<PAGE>
Investing
[LOGO OF EATON [PHOTO OF EARTH
VANCE APPEARS for the APPEARS HERE]
HERE]
21st
Century
Annual Report October 31, 1997
EV
[PHOTO OF STOCK
CERTIFICATES CLASSIC
APPEARS HERE]
STRATEGIC
INCOME
FUND
Eaton Vance
Global Management-Global Distribution
[PHOTO OF SKYLINE
APPEAR HERE]
Classic
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
LETTER TO SHAREHOLDERS
[PHOTO OF JAMES B. HAWKES APPEARS HERE]
James B. Hawkes,
President
EV Classic Strategic Income Fund had a total return of 10.2% for the year ended
October 31, 1997./1/ That return was the result of a decline in net asset value
per share from $12.09 on October 31, 1996 to $11.95 on October 31, 1997, and the
reinvestment of $1.13 in dividends and $0.105 in capital gain distributions. By
comparison, the average total return of 79 Multi-Sector Income Funds as compiled
by Lipper Analytical Services, Inc. -- a nationally recognized monitor of mutual
fund performance -- was 9.8% for the same period./2/
A volatile period for the world's fixed-income investors...
The past fiscal year was marked by unusually high volatility in the world's
fixed-income markets. Concerns over emerging nations' current account deficits,
a series of currency crises in Asia, and lingering questions over the fate of
European Monetary Union all contributed to rising volatility. Meanwhile,
conditions in the U.S. were relatively placid, as a sound economy was
accompanied by continued low inflation. In such a widely divergent investment
climate, it paid to be selective.
The Fund's performance again earned high marks from Morningstar...
In the face of high volatility, the Portfolio's flexibility to invest in a broad
range of markets provided a distinct advantage. Reflecting that advantage, the
Fund's risk-adjusted performance through October 31 earned it a Five-Star
Overall rating among taxable bond funds covered by Morningstar, Inc./3/ -- a
nationally recognized monitor of mutual fund performance.
1998 should bring more opportunities for high-yield investors...
As we've seen, the global bond markets proved very challenging in 1997. Yet, as
economic growth and development continue to alter the face of the world economy,
there remain ample opportunities for fixed-income investors, both here in the
U.S. and abroad. Strategic Income Portfolio will continue to monitor the markets
closely in search of those opportunities. In the pages that follow, portfolio
manager Mark Venezia reviews the past year in the global bond markets and offers
his outlook for the year ahead.
Sincerely,
/s/ James B. Hawkes
James B. Hawkes
President
December 9, 1997
- --------------------------------------------------------------------------------
Fund Information
as of October 31, 1997
Performance/4/ -
<TABLE>
<CAPTION>
Average Annual Total Returns (at net asset value)
- --------------------------------------------------------------------------------
<S> <C>
One year 10.2%
Life of Fund (5/25/94) 11.5
SEC Average Annual Total Returns (including applicable CDSC)
- --------------------------------------------------------------------------------
One year 9.2%
Life of Fund (5/25/94) 11.5
Five Largest Credit Exposures/5/
- --------------------------------------------------------------------------------
By total net assets
United States 78.9%
Ireland 4.4%
Norway 3.3%
Argentina 2.7%
Ecuador 2.1%
</TABLE>
/1/ This return does not include the applicable contingent deferred sales
charge.
/2/ It is not possible to invest directly in an Average or Index.
/3/ Morningstar ratings reflect historical risk-adjusted performance through
10/31/97 and are subject to change. Past performance is no guarantee of
future results. Funds are assigned ratings from 1 star (lowest) to 5 stars
(highest). Ratings are calculated from the funds' 3-, 5-, and 10-year
returns (with fee adjustment) in excess of 90-day Treasury bill returns. The
top 10% of the funds in a category receive 5 stars. For the 3-year period,
the Fund was rated 5 stars (1338 funds).
/4/ Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested. SEC return for one year reflects 1%
contingent deferred sales charge.
/5/ Five largest credit weightings account for 91.4% of the Portfolio's
investments, determined by dividing the total market value of the holdings
by the total net assets of the Portfolio. Holdings are subject to change.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost.
2
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
MANAGEMENT DISCUSSION
[PHOTO OF MARK S. VENEZIA APPEARS HERE]
Mark S. Venezia,
Portfolio Manager
An interview with Mark S. Venezia, portfolio manager of Strategic Income
Portfolio.
Q: Mark, the Fund turned in an excellent showing during the fiscal year. What
accounted for the strong performance?
A: This was a fairly good year for emerging markets and domestic high-yield
markets saw spreads tighten through much of the period. While that tightening
slowed in the emerging markets in mid-summer, it continued in the U.S.
markets though September.
Then, in late October, the market changed dramatically, as currency crises
shook the Asian markets and rattled investors in other emerging markets.
Prior to the crisis, emerging market spreads -- the yield difference between
emerging market bonds and U.S. Treasuries with similar maturities -- had been
in the 300 basis point (3.0%) range. At the height of the currency crisis,
these spreads rose to as high as 900 basis points before rallying back to the
600 basis point level. Those volatile shifts all occured within a period of
several days in the last week of October, creating a most difficult climate
as the period came to a close.
Q: How did you manage to avoid the downturn that rocked so many of the fixed-
income markets?
A: Primarily by emphasizing the U.S. while reducing our exposure to foreign
markets. Interestingly, we were able to avoid much of the volatility of the
global markets even while increasing the Portfolio's overall duration -- a
measure of relative interest rate risk. On October 31, the Portfolio's
duration was 3.8 years, up from 2.9 a year ago. We increased the Portfolio's
exposure to high-grade bonds -- to 53% on October 31 from 43% a year earlier
-- with our strongest weighting in U.S. mortgage-backed securities.
The U.S. market has benefited from manageable growth and continued low
inflation. That combination has proven a very favorable backdrop for domestic
bonds. In addition, U.S.-backed securities represent an investment in the
very highest-quality issuer as well as providing excellent liquidity in an
increasingly volatile market.
- --------------------------------------------------------------------------------
Five Largest Currency Exposures/1/
- --------------------------------------------------------------------------------
By total net assets
<TABLE>
<S> <C>
United States 85.4%
Norway 3.3%
Germany 2.7%
India 2.5%
Ireland 2.2%
U.S. Portion - Sector Allocation/1/
- --------------------------------------------------------------------------------
By total net assets
Seasoned Mortgage-backed Securities 59.8%
High-Yield Corporates 21.3%
Commercial Paper 13.5%
Put Bonds 3.3%
U.S. Treasuries 2.1%
</TABLE>
/1/ Because the Portfolio is actively managed, currency exposures and sector
allocations are subject to change.
- --------------------------------------------------------------------------------
Mutual fund shares are not insured 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.
- --------------------------------------------------------------------------------
3
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
MANAGEMENT DISCUSSION CONT'D
Q: Why did you focus predominantly on mortgage-backed securities?
A: In my view, mortgage-backed securities (MBS) were the sector of the market
with the least potential for spread widening. Accordingly, we raised this
segment of the Portfolio to 48% at October 31 from 35% a year ago. As
investors may know, MBS represent pools of homeowners' mortgages. MBS provide
a yield advantage over Treasuries and are especially attractive in a stable
interest rate environment. And because they are U.S. government-backed, they
are of the highest quality.
We focus on the seasoned segment of the MBS market. In aggregate, seasoned
MBS have highly predictable prepayment rates -- the rates at which homeowners
prepay their mortgages. Their predictability makes seasoned securities
preferable to their unseasoned counterparts, which may provide uneven cash
flows and require investors to reinvest at unfavorable interest rates.
Q: Did you increase your commitments to U.S. high-yield bonds?
A: Yes. As part of our shift to the U.S., we increased our investments in U.S.
high-yield corporate bonds. The U.S. high-yield bond market performed very
well during the year. The economy remained in high gear and corporate
earnings continued to improve. Also, the strong performance of the stock
market increased the equity capitalization of these companies, thereby
improving debt-to-equity ratios. The high-yield market was further aided by a
surge in the number of mergers and industry consolidations. This trend was
witnessed across a broad array of industries, leading to larger, better
capitalized companies. While the high-yield market felt some volatility along
with the emerging markets in late October, the impact was much less
pronounced. Domestic high-yield spreads, meanwhile, which had been 300 basis
points, rose to 400 before settling back to 350.
Q: What were the difficulties in the Asian markets?
A: Several countries in southeast Asia -- including Indonesia, Thailand, and the
Philippines -- have been forced to sharply devalue their currencies in recent
months. In light of the countries' continuing current account deficits, their
currencies were grossly overvalued. While they tried gamely to defend their
currencies, their underlying economic fundamentals, as well as speculative
raids by currency traders, made devaluation inevitable. As the trend toward
devaluation rolled through Asia, financial markets were destabilized, with
some of that instability spreading to other emerging markets.
Q: How have you limited the Portfolio's foreign exposure?
A: We used a variety of measures during the year to reduce the Portfolio's
international credit exposure. The most significant move was the
aforementioned shift to the U.S. market, but we also sharply scaled back our
holdings in several vulnerable areas.
The most dramatic cuts in foreign positions were those in southeast Asia,
where high yields had attracted us from 1994 through 1996. Although we
suffered losses in our Philippine peso and Indonesian rupiah positions, they
were partially offset by our short position in the Japanese yen. The Japanese
economy remains so weak that the central bank will require a continued,
accommodative monetary policy.
Our Brady bond positions, 13.1% of the Portfolio a year ago, were gradually
reduced during the period, ending the fiscal year at 9.2%. The largest
reductions among the Brady nations were in Brazil and Argentina, the
countries in Latin America that suffered the brunt of the October crisis.
Brazil, for example, continues to champion economic reforms, but suffers from
a nagging current account deficit.
4
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
MANAGEMENT DISCUSSION CONT'D
In Eastern Europe, where we had a 16% exposure a year ago, we now have only a
1% position in Bulgarian Brady bonds and no foreign currency exposure
whatsoever. In Western Europe, we've held modest positions in the German mark
and in Irish government bonds. Germany has maintained an artificially weak
mark in recent years in order to promote European monetary union (EMU). Now
that EMU appears certain, the Bundesbank is in good position to ultimately
raise interest rates. Meanwhile, Ireland's buoyant economy appears to have
assured its entry into the first wave of EMU.
Q: Mark, what is your outlook for the coming year?
A: Given current conditions, most risk/reward factors favor the U.S. market. The
U.S. continues to benefit from moderate growth, low inflation, and a
political stability that encourages a flight to high-quality, dollar-
denominated securities.
Elsewhere, it's apparent that the Japanese yen is likely to weaken further as
Japan's economic fundamentals deteriorate. The opposite is true of Germany,
which has kept interest rates artificially low. Thus, we should see the
German mark strengthen somewhat in coming months.
As I indicated earlier, we have exited most of the emerging markets, although
we may very well see some interesting opportunities appear once the markets
have settled from their recent instability. That flexibility is among the
most appealing aspects of Strategic Income Portfolio. It allowed us to move
nimbly earlier in the fiscal year and thus avoid the difficulties in some
foreign markets. Fortunately, our charter is broad enough to include a fairly
wide range of investments in terms of credit quality as well as country of
origin. I believe that same flexibility will allow us to take advantage of
future global opportunities as they occur.
Comparison of Change in Value of a $10,000 Investment in the Fund vs. Morgan
Hedged Short-Term Global Index*
From May 31, 1994, through October 31, 1997
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
EV Classic J.P. Morgan Hedged Consumer
Date Strategic Income Fund Short-Term Global Index Price Index
- ---- --------------------- ----------------------- -----------
<S> <C> <C> <C>
05/31/94 $10,000 $10,000 10,000
06/30/94 $9,631 $10,002 10,034
07/31/94 $9,697 $10,073 10,061
08/31/94 $9,859 $10,073 10,102
09/30/94 $9,859 $10,073 10,129
10/31/94 $9,879 $10,112 10,136
11/30/94 $9,980 $10,123 10,149
12/31/94 $9,980 $10,134 10,149
01/31/95 $9,859 $10,258 10,190
02/28/95 $9,838 $10,380 10,231
03/31/95 $9,808 $10,462 10,264
04/30/95 $10,406 $10,562 10,298
05/31/95 $10,923 $10,746 10,319
06/30/95 $10,821 $10,785 10,339
07/31/95 $10,923 $10,863 10,339
08/31/95 $11,166 $10,950 10,366
09/30/95 $11,399 $11,027 10,386
10/31/95 $11,480 $11,121 10,420
11/30/95 $11,632 $11,242 10,414
12/31/95 $11,765 $11,338 10,407
01/31/96 $12,039 $11,450 10,468
02/28/96 $11,818 $11,415 10,502
03/31/96 $11,903 $11,435 10,556
04/30/96 $12,160 $11,507 10,597
05/31/96 $12,227 $11,546 10,617
06/30/96 $12,418 $11,608 10,624
07/31/96 $12,429 $11,669 10,644
08/31/96 $12,634 $11,747 10,664
09/30/96 $13,028 $11,874 10,698
10/31/96 $13,212 $11,999 10,732
11/30/96 $13,612 $12,118 10,753
12/31/96 $13,686 $12,155 10,753
01/31/97 $13,936 $12,227 10,786
02/28/97 $14,063 $12,255 10,820
03/31/97 $13,912 $12,243 10,847
04/30/97 $13,983 $12,349 10,861
05/31/97 $14,105 $12,426 10,854
06/30/97 $14,244 $12,525 10,868
07/31/97 $14,529 $12,628 10,881
08/31/97 $14,348 $12,651 10,902
09/30/97 $14,594 $12,748 10,929
10/31/97 $14,550 $12,815 10,956
</TABLE>
Performance+
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Annual Total Returns (at net asset value)
- --------------------------------------------------------------------------------
<S> <C>
One year 10.2%
Life of Fund (5/25/94) 11.5
SEC Average Annual Total Returns (including applicable CDSC)
- --------------------------------------------------------------------------------
One year 9.2%
Life of Fund (5/25/94) 11.5
</TABLE>
* Source: Towers Data Systems, Bethesda, MD. Investment operations commenced
5/25/94. Index information is only available at month-end; therefore, the line
comparison begins at the next month-end following the commencement of the
Fund's investment operations.
The chart compares the Fund's total return with that of the J.P. Morgan Hedged
Short-Term Global Index, a broad-based, unmanaged market index of short-term,
global bonds, and the Consumer Price Index, a widely recognized measure of
inflation. Returns are calculated by determining the percentage change in net
asset value (NAV) with all distributions reinvested. The lines on the chart
represent the total returns of $10,000 hypothetical investments in the Fund
and the Indices. The Indices' total return does not reflect commissions or
expenses that would have been incurred if an investor individually purchased
or sold the securities represented in the Index. It is not possible to invest
directly in an Index.
+ Returns are calculated by determining the percentage change in net asset value
(NAV) with all distributions reinvested. SEC return for one year reflects 1%
contingent deferred sales charge.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less their original cost.
5
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
As of October 31, 1997
Assets
- --------------------------------------------------------------------------
<S> <C>
Investment in Strategic Income Portfolio, at value
(Note 1A) (identified cost, $7,498,555) $7,542,942
Investment in High Income Portfolio, at value
(Note 1A) (identified cost, $1,083,851) 1,072,746
Receivable from the Administrator (Note 4) 59,294
Deferred organization expenses (Note 1D) 11,614
- --------------------------------------------------------------------------
Total assets $8,686,596
- --------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------
Dividends payable $ 78,928
Payable for Fund shares redeemed 194,323
Accrued expenses 13,704
- --------------------------------------------------------------------------
Total liabilities $ 286,955
- --------------------------------------------------------------------------
Net Assets for 702,848 shares of
beneficial interest outstanding $8,399,641
- --------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------
Paid-in capital $8,421,924
Accumulated net realized loss on investments from
Portfolios (computed on the basis of identified cost) (69,703)
Accumulated undistributed net investment income 14,138
Net unrealized appreciation of investments from
Portfolios (computed on the basis of identified cost) 33,282
- --------------------------------------------------------------------------
Total $8,399,641
- --------------------------------------------------------------------------
Net Asset Value, Offering and Redemption
Price Per Share (Note 6)
- --------------------------------------------------------------------------
($8,399,641 / 702,848 shares of
beneficial interest outstanding) $ 11.95
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
October 31, 1997
Investment Income (Notes 1B and 8)
- --------------------------------------------------------------------------
<S> <C>
Interest income allocated from Portfolios $ 201,102
Expenses allocated from Portfolios (19,870)
- --------------------------------------------------------------------------
Net investment income from Portfolios $ 181,232
- --------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------
Distribution and service fees (Note 5) $ 22,823
Transfer and dividend disbursing agent fees 2,320
Printing and postage 18,117
Legal and accounting services 14,945
Registration fees 13,685
Amortization of organization expenses (Note 1D) 7,997
Custodian fee 4,805
Miscellaneous 4,842
- --------------------------------------------------------------------------
Total expenses $ 89,534
- --------------------------------------------------------------------------
Deduct --
Allocation of expenses to the Administrator (Note 4) $ 59,294
- --------------------------------------------------------------------------
Total expense reductions $ 59,294
- --------------------------------------------------------------------------
Net expenses $ 30,240
- --------------------------------------------------------------------------
Net investment income $ 150,992
- --------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) from Portfolios (Note 8)
- --------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ (18,950)
Financial futures contracts (11,664)
Foreign currency transactions 82,233
- --------------------------------------------------------------------------
Net realized gain on investments $ 51,619
- --------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investment transactions $ (63,663)
Financial futures contracts 44,400
Foreign currency transactions (21,233)
- --------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ (40,496)
- --------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 11,123
- --------------------------------------------------------------------------
Net increase in net assets from operations $ 162,115
- --------------------------------------------------------------------------
</TABLE>
See notes to financial statements
6
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended Year Ended
in Net Assets October 31, 1997 October 31, 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 150,992 $ 69,084
Net realized gain on investments 51,619 34,139
Net change in unrealized appreciation
(depreciation) of investments (40,496) 72,758
- ----------------------------------------------------------------------------------
Net increase in net assets from operations $ 162,115 $ 175,981
- ----------------------------------------------------------------------------------
Distributions to shareholders (Note 2) --
From net investment income $ (150,992) $ (69,084)
In excess of net investment income (57,514) (9,026)
From net realized gain on investments (51,619) --
In excess of net realized gain (23,043) --
- ----------------------------------------------------------------------------------
Total distributions to shareholders $ (283,168) $ (78,110)
- ----------------------------------------------------------------------------------
Transactions in shares of beneficial
interest (Note 3) --
Proceeds from sale of shares $ 8,802,969 $1,623,722
Net asset value of shares issued to
shareholders in payment of
distributions declared 145,504 65,510
Cost of shares redeemed (2,121,042) (105,245)
- ----------------------------------------------------------------------------------
Net increase in net assets from Fund
share transactions $ 6,827,431 $1,583,987
- ----------------------------------------------------------------------------------
Net increase in net assets $ 6,706,378 $1,681,858
- ----------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------
At beginning of year $ 1,693,263 $ 11,405
- ----------------------------------------------------------------------------------
At end of year $ 8,399,641 $1,693,263
- ----------------------------------------------------------------------------------
Accumulated undistributed
net investment income
included in net assets
- ----------------------------------------------------------------------------------
At end of year $ 14,138 $ 13,489
- ----------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
7
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
FINANCIAL STATEMENTS CONT'D
Financial Highlights
<TABLE>
<CAPTION>
Year Ended October 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995++ 1994*++
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--Beginning of period $ 12.090 $11.330 $ 9.750 $ 10.000
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.977 $ 0.804 $ 1.021 $ 0.348
Net realized and unrealized gain (loss) on investments 0.207 0.865 0.559 (0.495)
- -----------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations $ 1.184 $ 1.669 $ 1.580 $ (0.147)
- -----------------------------------------------------------------------------------------------------------------------------------
Less distributions
- -----------------------------------------------------------------------------------------------------------------------------------
From net investment income $ (0.977) $(0.804) $ -- $ (0.103)
In excess of net investment income (0.159) (0.105) -- --
From net realized gain on investments (0.130) -- -- --
In excess of net realized gain on investments (0.058) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (1.324) $(0.909) $ -- $ (0.103)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value-- End of period $ 11.950 $12.090 $ 11.330 $ 9.750
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return/(1)/ 10.13% 15.09% 16.21% (1.41)%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data +++
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 8,400 $ 1,693 $ 11 $ 10
Ratio of net expenses to average daily net assets/(2)/ 2.16% 2.38% 0.90% 0.76%+
Ratio of net investment income to average daily net assets 6.52% 7.08% 9.84% 7.74%+
</TABLE>
+++ The operating expenses of the Fund reflect an allocation of expenses to the
Administrator. Had such action not been taken, the ratios and net investment
income (loss) per share would have been as follows:
<TABLE>
<S> <C> <C> <C> <C>
Ratios (As a percentage of average daily net assets):
Expenses/(2)/ 4.72% 8.71% 131.85% 160.83%+
Net investment income (loss) 3.96% 0.75% (121.12)% (152.33)%+
Net investment income (loss) per share $ 0.593 $ 0.085 $(13.000) $ (6.900)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Per share data has been computed based on average shares outstanding during
the period.
* For the period from the start of business, May 25, 1994, to October 31,
1994.
/(1)/Total 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.
/(2)/Includes the Fund's share of its corresponding Portfolio's allocated
expenses.
See notes to financial statements
8
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
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 currently invests all of its investable assets
in interests in two Portfolios, Strategic Income Portfolio and High Income
Portfolio (the Portfolios), New York Trusts which have investment objectives
consistent with that of the Fund. The value of the Fund's investment in the
Portfolios reflects the Fund's proportionate interest in the net assets of
the Strategic Income Portfolio and the High Income Portfolio (6.2% and 0.1%
at October 31, 1997, respectively). The performance of the Fund is directly
affected by the performance of the Portfolios. The financial statements of
the Strategic Income 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. See Note 8 for further information on the
results of operations of High Income Portfolio. A copy of the financial
statements of High Income Portfolio is available upon request from Eaton
Vance Distributors.
On June 23, 1997, the Board of Trustees approved a Plan of Reorganization
(the "Plan") for the Trust. Under the terms of the Plan, the EV Marathon
Strategic Income Fund (the Successor Fund), a separate series of the Trust,
would acquire substantially all of the assets and liabilities of the Fund
(the Acquired Fund). The transaction will be structured for tax purposes to
qualify as a tax-free reorganization under the Internal Revenue Code. The
Trust will issue and deliver to the Acquired Fund a number of full and
fractional shares of beneficial interest of a separate class of the
Successor Fund (Class C shares), which will be equal in value to the net
asset values per share of the Acquired Fund multiplied by the number of full
and fractional shares of the Acquired Fund then outstanding. Such
transaction will occur after the close of business, on October 31, 1997.
Effective November 1, 1997, the EV Marathon Strategic Income Fund changed
its name to the Eaton Vance Strategic Income Fund.
A Investment Valuation -- Valuation of securities by the Strategic Income
Portfolio is discussed in Note 1A of the Strategic Income Portfolio's Notes to
Financial Statements, which are included elsewhere in this report. High Income
Portfolio's valuation policies are as follows: Investments listed on
securities exchanges or in the NASDAQ National Market are valued at closing
sale prices. Listed or unlisted investments for which closing sale prices are
not available are valued at the mean between the latest bid and asked prices.
Fixed income investments (other than short-term obligations), including listed
investments and investments for which price quotations are available, will
normally be valued on the basis of market valuations furnished by a pricing
service. Financial futures contracts listed on commodity exchanges are valued
at closing settlement prices. Short-term obligations, maturing in sixty days
or less, are valued at amortized cost, which approximates value. Investments
for which there are no quotations or valuations are valued at fair value using
methods determined in good faith by or at the direction of the Trustees.
B Income -- The Fund's net investment income consists of the Fund's pro rata
share of the net investment income of the Portfolios, 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. Pursuant to Section 852 of the Internal
Revenue Code, the Fund designates $25,548 as capital gain dividends for its
taxable year ended October 31, 1997, $23,348 of this long-term gain is
designated as a 20% rate gain distribution.
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.
9
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
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 Portfolios. Pursuant to the respective
custodian agreements, IBT receives fees reduced by credits which are
determined based on the average daily cash balances the Fund or the
Portfolios 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.
3 Capital Stock
------------------------------------------------------------------------------
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1997 October 31, 1996
-----------------------------------------------------------------------
<S> <C> <C>
Sales 725,136 142,327
Issued to shareholders electing
to receive payments of
distributions in capital stock 11,979 5,582
Redemptions (174,366) (8,817)
-----------------------------------------------------------------------
Net increase 562,749 139,092
-----------------------------------------------------------------------
</TABLE>
4 Transactions with Affiliates
------------------------------------------------------------------------------
Eaton Vance Management (EVM) serves as the administrator of the Fund, but
currently receives no compensation for these services. The Portfolios have
engaged Boston Management and Research (BMR), a subsidiary of EVM, to render
investment advisory services. See Note 2 of each of the Portfolios Notes to
Financial Statements. To enhance the net income of the Fund, $59,294 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.
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
10
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
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. For the year ended October
31, 1997, the Fund paid or accrued $17,241, payable to EVD. At October 31,
1997, the amount of Uncovered Distribution Charges of EVD calculated under
the Plan was approximately $602,000.
In addition, the Plan permits the Fund to make monthly payments of service
fees to the Principal Underwriter in amounts not exceeding 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 and Authorized
Firms 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, 1997 in the amount of $5,582.
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 the 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 officers and Trustees of the Fund are officers or directors of EVD.
6 Contingent Deferred Sales Charge
------------------------------------------------------------------------------
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.
EVD received $1,015 of CDSC for the year ended October 31, 1997.
7 Investment Transactions
------------------------------------------------------------------------------
Increases and decreases in the Fund's investment in the Strategic Income
Portfolio for the year ended October 31, 1997, aggregated $9,141,098 and
$3,466,961, respectively. Increases and decreases in the Fund's investment in
the High Income Portfolio for the year ended October 31, 1997 aggregated
$1,156,778 and $88,762, respectively.
8 Investments in Portfolios
------------------------------------------------------------------------------
For the year ended October 31, 1997, the Fund was allocated net investment
income and realized and unrealized gain (loss) from the Portfolios as follows:
<TABLE>
<CAPTION>
Strategic Income High Income
Portfolio Portfolio Total
------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 190,120 $ 10,982 $ 201,102
Expenses (19,179) (691) (19,870)
------------------------------------------------------------------------------
Net investment income $ 170,941 $ 10,291 $ 181,232
------------------------------------------------------------------------------
Net realized gain (loss)--
Investment transactions $ (24,497) 5,547 $ (18,950)
Financial futures contracts (11,664) -- (11,664)
Foreign currency
transactions 82,233 -- 82,233
------------------------------------------------------------------------------
Net realized gain on
investments $ 46,072 $ 5,547 $51,619
------------------------------------------------------------------------------
Change in unrealized
appreciation (depreciation)--
Investment transactions $ (52,559) $ (11,104) $ (63,663)
Financial futures contracts 44,400 -- 44,400
Foreign currency
transactions (21,233) -- (21,233)
------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
of investments $ (29,392) $ (11,104) $ (40,496)
------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
INDEPENDENT AUDITORS' REPORT
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, 1997, the related statement of operations for the year then ended,
the statement of changes in net assets for each of the two years then ended and
the financial highlights for each of the three 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. 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, 1997, the results of its operations for the year then ended, the
changes in its net assets for each of the two years ended October 31, 1997, and
the financial highlights for each of the three years then ended and 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 5, 1997
12
<PAGE>
Strategic Income Portfolio as of October 31, 1997
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Bonds & Notes -- 87.2%
Principal U.S. $ Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Argentina -- 3.2% U.S. Dollar
- --------------------------------------------------------------------------------
Argentina Discount Bond (Brady),
6.875%, 3/31/23 4,750,000 $ 3,764,375
- --------------------------------------------------------------------------------
Total Argentina (identified cost, $3,438,378) $ 3,764,375
- --------------------------------------------------------------------------------
Brazil -- 2.2% U.S. Dollar
- --------------------------------------------------------------------------------
Brazil Discount Bond (Brady),
6.688%, 4/15/24 3,500,000 $ 2,651,250
- --------------------------------------------------------------------------------
Total Brazil (identified cost, $2,419,632) $ 2,651,250
- --------------------------------------------------------------------------------
Bulgaria -- 1.2% U.S. Dollar
- --------------------------------------------------------------------------------
Bulgaria Discount Bond (Brady),
6.688%, 7/28/24 2,000,000 $ 1,393,750
- --------------------------------------------------------------------------------
Total Bulgaria (identified cost, $1,397,500) $ 1,393,750
- --------------------------------------------------------------------------------
Ecuador -- 2.4% U.S. Dollar
- --------------------------------------------------------------------------------
Ecuador Discount Bond (Brady),
6.688%, 2/28/25 4,100,000 $ 2,885,375
- --------------------------------------------------------------------------------
Total Ecuador (identified cost, $2,513,100) $ 2,885,375
- --------------------------------------------------------------------------------
Indonesia -- 0.5% U.S. Dollar
- --------------------------------------------------------------------------------
APP Global Finance III,
10.094%, 4/17/02/(1)/ 600,000 $ 543,000
- --------------------------------------------------------------------------------
Total Indonesia (identified cost, $549,583) $ 543,000
- --------------------------------------------------------------------------------
Ireland -- 5.2% Irish Punt
- --------------------------------------------------------------------------------
Irish Government, 9.25% , 7/11/03 3,500,000 $ 6,159,556
- --------------------------------------------------------------------------------
Total Ireland (identified cost, $6,052,161) $ 6,159,556
- --------------------------------------------------------------------------------
Morocco -- 1.5% Deutsche Mark
- --------------------------------------------------------------------------------
Snap Limited, 11.50% , 1/29/09 3,000,000 $ 1,814,709
- --------------------------------------------------------------------------------
Total Morocco (identified cost, $1,853,583) $ 1,814,709
- --------------------------------------------------------------------------------
Norway -- 3.9% Norwegian Krone
- --------------------------------------------------------------------------------
Norway Government, 6.75% , 1/15/07 20,000,000 $ 3,041,533
Norway Government, 7.00% , 5/31/01 10,000,000 1,510,792
- --------------------------------------------------------------------------------
Total Norway (identified cost, $4,587,443) $ 4,552,325
- --------------------------------------------------------------------------------
The Philippines -- 0.8% U.S. Dollar
- --------------------------------------------------------------------------------
JG Summit Cayman, 3.50% , 12/23/03 1,500,000 $ 937,500
- --------------------------------------------------------------------------------
Total The Philippines
(identified cost, $1,203,147) $ 937,500
- --------------------------------------------------------------------------------
United Kingdom -- 2.0% U.S. Dollar
- --------------------------------------------------------------------------------
Diamond Cable Communications Co., PLC,
144A, Sr. Disc. Notes, 10.75%
(0% until 2002), 2/15/07 2,000,000 $ 1,280,000
Newsquest Capital Corp., Sr. Sub. Note,
11.00% , 5/01/06 1,000,000 $ 1,110,000
- --------------------------------------------------------------------------------
Total United Kingdom
(identified cost, $2,287,751) $ 2,390,000
- --------------------------------------------------------------------------------
United States -- 64.3% U.S. Dollar
- --------------------------------------------------------------------------------
Corporate Bonds & Notes -- 5.7%
Applied Extrusion Inc., Sr. Notes,
11.50%, 4/01/02 1,000,000 $ 1,070,000
Dayton Hudson MTN, 9.52%, 6/10/15 350,000 421,817
Overhead Door Corp., Sr. Notes,
12.25%, 2/01/00 1,500,000 1,558,125
TRW Inc., Medium Term Notes,
9.35%, 6/04/20 1,900,000 2,432,266
United International-Series B,
0.00%, 11/15/99 1,500,000 1,245,000
- --------------------------------------------------------------------------------
Total Corporate Bonds & Notes
(identified cost, $6,165,695) $ 6,727,208
- --------------------------------------------------------------------------------
Mortgage Pass-Throughs -- 56.6%
Federal Home Loan Mortgage Corp.:
4.75%, with various maturities to 2003 24,292 $ 23,795
5.50%, with maturity at 2019 3,273 3,293
8.00%, with various maturities to 2021 9,418,342 9,861,664
8.50%, with various maturities to 2019 2,679,237 2,866,629
9.00%, with maturity at 2019 803,984 871,583
9.25%, with maturity at 2010 2,199,386 2,351,495
12.50%, with maturity at 2011 108,926 126,230
12.75%, with maturity at 2013 157,544 183,817
13.25%, with maturity at 2013 144,461 170,204
13.50%, with maturity at 2019 417,207 496,891
- --------------------------------------------------------------------------------
$ 16,955,601
- --------------------------------------------------------------------------------
Federal National Mortgage Association:
4.75%, with maturity at 1999 15,378 $ 15,383
5.00%, with maturity at 2003 106,659 104,889
5.50%, with various maturities to 2012 48,537 48,519
7.50%, with various maturities to 2018 4,268,264 4,422,837
8.00%, with various maturities to 2013 3,544,195 3,712,349
8.25%, with maturity at 2007 3,419,514 3,569,268
8.50%, with various maturities to 2026 5,953,380 6,383,078
9.00%, with maturity at 2010 1,835,874 1,970,099
12.00%, with maturity at 2015 1,367,404 1,584,668
12.50%, with various maturities to 2019 8,389,207 9,858,347
12.75%, with maturity at 2014 175,976 210,147
13.00%, with various maturities to 2015 3,453,864 4,109,676
13.25%, with maturity at 2014 232,442 280,774
13.50%, with various maturities to 2015 1,897,416 2,263,990
14.75%, with various maturities to 2012 2,380,057 2,943,082
- --------------------------------------------------------------------------------
$ 41,477,106
- --------------------------------------------------------------------------------
Government National Mortgage Association:
6.50%, with various maturities to 2007 942,604 $ 953,636
</TABLE>
See notes to financial statements
13
<PAGE>
Strategic Income Portfolio as of October 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
<TABLE>
<CAPTION>
Principal U.S. $ Value
- --------------------------------------------------------------------------------
United States (continued)
- --------------------------------------------------------------------------------
<S> <C> <C>
Government National Mortgage Association
(continued):
7.50%, with various maturities to 2017 1,329,260 $ 1,398,413
9.00%, with maturity at 2016 1,069,231 1,158,067
12.50%, with maturity at 2019 3,766,600 4,443,232
13.50%, with various maturities to 2014 329,690 402,100
- --------------------------------------------------------------------------------
$ 8,355,448
- --------------------------------------------------------------------------------
Total Mortgage Pass-Throughs
(identified cost, $66,035,145) $ 66,788,155
- --------------------------------------------------------------------------------
U.S. Treasury Bond -- 2.0%
United States Treasury Bond, 11.75%,
2/15/01/(2)/ (identified cost, $2,603,438) 2,000,000 $ 2,357,180
- --------------------------------------------------------------------------------
Total United States
(identified cost, $74,804,278) $ 75,872,543
- --------------------------------------------------------------------------------
Total Bonds & Notes
(identified cost $101,106,556) $ 102,964,383
- --------------------------------------------------------------------------------
Short-Term
Investments -- 12.8% U.S. Dollar
Banque National De Paris, Euro
Time-deposit Cayman Islands,
5.625%, 11/03/97 4,100,000 $ 4,100,000
Postipanki, NY Cayman Time Deposit,
5.620%, 11/03/97 5,000,000 5,000,000
Skandinaviska Enskilada Banken Time
Deposit, 5.625%, 11/03/97 6,002,730 6,002,730
- --------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $15,102,730) $ 15,102,730
- --------------------------------------------------------------------------------
Total Investments -- 100.0%
(identified cost $116,209,286) $ 118,067,113
- --------------------------------------------------------------------------------
</TABLE>
/(1)/ Variable rate security.
/(2)/ Security (or a portion thereof) has been segregated to cover margin
requirements on open financial futures contracts.
See notes to financial statements
14
<PAGE>
Strategic Income Portfolio as of October 31, 1997
FINANCIAL STATEMENTS
Statement of Assets & Liabilities
<TABLE>
<CAPTION>
As of October 31, 1997
Assets
- ------------------------------------------------------------------------------------------
<S> <C>
Investments, at value (Note 1A) (identified cost, $116,209,286) $ 118,067,113
Cash 70,312
Receivable for investments sold 23,925
Interest receivable 1,520,911
Receivable for daily variation margin on open financial
futures contracts (Note 5) 70,961
Receivable for open forward foreign currency contracts (Note 1H) 2,956,076
Deferred organization expenses (Note 1J) 6,254
- ------------------------------------------------------------------------------------------
Total assets $ 122,715,552
- ------------------------------------------------------------------------------------------
Liabilities
- ------------------------------------------------------------------------------------------
Payable for investments purchased $ 1,434,281
Payable to affiliate for Trustees' fees (Note 2) 689
Accrued expenses 24,583
- ------------------------------------------------------------------------------------------
Total liabilities $ 1,459,553
- ------------------------------------------------------------------------------------------
Net Assets applicable to investors' interest in Portfolio $ 121,255,999
- ------------------------------------------------------------------------------------------
Sources of Net Assets
- ------------------------------------------------------------------------------------------
Net proceeds from capital contributions and withdrawals $ 115,644,338
Net unrealized appreciation of investments (computed on the
basis of identified cost) 5,611,661
- ------------------------------------------------------------------------------------------
Total $ 121,255,999
- ------------------------------------------------------------------------------------------
<CAPTION>
Statement of Operations
For the Year Ended
October 31, 1997
Investment Income (Note 1B)
- ------------------------------------------------------------------------------------------
<S> <C>
Interest income $ 11,644,406
- ------------------------------------------------------------------------------------------
Total income $ 11,644,406
- ------------------------------------------------------------------------------------------
Expenses
- ------------------------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 679,210
Administration fee (Note 2) 195,786
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 8,729
Custodian fee 164,817
Legal and accounting services 67,135
Amortization of organization expenses (Note 1J) 4,709
Miscellaneous 7,032
- ------------------------------------------------------------------------------------------
Total expenses $ 1,127,418
- ------------------------------------------------------------------------------------------
Net investment income $ 10,516,988
- ------------------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- ------------------------------------------------------------------------------------------
Net realized gain (loss)--
Investment transactions $ 1,249,916
Financial futures contracts (308,110)
Foreign currency transactions 5,418,169
- ------------------------------------------------------------------------------------------
Net realized gain on investments $ 6,359,975
- ------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investment transactions (identified cost basis) $ (3,069,262)
Financial futures contracts 891,508
Foreign currency transactions (128,907)
- ------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ (2,306,661)
- ------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 4,053,314
- ------------------------------------------------------------------------------------------
Net increase in net assets from operations $ 14,570,302
- ------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
15
<PAGE>
Strategic Income Portfolio as of October 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended Year Ended
in Net Assets October 31, 1997 October 31, 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 10,516,988 $ 11,982,292
Net realized gain on investments 6,359,975 9,573,199
Net change in unrealized
appreciation (depreciation)
of investments (2,306,661) 3,820,588
- -------------------------------------------------------------------------------------
Net increase in net assets
from operations $ 14,570,302 $ 25,376,079
- -------------------------------------------------------------------------------------
Capital transactions --
Contributions $ 36,154,026 $ 10,557,996
Withdrawals (61,875,128) (56,110,565)
- -------------------------------------------------------------------------------------
Net decrease in net assets from
capital transactions $ (25,721,102) $ (45,552,569)
- -------------------------------------------------------------------------------------
Net decrease in net assets $ (11,150,800) $ (20,176,490)
- -------------------------------------------------------------------------------------
Net Assets
- -------------------------------------------------------------------------------------
At beginning of year $ 132,406,799 $ 152,583,289
- -------------------------------------------------------------------------------------
At end of year $ 121,255,999 $ 132,406,799
- -------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
16
<PAGE>
Strategic Income Portfolio as of October 31, 1997
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------------------------------
1997 1996 1995 1994*
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to average daily net assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expenses 0.86% 0.86% 0.84% 0.82%+
Net investment income 8.06% 8.62% 9.08% 8.41%+
Portfolio Turnover 77% 71% 78% 71%
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $ 121,256 $ 132,407 $ 152,583 $ 236,469
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, March 1, 1994, to October 31, 1994.
See notes to financial statements
17
<PAGE>
Strategic Income Portfolio as of October 31, 1997
NOTES TO FINANCIAL STATEMENTS
1 Significant Accounting Policies
------------------------------------------------------------------------------
Strategic Income Portfolio (the Portfolio) is registered under the Investment
Company Act of 1940 as a non-diversified open-end investment company. The
Portfolio, which was organized as a trust under the laws of the State of New
York in 1992, seeks to provide a high level of income by investing in a global
portfolio consisting primarily of high grade debt securities. The Declaration
of Trust permits the Trustees to issue beneficial interests in the Portfolio.
The following is a summary of significant accounting policies of the
Portfolio. The policies are in conformity with generally accepted accounting
principles.
A Investment Valuation -- Debt securities (other than mortgage-backed, "pass-
through," securities and short-term obligations maturing in sixty days or
less), including listed securities and securities for which price quotations
are available and forward contracts, will normally be valued on the basis of
market valuations furnished by pricing services. Mortgage backed, "pass-
through," securities are valued using 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 prices. Short-term obligations and
money-market securities maturing in sixty days or less are valued at amortized
cost which approximates value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency
and translated to U.S. dollars at the current exchange rate. Investments for
which market quotations are unavailable are valued at fair value using methods
determined in good faith by or at the direction of the Trustees.
B Income -- Interest income is determined on the basis of interest accrued and
discount earned, adjusted for amortization of 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 Portfolio is subject to special tax rules that may
affect the amount, timing and character of gains recognized on certain of the
Portfolio's investments. 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
18
<PAGE>
Strategic Income Portfolio as of October 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
and sales of foreign investment securities and income and expenses are
converted into U.S. dollars based upon currency exchange rates prevailing on
the respective dates of such transactions. Recognized gains or losses on
investment transactions attributable to changes in foreign currency exchange
rates are recorded for financial statement purposes as net realized gains and
losses on investments. That portion of unrealized gains and losses on
investments that 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 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 Expenses -- 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 of the Portfolio. Pursuant to the custodian agreement, IBT receives
a fee reduced by credits which are determined based on the average daily cash
balance the Portfolio maintains with IBT. All significant credit balances used
to reduce the Portfolio's custodian fees are reflected as a reduction of
operating expenses on the Statement of Operations.
L Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial 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 income (i.e., income other than gains from the sale of
19
<PAGE>
Strategic Income Portfolio as of October 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
investments). Such percentages are reduced as average daily net assets exceed
certain levels. For the year ended October 31, 1997, the fee was equivalent to
0.52% of the Portfolio's average net assets for such period and amounted to
$679,210. 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 $195,786 for the year ended
October 31, 1997.
Except as to Trustees of the Portfolio who are not members of EVM's or BMR's
organization, officers and Trustees receive remuneration for their services to
the Portfolio out of such investment adviser fee. Trustees of the Portfolio
that are not affiliated with the Investment Adviser may elect to defer receipt
of all or a portion of their annual fees in accordance with the terms of the
Trustees Deferred Compensation Plan. For the year ended October 31, 1997, no
significant amounts have been deferred. Certain of the officers and Trustees
of the Portfolios are officers and directors/trustees of the above
organizations.
3 Line of Credit
------------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR or
EVM and its affiliates in a $100 million unsecured line of credit agreement
with a group of banks. The portfolio may temporarily borrow from the line of
credit to satisfy redemption requests or settle investment transactions.
Interest is charged to each portfolio or fund based on its borrowings at an
amount above the Eurodollar rate or federal funds rate. In addition, a fee
computed at an annual rate of 0.10% on the daily unused portion of the line of
credit is allocated among the participating portfolios and funds at the end of
each quarter. The Portfolio did not have any significant borrowings or
allocated fees during the period.
4 Investment Transactions
------------------------------------------------------------------------------
The Portfolio invests primarily in foreign government and U.S. Government debt
securities. The ability of the issuers of the debt securities to meet their
obligations may be affected by economic developments in a specific industry or
country. The Portfolio regularly invests in lower rated and comparable quality
unrated high yield securities. These investments have different risks than
investments in debt securities rated investment grade and held by the
Portfolio. Risk of loss upon default by the borrower is significantly greater
with respect to such debt securities than with other debt securities because
these securities are generally unsecured and are more sensitive to adverse
economic conditions, such as recession or increasing interest rates, than are
investment grade issuers. At October 31, 1997, the Portfolio had invested
approximately 16.7% of its net assets or approximately $20,253,000 in high
yield securities. Purchases and sales of investments, other than short-term
obligations, for the year ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>
Purchases
------------------------------------------------------------------------------
<S> <C>
Investments (non-U.S. Government) $46,252,396
U.S. Government Securities 43,636,016
------------------------------------------------------------------------------
$89,888,412
------------------------------------------------------------------------------
Sales
------------------------------------------------------------------------------
Investments (non-U.S. Government) $84,545,598
U.S. Government Securities 12,274,628
------------------------------------------------------------------------------
$96,820,226
------------------------------------------------------------------------------
</TABLE>
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 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.
20
<PAGE>
Strategic Income Portfolio as of October 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
A summary of obligations under these financial instruments at October 31, 1997
is as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Sales
- --------------------------------------------------------------------------------
Net Unrealized
Settlement In Exchange For Appreciation
Date Deliver (in U.S. dollars) (Depreciation)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
11/24/97 Australian Dollar
2,000,000 $ 1,461,960 $ 55,580
11/5/97- Belgian Franc
11/17/97 721,805,951 23,745,222 3,473,632
11/24/97 British Pound Sterling
1,184,016 1,932,314 (47,078)
12/17/97 Indonesian Rupiah
5,301,750,000 1,707,488 259,122
11/28/97 Irish Punt
2,070,000 3,034,620 (72,842)
11/14/97- Japanese Yen
1/28/98 652,000,000 5,508,447 50,977
12/2/97 Singapore Dollar
3,000,000 1,982,161 91,285
11/20/97- Thai Baht
12/26/97 103,200,000 3,038,041 527,882
- --------------------------------------------------------------------------------
$42,410,253 $4,338,558
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Purchases
- --------------------------------------------------------------------------------
Net Unrealized
Settlement Deliver Appreciation
Date In Exchange For (in U.S. dollars) (Depreciation)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
11/24/97 Australian Dollar
2,000,000 $ 1,386,420 $ 19,960
11/5/97- Belgian Franc
11/28/97 607,265,306 16,849,206 208,547
11/17/97 Deutsche Mark
3,400,000 1,910,112 59,944
12/17/97- Indonesian Rupiah
12/26/97 14,301,750,000 5,470,246 (1,566,209)
11/14/97 Indian Rupee
127,750,000 3,500,000 6,403
12/02/97 Singapore Dollar
3,000,000 2,002,002 (111,127)
- --------------------------------------------------------------------------------
$31,117,986 $(1,382,482)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts
- --------------------------------------------------------------------------------
Net Unrealized
Expiration Appreciation
Date Contracts Position (Depreciation)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/97 109 US 5 year Treasury Long $ 202,015
Note Futures
12/97 200 US 30 year Long 894,256
Bond Futures
12/97 10 German 10 year Short (2,643)
Bond Futures
12/97 62 French 10 year Short (2,278)
Bond Futures
12/97 8 Japanese 10 year Short (262,239)
Bond Futures
12/97 27 Italian 10 year Short (73,998)
Bond Futures
- --------------------------------------------------------------------------------
$ 755,113
- --------------------------------------------------------------------------------
</TABLE>
At October 31, 1997, the Portfolio had sufficient cash and/or securities to
cover potential obligations arising from open futures and forward contracts,
as well as margin requirements on open futures contracts.
6 Federal Income Tax Basis of Investments
------------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the investments
owned at October 31, 1997, as computed on a federal income tax basis, were as
follows:
<TABLE>
<S> <C>
Aggregate cost $117,099,817
------------------------------------------------------------------------------
Gross unrealized appreciation $ 1,392,633
Gross unrealized depreciation (425,337)
------------------------------------------------------------------------------
Net unrealized appreciation $ 967,296
------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Strategic Income Portfolio as of October 31, 1997
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders
of Strategic Income Portfolio
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities of
Strategic Income Portfolio (the Portfolio), including the portfolio of
investments, as of October 31, 1997, the related statement of operations for the
year then ended, the statement of changes in net assets for the two years ended
October 31, 1997, and the supplementary data for each of the three years ended
October 31, 1997, 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, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and supplementary data referred to
above present fairly, in all material respects, the financial position of the
Portfolio, as of October 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years ended
October 31, 1997, and the supplementary data for each of the three years ended
October 31, 1997, 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 5, 1997
22
<PAGE>
EV Classic Strategic Income Fund as of October 31, 1997
INVESTMENT MANAGEMENT
EV Classic Strategic Income Fund
<TABLE>
<CAPTION>
Officers Independent Trustees
<S> <C>
M. Dozier Gardner Donald R. Dwight
President and Trustee President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
James B. Hawkes
Vice President and Trustee Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
William H. Ahern, Jr. Banking, Harvard University Graduate School of
Vice President Business Administration
Thomas J. Fetter Norton H. Reamer
Vice President President and Director, United Asset
Management Corporation
Michael B. Terry
Vice President John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
James L. O'Connor
Treasurer Jack L. Treynor
Investment Adviser and Consultant
Alan R. Dynner
Secretary
<CAPTION>
Strategic Income Portfolio
Officers Independent Trustees
<S> <C>
James B. Hawkes Donald R. Dwight
President and Trustee President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
Mark S. Venezia
Vice President Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
James L. O'Connor Banking, Harvard University Graduate School of
Treasurer Business Administration
Alan R. Dynner Norton H. Reamer
Secretary President and Director, United Asset
Management Corporation
John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
</TABLE>
23
<PAGE>
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 Investor Services Group, Inc.
Attention: Eaton Vance Funds
P.O. Box 5123
Westborough, MA 01581-5123
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
EV Classic Strategic Income Fund
24 Federal Street
Boston, MA 02110
- --------------------------------------------------------------------------------
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-12/97
