<PAGE>
[EATON VANCE LOGO] [PICTURE OF EARTH]
Annual Report October 31, 1999
[PICTURE OF BONDS] EATON VANCE
STRATEGIC
INCOME
FUND
Global Management-Global Distribution
[PICTURE OF BUILDINGS]
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
- -------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- -------------------------------------------------------------------------------
[PHOTO]
James B. Hawkes
President
Eaton Vance Strategic Income Fund Class A shares had a total return of 8.40%
during the year ended October 31, 1999. That return was the result of a
decline in net asset value per share (NAV) from $9.22 on October 31, 1998 to
$9.11 on October 31, 1999, and the reinvestment of $0.867 in dividends.(1)
The Fund's Class B shares had a total return of 7.32% during the year ended
October 31, 1999. This return resulted from a decline in NAV from $8.72 on
October 31, 1998 to $8.61 on October 31, 1999, and the reinvestment of $0.736
in dividends.1 Class C shares had a total return of 7.23% for the year, the
result of a decline in NAV from $11.01 on October 31, 1998 to $10.87 on
October 31, 1999, and the reinvestment of $0.921 in dividends.(1)
After a difficult 1998, many global markets rebounded in 1999...
Following a tumultuous year in 1998, many of the world's fixed-income markets
recovered strongly in 1999. Asian economies strengthened and the U.S.
maintained a pattern of manageable growth and low-inflation. Investors
realized that the flight to quality that characterized the fall of 1998 was
an overreaction to the year's global difficulties. Yields for 5-year
Treasuries, which had declined to as low as 3.9% in October 1998, rose back
to 6.0% by October 31, 1999.
Strategic Income Fund outperformed other fixed-income asset classes and its
peer group during the fiscal year...
Strategic Income Fund's Class A, Class B, and Class C shares outperformed
many other fixed-income vehicles during the year, including U.S. Treasury
bonds, mortgage-backed securities and corporate bonds. The Fund also
outperformed the average 3.54% 1-year return of its Multi-Sector Income Fund
peer group, according to Lipper, Inc., a nationally recognized monitor of
mutual fund performance.(2)
The year 2000 should provide more global fixed-income opportunities...
As we've seen once again in the past year, the global bond markets present
challenges that match their unique opportunities. Yet, it's clear that the
fixed-income markets will continue to play a major role in capital formation
for emerging economies as well as for entrepreneurs here in the U.S. The
flexibility to seek out situations both domestically and abroad is what sets
Strategic Income Fund apart. We believe the year 2000 will afford many more
such opportunities. In the pages that follow, portfolio manager Mark Venezia
provides his insights into the year just ended, and suggests what may lie
ahead for global bond investors in 2000.
Sincerely,
/s/ James B. Hawkes
James B. Hawkes
President
December 8, 1999
- --------------------------------------------------------------------------------
FUND INFORMATION
as of October 31, 19991
<TABLE>
<CAPTION>
Performance(3) Class A Class B Class C
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average Annual Total Returns (at net asset value)
- ---------------------------------------------------------------------------------------------------------------------
One Year 8.40% 7.32% 7.23%
Five Years N.A. 9.30 9.54
Life of Fund+ 3.90 6.38 8.45
SEC Average Annual Total Returns (including sales charge or applicable CDSC)
- ---------------------------------------------------------------------------------------------------------------------
One Year 3.25% 2.38% 6.24%
Five Years N.A. 9.02 9.54
Life of Fund+ 1.07 6.38 8.45
</TABLE>
+Inception Dates - Class A: 1/23/98; Class B: 11/26/90; Class C:5/25/94
Regional Weightings(4)
- --------------------------------------------------------------------------------
By total investments - Weightings reflect the Fund's investment in Strategic
Income Portfolio (holdings described beginning on page 16) and a 22.0%
investment in High Income Portfolio.
<TABLE>
<S> <C>
U.S. Investment Grade 54.3%
U.S. High Yield 22.0%
Latin America 9.5%
Asia/Pacific 8.1%
Europa 6.1%
</TABLE>
(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) It is not possible to invest
directly in a Lipper category. (3) 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.
(4) Because the Portfolio is actively managed, Regional Weightings are
subject to change.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost.
2
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION
- --------------------------------------------------------------------------------
[PHOTO]
Mark S. Venezia
Portfolio Manager
AN INTERVIEW WITH MARK S. VENEZIA, PORTFOLIO MANAGER OF STRATEGIC INCOME
PORTFOLIO
Q:Mark, following the difficulties of 1998, global fixed-income markets fared
much better in 1999. How would you characterize the global markets in the
past fiscal year?
A:The global bond markets rallied strongly at the beginning of the fiscal year,
which began in November 1998. Last year's financial crises in key emerging
markets eased somewhat, and Asia's emerging economies began to take steps
toward stability. Gross domestic product has increased significantly in many
of these Asian countries. Selective tax cuts have stimulated consumer demand
while industrial production is also rising.
In the U.S., the high-yield market, which lost ground in last year's flight to
quality, rebounded very strongly around the turn of the year and was among the
best-performing fixed-income asset classes for the fiscal year. With quality
spreads of roughly 650 basis points (6.5%) at the market bottom, we found
excellent value in lower-rated corporate bonds. Strategic Income Fund gains
exposure to the high-yield market through its holdings in Eaton Vance High
Income Portfolio.
Opening 1999, the Latin American markets were on the defensive, as Brazil's
difficulties cast a shadow over the region. Brazil devalued its currency in
January, a move that hurt its neighbors, especially Argentina. Although
Ecuador defaulted on its Brady bond debt in October, this long-anticipated
move had little effect on the region's markets. Indeed, accumulating evidence
of regional stability and higher commodity prices has brought a recovery in
these markets.
Q:With that as a backdrop, how have you positioned the Portfolio in recent
months?
A:Over the course of the fiscal year, we increased the Portfolio's investments
in the U.S. high-yield market and in Asia, while paring our exposure to Latin
America and Eastern Europe. At October 31, 1999, 22.0% of the Fund's total
investments was invested in High Income Portfolio, an increase from 12.5% a
year earlier. Asia represented an 8.1% weighting, up from 4.2%; Latin America
constituted 9.5%, down from 13.5%; and Eastern Europe was 3.8%, down from 4.9%
a year ago.
Q:What areas did you find attractive in Asia?
A:Our increased exposure to Asia was generally focused on corporate bonds in
Indonesia, the
- --------------------------------------------------------------------------------
Quality Weightings(1)
- --------------------------------------
[CHART]
<TABLE>
<S> <C>
Investment Grade 57.0%
Below Investment Grade 43.0%
</TABLE>
(1) Because the Portfolio is actively managed, Quality Weightings are subject to
change. Weightings include the Fund's investment in Strategic Income Portfolio
(holdings described beginning on page 16) and a 22.0% investment in High Income
Portfolio.
The Portfolio's holdings will change over time. The discussion of specific
holdings reflects only the portfolio manager's view of those holdings as of the
date of this report.
- --------------------------------------------------------------------------------
MUTUAL FUND SHARES ARE NOT INSURED BY THE FDIC AND ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE SUBJECT
TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTED.
- --------------------------------------------------------------------------------
3
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION CONT'D
- --------------------------------------------------------------------------------
Philippines, Korea and Thailand. With low inflation allowing the region's
central banks to reduce interest rates, industrial activity has been given a
shot in the arm. In addition, in the wake of last year's crisis, many
companies have restructured, wringing out the excesses of recent years and
making the companies more competitive.
Q:Could you give some examples of Asia-based companies in whose bonds you
invested?
A:In Indonesia, we had a position in Daya Guna Samudra, a fishing company that
exports to the rest of Asia. The company has modernized its fleet of fishing
vessels in order to improve harvests in the Arafuru and South China Seas. In
addition, newly-elected president Wahid has pledged to protect Indonesia's
territorial waters, a move that should provide Daya Guna some insulation in
the region's increasingly competitive fishing industry.
In the Philippines, J. G. Summit is a conglomerate with wide-ranging business
interests, including telecommunications, food processing and banking. Summit
has started to reduce its exposure to financial services in recent months in
order to focus on its core businesses. The company has a very strong brand
name and near-monopoly status in some segments of the Philippine food market.
In Korea, we had a successful run in Samsung Electronics, a major
semiconductor producer that benefited from rising semiconductor prices. We
managed to capitalize on this positive story through Samsung's convertible
bonds, which we thought were greatly undervalued last year. So we managed to
participate in Korea's rally with the limited downside risk of a bond.
Q:You indicated an increased commitment to the U.S. high-yield market. What
prompted that move?
A:After last year's flight to Treasuries, quality spreads - the difference in
yields between bonds of varying quality - were extraordinarily wide, reaching
as high as 650 basis points (6.5%) over similar maturity Treasury bonds.
Spreads haven't been that wide since 1991 and we believed it was a good
opportunity to increase our weighting in High Yield Portfolio. The high-yield
market rallied strongly in the first half of the fiscal year before
encountering some supply pressures at mid-year. However, spreads remain
historically wide and we're enthusiastic about the market in the coming year.
Q:What changes have you made to your positions in Latin America?
A:We eliminated our investments in Argentina and Ecuador. Argentina has a large
trade exposure with Brazil and its fixed exchange rate has contributed to the
country's second major recession in five years. Argentina's GDP has declined
by 5% while unemployment has continued to increase. Ecuador is in the midst of
a fiscal crisis. We sold our position because we did not believe that even the
new reform-minded government could pass the needed legislation.
In sharp contrast to those Latin trouble spots, we held onto our investments
in Mexico. The country weathered last year's crisis relatively well, primarily
as a result of its floating exchange rate. The floating exchange rate
eliminated the necessity of raising interest rates to defend the peso.
Mexico's economy has also benefited from rising oil prices as well as its
trade exposure to the robust U.S. economy.
Q:Do you still have investments in mortgage-backed securities?
A:Yes, we've retained some exposure to seasoned mortgage-backed securities
(MBS). However, we've reduced these holdings in recent months in favor of
Federal National Mortgage Co. (Fannie Mae) and Federal Home Loan Mortgage Co.
(Freddie Mac) debentures. Fannie Mae and Freddie Mac are government-
4
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION CONT'D
- --------------------------------------------------------------------------------
sponsored enterprises that were created to provide liquidity for the U.S.
mortgage market. In addition to issuing MBS, the companies each have a large
portfolio of retained mortgages.
Fannie Mae and Freddie Mac have been major beneficiaries of the housing boom
in recent years. However, yield spreads for their debentures widened
significantly during this past summer. As our MBS holdings paid down
principal, we directed a portion of the proceeds into Fannie Mae and Freddie
Mac debentures, which provided extremely attractive yields in very
high-quality securities.
Q:Mark, what is your outlook for the coming year?
A:I believe that the outlook for selected global bond markets has improved
significantly in 1999. The U.S. economy appears sound, and, with increasing
global competition, modest wage demands and a vigilant Federal Reserve,
inflation remains in check. With last year's flight to quality having abated,
we believe the U.S. high-yield bond market is once again an attractive area
for fixed-income investors.
Elsewhere, Asian governments appear to have addressed some issues that
triggered last year's problems and their economies have begun to recover.
Lower interest rates should promote stronger GDP growth throughout the region.
And while major Latin markets continue to struggle, they will bear watching
for signs of a turnaround.
As demonstrated in the past year, the Portfolio's flexible charter allows it
to move among markets and to respond quickly to changing market conditions. I
believe that Strategic Income Portfolio is well-positioned to take advantage
of additional global opportunities as they occur in the coming year.
[GRAPH]
EATON VANCE STRATEGIC INCOME FUND, CLASS B VS.
LEHMAN AGGREGATE BOND INDEX AND THE COMPOSITE OF LIPPER FUND CATEGORY AVERAGES
<TABLE>
<CAPTION>
DATE FUND/NAV LEHMAN LIPPER
<S> <C> <C> <C>
11/30/90 $10,000 $10,000 $10,000
12/31/90 $9,973 $10,156 $10,024
1/31/91 $10,091 $10,282 $10,189
2/28/91 $10,197 $10,369 $10,201
3/31/91 $10,340 $10,439 $9,975
4/30/91 $10,438 $10,554 $10,070
5/31/91 $10,580 $10,615 $10,086
6/30/91 $10,553 $10,610 $10,046
7/31/91 $10,550 $10,757 $10,170
8/31/91 $10,640 $10,989 $10,254
9/30/91 $10,739 $11,212 $10,411
10/31/91 $10,819 $11,337 $10,508
11/30/91 $10,732 $11,441 $10,511
12/31/91 $10,794 $11,781 $10,670
1/31/92 $10,840 $11,621 $10,623
2/28/92 $10,952 $11,696 $10,687
3/31/92 $10,958 $11,631 $10,703
4/30/92 $11,109 $11,715 $10,798
5/31/92 $11,185 $11,936 $10,912
6/30/92 $11,222 $12,101 $10,978
7/31/92 $11,239 $12,348 $11,010
8/31/92 $11,079 $12,472 $10,969
9/30/92 $10,719 $12,621 $10,662
10/31/92 $10,662 $12,453 $10,650
11/30/92 $10,626 $12,458 $10,570
12/31/92 $10,719 $12,653 $10,590
1/31/93 $10,762 $12,896 $10,643
2/28/93 $11,015 $13,122 $10,725
3/31/93 $11,102 $13,177 $10,771
4/30/93 $11,192 $13,269 $10,832
5/31/93 $11,261 $13,287 $10,914
6/30/93 $11,341 $13,527 $10,952
7/31/93 $11,545 $13,604 $10,978
8/31/93 $11,603 $13,842 $11,018
9/30/93 $11,487 $13,880 $11,000
10/31/93 $11,782 $13,931 $11,070
11/30/93 $11,740 $13,813 $11,033
12/31/93 $11,880 $13,887 $11,134
1/31/94 $12,073 $14,075 $11,213
2/28/94 $11,738 $13,830 $11,049
3/31/94 $11,097 $13,488 $10,899
4/30/94 $11,184 $13,380 $10,894
5/31/94 $11,352 $13,379 $10,906
6/30/94 $10,920 $13,349 $10,827
7/31/94 $10,973 $13,615 $10,863
8/31/94 $11,136 $13,631 $10,907
9/30/94 $11,130 $13,431 $10,941
10/31/94 $11,154 $13,419 $10,975
11/30/94 $11,284 $13,389 $10,993
12/31/94 $11,254 $13,482 $10,697
1/31/95 $11,047 $13,749 $10,627
2/28/95 $11,022 $14,076 $10,672
3/31/95 $10,992 $14,162 $10,650
4/30/95 $11,474 $14,360 $10,829
5/31/95 $11,920 $14,916 $10,974
6/30/95 $11,802 $15,025 $11,002
7/31/95 $11,898 $14,992 $11,101
8/31/95 $12,110 $15,173 $11,150
9/30/95 $12,350 $15,320 $11,258
10/31/95 $12,419 $15,519 $11,331
11/30/95 $12,662 $15,752 $11,411
12/31/95 $12,880 $15,973 $11,493
1/31/96 $13,394 $16,078 $11,587
2/28/96 $13,132 $15,798 $11,555
3/31/96 $13,219 $15,688 $11,577
4/30/96 $13,500 $15,600 $11,651
5/31/96 $13,572 $15,569 $11,696
6/30/96 $13,780 $15,777 $11,778
7/31/96 $13,812 $15,820 $11,852
8/31/96 $14,049 $15,793 $11,908
9/30/96 $14,487 $16,680 $12,022
10/31/96 $14,714 $16,425 $12,136
11/30/96 $15,164 $16,706 $12,254
12/31/96 $15,223 $16,550 $12,279
1/31/97 $15,539 $16,601 $12,271
2/28/97 $15,685 $16,643 $12,269
3/31/97 $15,534 $16,458 $12,057
4/30/97 $15,640 $16,705 $12,170
5/31/97 $15,767 $16,864 $12,404
6/30/97 $15,907 $17,064 $12,595
7/31/97 $16,219 $17,525 $12,887
8/31/97 $16,013 $17,376 $12,820
9/30/97 $16,275 $17,632 $13,095
10/31/97 $16,250 $17,887 $12,988
11/30/97 $16,376 $17,970 $13,062
12/31/97 $16,520 $18,151 $13,170
1/31/98 $16,648 $19,383 $13,343
2/28/98 $16,713 $18,369 $13,438
3/31/98 $16,912 $18,431 $13,555
4/30/98 $16,897 $18,527 $13,602
5/31/98 $16,921 $18,703 $13,582
6/30/98 $16,869 $18,862 $13,550
7/31/98 $17,002 $18,902 $13,611
8/31/98 $16,080 $19,210 $12,825
9/30/98 $16,192 $19,659 $13,040
10/31/98 $16,217 $19,555 $12,958
11/30/98 $16,870 $19,667 $13,373
12/31/98 $16,839 $19,726 $13,358
1/31/99 $16,864 $19,866 $13,429
2/28/99 $16,897 $19,518 $13,281
3/31/99 $17,171 $19,625 $13,475
4/30/99 $17,481 $19,688 $13,738
5/31/99 $17,217 $19,515 $13,446
6/30/99 $17,254 $19,452 $13,459
7/31/99 $17,238 $19,369 $13,422
8/31/99 $17,122 $19,359 $13,338
9/30/99 $17,260 $19,584 $13,407
10/31/99 $17,403 $19,656 $13,428
</TABLE>
<TABLE>
<CAPTION>
Performance** Class A Class B Class C
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average Annual Total Returns (at net asset value)
- ------------------------------------------------------------------------------------------------------------------
One Year 8.40% 7.32% 7.23%
Five Years N.A. 9.30 9.54
Life of Fund+ 3.90 6.38 8.45
SEC Average Annual Total Returns (including sales charge or applicable CDSC)
- ------------------------------------------------------------------------------------------------------------------
One Year 3.25% 2.38% 6.24%
Five Years N.A. 9.02 9.54
Life of Fund+ 1.07 6.38 8.45
</TABLE>
+Inception Dates - Class A: 1/23/98; Class B: 11/26/90; Class C:5/25/94*
* Source: TowersData, 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. The chart also offers a
comparison with a 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, 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 $10,647 on October 31, 1999; $10,143 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 $15,579 on October 31, 1999. The Index's
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, 1999
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1999
<S> <C>
Assets
- ------------------------------------------------------
Investment in Strategic Income
Portfolio, at value
(identified cost, $150,725,986) $150,282,065
Investment in High Income Portfolio, at
value
(identified cost, $44,831,863) 43,055,350
Receivable for Fund shares sold 594,893
Deferred organization expenses 241
- ------------------------------------------------------
TOTAL ASSETS $193,932,549
- ------------------------------------------------------
Liabilities
- ------------------------------------------------------
Dividends payable $ 845,412
Payable for Fund shares redeemed 302,713
Payable to affiliate for Trustees' fees 283
Payable to affiliate for service fees 171
Accrued expenses 83,412
- ------------------------------------------------------
TOTAL LIABILITIES $ 1,231,991
- ------------------------------------------------------
NET ASSETS $192,700,558
- ------------------------------------------------------
Sources of Net Assets
- ------------------------------------------------------
Paid-in capital $212,545,344
Accumulated net realized loss from
Portfolios (computed on the basis
of identified cost) (19,203,252)
Accumulated undistributed net investment
income 1,578,900
Net unrealized depreciation from
Portfolios (computed on the basis
of identified cost) (2,220,434)
- ------------------------------------------------------
TOTAL $192,700,558
- ------------------------------------------------------
Class A Shares
- ------------------------------------------------------
NET ASSETS $ 6,050,349
SHARES OUTSTANDING 664,448
NET ASSET VALUE AND REDEMPTION PRICE PER
SHARE
(net assets DIVIDED BY shares of
beneficial interest outstanding) $ 9.11
MAXIMUM OFFERING PRICE PER SHARE
(100 DIVIDED BY 95.25 of $9.11) $ 9.56
- ------------------------------------------------------
Class B Shares
- ------------------------------------------------------
NET ASSETS $155,768,345
SHARES OUTSTANDING 18,086,703
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE (NOTE 6)
(net assets DIVIDED BY shares of
beneficial interest outstanding) $ 8.61
- ------------------------------------------------------
Class C Shares
- ------------------------------------------------------
NET ASSETS $ 30,881,864
SHARES OUTSTANDING 2,840,876
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE (NOTE 6)
(net assets DIVIDED BY shares of
beneficial interest outstanding) $ 10.87
- ------------------------------------------------------
</TABLE>
On sales of $25,000 or more, the offering price of Class A shares is reduced.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
OCTOBER 31, 1999
<S> <C>
Investment Income
- -----------------------------------------------------
Interest allocated from Portfolios (net
of foreign taxes, $89,585) $17,961,912
Dividends allocated from Portfolios 414,934
Expenses allocated from Portfolios (1,455,099)
- -----------------------------------------------------
NET INVESTMENT INCOME FROM PORTFOLIOS $16,921,747
- -----------------------------------------------------
Expenses
- -----------------------------------------------------
Trustees fees and expenses $ 5,339
Distribution and service fees
Class A 2,135
Class B 1,380,060
Class C 250,798
Transfer and dividend disbursing agent
fees 216,660
Registration fees 45,254
Printing and postage 37,040
Legal and accounting services 31,323
Custodian fee 22,805
Amortization of organization expenses 7,364
Miscellaneous 31,681
- -----------------------------------------------------
TOTAL EXPENSES $ 2,030,459
- -----------------------------------------------------
NET INVESTMENT INCOME $14,891,288
- -----------------------------------------------------
Realized and Unrealized
Gain (Loss) from Portfolios
- -----------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified
cost basis) $(4,967,011)
Financial futures contracts (1,885,965)
Written options 188,125
Foreign currency and forward foreign
currency exchange
contract transactions (1,825,129)
- -----------------------------------------------------
NET REALIZED LOSS $(8,489,980)
- -----------------------------------------------------
Change in unrealized appreciation
(depreciation) --
Investments $ 4,385,130
Financial futures contracts 517,505
Written options (110,000)
Foreign currency and forward foreign
currency exchange contracts 976,958
- -----------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) $ 5,769,593
- -----------------------------------------------------
NET REALIZED AND UNREALIZED LOSS $(2,720,387)
- -----------------------------------------------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS $12,170,901
- -----------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
FINANCIAL STATEMENTS CONT'D
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Increase (Decrease) YEAR ENDED YEAR ENDED
IN NET ASSETS OCTOBER 31, 1999 OCTOBER 31, 1998
<S> <C> <C>
- ----------------------------------------------------------------------------
From operations --
Net investment income $ 14,891,288 $ 11,629,772
Net realized gain (loss) (8,489,980) 880,442
Net change in unrealized
appreciation (depreciation) 5,769,593 (13,529,672)
- ----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS $ 12,170,901 $ (1,019,458)
- ----------------------------------------------------------------------------
Distributions to shareholders --
From net investment income
Class A $ (336,914) $ (69,136)
Class B (11,738,650) (11,029,458)
Class C (1,942,599) (1,413,057)
In excess of net investment income
Class A -- (2,776)
Class C -- (84,937)
Tax return of capital
Class A (22,890) --
Class B (797,540) --
Class C (131,983) --
- ----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ (14,970,576) $ (12,599,364)
- ----------------------------------------------------------------------------
Transactions in shares of beneficial interest --
Proceeds from sale of shares
Class A $ 4,478,258 $ 2,660,681
Class B 40,594,578 38,733,721
Class C 15,813,624 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 237,539 34,786
Class B 4,915,690 5,045,715
Class C 1,141,637 1,065,842
Cost of shares redeemed
Class A (549,826) (579,130)
Class B (26,086,695) (24,263,796)
Class C (5,065,992) (8,509,686)
- ----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM FUND
SHARE TRANSACTIONS $ 35,478,813 $ 43,044,042
- ----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS $ 32,679,138 $ 29,425,220
- ----------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
NET ASSETS OCTOBER 31, 1999 OCTOBER 31, 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
At beginning of year $ 160,021,420 $ 130,596,200
- ----------------------------------------------------------------------------
AT END OF YEAR $ 192,700,558 $ 160,021,420
- ----------------------------------------------------------------------------
Accumulated undistributed
net investment income
included in net assets
- ----------------------------------------------------------------------------
AT END OF YEAR $ 1,578,900 $ 2,157,271
- ----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
FINANCIAL STATEMENTS CONT'D
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
------------------------
YEAR ENDED OCTOBER 31,
------------------------
1999(1) 1998(2)
<S> <C> <C>
- --------------------------------------------------------------------
Net asset value -- Beginning of year $ 9.220 $10.000
- --------------------------------------------------------------------
Income (loss) from operations
- --------------------------------------------------------------------
Net investment income $ 0.852 $ 0.668
Net realized and unrealized loss (0.095) (0.767)
- --------------------------------------------------------------------
TOTAL INCOME (LOSS) FROM OPERATIONS $ 0.757 $(0.099)
- --------------------------------------------------------------------
Less distributions
- --------------------------------------------------------------------
From net investment income $(0.819) $(0.654)
In excess of net investment income -- (0.027)
Tax return of capital (0.048) --
- --------------------------------------------------------------------
TOTAL DISTRIBUTIONS $(0.867) $(0.681)
- --------------------------------------------------------------------
NET ASSET VALUE -- END OF YEAR $ 9.110 $ 9.220
- --------------------------------------------------------------------
TOTAL RETURN(3) 8.40% (1.29)%
- --------------------------------------------------------------------
Ratios/Supplemental Data
- --------------------------------------------------------------------
Net assets, end of year (000's omitted) $ 6,050 $ 2,009
Ratios (As a percentage of average daily
net assets):
Expenses(4) 1.08% 1.03%(5)
Net investment income 9.20% 8.44%(5)
Portfolio Turnover of the Portfolio 47% 71%
- --------------------------------------------------------------------
</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 Portfolios' allocated expenses for the
period the Fund was investing in the Portfolios.
(5) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
FINANCIAL STATEMENTS CONT'D
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
1999(1) 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net asset value -- Beginning of year $ 8.720 $ 9.470 $ 9.310 $ 8.500 $ 8.290
- --------------------------------------------------------------------------------------------------------------
Income (loss) from operations
- --------------------------------------------------------------------------------------------------------------
Net investment income $ 0.731 $ 0.684 $ 0.657 $ 0.655 $ 0.726
Net realized and unrealized gain (loss) (0.105) (0.686) 0.288 0.858 0.167
- --------------------------------------------------------------------------------------------------------------
TOTAL INCOME (LOSS) FROM OPERATIONS $ 0.626 $ (0.002) $ 0.945 $ 1.513 $ 0.893
- --------------------------------------------------------------------------------------------------------------
Less distributions
- --------------------------------------------------------------------------------------------------------------
From net investment income $ (0.688) $ (0.748) $ (0.657) $ (0.655) $ (0.361)
In excess of net investment income -- -- (0.128) (0.048) --
Tax return of capital (0.048) -- -- -- (0.322)
- --------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (0.736) $ (0.748) $ (0.785) $ (0.703) $ (0.683)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE -- END OF YEAR $ 8.610 $ 8.720 $ 9.470 $ 9.310 $ 8.500
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN(2) 7.32% (0.20)% 10.44% 18.48% 11.34%
- --------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $155,768 $138,495 $130,596 $129,671 $150,767
Ratios (As a percentage of average daily
net assets):
Expenses(3) 1.96% 1.96% 2.08% 2.17% 2.18%
Net investment income 8.31% 7.40% 6.91% 7.38% 7.85%
Portfolio Turnover of the Portfolio 47% 71% 77% 71% 78%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income per share was computed using average shares
outstanding.
(2) 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.
(3) Includes the Fund's share of the Portfolios' allocated expenses for the
period the Fund was investing in the Portfolios.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
FINANCIAL STATEMENTS CONT'D
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
------------------------
YEAR ENDED OCTOBER 31,
------------------------
1999(1) 1998
<S> <C> <C>
- --------------------------------------------------------------------
Net asset value -- Beginning of year $11.010 $11.950
- --------------------------------------------------------------------
Income (loss) from operations
- --------------------------------------------------------------------
Net investment income $ 0.912 $ 0.869
Net realized and unrealized loss (0.132) (0.872)
- --------------------------------------------------------------------
TOTAL INCOME (LOSS) FROM OPERATIONS $ 0.780 $(0.003)
- --------------------------------------------------------------------
Less distributions
- --------------------------------------------------------------------
From net investment income $(0.872) $(0.884)
In excess of net investment income -- (0.053)
Tax return of capital (0.048) --
- --------------------------------------------------------------------
TOTAL DISTRIBUTIONS $(0.920) $(0.937)
- --------------------------------------------------------------------
NET ASSET VALUE -- END OF YEAR $10.870 $11.010
- --------------------------------------------------------------------
TOTAL RETURN(2) 7.23% (0.15)%
- --------------------------------------------------------------------
Ratios/Supplemental Data
- --------------------------------------------------------------------
Net assets, end of year (000's omitted) $30,882 $19,518
Ratios (As a percentage of average daily
net assets):
Expenses(3) 2.03% 2.03%
Net investment income 8.22% 7.37%
Portfolio Turnover of the Portfolio 47% 71%
- --------------------------------------------------------------------
</TABLE>
(1) Net investment income per share was computed using average shares
outstanding.
(2) 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.
(3) Includes the Fund's share of the Portfolios' allocated expenses for the
period the Fund was investing in the Portfolios.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
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 generally 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). Each class represents a pro
rata interest in the Fund, but votes separately on class-specific matters and
(as noted below) is subject to different expenses. 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 (99.99% and 4.0% at
October 31, 1999, 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 the 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, 1999, the Fund, for Federal
income tax purposes, had a capital loss carryover of $19,005,452, 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), October 31,
2006 ($2,245,050) and October 31, 2007 ($7,933,008).
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 revenue and expense during the reporting period. Actual results could
differ from those estimates.
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
11
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
NOTES TO FINANCIAL STATEMENTS CONT'D
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 Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
CLASS A 1999 1998*
<S> <C> <C>
------------------------------------------------------------------
Sales 479,935 276,254
Issued to shareholders electing to
receive payments of distributions in
Fund shares 25,638 3,622
Redemptions (58,971) (62,030)
------------------------------------------------------------------
NET INCREASE 446,602 217,846
------------------------------------------------------------------
</TABLE>
* For the period from the commencement of offering of Class A shares,
January 23, 1998, to October 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
CLASS B 1999 1998
<S> <C> <C>
------------------------------------------------------------------
Sales 4,608,260 4,165,687
Issued to shareholders electing to
receive payments of distributions in
Fund shares 557,297 543,656
Redemptions (2,965,773) (2,609,018)
------------------------------------------------------------------
NET INCREASE 2,199,784 2,100,325
------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
CLASS C 1999 1998
<S> <C> <C>
------------------------------------------------------------------
Sales 1,420,517 1,727,701
Issued to shareholders electing to
receive payments of distributions in
Fund shares 102,858 91,129
Redemptions (455,954) (748,223)
Issued to EV Classic Strategic Income
Fund shareholders -- 702,848
------------------------------------------------------------------
NET INCREASE 1,067,421 1,773,455
------------------------------------------------------------------
</TABLE>
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 Portfolio's Notes to financial statements. Certain
officers and Trustees of the Fund and of the Portfolios are officers of the
above organizations (see 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. The Fund was informed that Eaton Vance Distributors, Inc. (EVD),
a subsidiary of EVM and the Fund's principal underwriter, received $4,544 as
its portion of the sales charge on sales of Class A shares for the year ended
October 31, 1999.
5 Distribution and Service Plans
- -------------------------------------------
The Fund has in effect distribution plans for Class B (Class B Plan) and
Class C (Class C Plan) pursuant to Rule 12b-1 under the Investment Company
Act of 1940 and a service plan for Class A shares. The Class B and Class C
Plans require the Fund to pay EVD, amounts equal to 1/365 of 0.75% of the
Fund's average daily net assets attributable to Class B and Class C shares,
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) interest 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
12
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
NOTES TO FINANCIAL STATEMENTS CONT'D
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 year ended October 31, 1999, the Fund paid or
accrued $1,124,927 and $188,098, 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, 1999, the amount of Uncovered Distribution
Charges of EVD calculated under the Plans was approximately $24,025,000 and
$2,553,000 for Class B and Class C shares, respectively.
The Plans authorize the Fund to make payments of service fees to EVD,
investment dealers, and other persons in amounts not exceeding 0.25% of the
Fund's average daily net assets attributable to Class A, Class B, and
Class C shares for each fiscal year. The Trustees initially implemented the
Plans by authorizing the Fund to make quarterly payments of service fees to
EVD and investment dealers equal to 0.25% per annum of the Fund's average
daily net assets attributable to Class A and Class B shares based on the
value of Fund shares sold by such persons and remaining outstanding for at
least one year. On October 4, 1999, the Trustees approved service fee
payments equal to 0.25% per annum of the Fund's average daily net assets
attributable to Class A and Class B shares for any fiscal year on shares of
the Fund sold on or after October 12, 1999. The Class C Plan permits the Fund
to make monthly payments of service fees in amounts not expected to exceed
0.25% of the Fund's average daily net assets attributable to Class C shares
for any fiscal year. Service fee payments will be made for personal services
and/or the maintenance of shareholder accounts. Service fees are separate and
distinct from the sales and 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. Service fee
payments for the year ended October 31, 1999 amounted to $2,135, $255,133,
and $62,700 for Class A, Class B, and Class C shares, respectively.
6 Contingent Deferred Sales Charge
- -------------------------------------------
A contingent deferred sales charge (CDSC) generally is imposed on redemptions
of Class B shares made within six years of purchase and on redemptions 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 redemptions 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 and may
be waived under certain other limited conditions. CDSC charges are paid to
EVD to reduce the amount of Uncovered Distribution Charges calculated under
the Fund's Distribution Plans. CDSC charges received when no Uncovered
Distribution Charges exist will be credited to the Fund. The Fund has been
informed that EVD received approximately $218,000 and $6,000 of CDSC paid by
shareholders of Class B and Class C shares, respectively, during the year
ended October 31, 1999.
7 Investment Transactions
- -------------------------------------------
Increases and decreases in the Fund's investment in the Strategic Income
Portfolio for the year ended October 31, 1999, aggregated $63,662,682 and
$60,949,450, respectively. Increases in the Fund's investment in the High
Income Portfolio aggregated $16,000,000.
13
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
NOTES TO FINANCIAL STATEMENTS CONT'D
8 Investment in Portfolios
- -------------------------------------------
For the year ended October 31, 1999, 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 $ -- $ 414,934 $ 414,934
Interest income 13,826,915 4,134,997 17,961,912
Expenses (1,189,698) (265,401) (1,455,099)
-------------------------------------------------------------------------------
NET INVESTMENT INCOME $12,637,217 $4,284,530 $16,921,747
-------------------------------------------------------------------------------
Net realized gain (loss) --
Investments (identified cost basis) $(5,187,644) $ 220,633 $(4,967,011)
Financial futures contracts (1,885,965) -- (1,885,965)
Written options 188,125 -- 188,125
Foreign currency and forward foreign
currency exchange contracts
transactions (1,825,129) -- (1,825,129)
-------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON INVESTMENTS $(8,710,613) $ 220,633 $(8,489,980)
-------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
Investments $ 3,811,832 $ 573,298 $ 4,385,130
Financial futures contracts 517,505 -- 517,505
Written options (110,000) -- (110,000)
Foreign currency and forward foreign
currency exchange contracts 976,958 -- 976,958
-------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) $ 5,196,295 $ 573,298 $ 5,769,593
-------------------------------------------------------------------------------
</TABLE>
9 Transfer of Net Assets
- -------------------------------------------
On November 1, 1997, the Fund, formerly known as the 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, the 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 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.
14
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
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, 1999, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods presented, 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 8, 1999
15
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
PORTFOLIO OF INVESTMENTS
<TABLE>
<S> <C> <C> <C>
BONDS & NOTES -- 95.4%
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Bulgaria -- 1.5%
- -------------------------------------------------------------------------------
Bulgaria Discount Bond (Brady),
5.875%, 7/28/24(1) $ 3,000,000 $ 2,238,750
- -------------------------------------------------------------------------------
Total Bulgaria (identified cost $1,780,513) $ 2,238,750
- -------------------------------------------------------------------------------
Greece -- 2.2%
- -------------------------------------------------------------------------------
Hellenic Republic, 9.20%, 3/21/02 GRD 1,000,000,000 $ 3,271,993
- -------------------------------------------------------------------------------
Total Greece (identified cost $3,762,330) $ 3,271,993
- -------------------------------------------------------------------------------
Indonesia -- 3.1%
- -------------------------------------------------------------------------------
APP Global Finance, 2.00%, 7/25/00 $ 1,500,000 $ 1,500,000
DGS International Finance,
10.00%, 6/1/07 2,000,000 1,410,000
Indah Kiat Finance Mauritius, Sr. Unsec.
Notes, 10.00%, 7/1/07 1,000,000 642,500
Indah Kiat International Finance,
6.15%, 3/14/00 JPY 125,000,000 1,137,725
- -------------------------------------------------------------------------------
Total Indonesia (identified cost $4,401,662) $ 4,690,225
- -------------------------------------------------------------------------------
Malaysia -- 1.0%
- -------------------------------------------------------------------------------
Commerce Asset Holdings, 0.00%, 6/17/02 $ 2,000,000 $ 1,550,000
- -------------------------------------------------------------------------------
Total Malaysia (identified cost $1,461,469) $ 1,550,000
- -------------------------------------------------------------------------------
Mexico -- 7.7%
- -------------------------------------------------------------------------------
Alestra SA, Sr. Notes,
12.125%, 5/15/06(2) $ 1,000,000 $ 972,500
Mexican Discount Bond (Brady),
Series B, w/ attached warrants,
5.875%, 12/31/19(1) 4,000,000 3,510,020
Mexican Discount Bond (Brady),
Series D, w/ attached warrants,
6.068%, 12/31/19(1) 8,000,000 7,020,040
- -------------------------------------------------------------------------------
Total Mexico (identified cost $10,764,248) $ 11,502,560
- -------------------------------------------------------------------------------
Morocco -- 0.6%
- -------------------------------------------------------------------------------
Snap Ltd., 11.50%, 1/29/09 DEM 1,791,595 $ 867,224
- -------------------------------------------------------------------------------
Total Morocco (identified cost $874,302) $ 867,224
- -------------------------------------------------------------------------------
Peru -- 4.2%
- -------------------------------------------------------------------------------
Peru FLIRB (Brady), 3.75%, 3/7/17(1) $ 7,000,000 $ 3,885,035
Peru PDI (Brady), 4.50%, 3/7/17(1) 4,000,000 2,500,020
- -------------------------------------------------------------------------------
Total Peru (identified cost $6,071,584) $ 6,385,055
- -------------------------------------------------------------------------------
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Philippines -- 3.6%
- -------------------------------------------------------------------------------
Bayan Telecommunications,
13.50%, 7/15/06(2) $ 2,000,000 $ 1,900,400
JG Summit Cayman, 3.50%, 12/23/03 2,000,000 1,525,000
Republic of Philippines,
9.875%, 1/15/19 2,000,000 1,942,500
- -------------------------------------------------------------------------------
Total Philippines (identified cost $5,288,569) $ 5,367,900
- -------------------------------------------------------------------------------
Thailand -- 2.4%
- -------------------------------------------------------------------------------
Bangkok Bank, 8.75%, 3/15/07(2) $ 2,000,000 $ 1,660,000
Siam Commercial Bank, 7.50%, 3/15/06(2) 2,400,000 1,932,000
- -------------------------------------------------------------------------------
Total Thailand (identified cost $3,653,820) $ 3,592,000
- -------------------------------------------------------------------------------
Turkey -- 2.7%
- -------------------------------------------------------------------------------
Republic of Turkey, 11.875%, 11/5/04 $ 3,000,000 $ 2,988,840
Republic of Turkey, 12.375%, 6/15/09 1,000,000 1,011,250
- -------------------------------------------------------------------------------
Total Turkey (identified cost $3,978,471) $ 4,000,090
- -------------------------------------------------------------------------------
United Kingdom -- 0.7%
- -------------------------------------------------------------------------------
Esprit Telecom Group PLC,
11.00%, 6/15/08 DEM 2,000,000 $ 1,078,054
- -------------------------------------------------------------------------------
Total United Kingdom (identified cost $1,117,631)
$ 1,078,054
- -------------------------------------------------------------------------------
United States -- 65.7%
- -------------------------------------------------------------------------------
CORPORATE BONDS & NOTES -- 12.9%
American Greetings, 6.10%, 8/1/28 $ 1,000,000 $ 916,180
AT & T Corp., 6.50%, 3/15/29 4,000,000 3,549,160
Baltimore Natural Gas and Electric,
6.73%, 6/12/12 400,000 398,816
Beneficial Corp., 8.40%, 5/15/08 330,000 352,404
Commercial Credit Corp., 7.875%, 2/1/25 2,000,000 2,153,080
Dayton Hudson Medium Term Notes,
5.865%, 8/15/27 1,000,000 995,750
Dayton Hudson Medium Term Notes,
9.52%, 6/10/15 350,000 404,964
Ford Motor Co., 7.45%, 7/16/31 2,000,000 1,975,800
General Motors Acceptance Corp.,
8.875%, 6/1/10 1,000,000 1,117,120
Johnson Controls, 7.70%, 3/1/15 1,000,000 1,037,700
Motorola, Inc., 6.50%, 9/1/25 300,000 294,198
Motorola, Inc., 8.40%, 8/15/31 1,500,000 1,659,240
NBD Bank N.A., 8.25%, 11/1/24 610,000 652,938
Procter and Gamble Co., 8.00%, 9/1/24 1,500,000 1,665,975
TRW, Inc., Medium Term Notes,
9.35%, 6/4/20 1,900,000 2,152,339
- -------------------------------------------------------------------------------
Total Corporate Bonds & Notes (identified cost $19,454,870)
$ 19,325,664
- -------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
PORTFOLIO OF INVESTMENTS CONT'D
<TABLE>
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
United States (continued)
- -------------------------------------------------------------------------------
MORTGAGE PASS-THROUGHS -- 39.0%
Federal Home Loan Mortgage Corp.:
4.75% with maturity at 2001 $ 4,416 $ 4,373
8.00% with various maturities to 2021 6,639,623 6,788,618
8.50% with various maturities to 2019 1,325,320 1,374,408
9.00% with maturity at 2019 388,812 407,654
9.25% with various maturities to 2016 4,305,336 4,507,683
9.50% with maturity at 2015 1,476,023 1,547,054
9.75% with various maturities to 2020 1,051,718 1,119,986
10.50% with maturity at 2020 764,183 827,145
11.00% with maturity at 2019 1,656,327 1,797,251
11.25% with maturity at 2010 224,616 243,626
12.50% with various maturities to
2019 1,903,746 2,158,700
12.75% with maturity at 2013 98,893 111,034
13.25% with maturity at 2013 90,641 102,981
13.50% with maturity at 2019 221,035 253,217
- -------------------------------------------------------------------------------
$ 21,243,730
- -------------------------------------------------------------------------------
Federal National Mortgage Association:
5.00% with maturity at 2003 $ 44,337 $ 43,741
5.50% with maturity at 2012 3,602 3,513
7.00% with maturity at 2014 3,533,322 3,538,138
7.50% with various maturities to 2018 2,175,255 2,208,970
8.00% with various maturities to 2019 1,827,310 1,868,682
8.50% with various maturities to 2026 7,179,281 7,436,997
9.00% with various maturities to 2021 3,627,553 3,793,211
9.50% with maturity at 2013 1,639,218 1,738,934
11.00% with maturity at 2025 775,686 852,389
12.00% with maturity at 2015 580,371 649,011
12.50% with maturity at 2015 3,649,600 4,132,223
12.75% with maturity at 2014 76,972 86,787
13.00% with various maturities to
2027 1,855,182 2,114,015
13.25% with maturity at 2014 196,077 227,031
13.50% with various maturities to
2015 1,075,072 1,225,794
14.75% with maturity at 2012 1,556,330 1,826,289
- -------------------------------------------------------------------------------
$ 31,745,725
- -------------------------------------------------------------------------------
Government National Mortgage Association:
6.50% with maturity at 2002 $ 392,604 $ 394,206
7.50% with maturity at 2017 659,192 671,552
8.30% with maturity at 2020 825,730 857,699
8.50% with maturity at 2009 728,506 752,790
9.00% with maturity at 2016 492,690 517,666
12.50% with maturity at 2019 2,041,014 2,280,184
13.50% with maturity at 2014 175,591 201,109
- -------------------------------------------------------------------------------
$ 5,675,206
- -------------------------------------------------------------------------------
Total Mortgage Pass-Throughs (identified cost $60,002,240)
$ 58,664,661
- -------------------------------------------------------------------------------
SECURITY PRINCIPAL U.S. $ VALUE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
United States (continued)
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DEBENTURES -- 12.4%
Federal Home Loan Mortgage Corp.,
6.45%, 4/29/09 $ 6,000,000 $ 5,699,040
Federal National Mortgage Association,
6.00%, 5/15/08 3,000,000 2,859,360
Federal National Mortgage Association,
6.25%, 5/15/29 11,000,000 10,084,690
- -------------------------------------------------------------------------------
Total U.S. Government Agency Debentures
(identified cost $18,556,066) $ 18,643,090
- -------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 1.4%
United States Treasury
Bond, 11.75%, 2/15/01(3)
(identified cost $2,603,438) $ 2,000,000 $ 2,147,020
- -------------------------------------------------------------------------------
Total United States (identified cost $100,616,614)
$ 98,780,435
- -------------------------------------------------------------------------------
Total Bonds & Notes (identified cost $143,771,213)
$143,324,286
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 4.9%
SECURITY PRINCIPAL VALUE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Banque National De Paris Euro
Time-deposit Cayman Islands,
5.25%, 11/1/99 $ 7,400,000 $ 7,400,000
- -------------------------------------------------------------------------------
Total Short-Term Investments (at amortized cost $7,400,000)
$ 7,400,000
- -------------------------------------------------------------------------------
Total Investments -- 100.3%
(identified cost $151,171,213) $150,724,286
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities -- (0.3)% $ (442,211)
- -------------------------------------------------------------------------------
Net Assets -- 100.0% $150,282,075
- -------------------------------------------------------------------------------
</TABLE>
DEM - Deutsche Mark
GRD - Greek Drachma
JPY - Japanese Yen
(1) Variable rate security.
(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.
(3) Security (or a portion thereof) has been segregated to cover margin
requirements on open financial futures contracts.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1999
<S> <C>
Assets
- ------------------------------------------------------
Investments, at value
(identified cost, $151,171,213) $150,724,286
Cash 8,483
Receivable for investments sold 204,900
Interest receivable 2,534,146
Other assets 44,150
- ------------------------------------------------------
TOTAL ASSETS $153,515,965
- ------------------------------------------------------
Liabilities
- ------------------------------------------------------
Payable for investments purchased $ 2,988,840
Payable for open forward currency
contracts 86,014
Payable to affiliate for Trustees' fees 694
Payable for daily variation margin on
open financial futures
contracts, net 30,468
Accrued expenses 127,874
- ------------------------------------------------------
TOTAL LIABILITIES $ 3,233,890
- ------------------------------------------------------
NET ASSETS APPLICABLE TO INVESTORS'
INTEREST IN PORTFOLIO $150,282,075
- ------------------------------------------------------
Sources of Net Assets
- ------------------------------------------------------
Net proceeds from capital contributions
and withdrawals $150,725,996
Net unrealized depreciation (computed on
the basis of identified cost) (443,921)
- ------------------------------------------------------
TOTAL $150,282,075
- ------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
OCTOBER 31, 1999
<S> <C>
Investment Income
- -----------------------------------------------------
Interest (net of foreign taxes, $89,585) $13,826,915
- -----------------------------------------------------
TOTAL INVESTMENT INCOME $13,826,915
- -----------------------------------------------------
Expenses
- -----------------------------------------------------
Investment adviser fee $ 768,111
Administration fee 208,472
Trustees fees and expenses 17,211
Custodian fee 99,110
Legal and accounting services 84,544
Amortization of organization expenses 1,558
Miscellaneous 10,691
- -----------------------------------------------------
TOTAL EXPENSES $ 1,189,697
- -----------------------------------------------------
NET INVESTMENT INCOME $12,637,218
- -----------------------------------------------------
Realized and Unrealized Gain (Loss)
- -----------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified
cost basis) $(5,187,644)
Financial futures contracts (1,885,966)
Written options 188,125
Foreign currency and forward foreign
currency exchange
contract transactions (1,825,129)
- -----------------------------------------------------
NET REALIZED LOSS $(8,710,614)
- -----------------------------------------------------
Change in unrealized appreciation
(depreciation) --
Investments (identified cost basis) $ 3,811,833
Financial futures contracts 517,506
Written options (110,000)
Foreign currency and forward foreign
currency exchange contracts 976,957
- -----------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) $ 5,196,296
- -----------------------------------------------------
NET REALIZED AND UNREALIZED LOSS $(3,514,318)
- -----------------------------------------------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS $ 9,122,900
- -----------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
FINANCIAL STATEMENTS CONT'D
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Increase (Decrease) YEAR ENDED YEAR ENDED
IN NET ASSETS OCTOBER 31, 1999 OCTOBER 31, 1998
<S> <C> <C>
- ----------------------------------------------------------------------------
From operations --
Net investment income $ 12,637,218 $ 11,309,422
Net realized gain (loss) (8,710,614) 1,190,706
Net change in unrealized
appreciation (depreciation) 5,196,296 (11,251,878)
- ----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS $ 9,122,900 $ 1,248,250
- ----------------------------------------------------------------------------
Capital transactions --
Contributions $ 63,662,682 $ 63,230,486
Withdrawals (60,949,450) (47,288,792)
- ----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM
CAPITAL TRANSACTIONS $ 2,713,232 $ 15,941,694
- ----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS $ 11,836,132 $ 17,189,944
- ----------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------
At beginning of year $ 138,445,943 $ 121,255,999
- ----------------------------------------------------------------------------
AT END OF YEAR $ 150,282,075 $ 138,445,943
- ----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
FINANCIAL STATEMENTS CONT'D
SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Ratios to average daily net assets
- --------------------------------------------------------------------------------
Expenses 0.86% 0.83% 0.86% 0.86% 0.84%
Net investment income 9.14% 8.31% 8.06% 8.62% 9.08%
Portfolio Turnover 47% 71% 77% 71% 78%
- --------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000'S OMITTED) $150,282 $138,446 $121,256 $132,407 $152,583
- --------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
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 premium or accretion 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 Internal Revenue Code) in order for its investors to satisfy them.
The Portfolio will allocate at least annually among its investors each
investor's distributive share of the Portfolio's net investment income, net
realized capital gains, and any other items of income, gain, loss, deduction
or credit.
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 for
both hedging against anticipated future changes in interest or currency
exchange rates and investment purposes. 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 results from fluctuations in foreign currency exchange rates
is not separately disclosed.
G Written Options -- The Portfolio may write call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the
21
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
NOTES TO FINANCIAL STATEMENTS CONT'D
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 Expense Reduction -- Investors Bank & Trust Company (IBT) serves as custodian
of the Portfolio. Pursuant to the custodian agreement, IBT receives a fee
reduced by credits which are determined based on the average daily cash
balance the Portfolio maintains with IBT. All significant credit balances
used to reduce the Portfolio custodian fees are reflected as a reduction of
operating expenses on the Statement of Operations. For the year ended October
31, 1999, $1,443 in credit balances were used to reduce the Portfolio's
custodian fee.
K Deferred Organization Expenses -- Costs incurred by the Portfolio in
connection with its organization were being amortized on the straight-line
basis over five years and are fully amortized at October 31, 1999.
L Use of Estimates -- The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of income and expense during the reporting period. Actual results could
differ from those estimates.
M Other -- Investment transactions are accounted for on a trade date basis.
2 Investment Adviser Fee and Other Transactions with Affiliates
- -------------------------------------------
The investment adviser fee is earned by Boston Management and Research (BMR),
a wholly-owned subsidiary of Eaton Vance Management (EVM), as compensation
for management and investment advisory services rendered to the Portfolio.
The fee is based upon a percentage of average daily net assets plus a
percentage of gross income (i.e., income other than gains from the sale of
investments). Such percentages are reduced as average daily net assets exceed
certain levels. For the year ended October 31, 1999, the fee was equivalent
to 0.56% of the Portfolio's average net assets for such period and amounted
to $768,111. An administration fee, computed at an effective annual rate of
0.15% of average daily net assets was also paid to BMR for administrative
services and office facilities. Such fee amounted to $208,472 for the year
ended October 31, 1999.
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
22
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
NOTES TO FINANCIAL STATEMENTS CONT'D
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,
1999, no significant amounts have been deferred. Certain of the officers and
Trustees of the Portfolios are officers of the above organizations.
3 Line of Credit
- -------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR or
EVM and its affiliates in a $120 million unsecured line of credit agreement
with a group of banks. The Portfolio may temporarily borrow from the line of
credit to satisfy redemption requests or settle investment transactions.
Interest is charged to each portfolio or fund based on its borrowings at an
amount above the Eurodollar rate or federal funds rate. In addition, a fee
computed at an annual rate of 0.10% on the daily unused portion of the line
of credit is allocated among the participating portfolios and funds at the
end of each quarter. The Portfolio did not have any significant borrowings or
allocated fees during the period.
4 Investment Transactions
- -------------------------------------------
The Portfolio invests primarily in foreign government and U.S. Government
debt securities. The ability of the issuers of the debt securities to meet
their obligations may be affected by economic developments in a specific
industry or country. The Portfolio regularly invests in lower rated and
comparable quality unrated high yield securities. These investments have
different risks than investments in debt securities rated investment grade
and held by the Portfolio. Risk of loss upon default by the borrower is
significantly greater with respect to such debt securities than with other
debt securities because these securities are generally unsecured and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than are investment grade issuers. At October 31, 1999, the
Portfolio had invested approximately 27.5% of its net assets or approximately
$41,272,000 in high yield securities. Purchases and sales of investments,
other than short-term obligations, for the year ended October 31, 1999 were
as follows:
<TABLE>
<CAPTION>
PURCHASES
<S> <C>
-----------------------------------------------------
Investments (non-U.S. Government) $67,802,079
U.S. Government Securities 22,786,072
-----------------------------------------------------
$90,588,151
-----------------------------------------------------
<CAPTION>
SALES
<S> <C>
-----------------------------------------------------
Investments (non-U.S. Government) $57,072,676
U.S. Government Securities 3,236,019
-----------------------------------------------------
$60,308,695
-----------------------------------------------------
</TABLE>
5 Financial Instruments
- -------------------------------------------
The Portfolio regularly trades in financial instruments with off-balance
sheet risk in the normal course of its investing activities and 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, 1999 is as
follows:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
SALES
----------------------------------------------------------------------------------------
NET UNREALIZED
SETTLEMENT IN EXCHANGE FOR APPRECIATION
DATE(S) DELIVER (IN U.S. DOLLARS) (DEPRECIATION)
<C> <S> <C> <C>
----------------------------------------------------------------------------------------
11/12/99 Euro Dollar
5,200,000 $ 5,484,752 $ 24,614
11/10/99 Japanese Yen
961,991,267 9,153,105 (79,908)
----------------------------------------------------------------------------------------
$14,637,857 $(55,294)
----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PURCHASES
----------------------------------------------------------------------------------------
SETTLEMENT DELIVER NET UNREALIZED
DATE(S) IN EXCHANGE FOR (IN U.S. DOLLARS) DEPRECIATION
<C> <S> <C> <C>
----------------------------------------------------------------------------------------
11/30/99 Australian Dollar
5,700,000 $3,667,950 $(18,848)
11/22/99 Philippine Peso
120,210,000 3,000,000 (11,872)
----------------------------------------------------------------------------------------
$6,667,950 $(30,720)
----------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
NOTES TO FINANCIAL STATEMENTS CONT'D
<TABLE>
<CAPTION>
FUTURES CONTRACTS
-------------------------------------------------------------------------------
EXPIRATION NET UNREALIZED
DATE(S) CONTRACTS POSITION APPRECIATION
<C> <S> <C> <C>
-------------------------------------------------------------------------------
12/99 35 Euro-Bond Long $41,999
12/99 49 US Treasury Bond Short 23,250
-------------------------------------------------------------------------------
$65,249
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WRITTEN CALL OPTIONS
-----------------------------------------------------------------------------
NUMBER OF CONTRACTS PREMIUMS
<S> <C> <C>
-----------------------------------------------------------------------------
Outstanding, beginning of year 160 $ 188,125
Options expired (160) (188,125)
-----------------------------------------------------------------------------
OUTSTANDING, END OF YEAR -- $ --
-----------------------------------------------------------------------------
</TABLE>
At October 31, 1999, 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
investment securities at October 31, 1999, as computed on a federal income
tax basis, were as follows:
<TABLE>
<S> <C>
AGGREGATE COST $151,286,370
------------------------------------------------------
Gross unrealized appreciation $ 2,499,094
Gross unrealized depreciation (3,061,178)
------------------------------------------------------
NET UNREALIZED DEPRECIATION $ (562,084)
------------------------------------------------------
</TABLE>
24
<PAGE>
STRATEGIC INCOME PORTFOLIO AS OF OCTOBER 31, 1999
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, 1999, and the results of its operations, the changes in its net
assets, and the supplementary data for the periods presented, 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, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 8, 1999
25
<PAGE>
EATON VANCE STRATEGIC INCOME FUND AS OF OCTOBER 31, 1999
INVESTMENT MANAGEMENT
EATON VANCE STRATEGIC INCOME FUND
Officers
James B. Hawkes
President and Trustee
William H. Ahern, Jr.
Vice President
Thomas J. Fetter
Vice President
Armin Lang
Vice President
Robert B. MacIntosh
Vice President
Edward E. Smiley, Jr.
Vice President
James L. O'Connor
Treasurer
Alan R. Dynner
Secretary
Trustees
Jessica M. Bibliowicz
President and Chief Executive Officer
National Financial Partners
Donald R. Dwight
President, Dwight Partners, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Banking Emeritus, Harvard University 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
Jack L. Treynor
Investment Adviser and Consultant
STRATEGIC INCOME PORTFOLIO
Officers
James B. Hawkes
President and Trustee
Mark S. Venezia
Vice President
James L. O'Connor
Treasurer
Alan R. Dynner
Secretary
Trustees
Jessica M. Bibliowicz
President and Chief Executive Officer
National Financial Partners
Donald R. Dwight
President, Dwight Partners, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Banking Emeritus, Harvard University 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
Jack L. Treynor
Investment Adviser and Consultant
26
<PAGE>
INVESTMENT ADVISER OF
STRATEGIC INCOME PORTFOLIO
BOSTON MANAGEMENT AND RESEARCH
The Eaton Vance Building
255 State Street
Boston, MA 02109
ADMINISTRATOR OF EATON VANCE
STRATEGIC INCOME FUND
EATON VANCE MANAGEMENT
The Eaton Vance Building
255 State Street
Boston, MA 02109
PRINCIPAL UNDERWRITER
EATON VANCE DISTRIBUTORS, INC.
The Eaton Vance Building
255 State Street
Boston, MA 02109
(617)482-8260
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 Clarendon Street
Boston, MA 02116
TRANSFER AND DIVIDEND DISBURSING AGENT
PFPC GLOBAL FUND SERVICES
Attention: Eaton Vance Funds
P.O. Box 5123
Westborough, MA 01581-5123
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110
EATON VANCE STRATEGIC INCOME FUND
THE EATON VANCE BUILDING
255 STATE STREET
BOSTON, MA 02109
- --------------------------------------------------------------------------------
This report must be preceded or accompanied by a current prospectus which
contains more complete information on the Fund, including its distribution plan,
sales charges and expenses. Please read the prospectus carefully before you
invest or send money.
- --------------------------------------------------------------------------------
028-10/99 SISRC-10/99
