[LOGO]
EV Marathon Strategic
Income Fund
Annual
Shareholder Report
October 31, 1996
To Shareholders
I am happy to report that EV Marathon Strategic Income Fund had a total
return of 18.5% during the year ended October 31, 1996. That return was
the result of a rise in net asset value per share to $9.31 from $8.50 on
October 31, 1995, and the reinvestment of $0.703 in income dividends. It
does not include the effect of contingent deferred sales charges on
certain redeeming shareholders. Based on the October dividend and the
closing net asset value of $9.31, the Fund's distribution rate
was 8.23%. By any measure, fiscal 1996 was an outstanding year for EV
Marathon Strategic Income Fund. As Mark Venezia discusses on page 2, the
Fund's strong results ranked it 2nd of 89 funds in the "Short-Term World
Income Fund" category, according to Morningstar, Inc. an independent
mutual fund ranking service.*
1996: Robust performance and a record year for global issuance...
Paced by the strong showing of Brady bonds and lower interest rates in
Europe, 1996 has been a banner year for the global bond markets. Not
surprisingly, 1996 is also shaping up as a record year for the issuance
of global bonds. Through June 30 alone, $350 billion in new bonds had
come to market, a 60% increase over the same period last year. Several
forces have been driving the trend, including high levels of government
borrowing as emerging economies raise the capital necessary to fund
economic development. The increased global supply has met with a warm
reception from investors. More than $115 billion of dollar-denominated
bonds are scheduled to mature in 1996, according to the Euromoney
Capital Market Data Base, and a good portion of that capital is being
redirected into high-yield global bonds.
* Morningstar rankings reflect historical performance through 10/31/96.
For the 3-year and 5 year periods ending 10/31/96, the fund was ranked
6th of 50 funds and 18th of 31 funds, respectively. Rankings are based
on the fund's total returns and do not take sales charges into
consideration. Past performance is no guarantee of future results.
Meanwhile, the U.S. bond market, provided selective opportunities...
The U.S. market was generally under pressure throughout the period, as
yields for 5-year Treasuries rose from 5.81% on October 31, 1995 to
6.07% on October 31, 1996. While many investors had anticipated an
economic slowdown in the second half of the year, the economy not only
maintained its momentum but proved somewhat stronger than expected. The
economy's strength in the face of weaker expectations contributed to
rising volatility throughout the period.
Nonetheless, the Fund benefited from the response of its high-yield
corporate bonds to the continued economic growth, while its mortgage-
backed securities outperformed the Treasury market. Thus, in a difficult
fixed-income environment, shareholders again benefited from the Fund's
flexible investment approach. We believe that this time-tested strategy
will continue to provide good fixed income opportunities - both domestic
and global - in the years ahead. In the pages that follow, portfolio
manager Mark Venezia reviews the Fund's successful fiscal year and gives
his outlook for the global bond market.
[PHOTO OF JAMES B. HAWKES OMITTED]
Sincerely,
/S/James B. Hawkes
James B. Hawkes
President
December 20, 1996
Management Discussion
An interview with Mark S. Venezia, vice president and manager of Strategic
Income Portfolio.
Q. Mark, the Fund was ranked 2nd of 89 similar funds in the "Short-Term
World Income Fund" category for the year ended October 31, 1996, according
to Morningstar, an independent mutual fund ranking service. To what do you
attribute the Fund's strong showing?
A. Generally, this was a period when many global market trends worked
in the Fund's favor. Our Brady bonds were the largest contributors to
the Fund's performance, as emerging markets rallied very strongly during
the period. Second, we benefited from our exposure to Europe, as
interest rates fell during the period. Third, yields in the so-called
"Dollar Bloc" nations fell dramatically, causing our Canadian,
Australian, and New Zealand positions to outperform the U.S. Fourth,
while the U.S. Treasury market remained under some pressure, the
Fund benefited from a narrowing of spreads in our U.S. mortgage-backed
securities and high-yield corporate bonds. And finally, the Fund
achieved currency gains as a result of the strength of the dollar
against the yen and the German mark.
Fund shares are not guaranteed by the FDIC and are not deposits or other
obligations of, or guaranteed by, any depository institution. Shares are
subject to investment risks, including possible loss of principal
invested.
Q. Why did the Brady markets do so well?
A. There were several reasons. With the currency crises and market
turbulence of 1994 and early 1995 behind them, global bond investors
focused on the progress emerging countries have made in implementing
economic reforms, fighting inflation and reducing current account
deficits. Moreover, with interest rates in the U.S., Europe, and Japan
still relatively low, the attractive yields on Brady bonds drew increasing
attention. Finally, these emerging economies have shown that they can
sustain growth rates well above those of the industrialized nations.
As a result, we saw some improvement in credit quality among most Brady
issuers. These strong fundamentals all gave a lift to the Brady markets.
[PHOTO OF MARK S. VENEZIA OMITTED]
Caption reads: Mark S. Venezia
Q. Which Brady markets were the best performers for the Fund?
A. Predominantly the Latin American markets, although all emerging
markets tended to fare well. In the first half of the fiscal year,
Poland and Argentina were good positions for the Fund. Investors gave a
warm reception to Argentina's Second Reform of the State, which promised
tax reform and spending cuts. Meanwhile, the Polish market responded
well to the election of President Kwasniewski and the likelihood of a
more stable government still dedicated to economic reform. Moody's and
Standard & Poor's, major bond-rating agencies, assigned Polish Bradys
investment grade ratings, sparking a sharp rally in the bonds.
In the second half of the period, we focused increasingly on Brazil and
Ecuador, each of which has made remarkable economic progress. Brazil,
for example, reported zero inflation for the month of September and
continued to make progress on administrative reforms. Ecuador fared well
as oil prices firmed throughout the year. In addition, newly-elected
President Bucaram has proven more sensitive to the needs of business and
foreign investors than his populist campaign suggested. That has further
encouraged investors.
Q. You've referred to the importance of Brady bonds to the Fund's
performance. Could you briefly explain the mechanics of the Brady bond
markets?
A. Certainly. As some investors already know, Brady bonds are named
after former U.S. Treasury secretary Nicholas Brady, the architect of a
U.S. plan to ensure the medium-term economic stability of debtor
emerging nations. The basic concept behind the Brady Plan was to
restructure these nations' commercial bank loans into bonds, thereby
providing debt relief for the borrowers while creating a relatively
liquid market for the new debt securities.
Top five weightings according to...
...Regional Credit Exposure
allocations based U.S. 42.2%
on the location Ireland 10.3
of the issuer of each Brazil 7.3
security. This shows Poland 6.4
that the Portfolio's Norway 5.3
largest holdings
were in the U.S.
and Ireland.
...The Portfolio's Currency Allocation
holdings broken U.S. 40.4%
down by country Ireland 10.5
of currency Czech Republic 9.8
denomination. Indonesia 7.7
This shows where Philippines 7.2
movement in
foreign exchange
rates will have the
greatest impact
on the Fund's
share price.
...The contribution Interest Rate
of a country's Sensitivity*
positive weighting to the U.S. 38.6%
Portfolio's duration. Germany 28.8
This shows where Ireland 21.2
changing interest Norway 10.4
rates will have the Canada 9.4
greatest impact
on share prices.
Footnote reads:
* Calculated by determining the interest rate sensitivity of
the Portfolio's positions in each country and dividing by the
Portfolio's overall interest rate sensitivity.
[GRAPHIC CHART OMITTED: The Brady Bond Market:]
Brady issuers demonstrate
improving economic fundamentals*...
1995
GDP Reserves
----- --------
Argentina $276 B $14.3 B
Brazil 689 B 51.8 B
Ecuador 18 B 1.6 B
Mexico 279 B 16.9 B
Philippines 74 B 7.0 B
Poland 116 B 15.0 B
Venezuela 79 B 6.3 B
Footnote reads:
*Data for 1995; Source: J.P. Morgan, Inc.
[GRAPHIC VERTICAL BAR CHART WITH IMAGE OF PAPER SCROLL IN BACKROUND
OMITTED: While Brady trading volume continues to surge.]
'91 $200B
'92 $730B
'93 $1,979B
'94 $2,766B
'95 $3,000B
Footnote reads:
Source: Emerging Markets Traders Association.
The first such plan, featuring an agreement with Mexico, went into
effect in 1990. Although there have been many variations on this early
theme, this first agreement provided the basic precedent for future
efforts: 1) securitization, or transforming bank loans into bonds; 2)
collateralized principal, whereby the principal portion of some newly
created bonds is backed by zero-coupon U.S. Treasuries; 3) discounted
exchanges, whereby loans are exchanged at a discount in return for long-
term, floating-rate bonds; and 4) below-market fixed coupons, whereby
loans are exchanged at par value, but with below-market coupons. These
various structures have been used to improve economic stability for a
wide range of emerging markets in Latin America, Southeast Asia, the
Middle East and Eastern Europe.
Q. What are the overall benefits of the Brady market?
A. There are several. First, for emerging economies, the use of Brady
bonds provides debt relief through lower interest rates, longer
maturities, and principal reduction. Often, that debt relief gives these
nations additional breathing room in the critical early transition to a
market economy. Second, the underlying credit of some of the new debt is
improved through guarantees of principal repayment, which is very
important from the investors' point of view. Finally, the process helps
to broaden the investor base for the bonds and thereby improve their
liquidity. As a measure of that liquidity, trading in Brady bonds will
far exceed $1 trillion in 1996.
[GRAPHIC PIE CHART OMITTED: Strategic Allocation:*]
High-Yield 16.4%
Foreign
Investment Grade 39.3%
U.S. Investment
Grade 44.3%
Footnote reads:
*Based on market value as of 10/31/96
Because the Fund is actively managed, country
and sector allocations are subject to change.
Q. Why did the Fund benefit from a strong dollar?
A. In fiscal year 1996, the dollar was very strong relative to the
Japanese yen. The Fund maintained short positions versus the yen
throughout the period, which helped the Fund's performance. Meanwhile,
in Europe, the Fund benefited from the relative strength of the dollar
against the German mark. Typically, when the mark is weak versus the
dollar, the other western European countries benefit. Therefore, our
strategy in Europe was to hold bond positions in peripheral European
countries, while maintaining short positions in mark-related currencies.
That strategy was doubly effective because we not only realized the
"carry" - the yield difference between our bond holdings and our short
currency positions - but also benefited from a strong outperformance by
the European bond markets. Yields fell throughout Europe as countries
prepared to meet the strict economic criteria for monetary union.
Q. Looking forward, Mark, what is your outlook for the global markets in
the coming year?
A. I'm optimistic about the coming year for several reasons. First, the
emerging nations are likely to continue their progress toward economic
reform. While it's unreasonable to expect a repeat of this year's
remarkable returns from the Brady markets, the emerging markets should
still present good investment opportunities. Second, some global
markets - Germany is a good example - still have relatively steep yield
curves, so they may have room for further appreciation in those markets.
Finally - and perhaps most fundamentally - inflation is still in decline
around the world. That is certainly a favorable development for global
bond investors.
Naturally, past trends do not guarantee future performance. And of
course, investing in global markets and high-yield markets may involve
currency and political risk. But foreign bonds continue to represent
unique vehicles for fixed-income investors. In the coming year,
EV Marathon Strategic Income Fund will continue to pursue those
opportunities.
Comparison of Change in Value of a $10,000 Investment in EV Marathon
Strategic Income Fund, the J.P. Morgan Hedged Short-Term Global Index and
the Lipper Short World Multi-Market Income Funds average
From November 30, 1990, through October 31, 1996
AVERAGE 1 5 Life of Value of
ANNUAL RETURNS Year Years Fund* Investment at 10/31
- ---------------------------------------------------------------------
Including CDSC 15.5% 6.3% 6.7% $14,710
Without CDSC 18.5% 6.3% 6.7% $14,710
EV Marathon Strategic Income Fund vs. Lipper Short World Multi-Market
Income Funds average and J.P. Morgan Hedged Short-Term Global Index
Date Fund Fund w/ CD Lipper JP Morgan
11/30/90 $10,000 NA $10,000 $10,000
12/31/90 $9,970 NA $10,024 $10,098
1/31/91 $10,090 NA $10,189 $10,191
2/28/91 $10,200 NA $10,201 $10,279
3/31/91 $10,340 NA $9,975 $10,341
4/30/91 $10,440 NA $10,070 $10,431
5/31/91 $10,580 NA $10,086 $10,507
6/30/91 $10,550 NA $10,046 $10,529
7/31/91 $10,550 NA $10,170 $10,595
8/31/91 $10,640 NA $10,254 $10,732
9/30/91 $10,740 NA $10,411 $10,833
10/31/91 $10,820 NA $10,508 $10,931
11/30/91 $10,730 NA $10,511 $11,013
12/31/91 $10,790 NA $10,670 $11,151
1/31/92 $10,840 NA $10,625 $11,176
2/28/92 $10,950 NA $10,687 $11,206
3/31/92 $10,960 NA $10,703 $11,189
4/30/92 $11,110 NA $10,798 $11,274
5/31/92 $11,180 NA $10,911 $11,360
6/30/92 $11,220 NA $10,978 $11,439
7/31/92 $11,240 NA $11,010 $11,520
8/31/92 $11,080 NA $10,969 $11,573
9/30/92 $10,720 NA $10,662 $11,697
10/31/92 $10,660 NA $10,649 $11,713
11/30/92 $10,630 NA $10,570 $11,707
12/31/92 $10,720 NA $10,590 $11,806
1/31/93 $10,760 NA $10,643 $11,900
2/28/93 $11,010 NA $10,725 $12,003
3/31/93 $11,100 NA $10,771 $12,042
4/30/93 $11,190 NA $10,832 $12,108
5/31/93 $11,260 NA $10,914 $12,111
6/30/93 $11,340 NA $10,952 $12,222
7/31/93 $11,540 NA $10,978 $12,263
8/31/93 $11,600 NA $11,018 $12,351
9/30/93 $11,490 NA $11,000 $12,380
10/31/93 $11,780 NA $11,070 $12,444
11/30/93 $11,740 NA $11,032 $12,469
12/31/93 $11,880 NA $11,134 $12,543
1/31/94 $12,070 NA $11,213 $12,591
2/28/94 $11,740 NA $11,048 $12,493
3/31/94 $11,100 NA $10,899 $12,452
4/30/94 $11,180 NA $10,895 $12,418
5/31/94 $11,350 NA $10,906 $12,421
6/30/94 $10,920 NA $10,827 $12,424
7/31/94 $10,970 NA $10,863 $12,513
8/31/94 $11,140 NA $10,907 $12,516
9/30/94 $11,130 NA $10,941 $12,513
10/31/94 $11,150 NA $10,975 $12,562
11/30/94 $11,280 NA $10,993 $12,576
12/31/94 $11,250 NA $10,697 $12,590
1/31/95 $11,050 NA $10,627 $12,744
2/28/95 $11,020 NA $10,672 $12,896
3/31/95 $10,990 NA $10,650 $12,998
4/30/95 $11,470 NA $10,829 $13,122
5/31/95 $11,920 NA $10,974 $13,350
6/30/95 $11,800 NA $11,002 $13,399
7/31/95 $11,900 NA $11,101 $13,496
8/31/95 $12,110 NA $11,150 $13,604
9/30/95 $12,350 NA $11,258 $13,700
10/31/95 $12,420 NA $11,331 $13,817
11/30/95 $12,660 NA $11,407 $13,967
12/31/95 $12,880 NA $11,519 $14,086
1/31/96 $13,390 NA $11,657 $14,225
2/28/96 $13,130 NA $11,599 $14,181
3/31/96 $13,220 NA $11,645 $14,206
4/30/96 $13,500 NA $11,750 $14,296
5/31/96 $13,570 NA $11,809 $14,345
6/30/96 $13,780 NA $11,903 $14,429
7/31/96 $13,810 NA $11,999 $14,505
8/31/96 $14,050 NA $12,095 $14,602
9/30/96 $14,490 NA $12,264 $14,760
10/31/96 $14,710 $13,780 $12,387 $14,915
Footnote reads:
Past performance is not indicative of future results. Investment returns and
principal will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Source: Towers Data Systems,
Bethesda, MD Lipper Analytical Services, Inc. **Investment operations
commenced 11/26/90. +Index information is available only at month-end;
therefore, the line comparison begins at the next month-end following the
commencement of the Fund's investment operations. It is not possible to invest
directly in the index.
Fund performance
In accordance with guidelines issued by the Securities and Exchange
Commission, we are including a performance chart comparing your Fund's
total return with that of a broad-based investment index. The lines on
the chart represent the total returns of $10,000 hypothetical
investments in EV Marathon Strategic Income Fund and the unmanaged J.P.
Morgan Hedged Short-Term Global Index.
The total return figures
The blue solid line on the chart represents the Fund's performance at
net asset value. The Fund's total return figure reflects Fund expenses
and transaction costs, and assumes the reinvestment of income dividends
and capital gain distributions. The total return figures for the Fund
reflect the Fund's maximum applicable deferred sales charge (CDSC),
deducted at redemption as follows: 3% - 1st year; 2.5% - 2nd year; 2% -
3rd year; 1% - 4th year.
The black line represents the performance of the J.P. Morgan Hedged
Short-Term Global Index. The Index's return does not reflect any
commissions or expenses that would be incurred if an investor
individually purchased or sold the securities represented in the Index.
It is not possible to invest in the Index itself. The dotted line
represents the average performance of Short World Multi-Market Income
Funds, as compiled by Lipper Analytical Services, Inc., a mutual fund
ranking service, and is included to show how the Fund has performed
relative to its universe.
<TABLE>
<CAPTION>
EV Marathon Strategic Income Fund
Financial Statements
Statement of Assets and Liabilities
October 31, 1996
<S> <C> <C>
Assets:
Investment in Strategic Income Portfolio (Portfolio), at value (Note 1A) $130,725,618
Receivable for Fund shares sold 22,222
------------
Total assets $130,747,840
Liabilities:
Dividends payable $605,914
Payable for Fund shares redeemed 423,659
Payable to affiliate --
Trustees' fees 278
Accrued expenses 46,800
------------
Total liabilities 1,076,651
------------
Net Assets for 13,932,253 shares of beneficial interest outstanding $129,671,189
============
Sources of Net Assets:
Paid-in capital $135,298,105
Accumulated net realized loss on investment transactions
(computed on the basis of identified cost) (12,949,190)
Unrealized appreciation of investments from Portfolio
(computed on the basis of identified cost) 7,844,544
Distributions in excess of net investment income (522,270)
------------
Total net assets $129,671,189
============
Net Asset Value, Offering and Redemption Price (Note 7) Per Share
($129,671,189 (divided by) 13,932,253 shares of beneficial interest) $9.31
======
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1996
<S> <C> <C>
Investment Income (Note 1B):
Interest income allocated from Portfolio $13,089,249
Expenses allocated from Portfolio (1,190,751)
-----------
Total investment income $11,898,498
Expenses --
Compensation of Trustees not members of the
Investment Adviser's organization (Note 5) $3,238
19,354
Distribution costs (Note 6) 1,260,656
Transfer and dividend disbursing agent fees 152,360
Printing and postage 92,802
Legal and accounting services 19,711
Registration fees 18,836
State taxes 200,000
Amortization of organization expenses (Note 1D) 4,633
Miscellaneous 16,677
-----------
Total expenses 1,788,267
-----------
Net investment income $10,110,231
-----------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) from Portfolio (identified cost basis) (including net
loss due to foreign currency rate fluctuations of $766,402) --
Investment transactions $9,048,161
Financial futures contracts (116,435)
Written option transactions 23,127
Foreign currency and forward foreign currency exchange contracts 584,207
-----------
Net realized gain on investments $9,539,060
Change in unrealized appreciation of investments 3,747,829
-----------
Net realized and unrealized gain on investments $13,286,889
-----------
Net increase in net assets resulting from operations $23,397,120
===========
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Year Ended October 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $10,110,231 $14,128,443
Net realized gain (loss) on investments 9,539,060 (11,886,396)
Change in unrealized appreciation of investments 3,747,829 15,636,069
----------- -----------
Net increase in net assets from operations $23,397,120 $17,878,116
----------- -----------
Distributions to shareholders (Note 2 ) --
From net investment income ($10,110,231) ($7,936,820)
In excess of net investment income (748,802) --
From tax return of capital -- (7,061,789)
----------- -----------
Total distributions ($10,859,033) ($14,998,609)
----------- -----------
Transactions in shares of capital stock (Note 3) --
Proceeds from sale of shares $7,147,913 $4,881,401
Net asset value of shares issued to shareholders
in payment of distributions declared 5,396,728 7,134,341
Cost of shares redeemed (46,178,157) (97,267,733)
----------- -----------
Decrease in net assets from capital stock transactions ($33,633,516) ($85,251,991)
----------- -----------
Net decrease in net assets ($21,095,429) ($82,372,484)
Net Assets:
At beginning of year 150,766,618 233,139,102
----------- -----------
At end of year (including distributions in excess of net
investment income of $522,270 and
$1,254,659, respectively) $129,671,189 $150,766,618
============ ============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Year Ended October 31,
--------------------------------------------------
1996 1995 1994+ 1993 1992
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value -- Beginning of year $8.500 $8.290 $9.410 $9.120 $9.920
-------- -------- -------- -------- --------
Income from operations:
Net investment income $0.655 $0.726 $0.645 $0.239 $0.816
Net realized and unrealized gain
(loss) on investments $0.858 $0.167 ($1.135) $0.683 ($0.943)
-------- -------- -------- -------- --------
Total income (loss) from operations $1.513 $0.893 ($0.490) $0.922 ($0.127)
-------- -------- -------- -------- --------
Less distributions:
From net investment income ($0.655) ($0.361) ($0.343) ($0.632) ($0.673)
In excess of net investment income (0.048) -- -- -- --
From tax return of capital -- (0.322) (0.290) -- --
-------- -------- -------- -------- --------
Total distributions ($0.703) ($0.683) ($0.633) ($0.632) ($0.673)
-------- -------- -------- -------- --------
Net asset value -- End of year $9.310 $8.500 $8.290 $9.410 $9.120
Total Return * 18.48% 11.34% (5.33%) 10.51% (1.45%)
Ratios/Supplemental Data
(to average daily net assets):
Expenses (1) 2.17% 2.18% 2.00% 1.99% 1.95%
Net investment income 7.38% 7.85% 7.24% 7.53% 8.20%
Portfolio Turnover * * -- -- 55% 55% 56%
Net assets at the end of period
(000's omitted) $129,671 $150,767 $233,139 $381,227 $533,253
* Total investment return is calculated assuming a purchase at the net asset value on the
first day and a sale at the net asset value on the last day of each period reported.
Dividends and distributions, if any, are assumed to be reinvested at the net asset value
on the payable date. Total return is not computed on an annualized basis.
** Portfolio Turnover represents the rate of portfolio activity for the period while the Fund
was making investments directly in securities. The portfolio turnover for the period since the
Fund transferred substantially all of its investable assets to the Portfolio is shown in the
Portfolio's financial statements which are included elsewhere in this report.
+ Per share amounts have been calculated using the monthly average share method which more
approximately presents the per share data for the period, since the use of the undistributed
method does not accord with the results of operations.
(1) Includes the Fund's share of Strategic Income Portfolio's allocated expenses for the years
ended October 31, 1996 and 1995 and for the period from March 31, 1994 to October 31, 1994.
The accompanying notes are an integral part of the financial statements
</TABLE>
Notes to Financial Statements
(1) Significant Accounting Policies
EV Marathon Strategic Income Fund (the Fund) is a non-diversified series
of Eaton Vance Mutual Funds Trust (the Trust). The Fund is registered
under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund invests all of its investable
assets in interests in the Strategic Income Portfolio (the Portfolio), a
New York Trust, having the same investment objective as the Fund. The
value of the Fund's investment in the Portfolio reflects the Fund's
proportionate interest in the net assets of the Portfolio (98.7% at
October 31, 1996). The performance of the Fund is directly affected by
the performance of the Portfolio. The financial statements of the
Portfolio, including the portfolio of investments, are included
elsewhere in this report and should be read in conjunction with the
Fund's financial statements. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation
of its financial statements. The policies are in conformity with
generally accepted accounting principles.
A. Investment Valuation -- Valuation of securities by the Portfolio is
discussed in Note 1 of the Portfolio's Notes to Financial Statements
which are included elsewhere in this report.
B. Income -- The Fund's net investment income consists of the Fund's pro
rata share of the net investment income of the Portfolio, less all
actual and accrued expenses of the Fund determined in accordance with
generally accepted accounting principles.
C. Federal Taxes -- The Fund's policy is to comply with the provisions
of the Internal Revenue Code applicable to regulated investment
companies and to distribute to shareholders each year all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is necessary. At October 31, 1996,
the Fund, for federal income tax purposes, had a capital loss carryover of
$12,344,850, 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, 2001
($1,847,613), October 31, 2002 ($5,884,118) and October 31, 2003
($4,613,119).
D. Deferred Organization Expenses -- Costs incurred by the Fund in
connection with its organization, including registration costs, have
been amortized on the straight-line basis over five years.
E. Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
F. Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian to the Fund and the Portfolio. Pursuant to the custodian
agreement, IBT receives a fee reduced by credits which are determined
based on the average cash balance the Fund or the Portfolio maintains
with IBT. All significant credit balances used to reduce the Fund's
custodian fees are reflected as a reduction of operating expenses on the
statement of operations.
(2) Distributions to Shareholders
The net investment income of the Fund is determined daily and
substantially all of the net investment income so determined is declared
daily as a dividend to shareholders of record at the time of
declaration. Distributions are paid monthly. Distributions of allocated
realized capital gains, if any, are made at least annually. Shareholders
may reinvest 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. During the year ended October 31, 1996, reclassifications were
made among the Fund's capital accounts primarily due to differences in
book and tax accounting for investments in forward contracts and foreign
denominated investments. Net investment income, net realized gains and
net assets were not affected by this reclassification.
(3) Capital Stock
At October 31, 1996, there were one billion shares of $0.0001 par value
capital stock authorized. Transactions in capital stock were as follows:
Year Ended October 31,
-----------------------------
1996 1995
-------------- -------------
Sales 801,649 587,219
Issued to shareholders
electing to receive payment of
distributions in capital stock 608,806 867,130
Redemptions (5,223,821) (11,841,595)
-------------- -------------
Net decrease (3,813,366) (10,387,246)
============== =============
(4) Investment Transactions
Increases and decreases in the Fund's investment in the Portfolio for
the year ended October 31, 1996 aggregated $8,918,484 and $55,950,391,
respectively.
(5) Investment Adviser Fee and Other Transactions with Affiliates
Eaton Vance Management (EVM) serves as the administrator of the Fund,
but receives no compensation. The Portfolio has engaged Boston
Management and Research (BMR), a subsidiary of EVM, to render investment
advisory services. See Note 2 of the Portfolio's Notes to Financial
Statements which are included elsewhere in this report. Certain of the
officers and Trustees of the Fund and Portfolio are officers and directors/
trustees of the above organizations (Note 6). Except as to Trustees of the
Fund and the Portfolio 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.
(6) Distribution Plan
The Fund has adopted a distribution plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. The Plan, which is
approved annually, requires the Fund to pay the Principal Underwriter,
Eaton Vance Distributors, Inc. (EVD), amounts equal to 1/365th of 0.75%
of the Fund's daily net assets, for providing ongoing distribution
services and facilities to the Fund. The Fund will automatically
discontinue payments to EVD during any period in which there are no
outstanding Uncovered Distribution Charges, which are equivalent to the
sum of (i) 4.50% of the aggregate amount received by the Fund for shares
sold plus (ii) distribution fees calculated by applying the rate of 1%
over the prevailing prime rate to the outstanding balance of Uncovered
Distribution Charges of EVD, reduced by the aggregate amount of
contingent deferred sales charges (see Note 7) and daily amounts
theretofore paid to EVD. The amount payable to EVD with respect to each
day is accrued on such day as a liability of the Fund and, accordingly,
reduces the Fund's net assets. The Fund accrued $1,028,723 as payable to
EVD for the year ended October 31, 1996 representing 0.75% (annualized)
of average daily net assets. At October 31, 1996, the amount of
Uncovered Distribution Charges of EVD calculated under the Plan was
approximately $18,063,000.
In addition, the Plan authorizes the Fund to make payments of service
fees to the Principal Underwriter, Authorized Firms, and other persons
in amounts not exceeding 0.25% of the Fund's average daily net assets
for each fiscal year. The Trustees of the Trust have implemented the
Plan by authorizing the Fund to make quarterly payments of service fees
to the Principal Underwriter and Authorized Firms in amounts not
expected to exceed 0.25% of the Fund's average daily net assets for each
fiscal year based on the value of Fund shares sold by such persons and
remaining outstanding for at least twelve months. The Fund paid or
accrued service fees to or payable to EVD for the year ended October 31,
1996 in the amount of $231,933. Service fee payments are made for
personal services and/or the maintenance of shareholder accounts.
Service fees are separate and distinct from the sales commissions and
distribution fees payable by the Fund to EVD, and as such are not
subject to automatic discontinuance when there are no outstanding
Uncovered Distribution Charges of EVD.
Certain of the officers and Trustees of the Fund are officers or
directors of EVD.
(7) Contingent Deferred Sales Charge
A contingent deferred sales charge (CDSC) is imposed on any redemption
of Fund shares made within four years of purchase. Generally, the CDSC
is based upon the lower of the net asset value at date of redemption or
date of purchase. No charge is levied on shares acquired by reinvestment
of dividends or capital gain distributions. The CDSC is imposed at
declining rates that begin at 3% in the first year of redemption after
purchase, declining one-half of one percentage point in the second and
third years and one percentage point in the fourth and fifth years. No
CDSC is levied on shares which have been sold to EVM or its affiliates or
to their respective employees or clients. CDSC charges are paid to EVD
to reduce the amount of Uncovered Distribution Charges calculated under
the Fund's Distribution Plan. CDSC charges received when no Uncovered
Distribution Charges exist will be credited to the Fund. EVD received
approximately $76,000 of CDSC paid by shareholders for the year ended
October 31, 1996.
Report of Independent Accountants
To the Board of Trustees of Eaton Vance Mutual Funds Trust and
Shareholders of EV Marathon Strategic Income Fund:
We have audited the accompanying statement of assets and liabilities of
EV Marathon Strategic Income Fund, a series of Eaton Vance Mutual Funds
Trust, as of October 31, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for
each of the two years then ended and the financial highlights for each
of the five years then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements
and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of October 31, 1996 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of EV Marathon Strategic Income Fund, a series of
Eaton Vance Mutual Funds Trust, as of October 31, 1996, the results of
its operations for the year then ended, the changes in its net assets
for each of the two years then ended, and the financial highlights for
each of the five years then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 2, 1996
<TABLE>
<CAPTION>
Strategic income portfolio
Portfolio of investments
October 31, 1996
<S> <C> <C>
Principal U.S. $ Value
- ------------------------------------------------------------------------------------------------
Bonds & Notes -- 90.8%
- ------------------------------------------------------------------------------------------------
ARGENTINA, 4.2% U.S. Dollars
Argentina Discount Bond (Brady), 6.4375%, 3/31/23
(identified cost $5,119,445) 7,700,000 $ 5,563,250
---------------
AUSTRALIA, 0.6% Australian Dollars
State Electricity - Victoria, 9.25%, 9/18/03
(identified cost $733,564) 1,000,000 $ 851,231
---------------
BRAZIL, 7.3% U.S. Dollars
Brazil Discount Bond (Brady), 6.5%, 4/15/24
(identified cost $7,844,804) 13,200,000 $ 9,718,500
---------------
COLOMBIA, 2.7% U.S. Dollars
FEN, 9.375%, 6/15/06
(identified cost $3,552,500) 3,500,000 $ 3,609,375
---------------
CZECH REPUBLIC, 4.6% Czech Korunas
CEZ (Czech Electric Company), 14.375%, 1/27/01
(identified cost $6,022,084) 159,710,000 $ 6,137,439
---------------
DENMARK, 1.4% Danish Krone
Denmark Government, 8%, 3/15/06
(identified cost $1,869,421) 10,000,000 $ 1,849,713
---------------
ECUADOR 1.4% U.S. Dollars
Ecuador Discount Bond (Brady), 6.50%, 2/28/25
(identified cost $1,625,211) 2,900,000 $ 1,901,313
---------------
IRELAND, 10.3% Irish Pound
Irish Government, 8%, 8/18/06 3,000,000 $ 5,243,751
Irish Government, 9.25%, 7/11/03 4,500,000 8,411,749
---------------
Total Ireland (identified cost $12,681,571) $ 13,655,500
---------------
NEW ZEALAND, 4.2% New Zealand Dollars
New Zealand Government, 6.5%, 2/15/00 4,000,000 $ 2,769,047
New Zealand Government, 8%, 11/15/06 3,800,000 2,819,933
---------------
Total New Zealand (identified cost $5,317,623) $ 5,588,980
---------------
NORWAY, 5.3% Norwegian Krones
Norway Government, 6.75%, 1/15/07 20,000,000 $ 3,121,289
Norway Government, 7.0%, 5/31/01 24,000,000 3,914,686
---------------
Total Norway (identified cost $6,814,190) $ 7,035,975
---------------
POLAND, 6.4% Polish Zloty
Polish Government T-Bill, 0%, 11/6/96 4,640,000 $ 1,645,932
Polish Government T-Bill, 0%, 12/18/96 3,670,000 1,274,691
Polish Government T-Bill, 0%, 1/1/97 5,860,000 2,021,571
Polish Government T-Bill, 0%, 1/29/97 10,420,000 3,545,081
---------------
Total Poland (identified cost $8,560,401) $ 8,487,275
---------------
UNITED STATES, 42.2% U.S. Dollars
Corporate Bonds & Notes, 5.4%
Agricultural Minerals & Chemicals,
Sr. Notes, 10.75%, 9/30/03 1,000,000 $ 1,065,000
Applied Extrusion, Sr. Notes, 11.5%, 4/1/02 1,000,000 1,045,000
Dayton Hudson Medium Term Note, 9.5%, 6/10/15 665,000 767,769
Dayton Hudson Medium Term Note, 9.52%, 6/10/15 350,000 404,583
Overhead Door Corp., Sr. Notes, 12.25%, 2/1/00 500,000 540,000
TRW Inc., Medium Term Note, 9.35%, 6/4/20 1,900,000 2,288,417
United International Holdings Inc.,
Sr. Sec. Disc. Notes, 0%, 11/15/99 1,500,000 1,035,000
---------------
Total United States Corporate Bonds & Notes
(identified cost $6,740,638) $ 7,145,769
---------------
Mortgage Pass-Throughs, 34.9% U.S. Dollars
Federal Home Loan Mortgage Corp.
Participation Certificates:
4.75%, with various maturities to 2003 40,582 $ 39,776
5.5%, with maturity at 2019 22,409 22,429
8%, with various maturities to 2021 4,438,216 4,591,223
8.5%, with various maturities to 2024 5,428,489 5,711,766
9%, with maturity at 2019 996,142 1,061,484
12.5%, with maturity at 2011 126,267 143,651
12.75%, with maturity at 2013 201,306 229,027
13%, with maturity at 2013 146,828 171,027
13.5%, with maturity at 2019 552,700 649,918
---------------
$ 12,620,301
---------------
Federal National Mortgage Association
Mortgage-Backed Securities:
4.75%, with maturity at 1999 65,853 $ 65,200
5%, with maturity at 2003 156,521 153,070
5.5%, with various maturities to 2012 133,861 133,327
7.5%, with maturity at 2002 939,228 958,609
8%, with various maturities to 2013 4,029,758 4,177,277
8.5%, with various maturities to 2026 3,637,468 3,823,635
9%, with various maturities to 2017 8,292,458 8,814,032
12.75%, with maturity at 2014 197,178 230,626
13%, with various maturities to 2015 1,408,664 1,643,333
13.25%, with maturity at 2014 303,799 360,103
13.5%, with various maturities to 2015 1,235,267 1,438,421
14.75%, with various maturities to 2012 2,942,240 3,555,441
---------------
$ 25,353,074
---------------
Government National Mortgage Association: U.S. Dollars
6.5%, with various maturities to 2007 1,292,604 $ 1,298,318
8%, with maturity at 2017 4,781,543 4,978,231
9%, with maturity at 2016 1,240,467 1,323,852
13.5%, with various maturities to 2014 562,280 673,444
---------------
$ 8,273,845
---------------
Total Mortgage Pass-Throughs (identified cost, $45,801,731) $ 46,247,220
---------------
U.S. Treasury Bond, 11.75%, 2/15/01+ U.S. Dollars
(identified cost, $2,603,438) 2,000,000 $ 2,422,180
---------------
Total United States (identified cost, $55,145,807) $ 55,815,169
---------------
Total Bonds & Notes (identified cost, $115,286,631) $ 120,213,720
---------------
- ------------------------------------------------------------------------------------------------
Short-Term Obligations -- 3.8%
- ------------------------------------------------------------------------------------------------
Banque National De Paris, Euro Time-Deposit U.S. Dollars
Cayman Islands, 5.50%, 11/1/96
(at amortized cost) 5,000,000 $ 5,000,000
---------------
Total Investments (identified cost, $120,286,631) $ 125,213,720
Other Assets, less Liabilities, 5.4% 7,193,079
---------------
Net Assets, 100% $ 132,406,799
===============
+Security pledged as collateral on financial futures contracts.
The accompanying notes are an integral part of the financial statements
</TABLE>
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1996
<S> <C>
Assets:
Investments, at value (Note 1A) (identified
cost, $120,286,631) $ 125,213,720
Cash 659
Foreign currency, at value (identified cost, $7,952) 7,744
Receivable for investments sold 1,896,365
Interest receivable 2,359,131
Deferred organization expenses (Note 1J) 10,963
Receivable for foreign
forward currency exchange contracts 2,971,260
-------------
Total assets $ 132,459,842
Liabilities:
Payable for daily variation margin on open
financial futures contracts (Note 1E) $ 29,359
Payable to affiliate --
Trustees' fees 681
Accrued expenses 23,003
-------------
Total liabilities 53,043
-------------
Net Assets applicable to investors'
interest in Portfolio $ 132,406,799
=============
Sources of Net Assets:
Net proceeds from capital contributions
and withdrawals $ 124,488,477
Unrealized appreciation of investments, futures,
options and foreign currency (computed on the
basis of identified cost) 7,918,322
-------------
Total $ 132,406,799
=============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1996
<S> <C>
Investment Income:
Interest Income -- $ 13,181,562
Expenses --
Investment adviser fee (Note 2) $ 744,744
Administration fee (Note 2) 208,657
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 8,663
Custodian fees 138,046
Legal and accounting services 87,414
Amortization of organization expenses (Note 1J) 4,721
Miscellaneous 7,025
-------------
Total expenses 1,199,270
-------------
Net investment income $ 11,982,292
-------------
Realized and Unrealized Gain (Loss) on Investments,
Futures, Options and Foreign Currency:
Net realized gain (loss) (identified cost basis)
(including net loss due to foreign currency rate
fluctuations of $775,003) --
Investment transactions $ 9,066,256
Financial futures contracts (115,205)
Written options 23,385
Foreign currency and forward foreign
currency exchange contracts 598,763
-------------
Net realized gain on investments,
futures, options and foreign currency $ 9,573,199
Change in unrealized appreciation (depreciation) --
Investments $ (2,027,026)
Financial futures contracts 426,241
Foreign currency and forward foreign
currency exchange contracts 5,421,373
-------------
Net change in unrealized appreciation
of investments, futures, options and
foreign currency $ 3,820,588
-------------
Net realized and unrealized gain on investments,
futures, options and foreign currency 13,393,787
-------------
Net increase in net assets resulting from operations $ 25,376,079
=============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Year Ended October 31,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $ 11,982,292 $ 16,533,049
Net realized gain (loss) on investments, futures,
options and foreign currency 9,573,199 (11,886,837)
Change in unrealized appreciation
of investments, futures, options and foreign currency 3,820,588 15,637,070
------------- -------------
Net increase in net assets resulting from operations $ 25,376,079 $ 20,283,282
------------- -------------
Capital transactions --
Contributions $ 10,557,996 $ 7,892,611
Withdrawals (56,110,565) (112,061,370)
------------- -------------
Net decrease in net assets resulting
from capital transactions $ (45,552,569) $(104,168,759)
------------- -------------
Total decrease in net assets $ (20,176,490) $ (83,885,477)
Net Assets:
At beginning of year 152,583,289 236,468,766
------------- -------------
At end of year $ 132,406,799 $ 152,583,289
============= =============
<CAPTION>
- ----------------------------------------------------------------------------------------------
Supplementary Data
Year Ended October 31,
------------------------------------------
1996 1995 1994*
---------- ----------- ----------
<S> <C> <C> <C>
Ratios (as a percentage of average net assets):
Expenses 0.86% 0.84% 0.82%+
Net investment income 8.62% 9.08% 8.41%+
Portfolio Turnover 97% 78% 71%
+Computed on an annualized basis.
*For the period from the start of business, March 1, 1994, to October 31, 1994.
The accompanying notes are an integral part of the financial statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(1) Significant Accounting Policies
Strategic Income Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940 as a non-diversified open-end
investment company. The Portfolio, which was organized as a trust
under the laws of the State of New York in 1992, seeks to provide a
high level of income by investing in a global portfolio consisting
primarily of high grade debt securities. The Declaration of Trust
permits the Trustees to issue beneficial interests in the Portfolio.
The following is a summary of significant accounting policies of the
Portfolio. The policies are in conformity with generally accepted
accounting principles.
A. Investment Valuations - Debt securities (other than mortgage-
backed, "pass-through," securities and short-term obligations
maturing in sixty days or less), including listed securities and
securities for which price quotations are available and forward
contracts, will normally be valued on the basis of market valuations
furnished by pricing services. Mortgage backed, "pass through,"
securities are valued using a matrix pricing system which takes into
account yield differentials, anticipated prepayments and interest
rates. Financial futures contracts listed on commodity exchanges and
exchange-traded options are valued at closing settlement price.
Short-term obligations and money-market securities maturing in sixty
days or less are valued at amortized cost which approximates value.
Non-U.S. dollar denominated short-term obligations are valued at
amortized cost as calculated in the base currency and translated
into U.S. dollars at the current exchange rate. Investments for
which market quotations are unavailable are valued at fair value
using methods determined in good faith by or at the direction of the
Trustees.
B. Income - Interest income is determined on the basis of interest
accrued and discount earned, adjusted for amortization of discount
when required for federal income tax purposes.
C. Gains and Losses From Investment Transactions - Realized gains
and losses from investment transactions are recorded on the basis of
identified cost. For book purposes, gains and losses are not recognized
until disposition. For federal tax purposes, the Fund is subject to
special tax rules that may affect the amount, timing, and character of
gains recognized on certain of the Portfolio's investments. The Portfolio
has elected, under Section 1092 of the Internal Revenue Code (the "Code"),
to utilize mixed straddle accounting for certain designated classes of
activities involving domestic options and domestic financial futures
contracts in determining recognized gains and losses. Under this
method, Section 1256 positions (financial futures contracts and
options on investments or financial futures contracts) and non-
Section 1256 positions (bonds, etc.) are marked-to-market on a daily
basis resulting in the recognition of taxable gains and losses on a
daily basis. Such gains or losses are categorized as short-term or
long-term based on aggregation rules provided in the Code.
D. Income Taxes - The Portfolio is treated as a partnership for
federal tax purposes. No provision is made by the Portfolio for
federal or state taxes on any taxable income of the Portfolio
because each investor in the Portfolio is ultimately responsible for
the payment of any taxes. Since some of the Portfolio's investors
are regulated investment companies that invest all or substantially
all of their assets in the Portfolio, the Portfolio normally must
satisfy the applicable source of income and diversification
requirements (under the Code) in order for its investors to satisfy
them. The Portfolio will allocate at least annually among its
investors each investor's distributive share of the Portfolio's net
investment income, net realized capital gains, and any other items
of income, gain, loss, deduction or credit.
E. Financial Futures Contracts - Upon entering into a financial
futures contract, the Portfolio is required to deposit an amount
("initial margin"), either in cash or securities, equal to a certain
percentage of the purchase price indicated in the financial futures
contract. Subsequent payments are made or received by the Portfolio
("variation margin") each day, dependent on the daily fluctuations
in the value of the underlying security, and are recorded for book
purposes as unrealized gains or losses by the Portfolio. The
Portfolio's investment in financial futures contracts is designed to
hedge against anticipated future changes in interest or currency
exchange rates. Should interest or currency exchange rates move
unexpectedly, the Portfolio may not achieve the anticipated benefits
of the financial futures contracts and may realize a loss. If the
Portfolio enters into a closing transaction, the Portfolio will
realize, for book purposes, a gain or loss equal to the difference
between the value of the financial futures contract to sell and
financial futures contract to buy.
F. Foreign Currency Translation - Investment valuations, other
assets, and liabilities initially expressed in foreign currencies
are converted each business day into U.S. dollars based upon current
exchange rates. Purchases and sales of foreign investment securities
and income and expenses are converted into U.S. dollars based upon
currency exchange rates prevailing on the respective dates of such
transactions. Recognized gains and losses on investment transactions
attributable to foreign currency rates are recorded for financial
statement purposes as net realized gains and losses on investments.
That portion of unrealized gains and losses on investments that
result from fluctuations in foreign currency exchange rates are not
separately disclosed.
G. Written Options - The Portfolio may write call or put options for
which premiums are received and are recorded as liabilities, and are
subsequently adjusted to the current value of the options written.
Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are
exercised or are closed are offset against the proceeds or amount
paid on the transaction to determine the realized gain or loss. If a
put option is exercised, the premium reduces the cost basis of the
securities purchased by the Portfolio. The Portfolio as a writer of
an option may have no control over whether the underlying securities
may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the securities
underlying the written option.
H. Forward Foreign Currency Exchange Contracts - The Portfolio may
enter into forward foreign currency exchange contracts for the
purchase or sale of a specific foreign currency at a fixed price on
a future date. Risks may arise upon entering these contracts from
the potential inability of counterparties to meet the terms of their
contracts and from movements in the value of a foreign currency
relative to the U.S. dollar. The Portfolio will enter into forward
contracts for hedging purposes as well as non-hedging purposes. The
forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized
until such time as the contracts have been closed.
I. Reverse Repurchase Agreements - The Portfolio may enter into
reverse repurchase agreements. Under such an agreement, the
Portfolio temporarily transfers possession, but not ownership, of a
security to a counterparty, in return for cash. At the same time,
the Portfolio agrees to repurchase the security at an agreed-upon
price and time in the future. The Portfolio may enter into reverse
repurchase agreements for temporary purposes, such as to fund
withdrawals, or for use as hedging instruments where the underlying
security is denominated in a foreign currency. As a form of
leverage, reverse repurchase agreements may increase the risk of
fluctuation in the market value of the Portfolio's assets or in its
yield. Liabilities to counterparties under reverse repurchase
agreements are recognized in the statement of assets and liabilities
at the same time at which cash is received by the Portfolio. The
securities underlying such agreements continue to be treated as
owned by the Portfolio and remain in the Portfolio of investments.
Interest charged on amounts borrowed by the Portfolio under reverse
repurchase agreements is accrued daily and offset against interest
income for financial statement purposes.
J. Deferred Organization Expense - Costs incurred by the Portfolio
in connection with its organization are being amortized on the
straight-line basis over five years.
K. Expense Reduction - Investors Bank & Trust Company (IBT) serves
as custodian to the Portfolio. Pursuant to the custodian agreement,
IBT receives a fee reduced by credit which is determined based on
the average cash balance the Portfolio maintains with IBT. All
significant credit balances used to reduce the Portfolio's custodian
fees are reflected as a reduction of operation expenses on the
Statement of Operations.
L. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
M. Other - Investment transactions are accounted for on a trade date
basis.
(2) Investment Adviser Fee and Other
Transactions with Affiliates
The investment adviser fee is earned by Boston Management and
Research (BMR), a wholly-owned subsidiary of Eaton Vance Management
(EVM), as compensation for management and investment advisory
services rendered to the Portfolio. The fee is based upon a
percentage of average daily net assets plus a percentage of gross
investment income (i.e., income other than gains from the sale of
investments). Such percentages are reduced as average daily net
assets exceed certain levels. For the year ended October 31, 1996,
the fee was equivalent to 0.54% (annualized) of the Portfolio's
average net assets for such period and amounted to $744,744. An
administration fee, computed at an effective annual rate of 0.15% of
average daily net assets was also paid to BMR for administrative
services and office facilities. Such fee amounted to $208,657 for
the year ended October 31, 1996.
Except for Trustees of the Portfolio who are not members of EVM's or
BMR's organization, officers and Trustees receive remuneration for
their services to the Portfolio out of such investment adviser fee.
Certain officers of the Portfolio and Trustees of the Trust are
officers and directors/trustees of the above organizations. Trustees
of the Portfolio may elect to defer receipt of all or a portion of
their annual fees in accordance with the terms of the Trustees
Deferred Compensation Plan. For the year ended October 31, 1996, no
significant amounts have been deferred.
(3) Line of Credit
The Portfolio participates with other portfolios and funds managed
by BMR or EVM in a $120 million unsecured line of credit agreement
with a bank. Borrowings will be made by the Portfolio solely to
facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Interest is charged to each portfolio or fund
based on its borrowings at the bank's base rate or at an amount
above either the bank's adjusted certificate of deposit rate, a
Eurodollar rate, or a federal funds effective rate. In addition, a
fee computed at an annual rate of 0.15% on the daily unused portion
of the facility is allocated among the participating portfolios and
funds at the end of each quarter. The Portfolio did not have any
significant borrowings or allocated fees during the year.
(4) Investment Transactions
The Portfolio invests primarily in foreign government and U.S.
Government debt securities. The ability of the issuers of the debt
securities to meet their obligations may be affected by economic
developments in a specific industry or country. Purchases and sales
of investments, other than short-term obligations, for the year
ended October 31, 1996 were as follows:
Purchases -
Investments (non-U.S. Government) $ 88,108,189
U.S. Government Securities 34,398,490
------------
$122,506,679
============
Sales -
Investments (non-U.S. Government) $146,483,894
U.S. Government Securities 1,284,688
------------
$147,768,582
============
(5) Financial Instruments
The Portfolio regularly trades in financial instruments with off-
balance sheet risk in the normal course of its investing activities
to assist in managing exposure to various market risks. These
financial instruments include written options, forward foreign
currency exchange contracts and financial futures contracts and may
involve, to a varying degree, elements of risk in excess of the
amounts recognized for financial statement purposes. The notional or
contractual amounts of these instruments represent the investment
the Portfolio has in particular classes of financial instruments and
does not necessarily represent the amounts potentially subject to
risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are
considered.
<TABLE>
<CAPTION>
A summary of obligations under these financial instruments at
October 31, 1996 is as follows:
Forward Foreign Currency Exchange Contracts
Sales
- ------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ---------------- --------------
<S> <C> <C> <C> <C>
11/25/96 Australian Dollar 4,000,000 $ 3,145,400 $ (23,233)
11/5/96-11/29/96 Belgian Franc 1,112,959,031 38,049,468 2,304,779
11/5/96-1/22/97 Swiss Franc 12,184,273 9,980,904 250,731
11/22/96-12/24/96 Japanese Yen 726,000,000 6,814,064 408,016
12/10/96 New Zealand Dollars 809,921 556,739 (13,202)
---------------- --------------
$ 58,546,575 $ 2,927,091
================ ==============
<CAPTION>
Purchases
- ----------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ---------------- --------------
<S> <C> <C> <C>
11/25/96-11/29/96 Belgian Franc 209,500,272 $ 6,812,444 $ (80,640)
1/27/97 Canadian Dollar 3,750,000 2,801,958 10,008
1/31/97 Czech Koruna 169,905,000 6,237,335 (33,434)
11/6/96-12/6/96 Indonesian Rupiah 23,750,000,000 10,049,138 98,232
11/26/96 Indian Rupee 73,260,000 2,000,000 40,555
11/13/96-3/25/97 Philippine Peso 252,505,000 9,500,000 13,497
11/08/96 Thai Baht 63,700,000 2,500,000 (4,049)
---------------- --------------
$ 39,900,875 $ 44,169
================ ==============
<CAPTION>
Futures Contracts
Net Unrealized
Appreciation
Expiration Date Contracts Position (Depreciation)
- --------------- --------- ---------- --------------
<S> <C> <C> <C>
12/96 47 U.S. 5 year Treasury Bond Futures Short $ (58,345)
12/96 39 U.S. 10 year Treasury Bond Futures Short (43,443)
12/96 28 U.S. 30 year Treasury Bond Futures Short (117,411)
12/96 22 Australian 10 year Bond Futures Long 110,629
12/96 70 Canadian 10 year Bond Futures Long 328,220
12/96 107 French 10 year Bond Futures Short (420,629)
12/96 97 German 10 year Bond Futures Long 297,127
12/96 4 Japanese 10 year Bond Futures Short (164,969)
--------------
$ (68,821)
==============
At October 31, 1996, the Portfolio had sufficient cash and/or securities
to cover margin requirements on open futures contracts.
</TABLE>
Written Option Transactions
Transactions in written options for the period ended
October 31, 1996 were as follows:
Number
of Contracts Premiums
------------- ------------
Outstanding, beginning of year -- --
Options written 3,000 $23,385
Options exercised -- --
Options expired (3,000) ($23,385)
----- -------
Outstanding, end of year -- --
===== =======
(6) Federal Income Tax Basis of Investments
The cost and unrealized appreciation/depreciation in value of the
investments owned at October 31, 1996, as computed on a federal
income tax basis, were as follows:
Aggregate cost $ 120,786,543
=============
Gross unrealized appreciation $ 4,520,011
Gross unrealized depreciation 92,834
-------------
Net unrealized appreciation $ 4,427,177
=============
Report of Independent Accountants
To the Trustees and Investors of Strategic
Income Portfolio:
We have audited the accompanying statement of assets and liabilities
of Strategic Income Portfolio, including the portfolio of
investments, as of October 31, 1996, the related statement of
operations for the year then ended and the statements of changes in
net assets for each of the two years then ended, and supplementary
data for each of the two years then ended and for the period from
March 1, 1994 (start of business) to October 31, 1994. These
financial statements and supplementary data are the responsibility
of the Portfolio's management. Our responsibility is to express an
opinion on these financial statements and supplementary data based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and supplementary data are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October
31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and supplementary data
referred to above present fairly, in all material respects, the
financial position of Strategic Income Portfolio as of October 31,
1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years then ended, and
the supplementary data for each of the two years then ended and for
the period from March 1, 1994 (start of business) to October 31,
1994, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 2, 1996
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Investment Management
EV Marathon
Strategic Income Fund
- --------------------------
Officers
M. Dozier Gardner
President, Trustee
James B. Hawkes
Vice President, Trustee
H. Day Brigham, Jr.
Vice President
William H. Ahern, Jr.
Vice President
Michael B. Terry
Vice President
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
- -------------------------
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment Banking,
Harvard University Graduate School of Business Administration
Norton H. Reamer
President and Director, United Asset Management Corporation
John L. Thorndike
Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
Strategic
Income Portfolio
- --------------
Officers
James B. Hawkes
President, Trustee
Mark S. Venezia
Vice President and Portfolio Manager
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment Banking,
Harvard University Graduate School of Business Administration
Norton H. Reamer
President and Director, United Asset Management Corporation
John L. Thorndike
Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
Investment Adviser of
Strategic Income Portfolio
Boston Management and Research
24 Federal Street
Boston, MA 02110
Administrator of EV Marathon
Strategic Income Fund
Eaton Vance Management
24 Federal Street
Boston, MA 02110
Principal Underwriter
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(617) 482-8260
Custodian
Investors Bank & Trust Company
89 South Street
P.O. Box 1537
Boston, MA 02205-1537
Transfer Agent
First Data Investor Services Group, Inc.
BOS725
P.O. Box 1559
Boston, MA 02104
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
October 31, 1996
This report must be preceded or accompanied by
a current prospectus which contains more complete
information on the Fund, including its distribution plan,
sales charges and expenses. Please read the prospectus
carefully before you invest or send money.
EV Marathon Strategic
Income Fund
24 Federal Street
Boston, MA 02110 M-SGSRC-12/96
