<PAGE> 1
<TABLE>
<S> <C>
INVESTMENT ADVISER OF
STRATEGIC INCOME PORTFOLIO
Boston Management and Research
24 Federal Street
Boston, MA 02110
ADMINISTRATOR OF EV CLASSIC
STRATEGIC INCOME FUND
Eaton Vance Management
24 Federal Street
Boston, MA 02110
EV CLASSIC STRATEGIC INCOME FUND
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(617) 482-8260
CUSTODIAN
Investors Bank & Trust Company
24 Federal Street
Boston, MA 02110
TRANSFER AND DIVIDEND DISBURSING AGENT SEMI-ANNUAL
The Shareholder Services Group, Inc. SHAREHOLDER REPORT
BOS725 APRIL 30, 1995
P.O. Box 1559
Boston, MA 02104
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
This report must be preceded or accompanied
by a current prospectus which contains more
complete information on the Fund, including
its distribution plan, sales charges and
expenses. Please read the prospectus
carefully before you invest or send money.
</TABLE>
<PAGE> 2
TO SHAREHOLDERS
EV Classic Stratgeic Income Fund had a total return of 5.3 percent during the
six months ended April 30, 1995. That return was the result of a rise in net
asset value per share to $10.27 from $9.75 on October 31, 1994 and does not
include the effect of contingent deferred sales charges on shareholders
redeeming within the first year.
THE MEXICAN PESO CRISIS SHOOK THE GLOBAL MARKETS IN DECEMBER...
As it did in 1994, the global markets continued to demonstrate unusual
volatility in eary 1995. The event that most roiled the markets during the
six-month period was the decision of Mexico, due to a shortage of foreign
reserves, to devalue the Mexican peso. The devaluation caused great uncertainty
among foreign investors who feared that the country might be forced to default
on outstanding debt. While the Mexican crisis had no direct effect on countries
in the southern hemisphere, those uncertainties initially reverberated
throughout the rest of Latin America.
THE BRADY BOND MARKET FELT THE BRUNT OF THE MEXICAN CRISIS...
The Mexican crisis was especially hard on the Brady bond market. Brady bonds
were created in the 1980s as a way to restructure billions of dollars of
defaulted sovereign debt issued by less developed countries. Orginated by former
U.S. Treasury Nicholas Brady, many of the bonds are backed by U.S. Treasury
collateral, and dollar-denominated and thus free of direct currency risk. Oddly
enough, as a measure of the market's overreaction to the Mexican peso
devaluation, Argentine and Brazilian Bradys were battered by the crisis, as were
Bradys in markets as far away as Poland. As we've noted in previous reports, the
Portfolio has for some time avoided Mexico altogether. However, the Fund had an
otherwise large exposure to Brady bonds, and consequently the Fund lost ground
from mid-December through early March, declining around 8 percent at its low
point.
AN INTERNATIONAL RESCUE PACKAGE PROMPTS A RALLY IN BRADY BONDS...
With the assembling of a $50 billion Mexican rescue package by the U.S. and
supranational lenders, faith was once again restored among investors. In the
wake of the rescue package, the Brady market rallied strongly, especially in
Argentina and Brazil. The Fund recovered much of the ground lost earlier in the
period and posted a positive return for the six-months.
In the pages that follow, portfolio manager Mark Venezia describes the market
during the period, and highlights the changes within the Portfolio. Mark
highlights areas that represent good value and makes a strong case for devoting
a portion of one's portfolio to the global bond market.
Sincerely,
/s/ James B. Hawkes
James B. Hawkes
President
June 20, 1995
<PAGE> 3
MANAGEMENT DISCUSSION
An interview with Mark S. Venezia, vice president and portfolio manager of
Strategic Income Portfolio.
Q. MARK, HOW WOULD YOU EVALUATE THE FUND'S
PERFORMANCE DURING THE SIX-MONTH PERIOD?
A. The Fund reflected some of the market volatility late in 1994 due to the
weak Brady bond market. However, from start to finish, the Fund fared
relatively well, especially in view of the havoc casued by the peso
devaluation. Moreover, the Fund benefited from its exposure to the Dollar
Bloc markets, - including Canada, New Zealand, and Australia - as well as
to the U.S. market, which have each registered strong net gains in 1995.
While these markets deteriorated from mid-to-late-December in reaction to
the peso crisis, they rallied from January through April on signs of
moderating economic growth. In addition, the Fund benefited from its
exposure to the European markets, especially Finland. Toward the end of
the six-month period, many of the European bond markets began to show
signs of recovery.
Q. HOW HAVE YOU STRUCTURED THE PORTFOLIO?
A. With respect to strategic allocations, the Portfolio had around 44
percent of its investments in foreign investment grade bonds at April 30,
down from 56 percent on October 31. Thirty-five percent was invested
in high yield bonds, including Brady bonds. That is a modest increase from
28 percent on October 31. And about 21 percent was invested in U.S.
investment grade bonds, an increase from 16 percent in October. The
positions and duration in the U.S. were increased to take advantage of
what appears to be a cyclical peak in U.S. rates. The Dollar Bloc
investments remained important holdings for the Fund, as did Finland,
which continues to post strong economic fundamentals. Within our Brady bond
positions, I remain very positive about Argentina and Brazil.
Q. GIVEN THE RECENT CRISIS IN LATIN AMERICA, WHY DO YOU REMAIN POSITIVE
ON ARGENTINA AND BRAZIL?
A. Initially, the investor concerns about Mexico spilled into Argentina and
Brazil and had a dampening effect on investor sentiment. However, as it
turned out, those concerns were exaggerated. Argentina has bolstered its
banks, kept inflation in check, and dramatically lowered its trade deficit.
With the recent re-election of president Menem, the country is expected
to continue along the path of reform. While the economy has slowed due
to higher taxes and an outflow of capital, Argentina has weatherd the storm
well. I am very optimistic about Brazil, which brought inflation down from
40 percent per month to 2 percent per month last year and is just
beginning the process of privatization. The Brady bonds of both of these
countries have recovered significantly since early March.
<PAGE> 4
Q. WHAT WERE SOME OF THE FUND'S MORE SUCCESSFUL INVESTMENTS DURING
THE SIX-MONTH PERIOD?
A. New Zealand, the Fund's largest foreign commitment, has fared very well
during the period. For several years, New Zealand has offered relatively
high real interest rates - nominal rates adjusted for inflation - while
containing inflation. For example, as of April 30, yields for New
Zealand 5-year bonds remained in the 8 percent range while rates for
5-year U.S. bonds were around 6.8 percent. In addition, New Zealand has
achieved fiscal surpluses which they have dedicated to debt reduction,
eschewing the temptation to increase social spending. Another attraction of
New Zealand has been its strong currency. The country's currency
appreciated about 9.1 percent versus the dollar during the six-month
period.
Q. WERE THERE ANY OTHER STRONG PERFORMING MARKETS?
A. Yes. Another strong performer was Finland. In recent years,
Finland has managed to encourage economic growth while averting
inflation and has successfully initiated fiscal reforms to reduce its
budget deficit. Finland compares very favorably to some of its neighbors,
such as Sweden, which have taken the socialist path and are now faced with
financial peril. We have long targeted Finland as a market primed to
outperform its Scandinavian neighbors.
- ---------------------------------------------------------------------
PORTFOLIO INVESTMENTS
TOP FIVE WEIGHTINGS ACCORDING TO...
...Regional CREDIT EXPOSURE
allocations based
on the location U.S. 30.6%
of the issuer of each NEW ZEALAND 12.6
security. This shows ARGENTINA 11.9
that the Portfolio's FINLAND 8.5
largest holdings BRAZIL 7.4
were in the U.S.
and New Zealand
... The Portfolio's CURRENCY ALLOCATION
holdings broken
down by country U.S. 23.4%
of currency THAILAND 11.0
denomination. NEW ZEALAND 10.2
This shows where INDONESIA 10.1
movements in GERMANY 8.2
exchange rates
will have the
greatest impact
on the Fund's
share price.
...The contribution INTEREST RATE
of a country SENSITIVITY
weighting to the
Portfolio's duration. NEW ZEALAND 25.7%
This shows where U.S. 20.9
changing interest CANADA 20.4
rates will have the FINLAND 19.8
greatest impact DENMARK 11.3
on share prices
- ---------------------------------------------------------------------
<PAGE> 5
- --------------------------------------------------------------------------------
ARGENTINA: A PROFILE*
INFLATION RATE: ....... 4.0%
..................... (1994)
FISCAL SURPLUS AS
% OF GDP: ............. 1.3%
EXTERNAL DEBT: $ 85 BILLION
SIZE OF ECONOMY:
................ $288 BILLION
[MAP OF [PHOTO]
ARGENTINA] INCOME PER CAPITA:
.................... $8,671
YIELD ON ARGENTINE
BRADY BONDS........... 13.5%
* Source: Ministry of Economy
[CAPTION FOR PHOTO]
MARK VENEZIA, (R.),
PORTFOLIO MANAGER
OF THE STRATEGIC INCOME
PORTFOLIO, AND DOMINGO
CAVALLO, FINANCE
MINISTER OF ARGENTINA.
- --------------------------------------------------------------------------------
Q. ARE YOU ATTRACTED TO ANY OTHER COUNTRIES IN EUROPE?
A. Yes. Eastern Europe is providing some interesting opportunities. For
example, in the space of only five years, the Czech republic has been
transformed from the most rigid communist dictatorship into the most
de-regulated and privatized nation in eastern Europe. Last year the
country emerged from a long recession, registering GDP growth of 2.4
percent, while cutting inflation in half, to 10 percent. Foreign
investment surged to $3 billion in 1994, according to the Ministry of
Finance. A large inflow of foreign investment is helping to
modernize manufacturing facilities and build stronger ties to the west.
Importantly, the Czech koruna has been among the most stable currencies in
Europe and is fast heading toward convertibility.
Elsewhere in eastern Europe, Poland is generating rapid economic growth,
with GDP advancing 5.5 percent in 1994. The Polish people have
demonstrated a strong entrepreneurial flair, with 2.3 million small
ventures organized in the past 5 years alone. The Polish currency, the
zloty, has performed relatively well this year, following years of weakness.
The government has mounted an ambitious privatization plan which has been
welcomed by the International Monetary Fund and the World Bank and marks a
further step toward a free market economy.
<PAGE> 6
[PIE CHART]
Pie chart with the heading: "STRATEGIC ALLOCATION:*" and a sub-heading which
states: "Adding a high yield advantage to global diversification". The pie is
divided into the following increments: FOREIGN INVESTMENT GRADE - 43.8%; HIGH
YIELD - 34.7%; U.S. INVESTMENT GRADE - 21.5%. A footnote at the bottom
indicates "* Based on market value as of 4/30/95".
Q. THE DOLLAR HAS BEEN VERY WEAK THIS YEAR. DO YOU TAKE POSITIONS WITH
RESPECT TO THE U.S. CURRENCY?
A. Frankly, the movement of the dollar is one of the great imponderable
questions in this market. It has been a long-standing practice of the
the Fund not to take significant direct positions with respect to the
dollar. However, the movements of the dollar and the U.S. bond market
tend to have dramatic effects on markets around the globe. Therefore,
each position is implicitly affected by the dollar. But we have tried to
balance these positions so that the Fund would be more or less neutral
with respect to dollar movments.
Q. WHAT IS YOUR OUTLOOK FOR THE GLOBAL BOND MARKETS?
A. I'm very positive on the future of the global markets. In order to look
ahead it's useful to look at recent history. Investors may recall that in
early 1994, global bond spreads - the difference between bond yields of
different countries - were extremely narrow. Essentially, global bond
yields had converged to levels very close to those of the U.S.
Subsequently, when U.S. interest rates began to rise in 1994, global yields
rose at a much faster pace, jumping twice as much as those in the U.S.
The market exaggerated the credit and inflation risks of the rest of the
world's bond markets. While those markets have rallied in 1995, they
haven't kept pace with the U.S. If our Federal Reserve actually lowers the
Federal funds rate later this year, I would expect money to flow back
abroad. Naturally there are continuing risks in foreign investments and
the past trends do not insure a repeat of history. But I remain
optimistic on the prospects for foreign bond markets.
<PAGE> 7
EV CLASSIC STRATEGIC INCOME FUND
FINANCIAL STATEMENTS
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------------------------------
APRIL 30, 1995
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investment in Strategic Income Portfolio (Portfolio), at value (Note 1A) $13,480
Receivable from the Administrator (Note 4) 5,173
Deferred organization expenses (Note 1D) 31,773
-------
Total assets $50,426
LIABILITIES:
Accrued expenses $40,028
-------
Total liabilities 40,028
-------
NET ASSETS $10,398
=======
SOURCES OF NET ASSETS:
Paid-in capital $10,106
Accumulated net realized loss on investment and financial futures
transactions from Portfolio (computed on the basis of identified cost) (845)
Unrealized appreciation of investments and financial futures contracts
from Portfolio (computed on the basis of identified cost) 692
Undistributed net investment income 445
-------
Total $10,398
=======
SHARES OF BENEFICIAL INTEREST 1,012
=======
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($10,398/1,012 shares of beneficial interest) $ 10.27
=======
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 8
<TABLE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1995 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME (NOTE 1B):
Interest income allocated from Portfolio $ 484
Expenses allocated from Portfolio (39)
------
Total investment income $ 445
------
Expenses-
Transfer and dividend disbursing agent fees $ 750
Legal and accounting services 257
Amortization of organization expenses (Note 1D) 3,966
Registration fees 200
------
Total expenses $5,173
Deduct preliminary allocation of expenses to the Administrator (Note 4) 5,173
------
Net expenses -
------
Net investment income $ 445
------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from Portfolio (identified cost basis) (including
net loss due to foreign currency rate fluctuations of $49) -
Investment security transactions $(327)
Financial futures contracts (33)
Foreign currency and forward foreign currency exchange contracts (236)
-----
Net realized loss on investments $ (596)
Change in unrealized appreciation of investments 673
------
Net realized and unrealized gain $ 77
------
Net increase in net assets from operations $ 522
======
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 9
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
INCREASE (DECREASE) IN NET ASSETS: April 30, 1995 Year Ended
From operations - (Unaudited) October 31, 1994*
---------------- -----------------
<S> <C> <C>
Net investment income $ 445 $ 355
Net realized loss on investments (596) (508)
Change in unrealized appreciation of investments 673 19
------- -------
Net decrease in net assets from operations $ 522 $ (134)
------- -------
Dividends to shareholders from net investment income (Note 2) - - $ (108)
------- -------
Transactions in shares of beneficial interest (Note 3) -
Proceeds from sales of shares - $10,000
Net asset value of shares issued to shareholders in payment of distributions declared - 108
Cost of shares redeemed - -
------- -------
Increase in net assets from Fund share transactions - $10,108
------- -------
Net increase in net assets $ 522 $ 9,866
NET ASSETS:
At beginning of period 9,876 10
------- -------
At end of period (including undistributed net investment income of $445 and $0, respectively) $10,398 $ 9,876
======= =======
<FN>
* For the period from the start of business, May 25, 1994, to October 31, 1994.
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 10
<TABLE>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
April 30, 1995 Year Ended
(Unaudited) October 31, 1994*
---------------- -----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.750 $10.000
------- -------
Income(loss) from operations:
Net investment income $ 0.440 $ 0.348
Net realized and unrealized gain(loss) on investments 0.080 (0.495)
------- -------
Total income(loss) from operations $ 0.520 $(0.147)
------- -------
LESS DISTRIBUTIONS:
From net investment income - $(0.103)
------- -------
NET ASSET VALUE, END OF PERIOD $10.270 $ 9.750
======= =======
TOTAL RETURN (1) 5.33% (1.41%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $ 10 $10
Ratio of net expenses to average daily net assets (2) 0.79% + 0.76% +
Ratio of net investment income to average daily net assets 9.07% + 7.74% +
<FN>
* For the six months ended April 30, 1995, and for the period from the start of business,
May 25, 1994, to October 31, 1994, the operating expenses of the Fund reflect an
allocation of expenses to the Administrator. Had such action not been taken, net
investment loss per share and the ratios would have been as follows:
NET INVESTMENT LOSS PER SHARE $(4.667) $(6.900)
======= =======
RATIOS (As a percentage of average daily net assets):
Expenses (2) 105.42%+ 160.83%+
Net investment loss (96.35%)+ (152.33%)+
* For the period from the start of business, May 25, 1994, to October 31, 1994.
+ Computed on an annualized basis.
(1) Total investment return is calculated assuming a purchase at the net asset value
on the first day and a sale at the net asset value on the last day of each period
reported. Dividends and distributions, if any, are assumed to be reinvested at the
net asset value on the payable date.
(2) Includes the Fund's share of Strategic Income Portfolio's allocated expenses.
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
EV Classic Strategic Income Fund (the Fund), formerly EV Classic Short-Term
Strategic Income Fund, is a non-diversified series of Eaton Vance Investment
Fund, Inc. (the Corporation), which was incorporated under Maryland law on
October 4, 1990, (as Eaton Vance Short-Term Global Income Fund, Inc.) as the
successor to a Massachusetts business trust organized on August 21, 1990. The
Corporation changed its name to Eaton Vance Investment Fund, Inc. on August 17,
1993. The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. The Fund invests all of
its investable assets in interests in the Strategic Income Portfolio (the
Portfolio),a New York Trust having the same investment objective as the Fund.
The value of the Fund's investment in the Portfolio reflects the Fund's
proportionate interest in the net assets of the Portfolio (0.01% at April 30,
1995.) The performance of the Fund is directly affected by the performance of
the Portfolio. The financial statements of the Portfolio, including the
portfolio of investments, are included elsewhere in this report and should be
read in conjunction with the Fund's financial statements. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles.
A. INVESTMENT VALUATIONS - Valuation of securities by the Portfolio is
discussed in Note 1 of the Portfolio's Notes to Financial Statements which
are included elsewhere in this report.
B. INCOME - The Fund's net investment income consists of the Fund's pro rata
share of the net investment income of the Portfolio, less all actual and
accrued expenses of the Fund determined in accordance with generally accepted
accounting principles.
C. FEDERAL TAXES - The Fund's intention is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year all of its taxable income, including any
net realized gain on investments. At October 31, 1994, the Fund did not
qualify as a regulated investment company for federal income tax purposes and
was treated as a corporation.
D. DEFERRED ORGANIZATION EXPENSES - Costs incurred by the Fund in connection
with its organization, including registration costs, are being amortized on
the straight-line basis over five years beginning on the date the Fund commenced
operations.
E. DISTRIBUTION COSTS - For book and tax purposes, commissions paid on the sale
of shares and other distribution costs are charged to operations. (Note 5).
F. OTHER - Investment transactions are accounted for on a trade date basis.
G. INTERIM FINANCIAL INFORMATION - The interim financial statements relating
to April 30, 1995 and for the period then ended have not been audited by
independent certified public accountants, but in the opinion of the Fund's
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial statements.
(2) DISTRIBUTIONS TO SHAREHOLDERS
The net income of the Fund is determined daily and substantially all of the net
income so determined is declared as a dividend to shareholders of record at the
time of declaration. Distributions, if any, are paid monthly. Distributions of
allocated realized capital gains, if any, are made at least annually.
Shareholders may reinvest capital gain distributions in additional shares of the
Fund at the net asset value as of the ex-dividend date. Distributions are paid
in the form of additional shares or, at the election of the shareholder, in
cash. The Fund distinguishes between distributions on a tax basis and a
financial reporting basis. Generally accepted accounting principles require
that only distributions in excess of tax basis earnings and profits be reported
in the financial statements as a return of capital. Differences in the
recognition or classification of income between the financial statements and tax
earnings and profits which result in temporary over distributions for financial
statement purposes are classified as
<PAGE> 12
distributions in excess of net investment income or accumulated net realized
gains. Permanent differences between book and tax accounting relating to
distributions are reclassified to paid-in capital.
<TABLE>
(3) CAPITAL STOCK
At April 30, 1995 there were one billion shares of $0.0001 par value capital
stock authorized. Transactions in capital stock were as follows:
<CAPTION>
SIX MONTHS ENDED
APRIL 30, 1995 YEAR ENDED
(UNAUDITED) OCTOBER 31, 1994*
---------------- -----------------
<S> <C> <C>
Sales - 1,000
Issued to shareholders electing
to receive payments of
distributions in capital stock - 12
Redemptions - -
---- -----
Net increase - 1,012
==== =====
<FN>
* For the period from the start of business, May 25, 1994, to October 31, 1994.
</TABLE>
(4) TRANSACTIONS WITH AFFILIATES
Eaton Vance Management (EVM) serves as the administrator of the Fund, but
currently receives no compensation for these services. The Portfolio has
engaged Boston Management and Research (BMR), a subsidiary of EVM, to render
investment advisory services. See Note 2 of the Portfolio's Notes to Financial
Statements which are included elsewhere in this report. To enhance the net
income of the Fund, $5,173 of expenses related to the operation of the Fund were
allocated, on a preliminary basis, to EVM. Except as to Directors of the Fund
and the Portfolio who are not members of EVM's or BMR's organization, officers
and Directors receive remuneration for their services to the Fund out of such
investment adviser fee. Investors Bank & Trust Company (IBT), an affiliate of
EVM, serves as custodian to the Fund and the Portfolio. Pursuant to the
respective custodian agreements, IBT receives a fee reduced by credits which are
determined based on the average cash balances the Fund or the Portfolio
maintains with IBT. Certain of the officers and Directors of the Fund and
Portfolio are officers and directors/trustees of the above organizations (Note
5).
(5) DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the Plan) pursuant to Rule 12b-1 under
the Investment Company Act of 1940. Effective January 30, 1995, the Directors
of the Fund adopted an Amended Distribution Plan. The Plan requires the Fund to
pay the Principal Underwriter, Eaton Vance Distributors, Inc. (EVD), amounts
equal to 1/365 of 0.75% of the Fund's daily net assets, for providing ongoing
distribution services and facilities to the Fund. The Fund will automatically
discontinue payments to EVD during any period in which there are no outstanding
Uncovered Distribution Charges, which are equivalent to the sum of (i) 6.25% of
the aggregate amount received by the Fund for shares sold plus (ii)
distribution fees calculated by applying the rate of 1% over the prevailing
prime rate to the outstanding balance of Uncovered Distribution Charges of EVD,
reduced by the aggregate amount of contingent deferred sales charges (see Note
6) and amounts theretofore paid to EVD. The amount payable to EVD with respect
to each day is accrued on such day as a liability of the Fund and, accordingly,
reduces the Fund's net assets. For the six months ended April 30, 1995, the
Fund paid or accrued $0 to or payable to EVD.
In addition, the Plan permits the Fund to make monthly payments of
service fees to the Principal Underwriter in amounts not expected to exceed
0.25% of the Fund's average daily net assets for any fiscal year. The
Directors of the Corporation have initially implemented the Plan by authorizing
the Fund to make monthly service fee payments to the Principal Underwriter in
amounts not expected to exceed 0.25% of the Fund's average daily net assets for
any fiscal year. Pursuant to the Amended Distribution Plan, on sales made prior
to January 30, 1995, EVD made monthly service fee payments to Authorized Firms
in amounts anticipated to be equivalent to 0.25%, annualized, of the assets
maintained in the Fund by their customers. On sales of shares made on January
30, 1995 and thereafter, EVD currently expects to pay to an Authorized Firm a
service fee at the time of sale equal to 0.25% of the purchase price of the
shares sold by such Firm and monthly payments of service fees in amounts not
expected to exceed 0.25% per annum of the Fund's average daily net assets
<PAGE> 13
based on the value of Fund shares sold by such Firm and remaining outstanding
for at least one year. During the first year after a purchase of Fund shares,
EVD will retain the service fee as reimbursement for the service fee payment
made to the Authorized Firm at the time of sale. Service fee payments are made
for personal services and/or maintenance of shareholder accounts. Service fees
paid to EVD and Authorized Firms are separate and distinct from the sales
commissions and distribution fees payable by the Fund to EVD, and as such are
not subject to automatic discontinuance when there are no outstanding Uncovered
Distribution Charges of EVD. No provision for service fee payments was made for
the six months ended April 30, 1995.
Certain of the officers of the Fund and Directors of the Corporation are
officers or directors of EVD.
(6) CONTINGENT DEFERRED SALES CHARGE
For shares purchased on or after January 30, 1995, a contingent deferred sales
charge (CDSC) of 1% is imposed on any redemption of Fund shares made within one
year of purchase. Generally the CDSC is based upon the lower of the net asset
value at date of redemption or date of purchase. No charge is levied on
shares acquired by reinvestment of dividends or capital gain distributions. No
CDSC is levied on shares which have been sold to EVD or its affiliates or to
their respective employees or clients. CDSC charges are paid to EVD to reduce
the amount of Uncovered Distribution Charges calculated under the Fund's
Distribution Plan. CDSC received when no Uncovered Distribution Charges exist
will be credited to the Fund. For the six months ended April 30, 1995, EVD
received no CDSC paid by shareholders.
(7) INVESTMENT TRANSACTIONS
Increases and decreases in the Fund's investment in the Portfolio for the six
months ended April 30, 1995, aggregated $7,345, and $1,805, respectively.
<PAGE> 14
- --------------------------------------------------------------------------------
<TABLE>
STRATEGIC INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
APRIL 30, 1995
<CAPTION>
- -------------------------------------------------------------------------------------------
PRINCIPAL U.S. $ VALUE
- -------------------------------------------------------------------------------------------
BONDS & NOTES 94.3%
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA, 11.4% Argentine Pesos
Argentina Pre-1 BOCON, 3.94%, 4/1/01 2,000,000 1,020,000
U.S. Dollars
Argentina Pre-2 BOCON, 6.1603%, 4/1/01 7,000,000 4,847,500
Argentina Pre-2 BOCON, 6.1603%, 4/1/07 1,000,000 495,000
Argentina Discount (Brady), 7.125%, 3/31/23 15,400,000 8,989,750
Argentina FRB Bond (Brady), 7.3125%, 3/31/05 8,000,000 4,755,000
-----------
Total Argentina (identified cost, $19,422,000) $20,107,250
-----------
AUSTRALIA, 3.2% Australian Dollars
Commonwealth Bank of Australia, 11%, 10/16/01 2,000,000 $ 1,537,020
State Bank of New South Wales, 9%, 9/17/02 5,000,000 3,458,665
Treasury Corp. - Victoria, 9.25%, 9/18/03 1,000,000 686,974
-----------
Total Australia (identified cost, $6,042,783) $ 5,682,659
-----------
BRAZIL, 7.3% U.S. Dollars
Brazil Eligible Interest Bond (Brady), 7.25%, 4/15/06 2,694,000 $ 1,449,709
Brazil Discount Bond (Brady), 7.25%, 4/15/24 20,800,000 11,362,000
-----------
Total Brazil (identified cost, $13,084,572) $12,811,709
-----------
COSTA RICA, 2.6% U.S. Dollars
Costa Rica Interest Series B (Brady), 7.0625%, 5/21/05 1,531,870 $ 1,128,478
Costa Rica Principal Series A (Brady), 6.25%, 5/21/10 7,000,000 3,418,331
-----------
Total Costa Rica (identified cost, $6,069,749) $ 4,546,809
-----------
CZECH REPUBLIC, 3.8% Czech Korunas
CEZ, 14.375%, 1/27/01
(identified cost, $6,022,084) 159,710,000 $ 6,658,455
-----------
DENMARK, 4.5% Danish Krone
Denmark Government, 8%, 5/15/03 28,000,000 $ 4,974,260
Denmark Government, 8%, 3/15/06 17,200,000 2,998,692
-----------
Total Denmark (identified cost, $7,690,173) $ 7,972,952
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 15
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRINCIPAL U.S. $ VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FINLAND, 8.2% Finnish Markka
Republic of Finland, 9.5%, 3/15/04
(identified cost, $12,083,718) 60,000,000 $14,431,847
-----------
ICELAND, 2.4% Icelandic Kornur
Nordic Investment Bank, 6.75%, 11/29/96
(identified cost, $4,276,428) 250,000,000 $ 4,237,250
-----------
IRELAND, 2.8% Irish Pound
Irish Government, 9.25%, 7/11/03
(identified cost, $4,929,755) 3,000,000 $ 5,009,301
-----------
NEW ZEALAND, 12.2% New Zealand Dollars
Abbey National, 0%, 10/4/96 6,900,000 $ 4,115,571
New Zealand Government, 8%, 11/15/06 14,550,000 9,860,567
New Zealand Government, 10%, 3/15/02 10,000,000 7,515,828
-----------
Total New Zealand (identified cost, $19,297,769) $21,491,966
-----------
POLAND, 3.7% Polish Zloty
Polish Government T-Bill, 0%, 7/20/95 4,000,000 $ 1,600,557
Polish Government T-Bill, 0%, 7/26/95 3,000,000 1,185,760
U.S. Dollars
Poland-PDI (Brady), 3.25%, 10/27/14 7,500,000 3,543,750
-----------
Total Poland (identified cost, $5,895,556) $ 6,330,067
-----------
THAILAND, 4.8% Thai Baht
Deutsche Bank Certificate of Deposit,
8.75%, 9/19/96 60,000,000 $ 2,434,860
ABN-Amro Bank Hong Kong Certificate of Deposit,
9.1%, 8/5/97 150,000,000 6,083,550
-----------
Total Thailand (identified cost, $8,399,597) $ 8,518,410
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 16
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
PRINCIPAL U.S. $ VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES, 27.4%
Corporate Bonds & Notes, 13.8%
ACME Metals Inc., Sr. Sec. Notes, 12.5%, 8/1/02 500,000 $ 515,000
Agricultural Minerals & Chemicals, Sr. Notes, 10.75%, 9/30/03 1,000,000 1,037,500
American General Finance, 8.125%, 8/15/09 1,000,000 1,043,860
American Restaurant Group, Sr. Sec. Notes, 12%, 9/15/98 1,000,000 910,000
Applied Extrusion, Sr. Notes, 11.5%, 4/1/02 1,000,000 1,045,000
Cablevision Industries, Debs., 10.75%, 1/30/02 1,000,000 1,065,000
Dade International Inc., 13%, 2/01/05 1,000,000 1,045,000
Dayton Hudson Medium Term Note, 9.5%, 6/10/15 665,000 765,916
Dayton Hudson Medium Term Note, 9.52%, 6/10/15 350,000 403,768
Dayton Hudson Medium Term Note, 9.35%, 6/16/20 600,000 685,148
Corporate Express Inc., Sr. Sub. Notes, 9.125%, 3/15/04 500,000 475,000
Flagstar Corp., Sr. Sub. Debs., 11.25%, 11/1/04 1,000,000 815,000
General Electric Capital Corp., 8.625%, 6/15/08 250,000 270,753
General Electric Capital Corp., 8.30%, 9/20/09 2,000,000 2,172,980
General Motors Acceptance Corp., 8.75%, 7/15/05 250,000 264,393
ITT Corp., 8.5%, 10/15/01 750,000 778,103
ITT Corp., 8.55%, 6/15/09 270,000 290,958
Jorgensen Earle, Sr. Notes, 10.75%, 3/1/00 1,000,000 967,500
Moran Transportation, 1st Mortgage Bonds, 11.75%, 7/15/04 1,000,000 960,000
NL Industries Inc., Sr. Sec. Disc. Notes,
13% (0% until 10/15/98), 10/15/05 1,000,000 705,000
Purina Mills, Sr. Sub. Notes, 10.25%, 9/1/03 1,000,000 1,005,000
Roadmaster Industries Inc., Sr. Sub. Notes, 11.75%, 7/15/02 1,000,000 962,500
SD Warren Co., 12%, 12/15/04 1,000,000 1,080,000
Stone Container Corp., Sr. Sub. Debs., 10.75%, 10/1/02 1,000,000 1,055,000
TRW Inc., Medium Term Note, 9.35%, 6/4/20 1,900,000 2,100,526
Waters Corporation, Sr. Sub. Notes, 12.75%, 9/30/04 1,000,000 1,015,000
Westpoint Stevens, Sr. Sub. Notes, 9.375%, 12/15/05 1,000,000 950,000
-----------
Total United States Corporate Bonds & Notes
(identified cost, $23,882,689) $24,383,905
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 17
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRINCIPAL U.S. $ VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE PASS-THROUGHS, 11.5%
Federal Home Loan Mortgage Corp. Participation Certificates:
4.75%, with various maturities to 2003 181,124 $ 174,827
5.5%, with various maturities to 2019 114,846 112,682
12.5%, with maturity at 2011 199,651 221,223
12.75%, with maturity at 2013 209,813 235,079
13.25%, with various maturities to 2013 306,907 348,946
13.5%, with maturity at 2019 820,333 941,121
-----------
$ 2,033,878
-----------
Federal National Mortgage Association
Mortgage-Backed Securities:
4.75%, with maturity at 1999 181,076 $ 174,087
5%, with maturity at 2003 265,174 250,642
5.5%, with various maturities to 2012 315,421 304,007
7.5%, with maturity at 2002 1,403,344 1,401,830
8%, with maturity at 2013 2,031,547 2,062,027
12.75%, with maturity at 2014 281,027 317,754
13%, with various maturities to 2015 2,054,086 2,333,436
13.25%, with maturity at 2014 309,170 356,180
13.5%, with various maturities to 2015 1,671,388 1,904,591
14.75%, with various maturities to 2012 3,995,144 4,704,599
-----------
$13,809,153
-----------
Government National Mortgage Association:
6.5%, with various maturities to 2007 1,867,603 $ 1,806,407
9%, with maturity at 2016 1,625,841 1,735,201
13.5%, with various maturities to 2014 766,206 885,205
-----------
$ 4,426,813
-----------
Total Mortgage Pass-Throughs (identified cost, $20,286,981) $20,269,844
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 18
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL U.S. $ VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond, 11.75%, 2/15/01+ (identified cost, $3,862,188) 3,000,000 $ 3,683,715
------------
Total United States (identified cost, $48,031,858) $ 48,337,464
------------
Total Bonds & Notes (identified cost, $161,246,042) $166,136,139
------------
- ----------------------------------------------------------------------------------------------------
SHORT-TERM OBLIGATION 1.8%
- ----------------------------------------------------------------------------------------------------
Banque National De Paris, Euro Time-Deposit
Cayman Islands, 6.00%, 5/1/95 3,200,000 $ 3,200,000
------------
Total Investments (identified cost, $164,446,042) $169,336,139
OTHER ASSETS, LESS LIABILITIES, 3.9% 6,872,731
------------
NET ASSETS, 100% $176,208,870
============
<FN>
+ Security pledged as collateral on financial futures contracts
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 19
FINANCIAL STATEMENTS
<TABLE>
- ------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
<S> <C> <C>
ASSETS:
Investments, at value (Note 1A) (identified cost, $164,446,042) $169,336,139
Cash 17,326
Foreign currency, at value (cost, $2,102,107) 2,174,475
Receivable for investments sold 11,716,939
Interest receivable 3,989,316
Deferred organization expenses (Note 1J) 18,058
------------
Total assets $187,252,253
LIABILITIES:
Payable for investments purchased $5,903,911
Payable for forward foreign currency exchange contracts (Note 5) 5,046,842
Payable for daily variation margin on financial futures contracts 67,155
Payable to affiliates
Trustees fees 1,081
Custodian fee 4,153
Accrued expenses 20,241
----------
Total liabilities 11,043,383
-------------
NET ASSETS applicable to investors' interest in Portfolio $176,208,870
============
SOURCES OF NET ASSETS:
Net proceeds from capital contributions and withdrawals $176,411,279
Unrealized depreciation of investments, futures, foreign currency and forward
foreign currency exchange contracts (computed on the basis of identified cost) (202,409)
------------
Total $176,208,870
============
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 20
<TABLE>
- ------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1995
<S> <C> <C>
INVESTMENT INCOME (NOTE 1B):
Interest income $ 9,638,782
Expenses
Investment adviser fee (Note 2) $ 542,538
Administration fee (Note 2) 149,411
Compensation of Directors not members of the
Investment Adviser s organization (Note 2) 6,249
Custodian fee (Note 2) 63,015
Legal and accounting services 27,366
Amortization of organization expenses (Note 1J) 2,334
Miscellaneous 14,932
-----------
Total expenses 805,845
------------
Net investment income $ 8,832,937
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) (identified cost basis) (including net gain due to
foreign currency rate fluctuations of $850,458) --
Investment transactions $(9,078,067)
Financial futures 165,895
Foreign currency and forward foreign currency exchange contracts (5,017,777)
-----------
Net realized loss on investments $(13,929,949)
Change in unrealized appreciation (depreciation) --
Investment transactions $10,689,153
Financial futures (684,419)
Foreign currency and forward foreign currency exchange contracts 1,332,192
-----------
Net change in unrealized appreciation of investments 11,336,926
------------
Net realized and unrealized loss on investments $ (2,593,023)
------------
Net increase in net assets resulting from operations $ 6,239,914
============
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 21
FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1995 OCTOBER 31, 1994++
-------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations
Net investment income $ 8,832,937 $ 15,949,560
Net realized loss on investments (13,929,949) (23,646,259)
Net change in unrealized appreciation (depreciation) of investments 11,336,926 (7,159,575)
------------ -------------
Net increase (decrease) in net assets resulting from operations
$ 6,239,914 $ (14,856,274)
------------ -------------
Capital transactions
Contributions $ 3,905,503 $ 353,394,561
Withdrawals (70,405,313) (102,169,541)
------------ -------------
Increase (decrease) in net assets resulting from capital transactions $(66,499,810) $ 251,225,020
------------- -------------
Total increase (decrease) in net assets $(60,259,896) $ 236,368,746
NET ASSETS:
At beginning of period 236,468,766 100,020
------------ -------------
At end of period $176,208,870 $ 236,468,766
============ =============
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DATA
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1995 OCTOBER 31, 1994++
-------------- ----------------
<S> <C> <C>
RATIOS (as a percentage of average net assets)
Expenses 0.81%+ 0.82%+
Net investment income 8.88%+ 8.41%+
Portfolio Turnover 55% 71%
<FN>
+ Computed on an annualized basis
++ For the period from the start of business, March 1, 1994, to October 31, 1994
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 22
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES
Strategic Income Portfolio (the Portfolio) is registered under the Investment
Company Act of 1940 as a non-diversified open-end investment company which was
organized as a trust under the laws of the State of New York in 1992. The
Declaration of Trust permits the Trustees to issue beneficial interests in
the Portfolio. Investment operations began on March 1, 1994, with the
acquisition of net assets of $348,433,258 in exchange for an interest in the
Portfolio by one of the Portfolio s investors. The following is a summary of
significant accounting policies of the Portfolio. The policies are in conformity
with generally accepted accounting principles.
A. INVESTMENT VALUATIONS - Debt securities (other than mortgage-backed,
pass-through, securities and short-term obligations maturing in sixty days or
less), including listed securities and securities for which price quotations are
available and forward contracts, will normally be valued on the basis of market
valuations furnished by pricing services. Mortgage backed, pass through
securities are valued using a matrix pricing system which takes into account
closing bond valuations, yield differentials, anticipated prepayments and
interest rates. Financial futures contracts listed on commodity exchanges and
exchange-traded options are valued at closing settlement price. Short-term
obligations and money-market securities maturing in sixty days or less are
valued at amortized cost which approximates value. Non-U.S. dollar denominated
short-term obligations are valued at amortized cost as calculated in the base
currency and translated into U.S. dollars at the current exchange rate.
Investments for which market quotations are unavailable are valued at fair value
using methods determined in good faith by or at the direction of the Trustees.
B. INCOME - Interest income is determined on the basis of interest accrued and
discount earned, adjusted for amortization of discount when required for federal
income tax purposes.
C. GAINS AND LOSSES FROM SECURITY TRANSACTIONS - For book purposes, gains and
losses are not recognized until disposition. For federal tax purposes, the
Fund is subject to special tax rules that may affect the amount, timing, and
character of gains recognized on certain of the Portfolio's investments. The
Portfolio has elected, under Section 1092 of the Internal Revenue Code, to
utilize mixed straddle accounting for certain designated classes of activities
involving domestic options and domestic financial futures contracts in
determining recognized gains and losses. Under this method, Section 1256
positions (financial futures contracts and options on investments or financial
futures contracts) and non-Section 1256 positions (bonds, etc.) are
marked-to-market on a daily basis resulting in the recognition of taxable
gains and losses on a daily basis. Such gains or losses are categorized as
short-term or long-term based on aggregation rules provided in the Code.
D. INCOME TAXES - The Portfolio is treated as a partnership for federal tax
purposes. No provision is made by the Portfolio for federal or state taxes on
any taxable income of the Portfolio because each investor in the Portfolio is
ultimately responsible for the payment of any taxes. Since some of the
Portfolio s investors are regulated investment companies that invest all or
substantially all of their assets in the Portfolio, the Portfolio normally must
satisfy the applicable source of income and diversification requirements (under
the Code) in order for its investors to satisfy them. The Portfolio will
allocate at least annually among its investors each investor s distributive
share of the Portfolio s net investment income, net realized capital gains, and
any other items of income, gain, loss, deduction or credit.
E. FINANCIAL FUTURES CONTRACTS - Upon the entering of a financial futures
contract, the Portfolio is required to deposit an amount ("initial margin")
either in cash or securities equal to a certain percentage of the purchase price
indicated in the financial futures contract. Subsequent payments are made
or received by the Portfolio ("margin maintenance") each day, dependent on the
daily
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
fluctuations in the value of the underlying security, and are recorded for book
purposes as unrealized gains or losses by the Portfolio. The Portfolio s
investment in financial futures contracts is designed only to hedge against
anticipated future changes in interest or currency exchange rates. Should
interest or currency exchange rates move unexpectedly, the Portfolio may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss. If the Portfolio enters into a closing transaction, the
Portfolio will realize, for book purposes, a gain or loss equal to the
difference between the value of the financial futures contract to sell and
financial futures contract to buy.
F. FOREIGN CURRENCY TRANSLATION - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investment securities and income and expenses are converted
into U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. Recognized gains and losses on investment
transactions attributable to foreign currency rates are recorded for financial
statement purposes as net realized gains and losses on investments. That portion
of unrealized gains and losses on investments that result from fluctuations in
foreign currency exchange rates are not separately disclosed.
G. WRITTEN OPTIONS - The Portfolio may write call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or are closed are offset
against the proceeds or amount paid on the transaction to determine the realized
gain or loss. If a put option is exercised, the premium reduces the cost basis
of the securities purchased by the Portfolio. The Portfolio as a writer of an
option may have no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the securities underlying the written option.
H. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The Portfolio may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific foreign currency at a fixed price on a future date. Risks may arise
upon entering these contracts from the potential inability of counterparties
to meet the terms of their contracts and from movements in the value of a
foreign currency relative to the U.S. dollar. The Portfolio will enter into
forward contracts for hedging purposes as well as non-hedging purposes. The
forward foreign currency exchange contracts are adjusted by the daily exchange
rate of the underlying currency and any gains or losses are recorded for
financial statement purposes as unrealized until such time as the contracts have
been closed or offset.
I. REVERSE REPURCHASE AGREEMENTS - The Portfolio may enter into reverse
repurchase agreements. Under such an agreement, the Portfolio temporarily
transfers possession, but not ownership, of a security to a counterparty, in
return for cash. At the same time, the Portfolio agrees to repurchase the
security at an agreed-upon price and time in the future. The Portfolio may enter
into reverse repurchase agreements for temporary purposes, such as to fund
redemptions, or for use as hedging instruments where the underlying security is
foreign denominated. As a form of leverage, reverse repurchase agreements may
increase the risk of fluctuation in the market value of the Portfolio s assets
or in its yield. Liabilities to counterparties under reverse repurchase
agreements are recognized in the statement of assets and liabilities at the same
time at which cash is received by the Fund. The securities underlying such
agreements continue to be treated as owned by the Fund and remain in the
Portfolio of investments. Interest charged on amounts borrowed by the Portfolio
under reverse repurchase agreements is accrued daily and offset against interest
income for financial statement
<PAGE> 24
- --------------------------------------------------------------------------------
purposes.
J. DEFERRED ORGANIZATION EXPENSE - Costs incurred by the Portfolio in
connection with its organization are being amortized on the straight-line basis
over five years.
K. OTHER - Investment transactions are accounted for on the date the investments
are purchased or sold.
- --------------------------------------------------------------------------------
(2) INVESTMENT ADVISER FEE AND OTHER
TRANSACTIONS WITH AFFILIATES
The investment adviser fee is earned by Boston Management and Research (BMR), a
wholly-owned subsidiary of Eaton Vance Management (EVM), as compensation for
management and investment advisory services rendered to the Portfolio. The fee
is based upon a percentage of average daily net assets plus a percentage of
gross investment income (i.e., income other than gains from the sale of
investments). Such percentages are reduced as average daily net assets exceed
certain levels. For the six months ended April 30, 1995, the fee was equivalent
to 0.55% (annualized) of the Portfolio's average net assets for such period and
amounted to $542,538. An administration fee, computed at an effective annual
rate of 0.15% of average daily net assets was also paid to BMR for
administrative services and office facilities. Such fee amounted to $149,411 for
the six months ended April 30, 1995. Except for Trustees of the Portfolio who
are not members of EVM's or BMR's organization, officers and Trustees receive
remuneration for their services to the Portfolio out of such investment adviser
fee. Investors Bank & Trust Company (IBT), an affiliate of EVM and BMR, serves
as custodian of the Portfolio. Pursuant to the custodian agreement, IBT receives
a fee reduced by credits which are determined based on the average daily cash
balances the Portfolio maintains with IBT. Certain officers of the Portfolio and
Directors of the Corporation are officers and directors/trustees of the above
organizations. Trustees of the Portfolio that are not affiliated with the
Investment Adviser may elect to defer receipt of all or a percentage of their
annual fees in accordance with the terms of the Trustees Deferred Compensation
Plan. For the six months ended April 30, 1995, no significant amounts have been
deferred.
- --------------------------------------------------------------------------------
(3) LINE OF CREDIT
The Portfolio participates with other portfolios and funds managed by BMR or EVM
in a $120 million unsecured line of credit agreement with a bank. The line of
credit consists of a $20 million committed facility and a $100 million
discretionary facility. Borrowings will be made by the Portfolio solely to
facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Interest is charged to each portfolio or fund based on its
borrowings at an amount above either the bank's adjusted certificate of deposit
rate, a variable adjusted certificate of deposit rate, or a federal funds
effective rate. In addition, a fee computed at an annual rate of 1/4 of 1% on
the $20 million committed facility and on the daily unused portion of the
$100 million discretionary facility is allocated among the participating
portfolios and funds at the end of each quarter. The Portfolio did not have any
significant borrowings or allocated fees during the six months ended April 30,
1995.
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
(4) INVESTMENTS
The Portfolio invests primarily in foreign debt securities and U.S. Government
securities, the aggregate of which have a dollar weighted average maturity of
not more than three years. The ability of the issuers of the debt securities to
meet their obligations may be affected by economic developments in a specific
industry or country. Purchases and sales of investments, other than short-term
obligations, for the six months ended April 30, 1995 were as follows:
<S> <C>
Purchases
Investments (non-U.S. Government) $100,916,537
U.S. Government Securities 5,147,873
------------
$106,064,410
============
Sales
Investments (non-U.S. Government) $161,343,280
U.S. Government Securities 7,499,125
------------
$168,842,405
============
</TABLE>
- --------------------------------------------------------------------------------
(5) FINANCIAL INSTRUMENTS
The Portfolio regularly trades in financial instruments with off-balance sheet
risk in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include written
options, forward foreign currency exchange contracts and financial futures
contracts and may involve, to a varying degree, elements of risk in excess of
the amounts recognized for financial statement purposes. The notional or
contractual amounts of these instruments represent the investment the Portfolio
has in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered.
<TABLE>
A summary of obligations under these financial instruments at April 30, 1995 is
as follows:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<CAPTION>
Sales
- ----
In Exchange Net Unrealized
Settlement For (in U.S. Appreciation
Date Deliver Dollars) (Depreciation)
- -------------- ------------------------------------- ------------ --------------
<S> <C> <C> <C> <C>
5/8/95 Australian Dollar 3,000,000 $ 2,208,000 $ 25,700
11/15/95-11/22/95 Belgian Franc 1,043,560,561 33,715,716 (3,065,311)
5/31/95 Canadian Dollar 13,700,000 9,636,992 (415,472)
5/8/95 Deutsche Mark 8,847,921 6,408,565 --
5/31/95-7/18/95 Finnish Markka 82,213,531 18,859,267 (430,082)
6/15/95 Japanese Yen 1,500,000,000 14,943,216 (3,010,779)
8/1/95 New Zealand Dollar 7,467,591 5,000,000 10,249
5/5/95 Phillippine Peso 177,555,000 7,000,000 213,443
5/15/95 Swiss Franc 13,231,745 10,337,301 (1,247,472)
------------ -----------
$108,109,057 $(7,919,724)
============ ===========
</TABLE>
<PAGE> 26
- --------------------------------------------------------------------------------
<TABLE>
(5) FINANCIAL INSTRUMENTS (CONTINUED)
<CAPTION>
Purchases
- --------
Deliver Net Unrealized
Settlement (in United Appreciation
Date In Exchange for States Dollars) (Depreciation)
- ---------------- -------------------------------------- -------------- -----------
<S> <C> <C> <C> <C>
5/8/95 Australian Dollar 3,000,000 $ 2,250,000 $ (67,700)
11/15/95 Belgian Franc 84,612,092 3,011,106 (29,019)
5/31/95-6/1/95 Canadian Dollar 25,894,183 18,726,729 273,062
7/18/95 Czech Rep Koruna 169,905,000 6,443,606 58,441
5/2/95-5/31/95 Deutsche Mark 28,468,494 20,106,642 482,504
5/3/95 Finnish Markka 15,582,850 3,656,401 --
6/13/95-12/5/95 Indonesian Rupiah 40,500,000,000 17,649,037 (15,815)
6/15/95 Japanese Yen 1,024,000,000 10,641,172 1,615,422
5/5/95 Polish Zloty 3,791,080 1,598,937 --
3/6/96 Singapore Dollar 13,300,000 9,433,962 400,337
5/15/95-12/4/95 Thai Baht 322,000,000 12,778,845 155,649
------------ ----------
$106,296,437 $2,872,881
============ ==========
</TABLE>
<TABLE>
FUTURES CONTRACTS
<CAPTION>
Net Unrealized
Appreciation
Expiration Date Contracts Position (Depreciation)
- --------------- --------- -------- --------------
<S> <C> <C> <C>
6/95 111 U.S. 30 year Bond Futures Short $(264,733)
6/95 107 U.S. 5 year Bond Futures Short 44,392
6/95 190 Canadian 10 year Bond Futures Long 270,041
6/95 48 German 10 year Bond Futures Short (31,271)
6/95 50 Italian 10 year Bond Futures Short (136,460)
---------
$(118,031)
=========
</TABLE>
At April 30, 1995, the Portfolio had sufficient cash and/or securities to
cover margin requirements on open futures contracts.
- --------------------------------------------------------------------------------
(6) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation/depreciation in value of the investments
owned at April 30, 1995, as computed on a federal income tax basis, were as
follows:
Aggregate cost $164,754,224
============
Gross unrealized appreciation $ 7,433,010
Gross unrealized depreciation 2,851,095
------------
Net unrealized appreciation $ 4,581,915
============
<PAGE> 27
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REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE TRUSTEES AND INVESTORS OF STRATEGIC INCOME PORTFOLIO:
We have audited the accompanying statement of assets and liabilities of
Strategic Income Portfolio, including the portfolio of investments, as of April
30, 1995, the related statements of operations, changes in net assets and
supplementary data for the six months ended April 30, 1995 and for the period
from March 1, 1994 (start of business) to October 31, 1994. These financial
statements and supplementary data are the responsibility of the Portfolio s
management. Our responsibility is to express an opinion on these financial
statements and supplementary data based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and supplementary
data are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1995 by correspondence with the custodians 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 supplementary data referred to
above present fairly, in all material respects, the financial position of
Strategic Income Portfolio as of April 30, 1995, the results of its operations,
changes in net assets and the supplementary data for the six months ended
April 30, 1995 and for the period from March 1, 1994 (start of business) to
October 31, 1994, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 26, 1995
<PAGE> 28
<TABLE>
- --------------------------------------------------------------------------------
INVESTMENT MANAGEMENT
EV CLASSIC STRATEGIC
STRATEGIC INCOME FUND INCOME PORTFOLIO
- ---------------- ----------------
<S> <C>
OFFICERS OFFICERS
JAMES B. HAWKES JAMES B. HAWKES
President, Director President, Director
MARK S. VENEZIA MARK S. VENEZIA
Vice President Vice President
MARK P. DOMAN MARK P. DOMAN
Assistant Vice President Assistant Vice President
JAMES L. O CONNOR JAMES L. O CONNOR
Treasurer Treasurer
THOMAS OTIS THOMAS OTIS
Secretary Secretary
JAMES F. ALBAN JAMES F. ALBAN
Assistant Treasurer Assistant Treasurer
JANET E. SANDERS JANET E. SANDERS
Assistant Treasurer and Assistant Secretary Assistant Treasurer and Assistant Secretary
A. JOHN MURPHY A. JOHN MURPHY
Assistant Secretary Assistant Secretary
DIRECTORS INDEPENDENT TRUSTEES
LANDON T. CLAY DONALD R. DWIGHT
Chairman, Eaton Vance Corp. President, Dwight Partners, Inc.
Chairman, Newspaper of New England, Inc.
DONALD R. DWIGHT
President, Dwight Partners, Inc. SAMUEL L. HAYES, III
Chairman, Newspapers of New England, Inc. Jacob H. Schiff Professor of Investment Banking,
Harvard University Graduate School of Business
SAMUEL L. HAYES, III Administration
Jacob H. Schiff Professor of Investment Banking,
Harvard University Graduate School of Business NORTON H. REAMER
Administration President and Director,
United Asset Management
NORTON H. REAMER Corporation
President and Director, United Asset Management
Corporation JOHN L. THORNDIKE
Director,
JOHN L. THORNDIKE Fiduciary Company Incorporated
Director, Fiduciary Company Incorporated
JACK L. TREYNOR
JACK L. TREYNOR Investment Adviser and Consultant
Investment Adviser and Consultant
</TABLE>
