[LOGO: HOUSE]
EV Classic
Strategic Income
Fund
Annual
Shareholder Report
October 31, 1996
To Shareholders
I am happy to report that EV Classic Strategic Income Fund had a
total return of 15.1% during the year ended October 31, 1996. That
return was the result of a rise in net asset value per share to
$12.09 from $11.33 on October 31, 1995, and the reinvestment of
$0.883 in dividends. It does not include the effect of the 1%
contingent deferred sales charges incurred by shareholders redeeming
within the first year. Based on the October dividend and the
closing net asset value of $12.09, the Fund's distribution rate was
8.23%.
1996: Robust performance for the global bond market and a record
year for global bond issuance...
Paced by the strong showing of Brady bonds and lower interest rates
in Europe, 1996 has been a banner year for the global bond markets.
Driven by falling rates and improving credit quality, foreign bond
markets have drawn increasing interest from institutional and
individual investors alike. Not surprisingly, given the excellent
fixed-income climate, 1996 is also shaping up as a record year for
the issuance of global bonds. Through June 30 alone, $350 billion in
new bonds had come to market, a 60% increase over the same period
last year. Several forces have been driving the trend, including
high levels of government borrowing as emerging economies raise the
capital necessary to fund economic development. The increased global
supply has met with a warm reception from investors. More than $115
billion of dollar-denominated bonds are scheduled to mature in 1996,
according to the Euromoney Capital Market Data Base, and a good
portion of that capital is being redirected into high-yield global
bonds.
Meanwhile, the U.S. bond market, while on the defensive, provided
some selective opportunities...
The U.S. market was generally under pressure throughout the period,
as yields for 5-year Treasuries rose from 5.81% on October 31, 1995
to 6.0% on October 31, 1996. While many investors had anticipated an
economic slowdown in the second half of the year, the economy not
only maintained its momentum but actually proved somewhat stronger
than expected. The economy's strength in the face of weaker
expectations contributed to increasing volatility throughout the
period.
Nonetheless, the Fund benefited from the response of its high-yield
corporate bonds to continued economic growth, while its mortgage-
backed securities outperformed the Treasury market. Thus, in a
difficult fixed-income environment, shareholders again benefited
from the Fund's flexible investment approach. We believe that this
time-tested strategy will continue to provide good fixed income
opportunities - both domestic and global - in the years ahead. In
the pages that follow, portfolio manager Mark Venezia reviews the
Fund's successful fiscal year and gives his outlook for the global
bond market.
[PHOTO OF JAMES B. HAWKES OMITTED]
Sincerely,
/S/ James B. Hawkes
James B. Hawkes
President
December 20, 1996
Fund shares are not guaranteed by the FDIC and are not deposits or
other obligations of, or guaranteed by, any depository institution.
Shares are subject to investment risks, including possible loss of
principal invested.
Management Discussion
An interview with Mark S. Venezia,
vice president and manager of
Strategic Income Portfolio.
Q. Mark, the Fund had an excellent performance during the fiscal
year ended October 31, 1996. To what do you attribute the Fund's
strong showing?
A. Generally, this was a period when many global market trends
worked in the Fund's favor. Our Brady bonds (see Question on page 4)
were the largest contributors to the Fund's performance, as emerging
markets rallied very strongly during the period. Second, we
benefited from our exposure to Europe, as interest rates fell during
the period. Third, yields in the so-called "Dollar Bloc" nations
fell dramatically, causing our Canadian, Australian, and New Zealand
positions to outperform the U.S. Fourth, while the U.S. Treasury
market remained under some pressure, the Fund benefited from a
narrowing of spreads in our U.S. mortgage-backed securities and
high-yield corporate bonds. And finally, the Fund achieved currency
gains as a result of the strength of the dollar against the yen and
the German mark.
Q. Why did the Brady markets do so well?
A. There were several reasons. With the currency crises and market
turbulence of 1994 and early 1995 behind them, global bond investors
focused on the progress emerging countries have made in implementing
economic reforms, fighting inflation and reducing current account
deficits. Moreover, with interest rates in the U.S., Europe, and
Japan still relatively low, the attractive yields on Brady bonds
drew increasing attention. Finally, these emerging economies have
shown that they can sustain growth rates well above those of the
industrialized nations. As a result, we saw some improvement in
credit quality among most Brady issuers. These strong fundamentals
all gave a lift to the Brady markets.
[PHOTO OF MARK S. VENEZIA OMITTED]
Q. Which Brady markets were the best performers for the Fund?
A. Predominantly the Latin American markets, although all emerging
markets tended to fare well. In the first half of the fiscal year,
Poland and Argentina were good positions for the Fund. Investors
gave a warm reception to Argentina's Second Reform of the State,
which promised tax reform and spending cuts. Meanwhile, the Polish
market responded well to the election of President Kwasniewski and
the likelihood of a more stable government still dedicated to
economic reform. Moody's and Standard & Poor's, major bond-rating
agencies, assigned Polish Bradys investment grade ratings, sparking
a sharp rally in the bonds.
In the second half of the period, we focused increasingly on Brazil
and Ecuador, each of which has made remarkable economic progress.
Brazil, for example, reported zero inflation for the month of
September and continued to make progress on administrative reforms.
Ecuador fared well as oil prices firmed throughout the year. In
addition, newly-elected President Bucaram has proven more sensitive
to the needs of business and foreign investorsthan his populist
campaign suggested. That has further encouraged investors.
Q. You've referred to the importance of Brady bonds to the Fund's
performance. Could you briefly explain the mechanics of the Brady
bond markets?
A. Certainly. As some investors already know, Brady bonds are named
after former U.S. Treasury secretary Nicholas Brady, the architect
of a U.S. plan to ensure the medium-term economic stability of
debtor emerging nations. The basic concept behind the Brady Plan was
to restructure these nations' commercial bank loans into bonds,
thereby providing debt relief for the borrowers while creating a
relatively liquid market for the new debt securities.
Portfolio Investments:
Top five weightings according to...
...Regional Credit Exposure
allocations based U.S. 42.2%
on the location Ireland 10.3
of the issurer of each Brazil 7.3
security. This shows Poland 6.4
that the Portfolio's Norway 5.3
largest holdings
were in the U.S.
and Ireland.
...The Portfolio's Currency Allocation
holdings broken U.S. 40.4%
down by country Ireland 10.5
of currency Czech Republic 9.8
denomination. Indonesia 7.7
This shows where Philippines 7.2
movements in
foreign exchange
on the Fund's
share price.
...The contribution Interest Rate
of a country's Sensitivity*
positive weighting to the U.S. 38.6%
Portfolio's duration. Germany 28.8
This shows where Ireland 21.2
changing interest Norway 10.4
rates will have the Canada 9.4
greatest impact
on share prices.
* Calculated by determinging the interest rate sensitivity fo the
Portfolio's positions in each country and dividing by the
Portfolio's overall interest rate sensitivity.
[GRAPHIC CHART OMITTED: The Brady Bond Market:]
Brady issuers demonstrate
improving economic fundamentals*...
1995
GDP Reserves
----- --------
Argentina $276 B $14.3 B
Brazil 689 B 51.8 B
Ecuador 18 B 1.6 B
Mexico 279 B 16.9 B
Philippines 74 B 7.0 B
Poland 116 B 15.0 B
Venezuela 79 B 6.3 B
Footnote reads:
*Data for 1995; Source: J.P. Morgan, Inc.
[GRAPHIC VERTICAL BAR CHART WITH IMAGE OF PAPER SCROLL IN BACKROUND
OMITTED: While Brady trading volume continues to surge.]
'91 $200B
'92 $730B
'93 $1,979B
'94 $2,766B
'95 $3,000B
Footnote reads:
Source: Emerging Markets Traders Association.
The first such plan, featuring an agreement with Mexico, went into
effect in 1990. Although there have been many variations on this
early theme, this first agreement provided the basic precedent for
future efforts: 1) securitization, or transforming bank loans into
bonds; 2) collateralized principal, whereby the principal portion of
some newly created bonds is backed by zero-coupon U.S. Treasuries;
3) discounted exchanges, whereby loans are exchanged at a discount
in return for long-term, floating-rate bonds; and 4) below-market
fixed coupons, whereby loans are exchanged at par value, but with
below-market coupons. These various structures have been used to
improve economic stability for a wide range of emerging markets in
Latin America, Southeast Asia, the Middle East and Eastern Europe.
Q. What are the overall benefits of the Brady market?
A. There are several. First, for emerging econo-mies, the use of
Brady bonds provides debt relief through lower interest rates,
longer maturities, and principal reduction. Often, that debt relief
gives these nations additional breathing room in the critical early
transition to a market economy. Second, the underlying credit of
some of the new debt is improved through guarantees of principal
repayment, which is very important from the investors' point of
view. Finally, the process helps to broaden the investor base for
the bonds and thereby improve their liquidity. As a measure of that
liquidity, trading in Brady bonds will far exceed $1 trillion in
1996.
[GRAPHIC PIE CHART OMITTED: Strategic Allocation:*]
High-Yield 16.4%
Foreign
Investment Grade 39.3%
U.S. Investment
Grade 44.3%
Footnote reads:
*Based on market valkue as of 10/31/96
Because the Fund is actively managed, country
and sector allocations are subject to change.
Q. Why did the Fund benefit from a strong dollar?
A. In fiscal year 1996, the dollar was very strong relative to the
Japanese yen. The Fund maintained short positions versus the yen
throughout the period, which helped the Fund's performance.
Meanwhile, in Europe, the Fund benefited from the relative strength
of the dollar against the German mark. Typically, when the mark is
weak versus the dollar, the other western European countries
benefit. Therefore, our strategy in Europe was to hold bond
positions in peripheral European countries, while maintaining short
positions in mark-related currencies. That strategy was doubly
effective because we not only realized the "carry" - the yield
difference between our bond holdings and our short currency
positions - but also benefited from a strong outperformance by the
European bond markets. Yields fell throughout Europe as countries
prepared to meet the strict economic criteria for monetary union.
Q. Looking forward, Mark, what is your outlook for the global
markets in the coming year?
A. I'm optimistic about the coming year forseveral reasons. First,
the emerging nations are likely to continue their progress toward
economic reform. While it's unreasonable to expect a repeat of this
year's remarkable returns from the Brady markets, the emerging
markets should still present good investment opportunities. Second,
some global markets - Germany is a good example - still have
relatively steep yield curves, so they may have room for further
appreciation in those markets. Finally, - and perhaps most
fundamentally - inflation is still in decline around the world. That
is certainly a favorable development for global bond investors.
Naturally, past trends do not guarantee future performance. And of
course, investing in global markets and high-yield markets may
involve currency and political risk. But foreign bonds continue to
represent unique vehicles for fixed-income investors. In the coming
year, EV Classic Strategic Income Fund will continue to pursue those
opportunities.
Comparison of Change in Value of a $10,000 Investment in EV Marathon
Strategic Income Fund, the J.P. Morgan Hedged Short-Term Global Index and
the Lipper Short World Multi-Market Income Funds average
From November 30, 1990, through October 31, 1996
AVERAGE 1 Life of Value of
ANNUAL RETURNS Year Fund* Investment at 10/31
- ----------------------------------------------------------
Including CDSC 14.1% 12.0% $13,212
Without CDSC 15.1% 12.0% $13,212
EV Classic Strategic Income Fund vs. Lipper Short World Multi-Market
Income Funds average and J.P. Morgan Hedged Short-Term Global Index
Date Fund Lipper JP Morgan
5/31/94 $10,000 $10,000 $10,000
6/30/94 $9,631 $9,928 $10,002
7/31/94 $9,697 $9,961 $10,073
8/31/94 $9,859 $10,001 $10,073
9/30/94 $9,859 $10,032 $10,073
10/31/94 $9,879 $10,063 $10,112
11/30/94 $9,980 $10,080 $10,123
12/31/94 $9,980 $9,809 $10,134
1/31/95 $9,859 $9,745 $10,258
2/28/95 $9,838 $9,786 $10,380
3/31/95 $9,808 $9,766 $10,462
4/30/95 $10,406 $9,930 $10,562
5/31/95 $10,923 $10,063 $10,746
6/30/95 $10,821 $10,089 $10,785
7/31/95 $10,923 $10,180 $10,863
8/31/95 $11,166 $10,225 $10,950
9/30/95 $11,399 $10,324 $11,027
10/31/95 $11,480 $10,391 $11,121
11/30/95 $11,632 $10,461 $11,242
12/31/95 $11,765 $10,564 $11,338
1/31/96 $12,039 $10,691 $11,450
2/28/96 $11,818 $10,638 $11,415
3/31/96 $11,903 $10,680 $11,435
4/30/96 $12,160 $10,776 $11,507
5/31/96 $12,227 $10,830 $11,546
6/30/96 $12,418 $10,916 $11,608
7/31/96 $12,429 $11,004 $11,669
8/31/96 $12,634 $11,092 $11,747
9/30/96 $13,028 $11,247 $11,874
10/31/96 $13,212 $11,360 $11,999
Footnote reads:
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 Lipper Analytical Services, Inc. **Investment operations
commenced 11/26/90. +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. It is not possible to invest
directly in the index.
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 Classic Strategic Income Fund and the
unmanaged J.P. Morgan Hedged Short-Term Global Index.
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 represents the performance of the J.P. Morgan
Hedged Short-Term Global Index. The Index's return does not reflect
any commissions or expenses that would be incurred if an investor
individually purchased or sold the securities represented in the
Index. It is not possible to invest in the Index itself. 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, 1996
<S> <C> <C>
Assets:
Investment in Strategic Income Portfolio (Portfolio),
at value (Note 1A) $ 1,681,181
Receivable from the Administrator (Note 4) 36,776
Deferred organization expenses (Note 1D) 19,611
-------------
Total assets $ 1,737,568
Liabilities:
Dividends payable $ 3,441
Accrued organization expense 39,263
Accrued expenses 1,601
-------------
Total liabilities 44,305
-------------
Net Assets for 140,099 shares of beneficial
interest outstanding $ 1,693,263
=============
Sources of Net Assets:
Paid-in capital $ 1,594,400
Accumulated net realized gain on investment transactions
(computed on the basis of identified cost) 11,596
Unrealized appreciation of investments from Portfolio
(computed on the basis of identified cost) 73,778
Accumulated undistributed net investment income 13,489
-------------
Total $ 1,693,263
=============
Net Asset Value, Offering and Redemption Price Per Share
($1,693,263 (divided by) 140,099 shares of beneficial interest) $12.09
======
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1996
<S> <C> <C>
Investment Income (Note 1B):
Interest income allocated from Portfolio $ 92,313
Expenses allocated from Portfolio (8,519)
-------------
Total investment income $ 83,794
Expenses --
Custodian fees $ 2,491
Distribution costs (Note 5) 9,441
Transfer and dividend disbursing agent fees 935
Printing and postage 22,294
Legal and accounting services 12,937
Registration fees 16,538
Amortization of organization expenses (Note 1D) 8,886
Miscellaneous 2,944
------------
Total expenses $ 76,466
Deduct allocation of expenses to the Administrator
(Note 4) (61,756)
------------
Net expenses 14,710
-------------
Net investment income $ 69,084
-------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) from Portfolio (identified
cost basis) (including net loss due to foreign currency
rate fluctuations of $8,601) --
Investment transactions $ 18,095
Financial futures contracts 1,230
Written option transactions 258
Foreign currency and forward foreign
currency exchange contracts 14,556
------------
Net realized gain on investments $ 34,139
Change in unrealized appreciation of investments 72,758
-------------
Net realized and unrealized gain on investments $ 106,897
-------------
Net increase in net assets from operations $ 175,981
=============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Year Ended October 31,
------------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $ 69,084 $ 1,031
Net realized gain (loss) on investments 34,139 (441)
Change in unrealized appreciation of investments 72,758 1,001
------------- -------------
Net increase in net assets from operations $ 175,981 $ 1,591
------------- -------------
Distributions to shareholders (Note 2) --
From net investment income $ (69,084) $ --
In excess of net investment income (9,026) --
------------- -------------
Total distributions $ (78,110) $ --
------------- -------------
Transactions in shares of capital stock (Note 3) --
Proceeds from sale of shares $ 1,623,722 $ --
Net asset value of shares issued to shareholders
in payment of distributions declared 65,510 --
Cost of shares redeemed (105,245) (62)
------------- -------------
Increase (decrease) in net assets
from Fund share transactions $ 1,583,987 $ (62)
------------- -------------
Net increase in net assets $ 1,681,858 $ 1,529
Net Assets:
At beginning of year 11,405 9,876
------------- -------------
At end of year (including accumulated
undistributed net investment income of $13,489
and $590, respectively) $ 1,693,263 $ 11,405
============= =============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Year Ended October 31,
--------------------------------------------------
1996 1995++ 1994*++
-------------- ------------ ------------
<S> <C> <C> <C>
Net asset value -- Beginning of year $ 11.330 $ 9.750 $ 10.000
-------- -------- --------
Income from operations:
Net investment income ** $ 0.804 $ 1.021 $ 0.348
Net realized and unrealized gain
(loss) on investments 0.865 0.559 (0.495)
-------- -------- --------
Total income (loss) from operations $ 1.669 $ 1.580 $ (0.147)
-------- -------- --------
Less distributions:
From net investment income $ (0.804) $ -- $ (0.103)
In excess of net investment income (0.105) -- --
-------- -------- --------
Total distributions $ (0.909) $ -- $ (0.103)
-------- -------- --------
Net asset value -- End of year $ 12.090 $ 11.330 $ 9.750
======== ======== ========
Total Return (2) 15.09% 16.21% (1.41%)
Ratios/Supplemental Data **
Ratio of net expenses to average net assets (1) 2.38% 0.90% 0.76%+
Ratio of net investment income to average net assets 7.08% 9.84% 7.74%+
Net assets, end of period (000's omitted) $ 1,693 $ 11 $ 10
** The operating expenses of the Fund reflect an allocation of expenses to the Administrator. Had such
action not been taken, net investment income (loss) per share and the ratios would have been as follows:
Net investment income (loss) per share $ 0.085 $(13.000) $ (6.900)
======== ======== ========
Ratios (As a percentage of average net assets):
Expenses (1) 8.71% 131.85% 160.83%+
Net investment income (loss) 0.75% (121.12%) (152.33%)+
+ Computed on an annualized basis
++ Per share amounts have been computed using average share outstanding during the period.
* For the period from the start of business, May 25, 1994, to October 31, 1994.
(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. Total return is not
computed on an annualized basis.
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 Trust (the Trust). 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 (1.3% at October 31, 1996.) 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 Valuation -- 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. Federal Taxes -- The Fund's policy is to comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies and to distribute to shareholders each year all
of its taxable income, including any net realized gain on
investments. Accordingly no provision for Federal income or excise
tax is necessary.
D. 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.
E. 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 income and expenses
during the reporting period. Actual results could differ from those
estimates.
F. Expense Reduction -- Investors Bank & Trust Company (IBT) serves
as custodian to the Fund and the Portfolio. Pursuant to the
custodian agreement, IBT receives a fee reduced by credits which is
determined based on the average cash balance the Fund or the
Portfolio maintains with IBT. All significant credit balances used
to reduce the Fund's custodian fees are reflected as a reduction of
operating expenses on the Statement of Operations.
(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 of 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 of net investment income or accumulated net realized gains.
Permanent differences between book and tax accounting relating to
distributions are reclassified to paid-in capital. During the year
ended October 31, 1996, reclassifications were made among the Fund's
capital accounts primarily due to differences in book and tax
accounting for investments in forward contracts and foreign
denominated investments. Net investment income, net realized gains
and net assets were not affected by this reclassification.
(3) Capital Stock
At October 31, 1996 there were one billion shares of $0.0001 par
value capital stock authorized. Transactions in capital stock were
as follows:
Year Ended October 31,
----------------------------
1996 1995
----------- ----------
Sales 142,327 --
Issued to shareholders
electing to receive
payments of
distributions in
capital stock 5,582 --
Redemptions (8,817) (6)
------------ ----------
Net increase (decrease) 139,092 (6)
============ ==========
(4) Transactions with Affiliates
Eaton Vance Management (EVM) serves as the administrator of the
Fund, but 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, $61,756, of expenses related to the operation of the Fund were
allocated to EVM. Certain of the officers and Trustees of the Fund
and Portfolio are officers and directors/trustees of the above
organizations (Note 5). 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 earned by BMR.
(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, which is
approved annually, 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
equivalent 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. The
Fund paid or accrued $7,225, to EVD for the year ended October 31,
1996. At October 31, 1996, the amount of Uncovered Distributions
Charges of EVD calculated under the Plan was approximately $90,000.
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 Trustees of the Trust 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. The Fund paid
or accrued service fees to or payable to EVD for the year ended
October 31, 1996, in the amount of $2,216. 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 pays
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.
Certain of the officers and Trustees of the Fund 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) of 1% 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, 1996, no CDSC was received by EVD
from shareholders.
(7) Investment Transactions
Increases and decreases in the Fund's investment in the Portfolio
for the year ended October 31, 1996 aggregated $1,639,512 and
$160,174, 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, 1996, the related statement of
operations for the year then ended, the statements of changes in net
assets for each of the two years then ended and the financial
highlights for each of the two years then ended and for the period
from May 25, 1994 (start of business) 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 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, 1996, by correspondence with the custodian. 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, 1996, the results
of its operations for the year then ended, the changes in its net
assets for each of the two years then ended and the financial
highlights for each of the two years then ended and for the period
from May 25, 1994 (start of business) to October 31, 1994, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 2, 1996
Strategic Income Portfolio
Portfolio of Investments
October 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Principal U.S. $ Value
- ------------------------------------------------------------------------------------------------
Bonds & Notes -- 90.8%
- ------------------------------------------------------------------------------------------------
ARGENTINA, 4.2% U.S. Dollars
Argentina Discount Bond (Brady), 6.4375%, 3/31/23
(identified cost $5,119,445) 7,700,000 $ 5,563,250
---------------
AUSTRALIA, 0.6% Australian Dollars
State Electricity - Victoria, 9.25%, 9/18/03
(identified cost $733,564) 1,000,000 $ 851,231
---------------
BRAZIL, 7.3% U.S. Dollars
Brazil Discount Bond (Brady), 6.5%, 4/15/24
(identified cost $7,844,804) 13,200,000 $ 9,718,500
---------------
COLOMBIA, 2.7% U.S. Dollars
FEN, 9.375%, 6/15/06
(identified cost $3,552,500) 3,500,000 $ 3,609,375
---------------
CZECH REPUBLIC, 4.6% Czech Korunas
CEZ (Czech Electric Company), 14.375%, 1/27/01
(identified cost $6,022,084) 159,710,000 $ 6,137,439
---------------
DENMARK, 1.4% Danish Krone
Denmark Government, 8%, 3/15/06
(identified cost $1,869,421) 10,000,000 $ 1,849,713
---------------
ECUADOR 1.4% U.S. Dollars
Ecuador Discount Bond (Brady), 6.50%, 2/28/25
(identified cost $1,625,211) 2,900,000 $ 1,901,313
---------------
IRELAND, 10.3% Irish Pound
Irish Government, 8%, 8/18/06 3,000,000 $ 5,243,751
Irish Government, 9.25%, 7/11/03 4,500,000 8,411,749
---------------
Total Ireland (identified cost $12,681,571) $ 13,655,500
---------------
NEW ZEALAND, 4.2% New Zealand Dollars
New Zealand Government, 6.5%, 2/15/00 4,000,000 $ 2,769,047
New Zealand Government, 8%, 11/15/06 3,800,000 2,819,933
---------------
Total New Zealand (identified cost $5,317,623) $ 5,588,980
---------------
NORWAY, 5.3% Norwegian Krones
Norway Government, 6.75%, 1/15/07 20,000,000 $ 3,121,289
Norway Government, 7.0%, 5/31/01 24,000,000 3,914,686
---------------
Total Norway (identified cost $6,814,190) $ 7,035,975
---------------
POLAND, 6.4% Polish Zloty
Polish Government T-Bill, 0%, 11/6/96 4,640,000 $ 1,645,932
Polish Government T-Bill, 0%, 12/18/96 3,670,000 1,274,691
Polish Government T-Bill, 0%, 1/1/97 5,860,000 2,021,571
Polish Government T-Bill, 0%, 1/29/97 10,420,000 3,545,081
---------------
Total Poland (identified cost $8,560,401) $ 8,487,275
---------------
UNITED STATES, 42.2% U.S. Dollars
Corporate Bonds & Notes, 5.4%
Agricultural Minerals & Chemicals,
Sr. Notes, 10.75%, 9/30/03 1,000,000 $ 1,065,000
Applied Extrusion, Sr. Notes, 11.5%, 4/1/02 1,000,000 1,045,000
Dayton Hudson Medium Term Note, 9.5%, 6/10/15 665,000 767,769
Dayton Hudson Medium Term Note, 9.52%, 6/10/15 350,000 404,583
Overhead Door Corp., Sr. Notes, 12.25%, 2/1/00 500,000 540,000
TRW Inc., Medium Term Note, 9.35%, 6/4/20 1,900,000 2,288,417
United International Holdings Inc.,
Sr. Sec. Disc. Notes, 0%, 11/15/99 1,500,000 1,035,000
---------------
Total United States Corporate Bonds & Notes
(identified cost $6,740,638) $ 7,145,769
---------------
Mortgage Pass-Throughs, 34.9% U.S. Dollars
Federal Home Loan Mortgage Corp.
Participation Certificates:
4.75%, with various maturities to 2003 40,582 $ 39,776
5.5%, with maturity at 2019 22,409 22,429
8%, with various maturities to 2021 4,438,216 4,591,223
8.5%, with various maturities to 2024 5,428,489 5,711,766
9%, with maturity at 2019 996,142 1,061,484
12.5%, with maturity at 2011 126,267 143,651
12.75%, with maturity at 2013 201,306 229,027
13%, with maturity at 2013 146,828 171,027
13.5%, with maturity at 2019 552,700 649,918
---------------
$ 12,620,301
---------------
Federal National Mortgage Association
Mortgage-Backed Securities:
4.75%, with maturity at 1999 65,853 $ 65,200
5%, with maturity at 2003 156,521 153,070
5.5%, with various maturities to 2012 133,861 133,327
7.5%, with maturity at 2002 939,228 958,609
8%, with various maturities to 2013 4,029,758 4,177,277
8.5%, with various maturities to 2026 3,637,468 3,823,635
9%, with various maturities to 2017 8,292,458 8,814,032
12.75%, with maturity at 2014 197,178 230,626
13%, with various maturities to 2015 1,408,664 1,643,333
13.25%, with maturity at 2014 303,799 360,103
13.5%, with various maturities to 2015 1,235,267 1,438,421
14.75%, with various maturities to 2012 2,942,240 3,555,441
---------------
$ 25,353,074
---------------
Government National Mortgage Association: U.S. Dollars
6.5%, with various maturities to 2007 1,292,604 $ 1,298,318
8%, with maturity at 2017 4,781,543 4,978,231
9%, with maturity at 2016 1,240,467 1,323,852
13.5%, with various maturities to 2014 562,280 673,444
---------------
$ 8,273,845
---------------
Total Mortgage Pass-Throughs (identified cost, $45,801,731) $ 46,247,220
---------------
U.S. Treasury Bond, 11.75%, 2/15/01+ U.S. Dollars
(identified cost, $2,603,438) 2,000,000 $ 2,422,180
---------------
Total United States (identified cost, $55,145,807) $ 55,815,169
---------------
Total Bonds & Notes (identified cost, $115,286,631) $ 120,213,720
---------------
- ------------------------------------------------------------------------------------------------
Short-Term Obligations -- 3.8%
- ------------------------------------------------------------------------------------------------
Banque National De Paris, Euro Time-Deposit U.S. Dollars
Cayman Islands, 5.50%, 11/1/96
(at amortized cost) 5,000,000 $ 5,000,000
---------------
Total Investments (identified cost, $120,286,631) $ 125,213,720
Other Assets, less Liabilities, 5.4% 7,193,079
---------------
Net Assets, 100% $ 132,406,799
===============
+Security pledged as collateral on financial futures contracts.
The accompanying notes are an integral part of the financial statements
</TABLE>
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1996
<S> <C>
Assets:
Investments, at value (Note 1A) (identified
cost, $120,286,631) $ 125,213,720
Cash 659
Foreign currency, at value (identified cost, $7,952) 7,744
Receivable for investments sold 1,896,365
Interest receivable 2,359,131
Deferred organization expenses (Note 1J) 10,963
Receivable for foreign
forward currency exchange contracts 2,971,260
-------------
Total assets $ 132,459,842
Liabilities:
Payable for daily variation margin on open
financial futures contracts (Note 1E) $ 29,359
Payable to affiliate --
Trustees' fees 681
Accrued expenses 23,003
-------------
Total liabilities 53,043
-------------
Net Assets applicable to investors'
interest in Portfolio $ 132,406,799
=============
Sources of Net Assets:
Net proceeds from capital contributions
and withdrawals $ 124,488,477
Unrealized appreciation of investments, futures,
options and foreign currency (computed on the
basis of identified cost) 7,918,322
-------------
Total $ 132,406,799
=============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1996
<S> <C>
Investment Income:
Interest Income -- $ 13,181,562
Expenses --
Investment adviser fee (Note 2) $ 744,744
Administration fee (Note 2) 208,657
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 8,663
Custodian fees 138,046
Legal and accounting services 87,414
Amortization of organization expenses (Note 1J) 4,721
Miscellaneous 7,025
-------------
Total expenses 1,199,270
-------------
Net investment income $ 11,982,292
-------------
Realized and Unrealized Gain (Loss) on Investments,
Futures, Options and Foreign Currency:
Net realized gain (loss) (identified cost basis)
(including net loss due to foreign currency rate
fluctuations of $775,003) --
Investment transactions $ 9,066,256
Financial futures contracts (115,205)
Written options 23,385
Foreign currency and forward foreign
currency exchange contracts 598,763
-------------
Net realized gain on investments,
futures, options and foreign currency $ 9,573,199
Change in unrealized appreciation (depreciation) --
Investments $ (2,027,026)
Financial futures contracts 426,241
Foreign currency and forward foreign
currency exchange contracts 5,421,373
-------------
Net change in unrealized appreciation
of investments, futures, options and
foreign currency $ 3,820,588
-------------
Net realized and unrealized gain on investments,
futures, options and foreign currency 13,393,787
-------------
Net increase in net assets resulting from operations $ 25,376,079
=============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Year Ended October 31,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $ 11,982,292 $ 16,533,049
Net realized gain (loss) on investments, futures,
options and foreign currency 9,573,199 (11,886,837)
Change in unrealized appreciation
of investments, futures, options and foreign currency 3,820,588 15,637,070
------------- -------------
Net increase in net assets resulting from operations $ 25,376,079 $ 20,283,282
------------- -------------
Capital transactions --
Contributions $ 10,557,996 $ 7,892,611
Withdrawals (56,110,565) (112,061,370)
------------- -------------
Net decrease in net assets resulting
from capital transactions $ (45,552,569) $(104,168,759)
------------- -------------
Total decrease in net assets $ (20,176,490) $ (83,885,477)
Net Assets:
At beginning of year 152,583,289 236,468,766
------------- -------------
At end of year $ 132,406,799 $ 152,583,289
============= =============
<CAPTION>
- ----------------------------------------------------------------------------------------------
Supplementary Data
Year Ended October 31,
------------------------------------------
1996 1995 1994*
---------- ----------- ----------
<S> <C> <C> <C>
Ratios (as a percentage of average net assets):
Expenses 0.86% 0.84% 0.82%+
Net investment income 8.62% 9.08% 8.41%+
Portfolio Turnover 97% 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. The Portfolio, which was organized as a trust
under the laws of the State of New York in 1992, seeks to provide a
high level of income by investing in a global portfolio consisting
primarily of high grade debt securities. The Declaration of Trust
permits the Trustees to issue beneficial interests in the Portfolio.
The following is a summary of significant accounting policies of the
Portfolio. The policies are in conformity with generally accepted
accounting principles.
A. Investment 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 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 Investment Transactions - Realized gains
and losses from investment transactions are recorded on the basis of
identified cost. For book purposes, gains and losses are not recognized
until disposition. For federal tax purposes, the 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 (the "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 entering into a financial
futures contract, the Portfolio is required to deposit an amount
("initial margin"), either in cash or securities, equal to a certain
percentage of the purchase price indicated in the financial futures
contract. Subsequent payments are made or received by the Portfolio
("variation margin") each day, dependent on the daily fluctuations
in the value of the underlying security, and are recorded for book
purposes as unrealized gains or losses by the Portfolio. The
Portfolio's investment in financial futures contracts is designed 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.
I. Reverse Repurchase Agreements - The Portfolio may enter into
reverse repurchase agreements. Under such an agreement, the
Portfolio temporarily transfers possession, but not ownership, of a
security to a counterparty, in return for cash. At the same time,
the Portfolio agrees to repurchase the security at an agreed-upon
price and time in the future. The Portfolio may enter into reverse
repurchase agreements for temporary purposes, such as to fund
withdrawals, or for use as hedging instruments where the underlying
security is denominated in a foreign currency. As a form of
leverage, reverse repurchase agreements may increase the risk of
fluctuation in the market value of the Portfolio's assets or in its
yield. Liabilities to counterparties under reverse repurchase
agreements are recognized in the statement of assets and liabilities
at the same time at which cash is received by the Portfolio. The
securities underlying such agreements continue to be treated as
owned by the Portfolio and remain in the Portfolio of investments.
Interest charged on amounts borrowed by the Portfolio under reverse
repurchase agreements is accrued daily and offset against interest
income for financial statement purposes.
J. 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. Expense Reduction - Investors Bank & Trust Company (IBT) serves
as custodian to the Portfolio. Pursuant to the custodian agreement,
IBT receives a fee reduced by credit which is determined based on
the average cash balance the Portfolio maintains with IBT. All
significant credit balances used to reduce the Portfolio's custodian
fees are reflected as a reduction of operation expenses on the
Statement of Operations.
L. 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 income and expenses
during the reporting period. Actual results could differ from those
estimates.
M. Other - Investment transactions are accounted for on a trade date
basis.
(2) Investment Adviser Fee and Other
Transactions with Affiliates
The investment adviser fee is earned by Boston Management and
Research (BMR), a wholly-owned subsidiary of Eaton Vance Management
(EVM), as compensation for management and investment advisory
services rendered to the Portfolio. The fee is based upon a
percentage of average daily net assets plus a percentage of gross
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, 1996,
the fee was equivalent to 0.54% (annualized) of the Portfolio's
average net assets for such period and amounted to $744,744. An
administration fee, computed at an effective annual rate of 0.15% of
average daily net assets was also paid to BMR for administrative
services and office facilities. Such fee amounted to $208,657 for
the year ended October 31, 1996.
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.
Certain officers of the Portfolio and Trustees of the Trust are
officers and directors/trustees of the above organizations. Trustees
of the Portfolio may elect to defer receipt of all or a portion of
their annual fees in accordance with the terms of the Trustees
Deferred Compensation Plan. For the year ended October 31, 1996, 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. 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 the bank's base rate or at an amount
above either the bank's adjusted certificate of deposit rate, a
Eurodollar rate, or a federal funds effective rate. In addition, a
fee computed at an annual rate of 0.15% on the daily unused portion
of the 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.
(4) Investment Transactions
The Portfolio invests primarily in foreign government and U.S.
Government debt securities. The ability of the issuers of the debt
securities to meet their obligations may be affected by economic
developments in a specific industry or country. Purchases and sales
of investments, other than short-term obligations, for the year
ended October 31, 1996 were as follows:
Purchases -
Investments (non-U.S. Government) $ 88,108,189
U.S. Government Securities 34,398,490
------------
$122,506,679
============
Sales -
Investments (non-U.S. Government) $146,483,894
U.S. Government Securities 1,284,688
------------
$147,768,582
============
(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.
<TABLE>
<CAPTION>
A summary of obligations under these financial instruments at
October 31, 1996 is as follows:
Forward Foreign Currency Exchange Contracts
Sales
- ------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ---------------- --------------
<S> <C> <C> <C> <C>
11/25/96 Australian Dollar 4,000,000 $ 3,145,400 $ (23,233)
11/5/96-11/29/96 Belgian Franc 1,112,959,031 38,049,468 2,304,779
11/5/96-1/22/97 Swiss Franc 12,184,273 9,980,904 250,731
11/22/96-12/24/96 Japanese Yen 726,000,000 6,814,064 408,016
12/10/96 New Zealand Dollars 809,921 556,739 (13,202)
---------------- --------------
$ 58,546,575 $ 2,927,091
================ ==============
<CAPTION>
Purchases
- ----------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ---------------- --------------
<S> <C> <C> <C>
11/25/96-11/29/96 Belgian Franc 209,500,272 $ 6,812,444 $ (80,640)
1/27/97 Canadian Dollar 3,750,000 2,801,958 10,008
1/31/97 Czech Koruna 169,905,000 6,237,335 (33,434)
11/6/96-12/6/96 Indonesian Rupiah 23,750,000,000 10,049,138 98,232
11/26/96 Indian Rupee 73,260,000 2,000,000 40,555
11/13/96-3/25/97 Philippine Peso 252,505,000 9,500,000 13,497
11/08/96 Thai Baht 63,700,000 2,500,000 (4,049)
---------------- --------------
$ 39,900,875 $ 44,169
================ ==============
<CAPTION>
Futures Contracts
Net Unrealized
Appreciation
Expiration Date Contracts Position (Depreciation)
- --------------- --------- ---------- --------------
<S> <C> <C> <C>
12/96 47 U.S. 5 year Treasury Bond Futures Short $ (58,345)
12/96 39 U.S. 10 year Treasury Bond Futures Short (43,443)
12/96 28 U.S. 30 year Treasury Bond Futures Short (117,411)
12/96 22 Australian 10 year Bond Futures Long 110,629
12/96 70 Canadian 10 year Bond Futures Long 328,220
12/96 107 French 10 year Bond Futures Short (420,629)
12/96 97 German 10 year Bond Futures Long 297,127
12/96 4 Japanese 10 year Bond Futures Short (164,969)
--------------
$ (68,821)
==============
At October 31, 1996, the Portfolio had sufficient cash and/or securities
to cover margin requirements on open futures contracts.
</TABLE>
Written Option Transactions
Transactions in written options for the period ended
October 31, 1996 were as follows:
Number
of Contracts Premiums
------------- ------------
Outstanding, beginning of year -- --
Options written 3,000 $23,385
Options exercised -- --
Options expired (3,000) ($23,385)
----- -------
Outstanding, end of year -- --
===== =======
(6) Federal Income Tax Basis of Investments
The cost and unrealized appreciation/depreciation in value of the
investments owned at October 31, 1996, as computed on a federal
income tax basis, were as follows:
Aggregate cost $ 120,786,543
=============
Gross unrealized appreciation $ 4,520,011
Gross unrealized depreciation 92,834
-------------
Net unrealized appreciation $ 4,427,177
=============
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, 1996, the related statement of
operations for the year then ended and the statements of changes in
net assets for each of the two years then ended, and supplementary
data for each of the two years then ended 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 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 owned as of October
31, 1996 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 Strategic Income Portfolio as of October 31,
1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years then ended, and
the supplementary data for each of the two years then ended 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 2, 1996
This page intentionally left blank.
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
Michael 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
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 15374
Boston, MA 02205-1537
Transfer and Dividend Disbursing Agent
First Data Investor 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.
C-SGSRC-12/96
EV Classic Strategic
Income Fund
24 Federal Street
Boston, MA 02110
