<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
PORTFOLIO OF INVESTMENTS
<TABLE>
<S> <C> <C> <C>
BONDS & NOTES -- 95.4%
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Bulgaria -- 1.5%
- -------------------------------------------------------------------------------
Bulgaria Discount Bond (Brady),
5.875%, 7/28/24(1) $ 3,000,000 $ 2,238,750
- -------------------------------------------------------------------------------
Total Bulgaria (identified cost $1,780,513) $ 2,238,750
- -------------------------------------------------------------------------------
Greece -- 2.2%
- -------------------------------------------------------------------------------
Hellenic Republic, 9.20%, 3/21/02 GRD 1,000,000,000 $ 3,271,993
- -------------------------------------------------------------------------------
Total Greece (identified cost $3,762,330) $ 3,271,993
- -------------------------------------------------------------------------------
Indonesia -- 3.1%
- -------------------------------------------------------------------------------
APP Global Finance, 2.00%, 7/25/00 $ 1,500,000 $ 1,500,000
DGS International Finance,
10.00%, 6/1/07 2,000,000 1,410,000
Indah Kiat Finance Mauritius, Sr. Unsec.
Notes, 10.00%, 7/1/07 1,000,000 642,500
Indah Kiat International Finance,
6.15%, 3/14/00 JPY 125,000,000 1,137,725
- -------------------------------------------------------------------------------
Total Indonesia (identified cost $4,401,662) $ 4,690,225
- -------------------------------------------------------------------------------
Malaysia -- 1.0%
- -------------------------------------------------------------------------------
Commerce Asset Holdings, 0.00%, 6/17/02 $ 2,000,000 $ 1,550,000
- -------------------------------------------------------------------------------
Total Malaysia (identified cost $1,461,469) $ 1,550,000
- -------------------------------------------------------------------------------
Mexico -- 7.7%
- -------------------------------------------------------------------------------
Alestra SA, Sr. Notes,
12.125%, 5/15/06(2) $ 1,000,000 $ 972,500
Mexican Discount Bond (Brady),
Series B, w/ attached warrants,
5.875%, 12/31/19(1) 4,000,000 3,510,020
Mexican Discount Bond (Brady),
Series D, w/ attached warrants,
6.068%, 12/31/19(1) 8,000,000 7,020,040
- -------------------------------------------------------------------------------
Total Mexico (identified cost $10,764,248) $ 11,502,560
- -------------------------------------------------------------------------------
Morocco -- 0.6%
- -------------------------------------------------------------------------------
Snap Ltd., 11.50%, 1/29/09 DEM 1,791,595 $ 867,224
- -------------------------------------------------------------------------------
Total Morocco (identified cost $874,302) $ 867,224
- -------------------------------------------------------------------------------
Peru -- 4.2%
- -------------------------------------------------------------------------------
Peru FLIRB (Brady), 3.75%, 3/7/17(1) $ 7,000,000 $ 3,885,035
Peru PDI (Brady), 4.50%, 3/7/17(1) 4,000,000 2,500,020
- -------------------------------------------------------------------------------
Total Peru (identified cost $6,071,584) $ 6,385,055
- -------------------------------------------------------------------------------
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Philippines -- 3.6%
- -------------------------------------------------------------------------------
Bayan Telecommunications,
13.50%, 7/15/06(2) $ 2,000,000 $ 1,900,400
JG Summit Cayman, 3.50%, 12/23/03 2,000,000 1,525,000
Republic of Philippines,
9.875%, 1/15/19 2,000,000 1,942,500
- -------------------------------------------------------------------------------
Total Philippines (identified cost $5,288,569) $ 5,367,900
- -------------------------------------------------------------------------------
Thailand -- 2.4%
- -------------------------------------------------------------------------------
Bangkok Bank, 8.75%, 3/15/07(2) $ 2,000,000 $ 1,660,000
Siam Commercial Bank, 7.50%, 3/15/06(2) 2,400,000 1,932,000
- -------------------------------------------------------------------------------
Total Thailand (identified cost $3,653,820) $ 3,592,000
- -------------------------------------------------------------------------------
Turkey -- 2.7%
- -------------------------------------------------------------------------------
Republic of Turkey, 11.875%, 11/5/04 $ 3,000,000 $ 2,988,840
Republic of Turkey, 12.375%, 6/15/09 1,000,000 1,011,250
- -------------------------------------------------------------------------------
Total Turkey (identified cost $3,978,471) $ 4,000,090
- -------------------------------------------------------------------------------
United Kingdom -- 0.7%
- -------------------------------------------------------------------------------
Esprit Telecom Group PLC,
11.00%, 6/15/08 DEM 2,000,000 $ 1,078,054
- -------------------------------------------------------------------------------
Total United Kingdom (identified cost $1,117,631)
$ 1,078,054
- -------------------------------------------------------------------------------
United States -- 65.7%
- -------------------------------------------------------------------------------
CORPORATE BONDS & NOTES -- 12.9%
American Greetings, 6.10%, 8/1/28 $ 1,000,000 $ 916,180
AT & T Corp., 6.50%, 3/15/29 4,000,000 3,549,160
Baltimore Natural Gas and Electric,
6.73%, 6/12/12 400,000 398,816
Beneficial Corp., 8.40%, 5/15/08 330,000 352,404
Commercial Credit Corp., 7.875%, 2/1/25 2,000,000 2,153,080
Dayton Hudson Medium Term Notes,
5.865%, 8/15/27 1,000,000 995,750
Dayton Hudson Medium Term Notes,
9.52%, 6/10/15 350,000 404,964
Ford Motor Co., 7.45%, 7/16/31 2,000,000 1,975,800
General Motors Acceptance Corp.,
8.875%, 6/1/10 1,000,000 1,117,120
Johnson Controls, 7.70%, 3/1/15 1,000,000 1,037,700
Motorola, Inc., 6.50%, 9/1/25 300,000 294,198
Motorola, Inc., 8.40%, 8/15/31 1,500,000 1,659,240
NBD Bank N.A., 8.25%, 11/1/24 610,000 652,938
Procter and Gamble Co., 8.00%, 9/1/24 1,500,000 1,665,975
TRW, Inc., Medium Term Notes,
9.35%, 6/4/20 1,900,000 2,152,339
- -------------------------------------------------------------------------------
Total Corporate Bonds & Notes
(identified cost $19,454,870) $ 19,325,664
- -------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
PORTFOLIO OF INVESTMENTS CONT'D
<TABLE>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
United States (continued)
- -------------------------------------------------------------------------------
MORTGAGE PASS-THROUGHS -- 39.0%
Federal Home Loan Mortgage Corp.:
4.75% with maturity at 2001 $ 4,416 $ 4,373
8.00% with various maturities to 2021 6,639,623 6,788,618
8.50% with various maturities to 2019 1,325,320 1,374,408
9.00% with maturity at 2019 388,812 407,654
9.25% with various maturities to 2016 4,305,336 4,507,683
9.50% with maturity at 2015 1,476,023 1,547,054
9.75% with various maturities to 2020 1,051,718 1,119,986
10.50% with maturity at 2020 764,183 827,145
11.00% with maturity at 2019 1,656,327 1,797,251
11.25% with maturity at 2010 224,616 243,626
12.50% with various maturities to 2019 1,903,746 2,158,700
12.75% with maturity at 2013 98,893 111,034
13.25% with maturity at 2013 90,641 102,981
13.50% with maturity at 2019 221,035 253,217
- -------------------------------------------------------------------------------
$ 21,243,730
- -------------------------------------------------------------------------------
Federal National Mortgage Association:
5.00% with maturity at 2003 $ 44,337 $ 43,741
5.50% with maturity at 2012 3,602 3,513
7.00% with maturity at 2014 3,533,322 3,538,138
7.50% with various maturities to 2018 2,175,255 2,208,970
8.00% with various maturities to 2019 1,827,310 1,868,682
8.50% with various maturities to 2026 7,179,281 7,436,997
9.00% with various maturities to 2021 3,627,553 3,793,211
9.50% with maturity at 2013 1,639,218 1,738,934
11.00% with maturity at 2025 775,686 852,389
12.00% with maturity at 2015 580,371 649,011
12.50% with maturity at 2015 3,649,600 4,132,223
12.75% with maturity at 2014 76,972 86,787
13.00% with various maturities to 2027 1,855,182 2,114,015
13.25% with maturity at 2014 196,077 227,031
13.50% with various maturities to 2015 1,075,072 1,225,794
14.75% with maturity at 2012 1,556,330 1,826,289
- -------------------------------------------------------------------------------
$ 31,745,725
- -------------------------------------------------------------------------------
Government National Mortgage Association:
6.50% with maturity at 2002 $ 392,604 $ 394,206
7.50% with maturity at 2017 659,192 671,552
8.30% with maturity at 2020 825,730 857,699
8.50% with maturity at 2009 728,506 752,790
9.00% with maturity at 2016 492,690 517,666
12.50% with maturity at 2019 2,041,014 2,280,184
13.50% with maturity at 2014 175,591 201,109
- -------------------------------------------------------------------------------
$ 5,675,206
- -------------------------------------------------------------------------------
Total Mortgage Pass-Throughs
(identified cost $60,002,240) $ 58,664,661
- -------------------------------------------------------------------------------
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
United States (continued)
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DEBENTURES -- 12.4%
Federal Home Loan Mortgage Corp.,
6.45%, 4/29/09 $ 6,000,000 $ 5,699,040
Federal National Mortgage Association,
6.00%, 5/15/08 3,000,000 2,859,360
Federal National Mortgage Association,
6.25%, 5/15/29 11,000,000 10,084,690
- -------------------------------------------------------------------------------
Total U.S. Government Agency Debentures
(identified cost $18,556,066) $ 18,643,090
- -------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 1.4%
United States Treasury Bond, 11.75%, 2/15/01(3)
(identified cost $2,603,438) $ 2,000,000 $ 2,147,020
- -------------------------------------------------------------------------------
Total United States
(identified cost $100,616,614) $ 98,780,435
- -------------------------------------------------------------------------------
Total Bonds & Notes
(identified cost $143,771,213) $143,324,286
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 4.9%
SECURITY PRINCIPAL VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
Banque National De Paris Euro Time-deposit
Cayman Islands, 5.25%, 11/1/99 $ 7,400,000 $ 7,400,000
- -------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $7,400,000) $ 7,400,000
- -------------------------------------------------------------------------------
Total Investments -- 100.3%
(identified cost $151,171,213) $150,724,286
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities -- (0.3)% $ (442,211)
- -------------------------------------------------------------------------------
Net Assets -- 100.0% $150,282,075
- -------------------------------------------------------------------------------
</TABLE>
DEM - Deutsche Mark
GRD - Greek Drachma
JPY - Japanese Yen
(1) Variable rate security.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(3) Security (or a portion thereof) has been segregated to cover margin
requirements on open financial futures contracts.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1999
<S> <C>
Assets
- ------------------------------------------------------
Investments, at value
(identified cost, $151,171,213) $150,724,286
Cash 8,483
Receivable for investments sold 204,900
Interest receivable 2,534,146
Other assets 44,150
- ------------------------------------------------------
TOTAL ASSETS $153,515,965
- ------------------------------------------------------
Liabilities
- ------------------------------------------------------
Payable for investments purchased $ 2,988,840
Payable for open forward currency
contracts 86,014
Payable to affiliate for Trustees' fees 694
Payable for daily variation margin on
open financial futures
contracts, net 30,468
Accrued expenses 127,874
- ------------------------------------------------------
TOTAL LIABILITIES $ 3,233,890
- ------------------------------------------------------
NET ASSETS APPLICABLE TO INVESTORS'
INTEREST IN PORTFOLIO $150,282,075
- ------------------------------------------------------
Sources of Net Assets
- ------------------------------------------------------
Net proceeds from capital contributions
and withdrawals $150,725,996
Net unrealized depreciation (computed on
the basis of identified cost) (443,921)
- ------------------------------------------------------
TOTAL $150,282,075
- ------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
OCTOBER 31, 1999
<S> <C>
Investment Income
- -----------------------------------------------------
Interest (net of foreign taxes, $89,585) $13,826,915
- -----------------------------------------------------
TOTAL INVESTMENT INCOME $13,826,915
- -----------------------------------------------------
Expenses
- -----------------------------------------------------
Investment adviser fee $ 768,111
Administration fee 208,472
Trustees fees and expenses 17,211
Custodian fee 99,110
Legal and accounting services 84,544
Amortization of organization expenses 1,558
Miscellaneous 10,691
- -----------------------------------------------------
TOTAL EXPENSES $ 1,189,697
- -----------------------------------------------------
NET INVESTMENT INCOME $12,637,218
- -----------------------------------------------------
Realized and Unrealized Gain (Loss)
- -----------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified
cost basis) $(5,187,644)
Financial futures contracts (1,885,966)
Written options 188,125
Foreign currency and forward foreign
currency exchange
contract transactions (1,825,129)
- -----------------------------------------------------
NET REALIZED LOSS $(8,710,614)
- -----------------------------------------------------
Change in unrealized appreciation
(depreciation) --
Investments (identified cost basis) $ 3,811,833
Financial futures contracts 517,506
Written options (110,000)
Foreign currency and forward foreign
currency exchange contracts 976,957
- -----------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) $ 5,196,296
- -----------------------------------------------------
NET REALIZED AND UNREALIZED LOSS $(3,514,318)
- -----------------------------------------------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS $ 9,122,900
- -----------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
FINANCIAL STATEMENTS CONT'D
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Increase (Decrease) YEAR ENDED YEAR ENDED
in Net Assets OCTOBER 31, 1999 OCTOBER 31, 1998
<S> <C> <C>
- ----------------------------------------------------------------------------
From operations --
Net investment income $ 12,637,218 $ 11,309,422
Net realized gain (loss) (8,710,614) 1,190,706
Net change in unrealized
appreciation (depreciation) 5,196,296 (11,251,878)
- ----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS $ 9,122,900 $ 1,248,250
- ----------------------------------------------------------------------------
Capital transactions --
Contributions $ 63,662,682 $ 63,230,486
Withdrawals (60,949,450) (47,288,792)
- ----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM
CAPITAL TRANSACTIONS $ 2,713,232 $ 15,941,694
- ----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS $ 11,836,132 $ 17,189,944
- ----------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------
At beginning of year $ 138,445,943 $ 121,255,999
- ----------------------------------------------------------------------------
AT END OF YEAR $ 150,282,075 $ 138,445,943
- ----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
FINANCIAL STATEMENTS CONT'D
SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Ratios to average daily net assets
- --------------------------------------------------------------------------------
Expenses 0.86% 0.83% 0.86% 0.86% 0.84%
Net investment income 9.14% 8.31% 8.06% 8.62% 9.08%
Portfolio Turnover 47% 71% 77% 71% 78%
- --------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000'S OMITTED) $150,282 $138,446 $121,256 $132,407 $152,583
- --------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
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. The
Portfolio, which was organized as a trust under the laws of the State of New
York in 1992, seeks to provide a high level of income by investing in a
global portfolio consisting primarily of high grade debt securities. The
Declaration of Trust permits the Trustees to issue beneficial interests in
the Portfolio. The following is a summary of significant accounting policies
of the Portfolio. The policies are in conformity with generally accepted
accounting principles.
A Investment Valuation -- 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 an independent matrix
pricing system applied by the advisor which takes into account closing bond
valuations, yield differentials, anticipated prepayments and interest rates
provided by dealers. Financial futures contracts listed on commodity
exchanges and exchange-traded options are valued at closing settlement
prices. 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 to 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 premium or accretion of
discount when required for federal income tax purposes.
C Gains and Losses From Investment Transactions -- Realized gains and losses
from investment transactions are recorded on the basis of identified cost. For
book purposes, gains and losses are not recognized until disposition. For
federal tax purposes, the Portfolio is subject to special tax rules that may
affect the amount, timing and character of gains recognized on certain of the
Portfolio's investments.
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 Internal Revenue 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 entering into 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 ("variation margin") each day, dependent on
the daily 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 for
both hedging against anticipated future changes in interest or currency
exchange rates and investment purposes. 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 or losses on
investment transactions attributable to changes in foreign currency exchange
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 results from fluctuations in foreign currency exchange rates
is 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
21
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
NOTES TO FINANCIAL STATEMENTS CONT'D
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 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.
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 withdrawals, or for use as hedging instruments where the underlying
security is denominated in a foreign currency. 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 Portfolio. The securities underlying such agreements continue
to be treated as owned by the Portfolio 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 purposes.
J Expense Reduction -- Investors Bank & Trust Company (IBT) 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
balance the Portfolio maintains with IBT. All significant credit balances
used to reduce the Portfolio custodian fees are reflected as a reduction of
operating expenses on the Statement of Operations. For the year ended October
31, 1999, $1,443 in credit balances were used to reduce the Portfolio's
custodian fee.
K Deferred Organization Expenses -- Costs incurred by the Portfolio in
connection with its organization were being amortized on the straight-line
basis over five years and are fully amortized at October 31, 1999.
L Use of Estimates -- The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of income and expense during the reporting period. Actual results could
differ from those estimates.
M Other -- Investment transactions are accounted for on a trade date basis.
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 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 year ended October 31, 1999, the fee was equivalent
to 0.56% of the Portfolio's average net assets for such period and amounted
to $768,111. 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 $208,472 for the year
ended October 31, 1999.
Except as to 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. Trustees of the
Portfolio
22
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
NOTES TO FINANCIAL STATEMENTS CONT'D
that are not affiliated with the Investment Adviser may elect to defer
receipt of all or a portion of their annual fees in accordance with the terms
of the Trustees Deferred Compensation Plan. For the year ended October 31,
1999, no significant amounts have been deferred. Certain of the officers and
Trustees of the Portfolios are officers of the above organizations.
3 Line of Credit
- -------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR or
EVM and its affiliates in a $120 million unsecured line of credit agreement
with a group of banks. The Portfolio may temporarily borrow from the line of
credit to satisfy redemption requests or settle investment transactions.
Interest is charged to each portfolio or fund based on its borrowings at an
amount above the Eurodollar rate or federal funds rate. In addition, a fee
computed at an annual rate of 0.10% on the daily unused portion of the line
of credit 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 period.
4 Investment Transactions
- -------------------------------------------
The Portfolio invests primarily in foreign government and U.S. Government
debt securities. 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. The Portfolio regularly invests in lower rated and
comparable quality unrated high yield securities. These investments have
different risks than investments in debt securities rated investment grade
and held by the Portfolio. Risk of loss upon default by the borrower is
significantly greater with respect to such debt securities than with other
debt securities because these securities are generally unsecured and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than are investment grade issuers. At October 31, 1999, the
Portfolio had invested approximately 27.5% of its net assets or approximately
$41,272,000 in high yield securities. Purchases and sales of investments,
other than short-term obligations, for the year ended October 31, 1999 were
as follows:
<TABLE>
<CAPTION>
PURCHASES
<S> <C>
-----------------------------------------------------
Investments (non-U.S. Government) $67,802,079
U.S. Government Securities 22,786,072
-----------------------------------------------------
$90,588,151
-----------------------------------------------------
<CAPTION>
SALES
<S> <C>
-----------------------------------------------------
Investments (non-U.S. Government) $57,072,676
U.S. Government Securities 3,236,019
-----------------------------------------------------
$60,308,695
-----------------------------------------------------
</TABLE>
5 Financial Instruments
- -------------------------------------------
The Portfolio regularly trades in financial instruments with off-balance
sheet risk in the normal course of its investing activities and to assist in
managing exposure to various market risks. These financial instruments
include written options, forward foreign currency 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. A summary of
obligations under these financial instruments at October 31, 1999 is as
follows:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
SALES
----------------------------------------------------------------------------------------
NET UNREALIZED
SETTLEMENT IN EXCHANGE FOR APPRECIATION
DATE(S) DELIVER (IN U.S. DOLLARS) (DEPRECIATION)
<C> <S> <C> <C>
----------------------------------------------------------------------------------------
11/12/99 Euro Dollar
5,200,000 $ 5,484,752 $ 24,614
11/10/99 Japanese Yen
961,991,267 9,153,105 (79,908)
----------------------------------------------------------------------------------------
$14,637,857 $(55,294)
----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PURCHASES
----------------------------------------------------------------------------------------
SETTLEMENT DELIVER NET UNREALIZED
DATE(S) IN EXCHANGE FOR (IN U.S. DOLLARS) DEPRECIATION
<C> <S> <C> <C>
----------------------------------------------------------------------------------------
11/30/99 Australian Dollar
5,700,000 $3,667,950 $(18,848)
11/22/99 Philippine Peso
120,210,000 3,000,000 (11,872)
----------------------------------------------------------------------------------------
$6,667,950 $(30,720)
----------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
NOTES TO FINANCIAL STATEMENTS CONT'D
<TABLE>
<CAPTION>
FUTURES CONTRACTS
-------------------------------------------------------------------------------
EXPIRATION NET UNREALIZED
DATE(S) CONTRACTS POSITION APPRECIATION
<C> <S> <C> <C>
-------------------------------------------------------------------------------
12/99 35 Euro-Bond Long $41,999
12/99 49 US Treasury Bond Short 23,250
-------------------------------------------------------------------------------
$65,249
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WRITTEN CALL OPTIONS
-----------------------------------------------------------------------------
NUMBER OF CONTRACTS PREMIUMS
<S> <C> <C>
-----------------------------------------------------------------------------
Outstanding, beginning of year 160 $ 188,125
Options expired (160) (188,125)
-----------------------------------------------------------------------------
OUTSTANDING, END OF YEAR -- $ --
-----------------------------------------------------------------------------
</TABLE>
At October 31, 1999, the Portfolio had sufficient cash and/ or securities to
cover potential obligations arising from open futures and forward contracts,
as well as margin requirements on open futures contracts.
6 Federal Income Tax Basis of Investments
- -------------------------------------------
The cost and unrealized appreciation (depreciation) in value of the
investment securities at October 31, 1999, as computed on a federal income
tax basis, were as follows:
<TABLE>
<S> <C>
AGGREGATE COST $151,286,370
------------------------------------------------------
Gross unrealized appreciation $ 2,499,094
Gross unrealized depreciation (3,061,178)
------------------------------------------------------
NET UNREALIZED DEPRECIATION $ (562,084)
------------------------------------------------------
</TABLE>
24
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
INDEPENDENT ACCOUNTANTS' REPORT
TO THE TRUSTEES AND INVESTORS
OF STRATEGIC INCOME PORTFOLIO:
- ---------------------------------------------
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and supplementary data present fairly, in all material
respects, the financial position of Strategic Income Portfolio (the "Portfolio")
at October 31, 1999, and the results of its operations, the changes in its net
assets, and the supplementary data for the periods presented, in conformity with
generally accepted accounting principles. These financial statements and
supplementary data (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 8, 1999
25
<PAGE>
STRATEGIC INCOME PORTFOLIO
Officers
James B. Hawkes
President and Trustee
Mark S. Venezia
Vice President
James L. O'Connor
Treasurer
Alan R. Dynner
Secretary
Trustees
Jessica M. Bibliowicz
President and Chief Executive Officer
National Financial Partners
Donald R. Dwight
President, Dwight Partners, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Banking Emeritus, Harvard University Graduate
School of Business Administration
Norton H. Reamer
Chairman and Chief Executive Officer,
United Asset Management Corporation
Lynn A. Stout
Professor of Law,
Georgetown University Law Center
Jack L. Treynor
Investment Adviser and Consultant
26
