<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 2000
PORTFOLIO OF INVESTMENTS
BONDS & NOTES -- 93.0%
<TABLE>
<CAPTION>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C>
-------------------------------------------------------------------------------
Argentina -- 2.1%
-------------------------------------------------------------------------------
Cablevision SA, 13.75%, 4/30/07 $ 4,000,000 $ 3,240,000
-------------------------------------------------------------------------------
Total Argentina (identified cost $3,909,193) $ 3,240,000
-------------------------------------------------------------------------------
Brazil -- 4.5%
-------------------------------------------------------------------------------
Brazil Discount Bond (Brady),
7.625%, 4/15/24(1) $ 9,000,000 $ 6,918,750
-------------------------------------------------------------------------------
Total Brazil (identified cost $7,100,212) $ 6,918,750
-------------------------------------------------------------------------------
Bulgaria -- 1.9%
-------------------------------------------------------------------------------
Bulgaria Discount Bond (Brady), Series
A, 7.75%, 7/28/24(1) $ 4,000,000 $ 3,010,000
-------------------------------------------------------------------------------
Total Bulgaria (identified cost $2,579,117) $ 3,010,000
-------------------------------------------------------------------------------
China -- 4.1%
-------------------------------------------------------------------------------
China Mobile Ltd., 2.25%, 11/3/05(2) $ 1,250,000 $ 1,301,562
Huaneng Power International PLC,
1.75%, 5/21/04(2) 3,000,000 3,468,750
Tingyi (CI) Holdings Corp.,
1.625%, 7/17/02(2) 1,500,000 1,638,750
-------------------------------------------------------------------------------
Total China (identified cost $6,247,500) $ 6,409,062
-------------------------------------------------------------------------------
Ecuador -- 1.5%
-------------------------------------------------------------------------------
Republic of Ecuador,
4.00%, 8/15/30(1)(3) $ 6,000,000 $ 2,289,000
-------------------------------------------------------------------------------
Total Ecuador (identified cost $2,280,000) $ 2,289,000
-------------------------------------------------------------------------------
Indonesia -- 2.2%
-------------------------------------------------------------------------------
APP China Group Ltd., 14.00%, 3/15/10 $ 2,000,000 $ 820,000
APP Finance VI, 0.00%, 11/18/12(2) 4,000,000 410,000
APP Finance VII, 3.50%, 4/30/03(2) 2,000,000 890,000
DGS International Finance,
10.00%, 6/1/07 2,000,000 330,000
Indah Kiat Finance Mauritius, Sr. Unsec.
Notes, 10.00%, 7/1/07 1,000,000 380,000
Indah Kiat International Finance,
12.50%, 6/15/06 1,000,000 530,000
-------------------------------------------------------------------------------
Total Indonesia (identified cost $6,633,819) $ 3,360,000
-------------------------------------------------------------------------------
Mexico -- 1.1%
-------------------------------------------------------------------------------
Alestra SA, Sr. Notes, 12.625%, 5/15/09 $ 2,000,000 $ 1,705,000
-------------------------------------------------------------------------------
Total Mexico (identified cost $1,789,844) $ 1,705,000
-------------------------------------------------------------------------------
<CAPTION>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
-------------------------------------------------------------------------------
Morocco -- 0.4%
-------------------------------------------------------------------------------
Snap Ltd., 11.50%, 1/29/09 DEM 1,612,500 $ 586,828
-------------------------------------------------------------------------------
Total Morocco (identified cost $796,346) $ 586,828
-------------------------------------------------------------------------------
Philippines -- 0.5%
-------------------------------------------------------------------------------
Bayan Telecommunications,
13.50%, 7/15/06(3) $ 2,000,000 $ 730,000
-------------------------------------------------------------------------------
Total Philippines (identified cost $1,887,649) $ 730,000
-------------------------------------------------------------------------------
Poland -- 3.0%
-------------------------------------------------------------------------------
Poland Government Bond, 8.50%, 2/12/05 PLN 28,000,000 $ 4,708,284
-------------------------------------------------------------------------------
Total Poland (identified cost $5,832,191) $ 4,708,284
-------------------------------------------------------------------------------
Qatar -- 0.6%
-------------------------------------------------------------------------------
State of Qatar, 9.75%, 6/15/30 $ 1,000,000 $ 973,475
-------------------------------------------------------------------------------
Total Qatar (identified cost $979,723) $ 973,475
-------------------------------------------------------------------------------
Republic of Korea -- 1.6%
-------------------------------------------------------------------------------
Cho Hung Bank, Sub. Notes,
11.50%, 4/1/10(3) $ 1,500,000 $ 1,440,000
Korea Hanvit Bank, Sub. Notes,
11.75%, 3/1/10 1,000,000 962,500
-------------------------------------------------------------------------------
Total Republic of Korea
(identified cost $2,486,329) $ 2,402,500
-------------------------------------------------------------------------------
Russia -- 2.0%
-------------------------------------------------------------------------------
Russia Federation, 2.25%, 3/31/30 $ 8,000,000 $ 3,020,000
-------------------------------------------------------------------------------
Total Russia (identified cost $3,108,800) $ 3,020,000
-------------------------------------------------------------------------------
Taiwan -- 3.1%
-------------------------------------------------------------------------------
Macronix International Co.,
1.00%, 2/1/05(2) $ 500,000 $ 518,750
Macronix International Co.,
1.00%, 2/1/05(2)(3) 1,500,000 1,556,250
Mosel Vitelic, Inc.,
1.00%, 2/2/05(2)(3) 3,000,000 2,850,000
-------------------------------------------------------------------------------
Total Taiwan (identified cost $5,523,125) $ 4,925,000
-------------------------------------------------------------------------------
Turkey -- 2.5%
-------------------------------------------------------------------------------
Republic of Turkey, 11.75%, 6/15/10 $ 3,000,000 $ 2,913,750
Republic of Turkey, 11.875%, 1/15/30 1,000,000 978,750
-------------------------------------------------------------------------------
Total Turkey (identified cost $4,090,000) $ 3,892,500
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 2000
PORTFOLIO OF INVESTMENTS CONT'D
<TABLE>
<CAPTION>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
-------------------------------------------------------------------------------
United Kingdom -- 0.1%
-------------------------------------------------------------------------------
Esprit Telecom Group PLC,
11.00%, 6/15/08 DEM 2,000,000 $ 151,635
-------------------------------------------------------------------------------
Total United Kingdom
(identified cost $1,117,631) $ 151,635
-------------------------------------------------------------------------------
United States -- 61.8%
-------------------------------------------------------------------------------
CORPORATE BONDS & NOTES -- 15.3%
American Greetings, 6.10%, 8/1/28 $ 1,000,000 $ 893,790
AT&T Corp., 6.50%, 3/15/29 4,000,000 3,150,360
Baltimore Natural Gas and Electric,
6.73%, 6/12/12 400,000 398,884
Bellsouth Capital Fund, 6.04%, 11/15/26 300,000 298,410
Beneficial Corp., 8.40%, 5/15/08 330,000 339,953
Coca-Cola Enterprise, Deb.,
7.00%, 10/1/26 375,000 368,745
Commercial Credit Corp., 7.875%, 2/1/25 2,000,000 2,025,320
Dayton Hudson, Medium Term Notes,
9.52%, 6/10/15 350,000 411,442
Eaton Corp., 8.875%, 6/15/19 500,000 531,100
Ford Holdings, 9.30%, 3/1/30 1,000,000 1,104,320
Ford Motor Co., 7.45%, 7/16/31 2,000,000 1,848,640
General Motors Acceptance Corp.,
8.875%, 6/1/10 1,000,000 1,074,200
Grand Metropolitan Investment Corp.,
7.45%, 4/15/35 350,000 355,022
Ingersoll-Rand Co., 6.48%, 6/1/25 1,050,000 1,001,773
Ingersoll-Rand Co., Deb.,
6.443%, 11/15/27 120,000 110,934
Johnson Controls, 7.70%, 3/1/15 1,500,000 1,504,275
Level 3 Communication Inc., Sr. Notes,
11.25%, 3/15/10 EUR 1,000,000 726,603
Motorola, Inc., 6.50%, 9/1/25 300,000 292,080
Motorola, Inc., 8.40%, 8/15/31 1,500,000 1,601,205
NBD Bank N.A., 8.25%, 11/1/24 610,000 647,393
Northwest National Gas, 6.80%, 5/21/07 250,000 249,425
Procter and Gamble Co., 8.00%, 9/1/24 1,500,000 1,611,135
TRW, Inc., Medium Term Notes,
9.35%, 6/4/20 1,900,000 2,040,011
Willamette Industries, Deb.,
7.35%, 7/1/26 50,000 49,476
Worldcom, Inc., 7.75%, 4/1/27 1,000,000 1,006,870
-------------------------------------------------------------------------------
Total Corporate Bonds & Notes
(identified cost $25,039,486) $ 23,641,366
-------------------------------------------------------------------------------
MORTGAGE PASS-THROUGHS -- 32.9%
Federal Home Loan Mortgage Corp.:
4.75% with maturity at 2001 $ 219 $ 216
8.00% with various maturities to 2021 4,058,465 4,135,789
8.15% with maturity at 2021 3,824,601 3,908,211
8.50% with various maturities to 2019 1,085,131 1,126,737
9.00% with maturity at 2019 313,105 328,919
9.25% with various maturities to 2016 3,443,586 3,593,725
<CAPTION>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
-------------------------------------------------------------------------------
United States (continued)
-------------------------------------------------------------------------------
9.50% with maturity at 2015 $ 1,197,006 $ 1,250,621
9.75% with various maturities to 2020 798,473 844,611
10.50% with maturity at 2020 571,895 620,814
11.00% with maturity at 2019 1,303,814 1,412,853
11.25% with maturity at 2010 206,951 223,395
12.50% with various maturities to
2019 1,413,073 1,597,968
12.75% with maturity at 2013 83,261 93,685
13.25% with maturity at 2013 58,305 66,480
13.50% with maturity at 2019 178,441 204,223
-------------------------------------------------------------------------------
$ 19,408,247
-------------------------------------------------------------------------------
Federal National Mortgage Association:
5.00% with maturity at 2003 $ 23,522 $ 23,025
5.50% with maturity at 2012 2,914 2,834
7.00% with maturity at 2014 3,108,327 3,140,252
7.50% with various maturities to 2018 1,743,610 1,767,283
8.00% with various maturities to 2019 1,400,965 1,434,885
8.50% with various maturities to 2026 4,034,228 4,184,328
9.00% with various maturities to 2021 3,423,628 3,581,019
9.50% with maturity at 2013 1,238,777 1,312,743
11.00% with maturity at 2025 572,149 628,506
11.50% with maturity at 2019 1,225,152 1,379,264
12.00% with maturity at 2015 502,627 563,739
12.50% with maturity at 2015 2,831,597 3,199,254
12.75% with maturity at 2014 75,261 86,884
13.00% with various maturities to
2027 1,517,816 1,744,978
13.25% with maturity at 2014 147,214 172,285
13.50% with various maturities to
2015 745,561 852,829
14.75% with maturity at 2012 1,346,790 1,604,342
-------------------------------------------------------------------------------
$ 25,678,450
-------------------------------------------------------------------------------
Government National Mortgage Association:
6.50% with maturity at 2002 $ 342,604 $ 339,510
7.50% with maturity at 2017 485,896 502,059
7.75% with maturity at 2019 501,235 510,949
8.30% with maturity at 2020 741,761 771,699
8.50% with maturity at 2009 522,781 537,452
9.00% with various maturities to 2016 1,141,631 1,194,288
12.50% with maturity at 2019 1,555,635 1,769,960
13.50% with maturity at 2014 141,868 165,800
-------------------------------------------------------------------------------
$ 5,791,717
-------------------------------------------------------------------------------
Total Mortgage Pass-Throughs
(identified cost $51,719,361) $ 50,878,414
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 2000
PORTFOLIO OF INVESTMENTS CONT'D
<TABLE>
<CAPTION>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C>
-------------------------------------------------------------------------------
United States (continued)
-------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DEBENTURES -- 12.3%
Federal Home Loan Mortgage Corp.,
6.45%, 4/29/09 $ 6,000,000 $ 5,703,600
Federal Home Loan Mortgage Corp.,
6.625%, 9/15/09 3,000,000 2,981,250
Federal National Mortgage Association,
6.25%, 5/15/29 11,000,000 10,285,000
-------------------------------------------------------------------------------
Total U.S. Government Agency Debentures
(identified cost, $18,726,566) $ 18,969,850
-------------------------------------------------------------------------------
U.S. Treasury Obligations -- 1.3%
-------------------------------------------------------------------------------
United States Treasury Bond,
11.75%, 2/15/01(4) --
(identified cost $2,603,438) $ 2,000,000 $ 2,029,680
-------------------------------------------------------------------------------
Total United States
(identified cost $98,088,851) $ 95,519,310
-------------------------------------------------------------------------------
Total Bonds & Notes
(identified cost $154,450,330) $143,841,344
-------------------------------------------------------------------------------
</TABLE>
WARRANTS -- 0.0%
<TABLE>
<CAPTION>
SECURITY SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------
Indonesia -- 0.0%
-------------------------------------------------------------------------------
Asia Pulp and Paper 2,000 $ 0
-------------------------------------------------------------------------------
Total Indonesia (identified cost $0) $ 0
-------------------------------------------------------------------------------
Total Warrants (identified cost $0) $ 0
-------------------------------------------------------------------------------
</TABLE>
U.S. COMMON STOCKS -- 2.4%
<TABLE>
<CAPTION>
SECURITY SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------
REITS -- 2.4%
-------------------------------------------------------------------------------
Archstone Communities Trust 35,800 $ 843,537
Duke-Weeks Realty Corp. 36,500 864,594
Plum Creek Timber Co., Inc. 31,400 814,438
Public Storage, Inc. 52,800 1,188,000
-------------------------------------------------------------------------------
Total U.S. Common Stocks
(identified cost $3,558,534) $ 3,710,569
-------------------------------------------------------------------------------
</TABLE>
SHORT-TERM INVESTMENTS -- 5.5%
<TABLE>
<CAPTION>
SECURITY PRINCIPAL VALUE
<S> <C> <C>
-------------------------------------------------------------------------------
Banque National De Paris Euro
Time-Deposit
Cayman Islands, 6.45%, 11/1/00 $ 8,600,000 $ 8,600,000
-------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $8,600,000) $ 8,600,000
-------------------------------------------------------------------------------
Total Investments -- 100.9%
(identified cost $166,608,864) $156,151,913
-------------------------------------------------------------------------------
Other Assets, Less Liabilities -- (0.9)% $ (1,439,729)
-------------------------------------------------------------------------------
Net Assets -- 100.0% $154,712,184
-------------------------------------------------------------------------------
</TABLE>
REIT - Real Estate Investment Trust
EUR - Euro Dollar
DEM - Deutsche Mark
PLN - Polish Zloty
(1) Variable rate security.
(2) Convertible Bond.
(3) 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.
(4) 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, 2000
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 2000
<S> <C>
Assets
------------------------------------------------------
Investments, at value
(identified cost, $166,608,864) $156,151,913
Cash 80,601
Receivable for investments sold 889,039
Interest receivable 2,952,611
Receivable for daily variation margin on
open financial futures contracts, net 16,513
Receivable for open forward foreign
currency contracts 307,746
Prepaid expenses 1,620
------------------------------------------------------
TOTAL ASSETS $160,400,043
------------------------------------------------------
Liabilities
------------------------------------------------------
Payable for investments purchased $ 5,202,465
Payable to affiliate for Trustees' fees 1,678
Payable for open forward foreign
currency contracts 106,362
Payable for open swap contracts 343,706
Accrued expenses 33,648
------------------------------------------------------
TOTAL LIABILITIES $ 5,687,859
------------------------------------------------------
NET ASSETS APPLICABLE TO INVESTORS'
INTEREST IN PORTFOLIO $154,712,184
------------------------------------------------------
Sources of Net Assets
------------------------------------------------------
Net proceeds from capital contributions
and withdrawals $165,694,712
Net unrealized depreciation (computed on
the basis of identified cost) (10,982,528)
------------------------------------------------------
TOTAL $154,712,184
------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
OCTOBER 31, 2000
<S> <C>
Investment Income
------------------------------------------------------
Interest $ 14,189,858
Dividends 221,810
------------------------------------------------------
TOTAL INVESTMENT INCOME $ 14,411,668
------------------------------------------------------
Expenses
------------------------------------------------------
Investment adviser fee $ 827,576
Administration fee 235,441
Trustees' fees and expenses 17,352
Legal and accounting services 119,534
Custodian fee 92,498
Miscellaneous 3,665
------------------------------------------------------
TOTAL EXPENSES $ 1,296,066
------------------------------------------------------
NET INVESTMENT INCOME $ 13,115,602
------------------------------------------------------
Realized and Unrealized
Gain (Loss)
------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified
cost basis) $ 611,334
Financial futures contracts (920,337)
Foreign currency and forward foreign
currency exchange contract
transactions 1,710,982
------------------------------------------------------
NET REALIZED GAIN $ 1,401,979
------------------------------------------------------
Change in unrealized appreciation
(depreciation) --
Investments (identified cost basis) $(10,010,024)
Financial futures contracts (377,683)
Interest rate swap contracts (343,706)
Foreign currency and forward foreign
currency exchange contracts 192,806
------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) $(10,538,607)
------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS $ (9,136,628)
------------------------------------------------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS $ 3,978,974
------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 2000
FINANCIAL STATEMENTS CONT'D
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED YEAR ENDED
IN NET ASSETS OCTOBER 31, 2000 OCTOBER 31, 1999
<S> <C> <C>
----------------------------------------------------------------------------
From operations --
Net investment income $ 13,115,602 $ 12,637,218
Net realized gain (loss) 1,401,979 (8,710,614)
Net change in unrealized appreciation
(depreciation) (10,538,607) 5,196,296
----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS $ 3,978,974 $ 9,122,900
----------------------------------------------------------------------------
Capital transactions --
Contributions $ 58,894,662 $ 63,662,682
Withdrawals (58,443,527) (60,949,450)
----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM CAPITAL
TRANSACTIONS $ 451,135 $ 2,713,232
----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS $ 4,430,109 $ 11,836,132
----------------------------------------------------------------------------
Net Assets
----------------------------------------------------------------------------
At beginning of year $ 150,282,075 $ 138,445,943
----------------------------------------------------------------------------
AT END OF YEAR $ 154,712,184 $ 150,282,075
----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 2000
FINANCIAL STATEMENTS CONT'D
SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------
Ratios (As a percentage of
average daily net assets):
Expenses 0.83% 0.86% 0.83% 0.86% 0.86%
Net investment income 8.36% 9.14% 8.31% 8.06% 8.62%
Portfolio Turnover 49% 47% 71% 77% 71%
-----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000'S OMITTED) $154,712 $150,282 $138,446 $121,256 $132,407
-----------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 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 achieve 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 at least 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
investors 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
21
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 2000
NOTES TO FINANCIAL STATEMENTS CONT'D
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 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 Interest Rate Swaps -- The Portfolio has entered into interest rate swap
agreements to enhance return, to hedge against fluctuations in securities
prices or interest rates or as substitution for the purchase or sale of
securities. Pursuant to these agreements the Portfolio makes monthly payments
at a rate equal to a predetermined spread to the one-month LIBOR. In
exchange, the Portfolio receives payments based on the rate of return of a
benchmark industry index. During the term of the outstanding swap agreement,
changes in the underlying value of the swap are recorded as unrealized gains
and losses. Payments received or made at the end of the measurement period
are recorded as realized gains or losses. The value of the swap is determined
by changes in the relationship between two rates of interest. The Portfolio
is exposed to credit loss in the event of non-performance by the swap
counterparty. However, the Portfolio does not anticipate non-performance by
the counterparty. Risk may also arise from the unanticipated movements in
value of interest rates.
K 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 Portfolios custodian fees are reported separately as a reduction
of total expenses in the Statement of Operations. For the year ended October
31, 2000, $3,177 in credits were used to reduce the Portfolio's custodian
fee.
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
22
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 2000
NOTES TO FINANCIAL STATEMENTS CONT'D
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, 2000, the fee was equivalent
to 0.53% of the Portfolio's average net assets for such period and amounted
to $827,576. 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 $235,441 for the year
ended October 31, 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 year ended October
31, 2000, no significant amounts have been deferred. Certain 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 $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 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 year ended October 31,
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 October 31, 2000, the
Portfolio had invested approximately 25.8% of its net assets or approximately
$39,898,000 in high yield securities. Purchases and sales of investments,
other than short-term obligations, for the year ended October 31, 2000 were
as follows:
<TABLE>
<S> <C>
PURCHASES
-----------------------------------------------------
Investments (non-U.S. Government) $74,280,603
U.S. Government Securities 10,455,023
-----------------------------------------------------
$84,735,626
-----------------------------------------------------
SALES
-----------------------------------------------------
Investments (non-U.S. Government) $54,367,224
U.S. Government Securities 17,543,565
-----------------------------------------------------
$71,910,789
-----------------------------------------------------
</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, financial
futures contracts and interest rate swaps 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
23
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 2000
NOTES TO FINANCIAL STATEMENTS CONT'D
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, 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>
----------------------------------------------------------------------------------------
11/6/00 Euro Dollar
9,250,000 $ 8,093,750 $ 253,497
11/30/00 Japanese Yen
833,179,110 7,728,934 54,249
----------------------------------------------------------------------------------------
$ 15,822,684 $ 307,746
----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PURCHASES
----------------------------------------------------------------------------------------
SETTLEMENT DELIVER NET UNREALIZED
DATE(S) IN EXCHANGE FOR (IN U.S. DOLLARS) DEPRECIATION
<S> <C> <C> <C>
----------------------------------------------------------------------------------------
11/20/00 Australian Dollar
5,700,000 $ 2,984,919 $ (40,014)
11/6/00 Euro Dollar
3,227,851 2,802,259 (66,348)
----------------------------------------------------------------------------------------
$ 5,787,178 $ (106,362)
----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FUTURES CONTRACTS
----------------------------------------------------------------------------------------------------------------
NET UNREALIZED
EXPIRATION APPRECIATION
DATE(S) CONTRACTS POSITION (DEPRECIATION)
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------
12/00 35 Euro-Bond Long $ 6,405
12/00 13 Japanese Bond Short (318,839)
----------------------------------------------------------------------------------------------------------------
$ (312,434)
----------------------------------------------------------------------------------------------------------------
</TABLE>
At October 31, 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.
The Portfolio has entered into an interest rate swap agreement with Goldman
Sachs Capital Markets whereby the Portfolio makes monthly payments at a rate
equal to the one-month LIBOR plus 0.1% on the notional amount of $10,000,000.
In exchange, the Portfolio receives payments equal to the total return on the
Lehman Brothers High Yield Bond Index on the same notional amount. The value
of the contract, which terminates at April 1, 2001, is recorded as a payable
for open swap contracts of $343,706 at October 31, 2000.
6 Federal Income Tax Basis of Investments
-------------------------------------------
The cost and unrealized appreciation (depreciation) in value of the
investment securities at October 31, 2000, as computed on a federal income
tax basis, were as follows:
<TABLE>
<S> <C>
AGGREGATE COST $166,730,491
------------------------------------------------------
Gross unrealized appreciation $ 1,116,186
Gross unrealized depreciation (11,694,764)
------------------------------------------------------
NET UNREALIZED DEPRECIATION $(10,578,578)
------------------------------------------------------
</TABLE>
24
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 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 the supplementary data present fairly, in all material
respects, the financial position of Strategic Income Portfolio (the "Portfolio")
at October 31, 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 October 31, 2000 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 2000
25
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 2000
INVESTMENT MANAGEMENT
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 Operating Officer,
Hellman, Jordan Management Co., Inc.
President, Jordan Simmons Capital LLC
and Unicorn Corporation
Lynn A. Stout
Professor of Law,
Georgetown University Law Center
Jack L Treynor
Investment Adviser and Consultant
26
