<PAGE>
[LOGO OF EATON VANCE [PHOTOGRAPH OF EARTH
APPEARS HERE] APPEARS HERE]
Semiannual Report April 30, 1997
[PHOTOGRAPH OF FINANCIAL DOCUMENTS
APPEARS HERE]
EV
MARATHON
STRATEGIC
INCOME
FUND
Eaton Vance
Global Management-Global Distribution
[PHOTOGRAPH OF SKYSCRAPERS
APPEARS HERE]
Marathon
<PAGE>
EV Marathon Strategic Income Fund as of April 30, 1997
INVESTMENT UPDATE
[PHOTOGRAPH OF MARK VENEZIA,
PORTFOLIO MANAGER APPEARS HERE]
Investment Environment
- -------------------------------------------------------------------------------
The Global Bond Markets
. U.S. interest rates remained generally higher than foreign benchmark interest
rates during the period. For example, following the March rate hike by the
Federal Reserve, U.S. 10-year bond yields stood at 6.7%, while German bonds
yielded 5.8% and Japan's bond yields were 2.5%.
. Structural reform and the opening of economies continued during the period,
with countries as diverse as Korea, India and Romania taking steps to make
their markets more accessible to offshore investors. As these new markets
become more developed and other emerging markets continue to seek financing,
the universe of rewarding fixed-income investments will continue to expand
accordingly.
The Fund
- -------------------------------------------------------------------------------
Performance for the Past Six Months
. The Fund had a total return of 6.3% during the six months ended April 30,
1997./1/ That return was the result of a rise in net asset value per share
from $9.31 on October 31, 1996 to $9.50 on April 30, 1997, and the
reinvestment of $0.391 in income dividends.
. The Fund's risk-adjusted performance earned it a Five-Star Rating/2/ among
1193 taxable bond funds covered by Morningstar, Inc. - a nationally recognized
monitor of mutual fund performance - for the three-year period ended April 30.
In addition, the Fund's one-year performance outpaced the 10.8% average return
of 62 Multi-Sector Income Funds,/3/ according to Lipper Analytical Services,
Inc., a mutual fund ranking service.
Recent Portfolio Strategy
. With foreign interest rates significantly lower than U.S. rates, the Portfolio
continued its shift to the U.S. At April 30, the U.S. represented 65.3% of the
Fund's credit exposure, up from 42.2% on October 31, 1996.
. The Portfolio maintained selected Latin American positions, including Brazil,
Ecuador, Argentina and Colombia dollar-denominated debt. This region fared
well during the period. Brazil and Argentina were upgraded in March by
Standard & Poor's, a major bond ratings agency.
. The Portfolio reduced its foreign exchange exposure substantially. In Eastern
Europe and Asia, we avoided current account deficit-plagued countries such as
the Czech Republic and Thailand. In Western Europe, we took profits in Ireland
and Norway.
U.S. investments
. U.S. Mortgage-backed securities (MBS) were the Portfolio's largest investments
at April 30. With global yield spreads historically narrow, MBS represented a
relatively attractive investment in high-quality, U.S. government-backed
securities.
. Among its high-yield corporate bonds, the Portfolio owned media-related issues
such as cable operator Diamond Cable Communications Co. and broadcaster United
International Holdings, Inc. Cable companies continued to enjoy good
subscriber growth, while the broadcast media sector was swept by a wave of
mergers and acquisitions.
- -------------------------------------------------------------------------------
/1/This return does not include contingent deferred sales charge (CDSC) incurred
by certain redeeming shareholders.
/2/Morningstar ratings reflect historical risk-adjusted performance through
4/30/97 and are subject to change. Past performance is no guarantee of future
results. Funds are assigned ratings from 1 star (lowest) to 5 stars
(highest). Ratings are calculated from the funds' 1-,3-,5-, and 10-year
returns (with fee adjustment) in excess of 90-day Treasury bill returns. The
top 10% of the funds in a category receive 5 stars, the next 22.5%, 4 stars,
and the following 35%, 3 stars. For the 3-year period, the Fund was rated 5
stars (1193 funds); for the 5-year period, 3 stars (641 funds). The Fund's
overall rating was 4 stars.
/3/It is not possible to invest directly in the Lipper average of Multi-Sector
Income Funds.
/4/Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested. SEC average annual returns reflect
applicable CDSC on the following schedule: 3% - 1st year; 2.5% - 2nd year;
2% - 3rd year; 1% - 4th year.
/5/Because the Fund is actively managed, credit and currency exposures are
subject to change.
Past performance is no guarantee of future results. The value of an
investment in the Fund may fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
----------------------------------------------------------------------------
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.
----------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Fund Information
as of April 30, 1997
<TABLE>
<CAPTION>
Average Annual Total Returns/4/
- -----------------------------------------
At net asset value
- -----------------------------------------
<S> <C>
One year 15.9%
Five years 7.1
Life of Fund (11/26/90) 7.2
<CAPTION>
Including applicable CDSC
- -----------------------------------------
<S> <C>
One year 12.9%
Five years 7.1
Life of Fund (11/26/90) 7.2
<CAPTION>
Five Largest Credit Exposures/5/
- -----------------------------------------
By total net assets
<S> <C>
United States 65.3%
Poland 6.7%
Brazil 6.5%
Ireland 4.8%
New Zealand 3.7%
<CAPTION>
Five Largest Currency Exposures/5/
- -----------------------------------------
By total net assets
<S>
United States 70.3%
Germany 8.2%
Indonesia 7.2%
Poland 6.7%
Norway 3.5%
</TABLE>
2
<PAGE>
EV Marathon Strategic Income Fund as of April 30, 1997
FINANCIAL STATEMENTS (Unaudited)
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
As of April 30, 1997
Assets
- --------------------------------------------------------------------------------
<S> <C>
Investment in Strategic Income Portfolio, at value
(Note 1A)(identified cost, $123,971,468) $129,827,080
Receivable for Fund shares sold 239,177
- --------------------------------------------------------------------------------
Total Assets $130,066,257
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Dividends payable $ 578,018
Payable for Fund shares redeemed 380,733
Payable to affiliate -
Trustees' fees 280
Accrued expense 100,368
- --------------------------------------------------------------------------------
Total liabilities $ 1,059,399
- --------------------------------------------------------------------------------
Net Assets for 13,582,486 shares of
beneficial interest outstanding $129,006,858
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Paid-in capital $131,966,032
Accumulated net realized loss on investments
(computed on the basis of identified cost) (7,481,368)
Accumulated distributions in excess of net
investment income (1,333,418)
Unrealized appreciation of investments from
Portfolio (computed on the basis of identified
cost) 5,855,612
- --------------------------------------------------------------------------------
Total $129,006,858
- --------------------------------------------------------------------------------
Net Asset Value, Offering and Redemption
Price Per Share (Note 6)
- --------------------------------------------------------------------------------
( $129,006,858 / 13,582,486 shares of
beneficial interest outstanding) $ 9.50
- --------------------------------------------------------------------------------
</TABLE>
Statement of Operations
<TABLE>
<CAPTION>
For the Six Months Ended
April 30, 1997
Investment Income
- --------------------------------------------------------------------------------
<S> <C>
Interest income allocated from Portfolio $ 5,958,992
Expenses allocated from Portfolio (576,323)
- --------------------------------------------------------------------------------
Net investment income from Portfolio $ 5,382,669
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Distribution fees (Note 5) $ 649,552
Compensation of Trustees not members of the
Administrator's organization (Note 4) 1,632
Transfer and dividend disbursing agent fees 82,696
Printing and postage 45,708
Legal and accounting services 6,993
Registration fees 6,841
Custodian fee 6,518
Miscellaneous 16,709
- --------------------------------------------------------------------------------
Total expenses $ 816,649
- --------------------------------------------------------------------------------
Net investment income $ 4,566,020
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) from Portfolio
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ 654,628
Financial futures contracts 266,707
Foreign currency transactions 4,546,487
- --------------------------------------------------------------------------------
Net realized gain on investments $ 5,467,822
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investment transactions $ (2,438,267)
Financial futures contracts (171,346)
Foreign currency transactions 620,681
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ (1,988,932)
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 3,478,890
- --------------------------------------------------------------------------------
Net increase in net assets from operations $ 8,044,910
- --------------------------------------------------------------------------------
</TABLE>
See Notes to financial statements
3
<PAGE>
EV Marathon Strategic Income Fund as of April 30, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended
Increase (Decrease) April 30, 1997 Year Ended
in Net Assets (Unaudited) October 31, 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 4,566,020 $ 10,110,231
Net realized gain on 5,467,822 9,539,060
investments
Net change in unrealized
appreciation
(depreciation)
of investments (1,988,932) 3,747,829
- ------------------------------------------------------------------------------
Net increase in net assets
from operations $ 8,044,910 $ 23,397,120
- ------------------------------------------------------------------------------
Distributions to shareholders (Note 2)-
From net investment income $ (4,566,020) $ (10,110,231)
In excess of net
investment income (811,148) (748,802)
- ------------------------------------------------------------------------------
Total distributions to shareholders $ (5,377,168) $ (10,859,033)
- ------------------------------------------------------------------------------
Transactions in shares of beneficial
interest (Note 3) --
Proceeds from sale of shares $ 8,676,444 $ 7,147,913
Net asset value of shares
issued to shareholders
in payment of
distributions declared 2,567,739 5,396,728
Cost of shares redeemed (14,576,256) (46,178,157)
- ------------------------------------------------------------------------------
Net decrease in net assets
from Fund share transactions $ (3,332,073) $ (33,633,516)
- ------------------------------------------------------------------------------
Net decrease in net assets $ (664,331) $ (21,095,429)
- ------------------------------------------------------------------------------
Net Assets
- ------------------------------------------------------------------------------
At beginning of period $129,671,189 $ 150,766,618
- ------------------------------------------------------------------------------
At end of period $129,006,858 $ 129,671,189
- ------------------------------------------------------------------------------
Accumulated
distributions in excess of
net investment income
included in net assets
- ------------------------------------------------------------------------------
At end of period $ 1,333,418 $ 522,270
- ------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
4
<PAGE>
EV Marathon Strategic Income Fund as of April 30, 1997
FINANCIAL STATEMENTS CONT'D
Financial Highlights
<TABLE>
<CAPTION>
Six Months Ended Year Ended October 31,
April 30, 1997 -------------------------------------------------------
(Unaudited) 1996 1995 1994++ 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- Beginning of period $ 9.310 $ 8.500 $ 8.290 $ 9.410 $ 9.120 $ 9.920
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.330 $ 0.655 $ 0.726 $ 0.645 $ 0.239 $ 0.816
Net realized and unrealized gain (loss) on investments 0.251 0.858 0.167 (1.135) 0.683 (0.943)
- ---------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations $ 0.581 $ 1.513 $ 0.893 $ (0.490) $ 0.922 $ (0.127)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ---------------------------------------------------------------------------------------------------------------------------------
From net investment income $ (0.330) $ (0.655) $ (0.361) $ (0.343) $ (0.632) $ (0.673)
In excess of net investment income (0.061) (0.048) -- -- -- --
From tax return of capital -- -- (0.322) (0.290) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.391) $ (0.703) $ (0.683) $ (0.633) $ (0.632) $ (0.673)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value -- End of period $ 9.500 $ 9.310 $ 8.500 $ 8.290 $ 9.410 $ 9.120
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return /(1)/ 6.29% 18.48% 11.34% (5.33)% 10.51% (1.45)%
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $129,007 $129,671 $150,767 $233,139 $381,227 $533,253
Ratio of net expenses to average net assets /(2)/ 2.14%+ 2.17% 2.18% 2.00% 1.99% 1.95%
Ratio of net investment income to average net assets 7.03%+ 7.38% 7.85% 7.24% 7.53% 8.20%
Portfolio Turnover /(3)/ -- -- -- 55% 55% 56%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Per share amounts have been calculated using average shares outstanding.
/(1)/ Total return is calculated assuming a purchase at the net asset value on
the first day and a sale at the net asset value on the last day of each
period reported. Dividends and distributions, if any, are assumed to be
reinvested at the net asset value on the payable date. Total return is not
computed on an annualized basis.
/(2)/ Includes the Fund's share of the Portfolio's allocated expenses.
/(3)/ Portfolio Turnover represents the rate of portfolio activity for the
period while the Fund was making investments directly in securities. The
portfolio turnover rate for the period since the Fund transferred
substantially all of its investable assets to the Portfolio is shown in
the Portfolio's financial statements which are included elsewhere in this
report.
See notes to financial statements.
5
<PAGE>
EV Marathon Strategic Income Fund as of April 30, 1997
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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 (99.5% at April 30, 1997). 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 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
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 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.
E Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian to the Fund and the Portfolio. Pursuant to the respective custodian
agreements, IBT receives fees reduced by credits which are determined based on
the average daily cash balances the Fund or the Portfolio maintain with IBT.
All significant credit balances used to reduce the Fund's custodian fees are
reflected as a reduction of expenses on the Statement of Operations.
F Interim Financial Information -- The interim financial statements relating
to April 30, 1997 and for the six months then ended have not been audited by
independent certified public accountants, but in the opinion of the Fund's
management reflect all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial statements.
2 Distributions to Shareholders
-----------------------------------------------------------------------------
The net income of the Fund is determined daily and substantially all of the
net income so determined is declared as a dividend to shareholders of record
at the time of declaration. Distributions are paid monthly. Distributions of
allocated realized capital gains, if any, are made at least annually.
Shareholders may reinvest income and capital gain distributions in additional
shares of the Fund at the net asset value as of the ex-dividend date.
Distributions are paid in the form of additional shares or, at the election of
the shareholder, in cash. The Fund distinguishes between distributions on a
tax basis and a financial reporting basis. Generally accepted accounting
principles require that only distributions in excess of tax basis earnings and
profits be reported in the financial statements as a return of capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in over-
distributions for financial statement purposes only are classified as
distributions in excess of net investment income or accumulated net realized
gains. Permanent differences between book and tax accounting relating to
distributions are reclassified to paid-in capital.
6
<PAGE>
EV Marathon Strategic Income Fund as of April 30,1997
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
3 Capital Stock
------------------------------------------------------------------------------
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares (without par value). Transactions in capital stock
were as follows:
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1997 Year Ended
(Unaudited) October 31, 1996
------------------------------------------------------------------------------
<S> <C> <C>
Sales 909,483 801,649
Issued to shareholders electing to
receive payments of distributions
in capital stock 269,105 608,806
Redemptions (1,528,355) (5,223,821)
------------------------------------------------------------------------------
Net increase (decrease) (349,767) (3,813,366)
------------------------------------------------------------------------------
</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 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 5). 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.
5 Distribution Plan
------------------------------------------------------------------------------
The Fund has adopted a distribution plan (the Plan) pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Plan, which is approved
annually, requires the Fund to pay the Principal Underwriter, Eaton Vance
Distributors, Inc. (EVD), amounts equal to 1/365 of 0.75% of the Fund's daily
net assets, for providing ongoing distribution services and facilities to the
Fund. The Fund will automatically discontinue payments to EVD during any
period in which there are no outstanding Uncovered Distribution Charges, which
are equivalent to the sum of (i) 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 6) 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. For the six months ended April 30, 1997, the Fund paid or accrued
$487,164, payable to EVD representing 0.75% (annualized) of average daily net
assets. At April 30, 1997, the amount of Uncovered Distribution Charges of EVD
calculated under the Plan was approximately $18,673,000.
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
to exceed 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
period ended April 30, 1997 in the amount of $162,388. 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
<PAGE>
EV Marathon Strategic Income Fund as of April 30, 1997
NOTES TO FINANCIAL STATEMENTS (Unaudited)
6 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 $3,900 of CDSC paid by shareholders for the six months
ended April 30, 1997.
7 Investment Transactions
------------------------------------------------------------------------------
Increases and decreases in the Fund's investment in the Portfolio for the six
months ended April 30, 1997, aggregated $9,200,853 and $18,960,950,
respectively.
8 Special Meeting of Stockholders
------------------------------------------------------------------------------
The Fund held a special meeting of stockholders on February 26, 1997. On
December 31, 1996, the record date for the meeting, the Fund had
13,836,031.713 shares outstanding, of which 8,213,066.900 shares were
represented at the meeting. The votes at the meeting were as follows:
Item 1: To consider and act upon a proposal to modify the investment
objective of the Fund.
<TABLE>
<CAPTION>
Number of Shares
-----------------------------------------------------------------------------
<S> <C>
Affirmative 6,541,814.329
Against 357,292.040
Abstain 441,148.513
------------------------------------------------------------------------------
</TABLE>
Item 2: To consider and act upon a proposal to adopt a revised investment
structure wherein the Fund would have the ability to invest in one or more
investment companies with consistent, but somewhat different, investment
policies than the Fund.
<TABLE>
<CAPTION>
Number of Shares
-----------------------------------------------------------------------------
<S> <C>
Affirmative 6,420,488.052
Against 454,879.957
Abstain 464,886.891
------------------------------------------------------------------------------
</TABLE>
Item 3: To ratify the selection of Coopers & Lybrand L.L.P. as the independent
accountants of the Fund.
<TABLE>
<CAPTION>
Number of Shares
-----------------------------------------------------------------------------
<S> <C>
Affirmative 7,740,128.327
Against 85,481.971
Abstain 387,456.602
------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Strategic Income Portfolio as of April 30, 1997
PORTFOLIO OF INVESTMENTS
Bonds & Notes -- 88.7%
<TABLE>
<CAPTION>
Principal U.S. $ Value
- ----------------------------------------------------------------------------
<S> <C> <C>
Argentina -- 2.4% U.S. Dollar
- ----------------------------------------------------------------------------
Argentina Discount Bond (Brady), 6.375%
3/31/23 3,750,000 $ 3,103,125
- ----------------------------------------------------------------------------
Total Argentina (identified cost, $2,546,798) $ 3,103,125
- ----------------------------------------------------------------------------
Australia -- 0.6% Australian Dollar
- ----------------------------------------------------------------------------
State Electricity - Victoria, 9.25%, 9/18/03 1,000,000 $ 822,191
- ----------------------------------------------------------------------------
Total Australia (identified cost, $733,564) $ 822,191
- ----------------------------------------------------------------------------
Brazil -- 6.6% U.S. Dollar
- ----------------------------------------------------------------------------
Brazil Discount Bond (Brady), 6.875%,
4/15/24 10,500,000 $ 8,459,062
- ----------------------------------------------------------------------------
Total Brazil (identified cost, $6,472,627) $ 8,459,062
- ----------------------------------------------------------------------------
Colombia -- 1.8% U.S. Dollar
- ----------------------------------------------------------------------------
FEN, 9.375%, 6/15/06 2,200,000 $ 2,303,125
- ----------------------------------------------------------------------------
Total Colombia (identified cost, $2,233,000) $ 2,303,125
- ----------------------------------------------------------------------------
Ecuador -- 2.2% U.S. Dollar
- ----------------------------------------------------------------------------
Ecuador Discount Bond (Brady), 6.438%,
2/28/25 4,100,000 $ 2,749,563
- ----------------------------------------------------------------------------
Total Ecuador (identified cost, $2,483,844) $ 2,749,563
- ----------------------------------------------------------------------------
Ireland -- 4.7% Irish Punt
- ----------------------------------------------------------------------------
Irish Government, 9.25%, 7/11/03 3,500,000 $ 6,056,989
- ----------------------------------------------------------------------------
Total Ireland (identified cost, $6,052,161) $ 6,056,989
- ----------------------------------------------------------------------------
Morocco -- 1.4% Deutsche Mark
- ----------------------------------------------------------------------------
Snap Limited, 11.50%, 1/29/09 3,000,000 $ 1,827,053
- ----------------------------------------------------------------------------
Total Morocco (identified cost, $1,853,583) $ 1,827,053
- ----------------------------------------------------------------------------
New Zealand -- 3.7% New Zealand Dollar
- ----------------------------------------------------------------------------
New Zealand Government, 8.00%, 4/15/04 6,850,000 $ 4,768,445
- ----------------------------------------------------------------------------
Total New Zealand (identified cost, $4,740,584) $ 4,768,445
- ----------------------------------------------------------------------------
Norway -- 3.5% Norwegian Krone
- ----------------------------------------------------------------------------
Norway Government, 6.75%, 1/15/07 20,000,000 $ 2,928,173
Norway Government, 7.00%, 5/31/01 10,000,000 1,512,211
- ----------------------------------------------------------------------------
Total Norway (identified cost, $4,587,443) $ 4,440,384
- ----------------------------------------------------------------------------
Poland -- 6.9% Polish Zloty
- ----------------------------------------------------------------------------
Polish T-bill, 0.00%, 5/07/97 12,940,000 $ 4,074,985
Polish T-bill, 0.00%, 6/18/97 4,040,000 1,241,828
Polish T-bill, 0.00%, 7/30/97 11,510,000 3,453,728
- ----------------------------------------------------------------------------
Total Poland (identified cost, $9,041,328) $ 8,770,541
- ----------------------------------------------------------------------------
The Philippines -- 0.9% U.S. Dollar
- ----------------------------------------------------------------------------
JG Summit Cayman, 3.50%, 12/23/03 1,500,000 $ 1,095,000
- ----------------------------------------------------------------------------
Total The Philippines (identified cost, $1,178,795) $ 1,095,000
- ----------------------------------------------------------------------------
United Kingdom -- 1.7% U.S. Dollar
- ----------------------------------------------------------------------------
Diamond Cable Communications Co., 144A,
Sr. Disc. Notes, 10.75%, (0% until
2002), 2/15/07 2,000,000 $ 1,190,000
Newsquest Capital Corp., Sr. Sub.
Notes, 11.00%, 5/01/06 1,000,000 1,045,000
- ----------------------------------------------------------------------------
Total United Kingdom (identified cost, $2,224,199) $ 2,235,000
- ----------------------------------------------------------------------------
United States -- 52.3% U.S. Dollar
- ----------------------------------------------------------------------------
Corporate Bonds & Notes -- 5.0%
Agricultural Minerals & Chemicals Inc.,
Sr. Notes, 10.75%, 9/30/03 1,000,000 $ 1,065,000
Applied Extrusion Inc., Sr. Notes,
11.50%, 4/01/02 1,000,000 1,045,000
Dayton Hudson Mountain, 9.52%, 6/10/15 350,000 392,060
Overhead Door Corp., Sr. Notes, 12.25%,
2/01/00 500,000 527,500
TRW Inc., Medium Term Notes, 9.35%,
6/04/20 1,900,000 2,240,100
United International-Series B, 0.00%,
11/15/99 1,500,000 1,087,500
- ----------------------------------------------------------------------------
Total Corporate Bonds & Notes (identified cost,
$6,070,158) $ 6,357,160
- ----------------------------------------------------------------------------
Mortgage Pass-Throughs -- 47.3%
Federal Home Loan Mortgage Corp.:
4.75%, with various maturities to 2003 33,735 $ 32,853
5.50%, with maturity at 2019 10,816 10,814
8.00%, with various maturities to 2021 4,184,693 4,282,177
8.50%, with various maturities to 2024 4,981,955 5,205,024
9.00%, with maturity at 2019 898,561 952,688
12.50%, with maturity at 2011 112,119 127,982
12.75%, with maturity at 2013 198,341 229,861
13.25%, with maturity at 2013 145,862 170,532
13.50%, with maturity at 2019 495,156 585,264
- ----------------------------------------------------------------------------
$ 11,597,195
- ----------------------------------------------------------------------------
Federal National Mortgage Association:
4.75%, with maturity at 1999 34,601 $ 34,216
5.00%, with maturity at 2003 127,554 123,767
5.50%, with various maturities to 2012 88,780 88,099
7.50%, with various maturities to 2018 2,482,565 2,511,417
8.00%, with various maturities to 2013 3,778,952 3,870,819
8.50%, with various maturities to 2026 3,416,488 3,585,293
9.00%, with various maturities to 2017 7,665,871 8,099,357
12.00%, with maturity at 2015 1,707,245 1,955,097
12.50%, with various maturities to 2019 5,500,218 6,412,614
12.75%, with maturity at 2014 177,994 208,993
13.00%, with various maturities to 2015 3,984,084 4,678,235
13.25%, with maturity at 2014 234,128 279,444
</TABLE>
See notes to financial statements
9
<PAGE>
Strategic Income Portfolio as of April 30, 1997
PORTFOLIO OF INVESTMENTS CONT'D
<TABLE>
<CAPTION>
Principal U.S. $ Value
- -------------------------------------------------------------------------------
<S> <C> <C>
United States (continued)
- -------------------------------------------------------------------------------
13.50%, with various maturities to 2015 2,187,464 $ 2,583,690
14.75%, with various maturities to 2012 2,646,817 3,251,672
- -------------------------------------------------------------------------------
$ 37,682,713
- -------------------------------------------------------------------------------
Government National Mortgage Association:
6.50%, with various maturities to 2007 1,142,604 $ 1,137,450
7.50%, with various maturities to 2017 1,415,903 1,433,589
8.00%, with maturity at 2017 4,505,632 4,649,506
9.00%, with maturity at 2016 1,169,909 1,244,500
13.50%, with various maturities to 2014 439,379 528,807
- -------------------------------------------------------------------------------
$ 8,993,852
- -------------------------------------------------------------------------------
Total Mortgage Pass-Throughs (identified cost,
$58,329,874) $ 58,273,760
- -------------------------------------------------------------------------------
United States Treasury Bond, 11.75%,
2/15/01/(1)/ (identified cost,
$2,603,438) 2,000,000 $ 2,345,620
- -------------------------------------------------------------------------------
Total United States (identified cost,
$67,003,470) $ 66,976,540
- -------------------------------------------------------------------------------
Total Bonds & Notes
(identified cost $111,151,396) $113,607,018
- -------------------------------------------------------------------------------
Short-Term
Investments -- 11.3% U.S. Dollar
Banque National De Paris, Euro
Time-deposit Cayman Islands, 5,500,000 $ 5,500,000
5.688%, 5/01/97
Postipanki-n.y. Cayman Time Deposit,
5.450%, 5/01/97 3,000,000 3,000,000
Skandinaviska Enskilada Banken Time
Deposit, 5.470%, 5/02/97 6,000,000 6,000,000
- -------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $14,500,000) $ 14,500,000
- -------------------------------------------------------------------------------
Total Investments -- 100%
(identified cost $125,651,396) $128,107,018
- -------------------------------------------------------------------------------
</TABLE>
/(1)/ Security has been segregated to cover margin requirements on open
financial futures contracts.
See notes to financial statements
10
<PAGE>
Strategic Income Portfolio as of April 30, 1997
FINANCIAL STATEMENTS
Statement of Assets & Liabilities
<TABLE>
<CAPTION>
As of April 30, 1997
Assets
- --------------------------------------------------------------------------------
<S> <C>
Investments, at value (Note 1A)
(identified cost $125,651,396) $128,107,018
Cash 76,339
Foreign currency, at value
(identified cost, $5,735) 812
Receivable for investments sold 2,044,141
Interest receivable 1,343,665
Receivable for variation margin on open financial futures contracts 21,935
Receivable for open forward foreign currency contracts 3,621,210
Deferred organization expenses (Note 1J) 8,628
- --------------------------------------------------------------------------------
Total assets $135,223,748
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Payable for investments purchased $ 4,748,323
Payable to affiliate for Trustees' fees 638
Accrued expenses 39,689
- --------------------------------------------------------------------------------
Total liabilities $ 4,788,650
- --------------------------------------------------------------------------------
Net Assets applicable to investors' interest in Portfolio $130,435,098
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Net proceeds from capital contributions and withdrawals $124,539,001
Unrealized appreciation of investments, futures, and forward
currency contracts (computed on basis of identified cost) 5,896,097
- --------------------------------------------------------------------------------
Total $130,435,098
- --------------------------------------------------------------------------------
</TABLE>
Statement of Operations
<TABLE>
<CAPTION>
For the Six Months Ended
April 30, 1997
Investment Income
- --------------------------------------------------------------------------------
<S> <C>
Interest income $ 6,028,441
- --------------------------------------------------------------------------------
Total income $ 6,028,441
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 348,842
Administration fee (Note 2) 99,129
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 4,407
Custodian fee 89,068
Legal and accounting services 36,889
Amortization of organization expenses (Note 1J) 2,335
Miscellaneous 2,317
- --------------------------------------------------------------------------------
Total expenses $ 582,987
- --------------------------------------------------------------------------------
Net investment income $ 5,445,454
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- --------------------------------------------------------------------------------
Net realized gain (loss)(identified cost basis)--
Investment transactions $ 670,688
Financial futures contracts 275,479
Foreign currency and forward foreign currency
exchange transactions 4,604,783
- --------------------------------------------------------------------------------
Net realized gain on investments $ 5,550,950
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)--
Investments (identified cost basis) $ (2,471,467)
Financial futures contracts (147,034)
Foreign currency and forward foreign
exchange contracts 596,276
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ (2,022,225)
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 3,528,725
- --------------------------------------------------------------------------------
Net increase in net assets from operations $ 8,974,179
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
11
<PAGE>
Strategic Income Portfolio as of April 30, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Six Months Ended Year Ended
in Net Assets April 30, 1997 October 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 5,445,454 $ 11,982,292
Net realized gain on investments 5,550,950 9,573,199
Net change in unrealized
appreciation (depreciation)
of investments (2,022,225) 3,820,588
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 8,974,179 $ 25,376,079
- --------------------------------------------------------------------------------
Capital transactions --
Contributions $ 9,999,692 $ 10,557,996
Withdrawals (20,945,572) (56,110,565)
- --------------------------------------------------------------------------------
Net decrease in net assets from
capital transactions $(10,945,880) $(45,552,569)
- --------------------------------------------------------------------------------
Total decrease in net assets $ (1,971,701) $(20,176,490)
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of period $132,406,799 $152,583,289
- --------------------------------------------------------------------------------
At end of period $130,435,098 $132,406,799
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
12
<PAGE>
Strategic Income Portfolio as of April 30, 1997
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Year Ended October 31,
Six Months Ended ------------------------------------------------
April 30, 1997 1996 1995 1994*
- --------------------------------------------------------------------------------------------------------------------------
Ratios to average daily net assets
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expenses 0.88%+ 0.86% 0.84% 0.82%+
Net investment income 8.24%+ 8.62% 9.08% 8.41%+
Portfolio Turnover 26% 71% 78% 71%
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $130,435 $132,407 $152,583 $236,469
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, March 1, 1994, to October 31, 1994.
See notes to financial statements
13
<PAGE>
Strategic Income Portfolio as of April 30, 1997
NOTES TO FINANCIAL STATEMENTS
1 Significant Accounting Policies
------------------------------------------------------------------------------
Strategic Income Portfolio (the Portfolio) is registered under the Investment
Company Act of 1940 as a non-diversified open-end investment company. The
Portfolio, which was organized as a trust under the laws of the State of New
York in 1992, seeks to provide a high level of income by investing in a global
portfolio consisting primarily of high grade debt securities. The Declaration
of Trust permits the Trustees to issue beneficial interests in the Portfolio.
The following is a summary of significant accounting policies of the
Portfolio. The policies are in conformity with generally accepted accounting
principles.
A Investment Valuation -- Debt securities (other than mortgage-backed, "pass-
through," securities and short-term obligations maturing in sixty days or
less), including listed securities and securities for which price quotations
are available and forward contracts, will normally be valued on the basis of
market valuations furnished by pricing services. Mortgage backed, "pass-
through," securities are valued using a matrix pricing system which takes into
account yield differentials, anticipated prepayments and interest rates.
Financial futures contracts listed on commodity exchanges and exchange-traded
options are valued at closing settlement 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 to U.S. dollars at the current exchange rate. Investments for
which market quotations are unavailable are valued at fair value using methods
determined in good faith by or at the direction of the Trustees.
B Income -- Interest income is determined on the basis of interest accrued and
discount earned, adjusted for amortization of discount when required for
federal income tax purposes.
C Gains and Losses From Investment Transactions -- Realized gains and losses
from investment transactions are recorded on the basis of identified cost. For
book purposes, gains and losses are not recognized until disposition. For
federal tax purposes, the Portfolio is subject to special tax rules that may
affect the amount, timing and character of gains recognized on certain of the
Portfolio's investments. The Portfolio has elected, under Section 1092 of the
Internal Revenue Code (the Code), to utilize mixed straddle accounting for
certain designated classes of activities involving domestic options and
domestic financial futures contracts in determining recognized gains and
losses. Under this method, Section 1256 positions (financial futures contracts
and options on investments or financial futures contracts) and non-Section
1256 positions (bonds, etc.) are marked-to-market on a daily basis resulting
in the recognition of taxable gains and losses on a daily basis. Such gains or
losses are categorized as short-term or long-term based on aggregation rules
provided in the Code.
D Income Taxes -- The Portfolio is treated as a partnership for federal tax
purposes. No provision is made by the Portfolio for federal or state taxes on
any taxable income of the Portfolio because each investor in the Portfolio is
ultimately responsible for the payment of any taxes. Since some of the
Portfolio's investors are regulated investment companies that invest all or
substantially all of their assets in the Portfolio, the Portfolio normally
must satisfy the applicable source of income and diversification requirements
(under the Code) in order for its investors to satisfy them. The Portfolio
will allocate at least annually among its investors each investor's
distributive share of the Portfolio's net investment income, net realized
capital gains, and any other items of income, gain, loss, deduction or credit.
E Financial Futures Contracts -- Upon entering into a financial futures
contract, the Portfolio is required to deposit an amount ("initial margin"),
either in cash or securities, equal to a certain percentage of the purchase
price indicated in the financial futures contract. Subsequent payments are
made or received by the Portfolio ("variation margin") each day, dependent on
the daily fluctuations in the value of the underlying security, and are
recorded for book purposes as unrealized gains or losses by the Portfolio. The
Portfolio's investment in financial futures contracts is designed to hedge
against anticipated future changes in interest or currency exchange rates.
Should interest or currency exchange rates move unexpectedly, the Portfolio
may not achieve the anticipated benefits of the financial futures contracts
and may realize a loss. If the Portfolio enters into a closing transaction,
the Portfolio will realize, for book purposes, a gain or loss equal to the
difference between the value of the financial futures contract to sell and
financial futures contract to buy.
F Foreign Currency Translation -- Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
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.
14
<PAGE>
Strategic Income Portfolio as of April 30, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
That portion of unrealized gains and losses on investments that result from
fluctuations in foreign currency exchange rates are not separately disclosed.
G Written Options -- The Portfolio may write call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Portfolio. The Portfolio as writer of an option
may have no control over whether the underlying securities may be sold (call)
or purchased (put) and as a result bears the market risk of an unfavorable
change in the price of the securities underlying the written option.
H Forward Foreign Currency Exchange Contracts -- The Portfolio may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific foreign currency at a fixed price on a future date. Risks may arise
upon entering these contracts from the potential inability of counterparties
to meet the terms of their contracts and from movements in the value of a
foreign currency relative to the U.S. dollar. The Portfolio will enter into
forward contracts for hedging purposes as well as non-hedging purposes. The
forward foreign currency exchange contracts are adjusted by the daily exchange
rate of the underlying currency and any gains or losses are recorded for
financial statement purposes as unrealized until such time as the contracts
have been closed.
I Reverse Repurchase Agreements -- The Portfolio may enter into reverse
repurchase agreements. Under such an agreement, the Portfolio temporarily
transfers possession, but not ownership, of a security to a counterparty, in
return for cash. At the same time, the Portfolio agrees to repurchase the
security at an agreed-upon price and time in the future. The Portfolio may
enter into reverse repurchase agreements for temporary purposes, such as to
fund withdrawals, or for use as hedging instruments where the underlying
security is denominated in a foreign currency. As a form of leverage, reverse
repurchase agreements may increase the risk of fluctuation in the market value
of the Portfolio's assets or in its yield. Liabilities to counterparties under
reverse repurchase agreements are recognized in the Statement of Assets and
Liabilities at the same time at which cash is received by the Portfolio. The
securities underlying such agreements continue to be treated as owned by the
Portfolio and remain in the Portfolio of investments. Interest charged on
amounts borrowed by the Portfolio under reverse repurchase agreements is
accrued daily and offset against interest income for financial statement
purposes.
J Deferred Organization Expenses -- Costs incurred by the Portfolio in
connection with its organization are being amortized on the straight-line
basis over five years.
K Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian of the Portfolio. Pursuant to the custodian agreement, IBT receives
a fee reduced by credits which are determined based on the average daily cash
balance the Portfolio maintains with IBT. All significant credit balances used
to reduce the Portfolio's custodian fees are reflected as a reduction of
operating expenses on the Statement of Operations.
L Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
M Other -- Investment transactions are accounted for on a trade date basis.
2 Investment Adviser Fee and Other Transactions with Affiliates
------------------------------------------------------------------------------
The investment adviser fee is earned by Boston Management and Research (BMR),
a wholly-owned subsidiary of Eaton Vance Management (EVM), as compensation for
management and investment advisory services rendered to the Portfolio. The fee
is based upon a percentage of average daily net assets plus a percentage of
gross income (i.e., income other than gains from the sale of investments).
Such percentages are reduced as average daily net assets exceed certain
levels. For the six months ended April 30, 1997, the fee was equivalent to
0.53% (annualized) of the Portfolio's average net assets for such period and
amounted to $348,842. 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 $99,129
for the six months ended April 30, 1997.
Except as to Trustees of the Portfolio who are not members of EVM's or BMR's
organization, officers and Trustees receive remuneration for their services to
the Portfolio out of such investment adviser fee. Trustees of the Portfolio
15
<PAGE>
Strategic Income Portfolio as of April 30, 1997
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 six months ended April 30, 1997, no
significant amounts have been deferred. Certain of the officers and Trustees
of the Portfolios are officers and directors/trustees of the above
organizations.
3 Line of Credit
------------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR or
EVM and its affiliates in a $120 million unsecured line of credit agreement
with a group of banks. 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 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 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 April 30, 1997, the Portfolio had invested
approximately 18% of its net assets or approximately $23,515,000 in high yield
securities. Purchases and sales of investments, other than short-term
obligations, for the six months ended April 30, 1997 were as follows:
<TABLE>
<CAPTION>
Purchases
------------------------------------------------------------------------------
<S> <C>
Investments (non-U.S. Government) $ 31,149,916
U.S. Government Securities 16,845,338
------------------------------------------------------------------------------
$ 47,995,254
------------------------------------------------------------------------------
Sales
------------------------------------------------------------------------------
Investments (non-U.S. Government) $ 49,898,608
U.S. Government Securities -
------------------------------------------------------------------------------
$ 49,898,608
------------------------------------------------------------------------------
</TABLE>
5 Financial Instruments
------------------------------------------------------------------------------
The Portfolio regularly trades in financial instruments with off-balance sheet
risk in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include written
options and financial futures contracts and may involve, to a varying degree,
elements of risk in excess of the amounts recognized for financial statement
purposes. The notional or contractual amounts of these instruments represent
the investment the Portfolio has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
A summary of obligations under these financial instruments at April 30, 1997
is as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Sales
------------------------------------------------------------------------------
Net Unrealized
Settlement In Exchange For Appreciation
Date Deliver (in U.S. dollars) (Depreciation)
------------------------------------------------------------------------------
<S> <C> <C> <C>
7/1/97 Australian Dollar
4,000,000 $ 3,129,200 $ 4,461
11/5/97- Belgian Franc
11/17/97 721,805,951 23,745,222 3,275,994
5/5/97 Czech Koruna
63,360,188 2,036,729 (5,457)
5/2/97 Deutsche Mark
15,385,467 8,904,459 32,174
5/19/97 British Pound Sterling
4,000,000 6,488,600 3,777
7/24/97 Irish Punt
4,140,000 6,450,120 257,146
</TABLE>
16
<PAGE>
Strategic Income Portfolio as of April 30, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
Forward Foreign Currency Exchange Contracts (continued)
<TABLE>
<CAPTION>
Sales
------------------------------------------------------------------------------
Net Unrealized
Settlement In Exchange For Appreciation
Date Deliver (in U.S. dollars) (Depreciation)
------------------------------------------------------------------------------
<S> <C> <C> <C>
6/3/97- Japanese Yen
6/27/97 643,870,496 5,324,981 214,515
7/23/97 Republic of Korea Won
2,206,250,000 2,515,678 --
8/1/97 New Zealand Dollar
6,848,378 4,739,078 3,835
------------------------------------------------------------------------------
$63,334,067 $3,786,445
------------------------------------------------------------------------------
<CAPTION>
Purchases
------------------------------------------------------------------------------
Net Unrealized
Settlement Deliver Appreciation
Date In Exchange For (in U.S. dollars) (Depreciation)
------------------------------------------------------------------------------
<S> <C> <C> <C>
5/2/97 - Deutsche Mark
5/9/97 30,210,467 $17,487,877 $ (62,270)
5/19/97 British Pound Sterling
4,000,000 6,554,400 (69,577)
5/6/97- Indonesian Rupiah
12/17/97 23,301,750,000 9,476,156 (70,122)
7/18/97 Indian Rupee
126,525,000 3,500,000 13,835
7/23/97 Republic of Korea Won
2,206,250,000 2,500,000 15,678
5/1/97 New Zealand Dollar
6,848,378 4,751,952 (3,773)
5/19/97 Philippine Peso
53,156,000 2,000,000 10,994
------------------------------------------------------------------------------
$46,270,385 $ (165,235)
------------------------------------------------------------------------------
<CAPTION>
Futures Contracts
------------------------------------------------------------------------------
Net Unrealized
Expiration Appreciation
Date Contracts Position (Depreciation)
------------------------------------------------------------------------------
<S> <C> <C> <C>
6/97 17 US Treasury
Bond Futures Short $ (14,442)
6/97 59 Canadian 10 year
Bond Futures Long (133,715)
6/97 77 German 10 Year
Bond Futures Long (94,621)
6/97 62 French 10 Year
Bond Futures Short 25,970
6/97 6 Japanese 10 year
Bond Futures Short 13,806
6/97 27 Italian 10 year
Bond Futures Short (12,854)
------------------------------------------------------------------------------
$ (215,856)
------------------------------------------------------------------------------
</TABLE>
At April 30, 1997, the Portfolio had sufficient cash and/or securities to
cover potential obligations arising from open futures and forward contracts,
as well as margin requirements on open futures contracts.
6 Federal Income Tax Basis of Investments (Unaudited)
------------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the investments
owned at April 30, 1997, as computed on a federal income tax basis, were as
follows:
<TABLE>
<S> <C>
Aggregate cost $ 125,712,579
------------------------------------------------------------------------------
Gross unrealized appreciation $ 3,010,721
Gross unrealized depreciation (616,282)
------------------------------------------------------------------------------
Net unrealized appreciation $ 2,394,439
------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Strategic Income Portfolio as of April 30, 1997
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders
of Strategic Income Portfolio
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Strategic Income Portfolio (the Portfolio) as
of April 30, 1997, the related statement of operations for the six month period
then ended, the statement of changes in net assets for the six months ended
April 30, 1997 and the year ended October 31, 1996, and the supplementary data
for the six months ended April 30, 1997, each of the two years ended October 31,
1996, 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 April
30, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and supplementary data referred to
above present fairly, in all material respects, the financial position of the
Portfolio, as of April 30, 1997, the results of its operations for the six month
period then ended, the changes in its net assets for the six months ended April
30, 1997 and the year ended October 31, 1996, and the supplementary data for the
six months ended April 30, 1997, each of the two years ended October 31, 1996,
and for the period from March 1, 1994 (start of business) to October 31, 1994,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND LLP
Boston, Massachusetts
June 2, 1997
18
<PAGE>
EV Marathon Strategic Income Fund as of April 30, 1997
INVESTMENT MANAGEMENT
EV Marathon Strategic Income Fund
Officers
M. Dozier Gardner
President and Trustee
James B. Hawkes
Vice President and Trustee
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
Formerly Director, Fiduciary Company Incorporated
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
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
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
19
<PAGE>
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 and Dividend Disbursing Agent
First Data Investor Services Group, Inc.
Attention: Eaton Vance Funds
P.O. Box 5123
Westborough, MA 01581-5123
Independent Accountants
Coopers & Lybrand LLP
One Post Office Square
Boston, MA 02109
EV Marathon Strategic Income Fund
24 Federal Street
Boston, MA 02110
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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.
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M-SGSRC-6/97
