<PAGE>
Special Investment Portfolio as of December 31, 1997
PORTFOLIO OF INVESTMENTS
Common Stocks -- 96.0%
Security Shares Value
- --------------------------------------------------------------------------------
Advertising -- 2.9%
- --------------------------------------------------------------------------------
Catalina Marketing Corp.* 14,000 $ 647,500
Specialized market research.
Outdoor Systems, Inc.* 42,410 1,627,483
Dominant operator of outdoor advertising.
- --------------------------------------------------------------------------------
$ 2,274,983
- --------------------------------------------------------------------------------
Banks - Regional -- 0.9%
- --------------------------------------------------------------------------------
Colonial Bancgroup, Inc. 21,000 $ 723,188
Emerging banking company in the
Southeastern U.S.
- --------------------------------------------------------------------------------
$ 723,188
- --------------------------------------------------------------------------------
Banks and Money Services -- 0.7%
- --------------------------------------------------------------------------------
Bank United Corp., Class A 12,000 $ 587,250
Operates 70 branch bank system in Texas.
- --------------------------------------------------------------------------------
$ 587,250
- --------------------------------------------------------------------------------
Broadcasting and Cable -- 3.2%
- --------------------------------------------------------------------------------
Emmis Broadcasting Corp., Class A* 23,000 $ 1,049,375
Diversified media company.
Jacor Communications, Inc.* 16,500 876,563
Rapidly growing operator of radio stations and
syndicated programming.
Sinclair Broadcast Group, Class A* 13,000 606,125
Well managed operator of diversified
broadcast properties.
- --------------------------------------------------------------------------------
$ 2,532,063
- --------------------------------------------------------------------------------
Building Materials -- 1.0%
- --------------------------------------------------------------------------------
Texas Industries, Inc. 18,000 $ 810,000
Regional producer of building products in
the Southwest.
- --------------------------------------------------------------------------------
$ 810,000
- --------------------------------------------------------------------------------
Business Products and Services -- 8.7%
- --------------------------------------------------------------------------------
Abacus Direct Corp.* 10,000 $ 410,000
Provider of specialized marketing programs.
CN Maximus, Inc.* 20,950 506,728
Management consulting group.
Franklin Covey Co. 13,000 286,000
Time management seminars and products.
Gartner Group, Inc. Class A* 30,000 1,117,500
Leading consultant of high tech
equipment purchases.
Gulf South Medical Supply, Inc.* 8,000 298,000
Leading distributor of health care
products.
Learning Tree International* 15,000 433,125
Leading operator of computer software
training programs.
Netscape Communications Corp.* 9,000 219,375
Leading provider of internet browser
software.
Personnel Group of America, Inc.* 7,000 231,000
Temporary employment company.
Sanmina Corp.* 6,000 406,500
Operates contract manufacturing
facilities for high tech companies.
Saville Systems PLC ADR* 11,000 456,500
Provides billing software for the
telecommunications industry.
Structural Dynamics Research Corp.* 301 6,773
Niche developer and provider of
engineering software.
Sylvan Learning Systems, Inc.* 15,000 585,000
Operates specialized educational tutoring
and testing centers.
United Rentals, Inc.* 30,000 579,375
Unique operator of outlets renting
specialized construction equipment.
Vantive Corp. 50,000 1,262,500
Leading provider of customer care and
sales force automation software.
- --------------------------------------------------------------------------------
$ 6,798,376
- --------------------------------------------------------------------------------
Communications Equipment -- 0.7%
- --------------------------------------------------------------------------------
ECI Telecommunications 20,000 $ 510,000
A company that produces advanced
telecommunications equipment.
- --------------------------------------------------------------------------------
$ 510,000
- --------------------------------------------------------------------------------
See notes to financial statements
13
<PAGE>
Special Investment Portfolio as of December 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
Security Shares Value
- --------------------------------------------------------------------------------
Communications Services -- 0.8%
- --------------------------------------------------------------------------------
Nextel Communications, Inc., Class A* 7,500 $ 195,000
Operates a vast network of digital
communications systems.
Transition Systems, Inc.* 20,000 442,500
Healthcare information systems.
- --------------------------------------------------------------------------------
$ 637,500
- --------------------------------------------------------------------------------
Computer Software -- 5.5%
- --------------------------------------------------------------------------------
Baan Co. NV* 10,000 $ 330,000
Leading vendors of enterprise resource
software - integrates a company's
software programs.
CBT Group PLC, ADR* 5,000 410,625
Specialized provider of computer based
training systems.
Documentum, Inc.* 9,000 379,125
Provides niche software enabling large
corporations to integrate their documents
into a central system.
HNC Software, Inc.* 5,000 215,000
Develops specialty software products that
enable credit suppliers define risk/reward
scores for loans.
J.D. Edwards, Inc.* 18,000 531,000
Leading vendor of enterprise resource
software - specialized in mid range
corporations.
Manugistics Group, Inc.* 10,000 446,250
Develops software that ties together suppliers
to the manufacturers they serve.
Pegasystems, Inc.* 20,000 403,750
Marketing information specialist.
PeopleSoft, Inc.* 28,000 1,092,000
Specialty software for human resources
and manufacturing.
Symantec* 22,000 482,625
Designs and distributes the Norton Antivirus
software programs.
- --------------------------------------------------------------------------------
$ 4,290,375
- --------------------------------------------------------------------------------
Consumer Services -- 1.4%
- --------------------------------------------------------------------------------
Strayer Education, Inc. 32,865 $ 1,084,545
Specialized supplemental education
services.
- --------------------------------------------------------------------------------
$ 1,084,545
- --------------------------------------------------------------------------------
Drugs -- 3.3%
- --------------------------------------------------------------------------------
Curative Health Services, Inc.* 25,000 $ 759,375
Operator of specialty burn unit clinics.
Genzyme Corp.* 10,000 68,750
Leading researcher in gene therapy.
Genzyme Corp. Class A* 43,000 1,193,250
Diversified biotechnology pharmaceuticals.
Parexel International Corp.* 15,000 555,000
Contract research services for large
drug companies.
- --------------------------------------------------------------------------------
$ 2,576,375
- --------------------------------------------------------------------------------
Electrical Equipment -- 1.9%
- --------------------------------------------------------------------------------
Level One Communications, Inc.* 24,000 $ 678,000
Designs and sells integrated circuits.
Linear Technology Corp. 14,000 806,750
Manufacturer of high performance linear
integrated circuits.
- --------------------------------------------------------------------------------
$ 1,484,750
- --------------------------------------------------------------------------------
Electronics - Semiconductors -- 1.6%
- --------------------------------------------------------------------------------
Microchip Technology, Inc.* 11,000 $ 330,000
Designs and manufactures specialty
semiconductor chips.
Qlogic Corp.* 9,950 293,525
Designs and distributes specialty chips and
systems for communications products.
Teradyne, Inc.* 20,000 640,000
High quality semiconductor manufacturing
equipment supplier.
- --------------------------------------------------------------------------------
$ 1,263,525
- --------------------------------------------------------------------------------
Entertainment -- 1.4%
- --------------------------------------------------------------------------------
MGM Grand, Inc.* 30,000 $ 1,081,875
Operator of MGM Grand Hotel in Las Vegas.
- --------------------------------------------------------------------------------
$ 1,081,875
- --------------------------------------------------------------------------------
Financial - Miscellaneous -- 1.5%
- --------------------------------------------------------------------------------
Capital One Financial Corp.* 12,000 $ 650,250
Leading credit card services specialists.
See notes to financial statements
14
<PAGE>
Special Investment Portfolio as of December 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
Security Shares Value
- --------------------------------------------------------------------------------
Financial - Miscellaneous (continued)
- --------------------------------------------------------------------------------
E*Trade Group, Inc.* 23,000 $ 529,000
Innovative, high quality electronic internet
stock brokerage firm.
- --------------------------------------------------------------------------------
$ 1,179,250
- --------------------------------------------------------------------------------
Health Services -- 14.3%
- --------------------------------------------------------------------------------
American Retirement Corp.* 40,000 $ 800,000
Assisted living services.
Bioreliance Corp.* 850 19,550
Provides contract research services for
biotechnology and medical
research departments.
Concentra Managed Care, Inc.* 26,790 904,163
Specialized health care operator of workman's
compensation programs.
Elan Corp., PLC, ADR* 14,000 716,625
Specialty pharmaceutical.
Express Scripts, Inc., Class A* 17,000 1,020,000
Rapidly growing pharmacy specialist.
Guidant Corp. 9,000 560,250
Well regarded designer and manufacturer
of leading edge stents and health care
products.
Health Management Associates, Inc. Class A* 51,000 1,287,750
Hospital chain.
Medicis Pharmaceutical, Inc., Class A* 10,000 511,250
Developer and marketer of unique
dermatological products.
MiniMed, Inc.* 23,000 894,125
Developer and manufacturer of medical devices
focusing on diabetics.
Monarch Dental Corp. 800 10,600
Provides specialty dental care.
National Surgery Centers, Inc.* 54,000 1,417,499
Operator of independent surgery units.
Omnicare, Inc. 27,000 837,000
Provides pharmacy services to retirement centers.
Pediatrix Medical Group, Inc.* 11,000 470,250
Operates pediatric care units.
PhyCor, Inc.* 13,000 351,000
Physicians practice management.
Renal Care Group, Inc.* 14,000 448,000
One of the largest providers of renal
treatment centers.
Sunrise Assisted Living, Inc.* 13,000 560,625
One of the leading operators of assisted care
facilities for senior citizens.
Vertex Pharmaceuticals, Inc.* 10,000 330,000
Developing biotechnology company.
- --------------------------------------------------------------------------------
$ 11,138,687
- --------------------------------------------------------------------------------
Household Products -- 0.7%
- --------------------------------------------------------------------------------
Sola International* 17,000 $ 552,500
Specialty eye care products.
- --------------------------------------------------------------------------------
$ 552,500
- --------------------------------------------------------------------------------
Information Services -- 15.7%
- --------------------------------------------------------------------------------
Acxiom Corp.* 23,000 $ 442,750
Database information services.
Affiliated Computer Services, Inc. Class A* 45,000 1,184,063
Nationwide provider of information
processing services.
Aspen Technologies, Inc.* 25,000 856,250
Specialty software for upgrading
manufacturing plants.
BISYS Group, Inc.* 28,000 931,000
Services financial institutions with computer,
administrative and marketing
support data processing services.
Cambridge Technology Partners, Inc.* 25,000 1,040,625
Software consulting company.
CCC Information Services Group* 60,000 1,185,000
Automotive repair information specialist.
Cognos, Inc.* 15,000 345,000
Computer tool developer and supporter.
FIserv, Inc.* 17,300 849,863
Provider of data processing services to banks
and savings institutions, benefiting from
outsourcing trend.
Harbinger, Corp.* 14,000 393,750
Electronic Data Interchange products
and services.
IDX Systems Corp.* 9,000 333,000
Healthcare information systems.
Nova Corp. Georgia* 36,000 900,000
Nation's largest bankcard processor.
Paychex, Inc.* 27,000 1,366,874
Payroll and corporate information services.
See notes to financial statements
15
<PAGE>
Special Investment Portfolio as of December 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
Security Shares Value
- --------------------------------------------------------------------------------
Information Services (continued)
- --------------------------------------------------------------------------------
SunGard Data Systems, Inc.* 40,000 $ 1,240,000
Data storage and emergency back up products.
Veritas Software Co.* 22,500 1,147,500
Provides communications companies with
software measuring systems.
- --------------------------------------------------------------------------------
$12,215,675
- --------------------------------------------------------------------------------
Insurance -- 2.9%
- --------------------------------------------------------------------------------
HCC Insurance Holdings, Inc. 25,000 $ 531,250
Emerging specialty insurance provider.
Mercury General Corp. 5,000 276,250
Large provider of specialized auto
insurance policies.
Mutual Risk Management Ltd. 48,006 1,437,179
Specialty insurer focusing on
workmen's compensation.
- --------------------------------------------------------------------------------
$ 2,244,679
- --------------------------------------------------------------------------------
Investment Services -- 4.3%
- --------------------------------------------------------------------------------
Centura Banks, Inc. 17,500 $ 1,207,500
Growing Southeastern bankers.
PMI Group, Inc. 15,000 1,084,688
Specialty financial products.
Sovereign Bancorp, Inc. 50,000 1,037,500
A thrift holding company.
- --------------------------------------------------------------------------------
$ 3,329,688
- --------------------------------------------------------------------------------
Machinery -- 1.0%
- --------------------------------------------------------------------------------
Camco International, Inc. 12,000 $ 764,250
Oilfield services.
- --------------------------------------------------------------------------------
$ 764,250
- --------------------------------------------------------------------------------
Medical Products -- 3.1%
- --------------------------------------------------------------------------------
Heartstream, Inc.* 39,000 $ 416,813
Portable defibrillator products.
Invacare Corp. 19,000 413,250
Provider of diverse medical products.
Sofamor Danek Group, Inc.* 24,000 1,561,499
Leading developer/manufacturer of
spinal implant devices. Company markets
products internationally.
- --------------------------------------------------------------------------------
$ 2,391,562
- --------------------------------------------------------------------------------
Oil and Gas - Exploration
and Production -- 6.0%
- --------------------------------------------------------------------------------
Anadarko Petroleum Corp. 7,000 $ 424,813
A leading independent company in oil and
gas exploration, development and
production.
Apache Corp. 22,000 771,375
Diversified exploration company focusing
primarily on domestic drilling prospects.
Cross Timbers Oil Co. 36,000 897,750
Emerging growth energy company with good
exploration track record.
Encal Energy, Ltd.* 110,000 357,500
Specialized energy exploration company.
Louis Dreyfus Natural Gas* 26,640 497,835
Niche developer and driller of gas properties.
Newfield Exploration Co.* 32,000 746,000
Acquires and develops energy properties in
domestic U.S..
Noble Affiliates, Inc. 27,000 951,750
An independent energy company
that specializes in oil and gas exploration
and production.
- --------------------------------------------------------------------------------
$ 4,647,023
- --------------------------------------------------------------------------------
Publishing -- 1.6%
- --------------------------------------------------------------------------------
A.H. Belo Corp. 21,927 $ 1,230,664
Publishes Dallas Morning News and
Providence Journal; also operates T.V.
and radio properties.
- --------------------------------------------------------------------------------
$ 1,230,664
- --------------------------------------------------------------------------------
REITS -- 1.1%
- --------------------------------------------------------------------------------
Crescent Real Estate Equitable Co. 17,000 $ 669,375
Unique REIT operating primarily in Texas
real estate.
Equity Office Properties 5,000 157,813
REIT focusing on office buildings
throughout the U.S..
- --------------------------------------------------------------------------------
$ 827,188
- --------------------------------------------------------------------------------
See notes to financial statements
16
<PAGE>
Special Investment Portfolio as of December 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
Security Shares Value
- --------------------------------------------------------------------------------
Retail - Food and Drug -- 2.5%
- --------------------------------------------------------------------------------
Papa John's International, Inc.* 29,000 $ 1,011,375
Rapidly growing restaurant chain.
Starbucks Corp.* 25,000 959,375
High quality specialty retailer.
- --------------------------------------------------------------------------------
$ 1,970,750
- --------------------------------------------------------------------------------
Retail - Specialty and Apparel -- 4.5%
- --------------------------------------------------------------------------------
Bed Bath and Beyond, Inc.* 35,000 $ 1,347,499
Specialty retailer.
Polo Ralph Lauren Corp., Class A* 34,000 826,625
A designer of men's and women's clothing.
The Mens Wearhouse, Inc.* 30,000 1,042,500
Specialty apparel chain.
Tommy Hilfiger Corp. 9,000 316,125
Rapidly growing specialty apparel manufacturer.
- --------------------------------------------------------------------------------
$ 3,532,749
- --------------------------------------------------------------------------------
Telephone Utilities -- 1.1%
- --------------------------------------------------------------------------------
ACC Corp.* 6,000 $ 303,000
Specialized telecommunications company
recently acquired by Teleport.
Pacific Gateway Exchange, Inc.* 11,000 591,938
Leading provider of foreign long distance services.
- --------------------------------------------------------------------------------
$ 894,938
- --------------------------------------------------------------------------------
Transportation -- 1.7%
- --------------------------------------------------------------------------------
Comair Holdings, Inc. 54,000 $ 1,302,749
Regional airline holding company.
- --------------------------------------------------------------------------------
$ 1,302,749
- --------------------------------------------------------------------------------
Total Common Stocks
(identified cost $58,217,577) $ 74,877,157
- --------------------------------------------------------------------------------
Commercial Paper -- 4.3%
Principal
Amount
Security (000 Omitted) Value
- --------------------------------------------------------------------------------
Associates Corp., N.A., 6.70%, 1/2/98 $ 3,323 $ 3,322,382
- --------------------------------------------------------------------------------
Total Commercial Paper
(amortized cost $3,322,382) $ 3,322,382
- --------------------------------------------------------------------------------
Total Investments -- 100.3%
(identified cost $61,539,959) $ 78,199,539
- --------------------------------------------------------------------------------
Other Assets, Less Liabilities -- (0.3)% $ (230,450)
- --------------------------------------------------------------------------------
Net Assets -- 100%
- --------------------------------------------------------------------------------
ADR -- American Depositary Receipt
* Non-income producing security.
See notes to financial statements
17
<PAGE>
Special Investment Portfolio as of December 31, 1997
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
As of December 31, 1997
Assets
- ------------------------------------------------------------------------------
Investments, at value (Note 1A)
(identified cost, $61,539,959) $ 78,199,539
Cash 2,021
Interest and dividends receivable 6,788
Deferred organization expenses (Note 1F) 5,021
- ------------------------------------------------------------------------------
Total assets $ 78,213,369
- ------------------------------------------------------------------------------
Liabilities
- ------------------------------------------------------------------------------
Payable for investments purchased $ 223,688
Payable to affiliate for Trustees' fees (Note 2) 1,600
Accrued expenses 18,992
- ------------------------------------------------------------------------------
Total liabilities $ 244,280
- ------------------------------------------------------------------------------
Net Assets applicable to investors' interest in Portfolio $ 77,969,089
- ------------------------------------------------------------------------------
Sources of Net Assets
- ------------------------------------------------------------------------------
Net proceeds from capital contributions and withdrawals $ 61,309,509
Net unrealized appreciation of investments (computed on
the basis of identified cost) 16,659,580
- ------------------------------------------------------------------------------
Total $ 77,969,089
- ------------------------------------------------------------------------------
Statement of Operations
For the Year Ended
December 31, 1997
Investment Income (Note 1B & 1E)
- ------------------------------------------------------------------------------
Dividends (net of foreign taxes, $291) $ 136,228
Interest income 372,912
Miscellaneous income 5,155
- ------------------------------------------------------------------------------
Total income $ 514,295
- ------------------------------------------------------------------------------
Expenses
- ------------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 488,529
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 5,798
Custodian fee (Note 1D) 65,571
Legal and accounting services 24,722
Amortization of organization expenses (Note 1F) 3,132
Miscellaneous 2,661
- ------------------------------------------------------------------------------
Total expenses $ 590,413
- ------------------------------------------------------------------------------
Net investment loss $ (76,118)
- ------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- ------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ 13,086,809
- ------------------------------------------------------------------------------
Net realized gain on investment transactions $ 13,086,809
- ------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments (identified cost basis) $ (2,245,462)
- ------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ (2,245,462)
- ------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 10,841,347
- ------------------------------------------------------------------------------
Net increase in net assets from operations $ 10,765,229
- ------------------------------------------------------------------------------
See notes to financial statements
18
<PAGE>
Special Investment Portfolio as of December 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
Increase (Decrease) Year Ended Year Ended
in Net Assets December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------
From operations --
Net investment income (loss) $ (76,118) $ 135,724
Net realized gain on
investment transactions 13,086,809 18,226,741
Net change in unrealized
appreciation (depreciation)
of investments (2,245,462) (1,762,538)
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 10,765,229 $ 16,599,927
- --------------------------------------------------------------------------------
Capital transactions --
Contributions $ 39,249,662 $ 10,738,468
Withdrawals (54,993,076) (18,331,396)
- --------------------------------------------------------------------------------
Net decrease in net assets from
capital transactions $ (15,743,414) $ (7,592,928)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets $ (4,978,185) $ 9,006,999
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of year $ 82,947,274 $ 73,940,275
- --------------------------------------------------------------------------------
At end of year $ 77,969,089 $ 82,947,274
- --------------------------------------------------------------------------------
See notes to financial statements
19
<PAGE>
Special Investment Portfolio as of December 31, 1997
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 *
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ratios to average daily net assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses 0.75% 0.76% 0.77% 0.74%+
Net investment income (loss) (0.10)% 0.18% 0.19% 0.20%+
Portfolio Turnover 156% 91% 81% 19%
- ----------------------------------------------------------------------------------------------------------------------------------
Average commission rate (per share)/(1)/ $0.0584 $0.0579 $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $77,969 $82,947 $73,940 $64,442
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, August 1, 1994, to December 31,
1994.
/(1)/ Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the fiscal year by the total number of
shares purchased and sold during the fiscal year for which commissions
were charged. For fiscal years beginning on or after September 1, 1995, a
Portfolio is required to disclose its average commission rate per share
for security trades on which commissions were charged.
See notes to financial statements
20
<PAGE>
Special Investment Portfolio as of December 31, 1997
NOTES TO FINANCIAL STATEMENTS
1 Significant Accounting Policies
-----------------------------------------------------------------------------
Special Investment Portfolio (the Portfolio) is registered under the
Investment Company Act of 1940 as a diversified open-end investment company
which was organized as a trust under the laws of the State of New York on May
1, 1992. The Declaration of Trust permits the Trustees to issue 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 Valuations -- Securities listed on foreign or U.S. securities
exchanges or in the NASDAQ National Market System generally are valued at
closing sales prices or, if there were no sales, at the mean between the
closing bid and asked prices on the exchange where such securities are
principally traded or on such National Market System. Unlisted or listed
securities for which closing sales prices are not available are valued at the
mean between the latest available bid and asked prices on the principal
market where the security was traded. An option is valued at the last sale
price as quoted on the principal exchange or board of trade on which such
option or contract is traded or, in the absence of a sale, at the mean
between the last bid and asked prices. Futures positions on securities or
currencies are generally valued at closing settlement prices. Short-term debt
securities with a remaining maturity of 60 days or less are valued at
amortized cost. If securities were acquired with a remaining maturity of more
than 60 days, their amortized cost value will be based on their value on the
sixty-first day prior to maturity. Other fixed income and debt securities,
including listed securities and securities for which price quotations are
available, will normally be valued on the basis of valuations furnished by a
pricing service. Securities for which market quotations are unavailable,
including any security the disposition of which is restricted under the
Securities Act of 1933, and other assets will be appraised at their fair
market value as determined in good faith by or at the direction of the
Trustees of the Portfolio.
B Income -- Interest income is determined on the basis of interest accrued
adjusted for amortization of premium or 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.
C Income Taxes -- The Portfolio has elected to be treated as a partnership
for United States 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. 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.
D 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
balances the Portfolio maintains with IBT. All significant credit balances
used to reduce the Portfolio's custodian fees are reflected as a reduction of
expenses on the Statement of Operations.
E Other -- Investment transactions are accounted for on a trade date basis.
F Deferred Organization Expenses -- Costs incurred by the Portfolio in
connection with its organization are being amortized on the straight-line
basis over five years.
G Use of Estimates -- The preparation of 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 revenue and expense during the reporting period. Actual results could
differ from those estimates.
21
<PAGE>
Special Investment Portfolio as of December 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
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 at the annual rate of 5/8 of 1% of average daily net assets. For
the year ended December 31, 1997, the fee was equivalent to 0.625% of the
Portfolio's average net assets for such period and amounted to $488,529.
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. Certain of the officers
and Trustees of the Portfolio are officers and directors/trustees of the
above organizations. Trustees of the Portfolio that are not affiliated with
the Investment Adviser may elect to defer receipt of all or a percentage of
their annual fees in accordance with the terms of the Trustees Deferred
Compensation Plan. For the year ended December 31, 1997, no significant
amounts have been deferred.
3 Investment Transactions
-----------------------------------------------------------------------------
Purchases and sales of investments, other than short-term obligations,
aggregated $110,954,191 and $115,346,330, respectively.
4 Federal Income Tax Basis of Investments
-----------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the investments
owned at December 31, 1997, as computed on a federal income tax basis, were
as follows:
Aggregate cost $ 61,828,650
-----------------------------------------------------------------------------
Gross unrealized appreciation $ 17,999,603
Gross unrealized depreciation (1,628,720)
-----------------------------------------------------------------------------
Net unrealized appreciation $ 16,370,883
-----------------------------------------------------------------------------
5 Line of Credit
-----------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR and
EVM and its affiliates in a committed $100 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 year ended December 31,
1997.
6 Risk Associated with Foreign Investments
-----------------------------------------------------------------------------
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less
publicly available information about foreign companies, particularly those
not subject to the disclosure and reporting requirements of the U.S.
securities laws. Foreign issuers are generally not bound by uniform
accounting, auditing, and financial reporting requirements and standards of
practice comparable to those applicable to domestic issuers. Investments in
foreign securities also involve the risk of possible adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, limitation on the removal of funds or other assets of the
Portfolio, political or financial instability or diplomatic and other
developments which could affect such investments. Foreign stock markets,
while growing in volume and sophistication, are generally not as developed as
those in the United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less liquid and
more volatile than securities of comparable U.S. companies. In general, there
is less overall governmental supervision and regulation of foreign securities
markets, broker-dealers and issuers than in the United States.
22
<PAGE>
Special Investment Portfolio as of December 31, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors
of Special Investment Portfolio:
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities of Special
Investment Portfolio, including the portfolio of investments, as of December 31,
1997, the related statement of operations for the year then ended, changes in
net assets for each of the two years in the period then ended and supplementary
data for each of the three years in the period then ended and for the period
from August 1, 1994 (start of business) to December 31, 1994. These financial
statements and supplementary data are the responsibility of the Portfolio's
management. Our responsibility is to express an opinion on these financial
statements and supplementary data based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and supplementary
data are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities held as of
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and supplementary data referred to
above present fairly, in all material respects, the financial position of the
Special Investment Portfolio as of December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the supplementary data for each of
the three years in the period then ended, and for the period from August 1, 1994
(start of business) to December 31, 1994, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 6, 1998
23
<PAGE>
Special Equities Portfolio as of December 31, 1997
Special Investment Portfolio
Officers
James B. Hawkes
President and Trustee
Edward E. Smiley, Jr.
Vice President and
Portfolio Manager
James L. O'Connor
Treasurer
Alan R. Dynner
Secretary
Trustees
M. Dozier Gardner
Vice Chairman, Eaton Vance
Management
Donald R. Dwight
President, Dwight Partners, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Banking, Harvard University Graduate School of Business Administration
Norton H. Reamer
President and Director, United Asset
Management Corporation
John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
24
