PORTFOLIO
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Mitchell Hutchins Series Trust--Small Cap Portfolio
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Mitchell Hutchins Series Trust--Small
Cap Portfolio (the "Portfolio") (one of the Portfolios constituting Mitchell
Hutchins Series Trust (the "Fund")) as of December 31, 1999, the related
statement of operations for the year then ended, the statement of changes in net
assets for the period September 28, 1998 (commencement of operations) through
December 31, 1999, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of investments owned as of December 31, 1999, by correspondence
with the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Mitchell Hutchins Series Trust--Small Cap Portfolio at December 31, 1999, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the indicated periods, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
February 16, 2000
15
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
MITCHELL
HUTCHINS SERIES
TRUST
SMALL CAP
PORTFOLIO
DECEMBER 31, 1999
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All rights reserved.
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