<PAGE> 1
TO SHAREHOLDERS
EV Marathon Strategic Income Fund had a total return of 3.0 percent during the
six months ended April 30, 1995. That return was the result of a decline in net
asset value per share to $8.18 from $8.29 on October 31, 1994, and the
reinvestment of $0.339 in income dividends, and does not include the effect of
contingent deferred sales charges on certain redeeming shareholders. Based on
the April dividend and the closing net asset value of $8.18, the Fund's
distribution rate was 8.34 percent.
THE MEXICAN PESO CRISIS SHOOK THE GLOBAL MARKETS IN DECEMBER...
The Fund's positive performance was especially noteworthy in light of the
global market's volatility. The event that most roiled the markets during the
six-month period was the decision of Mexico, due to a shortage of foreign
reserves, to devalue the Mexican peso. The devaluation caused great uncertainty
among foreign investors who feared that the country might be forced to default
on outstanding debt. While the Mexican crisis had no direct effect on countries
in the southern hemisphere, those uncertainties initially reverberated
throughout the rest of Latin America.
THE BRADY BOND MARKET FELT THE BRUNT OF THE MEXICAN CRISIS...
As we've noted in previous reports, the Portfolio has for some time avoided
Mexico altogether. However, the Mexican crisis was especially hard on the Brady
bond market, where the fund did have a large exposure. Brady bonds were
created in the 1980s as a way to restructure billions of dollars of defaulted
sovereign debt issued by less developed countries. Originated by former U.S.
Treasury secretary Nicholas Brady, many of the bonds are backed by U.S.
Treasury collateral, and are dollar-denominated and thus free of direct
currency risk. Oddly enough, as a measure of the market's overreaction to the
Mexican peso devaluation, Argentine and Brazilian Bradys were battered by the
crisis, as were Bradys in markets as far away as Poland. Consequently the Fund
lost ground from mid-December through early March, declining around 8 percent
at its low point.
AN INTERNATIONAL RESCUE PACKAGE PROMPTS A RALLY IN BRADY BONDS...
With the assembling of a $50 billion Mexican rescue package by the U.S. and
supranational lenders, faith was once again restored among investors. In the
wake of the rescue package, the Brady market rallied strongly, especially in
Argentina and Brazil. The Fund recovered much of the ground lost earlier in the
period and posted a positive return for the six-month period.
In the pages that follow, portfolio manager Mark Venezia describes the market
during the period, and highlights the changes within the Portfolio. Mark
highlights areas that represent good value and makes a strong case for devoting
a portion of one's portfolio to the global bond market.
[PHOTO] Sincerely,
/s/ JAMES B. HAWKES
James B. Hawkes,
President
June 20, 1995
1
<PAGE> 2
MANAGEMENT DISCUSSION
An interview with Mark S. Venezia, vice president and portfolio manager of
Strategic Income Portfolio.
Q. MARK, HOW WOULD YOU EVALUATE THE FUND'S PERFORMANCE DURING THE SIX-MONTH
PERIOD?
A. The Fund reflected some of the market volatility late in 1994 due to the
weak Brady bond market. However, from start to finish, the Fund fared
relatively well, especially in view of the havoc casued by the peso
devaluation. Moreover, the Fund benefited from its exposure to the Dollar
Bloc markets -- including Canada, New Zealand, and Australia -- as well as
to the U.S. market, which have each registered strong net gains in 1995.
While these markets deteriorated from mid-to-late-December in reaction to
the peso crisis, they rallied from January through April on signs of
moderating economic growth. In addition, the Fund benefited from its
exposure to the European markets, especially Finland. Toward the end of the
six-month period, many of the European bond markets began to show signs of
recovery.
Q. HOW HAVE YOU STRUCTURED THE PORTFOLIO?
A. With respect to strategic allocations, the Portfolio had approximately 44
percent of its investments in foreign investment grade bonds at April 30,
down from 56 percent on October 31. Thirty-five percent was invested in
high yield bonds, including Brady bonds. That is a modest increase from 28
percent on October 31. And approximately 21 percent was invested in U.S.
investment grade bonds, an increase from 16 percent in October. The
positions and duration in the U.S. were increased to take advantage of
what appears to be a cyclical peak in U.S. rates. The Dollar Bloc
investments remained important holdings for the Fund, as did Finland,
which continues to post strong economic fundamentals. Within our Brady
bond positions, I remain very positive about Argentina and Brazil.
[PHOTO]
MARK S. VENEZIA
Q. GIVEN THE RECENT CRISIS IN LATIN AMERICA, WHY DO YOU REMAIN POSITIVE ON
ARGENTINA AND BRAZIL?
A. Initially, the investor concerns about Mexico spilled into Argentina and
Brazil and had a dampening effect on investor sentiment. However, as it
turned out, those concerns were exaggerated. Argentina has bolstered its
banks, kept inflation in check, and dramatically lowered its trade deficit.
With the recent re-election of President Menem, the country is expected to
continue along the path of reform. While the economy has slowed due to
higher taxes and an outflow of capital, Argentina has weathered the storm
well. I am very optimistic
2
<PAGE> 3
about Brazil, which brought inflation down from 50 percent per month to 2
percent per month last year and is just beginning the process of
privatization. The Brady bonds of both of these countries have recovered
significantly since early March.
Q. WHAT WERE SOME OF THE FUND'S MORE SUCCESSFUL INVESTMENTS DURING THE SIX-
MONTH PERIOD?
A. New Zealand, the Fund's largest foreign commitment, has fared very well
during the period. For several years, New Zealand has offered relatively
high real interest rates -- nominal rates adjusted for inflation -- while
containing inflation. For example, as of April 30, yields for New Zealand
5-year bonds remained in the 8 percent range while rates for 5-year U.S.
bonds were around 6.8 percent. In addition, New Zealand has achieved fiscal
surpluses which they have dedicated to debt reduction, eschewing the
temptation to increase social spending. Another attraction of New Zealand
has been its strong currency. The country's currency appreciated about 9.1
percent versus the dollar during the six-month period.
Q. WERE THERE ANY OTHER STRONG PERFORMING MARKETS?
A. Yes. Another strong performer was Finland. In recent years, Finland has
managed to encourage economic growth while averting inflation and has
successfully initiated fiscal
PORTFOLIO INVESTMENTS:
Top five weightings according to...
<TABLE>
<CAPTION>
CREDIT EXPOSURE
<S> <C> <C>
...Regional allocations based on the location U.S. 27.4%
of the issuer of each security. This shows that New Zealand 12.2
the Portfolio's largest holdings were in the Argentina 11.4
U.S. and New Zealand. Finland 8.2
Brazil 7.3
CURRENCY ALLOCATION
...The Portfolio's holdings broken down by U.S. 23.4%
country of currency denomination. This shows Thailand 11.0
where movements in foreign exchange rates New Zealand 10.2
will have the greatest impact on the Fund's Indonesia 10.1
share price. Germany 8.2
INTEREST RATE SENSITIVITY
...The contribution of a country weighting New Zealand 25.7%
to the Portfolio's duration. This shows where U.S. 20.9
changing interest rates will have the greatest Canada 20.4
impact on share prices. Finland 19.8
Denmark 11.3
</TABLE>
3
<PAGE> 4
ARGENTINA: A PROFILE*
[MAP: ARGENTINA]
ARGENTINA: WEATHERING THE STORM IN MEXICO...
<TABLE>
<S> <C>
INFLATION RATE: ........................ 4.0%
FISCAL SURPLUS AS % OF GDP: ........... -0.1%
EXTERNAL DEBT: .................. $85 BILLION
SIZE OF ECONOMY: ............... $288 BILLION
INCOME PER CAPITA: ................... $8,671
YIELD ON ARGENTINE BRADY BONDS ........ 13.5%
</TABLE>
* Information for 1994.
Source: Ministry of Economy
[PHOTO]
MARK VENEZIA, PORTFOLIO MANAGER OF THE
STRATEGIC INCOME PORTFOLIO, AND
DOMINGO CAVALLO, FINANCE MINISTER
OF ARGENTINA.
reforms to reduce its budget deficit. Finland compares very favorably to
some of its neighbors, such as Sweden, which have taken the socialist path
and are now faced with financial peril. We have long targeted Finland as a
market primed to outperform its Scandinavian neighbors.
Q. ARE YOU ATTRACTED TO ANY OTHER COUNTRIES IN EUROPE?
A. Yes. Eastern Europe is providing some interesting opportunities. For
example, in the space of only five years, the Czech republic has been
transformed from the most rigid communist dictatorship into the most
de-regulated and privatized nation in eastern Europe. Last year the country
emerged from a long recession, registering GDP growth of 2.4 percent, while
cutting inflation in half, to 10 percent. Foreign investment surged to $3
billion in 1994, according to the Ministry of Finance. A large inflow of
foreign investment is helping to modernize manufacturing facilities and
build stronger ties to the west. Importantly, the Czech Koruna has been
among the most stable currencies in Europe and is fast heading toward
convertibility.
Elsewhere in eastern Europe, Poland is generating rapid economic growth,
with GDP advancing 5.5 percent in 1994. The Polish people have demonstrated
a strong
4
<PAGE> 5
STRATEGIC ALLOCATION:*
Adding a high yield advantage to global diversification
Pie chart, with the categories:
FOREIGN INVESTMENT GRADE......................43.8%
HIGH YIELD....................................34.7%
U.S. INVESTMENT GRADE.........................21.5%
* Based on market value as of 4/30/95
entrepreneurial flair, with 2.3 million small ventures organized in the
past 5 years alone. The Polish currency, the Zloty, has performed
relatively well this year, following years of weakness. The government has
mounted an ambitious privatization plan which has been welcomed by the
International Monetary Fund and the World Bank and marks a further step
toward a free market economy.
Q. THE DOLLAR HAS BEEN VERY WEAK THIS YEAR. DO YOU TAKE POSITIONS WITH RESPECT
TO THE U.S. CURRENCY?
A. Frankly, the movement of the dollar is one of the great imponderable
questions in this market. It has been a long-standing practice of the Fund
not to take significant direct positions with respect to the dollar.
However, the movements of the dollar and the U.S. bond market tend to have
dramatic effects on markets around the globe. Therefore, each position is
implicitly affected by the dollar. But we have tried to balance these
positions so that the Fund would be more or less neutral with respect to
dollar movements.
Q. WHAT IS YOUR OUTLOOK FOR THE GLOBAL BOND MARKETS?
A. I'm very positive on the future of the global markets. In order to look
ahead it's useful to look at recent history. Investors may recall that in
early 1994, global bond spreads -- the difference between bond yields of
different countries -- were extremely narrow. Essentially, global bond
yields had converged to levels very close to those of the U.S. Subsequently,
when U.S. interest rates began to rise in 1994, global yields rose at a much
faster pace, jumping twice as much as those in the U.S. The market
exaggerated the credit and inflation risks of the rest of the world's bond
markets. While those markets have rallied in 1995, they haven't kept pace
with the U.S. But if our Federal Reserve actually lowers the Federal funds
rate later this year, I would expect money to flow back abroad. Naturally
there are continuing risks in foreign investments and the past trends do not
insure a repeat of history. But I remain optimistic on the prospects for
foreign bond markets.
5
<PAGE> 6
EV MARATHON STRATEGIC INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995
(Unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
Investment in Strategic Income Portfolio (Portfolio),
at value (Note 1A) $176,195,390
Receivable for Fund shares sold 33,741
Deferred organization expenses (Note 1D) 16,864
------------
Total assets $176,245,995
LIABILITIES:
Dividends payable $ 812,803
Payable for Fund shares redeemed 1,474,391
Payable to affiliates --
Directors' fees 270
Custodian fees 720
Accrued expenses 167,301
----------
Total liabilities 2,455,485
------------
NET ASSETS for 21,234,604 shares of capital stock outstanding $173,790,510
============
SOURCES OF NET ASSETS:
Paid-in capital $205,291,713
Accumulated net realized loss on investment transactions
(computed on the basis of identified cost) (27,336,818)
Unrealized depreciation of investments from Portfolio
(computed on the basis of identified cost) (203,101)
Distributions in excess of net investment income ( 3,961,284)
------------
Total net assets $173,790,510
============
NET ASSET VALUE AND REDEMPTION PRICE (NOTE 7) PER SHARE
($173,790,510 / 21,234,604 shares of capital stock) $8.18
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTERGRAL PART OF THESE FINANCIAL STATEMENTS
6
<PAGE> 7
STATEMENT OF OPERATIONS
Six Months Ended April 30, 1995
(Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1B):
Interest income allocated from Portfolio $ 9,638,302
Expenses allocated from Portfolio (805,806)
------------
Total investment income $ 8,832,496
Expenses --
Compensation of Directors not members of the
Administrator's organization (Note 5) $ 1,602
Distribution fees (Note 6) 952,557
Custodian fees (Note 5) 8,938
Transfer and dividend disbursing agent fees 94,719
Printing and postage 42,874
Legal and accounting services 18,131
Registration fees 8,830
State taxes 135,678
Amortization of organization expenses (Note 1D) 12,031
Miscellaneous 77,909
-----------
Total expenses 1,353,269
------------
Net investment income $ 7,479,227
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from Portfolio (identified cost basis) (including
net gain due to foreign currency rate fluctuations of $850,410) --
Investment transactions $(9,077,744)
Financial futures 165,928
Foreign currency and forward foreign currency exchange contracts (5,017,541)
-----------
Net realized loss on investment transactions $(13,929,357)
Change in unrealized appreciation of investments 11,336,253
------------
Net realized and unrealized loss on investments $ (2,593,104)
------------
Net increase in net assets resulting from operations $ 4,886,123
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
7
<PAGE> 8
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1995 Year Ended
(Unaudited) October 31, 1994
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 7,479,227 $ 22,438,729
Net realized loss on investments (13,929,357) (23,840,457)
Change in unrealized appreciation (depreciation) of investments 11,336,253 (16,738,089)
------------ -------------
Net increase (decrease) in net assets from operations $ 4,886,123 $ (18,139,817)
------------ -------------
Distributions to shareholders (Note 2) --
From net investment income $ (7,479,227) $ (11,940,608)
In excess of net investment income (848,057) --
From tax return of capital -- (10,103,292)
------------ -------------
Total distributions $ (8,327,284) $ (22,043,900)
------------ -------------
Transactions in shares of capital stock (Note 3) --
Proceeds from sales of shares $ 2,381,544 $ 5,937,845
Net asset value of shares issued to shareholders in payment of
distributions declared 4,204,297 10,738,599
Cost of shares redeemed (62,493,272) (124,580,918)
------------ -------------
Decrease in net assets from capital stock transactions $(55,907,431) $(107,904,474)
------------ -------------
Net decrease in net assets $(59,348,592) $(148,088,191)
NET ASSETS:
At beginning of period 233,139,102 381,227,293
------------ -------------
At end of period (including distributions in excess of net investment
income of $3,961,284 and $3,184,425, respectively) $173,790,510 $ 233,139,102
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
8
<PAGE> 9
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Six Months Ended Year Ended October 31,
April 30, 1995 ---------------------------------------------------------
(Unaudited) 1994(++++) 1993 1992 1991(++)
---------------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -- Beginning of period $ 8.290 $ 9.410 $ 9.120 $ 9.920 $ 10.000
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS:
Net investment income $ 0.265 $ 0.645 $ 0.239 $ 0.816 $ 0.786
Net realized and unrealized gain (loss) on
investments (0.036) (1.135) 0.683 (0.943) (0.022)(+++)
-------- -------- -------- -------- --------
Total income (loss) from operations $ 0.229 $ (0.490) $ 0.922 $ (0.127) $ 0.764
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
From net investment income $ (0.265) $ (0.343) $ (0.632) $ (0.673) $ (0.786)
In excess of net investment income (0.074) -- -- -- --
From tax return of capital -- (0.290) -- -- --
From paid-in capital -- -- -- -- (0.058)
-------- -------- -------- -------- --------
Total distributions $ (0.339) $ (0.633) $ (0.632) $ (0.673) $ (0.844)
-------- -------- -------- -------- --------
NET ASSET VALUE -- End of period $ 8.180 $ 8.290 $ 9.410 $ 9.120 $ 9.920
======== ======== ======== ======== ========
TOTAL RETURN* 3.00% (5.33%) 10.51% (1.45%) 7.97%
RATIOS/SUPPLEMENTAL DATA
(as a percentage of average daily net
assets):
Expenses** 2.20%(+) 2.00% 1.99% 1.95% 2.11%(+)
Net investment income 7.63%(+) 7.24% 7.53% 8.20% 8.24%(+)
PORTFOLIO TURNOVER*** -- 55% 55% 56% 20%
NET ASSETS AT END OF PERIOD (000'S OMITTED) $173,791 $233,139 $381,227 $533,253 $589,182
</TABLE>
* 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.
** Includes the Fund's share of Strategic Income Portfolio's allocated
expenses for the six months ended April 30, 1995, and for the period
from March 1, 1994, to October 31, 1994.
*** 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.
(+) Computed on an annualized basis.
(++) For the period from the start of operations, November 26, 1990, to
October 31, 1991.
(+++) The per share amount is not in accord with the net realized and
unrealized gain for the period due to the timing of the sales of Fund
shares and the amount of per-share realized and unrealized gains and
losses at such time.
(++++) 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.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES
EV Marathon Strategic Income Fund (the Fund), formerly Eaton Vance Short-Term
Global Income Fund, is a non-diversified series of Eaton Vance Investment Fund,
Inc. (the Corporation), which was incorporated under Maryland law on October 4,
1990 (as Eaton Vance Short-Term Global Income Fund, Inc.). 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 (99.99% at April 30, 1995). 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 VALUATIONS -- Valuations 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, 1994, the Fund, for federal income
tax purposes, had a capital loss carryover of $14,102,503, 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, 1999
($291,348), October 31, 2000 ($3,750,599), October 31, 2001 ($4,630,516) and
October 31, 2002 ($5,430,040).
D. DEFERRED ORGANIZATION EXPENSES -- Costs incurred by the Fund in connection
with its organization, including registration costs, are being amortized on the
straight-line basis over five years.
E. DISTRIBUTION COSTS -- For book purposes, commissions paid on the sale of
shares and other distribution costs are charged to operations. For tax
purposes, commissions paid were charged to paid-in capital prior to December 1,
1994, and subsequently charged to operations. The change in the tax accounting
practice was prompted by a recent Internal Revenue Service ruling and has no
effect on either the Fund's current yield or total return (Note 6).
F. OTHER -- Investment transactions are accounted for on the date the
investments are purchased or sold.
G. INTERIM FINANCIAL INFORMATION -- The interim financial statements relating
to April 30, 1995 and for the period 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.
10
<PAGE> 11
(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 six months ended
April 30, 1995, $71,198 was reclassified from distributions in excess of net
investment income to paid-in capital, due to the differences between book and
tax accounting for distribution fees being considered as permanent differences.
Net investment income, net realized gains and net assets were not affected by
this reclassification.
(3) CAPITAL STOCK
At April 30, 1995, there were one billion shares of $0.0001 par value capital
stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1995 Year Ended
(Unaudited) October 31, 1994
---------------- ----------------
<S> <C> <C>
Sales 290,704 655,615
Issued to shareholders electing to receive payment of
distributions in capital stock 517,314 1,221,688
Redemptions (7,706,279) (14,266,256)
---------- -----------
Net decrease (6,898,261) (12,388,953)
========== ===========
</TABLE>
(4) INVESTMENT TRANSACTIONS
Increases and decreases in the Fund's investment in the Portfolio for the six
months ended April 30, 1995 aggregated $3,898,158 and $70,403,508,
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. Except as to Directors of the Fund and the Portfolio
who are not members of EVM's organization, officers and Directors receive
remuneration for their services to the Fund out of such investment adviser fee.
Investors Bank & Trust Company (IBT), an affiliate of EVM, serves as custodian
of the Fund and the Portfolio. Pursuant to the respective custodian agreements,
IBT receives a
11
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
fee reduced by credits which are determined based on the average cash balances
the Fund or the Portfolio maintains with IBT. Certain of the officers and
Directors of the Fund and Portfolio are officers and directors/trustees of the
above organizations (Note 6).
(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 requires the Fund to pay the
Principal Underwriter, Eaton Vance Distributors, Inc. (EVD), 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 $736,513 as payable to EVD for
the six months ended April 30, 1995 representing 0.75% (annualized) of average
daily net assets. At April 30, 1995, the amount of Uncovered Distribution
Charges of EVD calculated under the Plan was approximately $17,075,000.
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 Directors of the Corporation 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 six months ended
April 30, 1995 in the amount of $216,044. 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 of the Fund and Directors of the Corporation 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 $468,000 of CDSC paid by shareholders for the six months ended
April 30, 1995.
12
<PAGE> 13
STRATEGIC INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
APRIL 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL U.S. $ VALUE
- ------------------------------------------------------------------------------------------------------------
BONDS & NOTES -- 94.3%
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA, 11.4% Argentine Pesos
Argentina Pre-1 BOCON, 3.94%, 4/1/01 2,000,000 $ 1,020,000
U.S. Dollars
Argentina Pre-2 BOCON, 6.1603%, 4/1/01 7,000,000 4,847,500
Argentina Pre-2 BOCON, 6.1603%, 4/1/07 1,000,000 495,000
Argentina Discount (Brady), 7.125%, 3/31/23 15,400,000 8,989,750
Argentina FRB Bond (Brady), 7.3125%, 3/31/05 8,000,000 4,755,000
------------
Total Argentina (identified cost, $19,422,000) $ 20,107,250
------------
AUSTRALIA, 3.2% Australian Dollars
Commonwealth Bank of Australia, 11%, 10/16/01 2,000,000 $ 1,537,020
State Bank of New South Wales, 9%, 9/17/02 5,000,000 3,458,665
Treasury Corp. -- Victoria, 9.25%, 9/18/03 1,000,000 686,974
------------
Total Australia (identified cost, $6,042,783) $ 5,682,659
------------
BRAZIL, 7.3% U.S. Dollars
Brazil Eligible Interest Bond (Brady), 7.25%, 4/15/06 2,694,000 $ 1,449,709
Brazil Discount Bond (Brady), 7.25%, 4/15/24 20,800,000 11,362,000
------------
Total Brazil (identified cost, $13,084,572) $ 12,811,709
------------
COSTA RICA, 2.6% U.S. Dollars
Costa Rica Interest Series B (Brady), 7.0625%, 5/21/05 1,531,870 $ 1,128,478
Costa Rica Principal Series A (Brady), 6.25%, 5/21/10 7,000,000 3,418,331
------------
Total Costa Rica (identified cost, $6,069,749) $ 4,546,809
------------
CZECH REPUBLIC, 3.8% Czech Korunas
CEZ, 14.375%, 1/27/01 (identified cost, $6,022,084) 159,710,000 $ 6,658,455
------------
DENMARK, 4.5% Danish Krone
Denmark Government, 8%, 5/15/03 28,000,000 $ 4,974,260
Denmark Government, 8%, 3/15/06 17,200,000 2,998,692
------------
Total Denmark (identified cost, $7,690,173) $ 7,972,952
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL U.S. $ VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINLAND, 8.2% Finnish Markka
Republic of Finland, 9.5%, 3/15/04 (identified cost,
$12,083,718) 60,000,000 $ 14,431,847
------------
ICELAND, 2.4% Icelandic Kornur
Nordic Investment Bank, 6.75%, 11/29/96 (identified
cost, $4,276,428) 250,000,000 $ 4,237,250
------------
IRELAND, 2.8% Irish Pound
Irish Government, 9.25%, 7/11/03 (identified cost,
$4,929,755) 3,000,000 $ 5,009,301
------------
NEW ZEALAND, 12.2% New Zealand Dollars
Abbey National, 0%, 10/4/96 6,900,000 $ 4,115,571
New Zealand Government, 8%, 11/15/06 14,550,000 9,860,567
New Zealand Government, 10%, 3/15/02 10,000,000 7,515,828
------------
Total New Zealand (identified cost, $19,297,769) $ 21,491,966
------------
POLAND, 3.7% Polish Zloty
Polish Government T-Bill, 0%, 7/20/95 4,000,000 $ 1,600,557
Polish Government T-Bill, 0%, 7/26/95 3,000,000 1,185,760
U.S. Dollars
Poland-PDI (Brady), 3.25%, 10/27/14 7,500,000 3,543,750
------------
Total Poland (identified cost, $5,895,556) $ 6,330,067
------------
THAILAND, 4.8% Thai Baht
Deutsche Bank Certificate of Deposit, 8.75%,
9/19/96 60,000,000 $ 2,434,860
ABN-Amro Bank Hong Kong -- Certificate of Deposit,
9.1%, 8/5/97 150,000,000 6,083,550
------------
Total Thailand (identified cost, $8,399,597) $ 8,518,410
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
14
<PAGE> 15
<TABLE>
<CAPTION>
PRINCIPAL U.S. $ VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES, 27.4%
CORPORATE BONDS & NOTES, 13.8%
ACME Metals Inc., Sr. Sec. Notes, 12.5%, 8/1/02 500,000 $ 515,000
Agricultural Minerals & Chemicals, Sr. Notes, 10.75%, 9/30/03 1,000,000 1,037,500
American General Finance, 8.125%, 8/15/09 1,000,000 1,043,860
American Restaurant Group, Sr. Sec. Notes, 12%, 9/15/98 1,000,000 910,000
Applied Extrusion, Sr. Notes, 11.5%, 4/1/02 1,000,000 1,045,000
Cablevision Industries, Debs., 10.75%, 1/30/02 1,000,000 1,065,000
Dade International Inc., 13%, 2/01/05 1,000,000 1,045,000
Dayton Hudson Medium Term Note, 9.5%, 6/10/15 665,000 765,916
Dayton Hudson Medium Term Note, 9.52%, 6/10/15 350,000 403,768
Dayton Hudson Medium Term Note, 9.35%, 6/16/20 600,000 685,148
Corporate Express Inc., Sr. Sub. Notes, 9.125%, 3/15/04 500,000 475,000
Flagstar Corp., Sr. Sub. Debs., 11.25%, 11/1/04 1,000,000 815,000
General Electric Capital Corp., 8.625%, 6/15/08 250,000 270,753
General Electric Capital Corp., 8.30%, 9/20/09 2,000,000 2,172,980
General Motors Acceptance Corp., 8.75%, 7/15/05 250,000 264,393
ITT Corp., 8.5%, 10/15/01 750,000 778,103
ITT Corp., 8.55%, 6/15/09 270,000 290,958
Jorgensen Earle, Sr. Notes, 10.75%, 3/1/00 1,000,000 967,500
Moran Transportation, 1st Mortgage Bonds, 11.75%, 7/15/04 1,000,000 960,000
NL Industries Inc., Sr. Sec. Disc. Notes,13% (0% until
10/15/98), 10/15/05 1,000,000 705,000
Purina Mills, Sr. Sub. Notes, 10.25%, 9/1/03 1,000,000 1,005,000
Roadmaster Industries Inc., Sr. Sub. Notes, 11.75%, 7/15/02 1,000,000 962,500
SD Warren Co., 12%, 12/15/04 1,000,000 1,080,000
Stone Container Corp., Sr. Sub. Debs., 10.75%, 10/1/02 1,000,000 1,055,000
TRW Inc., Medium Term Note, 9.35%, 6/4/20 1,900,000 2,100,526
Waters Corporation, Sr. Sub. Notes, 12.75%, 9/30/04 1,000,000 1,015,000
Westpoint Stevens, Sr. Sub. Notes, 9.375%, 12/15/05 1,000,000 950,000
------------
Total United States Corporate Bonds & Notes
(identified cost, $23,882,689) $ 24,383,905
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL U.S. $ VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE PASS-THROUGHS, 11.5%
Federal Home Loan Mortgage Corp. Participation Certificates:
4.75%, with various maturities to 2003 181,124 $ 174,827
5.5%, with various maturities to 2019 114,846 112,682
12.5%, with maturity at 2011 199,651 221,223
12.75%, with maturity at 2013 209,813 235,079
13.25%, with various maturities to 2013 306,907 348,946
13.5%, with maturity at 2019 820,333 941,121
------------
$ 2,033,878
------------
Federal National Mortgage Association
Mortgage-Backed Securities:
4.75%, with maturity at 1999 181,076 $ 174,087
5%, with maturity at 2003 265,174 250,642
5.5%, with various maturities to 2012 315,421 304,007
7.5%, with maturity at 2002 1,403,344 1,401,830
8%, with maturity at 2013 2,031,547 2,062,027
12.75%, with maturity at 2014 281,027 317,754
13%, with various maturities to 2015 2,054,086 2,333,436
13.25%, with maturity at 2014 309,170 356,180
13.5%, with various maturities to 2015 1,671,388 1,904,591
14.75%, with various maturities to 2012 3,995,144 4,704,599
------------
$ 13,809,153
------------
Government National Mortgage Association:
6.5%, with various maturities to 2007 1,867,603 $ 1,806,407
9%, with maturity at 2016 1,625,841 1,735,201
13.5%, with various maturities to 2014 766,206 885,205
$4,426,813
------------
Total Mortgage Pass-Throughs (identified cost,
$20,286,981) $ 20,269,844
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
16
<PAGE> 17
<TABLE>
<CAPTION>
PRINCIPAL U.S. $ VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond, 11.75%, 2/15/01(+) (identified cost,
$3,862,188) 3,000,000 $ 3,683,715
------------
Total United States (identified cost, $48,031,858) $ 48,337,464
------------
TOTAL BONDS & NOTES (IDENTIFIED COST, $161,246,042) $166,136,139
------------
- ------------------------------------------------------------------------------------------------------------
SHORT-TERM OBLIGATION -- 1.8%
- ------------------------------------------------------------------------------------------------------------
Banque National De Paris, Euro Time-Deposit
Cayman Islands, 6.00%, 5/1/95 3,200,000 $ 3,200,000
------------
Total Investments (identified cost, $164,446,042) $169,336,139
OTHER ASSETS, LESS LIABILITIES, 3.9% 6,872,731
------------
NET ASSETS, 100% $176,208,870
============
</TABLE>
(+) Security pledged as collateral on financial futures contracts
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Note 1A) (identified cost, $164,446,042) $ 169,336,139
Cash 17,326
Foreign currency, at value (cost, $2,102,107) 2,174,475
Receivable for investments sold 11,716,939
Interest receivable 3,989,316
Deferred organization expenses (Note 1J) 18,058
-------------
Total assets $ 187,252,253
LIABILITIES:
Payable for investments purchased $ 5,903,911
Payable for forward foreign currency exchange contracts (Note 5) 5,046,842
Payable for daily variation margin on financial futures
contracts 67,155
Payable to affiliates
Trustees' fees 1,081
Custodian fee 4,153
Accrued expenses 20,241
-----------
Total liabilities 11,043,383
-------------
NET ASSETS applicable to investors' interest in Portfolio $ 176,208,870
=============
SOURCES OF NET ASSETS:
Net proceeds from capital contributions and withdrawals $ 176,411,279
Unrealized depreciation of investments, futures, foreign currency
and forward foreign currency exchange contracts (computed on the
basis of identified cost) (202,409)
-------------
Total $ 176,208,870
=============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
18
<PAGE> 19
STATEMENT OF OPERATIONS
For the six months ended April 30, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1B):
Interest income -- $ 9,638,782
Expenses --
Investment adviser fee (Note 2) $ 542,538
Administration fee (Note 2) 149,411
Compensation of Directors not members of the
Investment Adviser's organization (Note 2) 6,249
Custodian fee (Note 2) 63,015
Legal and accounting services 27,366
Amortization of organization expenses (Note 1J) 2,334
Miscellaneous 14,932
-----------
Total expenses 805,845
------------
Net investment income $ 8,832,937
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) (identified cost basis)
(including net gain due to foreign currency rate
fluctuations of $850,458) --
Investment transactions $(9,078,067)
Financial futures 165,895
Foreign currency and forward foreign currency
exchange contracts (5,017,777)
-----------
Net realized loss on investments $(13,929,949)
Change in unrealized appreciation (depreciation) --
Investment transactions $10,689,153
Financial futures (684,419)
Foreign currency and forward foreign currency
exchange contracts 1,332,192
-----------
Net change in unrealized appreciation of investments 11,336,926
------------
Net realized and unrealized loss on investments $ (2,593,023)
------------
Net increase in net assets resulting from operations $ 6,239,914
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
19
<PAGE> 20
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
April 30, 1995 October 31, 1994(++)
---------------- --------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 8,832,937 $ 15,949,560
Net realized loss on investments (13,929,949) (23,646,259)
Net change in unrealized appreciation (depreciation)
of investments 11,336,926 (7,159,575)
------------ -------------
Net increase (decrease) in net assets resulting
from operations $ 6,239,914 $ (14,856,274)
------------ -------------
Capital transactions --
Contributions $ 3,905,503 $ 353,394,561
Withdrawals (70,405,313) (102,169,541)
------------ -------------
Increase (decrease) in net assets resulting from capital
transactions $(66,499,810) $ 251,225,020
------------ -------------
Total increase (decrease) in net assets $(60,259,896) $ 236,368,746
NET ASSETS:
At beginning of period 236,468,766 100,020
------------ -------------
At end of period $176,208,870 $ 236,468,766
============ =============
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Six Months Ended Year Ended
April 30, 1995 October 31, 1994(++)
---------------- --------------------
<S> <C> <C>
RATIOS (as a percentage of average net assets)
Expenses 0.81%(+) 0.82%(+)
Net investment income 8.88%(+) 8.41%(+)
PORTFOLIO TURNOVER 55% 71%
</TABLE>
(+) 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
20
<PAGE> 21
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 which was
organized as a trust under the laws of the State of New York in 1992. The
Declaration of Trust permits the Trustees to issue beneficial interests in the
Portfolio. Investment operations began on March 1, 1994, with the acquisition
of net assets of $348,433,258 in exchange for an interest in the Portfolio by
one of the Portfolio's investors. 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 closing bond valuations,
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 SECURITY TRANSACTIONS -- 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, 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 the entering of 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.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Subsequent payments are made or received by the Portfolio ("margin
maintenance") 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 only 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 or offset.
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 redemptions, or for use as hedging instruments where the underlying
security is foreign denominated. 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 Fund. The securities
underlying such agreements continue to be treated as owned by the Fund 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.
22
<PAGE> 23
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. OTHER -- Investment transactions are accounted for on the date the
investments are purchased or sold.
(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 six months ended April 30, 1995, the fee was equivalent
to 0.55% (annualized) of the Portfolio's average net assets for such period and
amounted to $542,538. 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 $149,411
for the six months ended April 30, 1995.
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. Investors Bank & Trust
Company (IBT), an affiliate of EVM and BMR, 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 balances the
Portfolio maintains with IBT. Certain officers of the Portfolio and Directors
of the Corporation are officers and directors/trustees of the above
organizations. Trustees of the Portfolio that are not affiliated with the
Investment Adviser may elect to defer receipt of all or a percentage of their
annual fees in accordance with the terms of the Trustees Deferred Compensation
Plan. For the six months ended April 30, 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. The line
of credit consists of a $20 million committed facility and a $100 million
discretionary facility. 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 an amount above either the bank's adjusted certificate of deposit
rate, a variable adjusted certificate of deposit rate, or a federal funds
effective rate. In addition, a fee computed at an annual rate of 1/4 of 1% on
the $20 million committed facility and on the daily unused portion of the $100
million discretionary 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 six months ended April 30,
1995.
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) INVESTMENTS
The Portfolio invests primarily in foreign debt securities and U.S. Government
securities, the aggregate of which have a dollar weighted average maturity of
not more than three years. 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 six months ended April 30, 1995 were as follows:
<TABLE>
<S> <C>
Purchases --
Investments (non-U.S. Government) $100,916,537
U.S. Government Securities 5,147,873
------------
$106,064,410
============
Sales --
Investments (non-U.S. Government) $161,343,280
U.S. Government Securities 7,499,125
------------
$168,842,405
============
</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, 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.
A summary of obligations under these financial instruments at April 30, 1995 is
as follows:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Sales
<TABLE>
<CAPTION>
In Exchange Net Unrealized
Settlement For (in U.S. Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ------------ --------------
<S> <C> <C> <C> <C>
5/8/95 Australian Dollar 3,000,000 $ 2,208,000 $ 25,700
11/15/95--11/22/95 Belgian Franc 1,043,560,561 33,715,716 (3,065,311)
5/31/95 Canadian Dollar 13,700,000 9,636,992 (415,472)
5/8/95 Deutsche Mark 8,847,921 6,408,565 --
5/31/95--7/18/95 Finnish Markka 82,213,531 18,859,267 (430,082)
6/15/95 Japanese Yen 1,500,000,000 14,943,216 (3,010,779)
8/1/95 New Zealand Dollar 7,467,591 5,000,000 10,249
5/5/95 Phillippine Peso 177,555,000 7,000,000 213,443
5/15/95 Swiss Franc 13,231,745 10,337,301 (1,247,472)
------------ -----------
$108,109,057 $(7,919,724)
============ ===========
</TABLE>
24
<PAGE> 25
(5) FINANCIAL INSTRUMENTS (CONTINUED)
Purchases
<TABLE>
<CAPTION>
Deliver Net Unrealized
Settlement (in United Appreciation
Date In Exchange for States Dollars) (Depreciation)
- ------------------ -------------------------------------- -------------- --------------
<S> <C> <C> <C> <C>
5/8/95 Australian Dollar 3,000,000 $ 2,250,000 $ (67,700)
11/15/95 Belgian Franc 84,612,092 3,011,106 (29,019)
5/31/95--6/1/95 Canadian Dollar 25,894,183 18,726,729 273,062
7/18/95 Czech Rep Koruna 169,905,000 6,443,606 58,441
5/2/95--5/31/95 Deutsche Mark 28,468,494 20,106,642 482,504
5/3/95 Finnish Markka 15,582,850 3,656,401 --
6/13/95--12/5/95 Indonesian Rupiah 40,500,000,000 17,649,037 (15,815)
6/15/95 Japanese Yen 1,024,000,000 10,641,172 1,615,422
5/5/95 Polish Zloty 3,791,080 1,598,937 --
3/6/96 Singapore Dollar 13,300,000 9,433,962 400,337
5/15/95--12/4/95 Thai Baht 322,000,000 12,778,845 155,649
------------ -----------
$106,296,437 $ 2,872,881
============ ===========
</TABLE>
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Expiration Date Contracts Position (Depreciation)
- ------------------ ------------ ----------- --------------
<S> <C> <C> <C>
6/95 111 U.S. 30 year Bond Futures Short $(264,733)
6/95 107 U.S. 5 year Bond Futures Short 44,392
6/95 190 Canadian 10 year Bond Futures Long 270,041
6/95 48 German 10 year Bond Futures Short (31,271)
6/95 50 Italian 10 year Bond Futures Short (136,460)
---------
$(118,031)
=========
</TABLE>
At April 30, 1995, the Portfolio had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
(6) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation/depreciation in value of the investments
owned at April 30, 1995, as computed on a federal income tax basis, were as
follows:
<TABLE>
<S> <C>
Aggregate cost $164,754,224
============
Gross unrealized appreciation $ 7,433,010
Gross unrealized depreciation 2,851,095
------------
Net unrealized appreciation $ 4,581,915
============
</TABLE>
25
<PAGE> 26
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 April
30, 1995, the related statements of operations, changes in net assets and
supplementary data for the six months ended April 30, 1995 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 audit.
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, 1995 by correspondence with the custodians 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 April 30, 1995, the results of its operations,
changes in net assets and the supplementary data for the six months ended April
30, 1995 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
May 26, 1995
26
<PAGE> 27
INVESTMENT MANAGEMENT
EV MARATHON
STRATEGIC INCOME FUND
OFFICERS
JAMES B. HAWKES
President, Director
MARK S. VENEZIA
Vice President
MARK P. DOMAN
Assistant Vice President
JAMES L. O'CONNOR
Treasurer
THOMAS OTIS
Secretary
JAMES F. ALBAN
Assistant Treasurer
JANET E. SANDERS
Assistant Treasurer and Assistant Secretary
A. JOHN MURPHY
Assistant Secretary
DIRECTORS
LANDON T. CLAY
Chairman, Eaton Vance Corp.
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, Director
MARK S. VENEZIA
Vice President and Portfolio Manager
MARK P. DOMAN
Assistant Vice President
JAMES L. O'CONNOR
Treasurer
THOMAS OTIS
Secretary
JAMES F. ALBAN
Assistant Treasurer
JANET E. SANDERS
Assistant Treasurer and Assistant Secretary
A. JOHN MURPHY
Assistant 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
27
<PAGE> 28
INVESTMENT ADVISER OF
STRATEGIC INCOME PORTFOLIO
Boston Management & 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
24 Federal Street
Boston, MA 02110
TRANSFER AGENT
The Shareholder 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
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
[LOGO]
EV MARATHON
STRATEGIC
INCOME FUND
SEMI-ANNUAL
SHAREHOLDER REPORT
APRIL 30, 1995
[ILLUSTRATION OF FLAGS]
