<PAGE>
[LOGO OF EATON VANCE MUTUAL FUNDS APPEARS HERE]
[PHOTO OF GLOBE FROM SPACE APPEARS HERE]
Annual report October 31, 1998
EATON VANCE
[PHOTO OF STOCK CERTIFICATE
APPEARS HERE] STRATEGIC
INCOME
FUND
Global Management-Global Distribution
[PHOTO OF SKYSCRAPER BUILDINGS APPEARS HERE]
<PAGE>
Eaton Vance Strategic Income Fund as of October 31, 1998
Letter to Shareholders
[PHOTO OF JAMES B. HAWKES APPEARS HERE]
James B. Hawkes
President
Eaton Vance Strategic Income Fund, Class A shares, had a total return of -1.3%
for the period from inception on January 23, 1998 through October 31, 1998. That
return was the result of a decline in net asset value per share (NAV) from
$10.00 on January 23, 1998 to $9.22 on October 31, 1998, and the reinvestment of
$0.666 in dividends./1/
The Fund's Class B shares had a total return of -0.2% during the year ended
October 31, 1998. This return resulted from a decline in NAV from $9.47 on
October 31, 1997 to $8.72 on October 31, 1998, and the reinvestment of $0.748 in
dividends./1/
Class C shares had a total return of -0.2% for the year, the result of a decline
in NAV from $11.95 on October 31, 1997 to $11.01 on October 31, 1998, and the
reinvestment of $0.947 in dividends./1/
Amid growing concerns over emerging economies, U.S. Treasury bonds mounted a
powerful rally...
The world's fixed-income markets were characterized by tremendous volatility in
the summer and fall of 1998 - driven primarily by investor concerns over Russian
default and the threat of a devaluation of the Brazilian real. As many emerging
markets retreated, the U.S. Treasury market mounted a powerful rally, with
investors focusing on the highest quality bonds. Meanwhile, the performance of
lower-quality issues lagged significantly. The statistics are especially
telling. Yields for 5-year Treasuries stood at 5.8% at October 31, 1997.
However, in the flight to quality that accompanied the October crisis, those
5-year yields fell as low as 3.9% in early October, before returning to 4.5% by
October 31, 1998. That is a good measure of the volatility that characterized
the bond market.
Over the long-term, a flexible, global approach has delivered good fixed-income
returns...
The fiscal year ended October 31, 1998 clearly demonstrated the ever-changing
nature of the global markets. But equally as important, this period pointed out
the value of a flexible approach to fixed-income investing: combining
investments in countries having above-average economic growth and declining
inflation with attractive high-yielding opportunities here at home. While the
past year has been unnerving for many investors, we believe the time-tested
approach of the Strategic Income Portfolio is well-suited to deliver attractive,
fixed-income investment results in the years to come. In the pages that follow,
portfolio manager Mark Venezia provides his insights into the year just ended,
and suggests what may lie ahead for bond investors in 1999.
Sincerely,
/s/ James B. Hawkes
James B. Hawkes
President
December 9, 1998
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Fund Information
as of October 31, 1998
Performance/2/ Class A Class B Class C
- --------------------------------------------------------------------------------
Average Annual Total Returns (at net asset value)
- --------------------------------------------------------------------------------
One Year N.A. -0.2% -0.2%
Five Years N.A. 6.6 N.A.
Life of Fund+ -1.3 6.3 8.7
SEC Average Annual Total Returns (including sales charge or applicable CDSC)
- --------------------------------------------------------------------------------
One Year N.A. -4.8% -1.1%
Five Years N.A. 6.3 N.A.
Life of Fund+ -6.0 6.3 8.7
+Inception Dates - Class A: 1/23/98; Class B: 11/26/90; Class C: 5/25/94
Regional Weightings/3/
- --------------------------------------------------------------------------------
By total investments
[PIE CHART APPEARS HERE]
U.S. High Grade 57.3%
Latin America 13.0%
U.S. Domestic High Yield 12.9%
Europe 9.0%
Asia/Pacific 7.8%
/1/ These returns do not include the 4.75% maximum sales charge for the Fund's
Class A shares or the applicable contingent deferred sales charges (CDSC) for
Class B and Class C shares. /2/ Returns are historical and are calculated by
determining the percentage change in net asset value with all distributions
reinvested. SEC returns for Class A reflect the maximum 4.75% sales charge.
SEC returns for Class B reflect applicable CDSC based on the following
schedule: 5% - 1st and 2nd years; 4% - 3rd year; 3% - 4th year; 2% - 5th year;
1% - 6th year. SEC 1-Year return for Class C reflects a 1% CDSC. /3/ Because
the Portfolio is actively managed, Regional Weightings are subject to change.
Analysis includes investment in High Income Portfolio.
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
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Eaton Vance Strategic Income Fund as of October 31, 1998
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, how would you characterize the global fixed-income markets in the past
year?
A: The global credit markets reflected deepening investor concerns over some
emerging market economies and the fear that market excesses could result in
a global crisis. Interestingly, through mid-summer, the outlook was fairly
benign. The U.S. economy was posting manageable growth, while Europe
continued its recovery and anticipated monetary union in 1999.
Meanwhile, Asian economies remained very weak but were at least addressing
their problems. Generally, the markets remained in a fairly narrow trading
range. In mid-August, however, the markets went into a freefall, when a
series of events here and abroad introduced a period of instability.
Q: What brought about the sudden market collapse?
A: In August, a Russian default on government debt raised concerns that other
emerging markets might follow suit. By itself, Russia has relatively little
global economic impact, but its failure sent tremors through the markets. The
situation in Brazil was especially disconcerting. Brazil's soaring fiscal
deficit increased the possibility of a currency devaluation. With Brazil as
the linchpin of the Latin economy, the specter of devaluation haunted the
world's central bankers. Finally, the near collapse of a large U.S. hedge
fund in August gave rise to fears of a broader financial meltdown.
Amid this discouraging news, investors sought refuge in U.S. Treasury bonds,
the world's highest-quality security. As a result, quality spreads - the
yield difference between bonds of varying quality - widened significantly in
virtually every fixed-income category: emerging market bonds, high-yield
corporate bonds, and even mortgage-backed securities, some of which are
backed by the full faith and credit of the U.S. government. All of these
markets which constitute much of the Fund's investment universe -
underperformed during the August-to-October crisis, erasing the solid gains
made earlier in the year.
Q: You suggested that yield spreads on mortgage-backed securities - the
Portfolio's largest investment - widened inordinately during the period.
Could you explain that further?
A: Yes. While the flight to quality brought about many market anomalies, one of
the most pronounced was the underperformance of mortgaged-backed securities.
That was especially true among seasoned mortgage-backed securities. In a
period of declining inter-
- --------------------------------------------------------------------------------
Quality Weightings1
- -----------------------------
[PIE CHART APPEARS HERE]
Investment Grade 64.8%
Below Investment Grade 35.2%
1 Because the Portfolio is actively managed, Quality Weightings are subject to
change. Analysis includes investment in High Income Portfolio.
- --------------------------------------------------------------------------------
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
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Eaton Vance Strategic Income Fund as of October 31, 1998
Management Discussion Cont'd
est rates, such as we have seen in the past year, homeowners tend to
refinance their mortgages in order to take advantage of lower mortgage rates.
This, however, is not generally true of seasoned MBS, which contain mortgages
originated in the late 1970s and early 1980s. These borrowers have had many
opportunities to refinance in the past. As a result, seasoned MBS have highly
predictable prepayment rates and very manageable cash flows.
On the other hand, generic MBS, which typically contain mortgages originated
in the 1990s, feature rising prepayment rates as interest rates decline. They
are, therefore, less attractive because investors are forced to reinvest
principal payments at lower interest rates.
In this recent period, however, investors ignored these historical
regularities, vastly overestimating prepayment assumptions for seasoned MBS.
With a combination of widening spreads and increasing prepayment assumptions,
the seasoned segment of the market badly underperformed.
Q: Have you maintained your commitment to the MBS market?
A: Yes. Yield spreads for MBS widened by 150 basis points (1.5%) during the
downturn. However, despite the market's overreaction, prepayment rates for
seasoned securities remained well within historical norms. As a result, we
believe that the seasoned segment of the mortgage-backed securities market
now offers unusually good value and a very attractive yield advantage in a
U.S. government agency-backed security. The Portfolio took advantage of the
market sell-off, slightly increasing its exposure to MBS to 52% at October
31, 1998.
Q: How would you evaluate the high-yield markets following the October downturn?
A: In my view, high-yield bonds - both emerging market and domestic bonds - are
very attractive at their recent levels. While equity markets have regained
roughly 80% of the ground lost during the downturn, the high-yield bond
markets have recovered only about half. That suggests that there is more
value in the fixed-income area.
The widening of quality spreads in the domestic market was especially
dramatic. High-yield spreads - as narrow as 290 basis points (2.9%) over
Treasuries before the crisis - recently widened to 700 basis points (7.0%).
Those are levels not seen since 1990, when the economy was in recession and
default rates were significantly higher than they are today. Thus, in my
view, the widening of spreads was much overdone.
Q: And what about the prospects of the emerging markets?
A: The emerging markets have showed tentative signs of a turnaround. Latin
America has been the Portfolio's largest foreign emphasis. Given its good
fundamentals, Mexico appears quite cheap. On the other hand, we have
eliminated Brazil altogether. While the developed nations have put together
an impressive rescue package, the risks in Brazil remain fairly high.
Meanwhile, in Eastern Europe, the Portfolio maintained its Bulgarian Brady
bond position. Bulgaria's experiment with capitalism is an emerging success
story, despite the difficulties of some of its neighbors in the region.
In Asia, there appears to be a slow recovery under way, although many hurdles
remain. We are less sanguine about Japan, where we maintain a short position
in the Japanese yen. The Japanese economy remains weak and the government's
response to date has been inadequate. With interest rates close to 0%, they
believe there is little capacity for monetary stimulus. Furthermore, the
government seems unable to grasp the dramatic restructuring that is necessary
to reform its banking system.
4
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Eaton Vance Strategic Income Fund as of October 31, 1998
Management Discussion Cont'd
Q: Mark, what is your outlook for the coming year?
A: Broadly speaking, we don't expect dramatic change and that should keep bond
returns positive. Some of the market's concerns are being addressed. The
International Monetary Fund has finalized a package to bolster Brazil, and
the Federal Reserve has lowered interest rates three times. Those measures
have helped to restore equilibrium to the markets.
Looking ahead, I believe there are significant fixed-income opportunities in
the wake of this year's market instability. Clearly, as I explained earlier,
high-quality, seasoned mortgage-backed securities are very attractive.
As for the high-yield sector, we've already seen investors start to return to
the market. We'll likely see many more compelling opportunities in the year
ahead.
Finally, it's important to recognize that, given the recent bout with
economic instability, there are still risks within the emerging markets. But
there are also countries where fundamentals continue to improve. For example,
Bulgaria and Peru continue to make impressive progress.
The flexibility to invest in such a wide range of markets is a major
advantage for the Portfolio. I believe that flexibility will allow us to take
advantage of new opportunities in these markets as they unfold in the coming
year.
Comparison of Change in Value of a $10,000 Investment in Eaton
Vance Strategic Income Fund, Class B vs. the Lehman Aggregate Bond
Index, J.P. Morgan Hedged Short-Term Global Index, and a
Composite of Lipper Fund Category Averages* Nov.30, 1990-Oct.31, 1998
[LINE GRAPH APPEARS HERE]
Eaton Vance Strategic Income Fund, Class B vs.
Lehman Aggregate Bond Index, the J.P. Morgan Hedged Short-Term
Global Index and the Composite of Lipper Fund Category Averages
Date Fund/NAV Lehman Morgan Composite
---- -------- ------ ------ ---------
11/30/90 $10,000 $10,000 $10,000 $10,000
12/31/90 $9,973 $10,156 $10,098 $10,024
1/31/91 $10,091 $10,282 $10,191 $10,189
2/28/91 $10,197 $10,369 $10,279 $10,201
3/31/91 $10,340 $10,439 $10,341 $9,975
4/30/91 $10,438 $10,554 $10,431 $10,070
5/31/91 $10,580 $10,615 $10,507 $10,086
6/30/91 $10,553 $10,610 $10,529 $10,046
7/31/91 $10,550 $10,757 $10,595 $10,170
8/31/91 $10,640 $10,989 $10,732 $10,254
9/30/91 $10,739 $11,212 $10,833 $10,411
10/31/91 $10,819 $11,337 $10,931 $10,508
11/30/91 $10,732 $11,441 $11,013 $10,511
12/31/91 $10,794 $11,781 $11,151 $10,670
1/31/92 $10,840 $11,621 $11,176 $10,623
2/28/92 $10,952 $11,696 $11,206 $10,687
3/31/92 $10,958 $11,631 $11,189 $10,703
4/30/92 $11,109 $11,715 $11,274 $10,798
5/31/92 $11,185 $11,936 $11,360 $10,912
6/30/92 $11,222 $12,101 $11,439 $10,978
7/31/92 $11,239 $12,348 $11,520 $11,010
8/31/92 $11,079 $12,472 $11,573 $10,969
9/30/92 $10,719 $12,621 $11,697 $10,662
10/31/92 $10,662 $12,453 $11,713 $10,650
11/30/92 $10,626 $12,458 $11,707 $10,570
12/31/92 $10,719 $12,653 $11,806 $10,590
1/31/92 $10,762 $12,896 $11,900 $10,643
2/28/93 $11,015 $13,122 $12,003 $10,725
3/31/93 $11,102 $13,177 $12,042 $10,771
4/30/93 $11,192 $13,269 $12,108 $10,832
5/31/93 $11,261 $13,287 $12,111 $10,914
6/30/93 $11,341 $13,527 $12,222 $10,952
7/31/93 $11,545 $13,604 $12,263 $10,978
8/31/93 $11,603 $13,842 $12,351 $11,018
9/30/93 $11,487 $13,880 $12,380 $11,000
10/31/93 $11,782 $13,931 $12,444 $11,070
11/30/93 $11,740 $13,813 $12,469 $11,033
12/31/93 $11,880 $13,887 $12,543 $11,134
1/31/94 $12,073 $14,075 $12,591 $11,213
2/28/94 $11,738 $13,830 $12,493 $11,049
3/31/94 $11,097 $13,488 $12,452 $10,899
4/30/94 $11,184 $13,380 $12,418 $10,894
5/31/94 $11,352 $13,379 $12,421 $10,906
6/30/94 $10,920 $13,349 $12,424 $10,827
7/31/94 $10,973 $13,615 $12,513 $10,863
8/31/94 $11,136 $13,631 $12,516 $10,907
9/30/94 $11,130 $13,431 $12,513 $10,941
10/31/94 $11,154 $13,419 $12,562 $10,975
11/30/94 $11,284 $13,389 $12,576 $10,993
12/31/94 $11,254 $13,482 $12,590 $10,697
1/31/95 $11,047 $13,749 $12,744 $10,627
2/28/95 $11,022 $14,076 $12,896 $10,672
3/31/95 $10,992 $14,162 $12,998 $10,650
4/30/95 $11,474 $14,360 $13,122 $10,829
5/31/95 $11,920 $14,916 $13,350 $10,974
6/30/95 $11,802 $15,025 $13,399 $11,002
7/31/95 $11,898 $14,992 $13,496 $11,101
8/31/95 $12,110 $15,173 $13,604 $11,150
9/30/95 $12,350 $15,320 $13,700 $11,258
10/31/95 $12,419 $15,519 $13,817 $11,331
11/30/95 $12,662 $15,752 $13,967 $11,411
12/31/95 $12,880 $15,973 $14,086 $11,493
1/31/96 $13,394 $16,078 $14,225 $11,587
2/28/96 $13,132 $15,798 $14,181 $11,555
3/31/96 $13,219 $15,688 $14,206 $11,577
4/30/96 $13,500 $15,600 $14,296 $11,651
5/31/96 $13,572 $15,569 $14,345 $11,696
6/30/96 $13,780 $15,777 $14,429 $11,778
7/31/96 $13,812 $15,820 $14,505 $11,852
8/31/96 $14,049 $15,793 $14,602 $11,908
9/30/96 $14,487 $16,680 $14,760 $12,022
10/31/96 $14,714 $16,425 $14,915 $12,136
11/30/96 $15,164 $16,706 $15,063 $12,254
12/31/96 $15,223 $16,550 $15,109 $12,279
1/31/97 $15,539 $16,601 $15,199 $12,271
2/28/97 $15,685 $16,643 $15,233 $12,269
3/31/97 $15,534 $16,458 $15,218 $12,243
4/30/97 $15,640 $16,705 $15,351 $12,358
5/31/97 $15,767 $16,864 $15,446 $12,595
6/30/97 $15,907 $17,064 $15,569 $12,789
7/31/97 $16,219 $17,525 $15,697 $13,086
8/31/97 $16,013 $17,376 $15,725 $13,018
9/30/97 $16,275 $17,632 $15,846 $13,298
10/31/97 $16,250 $17,887 $15,929 $13,189
11/30/97 $16,376 $17,970 $16,015 $13,264
12/31/97 $16,520 $18,151 $16,162 $13,374
1/31/98 $16,648 $19,383 $16,328 $13,549
2/28/98 $16,713 $18,369 $16,415 $13,646
3/31/98 $16,912 $18,431 $16,489 $13,764
4/30/98 $16,897 $18,527 $16,548 $13,812
5/31/98 $16,921 $18,703 $16,682 $13,792
6/30/98 $16,869 $18,862 $16,770 $13,760
7/31/98 $17,002 $18,902 $16,881 $13,822
8/31/98 $16,080 $19,210 $17,092 $13,023
9/30/98 $16,192 $19,659 $17,263 $13,242
10/31/98 $16,217 $19,555 $17,358 $13,165
Performance** Class A Class B Class C
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Average Annual Total Returns (at net asset value)
- --------------------------------------------------------------------------------
One Year N.A. -0.2% -0.2%
Five Years N.A. 6.6 N.A.
Life of Fund+ -1.3 6.3 8.7
SEC Average Annual Total Returns (including sales charge or applicable CDSC)
- --------------------------------------------------------------------------------
One Year N.A. -4.8% -1.1%
Five Years N.A. 6.3 N.A.
Life of Fund+ -6.0 6.3 8.7
+Inception Dates - Class A: 1/23/98; Class B: 11/26/90; Class C: 5/25/94
* Source: Towers Data Systems, Bethesda, MD. Investment operations commenced
11/26/90. 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 Lehman Aggregate
Bond Index, an unmanaged, broad-based index containing only investment-grade,
fixed-income securities traded in the U.S. Securities in the Index are
included without regard to their duration. The lines on the chart represent
the total returns of $10,000 hypothetical investments in the Fund and the
Indices. Returns are calculated by determining the percentage change in net
asset value (NAV) with all distributions reinvested. With this report, we are
establishing the Lehman Aggregate Bond Index as the Fund's primary benchmark
in the belief that it more accurately reflects the Fund's investment policy
beginning March 1, 1997 through the present (see below) than does the Fund's
previous benchmark, the J.P.Morgan Hedged Short-Term Global Index, a broad-
based, unmanaged index of short-term, global bonds. In keeping with Securities
and Exchange Commission regulations, we are including both Indices in this
report. The chart also offers a comparison with the Composite of Lipper Fund
Category averages, reflecting the average total returns of the funds in the
same categories as this Fund. The fund categories are established by Lipper
Analytical Services, Inc., a nationally recognized monitor of mutual fund
performance. Funds within a category have similar investment policies. The
Composite is provided because the Fund amended its investment policies on
March 1, 1997, allowing the Fund to invest in a portfolio with a dollar-
weighted average maturity of any duration. In connection with this change, the
Fund's Lipper category also changed. Reflecting that change, the performance
of a Composite is based on the Lipper Short World Multi-Market Income Funds
category from November 30, 1990 through March 1, 1997, and thereafter, on the
Lipper Multi-Sector Income Funds category. An investment in the Fund's Class A
shares on 1/31/98 at net asset value would have been worth $9,822 on October
31, 1998; $9,356 including the 4.75% sales charge. An investment in the Fund's
Class C shares on 5/31/94 at net asset value would have been worth $14,529 on
August 31, 1998. The Indices' and Composite's total returns do 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 or a Composite.
**Returns are historical and are calculated by determining the percentage change
in net asset value with all distributions reinvested. SEC returns for Class A
reflect the maximum 4.75% sales charge. SEC returns for Class B reflect
applicable CDSC based on the following schedule: 5% - 1st and 2nd years; 4% -
3rd year; 3% - 4th year; 2% - 5th year; 1% - 6th year. SEC 1-year return for
Class C reflects 1% CDSC.
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.
5
<PAGE>
Eaton Vance Strategic Income Fund as of October 31, 1998
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
As of October 31, 1998
Assets
- --------------------------------------------------------------------------------
Investment in Strategic Income Portfolio, at value
(identified cost, $144,086,150) $138,445,933
Investment in High Income Portfolio, at value
(identified cost, $24,326,699) 21,976,889
Receivable for Fund shares sold 651,392
Deferred organization expenses 7,605
- --------------------------------------------------------------------------------
Total assets $161,081,819
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Dividends payable $ 723,132
Payable for Fund shares redeemed 248,235
Payable to affiliate for Trustees' fees 106
Other accrued expenses 88,926
- --------------------------------------------------------------------------------
Total liabilities $ 1,060,399
- --------------------------------------------------------------------------------
Net Assets $160,021,420
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Paid-in capital $178,018,944
Accumulated net realized loss from Portfolios
(computed on the basis of identified cost) (12,164,768)
Accumulated undistributed net investment income 2,157,271
Net unrealized depreciation from Portfolios
(computed on the basis of identified cost) (7,990,027)
- --------------------------------------------------------------------------------
Total $160,021,420
- --------------------------------------------------------------------------------
Class A Shares
- --------------------------------------------------------------------------------
Net Assets $ 2,008,809
Shares Outstanding 217,846
Net Asset Value and Redemption Price Per Share
(net assets / shares of beneficial interest
outstanding) $ 9.22
Maximum Offering Price Per Share
(100 / 95.25 of $9.22) $ 9.68
- --------------------------------------------------------------------------------
Class B Shares
- --------------------------------------------------------------------------------
Net Assets $138,494,549
Shares Outstanding 15,886,919
Net Asset Value, Offering Price and Redemption
Price Per Share
(net assets / shares of beneficial interest
outstanding) $ 8.72
- --------------------------------------------------------------------------------
Class C Shares
- --------------------------------------------------------------------------------
Net Assets $ 19,518,062
Shares Outstanding 1,773,455
Net Asset Value, Offering Price and Redemption
Price Per Share
(net assets / shares of beneficial interest
outstanding) $ 11.01
- --------------------------------------------------------------------------------
On sales of $25,000 or more, the offering price of Class A shares is reduced.
Statement of Operations
For the Year Ended
October 31, 1998
Investment Income
- --------------------------------------------------------------------------------
Interest allocated from Portfolios $ 14,498,605
Dividends allocated from Portfolios 214,172
Expenses allocated from Portfolios (1,264,859)
- --------------------------------------------------------------------------------
Net investment income from Portfolios $ 13,447,918
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Distribution and service fees
Class B $ 1,262,313
Class C 188,940
Trustees fees and expenses 3,493
Transfer and dividend disbursing agent fees 222,294
Registration fees 53,627
Printing and postage 26,723
Custodian fee 22,463
Legal and accounting services 17,644
Amortization of organization expenses 4,009
Miscellaneous 16,640
- --------------------------------------------------------------------------------
Total expenses $ 1,818,146
- --------------------------------------------------------------------------------
Net investment income $ 11,629,772
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) from Portfolios
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ (4,664,328)
Financial futures contracts 469,230
Foreign currency transactions 5,075,540
- --------------------------------------------------------------------------------
Net realized gain $ 880,442
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)--
Investments $ (8,394,381)
Financial futures contracts (1,207,370)
Options 110,000
Foreign currency and forward foreign currency
exchange contracts (4,037,921)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) $(13,529,672)
- --------------------------------------------------------------------------------
Net realized and unrealized loss $(12,649,230)
- --------------------------------------------------------------------------------
Net decrease in net assets from operations $ (1,019,458)
- --------------------------------------------------------------------------------
See notes to financial statements
6
<PAGE>
Eaton Vance Strategic Income Fund as of October 31, 1998
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
Increase (Decrease) Year Ended Year Ended
in Net Assets October 31, 1998 October 31, 1997
- --------------------------------------------------------------------------------
From operations--
Net investment income $ 11,629,772 $ 9,023,317
Net realized gain 880,442 6,394,233
Net change in unrealized
appreciation (depreciation) (13,529,672) (2,338,181)
- --------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ (1,019,458) $ 13,079,369
- --------------------------------------------------------------------------------
Distributions to shareholders --
From net investment income
Class A $ (69,136) $ --
Class B (11,029,458) (9,023,317)
Class C (1,413,057) --
In excess of net
investment income
Class A (2,776) --
Class B -- (1,758,107)
Class C (84,937) --
- --------------------------------------------------------------------------------
Total distributions to
shareholders $(12,599,364) $ (10,781,424)
- --------------------------------------------------------------------------------
Transactions in shares of beneficial
interest --
Proceeds from sale of
shares
Class A $ 2,660,681 $ --
Class B 38,733,721 21,726,736
Class C 20,456,268 --
Issued in reorganization
of EV Classic Strategic
Income Fund 8,399,641 --
Net asset value of shares
issued to shareholders
in payment of
distributions declared
Class A 34,786 --
Class B 5,045,715 5,147,130
Class C 1,065,842 --
Cost of shares redeemed
Class A (579,130) --
Class B (24,263,796) (28,246,800)
Class C (8,509,686) --
- --------------------------------------------------------------------------------
Net increase (decrease) in net
assets from Fund share
transactions $ 43,044,042 $ (1,372,934)
- --------------------------------------------------------------------------------
Net increase in net assets $ 29,425,220 $ 925,011
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of year $130,596,200 $ 129,671,189
- --------------------------------------------------------------------------------
At end of year $160,021,420 $ 130,596,200
- --------------------------------------------------------------------------------
Accumulated undistributed net
investment income included in net assets
- --------------------------------------------------------------------------------
At end of year $ 2,157,271 $ 993,951
- --------------------------------------------------------------------------------
See notes to financial statements
7
<PAGE>
Eaton Vance Strategic Income Fund as of October 31, 1998
FINANCIAL STATEMENTS CONT'D
Financial Highlights
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
---------------------------------------------------------------------------------------
Class A(2) Class B Class C Class B Class B Class B Class B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value -- Beginning of year $10.000 $ 9.470 $ 11.950 $ 9.310 $ 8.500 $ 8.290 $ 9.410
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.668 $ 0.684 $ 0.869 $ 0.657 $ 0.655 $ 0.726 $ 0.645
Net realized and unrealized gain (loss) (0.767) (0.686) (0.872) 0.288 0.858 0.167 (1.135)
- ------------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations $(0.099) $ (0.002) $ (0.003) $ 0.945 $ 1.513 $ 0.893 $ (0.490)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.654) $ (0.748) $ (0.884) $ (0.657) $ (0.655) $ (0.361) $ (0.343)
In excess of net investment income (0.027) -- (0.053) (0.128) (0.048) -- --
From paid-in capital -- -- -- -- -- (0.322) (0.290)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions $(0.681) $ (0.748) $ (0.937) $ (0.785) $ (0.703) $ (0.683) $ (0.633)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value -- End of year $ 9.220 $ 8.720 $ 11.010 $ 9.470 $ 9.310 $ 8.500 $ 8.290
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (3) (1.29)% (0.20)% (0.15)% 10.44% 18.48% 11.34% (5.33)%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $ 2,009 $138,495 $ 19,518 $ 130,596 $ 129,671 $150,767 $233,139
Ratios (As a percentage of average daily
net assets):
Expenses (4) 1.03% 1.96% 2.03% 2.08% 2.17% 2.18% 2.00%
Net investment income 8.44% 7.40% 7.37% 6.91% 7.38% 7.85% 7.24%
Portfolio Turnover (5) -- -- -- -- -- -- 55%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income per share was computed using average shares
outstanding.
(2) For the period from the commencement of offering of Class A shares, January
23, 1998, to October 31, 1998.
(3) 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 reinvested at the
net asset value on the reinvestment date. Total return is not computed on an
annualized basis.
(4) Includes the Fund's share of the Portfolio's allocated expenses for the
period the Fund was investing in the Portfolio.
(5) Portfolio Turnover represents the rate of portfolio activity for the period
while the Fund was making investments directly in securities. The portfolio
turnover rate for the period since the Fund transferred all of its
investable assets to the Portfolio is shown in the Portfolio's financial
statements which are included elsewhere in this report.
See notes to financial statements
8
<PAGE>
Eaton Vance Strategic Income Fund as of October 31, 1998
NOTES TO FINANCIAL STATEMENTS
1 Significant Accounting Policies
----------------------------------------------------------------------------
Eaton Vance 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 offers three classes of shares. Class A shares
are sold subject to a sales charge imposed at the time of purchase. Class B
and Class C shares are sold at net asset value and are subject to a
contingent deferred sales charge (see Note 6). All classes of shares have
equal rights to assets and voting privileges. Realized and unrealized gains
and losses are allocated daily to each class of shares based on the relative
net assets of each class to the total net assets of the Fund. Net investment
income, other than class specific expenses, is allocated daily to each class
of shares based upon the ratio of the value of each class' paid shares to
the total value of all paid shares. Each class of shares differs in its
distribution plan and certain other class specific expenses. 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 (100.0% and 2.5% at
October 31, 1998, 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. 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.
The following is a summary of significant accounting policies consistently
followed by the Fund in preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A Investment Valuation -- Valuation of securities by the Strategic Income
Portfolio is discussed in Note 1A of the 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. At October 31, 1998, the Fund, for
Federal income tax purposes, had a capital loss carryover of $11,072,444,
which will reduce the Fund's taxable income arising from future net realized
gains on investments, if any, to the extent permitted by the Internal
Revenue Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Fund of any
liability for federal income or excise tax. Such capital loss carryovers
will expire on October 31, 2002 ($4,214,275), October 31, 2003 ($4,613,119)
and October 31, 2006 ($2,245,050).
D 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.
9
<PAGE>
Eaton Vance Strategic Income Fund as of October 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
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 are paid monthly. Distributions of
allocated realized capital gains, if any, are made at least annually.
Shareholders may reinvest income and 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 over-distributions for financial statement purposes only 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 Shares of Beneficial Interest
----------------------------------------------------------------------------
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares (without par value). Transactions in Fund
shares were as follows:
Year Ended
Class A October 31, 1998*
----------------------------------------------------------------------------
Sales 276,254
Issued to shareholders electing to receive
payment of distributions in Fund shares 3,622
Redemptions (62,030)
----------------------------------------------------------------------------
Net increase 217,846
----------------------------------------------------------------------------
* For the period from the commencement of offering of Class A shares,
January 23, 1998, to October 31, 1998.
Year Ended October 31,
-----------------------------------
Class B 1998 1997
----------------------------------------------------------------------------
Sales 4,165,687 2,277,649
Issued to shareholders electing to
receive payments of distributions
in Fund shares 543,656 539,780
Redemptions (2,609,018) (2,963,088)
----------------------------------------------------------------------------
Net increase (decrease) 2,100,325 (145,659)
----------------------------------------------------------------------------
Year Ended
Class C October 31, 1998
----------------------------------------------------------------------------
Sales 1,727,701
Issued to shareholders electing to receive payment of
distributions in Fund shares 91,129
Redemptions (748,223)
Issued to EV Classic Strategic Income
Fund shareholders 702,848
----------------------------------------------------------------------------
Net increase 1,773,455
----------------------------------------------------------------------------
4 Investment Adviser Fee and Other Transactions
with Affiliates
----------------------------------------------------------------------------
Eaton Vance Management (EVM) serves as the administrator of the Fund, but
receives no compensation. 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. Certain
of the officers and Trustees of the Fund and Portfolios' are officers and
directors/trustees of the above organizations (Note 5). Except as to
Trustees of the Fund and the Portfolios who are not members of EVM's
organization, officers and Trustees receive remuneration for their services
to the Fund out of such investment adviser fee. Eaton Vance Distributors,
Inc. (EVD), a subsidiary of EVM and the Fund's principal underwriter,
received $3,458 as its portion of the sales charge on sales of Class A
shares for the period ended October 31, 1998.
10
<PAGE>
Eaton Vance Strategic Income Fund as of October 31, 1998 NOTES TO FINANCIAL
STATEMENTS CONT'D
5 Distribution and Service Plans
----------------------------------------------------------------------------
The Fund has adopted a Service Plan for the Fund's Class A shares (the
"Class A Plan") that is designed to meet the service fee requirements of the
sales charge rule of the National Association of Securities Dealers, Inc.
The Class A Plan provides that the Fund may make service fee payments for
personal services and/or the maintenance of shareholder accounts to the
Principal Underwriter, financial service firms ("Authorized Firms") and
other persons in amounts not exceeding 0.25% of average daily net assets for
Class A shares for any fiscal year. The Trustees have initially implemented
the Class A Plan by authorizing Class A to make quarterly service fee
payments to the Principal Underwriter and Authorized Firms in amounts not
expected to exceed 0.25% of the average daily net assets for any fiscal year
which is based on the value of Class A shares sold by such persons and
remaining outstanding for at least twelve months. Class A expects to begin
making service fee payments during the quarter ended March 31, 1999.
The Fund has also adopted distribution plans (Class B Plan and Class C Plan,
the Plans) pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Plans, which are approved annually, require the Fund to pay the
Principal Underwriter, Eaton Vance Distributors, Inc. (EVD), amounts equal
to 1/365 of 0.75% of the Fund's Class B and Class C average 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) 5% and 6.25% of the aggregate amount
received by the Fund for Class B and Class C shares sold, respectively, plus
(ii) distribution fees calculated by applying the rate of 1% over the
prevailing prime rate to the outstanding balance of Uncovered Distribution
Charges due EVD, of each respective class reduced by the aggregate amount of
contingent deferred sales charges (see Note 6) and daily amounts theretofore
paid to EVD by each respective class. 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 period ended October 31,
1998, the Fund paid or accrued $1,029,583 and $141,705, respectively, to or
payable to EVD representing 0.75% of average daily net assets of Class B and
Class C shares, respectively. At October 31, 1998, the amount of Uncovered
Distribution Charges of EVD calculated under the Plans was approximately
$21,807,000 and $1,626,000 for Class B and Class C shares, respectively.
In addition, the Plans authorize the Fund to make payments of service fees
to EVD, Authorized Firms, and other persons in amounts not exceeding 0.25%
of their average daily net assets for each fiscal year. Service fee payments
are made for personal services and/or the maintenance of shareholder
accounts. Under the Class B Plan, this fee is paid quarterly in arrears
based on the value of Class B shares sold by such persons and remaining
outstanding for at least twelve months. Under the Class C Plan, EVD
currently expects to pay to an Authorized Firm (a) a service fee (except on
exchange transactions and reinvestments) at the time of sale equal to 0.25%
of the purchase price of the Class C shares sold by such Firm and (b)
monthly service fees approximately equivalent to 1/12 of 0.25% of the value
of Class C shares sold by such Firm and remaining outstanding for at least
one year. During the first year after a purchase of Class C shares, EVD will
retain the service fee as reimbursement for the service fee payment made to
Authorized Firms at the time of sale. Service fee payments for the year
ended October 31, 1998, amounted to $232,730 and $47,235, respectively, for
Class B and Class C, respectively. Service fees 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.
6 Contingent Deferred Sales Charge
----------------------------------------------------------------------------
A contingent deferred sales charge (CDSC) is imposed on any redemption of
Class B shares made within six years of purchase. A CDSC of 1% is imposed on
any redemption of Class C shares made within one year of purchase.
Generally, the CDSC is based on the lower of the net asset value at the date
of redemption or date of purchase. No charge is levied on shares acquired by
reinvestment of dividends or capital gains distributions. The Class B CDSC
is imposed at declining rates that begin at 5% in the case of redemption's
in the first and second years of redemption after purchase, declining one
percentage point each subsequent year. Class C shares will be subject to a
1% CDSC if redeemed within one year of purchase. No CDSC is levied on shares
which have been sold to EVM 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 funds
11
<PAGE>
Eaton Vance Strategic Income Fund as of October 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
Distribution Plans. CDSC charges received when no Uncovered Distribution
Charges exist will be credited to the Fund. EVD received approximately
$55,000 and $12,000 of CDSC paid by shareholders of Class B and Class C
shares, respectively, during the period ended October 31, 1998.
7 Investment Transactions
----------------------------------------------------------------------------
Increases and decreases in the Fund's investment in the Strategic Income
Portfolio for the year ended October 31, 1998, aggregated $63,230,486 and
$47,288,792, respectively. Increases in the Fund's investment in the High
Income Portfolio aggregated $1,000,000.
8 Investment in Portfolios
----------------------------------------------------------------------------
For the year ended October 31, 1998, 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>
Dividend income $ 21,947 $ 192,225 $ 214,172
Interest income 12,415,668 2,082,937 14,498,605
Expenses (1,128,193) (136,666) (1,264,859)
------------------------------------------------------------------------------
Net investment income $ 11,309,422 $2,138,496 $ 13,447,918
------------------------------------------------------------------------------
Net realized gain (loss)--
Investments (identified
cost basis) $ (4,354,064) $ (310,264) $ (4,664,328)
Financial futures contracts 469,230 -- 469,230
Foreign currency
transactions 5,075,540 -- 5,075,540
------------------------------------------------------------------------------
Net realized gain $ 1,190,706 $ (310,264) $ 880,442
------------------------------------------------------------------------------
Change in unrealized
appreciation (depreciation)
Investments $ (6,116,586) $(2,277,795) $ (8,394,381)
Financial futures contracts (1,207,370) -- (1,207,370)
Options 110,000 -- 110,000
Foreign currency,
and forward
foreign currency
exchange contracts (4,037,921) -- (4,037,921)
------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation) $(11,251,877) $(2,277,795) $(13,529,672)
------------------------------------------------------------------------------
</TABLE>
9 Transfer of Net Assets
----------------------------------------------------------------------------
On November 1, 1997, EV Marathon Strategic Income Fund acquired the net
assets of EV Classic Strategic Income Fund pursuant to an Agreement and Plan
of Reorganization dated June 23, 1997. In accordance with the agreement, EV
Marathon Strategic Income Fund, at the closing, issued 702,848 Class C
shares of the Fund having an aggregate value of $8,399,641. As a result, the
Fund issued one Class C share for each share of EV Classic Strategic Income
Fund. The transaction was structured for tax purposes to qualify as a tax
free reorganization under the Internal Revenue Code. The EV Classic
Strategic Income Fund's net assets at the date of the transaction were
$8,399,641, including $33,282 of unrealized appreciation, and a net asset
value per share of $11.95. Directly after the merger, the combined net
assets of the Eaton Vance Strategic Income Fund (formerly "EV Marathon
Strategic Income Fund") were $138,995,841 with a net asset value of $9.47
and $11.95 for Class B shares and Class C shares, respectively.
10 Name Change
----------------------------------------------------------------------------
Effective November 1, 1997, EV Marathon Strategic Income Fund changed its
name to Eaton Vance Strategic Income Fund.
12
<PAGE>
Eaton Vance Strategic Income Fund as of October 31, 1998
INDEPENDENT ACCOUNTANTS' REPORT
To the Trustees of Eaton Vance Mutual Funds Trust and Shareholders of Eaton
Vance Strategic Income Fund:
- --------------------------------------------------------------------------------
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets and financial
highlights present fairly, in all material respects, the financial position of
Eaton Vance Strategic Income Fund (the "Fund") at October 31, 1998, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PriceWaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998
13
<PAGE>
Strategic Income Portfolio as of October 31, 1998
PORTFOLIO OF INVESTMENTS
Bonds & Notes-- 97.6%
Principal U.S. $ Value
- --------------------------------------------------------------------------------
Argentina -- 4.1% U.S. Dollar
- --------------------------------------------------------------------------------
Argentina Discount Bond (Brady),
6.625% , 3/31/23(1) 5,750,000 $ 4,003,438
Transener, 9.25% , 4/01/08(2) 2,000,000 1,660,000
- --------------------------------------------------------------------------------
Total Argentina (identified cost, $6,092,889) $ 5,663,438
- --------------------------------------------------------------------------------
Bulgaria -- 5.6% U.S. Dollar
- --------------------------------------------------------------------------------
Bulgaria Discount Bond (Brady),
6.688% , 7/28/24(1) 11,000,000 $ 7,706,875
- --------------------------------------------------------------------------------
Total Bulgaria (identified cost, $7,726,715) $ 7,706,875
- --------------------------------------------------------------------------------
Ecuador -- 2.9% U.S. Dollar
- --------------------------------------------------------------------------------
Ecuador Discount Bond (Brady),
6.625% , 2/28/25(1) 7,600,000 $ 3,923,500
- --------------------------------------------------------------------------------
Total Ecuador (identified cost, $4,204,575) $ 3,923,500
- --------------------------------------------------------------------------------
Greece -- 3.4% Greek Drachma
- --------------------------------------------------------------------------------
Hellenic Republic, 8.90%, 4/01/03 1,300,000,000 $ 4,617,120
- --------------------------------------------------------------------------------
Total Greece (identified cost, $4,280,940) $ 4,617,120
- --------------------------------------------------------------------------------
Hong Kong -- 1.0% U.S. Dollar
- --------------------------------------------------------------------------------
Guangdong Enterprises, 8.75%, 12/15/03(2) 3,000,000 $ 1,335,000
- --------------------------------------------------------------------------------
Total Hong Kong (identified cost, $2,741,780) $ 1,335,000
- --------------------------------------------------------------------------------
Indonesia -- 1.2% U.S. Dollar
- --------------------------------------------------------------------------------
APP Global Finance III, 9.407% ,
4/17/02(1)(3) 600,000 $ 270,000
Indah Kiat Finance Mauritius, Sr.
Unsec. Notes, 10.00% , 7/01/07 2,750,000 1,430,000
- --------------------------------------------------------------------------------
Total Indonesia (identified cost, $2,693,372) $ 1,700,000
- --------------------------------------------------------------------------------
Mexico -- 5.8% U.S. Dollar
- --------------------------------------------------------------------------------
Mexican Discount Bond (Brady), Series B,
w/ attached warrants, 6.477%,
12/31/19 3,000,000 $ 2,368,140
Mexican Discount Bond (Brady), Series D,
w/ attached warrants, 6.602%,
12/31/19 7,000,000 5,525,660
- --------------------------------------------------------------------------------
Total Mexico (identified cost, $8,091,821) $ 7,893,800
- --------------------------------------------------------------------------------
New Zealand -- 4.1% New Zealand Dollar
- --------------------------------------------------------------------------------
New Zealand Government, 7.00%, 7/15/09 9,500,000 $ 5,667,157
- --------------------------------------------------------------------------------
Total New Zealand (identified cost, $5,264,521) $ 5,667,157
- --------------------------------------------------------------------------------
Peru -- 2.3% U.S. Dollar
- --------------------------------------------------------------------------------
Peru FLIRB (Brady), 3.25%, 3/07/17 4,000,000 $ 2,040,000
Peru PDI (Brady), 4.00%, 3/07/17 2,000,000 1,150,000
- --------------------------------------------------------------------------------
Total Peru (identified cost, $2,860,436) $ 3,190,000
- --------------------------------------------------------------------------------
Philippines-- 2.1% U.S. Dollar
- --------------------------------------------------------------------------------
JG Summit Cayman, 3.50%, 12/23/03 2,500,000 $ 1,187,500
Philippine Par Bond (Brady),
6.50%, 12/01/17(1) 2,000,000 1,620,000
- --------------------------------------------------------------------------------
Total Philippines (identified cost, $3,650,533) $ 2,807,500
- --------------------------------------------------------------------------------
United Kingdom -- 1.1% Deutsche Mark
- --------------------------------------------------------------------------------
Colt Telecom Group PLC Notes,
7.625%, 7/31/08(2) 1,000,000 $ 531,449
Esprit Telecom Group PLC, 11.00%,6/15/08(2) 2,000,000 1,020,624
- --------------------------------------------------------------------------------
Total United Kingdom (identified cost, $1,656,198) $ 1,552,073
- --------------------------------------------------------------------------------
United States -- 64.0% U.S. Dollar
- --------------------------------------------------------------------------------
Corporate Bonds & Notes -- 2.6%
Dayton Hudson Medium Term Notes,
9.52%, 6/10/15 350,000 $ 469,277
TRW Inc., Medium Term Notes,
9.35%, 6/04/20 1,900,000 2,388,129
United International Holdings, Inc.,
Sr. Disc. Notes, 10.75%,
(0% until 2/15/03), 2/15/08 1,500,000 675,000
- --------------------------------------------------------------------------------
Total Corporate Bonds & Notes (identified cost,
$3,364,038) $ 3,532,406
- --------------------------------------------------------------------------------
Mortgage Pass-Throughs -- 59.7%
Federal Home Loan Mortgage Corp.:
4.75%, with maturity at 2001 8,072 $ 7,997
5.50%, with maturity at 2019 147 147
8.00%, with various maturities to 2021 9,392,346 9,758,731
8.50%, with various maturities to 2019 1,904,435 2,002,583
9.00%, with maturity at 2019 580,278 613,511
9.25%, with various maturities to 2016 4,794,867 5,060,583
9.50%, with maturity at 2015 2,000,706 2,113,556
9.75%, with maturity at 2020 770,274 839,429
11.00%, with maturity at 2019 2,250,505 2,504,041
11.25%, with maturity at 2010 391,751 435,894
12.50%, with various maturities to 2019 2,526,726 2,943,477
12.75%, with maturity at 2013 151,213 174,408
13.25%, with maturity at 2013 118,473 138,161
13.50%, with maturity at 2019 324,219 381,905
- --------------------------------------------------------------------------------
$ 26,974,423
- --------------------------------------------------------------------------------
Federal National Government Loan:
9.00%, with maturity at 2021 1,950,110 $ 2,057,887
9.50%, with maturity at 2013 2,150,191 2,347,799
11.00%, with maturity at 2025 971,540 1,093,953
- --------------------------------------------------------------------------------
$ 5,499,639
- --------------------------------------------------------------------------------
See notes to financial statements
14
<PAGE>
Strategic Income Portfolio as of October 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
Principal U.S. $ Value
- --------------------------------------------------------------------------------
United States (continued)
- --------------------------------------------------------------------------------
Federal National Mortgage Association:
4.75%, with maturity at 1999 978 $ 975
5.00%, with maturity at 2003 74,809 74,357
5.50%, with maturity at 2012 6,293 6,298
7.00%, with maturity at 2014 4,584,533 4,745,330
7.50%, with various maturities to 2018 2,834,423 2,944,956
8.00%, with various maturities to 2019 2,704,873 2,821,288
8.50%, with various maturities to 2026 12,246,262 12,856,807
9.00%, with maturity at 2010 1,411,550 1,485,347
12.00%, with maturity at 2015 987,954 1,133,543
12.50%, with various maturities to 2027 6,364,133 7,384,449
12.75%, with maturity at 2014 113,489 134,175
13.00%, with various maturities to 2015 2,654,216 3,120,891
13.25%, with maturity at 2014 199,743 237,678
13.50%, with various maturities to 2015 1,502,364 1,769,551
14.75%, with various maturities to 2012 2,013,643 2,436,818
- --------------------------------------------------------------------------------
$ 41,152,463
- --------------------------------------------------------------------------------
Government National Mortgage Association:
6.50%, with various maturities to 2007 642,604 $ 651,071
7.50%, with various maturities to 2017 905,557 951,053
8.30%, with maturity at 2020 1,174,418 1,234,465
8.50%, with maturity at 2009 1,097,427 1,162,590
9.00%, with maturity at 2016 738,244 779,416
12.50%, with maturity at 2019 2,783,349 3,232,910
13.50%, with various maturities to 2014 240,556 289,298
- --------------------------------------------------------------------------------
$ 8,300,803
- --------------------------------------------------------------------------------
Total Mortgage Pass-Throughs (identified cost,
$82,089,886) $ 81,927,328
- --------------------------------------------------------------------------------
U.S. Treasury Bond -- 1.7%
United States Treasury Bond, 11.75%, 2/15/01(4)
(identified cost, $2,603,438) 2,000,000 $ 2,319,060
- --------------------------------------------------------------------------------
Total United States (identified cost, $88,057,362) $ 87,778,794
- --------------------------------------------------------------------------------
Total Bonds & Notes
(identified cost $137,321,142) $ 133,835,257
- --------------------------------------------------------------------------------
Preferred Stocks -- 0.4%
Hong Kong -- 0.4% U.S. Dollar
- --------------------------------------------------------------------------------
Guangdong Investment Ltd., 3.25%, 1/07/03(2) 1,350,000 $ 580,500
- --------------------------------------------------------------------------------
Total Hong Kong (identified cost, $1,353,375) $ 580,500
- --------------------------------------------------------------------------------
Total Preferred Stocks
(identified cost $1,353,375) $ 580,500
- --------------------------------------------------------------------------------
Short-Term Investments -- 2.0%
Principal U.S. $ Value
- --------------------------------------------------------------------------------
U.S. Dollar
- --------------------------------------------------------------------------------
Banque National De Paris, Euro Time-deposit
Cayman Islands, 5.500%, 11/02/98 2,700,000 $ 2,700,000
- --------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $2,700,000) $ 2,700,000
- --------------------------------------------------------------------------------
Total Investments -- 100.0%
(identified cost $141,374,517) $ 137,115,757
- --------------------------------------------------------------------------------
(1) Variable rate security. Rate indicated is the rate at October 31, 1998.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. It is the
Portfolio's intention to hold this security until maturity.
(3) Security valued at fair value using methods determined in good faith by or
at the direction of the Trustees.
(4) Security (or a portion thereof) has been segregated to cover margin
requirements on open financial futures contracts.
See notes to financial statements
15
<PAGE>
Strategic Income Portfolio as of October 31, 1998
FINANCIAL STATEMENTS
Statement of Assets & Liabilities
As of October 31, 1998
Assets
- --------------------------------------------------------------------------------
Investments, at value (identified cost, $141,374,517) $137,115,757
Cash 41,753
Receivable for investments sold 277,981
Interest receivable 2,341,426
Deferred organization expenses 1,558
- --------------------------------------------------------------------------------
Total assets $139,778,475
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Payable for daily variation margin on open
financial futures contracts $ 262,750
Written options, at value 78,125
Payable for open forward foreign currency contracts 974,112
Other accrued expenses 17,545
- --------------------------------------------------------------------------------
Total liabilities $ 1,332,532
- --------------------------------------------------------------------------------
Net Assets applicable to investors' interest in Portfolio $138,445,943
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Net proceeds from capital contributions and withdrawals $144,086,160
Net unrealized depreciation (computed on the basis
of identified cost) (5,640,217)
- --------------------------------------------------------------------------------
Total $138,445,943
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended
October 31, 1998
Investment Income
- --------------------------------------------------------------------------------
Interest $ 12,415,668
Dividends 21,947
- --------------------------------------------------------------------------------
Total investment income $ 12,437,615
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Investment adviser fee $ 713,908
Administration fee 204,036
Trustees fees and expenses 9,901
Custodian fee 111,418
Legal and accounting services 81,019
Amortization of organization expenses 4,696
Miscellaneous 3,215
- --------------------------------------------------------------------------------
Total expenses $ 1,128,193
- --------------------------------------------------------------------------------
Net investment income $ 11,309,422
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss)
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ (4,354,064)
Financial futures contracts 469,230
Foreign currency transactions 5,075,540
- --------------------------------------------------------------------------------
Net realized gain $ 1,190,706
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)--
Investments (identified cost basis) $ (6,116,587)
Financial futures contracts (1,207,370)
Options 110,000
Foreign currency and forward foreign currency
exchange contracts (4,037,921)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) $(11,251,878)
- --------------------------------------------------------------------------------
Net realized and unrealized loss $(10,061,172)
- --------------------------------------------------------------------------------
Net increase in net assets from operations $ 1,248,250
- --------------------------------------------------------------------------------
See notes to financial statements
16
<PAGE>
Strategic Income Portfolio as of October 31, 1998
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
Increase (Decrease) Year Ended Year Ended
in Net Assets October 31,1998 October 31, 1997
- --------------------------------------------------------------------------------
From operations--
Net investment income $ 11,309,422 $ 10,516,988
Net realized gain 1,190,706 6,359,975
Net change in unrealized
appreciation (depreciation) (11,251,878) (2,306,661)
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 1,248,250 $ 14,570,302
- --------------------------------------------------------------------------------
Capital transactions --
Contributions $ 63,230,486 $ 36,154,026
Withdrawals (47,288,792) (61,875,128)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital transactions $ 15,941,694 $ (25,721,102)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets $ 17,189,944 $ (11,150,800)
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of year $121,255,999 $ 132,406,799
- --------------------------------------------------------------------------------
At end of year $138,445,943 $ 121,255,999
- --------------------------------------------------------------------------------
See notes to financial statements
17
<PAGE>
Strategic Income Portfolio as of October 31, 1998
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratios to average daily net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 0.83% 0.86% 0.86% 0.84% 0.82%(2)
Net investment income 8.31% 8.06% 8.62% 9.08% 8.41%(2)
Portfolio Turnover 71% 77% 71% 78% 71%
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $ 138,446 $ 121,256 $ 132,407 $ 152,583 $ 236,469
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from the start of business, March 1, 1994, to October 31,
1994.
(2) Annualized.
See notes to financial statements
18
<PAGE>
Strategic Income Portfolio as of October 31, 1998
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 an independent matrix
pricing system applied by the advisor which takes into account closing bond
valuations, yield differentials, anticipated prepayments and interest rates
provided by dealers. 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.
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 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.
19
<PAGE>
Strategic Income Portfolio as of October 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
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 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.
L Other -- Investment transactions are accounted for on a trade date basis.
2 Investment Adviser Fee and Other Transactions with Affiliates
----------------------------------------------------------------------------
The investment adviser fee is earned by Boston Management and Research
(BMR), a wholly-owned subsidiary of Eaton Vance Management (EVM), as
compensation for management and investment advisory services rendered to the
Portfolio. The fee is based upon a percentage of average daily net assets
plus a percentage of gross income (i.e., income other than gains from the
sale of investments). Such percentages are reduced as average daily net
assets exceed certain levels. For the year ended October 31, 1998, the fee
was equivalent to 0.52% of the Portfolio's average net assets for such
period and amounted to $713,908. 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
$204,036 for the year ended October 31, 1998.
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, 1998, no significant amounts have been deferred. Certain of the
officers and Trustees of the Portfolios are officers and directors/trustees
of the above organizations.
20
<PAGE>
Strategic Income Portfolio as of October 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
3 Line of Credit
----------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR or
EVM and its affiliates in an $80 million ($130 million effective November
12, 1998) 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,
1998, the Portfolio had invested approximately 25.5% of its net assets or
approximately $35,367,000 in high yield securities. Purchases and sales of
investments, other than short-term obligations, for the year ended October
31, 1998 were as follows:
Purchases
-----------------------------------------------------------------------------
Investments (non-U.S. Government) $ 80,779,353
U.S. Government Securities 48,266,943
-----------------------------------------------------------------------------
$ 129,046,296
-----------------------------------------------------------------------------
Sales
-----------------------------------------------------------------------------
Investments (non-U.S. Government) $ 56,894,687
U.S. Government Securities 31,190,852
-----------------------------------------------------------------------------
$ 88,085,539
-----------------------------------------------------------------------------
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 contracts and financial
futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes. The
notional or contractual amounts of these instruments represent the
investment the Portfolio has in particular classes of financial instruments
and does not necessarily represent the amounts potentially subject to risk.
The measurement of the risks associated with these instruments is meaningful
only when all related and offsetting transactions are considered. A summary
of obligations under these financial instruments at October 31, 1998, is as
follows:
Forward Foreign Currency Exchange Contracts
----------------------------------------------------------------------------
Sales
----------------------------------------------------------------------------
Net Unrealized
Settlement In Exchange For Appreciation
Date(s) Deliver (in U.S. dollars) (Depreciation)
----------------------------------------------------------------------------
11/24/98- Deutsche Mark
2/01/99 10,717,920 $ 6,490,744 $ (198,888)
2/22/99 Hong Kong Dollar
40,000,000 5,136,536 (128,711)
11/05/98 Japanese Yen
727,000,000 6,240,531 (106,234)
12/11/98 New Taiwan Dollar
143,600,000 4,427,452 (427,452)
11/09/98- New Zealand Dollar
11/16/98 9,500,000 5,025,699 (74,662)
1/25/99- Republic of Korea Won 5,016,603 (16,603)
2/26/99 6,677,000,000
11/24/98- Singapore Dollar
12/18/98 9,000,000 5,551,970 (375,600)
----------------------------------------------------------------------------
$ 37,889,535 $(1,328,150)
----------------------------------------------------------------------------
21
<PAGE>
Strategic Income Portfolio as of October 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
Purchases
----------------------------------------------------------------------------
Net Unrealized
Settlement Deliver Appreciation
Date(s) In Exchange For (in U.S. dollars) (Depreciation)
----------------------------------------------------------------------------
12/11/98 New Taiwan Dollar
143,600,000 $4,427,452 $ 89,084
1/08/99 Philippine Peso
133,950,000 3,260,407 260,407
11/05/98- Singapore Dollar
11/24/98 9,000,000 5,543,531 4,547
----------------------------------------------------------------------------
$13,231,390 $ 354,038
----------------------------------------------------------------------------
Futures Contracts
----------------------------------------------------------------------------
Net
Unrealized
Expiration Appreciation
Date Contracts Position (Depreciation)
----------------------------------------------------------------------------
12/21/98 115 Municipal Bond Futures Long $ (101,130)
12/31/98 159 US 30 year Bond Futures Long (23,289)
12/21/98 12 Japanese 10 year Bond Futures Short (327,838)
----------------------------------------------------------------------------
$ (452,257)
----------------------------------------------------------------------------
Written Call Options
----------------------------------------------------------------------------
Number of Contracts Premiums
----------------------------------------------------------------------------
Outstanding, beginning of year 0 $ 0
----------------------------------------------------------------------------
Options written 160 188,125
----------------------------------------------------------------------------
Outstanding, end of year 160 $ 188,125
----------------------------------------------------------------------------
At October 31, 1998, 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, 1998, as computed on a federal income tax
basis, were as follows:
Aggregate cost $142,051,843
----------------------------------------------------------------------------
Gross unrealized appreciation $ 1,486,185
Gross unrealized depreciation (6,422,271)
----------------------------------------------------------------------------
Net unrealized depreciation (4,936,086)
----------------------------------------------------------------------------
22
<PAGE>
Strategic Income Portfolio as of October 31, 1998
INDEPENDENT ACCOUNTANTS' REPORT
To the Trustees and Investors
of Strategic Income Portfolio:
- --------------------------------------------------------------------------------
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and supplementary data present fairly, in all material
respects, the financial position of Strategic Income Portfolio (the "Portfolio")
at October 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the supplementary data for each of the four years then ended, and for the period
from the start of business, March 1, 1994, to October 31, 1994, in conformity
with generally accepted accounting principles. These financial statements and
supplementary data (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998
23
<PAGE>
Eaton Vance Strategic Income Fund as of October 31, 1998
INVESTMENT MANAGEMENT
Eaton Vance Strategic Income Fund
Officers Independent Trustees
James B. Hawkes Jessica M. Bibliowicz
President and Trustee President and Chief Operating Officer,
John A. Levin & Co.
William H. Ahern, Jr. Director, Baker, Fentress & Company
Vice President
Donald R. Dwight
Thomas J. Fetter President, Dwight Partners, Inc.
Vice President
Samuel L. Hayes, III
Robert B. MacIntosh Jacob H. Schiff Professor of Investment
Vice President Banking, Emeritus, Harvard University Graduate
School of Business Administration
Michael B. Terry
Vice President Norton H. Reamer
Chairman and Chief Executive Officer,
James L. O'Connor United Asset Management Corporation
Treasurer
Lynn A. Stout
Alan R. Dynner Professor of Law,
Secretary Georgetown University Law Center
John L. Thorndike
Formerly Director, Fiduciary
Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
Strategic Income Portfolio
Officers Independent Trustees
James B. Hawkes Jessica M. Bibliowicz
President and Trustee President and Chief Operating Officer,
John A. Levin & Co.
Mark S. Venezia Director, Baker, Fentress & Company
Vice President and
Portfolio Manager Donald R. Dwight
President, Dwight Partners, Inc.
James L. O'Connor
Treasurer Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Alan R. Dynner Banking, Emeritus, Harvard University
Secretary Graduate School of Business Administration
Norton H. Reamer
Chairman and Chief Executive Officer,
United Asset Management Corporation
Lynn A. Stout
Professor of Law,
Georgetown University Law Center
John L. Thorndike
Formerly Director, Fiduciary
Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
24
<PAGE>
Investment Adviser of
Strategic Income Portfolio
Boston Management and Research
24 Federal Street
Boston, MA 02110
Administrator of Eaton Vance
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
200 Clarendon Street
Boston, MA 02116
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
PricewaterhouseCoopers LLP
One Post Office Square
Boston, MA 02109
Eaton Vance 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.
- --------------------------------------------------------------------------------
SISRC-12/98
