<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
PORTFOLIO OF INVESTMENTS
BONDS & NOTES -- 93.5%
<TABLE>
<CAPTION>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
-----------------------------------------------------------------------------
Argentina -- 1.2%
-----------------------------------------------------------------------------
Cablevision SA, 13.75%, 4/30/07(1) $ 2,000,000 $ 1,940,000
-----------------------------------------------------------------------------
Total Argentina (identified cost $1,977,506) $ 1,940,000
-----------------------------------------------------------------------------
Brazil -- 4.4%
-----------------------------------------------------------------------------
Brazil Discount Bond (Brady),
7.375%, 4/15/24(2) $ 9,000,000 $ 6,969,420
-----------------------------------------------------------------------------
Total Brazil (identified cost $7,058,959) $ 6,969,420
-----------------------------------------------------------------------------
Bulgaria -- 1.4%
-----------------------------------------------------------------------------
Bulgaria Discount Bond (Brady),
Series A, 7.063%, 7/28/24(2) $ 3,000,000 $ 2,302,500
-----------------------------------------------------------------------------
Total Bulgaria (identified cost $1,805,069) $ 2,302,500
-----------------------------------------------------------------------------
Greece -- 1.8%
-----------------------------------------------------------------------------
Hellenic Republic, 9.20%, 3/21/02 GRD 1,000,000,000 $ 2,855,018
-----------------------------------------------------------------------------
Total Greece (identified cost $3,762,330) $ 2,855,018
-----------------------------------------------------------------------------
Indonesia -- 3.7%
-----------------------------------------------------------------------------
APP Finance VI, 0.00%, 11/18/12 $ 4,000,000 $ 720,000
APP Finance VII, 3.50%, 4/30/03(3) 1,000,000 790,000
APP Global Finance V, 2.00%, 7/25/00(3) 2,000,000 2,360,000
DGS International Finance,
10.00%, 6/1/07 2,000,000 660,000
Indah Kiat Finance Mauritius, Sr. Unsec.
Notes, 10.00%, 7/1/07 1,000,000 652,500
Indah Kiat International Finance,
12.50%, 6/15/06 1,000,000 760,000
-----------------------------------------------------------------------------
Total Indonesia (identified cost $6,455,131) $ 5,942,500
-----------------------------------------------------------------------------
Mexico -- 1.8%
-----------------------------------------------------------------------------
Alestra SA, Sr. Notes, 12.125%, 5/15/06 $ 3,000,000 $ 2,910,000
-----------------------------------------------------------------------------
Total Mexico (identified cost $3,000,000) $ 2,910,000
-----------------------------------------------------------------------------
Morocco -- 0.4%
-----------------------------------------------------------------------------
Snap Ltd., 11.50%, 1/29/09 DEM 1,612,500 $ 679,579
-----------------------------------------------------------------------------
Total Morocco (identified cost $791,573) $ 679,579
-----------------------------------------------------------------------------
Peru -- 4.4%
-----------------------------------------------------------------------------
Peru FLIRB (Brady), 3.75%, 3/7/17(2) $ 7,000,000 $ 4,291,875
Peru PDI (Brady), 4.50%, 3/7/17(2) 4,000,000 2,691,520
-----------------------------------------------------------------------------
Total Peru (identified cost $6,249,254) $ 6,983,395
-----------------------------------------------------------------------------
<CAPTION>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
-----------------------------------------------------------------------------
Philippines -- 1.5%
-----------------------------------------------------------------------------
Bayan Telecommunications,
13.50%, 7/15/06(1) $ 2,000,000 $ 1,450,000
Republic of Philippines,
10.625%, 3/16/25 1,000,000 927,500
-----------------------------------------------------------------------------
Total Philippines (identified cost $2,875,092) $ 2,377,500
-----------------------------------------------------------------------------
Poland -- 3.2%
-----------------------------------------------------------------------------
Poland Government Bond, 8.50%, 2/12/05 PLN 28,000,000 $ 5,125,000
-----------------------------------------------------------------------------
Total Poland (identified cost $5,754,134) $ 5,125,000
-----------------------------------------------------------------------------
Republic of Korea -- 0.9%
-----------------------------------------------------------------------------
Cho Hung Bank, Sub. Notes,
11.50%, 4/1/10(1) $ 1,500,000 $ 1,477,500
-----------------------------------------------------------------------------
Total Republic of Korea (identified cost $1,500,000)
$ 1,477,500
-----------------------------------------------------------------------------
Taiwan -- 4.6%
-----------------------------------------------------------------------------
Acer, Inc., 0.00%, 2/1/05(1)(3) $ 2,000,000 $ 1,990,000
Macronix International Co.,
1.00%, 2/1/05(1)(3) 1,500,000 1,942,500
Mosel Vitelic, Inc.,
1.00%, 2/2/05(1)(3) 3,000,000 3,435,000
-----------------------------------------------------------------------------
Total Taiwan (identified cost $6,977,501) $ 7,367,500
-----------------------------------------------------------------------------
Thailand -- 1.1%
-----------------------------------------------------------------------------
Bangkok Bank, 8.75%, 3/15/07(1) $ 2,000,000 $ 1,720,000
-----------------------------------------------------------------------------
Total Thailand (identified cost $1,689,847) $ 1,720,000
-----------------------------------------------------------------------------
Turkey -- 2.7%
-----------------------------------------------------------------------------
Republic of Turkey, 11.875%, 1/15/30 $ 3,000,000 $ 3,243,750
Republic of Turkey, 12.375%, 6/15/09 1,000,000 1,090,000
-----------------------------------------------------------------------------
Total Turkey (identified cost $4,115,930) $ 4,333,750
-----------------------------------------------------------------------------
United Kingdom -- 0.5%
-----------------------------------------------------------------------------
Esprit Telecom Group PLC,
11.00%, 6/15/08 DEM 2,000,000 $ 870,830
-----------------------------------------------------------------------------
Total United Kingdom (identified cost $1,117,631)
$ 870,830
-----------------------------------------------------------------------------
United States -- 59.9%
-----------------------------------------------------------------------------
CORPORATE BONDS & NOTES -- 15.4%
American Greetings, 6.10%, 8/1/28 $ 1,000,000 $ 863,320
AT & T Corp., 6.50%, 3/15/29 4,000,000 3,384,360
Baltimore Natural Gas and Electric,
6.73%, 6/12/12 400,000 388,540
Bellsouth Capital Fund, 6.04%, 11/15/26 300,000 294,294
Beneficial Corp., 8.40%, 5/15/08 330,000 336,115
Commercial Credit Corp., 7.875%, 2/1/25 2,000,000 2,026,740
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
PORTFOLIO OF INVESTMENTS CONT'D
<TABLE>
<CAPTION>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
-----------------------------------------------------------------------------
United States (continued)
-----------------------------------------------------------------------------
Dayton Hudson, Medium Term Notes,
5.865%, 8/15/27 $ 1,000,000 $ 996,860
Dayton Hudson, Medium Term Notes,
9.52%, 6/10/15 350,000 407,652
Eaton Corp., 8.875%, 6/15/19 500,000 564,915
Ford Holdings, 9.30%, 3/1/30 1,000,000 1,123,810
Ford Motor Co., 7.45%, 7/16/31 2,000,000 1,899,320
General Motors Acceptance Corp.,
8.875%, 6/1/10 1,000,000 1,053,920
Grand Metropolitan Investments Corp.,
7.45%, 4/15/35 300,000 297,486
Ingersoll-Rand, 6.48%, 6/1/25 1,000,000 931,160
Johnson Controls, 7.70%, 3/1/15 1,500,000 1,554,810
Level 3 Communications, Inc., Sr. Notes,
11.25%, 3/15/10(1) EUR 1,000,000 880,154
Motorola, Inc., 6.50%, 9/1/25 300,000 288,081
Motorola, Inc., 8.40%, 8/15/31 1,500,000 1,621,350
NBD Bank N.A., 8.25%, 11/1/24 610,000 632,296
Northwest National Gas, 6.80%, 5/21/07 250,000 249,045
Penney (JC) Co., Inc., 7.40%, 4/1/37 300,000 253,896
Procter and Gamble Co., 8.00%, 9/1/24 1,500,000 1,555,635
TRW, Inc., Medium Term Notes,
9.35%, 6/4/20 1,900,000 2,177,210
Worldcom, Inc., 7.75%, 4/1/27 1,000,000 967,520
-----------------------------------------------------------------------------
Total Corporate Bonds & Notes (identified cost, $25,690,572)
$ 24,748,489
-----------------------------------------------------------------------------
MORTGAGE PASS-THROUGHS -- 31.9%
Federal Home Loan Mortgage Corp.:
4.75% with maturity at 2001 $ 1,084 $ 1,063
8.00% with various maturities to 2021 5,931,915 5,957,356
8.50% with various maturities to 2019 1,185,102 1,212,224
9.00% with maturity at 2019 346,969 359,517
9.25% with various maturities to 2016 3,850,105 3,963,716
9.50% with maturity at 2015 1,319,497 1,359,318
9.75% with various maturities to 2020 915,317 956,140
10.50% with maturity at 2020 638,886 682,630
11.00% with maturity at 2019 1,474,722 1,577,350
11.25% with maturity at 2010 216,040 230,711
12.50% with various maturities to
2019 1,604,539 1,797,258
12.75% with maturity at 2013 95,523 105,809
13.25% with maturity at 2013 70,000 78,586
13.50% with maturity at 2019 197,153 222,985
-----------------------------------------------------------------------------
$ 18,504,663
-----------------------------------------------------------------------------
Federal National Mortgage Association:
5.00% with maturity at 2003 $ 34,584 $ 33,665
5.50% with maturity at 2012 3,263 3,133
7.00% with maturity at 2014 3,327,683 3,285,229
7.50% with various maturities to 2018 1,949,075 1,947,248
<CAPTION>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
-----------------------------------------------------------------------------
United States (continued)
-----------------------------------------------------------------------------
8.00% with various maturities to 2019 $ 1,616,858 $ 1,629,547
8.50% with various maturities to 2026 4,548,076 4,643,618
9.00% with various maturities to 2021 3,224,683 3,321,458
9.50% with maturity at 2013 1,492,734 1,559,590
11.00% with maturity at 2025 692,433 751,653
11.50% with maturity at 2019 1,425,210 1,576,038
12.00% with maturity at 2015 532,415 588,722
12.50% with maturity at 2015 3,170,200 3,543,827
12.75% with maturity at 2014 76,145 85,997
13.00% with various maturities to
2027 1,669,538 1,885,757
13.25% with maturity at 2014 148,872 171,000
13.50% with various maturities to
2015 830,152 935,727
14.75% with maturity at 2012 1,484,174 1,729,615
-----------------------------------------------------------------------------
$ 27,691,824
-----------------------------------------------------------------------------
Government National Mortgage Association:
6.50% with maturity at 2002 $ 342,604 $ 338,504
7.50% with maturity at 2017 514,567 519,467
8.30% with maturity at 2020 774,195 792,002
8.50% with maturity at 2009 615,535 625,112
9.00% with maturity at 2016 449,928 465,783
12.50% with maturity at 2019 1,790,600 2,008,561
13.50% with maturity at 2014 161,486 185,638
-----------------------------------------------------------------------------
$ 4,935,067
-----------------------------------------------------------------------------
Total Mortgage Pass-Throughs (identified cost, $52,958,521)
$ 51,131,554
-----------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DEBENTURES -- 11.3%
Federal Home Loan Mortgage Corp.,
6.45%, 4/29/09 $ 6,000,000 $ 5,536,380
Federal Home Loan Mortgage Corp.,
6.625%, 9/15/09 3,000,000 2,859,840
Federal National Mortgage Association,
6.25%, 5/15/29 11,000,000 9,740,170
-----------------------------------------------------------------------------
Total U.S. Government Agency Debentures
(identified cost, $18,694,568) $ 18,136,390
-----------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 1.3%
United States Treasury Bond,
11.75%, 2/15/01(4)
-(identified cost, $2,603,437) $ 2,000,000 $ 2,083,740
-----------------------------------------------------------------------------
Total United States (identified cost $99,947,098)
$ 96,100,173
-----------------------------------------------------------------------------
Total Bonds & Notes (identified cost, $155,077,055)
$149,954,665
-----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
PORTFOLIO OF INVESTMENTS CONT'D
U.S. COMMON STOCKS -- 1.0%
<TABLE>
<CAPTION>
SECURITY SHARES VALUE
<S> <C> <C> <C>
-----------------------------------------------------------------------------
REITS -- 1.0%
-----------------------------------------------------------------------------
Archstone Communities Trust 19,500 $ 421,687
Duke-Weeks Realty Corp. 20,500 444,594
Public Storage, Inc. 33,000 738,375
-----------------------------------------------------------------------------
Total U.S. Common Stocks (identified cost $1,579,315)
$ 1,604,656
-----------------------------------------------------------------------------
</TABLE>
SHORT-TERM INVESTMENTS -- 3.4%
<TABLE>
<CAPTION>
SECURITY PRINCIPAL VALUE
<S> <C> <C> <C>
-----------------------------------------------------------------------------
Banque National De Paris Euro
Time-deposit Cayman Islands,
5.938%, 5/1/00 $ 5,400,000 $ 5,400,000
-----------------------------------------------------------------------------
Total Short-Term Investments (at amortized cost, $5,400,000)
$ 5,400,000
-----------------------------------------------------------------------------
Total Investments -- 97.9%
(identified cost $162,056,370) $156,959,321
-----------------------------------------------------------------------------
Other Assets, Less Liabilities -- 2.1% $ 3,336,480
-----------------------------------------------------------------------------
Net Assets -- 100.0% $160,295,801
-----------------------------------------------------------------------------
</TABLE>
DEM - Deutsche Mark
EUR - Euro
GRD - Greek Drachma
PLN - Polish Zloty
REIT - Real Estate Investment Trust
(1) 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.
(2) Variable rate security.
(3) Convertible Bond
(4) Security (or a portion thereof) has been segregated to cover margin
requirements on open financial futures contracts.
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
AS OF APRIL 30, 2000
<S> <C>
Assets
------------------------------------------------------
Investments, at value
(identified cost, $162,056,370) $156,959,321
Cash 31,938
Receivable for investments sold 169,048
Interest receivable 2,521,336
Receivable for daily variation margin on
open financial futures
contracts, net 54,751
Receivable for open forward foreign
currency contracts, net 730,953
------------------------------------------------------
TOTAL ASSETS $160,467,347
------------------------------------------------------
Liabilities
------------------------------------------------------
Payable to affiliate for Trustees' fees $ 3,890
Accrued expenses 167,656
------------------------------------------------------
TOTAL LIABILITIES $ 171,546
------------------------------------------------------
NET ASSETS APPLICABLE TO INVESTORS'
INTEREST IN PORTFOLIO $160,295,801
------------------------------------------------------
Sources of Net Assets
------------------------------------------------------
Net proceeds from capital contributions
and withdrawals $164,555,708
Net unrealized depreciation (computed on
the basis of identified cost) (4,259,907)
------------------------------------------------------
TOTAL $160,295,801
------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
APRIL 30, 2000
<S> <C>
Investment Income
-----------------------------------------------------
Interest $ 6,719,237
Dividends 73,606
-----------------------------------------------------
TOTAL INVESTMENT INCOME $ 6,792,843
-----------------------------------------------------
Expenses
-----------------------------------------------------
Investment adviser fee $ 393,606
Administration fee 112,881
Trustees fees and expenses 10,838
Legal and accounting services 100,390
Custodian fee 43,274
Miscellaneous 571
-----------------------------------------------------
TOTAL EXPENSES $ 661,560
-----------------------------------------------------
NET INVESTMENT INCOME $ 6,131,283
-----------------------------------------------------
Realized and Unrealized Gain (Loss)
-----------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified
cost basis) $ 1,470,874
Financial futures contracts (360,143)
Foreign currency and forward foreign
currency exchange
contract transactions 722,176
-----------------------------------------------------
NET REALIZED GAIN $ 1,832,907
-----------------------------------------------------
Change in unrealized appreciation
(depreciation) --
Investments (identified cost basis) $(4,650,122)
Financial futures contracts 50,692
Foreign currency and forward foreign
currency exchange contracts 783,444
-----------------------------------------------------
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) $(3,815,986)
-----------------------------------------------------
NET REALIZED AND UNREALIZED LOSS $(1,983,079)
-----------------------------------------------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS $ 4,148,204
-----------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
FINANCIAL STATEMENTS CONT'D
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INCREASE (DECREASE) SIX MONTHS ENDED YEAR ENDED
IN NET ASSETS APRIL 30, 2000 OCTOBER 31, 1999
<S> <C> <C>
----------------------------------------------------------------------------
From operations --
Net investment income $ 6,131,283 $ 12,637,218
Net realized gain (loss) 1,832,907 (8,710,614)
Net change in unrealized
appreciation (depreciation) (3,815,986) 5,196,296
----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS $ 4,148,204 $ 9,122,900
----------------------------------------------------------------------------
Capital transactions --
Contributions $ 29,545,557 $ 63,662,682
Withdrawals (23,680,035) (60,949,450)
----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM
CAPITAL TRANSACTIONS $ 5,865,522 $ 2,713,232
----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS $ 10,013,726 $ 11,836,132
----------------------------------------------------------------------------
Net Assets
----------------------------------------------------------------------------
At beginning of period $ 150,282,075 $ 138,445,943
----------------------------------------------------------------------------
AT END OF PERIOD $ 160,295,801 $ 150,282,075
----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
FINANCIAL STATEMENTS CONT'D
SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED --------------------------------------------------------------
APRIL 30, 2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
------------------------------------------------------------------------------------------------------------------
Ratios (As a percentage of
average daily net assets):
Expenses 0.88%(1) 0.86% 0.83% 0.86% 0.86% 0.84%
Net investment income 8.14%(1) 9.14% 8.31% 8.06% 8.62% 9.08%
Portfolio Turnover 27% 47% 71% 77% 71% 78%
------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(000'S OMITTED) $160,296 $150,282 $138,446 $121,256 $132,407 $152,583
------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
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. Equity securities listed on securities exchanges or in the NASDAQ
National Market are valued at closing sales prices or, if there has been no
sale, at the mean between the closing bid and asked prices. Unlisted
securities are valued at the mean between the latest available bid and asked
prices. 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. Dividend income is
recorded on the ex-dividend date for dividends received in cash and/or
securities. However, if the ex-dividend date has passed, certain dividends
from foreign securities are recorded as the Portfolio is informed of the
ex-dividend date. Dividend income may include dividends that represent
returns of capital 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 one of the
Portfolio's investors is a regulated investment company that invests all or
substantially all of its 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. Withholding taxes on foreign dividends and capital gains have been
provided for in accordance with the Portfolio's understanding of the
applicable countries' tax rules and rates.
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
18
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
NOTES TO FINANCIAL STATEMENTS CONT'D
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 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 credits used to
reduce the Portfolio's custodian fees are reported separately as a reduction
of total expenses in the Statement of Operations. For the six months ended
April 30, 2000, $817 in credits were used to reduce the Portfolio's custodian
fee.
K 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.
L 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 six months ended April 30, 2000, the fee was
equivalent to 0.52% of the Portfolio's average net assets for such period and
amounted to $393,606. An administration fee, computed at an effective annual
rate of 0.15% of average daily net
19
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
NOTES TO FINANCIAL STATEMENTS CONT'D
assets was also paid to BMR for administrative services and office
facilities. Such fee amounted to $112,881 for the six months ended April 30,
2000.
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 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 six months ended
April 30, 2000, no significant amounts have been deferred. Certain officers
and Trustees of the Portfolio 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 $150 million unsecured line of credit agreement
with a group of banks. 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 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 six months
ended April 30, 2000.
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 April 30, 2000, the
Portfolio had invested approximately 29.2% of its net assets or approximately
$46,755,000 in high yield securities. Purchases and sales of investments,
other than short-term obligations, for the six months ended April 30, 2000
were as follows:
<TABLE>
<CAPTION>
PURCHASES
<S> <C>
-----------------------------------------------------
Investments (non-U.S. Government) $45,170,538
U.S. Government Securities 4,583,227
-----------------------------------------------------
$49,753,765
-----------------------------------------------------
<CAPTION>
SALES
<S> <C>
-----------------------------------------------------
Investments (non-U.S. Government) $28,086,736
U.S. Government Securities 10,918,463
-----------------------------------------------------
$39,005,199
-----------------------------------------------------
</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 April 30, 2000 is as
follows:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
SALES
-------------------------------------------------------------------
SETTLEMENT IN EXCHANGE FOR NET UNREALIZED
DATE(S) DELIVER (IN U.S. DOLLARS) APPRECIATION
<S> <C> <C> <C>
-------------------------------------------------------------------
5/15/00 Euro
14,700,000 $ 14,066,430 $ 661,008
5/11/00 Japanese Yen
833,179,110 7,889,954 141,329
-------------------------------------------------------------------
$ 21,956,384 $ 802,337
-------------------------------------------------------------------
</TABLE>
20
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
NOTES TO FINANCIAL STATEMENTS CONT'D
<TABLE>
<CAPTION>
PURCHASES
-------------------------------------------------------------------
SETTLEMENT DELIVER NET UNREALIZED
DATE(S) IN EXCHANGE FOR (IN U.S. DOLLARS) DEPRECIATION
<S> <C> <C> <C>
-------------------------------------------------------------------
5/15/00 Australian Dollar
5,700,000 $ 3,404,040 $ (71,384)
-------------------------------------------------------------------
$ 3,404,040 $ (71,384)
-------------------------------------------------------------------
<CAPTION>
FUTURES CONTRACTS
-------------------------------------------------------------------
NET UNREALIZED
EXPIRATION APPRECIATION
DATE(S) CONTRACTS POSITION (DEPRECIATION)
<S> <C> <C> <C>
-------------------------------------------------------------------
6/00 35 Euro-Bond Long $ 49,307
6/00 12 Japanese Bond Short (146,343)
6/00 311 US Treasury Bond Short 212,977
-------------------------------------------------------------------
$ 115,941
-------------------------------------------------------------------
</TABLE>
At April 30, 2000, 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 (Unaudited)
-------------------------------------------
The cost and unrealized appreciation (depreciation) in value of the
investment securities at April 30, 2000, as computed on a federal income tax
basis, were as follows:
<TABLE>
<S> <C>
AGGREGATE COST $162,541,736
------------------------------------------------------
Gross unrealized appreciation $ 2,270,713
Gross unrealized depreciation (7,853,128)
------------------------------------------------------
NET UNREALIZED DEPRECIATION $ (5,582,415)
------------------------------------------------------
</TABLE>
21
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF APRIL 30, 2000
INDEPENDENT ACCOUNTANTS' REPORT
TO THE TRUSTEES AND INVESTORS
OF STRATEGIC INCOME PORTFOLIO:
---------------------------------------------
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio 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 April 30, 2000, and the results of its operations, the changes in its net
assets, and the supplementary data for the periods presented, in conformity with
accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America 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 April 30, 2000 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 26, 2000
22
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF APRIL 30, 2000
INVESTMENT MANAGEMENT
STRATEGIC INCOME PORTFOLIO
Officers
James B. Hawkes
President and Trustee
Mark S. Venezia
Vice President and
Portfolio Manager
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
23
