<PAGE>
EV MARATHON STRATEGIC INCOME FUND
EV MARATHON STRATEGIC INCOME FUND (THE "FUND") IS A MUTUAL FUND SEEKING A
HIGH LEVEL OF INCOME BY INVESTING IN A GLOBAL PORTFOLIO CONSISTING PRIMARILY OF
HIGH GRADE DEBT SECURITIES AND HAVING A DOLLAR WEIGHTED AVERAGE MATURITY OF NOT
MORE THAN THREE YEARS. THE FUND INVESTS ITS ASSETS IN STRATEGIC INCOME PORTFOLIO
(THE "PORTFOLIO"), A NON-DIVERSIFIED OPEN-END INVESTMENT COMPANY HAVING THE SAME
INVESTMENT OBJECTIVE AS THE FUND, RATHER THAN BY DIRECTLY INVESTING IN AND
MANAGING ITS OWN PORTFOLIO OF SECURITIES AS WITH HISTORICALLY STRUCTURED MUTUAL
FUNDS. THE PORTFOLIO'S INVESTMENT ADVISER WILL INVEST IN A VARIETY OF INCOME
PRODUCING SECURITIES, INCLUDING THOSE OF BELOW INVESTMENT GRADE QUALITY. THE
VALUE OF FUND SHARES WILL FLUCTUATE BECAUSE OF CHANGES IN CURRENCY EXCHANGE
RATES, CREDIT QUALITY AND INTEREST RATES, AND OTHER FACTORS. THE FUND IS A
SERIES OF EATON VANCE MUTUAL FUNDS TRUST (THE "TRUST").
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other insured depository institution, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency. Shares of the Fund involve
investment risks, including fluctuations in value and the possible loss of some
or all of the principal investment.
This Prospectus is designed to provide you with information you should
know before investing. Please retain this document for future reference. A
Statement of Additional Information dated October 30, 1995 for the Fund, as
supplemented from time to time, has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. This Statement of
Additional Information is available without charge from the Fund's principal
underwriter, Eaton Vance Distributors, Inc. (the "Principal Underwriter"), 24
Federal Street, Boston, MA 02110 (telephone (800) 225-6265). The Portfolio's
investment adviser is Boston Management and Research (the "Investment
Adviser"), a wholly-owned subsidiary of Eaton Vance Management, and Eaton
Vance Management is the administrator (the "Administrator") of the Fund and
the Portfolio. The offices of the Investment Adviser and the Administrator are
located at 24 Federal Street, Boston, MA 02110.
- ------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page Page
<S> <C> <S> <C>
Shareholder and Fund Expenses ..................... 2 How to Redeem Fund Shares ..................... 16
The Fund's Financial Highlights ................... 3 Reports to Shareholders ....................... 18
The Fund's Investment Objective ................... 4 The Lifetime Investing Account/Distribution
Investment Policies and Risks ..................... 4 Options ..................................... 18
Organization of the Fund and the Portfolio ........ 9 The Eaton Vance Exchange Privilege ............ 20
Management of the Fund and the Portfolio .......... 11 Eaton Vance Shareholder Services .............. 21
Distribution Plan ................................. 13 Distribution and Taxes ........................ 22
Valuing Fund Shares ............................... 14 Performance Information ....................... 23
How to Buy Fund Shares ............................ 15 Appendix ...................................... 25
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
PROSPECTUS DATED OCTOBER 30, 1995
<PAGE>
SHAREHOLDER AND FUND EXPENSES
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Sales Charges Imposed on Purchases of Shares None
Sales Charges Imposed on Reinvested Distributions None
Fees to Exchange Shares None
Range of Declining Contingent Deferred Sales Charges Imposed on
Redemptions During the First Five Years (as a percentage of
redemption proceeds exclusive of all reinvestmentsand capital
appreciation in the account) 3%-0%
ANNUAL FUND AND ALLOCATED PORTFOLIO OPERATING EXPENSES
(as a percentage of average daily net assets)
Investment Adviser Fee 0.54%
Rule 12b-1 Distribution (and Service) Fees 0.95%
Other Expenses (including administration fee of 0.15% paid by
the Portfolio) 0.51%
----
Total Operating Expenses 2.00%
====
<TABLE>
<CAPTION>
EXAMPLES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following contingent deferred sales charge and
expenses on a $1,000 investment, assuming (a) 5% annual return and (b)
redemption at the end of each period: $50 $83 $108 $233
An investor would pay the following expenses on the same investment,
assuming (a) 5% annual return and (b) no redemptions: $20 $63 $108 $233
</TABLE>
Notes:
The table and Examples summarize the aggregate expenses of the Fund and the
Portfolio and are designed to help investors understand the costs and expenses
they will bear, directly or indirectly, by investing in the Fund. The
information set out in the table and Examples is based on expenses for the most
recent fiscal year.
The Fund invests exclusively in the Portfolio. The Trustees of the Trust
believe that the aggregate per share expenses of the Fund and the Portfolio
should approximate, and over time may be less than, the per share expenses that
the Fund would incur if the Trustees retained the services of an investment
adviser and its assets were invested directly in the type of securities being
held by the Portfolio.
The Examples should not be considered a representation of past or future
expenses and actual expenses may be greater or less than those shown. Federal
regulations require the Examples to assume a 5% annual return, but actual annual
return will vary. For further information regarding the expenses of both the
Fund and the Portfolio see "Organization of the Fund and the Portfolio,"
"Management of the Fund and the Portfolio", "How to Redeem Fund Shares", and
"Distribution Plan." A long-term shareholder in the Fund may pay more than the
economic equivalent of the maximum front-end sales charge permitted by a rule of
the National Association of Securities Dealers, Inc.
The Portfolio's monthly advisory fee has two components, a fee based on
daily net assets and a fee based on daily gross income, as set forth in the fee
schedule on page 11.
No contingent deferred sales charge is imposed on (a) shares purchased more
than four years prior to the redemption, (b) shares acquired through the
reinvestment of distributions or (c) any appreciation in value of other shares
in the account (see "How to Redeem Fund Shares"), and no such charge is imposed
on exchanges of Fund shares for shares of one or more other funds listed under
"The Eaton Vance Exchange Privilege".
Other investment companies and investors with different distribution
arrangements and fees are investing in the Portfolio and others may do so in the
future. See "Organization of the Fund and the Portfolio".
<PAGE>
THE FUND'S FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
The following information (except the unaudited information for the six months
ended April 30, 1995) should be read in conjunction with the audited financial
statements included in the Statement of Additional Information, all of which has
been so included in reliance upon the report of Coopers & Lybrand L.L.P.,
independent accountants, as experts in accounting and auditing. Further
information regarding the performance of the Fund is contained in the Fund's
annual report to shareholders which may be obtained without charge by contacting
the Principal Underwriter, Eaton Vance Distributors, Inc.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED OCTOBER 31,<F5>
APRIL 30, 1995 -----------------------------------------
(UNAUDITED) 1994<F4> 1993 1992 1991<F2>
---------------- -------- -------- -------- --------
<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 (loss) gain on investments (0.036) (1.135) 0.683 (0.943) (0.022)<F3>
-------- -------- -------- -------- --------
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<F6> (0.074) -- -- -- (0.058)
From tax return of capital -- (0.290) -- -- --
-------- -------- -------- -------- --------
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<F7> 3.00% (5.33%) 10.51% (1.45%) 7.97%
RATIOS/SUPPLEMENTAL DATA (to average daily
net assets):
Expenses 2.20%<F1><F8> 2.00%<F8> 1.99% 1.95% 2.11%<F1>
Net investment income 7.63%<F1> 7.24% 7.53% 8.20% 8.24%<F1>
PORTFOLIO TURNOVER<F9> -- 55% 55% 56% 20%
NET ASSETS AT END OF PERIOD (000's omitted) $173,791 $233,139 $381,227 $533,253 $589,182
<FN>
<F1> Computed on an annualized basis.
<F2> For the period from the start of business, November 26, 1990, to October
31, 1991.
<F3> 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.
<F4> 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.
<F5> During the fiscal years ended 1993, 1992 and 1991, the Fund was making
investments directly in securities. As of the close of business February
28, 1994, the Fund transferred its assets to the Portfolio in exchange for
an interest in the Portfolio.
<F6> Distributions from paid-in-capital for the year ended October 31, 1991 has
been restated to conform with the treatment permitted under current
financial reporting standards.
<F7> 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. Distributions, if any, are assumed to be reinvested at the
net asset value on the payable date. Total return is calculated on a
non-annualized basis.
<F8> Includes the Fund's share of the Portfolio's allocated expenses for the six
months ended April 30, 1995, and for the period from March 1, 1994, to
October 31, 1994.
<F9> 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 its assets to the
Portfolio is shown in the Portfolio's financial statements which are
included in the Fund's report to shareholders.
</TABLE>
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
THE FUND'S INVESTMENT OBJECTIVE IS A HIGH LEVEL OF INCOME BY INVESTING IN A
GLOBAL PORTFOLIO CONSISTING PRIMARILY OF HIGH GRADE DEBT SECURITIES AND HAVING A
DOLLAR WEIGHTED AVERAGE MATURITY OF NOT MORE THAN THREE YEARS. Maturity is
measured by duration as described below. The Investment Adviser will allocate
investments among different countries, currencies and credits, including those
of below investment grade quality, based on the perception of the most favorable
markets and issuers, the relative yield and appreciation potential of a
particular country's securities and the relationship of a country's currency to
the U.S. dollar. Changes in exchange rates for the foreign currencies in which
the investments and forward contracts are denominated may adversely affect the
value of Fund shares. The Fund's investment objective may be changed by the
Trustees of the Trust without shareholder approval.
INVESTMENT POLICIES AND RISKS
- ------------------------------------------------------------------------------
THE FUND CURRENTLY SEEKS ITS OBJECTIVE BY INVESTING ALL OF ITS ASSETS IN
STRATEGIC INCOME PORTFOLIO, WHICH IS ITSELF AN OPEN-END INVESTMENT COMPANY
HAVING THE SAME INVESTMENT OBJECTIVE AS THE FUND. The Portfolio, in turn,
invests primarily in a portfolio of high grade debt securities of issuers
located anywhere in the world.
The Investment Adviser adjusts the Portfolio's investments and engages in
active management techniques to take advantage of differences in interest rates
and currency exchange rates in markets around the world, and other differences
among countries and markets. By allocating the Portfolio's assets actively among
issuers in different countries, and among securities denominated in different
currencies, the Investment Adviser attempts to achieve a higher level of current
income than might be available from a portfolio invested only in the securities
of one country or denominated in one currency. This strategy requires the
Investment Adviser to identify countries and currencies where the Portfolio's
investments will outperform comparable investments in other countries and
currencies and in many cases to predict changes in economies, markets, political
conditions, and other factors. The success of this strategy will, of course,
involve the risk that the Investment Adviser's predictions may be untimely or
incorrect. The Investment Adviser also seeks to identify markets and securities
which appear to be undervalued and make investments to profit from increases in
value.
The Portfolio will invest primarily in high grade debt securities. "High
grade" debt securities include securities issued or guaranteed as to principal
or interest by the U.S. Government or any of its agencies or instrumentalities,
and debt securities of private issuers and of foreign governmental issuers rated
at least A by Standard & Poor's Ratings Group, Moody's Investors Service, Inc.,
or Duff & Phelps Inc. They may also include commercial paper or other short-term
debt instruments rated in one of the two highest short-term ratings by any of
those rating services (or by Fitch Investors Service, Inc.), and certificates of
deposit and bankers' acceptances issued or guaranteed by, or time deposits
maintained at, banks having total assets of more than $500 million and
determined by the Investment Adviser to be of comparable credit quality to
short-term securities with those ratings. An unrated security will be considered
to be a high grade security if the Investment Adviser determines that it is of
comparable quality to any of the securities described above.
The Portfolio may invest the remainder of its assets in lower-rated debt
securities, although less than 35% of the Portfolio's assets will be invested in
securities rated below BBB-/Baa3 (commonly referred to as "junk bonds").
Lower-rated securities generally offer higher current yields and appreciation
potential than do higher rated securities, but are subject to greater risks.
Securities in the lower-rated categories are considered to be of poor standing
and predominantly speculative; securities in the lowest rating categories may be
in default and are generally regarded by the rating agencies as having extremely
poor prospects of ever attaining any real investment standing. The values of
lower-rated fixed income securities generally fluctuate more than those of
higher-rated fixed-income securities. For more detailed information about the
risks associated with investing in lower-rated securities, see "Additional Risk
and Investment Information" below.
The income producing securities in which the Portfolio invests may have
fixed, variable or floating interest rates, constitute a broad mix of asset
classes, and may include convertible bonds, securities of real estate investment
trusts and natural resource companies, stripped debt obligations, closed-end
investment companies (that invest primarily in debt securities the Portfolio
could invest in), preferred, preference and convertible stocks, equipment lease
certificates, equipment trust certificates, conditional sales contracts and debt
obligations collateralized by, or representing interests in pools of, mortgages
and other types of loans ("asset-backed obligations"). The Portfolio may invest
a portion of its assets in fixed and floating rate loans and loan interests. The
Portfolio will normally invest in securities of issuers located in at least
three different countries (which may include the United States), and will not
normally invest more than 25% of its assets in securities of issuers located in
a single foreign country or denominated in any single foreign currency, except
the U.S. dollar. Nevertheless, through "Active Management Strategies" discussed
below, the entire Fund may be exposed to foreign currency risks. For temporary
defensive purposes, the Portfolio may hold all or any portion of its assets in
securities of issuers located in the United States and in cash or money market
instruments. It is impossible to predict when, or for how long, the Portfolio
will engage in such strategies.
The Portfolio will maintain a dollar weighted average portfolio maturity of
not more than three years. In measuring the dollar weighted average portfolio
maturity of the Portfolio, the Portfolio will use the concept of "duration,"
adjusted to account for the volatility-reducing effect of diversifying a debt
portfolio among several countries. Duration represents the dollar weighted
average maturity of expected cash flows (i.e. interest and principal payments)
on one or more debt obligations, discounted to their present values. The
duration of a floating rate security will be defined as the time to the next
interest payment. The duration of an obligation is usually less than its stated
maturity and is related to the degree of volatility in the market value of the
obligation. Maturity measures only the time until a bond or other debt security
provides its final payment; it takes no account of the pattern of a security's
payments over time. Duration takes both interest and principal payments into
account and, thus, in the Investment Adviser's opinion, is a more accurate
measure of a debt security's price sensitivity in response to changes in
interest rates. In computing the duration of its portfolio, the Portfolio will
have to estimate the duration of debt obligations that are subject to prepayment
or redemption by the issuer, based on projected cash flows from such
obligations. The Portfolio may use various techniques to shorten or lengthen the
dollar weighted average maturity of its portfolio, including the acquisition of
debt obligations at a premium or discount, transactions in futures contracts and
options on futures and interest rate swaps. Subject to the requirement that the
dollar weighted average portfolio maturity will not exceed three years, the
Portfolio may invest in individual debt obligations of any maturity, including
obligations with a remaining stated maturity of more than three years.
The market value of the Portfolio's investments will change in response to
changes in currency exchange and interest rates, credit quality changes of
issuers and other factors. Changes in the values of portfolio securities will
not affect interest income derived from those securities, but will affect the
Portfolio's net asset value. See "Additional Risk and Investment Information"
below.
ACTIVE MANAGEMENT TECHNIQUES
Currency and Other Derivative Instruments. The Portfolio may purchase or
sell derivative instruments (which are instruments that derive their value from
another instrument, security, index or currency) to enhance return, to hedge
against fluctuations in securities prices, interest rates or currency exchange
rates, or as a substitute for the purchase or sale of securities or currencies.
The Portfolio's transactions in derivative instruments may be in the U.S. or
abroad and may include the purchase or sale of futures contracts on securities,
securities indices, other indices, other financial instruments or currencies;
options on futures contracts; exchange-traded and over-the-counter options on
securities, indices or currencies; and forward foreign currency exchange
contracts. The Portfolio's transactions in derivative instruments involve a risk
of loss or depreciation due to unanticipated adverse changes in securities
prices, interest rates, the other financial instruments' prices or currency
exchange rates, or the inability to close out a position or default by the
counterparty. The loss on derivative instruments (other than purchased options)
may exceed the Portfolio's initial investment in these instruments. In addition,
the Portfolio may lose the entire premium paid for purchased options that expire
before they can be profitably exercised by the Portfolio. The Portfolio incurs
transaction costs in opening and closing positions in derivative instruments.
There can be no assurance that the Investment Adviser's use of derivative
instruments will be advantageous to the Portfolio.
To the extent that the Portfolio enters into futures contracts, options on
futures contracts and options on foreign currencies traded on an exchange
regulated by the Commodity Futures Trading Commission ("CFTC"), in each case
that are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish these positions
(excluding the amount by which options are "in-the-money") may not exceed 5% of
the liquidation value of the Portfolio's investments, after taking into account
unrealized profits and unrealized losses on any contracts the Portfolio has
entered into.
Forward contracts are individually negotiated and privately traded by
currency traders and their customers. A forward contract involves an obligation
to purchase or sell a specific currency (or basket of currencies) for an agreed
price at a future date, which may be any fixed number of days from the date of
the contract. The Portfolio may engage in cross-hedging by using forward
contracts in one currency (or basket of currencies) to hedge against
fluctuations in the value of securities denominated in a different currency if
the Investment Adviser determines that there is an established historical
pattern or correlation between the two currencies (or the basket of currencies
and the underlying currency). Use of a different foreign currency magnifies the
Portfolio's exposure to foreign currency exchange rate fluctuations. The
Portfolio may also use forward contracts to shift its exposure to foreign
currency exchange rate changes from one currency to another. In addition, the
Portfolio may purchase forward contracts for non- hedging purposes when the
Investment Adviser anticipates that the foreign currency will appreciate in
value.
Interest Rate and Currency Swaps. The Portfolio may enter into interest rate
and currency swaps both for hedging purposes and to enhance return. Interest
rate swaps involve the exchange by the Portfolio with another party of their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies. The
Portfolio will enter into interest rate swaps on a net basis, so the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Portfolio is contractually obligated to make. If the
other party to an interest rate swap defaults, the Portfolio's risk of loss
consists of the net amount of interest payments that the Portfolio is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire payment stream in one designated currency in exchange
for the entire payment stream in the other designated currency. Therefore, the
entire principal value of a currency swap is subject to the risk that the other
party to the swap will default on its contractual delivery obligations.
The use of interest rate and currency swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The Investment Adviser has used
interest rate and currency swaps only to a limited extent but has utilized other
types of hedging techniques. If the Investment Adviser is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of the Fund would be less favorable than it would have
been if swaps were not used.
Securities loans, repurchase agreements, forward commitments and reverse
repurchase agreements. The Portfolio may lend its portfolio securities to
broker-dealers and may enter into repurchase agreements. These transactions must
be fully collateralized at all times, but involve some risk to the Portfolio if
the other party should default on its obligations and the lender is delayed or
prevented from recovering the collateral. The Portfolio may also purchase
securities for future delivery by means of "forward commitments."
The Portfolio may also enter into "reverse" repurchase agreements which
generally involve the sale of securities held and an agreement to repurchase the
securities at an agreed-upon price, date, and interest payment. The Portfolio
can invest the cash it receives or use it to meet redemption requests. Reverse
repurchase agreements and forward commitments may increase the overall
investment exposure of the Portfolio and involve investment leverage. Use of
investment leverage may increase the amount of any losses incurred by the
Portfolio in the case of adverse changes in market conditions or the failure of
the issuer of a security or financial instrument to meet its obligations. The
Portfolio may also enter into reverse repurchase agreements as a hedge against a
possible decline in the value of the foreign currency in which a debt security
is denominated by converting the foreign currency cash proceeds from the sale of
the debt security into U.S. dollars.
ADDITIONAL RISK AND INVESTMENT INFORMATION
Investments in foreign securities. Because foreign securities involve
foreign currencies, the values of the assets of the Portfolio and its net
investment income available for distribution may be affected favorably or
unfavorably by changes in currency exchange rates and exchange control
regulations. There may be less information publicly available about a foreign
issuer than about a U.S. issuer, and foreign issuers are not generally subject
to accounting, auditing, and financial reporting standards and practices
comparable to those in the United States. The willingness and ability of
sovereign issuers to pay principal and interest on government securities depends
on various economic factors, including among others the issuer's balance of
payments, overall debt level, and cash flow considerations related to the
availability of tax or other revenues to satisfy the issuer's obligations. The
securities of some foreign issuers are less liquid and at times more volatile
than securities of comparable U.S. issuers. Foreign brokerage commissions and
fees are also generally higher than in the United States. Foreign settlement
procedures and trade regulations may involve certain risks (such as delay in the
payment or delivery of securities or in the recovery of the Portfolio's assets
held abroad) and expenses not present in the settlement of domestic investments.
The Portfolio's investments may include securities issued by lesser-developed
countries, which are sometimes referred to as "emerging markets", and issuers
located in such countries. As a result, the Portfolio may be exposed to greater
risk and will be more dependent on the Investment Adviser's ability to assess
such risk than if the Portfolio invested solely in more developed countries.
In addition, there may be a possibility of nationalization or expropriation
of assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, and diplomatic developments which could
affect the values of the Portfolio's investments in certain foreign countries.
Legal remedies available to investors in certain foreign countries, including
remedies available in bankruptcy proceedings, may be more limited than those
available with respect to investments in the United States or in other foreign
countries. The laws of some foreign countries may limit the Portfolio's ability
to invest in securities of certain issuers located in those foreign countries.
Special tax considerations apply to foreign securities.
Investing in lower-rated securities. Lower quality debt securities are
subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations (credit risk) and may also be subject to price
volatility due to such factors as interest rate sensitivity, market perception
of the creditworthiness of the issuer and general market liquidity (market
risk). Lower rated and comparable unrated securities are also more likely to
react to real or perceived developments affecting market and credit risk than
are more highly rated securities, which react primarily to movements in the
general level of interest rates. The Portfolio may retain defaulted securities
in its portfolio when such retention is considered desirable by the Investment
Adviser. In the case of a defaulted security, the Portfolio may incur additional
expense seeking recovery of its investment. In the event the rating of a
security held by the Portfolio is downgraded, causing the Portfolio to have 35%
or more of its total assets in securities rated below investment grade, the
Investment Adviser will (in an orderly fashion within a reasonable period of
time) dispose of such securities as it deems necessary in order to comply with
this limitation. See the Appendix to this Prospectus for the asset composition
of the Portfolio for the fiscal year ended October 31, 1994. For a description
of securities ratings, see the Statement of Additional Information.
Interest Rate Risk. The value of Fund shares will reflect the value of the
Fund's interest in the Portfolio (which in turn, reflects the underlying value
of the Portfolio's assets and liabilities) and will change in response to
interest rate fluctuations. When interest rates decline, the value of debt
securities held by the Portfolio can be expected to rise. Conversely, when
interest rates rise, the value of debt securities held by the Portfolio can be
expected to decline.
Other Practices. The Portfolio may at times invest in so-called "zero-
coupon" bonds and (deferred interest bonds) and "payment-in-kind" bonds. Zero-
coupon bonds are issued at a significant discount from their principal amount
and interest is paid only at maturity rather than at intervals during the life
of the security. Payment-in-kind bonds allow the issuer, at its option, to make
current interest payments on the bonds either in cash or in additional bonds.
The values of zero-coupon bonds and payment-in-kind bonds are subject to greater
fluctuation in response to changes in market interest rates than bonds which pay
interest in cash currently. Because these instruments allow an issuer to avoid
the need to generate cash to meet current interest payments, they may involve
greater credit risks than bonds paying interest currently. Even though such
bonds do not pay current interest in cash, the Portfolio is nonetheless required
to accrue interest income on such investments and to distribute such amounts at
least annually to shareholders. Thus, the Portfolio could be required at times
to liquidate other investments in order to satisfy its distribution
requirements.
The Portfolio may temporarily borrow up to 5% of the value of its total
assets to satisfy redemption requests or settle securities transactions. Certain
securities held by the Portfolio may permit the issuer at its option to "call",
or redeem, its securities. If an issuer were to redeem securities held by the
Portfolio during a time of declining interest rates, the Portfolio may not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed.
The Portfolio is a "non-diversified" investment company under the Investment
Company Act of 1940. This means that it may invest its assets in a limited
number of issuers. Under the Internal Revenue Code, the Portfolio generally may
not, with respect to 50% of its total assets, invest more than 5% of its total
assets in securities of any one issuer, other than U.S. government securities.
With respect to the remaining 50% of its total assets, the Portfolio generally
may not invest more than 25% of its assets in securities of any one issuer,
other than U.S. government securities. Therefore, the Portfolio may invest up to
25% of its total assets in the securities of each of two issuers of securities
(other than U.S. government securities), which may subject the Portfolio to
greater risk to the extent that the Portfolio has invested a large portion of
its assets in the securities of only a few issuers and the values of such
securities declines.
Investment Restrictions. The Fund and the Portfolio have adopted certain
fundamental investment restrictions and policies which are enumerated in detail
in the Statement of Additional Information and which may not be changed unless
authorized by a shareholder vote or an investor vote, respectively. Except for
the fundamental investment restrictions and policies specifically enumerated in
the Statement of Additional Information, the investment objective and policies
of the Fund and the Portfolio are not fundamental policies and accordingly may
be changed by the Board of Trustees of the Trust and the Trustees of the
Portfolio without obtaining the approval of the Fund's shareholders or the
investors of the Portfolio, as the case may be. If any changes were made in the
Fund's investment objective, the Fund might have investment objectives different
from the objectives which an investor considered appropriate at the time the
investor became a shareholder in the Fund.
ORGANIZATION OF THE FUND AND THE PORTFOLIO
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The Fund is a non-diversified series of the Trust, a business trust established
under Massachusetts law pursuant to a Declaration of Trust dated May 7, 1984, as
amended and restated. The Trust is a mutual fund - an open-end management
investment company. THE BOARD OF TRUSTEES OF THE TRUST IS RESPONSIBLE FOR THE
OVERALL MANAGEMENT AND SUPERVISION OF ITS AFFAIRS. The Trust may issue an
unlimited number of shares of beneficial interest (no par value per share) in
one or more series and because the Trust can offer separate series (such as the
Fund) it is known as a "series company." When issued and outstanding, the shares
are fully paid and nonassessable by the Fund and redeemable as described under
"How to Redeem Fund Shares". Shareholders are entitled to one vote for each full
share held. Fractional shares may be voted proportionately. Shares have no
preemptive or conversion rights and are freely transferable. In the event of the
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets of the Fund available for distribution to shareholders.
THE PORTFOLIO IS ORGANIZED AS A TRUST UNDER THE LAWS OF THE STATE OF NEW
YORK AND INTENDS TO BE TREATED AS A PARTNERSHIP FOR FEDERAL TAX PURPOSES. The
Portfolio, as well as the Trust, intends to comply with all applicable federal
and state securities laws. The Portfolio's Declaration of Trust, as amended,
provides that the Fund and other entities permitted to invest in the Portfolio
(e.g., other U.S. and foreign investment companies, and common and commingled
trust funds) will each be liable for all obligations of the Portfolio. However,
the risk of the Fund incurring financial loss on account of such liability is
limited to circumstances in which both inadequate insurance exists and the
Portfolio itself is unable to meet its obligations. Accordingly, the Trustees of
the Trust believe that neither the Fund nor its shareholders will be adversely
affected by reason of the Fund investing in the Portfolio.
SPECIAL INFORMATION ON THE FUND/PORTFOLIO INVESTMENT STRUCTURE. An investor in
the Fund should be aware that the Fund, unlike mutual funds which directly
acquire and manage their own portfolios of securities, seeks to achieve its
investment objective by investing its assets in an interest in the Portfolio
(although the Fund may temporarily hold a de minimus amount of cash), which is a
separate investment company with an identical investment objective. Therefore,
the Fund's interest in the securities owned by the Portfolio is indirect. In
addition to selling an interest to the Fund, the Portfolio may sell interests to
other affiliated and non-affiliated mutual funds or institutional investors.
Such investors will invest in the Portfolio on the same terms and conditions and
will pay a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares at
the same public offering price as the Fund due to variations in sales
commissions and other operating expenses. Therefore, investors in the Fund
should be aware that these differences may result in differences in returns
experienced by investors in the various funds that invest in the Portfolio. Such
differences in returns are also present in other mutual fund structures,
including funds that have multiple classes of shares. For information regarding
the investment objective, policies and restrictions of the Portfolio, see "The
Fund's Investment Objective" and "Investment Policies and Risks". Further
information regarding investment practices may be found in the Statement of
Additional Information.
The Trustees of the Trust have considered the advantages and disadvantages
of investing the assets of the Fund in the Portfolio, as well as the advantages
and disadvantages of the two-tier format. The Trustees believe that the
structure offers opportunities for substantial growth in the assets of the
Portfolio, and affords the potential for economies of scale for the Fund, at
least when the assets of the Portfolio exceed $500 million. The public
shareholders of the Fund have previously approved the policy of investing the
Fund's assets in an interest in the Portfolio.
The Fund may withdraw (completely redeem) all its assets from the Portfolio
at any time if the Board of Trustees of the Trust determines that it is in the
best interest of the Fund to do so. The investment objective and the
nonfundamental investment policies of the Fund and the Portfolio may be changed
by the Trustees of the Trust and the Trustees of the Portfolio without obtaining
the approval of the shareholders of the Fund or the investors in the Portfolio,
as the case maybe. Any such change of the investment objective will be preceded
by thirty days' advance written notice to the shareholders of the Fund or the
investors in the Portfolio, as the case may be. If a shareholder redeems shares
because of a change in the nonfundamental objective or policies of the Fund,
those shares may be subject to a contingent deferred sales charge, as described
in "How to Redeem Fund Shares". In the event the Fund withdraws all of its
assets from the Portfolio, or the Board of Trustees of the Trust determines that
the investment objective of the Portfolio is no longer consistent with the
investment objective of the Fund, the Board of Trustees of the Trust would
consider what action might be taken, including investing the assets of the Fund
in another pooled investment entity or retaining an investment adviser to manage
the Fund's assets in accordance with its investment objective. The Fund's
investment performance may be affected by a withdrawal of all its assets from
the Portfolio.
Information regarding other pooled investment entities or funds which invest
in the Portfolio may be obtained by contacting Eaton Vance Distributors, Inc.
(the "Principal Underwriter" or "EVD"), 24 Federal Street, Boston, MA 02110,
(617) 482-8260. Smaller investors in the Portfolio may be adversely affected by
the actions of larger investors in the Portfolio. For example, if a large
investor withdraws from the Portfolio, the remaining investors may experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, the Portfolio may become less diverse, resulting in increased
portfolio risk, and experience decreasing economies of scale. However, this
possibility exists as well for historically structured mutual funds which have
large or institutional investors.
Until recently, the Administrator sponsored and advised historically
structured funds. Funds which invest all their assets in interests in a separate
investment company are a relatively new development in the mutual fund industry
and, therefore, the Fund may be subject to additional regulations than
historically structured funds.
The Declaration of Trust of the Portfolio provides that the Portfolio will
terminate 120 days after the complete withdrawal of the Fund or any other
investor in the Portfolio, unless either the remaining investors, by unanimous
vote at a meeting of such investors, or a majority of the Trustees of the
Portfolio, by written instrument consented to by all investors, agree to
continue the business of the Portfolio. This provision is consistent with
treatment of the Portfolio as a partnership for federal income tax purposes. See
"Distributions and Taxes" for further information. Whenever the Fund as an
investor in the Portfolio is requested to vote on matters pertaining to the
Portfolio (other than the termination of the Portfolio's business, which may be
determined by the Trustees of the Portfolio without investor approval), the Fund
will hold a meeting of Fund shareholders and will vote its interest in the
Portfolio for or against such matters proportionately to the instructions to
vote for or against such matters received from Fund shareholders. The Fund shall
vote shares for which it receives no voting instructions in the same proportion
as the shares for which it receives voting instructions. Other investors in the
Portfolio may alone or collectively acquire sufficient voting interests in the
Portfolio to control matters relating to the operation of the Portfolio, which
may require the Fund to withdraw its investment in the Portfolio or take other
appropriate action. Any such withdrawal could result in a distribution "in kind"
of portfolio securities (as opposed to a cash distribution from the Portfolio).
If securities are distributed, the Fund could incur brokerage, tax or other
charges in converting the securities to cash. In addition, the distribution in
kind may result in a less diversified portfolio of investments or adversely
affect the liquidity of the Fund. Notwithstanding the above, there are other
means for meeting shareholder redemption requests, such as borrowing.
The Trustees of the Trust, including a majority of the noninterested
Trustees, have approved written procedures designed to identify and address any
potential conflicts of interest arising from the fact that the Trustees of the
Trust and the Trustees of the Portfolio are the same. Such procedures require
each Board to take actions to resolve any conflict of interest between the Fund
and the Portfolio, and it is possible that the creation of separate Boards may
be considered. For further information concerning the Trustees and officers of
the Trust and the Portfolio, see the Statement of Additional Information.
MANAGEMENT OF THE FUND AND THE PORTFOLIO
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THE PORTFOLIO ENGAGES BOSTON MANAGEMENT AND RESEARCH ("BMR"), A WHOLLY-OWNED
SUBSIDIARY OF EATON VANCE MANAGEMENT ("EATON VANCE"), AS ITS INVESTMENT ADVISER.
EATON VANCE, ITS AFFILIATES AND ITS PREDECESSOR COMPANIES HAVE BEEN MANAGING
ASSETS OF INDIVIDUALS AND INSTITUTIONS SINCE 1924 AND MANAGING INVESTMENT
COMPANIES SINCE 1931. BMR's expertise in the management of fixed-income
securities ranges from government obligations, high-grade corporate and
municipal securities, foreign debt and bank loan interests to higher yielding
instruments. BMR's fixed-income division is armed with the research and
technical ability to gain immediate access to interest rate data around the
world.
Acting under the general supervision of the Board of Trustees of the
Portfolio, BMR manages the Portfolio's investments and affairs, and furnishes
for the use of the Portfolio office space and all necessary office facilities,
equipment and personnel for servicing the investments of the Portfolio. Under
its investment advisory agreement with the Portfolio, BMR receives a monthly
advisory fee equal to the aggregate of
(a) a daily asset-based fee computed by applying the annual asset rate
applicable to that portion of the total daily net assets in each
Category as indicated below, plus
(b) a daily income-based fee computed by applying the daily income rate
applicable to that portion of the total daily gross income (which
portion shall bear the same relationship to the total daily gross income
on such day as that portion of the total daily net assets in the same
Category bears to the total daily net assets on such day) in each
Category as indicated below:
<TABLE>
<CAPTION>
ANNUAL DAILY
CATEGORY DAILY NET ASSETS ASSET RATE INCOME RATE
-------- ---------------- ---------- -----------
<C> <S> <C> <C>
1 up to $500 million ................................................ 0.275% 2.75%
2 $500 million but less than $1 billion ............................. 0.250% 2.50%
3 $1 billion but less than $1.5 billion ............................. 0.225% 2.25%
4 $1.5 billion but less than $2 billion ............................. 0.200% 2.00%
5 $2 billion but less than $3 billion ............................... 0.175% 1.75%
6 $3 billion and over ............................................... 0.150% 1.50%
</TABLE>
Total daily gross income is the total gross investment income, exclusive of
capital gains and losses on investments and before deduction of expenses, earned
each day by the Portfolio.
As at October 31, 1994, the Portfolio had net assets of $236,468,766. For
the period from the start of business, March 1, 1994, to October 31, 1994, the
Portfolio paid BMR advisory fees equivalent to 0.49% (annualized) of the
Portfolio's average daily net assets for such period.
As of the close of business, February 28, 1994, the Fund transferred its
assets to the Portfolio in exchange for an interest in the Portfolio. Prior to
such date, the Fund retained Eaton Vance as its investment adviser pursuant to
the same fee schedule. For the period from November 1, 1993 to March 1, 1994,
the Fund paid Eaton Vance advisory fees equivalent to .54% (annualized) of the
Fund's average daily net assets for such period.
BMR OR EATON VANCE ACTS AS INVESTMENT ADVISER TO INVESTMENT COMPANIES AND
VARIOUS INDIVIDUAL AND INSTITUTIONAL CLIENTS WITH ASSETS UNDER MANAGEMENT OF
APPROXIMATELY $15 BILLION. Eaton Vance is a wholly-owned subsidiary of Eaton
Vance Corp., a publicly held holding company. Eaton Vance Corp., through its
subsidiaries and affiliates, engages in investment management and marketing
activities, fiduciary and banking services, oil and gas operations, real estate
investment, consulting and management, and development of precious metals
properties.
Mark S. Venezia has acted as the portfolio manager of the Portfolio since it
commenced operations. He was the Fund's portfolio manager from its inception
until the date its assets were transferred to the Portfolio. Mr. Venezia has
been a Vice President of Eaton Vance since 1987 and of BMR since 1992.
The Portfolio believes that most of the obligations which it will acquire
will normally be traded on a net basis (without commission) through
broker-dealers and banks acting for their own account. Such firms attempt to
profit from such transactions by buying at the bid price and selling at the
higher asked price of the market, and the difference is customarily referred to
as the spread. In selecting firms which will execute portfolio transactions, BMR
judges their professional ability and quality of service and uses its best
efforts to obtain execution at prices which are advantageous to the Portfolio
and at reasonably competitive spreads. Subject to the foregoing, BMR may
consider sales of shares of the Fund or of other investment companies sponsored
by BMR or Eaton Vance as a factor in the selection of firms to execute portfolio
transactions.
The Portfolio also engages BMR as its Administrator under an administration
agreement. Under the administration agreement, BMR is responsible for reviewing
and supervising the provision of custody services to the Portfolio and making
related reports and recommendations to the Board of Trustees of the Portfolio;
for providing certain valuation, legal, accounting and tax services in
connection with investments with foreign issuers or guarantors, investments
denominated in foreign currencies and transactions in derivative instruments;
and for such other special services as the Board may direct. BMR also furnishes
the office facilities and personnel necessary for providing these services. As
compensation for these services, BMR receives a monthly administration fee at an
annual rate of .15% of the Portfolio's average daily net assets.
The Trust has retained the services of Eaton Vance to act as Administrator
of the Fund. The Trust has not retained the services of an investment adviser
since the Trust seeks to achieve the investment objective of the Fund by
investing the Fund's assets in the Portfolio. As Administrator, Eaton Vance
provides the Fund with general office facilities and supervises the overall
administration of the Fund. For these services, Eaton Vance currently receives
no compensation. The Trustees of the Trust may determine, in the future, to
compensate Eaton Vance for such services.
The Portfolio and the Fund, as the case may be, will each be responsible for
all of its respective costs and expenses not expressly stated to be payable by
BMR under the investment advisory agreement and the administration agreement, by
Eaton Vance under the administrative services agreement, or by EVD under the
distribution agreement.
DISTRIBUTION PLAN
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THE FUND FINANCES DISTRIBUTION ACTIVITIES AND HAS ADOPTED A DISTRIBUTION PLAN
(THE "PLAN") PURSUANT TO RULE 12B-1 UNDER THE 1940 ACT. Rule 12b-1 permits a
mutual fund, such as the Fund, to finance distribution activities and bear
expenses associated with the distribution of its shares provided that any
payments made by the Fund are made pursuant to a written plan adopted in
accordance with the Rule. The Plan is subject to, and complies with, the sales
charge rule of the National Association of Securities Dealers, Inc. (the "NASD
Rule"). The Plan is described further in the Statement of Additional
Information, and the following is a description of the salient features of the
Plan. The Plan provides that the Fund, subject to the NASD Rule, will pay sales
commissions and distribution fees to the Principal Underwriter only after and as
a result of the sale of shares of the Fund. On each sale of Fund shares
(excluding reinvestment of distributions) the Fund will pay the Principal
Underwriter amounts representing (i) sales commissions equal to 4.5% of the
amount received by the Fund for each share sold and (ii) distribution fees
calculated by applying the rate of 1% over the prime rate then reported in The
Wall Street Journal to the outstanding balance of Uncovered Distribution Charges
(as described below) of the Principal Underwriter. The Principal Underwriter
currently expects to pay sales commissions (except on exchange transactions and
reinvestments) to a financial service firm (an "Authorized Firm") at the time of
sale equal to 3.5% of the purchase price of the shares sold by such Firm. The
Principal Underwriter will use its own funds (which may be borrowed from banks)
to pay such commissions. Because the payment of the sales commissions and
distribution fees to the Principal Underwriter is subject to the NASD Rule
described below, it will take the Principal Underwriter a number of years to
recoup the sales commissions paid by it to Authorized Firms from the payments
received by it from the Fund pursuant to the Plan.
THE NASD RULE REQUIRES THE FUND TO LIMIT ITS ANNUAL PAYMENTS OF SALES
COMMISSIONS AND DISTRIBUTION FEES TO AN AMOUNT NOT EXCEEDING .75% OF THE FUND'S
AVERAGE DAILY NET ASSETS FOR EACH FISCAL YEAR. Under its Plan, the Fund accrues
daily an amount at the rate of 1/365 of .75% of the Fund's net assets, and pays
such accrued amounts monthly to the Principal Underwriter. The Plan requires
such accruals to be automatically discontinued during any period in which there
are no outstanding Uncovered Distribution Charges under the Plan. Uncovered
Distribution Charges are calculated daily and, briefly, are equivalent to all
unpaid sales commissions and distribution fees to which the Principal
Underwriter is entitled under the Plan less all contingent deferred sales
charges theretofore paid to the Principal Underwriter. The Eaton Vance
organization may be considered to have realized a profit under the Plan if at
any point in time the aggregate amounts of all payments received by the
Principal Underwriter from the Fund pursuant to the Plan, including any
contingent deferred sales charges, have exceeded the total expenses theretofore
incurred by such organization in distributing shares of the Fund. Total expenses
for this purpose will include an allocable portion of the overhead costs of such
organization and its branch offices.
Because of the NASD Rule limitation on the amount of sales commissions and
distribution fees paid during any fiscal year, a high level of sales of Fund
shares during the initial years of the Fund's operations would cause a large
portion of the sales commissions attributable to a sale of Fund shares to be
accrued and paid by the Fund to the Principal Underwriter in fiscal years
subsequent to the year in which such shares were sold. This spreading of sales
commissions payments under the Plan over an extended period would result in the
incurrence and payment of increased distribution fees under the Plan.
For the fiscal year ended October 31, 1994, the Fund paid sales commissions
under the Plan equivalent to 0.75% of the Fund's average daily net assets for
such year. As at October 31, 1994, the outstanding Uncovered Distribution
Charges of the Principal Underwriter calculated under the Plan amounted to
approximately, $17,473,000 (which amount was equivalent to 7.5% of the Fund's
net assets on such day).
THE PLAN ALSO AUTHORIZES THE FUND TO MAKE PAYMENTS OF SERVICE FEES TO THE
PRINCIPAL UNDERWRITER, AUTHORIZED FIRMS AND OTHER PERSONS IN AMOUNTS NOT
EXCEEDING .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 .25% of the Fund's average daily net
assets for any fiscal year based on the value of Fund shares sold by such
persons and remaining outstanding for at least twelve months. As permitted by
the NASD Rule, such 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 the Principal
Underwriter, and as such are not subject to automatic discontinuance when there
are no outstanding Uncovered Distribution Charges of the Principal Underwriter.
For the fiscal year ended October 31, 1994, the Fund made service fee payments
equivalent to .20% of the Fund's average daily net assets for such year.
The Principal Underwriter may, from time to time, at its own expense,
provide additional incentives to Authorized Firms which employ registered
representatives who sell the Fund's shares and/or shares of other funds
distributed by the Principal Underwriter. In some instances, such additional
incentives may be offered only to certain Authorized Firms whose representatives
sell or are expected to sell significant amounts of shares. In addition, the
Principal Underwriter may from time to time increase or decrease the sales
commissions payable to Authorized Firms.
The Fund may, in its absolute discretion, suspend, discontinue or limit the
offering of its shares at any time. In determining whether any such action
should be taken, the Fund's management intends to consider all relevant factors,
including without limitation the size of the Fund, the investment climate and
market conditions, the volume of sales and redemptions of Fund shares, and the
amount of Uncovered Distribution Charges of the Principal Underwriter. The Plan
may continue in effect and payments may be made under the Plan following any
such suspension, discontinuance or limitation of the offering of Fund shares;
however, the Fund is not contractually obligated to continue the Plan for any
particular period of time. Suspension of the offering of Fund shares would not,
of course, affect a shareholder's ability to redeem shares.
VALUING FUND SHARES
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THE FUND VALUES ITS SHARES ONCE ON EACH DAY THE NEW YORK STOCK EXCHANGE (THE
"EXCHANGE") IS OPEN FOR TRADING, as of the close of regular trading on the
Exchange (normally 4:00 p.m. New York time). The Fund's net asset value per
share is determined by its custodian, Investors Bank & Trust Company ("IBT"),
(as agent for the Fund) in the manner authorized by the Board of Trustees of the
Trust. Net asset value is computed by dividing the value of the Fund's total
assets, less its liabilities, by the number of shares outstanding. Because the
Fund invests its assets in an interest in the Portfolio, the Fund's net asset
value will reflect the value of its interest in the Portfolio (which, in turn,
reflects the underlying value of the Portfolio's assets and liabilities).
Authorized Firms must communicate an investor's order to the Principal
Underwriter prior to the close of the Principal Underwriter's business day to
receive that day's net asset value per Fund share. It is the Authorized Firms'
responsibility to transmit orders promptly to the Principal Underwriter, which
is a wholly-owned subsidiary of Eaton Vance.
The Portfolio's net asset value is also determined as of the close of
regular trading on the Exchange by IBT (as custodian and agent for the
Portfolio) in the manner authorized by the Trustees of the Portfolio. Net asset
value is computed by subtracting the liabilities of the Portfolio from the value
of its total assets. Most debt securities are valued on the basis of market
valuations furnished by pricing services. For further information regarding the
valuation of the Portfolio's assets, see "Determination of Net Asset Value" in
the Statement of Additional Information. Eaton Vance Corp. owns 77.3% of the
outstanding stock of IBT, the Fund's and the Portfolio's custodian. Eaton Vance
Corp. has announced its intention to sell its interest in IBT in 1995.
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SHAREHOLDERS MAY DETERMINE THE VALUE OF THEIR INVESTMENT BY MULTIPLYING
THE NUMBER OF FUND SHARES OWNED BY THE CURRENT NET ASSET VALUE PER SHARE.
- ------------------------------------------------------------------------------
HOW TO BUY FUND SHARES
- ------------------------------------------------------------------------------
SHARES OF THE FUND MAY BE PURCHASED FOR CASH OR MAY BE ACQUIRED IN EXCHANGE FOR
SECURITIES. Investors may purchase shares of the Fund through Authorized Firms
at the net asset value per share of the Fund next determined after an order is
effective. The Fund may suspend the offering of shares at any time and may
refuse an order for the purchase of shares. An Authorized Firm may charge its
customers a fee in connection with transactions executed by that Firm.
An initial investment in the Fund must be at least $1,000. Once an account
has been established, the investor may send investments of $50 or more at any
time directly to the Fund's transfer agent (the "Transfer Agent") as follows:
The Shareholder Services Group, Inc., BOS725, P.O. Box 1559, Boston, MA 02104.
The $1,000 minimum initial investment is waived for Bank Automated Investing
accounts, which may be established with an investment of $50 or more. See "Eaton
Vance Shareholder Services".
In connection with employee benefit or other continuous group purchase plans
under which the average initial purchase by a participant of the plan is $1,000
or more, the Fund may accept initial investments of less than $1,000 on the part
of an individual participant. In the event a shareholder who is a participant of
such a plan terminates participation in the plan, his or her shares will be
transferred to a regular individual account. However, such account will be
subject to the right of redemption by the Fund as described below under "How to
Redeem Fund Shares."
ACQUIRING FUND SHARES IN EXCHANGE FOR SECURITIES. IBT, as escrow agent, will
receive securities acceptable to Eaton Vance, as Administrator, in exchange for
Fund shares at their net asset value as determined above. The minimum value of
securities (or securities and cash) accepted for deposit is $5,000. Securities
accepted will be sold by IBT as agent for the account of their owner on the day
of their receipt by IBT or as soon thereafter as possible. The number of Fund
shares to be issued in exchange for securities will be the aggregate proceeds
from the sale of such securities, divided by the applicable net asset value per
Fund share on the day such proceeds are received. Eaton Vance will use
reasonable efforts to obtain the then current market price for such securities,
but does not guarantee the best price available. Eaton Vance will absorb any
transaction costs, such as commissions, on the sale of the securities.
Securities determined to be acceptable should be transferred via book entry
or physically delivered, in proper form for transfer, through an Authorized
Firm, together with a completed and signed Letter of Transmittal in approved
form (available from Authorized Firms), as follows:
IN THE CASE OF BOOK ENTRY:
Deliver through Depository Trust Co.
Broker #2212
Investors Bank & Trust Company
For A/C EV Marathon Strategic Income Fund
IN THE CASE OF PHYSICAL DELIVERY:
Investors Bank & Trust Company
Attention: EV Marathon Strategic Income Fund
Physical Securities Processing Settlement Area
89 South Street
Boston, MA 02111
Investors who are contemplating an exchange of securities for shares of the
Fund, or their representatives, must contact Eaton Vance to determine whether
the securities are acceptable before forwarding such securities to IBT. Eaton
Vance reserves the right to reject any securities. Exchanging securities for
Fund shares may create a taxable gain or loss. Each investor should consult his
or her tax adviser with respect to the particular Federal, state and local tax
consequences of exchanging securities for Fund shares.
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IF YOU DON'T HAVE AN AUTHORIZED FIRM, EATON VANCE CAN RECOMMEND ONE.
- ------------------------------------------------------------------------------
HOW TO REDEEM FUND SHARES
- ------------------------------------------------------------------------------
A SHAREHOLDER MAY REDEEM FUND SHARES BY DELIVERING TO THE SHAREHOLDER SERVICES
GROUP, INC., BOS725, P.O. BOX 1559, BOSTON, MA 02104, during its business hours
a written request for redemption in good order, plus any stock certificates with
executed stock powers. The redemption price will be based on the net asset value
per Fund share next computed after such delivery. Good order means that all
relevant documents must be endorsed by the record owner (s) exactly as the
shares are registered and the signature(s) must be guaranteed by a member of
either the Securities Transfer Association's STAMP program or the New York Stock
Exchange's Medallion Signature Program, or certain banks, savings and loan
institutions, credit unions, securities dealers, securities exchanges, clearing
agencies and registered securities associations as required by a regulation of
the Securities and Exchange Commission and acceptable to The Shareholder
Services Group, Inc. In addition, in some cases, good order may require the
furnishing of additional documents such as where shares are registered in the
name of a corporation, partnership or fiduciary.
Within seven days after receipt of a redemption request in good order by The
Shareholder Services Group, Inc., the Fund will make payment in cash for the net
asset value of the redeemed shares as of the date determined above, reduced by
the amount of any applicable contingent deferred sales charge (described below)
and any federal income tax required to be withheld. Although the Fund normally
expects to make payment in cash for redeemed shares, the Trust, subject to
compliance with applicable regulations, has reserved the right to pay the
redemption price of shares of the Fund, either totally or partially, by a
distribution in kind of readily marketable securities withdrawn by the Fund from
the Portfolio. The securities so distributed would be valued pursuant to the
Portfolio's valuation procedures. If a shareholder received a distribution in
kind, the shareholder could incur brokerage or other charges in converting the
securities to cash.
To sell shares at their net asset value through an Authorized Firm (a
repurchase), a shareholder can place a repurchase order with the Authorized
Firm, which may charge a fee. The value of such shares is based upon the net
asset value calculated after EVD, as the Fund's agent, receives the order. It is
the Authorized Firm's responsibility to transmit promptly repurchase orders to
EVD. Throughout this Prospectus, the word "redemption" is generally meant to
include a repurchase.
If shares were recently purchased, the proceeds of redemption (or
repurchase) will not be sent until the check (including a certified or cashier's
check) received for the shares purchased has cleared. Payment for shares
tendered for redemption may be delayed up to 15 days from the purchase date when
the purchase check has not yet cleared. Redemptions or repurchases may result in
a taxable gain or loss.
Due to the high cost of maintaining small accounts, the Fund reserves the
right to redeem accounts with balances of less than $1,000. Prior to such a
redemption, shareholders will be given 60 days' written notice to make an
additional purchase. Thus, an investor making an initial investment of $1,000
would not be able to redeem shares without being subject to this policy.
However, no such redemptions would be required by the Fund if the cause of the
low account balance was a reduction in the net asset value of Fund shares. No
contingent deferred sales charge will be imposed with respect to such
involuntary redemptions.
CONTINGENT DEFERRED SALES CHARGE. Shares redeemed within the first four years of
their purchase (except shares acquired through the reinvestment of
distributions) generally will be subject to a contingent deferred sales charge.
This contingent deferred sales charge is imposed on any redemption the amount of
which exceeds the aggregate value at the time of redemption of (a) all shares in
the account purchased more than four years prior to the redemption, (b) all
shares in the account acquired through reinvestment of distributions, and (c)
the increase, if any, of value of all other shares in the account (namely those
purchased within the four years preceding the redemption) over the purchase
price of such shares. Redemptions are processed in a manner to maximize the
amount of redemption proceeds which will not be subject to a contingent deferred
sales charge. That is, each redemption will be assumed to have been made first
from the exempt amounts referred to in clauses (a), (b) and (c) above, and
second through liquidation of those shares in the account referred to in clause
(c) on a first-in-first-out basis. Any contingent deferred sales charge which is
required to be imposed on share redemptions will be made in accordance with the
following schedule:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ........................... 3.0%
Second .......................... 2.5%
Third ........................... 2.0%
Fourth .......................... 1.0%
Fifth and following ............. 0.0%
In calculating the contingent deferred sales charge upon the redemption of
Fund shares acquired in an exchange for shares of a fund currently listed under
"The Eaton Vance Exchange Privilege", the contingent deferred sales charge
schedule applicable to the shares at the time of purchase will apply and the
purchase of Fund shares acquired in the exchange is deemed to have occurred at
the time of the original purchase of the exchanged shares.
No contingent deferred sales charge will be imposed on Fund shares which
have been sold to Eaton Vance or its affiliates, or to their respective
employees or clients. The contingent deferred sales charge will be waived for
shares redeemed (1) pursuant to a Withdrawal Plan (see "Eaton Vance Shareholder
Services") or (2) as part of a required distribution from a tax-sheltered
retirement plan. The charge will also be waived on redemptions of shares
purchased on or after January 27, 1995 following the death of all beneficial
owners of such shares, provided the redemption is requested within one year of
death (a death certificate and other applicable documents may be required). The
contingent deferred sales charge will be paid to the Principal Underwriter or
the Fund. When paid to the Principal Underwriter it will reduce the amount of
Uncovered Distribution Charges calculated under the Fund's Distribution Plan.
See "Distribution Plan."
- ------------------------------------------------------------------------------
THE FOLLOWING EXAMPLE ILLUSTRATES THE OPERATION OF THE CONTINGENT DEFERRED
SALES CHARGE. ASSUME THAT AN INVESTOR y PURCHASES $10,000 OF THE FUND'S
SHARES AND THAT 16 MONTHS LATER THE VALUE OF THE ACCOUNT HAS GROWN THROUGH
INVESTMENT y PERFORMANCE AND REINVESTMENT OF DIVIDENDS TO $12,000. THE
INVESTOR THEN MAY REDEEM UP TO $2,000 OF SHARES WITHOUT y INCURRING A
CONTINGENT DEFERRED SALES CHARGE. IF THE INVESTOR SHOULD REDEEM $3,000 OF
SHARES, A CHARGE WOULD BE IMPOSED y ON $1,000 OF THE REDEMPTION. THE RATE
WOULD BE 2.5% BECAUSE THE REDEMPTION WAS MADE IN THE SECOND YEAR AFTER THE
PURCHASE WAS MADE AND THE CHARGE WOULD BE $25.
- ------------------------------------------------------------------------------
REPORTS TO SHAREHOLDERS
- ------------------------------------------------------------------------------
THE FUND WILL ISSUE TO ITS SHAREHOLDERS SEMI-ANNUAL AND ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS. Financial statements included in annual reports
are audited by the Fund's independent accountants. Shortly after the end of each
calendar year, the Fund will furnish all shareholders with information necessary
for preparing federal and state tax returns.
THE LIFETIME INVESTING ACCOUNT/DISTRIBUTION OPTIONS
- ------------------------------------------------------------------------------
AFTER AN INVESTOR MAKES AN INITIAL PURCHASE OF FUND SHARES, THE FUND'S TRANSFER
AGENT, THE SHAREHOLDER SERVICES GROUP, INC., WILL SET UP A LIFETIME INVESTING
ACCOUNT FOR THE INVESTOR ON THE FUND'S RECORDS. This account is a complete
record of all transactions between the investor and the Fund which at all times
shows the balance of shares owned. The Fund will not issue share certificates
except upon request.
At least quarterly, shareholders will receive a statement showing complete
details of any transaction and the current balance in the account. THE LIFETIME
INVESTING ACCOUNT ALSO PERMITS A SHAREHOLDER TO MAKE ADDITIONAL INVESTMENTS IN
SHARES BY SENDING A CHECK FOR $50 OR MORE to The Shareholder Services Group,
Inc.
Any questions concerning a shareholder's account or services available may
be directed by telephone to EATON VANCE SHAREHOLDER SERVICES at 800-225-6265,
extension 2, or in writing to The Shareholder Services Group, Inc., BOS725, P.O.
Box 1559, Boston, MA 02104 (Please provide the name of the shareholder, the Fund
and the account number).
THE FOLLOWING DISTRIBUTION OPTIONS WILL BE AVAILABLE TO ALL LIFETIME
INVESTING ACCOUNTS and may be changed as often as desired by written notice to
the Fund's dividend disbursing agent, The Shareholder Services Group, Inc.,
BOS725, P.O. Box 1559, Boston, MA 02104. The currently effective option will
appear on each account statement.
Share Option -- Dividends and capital gains will be reinvested in additional
shares.
Income Option -- Dividends will be paid in cash, and capital gains will be
reinvested in additional shares.
Cash Option -- Dividends and capital gains will be paid in cash.
The Share Option will be assigned if no other option is specified.
Distributions, including those reinvested, will be reduced by any withholding
required under federal income tax laws.
If the Income Option or Cash Option has been selected, dividend and/or
capital gains distribution checks which are returned by the United States Postal
Service as not deliverable or which remain uncashed for six months or more will
be reinvested in the account in shares at the then current net asset value.
Furthermore, the distribution option on the account will be automatically
changed to the Share Option until such time as the shareholder selects a
different option.
DISTRIBUTION INVESTMENT OPTION. In addition to the distribution options set
forth above, dividends and/or capital gains may be invested in additional shares
of another Eaton Vance fund. Before selecting this option, a shareholder should
obtain a prospectus of the other Eaton Vance fund and consider its objectives
and policies carefully.
"STREET NAME" ACCOUNTS. If shares of the Fund are held in a "street name"
account with an Authorized Firm, all recordkeeping, transaction processing and
payments of distributions relating to the beneficial owner's account will be
performed by the Authorized Firm, and not by the Fund and its Transfer Agent.
Since the Fund will have no record of the beneficial owner's transactions, a
beneficial owner should contact the Authorized Firm to purchase, redeem or
exchange shares, to make changes in or give instructions concerning the account,
or to obtain information about the account. The transfer of shares in a "street
name" account to an account with another dealer or to an account directly with
the Fund involves special procedures and will require the beneficial owner to
obtain historical purchase information about the shares in the account from the
Authorized Firm. Before establishing a "street name" account with an investment
firm, or transferring the account to another investment firm, an investor
wishing to reinvest distributions should determine whether the firm which will
hold the shares allows reinvestment of distributions in "street name" accounts.
- ------------------------------------------------------------------------------
UNDER A LIFETIME INVESTING ACCOUNT A SHAREHOLDER CAN MAKE ADDITIONAL
INVESTMENTS IN SHARES OF THE FUND BY SENDING A CHECK FOR $50 OR MORE.
- ------------------------------------------------------------------------------
THE EATON VANCE EXCHANGE PRIVILEGE
- ------------------------------------------------------------------------------
Shares of the Fund currently may be exchanged for one or more funds in the Eaton
Vance Marathon Group of Funds or Eaton Vance Money Market Fund, which are
distributed subject to a contingent deferred sales charge. Fund shares purchased
directly or acquired in an exchange from any EV Marathon Limited Maturity Tax
Free Fund may also be exchanged for shares of Eaton Vance Prime Rate Reserves
which are distributed subject to an early withdrawal charge. Exchanges will be
made on the basis of the net asset value per share of each fund at the time of
exchange, provided that such exchange offers are available only in states where
shares of the fund being acquired may legally be sold.
Each exchange must involve shares which have a net asset value of at least
$1,000. The exchange privilege may be changed or discontinued without penalty.
Shareholders will be given sixty (60) days' notice prior to any termination or
material amendment of the exchange privilege. The Fund does not permit the
exchange privilege to be used for "Market Timing" and may terminate the exchange
privilege for any shareholder account engaged in Market Timing activity. Any
shareholder account for which more than two round-trip exchanges are made within
any twelve month period will be deemed to be engaged in Market Timing.
Furthermore, a group of unrelated accounts for which exchanges are entered
contemporaneously by a financial intermediary will be considered to be engaged
in Market Timing.
The Shareholder Services Group, Inc. makes exchanges at the next determined
net asset value after receiving an exchange request in good order (see "How to
Redeem Fund Shares"). Consult The Shareholder Services Group, Inc. for
additional information concerning the exchange privilege. Applications and
prospectuses of the other funds are available from Authorized Firms or the
Principal Underwriter. The prospectus for each fund describes its investment
objectives and policies, and shareholders should obtain a prospectus and
consider these objectives and policies carefully before requesting an exchange.
No contingent deferred sales charge is imposed on exchanges. For purposes of
calculating the contingent deferred sales charge upon the redemption of shares
acquired in an exchange, the contingent deferred sales charge schedule
applicable to the shares at the time of purchase will apply and the purchase of
shares acquired in one or more exchanges is deemed to have occurred at the time
of the original purchase of the exchanged shares. For the contingent deferred
sales charge or early withdrawal charge schedule applicable to the Fund, Eaton
Vance Prime Rate Reserves and Class I shares of any EV Marathon Limited Maturity
Fund, see "How to Redeem Fund Shares". The contingent deferred sales charge
schedule applicable to the other EV Marathon funds is 5%, 5%, 4%, 3%, 2%, or 1%
in the event of a redemption occurring in the first, second, third, fourth,
fifth or sixth year, respectively, after the original share purchase.
Shares of other funds in the Eaton Vance Marathon Group of Funds and shares
of Eaton Vance Money Market Fund may be exchanged for Fund shares on the basis
of the net asset value per share of each fund at the time of the exchange, but
subject to any restrictions or qualifications set forth in the current
prospectus of any such fund.
Telephone exchanges are accepted by The Shareholder Services Group, Inc.,
provided that the investor has not disclaimed in writing the use of the
privilege. To effect such exchanges, call The Shareholder Services Group, Inc.
at 800-262-1122 or, within Massachusetts, 617-573-9403, Monday through Friday,
9:00 A.M. to 4:00 P.M. (Eastern Standard Time). Shares acquired by telephone
exchanges must be registered in the same name(s) and with the same address as
the shares being exchanged. Neither the Fund, the Principal Underwriter nor The
Shareholder Services Group, Inc. will be responsible for the authenticity of
exchange instructions received by telephone; provided that reasonable procedures
to confirm that instructions communicated are genuine have been followed.
Telephone instructions will be tape recorded. In times of drastic economic or
market changes, a telephone exchange may be difficult to implement. An exchange
may result in a taxable gain or loss.
EATON VANCE SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
THE FUND OFFERS THE FOLLOWING SERVICES, WHICH ARE VOLUNTARY, INVOLVE NO EXTRA
CHARGE, AND MAY BE CHANGED OR DISCONTINUED WITHOUT PENALTY AT ANY TIME. Full
information on each of the services described below and an application, where
required, are available from Authorized Firms or the Principal Underwriter. The
cost of administering such services for the benefit of shareholders who
participate in them is borne by the Fund as an expense to all shareholders.
INVEST-BY-MAIL -- FOR PERIODIC SHARE ACCUMULATION: Once the $1,000 minimum
investment has been made, checks of $50 or more payable to the order of EV
Marathon Strategic Income Fund may be mailed directly to The Shareholder
Services Group, Inc., BOS725, P.O. Box 1559, Boston, MA 02104 at any time --
whether or not distributions are reinvested. The name of the shareholder, the
Fund and the account number should accompany each investment.
BANK AUTOMATED INVESTING -- FOR REGULAR SHARE ACCUMULATION: Cash investments of
$50 or more may be made automatically each month or quarter from a shareholder's
bank account. The $1,000 minimum initial investment and small account redemption
policy are waived for these accounts.
WITHDRAWAL PLAN: A shareholder may draw on shareholdings systematically with
monthly or quarterly checks in an aggregate amount that does not exceed annually
12% of the account balance at the time the Plan is established. Such amount will
not be subject to a contingent deferred sales charge. See "How to Redeem Fund
Shares". A minimum deposit of $5,000 in shares is required.
REINVESTMENT PRIVILEGE: A SHAREHOLDER WHO HAS REPURCHASED OR REDEEMED SHARES MAY
REINVEST, WITH CREDIT FOR ANY CONTINGENT DEFERRED SALES CHARGES PAID ON THE
REDEEMED OR REPURCHASED SHARES, ANY PORTION OR ALL OF THE REPURCHASE OR
REDEMPTION PROCEEDS (PLUS THAT AMOUNT NECESSARY TO ACQUIRE A FRACTIONAL SHARE TO
ROUND OFF THE PURCHASE TO THE NEAREST FULL SHARE) IN SHARES OF THE FUND,
provided that the reinvestment is effected within 60 days after such repurchase
or redemption, and the privilege has not been used more than once in the prior
12 months. Shares are sold to a reinvesting shareholder at the next determined
net asset value following timely receipt of a written purchase order by the
Principal Underwriter or by the Fund (or by the Fund's Transfer Agent). To the
extent that any shares are sold at a loss and the proceeds are reinvested in
shares of the Fund (or other shares of the Fund are acquired within the period
beginning 30 days before and ending 30 days after the date of redemption), some
or all of the loss generally will not be allowed as a tax deduction.
Shareholders should consult their tax advisers concerning the tax consequences
of reinvestments.
TAX-SHELTERED RETIREMENT PLANS: Shares of the Fund are available for purchase
in connection with the following tax-sheltered retirement plans:
--Pension and Profit Sharing Plans for self-employed individuals,
corporations and non-profit organizations;
--Individual Retirement Account Plans for individuals and their non-
employed spouses; and
--403(b) Retirement Plans for employees of public school systems, hospitals,
colleges and other non-profit organizations meeting certain requirements
of the Internal Revenue Code of 1986, as amended (the "Code").
Detailed information concerning these plans, including certain exceptions to
minimum investment requirements, and copies of the plans are available from the
Principal Underwriter. This information should be read carefully and
consultation with an attorney or tax adviser may be advisable. The information
sets forth the service fee charged for retirement plans and describes the
federal income tax consequences of establishing a plan. Under all plans,
distributions will be automatically reinvested in additional shares.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
SUBSTANTIALLY ALL OF THE INVESTMENT INCOME ALLOCATED TO THE FUND BY THE
PORTFOLIO, LESS THE FUND'S DIRECT AND ALLOCATED EXPENSES, WILL BE DECLARED DAILY
AS A DISTRIBUTION TO FUND SHAREHOLDERS OF RECORD AT THE TIME OF DECLARATION.
Such distributions, whether taken in cash or reinvested in additional shares,
will ordinarily be paid on the last day of each month or the next business day
thereafter. The Fund anticipates that the entire monthly distribution, whether
paid in cash or reinvested in additional shares of the Fund, will constitute
taxable income to the shareholders, for federal income tax purposes.
Shareholders reinvesting the monthly distribution should treat the amount of the
entire distribution as the tax cost basis of the additional shares acquired by
reason of such reinvestment. Daily distribution crediting will commence on the
day that collected funds for the purchase of Fund shares are available at the
Transfer Agent. Shareholders of the Fund will receive timely federal income tax
information as to the taxable status of all distributions made by the Fund
during the calendar year. The Fund's net realized capital gains, if any, consist
of the net realized capital gains allocated to the Fund by the Portfolio for tax
purposes, after taking into account any available capital loss carryovers; the
Fund's net realized capital gains, if any, will be distributed at least once a
year, usually in December.
Distributions of the Fund which are derived from the Fund's allocated share
of the Portfolio's net investment income, net short-term capital gains and
certain foreign exchange gains are taxable to shareholders as ordinary income,
whether paid in cash or reinvested in additional shares.
Certain distributions, if declared in October, November or December and paid
the following January, will be taxable to shareholders as if received on
December 31 of the year in which they are declared.
Capital gains, if any, realized on sales of investments and on options and
futures transactions during the fiscal year, which ends on October 31, will be
offset by any capital loss carryovers and will be distributed annually, usually
in December, in compliance with the distribution requirements of the Code.
Distributions of long-term capital gains included therein are taxable to
shareholders as such, whether paid in cash or additional shares of the Fund and
regardless of the length of time Fund shares have been owned by the shareholder.
If shares are purchased shortly before the record date of a distribution, the
shareholder will pay the full price for the shares and then receive some portion
of the price back as a taxable distribution.
Income realized by the Portfolio from certain instruments and allocated to
the Fund may be subject to foreign income taxes on certain investments and the
Fund may make an election under Section 853 of the Code that would allow Fund
shareholders to claim a credit or deduction on their federal income tax returns
for (and treat as additional amounts distributed to them) their pro rata portion
of the Fund's allocated share of qualified taxes paid by the Portfolio to
foreign countries. This election may be made annually only if more than 50% of
the assets of the Fund including its allocable share of the Portfolio assets, at
the close of a taxable year consists of securities in foreign corporations. The
Fund will send a written notice of any such election (not later than sixty (60)
days after the close of its taxable year) to each shareholder indicating the
amount to be treated by him as his proportionate share of such taxes.
Availability of foreign tax credits or deductions for shareholders is subject to
certain additional restrictions and limitations at the Fund and shareholder
levels.
The Fund intends to qualify as a regulated investment company under the Code
and to satisfy all requirements necessary to be relieved of federal taxes on
income and gains it distributes to shareholders. In satisfying these
requirements, the Fund will treat itself as owning its proportionate share of
each of the Portfolio's assets and as entitled to the income of the Portfolio
properly attributable to such share.
- ------------------------------------------------------------------------------
AS A REGULATED INVESTMENT COMPANY UNDER THE CODE, THE FUND DOES NOT PAY
FEDERAL INCOME OR EXCISE TAXES TO THE EXTENT THAT IT DISTRIBUTES TO
SHAREHOLDERS ITS NET INVESTMENT INCOME AND NET REALIZED CAPITAL GAINS IN
ACCORDANCE WITH THE y TIMING REQUIREMENTS IMPOSED BY THE CODE. AS A
PARTNERSHIP UNDER THE CODE, THE PORTFOLIO ALSO DOES NOT PAY FEDERAL INCOME
OR EXCISE TAXES.
- ------------------------------------------------------------------------------
Shareholders should consult their own tax advisers with respect to the
local, state, federal and foreign tax consequences of investing in the Fund.
PERFORMANCE INFORMATION
- ------------------------------------------------------------------------------
FROM TIME TO TIME, THE FUND MAY ADVERTISE ITS YIELD AND/OR AVERAGE ANNUAL TOTAL
RETURN. The Fund's yield is calculated by dividing the net investment income per
share earned during a recent 30-day period by the maximum offering price per
share (net asset value) of the Fund on the last day of the period and
annualizing the resulting figure. The Fund's average annual total return is
determined by computing the average annual percentage change in value of $1,000
invested at the maximum public offering price (net asset value) for specified
periods ending with the most recent calendar quarter, assuming reinvestment of
all distributions. The average annual total return calculation assumes a
complete redemption of the investment and the deduction of any applicable
contingent deferred sales charge at the end of the period. The Fund may also
publish annual and cumulative total return figures from time to time.
The Fund may also publish total return figures which do not take into
account any contingent deferred sales charge which may be imposed upon
redemptions at the end of the specified period. Any performance figure which
does not take into account the contingent deferred sales charge would be reduced
to the extent such charge is imposed upon a redemption.
The Fund may also publish its distribution rate and/or its effective
distribution rate. The Fund's distribution rate is computed by dividing the most
recent monthly distribution per share annualized by the current net asset value
per share. The Fund's effective distribution rate is computed by dividing the
distribution rate by the ratio used to annualize the distribution and
reinvesting the resulting amount for a full year on the basis of such ratio. The
effective distribution rate will be higher than the distribution rate because of
the compounding effect of the assumed reinvestment. The Fund's yield is
calculated using a standardized formula the income component of which is
computed from the yields to maturity of all debt obligations held by the
Portfolio based on the market value of such obligations on the day preceding the
30-day period (with all purchases and sales of securities during such period
included in the income calculation on a settlement date basis). In contrast, the
distribution rate is based on the Fund's last monthly distribution, which tends
to be relatively stable and may be more or less than the amount of net
investment income and short-term capital gain actually earned by the Fund during
the month.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's total return, yield, distribution
rate or effective distribution rate for any prior period should not be
considered as a representation of what an investment may earn or what the Fund's
total return, yield, distribution rate or effective distribution rate may be in
any future period. If the expenses of the Fund or the Portfolio are allocated to
Eaton Vance, the Fund's performance will be higher.
<PAGE>
APPENDIX A
STRATEGIC INCOME PORTFOLIO
ASSET COMPOSITION INFORMATION
FOR FISCAL YEAR ENDED OCTOBER 31, 1994
AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1995
PERCENTAGE OF NET ASSETS
----------------------------------------
YEAR ENDED 8 MONTHS ENDED
OCTOBER 31, 1994 JUNE 30, 1995
---------------- -------------
Debt Securities --
Moody's Rating
Aaa .......... 37.4% 18.63%
Aa1 .......... 3.7 4.93
Aa2 .......... 26.8 31.06
Aa3 .......... 6.4 0
A1 ........... 4.6 3.39
A3 ........... .7 3.25
Ba2 .......... .7 0
Ba3 .......... 2.2 0
B1 ........... 0 2.03
B2 ........... 11.0 20.99
B3 ........... 2.7 3.12
Baa1 ......... 0 0.20
Baa3 ......... 0 5.98
Caa .......... 0 0.48
CCC .......... .1 0
Unrated ...... 3.7 5.94
---- ----
Total ........ 100.0% 100.0%
The chart above indicates the weighted average composition for the fiscal
year ended October 31, 1994 and the eight months ended June 30, 1995, with the
debt securities rated by Moody's Investors Service, Inc. separated into the
indicated categories. The weighted averages indicated above were calculated on a
dollar weighted basis and were computed as at the end of each month during the
period. The chart does not necessarily indicate what the composition of the
Portfolio will be in the current and subsequent fiscal years.
For the description of Moody's Investors Service, Inc's. ratings of debt
securities, see Appendix A to the Statement of Additional Information.
<PAGE>
INVESTMENT ADVISER AND ADMINISTRATOR
OF STRATEGIC INCOME PORTFOLIO
Boston Management & Research
24 Federal Street
Boston, MA 02110
ADMINISTRATOR OF EATON VANCE
STRATEGIC INCOME FUND
Eaton Vance Management
24 Federal Street
Boston, MA 02110
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(800) 225-6265
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
(800) 262-1122
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
EV MARATHON
STRATEGIC INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
M-SIP
[LOGO]
EV MARATHON
STRATEGIC INCOME
FUND
PROSPECTUS
OCTOBER 30, 1995
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
October 30, 1995
EV MARATHON STRATEGIC INCOME FUND
24 Federal Street
Boston, Massachusetts 02110
(800) 225-6265
- --------------------------------------------------------------------------------
TABLE OF CONTENTS Page
Investment Objective and Policies ................................ 2
Investment Restrictions .......................................... 9
Trustees and Officers ............................................ 10
Control Persons and Principal Holders of Securities .............. 13
Investment Adviser and Administrator ............................. 13
Custodian ........................................................ 16
Service for Withdrawal ........................................... 16
Determination of Net Asset Value ................................. 16
Investment Performance ........................................... 17
Taxes ............................................................ 18
Principal Underwriter ............................................ 20
Distribution Plan ................................................ 21
Portfolio Security Transactions .................................. 23
Other Information ................................................ 24
Independent Accountants .......................................... 25
Financial Statements ............................................. 26
Appendix A ....................................................... A-1
Appendix B ....................................................... B-1
- --------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF EV MARATHON STRATEGIC INCOME FUND (THE "FUND")
DATED OCTOBER 30, 1995, AS SUPPLEMENTED FROM TIME TO TIME. THIS STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH SUCH PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING EATON VANCE
DISTRIBUTORS, INC. (THE "PRINCIPAL UNDERWRITER") (SEE BACK COVER FOR ADDRESS AND
PHONE NUMBER).
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The investment objective of EV Marathon Strategic Income Fund (the "Fund"),
a non-diversified series of Eaton Vance Mutual Funds Trust (the "Trust"), is a
high level of income by investing in a global portfolio consisting primarily of
high grade debt securities and having a dollar weighted average maturity of not
more than three years. The Fund currently seeks to meet its investment objective
by investing its assets in the Strategic Income Portfolio (the "Portfolio"), a
separate registered investment company with the same investment objective as the
Fund.
Since the investment characteristics of the Fund will correspond directly to
those of the Portfolio, the following is a discussion of the various investments
of and techniques employed by the Portfolio and supplements the discussion
contained in the Fund's Prospectus. The Fund is subject to the same investment
policies as those of the Portfolio.
INCOME PRODUCING SECURITIES
Included in the income producing securities in which the Portfolio may
invest are preferred and preference stocks, convertible bonds, securities of
real estate investment trusts and natural resource companies, stripped debt
obligations, closed-end investment companies (that invest primarily in debt
securities the Portfolio could invest in), equipment lease certificates,
equipment trust certificates and conditional sales contracts. Preference stocks
are stocks that have many characteristics of preferred stocks, but are typically
junior to an existing class of preferred stocks. Securities of real estate
investment trusts, such as debentures, are affected by conditions in the real
estate industry and interest rates. Securities of natural resource companies are
subject to price fluctuation based upon inflationary pressures and demand for
natural resources. Stripped debt obligations are comprised of principal only or
interest only obligations. The value of closed-end investment company
securities, which are generally traded on an exchange, is affected by demand for
those securities regardless of the demand for the underlying portfolio assets.
Equipment lease certificates are debt obligations secured by leases on equipment
(such as railroad cars, airplanes or office equipment), with the issuer of the
certificate being the owner and lessor of the equipment. The issuers of
equipment lease certificates tend to be industrial, transportation and leasing
companies. Equipment trust certificates are debt obligations secured by an
interest in property (such as railroad cars or airplanes), the title of which is
held by a trustee while the property is being used by the borrower. Conditional
sales contracts are agreements under which the seller of property continues to
hold title to the property until the purchase price is fully paid or other
conditions are met by the buyer. The Portfolio has no current intention of
investing more than 5% of its total assets in any of these types of securities.
The Portfolio may purchase fixed-rate bonds which have a demand feature
allowing the holder to redeem the bonds at specified times. These bonds are more
defensive than conventional long-term bonds (protecting to some degree against a
rise in interest rates) while providing greater opportunity than comparable
intermediate term bonds, since the Portfolio may retain the bond if interest
rates decline. By acquiring these kinds of bonds the Portfolio obtains the
contractual right to require the issuer of the bonds to purchase the security at
an agreed upon price, which right is contained in the obligation itself rather
than in a separate agreement or instrument. Since this right is assignable only
with the bond, the Portfolio will not assign any separate value to such right.
The Portfolio may also purchase floating or variable rate obligations and
warrants when such warrants are part of a unit with other securities.
The Portfolio's investments in high yield, high risk obligations rated below
investment grade, which have speculative characteristics, bear special risks.
They are subject to greater credit risks, including the possibility of default
or bankruptcy of the issuer. The value of such investments may also be subject
to a greater degree of volatility in response to interest rate fluctuations,
economic downturns and changes in the financial condition of the issuer. These
securities generally are less liquid than higher quality securities. During
periods of deteriorating economic conditions and contractions in the credit
markets, the ability of such issuers to service their debt, meet projected goals
or obtain additional financing may be impaired. The Portfolio will also take
such action as it considers appropriate in the event of anticipated financial
difficulties default or bankruptcy of either the issuer of any such obligation
or of the underlying source of funds for debt service. Such action may include
retaining the services of various persons and firms (including affiliates of the
Investment Adviser) to evaluate or protect any real estate, facilities or other
assets securing any such obligation or acquired by the Portfolio as a result of
any such event. The Portfolio will incur additional expenditures in taking
protective action with respect to portfolio obligations in default and assets
securing such obligations.
The Portfolio may invest in obligations of domestic and foreign companies in
the group consisting of the banking and the financial services industries.
Companies in the banking industry include U.S. and foreign commercial banking
institutions (including their parent holding companies). Companies in the
financial services industry include finance companies, diversified financial
services companies and insurance and insurance holding companies. Companies
engaged primarily in the investment banking, securities, investment advisory or
investment company business are not deemed to be in the financial services
industry for this purpose. The securities held by the Portfolio may be affected
by economic or regulatory developments in or related to such industries.
Sustained increases in interest rates can adversely affect the availability and
cost of funds for an institution's lending activities, and a deterioration in
general economic conditions could increase the institution's exposure to credit
losses.
A bank from whom the Portfolio acquires a loan participation interest may be
treated as a co-issuer for tax diversification purposes to the extent that the
Portfolio does not have direct recourse against the borrower of the underlying
loan and is therefore relying on the credit of such bank. For industry
concentration purposes, the Investment Adviser will consider all relevant
factors in determining the issuer of a loan interest, including: the credit
quality of the borrower, the amount and quality of the collateral, the terms of
the loan agreement and the other relevant agreements (including inter-creditor
agreements), the degree to which the credit of such interpositioned person was
deemed material to the decision to purchase the loan interest, the interest rate
environment, and general economic conditions applicable to the borrower and such
interpositioned person.
MORTGAGE ROLLS
The Portfolio may enter into mortgage "dollar rolls" in which the Portfolio
sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Portfolio foregoes principal and interest paid on the mortgage-backed
securities. The Portfolio is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position or a cash equivalent security position which
matures on or before the forward settlement date of the dollar roll transaction.
The Portfolio will only enter into covered rolls. Covered rolls are not treated
as a borrowing or other senior security and will be excluded from the
calculation of the Portfolio's borrowings and other senior securities.
LENDING OF PORTFOLIO SECURITIES
The Portfolio may seek to increase its income by lending portfolio
securities to broker-dealers or other institutional borrowers. Under present
regulatory policies of the Securities and Exchange Commission, such loans are
required to be secured continuously by collateral in cash, cash equivalents or
U.S. Government securities held by the Portfolio's custodian and maintained on a
current basis at an amount at least equal to the market value of the securities
loaned, which will be marked to market daily. Cash equivalents include
certificates of deposit, commercial paper and other short-term money market
instruments. The Portfolio would have the right to call a loan and obtain the
securities loaned at any time on up to five business days' notice.
FOREIGN INVESTMENTS
Investing in foreign issuers involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. issuers. Since investments in foreign issuers may involve
currencies of foreign countries, and since the Portfolio may temporarily hold
funds in bank deposits in foreign currencies during completion of investment
programs, the Portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversions between various currencies.
Since foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a domestic company. Volume and liquidity in
most foreign bond markets is less than in the United States and securities of
some foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on U.S. exchanges, although the
Portfolio endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, broker-dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. The Portfolio may be required to pay for securities before
delivery. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect the Portfolio's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Portfolio may enter into forward foreign currency exchange contracts. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
At the maturity of a forward contract the Portfolio may either accept or
make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are often effected with the currency trader who is a party to
the original forward contract.
The Portfolio may enter into forward foreign currency exchange contracts in
several circumstances. First, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when the
Portfolio anticipates the receipt in a foreign currency of dividend or interest
payments on such a security which it holds, the Portfolio may desire to "lock
in" the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying transactions, the Portfolio will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of the Portfolio believes that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the securities held by the Portfolio denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Portfolio's
foreign assets.
The Portfolio's custodian will place cash or liquid high grade debt
securities into a segregated account of the Portfolio in an amount equal to the
value of the Portfolio's total assets, reduced by the value of any offsetting
forward or written or purchased option position on the same or a related
currency, committed to the consummation of forward foreign currency exchange
contracts requiring the Portfolio to purchase foreign currencies or forward
contracts entered into for non-hedging purposes. If the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account on a daily basis so that the value of the account will
equal the amount of the Portfolio's commitments with respect to such contracts,
net of any offsetting forward contracts or options positions.
The Portfolio generally will not enter into a forward contract with a term
of greater than one year. Using forward contracts to protect the value of the
securities held by the Portfolio against a decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which the Portfolio can achieve at some
future point in time.
While the Portfolio will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while the Portfolio may benefit from such transactions, unanticipated
changes in currency prices may result in a poorer overall performance for the
Fund than if the Portfolio had not engaged in any such transactions. Moreover,
there may be imperfect correlation between the securities held by the Portfolio
denominated in a particular currency and forward contracts entered into by the
Portfolio. Such imperfect correlation may prevent the Portfolio from achieving a
complete hedge or expose the Portfolio to risk of foreign exchange loss.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS
The Portfolio may write covered put and call options and purchase put and
call options on foreign currencies for the purpose of protecting against
declines in the dollar value of portfolio securities and against increases in
the dollar cost of securities to be acquired. A call option written by the
Portfolio obligates the Portfolio to sell specified currency to the holder of
the option at a specified price if the option is exercised at any time before
the expiration date. A put option written by the Portfolio would obligate the
Portfolio to purchase specified currency from the option holder at a specified
price if the option is exercised at any time before the expiration date.
A call option written by the Portfolio may be covered by segregating assets
denominated in the currency on which the call option is written. A written call
option or put option may also be covered by maintaining cash or high grade
liquid debt securities (either of which may be denominated in any currency) in a
segregated account, by entering into an offsetting forward contract and/or by
purchasing an offsetting option or any other option on the same or a related
currency and/or by purchasing an offsetting option or any other option which, by
virtue of its exercise price or otherwise, reduces the Portfolio's net exposure
on its written option position.
The writing of currency options involves a risk that the Portfolio will,
upon exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
The Portfolio may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." The Portfolio would also be able
to enter into closing sale transactions in order to realize gains or minimize
losses on options purchased by the Portfolio.
The Portfolio would normally purchase call options in anticipation of an
increase in the dollar value of currency in which securities to be acquired by
the Portfolio are denominated. The purchase of a call option would entitle the
Portfolio, in return for the premium paid, to purchase specified currency at a
specified price during the option period. The Portfolio would ordinarily realize
a gain if, during the option period, the value of such currency exceeded the sum
of the exercise price, the premium paid and transaction costs; otherwise the
Portfolio would realize a loss on the purchase of the call option.
The Portfolio would normally purchase put options in anticipation of a
decline in the dollar value of currency in which securities in its portfolio
("protective puts") are denominated. The purchase of a put option would entitle
the Portfolio, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the dollar value of the
securities held by the Portfolio due to currency exchange rate fluctuations. The
Portfolio would ordinarily realize a gain if, during the option period, the
value of the underlying currency decreased below the exercise price sufficiently
to cover the premium and transaction costs; otherwise the Portfolio would
realize a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON CURRENCY
An exchange traded options position may be closed out only on an options
exchange which provides a secondary market for an option of the same series.
Although the Portfolio will generally purchase or write only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an exchange will exist for any particular option,
or at any particular time. For some options no secondary market on an exchange
may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that the Portfolio would
have to exercise its options in order to realize any profit and would incur
transaction costs upon the sale of underlying securities pursuant to the
exercise of put options. If the Portfolio as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it will
not be able to sell the underlying currency (or security denominated in that
currency) until the option expires or it delivers the underlying currency upon
exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
The Portfolio may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities, as
described in the Fund's prospectus. Trading in over-the-counter options is
subject to the risk that the other party will be unable or unwilling to close-
out options purchased or written by the Portfolio. The staff of the Securities
and Exchange Commission takes the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
securities. However, with respect to options written with primary dealers in
U.S. Government securities or with dealers on the Federal Reserve's approved
list for foreign exchange dealers pursuant to an agreement requiring a closing
purchase transaction at a formula price, the amount of illiquid securities may
be calculated with reference to the repurchase formula.
The Portfolio intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Portfolio has a call
on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash,
U.S. Government Securities and other high grade liquid debt securities in a
segregated account with its custodian.
The amount of the premiums which the Portfolio may pay or receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option purchasing and writing activities.
FUTURES CONTRACTS
A change in the level of currency exchange rates or interest rates may
affect the value of the Portfolio's investments (or of investments that the
Portfolio expects to make). To hedge against such changes in such rates or
prices or for non-hedging purposes, the Portfolio may enter into (i) futures
contracts for the purchase or sale of securities, (ii) futures contracts on
securities indices; (iii) futures contracts on other financial instruments and
indices and (iv) futures contracts on foreign currencies. A futures contract may
generally be described as an agreement between two parties to buy and sell
particular financial instruments for an agreed price during a designated month
(or to deliver the final cash settlement price, in the case of a contract
relating to an index or otherwise not calling for physical delivery at the end
of trading in the contract). All futures contracts entered into by the Portfolio
are traded on U.S. exchanges or boards of trade that are licensed and regulated
by the Commodity Futures Trading Commission ("CFTC") or on foreign exchanges.
FUTURES ON SECURITIES OR CURRENCIES. A futures contract on a security or
currency is a binding contractual commitment which, if held to maturity, will
result in an obligation to make or accept delivery, during a particular month,
of securities or currency having a standardized face value and rate of return or
currency. By purchasing futures on securities or currency, the Portfolio will
legally obligate itself to accept delivery of the underlying security or
currency and pay the agreed price; by selling futures on securities or currency,
it will legally obligate itself to make delivery of the security or currency
against payment of the agreed price. Open futures positions on securities or
currency are valued at the most recent settlement price, unless such price does
not reflect the fair value of the contract, in which case the positions will be
valued by or under the direction of the Board of Trustees of the Portfolio.
Positions taken in the futures markets are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While the Portfolio's futures contracts on securities or
currency will usually be liquidated in this manner, it may instead make or take
delivery of the underlying securities or currency whenever it appears
economically advantageous for the Portfolio to do so. A clearing corporation
associated with the exchange on which futures on securities or currency are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
FUTURES CONTRACTS ON SECURITIES INDICES. Futures contracts on securities or
other indices do not require the physical delivery of securities, but merely
provide for profits and losses resulting from changes in the market value of a
contract to be credited or debited at the close of each trading day to the
respective accounts of the parties to the contract. On the contract's expiration
date a final cash settlement occurs and the futures position is simply closed
out. Changes in the market value of a particular futures contract reflect
changes in the level of the index on which the futures contract is based.
HEDGING STRATEGIES. Hedging by use of futures contracts seeks to establish more
certainly than would otherwise be possible the effective price, rate of return
or currency exchange rate on portfolio securities or securities that the
Portfolio owns or proposes to acquire. The Portfolio may, for example, take a
"short" position in the futures market by selling futures contracts in order to
hedge against an anticipated rise in interest rates or a decline in market
prices or foreign currency rates that would adversely affect the dollar value of
the securities held by the Portfolio. Such futures contracts may include
contracts for the future delivery of securities held by the Portfolio or
securities with characteristics similar to those of the securities held by the
Portfolio. Similarly, the Portfolio may sell futures contracts on currency in
which its securities are denominated or in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the Investment Adviser, there is a sufficient
degree of correlation between price trends for the securities held by the
Portfolio and futures contracts based on other financial instruments, securities
indices or other indices, the Portfolio may also enter into such futures
contracts as part of its hedging strategy. Although under some circumstances
prices of securities held by the Portfolio may be more or less volatile than
prices of such futures contracts, the Investment Adviser will attempt to
estimate the extent of this difference in volatility based on historical
patterns and to compensate for it by having the Portfolio enter into a greater
or lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting the securities held by the Portfolio. When
hedging of this character is successful, any depreciation in the value of
portfolio securities will substantially be offset by appreciation in the value
of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
such futures contracts. This would be done, for example, when the Portfolio
anticipates the subsequent purchase of particular securities when it has the
necessary cash, but expects the prices or currency exchange rates then available
in the applicable market to be less favorable than prices or rates that are
currently available.
OPTIONS ON FUTURES
The Portfolio may purchase and write call and put options on futures
contracts which are traded on a United States or foreign exchange or board of
trade. An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract at a specified
exercise price at any time during the option period. Upon exercise of the
option, the writer of the option is obligated to convey the appropriate futures
position to the holder of the option. If an option is exercised on the last
trading day before the expiration date of the option, a cash settlement will be
made in an amount equal to the difference between the closing price of the
futures contract and the exercise price of the option.
The Portfolio may use options on futures contracts solely for bona fide
hedging purposes as defined below or for non-hedging purposes subject to the
limitations imposed by CFTC regulations. If the Portfolio purchases a call (put)
option on a futures contract it benefits from any increase (decrease) in the
value of the futures contract, but is subject to the risk of decrease (increase)
in value of the futures contract. The benefits received are reduced by the
amount of the premium and transaction costs paid by the Portfolio for the
option. If market conditions do not favor the exercise of the option, the
Portfolio's loss is limited to the amount of such premium and transaction costs
paid by the Portfolio for the option.
If the Portfolio writes a call (put) option on a futures contract, the
Portfolio receives a premium but assumes the risk of a rise (decline) in value
in the underlying futures contract. If the option is not exercised, the
Portfolio gains the amount of the premium, which may partially offset
unfavorable changes due to interest rate or currency exchange rate fluctuations
in the value of securities held or to be acquired for the Portfolio. If the
option is exercised, the Portfolio will incur a loss, which will be reduced by
the amount of the premium it receives. However, depending on the degree of
correlation between changes in the value of its portfolio securities (or the
currency in which they are denominated) and changes in the value of futures
positions, the Portfolio's losses from writing options on futures may be
partially offset by favorable changes in the value of portfolio securities or in
the cost of securities to be acquired.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Portfolio's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
LIMITATIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
The Portfolio will engage in futures and related options transactions only
for bona fide hedging or non-hedging purposes as defined in or as permitted by
CFTC regulations. The Portfolio will determine that the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Portfolio
or which it expects to purchase. Except as stated below, the Portfolio's futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities (or the currency in which they are denominated) that the Portfolio
owns, or futures contracts will be purchased to protect the Portfolio against an
increase in the price of securities (or the currency in which they are
denominated) it intends to purchase. As evidence of this hedging intent, the
Portfolio expects that on 75% or more of the occasions on which it takes a long
futures (or option) position (involving the purchase of futures contracts), the
Portfolio will have purchased, or will be in the process of purchasing,
equivalent amounts of related securities (or assets denominated in the related
currency) in the cash market at the time when the futures (or option) position
is closed out. However, in particular cases, when it is economically
advantageous for the Portfolio to do so, a long futures position may be
terminated (or an option may expire) without the corresponding purchase of
securities or other assets. As an alternative to compliance with the bona fide
hedging definition, a CFTC regulation permits the Portfolio to elect to comply
with a different test, under which the aggregate initial margin and premiums
required to establish non-hedging positions in futures contracts and options on
futures will not exceed 5% of the Portfolio's net asset value after taking into
account unrealized profits and losses on such positions and excluding the
in-the-money amount of such options. The Portfolio will engage in transactions
in futures contracts and related options only to the extent such transactions
are consistent with the requirements of the Internal Revenue Code for
maintaining the qualification of the Fund as a regulated investment company for
Federal income tax purposes (see "Taxes").
The Portfolio will be required, in connection with transactions in futures
contracts and the writing of options on futures, to make margin deposits, which
will be held by the Portfolio's custodian for the benefit of the futures
commission merchant through whom the Portfolio engages in such futures and
options transactions. Cash or liquid high grade debt securities required to be
segregated in connection with a "long" futures position taken by the Portfolio
will also be held by the custodian in a segregated account and will be marked to
market daily.
INTEREST RATE AND CURRENCY SWAPS
The Portfolio will only enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out with the Portfolio receiving or paying,
as the case may be, only the net amount of the two payments. In contrast,
currency swaps usually involve the delivery of the entire payment stream in one
designated currency in exchange for the entire payment stream in the other
designated currency. Inasmuch as the Portfolio maintains a segregated account
with respect to all interest rate and currency swaps, the Portfolio and its
Investment Adviser believe that such obligations do not constitute senior
securities (as defined in the Investment Company Act of 1940) and, accordingly,
will not treat them as being subject to the Portfolio's borrowing restrictions.
The net amount of the excess, if any, of the Portfolio's obligations over its
entitlements with respect to each interest rate or currency swap will be accrued
on a daily basis and an amount of cash or liquid high grade debt securities
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Portfolio's custodian. The Portfolio
will not enter into any interest rate or currency swap unless the credit quality
of the unsecured senior debt or the claims-paying ability of the other party
thereto is considered to be investment grade by the Investment Adviser. If there
is a default by the other party to such a transaction, the Portfolio will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
which are traded in the interbank market.
REVERSE REPURCHASE AGREEMENTS
The Portfolio may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the Portfolio temporarily transfers possession of a
portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash. At the same time, the Portfolio agrees to repurchase the
instrument at an agreed upon time (normally within seven days) and price, which
reflects an interest payment. The Portfolio could also enter into reverse
repurchase agreements as a means of raising cash to satisfy redemption requests
without the necessity of selling portfolio assets.
When the Portfolio enters into a reverse repurchase agreement, any
fluctuations in the market value of either the securities transferred to another
party or the securities in which the proceeds may be invested would affect the
market value of the Portfolio's assets. As a result, such transactions may
increase fluctuations in the market value of the Portfolio's assets. While there
is a risk that large fluctuations in the market value of the Portfolio's assets
could affect the Fund's net asset value per share, this risk is not
significantly increased by entering into reverse repurchase agreements, in the
opinion of the Investment Adviser. Because reverse repurchase agreements may be
considered to be the practical equivalent of borrowing funds, they constitute a
form of leverage. If the Portfolio reinvests the proceeds of a reverse
repurchase agreement at a rate lower than the cost of the agreement, entering
into the agreement will lower the Fund's yield. While the Investment Adviser
does not consider reverse repurchase agreements to involve a traditional
borrowing of money, reverse repurchase agreements will be included within
"borrowings" contained in the Fund's investment restriction (2) set forth below.
At all times that a reverse repurchase agreement for borrowing purposes is
outstanding, the Portfolio will maintain cash or high grade liquid securities in
a segregated account at its custodian bank with a value at least equal to its
obligation under the agreement. Securities and other assets held in the
segregated account may not be sold while the reverse repurchase agreement is
outstanding, unless other suitable assets are substituted. To the extent that
the Portfolio enters into reverse repurchase agreements for hedging purposes as
described in the Fund's prospectus, the Portfolio will not be required to
maintain the segregated account described above.
PORTFOLIO TURNOVER
The Portfolio cannot accurately predict its portfolio turnover rate, but it
is anticipated that the annual turnover rate will generally not exceed 100%
(excluding turnover of securities having a maturity of one year or less). A 100%
annual turnover rate would occur, for example, if all the securities held by the
Portfolio were replaced in a period of one year. A high turnover rate (such as
100% or more) necessarily involves greater expenses to the Portfolio and may
result in the realization of substantial net short-term capital gains. The
Portfolio may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for fixed
income securities of different countries, to seek short-term profits during
periods of fluctuating interest rates, or for other reasons. Such trading will
increase the Portfolio's rate of turnover and the incidence of net short-term
capital gain distributions allocated to the Fund by the Portfolio which are
taxable to Fund shareholders as ordinary income.
INVESTMENT RESTRICTIONS
The following restrictions are designated as fundamental policies and as
such cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, which as used in this Statement of
Additional Information means the lesser of (a) 67% of the shares of the Fund
present or represented by proxy at a meeting if the holders of more than 50% of
the shares are present or represented at the meeting or (b) more than 50% of the
shares of the Fund. Accordingly, the Fund may not:
(1) Purchase any security (other than securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities) if such purchase,
at the time thereof, would cause 25% or more of the Fund's total assets (taken
at market value) to be invested in the securities of issuers in any single
industry, provided that the electric, gas and telephone utility industries shall
be treated as separate industries for purposes of this restriction;
(2) Borrow money or issue senior securities except as permitted by the
Investment Company Act of 1940;
(3) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities). The deposit or payment by the Fund of initial, maintenance or
variation margin in connection with all types of options and futures contract
transactions is not considered the purchase of a security on margin;
(4) Underwrite or participate in the marketing of securities of others,
except insofar as it may technically be deemed to be an underwriter in selling a
portfolio security under circumstances which may require the registration of the
same under the Securities Act of 1933;
(5) Purchase or sell real estate, although it may purchase and sell
securities which are secured by real estate and securities of companies which
invest or deal in real estate;
(6) Purchase or sell physical commodities or futures contracts for the
purchase or sale of physical commodities, provided that the Fund may enter into
all types of futures and forward contracts on currency, securities and
securities, economic and other indices and may purchase and sell options on such
futures contracts; or
(7) Make loans to any person, except by (a) the acquisition of debt
instruments and making portfolio investments, (b) entering into repurchase
agreements, and (c) lending portfolio securities.
Notwithstanding the investment policies and restrictions of the Fund, the
Fund may invest all of its investable assets in an open-end management
investment company with substantially the same investment objective, policies
and restrictions as the Fund.
The Portfolio has adopted substantially the same fundamental investment
restrictions as the foregoing numbered investment restrictions adopted by the
Fund; such restrictions cannot be changed without the approval of a "majority of
the outstanding voting securities" of the Portfolio, which as used in this
Statement of Additional Information means the lesser of (a) 67% of the
outstanding voting securities of the Portfolio present or represented by proxy
at a meeting if the holders of more than 50% of the outstanding voting
securities of the Portfolio are present or represented at the meeting or (b)
more than 50% of the outstanding voting securities of the Portfolio. The term
"voting securities" as used in this paragraph has the same meaning as in the
Investment Company Act of 1940 (the "1940 Act"). Whenever the Trust is requested
to vote on a change in the investment restrictions of the Portfolio, the Trust
will hold a meeting of Fund shareholders and will cast its vote as instructed by
the shareholders.
The Fund and the Portfolio have each adopted the following nonfundamental
investment policies which may be changed with respect to the Fund by the
Trustees of the Trust without approval by the Fund's shareholders or may be
changed with respect to the Portfolio by the Trustees of the Portfolio with or
without the approval of the Fund or the Portfolio's other investors. As a matter
of nonfundamental policy, the Fund and the Portfolio may not: (a) invest more
than 15% of net assets in investments which are not readily marketable,
including restricted securities and repurchase agreements maturing in more than
seven days. Restricted securities for the purposes of this limitation do not
include securities eligible for resale pursuant to Rule 144A of the Securities
Act of 1933 that the Board of Trustees of the Trust or the Trustees of the
Portfolio, or its delegate, determine to be liquid, based upon the trading
markets for the specific security; (b) make short sales of securities or
maintain a short position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for securities of
the same issue as, and equal in amount to, the securities sold short, and unless
no more than 25% of its net assets (taken at current value) is held as
collateral for such sales at any one time. It is the present intention of
management to make such sales only for the purpose of deferring realization of
gain or loss for Federal income tax purposes); (c) purchase or retain in its
portfolio any securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Trust or is a
member, officer, director or trustee of any investment adviser of the Trust or
the Portfolio if after the purchase of the securities of such issuer by the Fund
or the Portfolio one or more of such persons owns beneficially more than 1/2 of
1% of the shares or securities or both (all taken at market value) of such
issuer and such persons owning more than 1/2 of 1% of such shares of securities
together own beneficially more than 5% of such shares or securities or both (all
taken at market value); (d) purchase oil, gas or other mineral leases or
purchase partnership interests in oil, gas or other mineral exploration or
development programs; (e) invest more than 5% of its total assets (taken at
current value) in the securities of issuers which, including their predecessors,
have been in operation for less than three years; (f) purchase put or call
options on securities if after such purchase more than 5% of its net assets, as
measured by the aggregate of the premiums paid for such options, would be
invested in such options; and (g) purchase warrants with a value in excess of 5%
of net assets, or warrants which are not listed on the New York or American
Stock Exchange with a value in excess of 2% of its net assets. The Portfolio has
no current intention during the current year of engaging in short sales.
In order to permit the sale of shares of the Fund in certain states, the
Fund may make commitments more restrictive than the fundamental policies
described above. Should the Fund determine that any such commitment is no longer
in the best interests of the Fund and its shareholders, it will revoke the
commitment by terminating sales of its shares in the state(s) involved.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and the Portfolio are listed below.
Except as indicated, each individual has held the office shown or other offices
in the same company for the last five years. Unless otherwise noted, the
business address of each Trustee and officer is 24 Federal Street, Boston,
Massachusetts 02110, which is also the address of the Portfolio's Investment
Adviser, Boston Management and Research ("BMR") which is a wholly-owned
subsidiary of Eaton Vance Management ("Eaton Vance"); Eaton Vance's wholly-owned
subsidiary, Eaton Vance Distributors, Inc. ("EVD"), the principal underwriter of
the Fund; Eaton Vance's parent, Eaton Vance Corp. ("EVC"); and BMR's and Eaton
Vance's trustee, Eaton Vance, Inc. ("EV"). Eaton Vance and EV are both
wholly-owned subsidiaries of EVC. Those Trustees who are "interested persons" of
the Trust or those Trustees who are "interested persons" of the Portfolio, BMR,
Eaton Vance, EVC, EV, or EVD as defined in the 1940 Act, by virtue of their
affiliation with any one or more of the Trust, the Portfolio, BMR, Eaton Vance,
EVC, EV or EVD are indicated by an asterisk(*).
TRUSTEES OF THE TRUST AND THE PORTFOLIO
M. DOZIER GARDNER (61), President and Trustee of the Trust*
President and Chief Executive Officer of BMR, Eaton Vance, EVC and EV, and a
Director of EVC and EV. Director, Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
JAMES B. HAWKES (53), President of the Portfolio, Vice President of the Trust
and Trustee*
Executive Vice President, BMR, Eaton Vance, EVC and EV and a Director of EVC
and EV. Director, Trustee and officer of various investment companies
managed by Eaton Vance or BMR.
LANDON T. CLAY (68), Trustee of the Portfolio
Chairman of BMR, Eaton Vance, EVC and EV and a Director of EVC and EV. Director
or Trustee and officer of various investment companies managed by Eaton Vance
or BMR.
DONALD R. DWIGHT (63), Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company) founded in 1988; Chairman of the Board of Newspapers of New England,
Inc., since 1983. Director or Trustee of various investment companies managed
by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
SAMUEL L. HAYES, III (60), Trustee
Jacob H. Schiff, Professor of Investment Banking, Harvard Business School.
Director or Trustee of various investment companies managed by Eaton Vance
or BMR.
Address: Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02163
NORTON H. REAMER (59), Trustee
President and Director, United Asset Management Corporation, a holding company
owning institutional investment management firms. Chairman, President and
Director, The Regis Fund, Inc. (mutual fund). Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
JOHN L. THORNDIKE (68), Trustee
Director, Fiduciary Company Incorporated. Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: 175 Federal Street, Boston, Massachusetts 02110
JACK L. TREYNOR (65), Trustee
Investment Adviser and Consultant. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
OFFICERS OF THE TRUST AND THE PORTFOLIO
WILLIAM H. AHERN, JR. (36), Vice President of the Trust
Assistant Vice President of Eaton Vance and BMR. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Ahern was elected Vice
President of the Trust on June 19, 1995.
MARK VENEZIA (45), Vice President of the Portfolio
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
H. DAY BRIGHAM, JR. (68), Vice President of the Trust
Chairman of the Management Committee, Vice President of BMR, Eaton Vance, EVC
and EV, and a Director of EVC and EV. Director or Trustee and officer of
various investment companies managed by Eaton Vance or BMR.
MICHAEL B. TERRY (52), Vice President of the Trust
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Terry was elected Vice
President of the Trust on December 17, 1990.
JAMES L. O'CONNOR (49), Treasurer
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
THOMAS OTIS (63), Secretary
Vice President and Secretary of BMR, Eaton Vance, EVC and EV. Officer of various
investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (59), Assistant Secretary
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
A. JOHN MURPHY (32), Assistant Secretary
Assistant Vice President of BMR, Eaton Vance and EV since March 1, 1994;
employee of Eaton Vance since March 1993. Officer of various investment
companies managed by Eaton Vance or BMR. (State Regulations Supervisor, The
Boston Company, 1991-1993 and Registration Specialist, Fidelity Management &
Research Co., 1986-1991). Mr. Murphy was elected Assistant Secretary of the
Trust and the Portfolio on March 27, 1995.
JOHN P. RYNNE (53), Assistant Secretary of the Trust
Corporate Controller and Vice President of EVC. Vice President of Eaton Vance,
EVD and BMR, and Treasurer of Energex Corporation. Mr. Rynne was elected an
officer of the Trust on June 19, 1995.
ERIC G. WOODBURY (38), Assistant Secretary
Vice President of Eaton Vance since February 1993; formerly, associate at
Dechert, Price & Rhoads and Gaston & Snow. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Woodbury was elected Assistant
Secretary of the Trust and the Portfolio on June 19, 1995.
Messrs. Thorndike (Chairman), Hayes and Reamer are members of the Special
Committee of the Board of Trustees of the Trust and the Board of Trustees of the
Portfolio. The Special Committee's functions include a continuous review of the
Trust's contractual relationship with the administrator, the Portfolio's
contractual relationship with the investment adviser, making recommendations to
the Board regarding the compensation of those Trustees who are not members of
the Eaton Vance organization, and making recommendations to the Trustees
regarding candidates to fill vacancies, as and when they occur, in the ranks of
those Trustees who are not "interested persons" of the Trust, the Portfolio, or
the Eaton Vance organization.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees of the Trust and the Board of Trustees of the Portfolio.
The Audit Committee's functions include making recommendations to the Board
regarding the selection of the independent accountants, and reviewing with such
accountants and the Treasurer of the Trust and of the Portfolio matters relative
to accounting and auditing practices and procedures, accounting records,
internal accounting controls, and the functions performed by the custodian and
transfer agent of the Trust.
The fees and expenses of those Trustees of the Trust and of the Portfolio
who are not members of the Eaton Vance organization (the "noninterested
Trustees") are paid by the Fund (and the other series of the Trust) and the
Portfolio, respectively. (The Trustees of the Trust and the Portfolio who are
members of the Eaton Vance organization receive no compensation from the Fund or
the Portfolio.) During the fiscal year ended October 31, 1994, the noninterested
Trustees of the Trust and of the Portfolio received the following compensation
in their capacities as Trustees of the Fund and Trustees of the Portfolio, and,
during the year ended December 31, 1994, received the following compensation in
their capacities as Directors or Trustees of the other funds in the Eaton Vance
Fund Complex(1):
AGGREGATE AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM TRUST AND
NAME FROM FUND FROM PORTFOLIO FUND COMPLEX
---- ------------ -------------- -----------------
Donald R. Dwight ......... $2,026 $1,576 $135,000(2)
Samuel L. Hayes, III ..... 2,005 1,574 142,500(3)
Norton H. Reamer ......... 1,950 1,548 135,000
John L. Thorndike ........ 2,018 1,609 140,000
Jack L. Treynor .......... 2,060 1,625 140,000
- ----------
(1)The Eaton Vance fund complex consists of 211 registered investment
companies or series thereof.
(2)Includes $8,750 of deferred compensation.
(3)Includes $8,865 of deferred compensation.
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 a Trustees Deferred Compensation Plan (the
"Plan"). Under the Plan, an eligible Trustee may elect to have his deferred fees
invested by the Portfolio in the shares of one or more funds in the Eaton Vance
Family of Funds, and the amount paid to the Trustees under the Plan will be
determined based upon the performance of such investments. Deferral of Trustees'
fees in accordance with the Plan will have a negligible effect on the
Portfolio's assets, liabilities, and net income per share, and will not obligate
the Portfolio to retain the services of any Trustee or obligate the Portfolio to
pay any particular level of compensation to the Trustee.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SHARES
As of July 31, 1995, the Trustees and officers of the Trust, as a group,
owned in the aggregate less than 1% of the outstanding shares of the Fund. As of
July 31, 1995, Merrill Lynch, Pierce, Fenner & Smith, Inc. of New Brunswick, New
Jersey, was the record owner of approximately 40.65% of the outstanding shares,
which were held on behalf of its customers who are the beneficial owners of such
shares, and as to which it had voting power under certain limited circumstances.
To the knowledge of the Trust, no other person own of record or beneficially 5%
or more of its outstanding shares of the Fund as of such date.
INVESTMENT ADVISER AND ADMINISTRATOR
The Portfolio engages BMR as investment adviser pursuant to an Investment
Advisory Agreement dated March 1, 1994. BMR or Eaton Vance acts as investment
adviser to investment companies and various individual and institutional clients
with combined assets under management of approximately $15 billion.
Eaton Vance, its affiliates and its predecessor companies have been managing
assets of individuals and institutions since 1924 and managing investment
companies since 1931. They maintain a large staff of experienced fixed-income
and equity investment professionals to service the needs of their clients. The
fixed-income division focuses on all kinds of taxable investment-grade and
high-yield securities, tax-exempt investment-grade and high-yield securities,
foreign debt, and U.S. Government securities. The equity division covers stocks
ranging from blue chip to emerging growth companies.
BMR manages the investments and affairs of the Portfolio subject to the
supervision of the Portfolio's Board of Trustees. BMR furnishes to the Portfolio
investment research, advice and supervision, furnishes an investment program and
determines what securities will be purchased, held or sold by the Portfolio and
what portion, if any, of the Portfolio's assets will be held uninvested. The
Investment Advisory Agreement requires BMR to pay the salaries and fees of all
officers and Trustees of the Portfolio who are members of the BMR organization
and all personnel of BMR performing services relating to research and investment
activities. The Portfolio is responsible for all expenses not expressly stated
to be payable by BMR under the Investment Advisory Agreement, including, without
implied limitation, (i) expenses of maintaining the Portfolio and continuing its
existence, (ii) registration of the Portfolio under the 1940 Act, (iii)
commissions, fees and other expenses connected with the acquisition, holding and
disposition of securities and other investments, (iv) auditing, accounting and
legal expenses, (v) taxes and interest, (vi) governmental fees, (vii) expenses
of issue, sale and redemption of interests in the Portfolio, (viii) expenses of
registering and qualifying the Portfolio and interests in the Portfolio under
Federal and state securities laws and of preparing and printing registration
statements or other offering statements or memoranda for such purposes and for
distributing the same to investors, and fees and expenses of registering and
maintaining registrations of the Portfolio and of the Portfolio's placement
agent as broker-dealer or agent under state securities laws, (ix) expenses of
reports and notices to investors and of meetings of investors and proxy
solicitations therefor, (x) expenses of reports to governmental officers and
commissions, (xi) insurance expenses, (xii) association membership dues, (xiii)
fees, expenses and disbursements of custodians and subcustodians for all
services to the Portfolio (including without limitation safekeeping of funds,
securities and other investments, keeping of books, accounts and records, and
determination of net asset values, book capital account balances and tax capital
account balances), (xiv) fees, expenses and disbursements of transfer agents,
dividend disbursing agents, investor servicing agents and registrars for all
services to the Portfolio, (xv) expenses for servicing the accounts of
investors, (xvi) any direct charges to investors approved by the Trustees of the
Portfolio, (xvii) compensation and expenses of Trustees of the Portfolio who are
not members of BMR's organization, and (xviii) such non-recurring items as may
arise, including expenses incurred in connection with litigation, proceedings
and claims and the obligation of the Portfolio to indemnify its Trustees,
officers and investors with respect thereto.
For a description of the compensation that the Portfolio pays BMR under the
Investment Advisory Agreement, see the Fund's current Prospectus. As at October
31, 1994, the Portfolio had net assets of $236,468,766. For the period from the
start of business March 1, 1994 to October 31, 1994, the Portfolio paid BMR
advisory fees of $1,004,670 (equivalent to 0.49% (annualized) of the Portfolio's
average daily net assets for such period). Prior to the close of business,
February 28, 1994, (when the Fund transferred substantially all of its assets to
the Portfolio in exchange for an interest in the Portfolio), the Fund retained
Eaton Vance as its investment adviser under its investment advisory agreement.
As at October 31, 1994, the Fund had net assets of $233,139,102. For the period
November 1, 1993 to March 1, 1994, the Fund paid Eaton Vance advisory fees of
$658,963 (equivalent to 0.54% (annualized) of the Fund's average daily net
assets for such period). For the fiscal year ended October 31, 1993, the Fund
paid Eaton Vance advisory fees of $2,376,432 (equivalent to 0.54% of the Fund's
average net assets for such period. Eaton Vance received advisory fees of
$3,598,076 for the fiscal year ending October 31, 1992 (equivalent to 0.55% of
Fund's average daily net assets for such period). The agreement provided that
such fees shall be reduced by the amount, if any, of any contingent deferred
sales charge paid to the Fund's Principal Underwriter on any day on which there
exist no Uncovered Distribution Charges of the Principal Underwriter as
calculated under the Fund's Distribution Plan.
A commitment has been made to a state securities authority that Eaton Vance
will take certain actions, if necessary, so that the Fund's expenses will not
exceed expense limitation requirements of such state. The commitment may be
amended or rescinded by Eaton Vance in response to changes in the requirements
of the state or for other reasons.
The Investment Advisory Agreement with BMR remains in effect until February
28, 1996. It may be continued indefinitely thereafter so long as such
continuance after February 28, 1996 is approved at least annually (i) by the
vote of a majority of the Trustees of the Portfolio who are not interested
persons of the Portfolio or of BMR cast in person at a meeting specifically
called for the purpose of voting on such approval and (ii) by the Board of
Trustees of the Portfolio or by vote of a majority of the outstanding voting
securities of the Portfolio. The Agreement may be terminated at any time without
penalty on sixty (60) days' written notice by the Board of Trustees of either
party, or by vote of the majority of the outstanding voting securities of the
Portfolio, and the Agreement will terminate automatically in the event of its
assignment. The Agreement provides that BMR may render services to others and
engage in other business activities and may permit other fund clients and other
corporations and organizations to use the words "Eaton Vance" or "Boston
Management and Research" in their names. The Agreement also provides that BMR
shall not be liable for any loss incurred in connection with the performance of
its duties, or action taken or omitted under that Agreement, in the absence of
willful misfeasance, bad faith, gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
thereunder, or for any losses sustained in the acquisition, holding or
disposition of any security or other investment.
The Portfolio has also engaged BMR to act as its Administrator under an
Administration Agreement. The Administration Agreement with BMR remains in
effect until February 28, 1996 and shall continue in full force and effect
indefinitely thereafter, but only so long as such continuance is approved at
least annually (i) by the Trustees of the Portfolio and (ii) by the vote of a
majority of those Trustees of the Portfolio who are not interested persons of
the Portfolio or of the Administrator. Under the Administration Agreement, BMR
is obligated to (a) review and supervise the provision of all domestic and
foreign custodial services to the Portfolio, and to make such reports and
recommendations to the Board of Trustees of the Portfolio concerning the
provision of such services as the Board deems appropriate; (b) provide to the
Portfolio certain valuation, legal, accounting and tax assistance and services
in connection with the Portfolio's (i) investments in (A) securities,
obligations and commercial paper that are denominated in foreign currencies or
the European Currency Unit ("ECU"), or that are issued or guaranteed by foreign
entities, (B) certificates of deposit and bankers' acceptances issued or
guaranteed by, or time deposits maintained at, foreign banks or foreign branches
of U.S. banks, and (C) participation interests in loans by U.S. or foreign banks
that are made to foreign borrowers or that are denominated in foreign currencies
or the ECU; and (ii) transactions in derivative instruments, including
instruments indexed to foreign exchange rates, forward foreign currency exchange
contracts, put and call options on foreign currencies, futures contracts and
options on such contracts, and interest rate and currency swaps; and (c) provide
to the Portfolio such other special administrative services as the Board from
time to time shall instruct BMR to furnish under the Administration Agreement.
In return for these special services, the Portfolio pays BMR as compensation
under the Administration Agreement a monthly fee in the amount of .0125%
(equivalent to .15% annually) of the average daily net assets of the Portfolio.
For the period March 1, 1994, to October 31, 1994, the Portfolio paid BMR
administration fees of $284,828.
The Portfolio will be responsible for all costs and expenses not expressly
stated to be payable by BMR under the Administration Agreement. Such costs and
expenses to be borne by the Portfolio include, without limitation, the fees and
expenses of the Portfolio's custodian and transfer agent, including those
incurred for determining the Portfolio's net asset value and keeping the
Portfolio's books; expenses of pricing and valuation services; the cost of
interest certificates; membership dues in investment company organizations;
brokerage commissions and fees; fees and expenses of registering its interests;
expenses of reports to investors, proxy statements, and other expenses of
investor's meetings; insurance premiums; printing and mailing expenses;
interest, taxes and corporate fees; legal and accounting expenses; compensation
and expenses of Trustees not affiliated with BMR; and investment advisory and
administration fees. The Portfolio will also bear expenses incurred in
connection with litigation in which the Portfolio is a party and the legal
obligation the Portfolio may have to indemnify its officers and Trustees with
respect thereto.
As indicated in the Prospectus, Eaton Vance serves as Administrator of the
Fund under an Administrative Services Agreement, but receives no compensation
for providing administrative services to the Fund. Under its agreement with the
Fund, Eaton Vance has been engaged to administer the Fund's affairs, subject to
the supervision of the Trustees of the Trust, and shall furnish for the use of
the Fund office space and all necessary office facilities, equipment and
personnel for administering the affairs of the Fund. The Fund pays all of its
own expenses including, without limitation, (i) expenses of maintaining the Fund
and continuing its existence, (ii) registration of the Trust under the 1940 Act,
(iii) commissions, fees and other expenses connected with the purchase or sale
of securities and other investments, (iv) auditing, accounting and legal
expenses, (v) taxes and interest, (vi) governmental fees, (vii) expenses of
issue, sale, repurchase and redemption of shares, (viii) expenses of registering
and qualifying the Fund and its shares under Federal and state securities laws
and of preparing and printing prospectuses for such purposes and for
distributing the same to shareholders and investors, and fees and expenses of
registering and maintaining registrations of the Fund and of the Fund's
principal underwriter, if any, as broker-dealer or agent under state securities
laws, (ix) expenses of reports and notices to shareholders and of meetings of
shareholders and proxy solicitations therefor, (x) expenses of reports to
governmental officers and commissions, (xi) insurance expenses, (xii)
association membership dues, (xiii) fees, expenses and disbursements of
custodians and subcustodians for all services to the Fund (including without
limitation safekeeping of funds, securities and other investments, keeping of
books and accounts and determination of net asset values), (xiv) fees, expenses
and disbursements of transfer agents, dividend disbursing agents, shareholder
servicing agents and registrars for all services to the Fund, (xv) expenses for
servicing shareholder accounts, (xvi) any direct charges to shareholders
approved by the Trustees of the Trust, (xvii) compensation and expenses of
Trustees of the Trust who are not members of the Eaton Vance organization, and
(xviii) such non-recurring items as may arise, including expenses incurred in
connection with litigation, proceedings and claims and the obligation of the
Trust to indemnify its Trustees and officers with respect thereto. Prior to the
close of business, February 28, 1994 (when the Fund transferred substantially
all of its assets to the Portfolio in exchange for an interest in the
Portfolio), the Fund retained Eaton Vance as its administrator under its
Administration Agreement (which is no longer in effect) for which Eaton Vance
received a monthly administration fee at an annual rate of .15% of the Fund's
average daily net assets. For the period November 1, 1994, to March 1, 1994, and
for the fiscal years ended October 31, 1993 and 1992, the Fund paid Eaton Vance
administration fees of $182,735, $642,861 and $989,372, respectively. Since
March 1, 1994, Eaton Vance has continued to serve as the administrator of the
Fund but currently receives no compensation for these services.
BMR is a wholly-owned subsidiary of Eaton Vance. Eaton Vance and EV are both
wholly-owned subsidiaries of EVC. BMR and Eaton Vance are both Massachusetts
business trusts, and EV is the trustee of BMR and Eaton Vance. The Directors of
EV are Landon T. Clay, H. Day Brigham, Jr., M. Dozier Gardner, James B. Hawkes
and Benjamin A. Rowland, Jr. The Directors of EVC consist of the same persons
and John G. L. Cabot and Ralph Z. Sorenson. Mr. Clay is chairman and Mr. Gardner
is president and chief executive officer of EVC, BMR, Eaton Vance and EV. All of
the issued and outstanding shares of Eaton Vance and EV are owned by EVC. All of
the issued and outstanding shares of BMR are owned by Eaton Vance. All shares of
the outstanding Voting Common Stock of EVC are deposited in a Voting Trust which
expires on December 31, 1996, the Voting Trustees of which are Messrs. Clay,
Brigham, Gardner, Hawkes and Rowland. The Voting Trustees have unrestricted
voting rights for the election of Directors of EVC. All of the outstanding
voting trust receipts issued under said Voting Trust are owned by certain of the
officers of BMR and Eaton Vance who are also officers and Directors of EVC and
EV. As of July 31, 1995, Messrs. Clay, Gardner and Hawkes each owned 24% of such
voting trust receipts, and Messrs. Rowland and Brigham, owned 15% and 13%,
respectively, of such voting trust receipts. Messrs. Hawkes, Woodbury, Murphy,
Gardner, Clay, Brigham, Otis, Venezia, O'Connor, Ahern and Rynne and Ms. Sanders
are officers or Trustees of the Trust or officers or Trustees of the Portfolio
and are members of the EVC, BMR, Eaton Vance and EV organizations.
EVC owns all of the stock of Marblehead Energy Corp., which engages in oil
and gas operations, and 77.3% of the stock of Investors Bank & Trust Company,
custodian of the Fund and the Portfolio, which provides custodial, trustee and
other fiduciary services to investors, including individuals, employee benefit
plans, corporations, investment companies, savings banks and other institutions.
In addition, Eaton Vance owns all the stock of Northeast Properties, Inc., which
is engaged in real estate investment, consulting and management. EVC owns all
the stock of Fulcrum Management, Inc. and MinVen, Inc., which are engaged in the
development of precious metal properties. Eaton Vance, BMR, EVC and EV may also
enter into other businesses.
EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Fund and
the Portfolio, Investors Bank & Trust Company. It is Eaton Vance's opinion that
the terms and conditions of such transactions were not and will not be
influenced by existing or potential custodial or other relationships between the
Fund or the Portfolio and such banks.
CUSTODIAN
Investors Bank & Trust Company ("IBT"), 24 Federal Street, Boston,
Massachusetts (a 77.3% owned subsidiary of EVC) acts as custodian for the Fund
and the Portfolio. IBT has the custody of all cash and securities representing
the Fund's interest in the Portfolio, has custody of all the Portfolio's assets,
maintains the general ledger of the Portfolio and the Fund and computes the
daily net asset value of interests in the Portfolio and the net asset value of
shares of the Fund. In such capacity it attends to details in connection with
the sale, exchange, substitution, transfer or other dealings with the
Portfolio's investments, receives and disburses all funds and performs various
other ministerial duties upon receipt of proper instructions from the Fund and
the Portfolio. IBT charges custody fees which are competitive within the
industry. The fees for the Portfolio relate to 1) bookkeeping and valuation
services provided at an annual rate, 2) activity charges based upon the volume
of investment related transactions, and 3) reimbursement of out-of-pocket
expenses. These fees are then reduced by a credit for cash balances of the
Portfolio at the custodian equal to 75% of the 91-day, U.S. Treasury Bill
auction rate applied to the Portfolio's average daily collected balances. The
fee for the Fund relates to bookkeeping and valuation services and is based upon
a percentage of the Fund's net assets. In view of the ownership of EVC in IBT,
the Portfolio is treated as a self-custodian pursuant to Rule 17f-2 under the
1940 Act, and the Portfolio's investments held by IBT as custodian are thus
subject to the additional examinations by the Portfolio's independent certified
public accountants as called for by such Rule. During the fiscal year ended
October 31, 1994, the Fund paid IBT $139,168 and the Portfolio paid IBT
$191,871. EVC has announced its intention to sell its interest in IBT in 1995.
SERVICE FOR WITHDRAWAL
By a standard agreement, the Trust's Transfer Agent will send to the
shareholder regular monthly or quarterly payments of any designated amount based
upon the value of the shares held. The checks will be drawn from share
redemptions and hence, although they are a return of principal may give rise to
gain or loss for tax purposes. Income dividends and capital gains distributions
in connection with withdrawal accounts will be credited at net asset value as of
the record date for each distribution. Continued withdrawals in excess of
current income will eventually use up principal, particularly in a period of
declining market prices.
To use this service, at least $5,000 in cash or shares at the public
offering price (i.e., net asset value) will have to be deposited with the
Transfer Agent. A shareholder may not have a withdrawal plan in effect at the
same time he has authorized Bank Draft Investing or is otherwise making regular
purchases of Fund shares. Either the shareholder, the Transfer Agent or the
Principal Underwriter will be able to terminate the withdrawal plan at any time
without penalty.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Portfolio and of shares of the Fund is
determined by IBT, the custodian (as agent for the Fund and the Portfolio) in
the manner described under "Valuing Fund Shares" in the Fund's current
prospectus. The Fund and the Portfolio will be closed for business and will not
price their respective shares or interests on the following business holidays:
New Year's Day, Presidents' Day, Good Friday (a New York Stock Exchange
holiday), Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
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 prices. Over-the-counter options are valued at the mean
between the bid and asked prices provided by dealers. 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 maturing in sixty days or less 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 of the Portfolio.
The value of all assets and liabilities expressed in foreign currencies will
be converted into U.S. dollar values at the mean between the buying and selling
rates of such currencies against U.S. dollars last quoted on one of the
principal markets for such currencies. Generally, trading in foreign securities,
derivative instruments and currencies is substantially completed each day at
various times prior to the time the Portfolio calculates its net asset value. If
an event materially affecting the values of such securities, instruments or
currencies occurs between the time such values are determined and the time net
asset value is calculated, such securities, instruments or currencies may be
valued at fair value.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each day the New York Stock Exchange (the
"Exchange") is open for trading ("Portfolio Business Day") as of the close of
regular trading on the Exchange (the "Portfolio Valuation Time"). The value of
each investor's interest in the Portfolio will be determined by multiplying the
net asset value of the Portfolio by the percentage, determined on the prior
Portfolio Business Day, which represented that investor's share of the aggregate
interests in the Portfolio on such prior day. Any additions or withdrawals for
the current Portfolio Business Day will then be recorded. The investor's
percentage of the aggregate interest in the Portfolio will then be recomputed as
a percentage equal to the fraction (i) the numerator of which is the value of
such investor's investment in the Portfolio as of the Portfolio Valuation Time
on the prior Portfolio Business Day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's investment in the
Portfolio on the current Portfolio Business Day and (ii) the denominator of
which is the aggregate net asset value of the Portfolio as of the Portfolio
Valuation Time on the prior Portfolio Business Day plus or minus, as the case
may be, the amount of the net additions to or withdrawals from the aggregate
investment in the Portfolio on the current Portfolio Business Day by all
investors in the Portfolio. The percentage so determined will then be applied to
determine the value of the investor's interest in the Portfolio for the current
Portfolio Business Day.
INVESTMENT PERFORMANCE
The Fund's average annual total return is determined by multiplying a
hypothetical initial purchase order of $1,000 by the average annual compound
rate of return (including capital appreciation/depreciation, and dividends and
distributions paid and reinvested) for the stated period and annualizing the
results. The calculation assumes that all dividends and distributions are
reinvested at net asset value on the reinvestment dates during the period, and a
complete redemption of the investment and the deduction of the maximum
contingent deferred sales charge at the end of the period.
The Fund's yield is computed pursuant to a standardized formula by dividing
its net investment income per share earned during a recent 30-day period by the
net asset value per share on the last day of the period and annualizing the
resulting figure. Net investment income per share is calculated from the yields
to maturity of all debt obligations held by the Portfolio based on the market
value of such obligations, at the beginning of such period, reduced by accrued
Fund expenses for the period, with the resulting number being divided by the
average daily number of Fund shares outstanding and entitled to receive
dividends during the period. This yield figure does not reflect the deduction of
any contingent deferred sales charges which are imposed upon certain redemptions
at the rates set forth under "How to Redeem Fund Shares" in the prospectus. The
Fund's yield for the 30-day period ended April 30, 1995 was 7.88%.
The Fund may also publish its distribution rate and/or its effective
distribution rate. The Fund's distribution rate is computed by dividing the most
recent monthly distribution per share annualized, by the current net asset value
per share. The Fund's effective distribution rate is computed by dividing the
distribution rate by the ratio used to annualize the distribution and
reinvesting the resulting amount for a full year on the basis of such ratio. The
effective distribution rate will be higher than the distribution rate because of
the compounding effect of the assumed reinvestment. The Fund's yield is
calculated using a standardized formula, the income component of which is
computed from the yields to maturity of all debt obligations held by the
Portfolio based on the market value of such obligations on the day preceding the
30-day period (with all purchases and sales of securities during such period
included in the income calculation on a settlement date basis), whereas the
distribution rate is based on the Fund's last monthly distribution, which tends
to be relatively stable and may be more or less than the amount of net
investment income and short-term capital gain actually earned by the Fund during
the month (see "Distributions and Taxes" in the Fund's current Prospectus). The
Fund's distribution rate (calculated on April 30, 1995 and based on the Fund's
monthly distribution paid April 30, 1995) was 8.34%, and the Fund's effective
distribution rate (calculated on the same date and based on the same monthly
distribution) was 8.67%.
The table below indicates the total return (capital changes plus
reinvestment of all distributions) on a hypothetical investment of $1,000 in the
Fund covering the life of the Fund from the period from the start of business,
November 26, 1990 through April 30, 1995 and for the one year period ended April
30, 1995.
<TABLE>
<CAPTION>
VALUE OF A $1,000 INVESTMENT
VALUE OF INVEST- VALUE OF INVEST- TOTAL RETURN TOTAL RETURN
MENT BEFORE DE- MENT AFTER DE- BEFORE DEDUCTING AFTER DEDUCTING
DUCTING THE CON- DUCTING THE CON- THE CONTINGENT DEFERRED THE CONTINGENT DEFERRED
TINGENT DEFERRED TINGENT DEFERRED SALES CHARGE SALES CHARGE
INVESTMENT INVESTMENT AMOUNT OF SALES CHARGE SALES CHARGE** -------------------------- --------------------------
PERIOD DATE INVESTMENT ON 4/30/95 ON 4/30/95 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
- ------------ ---------- ----------- --------------- --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of the
Fund* 11/26/90 $1,000 $1,145.12 $1,145.12 14.51% 3.11% 14.51% 3.11%
1 Year Ended
4/30/95 4/30/94 $1,000 $1,025.94 $ 978.55 2.59% 2.59% -2.15% -2.15%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGES -- 11/26/90-4/30/95
NET ASSET VALUE TO NET ASSET VALUE NET ASSET VALUE TO NET ASSET VALUE
BEFORE DEDUCTING THE CONTINGENT DEFERRED AFTER DEDUCTING THE CONTINGENT DEFERRED
SALES CHARGE WITH ALL DISTRIBUTIONS REINVESTED SALES CHARGE WITH ALL DISTRIBUTIONS REINVESTED
PERIOD ---------------------------------------------- ----------------------------------------------
ENDED ANNUAL CUMULATIVE AVERAGE ANNUAL ANNUAL CUMULATIVE AVERAGE ANNUAL
- ---- ---- ------ --------- ---- ------ --------
<S> <C> <C> <C> <C> <C> <C>
10/31/91* -- 7.98% -- -- 5.00% --
10/31/92 -1.45% 6.41% 3.27% -6.05% 4.13% 2.12%
10/31/93 10.51% 17.59% 5.68% 5.51% 15.71% 5.10%
10/31/94 -5.33% 11.32% 2.76% -9.74% 10.49% 2.57%
4/30/95 2.87% 14.51% 3.11% -0.09% 14.51% 3.11%
- ----------
*Investment operations began on November 26, 1990.
**No contingent deferred sales charge is imposed on shares purchased more than four years prior to the redemption, shares
acquired through the reinvestment of distributions and any appreciation in value of other shares in the account, and no such
charge is imposed on exchanges of Fund shares for shares of one or more other funds listed under "The Eaton Vance Exchange
Privilege" in the Fund's current Prospectus.
</TABLE>
Past performance is not indicative of future results. Investment return and
principal value will fluctuate; shares, when redeemed, may be worth more or less
than original cost.
The Fund's total return may be compared to the Commodity Research Bureau
Futures Price Index and various domestic, international and global securities
indices. The Fund's total return and comparisons with these indices may be used
in advertisements and in information furnished to present or prospective
shareholders. The Fund's performance may differ from that of other investors in
the Portfolio, including the other investment companies.
From time to time, evaluations of the Fund's performance made by independent
sources, e.g., Lipper Analytical Services, Inc., CDA/Wiesenberger and
Morningstar, Inc., may be used in advertisements and in information
furnished to present or prospective shareholders.
From time to time, information showing the effects of compounding interest
may be included in advertisements and other material furnished to present and
prospective shareholders. Compounding is the process of earning interest on
principal plus interest that was earned earlier. Interest can be compounded
annually, semi-annually, quarterly or daily, e.g., $1,000 compounded annually at
9 percent will grow to $1,090 at the end of the first year and $1,188 at the end
of the second year. The extra $8, which was earned on the $90 interest from the
first year, is the compound interest. $1,000 compounded annually at 9 percent
grows to $2,367 at the end of 10 years and $5,604 at the end of 20 years. Other
examples of compounding $1,000 annually are that 7 percent grows to $1,967 at
the end of 10 years and $3,870 at the end of 20 years. At 12 percent the $1,000
grows to $3,106 at the end of 10 years and $9,646 at the end of 20 years. All of
these examples are for illustrative purposes only and are not meant to indicate
performance of the Fund.
Information used in advertisements and in materials furnished to present and
prospective shareholders may include statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds which may be employed
to meet specific financial goals, such as (1) funding retirement, (2) paying for
children's education, and (3) financially supporting aging parents. These three
financial goals may be referred to in such advertisements or materials as the
"Triple Squeeze."
TAXES
FEDERAL INCOME TAXES
Each series of the Trust is treated as a separate entity for federal income
tax purposes. The Fund has elected to be treated, has qualified, and intends to
continue to qualify each year as a regulated investment company under the
Internal Revenue Code (the "Code"). Accordingly, the Fund intends to satisfy
certain requirements relating to sources of its income and diversification of
its assets and to distribute all of its net investment income and net realized
capital gains in accordance with the timing requirements imposed by the Code, so
as to avoid any Federal income or excise tax to the Fund. The Fund so qualified
for its fiscal year ended October 31, 1994. See Notes to Financial Statements.
Because the Fund invests substantially all of its assets in the Portfolio, the
Portfolio normally must satisfy the applicable source of income and
diversification requirements in order for the Fund to satisfy them. The
Portfolio will allocate at least annually among its investors, including the
Fund, each investor's distributive share of the Portfolio's net taxable (if any)
and tax-exempt investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit. For purposes of applying the
requirements of the Code regarding qualification as a regulated investment
company, the Fund will be deemed (i) to own its proportionate share of each of
the assets of the Portfolio and (ii) to be entitled to the gross income of the
Portfolio attributable to such share.
In order to avoid federal excise tax, the Code requires that the Fund
distribute by December 31 of each calendar year at least 98% of its ordinary
income (not including tax-exempt income) for such year, at least 98% of the
excess of its realized capital gains over its realized capital losses, generally
computed on the basis of the one-year period ending on October 31 of such year,
after reduction by any available capital loss carryforwards, and 100% of any
income from the prior year (as previously computed) that was not paid out during
such year and on which the Fund paid no Federal income tax.
The Portfolio's transactions in options, futures contracts and forward
contracts will be subject to special tax rules that may affect the amount,
timing and character of the Fund's distributions to shareholders. For example,
certain positions held by the Portfolio on the last business day of each taxable
year will be marked to market (i.e., treated as if closed out on such day), and
any resulting gain or loss will generally be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Portfolio that
substantially diminish the Portfolio's risk of loss with respect to other
positions in its portfolio may constitute "straddles," which are subject to tax
rules that may cause deferral of Portfolio losses, adjustments in the holding
periods of Portfolio securities and conversion of short-term into long-term
capital losses. The Portfolio may make certain elections to mitigate adverse
consequences of these tax rules and may have to limit its activities in options,
futures contracts and forward contracts in order to enable the Fund to maintain
its qualification as a regulated investment company.
The Portfolio may be subject to foreign withholding taxes with respect to
income derived from foreign securities. These taxes may be reduced or eliminated
under the terms of an applicable U.S. income tax treaty. Since it is expected
that more than 50% of the value of the total assets of the Fund taking into
account its allocable share of the Portfolio's total assets, at the close of any
taxable year will consist of securities issued by foreign corporations, the Fund
may be eligible to pass through to shareholders their proportionate shares of
foreign taxes paid by the Fund, with the result that shareholders would include
such proportionate shares in income subject to federal income tax and would be
entitled to take a foreign tax credit or deduction for such foreign taxes,
subject to certain limitations. Certain foreign exchange gains and losses
realized by the Fund will be treated as ordinary income and losses. Certain uses
of foreign currency, foreign currency options, futures and forward contracts,
and interest rate and currency swaps, and investment by the Portfolio in certain
"passive foreign investment companies" may be limited or a tax election may be
made, if available, in order to preserve the Fund's qualification as a regulated
investment company and/or avoid imposition of a tax on the Fund.
The Portfolio's investment in zero coupon, deferred interest and payment in
kind securities will cause it to realize income prior to the receipt of cash
payments with respect to these securities. Such income will be allocated daily
to interests in the Portfolio in order to enable the Fund to distribute its
proportionate share of this income and avoid a tax payable by the Fund. The
Portfolio may be required to liquidate portfolio securities that it might
otherwise have continued to hold in order to generate cash that the Fund may
withdraw from the Portfolio for subsequent distribution to Fund shareholders.
The appropriate tax accounting for dollar rolls is also uncertain in some
respects, and the Portfolio's use of such rolls may accordingly be limited in
order to preserve the Fund's qualification as a regulated investment company.
Investments in lower-rated or unrated securities may present special tax
issues for the Portfolio and hence for the Fund to the extent actual or
anticipated defaults may be more likely with respect to such securities. Tax
rules are not entirely clear about issues such as when the Portfolio may cease
to accrue interest, original issue discount, or market discount; when and to
what extent deductions may be taken for bad debts or worthless securities; how
payments received on obligations in default should be allocated between
principal and income; and whether exchanges of debt obligations in a workout
context are taxable.
Distributions of taxable net investment income, the excess of net short-term
capital gains over net long-term capital losses and certain foreign exchange
gains earned by the Portfolio and allocated to the Fund are taxable to
shareholders of the Fund as ordinary income whether received in cash or
reinvested in additional shares. Only a small portion, if any, of such
distributions of net investment income made by the Fund may qualify for the
dividends-received deduction for corporations, subject to applicable limitations
under the Code. Distributions of the excess of net long-term capital gains over
net short-term capital losses (including any capital losses carried forward from
prior years) earned by the Portfolio and allocated to the Fund are taxable to
shareholders of the Fund as long-term capital gains, whether received in cash or
in additional shares and regardless of the length of time their shares of the
Fund have been held.
Any loss realized upon the redemption or exchange of shares with a tax
holding period of 6 months or less will be treated as a long-term capital loss
to the extent of any distribution of net long-term capital gains with respect to
such shares. All or a portion of any loss realized upon a taxable disposition of
Fund shares may be disallowed under "wash sale" rules if other shares of the
Fund are purchased (whether through the reinvestment of distributions or
otherwise) within 30 days before or after such disposition.
Special tax rules apply to Individual Retirement Accounts ("IRAs") and other
retirement plans, and persons investing through such plans should consult their
tax advisers for more information. The deductibility of such contributions may
be restricted or eliminated for particular shareholders.
Amounts paid by the Fund to individuals and certain other shareholders who
have not provided the Fund with their correct taxpayer identification number and
certain required certifications, as well as shareholders with respect to whom
the Fund has received notification from the Internal Revenue Service or a
broker, may be subject to "backup" withholding of Federal income tax from the
Fund's dividends and distributions and the proceeds of redemptions (including
repurchases and exchanges), at a rate of 31%. An individual's taxpayer
identification number is generally his or her social security number.
Non-resident alien individuals and certain foreign corporations and other
entities generally will be subject to a U.S. withholding tax at a rate of 30% on
the Fund's distributions from its ordinary income and the excess of its net
short-term capital gain over its net long-term capital loss, unless the tax is
reduced or eliminated by an applicable tax treaty. Distributions from the excess
of the Fund's net long-term capital gain over its net short-term capital loss
received by such shareholders and any gain from the sale or other disposition of
shares of the Fund generally will not be subject to U.S. Federal income
taxation, provided that non-resident alien status has been certified by the
shareholder. Different U.S. tax consequences may result if the shareholder is
engaged in a trade or business in the United States, is present in the United
States for a sufficient period of time during a taxable year to be treated as a
U.S. resident, or fails to provide any required certifications regarding status
as a non-resident alien investor. Foreign shareholders should consult their tax
advisers regarding the U.S. and foreign tax consequences of an investment in the
Fund.
The Fund had qualified to do business in the Commonwealth of Pennsylvania
and, therefore, was subject to the Pennsylvania foreign franchise and corporate
net income tax in respect of its business activities in Pennsylvania. The amount
of such taxes was $28,080 for the fiscal year ended October 31, 1994. In 1995,
however, the Fund took actions to cease doing business in Pennsylvania and does
not intend to pay Pennsylvania foreign franchise and corporate net income tax in
Pennsylvania. Accordingly, Fund shareholders should consult their tax advisers
regarding the applicability of Pennsylvania local and county personal property
taxes.
The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as retirement plans, tax-exempt entities,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to special tax rules that may apply in their
particular situations, as well as the state, local or foreign tax consequences
of investing in the Fund.
PRINCIPAL UNDERWRITER
Under the Distribution Agreement the Principal Underwriter acts as principal
in selling shares of the Fund. The expenses of printing copies of prospectuses
used to offer shares to financial service firms or investors and other selling
literature and of advertising are borne by the Principal Underwriter. The fees
and expenses of qualifying and registering and maintaining qualifications and
registrations of the Fund and its shares under Federal and state securities laws
are borne by the Fund. In addition, the Fund makes payments to the Principal
Underwriter pursuant to its Distribution Plan as described in the Fund's current
Prospectus; the provisions of the Distribution Plan relating to such payments
are included in the Distribution Agreement. The Distribution Agreement is
renewable annually by the Trust's Board of Trustees (including a majority of its
Trustees who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Fund's Distribution Plan or
the Distribution Agreement), may be terminated on sixty days' notice either by
such Trustees or by vote of a majority of the outstanding voting securities of
the Fund or on six months' notice by the Principal Underwriter and is
automatically terminated upon assignment. The Principal Underwriter distributes
Fund shares on a "best efforts" basis under which it is required to take and pay
for only such shares as may be sold.
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares and paid the Principal Underwriter $9,317.50 for the fiscal
year ended October 31, 1994 (being $2.50 for each repurchase transaction handled
by the Principal Underwriter). The Principal Underwriter estimates that the
expenses incurred by it in acting as repurchase agent for the Fund will exceed
the amounts paid therefor by the Fund.
DISTRIBUTION PLAN
The Distribution Plan (the "Plan") is described in the Prospectus and is
designed to meet the requirements of Rule 12b-1 under the 1940 Act and the sales
charge rule of the National Association of Securities Dealers, Inc. (the "NASD
Rule"). The purpose of the Plan is to compensate the Principal Underwriter for
its distribution services and facilities provided to the Fund by paying the
Principal Underwriter sales commissions and a separate distribution fee in
connection with sales of Fund shares. The following supplements the discussion
of the Plan contained in the Fund's Prospectus.
The amount payable to the Principal Underwriter pursuant to the Plan with
respect to each day will be accrued on such day as a liability of the Fund and
will accordingly reduce the Fund's net assets upon such accrual, all in
accordance with generally accepted accounting principles. The amount payable on
each day is limited to 1/365 of .75% of the Fund's net assets on such day. The
level of the Fund's net asset changes each day and depends upon the amount of
sales and redemptions of Fund shares, the changes in the value of the
investments held by the Portfolio investments of the Portfolio accrued and
allocated to the Fund on such day, and any dividends and distributions declared
by the Fund. The Fund does not accrue possible future payments as a liability of
the Fund or reduce the Fund's current net assets in respect of unknown amounts
which may become payable under the Plan in the future because the standards for
accrual of a liability under such accounting principles have not been satisfied.
The Plan provides that the Fund will receive all contingent deferred sales
charges and will make no payments to the Principal Underwriter in respect of any
day on which there are no outstanding Uncovered Distribution Charges of the
Principal Underwriter. Contingent deferred sales charges and accrued amounts
will be paid to the Principal Underwriter whenever there exist Uncovered
Distribution Charges under the Plan.
In calculating daily the amount of uncovered distribution charges,
distribution charges will include the aggregate amount of sales commissions and
distribution fees theretofore paid plus the aggregate amount of sales
commissions and distribution fees which the Principal Underwriter is entitled to
be paid under the Plan since its inception. Payments theretofore paid and
payable under the Plan by the Fund to the Principal Underwriter and contingent
deferred sales charges theretofore paid and payable to the Principal Underwriter
will be subtracted from such distribution charges; if the result of such
subtraction is positive, a distribution fee (computed at 1% over the prime rate
then reported in The Wall Street Journal) will be computed on such amount and
added thereto, with the resulting sum constituting the amount of outstanding
uncovered distribution charges with respect to such day. The amount of
outstanding uncovered distribution charges of the Principal Underwriter
calculated on any day does not constitute a liability recorded on the financial
statements of the Fund.
As currently implemented by the Trustees, the Plan authorizes payments of
sales commissions and distribution fees to the Principal Underwriter and service
fees to the Principal Underwriter and Authorized Firms which may be equivalent,
on an aggregate basis during any fiscal year of the Fund, to 1% of the Fund's
average daily net assets for such year. The Fund believes that the combined rate
of all these payments may be higher than the rate of payments made under
distribution plans adopted by other investment companies pursuant to Rule 12b-1.
Although the Principal Underwriter will use its own funds (which may be borrowed
from banks) to pay sales commissions at the time of sale, it is anticipated that
the Eaton Vance organization will profit by reason of the operation of the Plan
through an increase in the Fund's assets (thereby increasing the advisory fee
payable to BMR by the Portfolio) resulting from sale of Fund shares and through
amounts paid to the Principal Underwriter, including contingent deferred sales
charges pursuant to the Plan. The Eaton Vance organization may be considered to
have realized a profit under the Plan if at any point in time the aggregate
amounts theretofore received by the Principal Underwriter pursuant to the Plan
and from contingent deferred sales charges have exceeded the total expenses
theretofore incurred by such organization in distributing shares of the Fund.
Total expenses for this purpose will include an allocable portion of the
overhead costs of such organization and its branch offices, which costs will
include without limitation leasing expense, depreciation of building and
equipment, utilities, communication and postage expense, compensation and
benefits of personnel, travel and promotional expense, stationery and supplies,
literature and sales aids, interest expense, data processing fees, consulting
and temporary help costs, insurance, taxes other than income taxes, legal and
auditing expense and other miscellaneous overhead items. Overhead is calculated
and allocated for such purpose by the Eaton Vance organization in a manner
deemed equitable to the Fund.
Periods with a high level of sales of Fund shares accompanied by a low level
of early redemptions of Fund shares resulting in the imposition of contingent
deferred sales charges will tend to increase the time during which there will
exist Uncovered Distribution Charges of the Principal Underwriter. Conversely,
periods with a low level of sales of Fund shares accompanied by a high level of
early redemptions of Fund shares resulting in the imposition of contingent
deferred sales charges will tend to reduce the time during which there will
exist Uncovered Distribution Charges of the Principal Underwriter.
The amount of uncovered distribution charges of the Principal Underwriter at
any particular time depends upon various changing factors, including the level
and timing of sales of Fund shares, the nature of such sales (i.e., whether they
result from exchange transactions, reinvestments or from cash sales through
Authorized Firms), the level and timing of redemptions of Fund shares upon which
a contingent deferred sales charge will be imposed, the level and timing of
redemptions of Fund shares upon which no contingent deferred sales charge will
be imposed (including redemptions involving exchanges of Fund shares for shares
of another fund which result in a reduction of uncovered distribution charges),
changes in the level of the net assets of the Fund, and changes in the interest
rate used in the calculation of the distribution fee under the Plan.
For the fiscal year ended October 31, 1994, the Principal Underwriter paid
to Authorized Firms sales commissions aggregating $132,608 on sales of Fund
shares. During the same period, the Fund made sales commission payments to the
Principal Underwriter under the Plan aggregating $2,311,030, which amount
reduced Uncovered Distribution Charges. During such period contingent deferred
sales charges aggregating approximately $1,547,900 were imposed on early
redeeming shareholders and paid to the Principal Underwriter to reduce Uncovered
Distribution Charges. As at October 31, 1994, the outstanding Uncovered
Distribution Charges of the Principal Underwriter calculated under the Plan
amounted to approximately $17,473,000 (which amount was equivalent to 7.5% of
the Fund's net assets on such day).
The Plan also authorizes the Fund to make payments of service fees. During
the fiscal year ending October 31, 1994, the Fund made service fee payments
aggregating $665,173 to the Principal Underwriter, of which $663,446 was paid to
Authorized Firms and the balance of which was retained by the Principal
Underwriter.
Pursuant to Rule 12b-1, the Plan has been approved by the Fund's initial
sole shareholder (Eaton Vance) and by the Board of Trustees of the Trust,
including the Trustees of the Trust who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Plan or any agreements related to the Plan (the "Rule 12b-1 Trustees"). The Plan
provides that it shall continue in effect for so long as such continuance is
approved at least annually by the vote of both a majority of (i) the Rule 12b-1
Trustees and (ii) all of the Trustees then in office, and the Distribution
Agreement contains a similar provision. The Plan and Distribution Agreement may
be terminated at any time by a vote of a majority of the Rule 12b-1 Trustees or
by a vote of a majority of the outstanding voting securities of the Fund. The
provisions of the Plan relating to payments of sales commissions and
distribution fees to the Principal Underwriter are also included in the
Distribution Agreement between the Trust on behalf of the Fund and the Principal
Underwriter. Under the Plan the President or a Vice President of the Trust shall
provide to the Trustees for their review, and the Trustees shall review at least
quarterly, a written report of the amount expended under the Plan and the
purposes for which such expenditures were made. The Plan may not be amended to
increase materially the payments described therein without approval of the
shareholders of the affected class of the Fund, and all material amendments of
the Plan must also be approved by the Trustees as required by Rule 12b-1. So
long as the Plan is in effect, the selection and nomination of Trustees who are
not interested persons of the Trust shall be committed to the discretion of the
Trustees who are not such interested persons.
The Trustees believe that the Plan has been a significant factor in the
growth of the Fund's assets, resulting in increased investment flexibility and
advantages which have benefited and will continue to benefit the Fund and its
shareholders. Payments for sales commissions and distribution fees made to the
Principal Underwriter under the Plan will compensate the Principal Underwriter
for its services and expenses in distributing shares of the Fund. Service fee
payments made to the Principal Underwriter and Authorized Firms under the Plan
provide incentives to provide continuing personal services to investors and the
maintenance of shareholder accounts. By providing incentives to the Principal
Underwriter and Authorized Firms, the Plan is expected to result in the
maintenance of, and possible future growth in, the assets of the Fund. Based on
the foregoing and other relevant factors, the Trustees have determined that in
their judgment there is a reasonable likelihood that the Plan will benefit the
Fund and its shareholders.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the executing firm, are made by BMR.
BMR is also responsible for the execution of transactions for all other accounts
managed by it.
BMR places the portfolio security transactions of the Portfolio and of all
other accounts managed by it for execution with many firms. BMR uses its best
efforts to obtain execution of portfolio security transactions at prices which
are advantageous to the Portfolio and at reasonably competitive spreads or (when
a disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, BMR will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the executing firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions, and
the reasonableness of the spread or commission, if any. The debt securities and
obligations purchased and sold by the Portfolio are generally traded in the
domestic or foreign over-the-counter markets on a net basis (i.e. without
commission) through broker-dealers and banks acting for their own account rather
than as brokers, or otherwise involve transactions directly with the issuer of
such obligations. Such firms attempt to profit from such transactions by buying
at the bid price and selling at the higher asked price of the market for such
obligations, and the difference between the bid and asked price is customarily
referred to as the spread. The Portfolio may also purchase debt securities from
domestic and foreign underwriters, the cost of which may include undisclosed
fees and concessions to the underwriters. Transactions in foreign obligations
usually involve the payment of fixed brokerage commissions when executed on
foreign securities exchanges, which commissions are generally higher than those
in the United States. Although commissions on portfolio security transactions
will, in the judgment of BMR, be reasonable in relation to the value of the
services provided, commissions exceeding those which another firm might charge
may be paid to firms who were selected to execute transactions on behalf of the
Portfolio and BMR's other clients for providing brokerage and research services
to BMR.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Portfolio
may receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if BMR
determines in good faith that such commission was reasonable in relation to the
value of the brokerage and research services provided. This determination may be
made on the basis of either that particular transaction or on the basis of
overall responsibilities which BMR and its affiliates have for accounts over
which they exercise investment discretion. In making any such determination, BMR
will not attempt to place a specific dollar value on the brokerage and research
services provided or to determine what portion of the commission should be
related to such services. Brokerage and research services may include advice as
to the value of securities, the advisability of investing in, purchasing, or
selling securities, and the availability of securities or purchasers or sellers
of securities; furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement); and the "Research
Services" referred to in the next paragraph.
It is a common practice of the investment advisory industry and of the
advisers of investment companies, institutions and other investors to receive
research, statistical and quotation services, data, information and other
services, products and materials which assist such advisers in the performance
of their investment responsibilities ("Research Services") from broker-dealer
firms which execute portfolio transactions for the clients of such advisers and
from third parties with which such broker-dealers have arrangements. Consistent
with this practice, BMR receives Research Services from many broker-dealer firms
with which BMR places the Portfolio transactions and from third parties with
which these broker-dealers have arrangements. These Research Services include
such matters as general economic and market reviews, industry and company
reviews, evaluations of securities and portfolio strategies and transactions and
recommendations as to the purchase and sale of securities and other portfolio
transactions, financial, industry and trade publications, news and information
services, pricing and quotation equipment and services, and research oriented
computer hardware, software, data bases and services. Any particular Research
Service obtained through a broker-dealer may be used by BMR in connection with
client accounts other than those accounts which pay commissions to such
broker-dealer. Any such Research Service may be broadly useful and of value to
BMR in rendering investment advisory services to all or a significant portion of
its clients, or may be relevant and useful for the management of only one
client's account or of a few clients' accounts, or may be useful for the
management of merely a segment of certain clients' accounts, regardless of
whether any such account or accounts paid commissions to the broker-dealer
through which such Research Service was obtained. The advisory fee paid by the
Portfolio is not reduced because BMR receives such Research Services. BMR
evaluates the nature and quality of the various Research Services obtained
through broker-dealer firms and attempts to allocate sufficient commissions to
such firms to ensure the continued receipt of Research Services which BMR
believes are useful or of value to it in rendering investment advisory services
to its clients.
Subject to the requirement that BMR shall use its best efforts to seek and
execute portfolio security transactions at advantageous prices and at reasonably
competitive spreads or commission rates, BMR is authorized to consider as a
factor in the selection of any firm with whom portfolio orders may be placed the
fact that such firm has sold or is selling shares of the Fund or of other
investment companies sponsored by BMR or Eaton Vance. This policy is not
inconsistent with a rule of the National Association of Securities Dealers,
Inc., which rule provides that no firm which is a member of the Association
shall favor or disfavor the distribution of shares of any particular investment
company or group of investment companies on the basis of brokerage commissions
received or expected by such firm from any source.
Securities considered as investments for the Portfolio may also be
appropriate for other investment accounts managed by BMR or its affiliates. BMR
will attempt to allocate equitably portfolio security transactions among the
Portfolio and the portfolios of its other investment accounts purchasing
municipal obligations whenever decisions are made to purchase or sell securities
by the Portfolio and one or more of such other accounts simultaneously. In
making such allocations, the main factors to be considered are the respective
investment objectives of the Portfolio and such other accounts, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment by the Portfolio and such accounts, the size
of investment commitments generally held by the Portfolio and such accounts and
the opinions of the persons responsible for recommending investments to the
Portfolio and such accounts. While this procedure could have a detrimental
effect on the price or amount of the securities available to the Portfolio from
time to time, it is the opinion of the Trustees of the Trust and the Trustees of
the Portfolio that the benefits available from the BMR organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
For the period from the start of business, March 1, 1994 to October 31,
1994, the Portfolio paid foreign brokerage commissions on its portfolio security
transactions amounting to $6,875. For the period November 1, 1993 to February
28, 1994, the Fund paid foreign brokerage commissions on its portfolio security
transactions amounting to $6,300. During the fiscal year ended October 31, 1993,
the Fund paid no foreign brokerage commissions on its portfolio security
transactions; for the fiscal year ended October 31, 1992 the Fund paid foreign
brokerage commissions on its portfolio security transactions amounting to
$22,397.
OTHER INFORMATION
The Trust changed its name from Eaton Vance Government Obligations Trust on
July 10, 1995. On October 31, 1995, the Fund was organized as a series of the
Trust. Prior thereto, the Fund was a series of Eaton Vance Investment Fund,
Inc., pursuant to its agreement with the Trust, controls the use of the words
"Eaton Vance" in the Fund's name and may use the words "Eaton Vance" in other
connections and for other purposes.
The Trust's Amended and Restated Declaration of Trust may be amended by the
Trustees when authorized by vote of a majority of the outstanding voting
securities of the Trust and any other outstanding series of shares, the
financial interests of which are affected by the amendment. The Trustees may
also amend the Declaration of Trust without the vote or consent of shareholders
to change the name of the Trust or any series or to make such other changes as
do not have a materially adverse effect on the financial interests of
shareholders or if they deem it necessary to conform it to applicable Federal or
state laws or regulations. The Trust or any series or class thereof may be
terminated by: (1) the affirmative vote of the holders of not less than
two-thirds of the shares outstanding and entitled to vote at any meeting of
shareholders of the Trust or the appropriate series or class thereof, or by an
instrument or instruments in writing without a meeting, consented to by the
holders of two-thirds of the shares of the Trust or a series or class thereof,
provided, however, that, if such termination is recommended by the Trustees, the
vote of a majority of the outstanding voting securities of the Trust or a series
or class thereof entitled to vote thereon shall be sufficient authorization; or
(2) by means of an instrument in writing signed by a majority of the Trustees,
to be followed by a written notice to shareholders stating that a majority of
the Trustees has determined that the continuation of the Trust or a series or a
class thereof is not in the best interest of the Trust, such series or class or
of their respective shareholders.
As permitted by Massachusetts law, there will normally be no meeting of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees of the Trust holding office have been
elected by shareholders. In such an event the Trustees then in office will call
a shareholders' meeting for the election of Trustees. Except for the foregoing
circumstances and unless removed by action of the shareholders in accordance
with the Trust's By-laws, the Trustees shall continue to hold and may appoint
successor Trustees.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office. In addition, the By-Laws of the Trust provide that no natural person
shall serve as a Trustee of the Trust after the holders of record of not less
than two-thirds of the outstanding shares have declared that he be removed from
office either by declaration in writing filed with the custodian of the assets
of the Trust or by votes cast in person or by proxy at a meeting called for the
purpose. The By-laws further provide that under certain circumstances the
shareholders may call a meeting to remove a Trustee and that the Trust is
required to provide assistance in communicating with shareholders about such a
meeting. The By-Laws also provide that the Trustees shall promptly call a
meeting of shareholders for the purpose of voting upon a question of removal of
a Trustee when requested so to do by the record holders of not less than 10 per
centum of the outstanding shares.
In accordance with the Declaration of Trust of the Portfolio, there will
normally be no meetings of the investors for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees of the
Portfolio holding office have been elected by investors. In such an event the
Trustees then in office will call an investors' meeting for the election of
Trustees. Except for the foregoing circumstances and unless removed by action of
the investors in accordance with the Portfolio's Declaration of Trust, the
Trustees shall continue to hold office and may appoint successor Trustees.
The Declaration of Trust of the Portfolio provides that no person shall
serve as a Trustee if investors holding two-thirds of the outstanding interests
have removed him from that office either by a written declaration filed with the
Portfolio's custodian or by votes cast at a meeting called for that purpose. The
Declaration of Trust further provides that under certain circumstances the
investors may call a meeting to remove a Trustee and that the Portfolio is
required to provide assistance in communicating with investors about such a
meeting.
The right to redeem can be suspended and the payment of the redemption price
deferred when the New York Stock Exchange (the "Exchange") is closed (other than
for customary weekend and holiday closings), during periods when trading on the
Exchange is restricted as determined by the Securities and Exchange Commission
(the "Commission"), or during any emergency as determined by the Commission
which makes it impracticable for the Portfolio or the Fund to dispose of its
securities or value its assets, or during any other period permitted by order of
the Commission for the protection of investors.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, are the independent accountants for the Fund and the Portfolio providing
audit services, tax return preparation, and assistance and consultation with
respect to the preparation of filings with the Commission.
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS(1)
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safe-guarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporated bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
one year.
Issuers rated Prime-1 or P-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 or P-1
repayment ability will often be evidenced by many of the following
characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 or P-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S CORPORATE BOND RATINGS:
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P's rating because no public rating has been requested,
because there is insufficient information on which to base a rating, or because
S&P's does not rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER
A: S&P's commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
FITCH INVESTORS SERVICE, INC.
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F- 1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligors ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
HIGH YIELD BOND RATINGS
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default of interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and"D" represents
the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the addition
of a plus or minus sign to indicate the relative position of a credit within the
rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated "F-
1+".
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the "F-1+" and "F-1" categories.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
DUFF & PHELPS
INVESTMENT GRADE BOND RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AND AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, AND A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, AND BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
HIGH YIELD BOND RATINGS
BB+, BB, AND BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, AND B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
Preferred stocks are rated on the same scale as bonds but the preferred rating
gives weight to its more junior position in the capital structure. Structured
Financings are also rated on this scale.
COMMERCIAL PAPER/CERTIFICATES OF DEPOSIT
CATEGORY 1: TOP GRADE
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity including
internal operating factors and/or ready access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
CATEGORY 2: GOOD GRADE
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
CATEGORY 3: SATISFACTORY GRADE
DUFF 3: Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless timely payment is expected.
No ratings are issued for companies whose paper is not deemed to be of
investment grade.
* * * *
NOTES:
(1)The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated do
not necessarily represent ratings which would be given to these securities on
the date of the Portfolio's fiscal year end.
Bonds which are unrated expose the investor to risks with respect to capacity to
pay interest or repay principal which are similar to the risks of lower-rated
bonds. The Portfolio is dependent on the Investment Adviser's judgment, analysis
and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
<PAGE>
Appendix B - Economic & Statistical Information
Size of major bond markets Total publicly issued debt at year-end 1994 (in
billions of US $ equivalents)
Country Amount
United States $7,547
Japan 3,044
Germany 1,581
Italy 781
France 749
Canada 393
United Kingdom 437
Belgium 301
Sweden 186
Country Amount
Netherlands $228
Denmark 227
Switzerland 201
European Currency Unit (ECU) 145
Spain 144
Australia 108
Austria 68
Norway 41
Source: Salomon Brothers
This is a description for the Edgar filing of a pie chart
Europe $5,089 billion (31.5%)
Pacific $3,152 billion (19.5%)
Canada $393 billion (2.4%)
United States $7,547 billion (46.6%)
<PAGE>
Total returns (income plus capital changes) of short-term bonds Maximum 3-year
duration bonds - 12 months ended 12/31/94 (denominated in local currency)
Country Total return
Italy 6.21%
Ireland 4.31
Finland 4.24
Sweden 3.33
United Kingdom 5.24
France 3.43
Canada .99
Country Total return
Netherlands 4.36%
Germany 4.10
New Zealand .59
Australia 1.15
Japan .86
Switzerland 6.05
United States .61
Source: Bloomberg L.P., Reuters
Horizontal Bar Chart omitted for Edgar filing as described above.
U.S. pension assets invested abroad
(in billions of US $)
Year Amount
1979 $1.7
1980 3.5
1981 5.2
1982 7.0
1983 11.7
1984 15.5
1985 27.3
1986 45.2
1987 49.8
Year Amount
1988 $62.0
1989 68.0
1990 87.0
1991 134.7
1992 159.3
1993 248.5
Source: Eaton Vance Management
Pensions & Investments
Mountain Chart omitted for Edgar filing as described above.
Comparative short-term yields
3-month Eurodeposit rates vs. U.S. short-term rates (compounded) at 12/31/94
This is a description for the Edgar filing of a bar chart.
Portugal 10.98%
Mexico 31.99*
Italy 9.34
Indonesia 12.9
Sweden 8.4
Malaysia 5.5
Ireland 6.59
Germany 5.29
Thailand 8.7
Finland 5.94
United Kingdom 6.79
Australia 8.37
New Zealand 9.57
Switzerland 4.19
Canada 7.12
Japan 2.39
U.S.
Money market mutual funds 5.25
3-mo CDs 4.12
Bank money market funds 3.26
Sources: The Wall Street Journal, Reuters
* 91-day T-bill rate. Source: Bloomberg L.P.
<PAGE>
- --------------------------------------------------------------------------------
EV MARATHON SHORT-TERM STRATEGIC INCOME FUND
FINANCIAL STATEMENTS
<TABLE>
- ------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1994
<S> <C> <C>
ASSETS:
Investment in Short-Term Income Portfolio (Portfolio), at value (Note 1A) $236,461,350
Receivable for Fund shares sold 29,431
Deferred organization expenses (Note 1D) 28,895
------------
Total assets $236,519,676
LIABILITIES:
Dividends payable $2,132,041
Payable for Fund shares redeemed 1,142,793
Accrued expenses 105,740
----------
Total liabilities 3,380,574
------------
NET ASSETS for 28,132,865 shares of beneficial interest outstanding $233,139,102
============
SOURCES OF NET ASSETS:
Paid-in capital $261,270,342
Accumulated net realized loss on investment transactions
(computed on the basis of identified cost) (13,407,461)
Unrealized depreciation of investments from Portfolio
(computed on the basis of identified cost) (11,539,354)
Distributions in excess of net investment income (3,184,425)
------------
Total net assets $233,139,102
============
NET ASSET VALUE AND REDEMPTION PRICE (NOTE 7) PER SHARE
($233,139,102 -:- 28,132,865 shares of beneficial interest) $8.29
=====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended October 31, 1994
<S> <C> <C>
INVESTMENT INCOME (NOTE 1B):
Interest income $ 11,120,424
Interest income allocated from Portfolio 17,513,377
Expenses allocated from Portfolio (1,564,171)
------------
Total investment income $ 27,069,630
Expenses --
Investment adviser fee (Note 5) $ 658,963
Administration fee (Note 5) 182,735
Compensation of Directors not members of the
Investment Adviser's organization (Note 5) 7,797
Distribution fees (Note 6) 2,930,689
Custodian fees (Note 5) 139,168
Transfer and dividend disbursing agent fees 290,324
Printing and postage 121,091
Legal and accounting services 80,151
Registration fees 29,006
Amortization of organization expenses (Note 1D) 24,195
Miscellaneous 166,782
------------
Total expenses 4,630,901
------------
Net investment income $ 22,438,729
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) (identified cost basis) (including net loss due to
foreign currency rate fluctuations of $1,021,764)--
Investment security transactions $ 3,647,055
Financial futures 192,256
Written option transactions 1,366,812
Foreign currency and forward foreign currency exchange contracts (5,400,828)
Net realized loss from Portfolio (identified cost basis) (including net gain
due to foreign currency rate fluctuations of $134,438) --
Investment security transactions (8,009,611)
Financial futures (4,990,274)
Foreign currency and forward foreign currency exchange contracts (10,645,867)
------------
Net realized loss on investment transactions $(23,840,457)
Change in unrealized depreciation of investments (16,738,089)
------------
Net realized and unrealized loss on investments $(40,578,546)
------------
Net decrease in net assets resulting from operations $(18,139,817)
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Year Ended Year Ended
October 31, 1994 October 31, 1993
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations--
Net investment income $ 22,438,729 $ 33,245,421
Net realized loss on investments (23,840,457) (41,312,667)
Change in unrealized (depreciation) appreciation of investments (16,738,089) 50,268,446
-------------- --------------
Net (decrease) increase in net assets from operations $ (18,139,817) $ 42,201,200
-------------- --------------
Distributions to shareholders (Note 2)--
From net investment income $ (11,940,608) $ (29,736,774)
From tax return of capital (10,103,292) --
-------------- --------------
Total distributions $ (22,043,900) $ (29,736,774)
-------------- --------------
Transactions in shares of capital stock (Note 3)--
Proceeds from sales of shares $ 5,937,845 $ 10,869,320
Net asset value of shares issued to shareholders in payment of
distributions declared 10,738,599 14,923,919
Cost of shares redeemed (124,580,918) (190,283,766)
-------------- --------------
Decrease in net assets from capital stock transactions $(107,904,474) $(164,490,527)
-------------- --------------
Net decrease in net assets $(148,088,191) $(152,026,101)
NET ASSETS:
At beginning of year 381,227,293 533,253,394
-------------- --------------
At end of year (including distributions in excess of net investment
income of $3,184,425 and undistributed net investment income
of $43,918,231, respectively) $ 233,139,102 $ 381,227,293
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
- --------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<CAPTION>
Year Ended October 31,
--------------------------------------------------------
1994++++ 1993 1992 1991
-------- --------- --------- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE -- Beginning of year $ 9.410 $ 9.120 $ 9.920 $ 10.000
-------- -------- -------- --------
INCOME FROM OPERATIONS:
Net investment income $ 0.645 $ 0.239 $ 0.816 $ 0.786
Net realized and unrealized
(loss) gain on investments (1.135) 0.683 (0.943) (0.022)
-------- -------- -------- --------
Total (loss) income from operations $ (0.490) $ 0.922 $ (0.127) $ 0.764
-------- -------- -------- --------
LESS DISTRIBUTIONS:
From net investment income $ (0.343) $ (0.632) $ (0.673) $ (0.786)
From tax return of capital (0.290) -- -- --
From paid-in capital -- -- -- (0.058)
-------- -------- -------- --------
Total distributions $ (0.633) $ (0.632) $ (0.673) $ (0.844)
-------- -------- -------- --------
NET ASSET VALUE -- End of year $ 8.290 $ 9.410 $ 9.120 $ 9.920
======== ======== ======== ========
TOTAL RETURN (5.33%) 10.51% (1.45%) 7.97%
RATIOS/SUPPLEMENTAL DATA (to average
daily net assets):
Expenses 2.00%* 1.99% 1.95% 2.11%
Net investment income 7.24% 7.53% 8.20% 8.24%
PORTFOLIO TURNOVER** 55% 55% 56% 20%
NET ASSETS AT END OF PERIOD (000's omitted) $233,139 $381,227 $533,253 $589,182
<FN>
* Includes the Fund's share of Short-Term Income Portfolio's allocated
expenses 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
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES
EV Marathon Short-Term 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. On March 1, 1994, the Fund transferred
substantially all of its investable assets to the Short-Term Income Portfolio
(the Portfolio). The Fund invests all of its investable assets in interests in
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 (99.9% at October 31,
1994). 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
practices. Prior to the Fund's investment in the Portfolio, the Fund held its
investments directly. For investments held directly, interest income was
determined on the basis of interest accrued and discount earned, adjusted for
amortizationof discount when required for federal income tax purposes.
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 are charged to paid-in capital (Notes 6 and 10).
F. OTHER -- Investment transactions are accounted for on the date the
investments are purchased or sold.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
(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. The Fund incurred a tax return of capital in the amount of $10,103,292
for the year ended October 31, 1994, primarily due to realized losses on foreign
currency and forward foreign currency exchange contracts being classified as
ordinary losses for federal income tax purposes. Differences in the recognition
or classification of income between the financial statements and tax earnings
and profits which result in over-distributions for financial statement purposes
only are classified as distributions in excess of net investment income or
accumulated net realized gains. Permanent differences between book and tax
accounting relating to distributions are reclassified to paid-in capital.
- --------------------------------------------------------------------------------
(3) CAPITAL STOCK
<TABLE>
At October 31, 1994, there were one billion shares of $0.0001 par value capital
stock authorized. Transactions in capital stock were as follows:
<CAPTION>
Year Ended October 31,
-------------------------------
1994 1993
-------------------------------
<S> <C> <C>
Sales 655,615 1,174,404
Issued to shareholders electing to receive payment
of distributions in capital stock 1,221,688 1,615,743
Redemptions (14,266,256) (20,733,797)
------------ ------------
Net decrease (12,388,953) (17,943,650)
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(4) INVESTMENT TRANSACTIONS
On March 1, 1994, the Fund transferred substantially all of its assets to the
Portfolio in exchange for an interest in the Portfolio. Increases and decreases
in the Fund's investment in the Portfolio for the period from March 1, 1994, to
October 31, 1994 aggregated $5,049,104 and $102,164,879, respectively. Purchases
and sales of investments, other than short-term obligations, during the period
from November 1, 1993, to March 1, 1994, aggregated $188,305,634 and
$196,797,543, respectively.
<PAGE>
- -------------------------------------------------------------------------------
(5) INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Prior to March 1, 1994 (when the Fund transferred substantially all of its
assets to the Portfolio in exchange for an interest in the Portfolio), the Fund
retained Eaton Vance Management (EVM) as its investment adviser. The investment
adviser fee was earned by EVM as compensation for management and investment
advisory services rendered to the Fund. The fee was based upon a percentage of
average daily net assets plus a percentage of gross investment income (i.e.,
income other than gains from the sales of investments). For the period from
November 1, 1993, to March 1, 1994, the fee was equivalent to 0.54% (annualized)
of the Fund's average net assets for such period and amounted to $658,963. For
the period from November 1, 1993 to March 1, 1994, an administration fee,
computed at an effective annual rate of 0.15% of average net assets was also
paid to EVM for overall administrative services and general office facilities.
Such fee amounted to $182,735 for the period. Since March 1, 1994, Eaton Vance
has continued to serve as the administrator of the Fund, but currently receives
no compensation for these services.
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 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. 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 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 $2,311,030 to EVD for the year ended
October 31, 1994 representing 0.75% (annualized) of average daily net assets. At
October 31, 1994, the amount of Uncovered Distribution Charges of EVD calculated
under the Plan was approximately $17,473,000.
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
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(6) DISTRIBUTION PLAN (CONTINUED)
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. Provision for
service fee payments during the year ended October 31, 1994 amounted to
$619,659. Service fee payments will be made for personal services and/or the
maintenance of shareholder accounts. Service fees are separate and distinct from
the sales 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 directorsof 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
$1,547,900 of CDSC paid by shareholders for the year ended October 31, 1994.
- --------------------------------------------------------------------------------
(8) LINE OF CREDIT
Prior to March 1, 1994, the Fund participated with other funds managed by EVM in
a $120 million unsecured line of credit agreement with a bank. The line of
credit consisted of a $20 million committed facility and a $100 million
discretionary facility. Interest was charged to each 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 1C4 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 funds at the
end of each quarter. The Fund did not have anysignificant borrowings or
allocated fees during the period from November 1, 1993, to March 1, 1994. Since
March 1, 1994, the Portfolio participates in the line of credit agreement (See
note 3 to the Portfolio's financial statements.)
<PAGE>
- -------------------------------------------------------------------------------
(9) FINANCIAL INSTRUMENTS
The Fund regularly traded 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 included written options,
forward foreign currency exchange contracts and financial futures contracts and
may have involved, 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 Fund had 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 for the
period from November 1, 1993, to March 1, 1994, was as follows:
WRITTEN OPTION TRANSACTIONS
<TABLE>
Transactions in written options for the period from November 1, 1993 to March 1,
1994 were as follows:
<CAPTION>
Principal Amounts
of Contracts
(000 omitted) Premiums
----------------- ----------
<S> <C> <C>
Outstanding, beginning of period $ 25,000 $ 192,256
Options written: 0 0
Options exercised: 0 0
Options expired:
Canadian Dollars (25,000) (192,256)
-------- ---------
Outstanding, end of period $ 0 $ 0
======== =========
</TABLE>
- --------------------------------------------------------------------------------
(10) SUBSEQUENT EVENT
A recent Internal Revenue Service ruling requires that sales commissions paid by
the Fund pursuant to its Distribution Plan be expensed for tax purposes (rather
than charged to paid-in capital as the Fund has done in the past). The Fund
changed its tax accounting practice to conform to the ruling on December 1,
1994. The change will have no effect on the Fund's current yield or total
return.
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS OF EATON VANCE INVESTMENT FUND, INC. AND SHAREHOLDERS
OF EV MARATHON SHORT-TERM STRATEGIC INCOME FUND:
We have audited the accompanying statement of assets and liabilities of EV
Marathon Short-Term Strategic Income Fund, a series of Eaton Vance Investment
Fund, Inc. as of October 31, 1994, the related statement of operations for the
year then ended, the statement of changes in net assets for the two years then
ended and the financial highlights for each of the three years in the period
ended October 31, 1994, and for the period from the start of operations,
November 26, 1990, to October 31, 1991. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of EV
Marathon Short-Term Strategic Income Fund, a series of Eaton Vance Investment
Fund, Inc., as of October 31, 1994, the results of its operations for the year
then ended, the changes in its net assets for the two years then ended and the
financial highlights for the three years ended October 31, 1994, and for the
period from the start of operations, November 26, 1990, to October 31, 1991, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 15, 1994
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------
SHORT-TERM INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- ---------------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL U.S.$ VALUE
- ---------------------------------------------------------------------------------------------------
BONDS & NOTES --95.8%
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA, 10.2% U.S. Dollars
Argentina Discount Bond, (Brady), 5.8125%, 3/31/23
(identified cost, $26,948,500) 35,400,000 $24,204,750
-----------
AUSTRALIA, 7.7% Australian Dollars
Commonwealth Bank of Australia, 13.75%, 9/21/99 5,000,000 $ 4,147,322
Commonwealth Bank of Australia, 11%, 10/16/01 9,000,000 6,743,712
State Bank of New South Wales, 9%, 9/17/02 10,000,000 6,717,363
State Electricity -- Victoria, 9.25%, 9/18/03 1,000,000 666,169
-----------
Total Australia (identified cost, $19,968,579) $18,274,566
-----------
BRAZIL, 6.9% U.S. Dollars
Brazil IDU Bond, 6.0625%, 1/1/01 8,820,000 $ 7,232,400
Brazil Eligible Interest Bond, 6.6875%, 4/15/06 6,000,000 4,050,000
Brazil Discount Bond, (Brady), 6.6875%, 4/15/24 7,800,000 5,060,250
-----------
Total Brazil (identified cost, $16,076,219) $16,342,650
-----------
COSTA RICA, 3.2% U.S. Dollars
Costa Rica Interest Series B, (Brady), 5.8125%, 5/21/05 1,536,075 $ 1,305,664
Costa Rica Principal Series A, (Brady), 6.25%, 5/21/10 10,000,000 6,250,000
-----------
Total Costa Rica (identified cost, $8,113,334) $ 7,555,664
-----------
CZECH REPUBLIC, 2.7% Czech Korunas
CEZ, 14.375%, 1/27/01
(identified cost, $6,022,084) 159,710,000 $ 6,393,511
-----------
DENMARK, 2.5% Danish Krone
Denmark Government, 9%, 11/15/00
(identified cost, $6,155,561) 35,000,000 $ 5,969,976
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL U.S.$ VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
FINLAND, 13.9% Finnish Markka
Republic of Finland, 11%, 1/15/99 40,000,000 $ 9,115,400
Finnish Housing Fund, 11%, 3/15/01 15,000,000 3,378,870
Finnish Housing Fund, 10.5%, 6/15/01 82,000,000 18,079,442
Finnish Housing Fund, 10.75%, 3/15/02 10,000,000 2,250,420
------------
Total Finland (identified cost, $33,294,037) $ 32,824,132
------------
ICELAND, 2.7% Icelandic Kornur
Nordic Investment Bank, 6.75%, 11/29/96
(identified cost, $6,842,285) 400,000,000 $ 6,449,200
------------
Ireland, 3.4% Irish Pound
Irish Government, 9.25%, 7/11/03
(identified cost, $8,244,835) 5,000,000 $ 8,154,504
------------
NEW ZEALAND, 13.9% New Zealand Dollars
Abbey National, 0%, 10/4/96 6,900,000 $ 3,573,617
New Zealand Government, 8%, 7/15/98 24,000,000 14,339,720
New Zealand Government, 10%, 3/15/02 23,000,000 14,853,788
------------
Total New Zealand (identified cost, $32,101,740) $ 32,767,125
------------
PHILIPPINES, 5.5% U.S. Dollars
Philippine Par Bond, (Brady), 5.25%, 12/1/17 5,000,000 $ 3,093,750
Morgan Guaranty Trust Philippine Peso --
Linked Certificate of Deposit, 0%, 12/29/94 3,000,000 3,105,117
Morgan Guaranty Trust Philippine Peso --
Linked Certificate of Deposit, 0%, 1/30/95 7,000,000 6,840,568
------------
Total Philippines (identified cost, $13,052,649) $ 13,039,435
------------
THAILAND, 4.4% Thailand Baht
Finance One Certificate of Deposit, 0%, 2/1/95 50,000,000 $ 1,955,600
Deutsche Bank Certificate of Deposit, 8.75%, 9/19/96 60,000,000 2,402,820
ABN -- Amro Bank Hong Kong -- Certificate of Deposit,
9/1%, 8/5/97 150,000,000 6,003,450
------------
Total Thailand (identified cost, $10,347,639) $ 10,361,870
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL U.S.$ VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES, 18.8%
CORPORATE BONDS & NOTES, 7.8%
ACME Metals Inc, Sr. Sec. Notes, 12.5%, 8/1/02 500,000 $ 500,000
Agricultural Minerals & Chemicals, Sr. Notes,
10.75%, 9/30/03 1,000,000 1,020,000
American Restaurant Group, Sr. Sec. Notes, 12%, 9/15/98 1,000,000 950,000
Anchor Glass, Sr. Notes, 9.875%, 12/15/08 1,000,000 910,000
Applied Extrusion, Sr. Notes, 11.5%, 4/1/02 1,000,000 1,010,000
Cablevision Industries, Debs., 9.25%, 4/1/08 1,000,000 890,000
Dayton Hudson Medium Term Note, 9.5%, 6/10/15 665,000 707,961
Dayton Hudson Medium Term Note, 9.52%, 6/10/15 350,000 373,326
Dayton Hudson Medium Term Note, 9.35%, 6/16/20 600,000 642,632
Corporate Express Inc., Sr. Sub. Notes, 9.125%, 3/15/04 500,000 460,000
Flagstar Corp., Sr. Sub. Debs., 11.25%, 11/1/04 1,000,000 850,000
General Electric Capital Corp., 8.625%, 6/15/08 250,000 257,398
General Electric Capital Corp., 8.30%, 9/20/09 2,000,000 2,064,140
ITT Corp., 8.5%, 10/15/01 500,000 503,085
ITT Corp., 8.55%, 6/15/09 270,000 278,620
Jorgensen Earle, Sr. Notes, 10.75%, 3/1/00 1,000,000 1,000,000
Moran Transportation, 1st Mortgage Bond,
11.75%, 7/15/04 1,000,000 1,010,000
NL Industries Inc., Sr. Sec. Disc. Notes,
13% (0% until 10/15/98), 10/15/05 1,000,000 620,000
Purina Mills, Sr. Sub. Notes, 10.25%, 9/1/03 1,000,000 970,000
Stone Container Corp., Sr. Sub. Debs.,
10.75%, 10/1/02 500,000 492,500
Waters Corporation, Sr. Sub. Notes, 12/75%, 9/30/04 1,000,000 1,010,000
Weirton Steel Corp., Sr. Notes, 10.875%, 10/15/99 1,000,000 1,012,500
Westpoint Stevens, Sr. Sub. Notes, 9.375%, 12/15/05 1,000,000 893,750
------------
Total United States Corporate Bonds & Notes
(identified cost, $18,638,699) $ 18,425,912
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL U.S.$ VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE PASS-THROUGHS, 9.4%
Federal Home Loan Mortgage Corp. Participation Certificates:
4.75%, with various maturities to 2003 297,818 $ 286,513
5.5%, with various maturities to 2019 440,010 420,505
7.75%, with maturity at 2008 325,912 319,148
12.5%, with various maturities to 2013 846,179 941,330
12.75%, with maturity at 2013 246,797 274,504
13.25%, with various maturities to 2013 399,342 446,957
13.5%, with maturity at 2019 881,344 1,002,419
14%, with various maturities to 2014 3,003,600 3,436,008
14.5%, with maturity at 2010 156,580 180,394
------------
$ 7,307,778
------------
Federal National Mortgage Association
Mortgage-Backed Securities:
4.75%, with maturity at 1999 226,001 $ 215,706
5%, with maturity at 2003 308,598 289,423
5.5%, with various maturities to 2012 379,231 363,590
12.75%, with maturity at 2014 283,416 319,111
13%, with various maturities to 2015 2,309,967 2,588,536
13.25%, with maturity at 2014 310,685 351,335
13.5%, with various maturities to 2015 1,896,080 2,145,240
14.75%, with various maturities to 2012 4,303,974 5,048,653
------------
$ 11,321,594
------------
Government National Mortgage Association:
6.5%, with various maturities to 2002 2,100,081 $ 2,009,157
8.25%, with maturity at 2008 677,545 686,045
13.5%, with various maturities at 2014 798,000 916,814
------------
$ 3,612,016
------------
Total Mortgage Pass-Throughs $ 22,241,388
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL U.S.$ VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES TREASURY BOND, 1.6%
U.S. Treasury Bond, 11.75%, 2/15/01+
(identified cost, $3,862,188) 3,000,000 $ 3,621,738
------------
Total United States (identified cost, $44,973,069) $ 44,289,038
------------
TOTAL BONDS & NOTES (IDENTIFIED COST, $232,140,531) $226,626,421
------------
- -----------------------------------------------------------------------------------------------
OPTIONS PURCHASED BY FUND -- 0.1%
- -----------------------------------------------------------------------------------------------
OPTION TO DELIVER/RECEIVE, STRIKE PRICE, EXPIRATION MONTH:
Swedish Krona
Swedish Government Bond, 10.25%, 5/05/03/SEK,
92.094, November 1994 (premium paid $292,982) 100,000,000 $ 8,036
------------
- -----------------------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS -- 2.8%
- -----------------------------------------------------------------------------------------------
Banque National De Paris, Euro Time-Deposit
Cayman Islands, 4.75%, 11/1/94 5,600,000 $ 5,600,000
Postipanki -- N.Y., Cayman Time Deposit, 4.75%, 11/1/94 1,000,000 1,000,000
Salomon Brothers Inc. Repurchase Agreement, 4.75%,
dated 10/31/94, 11/01/94 90,000 90,000
------------
Total Short-Term Obligations, at amortized cost $ 6,690,000
------------
Total Investments (identified cost, $239,123,513), 98.7% $233,324,457
OTHER ASSETS, LESS LIABILITIES, 1.3% 3,144,309
------------
NET ASSETS, 100% $236,468,766
============
<FN>
+ Security pledged as collateral on financial futures contracts.
SEK -- Swedish Krona
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
<S> <C> <C>
ASSETS:
Investments, at value (Note 1A) (identified cost, $239,123,513) $ 233,324,457
Cash 395
Foreign currency, at value (cost, $2,046,864) 2,081,276
Receivable for investments sold 7,610,593
Interest receivable 6,649,563
Deferred organization expenses (Note 1J) 20,392
---------------
Total assets $ 249,686,676
LIABILITIES:
Payable for investments purchased $ 6,859,384
Payable for forward foreign currency exchange contracts 6,272,443
Payable for daily variation margin on financial futures contracts 45,153
Accrued expenses 40,930
--------------
Total liabilities 13,217,910
---------------
NET ASSETS applicable to investors' interest in Portfolio $ 236,468,766
===============
SOURCES OF NET ASSETS:
Net proceeds from capital contributions and withdrawals $ 248,008,101
Unrealized depreciation of investments (computed on the basis of
identified cost) (11,539,335)
---------------
Total $ 236,468,766
===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the period from the start of business, March 1, 1994, to October 31, 1994
<S> <C> <C>
INVESTMENT INCOME (NOTE 1B):
Interest income -- $ 17,513,766
Expenses --
Investment adviser fee (Note 2) $ 1,004,670
Administration fee (Note 2) 284,828
Compensation of Directors not members of the
Investment Adviser's organization (Note 2) 4,895
Custodian fee (Note 2) 191,871
Legal and accounting services 49,964
Registration costs 1,265
Amortization of organization expenses (Note 1J) 3,161
Miscellaneous 23,552
-------------
Total expenses 1,564,206
---------------
Net investment income $ 15,949,560
---------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss (identified cost basis) (including net gain due to foreign
currency rate fluctuations of $134,438) --
Investment transactions $ (8,009,774)
Financial futures (4,990,449)
Foreign currency and forward foreign currency exchange contracts (10,646,036)
-------------
Net realized loss on investments $ (23,646,259)
Unrealized depreciation of investments (7,159,575)
---------------
Net realized and unrealized loss of investments $ (30,805,834)
---------------
Net decrease in net assets resulting from operations $ (14,856,274)
===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
For the period from the start of business, March 1, 1994, to October 31, 1994
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 15,949,560
Net realized loss on investments (23,646,259)
Unrealized depreciation of investments (7,159,575)
--------------
Net decrease in net assets resulting from operations $ (14,856,274)
--------------
Capital transactions --
Contributions $ 353,394,561
Withdrawals (102,169,541)
--------------
Increase in net assets resulting from capital transactions $ 251,225,020
--------------
Total increase in net assets $ 236,368,746
NET ASSETS:
At beginning of period 100,020
--------------
At end of period $ 236,468,766
==============
- -----------------------------------------------------------------------------------------------
SUPPLEMENTARY DATA
For the period from the start of business, March 1, 1994, to October 31, 1994
RATIOS (as a percentage of average net assets)
Expenses 0.82%+
Net investment income 8.41%+
PORTFOLIO TURNOVER 71%
+ Computed on an annualized basis
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1) SIGNIFICANT ACCOUNTING POLICIES
Short-Term 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.
<PAGE>
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.
<PAGE>
- --------------------------------------------------------------------------------
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 period from the start of business, March 1, 1994, to
October 31, 1994, the fee was equivalent to0.49% (annualized) of the Portfolio's
average net assets for such period and amounted to $1,004,670. 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 $284,828 for the period from the start of business, March 1, 1994,
to October 31, 1994.
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 of the officers of the Portfolio and Directors of the
Corporation 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
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 period from March 1, 1994, to October
31, 1994.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(4) INVESTMENTS
<TABLE>
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 period from the start of business, March 1, 1994, to
October 31, 1994, were as follows:
<S> <C>
Purchases --
Investments (non-U.S. Government) $186,217,365
U.S. Government Securities --
------------
$186,217,365
============
Sales --
Investments (non-U.S. Government) $215,246,119
U.S. Government Securities 30,195,867
------------
$245,441,986
============
</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.
<TABLE>
A summary of obligations under these financial instruments at October 31, 1994
is as follows:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<CAPTION>
Sales
- ----
In Exchange Net Unrealized
Settlement For (in U.S. Appreciation
Date Deliver Dollars) (Depreciation)
- -------------- ------------------------------ --------------- ----------------
<S> <C> <C> <C> <C>
11/14/94-2/22/95 Belgian Franc 1,667,765,401 $ 48,538,463 $ (5,249,752)
11/03/94 Deutsche Mark 8,200,456 5,203,698 (233,405)
11/30/94-1/11/95 Finnish Markka 122,453,197 24,585,183 (1,890,521)
6/15/95 Japanese Yen 1,500,000,000 14,943,216 (849,578)
--------------- ----------------
$ 93,270,560 $ (8,223,256)
=============== ================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
(5) FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
Purchases
- ---------
Deliver Net Unrealized
Settlement (in United Appreciation
Date In Exchange for States Dollars) (Depreciation)
- ------------------- ----------------------------------- ---------------- --------------
<S> <C> <C> <C> <C>
12/8/94-12/21/94 Australian Dollar 14,364,306 $ 10,608,752 $ 34,039
11/30/94-12/29/94 Canadian Dollar 26,439,186 19,185,278 364,334
11/3/94-1/23/95 Deutsche Mark 18,321,265 12,209,152 (54,837)
2/6/95-3/13/95 Indonesian Rupiah 37,000,000,000 16,365,499 284,794
1/20/95 Indian Rupee 252,200,000 8,000,000 23,236
11/15/94-11/30/94 Italian Lira 26,578,254,451 16,294,212 898,737
1/30/95 Japanese Yen 324,000,000 3,367,108 (781)
3/6/95 Singapore Dollar 13,300,000 8,886,810 211,811
11/14/94-12/28/94 Thai Baht 550,000,000 21,811,572 189,480
--------------- --------------
$ 116,728,383 $ 1,950,813
=============== ==============
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts
Net Unrealized
Appreciation
Expiration Date Contracts Position (Depreciation)
- ------------------- ----------------------------------- ---------- --------------
<S> <C> <C> <C>
12/94 50 U.S. 30 year Bond Futures Short $ 201,562
12/94 40 U.S. 10 year Bond Futures Short 86,250
12/94 390 U.S. 5 year Bond Futures Short 833,407
12/94 300 Canadian 10 year Bond Futures Long (418,954)
12/94 90 Australian 10 year Bond Futures Long (159,713)
12/94 45 10 year Oat Bond Futures Short 23,836
--------------
$ 566,388
==============
</TABLE>
At October 31, 1994, the Portfolio had sufficient cash and/or securities to
cover margin requirements on open futures contracts.
WRITTEN OPTION TRANSACTIONS
- --------------------------------------------------------------------------------
(6) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation/depreciation in value of the investments
owned at October 31, 1994, as computed on a federal income tax basis, were as
follows:
<TABLE>
<S> <C>
Aggregate cost $ 238,409,103
===============
Gross unrealized depreciation $ 9,511,403
Gross unrealized appreciation 4,426,757
---------------
Net unrealized depreciation $ 5,084,646
===============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE TRUSTEES AND INVESTORS OF SHORT-TERM INCOME PORTFOLIO:
We have audited the accompanying statement of assets and liabilities of
Short-Term Income Portfolio, including the portfolio of investments, as of
October 31, 1994, the related statements of operations, changes in net assets
and supplementary data 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and supplementary data are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1994 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 audit provides 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
Short-Term Income Portfolio as of October 31, 1994, the results of its
operations, changes in its net assets and the supplementary data for the period
from March 1, 1994 (start of business) to October 31, 1994, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 15, 1994
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
(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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
<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
<PAGE>
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
<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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>
<PAGE>
(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>
<PAGE>
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
<PAGE>
INVESTMENT ADVISER AND ADMINISTRATOR
OF STRATEGIC INCOME PORTFOLIO
Boston Management & Research
24 Federal Street
Boston, MA 02110
ADMINISTRATOR OF EATON VANCE
STRATEGIC INCOME FUND
Eaton Vance Management
24 Federal Street
Boston, MA 02110
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(800) 225-6265
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
(800) 262-1122
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
EV MARATHON
STRATEGIC INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
M-SISAI
[LOGO]
EV MARATHON
STRATEGIC
INCOME
FUND
STATEMENT OF
ADDITIONAL
INFORMATION
OCTOBER 30, 1995
