solid box centered over column
Eaton Vance Logo goes here
EV Classic
Strategic Income
Fund
Annual Shareholder Report
October 31, 1995
solid box centered under column
solid box centered over column
Investment Adviser of
Strategic Income Portfolio
Boston Management and Research
24 Federal Street
Boston, MA 02110
Administrator of EV Classic
Strategic Income Fund
Eaton Vance Management
24 Federal Street
Boston, MA 02110
Principal Underwriter
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(617) 482-8260
Custodian
Investors Bank & Trust Company
89 South Street
P.O. Box 1537
Boston, MA 02205-1537
Transfer and Dividend Disbursing Agent
First Data Services Group, Inc.
BOS725
P.O. Box 1559
Boston, MA 02104
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
This report must be preceded or accompanied by
a current prospectus which contains more complete
information on the Fund, including its distribution plan,
sales charges and expenses. Please read the prospectus
carefully before you invest or send money.
EV Classic Strategic
Income Fund
24 Federal Street
Boston, MA 02110 C-SGSRC
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To Shareholders
EV Classic Strategic Income Fund had a total return of 16.2% during the
year ended October 31, 1995. That return was the result of a rise in net
asset value per share to $11.33 from $9.75 on October 31, 1994. It does
not include the effect of the 1% contingent deferred sales charges
incurred by shareholders redeeming within the first year.
Following a difficult start
in 1995, Brady bonds and the foreign markets mounted a
strong comeback...
The global markets were marked by extreme volatility early in 1995.
Emerging markets, in particular, reflected a high degree of investor
anxiety over the Mexican currency crisis and the threat of Mexican
default because of the devaluation of the peso. Those concerns initially
sent most emerging markets - including the Brady bond markets - sharply
lower.
However, investors were soon encouraged by the realization that the
Mexican problem was strictly a local affair and would not prove a
lasting threat to other global markets. Many of the emerging markets
rallied strongly, and the Brady bond market - foreign bonds that are
dollar-denominated and collateralized by U.S. Treasuries - mounted an
especially strong comeback. As a result of the market rally, the
emerging markets regained much of the ground lost in the difficult
market of 1994.
Meanwhile, the U.S. bond market was fueled by a steady decline in
interest rates...
The U.S. bond market has sustained a rally throughout 1995. Following on
the heels of 1994, a year during which the Federal Reserve pursued a
tight monetary policy, most economic data in 1995 have suggested that
inflation has been successfully contained. With little sign of
inflation, it appears that the Fed has achieved its goal of a soft
landing. The high-yield corporate bond market - which is represented in
the Portfolio - also fared well, benefiting from a favorable climate of
declining rates and slow-but-steady economic growth.
Clearly, this fiscal year has demonstrated the sometimes volatile nature
of the global bond markets. But equally as important, the year has
provided an example of the potential benefits of a globally diversified
fixed-income portfolio. Combining an investment in countries with above-
average economic growth and declining inflation with attractive high-
yielding opportunities here in the U.S. can result in solid investment
results. In the pages that follow, portfolio manager Mark Venezia
provides his insights into the year just ended, and suggests what may
lie ahead for bond investors in 1996.
Sincerely,
/s/James B. Hawkes
James B. Hawkes
President
December 20, 1995
Photo goes here
Management Discussion
An interview with Mark S. Venezia,
vice president and portfolio manager
of Strategic Income Portfolio.
Q. Mark, the Fund has turned in a strong performance during the past
year. What accounts for that performance?
A. I expected at the beginning of the year that the U.S. inflation rate
was going to remain relatively tame, and that the racheting up of
interest rates in 1994 would have the effect of dampening inflationary
impulses in the economy. Toward the end of 1994 and early in 1995, the
emerging bond markets encountered a very turbulent climate, as worries
over the Mexican peso crisis drifted into other markets. However, after
the dust had settled, many of the emerging markets rallied strongly,
with Brady bond markets turning in very strong performances.
Concurrently, the U. S. bond market rallied strongly in 1995. As a
result, funds at the long end of their duration* range - including EV
Marathon Strategic Income Fund - have fared relatively well. The Fund's
prospectus permits a maximum duration of three years. Because we have
maintained a duration in the 2.8-to-3 year range, the Fund has benefited
from the ongoing rally in the U.S. and European bond markets.
*Duration is a measure of sensitive to interest rate changes, or
volatility. Generally, the shorter a fund's duration, the less subject
it is to price fluctuation.
Q. How have you structured the Portfolio in recent months?
A. Following the prolonged rise in interest rates in the U.S., we
positioned the Portfolio to take advantage of the likelihood of lower
interest rates. From the standpoint of asset allocation, the Portfolio
had approximately 43% of its investments in foreign investment-grade
bonds at October 31, a slight decrease from 44% in April 30. Thirty-
three percent of the Portfolio's investments were invested in high-yield
bonds, including Brady bonds, down slightly from 35% in April. And
approximately 24% was invested in U.S. investment
grade bonds, an increase from 16% in April. Our largest foreign
commitments are Brazil, New Zealand and Ireland.
Photo goes here
Mark S. Venezia
- ---------------
Q. What is the Portfolio's largest investment?
A. Brazil remains the Portfolio's largest single foreign position. In
the past year, Brazil has begun to shed much of the baggage that
typically characterize emerging markets. For example, during the Mexican
crisis earlier in the year, when capital flows to much of the region
were interrupted and economic assumptions were questioned, Brazil
remained firmly on track. Unlike some of its neighbors, Brazil has
limited its dependence on foreign capital flows, making it less
vulnerable in times of crisis.
In addition, Brazil is still at the outset of its free market reform
process. Having only recently privatized some industry and opened its
markets, many of the economic benefits still lie ahead for the country.
Considering this favorable backdrop, I'm very positive about Brazil. All
of our Brazilian holdings are in U.S. dollar-denominated Brady bonds,
where we obtain a yield 600 basis points above U.S. Treasuries,
according to J.P. Morgan, Inc., without currency risk. To further
mitigate risk, we have chosen, for all but a fraction of our Brazil
investments, discount Brady bonds whose principal is collateralized by
zero coupon Treasuries held in escrow at the New York Federal Reserve.
Q. And what about your investments
in Europe?
A. Europe continues to pose difficult questions, principally due to the
ongoing negotiations regarding monetary union. In the end, it may become
difficult politically for Germany to embrace monetary union or for
France to maintain a tight fiscal budget. Each of those nations will
have parliamentary elections in 1998, a year of big decisions for
European monetary union. If it is clear that nationalist sentiment will
defeat monetary union, then yields of potential EMU beneficiaries such
as France will rise, while German yields will fall. Furthermore, the
door will be shut to Sweden, Italy and Spain.
Portfolio Investments:*
Top five weightings
according to...
...Regional Credit Exposure
allocations based
on the location U.S. 31.1%
of the issuer of each Brazil 11.5
security. This shows New Zealand 9.8
that the Portfolio's Ireland 9.0
largest holdings Argentina 6.5
were in the U.S.
and Brazil.
...The Portfolio's Currency Allocation
holdings broken
down by country U.S. 38.4%
of currency Thailand 9.9
denomination. New Zealand 9.5
This shows where Indonesia 9.5
movements in Chech Republic 8.9
foreign exchange
rates will have the
greatest impact
on the Fund's
share price.
...the contribution Interest Rate
of a country Sensitivity
weighting to the
Portfolio's duration. New Zealand 22.3%
This shows where Australia 18.7
changing interest Canada 15.7
rates will have the Ireland 15.2
greatest impact Denmark 11.1
on share prices.
* According to market value as of 10/31/95
[Map of New Zealand]
New Zealand: A Profile*
GDP Growth rate: 2.8%
Inflation rate: 1.7%
1995 fiscal surplus: 2.5%
Size of economy:
NZ$108 Billion
Net Government debt as
% of GDP: 37%
Yield (10/31) on New
Zealand 5-year bonds
7.2%
* Estimates for fourth quarter, 1995.
Source: Bain Securities
Q. Is there any country in Europe about which you're especially
enthusiastic?
A. As I indicated, the outlook for the European bond markets will hinge
on the outcome of the talks over monetary union. If monetary union
fails, Germany should stand out as the strongest economy and benchmark
currency. If union succeeds, I believe Ireland will be among the
countries likely to benefit most. Ireland has become increasingly
attractive. Despite having significantly lowered inflation and reduced
the nation's budget deficit, Ireland has relatively high yields because
the currency tends to track the English pound. If monetary union becomes
a reality at some point, the Irish currency will more likely follow the
deutsche mark. In that scenario, all Irish fixed-income investments are
likely to appreciate. But even if EMU fails, I believe the Irish markets
have very limited downside.
Q. And what is your favorite investment in the Pacific region?
A. New Zealand has consistently kept interest rates higher than the
U.S. since they first raised rates a year ago. New Zealand raised rates
somewhat later than the U.S., not realizing that their remarkable
economic growth would lead to higher inflation. Interestingly, the New
Zealand Central Bank is committed by law to containing underlying
inflation within a band of 0-to-2%. The contract between the Central
Bank and Parliament states that the term of the Bank's Governor will end
if inflation exceeds those parameters. That adds credibility to the
government's pledge to control inflation.
Strategic Allocation:* pie chart
Adding a high yield advantage to global diversification
U.S. Investment Grade 24.1%
High Yield 33.2%
Foriegn Investment Grade 42.7%
* Based on market value as of 10/31/95
A second feature that makes New Zealand attractive for investors is that
the country has run fiscal surpluses for several years running, and
continues to buy up a good deal of its own debt. As a result, New
Zealand bonds - with 5-year yields around 140 basis points (1.4%) higher
than similar U.S. yields, according to Bloomberg Financial - are
becoming scarce at a time when investor demand is growing.
Finally, New Zealand is increasingly viewed as a safe haven. For
example, during recent emerging market crises, such as the Mexican peso
crisis earlier in the year, New Zealand attracted a large inflow of
fixed-income investment, especially from Japan. That is eloquent
testimony to the respect the country is gaining from global investors.
Q. In your view, what is the outlook for the global bond markets?
A. While the foreign markets have made up some of the ground lost in
1994, there is still significant room for further appreciation. In my
view, investors can find opportunities in many corners of the world. For
example, Australia and New Zealand have potential for spreads to narrow
further as they continue to generate non-inflationary growth. Brazil
appears to be the dominant opportunity in Latin America. As I indicated
earlier, Ireland should be a strong performer if the propects improve
for European monetary union. Canada is also very compelling now that the
immediate crisis regarding the Quebec secession referendum has passed.
Finally, in the U.S., slow growth and low inflation have improved the
possibility that rates will decline further.
Naturally, as I've reminded shareholders in past reports, investing in
global markets and high-yield markets may entail an added degree of
risk, and past performance is not necessarily an indicator of future
trends. But these markets provide unique investment opportunities as
emerging countries build their economies and implement inflation
controls. In the coming year, EV Classic Strategic Income Fund should be
well-positioned to seek out those opportunities.
Eaton Vance worm chart
Comparison of Change in Value of a $10,000 Investment in EV Classic
Strategic Income Fund, the J.P. Morgan Hedged Short-Term Global Index,
the Merrill Lynch 1-3 Year U.S. Treasury Index and the Lipper Short
World Multi Market Income Fund category
From May 31, 1994 through October 31, 1995
Legend reads:
EV Classic Strategic Income Fund
J.P. Morgan Hedged Short-Term Global Index
Merrill Lynch 1-3 Year U.S. Treasury Index
Lipper Short World Multi Market Income Funds
AVG. ANNUAL 1 Life of
RETURNS Year Fund*
Without CDSC 16.2% 9.9%
With CDSC 15.2% 9.9%
plot points read:
C. STRAG lipper merrill JPMH
5/94 10,000 10,000 10,000 10,000
6/94 9,631 9,928 10,030 10,002
7/94 9,686 9,961 10,116 10,074
8/94 9,778 10,002 10,152 10,076
9/94 9,717 10,033 10,128 10,074
10/94 9,879 10,064 10,152 10,113
11/94 9,980 10,080 10,106 10,124
12/94 9,980 9,808 10,129 10,136
1/95 9,859 9,744 10,270 10,260
2/95 9,838 9,785 10,411 10,382
3/95 9,808 9,764 10,469 10,464
4/95 10,406 9,928 10,562 10,564
5/95 10,923 10,061 10,747 10,747
6/95 10,821 10,088 10,805 10,787
7/95 10,923 10,178 10,849 10,865
8/95 11,166 10,223 10,914 10,952
9/95 11,399 10,322 10,968 11,030
10/95 11,480 10,389 11,060 11,123
Vertical bar reads:
$11,500
10,500
9,500
Horizontal bar reads:
5/94+ 10/94 2/95 6/95 10/95
Vertical bar (right side) reads:
$11,480
$11,123
$11,060
$10,389
Past performance is not indicative of future results. Investment returns
and principal will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Source:
Towers Data Systems, Bethesda, MD.
* Investment operations commenced on 5/25/94.
+ Index information is available only at month-end; therefore, the line
comparison begins at the next month-end following the commencement of
the Fund's investment operations.
Fund performance
In accordance with guidelines issued by the Securities and Exchange
Commission, we are including a performance chart comparing your Fund's
total return with that of a broad-based investment index. The lines on
the chart represent the total returns of $10,000 hypothetical
investments in EV Marathon Strategic Income Fund, and, beginning with
this report, the unmanaged J.P. Morgan Hedged Short-Term Global Index.
We have changed the comparison index from the Merrill Lynch 1-3 year
U.S. Treasury Index because the J.P. Morgan Index more accurately
reflects the Fund's investment universe and provides a better benchmark
for comparison.
The total return figures
The heavy solid line on the chart represents the Fund's performance at
net asset value. The Fund's total return figure reflects Fund expenses
and transaction costs, and assumes the reinvestment of income dividends
and capital gain distributions.
The light solid line represent the performance of the J.P. Morgan Hedged
Short-Term Global Index, an unmanaged index of short-term global funds.
The dashed line represents the performance of the Merrill Lynch 1-3 year
U.S. Treasury Index, an unmanaged index of short-term bonds. The
Indices' returns do not reflect any commissions or expenses that would
be incurred if an investor individually purchased or sold the securities
represented in the Indices. It is not possible to invest in the Indices
themselves. The dotted line represents the average performance of Short
World Multi-Market Income Funds, as compiled by Lipper Analytical
Services Inc., a mutual fund ranking service, and is included to show
how the Fund has performed relative to its universe.
EV Classic Strategic Income Fund
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1995
<S> <C> <C>
Assets:
Investment in Strategic Income Portfolio (Portfolio), at value (Note 1A) $ 11,151
Receivable from the Administrator (Note 4) 13,723
Deferred organization expenses (Note 1C) 28,497
--------------
Total assets $ 53,371
Liabilities:
Payable to affiliates --
Custodian fee $ 585
Accrued expenses 41,381
--------------
Total liabilities 41,966
--------------
Net Assets for 1,007 shares of beneficial interest outstanding $ 11,405
==============
Sources of Net Assets:
Paid-in capital $ 9,190
Accumulated net realized gain on investment transactions
(computed on the basis of identified cost) 605
Unrealized appreciation of investments from Portfolio
(computed on the basis of identified cost) 1,020
Undistributed net investment income 590
--------------
Total $ 11,405
==============
Net Asset Value and Redemption Price Per Share
($11,405 / 1,007 shares of beneficial interest) $11.33
======
The accompanying notes are an integral part of the financial statements
</TABLE>
Financial Statements (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1995
<S> <C> <C>
Investment Income (Note 1B):
Interest income allocated from Portfolio $ 1,125
Expenses allocated from Portfolio (94)
--------------
Total investment income $ 1,031
Expenses --
Custodian fees (Note 4) $ 1,918
Transfer and dividend disbursing agent fees 17
Printing and postage 77
Legal and accounting services 699
Registration fees 1,685
Taxes 1,330
Amortization of organization expenses (Note 1C) 7,997
--------------
Total expenses $ 13,723
Deduct allocation of expenses to the Administrator (Note 4) (13,723)
--------------
Net expenses --
--------------
Net investment income $ 1,031
--------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) from Portfolio (identified cost basis) (including net gain
due to foreign currency rate fluctuations of $28) --
Investment transactions $ 2
Financial futures contracts (139)
Foreign currency and forward foreign currency exchange contracts (304)
--------------
Net realized loss on investments $ (441)
Change in unrealized appreciation of investments 1,001
--------------
Net realized and unrealized gain on investments $ 560
--------------
Net increase in net assets from operations $ 1,591
==============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Year Ended October 31,
------------------------------------------
1995 1994*
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $ 1,031 $ 355
Net realized loss on investments (441) (508)
Change in unrealized appreciation
of investments 1,001 19
-------------- --------------
Net increase (decrease) in net assets from operations $ 1,591 $ (134)
-------------- --------------
Distributions to shareholders (Note 2) --
From net investment income $ -- $ (108)
-------------- --------------
Total distributions $ -- $ (108)
-------------- --------------
Transactions in shares of beneficial interest (Note 3) --
Proceeds from sale of shares $ -- $ 10,000
Net asset value of shares issued to shareholders
in payment of distributions declared -- 108
Cost of shares redeemed (62) --
-------------- --------------
Increase (Decrease) in net assets
from fund share transactions $ (62) $ 10,108
-------------- --------------
Net increase in net assets $ 1,529 $ 9,866
Net Assets:
At beginning of year 9,876 10
-------------- --------------
At end of year (including undistributed net
investment income of $590 and
$0, respectively) $ 11,405 $ 9,876
============== ==============
*For the period from the start of business, May 25, 1994, to October 31, 1994.
The accompanying notes are an integral part of the financial statements
</TABLE>
Financial Statements (continued)
<TABLE>
<CAPTION>
Financial Highlights
Year ended October 31,
--------------------------------------
1995 1994*
---------- ----------
<S> <C> <C>
Net asset value, beginning of year $ 9.750 $ 10.000
---------- ----------
Income (loss) from operations:
Net investment income $ 1.021 $ 0.348
Net realized and unrealized gain (loss) on investments 0.559 (0.495)
---------- ----------
Total income (loss) from operations $ 1.580 $ (0.147)
Less distributions from net investment income -- (0.103)
---------- ----------
Net asset value, end of year $ 11.330 $ 9.750
========== ==========
Total Return (2) 16.21% (1.41%)
Ratios/Supplemental Data **
Net assets, end of period (000's omitted) $ 11 $ 10
Ratio of net expenses to average net assets (1) 0.90% 0.76%+
Ratio of net investment income to average net assets 9.84% 7.74%+
Ratio (As a percentage of average net assets):
** For the year ended October 31, 1995 and for the period from the start of business, May 25, 1994, to October 31, 1994,
the operating expenses of the Fund reflect an allocation of expenses to the Administrator. Had such action not been
taken, net investment loss per share and the ratios would have been as follows:
Net investment loss per share $ (13.000) $ (6.900)
Expenses (1) 131.85% 160.83%+
Net investment loss (121.12%) (152.33%)+
Note: Per share amounts have been computed using average shares outstanding during the period.
+ Computed on an annualized basis
(1) Includes the Fund's share of Strategic Income Portfolio's allocated expenses.
(2) Total investment return is calculated assuming a purchase at the net asset value on the first day and a sale at the net asset
value on the last day of each period reported. Dividends and distributions, if any, are assumed to be reinvested at the net
asset value on the payable date.
* For the period from the start of business, May 25, 1994, to October 31, 1994
The accompanying notes are an integral part of the financial statements
</TABLE>
Notes to Financial Statements
(1) Significant Accounting Policies
EV Classic Strategic Income Fund (the Fund), is a non-diversified series
of Eaton Vance Mutual Funds Turst. The Fund is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund invests all of its investable assets in
interests in the Strategic Income Portfolio (the Portfolio), a New York
Trust having the same investment objective as the Fund. The value of the
Fund's investment in the Portfolio reflects the Fund's proportionate
interest in the net assets of the Portfolio (.01% at October 31, 1995.)
The performance of the Fund is directly affected by the performance of
the Portfolio. The financial statements of the Portfolio, including the
portfolio of investments, are included elsewhere in this report and
should be read in conjunction with the Fund's financial statements. The
following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting
principles.
A. Investment Valuations - Valuation of securities by the Portfolio is
discussed in Note 1 of the Portfolio's Notes to Financial Statements
which are included elsewhere in this report.
B. Income - The Fund's net investment income consists of the Fund's pro
rata share of the net investment income of the Portfolio, less all
actual and accrued expenses of the Fund determined in accordance with
generally accepted accounting principles.
C. Deferred Organization Expenses - Costs incurred by the Fund in
connection with its organization, including registration costs, are
being amortized on the straight-line basis over five years beginning on
the date the Fund commenced operations.
D. Other - Investment transactions are accounted for on the date the
investments are purchased or sold.
- ----------------------------------------------------------------------
(2) Distributions to Shareholders
The net income of the Fund is determined daily and substantially all of
the net income so determined is declared as a dividend to shareholders
of record at the time of declaration. Distributions, if any, are paid
monthly. Distributions of allocated realized capital gains, if any, are
made at least annually. Shareholders may reinvest capital gain
distributions in additional shares of the Fund at the net asset value as
of the ex-dividend date. Distributions are paid in the form of
additional shares or, at the election of the shareholder, in cash. The
Fund distinguishes between distributions on a tax basis and a financial
reporting basis. Generally accepted accounting principles require that
only distributions in excess of tax basis earnings and profits be
reported in the financial statements as a return of capital. Differences
in the recognition or classification or income between the financial
statements and tax earnings and profits which result in temporary over
distributions for financial statement purposes are classified as
distributions in excess on net investment income or accumulated net
realized gains. Permanent differences between book and tax accounting
relating to distributions are reclassified to paid-in capital.
(3) Capital Stock
At October 31, 1995 there were one billion shares of $0.0001 par value
capital stock authorized. Transactions in capital stock were as follows:
Year Ended October 31,
--------------------
1995 1994*
------ ------
Sales - 1,000
Issued to shareholders electing
to receive payments of
distributions in capital stock - 13
Redemptions (6) -
------ ------
Net increase (decrease) (6) 1,013
====== ======
*For the period from the start of business, May 25, 1994, to October 31,
1994.
- ----------------------------------------------------------------------
(4) Transactions with Affiliates
Eaton Vance Management (EVM) serves as the administrator of the Fund,
but the currently receives no compensation for these services. The
Portfolio has engaged Boston Management and research (BMR), a subsidiary
of EVM, to render investment advisory services. See Note 2 of the
Portfolio's Notes to Financial Statements which are included elsewhere
in this report. To enhance the net income of the Fund, $13,723, of
expenses related to the operation of the Fund were allocated, on a
preliminary basis, to EVM. Except as to Trustees of the Fund and the
Portfolio who are not members of EVM's or BMR's organization, officers
and Trustees receive remuneration for their services to the Fund out of
such investment adviser fee. Investors Bank & Trust Company (IBT) serves
as custodian to the Fund and the Portfolio. Prior to November 10, 1995,
IBT was an affiliate of EVM and BMR. Pursuant to the respective
custodian agreements, IBT receives a fee reduced by credits which are
determined based on the average cash balances the Fund or the Portfolio
maintains with IBT. Certain of the officers and Directors of the Fund
and Portfolio are officers and directors/trustees of the above
organizations (Note 5).
- ----------------------------------------------------------------------
(5) Distribution Plan
The Fund has adopted a distribution plan (the Plan) pursuant to Rule
12b-1 under the Investment Company Act of 1940. The Plan requires the
Fund to pay the Principal Underwriter, Eaton Vance Distributors, Inc.
(EVD), amounts equal to 1/365 of 0.75% of the Fund's daily net assets,
for providing ongoing distribution services and facilities to the Fund.
The Fund will automatically discontinue payments to EVD during any
period in which there are no outstanding Uncovered Distribution Charges,
which are equilivent to the sum of (i) 6.25% of the aggregate amount
received by the Fund for shares sold plus (ii) distribution fees
calculated by applying the rate of 1% over the prevailing prime rate to
the outstanding balance of Uncovered Distribution Charges of EVD,
reduced by amounts theretofore paid to EVD. The amount payable to EVD
with respect to each day is accrued on such day as a liability of the
Fund and, accordingly, reduces the Fund's net assets. EVD earned no
daily compensation for the year ended October 31, 1995.
In addition, the Plan permits the Fund to make monthly payments of
service fees to the Principal Underwriter in amounts not expected to
exceed 0.25% of the Fund's average daily net assets for any fiscal year.
The Directors of the Corporation have initially implemented the Plan by
authorizing the Fund to make monthly service fee payments to the
Principal Underwriter in amounts not expected to exceed 0.25% of the
Fund's average daily net assets for any fiscal year. EVD makes monthly
service fee payments to Authorized Firms in amounts anticipated to be
equivalent to 0.25%, annualized, of the assets maintained in the Fund by
their customers. On sales of shares made on January 30, 1995 and
thereafter, EVD currently expects to pay to an Authorized Firm a service
fee at the time of sale equal to 0.25% of the purchase price of the
shares sold by such Firm and monthly payments of service fees in amounts
not expected to exceed 0.25% per annum of the Fund's average daily net
assets based on the value of Fund shares sold by such Firm and remaining
outstanding for at least one year. During the first year after a
purchase of Fund shares, EVD will retain the service fee as
reimbursement for the service fee payment made to the Authorized Firm at
the time of sale. Service fee payments are made for personal services
and/or maintenance of shareholder accounts. Service fees paid to EVD and
Authorized Firms are separate and distinct from the sales commissions
and distribution fees payable by the Fund to EVD, and as such are not
subject to automatic discontinuance when there are no outstanding
Uncovered Distribution Charges of EVD. No provision for service fee
payments was made for the year ended October 31, 1995.
Certain of the officers of the Fund and Directors of the Corporation are
officers or directors of EVD.
- ----------------------------------------------------------------------
(6) Contingent Deferred Sales Charge
For shares purchased on or after January 30, 1995, a contingent deferred
sales charge (CDSC) is imposed on any redemption of Fund shares made
within one year of purchase. Generally the CDSC is based upon the lower
of the net asset value at date of redemption or date of purchase. No
charge is levied on shares acquired by reinvestment of dividend or
capital gain distributions. No CDSC is levied on shares which have been
sold to EVD or its affiliates or to their respective employees or
clients. CDSC charges are paid to EVD to reduce the amount of Uncovered
Distribution Charges calculated under the Fund's Distribution Plan. CDSC
charges received when no Uncovered Distribution Charges Exist will be
credited to the Fund. For the year ended October 31, 1995, EVD received
no CDSC paid by shareholders.
- ----------------------------------------------------------------------
(7) Investment Transactions
Increases and decreases in the Fund's investment in the Portfolio for
the year ended October 31, 1995 aggregated 7,728 and 5,583,
respectively.
Report of Independent Accountants
To the Board of Trustees of Eaton Vance Mutual Funds Trust and
Shareholders of EV Classic Strategic Income Fund:
We have audited the accompanying statement of assets and liabilities of
EV Classic Strategic Income Fund, a series of Eaton Vance Mutual Funds
Trust as of October 31, 1995, the related statement of operations for
the year then ended, the statements of changes in net assets and the
financial highlights for year ended October 31, 1995, and for the period
from the start of business, May 25, 1994, to October 31, 1994. These
financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights 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
financial highlights are free of material misstatement. Our procedures
included confirmation of securities owned as of October 31, 1995, by
correspondence with the custodian. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. 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 financial highlights
referred to above present fairly, in all material respects, the
financial position of EV Classic Strategic Income Fund, a series of
Eaton Vance Mutual Funds Trust as of October 31, 1995, the results of
its operations for the year then ended, changes in its net assets and
the financial highlights for the year then ended, and for the period
from the start of business, May 25, 1994, to October 31, 1994, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 1, 1995
<TABLE>
<CAPTION>
Strategic Income Portfolio
Portfolio of Investments
October 31, 1995
Principal U.S. $ Value
- ------------------------------------------------------------------------------------------------------------------------------------
Bonds & Notes -- 93.9%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA, 7.3% Argentine Pesos
Argentina Pensioner Pre-1 BOCON, 4.5132%, 4/1/01 2,000,000 $ 1,242,500
U.S. Dollars
Argentina Pre-2 BOCON, 5.8005%, 4/1/07 1,000,000 605,000
Argentina Discount, 6.875%, 3/31/23 16,400,000 9,255,750
---------------
Total Argentina (identified cost $11,405,592) $ 11,103,250
---------------
AUSTRALIA, 4.3% Australian Dollars
Commonwealth Bank of Australia, 11%, 10/16/01 2,000,000 $ 1,664,416
State Bank of New South Wales, 10.75%, 3/12/02 5,000,000 4,128,696
State Electricity -- Victoria, 9.25%, 9/18/03 1,000,000 759,147
---------------
Total Australia (identified cost, $6,403,503) $ 6,552,259
---------------
BRAZIL, 11.4% U.S. Dollars
Brazil Eligible Interest Bond (Brady), 6.8125%, 4/15/06 2,694,000 $ 1,789,826
Brazil Discount Bond, (Brady), 6.8125%, 4/15/24 26,200,000 15,621,750
---------------
Total Brazil (identified cost $16,442,740) $ 17,411,576
---------------
COSTA RICA, 1.9% U.S. Dollars
Costa Rica Interest Series B, (Brady), 6.7656%, 5/21/05 1,504,480 $ 1,168,480
Costa Rica Principal Series A, (Brady), 6.25%, 5/21/10 3,000,000 1,775,001
---------------
Total Costa Rica (identified cost $3,326,339) $ 2,943,481
---------------
CZECH REPUBLIC, 4.3% Czech Korunas
CEZ, 14.375%, 1/27/01 159,710,000 $ 6,523,130
---------------
(identified cost $6,022,084)
DENMARK, 4.8% Danish Krone
Denmark Government, 8%, 5/15/03 20,000,000 $ 3,731,683
Denmark Government, 8%, 3/15/06 20,000,000 3,668,855
---------------
Total Denmark (identified cost $6,820,519) $ 7,400,538
---------------
ECUADOR 0.7% U.S. Dollars
Ecuador-Par, 3%, 2/28/2025 3,000,000 $ 997,500
---------------
(identified cost $990,000)
FINLAND, 4.2% Finnish Markka
Republic of Finland, 9.5%, 3/15/04 25,000,000 $ 6,453,263
---------------
(identified cost, $5,081,593)
IRELAND, 8.9% Irish Pound
Irish Government, 9.25%, 10/18/03 4,000,000 $ 6,962,927
Irish Government, 8%, 10/18/00 4,000,000 6,594,758
---------------
Total Ireland (identified cost, $13,016,494) $ 13,557,685
---------------
MEXICO, 1.2% Mexican Peso
Mexican Cetes, 0%, 2/15/96 1,454,000 $ 1,824,361
---------------
(identified cost, $2,149,873)
NEW ZEALAND, 9.6% New Zealand Dollars
New Zealand Government, 8%, 11/15/06 14,550,000 $ 10,101,798
New Zealand Government, 10%, 3/15/02 6,000,000 4,502,111
---------------
Total New Zealand (identified cost, $13,131,282) $ 14,603,909
---------------
POLAND, 4.5% Polish Zloty
Polish Government T-Bill, 0%, 12/20/95 3,000,000 $ 1,180,044
Polish Government T-Bill, 0%, 11/29/95 3,000,000 1,198,911
Polish Government T-Bill, 0%, 01/26/96 3,370,000 1,306,209
U.S. Dollars
Poland-PDI (Brady), 3.25%, 10/27/14 5,000,000 3,221,875
---------------
Total Poland (identified cost $5,776,452) $ 6,907,039
---------------
THAILAND, 3.8% Thai Baht
ABN-Amro Bank Hong Kong -- Certificate of Deposit, 9.1%, 8/5/97 150,000,000 $ 5,861,550
---------------
(identified cost, $6,004,205)
UNITED STATES, 27.0%
Corporate Bonds & Notes, 12.1%
Agricultural Minerals & Chemicals, Sr. Notes, 10.75%, 9/30/03 1,000,000 $ 1,060,000
American General Finance, 8.125%, 8/15/09 1,000,000 1,106,770
Applied Extrusion, Sr. Notes, 11.5%, 4/1/02 1,000,000 1,075,000
Corporate Express Inc., Sr. Sub. Notes, 9.125%, 3/15/04 500,000 497,500
Dade International Inc., 13%, 2/01/05 500,000 550,000
Dayton Hudson Medium Term Note, 9.5%, 6/10/15 665,000 814,951
Dayton Hudson Medium Term Note, 9.52%, 6/10/15 350,000 429,461
Dayton Hudson Medium Term Note, 9.35%, 6/16/20 600,000 739,440
General Electric Capital Corp., 8.625%, 6/15/08 250,000 291,468
General Electric Capital Corp., 8.30%, 9/20/09 2,000,000 2,284,160
General Motors Acceptance Corp., 8.75%, 7/15/05 250,000 282,470
Moran Transportation, 1st Mortgage Bonds, 11.75%, 7/15/04 1,000,000 935,000
Overhead Door Corp., Sr. Notes, 12.25%, 2/1/00 500,000 477,500
Purina Mills, Sr. Sub. Notes, 10.25%, 9/1/03 1,000,000 1,032,500
Roadmaster Industries Inc Sr. Sub. Notes, 11.75%, 7/15/02 1,000,000 720,000
SD Warren Co., 12%, 12/15/04 1,000,000 1,100,000
Stone Container Corp., Sr. Sub. Debs., 10.75%, 10/1/02 500,000 522,500
TRW Inc., Medium Term Note, 9.35%, 6/4/20 1,900,000 2,419,061
Waters Corporation, Sr. Sub. Notes, 12.75%, 9/30/04 1,000,000 1,100,000
Westpoint Stevens, Sr. Sub. Notes, 9.375%, 12/15/05 1,000,000 1,000,000
---------------
Total United States Corporate Bonds & Notes
(identified cost, $17,345,757) $ 18,437,781
---------------
Mortgage Pass-Throughs, 12.4%
Federal Home Loan Mortgage Corp. Participation Certificates:
4.75%, with various maturities to 2003 97,350 $ 95,015
5.5%, with maturity at 2019 82,239 81,714
12.5%, with maturity at 2011 195,811 223,154
12.75%, with maturity at 2013 206,657 238,223
13.25%, with various maturities to 2013 277,052 323,290
13.5%, with maturity at 2019 743,597 865,668
---------------
$ 1,827,064
---------------
Federal National Mortgage Association
Mortgage-Backed Securities:
4.75%, with maturity at 1999 145,956 $ 142,966
5%, with maturity at 2003 231,191 224,320
5.5%, with various maturities to 2012 258,762 254,199
7.5%, with maturity at 2002 1,260,998 1,287,205
8%, with maturity at 2013 1,880,553 1,955,188
12.75%, with maturity at 2014 278,471 326,509
13%, with various maturities to 2015 1,801,958 2,100,373
13.25%, with maturity at 2014 307,421 364,692
13.5%, with various maturities to 2015 1,499,033 1,734,023
14.75%, with various maturities at 2012 3,625,776 4,349,433
---------------
$ 12,738,908
---------------
Government National Mortgage Association:
6.5%, with various maturities to 2007 1,767,604 $ 1,762,794
9%, with maturity at 2016 1,535,810 1,702,829
13.5%, with various maturities at 2014 690,109 830,434
---------------
$ 4,296,057
---------------
Total Mortgage Pass-Throughs $ 18,862,029
---------------
U.S. Treasury Bond, 11.75%, 2/15/01+
(identified cost, $3,862,188) 3,000,000 $ 3,797,820
---------------
Total United States (identified cost, $39,643,911) $ 41,097,630
---------------
Total Bonds & Notes (identified cost, $136,214,587) $ 143,237,171
---------------
- ------------------------------------------------------------------------------------------------------------------------------------
Options Purchased by Fund -- 0.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Option to Deliver/Receive, Strike Price, Expiration Month:
Canadian Dollars
Canadian December 1995 10 year Bond Futures/CAD, 103, November 19 4,000,000 $ 892
Canadian December 1995 10 year Bond Futures/CAD, 104, November 19 1,000,000 446
Canadian December 1995 10 year Bond Futures/CAD, 105, November 19 2,000,000 2,082
Canadian December 1995 10 year Bond Futures/CAD, 106, November 19 1,000,000 1,933
---------------
Total Options Purchased (premium paid, $74,469) $ 5,353
---------------
- ------------------------------------------------------------------------------------------------------------------------------------
Short-Term Obligation -- 2.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Banque National De Paris, Euro Time-Deposit
Cayman Islands, 5.8125%, 11/1/95 4,000,000 $ 4,000,000
---------------
Total Investments (identified cost, $140,289,056) $ 147,242,524
Other Assets, less Liabilities, 3.5% 5,340,765
---------------
Net Assets, 100% $ 152,583,289
===============
+Security pledged as collateral on financial futures contracts.
CAD -- Canadian Dollars
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Statements
Statement of Assets and Liabilities
October 31, 1995
<S> <C> <C>
Assets:
Investments, at value (Note 1A) (identified cost, $140,289,056) $ 147,242,524
Cash 18,631
Foreign currency, at value (cost, $1,841,352) 1,882,211
Receivable for daily variation margin on open
financial futures contracts (Note 1E) 27,589
Receivable for investments sold 2,155,437
Interest receivable 3,782,499
Deferred organization expenses (Note 1J) 15,684
--------------
Total assets $ 155,124,575
Liabilities:
Payable for forward foreign currency exchange contracts $ 2,527,247
Payable to affiliates --
Trustees' fees 855
Custodian fee 6,732
Accrued expenses 6,452
--------------
Total liabilities 2,541,286
--------------
Net Assets applicable to investors' interest in Portfolio $ 152,583,289
==============
Sources of Net Assets:
Net proceeds from capital contributions and withdrawals $ 148,485,554
Unrealized appreciation of investments
(computed on the basis of identified cost) 4,097,735
--------------
Total $ 152,583,289
==============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1995
<S> <C> <C>
Investment Income:
Interest Income -- $ 18,061,570
Expenses --
Investment adviser fee (Note 2) $ 992,620
Administration fee (Note 2) 273,545
Compensation of Directors not members of the
Investment Adviser's organization (Note 2) 11,281
Custodian fees (Note 2) 134,894
Legal and accounting services 86,580
Amortization of organization expenses (Note 1J) 4,708
Miscellaneous 24,893
--------------
Total expenses 1,528,521
--------------
Net investment income $ 16,533,049
--------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized loss (identified cost basis) (including net gain due to
foreign currency rate fluctuations of $560,380) --
Investment transactions $ (4,786,213)
Financial futures contracts (1,240,447)
Foreign currency and forward foreign
currency exchange contracts (5,860,177)
--------------
Net realized loss on investments $ (11,886,837)
Change in unrealized appreciation (depreciation) --
Investment transactions $ 12,752,524
Financial futures contracts (1,061,449)
Foreign currency and forward foreign
currency exchange contracts 3,945,995
--------------
Net change in unrealized appreciation of investments $ 15,637,070
--------------
Net realized and unrealized gain on investments 3,750,233
--------------
Net increase in net assets resulting from operations $ 20,283,282
==============
The accompanying notes are an integral part of the financial statements
</TABLE>
Financial Statements (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Year Ended October 31,
---------------------------------------
1995 1994*
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $ 16,533,049 $ 15,949,560
Net realized loss on investments (11,886,837) (23,646,259)
Change in unrealized appreciation (depreciation)
of investments 15,637,070 (7,159,575)
-------------- --------------
Net increase (decrease) in net assets resulting from operations $ 20,283,282 $ (14,856,274)
-------------- --------------
Capital transactions --
Contributions $ 7,892,611 $ 353,394,561
Withdrawals (112,061,370) (102,169,541)
-------------- --------------
Increase (decrease) in net assets resulting from capital transactions $ (104,168,759) $ 251,225,020
-------------- --------------
Total increase (decrease) in net assets $ (83,885,477) $ 236,368,746
Net Assets:
At beginning of year 236,468,766 100,020
-------------- --------------
At end of year $ 152,583,289 $ 236,468,766
============== ==============
- ----------------------------------------------------------------------------------------------------------------------------------
Supplementary Data
Year Ended October 31,
---------------------------------------
1995 1994*
-------------- --------------
Ratios (as a percentage of average net assets):
Expenses 0.84% 0.82%+
Net investment income 9.08% 8.41%+
Portfolio Turnover 78% 71%
+Computed on an annualized basis.
*For the period from the start of business, March 1, 1994, to October 31, 1994.
The accompanying notes are an integral part of the financial statements
</TABLE>
Notes to Financial Statements
(1) Significant Accounting Policies
Strategic Income Portfolio (the Portfolio) is registered under the
Investment Company Act of 1940 as a non-diversified open-end investment
company which was organized as a trust under the laws of the State of
New York in 1992. The Declaration of Trust permits the Trustees to issue
beneficial interests in the Portfolio. Investment operations began on
March 1, 1994, with the acquisition of net assets of $348,433,258 in
exchange for an interest in the Portfolio by one of the Portfolio's
investors. The following is a summary of significant accounting policies
of the Portfolio. The policies are in conformity with generally accepted
accounting principles.
A. Investment Valuations - Debt securities (other than mortgage-backed,
"pass-through," securities and short-term obligations maturing in sixty
days or less), including listed securities and securities for which
price quotations are available and forward contracts, will normally be
valued on the basis of market valuations furnished by pricing services.
Mortgage backed, "pass through" securities are valued using a matrix
pricing system which takes into account closing bond valuations, yield
differentials, anticipated prepayments and interest rates. Financial
futures contracts listed on commodity exchanges and exchange-traded
options are valued at closing settlement price. Short-term obligations
and money-market securities maturing in sixty days or less are valued at
amortized cost which approximates value. Non-U.S. dollar denominated
short-term obligations are valued at amortized cost as calculated in the
base currency and translated into U.S. dollars at the current exchange
rate. Investments for which market quotations are unavailable are valued
at fair value using methods determined in good faith by or at the
direction of the Trustees.
B. Income - Interest income is determined on the basis of interest
accrued and discount earned, adjusted for amortization of discount when
required for federal income tax purposes.
C. Gains and Losses From Security
Transactions - For book purposes, gains and losses are not
recognized until disposition. For federal tax purposes, the Fund
is subject to special tax rules that may affect the amount, timing, and
character of gains recognized on certain of the Portfolio's investments.
The Portfolio has elected, under Section 1092 of the Internal Revenue
Code, to utilize mixed straddle accounting for certain designated
classes of activities involving domestic options and domestic financial
futures contracts in determining recognized gains and losses. Under this
method, Section 1256 positions (financial futures contracts and options
on investments or financial futures contracts) and non-Section 1256
positions (bonds, etc.) are marked-to-market on a daily basis resulting
in the recognition of taxable gains and losses on a daily basis. Such
gains or losses are categorized as short-term or long-term based on
aggregation rules provided in the Code.
D. Income Taxes - The Portfolio is treated as a partnership for federal
tax purposes. No provision is made by the Portfolio for federal or state
taxes on any taxable income of the Portfolio because each investor in
the Portfolio is ultimately responsible for the payment of any taxes.
Since some of the Portfolio's investors are regulated investment
companies that invest all or substantially all of their assets in the
Portfolio, the Portfolio normally must satisfy the applicable source of
income and diversification requirements (under the Code) in order for
its investors to satisfy them. The Portfolio will allocate at least
annually among its investors each investor's distributive share of the
Portfolio's net investment income, net realized capital gains, and any
other items of income, gain, loss, deduction or credit.
E. Financial Futures Contracts - Upon the entering of a financial
futures contract, the Portfolio is required to deposit an amount
("initial margin") either in cash or securities equal to a certain
percentage of the purchase price indicated in the financial futures
contract. Subsequent payments are made or received by the Portfolio
("margin maintenance") each day, dependent on the daily fluctuations in
the value of the underlying security, and are recorded for book purposes
as unrealized gains or losses by the Portfolio. The Portfolio's
investment in financial futures contracts is designed only to hedge
against anticipated future changes in interest or currency exchange
rates. Should interest or currency exchange rates move unexpectedly, the
Portfolio may not achieve the anticipated benefits of the financial
futures contracts and may realize a loss. If the Portfolio enters into a
closing transaction, the Portfolio will realize, for book purposes, a
gain or loss equal to the difference between the value of the financial
futures contract to sell and financial futures contract to buy.
F. Foreign Currency Translation - Investment valuations, other assets,
and liabilities initially expressed in foreign currencies are converted
each business day into U.S. dollars based upon current exchange rates.
Purchases and sales of foreign investment securities and income and
expenses are converted into U.S. dollars based upon currency exchange
rates prevailing on the respective dates of such transactions.
Recognized gains and losses on investment transactions attributable to
foreign currency rates are recorded for financial statement purposes as
net realized gains and losses on investments. That portion of unrealized
gains and losses on investments that result from fluctuations in foreign
currency exchange rates are not separately disclosed.
G. Written Options - The Portfolio may write call or put options for
which premiums are received and are recorded as liabilities, and are
subsequently adjusted to the current value of the options written.
Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are
exercised or are closed are offset against the proceeds or amount paid
on the transaction to determine the realized gain or loss. If a put
option is exercised, the premium reduces the cost basis of the
securities purchased by the Portfolio. The Portfolio as a writer of an
option may have no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of
an unfavorable change in the price of the securities underlying the
written option.
H. Forward Foreign Currency Exchange Contracts - The Portfolio may enter
into forward foreign currency exchange contracts for the purchase or
sale of a specific foreign currency at a fixed price on a future date.
Risks may arise upon entering these contracts from the potential
inability of counterparties to meet the terms of their contracts and
from movements in the value of a foreign currency relative to the U.S.
dollar. The Portfolio will enter into forward contracts for hedging
purposes as well as non-hedging purposes. The forward foreign currency
exchange contracts are adjusted by the daily exchange rate of the
underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until such time as the contracts have
been closed or offset.
I. Reverse Repurchase Agreements - The Portfolio may enter into reverse
repurchase agreements. Under such an agreement, the Portfolio
temporarily transfers possession, but not ownership, of a security to a
counterparty, in return for cash. At the same time, the Portfolio agrees
to repurchase the security at an agreed-upon price and time in the
future. The Portfolio may enter into reverse repurchase agreements for
temporary purposes, such as to fund redemptions, or for use as hedging
instruments where the underlying security is foreign denominated. As a
form of leverage, reverse repurchase agreements may increase the risk of
fluctuation in the market value of the Portfolio's assets or in its
yield. Liabilities to counterparties under reverse repurchase agreements
are recognized in the statement of assets and liabilities at the same
time at which cash is received by the Fund. The securities underlying
such agreements continue to be treated as owned by the Fund and remain
in the Portfolio of investments. Interest charged on amounts borrowed by
the Portfolio under reverse repurchase agreements is accrued daily and
offset against interest income for financial statement purposes.
J. Deferred Organization Expense - Costs incurred by the Portfolio in
connection with its organization are being amortized on the straight-
line basis over five years.
K. Other - Investment transactions are accounted for on the date the
investments are purchased or sold.
- ----------------------------------------------------------------------
(2) Investment Adviser Fee and Other Transactions with Affiliates
The investment adviser fee is earned by Boston Management and Research
(BMR), a wholly-owned subsidiary of Eaton Vance Management (EVM), as
compensation for management and investment advisory services rendered to
the Portfolio. The fee is based upon a percentage of average daily net
assets plus a percentage of gross investment income (i.e., income other
than gains from the sale of investments). Such percentages are reduced
as average daily net assets exceed certain levels. For the year ended
October 31, 1995, the fee was equivalent to 0.55% (annualized) of the
Portfolio's average net assets for such period and amounted to $992,620.
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 $273,545 for the
year ended October 31, 1995.
Except for Trustees of the Portfolio who are not members of EVM's or
BMR's organization, officers and Trustees receive remuneration for their
services to the Portfolio out of such investment adviser fee. Investors
Bank & Trust Company (IBT) serves as custodian of the Portfolio. Prior
to November 10, 1995, IBT was an affiliate of EVM and BMR. Pursuant to
the custodian agreement, IBT receives a fee reduced by credits which are
determined based on the average daily cash balances the Portfolio
maintains with IBT. Certain officers of the Portfolio and Directors of
the Corporation are officers and directors/trustees of the above
organizations. Trustees of the Portfolio that are not affiliated with
the Investment Adviser may elect to defer receipt of all or a percentage
of their annual fees in accordance with the terms of the Trustees
Deferred Compensation Plan. For the year ended October 31, 1995, no
significant amounts have been deferred.
- ----------------------------------------------------------------------
(3) Line of Credit
The Portfolio participates with other portfolios and funds managed by
BMR or EVM in a $120 million unsecured line of credit agreement with a
bank. The line of credit consists of a $20 million committed facility
and a $100 million discretionary facility. Borrowings will be made by
the Portfolio solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each
portfolio or fund based on its borrowings at an amount above either the
bank's adjusted certificate of deposit rate, a variable adjusted
certificate of deposit rate, or a federal funds effective rate. In
addition, a fee computed at an annual rate of 1/4 of 1% on the $20
million committed facility and on the daily unused portion of the $100
million discretionary facility is allocated among the participating
portfolios and funds at the end of each quarter. The Portfolio did not
have any significant borrowings or allocated fees during the year ended
October 31, 1995.
- ----------------------------------------------------------------------
(4) Investments
The Portfolio invests primarily in foreign debt securities and U.S.
Government securities, the aggregate of which have a dollar weighted
average maturity of not more than three years. The ability of the
issuers of the debt securities to meet their obligations may be affected
by economic developments in a specific industry or country. Purchases
and sales of investments, other than short-term obligations, for the
year ended October 31, 1995 were as follows:
Purchases -
Investments (non-U.S. Government) $132,446,244
U.S. Government Securities 5,147,873
------------
$137,594,117
============
Sales -
Investments (non-U.S. Government) $221,485,148
U.S. Government Securities 9,228,918
------------
$230,714,066
============
- ----------------------------------------------------------------------
(5) Financial Instruments
The Portfolio regularly trades in financial instruments with off-balance
sheet risk in the normal course of its investing activities to assist in
managing exposure to various market risks. These financial instruments
include written options, forward foreign currency exchange contracts and
financial futures contracts and may involve, to a varying degree,
elements of risk in excess of the amounts recognized for financial
statement purposes. The notional or contractual amounts of these
instruments represent the investment the Portfolio has in particular
classes of financial instruments and does not necessarily represent the
amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related
and offsetting transactions are considered.
A summary of obligations under these financial instruments at October
31, 1995 is as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Sales
- ------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ ------------------------------------ ----------- ------------
<S> <C> <C> <C> <C>
11/14/95-11/22/95 Belgian Franc 1,114,190,005 $36,186,832 $(2,269,363)
4/19/96 Canadian Dollar 5,000,000 3,645,909 (66,746)
12/11/95-3/21/96 Swiss Franc 6,038,904 5,039,247 (321,221)
11/1/95-11/2/95 Deutsche Mark 4,362,224 3,101,221 7,430
1/18/96-1/22/96 Finnish Markka 12,352,483 2,892,814 (15,522)
11/1/95 Icelandic Krona 114,973,810 1,782,540 1,105
12/8/95 Irish Pound 2,125,174 3,353,525 (79,742)
11/10/95-12/18/95 Japanese Yen 626,000,000 6,362,431 204,781
11/01/95 Mexican Neuvo Peso 13,297,820 1,863,745 (18,465)
12/8/95 New Zealand Dollar 3,343,841 2,158,616 (41,943)
11/1/95-11/10/95 Singapore Dollar 19,600,000 13,822,868 (35,092)
----------- ------------
$80,209,748 $ (2,634,778)
=========== ============
</TABLE>
(5) Financial Instruments (continued)
<TABLE>
<CAPTION>
Purchases
- ----------
Deliver Net Unrealized
Settlement (in United Appreciation
Date In Exchange for States Dollars) (Depreciation)
- ------------------ ------------------------------------ ----------- ------------
<S> <C> <C> <C> <C>
11/14/95-11/15/95 Belgian Franc 155,241,536 $ 5,341,496 $ 15,816
4/19/96 Canadian Dollar 5,000,000 3,725,782 (13,128)
12/11/95 Swiss Franc 2,702,631 2,353,183 34,971
1/18/96 Czech Rep Koruna 169,905,000 6,393,212 (4,086)
11/1/95-11/9/95 Deutsche Mark 6,543,335 4,655,857 (14,586)
11/7/95-1/16/96 Indonesian Rupiah 33,500,000,000 14,458,334 79,426
12/8/95 New Zealand Dollar 2,533,920 1,662,505 5,051
11/1/95-3/6/96 Singapore Dollar 19,600,000 13,880,916 58,270
11/16/95-1/11/96 Thai Baht 232,000,000 9,225,670 (54,203)
----------- --------
$61,695,955 $107,531
=========== ========
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts
Net Unrealized
Appreciation
Expiration Date Contracts Position (Depreciation)
- ------------------ ---------- ---------- --------------
<S> <C> <C> <C>
12/95 97 U.S. 30 year Bond Futures Short $ (438,929)
12/95 240 U.S. 5 year Bond Futures Short (295,008)
12/95 90 Australian 10 year Bond Futures Long (40,605)
12/95 145 Canadian 10 year Bond Futures Short 359,268
12/95 25 German 10 year Bond Futures Short (79,787)
--------------
$ (495,061)
==============
</TABLE>
At October 31, 1995, the Portfolio had sufficient cash and/or securities
to cover margin requirements on open futures contracts.
- ------------------------------------------------------------------------
(6) Federal Income Tax Basis of Investments
The cost and unrealized appreciation/depreciation in value of the
investments owned at October 31, 1995, as computed on a federal income
tax basis, were as follows:
Aggregate cost $ 142,570,086
=============
Gross unrealized appreciation $ 6,145,077
Gross unrealized depreciation 1,471,993
-------------
Net unrealized appreciation $ 4,673,084
=============
Report of Independent Accountants
To the Trustees and Investors of Strategic
Income Portfolio:
We have audited the accompanying statement of assets and liabilities of
Strategic Income Portfolio, including the portfolio of investments, as
of October 31, 1995, the related statement of operations for the year
then ended and the statements of changes in net assets and supplementary
data for the year ended October 31, 1995 and for the period from March
1, 1994 (start of business) to October 31, 1994. These financial
statements and supplementary data are the responsibility of the
Portfolio's management. Our responsibility is to express an opinion on
these financial statements and supplementary data based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
supplementary data are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of October 31, 1995 by
correspondence with the custodians and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and supplementary data referred
to above present fairly, in all material respects, the financial
position of Strategic Income Portfolio as of October 31, 1995, the
results of its operations for the year then ended and the changes in net
assets and the supplementary data for the the year ended October 31,
1995 and for the period from March 1, 1994 (start of business) to
October 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 1, 1995
Investment Management
EV Classic
Strategic Income Fund
- ---------------------
Officers
M. Dozier Gardner
President, Trustee
James B. Hawkes
Vice President, Trustee
H. Day Brigham, Jr.
Vice President
William H. Ahern, Jr.
Vice President
Micheal B. Terry
Vice President
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, 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
Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
Strategic
Income Portfolio
- ----------------
Officers
James B. Hawkes
President, Trustee
Mark S. Venezia
Vice President
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, 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
Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
