<PAGE>
EV CLASSIC
HIGH INCOME FUND
- ------------------------------------------------------------------------------
EV CLASSIC HIGH INCOME FUND (THE "FUND") IS A MUTUAL FUND SEEKING TO PROVIDE A
HIGH LEVEL OF CURRENT INCOME. THE FUND INVESTS ITS ASSETS IN HIGH INCOME
PORTFOLIO (THE "PORTFOLIO"), A 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 FUND IS A SERIES OF EATON VANCE MUTUAL FUNDS TRUST (THE
"TRUST").
THE PORTFOLIO SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING UP TO
100% OF ITS ASSETS IN LOWER-RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS", THAT
ENTAIL GREATER RISKS, INCLUDING DEFAULT, THAN THOSE OF HIGHER-RATED
SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS AND INVEST FOR THE
LONG TERM. SEE "THE FUND'S INVESTMENT OBJECTIVE" AND "INVESTMENT POLICIES AND
RISKS."
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 August 1, 1996 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. 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> <C> <C>
Shareholder and Fund Expenses .......................... 2 How to Redeem Fund Shares .......................... 13
The Fund's Financial Highlights ........................ 3 Reports to Shareholders ............................ 14
The Fund's Investment Objective ........................ 4 The Lifetime Investing Account/Distribution Options 15
Investment Policies and Risks .......................... 4 The Eaton Vance Exchange Privilege ................. 15
Organization of the Fund and the Portfolio ............. 7 Eaton Vance Shareholder Services ................... 16
Management of the Fund and the Portfolio ............... 9 Distributions and Taxes ............................ 17
Distribution Plan ...................................... 10 Performance Information ............................ 18
Valuing Fund Shares .................................... 12 Appendix A ......................................... 19
How to Buy Fund Shares ................................. 12 Appendix B ......................................... 21
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROSPECTUS DATED AUGUST 1, 1996
<PAGE>
SHAREHOLDER AND FUND EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
-------------------------------------------------------------------------------------------------------
<S> <C>
Sales Charges Imposed on Purchases of Shares None
Sales Charges Imposed on Reinvested Distributions None
Fees to Exchange Shares None
Contingent Deferred Sales Charges Imposed on Redemptions during the First Year
(as a percentage of redemption proceeds exclusive of all reinvestments and
capital appreciation in the account) 1.00%
ANNUAL FUND AND ALLOCATED PORTFOLIO OPERATING EXPENSES (as a percentage of average daily net assets)
----------------------------------------------------------------------------------------------------------
<S> <C>
Investment Adviser Fee 0.63%
Rule 12b-1 Distribution (and Service) Fees 1.00%
Other Expenses (after expense reduction) 0.06%
----
Total Operating Expenses (after expense reduction) 1.69%
====
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses (including a contingent
deferred sales charge in the case of redemption during the first year after
purchase) on a $1,000 investment, assuming (a) 5% annual return
and (b) redemption at the end of each period: $27 $53 $92 $200
</TABLE>
NOTES:
The table and Example 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. Information
for the Fund is based on its expenses for the most recent fiscal year. Absent an
allocation of expenses to the Administrator, Other Expenses would have been
1.61% and Total Operating Expenses would have been 3.24%.
The Fund invests exclusively in the Portfolio. The Trustees believe the
aggregate per share expenses of the Fund and the Portfolio should approximate,
and over time may be less than, the per share expenses the Fund would incur if
the Trust retained the services of an investment adviser for the Fund and the
Fund's assets were invested directly in the type of securities being held by the
Portfolio.
The Example 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 Example to assume a 5% annual return, but actual annual return will
vary. For further information regarding the expenses of the Fund and the
Portfolio, see "The Fund's Financial Highlights," "Organization of the Fund and
the Portfolio", "Management of the Fund and the Portfolio" and "How to Redeem
Fund Shares." 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. See "Distribution Plan."
No contingent deferred sales charge is imposed on (a) shares purchased more than
one year prior to 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." In the Example above, expenses would be $10 less in the
first year if there was no redemption.
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 9.
Other investment companies 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 should be read in conjunction with the audited
financial statements included in the Fund's annual report to shareholders
which is incorporated by reference into the Statement of Additional
Information in reliance upon the report of Deloitte & Touche LLP, independent
certified public 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.
- ------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
---------------------
1996 1995*
---------- ---------
NET ASSET VALUE, beginning of year $ 9.430 $ 10.000
-------- --------
INCOME (LOSS) FROM OPERATIONS:
Net investment income $ 0.888 $ 0.735
Net realized and unrealized gain (loss) on
investments 0.225 (0.544)
-------- --------
Total income from operations $ 1.113 $ 0.191
-------- --------
LESS DISTRIBUTIONS:
From net investment income $ (0.888) $ (0.735)
In excess of net investment income(1) (0.005) (0.026)
-------- --------
Total distributions $ (0.893) $ (0.761)
-------- --------
NET ASSET VALUE, end of year $ 9.650 $ 9.430
======== ========
TOTAL RETURN(2) 12.25% 1.89%
RATIOS/SUPPLEMENTAL DATA*:
Net assets, end of period (000 omitted) $ 7,614 $ 2,076
Ratio of net expenses to average daily net
assets(3) 1.69% 2.04%+
Ratio of net investment income to average daily
net assets 9.17% 9.17%+
* For the periods indicated, the operating expenses of the Fund reflect an
allocation of expenses to the Administrator. Had such action not been taken,
net investment income per share and the ratios would have been as follows:
NET INVESTMENT INCOME PER SHARE $ 0.738 $ 0.482
======== ========
RATIOS (As a percentage of average daily net assets):
Expenses(3) 3.24% 5.20%+
Net investment income 7.62% 6.01%+
* For the period from the start of business, June 8, 1994, to March 31, 1995.
+ Computed on an annualized basis.
(1)The Fund has followed the Statement of Position (SOP) 93-2: Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distribution by Investment Companies. The SOP requires that
differences in the recognition or classification of income between the
financial statements and tax earnings and profits that result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
(2)Total investment return is calculated asuming 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 computed on a
non-annualized basis.
(3)Includes the Fund's share of High Income Portfolio's allocated expenses.
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE
- ------------------------------------------------------------------------------
THE FUND'S INVESTMENT OBJECTIVE IS TO PROVIDE A HIGH LEVEL OF CURRENT INCOME.
The Fund currently seeks to meet its investment objective by investing its
assets in the Portfolio, a separate registered investment company which has the
same investment objective as the Fund. This investment structure is commonly
referred to as a "master/feeder" structure. The Portfolio seeks to invest a
significant portion of its assets in high-yielding, high risk, fixed-income
securities (commonly referred to as "junk-bonds") to achieve this objective. The
Fund's and the Portfolio's investment objectives are nonfundamental and may be
changed when authorized by a vote of the Trustees of the Trust or the Portfolio,
respectively, without obtaining the approval of the Fund's shareholders or the
investors in the Portfolio, as the case may be. The Trustees of the Trust have
no present intention to change the Fund's objective and intend to submit any
proposed material change in the investment objective to shareholders in advance
for their approval. The Fund may not be appropriate for investors who cannot
assume the greater risk of capital depreciation or loss inherent in seeking
higher yields.
INVESTMENT POLICIES AND RISKS
- ------------------------------------------------------------------------------
The Portfolio normally is invested as follows:
* at least 80% of its net assets in fixed-income securities, including
convertible securities; and
* up to 20% of its net assets in common stocks and other equity securities
when consistent with its objective or acquired as part of a unit combining
fixed-income and equity securities.
THE PORTFOLIO WILL NORMALLY INVEST AT LEAST 65% OF ITS ASSETS IN THE LOWEST
INVESTMENT GRADE AND LOWER RATED OBLIGATIONS (RATED BAA OR LOWER BY MOODY'S
INVESTORS SERVICE, INC. ("MOODY'S") OR BBB OR LOWER BY STANDARD & POOR'S RATINGS
GROUP ("S&P")) AND UNRATED OBLIGATIONS. For a description of Moody's and S&P's
ratings of fixed-income securities, see Appendix A to this Prospectus. Unrated
bonds are generally regarded as being speculative and expose the investor to
risks with respect to the issuer's capacity to pay interest and repay principal
which are similar to the risks of lower rated bonds. At March 31, 1996, the
Portfolio had approximately 93.6% of its assets invested in high yield, high
risk bonds that were rated lower than investment grade or unrated. See Appendix
B to this Prospectus for the Portfolio's asset composition information for the
most recent fiscal year of the Fund.
The Portfolio invests a substantial portion of its assets in high yield, high
risk securities issued in connection with mergers, acquisitions, leveraged
buy-outs, recapitalizations and other highly leveraged transactions. These
securities are subject to substantially greater credit risks than some of the
other fixed-income securities in which the Portfolio may invest. These credit
risks include the possibility of default or bankruptcy of the issuer. These
securities are less liquid than other fixed-income securities. During periods of
deteriorating economic conditions and contraction in the credit markets, the
ability of issuers of such securities to service their debt, meet projected
goals, or obtain additional financing may be impaired. For more detailed
information about the risks associated with investing in such securities, see
"Risk Considerations" below.
The Portfolio may also invest a portion of its assets in debt securities that
are not paying current income in anticipation of the receipt of possible future
income or capital appreciation. Interest and/or principal payments thereon could
be in arrears when such securities are acquired, and the issuer may be in
bankruptcy or undergoing a debt restructuring or reorganization. Such securities
may be unrated or the lowest rated obligations (rated C by Moody's or D by S&P).
Bonds rated C by Moody's are regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated D by S&P are in payment
default or a bankruptcy petition has been filed and debt service payments are
jeopardized. The Portfolio may retain defaulted obligations in its portfolio
when such retention is considered desirable by the Investment Adviser. The
Portfolio may also acquire other securities issued in exchange for such
obligations or issued in connection with the debt restructuring or
reorganization of the issuers, or where such acquisition, in the judgment of the
Investment Adviser, may enhance the value of such obligations or would otherwise
be consistent with the Portfolio's investment policies.
Although the Investment Adviser considers security ratings when making
investment decisions, it performs its own credit and investment analysis and
does not rely primarily on the ratings assigned by the rating services. In
evaluating the quality of a particular issue, whether rated or unrated, the
Investment Adviser will normally take into consideration, among other things,
the issuer's financial resources and operating history, its sensitivity to
economic conditions and trends, the ability of its management, its debt maturity
schedules and borrowing requirements, and relative values based on anticipated
cash flow, interest and asset coverages, and earnings prospects. Because of the
greater number of investment considerations involved in investing in high yield,
high risk bonds, the achievement of the Portfolio's objective depends more on
the Investment Adviser's judgment and analytical abilities than would be the
case if the Portfolio were investing primarily in securities in the higher
rating categories.
When the Investment Adviser believes that it is appropriate to do so, for
defensive purposes, more than 35% of the Portfolio's assets may be temporarily
invested in securities rated A or better by Moody's or S&P. All or a portion of
the Portfolio's assets may be invested temporarily in cash or short-term
obligations including, but not limited to, certificates of deposit, commercial
paper, short-term notes, obligations issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities and repurchase agreements.
FIXED-INCOME OBLIGATIONS. The fixed-income securities in which the Portfolio may
invest include preferred and preference stocks and all types of debt obligations
of both domestic and foreign issuers, such as bonds, debentures, notes,
equipment lease certificates, equipment trust certificates, conditional sale
contracts, commercial paper, and obligations issued or guaranteed by the U.S.
Government, any state or territory of the United States, any foreign government
or any of their respective political subdivisions, agencies or
instrumentalities. Debt securities may bear fixed, fixed and contingent,
variable or floating rates of interest. Investments in foreign securities may
not exceed 25% of total assets.
The Portfolio may also invest a portion of its assets in loan interests, which
are interests in amounts owed by a corporate, governmental or other borrower to
lenders or lending syndicates. Loan interests purchased by the Portfolio may
have a maturity of any number of days or years, may be secured or unsecured, and
may be of any credit quality. Loan interests, which may take the form of
participation interests in, assignments of or novations of a loan, may be
acquired from U.S. and foreign banks, insurance companies, finance companies or
other financial institutions which have made loans or are members of a lending
syndicate or from the holders of loan interests. Loan interests involve the risk
of loss in case of default or bankruptcy of the borrower and, in the case of
participation interests, involve the risk of insolvency of the agent lending
bank or other financial intermediary. The Portfolio may hold up to 15% of net
assets in illiquid securities, including securities legally restricted as to
resale, and securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933. Rule 144A securities may, however, be treated as liquid
by the Investment Adviser pursuant to procedures adopted by the Trustees, which
require consideration of factors such as trading activity, availability of
market quotations and number of dealers willing to purchase the security.
INVESTMENT PRACTICES
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 hedge against fluctuations in
interest rates, securities prices or currency exchange rates, to change the
duration of the Portfolio's fixed income portfolio or as a substitutes for the
purchase or sale of securities or currency. Options may be written to enhance
income. The Portfolio's transaction in derivative instruments may include the
purchase or sale of futures contracts on securities, (such as U.S. Government
securities), indices, other financial instruments (such as certificates of
deposit, Euro-dollar time deposits, and economic indices) or currencies; options
on futures contracts; exchange-traded options on securities, indices or
currencies; and forward contracts to purchase or sell currencies. All of the
Portfolio's transactions in derivative instruments involve a risk of loss or
depreciation due to: unanticipated adverse changes in interest rates, securities
prices or currency exchange rates; the inability to close out a position; tax
constraints on closing out positions; default by the counterparty; imperfect
correlation between a position and the desired hedge; and portfolio management
constraints on disposing of securities subject to such transactions. The loss on
derivative instruments (other than purchased options) may substantially 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.
The Portfolio's success in using derivative instruments to hedge portfolio
assets depends on the degree of price correlation between the derivative
instrument and the hedged asset. Imperfect correlation may be caused by several
factors, including temporary price disparities among the trading markets for the
derivative instrument, the assets underlying the derivative instrument and the
Portfolio's assets.
The Portfolio may write (sell) covered call and put options only with respect to
up to 25% of its net assets. 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 (the "CPTC"), 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
portfolio, after taking into account unrealized profits and unrealized losses on
any contacts the Portfolio has entered into. The Portfolio did not engage in
such transactions during the fiscal year ended March 31, 1996, and there is no
assurance that it will engage in such transactions in the future.
SHORT-TERM TRADING. Securities may be sold in anticipation of a market decline
(a rise in interest rates) and later purchased, or purchased in anticipation of
a market rise (a decline in interest rates) and later sold. In addition, a
security may be sold and another purchased at approximately the same time to
take advantage of what the Portfolio believes to be a temporary disparity in the
normal yield relationship between the two securities. Yield disparities may
occur for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes in the overall
demand for or supply of various types of fixed-income securities or changes in
the investment objectives of investors. Such trading may be expected to increase
the portfolio turnover rate and the expenses incurred in connection with such
trading. The Portfolio anticipates that its annual portfolio turnover rate will
generally not exceed 100% (excluding turnover of securities having a maturity of
one year or less).
RISK CONSIDERATIONS
Investors should carefully consider their ability to assume the risks of owning
shares of a mutual fund that invests in below investment grade debt obligations
(commonly referred to as "junk bonds") before making an investment in the Fund.
The lower ratings of certain securities held by the Portfolio reflect a greater
possibility that adverse changes in the financial condition of an issuer, or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by the Fund more volatile and could limit the Portfolio's ability to sell
its securities at prices approximating the values the Portfolio has placed on
such securities. It is possible that legislation may be adopted in the future
limiting the ability of certain financial institutions to purchase such
securities; such legislation may adversely affect the liquidity of such
securities. In the absence of a liquid trading market for securities held by it,
the Portfolio may be unable at times to establish the fair market value of such
securities.
The rating assigned to a security by a rating agency does not reflect an
assessment of the volatility of the security's market value or of the liquidity
of an investment in the securities. Credit ratings are based largely on the
issuer's historical financial condition and the rating agency's investment
analysis at the timing of rating, and the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial
condition. Credit quality in the high yield, high risk bond market can change
from time to time, and recently issued credit ratings may not fully reflect the
actual risks posed by a particular high yield security.
While the Investment Adviser will attempt to reduce the risks of investing in
lower rated or unrated securities through active portfolio management,
diversification, credit analysis and attention to current developments and
trends in the economy and the financial markets, there can be no assurance that
a broadly diversified portfolio of such securities would substantially lessen
the risks of defaults brought about by an economic downturn or recession.
The net asset value of the Fund will change in response to fluctuations in
prevailing interest rates and changes in the value of the securities held by the
Portfolio. When interest rates decline, the value of securities already held by
the Portfolio can be expected to rise. Conversely, when interest rates rise, the
value of existing portfolio security holdings can be expected to decline.
Changes in the credit quality of issuers of debt obligations held by the
Portfolio will affect the principal value (and possibly the income earned) on
such obligations. In addition, the values of such securities are affected by
changes in general economic conditions and business conditions affecting the
specific industries of their issuers. Changes by recognized rating services in
their ratings of any fixed-income security and in the ability of an issuer to
make payments of interest and principal may also affect the value of these
investments. The Portfolio will not dispose of a security solely because its
rating is reduced below its rating at the time of purchase, although the
Investment Adviser will monitor the investment to determine whether continued
investment in the security will assist in meeting the Portfolio's investment
objective.
Interest and/or principal payments on securities in default may be in arrears
when such securities are acquired, and the issuer may be in bankruptcy or
undergoing a debt restructuring or reorganization. In order to enforce its
rights in the event of a default under such securities, the Portfolio may be
required to take possession of and manage assets securing the issuer's
obligation on such securities, which may increase the Portfolio's operating
expenses and adversely affect the Portfolio's net asset value. As at March 31,
1996 the Portfolio held one obligation in default, which represented less than
1% of the Portfolio's net assets. This obligation was sold from the Portfolio.
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. In addition, the Portfolio may temporarily
borrow up to 5% of the value of its total assets to satisfy redemption requests
or settle securities transactions.
Loan interests generally are not rated by any nationally recognized rating
service and are, at present, not readily marketable and may be subject to
contractual restrictions on resale. An investment in restricted securities may
involve relative greater risk and cost to the Portfolio because of their
illiquidity. Moreover, liquid Rule 144A securities may increase the level of
Portfolio liquidity to the extent qualified institutional buyers become
uninterested in purchasing such securities.
Fixed-income securities that the Portfolio may invest in also include zero
coupon bonds, deferred interest bonds and bonds on which the interest is payable
in kind ("PIK bonds"). Zero coupon and deferred interest bonds are debt
obligations which are issued at a significant discount from face value. While
zero coupon bonds do not require the periodic payment of interest, deferred
interest bonds provide for a period of delay before the regular payment of
interest begins. PIK bonds are debt obligations which provide that the issuer
thereof may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations which
make regular payments of interest. The Portfolio will accrue income on such
investments for tax and accounting purposes, in accordance with applicable law,
the Fund's share of which income is distributable to shareholders. Because no
cash is received at the time such income is accrued, the Portfolio may be
required to liquidate other portfolio securities to enable the Fund to satisfy
its distribution obligations.
Investing in foreign securities may represent a greater degree of risk than
investing in domestic securities, because of the possibility of exchange rate
fluctuations, less publicly-available financial and other information, more
volatile and less liquid markets, less securities regulation, higher brokerage
costs, imposition of foreign withholding and other taxes, war, expropriation or
other adverse governmental actions.
THE FUND AND THE PORTFOLIO HAVE ADOPTED CERTAIN FUNDAMENTAL INVESTMENT
RESTRICTIONS WHICH ARE ENUMERATED IN DETAIL IN THE STATEMENT OF ADDITIONAL
INFORMATION AND WHICH MAY NOT BE CHANGED UNLESS AUTHORIZED BY A SHAREHOLDER
VOTE AND AN INVESTOR VOTE, RESPECTIVELY. EXCEPT FOR SUCH ENUMERATED
RESTRICTIONS AND AS OTHERWISE INDICATED IN THIS PROSPECTUS, THE INVESTMENT
OBJECTIVE AND POLICIES OF THE FUND AND THE PORTFOLIO ARE NOT FUNDAMENTAL
POLICIES AND ACCORDINGLY MAY BE CHANGED BY THE TRUSTEES OF THE TRUST AND THE
PORTFOLIO WITHOUT OBTAINING THE APPROVAL OF THE FUND'S SHAREHOLDERS OR THE
INVESTORS IN THE PORTFOLIO, AS THE CASE MAY BE. IF ANY CHANGES WERE MADE IN
THE FUND'S INVESTMENT OBJECTIVE, THE FUND MIGHT HAVE AN INVESTMENT OBJECTIVE
DIFFERENT FROM THE OBJECTIVE WHICH AN INVESTOR CONSIDERED APPROPRIATE AT THE
TIME THE INVESTOR BECAME A SHAREHOLDER IN THE FUND.
ORGANIZATION OF THE FUND AND THE PORTFOLIO
- ------------------------------------------------------------------------------
THE FUND IS A DIVERSIFIED SERIES OF THE TRUST, A BUSINESS TRUST ESTABLISHED
UNDER MASSACHUSETTS LAW PURSUANT TO A DECLARATION OF TRUST DATED MAY 7, 1984, AS
AMENDED. THE TRUST IS A MUTUAL FUND -- AN OPEN-END MANAGEMENT INVESTMENT
COMPANY. The Trustees of the Trust are 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
(such as the Fund). Each share represents an equal proportionate beneficial
interest in the Fund. When issued and outstanding, the shares are fully paid and
nonassessable by the Trust 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 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,
which is a separate investment company with an identical investment objective
(although the Fund may temporarily hold a de minimis amount of cash). 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, see "The Fund's Investment
Objective" and "Investment Policies and Risks". Further information regarding
the 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 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 Portfolio without obtaining the approval of the
shareholders of the Fund or the investors in the Portfolio, as the case may be.
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 within one year
of their purchase 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, such Trustees 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 1992, 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.
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.
Acting under the general supervision of the Board of Trustees of the Portfolio,
BMR manages the Portfolio's investments and affairs. BMR also 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
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 up to $500 million 0.300% 3.00%
2 $500 million but less than $1 billion 0.275% 2.75%
3 $1 billion but less than $1.5 billion 0.250% 2.50%
4 $1.5 billion but less than $2 billion 0.225% 2.25%
5 $2 billion but less than $3 billion 0.200% 2.00%
6 $3 billion and over 0.175% 1.75%
</TABLE>
As of March 31, 1996, the Portfolio had net assets of $511,347,139. For the
fiscal year ended March 31, 1996, the Portfolio paid BMR advisory fees
equivalent to 0.63% of the Portfolio's average daily net assets for such year.
Hooker Talcott, Jr. has acted as the Portfolio's manager since it commenced
operations. Mr. Talcott has been a Vice President of Eaton Vance since 1987
and of BMR since 1992. Michael Weilheimer is the co-portfolio manager and has
been a Vice President of Eaton Vance since 1992.
BMR OR EATON VANCE ACTS AS INVESTMENT ADVISER TO INVESTMENT COMPANIES AND
VARIOUS INDIVIDUAL AND INSTITUTIONAL CLIENTS WITH ASSETS UNDER MANAGEMENT OF
OVER $16 BILLION. Eaton Vance is a wholly-owned subsidiary of Eaton Vance Corp.,
a publicly-held holding company which through its subsidiaries and affiliates
engages primarly in investment management and marketing activities.
BMR places the portfolio transactions of the Portfolio for execution with many
broker-dealer firms. Fixed-income securities are normally 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 to
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 Fund, the Portfolio and BMR have adopted Codes of Ethics relating to
personal securities transactions. The Codes permit Eaton Vance personnel to
invest in securities (including securities that may be purchased or held by the
Portfolio) for their own accounts, subject to certain pre-clearance, reporting
and other restrictions and procedures contained in such Codes.
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 its 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, 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 INVESTMENT COMPANY ACT OF 1940
(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 6.25%
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. On sales of shares
made prior to January 30, 1995, the Principal Underwriter currently pays monthly
sales commissions to a financial services firm (an "Authorized Firm") in amounts
anticipated to be equivalent to .75%, annualized, of the assets maintained in
the Fund by the customers of such Firm. On sales of shares made on January 30,
1995 and thereafter, the Principal Underwriter currently expects to pay to an
Authorized Firm (a) sales commissions (except on exchange transactions and
reinvestments) at the time of sale equal to .75% of the purchase price of the
shares sold by such Firm, and (b) monthly sales commissions approximately
equivalent to 1/12 of .75% of the value of shares sold by such Firm and
remaining outstanding for at least one year. The Plan is designed to permit an
investor to purchase Fund shares through an Authorized Firm without incurring an
intial sales charge and at the same time permit the Principal Underwriter to
compensate Authorized Firms and other persons in connection with the sale of
Fund shares.
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 made to the Principal
Underwriter 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. During the
fiscal year ended March 31, 1996, the Fund paid or accrued sales commissions
under its Plan equivalent to 0.75% (annualized) of the Fund's average daily net
assets. As at March 31, 1996, the outstanding Uncovered Distribution Charges of
the Principal Underwriter calculated under the Plan amounted to approximately
$744,000 (equivalent to 9.8% 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 initially implemented this provision of the Plan by
authorizing the Fund to make monthly service fee payments to the Principal
Underwriter in amounts not expected to exceed .25% of the Fund's average daily
net assets for any fiscal year. The Fund accrues the service fee daily at the
rate of 1/365 of .25% of the Fund's net assets. On sales of shares made prior to
January 30, 1995, the Principal Underwriter currently makes monthly service fee
payments to an Authorized Firm in amounts anticipated to be equivalent to .25%,
annualized, of the assets maintained in the Fund by the customers of such Firm.
On sales of shares made on January 30, 1995 and thereafter, the Principal
Underwriter currently expects to pay to an Authorized Firm (a) a service fee
(except on exchange transactions and reinvestments) at the time of sale equal to
.25% of the purchase price of the shares sold by such Firm, and (b) monthly
service fees approximately equivalent to 1/12 of .25% of the value of shares
sold by such Firm and remaining outstanding for at least one year. During the
first year after a purchase of Fund shares, the Principal Underwriter will
retain the service fee as reimbursement for the service fee payment made to the
Authorized Firm at the time of sale. As permitted by the NASD Rule, all 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 the Principal
Underwriter, and as such are not subject to automatic discontinuance when there
are no outstanding Uncovered Distribution Charges of the Principal Underwriter.
During the fiscal year ended March 31, 1996, the Fund paid or accrued service
fee payments under its Plan equivalent to 0.25% (annualized) of the Fund's
average daily net assets for such period.
The Principal Underwriter may, from time to time, at its own expense, provide
additional incentives to Authorized Firms which employ registered
representatives who sell Fund 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
- ------------------------------------------------------------------------------
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 IBT Fund Services (Canada) Inc., (as agent for the Fund)
in the manner authorized by the Trustees of the Trust. IBT Fund Services
(Canada) Inc. is a subsidiary of Investors Bank & Trust Company ("IBT"), the
Fund's and the Portfolio's custodian. 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 Fund Services (Canada) Inc. (as 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. Fixed-income securities (other than short-term
obligations), including listed securities and securities for which price
quotations are available, will normally be valued on the basis of market
valuations furnished by a pricing service. For further information regarding the
valuation of the Portfolio's assets, see "Determination of Net Asset Value" in
the Statement of Additional Information.
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. An Authorized Firm may charge its customers a fee in connection with
transactions executed by that Firm. The Fund may suspend the offering of shares
at any time and may refuse an order for the purchase of shares.
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: First
Data Investor Services Group, P.O. Box 5153, Westborough, MA 01581-5123. 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 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 on the day of their receipt 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 available price. 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 Classic High Income Fund
IN THE CASE OF PHYSICAL DELIVERY:
Investors Bank & Trust Company
Attention: EV Classic High 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. 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.
IF YOU DON'T HAVE AN AUTHORIZED FIRM, EATON VANCE CAN RECOMMEND ONE.
HOW TO REDEEM FUND SHARES
- ------------------------------------------------------------------------------
A SHAREHOLDER MAY REDEEM FUND SHARES IN ONE OF THREE WAYS -- BY MAIL, BY
TELEPHONE OR THROUGH AN AUTHORIZED FIRM. The redemption price will be based on
the net asset value per Fund share next computed after a redemption request is
received in the proper form as described below.
REDEMPTION BY MAIL: Shares may be redeemed by delivering to First Data Investor
Services Group, P.O. Box 5123, Westborough, Massachusetts 01581-5123, during its
business hours a written request for redemption in good order, plus any share
certificates with executed stock powers. The redemption price will be based on
the net asset value per share of the Fund 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 First Data Investor Services Group. 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.
REDEMPTION BY TELEPHONE: Shares may be redeemed by telephone provided the
investor has not disclaimed in writing the use of the privilege. Such
redemptions can be effected by calling the Transfer Agent at 800-262-1122,
Monday through Friday, 9:00 a.m. to 4:00 p.m. (Eastern Standard Time). The
proceeds of a telephone redemption may be no greater than the maximum amount
established by the Principal Underwriter (currently $50,000) and may be mailed
only to the account address of record. Shares held by corporations, trusts or
certain other entities, or subject to fiduciary arrangements, may not be
redeemed by telephone. Neither the Fund, the Principal Underwriter nor the
Transfer Agent will be responsible for the authenticity of redemption
instructions received by telephone, provided that reasonable procedures to
confirm that instructions communicated by telephone are genuine have been
followed. If such procedures are not followed, the Fund, the Principal
Underwriter or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone instructions. Telephone instructions will
be tape recorded. In times of drastic economic or market changes, a telephone
redemption may be difficult to implement.
REDEMPTION THROUGH AN AUTHORIZED FIRM: 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.
Within seven days after receipt of a redemption request in good order by First
Data Investor Services Group, the Fund will make payment in cash for the net
asset value of the shares as of the date determined above, reduced by the amount
of any applicable CDSCs (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.
If shares were recently purchased, the proceeds of a 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 $750. Prior to such a redemption,
shareholders will be given 60 days' written notice to make an additional
purchase. However, no such redemption 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
involunatry redemptions.
CONTINGENT DEFERRED SALES CHARGE. Shares redeemed within the first year of their
purchase (except shares acquired through the reinvestment of distributions)
generally will be subject to a contingent deferred sales charge ("CDSC"). Any
CDSC which is required to be imposed on share redemptions will be equal to 1% of
the net asset value of redeemed shares. This CDSC 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 one year prior to the redemption,
(b) all shares in the account acquired through reinvestment of distributions,
and (c) the increase, if any, in the value in the other shares in the account
(namely those purchased within the year 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 CDSC. 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. As described under "Distribution Plan", the CDSC will be paid to the
Principal Underwriter or the Fund.
In calculating the CDSC upon the redemption of Fund shares acquired in an
exchange for shares of a fund currently listed under "The Eaton Vance Exchange
Privilege," 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 CDSC will be imposed on Fund shares which have been sold to Eaton Vance or
its affiliates, or to their respective employees or clients. The CDSC will also
be waived for shares redeemed (1) pursuant to a Withdrawal Plan (see "Eaton
Vance Shareholders Services"), (2) as part of a distribution from a retirement
plan qualified under Section 401, 403(b) or 457 of the Internal Revenue Code of
1986, as amended (the "Code"), or (3) as part of a minimum required distribution
from other tax-sheltered retirement plans.
REPORTS TO SHAREHOLDERS
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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 certified public accountants. Shortly
after the end of each calendar year, the Fund will furnish all shareholders with
information necessary for preparing federal and state income tax returns.
THE LIFETIME INVESTING ACCOUNT/DISTRIBUTION OPTIONS
- ------------------------------------------------------------------------------
AFTER AN INVESTOR MAKES AN INITIAL PURCHASE OF FUND SHARES, THE FUND'S TRANSFER
AGENT, FIRST DATA INVESTOR SERVICES GROUP, 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 share 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 First Data Investor
Services Group.
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 First Data Investor Services Group, P.O. Box 5123,
Westborough, MA 01581-5123 (please provide the name of the shareholder, the Fund
and the account number).
THE FOLLOWING DISTRIBUTION OPTIONS WILL BE AVAILABLE TO LIFETIME INVESTING
ACCOUNTS and may be changed as often as desired by written notice to the Fund's
dividend disbursing agent, First Data Investor Services Group, P.O. Box 5123,
Westborough, MA 01581-5123. 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 the 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.
Further, 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.
THE EATON VANCE EXCHANGE PRIVILEGE
- ------------------------------------------------------------------------------
Shares of the Fund may be exchanged for shares of one or more other funds in the
Eaton Vance Classic Group of Funds or Eaton Vance Money Market Fund, which are
distributed subject to a CDSC or equivalent early withdrawal charge, on the
basis of the net asset value per share of each fund at the time of the exchange,
provided that such exchange offers are available only in states where shares of
the fund being acquired may be legally 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.
First Data Investor Services Group makes exchanges at the next determined net
asset value after receiving an exchange request in good order (see "How to
Redeem Fund Shares"). Consult First Data Investor Services Group for additional
information concerning the exchange privilege. Applications and prospectuses of
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 CDSC is imposed on exchanges. For purposes of calculating the CDSC upon the
redemption of shares acquired in an exchange, 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.
Shares of the other funds in the Eaton Vance Classic Group of Funds (and shares
of Eaton Vance Money Market Fund acquired as the result of an exchange from an
EV Classic 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 First Data Investor Services Group provided
that the investor has not disclaimed in writing the use of the privilege. To
effect such exchanges, call First Data Investor Services Group at 800-262-1122
Monday through Friday, 9:00 a.m. to 4:00 p.m. (Eastern Standard Time). Shares
acquired by telephone exchange 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 First Data Investor Services Group 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. If such procedures are not followed, the Fund, the Principal
Underwriter or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone instructions. 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
Classic High Income Fund may be mailed directly to First Data Investor Services
Group, P.O. Box 5123, Westborough, MA 01581-5123 at any time -- whether or not
dividends 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 the
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 CDSC. 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 CDSC paid on the repurchased or redeemed 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 of the Fund 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 the 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 twenty-second day of each month or the next
business day thereafter. The Fund anticipates that for tax purposes the entire
distribution, whether paid in cash or reinvested in additional shares of the
Fund, will constitute income to its shareholders. 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.
Certain distributions if declared by the Fund 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.
Distributions of the Fund which are derived from net investment income, net
short-term capital gains and certain foreign exchange gains are taxable to
shareholders as ordinary income, whether received in cash or reinvested in
additional shares. Only a small portion, if any, of such distributions may be
eligible for the dividends-received deduction for corporations subject to
certain limitations.
Capital gains, if any, realized on sales of investments and on options and
futures transactions during the fiscal year, which ends on March 31, will be
offset by capital losses, including any capital loss carryovers, and will
usually be distributed with the Fund's first monthly distribution paid after the
close of such fiscal year. However, the Fund could make additional distributions
of capital gains in any year in order to comply with the distribution
requirements of the Code. Distributions of long-term capital gains are taxable
to shareholders as long-term capital gains, whether received in cash or
reinvested in 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 such 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.
Shareholders will receive annually tax information notices and Forms 1099 to
assist in the preparation of their federal and state tax returns for the prior
calendar year's distributions, proceeds from the redemption or exchange of Fund
shares, and federal income tax (if any), withheld by the Fund's Transfer Agent.
Shareholders should consult with their tax advisers concerning the applicability
of state, local or other taxes to an investment in the Fund.
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,
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 timing
requirements imposed by the Code. As a partnership under the Code, the Portfolio
does not pay federal income or excise taxes.
PERFORMANCE INFORMATION
- ------------------------------------------------------------------------------
FROM TIME TO TIME, THE FUND MAY ADVERTISE ITS YIELD AND/OR AVERAGE ANNUAL TOTAL
RETURN. The Fund's current 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 CDSC at the end
of the period. The Fund may also publish annual and cumulative total return
figures from time to time.The Fund may quote total return for the period prior
to commencement of operations which would reflect the Portfolio's total return
(and that of its predecessor) adjusted to reflect any applicable Fund sales
charge.
The Fund may also publish total return figures which do not take into account
any CDSC which may be imposed upon redemption at the end of the specified
period. Any performance figure which does not take into account the CDSC would
be reduced to the extent such charge is imposed upon a redemption.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's current yield or total return for
any prior period should not be considered as a representation of what an
investment may earn or what the Fund's yield or total return 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
DESCRIPTION OF MOODY'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-edge". 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 fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks 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.
SECURITIES IN WHICH THE PORTFOLIO MAY INVEST WILL INCLUDE THOSE IN THE FOLLOWING
CATEGORIES:
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 safeguarded
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 corporate 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.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
INVESTMENT GRADE
AAA: Bonds rated AAA have the highest rating assigned by S&P's. Capacity to
pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
SECURITIES IN WHICH THE PORTFOLIO MAY INVEST WILL INCLUDE THOSE IN THE FOLLOWING
CATEGORIES:
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit 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
bonds in this category than for bonds in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk 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 Standard & Poor's rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because Standard & Poor's does not rate a particular type of obligation as a
matter of policy.
NOTES: 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 speculative obligations. 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
HIGH INCOME PORTFOLIO
ASSET COMPOSITION INFORMATION
FOR THE PERIOD ENDED MARCH 31, 1996
PERCENT OF
NET ASSETS
----------
Preferred Stocks and Other Equity Securities ............. 1.7%
Short-Term Obligations ................................... 3.5%
Debt Securities -- Moody's Rating
Ba ................................................... 5.4%
B1 ................................................... 12.9%
B2 ................................................... 25.5%
B3 ................................................... 40.5%
Caa .................................................. 7.2%
Unrated .............................................. 3.3%
-----
Total ................................................ 100.0%
The chart above indicates the weighted average composition of the securities
held by the Portfolio for the fiscal year ended March 31, 1996, with the debt
securities rated by Moody's separated into the indicated categories. The
weighted average indicated above was calculated on a dollar weighted basis and
was computed as at the end of each month during the year. The charge does not
necessarily indicate what the composition of the Portfolio will be in the
current and subsequent fiscal years.
For a description of Moody's ratings of fixed-income securities, see Appendix A
to this Prospectus.
<PAGE>
[LOGO: EATON VANCE]
EV CLASSIC HIGH INCOME FUND
- --------------------------------------------------------------------------------
PROSPECTUS
AUGUST 1, 1996
EV CLASSIC
HIGH INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
- --------------------------------------------------------------------------------
INVESTMENT ADVISER OF HIGH INCOME PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV CLASSIC HIGH 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, 89 South Street, Boston, MA 02111
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, MA 02110
C-HIP
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
August 1, 1996
EV CLASSIC HIGH INCOME FUND
24 Federal Street
Boston, Massachusetts 02110
(800) 225-6265
This Statement of Additional Information consists of two parts. Part I
provides information about EV Classic High Income Fund (the "Fund") and certain
other series of Eaton Vance Mutual Funds Trust (the "Trust"). Part II provides
information solely about the Fund. Where appropriate, Part I includes
cross-references to the relevant sections of Part II.
- ------------------------------------------------------------------------------
TABLE OF CONTENTS Page
PART I
Investment Objective and Policies ......................... 2
Investment Restrictions ................................... 7
Trustees and Officers ..................................... 8
Investment Adviser and Administrator ..................... 10
Custodian ................................................. 12
Service for Withdrawal .................................... 13
Determination of Net Asset Value .......................... 13
Investment Performance .................................... 13
Taxes ..................................................... 15
Principal Underwriter ..................................... 17
Portfolio Security Transactions ........................... 17
Other Information ......................................... 18
Independent Certified Public Accountants .................. 19
Financial Statements ...................................... 19
PART II
Fees and Expenses ......................................... a-1
Distribution Plan ......................................... a-2
Performance Information ................................... a-4
Control Persons and Principal Holders of Securities ....... a-4
- ------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE FUNDS' PROSPECTUS DATED AUGUST 1, 1996, AS SUPPLEMENTED FROM
TIME TO TIME, WHICH IS INCORPORATED HEREIN BY REFERENCE. 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>
STATEMENT OF ADDITIONAL INFORMATION
PART I
This Part I provides information about the Fund, certain other series of the
Trust and the Portfolio. Capitalized terms used in this SAI and not otherwise
defined have the meanings given them in the Fund's Prospectus. The Fund is
subject to the same investment policies as those of the Portfolio. The Fund
currently seeks to achieve its objective by investing in the Portfolio.
ADDITIONAL INVESTMENT OBJECTIVE AND POLICIES
OTHER FIXED-INCOME SECURITIES
Included in the fixed-income securities in which the Portfolio may invest
are preferred, preference and convertible stocks, 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. 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. 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 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, which it
would anticipate using as short-term investments pending longer term investment
of its funds.
CONCENTRATION
Although there is no current intention to do so, the Portfolio may invest up
to 25% of its assets in securities of issuers in each of the electric, gas and
telephone utility industries if, in the opinion of the Investment Adviser, the
relative return available from such securities and the relative risk,
marketability, quality or availability of securities of issuers in such industry
justifies such an investment. The value of such investments may be affected to a
greater degree by adverse developments in such industries. Industry-wide
problems include the effects of fluctuating economic conditions, energy
conservation practices, environmental regulations, high capital expenditures,
construction delays due to pollution control and environmental considerations,
uncertainties as to fuel availability and costs, increased competition in
deregulated sectors of such industries and difficulties in obtaining timely and
adequate rate relief from regulatory commissions. If applications for rate
increases are not granted or are not acted upon promptly, the market prices of
and interest or dividend payments on utility securities may be adversely
affected.
LOAN INTERESTS
A loan in which the Portfolio may acquire a loan interest (a "Loan
Interest") is typically originated, negotiated and structured by a U.S. or
foreign commercial bank, insurance company, finance company or other financial
institution (the "Agent") for a lending syndicate of financial institutions. The
Agent typically administers and enforces the loan on behalf of the other lenders
in the syndicate. In addition, an institution, typically but not always the
Agent (the "Collateral Bank"), holds collateral (if any) on behalf of the
lenders. These Loan Interests may take the form of participation interests in,
assignments of or novations of a loan during its secondary distribution, or
direct interests during a primary distribution. Such Loan Interests may be
acquired from U.S. or foreign banks, insurance companies, finance companies or
other financial institutions who have made loans or are members of a lending
syndicate or from other holders of Loan Interests. The Portfolio may also
acquire Loan Interests under which the Portfolio derives its rights directly
from the borrower. Such Loan Interests are separately enforceable by the
Portfolio against the borrower and all payments of interest and principal are
typically made directly to the Portfolio from the borrower. In the event that
the Portfolio and other lenders become entitled to take possession of shared
collateral, it is anticipated that such collateral would be held in the custody
of a Collateral Bank for their mutual benefit. The Portfolio may not act as an
Agent, a Collateral Bank, a guarantor or sole negotiator or structurer with
respect to a loan.
The investment adviser will analyze and evaluate the financial condition of
the borrower in connection with the acquisition of any Loan Interest. The
Investment Adviser also analyzes and evaluates the financial condition of the
Agent and, in the case of Loan Interests in which the Portfolio does not have
privity with the borrower, those institutions from or through whom the Portfolio
derives its rights in a loan (the "Intermediate Participants"). From time to
time the Investment Adviser and its affiliates may borrow money from various
banks in connection with their business activities. Such banks may also sell
interests in loans to or acquire such interests from the Portfolio or may be
Intermediate Participants with respect to loans in which the Portfolio owns
interests. Such banks may also act as Agents for loans in which the Portfolio
owns interests.
In a typical loan the Agent administers the terms of the loan agreement. In
such cases, the Agent is normally responsible for the collection of principal
and interest payments from the borrower and the apportionment of these payments
to the credit of all institutions which are parties to the loan agreement. The
Portfolio will generally rely upon the Agent or an Intermediate Participant to
receive and forward to the Portfolio its portion of the principal and interest
payments on the loan. Furthermore, unless under the terms of a participation
agreement the Portfolio has direct recourse against the borrower, the Portfolio
will rely on the Agent and the other members of the lending syndicate to use
appropriate credit remedies against the borrower. The Agent is typically
responsible for monitoring compliance with covenants contained in the loan
agreement based upon reports prepared by the borrower. The seller of the Loan
Interest usually does, but is often not obligated to, notify holders of Loan
Interests of any failures of compliance. The Agent may monitor the value of the
collateral and, if the value of the collateral declines, may accelerate the
loan, may give the borrower an opportunity to provide additional collateral or
may seek other protection for the benefit of the participants in the loan. The
Agent is compensated by the borrower for providing these services under a loan
agreement, and such compensation may include special fees paid upon structuring
and funding the loan and other fees paid on a continuing basis. With respect to
Loan Interests for which the Agent does not perform such administrative and
enforcement functions, the Portfolio will perform such tasks on its own behalf,
although a Collateral Bank will typically hold any collateral on behalf of the
Portfolio and the other lenders pursuant to the applicable loan agreement.
A financial institution's appointment as Agent may usually be terminated in
the event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held by
the Agent under the loan agreement should remain available to holders of Loan
Interests. However, if assets held by the Agent for the benefit of the Portfolio
were determined to be subject to the claims of the Agent's general creditors,
the Portfolio might incur certain costs and delays in realizing payment on a
loan interest, or suffer a loss of principal and/or interest. In situations
involving Intermediate Participants similar risks may arise.
Purchasers of loan interests depend primarily upon the creditworthiness of
the borrower for payment of principal and interest. If the Portfolio does not
receive scheduled interest or principal payments on such indebtedness, the
Portfolio could be adversely affected. Loans that are fully secured offer the
Portfolio more protections than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the borrower's
obligation, or that the collateral can be liquidated. Indebtedness of borrowers
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Borrowers that are in bankruptcy or restructuring may never
pay off their indebtedness, or may pay only a small fraction of the amount owed.
Direct indebtedness of developing countries will also involve a risk that the
governmental entities responsible for the repayment of the debt may be unable,
or unwilling, to pay interest and repay principal when due.
The Portfolio limits the amount of total assets that it will invest in any
one issuer or in issuers within the same industry. See Investment Restrictions
(1) and (5) below. For purposes of these restrictions, the Portfolio generally
will treat the borrower as the "issuer" of a Loan Interest held by the
Portfolio. In the case of loan participations where the Agent or Intermediate
Participant serves as financial intermediary between the Portfolio and the
borrower, the Portfolio, in appropriate circumstances, will treat both the Agent
or Intermediate Participant and the borrower as "issuers" for the purposes of
determining whether the Portfolio has invested more than 5% of its total assets
in a single issuer. Treating a financial intermediary as an issuer of
indebtedness may restrict the Portfolio's ability to invest in indebtedness
related to a single intermediary, or a group of intermediaries engaged in the
same industry, even if the underlying borrowers represent many different
companies and industries.
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 generally 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.
Foreign stock markets, while growing in volume of trading activity, have
substantially less volume than the Exchange, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Similarly, volume and liquidity in most foreign bond markets is less
than in the United States and, at times, volatility of price can be greater than
in the United States. 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
stock exchanges, brokers 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. 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 TRANSACTIONS
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 transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
The Portfolio does not intend to enter into forward foreign currency
exchange contracts to protect the value of its portfolio securities on a regular
continuous basis, and will not do so if, as a result, the Portfolio will have
more than 15% of the value of its total assets committed to the consummation of
such contracts. The Portfolio also will not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Portfolio to deliver an amount of foreign currency
in excess of the value of the securities held by the Portfolio's or other assets
denominated in that currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the long-term
investment decisions made with regard to overall diversification strategies.
However, the Portfolio believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
the Portfolio will be served. The Portfolio generally will not enter into a
forward contract with a term of greater than one year.
OPTIONS ON SECURITIES
An 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 security until the option expires or it delivers the underlying
security 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 ("OCC") 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 OCC 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
OCC inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
FUTURES CONTRACTS
All futures contracts entered into by the Portfolio are traded on exchanges
or boards of trade that are licensed and regulated by the CFTC.
The Portfolio may purchase and write call and put options on futures
contracts which are traded on a U.S. exchange or board of trade.
The Portfolio will engage in futures and related options transactions for
bona fide hedging or non-hedging purposes as defined in or 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 that the Portfolio owns, or futures contracts will be purchased to
protect the Portfolio against an increase in the price of securities 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 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. 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 Code for maintaining the qualification
of the Fund as a regulated investment company for federal income tax purposes
(see "Taxes").
ASSET COVERAGE FOR DERIVATIVE INSTRUMENTS
Transactions using forward contracts, futures contracts and options (other
than options that the Portfolio has purchased) expose the Portfolio to an
obligation to another party. The Portfolio will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies, or other options, futures contracts or forward
contracts, or (2) cash, receivables and short-term debt securities with a value
sufficient at all times to cover its potential obligations not covered as
provided in (1) above. The Portfolio will comply with Securities and Exchange
Commission the ("Commission") guidelines regarding cover for these instruments
and, if the guidelines so require, set aside cash, U.S. Government securities or
other liquid, high grade debt securities in a segregated account with its
custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding forward contract, futures contract or option
is open, unless they are replaced with other appropriate assets. As a result,
the commitment of a large portion of the Portfolio's assets to cover or
segregated accounts could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
LENDING 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 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. During the existence of a loan,
the Portfolio will continue to receive the equivalent of the interest paid by
the issuer on the securities loaned and will also receive a fee or all of a
portion of the interest on investment of the collateral, if any. However, the
Portfolio may pay lending fees to such borrowers. The Portfolio would not have
the right to vote any securities having voting rights during the existence of a
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or the giving or withholding of their consent on
a material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovery or even loss of rights in the securities
loaned if the borrower of the securities fails financially. However, the loans
would be made only to organizations deemed by the Portfolio's management to be
of good standing and when, in the judgment of the Portfolio's management, the
consideration which can be earned from securities loans of this type justifies
the attendant risk. Securities lending involves administration expenses,
including finders' fees. The financial condition of the borrower will be
monitored by the Investment Adviser on an ongoing basis. If the Investment
Adviser determines to make securities loans, it is not intended that the value
of the securities loaned would exceed 30% of the Portfolio's total assets. As of
the present time, the Trustees of the Portfolio have not made a determination to
engage in this activity, and have no present intention of making such a
determination during the current fiscal year.
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 once in a period of one year. A high turnover rate (100%
or more) necessarily involves greater expenses to the Portfolio. The Portfolio
engages in portfolio trading (including short-term trading) if it believes that
a transaction including all costs will help in achieving its investment
objective.
Securities may be sold in anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold. In addition, a security may be sold and another
purchased at approximately the same time to take advantage of what the Portfolio
believes to be a temporary disparity in the normal yield relationship between
the two securities. Yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for or supply of various
types of fixed-income securities or changes in the investment objectives of
investors. Such trading may be expected to increase the portfolio turnover rate
and the expenses incurred in connection with such trading.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund 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 SAI 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) With respect to 75% of total assets of the Fund, purchase any security
if such purchase, at the time thereof, would cause more than 5% of the total
assets of the Fund (taken at market value) to be invested in the securities of a
single issuer, or cause more than 10% of the total outstanding voting securities
of such issuer to be held by the Fund, except obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and except securities
of other investment companies;
(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 any security if such purchase, at the time thereof, would cause
more than 25% of the Fund's total assets to be invested in any single industry,
provided that the electric, gas and telephone utility industries shall be
treated as separate industries for purposes of this restriction and further
provided that there is no limitation with respect to obligations issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities.
(6) 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;
(7) Purchase or sell physical commodities or contracts for the purchase or
sale of physical commodities; or
(8) Make loans to any person except by (i) the acquisition of debt
securities and making portfolio investments, (ii) entering into repurchase
agreements or (iii) 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 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.
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 the approval by the Fund's shareholders or may be
changed with respect to the Portfolio by the Trustees of the Portfolio without
the approval by the Fund or its other investors. As a matter of nonfundamental
policy, neither the Fund nor the Portfolio may (a) invest more than 15% of its
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 under the Securities Act of
1933 and commercial paper issued pursuant to Section 4(2) of said Act that the
Board of Trustees of the Trust or the Portfolio, or its delegate, determines to
be liquid; (b) 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; (c) purchase put or call options on
securities only 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 so
invested; (d) purchase warrants in excess of 5% of net assets, of which 2% may
be warrants which are not listed on the New York or American Stock Exchanges;
(e) make short sales of securities or maintain a short position, unless at all
times when a short position is open the Fund owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issuer as, and equal in
amount to, the securities sold short, and unless not more than 25% of the Fund's
net assets (taken at current value) is held as collateral for such sales at any
one time. (The Fund will make such sales only for the purpose of deferring
realization of gain or loss for federal income tax purposes.); (f) 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 the Portfolio or is a member, officer, director or trustee of an
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 or securities together own beneficially more than
5% of such shares or securities or both (all taken at market value); or (g)
purchase oil, gas or other mineral leases or purchase partnership interests in
oil, gas or other mineral exploration or development programs.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset, or describes a policy regarding quality
standards, such percentage limitation or standard shall be determined
immediately after and as a result of the Fund's or the Portfolio's acquisition
of such security or asset. Accordingly, any later increase or decrease resulting
from a change in values, assets or other circumstances, other than subsequent
rating change will not compel the Fund or the Portfolio, as the case may be, to
dispose of such security or other asset. Notwithstanding the foregoing, under
normal market conditions the Portfolio must take actions necessary to comply
with the policy of investing at least 65% of total assets in the lowest
investment grade and lower rated and unrated debt obligations. Moreover, the
Fund and Portfolio must always be in compliance with the borrowing policies set
forth above.
In order to permit the sale of shares of the Fund in certain states, the
Fund may make commitments more restrictive than the 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, a wholly-owned subsidiary of Eaton Vance; of 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 and officers who are "interested persons" of the Trust, the Portfolio,
BMR, Eaton Vance, EVC or EV, as defined in the Investment Company Act of 1940
(the "1940 Act"), by virtue of their affiliation with any one or more of the
Trust, the Portfolio, BMR, Eaton Vance, EVC or EV, are indicated by an
asterisk(*).
TRUSTEES OF THE TRUST AND THE PORTFOLIO
M. DOZIER GARDNER (63), President and Trustee*
President and Chief Executive Officer of BMR, Eaton Vance, EVC and EV, and
Director of EVC and EV. Director, Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
DONALD R. DWIGHT (65), 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
JAMES B. HAWKES (54), Vice President and Trustee*
Executive Vice President of BMR, Eaton Vance, EV and EVC and a Director of EV
and EVC. Director, Trustee and officer of various investment companies managed
by Eaton Vance or BMR. Mr. Hawkes was elected Vice President and Trustee of
the Trust on December 16, 1991.
SAMUEL L. HAYES, III (61), Trustee
Jacob H. Schiff, Professor of Investment Banking, Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard University Graduate School of Business Administration,
Soldiers Field Road, Boston, Massachusetts 02163
NORTON H. REAMER (60), Trustee
President and Director, United Asset Management Corporation, a holding company
owning institutional investment management firms. Chairman, President and
Director, UAM Funds (mutual funds). Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
JOHN L. THORNDIKE (69), 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 (66), 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. (37), 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. Ahern was elected Vice
President of the Trust on June 19, 1995.
H. DAY BRIGHAM, JR., (69) Vice President of the Trust
Chairman of the Management Committee, Vice President of Eaton Vance, BMR, EVC
and EV and Director of EVC and EV. Director, Trustee and officer of various
investment companies managed by Eaton Vance or BMR. Mr. Brigham was elected
Vice President of the Trust on June 19, 1995.
WILLIAM CHISHOLM (35), Vice President of the Portfolio
Senior Trust Officer of The Bank of Nova Scotia Trust Company (Cayman)
Limited. Officer of various investment companies managed by Eaton Vance or
BMR.
Address: The Bank of Nova Scotia Trust Company (Cayman) Ltd., The Bank of Nova
Scotia Building, P.O. Box 501, George Town, Grand Cayman, Cayman Islands,
British West Indies.
MICHAEL WEILHEIMER (35), Vice President of the Portfolio Vice President of Eaton
Vance Management since 1992; employee of Eaton Vance
since November 26, 1990. Mr. Weilheimer was elected Vice President of
Portfolio on December 18, 1995.
SUSAN SCHIFF (35), Vice President of the Portfolio
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR. Ms. Schiff was elected Vice
President of the Trust on February 24, 1992.
JOHN P. RYNNE (54), Assistant Secretary of the Trust
Corporate Controller and Vice President of EVC. Vice President of Eaton Vance,
EVD and BMR, and Treasurer of Energex Energy Corporation. Mr. Rynne was
elected an officer of the Trust on June 19, 1995.
MICHEL NORMANDEAU (44),Vice President of the Portfolio
Assistant Manager -- Trust Services of The Bank of Nova Scotia Trust Company
(Cayman) Limited. Officer of various investment companies managed by Eaton
Vance or BMR.
Address: The Bank of Nova Scotia Trust Company (Cayman) Ltd., The Bank of Nova
Scotia Building, P.O. Box 501, George Town, Grand Cayman, Cayman Islands,
British West Indies. Mr. Normandeau was elected Vice President of the Trust
on June 19, 1995.
RAYMOND O'NEILL (34), Vice President of the Portfolio
Managing Director of IBT Trust and Custodian Services (Ireland) Limited since
January, 1995. Vice President, Atlantic Corporate Management Limited,
Warwick, Bermuda 1991-1994. Officer, The Bank of Bermuda Limited, Hamilton,
Bermuda 1987-1991. Officer of various investment companies managed by Eaton
Vance or BMR. Mr. O'Neill was elected Vice President of the Trust on June
19, 1995.
Address: Earlsfort Terrace, Dublin 2, Ireland
HOOKER TALCOTT (54), Jr., Vice President of the Portfolio Vice President of BMR,
Eaton Vance and EV. Officer of various investment companies managed by Eaton
Vance or BMR.
MICHAEL B. TERRY (53), Vice President of the Trust
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
JAMES L. O'CONNOR (51), Treasurer
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
THOMAS OTIS (64), Secretary
Vice President and Secretary of BMR, Eaton Vance, EV and EVC. Officer of various
investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (60), Assistant Treasurer and Assistant Secretary
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
A. JOHN MURPHY (33), 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). Mr. Murphy was elected Assistant Secretary of
the Trust on March 27, 1995 and of the Portfolio on June 19, 1995.
ERIC G. WOODBURY (39), Assistant Secretary
Vice President of BMR, Eaton Vance and EV since February 1993; formerly
associate attorney at Dechert, Price & Rhoads and Gaston & Snow. Mr. Woodbury
was elected Assistant Secretary of the Trust and Portfolio on June 19, 1995.
Officer of various investment companies managed by Eaton Vance or BMR.
Messrs. Thorndike (Chairman), Hayes and Reamer are members of the Special
Committee of the Board of Trustees of the Trust and of the Portfolio. The
purpose of the Special Committee is to consider, evaluate and make
recommendations to the full Board of Trustees concerning (i) all contractual
arrangements with service providers to the Fund, including administrative
services, transfer agency, custodial, fund accounting and distribution services,
and (ii) all other matters in which Eaton Vance or its affiliates has any actual
or potential conflict of interest with the Fund, its shareholders or the
Portfolio.
The Nominating Commitee is comprised of four Trustees who are not
"interested persons" as that term is defined by the 1940 Act ("noninterested
Trustees"). The Committee has four-year staggered terms, with one member
rotating off the Committee to be replaced by another noninterested Trustee.
Messrs. Hayes (Chairman), Reamer, Thorndike and Treynor are currently serving on
the Committee. The purpose of the Committee is to recommend to the Board
nominees for the position of noninterested Trustee and to assure that at least a
majority of the Board of Trustees is independent of Eaton Vance and its
affiliates.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees of the Trust and of the Portfolio. The Audit Committee's
functions include making recommendations to the Trustees regarding the selection
of the independent public accountants, and reviewing with such accountants and
the Treasurer of the Trust and of the Portfolio matters relative to trading and
brokerage policies and practices, accounting and auditing practices and
procedures, accounting records, internal accounting controls, and the functions
performed by the custodian and transfer agent of the Fund and of the Portfolio.
Trustees of the Portfolio who 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. Neither the Portfolio nor
the Trust has a retirement plan for its Trustees.
The fees and expenses of those Trustees of the Trust and 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. For the compensation earned by the noninterested Trustees of the
Trust and the Portfolio, see "Fees and Expenses" in Part II. Messrs. Chisholm,
Normandeau and O'Neill are not U.S. residents. It may be difficult to effect
service of process within the U.S. or to realize judgments of U.S. courts upon
them. It is uncertain whether courts in other countries would entertain original
actions against them.
INVESTMENT ADVISER AND ADMINISTRATOR
The Portfolio engages BMR as investment adviser pursuant to an Investment
Advisory Agreement dated May 31, 1994. BMR or Eaton Vance acts as investment
adviser to investment companies and various individual and institutional clients
with combined assets under management of over $16 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,
and U.S. Government securities. The equity division covers stocks ranging from
blue chip to emerging growth companies.
Eaton Vance and its affiliates act as adviser to over 150 mutual funds,
individual and various institutional accounts, including corporations,
hospitals, retirement plans, universities, foundations and trusts. Eaton Vance
mutual funds feature international equities, domestic equities, tax-free
municipal bonds, and U.S. government and corporate bonds. Lloyd George
Management, an investment management firm based in Hong Kong, has advised Eaton
Vance's international equity funds since 1992. Lloyd George's staff includes 11
highly qualified investment professionals who manage U.S. $1.3 billion. Lloyd
George analysts cover East Asia, the India subcontinent, Russia and Eastern
Europe, Latin America, Australia and New Zealand from offices in Hong Kong,
London and Mumbai, India. Eaton Vance mutual funds are distributed by Eaton
Vance Distributors both within the United States and offshore. EVC owns 24% of
the Class A shares of Lloyd George Management (B.V.I.) Limited, a registered
investment adviser.
Eaton Vance Distributors believes that an investment professional can
provide valuable services to you to help you reach your investment goals.
Meeting investment goals requires time, objectivity and investment savvy. Before
making an investment recommendation, a representative can help you carefully
consider your short-term and long-term financial goals, your tolerance for
investment risk, your investment time frame, and other investments you may
already own. Your professional investment representatives are knowledgeable
about financial markets, as well as the wide range of investment opportunities
available. A representative can help you decide when to buy, sell of persevere
with your investments. A professional investment representative can provide you
with tailored financial advice.
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.
The Investment Advisory Agreement with BMR remains in effect until February
28, 1997. It may be continued indefinitely thereafter so long as such
continuance after February 28, 1997 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.
IBT Trust Company (Cayman), Ltd. maintains the Portfolio's principal
office and certain of its records and provides administrative assistance in
connection with meetings of the Portfolio's Trustees and interestholders.
As indicated in the Prospectus, Eaton Vance serves as Administrator of the
Fund, but currently receives no compensation for providing administrative
services to the Fund. Under its Administrative Services 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. For additional information about the
Administrator, see "Fees and Expenses" in Part II.
The Fund pays all of its own expenses including, without limitation, (i)
expenses of maintaining the Fund and continuing its existence, (ii) its pro rata
share of 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.
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 June 30, 1996, 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. Brigham, Gardner, Dwight,
Hayes, Reamer, Thorndike, Hawkes and Treynor are officers or Trustees of the
Trust and/or the Portfolio and are members of the EVC, BMR, Eaton Vance and EV
organizations. Messrs. Ahern, Chisholm, Normandeau, O'Neill, Otis, Murphy,
O'Connor, Talcott, Terry and Woodbury and Ms. Sanders are officers of the Trust
and/or the Portfolio and are also members of the BMR, Eaton Vance and EV
organizations. BMR will receive the fees paid under the Investment Advisory
Agreement.
EVC owns all of the stock of Energex Corporation, which engages in oil and
gas exploration and development. In addition, Eaton Vance owns all the stock of
Northeast Properties, Inc., which is engaged in real estate investment. EVC owns
all the stock of Fulcrum Management, Inc. and MinVen, Inc., which are engaged in
the precious metal mining venture investment and management. EVC, BMR, Eaton
Vance 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, IBT. 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
IBT, 89 South Street, Boston, Massachusetts 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 and has custody of all the Portfolio's
assets. Its subsidiary, IBT Fund Services (Canada) Inc., One First Canadian
Place, King Street West, Toronto, Ontario, Canada, 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 its
capacity as custodian, IBT 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. A
portion of the fee relates to custody, bookkeeping and valuation services and is
based upon a percentage of the Fund and Portfolio net assets, and a portion of
the fee relates to activity charges, primarily the number of portfolio
transactions. These fees are then reduced by a credit for cash balances of the
particular investment company at the custodian equal to 75% of the 91-day, U.S.
Treasury Bill auction rate applied to the particular investment company's
average daily collected balances for the week. Landon T. Clay, a Director of EVC
and an officer, Trustee or Director of other members of the Eaton Vance
organization, owns approximately 13% of the stock of Investors Financial
Services Corp., the holding company parent of IBT. Management believes that such
ownership does not create an affiliated person relationship between the Fund or
Portfolio and IBT under the Investment Company Act of 1940.
SERVICE FOR WITHDRAWAL
By a standard agreement, the Trust's Transfer Agent will send to the
shareholder regular monthly or quarterly payments of any permitted amount
designated by the shareholder (see "Eaton Vance Shareholder Services --
Withdrawal Plan" in the Fund's Prospectus) based upon the value of the shares
held. The checks will be drawn from share redemptions and, hence, are a return
of principal. 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. A shareholder may not have a withdrawal plan in effect at the same time
he/she has authorized Bank Automated Investing or is otherwise making regular
purchases of Fund shares. 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 Fund Services (Canada) Inc. (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.
The Portfolio's net asset value is computed by subtracting the liabilities
of the Portfolio from the value of its total assets. Fixed-income securities
(other than short-term obligations), including listed securities and securities
for which price quotations are available, will normally be valued on the basis
of market valuations furnished by a pricing service. The pricing service uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities, various relationships between
securities, and yield to maturity in determining value. Securities listed on
securities exchanges or in the NASDAQ National Market are valued at closing sale
prices. Unlisted or listed securities for which closing sale prices are not
available are valued at the mean between the latest bid and asked prices.
Short-term obligations maturing in sixty days or less are valued at amortized
cost, which approximates market. Other assets are valued at fair value using
methods determined in good faith by the Trustees.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each day 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. Each investor's percentage of the aggregate interest
in the Portfolio will then be recomputed as a percentage equal to a 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
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 result. The
calculation assumes that all distributions are reinvested at net asset value on
the reinvestment dates during the period, and a complete redemption of the
investment and, if applicable, the deduction of a CDSC at the end of the period.
For further information regarding the total return of the Fund, see "Performance
Information" in the Fund's Part II.
Yield is computed pursuant to a standardized formula by dividing net
investment income per share earned during a recent thirty-day period by the
maximum offering price (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 and from dividends from
equity securities based on stated annual rates, exclusive of special or extra
distributions, 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 CDSC which are imposed upon certain
redemptions at the rates set forth under "How to Redeem Fund Shares" in the
Fund's current Prospectus. For information concerning the yield of the Fund, see
"Performance Information" in the Fund's Part II.
The Principal Underwriter may also publish to Authorized Firms the Fund's
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 (the days in a year divided by the accrual days of the monthly period)
used to annualize the most recent monthly 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. Investors should note that 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 and from dividends
from equity securities based on stated annual rates, exclusive of special or
extra distributions, (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.
The Fund's total return may be compared to related indices, such as the
Consumer Price Index, the Bond Buyer 25 Revenue Bond Index and the Lehman
Brothers Municipal Bond Index which 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.
The Fund may provide information about Eaton Vance, its affiliates and other
investment advisers to the funds in the Eaton Vance Family of Funds in sales
material or advertisements provided to investors or prospective investors. Such
material or advertisements may also provide information on the use of investment
professionals by such investors.
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.
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. Information, charts and illustrations relating to inflation and
the effects of inflation on the dollar may be included in advertisements and
other material furnished to present and prospective shareholders.
Information, charts and illustrations showing comparative historical
information of high-yielding bonds as represented by The First Boston High Yield
Index over 10-year U.S. Treasury bonds may be used in advertisements and other
material furnished to present or prospective shareholders. The First Boston High
Yield Index is an unmanaged index of 713 high-yielding securities. The principal
and interest of U.S. Treasury bonds are guaranteed by the United States
Government, while high yield bonds, sometimes referred to as "junk bonds", are
of lower quality than investment-grade bonds and U.S. Government securities.
Rates are given for illustrative purposes only and are not meant to imply or
predict actual results of an investment in the Fund.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
-- cost associated with aging parents;
-- funding a college education (including its actual and estimated
cost);
-- health care expenses (including actual and projected expenses);
-- long-term disabilities (including the availability of, and coverage
provided by, disability insurance); and
-- retirement (including the availability of social security benefits,
the tax treatment of such benefits and statistics and other
information relating to maintaining a particular standard of living
and outliving existing assets).
Such information may also address different methods for saving money and the
results of such methods, as well as the benefits of investing in bond funds.
The Fund may provide information about Eaton Vance, its affiliates and other
investment advisers to the funds in the Eaton Vance Family of Funds in sales
material or advertisements provided to investors or prospective investors. Such
material or advertisements may also provide information on the use of investment
professionals by such investors.
TAXES
See "Distributions and Taxes" in the Fund's current Prospectus.
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
qualify each year, as a regulated investment company under the Internal Revenue
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 on the Fund. The Fund so qualified for its fiscal year ended March
31, 1996 (see the Notes to the Financial Statements incorporated, reference in
this SAI). 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 and
tax-exempt (if any) 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 (or be deemed to have distributed) by December 31 of each calendar
year at least 98% of its ordinary 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. Under current law,
provided that the Fund qualifies as a RIC for federal income tax purposes and
the Portfolio is treated as a partnership for Massachusetts and federal tax
purposes, neither the Fund nor the Portfolio is liable for any income, excise or
franchise tax in the Commonwealth of Massachusetts.
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 have to limit its activities in options,
futures contracts and forward contracts in order to enable the Fund to maintain
its qualification as a RIC.
The Portfolio may be subject to foreign withholding or other foreign taxes
with respect to income (possibly including, in some cases, capital gains) on
certain foreign securities. These taxes may be reduced or eliminated under the
terms of an applicable U.S. income tax treaty in some cases. As it is not
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 of the Fund will consist of securities issued by foreign
corporations, the Fund will not be eligible to pass through to shareholders
their proportionate share of any foreign tax credits or deductions for foreign
taxes paid by the Portfolio and allocated to the Fund. Certain foreign exchange
gains and losses realized by the Fund will be treated as ordinary income and
losses. Certain uses of foreign currency and foreign currency options, futures
and forward contracts 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 seek 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 and certain 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
and, 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.
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.
Any loss realized upon the sale or exchange of shares of the Fund 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 treated as 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.
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares at the rate of $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.
Special tax rules apply to Individual Retirement Accounts ("IRAs") and to
other retirement plans, and persons investing through such plans should consult
their tax advisers for more information. The deductibility of contributions to
IRAs 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 certifications required by the Internal Revenue Service (the "IRS"), as
well as shareholders with respect to whom the Fund has received notification
from the IRS 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, foreign corporations and certain other
foreign 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 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 Authorized Firms or investors and other
selling literature and of advertising is 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. For the amount
paid to the Principal Underwriter for acting as repurchase agent, see "Fees and
Expenses" in Part II.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the broker-dealer firm, are made by
Eaton Vance. Eaton Vance 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 broker-dealer firms. BMR
uses its best efforts to obtain execution of portfolio security transactions at
prices which are advantageous to the Portfolio and (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 general execution
and operational capabilities of the broker-dealer, the nature and character of
the market for the security, the confidentiality, speed and certainty of
effective execution required for the transaction, the reputation, reliability,
experience and financial condition of the broker-dealer, the value and quality
of services rendered by the broker-dealer in other transactions, and the
reasonableness of the commission or spread, if any. Transactions on United
States stock exchanges and other agency transactions involve the payment by the
Portfolio of negotiated brokerage commissions. Such commissions vary among
different broker-dealer firms, and a particular broker-dealer may charge
different commissions according to such factors as the difficulty and size of
the transaction and the volume of business done with the broker-dealer.
Transactions in foreign securities usually involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid or received by the Portfolio
usually includes an undisclosed dealer markup or markdown. In an underwritten
offering, the price paid by the Portfolio often includes a disclosed fixed
commission or discount retained by the underwriter or dealer. Although
commissions paid 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
broker-dealers who were selected to execute transactions on behalf of the
Portfolio and BMR's other clients in part 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 in the investment advisory industry for 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-dealers 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,
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 to
execute portfolio security transactions at advantageous prices and at reasonably
competitive commission rates or spreads, BMR is authorized to consider as a
factor in the selection of any broker-dealer 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 Eaton Vance or its
affiliates. BMR or Eaton Vance will attempt to allocate equitably portfolio
security transactions among the Portfolio and the portfolios of its other
investment accounts 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 that the benefits
available from the BMR organization outweigh any disadvantage that may arise
from exposure to simultaneous transactions.
OTHER INFORMATION
The Trust changed its name from Eaton Vance Government Obligations Trust on
July 10, 1995. On August 1, 1995, the Fund was reorganized as a series of the
Trust. Prior thereto, the Fund was a series of Eaton Vance High Income Trust.
Eaton Vance, pursuant to its agreement with the Trust, controls the use of the
words "Eaton Vance" and "EV" in the Fund's name and may use the words "Eaton
Vance" and "EV" in other connections and for other purposes.
The Trust's Declaration of Trust may be amended by the Trustees when
authorized by vote of a majority of the outstanding voting securities of the
Trust, 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 will 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.
The Trust is organized as a Massachusetts business trust. As permitted by
Massachusetts law, there will normally be no meetings of shareholders for the
purpose of electing Trustees of the Trust 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
shareholder's 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 office 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 holding
office have been elected by investors. In such an event the Trustees of the
Portfolio 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 right to redeem shares of the Fund can be suspended and the payment of
the redemption price deferred when 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 SEC, or during any emergency as
determined by the SEC which makes it impracticable for the Portfolio to dispose
of its securities or value its assets, or during any other period permitted by
order of the SEC for the protection of investors.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, are the
independent certified public accountants of the Fund and the Portfolio,
respectively, providing audit services, tax return preparation, and assistance
and consultation with respect to the preparation of filings with the SEC.
Deloitte & Touche, Grand Cayman, Cayman Islands, British West Indies, are the
independent certified public accountants of the Portfolio.
FINANCIAL STATEMENTS
The financial statements of the Fund and the Portfolio, which are included
in the Fund's Annual Report to Shareholders, are incorporated by reference into
this Statement of Additional Information and have been so incorporated in
reliance on the report of Deloitte & Touche LLP and Deloitte & Touche,
independent certified public accountants, as experts in accounting and auditing.
A copy of the Fund's most recent Annual Report accompanies this SAI.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
This Part II provides information about EV CLASSIC HIGH INCOME FUND. The
Fund became a series of the Trust on August 1, 1995.
FEES AND EXPENSES
INVESTMENT ADVISER
As at March 31, 1996, the Portfolio had net assets of $511,347,139. For the
fiscal year ended March 31, 1996, the Portfolio paid BMR advisory fees of
$3,094,793 (equivalent to 0.63% of the Portfolio's average daily net assets for
such period). For the period from the Portfolio's start of business, June 1,
1994 to March 31, 1995, the Portfolio paid BMR advisory fees of $2,260,748
(equivalent to 0.64% (annualized) of the Portfolio's average daily net assets
for such period).
ADMINISTRATOR
For the fiscal year ended March 31, 1996, $79,084 of the Fund's operating
expenses were allocated to the Administrator.
DISTRIBUTION PLAN
During the fiscal year ended March 31, 1996, the Principal Underwriter paid
to Authorized Firms sales commissions of $16,878 on sales of Fund shares. During
the same period, the Fund made sales commission payments under the Plan to the
Principal Underwriter aggregating $37,777, and the Principal Underwriter
received $20,899 in contingent deferred sales charges ("CDSCs") which were
imposed on early redeeming shareholders. These sales commissions and CDSC
payments reduced Uncovered Distribution Charges under the Plan. As at March 31,
1996, the outstanding Uncovered Distribution Charges of the Principal
Underwriter calculated under the Plan amounted to approximately $744,000 (which
amount was equivalent to 9.8% of the Fund's net assets on such date). During the
fiscal year ended March 31, 1996, the Fund made service fee payments to the
Principal Underwriter and Authorized Firms aggregating $12,593, of which $4,578
was paid to Authorized Firms, and the balance of which was retained by the
Principal Underwriter.
PRINCIPAL UNDERWRITER
For the fiscal year ended March 31, 1996, the Fund paid the Principal
Underwriter $192.50 for repurchase transactions handled by the Principal
Underwriter (being $2.50 for each such transaction).
BROKERAGE
For the Fiscal year ended March 31, 1996, the Portfolio paid no brokerage
commissions on portfolio transactions. During the period from the start of
business, June 1, 1994 to March 31, 1995, the Portfolio paid brokerage
commissions of $3,684 on portfolio security transactions, of which $569 was paid
in respect of portfolio security transactions aggregating approximately
$206,198.
TRUSTEES
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 of the Portfolio who are members of
the Eaton Vance organization receive no compensation from the Trust or the
Portfolio.) During the fiscal year ended March 31, 1996, the noninterested
Trustees of the Trust and the Portfolio earned the following compensation in
their capacities as Trustees from the Fund, the Portfolio and the other funds in
the Eaton Vance fund complex(1):
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM TRUST AND
NAME FROM FUND FROM PORTFOLIO FUND COMPLEX
- ---- ------------ -------------- -----------
<S> <C> <C> <C>
Donald R. Dwight ............................................... $9 $3,740(2) $137,500(4)
Samuel L. Hayes, III ........................................... 8 3,693(3) 153,750(5)
Noton H. Reamer ................................................ 8 3,662 137,500
John L. Thorndike .............................................. 8 3,774 142,500
Jack L. Treynor ................................................ 9 3,869 142,500
<FN>
- ----------
(1) The Eaton Vance fund complex consists of 219 registered investment companies or series thereof.
(2) Includes $1,253 of deferred compensation.
(3) Includes $1,272 of deferred compensation.
(4) Includes $35,313 of deferred compensation.
(5) Includes $37,500 of deferred compensation.
</TABLE>
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 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 by the Fund to the Principal Underwriter pursuant to the
Plan as sales commissions and distribution fees 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 by the Fund is limited to
1/365 of .75% of the Fund's net assets on such day. The level of the Fund's net
assets 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,
the expenses of the Fund and the Portfolio accrued and allocated to the Fund on
such day, income on portfolio investments of the Portfolio accrued and allocated
to the Fund on such day, and any dividends and distributions declared on Fund
shares. 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 such a liability under 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 by the Fund to the Principal Underwriter whenever there exist
Uncovered Distribution Charges under the Plan.
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.
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 or payable
under the Plan by the Fund to the Principal Underwriter and contingent deferred
sales charges theretofore paid or 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.
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 in the Eaton Vance Classic Group of Funds 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 shares sold prior to January 30, 1995,
Plan payments are as follows: the Principal Underwriter pays monthly sales
commissions and service fee payments to Authorized Firms equivalent to
approximately .75% and .25%, respectively, annualized of the assets maintained
in the Fund by their customers beginning at the time of sale. No payments were
made at the time of sale, and there is no contingent deferred sales charge.)
As currently implemented by the Trustees, the Plan authorizes payments of
sales commissions, distribution fees and service fees to the Principal
Underwriter 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.
For the sales commission and service fee payments made by the Fund and the
outstanding Uncovered Distribution Charges of the Principal Underwriter, see
"Fees and Expenses--Distribution Plan" in this Part II. 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 and service fees 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 the amounts paid to the Principal Underwriter,
including CDSC, 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 paid to the Principal Underwriter under the Plan,
and from CDSC, 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.
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 Rule 12b-1 Trustees. The Plan continues in effect through and
including April 28, 1997, and shall continue in effect indefinitely thereafter
for so long as such continuance is approved at least annually by the vote of
both a majority of (i) 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") 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 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 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 of the Trust believe that the Plan will be 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 of the
Trust have determined that in their judgment there is a reasonable likelihood
that the Plan will benefit the Fund and its shareholders.
PERFORMANCE INFORMATION
The table below indicates the cumulative and average annual total return on
a hypothetical investment of $1,000 in the Fund covering the periods from August
19, 1986 through March 31, 1996 and the five and one-year periods ended March
31, 1996. The total return for the period prior to the Fund's commencement of
operations on June 8, 1994 reflect the Portfolio's total return (or that of its
predecessor) adjusted to reflect any applicable Fund CDSC. The total return for
such prior period has not been adjusted to reflect the Fund's distribution fees
and certain other expenses. If such an adjustment were made, the performance
would be lower.
<TABLE>
<CAPTION>
VALUE OF A $1,000 INVESTMENT
VALUE VALUE
BEFORE AFTER TOTAL RETURN TOTAL RETURN
DEDUCTING DEDUCTING BEFORE DEDUCTING CDSC AFTER DEDUCTING CDSC**
INVESTMENT INVESTMENT AMOUNT OF THE CDSC THE CDSC** ----------------------- -----------------------
PERIOD DATE INVESTMENT ON 3/31/96 ON 3/31/96 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund 8/19/86 $1,000 $2,205.43 $2,205.43 120.54% 8.57% 120.54% 8.57%
5 Years Ended
3/31/96 3/31/91 $1,000 $1,970.67 $1,970.67 97.07% 14.53% 97.07% 14.53%
1 Year Ended
3/31/96* 3/31/95 $1,000 $1,122.52 $1,112.52 12.25% 12.25% 11.25% 11.25%
<FN>
- ----------
*If a portion of the Fund's expenses had not been subsidized, the Fund would have had lower returns.
**No CDSC is imposed on certain redemptions. See the Fund's current Prospectus.
</TABLE>
For the thirty-day period ended March 31, 1996, the yield of the Fund was
9.85%. If a portion of the Fund's expenses had not been allocated to Eaton
Vance, the Fund would have had a lower yield.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of June 28, 1996, 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
June 28, 1996, Merrill Lynch, Pierce, Fenner & Smith, Inc. New Brunswick, NJ was
the record owner of approximately 17.40% 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 owned of record or beneficially 5% or
more of the Fund's outstanding shares on such date.
<PAGE>
[LOGO: EATON VANCE]
EV CLASSIC HIGH INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1996
EV CLASSIC
HIGH INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
- --------------------------------------------------------------------------------
INVESTMENT ADVISER OF HIGH INCOME PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV CLASSIC HIGH 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, 89 South Street, Boston, MA 02110
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, MA 02110
C-HISAI
<PAGE>
To Shareholders
EV Classic High Income Fund had a total return of +12.3% during the year ended
March 31, 1996. That was the result of a rise in net asset value per share to
$9.65 on March 31, 1996, from $9.43 on March 31, 1995, and the reinvestment of
$0.894 per share in dividends, and does not include the effect of contingent
deferred sales charges incurred by certain redeeming shareholders. For
comparison, the Lehman Brothers High Yield Bond Index, an unmanaged index of
corporate bonds, returned +14.5% for the same period.
Based on the most recent dividend and a net asset value per share of $9.65 on
March 31, the Fund had a distribution rate of 9.12%.
FLUCTUATING INTEREST RATES LED TO A VOLATILE MARKET, BUT HIGH-YIELD BONDS POSTED
SOLID RETURNS...
The bond market has been unusually volatile the past year, a result of the
on-again, off-again nature of rancorous budget negotiations and mixed economic
signals. As a measure of changing market conditions, 10-year Treasury yields+,
which stood at 7.2% in March 1995, declined to 5.6% at year-end as the Federal
Reserve lowered interest rates in response to weak economic data. However,
spurred by isolated signs of inflation, rates were again on the rise early in
1996. By March, 1996, 10-year Treasury yields had climbed to 6.3%.
HIGH INCOME PORTFOLIO: RATINGS BREAKDOWN OF BOND HOLDINGS*
NON-
RATED OTHER Aaa Ba B1 B2 B3 Caa
3.3% 1.7% 3.5% 5.4% 12.9% 25.5% 40.5% 7.2%
*Moody's Investors Services ratings; percentages based on market value as of
March 31, 1996. Source: Eaton Vance Management.
A GOOD CLIMATE AHEAD FOR HIGH-YIELD BONDS...
A projected slow-growth economy should provide a very good climate for the
high-yield market, although there is naturally no guarantee of future trends. In
the pages that follow, portfolio manager Hooker Talcott, Jr. provides his
insights into the year just ended, and suggests what may lie ahead for high
yield bond investors.
Sincerely,
/s/ M.Dozier Gardner
[Photo of M. Dozier Gardner]
M.Dozier Gardner
President
May 19, 1996
+High yield bonds carry a higher degree of investment risk, while the principal
and interest of Treasury issues are guaranteed by the U.S. government. High
yield bonds are considered speculative because they present greater risks of
price volatility and default.
<PAGE>
Management Discussion
An interview with Hooker Talcott Jr., Vice President and Portfolio Manager of
High Income Portfolio.
Q. HOOKER, WHAT'S YOUR ASSESSMENT OF THE HIGH-YIELD MARKET DURING THE PAST
YEAR?
A. The high-yield market naturally reflected some of the volatility of the
Treasury market. In addition, the high-yield segment felt the impact of
supply pressures as a huge volume of new issuance came to market.
Interestingly, the wave of new supply was met with strong demand from
yield-oriented investors. So the market remained generally in balance from a
supply-and-demand perspective.
Q. WITH THAT AS A BACKDROP, WHAT DROVE THE FUND'S PERFORMANCE?
A. Considering the volatility, the Fund fared quite well. As I've indicated in
past reports, the Fund benefits in periods of volatility from being
positioned well away from the Treasury yield curve. That is, the high
coupons of the high-yield sector makes them less responsive to changes in
interest rates. In addition, given the contradictory messages sent by the
economy, the Fund clearly benefited from having maintained a good balance
between defensive issues and those that are more economically sensitive.
Q. YOU INDICATED THAT THE HIGH-YIELD SECTOR HAS WITNESSED A GOOD DEAL OF NEW
ISSUANCE IN THE PAST YEAR. WHAT ARE THE DIMENSIONS?
A. In the first quarter of 1996 alone, new high-yield issuance totalled $17.6
billion dollars. That is well ahead of the pace set in 1995, when new
issuance was the second highest on record. The single largest source of new
issuance - around 50% in the past six months - has been in the
telecommunications and cable sector, an increasingly significant component
of the Portfolio.
[Photo of Hooker Talcott, Jr.]
HOOKER TALCOTT, JR.
Q. WHAT'S BEHIND THE SURGE IN FINANCING ACTIVITY BY THE TELECOMMUNICATIONS
SECTOR?
A. The telecommunications sector is very capital-intensive. The pace of
technological and regulatory change in the sector has prompted many
companies to increase their financing efforts for capital expenditures and
the build-out of systems, as well as to purchase transmission spectrum at
auction. The passage by Congress of telecom legislation in February of this
year unleashed a wave of deregulation that has companies scrambling to enter
related fields that were previously off-limits. As a result, cable
operators, paging service companies, wireless companies and assorted media
companies have greatly increased their exposure to the high-yield market.
Q. RECENT ECONOMIC REPORTS SUGGEST THAT THE ECONOMY MAY NOT BE AS WEAK AS MANY
FEARED SOME MONTHS AGO. WHAT EFFECT MIGHT AN UPTICK IN THE ECONOMY HAVE ON
THE FUND?
A. The Fund is well-positioned to benefit from a stronger-than-expected
economy. Interestingly, there was talk for many months about a "soft
landing." As it turns out, the economy has barely landed at all. And that is
certainly a good sign for the high-yield segment of the market. A
slow-growth economy enables high-yield issuers - especially some of the more
cyclical companies found in the Portfolio - to grow their earnings and cash
flows, strengthen their balance sheets and possibly to realize an
improvement in credit quality.
Q. CAN YOU GIVE SOME EXAMPLES OF THE PORTFOLIO'S CYCLICAL HOLDINGS?
A. Yes. Among the cyclical sectors, we've maintained a fairly large exposure to
paper and forest products, steel companies, and energy. For example, one
large holding, Stone Container, is among the industry leaders in the
production of container board and corrugated containers. A stronger economy
results in more shipments by manufacturers and increased demand for
corrugated containers.
Steel companies, like Republic Engineered Steel, took on a good deal of debt
in recent years to modernize plants and become increasingly competitive with
global producers. That has paid off handsomely, as the companies now operate
more efficiently and will be better positioned to withstand the next
down-cycle. Finally, we've increased our commitments to the energy group,
through exploration companies like Chesapeake Energy Corp. and Trans Texas
Gas Corp. Energy prices have firmed recently with growing global economic
demand, falling inventories, and the failure of Iraqi supply to come to
market. Rising prices have improved the outlook for oil and gas exploration
companies.
Q. HOOKER, IN YOUR VIEW, WHAT IS THE OUTLOOK FOR THE HIGH-YIELD MARKET?
A. While the market has clearly been strong in the past year and there is some
uncertainty as to the course of the economy, the outlook for the high-yield
market remains positive. As I indicated earlier, heavy supply has received
an enthusiastic reception from investors. Naturally, past trends cannot
guarantee future results, but history has shown the high-yield sector as a
source of good, long-term investment opportunity.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN EV CLASSIC HIGH INCOME
FUND (INCLUDING SALES CHARGE) AND THE LEHMAN BROTHERS HIGH YIELD BOND INDEX
From June 1994, through March 31, 1996
AVERAGE ANNUAL RETURNS 1 Year Life of Fund*
With CDSC 11.3% 7.7%
Without CDSC 12.3% 7.7%
date C. High Income Lehman High Yield Bond
6/94+ 10,000 10,000
7/94 10,009 10,085
8/94 9,980 10,156
9/94 9,982 10,157
10/94 9,987 10,181
11/94 9,867 10,053
12/94 9,937 10,127
1/95 10,008 10,264
2/95 10,260 10,616
3/95 10,302 10,730
4/95 10,576 11,003
5/95 10,795 11,312
6/95 10,791 11,387
7/95 10,934 11,527
8/95 10,879 11,563
9/95 10,954 11,705
10/95 10,960 11,744
11/95 11,045 11,882
12/95 11,226 12,068
1/96 11,417 12,281
2/96 11,600 12,290
3/96 11,564 12,282
Past performance is not indicative of future results. Investment returns and
principal value will fluctuate so that in investor's share, when redeemed, may
be worth more or less than their original cost. Source: Towers Data Systems,
Bethesda, MD. *Investment operations commenced 6/8/94. + Index information is
available only at month-end; therefore, the line comparison begins at the next
month-end following the commencement of the Fund's investment operations.
FUND PERFORMANCE
In accordance with guidelines issued by the Securities and Exchange Commission,
we are including a performance chart that compares your Fund's total return with
that of a broad-based securities market index. The lines on the chart represent
the total returns of $10,000 hypothetical investments in the Fund and the
unmanaged Lehman Brothers High Yield Bond Index.
THE TOTAL RETURN FIGURES
The purple line on the chart represents the Fund's performance at net asset
value. The Fund's total return figure reflects Fund expenses and portfolio
transaction costs, and assumes the reinvestment of income dividends and capital
gain distributions.
The black line represents the performance of the Lehman Brothers High Yield Bond
Index, a broad-based, widely recognized unmanaged index of high-yield bonds. The
Index's total return does not reflect any commissions or expenses that would be
incurred if an investor individually purchased or sold the securities
represented in the Index. It is not possible to invest in the Index itself.
<PAGE>
-----------------------------------------
EV CLASSIC HIGH INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
March 31, 1996
- ------------------------------------------------------------------------------
ASSETS:
Investment in High Income Portfolio at value (Note 1A)
(identified cost, $7,480,186) $7,530,174
Receivable for Fund shares sold 45,659
Receivable from the Administrator (Note 4) 79,084
Deferred organization expenses (Note 1D) 22,569
----------
Total assets $7,677,486
LIABILITIES:
Dividends payable $16,881
Payable for Fund shares redeemed 40,125
Payable to affiliate -
Trustees' fees 41
Accrued expenses 6,188
-------
Total liabilities 63,235
----------
NET ASSETS for 789,182 shares of beneficial interest
outstanding $7,614,251
==========
SOURCES OF NET ASSETS:
Paid-in capital $7,607,826
Accumulated net realized loss on investment
transactions (computed on the basis of identified
cost) (39,875)
Accumulated distributions in excess of net investment
income (3,688)
Unrealized appreciation of investments from Portfolio
(computed on the basis of identified cost) 49,988
----------
Total $7,614,251
==========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
(NOTE 6) PER SHARE
($7,614,251 / 789,182 shares of beneficial interest) $9.65
=====
See notes to financial statements
<PAGE>
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
For the Year Ended March 31, 1996
- ------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1B):
Income allocated from Portfolio $554,466
Expenses allocated from Portfolio (35,306)
--------
Net investment income from Portfolio $519,160
Expenses --
Compensation of Trustees not members of the
Administrator's organization $ 41
Custodian fee (Note 4) 2,417
Distribution costs (Note 5) 50,995
Transfer and dividend disbursing agent fees 5,061
Printing and postage 27,280
Legal and accounting services 10,899
Registration costs 17,112
Amortization of organization expenses (Note 1D) 7,792
Miscellaneous 8,482
---------
Total expenses $ 130,079
Deduct --
Allocation of expenses to the Administrator (Note 4) 79,084
---------
Net expenses 50,995
--------
Net investment income $468,165
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from Portfolio on investment
transactions (identified cost basis) $(23,568)
Change in unrealized appreciation of investments 79,727
--------
Net realized and unrealized gain on investments $ 56,159
--------
Net increase in net assets resulting from
operations $524,324
========
See notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
------------------------
1996 1995*
---------- ----------
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 468,165 $ 107,426
Net realized loss on investments (23,568) (12,278)
Change in unrealized appreciation (depreciation)
of investments 79,727 (29,739)
---------- ----------
Net increase in net assets from operations $ 524,324 $ 65,409
---------- ----------
Distributions to shareholders (Note 2) --
From net investment income $ (468,165) $ (107,426)
In excess of net investment income (2,671) (3,796)
---------- ----------
Total distributions to shareholders $ (470,836) $ (111,222)
---------- ----------
Transactions in shares of beneficial interest
(Note 3) --
Proceeds from sales of shares $9,629,383 $4,486,001
Net asset value of shares issued to shareholders
in payment of distributions declared 285,803 61,821
Cost of shares redeemed (4,430,879) (2,425,563)
---------- ----------
Increase in net assets from Fund share
transactions $5,484,307 $2,122,259
---------- ----------
Net increase in net assets $5,537,795 $2,076,446
NET ASSETS:
At beginning of year 2,076,456 10
---------- ----------
At end of year (including accumulated
distributions in excess of net investment income
of $2,986 and $315, respectively) $7,614,251 $2,076,456
========== ==========
*For the period from the start of business, June 8, 1994, to March 31, 1995.
See notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
----------------------
1996 1995*
------- -------
NET ASSET VALUE beginning of year $ 9.430 $10.000
------- -------
INCOME (LOSS) FROM OPERATIONS:
Net investment income $ 0.888 $ 0.735
Net realized and unrealized gain (loss)
on investments 0.225 (0.544)
------- -------
Total income from operations $ 1.113 $ 0.191
------- -------
LESS DISTRIBUTIONS:
From net investment income $(0.888) $(0.735)
In excess of net investment income (0.005) (0.026)
------- -------
Total distributions $(0.893) $(0.761)
------- -------
NET ASSET VALUE, end of year $ 9.650 $ 9.430
======= =======
TOTAL RETURN\2/ 12.25% 1.89%
RATIOS/SUPPLEMENTAL DATA**:
Net assets, end of period (000 omitted) $ 7,614 $ 2,076
Ratio of net expenses to average daily net
assets\1/ 1.69% 2.04%+
Ratio of net investment income to average daily
net assets 9.17% 9.17%+
**For the period from the start of business, June 8, 1994, to March 31, 1995,
and for the year ended March 31, 1996, the operating expenses of the Fund
reflect an allocation of expenses to the Administrator. Had such action not
been taken, net investment income per share and the ratios would have been
as follows:
NET INVESTMENT INCOME PER SHARE $ 0.738 $ 0.482
======= =======
RATIOS (As a percentage of average daily net assets):
Expenses\1/ 3.24% 5.20%+
Net investment income 7.62% 6.01%+
+ Computed on an annualized basis.
* For the period from the start of business, June 8, 1994, to March 31, 1995.
\1/ Includes the Fund's share of High Income Portfolio's allocated expenses.
\2/ 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
invested at the net asset value on the payable date. Total return is
computed on a non-annualized basis.
See notes to financial statements
<PAGE>
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
EV Classic High Income Fund (the Fund) is a diversified series of Eaton Vance
Mutual Funds Trust (the Trust). The Trust is an entity of the type commonly
known as a Massachusetts business trust and 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 High 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
(1.5% at March 31, 1996). The performance of the Fund is directly affected by
the performance of the Portfolio. The financial statements of the Portfolio,
including the portfolio of investments, are included elsewhere in this report
and should be read in conjunction with the Fund's financial statements. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
A. INVESTMENT 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 net investment income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is necessary. At March 31, 1996, the Fund, for
federal income tax purposes, had a capital loss carryover of $3,625 which will
reduce the Fund's taxable income arising from future net realized gain 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 carryover will expire on March 31, 2003.
Additionally, net losses of $36,250 attributable to security transactions
incurred after October 31, 1995, are treated as arising on the first day of
the Fund's next taxable year.
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. OTHER -- Investment transactions are accounted for on a trade date basis.
F. USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from those estimates.
- ------------------------------------------------------------------------------
(2) DISTRIBUTIONS TO SHAREHOLDERS
The net income of the Fund is determined daily and substantially all of the net
income so determined is declared as a dividend to shareholders of record at the
time of declaration. Distributions of allocated realized capital gains, if any,
are made at least annually. Shareholders may reinvest capital gains
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 and requires that
only distributions in excess of tax basis earnings and profits are 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 temporary over distributions for financial statement
purposes are classified as distributions in excess of net investment income or
accumulated net realized gains. Permanent differences between book and tax
accounting relating to distributions are reclassified to paid-in capital.
- ------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
YEAR ENDED MARCH 31,
------------------------
1996 1995*
------ ------
Sales 998,958 466,843
Issued to shareholders electing to receive
payments of distributions in Fund shares 29,289 6,559
Redemptions (459,261) (253,207)
------- -------
Net increase 568,986 220,195
======= =======
*For the period from the start of business, June 8, 1994, to March 31, 1995.
- ------------------------------------------------------------------------------
(4) 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. To enhance the net income of the Fund, $79,084 of
expenses related to the operation of the Fund were allocated to EVM.
Except as to Trustees of the Fund and the Portfolio who are not members of
EVM's or BMR's organization, officers and Trustees receive remuneration for
their services to the Fund out of such investment adviser fee. Investors Bank
& Trust Company (IBT), serves as custodian to the Fund and the Portfolio.
Prior to November 10, 1995, IBT was an affiliate of EVM and BMR. 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. No significant credit balances were used to
reduce the Fund's custody fee. Certain of the officers and Trustees of the
Fund and Portfolio are officers and directors/trustees of the above
organizations (Note 5).
- ------------------------------------------------------------------------------
(5) DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Plan requires the Fund to pay the
Principal Underwriter, Eaton Vance Distributors, Inc. (EVD), amounts equal to
1/365th of 0.75% of the Fund's daily net assets, for providing ongoing
distribution services and facilities to the Fund. The Fund will automatically
discontinue payments to EVD during any period in which there are no outstanding
Uncovered Distribution Charges, which are equivalent to the sum of (i) 6.25% of
the aggregate amount received by the Fund for shares sold plus, (ii)
distribution fees calculated by applying the rate of 1% over the prevailing
prime rate to the outstanding balance of Uncovered Distribution Charges of EVD,
reduced by the aggregate amount of contingent deferred sales charges (see Note
6) and 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 paid or accrued $38,246 to or payable to
EVD for the year ended March 31, 1996, representing 0.75% (annualized) of
average daily net assets. At March 31, 1996, the amount of Uncovered
Distribution Charges of EVD calculated under the Plan was approximately
$744,000.
In addition, the Plan permits the Fund to make payments of service fees to
the Principal Underwriter in amounts not to exceed 0.25% of the Fund's average
daily net assets for any fiscal year. The Trustees have initially implemented
the Plan by authorizing the Fund to make monthly service fee payments to the
Principal Underwriter in amounts not exceeding 0.25% of the Fund's average
daily net assets for any fiscal year. The Fund paid or accrued service fees to
or payable to EVD for the year ended March 31, 1996 in the amount of $12,749.
Pursuant to the Distribution Plan, EVD currently expects to pay to an
Authorized Firm a service fee at the time of sale equal to 0.25% of the
purchase price of the shares sold by such Firm and monthly payments of service
fees in amounts not expected to exceed 0.25% per annum of the Fund's average
daily net assets based on the value of Fund shares sold by such Firm and
remaining outstanding for at least one year. During the first year after
purchase of Fund shares, EVD will retain the service fee as reimbursement for
the service fee payment made to the Authorized Firm at the time of sale.
Service fee payments are made for personal services and/or maintenance of
shareholder accounts. Service fees paid to EVD and Authorized Firms 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 officers and Trustees of the Fund are officers or directors of EVD.
- ------------------------------------------------------------------------------
(6) CONTINGENT DEFERRED SALES CHARGES
For shares purchased on or after January 30, 1995, a contingent deferred sales
charge (CDSC) of 1% is imposed on any redemption of Fund shares made within
one year 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 gains distributions.
No CDSC is levied on shares which have been sold to EVD 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 received when no Uncovered Distribution Charges
exist will be credited to the Fund. For the year ended March 31, 1996, EVD
received approximately $18,100 of CDSC paid by shareholders.
- ------------------------------------------------------------------------------
(7) INVESTMENT TRANSACTIONS
Increases and decreases in the Fund's investment in the Portfolio for the year
ended March 31, 1996, aggregated $9,786,484 and $4,943,316, respectively.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- ------------------------------------------------------------------------------
TO THE TRUSTEES AND SHAREHOLDERS OF
EATON VANCE MUTUAL FUNDS TRUST:
We have audited the accompanying statement of assets and liabilities of EV
Classic High Income Fund (one of the series constituting the Eaton Vance
Mutual Funds Trust) as of March 31, 1996, and the related statement of
operations for the year then ended and the statements of changes in net assets
and the financial highlights for the year ended March 31, 1996 and for the
period from the start of business, June 8, 1994, to March 31, 1995. These
financial statements and financial highlights are the responsibility of the
Trust'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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of EV Classic High
Income Fund at March 31, 1996, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated period,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
BOSTON, MASSACHUSETTS
APRIL 30, 1996
<PAGE>
-------------------------------
HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
(EXPRESSED IN UNITED STATES DOLLARS)
- -------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES - 93.6%
- -------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- -------------------------------------------------------------------------------
AUTOMOTIVE/TRUCK - 4.0%
$6,750,000 JPS Automotive Prod. Corp., Sr. Notes,
11.125%, 6/15/01 $ 6,682,500
3,800,000 Key Plastics, Sr. Notes, 14%, 11/15/99 3,876,000
5,035,000 Motor Wheel Corp., Senior Notes, 11.5%, 3/1/00 5,035,000
5,000,000 Terex Corp., Sr. Secured Notes,
13.75%, 5/15/02(1)
4,968,750
------------
$ 20,562,250
------------
BUILDING PRODUCTS - 3.6%
$8,250,000 Building Materials Corp., Sr. Sub. Notes,
11.75% (0% until 2000), 7/1/04 $ 6,105,000
7,100,000 Overhead Door Corp., Sr. Notes, 12.25%, 2/1/00 7,135,500
1,500,000 Southdown Inc., Sr. Sub. Notes., 10%,
3/1/06(1) 1,500,000
3,600,000 Tarkett International, Sr. Sub. Notes, 9%, 3/1/02 3,744,000
------------
$ 18,484,500
------------
CABLE - 2.3%
$4,200,000 Amer Telecasting, Sr. Disc. Notes 14.5%
(0% until 2000), 8/15/05 $ 2,761,500
3,470,000 Groupe Videotron 10.625%, 2/15/05 3,643,500
5,800,000 International CABLETEL, Inc., Sr. Disc Notes,
11.5% (0% until 2001), 2/1/06(1) 3,277,000
2,400,000 Rogers Comm. Inc., 9.125%, 1/15/06 2,322,000
------------
$ 12,004,000
------------
CHEMICALS - 7.0%
$5,000,000 Agricultural Minerals & Chemicals, Sr. Notes,
10.75%, 9/30/03 $ 5,425,000
4,503,000 GI Holdings, Sr. Discount Notes, 10%, 2/15/06(1) 4,503,000
1,448,000 GI Holdings, Sr. Disc, Notes, 0%, 10/1/98 1,154,780
5,000,000 NL Industries Inc., Sr. Sec. Notes, 11.75%,
10/15/03 5,187,500
4,250,000 NL Industries Inc., Sr. Disc. Notes, 13%
(0% until 1998), 10/15/05 3,187,500
7,850,000 Pioneer Americas Acq., Senior Notes,
13.625%, 4/1/05 8,379,875
3,800,000 Terra Industries Inc., Senior Notes, 10.5%,
6/15/05 4,123,000
3,700,000 UCC Investors, Sr. Sub. Notes, 11%, 5/1/03 3,792,500
------------
$ 35,753,155
------------
COMMUNICATIONS - 19.0%
$2,000,000 Allbritton Comm., Sr. Sub. Notes 9.75%,
11/30/07 $ 1,885,000
4,100,000 Alliance Entertainment Corp., Sr. Sub.
Notes, 11.25%, 7/15/05 4,059,000
4,000,000 Arch Communications, Sr. Disc. Notes,
10.875% (0% until 2001), 3/15/08 2,290,000
6,800,000 Australis Media LTD., Sub Disc. Notes,
14% (0% until 2000), 5/13/03 4,692,000
5,500,000 Brooks Fiber, Sr. Disc. Notes, 10.875%
(0% until 2001), 3/1/06(1) 3,190,000
2,800,000 Cablevision Systems, Sr. Sub. Notes,
9.25%, 11/1/05 2,800,000
2,400,000 Chancellor Broadcasting, Sr. Sub. Notes,
9.375%, 10/1/04 2,268,000
2,900,000 Clark USA, Inc., Senior Notes,
10.875%, 12/1/05(1) 3,030,500
4,480,000 CS Wireless Systems, Inc., 1st Mtg. Notes,
11.375% (0% until 2001), 3/1/06(1) 2,464,000
7,200,000 Dial Call Communications Inc., Sr. Red. Notes,
12.25% (0% until 1999), 4/15/04 4,536,000
8,600,000 Diamond Cable Communications Co.,
Sr. Disc. Notes, 11.75% (0% until 2000),
12/15/05 5,031,000
1,600,000 Diamond Cable Communications Co., Sr. Disc.
Notes, 13.25% (0% until 1999), 9/30/04 1,136,000
4,700,000 EZ Communications Corp, Sr. Sub. Notes,
9.75%, 12/1/05 4,676,500
5,000,000 Galaxy Telecom LP., Sr. Sub. Notes, 12.375%,
10/1/05 5,275,000
4,050,000 Granite Broadcasting Corp., Sr. Sub. Notes,
10.375%, 5/15/05 4,095,563
4,000,000 Heartland Wireless, Senior Notes 13%, 4/15/03(1) 4,420,000
1,600,000 In-Flight Phone Corp., Sr. Disc. Notes, 14%
(0% until 2002), 5/15/02 496,000
8,500,000 Marcus Cable Co., Sr. Disc. Notes, 14.25%
(0% until 2000), 12/15/05 5,440,000
2,800,000 Marcus Cable Co., Senior Debs., 11.875%, 10/1/05 2,982,000
4,875,000 MFS Communications Corp., Sr. Disc. Notes,
8.875% (0% until 2001), 11/15/06 3,022,500
3,200,000 Mobilemedia Corp., Sr. Sub. Notes, 9.375%,
11/1/07 3,136,000
6,500,000 Pricellular Wireless Comm., Sr Sub. Disc.
Nts. 12.25% (0% until 1998), 10/1/03 5,102,500
3,600,000 Sullivan Broadcasting, Sr. Sub. Notes,
10.25%, 12/15/2005(1) 3,564,000
12,153,200 United International Holdings Inc., Sr.
Sec. Disc. Notes, 0%, 11/15/99 7,838,814
8,400,000 Videotron Holdings, Sr. Disc. Notes, 11%
(0% until 2000), 8/15/05 5,334,000
4,000,000 Young Broadcasting Corp., Sr. Sub. Notes,
10.125%, 2/15/05 4,040,000
------------
$ 96,804,377
------------
ENERGY - 5.7%
$2,850,000 El Paso Electric Co., 1st Mtg. Notes,
9.4%, 5/1/11 $ 2,885,625
3,000,000 Gulf Canada Resources Ltd., Sr. Sub. Notes,
9.25%, 1/15/04 3,045,000
6,200,000 MCV Subordinated Secured Lease Obligations,
11.75%, 7/23/05 6,543,418
2,400,000 Mesa Capital Corp., Sec. Disc. Notes,
12.75%, 6/30/98 2,346,000
3,086,036 Midland Cogeneration Venture, Sr. Sec. Lease
Oblig., 10.33%, 7/23/02 3,251,910
3,600,000 Plains Resources, Sr. Sub. Notes, 10.25%,
3/15/06(1) 3,609,000
3,300,000 Trans Texas Gas Corp., Sr. Sec. Notes,
11.5%, 6/15/02 3,250,500
2,420,000 Tuboscope Vetco, Sr. Sub. Debs., 10.75%,
4/15/03 2,528,900
1,450,000 Vintage Petro, Sr. Sub. Notes, 9%, 12/15/05 1,413,750
------------
$ 28,874,103
------------
FOOD/RESTAURANTS/HOTELS - 7.3%
$4,000,000 Courtyard by Marriott, Senior Notes,
10.75%, 2/1/08(1) $ 3,960,000
8,250,000 Flagstar Corp., Sub. Debs., 10.75%, 9/15/01 7,425,000
3,900,000 HMC Acquisition Properties, Senior Notes,
9%, 12/15/07(1) 3,685,500
2,762,000 PM Holdings Corp., 11.5% (0% until 2000), 9/1/05 1,574,340
6,075,000 Purina Mills, Sr. Sec. Sub. Notes,
10.25%, 9/1/03 6,226,875
3,735,000 Seven Up / RC Bottling Co., Sr. Sec. Notes,
11.5%, 8/1/99* 2,241,000
7,000,000 Specialty Foods Corp., Senior Notes, 10.25%,
8/15/01 6,335,000
5,300,000 Van De Kamps, Inc., Sr. Sub. Notes, 12%,
9/15/05 5,671,000
------------
$ 37,118,715
------------
HEALTHCARE - 3.8%
$6,800,000 Dade International Inc., Sr. Sub. Notes,
13%, 2/1/05 $ 7,820,000
6,100,000 Ordna Corp., Sr. Sub. Notes, 11.375%, 8/15/04 6,862,500
1,000,000 Regency Health, Sr. Sub. Notes, 9.875%,
10/15/02 1,015,000
4,000,000 Unilab Corp., Senior Notes, 11%, 4/1/06 3,940,000
------------
$ 19,637,500
------------
HIGH TECH - 2.5%
$2,719,000 Blue Bell Funding Inc., Sec. Ext. Notes,
11.85%, 5/1/99 $ 2,583,050
5,500,000 GS Technologies Corp., Senior Notes, 12.25%,
10/1/05 5,527,500
3,000,000 Unisys Corp., Senior Notes, Variable Rates,
7/1/97 3,195,000
1,600,000 Unisys Corp., Senior Notes, 12%, 4/15/03(1) 1,581,232
------------
$ 12,886,782
------------
METALS - 3.2%
$3,840,000 Acme Metals Inc., Sr. Notes, 12.5%, 8/1/02 $ 3,964,800
4,000,000 Gulf States Steel, First Mtg. Notes,
13.5%, 4/15/03 3,660,000
3,000,000 Kaiser Aluminum, Sr. Sub. Notes, 12.75%,
2/1/03 3,180,000
1,500,000 Maxxam Group Inc., Sr. Sec. Notes, 11.25%,
8/1/03 1,425,000
2,025,000 Republic Engineered Steels Inc., First
Mtg., 9.875%, 12/15/01 1,852,875
2,105,000 Ucar Global Enterprises, Sr. Sub.
Notes, 12%, 1/15/05 2,420,750
------------
$ 16,503,425
------------
MANUFACTURING/MACHINERY - 9.0%
$6,000,000 Applied Extrusion Inc., Senior Notes,
11.5%, 4/1/02 $ 6,210,000
3,300,000 Day International Group, Inc., Sr. Sub.
Notes, 11.125%, 6/1/05 3,415,500
2,250,000 Dictaphone Corp., Sr. Sub. Notes, 11.75%,
8/1/05 2,250,000
3,225,000 Essex Group, Inc., Senior Notes, 10%, 5/1/03 3,257,250
2,850,000 Howmet Corp., Sr. Sub. Notes, 10%, 12/1/03(1) 3,013,875
5,550,000 Monarch Acquisition Corp., Senior Notes,
12.5%, 7/1/03 5,938,500
5,500,000 Newflo Corp., Sub. Notes, 13.25%, 11/15/02 5,775,000
4,750,000 Plastic Specialties & Tech, Sr. Sec. Notes,
11.25%, 12/1/03 4,750,000
2,000,000 RBX Corp., Sr. Sub. Notes, 11.25%, 10/15/05(1) 1,950,000
4,800,000 Shared Tech/Fairchild 12.25% (0% until 1999),
3/1/06(1) 3,408,000
5,250,000 Waters Tech. Corp., Sr. Sub. Notes, 12.75%,
9/30/04 6,273,750
------------
$ 46,241,875
------------
MISCELLANEOUS - 4.5%
$4,000,000 Alliant Tech Systems Inc., Sr. Sub. Notes,
11.75%, 3/1/03 $ 4,400,000
2,400,000 Imax Corp., Senior Notes, 10% (7% until 1997),
3/1/01 2,388,000
4,850,000 Roadmaster Industries Inc., Sr. Sub. Notes,
11.75%, 7/15/02 3,589,000
6,900,000 Selmer Company, Inc., Sr. Sub. Notes, 11%,
5/15/05 7,176,000
5,000,000 Williamhouse-Regency of Del., Sr. Sub. Deb.,
13%, 11/15/05(1) 5,525,000
------------
$ 23,078,000
------------
PAPER/PACKAGING - 7.6%
$2,400,000 Container Corp., Sr. Notes (Ser. B),
10.75%, 5/1/02 $ 2,454,000
3,907,613 Fort Howard Corp., Sr. Sec. Notes,
11%, 1/2/02 4,102,994
4,100,000 Gaylord Container Corp., Sr. Sub. Disc.
Debs., 12.75%, 5/15/05 4,141,000
1,500,000 Portola Packaging Corp., Senior Notes,
10.75%, 10/1/05 1,575,000
3,665,000 Repap Wisconsin, 2nd Party Sr. Sec. Notes,
9.875%, 5/1/06 3,353,475
5,250,000 Riverwood International, Sr. Sub. Notes,
10.875%, 4/1/08 5,236,875
3,000,000 S.D. Warren Company Inc., Sr. Sub. Notes,
12%, 12/15/04 3,165,000
2,500,000 Silgan Corp., Sr. Notes,
13.25%, 12/15/02 2,450,000
1,500,000 Silgan Corp., Sr. Sub. Notes,
11.75%, 6/15/02 1,597,500
4,500,000 Stone Container Corp., First Mtg. Notes,
10.75%, 10/1/02 4,466,250
3,200,000 Stone Container Corp., Sr. Notes, 12.625%,
7/15/98 3,376,000
2,950,000 U.S. Can Company, Sr. Sub. Notes, 13.5%,
1/15/02 3,127,000
------------
$ 39,045,094
------------
RECREATION - 4.0%
$4,000,000 AMF Group, Inc., Sr. Disc. Notes, 10.875%,
3/15/06(1) $ 3,980,000
800,000 AMF Group, Inc., Sr. Disc. Notes, 12.25%
(0% until 2000), 3/15/06(1) 436,000
5,000,000 Aztar Corp., Sr. Sub. Notes, 13.75%, 10/1/04 5,575,000
3,000,000 Trump Holdings & Funding, Senior Notes,
15.5%, 6/15/05 3,435,000
6,558,515 Trump Taj Mahal, First Mtg Bonds, 11.35%
(PIK), 11/15/99 6,894,639
------------
$ 20,320,639
------------
RETAILING - 7.3%
$5,600,000 Apparel Retailers Inc., Sr. Disc. Debs.,
12.75% (0% until 1998), 8/15/05 $ 3,920,000
6,575,000 Brunos, Inc., Sr. Sub. Notes, 10.5%, 8/1/05 6,312,000
4,200,000 Duane Reade, G.P., Sr. Notes, 12%, 9/15/02 3,990,000
2,000,000 Knoll, Inc., Sr. Sub. Notes, 10.875%, 3/15/06(1) 2,040,000
3,050,000 Levitz Furniture Corp., Sr. Sub. Notes,
9.625%, 7/15/03 1,891,000
2,000,000 Pathmark Stores Inc., Jr. Sub., Disc.
Notes, 11.625%, 6/15/02 1,950,000
8,500,000 Pathmark Stores Inc., Jr. Sub., Disc.
Notes, 10.75% (0% until 1999), 11/1/03 5,057,500
2,000,000 Ralphs Grocery Company, Inc., Sr. Sub. Notes,
11%, 6/15/05 1,800,000
5,500,000 Ralphs Grocery Co., Sr. Sub Notes, 13.75%,
6/15/05 5,610,000
4,980,000 Specialty Retailers, Inc., Sr. Sub. Notes,
11%, 8/15/03 4,855,500
------------
$ 37,426,000
------------
TEXTILES - 2.3%
$2,000,000 CMI Industries Inc., Sr. Sub. Notes, 9.5%,
10/1/03 $ 1,580,000
5,800,000 Dan River Inc., Sr. Sub. Notes, 10.125%,
12/15/03 5,510,000
4,500,000 Westpoint Stevens, Sr. Sub. Debs., 9.375%,
12/15/05 4,443,750
------------
$ 11,533,750
------------
TRANSPORTATION - 0.5%
$2,400,000 Alvey Systems Inc., Sr. Sub. Notes 11.375%,
1/31/03(1) $ 2,502,000
------------
TOTAL CORPORATE BONDS AND NOTES
(IDENTIFIED COST, $476,227,065) $478,776,165
------------
- ------------------------------------------------------------------------------
PREFERRED STOCK - 1.2%
- ------------------------------------------------------------------------------
SHARES/
WARRANTS SECURITY VALUE
- ------------------------------------------------------------------------------
40,000 Cablevision Systems Corp.,
11.125% (PIK), 2/15/96 $ 4,000,000
48,000 SD Warren Company W / Warrants, 14%, 12/15/06* 1,488,000
32,000 Terex Corp., 13% CV. Pfd w/warrants(1)* 800,000
------------
TOTAL PREFERRED STOCK
(IDENTIFIED COST, $6,041,600) $ 6,288,000
------------
- ------------------------------------------------------------------------------
COMMON STOCKS, WARRANTS AND RIGHTS - 0.8%
- ------------------------------------------------------------------------------
SHARES/
WARRANTS SECURITY VALUE
- ------------------------------------------------------------------------------
AUTO/TRUCK - 0.3%
214,839 Bucyrus-Erie Company, Common* $ 1,718,712
------------
CHEMICALS - 0.0%
9,908 UCC Invt Hldgs, Cl A Common+* $ 111,465
------------
COMMUNICATIONS - 0.0%
2,600 American Telecasting, Wts.* $ 88,400
7,200 Dial Call Communications, Exp. 4/15/04
Wts.(SD)+ 1,800
1,600 In Flight Phone Corp., Wts. Exp. 8/31/2002+* 0
7,840 United International Hldg. Inc., Wts.
Exp. 11/15/99+* 235,200
------------
$ 325,400
------------
FOOD - 0.0%
1,380 Servam Corp., Common* $ 0
12,276 Servam Corp., $2.00 Wts. Exp. 4/1/2001+* 0
2,760 Servam Corp., $4.50 Wts. Exp. 4/1/2001+* 0
48,000 Specialty Foods Acquisition, Common(1)* 36,000
------------
$ 36,000
------------
INDUSTRIAL - 0.0%
40,000 Thermadyne Holdings Corp., Common+* $ 400
------------
MANUFACTURING - 0.3%
101,973 Pullman Company, Common Stock+* $ 815,784
22,500 Southdown Inc., Wts. Exp. 10/31/96+* 95,625
10,425 Terex Corporation, Rights, Exp. 8/1/96+* 521
5,370 Terex Corporation, Rights Exp. 7/1/97+* 537
32,000 Terex Corp., Wts. Exp. 12/31/00+* 432,000
95,000 Triangle Wire & Cable, Inc., Common+* 190,000
-------------
$ 1,534,467
-------------
METALS - 0.0%
4,000 Gulf States Steel, Wts.(1)* $ 200
------------
MISCELLANEOUS - 0.0%
6,800 Australis Media, Wts.+* $ 0
------------
<PAGE>
PAPER / PACKAGING - 0.0%
48,000 SD Warren Company, Wts. Exp. 12/15/06* $ 216,000
------------
RETAILING - 0.0%
6,000 Waxman Industries, Wts. Exp. 9/1/96+* $ 60
------------
TOTAL COMMON STOCKS, WARRANTS AND RIGHTS
(IDENTIFIED COST, $9,361,823) $ 3,942,704
------------
- ------------------------------------------------------------------------------
SHORT-TERM OBLIGATION -- 3.3%
- ------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- ------------------------------------------------------------------------------
COMMERCIAL PAPER
$16,805,000 Prudential Funding
5.45%, 4/1/96, at amortized cost $ 16,805,000
------------
TOTAL INVESTMENTS (IDENTIFIED COST, $508,435,488) $505,811,869
OTHER ASSETS, LESS LIABILITIES -- 1.1% 5,535,270
------------
NET ASSETS - 100% $511,347,139
============
*Non-income producing security.
+Restricted Security (Note 6).
(1)Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At March 31, 1996,
the value of these securities amounted to $67,444,057 or 13.2% of net assets.
See notes to financial statements
<PAGE>
-------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
March 31, 1996
(Expressed in United States Dollars)
- ------------------------------------------------------------------------------
ASSETS:
Investments, at value (Note 1A) (identified cost,
$508,435,488) $505,811,869
Cash 43,941
Receivable for investments sold 1,702,455
Interest receivable 11,869,419
Deferred organization expenses (Note 1D) 14,292
------------
Total assets $519,441,976
LIABILITIES:
Payable for investments purchased $8,075,666
Payable to affiliate --
Trustees' fees 5,327
Accrued expenses 13,844
----------
Total liabilities 8,094,837
------------
NET ASSETS applicable to investors' interest in Portfolio $511,347,139
============
SOURCES OF NET ASSETS:
Net proceeds from capital contributions and
withdrawals $513,970,758
Unrealized depreciation of investments (computed
on the basis of identified cost) (2,623,619)
------------
Total $511,347,139
============
See notes to financial statements
<PAGE>
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
For the Year Ended March 31, 1996
(Expressed in United States Dollars)
- ------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest income $54,348,850
Expenses --
Investment adviser fee (Note 2) $3,094,793
Compensation of Trustees not members of the
Investment Adviser's organization 18,861
Custodian fee (Note 2) 218,175
Legal and accounting services 91,555
Amortization of organization expenses (Note 1D) 4,186
Miscellaneous 24,628
-----------
Total expenses 3,452,198
-----------
Net investment income $50,896,652
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment transactions
(identified cost basis) $(5,151,523)
Change in unrealized appreciation on investments 17,257,761
-----------
Net realized and unrealized gain on investments $12,106,238
-----------
Net increase in net assets from operations $63,002,890
===========
See notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
(Expressed in United States Dollars)
- ------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
------------------------------------
1996 1995*
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 50,896,652 $ 37,644,090
Net realized loss on investment
transactions (5,151,523) (13,221,664)
Change in unrealized appreciation
(depreciation) of investments 17,257,761 (7,038,030)
------------ -------------
Net increase in net assets from
operations $ 63,002,890 $ 17,384,396
------------ ------------
Capital transactions --
Contributions $172,948,713 $575,199,203
Withdrawals (167,156,279) (150,131,814)
------------ -------------
Increase in net assets
resulting from capital
transactions $ 5,792,434 $425,067,389
------------ ------------
Total increase in net assets $ 68,795,324 $442,451,785
NET ASSETS:
At beginning of year 442,551,815 100,030
------------ ------------
At end of year $511,347,139 $442,551,815
============ ============
*For the period from the start of business, June 1, 1994, to March 31, 1995.
- ------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- ------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
------------------------------------
1996 1995*
----------------- -----------------
RATIOS (As a percentage of average
daily net assets):
Expenses 0.71% 0.70%+
Net investment income 10.41% 10.63%+
PORTFOLIO TURNOVER 88% 53%
+Computed on an annualized basis.
*For the period from the start of business, June 1, 1994, to March 31, 1995.
See notes to financial statements
<PAGE>
-------------------------------
NOTES TO FINANCIAL STATEMENTS
(Expressed in United States Dollars)
(1) SIGNIFICANT ACCOUNTING POLICIES
High Income Portfolio (the Portfolio) is registered under the Investment Company
Act of 1940 as a diversified open-end management investment company which was
organized as a trust under the laws of the State of New York on May 1, 1992. The
Declaration of Trust permits the Trustees to issue interests in the Portfolio.
The following is a summary of significant accounting policies of the Portfolio.
The policies are in conformity with accounting principles generally accepted in
the United States of America.
A. INVESTMENT VALUATIONS -- Investments listed on securities exchanges or in
the NASDAQ National Market are valued at closing sale prices. Listed or
unlisted investments for which closing sale prices are not available are
valued at the mean between the latest bid and asked prices. Fixed income
investments (other than short-term obligations), including listed investments
and investments for which price quotations are available, will normally be
valued on the basis of market valuations furnished by a pricing service.
Financial futures contracts listed on commodity exchanges are valued at
closing settlement prices. Short-term obligations, maturing in sixty days or
less, are valued at amortized cost, which approximates value. Investments for
which there are no quotation or valuation 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,
adjusted for amortization of premium or discount when required for federal
income tax purposes. Dividend income is recorded on the ex-dividend date for
dividends received in cash and/or securities.
C. INCOME TAXES -- The Portfolio has elected to be treated as a partnership
for United States Federal tax purposes. No provision is made by the Portfolio
for federal or state taxes on any taxable income of the Portfolio because each
investor in the Portfolio is ultimately responsible for the payment of any
taxes. Since some of the Portfolio's investors are regulated investment
companies that invest all or substantially all of their assets in the
Portfolio, the Portfolio normally must satisfy the applicable source of income
and diversification requirements (under the Internal Revenue Code), in order
for its investors to satisfy them. The Portfolio will allocate at least
annually among its investors each investor's distributive share of the
Portfolio's net investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit.
D. DEFERRED ORGANIZATION EXPENSES -- Costs incurred by the Portfolio in
connection with its organization are being amortized on the straight-line
basis over five years.
E. FINANCIAL FUTURES CONTRACTS -- Upon the entering of a financial futures
contract, the Portfolio is required to deposit ("initial margin") either in
cash or securities an amount equal to a certain percentage of the purchase
price indicated in the financial futures contract. 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 rates. Should interest
rates move unexpectedly, the Portfolio may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss.
F. USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period.
Actual results could differ from those estimates.
G. OTHER -- Investment transactions are accounted for on a trade date basis.
- ------------------------------------------------------------------------------
(2) INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee is earned by Boston Management and Research (BMR),
a wholly-owned subsidiary of Eaton Vance Management (EVM), as compensation for
management and investment advisory services rendered to the Portfolio. The fee
is based upon a percentage of average daily net assets plus a percentage of
gross income (i.e., income other than gains from the sale of securities). For
the year ended March 31, 1996, the fee was equivalent to 0.63% (annualized) of
the Portfolio's average daily net assets for such period and amounted to
$3,094,793. Except as to Trustees of the Portfolio who are not members of
EVM's or BMR's organization, officers and Trustees receive remuneration for
their services to the Fund out of such investment adviser fee. Investors Bank
& Trust Company (IBT), serves as custodian of the Portfolio. Prior to November
10, 1995, IBT was an affiliate of EVM and BMR. 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. No
significant credit balances were used to reduce the Portfolio's custody fees.
Certain of the officers and Trustees of the Portfolio 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 portion of their annual fees in accordance with the terms of the
Trustee Deferred Compensation Plan. For the year ended March 31, 1996, no
significant amounts have been deferred.
- ------------------------------------------------------------------------------
(3) INVESTMENTS
The Portfolio invests primarily in debt securities. The ability of the issuers
of the debt securities held by the Portfolio to meet their obligations may be
affected by economic developments in a specific industry. Purchases and sales
of investments, other than U.S. Government securities and short-term
obligations, aggregated $459,046,658 and $412,888,560, respectively.
- ------------------------------------------------------------------------------
(4) LINE OF CREDIT
The Portfolio participates with other portfolios and funds managed by BMR and
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 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 funds and
portfolios at the end of each quarter. The Portfolio did not have any
significant borrowings or allocated fees during the year.
- ------------------------------------------------------------------------------
(5) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized depreciation/appreciation in value of the investments
owned at March 31, 1996, as computed on a federal income tax basis, were as
follows:
Aggregate cost $508,435,488
============
Gross unrealized depreciation $ 17,405,536
Gross unrealized appreciation 14,781,917
------------
Net unrealized depreciation $ 2,623,619
============
- -------------------------------------------------------------------------------
(6) RESTRICTED SECURITIES
At March 31, 1996, the Portfolio owned the following securities (constituting
0.4% of net assets) which were restricted as to public resale and not
registered under the Securities Act of 1933 (excluding Rule 144A securities).
The Portfolio has various registration rights (exercisable under a variety of
circumstances) with respect to certain of these securities. The fair value of
these securities is determined based on valuations provided by brokers when
available, or if not available, they are valued at fair value using methods
determined in good faith by or at the direction of the Trustees.
- ------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS, WARRANTS AND RIGHTS
- ----------------------------------
DESCRIPTION DATES OF ACQUISITION SHARES COST FAIR VALUE
- ----------- -------------------- ------ ---- ----------
<S> <C> <C> <C> <C>
Australis Media, Wts. 5/26/95 6,800 $ 0 $ 0
Dial Call Communications, Wts.,
Exp. 4/15/04 10/04/94 7,200 0 1,800
In Flight Phone Corp., Wts., Exp. 8/31/2002 11/28/95 1,600 0 0
Pullman Company, Common Stock 2/22/95 101,973 2,949,328 815,784
Servam Corp., $2.00 Wts., Exp. 4/1/01 12/15/87 12,276 0 0
Servam Corp., $4.50 Wts., Exp. 4/1/2001 12/15/87 2,760 0 0
Southdown Inc., Wts., Exp. 10/31/96 10/28/91 22,500 67,500 95,625
Terex Corp., Rights, Exp. 7/1/97 11/07/94 5,370 0 537
Terex Corp., Rights, Exp. 8/1/96 8/20/92, 7/01/94, 8/02/94 1,125 0 56
Terex Corp., Rights, Exp. 8/1/96 7/24/92 9,300 0 465
Terex Corp., Wts., Exp. 12/31/00 12/15/93 32,000 6,400 432,000
Thermadyne Holdings Corp., Common 4/03/89 40,000 28,800 400
Triangle Wire & Cable Inc., Common 3/17/94 95,000 2,250,000 190,000
UCC Invt. Holdings, Cl. A Common 10/24/86 9,908 9,834 111,465
United International Hldg., Inc., Wts. 10/01/91 7,840 222,186 235,200
Waxman Industries, Wts., Exp. 9/1/96 10/01/91 6,000 6,000 60
---------- ----------
$5,540,048 $1,883,392
========== ==========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
TO THE TRUSTEES AND INVESTORS OF
HIGH INCOME PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of High Income Portfolio as of March
31, 1996, and the related statement of operations for the year then ended and
the statements of changes in net assets and the supplementary data for the
year then ended and for the period from the start of business, June 1, 1994,
to March 31, 1995 (all expressed in United States dollars). These financial
statements and supplementary data are the responsibility of the Portfolio's
management. Our responsibility is to express an opinion on these financial
statements and supplementary data based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 at March 31, 1996 by correspondence with the
custodian and brokers; where replies were not received from brokers we
performed other auditing procedures. 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, such financial statements and supplementary data present
fairly, in all material respects, the financial position of High Income
Portfolio at March 31, 1996, the results of its operations, changes in its net
assets, and its supplementary data for the respective stated periods in
conformity with accounting principles generally accepted in the United States
of America.
DELOITTE & TOUCHE
GRAND CAYMAN, CAYMAN ISLANDS
BRITISH WEST INDIES
APRIL 30, 1996
<PAGE>
-----------------------------------------
INVESTMENT MANAGEMENT
EV CLASSIC OFFICERS INDEPENDENT TRUSTEES
HIGH INCOME FUND M. DOZIER GARDNER DONALD R. DWIGHT
24 Federal Street President, Trustee President, Dwight Partners, Inc.
Boston, MA 02110 JAMES B. HAWKES Chairman, Newspapers of
Vice President, Trustee New England, Inc.
H. DAY BRIGHAM, JR. SAMUEL L. HAYES, III
Vice President Jacob H. Schiff Professor of
WILLIAM H. AHERN, JR. Investment Banking, Harvard
Vice President University Graduate School of
MICHAEL B. TERRY Business Administration
Vice President President and Director, United Asset
JAMES L. O'CONNOR Management Corporation
Treasurer JOHN L. THORNDIKE
THOMAS OTIS Director, Fiduciary Company
Secretary Incorporated
JACK L. TREYNOR
Investment Adviser and Consultant
- -------------------------------------------------------------------------------
HIGH INCOME OFFICERS INDEPENDENT TRUSTEES
PORTFOLIO M. DOZIER GARDNER DONALD R. DWIGHT
24 Federal Street President, Trustee President, Dwight Partners, Inc.
Boston, MA 02110 JAMES B. HAWKES Chairman, Newspapers of
Vice President, Trustee New England, Inc.
HOOKER TALCOTT, JR. SAMUEL L. HAYES, III
Vice President and Jacob H. Schiff Professor of
Portfolio Manager Investment Banking, Harvard
WILLIAM CHISHOLM University Graduate School of
Vice President Business Administration
RAYMOND O'NEILL NORTON H. REAMER
Vice President President and Director, United Asset
MICHEL NORMANDEAU Management Corporation
Vice President JOHN L. THORNDIKE
MICHAEL W. WEILHEIMER Director, Fiduciary Company
Vice President Incorporated
JAMES L. O'CONNOR JACK L. TREYNOR
Treasurer Investment Adviser and
THOMAS OTIS Consultant
Secretary
<PAGE>
INVESTMENT ADVISER OF
HIGH INCOME PORTFOLIO
Boston Management and Research
24 Federal Street
Boston, MA 02110
ADMINISTRATOR OF
EV CLASSIC
HIGH INCOME FUND
Eaton Vance Management
24 Federal Street
Boston, MA 02110
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(617) 482-8260
CUSTODIAN
Investors Bank & Trust Company
89 South Street
P.O. Box 1537
Boston, MA 02205-1537
TRANSFER AGENT
First Data Investor Services Group, Inc.
BOS725
P.O. Box 1559
Boston, MA 02104
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
This report must be preceded or
accompanied by a current prospectus
which contains more complete
information on the Fund, including
its distribution plan, sales
charges and expenses. Please read
the prospectus carefully before you
invest or send money.
EV CLASSIC HIGH INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
C-HISRC-5/96
EV Classic
High Income
Fund
Annual Shareholder Report
March 31, 1996
<PAGE>
EV MARATHON
HIGH INCOME FUND
- ------------------------------------------------------------------------------
EV MARATHON HIGH INCOME FUND (THE "FUND") IS A MUTUAL FUND SEEKING TO PROVIDE A
HIGH LEVEL OF CURRENT INCOME. THE FUND INVESTS ITS ASSETS IN HIGH INCOME
PORTFOLIO (THE "PORTFOLIO"), A 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 FUND IS A SERIES OF EATON VANCE MUTUAL FUNDS TRUST (THE
"TRUST").
THE PORTFOLIO SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING UP TO 100%
OF ITS ASSETS IN LOWER-RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS", THAT ENTAIL
GREATER RISKS, INCLUDING DEFAULT, THAN THOSE OF HIGHER-RATED SECURITIES.
INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS AND INVEST FOR THE LONG TERM.
SEE "THE FUND'S INVESTMENT OBJECTIVE" AND "INVESTMENT POLICIES AND RISKS."
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 August 1, 1996 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. 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> <C> <C>
Shareholder and Fund Expenses ......................... 2 How to Redeem Fund Shares ......................... 13
The Fund's Financial Highlights ....................... 3 Reports to Shareholders ........................... 15
The Fund's Investment Objective ....................... 4 The Lifetime Investing Account/Distribution Options 15
Investment Policies and Risks ......................... 4 The Eaton Vance Exchange Privilege ................ 16
Organization of the Fund and the Portfolio ............ 7 Eaton Vance Shareholder Services .................. 17
Management of the Fund and the Portfolio .............. 9 Distributions and Taxes ........................... 17
Distribution Plan ..................................... 10 Performance Information ........................... 18
Valuing Fund Shares ................................... 11 Appendix A ........................................ 19
How to Buy Fund Shares ................................ 12 Appendix B ........................................ 21
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROSPECTUS DATED AUGUST 1, 1996
<PAGE>
SHAREHOLDER AND FUND EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
-------------------------------------------------------------------------------------------------------
<S> <C>
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 Seven Years (as a percentage of redemption proceeds exclusive
of all reinvestments and capital appreciation in the account) 5.00%-0%
<CAPTION>
ANNUAL FUND AND ALLOCATED PORTFOLIO OPERATING EXPENSES (as a percentage of average daily net assets)
-------------------------------------------------------------------------------------------------------
<S> <C>
Investment Adviser Fee 0.63%
Rule 12b-1 Distribution (and Service) Fees 0.92
Other Expenses 0.23
----
Total Operating Expenses 1.78%
====
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Aninvestor 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: $68 $96 $116 $209
An investor would pay the following expenses on the same
investment, assuming (a) 5% annual return and (b) no
redemptions: $18 $56 $ 96 $209
</TABLE>
NOTES:
The table and Example summarize the aggregate expenses of the Fund and the
Portfolio and are designed to help investors understand the costs and expenses
that they will bear, directly or indirectly, by investing in the Fund.
Information for the Fund is based on its expenses for the most recent fiscal
year.
The Fund invests exclusively in the Portfolio. The Trustees believe the
aggregate per share expenses of the Fund and the Portfolio should approximate,
and over time may be less than, the per share expenses the Fund would incur if
the Trust retained the services of an investment adviser for the Fund and the
Fund's assets were invested directly in the type of securities being held by the
Portfolio.
The Example 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 Example to assume a 5% annual return, but actual return will vary.
For further information regarding the expenses of the Fund and the Portfolio see
"The Fund's Financial Highlights", "Organization of the Fund and the Portfolio",
"Management of the Fund and the Portfolio" and "How to Redeem Fund Shares". 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. See "Distribution Plan".
No contingent deferred sales charge is imposed on (a) shares purchased more than
six 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".
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 9 of this prospectus.
Other investment companies 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 should be read in conjunction with the financial
statements included in the Fund's annual report to shareholders which is
incorporated by reference into the Statement of Additional Information in
reliance upon the report of Deloitte & Touche LLP, independent certified
public 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.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987(a)*
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, beginning of
year $ 6.920 $ 7.450 $ 7.480 $ 7.380 $ 6.120 $ 7.430 $ 9.230 $ 9.330 $10.380 $10.000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS:
Net investment income $ 0.665 $ 0.671 $ 0.697 $ 0.767 $ 0.825 $ 0.973 $ 1.053 $ 1.054 $ 1.041 $ 0.701
Net realized and unrealized
gain (loss) on investments 0.189 (0.507) 0.047 0.170 1.356 (1.187) (1.708) (0.023) (0.916) 0.427
Commissions paid on sale of
Fund shares -- -- -- -- -- -- -- -- -- (0.046)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total income (loss) from
operations $ 0.854 $ 0.164 $ 0.744 $ 0.937 $ 2.181 $(0.214) $(0.655) $ 1.031 $ 0.125 $ 1.082
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
From net investment income $(0.665) $(0.671) $(0.697) $(0.767) $(0.825) $(0.973) $(1.078) $(1.038) $(1.030) $(0.702)
In excess of net investment
income(1) (0.009) (0.023) (0.077) (0.070) (0.096) (0.123) (0.067) (0.093) (0.095) --
From realized capital gains -- -- -- -- -- -- -- -- (0.050) --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions $(0.674) $(0.694) $(0.774) $(0.837) $(0.921) $(1.096) $(1.145) $(1.131) $(1.125) $(0.702)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, end of year $ 7.100 $ 6.920 $ 7.450 $ 7.480 $ 7.380 $ 6.120 $ 7.430 $ 9.230 $ 9.330 $10.380
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN(2) 12.8% 2.51% 10.28% 13.41% 38.21% (2.84)% (8.14)% 11.58% 1.52% 2.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000 omitted) $496,966 $439,171 $399,259 $332,854 $252,967 $170,655 $214,075 $268,080 $231,648 $189,035
Ratio of expenses to average
daily net assets(3) 1.78% 1.78% 1.82% 2.09% 2.19% 2.37% 2.20% 2.19% 2.02% 1.01%+
Ratio of net investment
income
to average daily net assets 9.38% 9.52% 9.09% 10.31% 12.00% 14.54% 12.12% 11.28% 10.89% 11.06%+
PORTFOLIO TURNOVER(4) -- 11% 96% 91% 82% 57% 53% 57% 59% 47%
<FN>
* Period from the start of business, August 19, 1986, to March 31, 1987.
+ Computed on an annualized basis.
Notes:
(1) The Fund has followed the Statement of Position (SOP) 93-2: Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain, and Return of Capital Distribution by Investment Companies. The SOP requires that differences in the
recognition or classification of income between the financial statements and tax earnings and profits that result in temporary
over-distributions for financial statement purposes, are classified as distributions in excess of net investment income or
accumulated net realized gains.
(2) Total return is calculated assuming a purchase at the net asset value on the first day and a sale at the net asset value on
the last day of each period reported. Distributions, if any, are assumed to be reinvested at the net asset value on the
payable date.
(3) Includes the Fund's share of the Portfolio's allocated expenses subsequent to June 1, 1994.
(4) 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 in the Fund's Annual Report.
(a) On June 12, 1987, the Securities and Exchange Commission adopted a new rule which requires sales commissions paid to the
Principal Underwriter under the Distribution Plan to be treated as an operating expense rather than a charge to paid-in
capital. Accordingly, such commissions for the years ended after March 31, 1987 are reflected as an expense. As a result, for
such periods, expenses per share are increased and net income per share is decreased, with no effect on net asset value per
share. Also, the ratios of expenses and net investment income to average net assets are correspondingly affected. Had the rule
been in effect for the period from the start of business, August 19, 1986, to March 31, 1987, the annualized ratios of
expenses and net investment income to average net assets would have been 2.01% and 10.06%, respectively.
</TABLE>
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE
- -------------------------------------------------------------------------------
THE FUND'S INVESTMENT OBJECTIVE IS TO PROVIDE A HIGH LEVEL OF CURRENT INCOME.
The Fund currently seeks to meet its investment objective by investing its
assets in the Portfolio, a separate registered investment company which has the
same investment objective as the Fund. This investment structure is commonly
referred to as a "master/feeder" structure. The Portfolio seeks to invest a
significant portion of its assets in high-yielding, high risk, fixed-income
securities (commonly referred to as "junk-bonds"), to achieve this objective.
The Fund's and the Portfolio's investment objectives are nonfundamental and may
be changed when authorized by a vote of the Trustees of the Trust or the
Portfolio, respectively, without obtaining the approval of the Fund's
shareholders or the investors in the Portfolio, as the case may be. The Trustees
of the Trust have no present intention to change the Fund's objective and intend
to submit any proposed material change in the investment objective to
shareholders in advance for their approval. The Fund may not be appropriate for
investors who cannot assume the greater risk of capital depreciation or loss
inherent in seeking higher yields.
INVESTMENT POLICIES AND RISKS
- ------------------------------------------------------------------------------
The Portfolio normally is invested as follows:
* at least 80% of its net assets in fixed-income securities, including
convertible securities; and
* up to 20% of its net assets in common stocks and other equity securities
when consistent with its objective or acquired as part of a unit combining
fixed-income and equity securities.
THE PORTFOLIO WILL NORMALLY INVEST AT LEAST 65% OF ITS ASSETS IN THE LOWEST
INVESTMENT GRADE AND LOWER RATED OBLIGATIONS (RATED BAA OR LOWER BY MOODY'S
INVESTORS SERVICE, INC. ("MOODY'S") OR BBB OR LOWER BY STANDARD & POOR'S RATINGS
GROUP ("S&P")) AND UNRATED OBLIGATIONS. For a description of Moody's and S&P's
ratings of fixed-income securities, see Appendix A to this Prospectus. Unrated
bonds are generally regarded as being speculative and expose the investor to
risks with respect to the issuer's capacity to pay interest and repay principal
which are similar to the risks of lower rated bonds. At March 31, 1996, the
Portfolio had approximately 94.8% of its assets invested in high yield, high
risk bonds that were rated lower than investment grade or unrated. See Appendix
B to this Prospectus for the Portfolio's asset composition information for the
most recent fiscal year of the Fund.
The Portfolio invests a substantial portion of its assets in high yield, high
risk securities issued in connection with mergers, acquisitions, leveraged
buy-outs, recapitalizations and other highly leveraged transactions. These
securities are subject to substantially greater credit risks than some of the
other fixed-income securities in which the Portfolio may invest. These credit
risks include the possibility of default or bankruptcy of the issuer. These
securities are less liquid than other fixed-income securities. During periods of
deteriorating economic conditions and contraction in the credit markets, the
ability of issuers of such securities to service their debt, meet projected
goals, or obtain additional financing may be impaired. For more detailed
information about the risks associated with investing in such securities, see
"Risk Considerations" below.
The Portfolio may also invest a portion of its assets in debt securities that
are not paying current income in anticipation of the receipt of possible future
income or capital appreciation. Interest and/or principal payments thereon could
be in arrears when such securities are acquired, and the issuer may be in
bankruptcy or undergoing a debt restructuring or reorganization. Such securities
may be unrated or the lowest rated obligations (rated C by Moody's or D by S&P).
Bonds rated C by Moody's are regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated D by S&P are in payment
default or a bankruptcy petition has been filed and debt service payments are
jeopardized. The Portfolio may retain defaulted obligations in its portfolio
when such retention is considered desirable by the Investment Adviser. The
Portfolio may also acquire other securities issued in exchange for such
obligations or issued in connection with the debt restructuring or
reorganization of the issuers, or where such acquisition, in the judgment of the
Investment Adviser, may enhance the value of such obligations or would otherwise
be consistent with the Portfolio's investment policies.
Although the Investment Adviser considers security ratings when making
investment decisions, it performs its own credit and investment analysis and
does not rely primarily on the ratings assigned by the rating services. In
evaluating the quality of a particular issue, whether rated or unrated, the
Investment Adviser will normally take into consideration, among other things,
the issuer's financial resources and operating history, its sensitivity to
economic conditions and trends, the ability of its management, its debt maturity
schedules and borrowing requirements, and relative values based on anticipated
cash flow, interest and asset coverages, and earnings prospects. Because of the
greater number of investment considerations involved in investing in high yield,
high risk bonds, the achievement of the Portfolio's objective depends more on
the Investment Adviser's judgment and analytical abilities than would be the
case if the Portfolio were investing primarily in securities in the higher
rating categories.
When the Investment Adviser believes that it is appropriate to do so, for
defensive purposes, more than 35% of the Portfolio's assets may be temporarily
invested in securities rated A or better by Moody's or S&P. All or a portion of
the Portfolio's assets may be invested temporarily in cash or short-term
obligations including, but not limited to, certificates of deposit, commercial
paper, short-term notes, obligations issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities and repurchase agreements.
FIXED-INCOME OBLIGATIONS. The fixed-income securities in which the Portfolio may
invest include preferred and preference stocks and all types of debt obligations
of both domestic and foreign issuers, such as bonds, debentures, notes,
equipment lease certificates, equipment trust certificates, conditional sale
contracts, commercial paper, and obligations issued or guaranteed by the U.S.
Government, any state or territory of the United States, any foreign government
or any of their respective political subdivisions, agencies or
instrumentalities. Debt securities may bear fixed, fixed and contingent,
variable or floating rates of interest. Investments in foreign securities may
not exceed 25% of total assets.
The Portfolio may also invest a portion of its assets in loan interests, which
are interests in amounts owed by a corporate, governmental or other borrower to
lenders or lending syndicates. Loan interests purchased by the Portfolio may
have a maturity of any number of days or years, may be secured or unsecured, and
may be of any credit quality. Loan interests, which may take the form of
participation interests in, assignments of or novations of a loan, may be
acquired from U.S. and foreign banks, insurance companies, finance companies or
other financial institutions which have made loans or are members of a lending
syndicate or from the holders of loan interests. Loan interests involve the risk
of loss in case of default or bankruptcy of the borrower and, in the case of
participation interests, involve the risk of insolvency of the agent lending
bank or other financial intermediary.
The Portfolio may hold up to 15% of net assets in illiquid securities, including
securities legally restricted as to resale, and securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933. Rule 144A securities
may, however, be treated as liquid by the Investment Adviser pursuant to
procedures adopted by the Trustees, which require consideration of factors such
as trading activity, availability of market quotations and number of dealers
willing to purchase the security.
INVESTMENT PRACTICES
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 hedge against fluctuations in
interest rates, securities prices or currency exchange rates, to change the
duration of the Portfolio's fixed income portfolio or as a substitute for the
purchase or sale of securities or currency. Options may be written to enhance
income. The Portfolio's transactions in derivative instruments may include the
purchase or sale of futures contracts on securities, (such as U.S. Government
securities), indices, other financial instruments (such as certificates of
deposit, Eurodollar time deposits, and economic indices) or currencies; options
on futures contracts; exchange-traded options on securities, indices or
currencies; and forward contracts to purchase or sell currencies. All of the
Portfolio's transactions in derivative instruments involve a risk of loss or
depreciation due to: unanticipated adverse changes in interest rates, securities
prices or currency exchange rates; the inability to close out a position; tax
constraints on closing out positions; default by the counterparty; imperfect
correlation between a position and the desired hedge; and portfolio management
constraints on disposing of securities subject to such transactions. The loss on
derivative instruments (other than purchased options) may substantially 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.
The Portfolio's success in using derivative instruments to hedge portfolio
assets depends on the degree of price correlation between the derivative
instrument and the hedged asset. Imperfect correlation may be caused by several
factors, including temporary price disparities among the trading markets for the
derivative instrument, the assets underlying the derivative instrument and the
Portfolio's assets.
The Portfolio may write (sell) covered call and put options only with respect to
up to 25% of its net assets. 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 (the "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
portfolio, after taking into account unrealized profits and unrealized losses on
any contacts the Portfolio has entered into. The Portfolio did not engage in
such transactions during the period from June 1, 1994 (commencement of
operations) to March 31, 1996, and there is no assurance that it will engage in
such transactions in the future.
SHORT-TERM TRADING. Securities may be sold in anticipation of a market decline
(a rise in interest rates) or purchased in anticipation of a market rise (a
decline in interest rates) and later sold. In addition, a security may be sold
and another purchased at approximately the same time to take advantage of what
the Portfolio believes to be a temporary disparity in the normal yield
relationship between the two securities. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, such as changes in the overall demand for or
supply of various types of fixed-income securities or changes in the investment
objectives of investors. Such trading may be expected to increase the portfolio
turnover rate and the expenses incurred in connection with such trading. The
Portfolio anticipates that its annual portfolio turnover rate will generally not
exceed 100% (excluding turnover of securities having a maturity of one year or
less).
ADDITIONAL RISK CONSIDERATIONS
Investors should carefully consider their ability to assume the risks of owning
shares of a mutual fund that invests in below investment grade debt obligations
(commonly referred to as "junk bonds") before making an investment in the Fund.
The lower ratings of certain securities held by the Portfolio reflect a greater
possibility that adverse changes in the financial condition of an issuer, or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by the Fund more volatile and could limit the Portfolio's ability to sell
its securities at prices approximating the values the Portfolio has placed on
such securities. It is possible that legislation may be adopted in the future
limiting the ability of certain financial institutions to purchase such
securities; such legislation may adversely affect the liquidity of such
securities. In the absence of a liquid trading market for securities held by it,
the Portfolio may be unable at times to establish the fair market value of such
securities.
The rating assigned to a security by a rating agency does not reflect an
assessment of the volatility of the security's market value or of the liquidity
of an investment in the securities. Credit ratings are based largely on the
issuer's historical financial condition and the rating agency's investment
analysis at the timing of rating, and the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial
condition. Credit quality in the high yield, high risk bond market can change
from time to time, and recently issued credit ratings may not fully reflect the
actual risks posed by a particular high yield security.
While the Investment Adviser will attempt to reduce the risks of investing in
lower rated or unrated securities through active portfolio management,
diversification, credit analysis and attention to current developments and
trends in the economy and the financial markets, there can be no assurance that
a broadly diversified portfolio of such securities would substantially lessen
the risks of defaults brought about by an economic downturn or recession.
The net asset value of the Fund will change in response to fluctuations in
prevailing interest rates and changes in the value of the securities held by the
Portfolio. When interest rates decline, the value of securities already held by
the Portfolio can be expected to rise. Conversely, when interest rates rise, the
value of existing portfolio security holdings can be expected to decline.
Changes in the credit quality of issuers of debt obligations held by the
Portfolio will affect the principal value (and possibly the income earned) on
such obligations. In addition, the values of such securities are affected by
changes in general economic conditions and business conditions affecting the
specific industries of their issuers. Changes by recognized rating services in
their ratings of any fixed-income security and in the ability of an issuer to
make payments of interest and principal may also affect the value of these
investments. The Portfolio will not dispose of a security solely because its
rating is reduced below its rating at the time of purchase, although the
Investment Adviser will monitor the investment to determine whether continued
investment in the security will assist in meeting the Portfolio's investment
objective.
Interest and/or principal payments on securities in default may be in arrears
when such securities are acquired, and the issuer may be in bankruptcy or
undergoing a debt restructuring or reorganization. In order to enforce its
rights in the event of a default under such securities, the Portfolio may be
required to take possession of and manage assets securing the issuer's
obligation on such securities, which may increase the Portfolio's operating
expenses and adversely affect the Portfolio's net asset value. As at March 31,
1996, the Portfolio held one obligation in default, which represented less than
1% of the Portfolio's net assets. This obligation was sold from the Portfolio.
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. In addition, the Portfolio may temporarily
borrow up to 5% of the value of its total assets to satisfy redemption requests
or settle securities transactions.
Loan interests generally are not rated by any nationally recognized rating
service and are, at present, not readily marketable and may be subject to
contractual restrictions on resale. An investment in restricted securities may
involve relative greater risk and cost to the Portfolio because of their
illiquidity. Moreover, liquid Rule 144A securities may increase the level of
Portfolio liquidity to the extent qualified institutional buyers become
uninterested in purchasing such securities.
Fixed-income securities that the Portfolio may invest in also include zero
coupon bonds, deferred interest bonds and bonds on which the interest is payable
in kind ("PIK bonds"). Zero coupon and deferred interest bonds are debt
obligations which are issued at a significant discount from face value. While
zero coupon bonds do not require the periodic payment of interest, deferred
interest bonds provide for a period of delay before the regular payment of
interest begins. PIK bonds are debt obligations which provide that the issuer
thereof may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations which
make regular payments of interest. The Portfolio will accrue income on such
investments for tax and accounting purposes, in accordance with applicable law,
the Fund's share of which income is distributable to shareholders. Because no
cash is received at the time such income is accrued, the Portfolio may be
required to liquidate other portfolio securities to enable the Fund to satisfy
its distribution obligations.
Investing in foreign securities may represent a greater degree of risk than
investing in domestic securities, because of the possibility of exchange rate
fluctuations, less publicly-available financial and other information, more
volatile and less liquid markets, less securities regulation, higher brokerage
costs, imposition of foreign withholding and other taxes, war, expropriation or
other adverse governmental actions.
THE FUND AND THE PORTFOLIO HAVE ADOPTED CERTAIN FUNDAMENTAL INVESTMENT
RESTRICTIONS WHICH ARE ENUMERATED IN DETAIL IN THE STATEMENT OF ADDITIONAL
INFORMATION AND WHICH MAY NOT BE CHANGED UNLESS AUTHORIZED BY A SHAREHOLDER
VOTE, AND AN INVESTOR VOTE, RESPECTIVELY. EXCEPT FOR SUCH ENUMERATED
RESTRICTIONS AND AS OTHERWISE INDICATED IN THIS PROSPECTUS, THE INVESTMENT
OBJECTIVE AND POLICIES OF THE FUND AND THE PORTFOLIO ARE NOT FUNDAMENTAL
POLICIES AND ACCORDINGLY MAY BE CHANGED BY THE TRUSTEES OF THE TRUST AND THE
PORTFOLIO WITHOUT OBTAINING THE APPROVAL OF THE FUND'S SHAREHOLDERS OR THE
INVESTORS IN THE PORTFOLIO, AS THE CASE MAY BE. IF ANY CHANGES WERE MADE IN
THE FUND'S INVESTMENT OBJECTIVE, THE FUND MIGHT HAVE AN INVESTMENT OBJECTIVE
DIFFERENT FROM THE OBJECTIVE WHICH AN INVESTOR CONSIDERED APPROPRIATE AT THE
TIME THE INVESTOR BECAME A SHAREHOLDER IN THE FUND.
ORGANIZATION OF THE FUND AND THE PORTFOLIO
- ------------------------------------------------------------------------------
THE FUND IS A DIVERSIFIED SERIES OF THE TRUST A BUSINESS TRUST ESTABLISHED UNDER
MASSACHUSETTS LAW PURSUANT TO A DECLARATION OF TRUST DATED MAY 7, 1984, AS
AMENDED. THE TRUST IS A MUTUAL FUND -- AN OPEN-END MANAGEMENT INVESTMENT
COMPANY. The Trustees of the Trust are 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
(such as the Fund). Each share represents an equal proportionate beneficial
interest in the Fund. When issued and outstanding, the shares are fully paid and
nonassessable by the Trust 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 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,
which is a separate investment company with an identical investment objective,
(although the Fund may temporarily hold a de minimis amount of cash). 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, see "The Fund's Investment
Objective" and "Investment Policies and Risks". Further information regarding
the investment practices may also 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 Portfolio without obtaining the approval of the
shareholders of the Fund, or the investors in the Portfolio, as the case may be.
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 within one year
of their purchase 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, such Trustees 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 funds which have large or institutional
investors.
Until 1992, 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.
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.
Acting under the general supervision of the Board of Trustees of the Portfolio,
BMR manages the Portfolio's investments and affairs. BMR also furnishes for the
use of the Portfolio office space and all necessary office facilities, equipment
and personnel for servicing the invesments 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
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 up to $500 million 0.300% 3.00%
2 $500 million but less than $1 billion 0.275% 2.75%
3 $1 billion but less than $1.5 billion 0.250% 2.50%
4 $1.5 billion but less than $2 billion 0.225% 2.25%
5 $2 billion but less than $3 billion 0.200% 2.00%
6 $3 billion and over 0.175% 1.75%
</TABLE>
As of March 31, 1996, the Portfolio had net assets of $511,347,139. For the
fiscal year ended March 31, 1996, the Portfolio paid BMR advisory fees
equivalent to 0.63% of the Portfolio's average daily net assets for such year.
BMR OR EATON VANCE ACTS AS INVESTMENT ADVISER TO INVESTMENT COMPANIES AND
VARIOUS INDIVIDUAL AND INSTITUTIONAL CLIENTS WITH ASSETS UNDER MANAGEMENT OF
OVER $16 BILLION. Eaton Vance is a wholly-owned subsidiary of Eaton Vance Corp.,
a publicly-held holding company which through its subsidiaries and affiliates
engages primarily in investment management and marketing activities.
Hooker Talcott, Jr. has acted as portfolio manager of the Portfolio since it
commenced operations. Mr. Talcott has been a Vice President of Eaton Vance
since 1987 and of BMR since 1992. Michael Weilheimer is the co-portfolio
manager and has been a Vice President of Eaton Vance since 1992.
BMR places the portfolio transactions of the Portfolio for execution with many
broker-dealer firms. Fixed-income securities are normally 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 to
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 Fund, the Portfolio and BMR have adopted Codes of Ethics relating to
personal securities transactions. The Codes permit Eaton Vance personnel to
invest in securities (including securities that may be purchased or held by the
Portfolio) for their own accounts, subject to certain pre-clearance, reporting
and other restrictions and procedures contained in such Codes.
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 its 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, 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 INVESTMENT COMPANY ACT OF 1940
(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 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 services firm (an "Authorized Firm") at the time
of sale equal to 4% 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. During the
fiscal year ended March 31, 1996, the Fund paid or accrued sales commissions
under its Plan to the Principal Underwriter equivalent to .75% of the Fund's
average daily net assets for such year. As at March 31, 1996, the outstanding
Uncovered Distribution Charges of the Principal Underwriter calculated under the
Plan amounted to approximately $15,354,000 (which amount was equivalent to 3.1%
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 initially implemented this provision of the Plan by
authorizing the Fund to make quarterly service fee payments 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 March 31, 1996,
the Fund paid or accrued service fee payments under the Plan equivalent to 0.17%
(annualized) 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 Fund 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
- ------------------------------------------------------------------------------
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 IBT Fund Services (Canada) Inc., (as agent for the Fund)
in the manner authorized by the Trustees of the Trust. IBT Fund Services
(Canada) Inc. is a subsidiary of Investors Bank & Trust Company ("IBT"), the
Fund's and the Portfolio's custodian. 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 Fund Services (Canada) Inc. (as 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. Fixed-income securities (other than short-term
obligations), including listed securities and securities for which price
quotations are available, will normally be valued on the basis of market
valuations furnished by a pricing service. For further information regarding the
valuation of the Portfolio's assets, see "Determination of Net Asset Value" in
the Statement of Additional Information.
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. An Authorized Firm may charge its customers a fee in connection with
transactions executed by that Firm. The Fund may suspend the offering of shares
at any time and may refuse an order for the purchase of shares.
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: First
Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123. 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 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 on the day of their receipt 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 available price. 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 High Income Fund
IN THE CASE OF PHYSICAL DELIVERY:
Investors Bank & Trust Company
Attention: EV Marathon High 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. 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.
IF YOU DON'T HAVE AN AUTHORIZED FIRM, EATON VANCE CAN RECOMMEND ONE.
HOW TO REDEEM FUND SHARES
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A SHAREHOLDER MAY REDEEM FUND SHARES IN ONE OF THREE WAYS -- BY MAIL, BY
TELEPHONE OR THROUGH AN AUTHORIZED FIRM. The redemption price will be based on
the net asset value per Fund share next computed after a redemption request is
received in the proper form as described below.
REDEMPTION BY MAIL: Shares may be redeemed by delivering to First Data Investor
Services Group, P.O. Box 5123, Westborough, Massachusetts 01581-5123, during its
business hours a written request for redemption in good order, plus any share
certificates with executed stock powers. 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 First Data Investor Services Group. 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.
REDEMPTION BY TELEPHONE: Shares may be redeemed by telephone provided the
investor has not disclaimed in writing the use of the privilege. Such
redemptions can be effected by calling the Transfer Agent at 800-262-1122,
Monday through Friday, 9:00 a.m. to 4:00 p.m. (Eastern Standard Time). The
proceeds of a telephone redemption may be no greater than the maximum amount
established by the Principal Underwriter (currently $50,000) and may be mailed
only to the account address of record. Shares held by corporations, trusts or
certain other entities, or subject to fiduciary arrangements, may not be
redeemed by telephone. Neither the Fund, the Principal Underwriter nor the
Transfer Agent will be responsible for the authenticity of redemption
instructions received by telephone, provided that reasonable procedures to
confirm that instructions communicated by telephone are genuine have been
followed. If such procedures are not followed, the Fund, the Principal
Underwriter or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone instructions. Telephone instructions will
be tape recorded. In times of drastic economic or market changes, a telephone
redemption may be difficult to implement.
REDEMPTION THROUGH AN AUTHORIZED FIRM: 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.
Within seven days after receipt of a redemption request in good order by First
Data Investor Services Group, the Fund will make payment in cash for the net
asset value of the shares as of the date determined above, reduced by the amount
of any applicable contingent deferred sales charges (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.
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 $750. Prior to such a redemption,
shareholders will be given 60 days' written notice to make an additional
purchase. However, no such redemption 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
involunatry redemptions.
CONTINGENT DEFERRED SALES CHARGE. Shares redeemed within the first six years of
their purchase (except shares acquired through the reinvestment of
distributions) generally will be subject to a contingent deferred sales charge
("CDSC"). This CDSC 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 six years prior to the redemption, (b) all shares in the
account acquired through reinvestment of distributions, and (c) the increase, if
any, in the value in the other shares in the account (namely those purchased
within six 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 CDSC. 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. As described under "Distribution Plan", the CDSC will be paid to the
Principal Underwriter or the Fund. Any CDSC 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 or Second 5%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
In calculating the CDSC upon the redemption of Fund shares acquired in an
exchange for shares of a fund currently listed under "The Eaton Vance Exchange
Privilege", the CDSC schedule applicable to the shares at the time of purchase
will apply and the purchase of shares acquired in the exchange is deemed to have
occurred at the time of the original purchase of the exchanged shares.
No CDSC will be imposed on Fund shares which have been sold to Eaton Vance or
its affiliates, or to their respective employees or clients. The CDSC will also
be waived for shares redeemed (1) pursuant to a Withdrawal Plan (see "Eaton
Vance Shareholders Services"), (2) as part of a required distribution from a
tax-sheltered retirement plan or (3) 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 FOLLOWING EXAMPLE ILLUSTRATES THE OPERATION OF THE CDSC. ASSUME THAT AN
INVESTOR PURCHASES $10,000 OF THE FUND'S SHARES AND THAT 16 MONTHS LATER THE
VALUE OF THE ACCOUNT HAS GROWN THROUGH INVESTMENT PERFORMANCE AND REINVESTMENT
OF DISTRIBUTIONS TO $12,000. THE INVESTOR THEN MAY REDEEM UP TO $2,000 OF
SHARES WITHOUT INCURRING A CONTINGENT DEFERRED SALES CHARGE. IF THE INVESTOR
SHOULD REDEEM $3,000 OF SHARES, A CDSC WOULD BE IMPOSED ON $1,000 OF THE
REDEMPTION. THE RATE WOULD BE 5% BECAUSE IT WAS THE SECOND YEAR AFTER THE
PURCHASE WAS MADE AND THE CDSC WOULD BE $50.
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 certified public 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, FIRST DATA INVESTOR SERVICES GROUP, 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 share 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 First Data Investor
Services Group.
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 First Data Investor Services Group, P.O. Box 5123,
Westborough, MA 01581-5123 (please provide the name of the shareholder, the Fund
and the account number).
THE FOLLOWING DISTRIBUTION OPTIONS WILL BE AVAILABLE TO LIFETIME INVESTING
ACCOUNTS and may be changed as often as desired by written notice to the Fund's
dividend disbursing agent, First Data Investor Services Group, P.O. Box 5123,
Westborough, MA 01581-5123. 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 the 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.
Further, 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 a
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.
THE EATON VANCE EXCHANGE PRIVILEGE
- ------------------------------------------------------------------------------
Shares of the Fund currently may be exchanged for shares of one or more other
funds in the Eaton Vance Marathon Group of Funds (including Class I shares of
any EV Marathon Limited Maturity Fund) or Eaton Vance Money Market Fund, which
are distributed subject to a CDSC. Shares of the Fund may also be exchanged for
shares of Eaton Vance Prime Rate Reserves, which are subject to an early
withdrawal charge, and shares of a money market fund sponsored by an Authorized
Firm and approved by the Principal Underwriter (an "Authorized Firm fund"). Any
such exchange will be made on the basis of the net asset value per share of each
fund at the time of the exchange, provided that such exchange offers are
available only in states where shares of the fund being acquired may be legally
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.
First Data Investor Services Group makes exchanges at the next determined net
asset value after receiving an exchange request in good order (see "How to
Redeem Fund Shares"). Consult First Data Investor Services Group for additional
information concerning the exchange privilege. Applications and prospectuses of
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 CDSC is imposed on exchanges. For purposes of calculating the CDSC upon the
redemption of shares acquired in an exchange, the CDSC 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. However, the time during which shares
are held in an Authorized Firm fund will not be credited toward completion of
the CDSC period. For the CDSC schedule applicable to the Eaton Vance Marathon
Group of Funds (except EV Marathon Strategic Income Fund, Eaton Vance Prime Rate
Reserves and Class I shares of any EV Marathon Limited Maturity Fund), see "How
to Redeem Fund Shares". The CDSC or early withdrawal charge schedule applicable
to EV Marathon Strategic Income Fund, Eaton Vance Prime Rate Reserves and Class
I shares of any EV Marathon Limited Maturity Fund is 3%, 2.5%, 2% or 1% in the
event of a redemption occurring in the first, second, third or fourth year,
respectively, after the original share purchase.
Shares of the funds listed above 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 First Data Investor Services Group provided
that the investor has not disclaimed in writing the use of the privilege. To
effect such exchanges, call First Data Investor Services Group at 800-262-1122
Monday through Friday, 9:00 a.m. to 4:00 p.m. (Eastern Standard Time). Shares
acquired by telephone exchange 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 First Data Investor Services Group 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. If such procedures are not followed, the Fund, the Principal
Underwriter or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone instructions. 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 the EV
Marathon High Income Fund may be mailed directly to First Data Investor Services
Group, P.O. Box 5123, Westborough, MA 01581-5123 at any time -- whether or not
dividends 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 the
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 CDSC. 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 CDSC paid on the repurchased or redeemed 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 of the Fund 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 the 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 fifteenth day of each month or the next business
day thereafter. The Fund anticipates that for tax purposes the entire
distribution, whether paid in cash or reinvested in additional shares of the
Fund, will constitute income to its shareholders. 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.
Certain distributions, if declared by the Fund 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.
Distributions of the Fund which are derived from net investment income, net
short-term capital gains and certain foreign exchange gains are taxable to
shareholders as ordinary income, whether received in cash or reinvested in
additional shares. Only a small portion, if any, of such distributions may be
eligible for the dividends-received deduction for corporations subject to
certain limitations.
Capital gains, if any, realized on sales of investments and on options and
futures transactions during the fiscal year, which ends on March 31, will be
offset by capital losses, including any capital loss carryovers, and will
usually be distributed with the Fund's first monthly distribution paid after the
close of such fiscal year. However, the Fund could make additional distributions
of capital gains in any year in order to comply with the distribution
requirements of the Code. Distributions designated by the Fund as from long-term
capital gains are taxable to shareholders as long-term capital gains whether
received 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 such 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.
Shareholders will receive annually tax information notices and Forms 1099 to
assist in the preparation of their federal and state tax returns for the prior
calendar year's distributions, proceeds from the redemption or exchange of Fund
shares, and federal income tax (if any) withheld by the Fund's Transfer Agent.
Shareholders should consult with their tax advisers concerning the applicability
of state, local or other taxes to an investment in the Fund.
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 timing
requirements imposed by the Code. As a partnership under the Code, the Portfolio
does not pay federal income or excise taxes.
PERFORMANCE INFORMATION
- ------------------------------------------------------------------------------
FROM TIME TO TIME, THE FUND MAY ADVERTISE ITS YIELD AND/OR AVERAGE ANNUAL TOTAL
RETURN. The Fund's current 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 CDSC which may be imposed upon redemptions at the end of the specified
period. Any performance figure which does not take into account the CDSC would
be reduced to the extent such charge is imposed upon a redemption.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's current yield or total return for
any prior period should not be considered as a representation of what an
investment may earn or what the Fund's yield or total return 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
DESCRIPTION OF MOODY'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-edge". 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 fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks 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.
SECURITIES IN WHICH THE PORTFOLIO MAY INVEST WILL INCLUDE THOSE IN THE FOLLOWING
CATEGORIES:
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 safeguarded
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 corporate 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.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
INVESTMENT GRADE
AAA: Bonds rated AAA have the highest rating assigned by S&P's. Capacity to
pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
SECURITIES IN WHICH THE PORTFOLIO MAY INVEST WILL INCLUDE THOSE IN THE FOLLOWING
CATEGORIES:
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit 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
bonds in this category than for bonds in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk 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 Standard & Poor's rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because Standard & Poor's does not rate a particular type of obligation as a
matter of policy.
NOTES: 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 speculative obligations. 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
HIGH INCOME PORTFOLIO
ASSET COMPOSITION INFORMATION
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
PERCENT OF
NET ASSETS
----------
Preferred Stocks and Other Equity Securities ............. 1.7%
Short-term Obligations ................................... 3.5%
Debt Securities -- Moody's Rating
Ba ................................................... 5.4%
B1 ................................................... 12.9%
B2 ................................................... 25.5%
B3 ................................................... 40.5%
Caa .................................................. 7.2%
Unrated .............................................. 3.3%
------
Total ................................................ 100.00%
The chart above indicates the weighted average composition of the securities
held by the Portfolio for the fiscal year ended March 31, 1996, with the debt
securities rated by Moody's separated into the indicated categories. The
weighted average indicated above was calculated on a dollar weighted basis and
was computed as at the end of each month during the fiscal year. The chart does
not necessarily indicate what the composition of the Fund's portfolio will be in
the current and subsequent fiscal years.
For a description of Moody's ratings of fixed-income securities, see Appendix A
to this Prospectus.
<PAGE>
[LOGO: EATON VANCE]
EV MARATHON
HIGH INCOME
FUND
PROSPECTUS
AUGUST 1, 1996
EV MARATHON
HIGH INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
- --------------------------------------------------------------------------------
INVESTMENT ADVISER OF HIGH INCOME PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV MARATHON HIGH 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, 89 South Street, Boston, MA 02111
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, MA 02110
M-HIP
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
August 1, 1996
EV MARATHON HIGH INCOME FUND
24 Federal Street
Boston, Massachusetts 02110
(800) 225-6265
This Statement of Additional Information consists of two parts. Part I
provides information about EV Marathon High Income Fund (the "Fund"), High
Income Portfolio (the "Portfolio") and certain other series of Eaton Vance
Mutual Funds Trust (the "Trust"). The Fund's Par II (the "Part II") provides
information solely about the Fund. Where appropriate, Part I includes
cross-references to the relevant sections of Part II.
This Statement of Additional Information is sometimes referred to herein as
the "SAI".
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
PART I
Additional Investment Policies .......................................... 2
Investment Restrictions ................................................. 7
Trustees and Officers ................................................... 8
Investment Adviser and Administrator .................................... 10
Custodian ............................................................... 13
Service for Withdrawal .................................................. 13
Determination of Net Asset Value ........................................ 13
Investment Performance .................................................. 14
Taxes ................................................................... 15
Principal Underwriter ................................................... 17
Portfolio Security Transactions ......................................... 17
Other Information ....................................................... 19
Independent Certified Public Accountants ................................ 20
Financial Statements .................................................... 20
PART II
Fees and Expenses ....................................................... a-1
Distribution Plan ....................................................... a-2
Performance Information ................................................. a-4
Control Persons and Principal Holders of Securities ..................... a-4
- ------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE FUND'S PROSPECTUS DATED AUGUST 1, 1996, AS SUPPLEMENTED FROM
TIME TO TIME, WHICH IS INCORPORATED HEREIN BY REFERENCE. 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>
STATEMENT OF ADDITIONAL INFORMATION
PART I
This Part I provides information about the Fund, certain other series of the
Trust and the Portfolio. Capitalized terms used in this SAI and not otherwise
defined have the meanings given them in the Fund's Prospectus. The Fund is
subject to the same investment policies as those of the Portfolio. The Fund
currently seeks to achieve its objective by investing in the Portfolio.
ADDITIONAL INVESTMENT OBJECTIVE AND POLICIES
OTHER FIXED-INCOME SECURITIES
Included in the fixed-income securities in which the Portfolio may invest
are preferred, preference and convertible stocks, 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. 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. 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 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, which it
would anticipate using as short-term investments pending longer term investment
of its funds.
CONCENTRATION
Although there is no current intention to do so, the Portfolio may invest up
to 25% of its assets in securities of issuers in each of the electric, gas and
telephone utility industries if, in the opinion of the Investment Adviser, the
relative return available from such securities and the relative risk,
marketability, quality or availability of securities of issuers in such industry
justifies such an investment. The value of such investments may be affected to a
greater degree by adverse developments in such industries. Industry-wide
problems include the effects of fluctuating economic conditions, energy
conservation practices, environmental regulations, high capital expenditures,
construction delays due to pollution control and environmental considerations,
uncertainties as to fuel availability and costs, increased competition in
deregulated sectors of such industries and difficulties in obtaining timely and
adequate rate relief from regulatory commissions. If applications for rate
increases are not granted or are not acted upon promptly, the market prices of
and interest or dividend payments on utility securities may be adversely
affected.
LOAN INTERESTS
A loan in which the Portfolio may acquire a loan interest (a "Loan
Interest") is typically originated, negotiated and structured by a U.S. or
foreign commercial bank, insurance company, finance company or other financial
institution (the "Agent") for a lending syndicate of financial institutions. The
Agent typically administers and enforces the loan on behalf of the other lenders
in the syndicate. In addition, an institution, typically but not always the
Agent (the "Collateral Bank"), holds collateral (if any) on behalf of the
lenders. These Loan Interests may take the form of participation interests in,
assignments of or novations of a loan during its secondary distribution, or
direct interests during a primary distribution. Such Loan Interests may be
acquired from U.S. or foreign banks, insurance companies, finance companies or
other financial institutions who have made loans or are members of a lending
syndicate or from other holders of Loan Interests. The Portfolio may also
acquire Loan Interests under which the Portfolio derives its rights directly
from the borrower. Such Loan Interests are separately enforceable by the
Portfolio against the borrower and all payments of interest and principal are
typically made directly to the Portfolio from the borrower. In the event that
the Portfolio and other lenders become entitled to take possession of shared
collateral, it is anticipated that such collateral would be held in the custody
of a Collateral Bank for their mutual benefit. The Portfolio may not act as an
Agent, a Collateral Bank, a guarantor or sole negotiator or structurer with
respect to a loan.
The investment adviser will analyze and evaluate the financial condition of
the borrower in connection with the acquisition of any Loan Interest. The
Investment Adviser also analyzes and evaluates the financial condition of the
Agent and, in the case of Loan Interests in which the Portfolio does not have
privity with the borrower, those institutions from or through whom the Portfolio
derives its rights in a loan (the "Intermediate Participants"). From time to
time the Investment Adviser and its affiliates may borrow money from various
banks in connection with their business activities. Such banks may also sell
interests in loans to or acquire such interests from the Portfolio or may be
Intermediate Participants with respect to loans in which the Portfolio owns
interests. Such banks may also act as Agents for loans in which the Portfolio
owns interests.
In a typical loan the Agent administers the terms of the loan agreement. In
such cases, the Agent is normally responsible for the collection of principal
and interest payments from the borrower and the apportionment of these payments
to the credit of all institutions which are parties to the loan agreement. The
Portfolio will generally rely upon the Agent or an Intermediate Participant to
receive and forward to the Portfolio its portion of the principal and interest
payments on the loan. Furthermore, unless under the terms of a participation
agreement the Portfolio has direct recourse against the borrower, the Portfolio
will rely on the Agent and the other members of the lending syndicate to use
appropriate credit remedies against the borrower. The Agent is typically
responsible for monitoring compliance with covenants contained in the loan
agreement based upon reports prepared by the borrower. The seller of the Loan
Interest usually does, but is often not obligated to, notify holders of Loan
Interests of any failures of compliance. The Agent may monitor the value of the
collateral and, if the value of the collateral declines, may accelerate the
loan, may give the borrower an opportunity to provide additional collateral or
may seek other protection for the benefit of the participants in the loan. The
Agent is compensated by the borrower for providing these services under a loan
agreement, and such compensation may include special fees paid upon structuring
and funding the loan and other fees paid on a continuing basis. With respect to
Loan Interests for which the Agent does not perform such administrative and
enforcement functions, the Portfolio will perform such tasks on its own behalf,
although a Collateral Bank will typically hold any collateral on behalf of the
Portfolio and the other lenders pursuant to the applicable loan agreement.
A financial institution's appointment as Agent may usually be terminated in
the event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held by
the Agent under the loan agreement should remain available to holders of Loan
Interests. However, if assets held by the Agent for the benefit of the Portfolio
were determined to be subject to the claims of the Agent's general creditors,
the Portfolio might incur certain costs and delays in realizing payment on a
loan interest, or suffer a loss of principal and/or interest. In situations
involving Intermediate Participants similar risks may arise.
Purchasers of loan interests depend primarily upon the creditworthiness of
the borrower for payment of principal and interest. If the Portfolio does not
receive scheduled interest or principal payments on such indebtedness, the
Portfolio could be adversely affected. Loans that are fully secured offer the
Portfolio more protections than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the borrower's
obligation, or that the collateral can be liquidated. Indebtedness of borrowers
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Borrowers that are in bankruptcy or restructuring may never
pay off their indebtedness, or may pay only a small fraction of the amount owed.
Direct indebtedness of developing countries will also involve a risk that the
governmental entities responsible for the repayment of the debt may be unable,
or unwilling, to pay interest and repay principal when due.
The Portfolio limits the amount of total assets that it will invest in any
one issuer or in issuers within the same industry. See Investment Restrictions
(1) and (5) below. For purposes of these restrictions, the Portfolio generally
will treat the borrower as the "issuer" of a Loan Interest held by the
Portfolio. In the case of loan participations where the Agent or Intermediate
Participant serves as financial intermediary between the Portfolio and the
borrower, the Portfolio, in appropriate circumstances, will treat both the Agent
or Intermediate Participant and the borrower as "issuers" for the purposes of
determining whether the Portfolio has invested more than 5% of its total assets
in a single issuer. Treating a financial intermediary as an issuer of
indebtedness may restrict the Portfolio's ability to invest in indebtedness
related to a single intermediary, or a group of intermediaries engaged in the
same industry, even if the underlying borrowers represent many different
companies and industries.
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 generally 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.
Foreign stock markets, while growing in volume of trading activity, have
substantially less volume than the Exchange, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Similarly, volume and liquidity in most foreign bond markets is less
than in the United States and, at times, volatility of price can be greater than
in the United States. 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
stock exchanges, brokers 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. 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 TRANSACTIONS
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 transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
The Portfolio does not intend to enter into forward foreign currency
exchange contracts to protect the value of its portfolio securities on a regular
continuous basis, and will not do so if, as a result, the Portfolio will have
more than 15% of the value of its total assets committed to the consummation of
such contracts. The Portfolio also will not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Portfolio to deliver an amount of foreign currency
in excess of the value of the securities held by the Portfolio's or other assets
denominated in that currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the long-term
investment decisions made with regard to overall diversification strategies.
However, the Portfolio believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
the Portfolio will be served. The Portfolio generally will not enter into a
forward contract with a term of greater than one year.
OPTIONS ON SECURITIES
An 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 security until the option expires or it delivers the underlying
security 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 ("OCC") 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 OCC 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
OCC inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
FUTURES CONTRACTS
All futures contracts entered into by the Portfolio are traded on exchanges
or boards of trade that are licensed and regulated by the CFTC.
The Portfolio may purchase and write call and put options on futures
contracts which are traded on a U.S. exchange or board of trade.
The Portfolio will engage in futures and related options transactions for
bona fide hedging or non-hedging purposes as defined in or 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 that the Portfolio owns, or futures contracts will be purchased to
protect the Portfolio against an increase in the price of securities 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 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. 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 Code for maintaining the qualification
of the Fund as a regulated investment company for federal income tax purposes
(see "Taxes").
ASSET COVERAGE FOR DERIVATIVE INSTRUMENTS
Transactions using forward contracts, futures contracts and options (other
than options that the Portfolio has purchased) expose the Portfolio to an
obligation to another party. The Portfolio will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies, or other options, futures contracts or forward
contracts, or (2) cash, receivables and short-term debt securities with a value
sufficient at all times to cover its potential obligations not covered as
provided in (1) above. The Portfolio will comply with Securities and Exchange
Commission the ("Commission") guidelines regarding cover for these instruments
and, if the guidelines so require, set aside cash, U.S. Government securities or
other liquid, high grade debt securities in a segregated account with its
custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding forward contract, futures contract or option
is open, unless they are replaced with other appropriate assets. As a result,
the commitment of a large portion of the Portfolio's assets to cover or
segregated accounts could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
LENDING 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 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. During the existence of a loan,
the Portfolio will continue to receive the equivalent of the interest paid by
the issuer on the securities loaned and will also receive a fee or all of a
portion of the interest on investment of the collateral, if any. However, the
Portfolio may pay lending fees to such borrowers. The Portfolio would not have
the right to vote any securities having voting rights during the existence of a
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or the giving or withholding of their consent on
a material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovery or even loss of rights in the securities
loaned if the borrower of the securities fails financially. However, the loans
would be made only to organizations deemed by the Portfolio's management to be
of good standing and when, in the judgment of the Portfolio's management, the
consideration which can be earned from securities loans of this type justifies
the attendant risk. Securities lending involves administration expenses,
including finders' fees. The financial condition of the borrower will be
monitored by the Investment Adviser on an ongoing basis. If the Investment
Adviser determines to make securities loans, it is not intended that the value
of the securities loaned would exceed 30% of the Portfolio's total assets. As of
the present time, the Trustees of the Portfolio have not made a determination to
engage in this activity, and have no present intention of making such a
determination during the current fiscal year.
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 once in a period of one year. A high turnover rate (100%
or more) necessarily involves greater expenses to the Portfolio. The Portfolio
engages in portfolio trading (including short-term trading) if it believes that
a transaction including all costs will help in achieving its investment
objective.
Securities may be sold in anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold. In addition, a security may be sold and another
purchased at approximately the same time to take advantage of what the Portfolio
believes to be a temporary disparity in the normal yield relationship between
the two securities. Yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for or supply of various
types of fixed-income securities or changes in the investment objectives of
investors. Such trading may be expected to increase the portfolio turnover rate
and the expenses incurred in connection with such trading.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund 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 SAI 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) With respect to 75% of total assets of the Fund, purchase any security
if such purchase, at the time thereof, would cause more than 5% of the total
assets of the Fund (taken at market value) to be invested in the securities of a
single issuer, or cause more than 10% of the total outstanding voting securities
of such issuer to be held by the Fund, except obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and except securities
of other investment companies;
(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 any security if such purchase, at the time thereof, would cause
more than 25% of the Fund's total assets to be invested in any single industry,
provided that the electric, gas and telephone utility industries shall be
treated as separate industries for purposes of this restriction and further
provided that there is no limitation with respect to obligations issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities.
(6) 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;
(7) Purchase or sell physical commodities or contracts for the purchase or
sale of physical commodities; or
(8) Make loans to any person except by (i) the acquisition of debt
securities and making portfolio investments, (ii) entering into repurchase
agreements or (iii) 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 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.
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 the approval by the Fund's shareholders or may be
changed with respect to the Portfolio by the Trustees of the Portfolio without
the approval by the Fund or its other investors. As a matter of nonfundamental
policy, neither the Fund nor the Portfolio may (a) invest more than 15% of its
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 under the Securities Act of
1933 and commercial paper issued pursuant to Section 4(2) of said Act that the
Board of Trustees of the Trust or the Portfolio, or its delegate, determines to
be liquid; (b) 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; (c) purchase put or call options on
securities only 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 so
invested; (d) purchase warrants in excess of 5% of net assets, of which 2% may
be warrants which are not listed on the New York or American Stock Exchanges;
(e) make short sales of securities or maintain a short position, unless at all
times when a short position is open the Fund owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issuer as, and equal in
amount to, the securities sold short, and unless not more than 25% of the Fund's
net assets (taken at current value) is held as collateral for such sales at any
one time. (The Fund will make such sales only for the purpose of deferring
realization of gain or loss for federal income tax purposes.); (f) 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 the Portfolio or is a member, officer, director or trustee of an
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 or securities together own beneficially more than
5% of such shares or securities or both (all taken at market value); or (g)
purchase oil, gas or other mineral leases or purchase partnership interests in
oil, gas or other mineral exploration or development programs.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset, or describes a policy regarding quality
standards, such percentage limitation or standard shall be determined
immediately after and as a result of the Fund's or the Portfolio's acquisition
of such security or asset. Accordingly, any later increase or decrease resulting
from a change in values, assets or other circumstances, other than subsequent
rating change will not compel the Fund or the Portfolio, as the case may be, to
dispose of such security or other asset. Notwithstanding the foregoing, under
normal market conditions the Portfolio must take actions necessary to comply
with the policy of investing at least 65% of total assets in the lowest
investment grade and lower rated and unrated debt obligations. Moreover, the
Fund and Portfolio must always be in compliance with the borrowing policies set
forth above.
In order to permit the sale of shares of the Fund in certain states, the
Fund may make commitments more restrictive than the 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, a wholly-owned subsidiary of Eaton Vance; of 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 and officers who are "interested persons" of the Trust, the Portfolio,
BMR, Eaton Vance, EVC or EV, as defined in the Investment Company Act of 1940
(the "1940 Act"), by virtue of their affiliation with any one or more of the
Trust, the Portfolio, BMR, Eaton Vance, EVC or EV, are indicated by an
asterisk(*).
TRUSTEES OF THE TRUST AND THE PORTFOLIO
M. DOZIER GARDNER (63), President and Trustee*
President and Chief Executive Officer of BMR, Eaton Vance, EVC and EV, and
Director of EVC and EV. Director, Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
DONALD R. DWIGHT (65), 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
JAMES B. HAWKES (54), Vice President and Trustee*
Executive Vice President of BMR, Eaton Vance, EV and EVC and a Director of EV
and EVC. Director, Trustee and officer of various investment companies managed
by Eaton Vance or BMR. Mr. Hawkes was elected Vice President and Trustee of
the Trust on December 16, 1991.
SAMUEL L. HAYES, III (61), Trustee
Jacob H. Schiff, Professor of Investment Banking, Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard University Graduate School of Business Administration,
Soldiers Field Road, Boston, Massachusetts 02163
NORTON H. REAMER (60), Trustee
President and Director, United Asset Management Corporation, a holding company
owning institutional investment management firms. Chairman, President and
Director, UAM Funds (mutual funds). Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
JOHN L. THORNDIKE (69), 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 (66), 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. (37), 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. Ahern was elected Vice
President of the Trust on June 19, 1995.
H. DAY BRIGHAM, JR., (69) Vice President of the Trust
Chairman of the Management Committee, Vice President of Eaton Vance, BMR, EVC
and EV and Director of EVC and EV. Director, Trustee and officer of various
investment companies managed by Eaton Vance or BMR. Mr. Brigham was elected
Vice President of the Trust on June 19, 1995.
WILLIAM CHISHOLM (35), Vice President of the Portfolio
Senior Trust Officer of The Bank of Nova Scotia Trust Company (Cayman)
Limited. Officer of various investment companies managed by Eaton Vance or
BMR.
Address: The Bank of Nova Scotia Trust Company (Cayman) Ltd., The Bank of Nova
Scotia Building, P.O. Box 501, George Town, Grand Cayman, Cayman Islands,
British West Indies.
MICHAEL WEILHEIMER (35), Vice President of the Portfolio Vice President of Eaton
Vance Management since 1992; employee of Eaton Vance
since November 26, 1990. Mr. Weilheimer was elected Vice President of
Portfolio on December 18, 1995.
SUSAN SCHIFF (35), Vice President of the Portfolio
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR. Ms. Schiff was elected Vice
President of the Trust on February 24, 1992.
JOHN P. RYNNE (54), Assistant Secretary of the Trust
Corporate Controller and Vice President of EVC. Vice President of Eaton Vance,
EVD and BMR, and Treasurer of Energex Energy Corporation. Mr. Rynne was
elected an officer of the Trust on June 19, 1995.
MICHEL NORMANDEAU (44),Vice President of the Portfolio
Assistant Manager -- Trust Services of The Bank of Nova Scotia Trust Company
(Cayman) Limited. Officer of various investment companies managed by Eaton
Vance or BMR.
Address: The Bank of Nova Scotia Trust Company (Cayman) Ltd., The Bank of Nova
Scotia Building, P.O. Box 501, George Town, Grand Cayman, Cayman Islands,
British West Indies. Mr. Normandeau was elected Vice President of the Trust
on June 19, 1995.
RAYMOND O'NEILL (34), Vice President of the Portfolio
Managing Director of IBT Trust and Custodian Services (Ireland) Limited since
January, 1995. Vice President, Atlantic Corporate Management Limited,
Warwick, Bermuda 1991-1994. Officer, The Bank of Bermuda Limited, Hamilton,
Bermuda 1987-1991. Officer of various investment companies managed by Eaton
Vance or BMR. Mr. O'Neill was elected Vice President of the Trust on June
19, 1995.
Address: Earlsfort Terrace, Dublin 2, Ireland
HOOKER TALCOTT (54), Jr., Vice President of the Portfolio Vice President of BMR,
Eaton Vance and EV. Officer of various investment companies managed by Eaton
Vance or BMR.
MICHAEL B. TERRY (53), Vice President of the Trust
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
JAMES L. O'CONNOR (51), Treasurer
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
THOMAS OTIS (64), Secretary
Vice President and Secretary of BMR, Eaton Vance, EV and EVC. Officer of various
investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (60), Assistant Treasurer and Assistant Secretary
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
A. JOHN MURPHY (33), 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). Mr. Murphy was elected Assistant Secretary of
the Trust on March 27, 1995 and of the Portfolio on June 19, 1995.
ERIC G. WOODBURY (39), Assistant Secretary
Vice President of BMR, Eaton Vance and EV since February 1993; formerly
associate attorney at Dechert, Price & Rhoads and Gaston & Snow. Mr. Woodbury
was elected Assistant Secretary of the Trust and Portfolio on June 19, 1995.
Officer of various investment companies managed by Eaton Vance or BMR.
Messrs. Thorndike (Chairman), Hayes and Reamer are members of the Special
Committee of the Board of Trustees of the Trust and of the Portfolio. The
purpose of the Special Committee is to consider, evaluate and make
recommendations to the full Board of Trustees concerning (i) all contractual
arrangements with service providers to the Fund, including administrative
services, transfer agency, custodial, fund accounting and distribution services,
and (ii) all other matters in which Eaton Vance or its affiliates has any actual
or potential conflict of interest with the Fund, its shareholders or the
Portfolio.
The Nominating Commitee is comprised of four Trustees who are not
"interested persons" as that term is defined by the 1940 Act ("noninterested
Trustees"). The Committee has four-year staggered terms, with one member
rotating off the Committee to be replaced by another noninterested Trustee.
Messrs. Hayes (Chairman), Reamer, Thorndike and Treynor are currently serving on
the Committee. The purpose of the Committee is to recommend to the Board
nominees for the position of noninterested Trustee and to assure that at least a
majority of the Board of Trustees is independent of Eaton Vance and its
affiliates.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees of the Trust and of the Portfolio. The Audit Committee's
functions include making recommendations to the Trustees regarding the selection
of the independent public accountants, and reviewing with such accountants and
the Treasurer of the Trust and of the Portfolio matters relative to trading and
brokerage policies and practices, accounting and auditing practices and
procedures, accounting records, internal accounting controls, and the functions
performed by the custodian and transfer agent of the Fund and of the Portfolio.
Trustees of the Portfolio who 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. Neither the Portfolio nor
the Trust has a retirement plan for its Trustees.
The fees and expenses of those Trustees of the Trust and 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. For the compensation earned by the noninterested Trustees of the
Trust and the Portfolio, see "Fees and Expenses" in Part II. Messrs. Chisholm,
Normandeau and O'Neill are not U.S. residents. It may be difficult to effect
service of process within the U.S. or to realize judgments of U.S. courts upon
them. It is uncertain whether courts in other countries would entertain original
actions against them.
INVESTMENT ADVISER AND ADMINISTRATOR
The Portfolio engages BMR as investment adviser pursuant to an Investment
Advisory Agreement dated May 31, 1994. BMR or Eaton Vance acts as investment
adviser to investment companies and various individual and institutional clients
with combined assets under management of over $16 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,
and U.S. Government securities. The equity division covers stocks ranging from
blue chip to emerging growth companies.
Eaton Vance and its affiliates act as adviser to over 150 mutual funds,
individual and various institutional accounts, including corporations,
hospitals, retirement plans, universities, foundations and trusts. Eaton Vance
mutual funds feature international equities, domestic equities, tax-free
municipal bonds, and U.S. government and corporate bonds. Lloyd George
Management, an investment management firm based in Hong Kong, has advised Eaton
Vance's international equity funds since 1992. Lloyd George's staff includes 11
highly qualified investment professionals who manage U.S. $1.3 billion. Lloyd
George analysts cover East Asia, the India subcontinent, Russia and Eastern
Europe, Latin America, Australia and New Zealand from offices in Hong Kong,
London and Mumbai, India. Eaton Vance mutual funds are distributed by Eaton
Vance Distributors both within the United States and offshore. EVC owns 24% of
the Class A shares of Lloyd George Management (B.V.I.) Limited, a registered
investment adviser.
Eaton Vance Distributors believes that an investment professional can
provide valuable services to you to help you reach your investment goals.
Meeting investment goals requires time, objectivity and investment savvy. Before
making an investment recommendation, a representative can help you carefully
consider your short-term and long-term financial goals, your tolerance for
investment risk, your investment time frame, and other investments you may
already own. Your professional investment representatives are knowledgeable
about financial markets, as well as the wide range of investment opportunities
available. A representative can help you decide when to buy, sell of persevere
with your investments. A professional investment representative can provide you
with tailored financial advice.
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.
The Investment Advisory Agreement with BMR remains in effect until February
28, 1997. It may be continued indefinitely thereafter so long as such
continuance after February 28, 1997 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.
IBT Trust Company (Cayman), Ltd. maintains the Portfolio's principal
office and certain of its records and provides administrative assistance in
connection with meetings of the Portfolio's Trustees and interestholders.
As indicated in the Prospectus, Eaton Vance serves as Administrator of the
Fund, but currently receives no compensation for providing administrative
services to the Fund. Under its Administrative Services 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. For additional information about the
Administrator, see "Fees and Expenses" in Part II.
The Fund pays all of its own expenses including, without limitation, (i)
expenses of maintaining the Fund and continuing its existence, (ii) its pro rata
share of 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.
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 June 30, 1996, 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. Brigham, Gardner, Dwight,
Hayes, Reamer, Thorndike, Hawkes and Treynor are officers or Trustees of the
Trust and/or the Portfolio and are members of the EVC, BMR, Eaton Vance and EV
organizations. Messrs. Ahern, Chisholm, Normandeau, O'Neill, Otis, Murphy,
O'Connor, Talcott, Terry and Woodbury and Ms. Sanders are officers of the Trust
and/or the Portfolio and are also members of the BMR, Eaton Vance and EV
organizations. BMR will receive the fees paid under the Investment Advisory
Agreement.
EVC owns all of the stock of Energex Corporation, which engages in oil and
gas exploration and development. In addition, Eaton Vance owns all the stock of
Northeast Properties, Inc., which is engaged in real estate investment. EVC owns
all the stock of Fulcrum Management, Inc. and MinVen, Inc., which are engaged in
the precious metal mining venture investment and management. EVC, BMR, Eaton
Vance 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, IBT. 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
IBT, 89 South Street, Boston, Massachusetts 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 and has custody of all the Portfolio's
assets. Its subsidiary, IBT Fund Services (Canada) Inc., One First Canadian
Place, King Street West, Toronto, Ontario, Canada, 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 its
capacity as custodian, IBT 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. A
portion of the fee relates to custody, bookkeeping and valuation services and is
based upon a percentage of the Fund and Portfolio net assets, and a portion of
the fee relates to activity charges, primarily the number of portfolio
transactions. These fees are then reduced by a credit for cash balances of the
particular investment company at the custodian equal to 75% of the 91-day, U.S.
Treasury Bill auction rate applied to the particular investment company's
average daily collected balances for the week. Landon T. Clay, a Director of EVC
and an officer, Trustee or Director of other members of the Eaton Vance
organization, owns approximately 13% of the stock of Investors Financial
Services Corp., the holding company parent of IBT. Management believes that such
ownership does not create an affiliated person relationship between the Fund or
Portfolio and IBT under the Investment Company Act of 1940.
SERVICE FOR WITHDRAWAL
By a standard agreement, the Trust's Transfer Agent will send to the
shareholder regular monthly or quarterly payments of any permitted amount
designated by the shareholder (see "Eaton Vance Shareholder Services --
Withdrawal Plan" in the Fund's Prospectus) based upon the value of the shares
held. The checks will be drawn from share redemptions and, hence, are a return
of principal. 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. A shareholder may not have a withdrawal plan in effect at the same time
he/she has authorized Bank Automated Investing or is otherwise making regular
purchases of Fund shares. 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 Fund Services (Canada) Inc. (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.
The Portfolio's net asset value is computed by subtracting the liabilities
of the Portfolio from the value of its total assets. Fixed-income securities
(other than short-term obligations), including listed securities and securities
for which price quotations are available, will normally be valued on the basis
of market valuations furnished by a pricing service. The pricing service uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities, various relationships between
securities, and yield to maturity in determining value. Securities listed on
securities exchanges or in the NASDAQ National Market are valued at closing sale
prices. Unlisted or listed securities for which closing sale prices are not
available are valued at the mean between the latest bid and asked prices.
Short-term obligations maturing in sixty days or less are valued at amortized
cost, which approximates market. Other assets are valued at fair value using
methods determined in good faith by the Trustees.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each day 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. Each investor's percentage of the aggregate interest
in the Portfolio will then be recomputed as a percentage equal to a 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
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 result. The
calculation assumes that all distributions are reinvested at net asset value on
the reinvestment dates during the period, and a complete redemption of the
investment and, if applicable, the deduction of a CDSC at the end of the period.
For further information regarding the total return of the Fund, see "Performance
Information" in the Fund's Part II.
Yield is computed pursuant to a standardized formula by dividing net
investment income per share earned during a recent thirty-day period by the
maximum offering price (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 and from dividends from
equity securities based on stated annual rates, exclusive of special or extra
distributions, 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 CDSC which are imposed upon certain
redemptions at the rates set forth under "How to Redeem Fund Shares" in the
Fund's current Prospectus. For information concerning the yield of the Fund, see
"Performance Information" in the Fund's Part II.
The Principal Underwriter may also publish to Authorized Firms the Fund's
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 (the days in a year divided by the accrual days of the monthly period)
used to annualize the most recent monthly 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. Investors should note that 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 and from dividends
from equity securities based on stated annual rates, exclusive of special or
extra distributions, (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.
The Fund's total return may be compared to related indices, such as the
Consumer Price Index, the Bond Buyer 25 Revenue Bond Index and the Lehman
Brothers Municipal Bond Index which 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.
The Fund may provide information about Eaton Vance, its affiliates and other
investment advisers to the funds in the Eaton Vance Family of Funds in sales
material or advertisements provided to investors or prospective investors. Such
material or advertisements may also provide information on the use of investment
professionals by such investors.
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.
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. Information, charts and illustrations relating to inflation and
the effects of inflation on the dollar may be included in advertisements and
other material furnished to present and prospective shareholders.
Information, charts and illustrations showing comparative historical
information of high-yielding bonds as represented by The First Boston High Yield
Index over 10-year U.S. Treasury bonds may be used in advertisements and other
material furnished to present or prospective shareholders. The First Boston High
Yield Index is an unmanaged index of 713 high-yielding securities. The principal
and interest of U.S. Treasury bonds are guaranteed by the United States
Government, while high yield bonds, sometimes referred to as "junk bonds", are
of lower quality than investment-grade bonds and U.S. Government securities.
Rates are given for illustrative purposes only and are not meant to imply or
predict actual results of an investment in the Fund.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
-- cost associated with aging parents;
-- funding a college education (including its actual and estimated
cost);
-- health care expenses (including actual and projected expenses);
-- long-term disabilities (including the availability of, and coverage
provided by, disability insurance); and
-- retirement (including the availability of social security benefits,
the tax treatment of such benefits and statistics and other
information relating to maintaining a particular standard of living
and outliving existing assets).
Such information may also address different methods for saving money and the
results of such methods, as well as the benefits of investing in bond funds.
The Fund may provide information about Eaton Vance, its affiliates and other
investment advisers to the funds in the Eaton Vance Family of Funds in sales
material or advertisements provided to investors or prospective investors. Such
material or advertisements may also provide information on the use of investment
professionals by such investors.
TAXES
See "Distributions and Taxes" in the Fund's current Prospectus.
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
qualify each year, as a regulated investment company under the Internal Revenue
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 on the Fund. The Fund so qualified for its fiscal year ended March
31, 1996 (see the Notes to the Financial Statements incorporated, reference in
this SAI). 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 and
tax-exempt (if any) 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 (or be deemed to have distributed) by December 31 of each calendar
year at least 98% of its ordinary 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. Under current law,
provided that the Fund qualifies as a RIC for federal income tax purposes and
the Portfolio is treated as a partnership for Massachusetts and federal tax
purposes, neither the Fund nor the Portfolio is liable for any income, excise or
franchise tax in the Commonwealth of Massachusetts.
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 have to limit its activities in options,
futures contracts and forward contracts in order to enable the Fund to maintain
its qualification as a RIC.
The Portfolio may be subject to foreign withholding or other foreign taxes
with respect to income (possibly including, in some cases, capital gains) on
certain foreign securities. These taxes may be reduced or eliminated under the
terms of an applicable U.S. income tax treaty in some cases. As it is not
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 of the Fund will consist of securities issued by foreign
corporations, the Fund will not be eligible to pass through to shareholders
their proportionate share of any foreign tax credits or deductions for foreign
taxes paid by the Portfolio and allocated to the Fund. Certain foreign exchange
gains and losses realized by the Fund will be treated as ordinary income and
losses. Certain uses of foreign currency and foreign currency options, futures
and forward contracts 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 seek 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 and certain 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
and, 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.
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.
Any loss realized upon the sale or exchange of shares of the Fund 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 treated as 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.
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares at the rate of $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.
Special tax rules apply to Individual Retirement Accounts ("IRAs") and to
other retirement plans, and persons investing through such plans should consult
their tax advisers for more information. The deductibility of contributions to
IRAs 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 certifications required by the Internal Revenue Service (the "IRS"), as
well as shareholders with respect to whom the Fund has received notification
from the IRS 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, foreign corporations and certain other
foreign 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 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 Authorized Firms or investors and other
selling literature and of advertising is 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. For the amount
paid to the Principal Underwriter for acting as repurchase agent, see "Fees and
Expenses" in Part II.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the broker-dealer firm, are made by
Eaton Vance. Eaton Vance 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 broker-dealer firms. BMR
uses its best efforts to obtain execution of portfolio security transactions at
prices which are advantageous to the Portfolio and (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 general execution
and operational capabilities of the broker-dealer, the nature and character of
the market for the security, the confidentiality, speed and certainty of
effective execution required for the transaction, the reputation, reliability,
experience and financial condition of the broker-dealer, the value and quality
of services rendered by the broker-dealer in other transactions, and the
reasonableness of the commission or spread, if any. Transactions on United
States stock exchanges and other agency transactions involve the payment by the
Portfolio of negotiated brokerage commissions. Such commissions vary among
different broker-dealer firms, and a particular broker-dealer may charge
different commissions according to such factors as the difficulty and size of
the transaction and the volume of business done with the broker-dealer.
Transactions in foreign securities usually involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid or received by the Portfolio
usually includes an undisclosed dealer markup or markdown. In an underwritten
offering, the price paid by the Portfolio often includes a disclosed fixed
commission or discount retained by the underwriter or dealer. Although
commissions paid 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
broker-dealers who were selected to execute transactions on behalf of the
Portfolio and BMR's other clients in part 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 in the investment advisory industry for 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-dealers 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,
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 to
execute portfolio security transactions at advantageous prices and at reasonably
competitive commission rates or spreads, BMR is authorized to consider as a
factor in the selection of any broker-dealer 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 Eaton Vance or its
affiliates. BMR or Eaton Vance will attempt to allocate equitably portfolio
security transactions among the Portfolio and the portfolios of its other
investment accounts 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 that the benefits
available from the BMR organization outweigh any disadvantage that may arise
from exposure to simultaneous transactions.
OTHER INFORMATION
The Trust changed its name from Eaton Vance Government Obligations Trust on
July 10, 1995. On August 1, 1995, the Fund was reorganized as a series of the
Trust. Prior thereto, the Fund was a series of Eaton Vance High Income Trust.
Eaton Vance, pursuant to its agreement with the Trust, controls the use of the
words "Eaton Vance" and "EV" in the Fund's name and may use the words "Eaton
Vance" and "EV" in other connections and for other purposes.
The Trust's Declaration of Trust may be amended by the Trustees when
authorized by vote of a majority of the outstanding voting securities of the
Trust, 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 will 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.
The Trust is organized as a Massachusetts business trust. As permitted by
Massachusetts law, there will normally be no meetings of shareholders for the
purpose of electing Trustees of the Trust 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
shareholder's 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 office 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 holding
office have been elected by investors. In such an event the Trustees of the
Portfolio 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 right to redeem shares of the Fund can be suspended and the payment of
the redemption price deferred when 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 SEC, or during any emergency as
determined by the SEC which makes it impracticable for the Portfolio to dispose
of its securities or value its assets, or during any other period permitted by
order of the SEC for the protection of investors.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, are the
independent certified public accountants of the Fund and the Portfolio,
respectively, providing audit services, tax return preparation, and assistance
and consultation with respect to the preparation of filings with the SEC.
Deloitte & Touche, Grand Cayman, Cayman Islands, British West Indies, are the
independent certified public accountants of the Portfolio.
FINANCIAL STATEMENTS
The financial statements of the Fund and the Portfolio, which are included
in the Fund's Annual Report to Shareholders, are incorporated by reference into
this Statement of Additional Information and have been so incorporated in
reliance on the report of Deloitte & Touche LLP and Deloitte & Touche,
independent certified public accountants, as experts in accounting and auditing.
A copy of the Fund's most recent Annual Report accompanies this SAI.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
This Part II provides information about EV MARATHON HIGH INCOME FUND. The
Fund became a series of the Trust on August 1, 1995.
FEES AND EXPENSES
INVESTMENT ADVISER
As at March 31, 1996, the Portfolio had net assets of $511,347,139. For the
fiscal year ended March 31, 1996, the Portfolio paid BMR advisory fees of
$3,094,793 (equivalent to 0.63% of the Portfolio's average daily net assets for
such period). For the period from the Portfolio's start of business, June 1,
1994 to March 31, 1995, the Portfolio paid BMR advisory fees of $2,260,748
(equivalent to 0.64% (annualized) of the Portfolio's average daily net assets
for such period.
DISTRIBUTION PLAN
During the fiscal year ended March 31, 1996, the Principal Underwriter paid
to Authorized Firms sales commissions of $2,817,575 on sales of Fund shares.
During the same period, the Fund made sales commissions under the Plan to the
Principal Underwriter aggregating $3,601,214, and the Principal Underwriter
received $1,715,000 in CDSCs imposed on early redeeming shareholders. These
sales commissions and CDSC payments reduced Uncovered Distribution Charges under
the Plan. As at March 31, 1996 the outstanding Uncovered Distribution Charges of
the Principal Underwriter calculated under the Plan amounted to approximately
$15,354,000 (which amount was equivalent to 3.1% of the Fund's net assets on
such date). During the fiscal year ended March 31, 1996, the Fund paid or
accrued service fee payments under the Plan aggregating $793,318 to the
Principal Underwriter. The Principal Underwriter paid $788,655 as service fees
to Authorized Firms, the balance retained by the Principal Underwriter.
PRINCIPAL UNDERWRITER
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares at the rate of $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.
For the fiscal year ended March 31, 1996, the Fund paid the Principal
Underwriter $9,342.50 for repurchase transactions handled by the Principal
Underwriter (being $2.50 for each such transaction).
BROKERAGE COMMISSIONS
For the fiscal year ended March 31, 1996, the Portfolio paid no brokerage
commissions on portfolio transactions. During the period from June 1, 1994, to
March 31, 1995 (when the Fund transferred its assets to the Portfolio in
exchange for an interest in the Portfolio), the Fund paid brokerage commissions
of $3,684 on portfolio security transactions, of which $569 was paid in respect
of portfolio security transactions aggregating approximately $206,198. During
the Fund's fiscal year ended March 31, 1994, the Fund paid brokerage commissions
of $5,466 on portfolio security transactions. Of the total brokerage commissions
of $5,466 paid during the fiscal year ended March 31, 1994, approximately $5,466
was paid in respect of portfolio security transactions aggregating approximately
$1,819,100 to firms which provided some research services to Eaton Vance
(although many of such firms may have been selected in any particular
transaction primarily because of their execution capabilities).
TRUSTEES
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 of the Portfolio who are members of
the Eaton Vance organization receive no compensation from the Fund or the
Portfolio.) During the fiscal year ended March 31, 1996, the noninterested
Trustees of the Trust and the Portfolio earned the following compensation in
their capacities as Trustees from the Fund, the Portfolio and the other funds in
the Eaton Vance fund complex(1):
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM TRUST AND
NAME FROM FUND FROM PORTFOLIO FUND COMPLEX
- ---- ------------ -------------- -----------
<S> <C> <C> <C>
Donald R. Dwight ............................................... $680 $3,740(2) $137,500(4)
Samuel L. Hayes, III ........................................... 633 3,693(3) 153,750(5)
Norton H. Reamer ............................................... 631 3,662 137,500
John L. Thorndike .............................................. 639 3,774 142,500
Jack L. Treynor ................................................ 684 3,869 142,500
<FN>
- ----------
(1) The Eaton Vance fund complex consists of 219 registered investment companies or series thereof.
(2) Includes $1,253 of deferred compensation.
(3) Includes $1,272 of deferred compensation.
(4) Includes $35,313 of deferred compensation.
(5) Includes $37,500 of deferred compensation.
</TABLE>
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 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 by the Fund to the Principal Underwriter pursuant to the
Plan as sales commissions and distribution fees 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 by the Fund is limited to
1/365 of .75% of the Fund's net assets on such day. The level of the Fund's net
assets 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,
the expenses of the Fund and the Portfolio accrued and allocated to the Fund on
such day, income on portfolio investments of the Portfolio accrued and allocated
to the Fund on such day, and any dividends and distributions declared on Fund
shares. 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 CDSCs 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.
CDSCs and accrued amounts will be paid by the Fund to the Principal Underwriter
whenever there exist Uncovered Distribution Charges under the Plan.
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.
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 or payable
under the Plan by the Fund to the Principal Underwriter and contingent deferred
sales charges theretofore paid or 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.
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 CDSC will be imposed, the level and timing of redemptions of Fund shares upon
which no CDSC will be imposed (including redemptions involving exchanges of Fund
shares for shares of another fund in the Eaton Vance Marathon Group of Funds
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.
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. For the sales commission and service fee
payments made by the Fund and the outstanding Uncovered Distribution Charges of
the Principal Underwriter, see "Fees and Expenses -- Distribution Plan". The
Fund believes that the combined rate of all of these payments may be higher than
the rate of payments made under distributions 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 CDSCs 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, including CDSCs 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.
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 Rule 12b-1 Trustees. The Plan continues in effect through and
including April 28, 1997, and will continue in effect indefinitely thereafter
for so long as such continuance is approved at least annually by the vote of
both a majority of (i) 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 agreement related to the Plan (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 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 will
provide to the Trustees for their review, and the Trustees will 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 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 will be committed to the discretion of the Trustees who are not
such interested persons.
The Trustees of the Trust believe that the Plan will be 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 of the
Trust have determined that in their judgment there is a reasonable likelihood
that the Plan will benefit the Fund and its shareholders.
PERFORMANCE INFORMATION
The table below indicates the cummulative and average annual total return on
a hypothetical investment of $1,000 in the Fund covering the life of the Fund
from August 19, 1986, through March 31, 1996 and for the five and one-year
periods ended March 31, 1996.
<TABLE>
<CAPTION>
VALUE OF A $1,000 INVESTMENT
VALUE BEFORE VALUE AFTER TOTAL RETURN TOTAL RETURN
DEDUCTING DEDUCTING BEFORE DEDUCTING CDSC AFTER DEDUCTING CDSC
INVESTMENT INVESTMENT AMOUNT OF THE CDSC THE CDSC ------------------------ ------------------------
PERIOD DATE INVESTMENT ON 3/31/96 ON 3/31/96 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of
the Fund* 8/19/86 $1,000 $2,237.10 $2,237.10 123.71% 8.73% 123.71% 8.73%
5 Years
Ended 3/31/96 3/31/91 $1,000 $1,998.92 $1,978.92 99.89% 14.86% 97.89% 14.63%
1 Year
Ended 3/31/96 3/31/95 $1,000 $1,128.05 $1,078.05 12.80% 12.80% 7.80% 7.80%
</TABLE>
For the thirty-day period ended March 31, 1996, the yield of the Fund was
9.87%.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of June 28, 1996, 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
June 28, 1996, Merrill Lynch, Pierce, Fenner & Smith, Inc., New Brunswick, NJ
was the record owner of approximately 24.84% 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 owned of record or beneficially
5% or more of the Fund's outstanding shares as of such date.
<PAGE>
[LOGO: EATON VANCE]
EV MARATHON
HIGH INCOME
FUND
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1996
EV MARATHON
HIGH INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
- --------------------------------------------------------------------------------
INVESTMENT ADVISER OF HIGH INCOME PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV MARATHON HIGH 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, 89 South Street, Boston, MA 02111
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, MA 02110
M-HISAI
<PAGE>
TO SHAREHOLDERS
EV Marathon High Income Fund had a total return of +12.8% for the year ended
March 31, 1996. This was the result of a rise in net asset value per share to
$7.10 on March 31, 1996, from $6.92 on March 31, 1995, and the reinvestment of
$0.675 per share in dividends, and does not include contingent deferred sales
charges incurred by certain redeeming shareholders. The Lehman Brothers High
Yield Bond Index, an unmanaged index of corporate bonds, returned 14.5% for the
same period.
Based on the Fund's most recent dividend and a net asset value of $7.10, the
Fund had a distribution rate of 9.34% at March 31.
FLUCTUATING INTEREST RATES LED TO A VOLATILE MARKET, BUT HIGH-YIELD BONDS
POSTED SOLID RETURNS...
The bond market has been unusually volatile the past year, a result of the
on-again, off-again nature of rancorous budget negotiations and mixed economic
signals. As a measure of changing market conditions, 10-year Treasury yields\+/,
which stood at 7.2% in March 1995, declined to 5.6% at year-end as the Federal
Reserve lowered interest rates in response to weak economic data. However,
spurred by isolated signs of inflation, rates were again on the rise early in
1996. By March, 1996, 10-year Treasury yields had climbed to 6.3%.
\+/High yield bonds carry a higher degree of investment risk, while the
principal and interest of Treasury issues are guaranteed by the U.S.
government. High yield bonds are considered speculative because they present
greater risks of price volatility and default.
HIGH INCOME PORTFOLIO: RATINGS
BREAKDOWN OF BOND HOLDINGS*
NON-
RATED OTHER Aaa Ba B1 B2 B3 Caa
3.3% 1.7% 3.5% 5.4% 12.9% 25.5% 40.5% 7.2%
*Moody's Investors Service ratings; percentages based on market value as of
March 31, 1996. Source: Eaton Vance Management.
A GOOD CLIMATE AHEAD FOR HIGH-YIELD BONDS...
A projected slow-growth economy should provide a very good climate for the
high-yield market, although there is naturally no guarantee of future trends. In
the pages that follow, portfolio manager Hooker Talcott, Jr. provides his
insights into the year just ended, and suggests what may lie ahead for high
yield bond investors.
Sincerely,
[Photo of M. Dozier Gardner]
/s/ M. Dozier Gardner
M. Dozier Gardner
President
May 19, 1996
<PAGE>
MANAGEMENT DISCUSSION
An interview with Hooker Talcott Jr., Vice President and Portfolio Manager of
High Income Portfolio.
Q. HOOKER, WHAT'S YOUR ASSESSMENT OF THE HIGH-YIELD MARKET DURING THE
PAST YEAR?
A. The high-yield market naturally reflected some of the volatility of the
Treasury market. In addition, the high-yield segment felt the impact of
supply pressures as a huge volume of new issuance came to market.
Interestingly, the wave of new supply was met with strong demand from
yield-oriented investors. So the market remained generally in balance from a
supply-and-demand perspective.
Q. WITH THAT AS A BACKDROP, WHAT DROVE THE FUND'S PERFORMANCE?
A. Considering the volatility, the Fund fared quite well. As I've indicated in
past reports, the Fund benefits in periods of volatility from being
positioned well away from the Treasury yield curve. That is, the high
coupons of the high-yield sector makes them less responsive to changes in
interest rates. In addition, given the contradictory messages sent by the
economy, the Fund clearly benefited from having maintained a good balance
between defensive issues and those that are more economically sensitive.
Q. YOU INDICATED THAT THE HIGH-YIELD SECTOR HAS WITNESSED A GOOD DEAL OF NEW
ISSUANCE IN THE PAST YEAR. WHAT ARE THE DIMENSIONS?
A. In the first quarter of 1996
alone, new high-yield issuance
totalled $17.6 billion dollars.
That is well ahead of the pace
set in 1995, when new issuance Hooker Talcott, Jr.
was the second highest on
record. The single largest
source of new issuance - around
50% in the past six months - has
been in the telecommunications
and cable sector, an [Photo of Hooker Talcott, Jr.]
increasingly significant
component of the Portfolio.
Q. WHAT'S BEHIND THE SURGE IN FINANCING ACTIVITY BY THE TELECOMMUNICATIONS
SECTOR?
A. The telecommunications sector is very capital-intensive. The pace of
technological and regulatory change in the sector has prompted many
companies to increase their financing efforts for capital expenditures and
the build-out of systems, as well as to purchase transmission spectrum at
auction. The passage by Congress of telecom legislation in February of this
year unleashed a wave of deregulation that has companies scrambling to enter
related fields that were previously off-limits. As a result, cable
operators, paging service companies, wireless companies and assorted media
companies have greatly increased their exposure to the high-yield market.
Q. RECENT ECONOMIC REPORTS SUGGEST THAT THE ECONOMY MAY NOT BE AS WEAK AS MANY
FEARED SOME MONTHS AGO. WHAT EFFECT MIGHT AN UPTICK IN THE ECONOMY HAVE ON
THE FUND?
A. The Fund is well-positioned to benefit from a stronger-than-expected
economy. Interestingly, there was talk for many months about a "soft
landing." As it turns out, the economy has barely landed at all. And that is
certainly a good sign for the high-yield segment of the market. A
slow-growth economy enables high-yield issuers - especially some of the more
cyclical companies found in the Portfolio - to grow their earnings and cash
flows, strengthen their balance sheets and possibly to realize an
improvement in credit quality.
Q. CAN YOU GIVE SOME EXAMPLES OF THE PORTFOLIO'S CYCLICAL HOLDINGS?
A. Yes. Among the cyclical sectors, we've maintained a fairly large exposure to
paper and forest products, steel companies, and energy. For example, one
large holding, Stone Container, is among the industry leaders in the
production of container board and corrugated containers. A stronger economy
results in more shipments by manufacturers and increased demand for
corrugated containers.
Steel companies, like Republic Engineered Steel, took on a good deal of debt
in recent years to modernize plants and become increasingly competitive with
global producers. That has paid off handsomely, as the companies now operate
more efficiently and will be better positioned to withstand the next
down-cycle. Finally, we've increased our commitments to the energy group,
through exploration companies like Chesapeake Energy Corp. and Trans Texas
Gas Corp. Energy prices have firmed recently with growing global economic
demand, falling inventories, and the failure of Iraqi supply to come to
market. Rising prices have improved the outlook for oil and gas exploration
companies.
Q. HOOKER, IN YOUR VIEW, WHAT IS THE OUTLOOK FOR THE HIGH-YIELD MARKET?
A. While the market has clearly been strong in the past year and there is some
uncertainty as to the course of the economy, the outlook for the high-yield
market remains positive. As I indicated earlier, heavy supply has received
an enthusiastic reception from investors. Naturally, past trends cannot
guarantee future results, but history has shown the high-yield sector as a
source of good, long-term investment opportunity.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN EV MARATHON
HIGH INCOME FUND (INCLUDING SALES CHARGE) AND THE LEHMAN BROTHERS HIGH YIELD
BOND INDEX
From August 31, 1986, through March 31, 1996
----------------------------------------------
AVG. ANNUAL 1 5 LIFE OF
RETURNS YEAR YEAR FUND*
----------------------------------------------
With CDSC 7.8% 14.6% 8.7%
Without CDSC 12.8% 14.9% 8.7%
----------------------------------------------
date M. High Income Lehman High Yield
8/86+ 10000 10000
9/86 9940 10120
10/86 10287 10355
11/86 10393 10327
12/86 10426 10297
1/87 10718 10723
2/87 10977 10951
3/87 11093 11026
4/87 10875 10642
5/87 10781 10719
6/87 10904 10856
7/87 10917 10885
8/87 11008 10953
9/87 10791 10608
10/87 10345 10261
11/87 10560 10557
12/87 10689 10811
1/88 10885 11172
2/88 11169 11534
3/88 11261 11414
4/88 11377 11501
5/88 11445 11518
6/88 11620 11686
7/88 11798 11763
8/88 11893 11746
9/88 12015 11894
10/88 12155 12038
11/88 12246 12109
12/88 12433 12166
1/89 12499 12380
2/89 12597 12407
3/89 12565 12310
4/89 12583 12362
5/89 12760 12602
6/89 12908 12758
7/89 12950 12741
8/89 12965 12785
9/89 12947 12570
10/89 12710 12272
11/89 12568 12247
12/89 12574 12267
1/90 12281 12003
2/90 11745 11756
3/90 11542 12064
4/90 11636 12044
5/90 11859 12276
6/90 12093 12573
7/90 12362 12911
8/90 11788 12177
9/90 10982 11288
10/90 10618 10695
11/90 10384 11029
12/90 10253 11091
1/91 10136 11396
2/91 10731 12642
3/91 11214 13387
4/91 12053 13936
5/91 12092 13961
6/91 12489 14374
7/91 12971 14834
8/91 13126 15175
9/91 13405 15386
10/91 13891 15900
11/91 14050 15983
12/91 14184 16213
1/92 14755 16784
2/92 15139 17198
3/92 15499 17411
4/92 15667 17478
5/92 15900 17724
6/92 16119 17891
7/92 16335 18161
8/92 16545 18399
9/92 16649 18586
10/92 16402 18324
11/92 16479 18555
12/92 16708 18767
1/93 16993 19313
2/93 17367 19653
3/93 17578 19906
4/93 17718 20079
5/93 17984 20318
6/93 18333 20745
7/93 18536 20946
8/93 18580 21122
9/93 18565 21177
10/93 18972 21605
11/93 19213 21709
12/93 19535 21978
1/94 19920 22455
2/94 20044 22396
3/94 19386 21550
4/94 19158 21403
5/94 19270 21414
6/94 19317 21481
7/94 19232 21663
8/94 19206 21816
9/94 19206 21817
10/94 19211 21869
11/94 18977 21594
12/94 19182 21752
1/95 19263 22047
2/95 19757 22803
3/95 19872 23049
4/95 20418 23635
5/95 20858 24298
6/95 20881 24460
7/95 21201 24761
8/95 21093 24839
9/95 21234 25144
10/95 21256 25227
11/95 21456 25522
12/95 21841 25923
1/96 22174 26379
2/96 22503 26400
3/96 22416 26382
Past performance is not indicative of future results. Investment returns and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost. Source: Towers Data Systems,
Bethesda, MD. *Investment operations commenced 8/16/86. +Index information is
available only at month-end; therefore, the line comparison begins at the next
month-end following the commencement of the Fund's investment operations.
FUND PERFORMANCE
In accordance with guidelines issued by the Securities and Exchange Commission,
we are including a performance chart that compares your Fund's total return with
that of a broad-based investment index. The lines on the chart represent the
total returns of $10,000 hypothetical investments in EV Marathon High Income
Fund and the unmanaged Lehman Brothers High Yield Bond Index.
THE TOTAL RETURN FIGURES
The blue line on the chart represents the Fund's performance at net asset value.
The Fund's total return figure reflects Fund expenses and transaction costs, and
assumes the reinvestment of income dividends and capital gain distributions.
The black line represents the performance of the Lehman Brothers High Yield Bond
Index, an unmanaged index of high-yield bonds. The Index's total return does not
reflect any commissions or expenses that would be incurred if an investor
individually purchased or sold the securities represented in the Index. It is
not possible to invest in the Index itself.
<PAGE>
EV MARATHON HIGH INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
March 31, 1996
- ------------------------------------------------------------------------------
ASSETS:
Investment in High Income Portfolio, at value (Note 1A)
(identified cost, $501,296,194) $498,601,745
Receivable for Fund shares sold 1,392,963
------------
Total assets $499,994,708
LIABILITIES:
Dividends payable $2,005,199
Payable for Fund shares redeemed 725,369
Payable to affiliate --
Trustees' fees 826
Accrued expenses 297,734
----------
Total liabilities 3,029,128
------------
NET ASSETS for 70,032,517 shares of beneficial
interest outstanding $496,965,580
============
SOURCES OF NET ASSETS:
Paid-in capital $569,306,661
Accumulated distributions in excess of net
investment income (2,044,407)
Accumulated net realized loss on investment and
financial futures transactions
(computed on the basis of identified cost) (67,602,225)
Unrealized depreciation of investments from
Portfolio (computed on the basis of identified
cost) (2,694,449)
------------
Total $496,965,580
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION
PRICE (NOTE 6) PER SHARE
($496,965,580 / 70,032,517 shares of beneficial
interest) $7.10
=====
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS (Continued)
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
For the Year Ended March 31, 1996
- ------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1B):
Income allocated from Portfolio $53,531,485
Expenses allocated from Portfolio (3,400,143)
-----------
Net investment income from Portfolio $50,131,342
Expenses --
Compensation of Trustees not members of the
Administrator's organization (Note 4) $ 3,284
Custodian fee (Note 4) 25,250
Distribution costs (Note 5) 4,394,532
Transfer and dividend disbursing agent fees 371,033
Printing and postage 81,163
Registration costs 59,995
Legal and accounting services 17,472
Miscellaneous 202,674
----------
Total expenses 5,155,403
-----------
Net investment income $44,975,939
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from Portfolio on investment
transactions (identified cost basis) $(5,110,133)
Change in unrealized appreciation of investments 17,157,192
-----------
Net realized and unrealized gain $12,047,059
-----------
Net increase in net assets resulting from
operations $57,022,998
===========
See notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
-----------------------------
1996 1995
-------- --------
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 44,975,939 $ 39,910,197
Net realized loss on investments (5,110,133) (18,301,289)
Change in unrealized
appreciation (depreciation) of
investments 17,157,192 (11,002,226)
------------ ------------
Net increase in net assets
from operations $ 57,022,998 $ 10,606,682
------------ ------------
Distributions to shareholders
(Note 2) --
From net investment income $(44,975,939) $(39,910,197)
In excess of net investment
income (625,821) (1,365,660)
------------ $-----------
Total distributions to
shareholders $(45,601,760) $(41,275,857)
------------ ------------
Transactions in shares of beneficial
interest (Note 3) --
Proceeds from sales of shares $153,699,352 $207,324,262
Net asset value of shares issued
to shareholders in payment of
distributions declared 14,446,691 13,076,279
Cost of shares redeemed (121,772,551) (149,819,353)
------------ ------------
Increase in net assets from
Fund share transactions $ 46,373,492 $ 70,581,188
------------ ------------
Net increase in net assets $ 57,794,730 $ 39,912,013
NET ASSETS:
At beginning of year 439,170,850 399,258,837
------------ ------------
At end of year (including
accumulated distributions in
excess of net investment income
of $2,044,407 and $1,374,513,
respectively) $496,965,580 $439,170,850
============ ============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, beginning of year $ 6.920 $ 7.450 $ 7.480 $ 7.380 $ 6.120
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS:
Net investment income $ 0.665 $ 0.671 $ 0.697 $ 0.767 $ 0.825
Net realized and unrealized gain
(loss) on investments 0.189 (0.507) 0.047 0.170 1.356
------------ ------------ ------------ ------------ ------------
Total income from operations $ 0.854 $ 0.164 $ 0.744 $ 0.937 $ 2.181
------------ ------------ ------------ ------------ ------------
LESS DISTRIBUTIONS:
From net investment income $ (0.665) $ (0.671) $ (0.697) $ (0.767) $ (0.825)
In excess of net investment income (0.009) (0.023) (0.077) (0.070) (0.096)
------------ ------------ ------------ ------------ ------------
Total distributions $ (0.674) $ (0.694) $ (0.774) $ (0.837) $ (0.921)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, end of year $ 7.100 $ 6.920 $ 7.450 $ 7.480 $ 7.380
============ ============ ============ ============ ============
TOTAL RETURN(3) 12.8% 2.51% 10.28% 13.41% 38.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000
omitted) $ 496,966 $ 439,171 $ 399,259 $ 332,854 $ 252,967
Ratio of net expenses to average
daily net assets(1) 1.78% 1.78% 1.82% 2.09% 2.19%
Ratio of net investment income to
average daily net assets 9.38% 9.52% 9.09% 10.31% 12.00%
PORTFOLIO TURNOVER(2) -- 11% 96% 91% 82%
(1)Includes the Fund's share of High Income Portfolio's allocated expenses subsequent to June 1, 1994.
(2)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.
(3)Total return is calculated assuming a purchase at the net asset value on the first day and a sale at the net
asset value on the last day of each period reported. Dividends and distributions, if any, are assumed to be
reinvested at the net asset value on the payable date. Total return is calculated on a non-annualized basis.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
EV Marathon High Income Fund (the Fund) is a diversified series of Eaton Vance
Mutual Funds Trust (the Trust). The Trust is an entity of the type commonly
known as a Massachusetts business trust and 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 High 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
(97.5% at March 31, 1996). The performance of the Fund is directly affected by
the performance of the Portfolio. The financial statements of the Portfolio,
including the portfolio of investments, are included elsewhere in this report
and should be read in conjunction with the Fund's financial statements. The
following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATION -- Valuation of securities by the Portfolio is
discussed in Note 1 of the Portfolio's Notes to Financial Statements which are
included elsewhere in this report.
B. INCOME -- The Fund's net investment income consists of the Fund's pro rata
share of the net investment income
of the Portfolio, less all actual and accrued expenses of
the Fund determined in accordance with generally accepted accounting
principles.
C. FEDERAL TAXES -- The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net
realized gain on investments. Accordingly, no provision for federal income or
excise tax is necessary. At March 31, 1996, the Fund, for federal income tax
purposes, had a capital loss carryover of $62,849,991 which will reduce the
Fund's taxable income arising from future net realized gain 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 carryover will expire on March 31, 1999 ($21,013,203),
2000 ($23,278,421), 2003 ($12,690,352), and 2004 ($5,868,015), respectively.
Additionally, net losses of $4,676,080 attributable to security transactions
and net losses of $39,208 attributable to currency transactions incurred after
October 31, 1995, are treated as arising on the first day of the Fund's next
taxable year.
D. OTHER -- Investment transactions are accounted for on a trade date basis.
E. RECLASSIFICATION -- Certain prior year amounts have been reclassified to
conform to the current year presentation.
F. USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from those estimates.
- ------------------------------------------------------------------------------
(2) DISTRIBUTIONS TO SHAREHOLDERS
The net income of the Fund is determined daily and substantially all of the net
income so determined is declared daily as a dividend to shareholders of record
at the time of declaration. Such daily dividends will be paid monthly.
Distributions of 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 of the Fund or, at the election of the
shareholder, in cash. The Fund distinguishes between distributions on a tax
basis and a financial reporting basis. Generally accepted accounting principles
require that only distributions in excess of tax basis earnings and profits be
reported in the financial statements as a return of capital. Differences in the
recognition or classification of income between the financial statements and tax
earnings and profits which result in over- distributions for financial statement
purposes only are classified as distributions in excess of net investment income
or accumulated net realized gains. Permanent differences between book and tax
accounting relating to distributions are reclassified to paid-in capital.
- ------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
------------------------------
1996 1995
-------- --------
<S> <C> <C>
Sales 21,673,656 29,118,150
Issued to shareholders electing to receive payment of
distributions in Fund shares 2,037,734 1,855,391
Redemptions (17,161,486) (21,060,719)
----------- -----------
Net increase 6,549,904 9,912,822
=========== ===========
</TABLE>
- ------------------------------------------------------------------------------
(4) 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 Trustees of the Fund and the Portfolio
who are not members of EVM's or BMR's organization, officers and Trustees
receive remuneration for their services to the Fund out of such investment
adviser fee. Investors Bank & Trust Company (IBT), serves as custodian of the
Fund and the Portfolio. Prior to November 10, 1995, IBT was an affiliate of
EVM and BMR. 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. No significant credit balances
were used to reduce the Fund's custody fees. Certain of the officers and
Trustees of the Fund and Portfolio are officers and directors/trustees of the
above organizations (Note 5).
- ------------------------------------------------------------------------------
(5) DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Plan requires the Fund to pay
the principal underwriter, Eaton Vance Distributors, Inc. (EVD), amounts equal
to 1/365th of 0.75% of the Fund's daily net assets, for providing ongoing
distribution services and facilities to the Fund. The Fund will automatically
discontinue payments to EVD during any period in which there are no
outstanding Uncovered Distribution Charges, which are equivalent to the sum of
(i) 5% of the aggregate amount received by the Fund for shares sold plus, (ii)
distribution fees calculated by applying the rate of 1% over the prevailing
prime rate to the outstanding balance of Uncovered Distribution Charges of EVD
reduced by the aggregate amount of contingent deferred sales charges (see Note
6) and daily amounts theretofore paid to EVD. The amount payable to EVD with
respect to each day is accrued on such day as a liability of the Fund and,
accordingly, reduces the Fund's net assets. The Fund paid or accrued
$3,601,214 to or payable to EVD for the year ended March 31, 1996,
representing 0.75% (annualized) of average daily net assets. At March 31,
1996, the amount of Uncovered Distribution Charges of EVD calculated under the
Plan was approximately $15,354,000.
In addition, the Plan authorizes the Fund to make payments of service fees
to the Principal Underwriter, Authorized Firms and other persons in amounts
not to exceed 0.25% of the Fund's average daily net assets for each fiscal
year. The Trustees 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 to exceed 0.25% per annum of the Fund's average daily net
assets based on the value of the Fund shares sold by such persons and
remaining outstanding for at least one year. The Fund paid or accrued service
fees to or payable to EVD for the year ended March 31, 1996, in the amount of
$793,318. Service fee payments are made for personal services and/or the
maintenance of shareholder accounts. Service fees paid to EVD and Authorized
Firms 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 officers and Trustees of the Fund are officers or directors of EVD.
- -------------------------------------------------------------------------------
(6) CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge (CDSC) is imposed on any redemption of Fund
shares made within six 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 5% in
the case of redemptions in the first and second year after purchase, declining
one percentage point each subsequent year. No CDSC is levied on shares which
have been sold to the Investment Adviser or its affiliates or to their
respective employees. CDSC is paid to EVD to reduce the amount of Uncovered
Distribution Charges calculated under the Fund's Distribution Plan. If no
Uncovered Distribution Charges exist, the CDSC will be credited to the Fund.
EVD received approximately $1,715,000 of CDSC paid by shareholders for the
year ended March 31, 1996.
- ------------------------------------------------------------------------------
(7) INVESTMENT TRANSACTIONS
Increases and decreases in the Fund's investment in the Portfolio for the year
ended March 31, 1996, aggregated $157,753,700 and $161,770,484, respectively.
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ------------------------------------------------------------------------------
TO THE TRUSTEES AND SHAREHOLDERS OF
EATON VANCE MUTUAL FUNDS TRUST:
We have audited the accompanying statement of assets and liabilities of EV
Marathon High Income Fund (one of the series constituting the Eaton Vance
Mutual Funds Trust) as of March 31, 1996, the related statement of operations
for the year then ended, the statements of changes in net assets for the years
ended March 31, 1996 and 1995 and the financial highlights for each of the
years in the five-year period ended March 31, 1996. These financial
statements and financial highlights are the responsibility of the Trust'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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of EV Marathon High
Income Fund at March 31, 1996, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
BOSTON, MASSACHUSETTS
APRIL 30, 1996
<PAGE>
-------------------------------
HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
(EXPRESSED IN UNITED STATES DOLLARS)
- -------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES - 93.6%
- -------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- -------------------------------------------------------------------------------
AUTOMOTIVE/TRUCK - 4.0%
$6,750,000 JPS Automotive Prod. Corp., Sr. Notes,
11.125%, 6/15/01 $ 6,682,500
3,800,000 Key Plastics, Sr. Notes, 14%, 11/15/99 3,876,000
5,035,000 Motor Wheel Corp., Senior Notes, 11.5%, 3/1/00 5,035,000
5,000,000 Terex Corp., Sr. Secured Notes,
13.75%, 5/15/02(1)
4,968,750
------------
$ 20,562,250
------------
BUILDING PRODUCTS - 3.6%
$8,250,000 Building Materials Corp., Sr. Sub. Notes,
11.75% (0% until 2000), 7/1/04 $ 6,105,000
7,100,000 Overhead Door Corp., Sr. Notes, 12.25%, 2/1/00 7,135,500
1,500,000 Southdown Inc., Sr. Sub. Notes., 10%,
3/1/06(1) 1,500,000
3,600,000 Tarkett International, Sr. Sub. Notes, 9%, 3/1/02 3,744,000
------------
$ 18,484,500
------------
CABLE - 2.3%
$4,200,000 Amer Telecasting, Sr. Disc. Notes 14.5%
(0% until 2000), 8/15/05 $ 2,761,500
3,470,000 Groupe Videotron 10.625%, 2/15/05 3,643,500
5,800,000 International CABLETEL, Inc., Sr. Disc Notes,
11.5% (0% until 2001), 2/1/06(1) 3,277,000
2,400,000 Rogers Comm. Inc., 9.125%, 1/15/06 2,322,000
------------
$ 12,004,000
------------
CHEMICALS - 7.0%
$5,000,000 Agricultural Minerals & Chemicals, Sr. Notes,
10.75%, 9/30/03 $ 5,425,000
4,503,000 GI Holdings, Sr. Discount Notes, 10%, 2/15/06(1) 4,503,000
1,448,000 GI Holdings, Sr. Disc, Notes, 0%, 10/1/98 1,154,780
5,000,000 NL Industries Inc., Sr. Sec. Notes, 11.75%,
10/15/03 5,187,500
4,250,000 NL Industries Inc., Sr. Disc. Notes, 13%
(0% until 1998), 10/15/05 3,187,500
7,850,000 Pioneer Americas Acq., Senior Notes,
13.625%, 4/1/05 8,379,875
3,800,000 Terra Industries Inc., Senior Notes, 10.5%,
6/15/05 4,123,000
3,700,000 UCC Investors, Sr. Sub. Notes, 11%, 5/1/03 3,792,500
------------
$ 35,753,155
------------
COMMUNICATIONS - 19.0%
$2,000,000 Allbritton Comm., Sr. Sub. Notes 9.75%,
11/30/07 $ 1,885,000
4,100,000 Alliance Entertainment Corp., Sr. Sub.
Notes, 11.25%, 7/15/05 4,059,000
4,000,000 Arch Communications, Sr. Disc. Notes,
10.875% (0% until 2001), 3/15/08 2,290,000
6,800,000 Australis Media LTD., Sub Disc. Notes,
14% (0% until 2000), 5/13/03 4,692,000
5,500,000 Brooks Fiber, Sr. Disc. Notes, 10.875%
(0% until 2001), 3/1/06(1) 3,190,000
2,800,000 Cablevision Systems, Sr. Sub. Notes,
9.25%, 11/1/05 2,800,000
2,400,000 Chancellor Broadcasting, Sr. Sub. Notes,
9.375%, 10/1/04 2,268,000
2,900,000 Clark USA, Inc., Senior Notes,
10.875%, 12/1/05(1) 3,030,500
4,480,000 CS Wireless Systems, Inc., 1st Mtg. Notes,
11.375% (0% until 2001), 3/1/06(1) 2,464,000
7,200,000 Dial Call Communications Inc., Sr. Red. Notes,
12.25% (0% until 1999), 4/15/04 4,536,000
8,600,000 Diamond Cable Communications Co.,
Sr. Disc. Notes, 11.75% (0% until 2000),
12/15/05 5,031,000
1,600,000 Diamond Cable Communications Co., Sr. Disc.
Notes, 13.25% (0% until 1999), 9/30/04 1,136,000
4,700,000 EZ Communications Corp, Sr. Sub. Notes,
9.75%, 12/1/05 4,676,500
5,000,000 Galaxy Telecom LP., Sr. Sub. Notes, 12.375%,
10/1/05 5,275,000
4,050,000 Granite Broadcasting Corp., Sr. Sub. Notes,
10.375%, 5/15/05 4,095,563
4,000,000 Heartland Wireless, Senior Notes 13%, 4/15/03(1) 4,420,000
1,600,000 In-Flight Phone Corp., Sr. Disc. Notes, 14%
(0% until 2002), 5/15/02 496,000
8,500,000 Marcus Cable Co., Sr. Disc. Notes, 14.25%
(0% until 2000), 12/15/05 5,440,000
2,800,000 Marcus Cable Co., Senior Debs., 11.875%, 10/1/05 2,982,000
4,875,000 MFS Communications Corp., Sr. Disc. Notes,
8.875% (0% until 2001), 11/15/06 3,022,500
3,200,000 Mobilemedia Corp., Sr. Sub. Notes, 9.375%,
11/1/07 3,136,000
6,500,000 Pricellular Wireless Comm., Sr Sub. Disc.
Nts. 12.25% (0% until 1998), 10/1/03 5,102,500
3,600,000 Sullivan Broadcasting, Sr. Sub. Notes,
10.25%, 12/15/2005(1) 3,564,000
12,153,200 United International Holdings Inc., Sr.
Sec. Disc. Notes, 0%, 11/15/99 7,838,814
8,400,000 Videotron Holdings, Sr. Disc. Notes, 11%
(0% until 2000), 8/15/05 5,334,000
4,000,000 Young Broadcasting Corp., Sr. Sub. Notes,
10.125%, 2/15/05 4,040,000
------------
$ 96,804,377
------------
ENERGY - 5.7%
$2,850,000 El Paso Electric Co., 1st Mtg. Notes,
9.4%, 5/1/11 $ 2,885,625
3,000,000 Gulf Canada Resources Ltd., Sr. Sub. Notes,
9.25%, 1/15/04 3,045,000
6,200,000 MCV Subordinated Secured Lease Obligations,
11.75%, 7/23/05 6,543,418
2,400,000 Mesa Capital Corp., Sec. Disc. Notes,
12.75%, 6/30/98 2,346,000
3,086,036 Midland Cogeneration Venture, Sr. Sec. Lease
Oblig., 10.33%, 7/23/02 3,251,910
3,600,000 Plains Resources, Sr. Sub. Notes, 10.25%,
3/15/06(1) 3,609,000
3,300,000 Trans Texas Gas Corp., Sr. Sec. Notes,
11.5%, 6/15/02 3,250,500
2,420,000 Tuboscope Vetco, Sr. Sub. Debs., 10.75%,
4/15/03 2,528,900
1,450,000 Vintage Petro, Sr. Sub. Notes, 9%, 12/15/05 1,413,750
------------
$ 28,874,103
------------
FOOD/RESTAURANTS/HOTELS - 7.3%
$4,000,000 Courtyard by Marriott, Senior Notes,
10.75%, 2/1/08(1) $ 3,960,000
8,250,000 Flagstar Corp., Sub. Debs., 10.75%, 9/15/01 7,425,000
3,900,000 HMC Acquisition Properties, Senior Notes,
9%, 12/15/07(1) 3,685,500
2,762,000 PM Holdings Corp., 11.5% (0% until 2000), 9/1/05 1,574,340
6,075,000 Purina Mills, Sr. Sec. Sub. Notes,
10.25%, 9/1/03 6,226,875
3,735,000 Seven Up / RC Bottling Co., Sr. Sec. Notes,
11.5%, 8/1/99* 2,241,000
7,000,000 Specialty Foods Corp., Senior Notes, 10.25%,
8/15/01 6,335,000
5,300,000 Van De Kamps, Inc., Sr. Sub. Notes, 12%,
9/15/05 5,671,000
------------
$ 37,118,715
------------
HEALTHCARE - 3.8%
$6,800,000 Dade International Inc., Sr. Sub. Notes,
13%, 2/1/05 $ 7,820,000
6,100,000 Ordna Corp., Sr. Sub. Notes, 11.375%, 8/15/04 6,862,500
1,000,000 Regency Health, Sr. Sub. Notes, 9.875%,
10/15/02 1,015,000
4,000,000 Unilab Corp., Senior Notes, 11%, 4/1/06 3,940,000
------------
$ 19,637,500
------------
HIGH TECH - 2.5%
$2,719,000 Blue Bell Funding Inc., Sec. Ext. Notes,
11.85%, 5/1/99 $ 2,583,050
5,500,000 GS Technologies Corp., Senior Notes, 12.25%,
10/1/05 5,527,500
3,000,000 Unisys Corp., Senior Notes, Variable Rates,
7/1/97 3,195,000
1,600,000 Unisys Corp., Senior Notes, 12%, 4/15/03(1) 1,581,232
------------
$ 12,886,782
------------
METALS - 3.2%
$3,840,000 Acme Metals Inc., Sr. Notes, 12.5%, 8/1/02 $ 3,964,800
4,000,000 Gulf States Steel, First Mtg. Notes,
13.5%, 4/15/03 3,660,000
3,000,000 Kaiser Aluminum, Sr. Sub. Notes, 12.75%,
2/1/03 3,180,000
1,500,000 Maxxam Group Inc., Sr. Sec. Notes, 11.25%,
8/1/03 1,425,000
2,025,000 Republic Engineered Steels Inc., First
Mtg., 9.875%, 12/15/01 1,852,875
2,105,000 Ucar Global Enterprises, Sr. Sub.
Notes, 12%, 1/15/05 2,420,750
------------
$ 16,503,425
------------
MANUFACTURING/MACHINERY - 9.0%
$6,000,000 Applied Extrusion Inc., Senior Notes,
11.5%, 4/1/02 $ 6,210,000
3,300,000 Day International Group, Inc., Sr. Sub.
Notes, 11.125%, 6/1/05 3,415,500
2,250,000 Dictaphone Corp., Sr. Sub. Notes, 11.75%,
8/1/05 2,250,000
3,225,000 Essex Group, Inc., Senior Notes, 10%, 5/1/03 3,257,250
2,850,000 Howmet Corp., Sr. Sub. Notes, 10%, 12/1/03(1) 3,013,875
5,550,000 Monarch Acquisition Corp., Senior Notes,
12.5%, 7/1/03 5,938,500
5,500,000 Newflo Corp., Sub. Notes, 13.25%, 11/15/02 5,775,000
4,750,000 Plastic Specialties & Tech, Sr. Sec. Notes,
11.25%, 12/1/03 4,750,000
2,000,000 RBX Corp., Sr. Sub. Notes, 11.25%, 10/15/05(1) 1,950,000
4,800,000 Shared Tech/Fairchild 12.25% (0% until 1999),
3/1/06(1) 3,408,000
5,250,000 Waters Tech. Corp., Sr. Sub. Notes, 12.75%,
9/30/04 6,273,750
------------
$ 46,241,875
------------
MISCELLANEOUS - 4.5%
$4,000,000 Alliant Tech Systems Inc., Sr. Sub. Notes,
11.75%, 3/1/03 $ 4,400,000
2,400,000 Imax Corp., Senior Notes, 10% (7% until 1997),
3/1/01 2,388,000
4,850,000 Roadmaster Industries Inc., Sr. Sub. Notes,
11.75%, 7/15/02 3,589,000
6,900,000 Selmer Company, Inc., Sr. Sub. Notes, 11%,
5/15/05 7,176,000
5,000,000 Williamhouse-Regency of Del., Sr. Sub. Deb.,
13%, 11/15/05(1) 5,525,000
------------
$ 23,078,000
------------
PAPER/PACKAGING - 7.6%
$2,400,000 Container Corp., Sr. Notes (Ser. B),
10.75%, 5/1/02 $ 2,454,000
3,907,613 Fort Howard Corp., Sr. Sec. Notes,
11%, 1/2/02 4,102,994
4,100,000 Gaylord Container Corp., Sr. Sub. Disc.
Debs., 12.75%, 5/15/05 4,141,000
1,500,000 Portola Packaging Corp., Senior Notes,
10.75%, 10/1/05 1,575,000
3,665,000 Repap Wisconsin, 2nd Party Sr. Sec. Notes,
9.875%, 5/1/06 3,353,475
5,250,000 Riverwood International, Sr. Sub. Notes,
10.875%, 4/1/08 5,236,875
3,000,000 S.D. Warren Company Inc., Sr. Sub. Notes,
12%, 12/15/04 3,165,000
2,500,000 Silgan Corp., Sr. Notes,
13.25%, 12/15/02 2,450,000
1,500,000 Silgan Corp., Sr. Sub. Notes,
11.75%, 6/15/02 1,597,500
4,500,000 Stone Container Corp., First Mtg. Notes,
10.75%, 10/1/02 4,466,250
3,200,000 Stone Container Corp., Sr. Notes, 12.625%,
7/15/98 3,376,000
2,950,000 U.S. Can Company, Sr. Sub. Notes, 13.5%,
1/15/02 3,127,000
------------
$ 39,045,094
------------
RECREATION - 4.0%
$4,000,000 AMF Group, Inc., Sr. Disc. Notes, 10.875%,
3/15/06(1) $ 3,980,000
800,000 AMF Group, Inc., Sr. Disc. Notes, 12.25%
(0% until 2000), 3/15/06(1) 436,000
5,000,000 Aztar Corp., Sr. Sub. Notes, 13.75%, 10/1/04 5,575,000
3,000,000 Trump Holdings & Funding, Senior Notes,
15.5%, 6/15/05 3,435,000
6,558,515 Trump Taj Mahal, First Mtg Bonds, 11.35%
(PIK), 11/15/99 6,894,639
------------
$ 20,320,639
------------
RETAILING - 7.3%
$5,600,000 Apparel Retailers Inc., Sr. Disc. Debs.,
12.75% (0% until 1998), 8/15/05 $ 3,920,000
6,575,000 Brunos, Inc., Sr. Sub. Notes, 10.5%, 8/1/05 6,312,000
4,200,000 Duane Reade, G.P., Sr. Notes, 12%, 9/15/02 3,990,000
2,000,000 Knoll, Inc., Sr. Sub. Notes, 10.875%, 3/15/06(1) 2,040,000
3,050,000 Levitz Furniture Corp., Sr. Sub. Notes,
9.625%, 7/15/03 1,891,000
2,000,000 Pathmark Stores Inc., Jr. Sub., Disc.
Notes, 11.625%, 6/15/02 1,950,000
8,500,000 Pathmark Stores Inc., Jr. Sub., Disc.
Notes, 10.75% (0% until 1999), 11/1/03 5,057,500
2,000,000 Ralphs Grocery Company, Inc., Sr. Sub. Notes,
11%, 6/15/05 1,800,000
5,500,000 Ralphs Grocery Co., Sr. Sub Notes, 13.75%,
6/15/05 5,610,000
4,980,000 Specialty Retailers, Inc., Sr. Sub. Notes,
11%, 8/15/03 4,855,500
------------
$ 37,426,000
------------
TEXTILES - 2.3%
$2,000,000 CMI Industries Inc., Sr. Sub. Notes, 9.5%,
10/1/03 $ 1,580,000
5,800,000 Dan River Inc., Sr. Sub. Notes, 10.125%,
12/15/03 5,510,000
4,500,000 Westpoint Stevens, Sr. Sub. Debs., 9.375%,
12/15/05 4,443,750
------------
$ 11,533,750
------------
TRANSPORTATION - 0.5%
$2,400,000 Alvey Systems Inc., Sr. Sub. Notes 11.375%,
1/31/03(1) $ 2,502,000
------------
TOTAL CORPORATE BONDS AND NOTES
(IDENTIFIED COST, $476,227,065) $478,776,165
------------
- ------------------------------------------------------------------------------
PREFERRED STOCK - 1.2%
- ------------------------------------------------------------------------------
SHARES/
WARRANTS SECURITY VALUE
- ------------------------------------------------------------------------------
40,000 Cablevision Systems Corp.,
11.125% (PIK), 2/15/96 $ 4,000,000
48,000 SD Warren Company W / Warrants, 14%, 12/15/06* 1,488,000
32,000 Terex Corp., 13% CV. Pfd w/warrants(1)* 800,000
------------
TOTAL PREFERRED STOCK
(IDENTIFIED COST, $6,041,600) $ 6,288,000
------------
- ------------------------------------------------------------------------------
COMMON STOCKS, WARRANTS AND RIGHTS - 0.8%
- ------------------------------------------------------------------------------
SHARES/
WARRANTS SECURITY VALUE
- ------------------------------------------------------------------------------
AUTO/TRUCK - 0.3%
214,839 Bucyrus-Erie Company, Common* $ 1,718,712
------------
CHEMICALS - 0.0%
9,908 UCC Invt Hldgs, Cl A Common+* $ 111,465
------------
COMMUNICATIONS - 0.0%
2,600 American Telecasting, Wts.* $ 88,400
7,200 Dial Call Communications, Exp. 4/15/04
Wts.(SD)+ 1,800
1,600 In Flight Phone Corp., Wts. Exp. 8/31/2002+* 0
7,840 United International Hldg. Inc., Wts.
Exp. 11/15/99+* 235,200
------------
$ 325,400
------------
FOOD - 0.0%
1,380 Servam Corp., Common* $ 0
12,276 Servam Corp., $2.00 Wts. Exp. 4/1/2001+* 0
2,760 Servam Corp., $4.50 Wts. Exp. 4/1/2001+* 0
48,000 Specialty Foods Acquisition, Common(1)* 36,000
------------
$ 36,000
------------
INDUSTRIAL - 0.0%
40,000 Thermadyne Holdings Corp., Common+* $ 400
------------
MANUFACTURING - 0.3%
101,973 Pullman Company, Common Stock+* $ 815,784
22,500 Southdown Inc., Wts. Exp. 10/31/96+* 95,625
10,425 Terex Corporation, Rights, Exp. 8/1/96+* 521
5,370 Terex Corporation, Rights Exp. 7/1/97+* 537
32,000 Terex Corp., Wts. Exp. 12/31/00+* 432,000
95,000 Triangle Wire & Cable, Inc., Common+* 190,000
-------------
$ 1,534,467
-------------
METALS - 0.0%
4,000 Gulf States Steel, Wts.(1)* $ 200
------------
MISCELLANEOUS - 0.0%
6,800 Australis Media, Wts.+* $ 0
------------
<PAGE>
PAPER / PACKAGING - 0.0%
48,000 SD Warren Company, Wts. Exp. 12/15/06* $ 216,000
------------
RETAILING - 0.0%
6,000 Waxman Industries, Wts. Exp. 9/1/96+* $ 60
------------
TOTAL COMMON STOCKS, WARRANTS AND RIGHTS
(IDENTIFIED COST, $9,361,823) $ 3,942,704
------------
- ------------------------------------------------------------------------------
SHORT-TERM OBLIGATION -- 3.3%
- ------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- ------------------------------------------------------------------------------
COMMERCIAL PAPER
$16,805,000 Prudential Funding
5.45%, 4/1/96, at amortized cost $ 16,805,000
------------
TOTAL INVESTMENTS (IDENTIFIED COST, $508,435,488) $505,811,869
OTHER ASSETS, LESS LIABILITIES -- 1.1% 5,535,270
------------
NET ASSETS - 100% $511,347,139
============
*Non-income producing security.
+Restricted Security (Note 6).
(1)Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At March 31, 1996,
the value of these securities amounted to $67,444,057 or 13.2% of net assets.
See notes to financial statements
<PAGE>
-------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
March 31, 1996
(Expressed in United States Dollars)
- ------------------------------------------------------------------------------
ASSETS:
Investments, at value (Note 1A) (identified cost,
$508,435,488) $505,811,869
Cash 43,941
Receivable for investments sold 1,702,455
Interest receivable 11,869,419
Deferred organization expenses (Note 1D) 14,292
------------
Total assets $519,441,976
LIABILITIES:
Payable for investments purchased $8,075,666
Payable to affiliate --
Trustees' fees 5,327
Accrued expenses 13,844
----------
Total liabilities 8,094,837
------------
NET ASSETS applicable to investors' interest in Portfolio $511,347,139
============
SOURCES OF NET ASSETS:
Net proceeds from capital contributions and
withdrawals $513,970,758
Unrealized depreciation of investments (computed
on the basis of identified cost) (2,623,619)
------------
Total $511,347,139
============
See notes to financial statements
<PAGE>
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
For the Year Ended March 31, 1996
(Expressed in United States Dollars)
- ------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest income $54,348,850
Expenses --
Investment adviser fee (Note 2) $3,094,793
Compensation of Trustees not members of the
Investment Adviser's organization 18,861
Custodian fee (Note 2) 218,175
Legal and accounting services 91,555
Amortization of organization expenses (Note 1D) 4,186
Miscellaneous 24,628
-----------
Total expenses 3,452,198
-----------
Net investment income $50,896,652
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment transactions
(identified cost basis) $(5,151,523)
Change in unrealized appreciation on investments 17,257,761
-----------
Net realized and unrealized gain on investments $12,106,238
-----------
Net increase in net assets from operations $63,002,890
===========
See notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
(Expressed in United States Dollars)
- ------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
------------------------------------
1996 1995*
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 50,896,652 $ 37,644,090
Net realized loss on investment
transactions (5,151,523) (13,221,664)
Change in unrealized appreciation
(depreciation) of investments 17,257,761 (7,038,030)
------------ -------------
Net increase in net assets from
operations $ 63,002,890 $ 17,384,396
------------ ------------
Capital transactions --
Contributions $172,948,713 $575,199,203
Withdrawals (167,156,279) (150,131,814)
------------ -------------
Increase in net assets
resulting from capital
transactions $ 5,792,434 $425,067,389
------------ ------------
Total increase in net assets $ 68,795,324 $442,451,785
NET ASSETS:
At beginning of year 442,551,815 100,030
------------ ------------
At end of year $511,347,139 $442,551,815
============ ============
*For the period from the start of business, June 1, 1994, to March 31, 1995.
- ------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- ------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
------------------------------------
1996 1995*
----------------- -----------------
RATIOS (As a percentage of average
daily net assets):
Expenses 0.71% 0.70%+
Net investment income 10.41% 10.63%+
PORTFOLIO TURNOVER 88% 53%
+Computed on an annualized basis.
*For the period from the start of business, June 1, 1994, to March 31, 1995.
See notes to financial statements
<PAGE>
-------------------------------
NOTES TO FINANCIAL STATEMENTS
(Expressed in United States Dollars)
(1) SIGNIFICANT ACCOUNTING POLICIES
High Income Portfolio (the Portfolio) is registered under the Investment Company
Act of 1940 as a diversified open-end management investment company which was
organized as a trust under the laws of the State of New York on May 1, 1992. The
Declaration of Trust permits the Trustees to issue interests in the Portfolio.
The following is a summary of significant accounting policies of the Portfolio.
The policies are in conformity with accounting principles generally accepted in
the United States of America.
A. INVESTMENT VALUATIONS -- Investments listed on securities exchanges or in
the NASDAQ National Market are valued at closing sale prices. Listed or
unlisted investments for which closing sale prices are not available are
valued at the mean between the latest bid and asked prices. Fixed income
investments (other than short-term obligations), including listed investments
and investments for which price quotations are available, will normally be
valued on the basis of market valuations furnished by a pricing service.
Financial futures contracts listed on commodity exchanges are valued at
closing settlement prices. Short-term obligations, maturing in sixty days or
less, are valued at amortized cost, which approximates value. Investments for
which there are no quotation or valuation 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,
adjusted for amortization of premium or discount when required for federal
income tax purposes. Dividend income is recorded on the ex-dividend date for
dividends received in cash and/or securities.
C. INCOME TAXES -- The Portfolio has elected to be treated as a partnership
for United States Federal tax purposes. No provision is made by the Portfolio
for federal or state taxes on any taxable income of the Portfolio because each
investor in the Portfolio is ultimately responsible for the payment of any
taxes. Since some of the Portfolio's investors are regulated investment
companies that invest all or substantially all of their assets in the
Portfolio, the Portfolio normally must satisfy the applicable source of income
and diversification requirements (under the Internal Revenue Code), in order
for its investors to satisfy them. The Portfolio will allocate at least
annually among its investors each investor's distributive share of the
Portfolio's net investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit.
D. DEFERRED ORGANIZATION EXPENSES -- Costs incurred by the Portfolio in
connection with its organization are being amortized on the straight-line
basis over five years.
E. FINANCIAL FUTURES CONTRACTS -- Upon the entering of a financial futures
contract, the Portfolio is required to deposit ("initial margin") either in
cash or securities an amount equal to a certain percentage of the purchase
price indicated in the financial futures contract. 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 rates. Should interest
rates move unexpectedly, the Portfolio may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss.
F. USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period.
Actual results could differ from those estimates.
G. OTHER -- Investment transactions are accounted for on a trade date basis.
- ------------------------------------------------------------------------------
(2) INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee is earned by Boston Management and Research (BMR),
a wholly-owned subsidiary of Eaton Vance Management (EVM), as compensation for
management and investment advisory services rendered to the Portfolio. The fee
is based upon a percentage of average daily net assets plus a percentage of
gross income (i.e., income other than gains from the sale of securities). For
the year ended March 31, 1996, the fee was equivalent to 0.63% (annualized) of
the Portfolio's average daily net assets for such period and amounted to
$3,094,793. Except as to Trustees of the Portfolio who are not members of
EVM's or BMR's organization, officers and Trustees receive remuneration for
their services to the Fund out of such investment adviser fee. Investors Bank
& Trust Company (IBT), serves as custodian of the Portfolio. Prior to November
10, 1995, IBT was an affiliate of EVM and BMR. 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. No
significant credit balances were used to reduce the Portfolio's custody fees.
Certain of the officers and Trustees of the Portfolio 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 portion of their annual fees in accordance with the terms of the
Trustee Deferred Compensation Plan. For the year ended March 31, 1996, no
significant amounts have been deferred.
- ------------------------------------------------------------------------------
(3) INVESTMENTS
The Portfolio invests primarily in debt securities. The ability of the issuers
of the debt securities held by the Portfolio to meet their obligations may be
affected by economic developments in a specific industry. Purchases and sales
of investments, other than U.S. Government securities and short-term
obligations, aggregated $459,046,658 and $412,888,560, respectively.
- ------------------------------------------------------------------------------
(4) LINE OF CREDIT
The Portfolio participates with other portfolios and funds managed by BMR and
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 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 funds and
portfolios at the end of each quarter. The Portfolio did not have any
significant borrowings or allocated fees during the year.
- ------------------------------------------------------------------------------
(5) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized depreciation/appreciation in value of the investments
owned at March 31, 1996, as computed on a federal income tax basis, were as
follows:
Aggregate cost $508,435,488
============
Gross unrealized depreciation $ 17,405,536
Gross unrealized appreciation 14,781,917
------------
Net unrealized depreciation $ 2,623,619
============
- -------------------------------------------------------------------------------
(6) RESTRICTED SECURITIES
At March 31, 1996, the Portfolio owned the following securities (constituting
0.4% of net assets) which were restricted as to public resale and not
registered under the Securities Act of 1933 (excluding Rule 144A securities).
The Portfolio has various registration rights (exercisable under a variety of
circumstances) with respect to certain of these securities. The fair value of
these securities is determined based on valuations provided by brokers when
available, or if not available, they are valued at fair value using methods
determined in good faith by or at the direction of the Trustees.
- ------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS, WARRANTS AND RIGHTS
- ----------------------------------
DESCRIPTION DATES OF ACQUISITION SHARES COST FAIR VALUE
- ----------- -------------------- ------ ---- ----------
<S> <C> <C> <C> <C>
Australis Media, Wts. 5/26/95 6,800 $ 0 $ 0
Dial Call Communications, Wts.,
Exp. 4/15/04 10/04/94 7,200 0 1,800
In Flight Phone Corp., Wts., Exp. 8/31/2002 11/28/95 1,600 0 0
Pullman Company, Common Stock 2/22/95 101,973 2,949,328 815,784
Servam Corp., $2.00 Wts., Exp. 4/1/01 12/15/87 12,276 0 0
Servam Corp., $4.50 Wts., Exp. 4/1/2001 12/15/87 2,760 0 0
Southdown Inc., Wts., Exp. 10/31/96 10/28/91 22,500 67,500 95,625
Terex Corp., Rights, Exp. 7/1/97 11/07/94 5,370 0 537
Terex Corp., Rights, Exp. 8/1/96 8/20/92, 7/01/94, 8/02/94 1,125 0 56
Terex Corp., Rights, Exp. 8/1/96 7/24/92 9,300 0 465
Terex Corp., Wts., Exp. 12/31/00 12/15/93 32,000 6,400 432,000
Thermadyne Holdings Corp., Common 4/03/89 40,000 28,800 400
Triangle Wire & Cable Inc., Common 3/17/94 95,000 2,250,000 190,000
UCC Invt. Holdings, Cl. A Common 10/24/86 9,908 9,834 111,465
United International Hldg., Inc., Wts. 10/01/91 7,840 222,186 235,200
Waxman Industries, Wts., Exp. 9/1/96 10/01/91 6,000 6,000 60
---------- ----------
$5,540,048 $1,883,392
========== ==========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
TO THE TRUSTEES AND INVESTORS OF
HIGH INCOME PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of High Income Portfolio as of March
31, 1996, and the related statement of operations for the year then ended and
the statements of changes in net assets and the supplementary data for the
year then ended and for the period from the start of business, June 1, 1994,
to March 31, 1995 (all expressed in United States dollars). These financial
statements and supplementary data are the responsibility of the Portfolio's
management. Our responsibility is to express an opinion on these financial
statements and supplementary data based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 at March 31, 1996 by correspondence with the
custodian and brokers; where replies were not received from brokers we
performed other auditing procedures. 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, such financial statements and supplementary data present
fairly, in all material respects, the financial position of High Income
Portfolio at March 31, 1996, the results of its operations, changes in its net
assets, and its supplementary data for the respective stated periods in
conformity with accounting principles generally accepted in the United States
of America.
DELOITTE & TOUCHE
GRAND CAYMAN, CAYMAN ISLANDS
BRITISH WEST INDIES
APRIL 30, 1996
<PAGE>
INVESTMENT MANAGEMENT
EV MARATHON OFFICERS INDEPENDENT TRUSTEES
HIGH INCOME FUND M. DOZIER GARDNER DONALD R. DWIGHT
24 Federal Street President, Trustee President, Dwight Partners, Inc.
Boston, MA 02110 JAMES B. HAWKES Chairman, Newspapers of
Vice President, Trustee New England, Inc.
H. DAY BRIGHAM, JR. SAMUEL L. HAYES, III
Vice President Jacob H. Schiff Professor of
WILLIAM H. AHERN, JR. Investment Banking, Harvard
Vice President University Graduate School of
MICHAEL B. TERRY Business Administration
Vice President NORTON H. REAMER
JAMES L. O'CONNOR President and Director, United Asset
Treasurer Management Corporation
THOMAS OTIS JOHN L. THORNDIKE
Secretary Director, Fiduciary Company
Incorporated
JACK L. TREYNOR
Investment Adviser and Consultant
- -------------------------------------------------------------------------------
HIGH INCOME OFFICERS INDEPENDENT TRUSTEES
PORTFOLIO M. DOZIER GARDNER DONALD R. DWIGHT
24 Federal Street President, Trustee President, Dwight Partners, Inc.
Boston, MA 02110 JAMES B. HAWKES Chairman, Newspapers of
Vice President, Trustee New England, Inc.
HOOKER TALCOTT, JR. SAMUEL L. HAYES, III
Vice President and Jacob H. Schiff Professor of
Portfolio Manager Investment Banking, Harvard
WILLIAM CHISHOLM University Graduate School of
Vice President Business Administration
RAYMOND O'NEILL NORTON H. REAMER
Vice President President and Director, United Asset
MICHEL NORMANDEAU Management Corporation
Vice President JOHN L. THORNDIKE
MICHAEL W. WEILHEIMER Director, Fiduciary Company
Vice President Incorporated
JAMES L. O'CONNOR JACK L. TREYNOR
Treasurer Investment Adviser and
THOMAS OTIS Consultant
Secretary
<PAGE>
INVESTMENT ADVISER OF
HIGH INCOME PORTFOLIO
Boston Management and Research
24 Federal Street
Boston, MA 02110
ADMINISTRATOR OF
EV MARATHON HIGH INCOME FUND
Eaton Vance Management
24 Federal Street
Boston, MA 02110
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(617) 482-8260
CUSTODIAN
Investors Bank & Trust Company
89 South Street
P.O. Box 1537
Boston, MA 02205-1537
TRANSFER AGENT
First Data Investor Services Group, Inc.
BOS725
P.O. Box 1559
Boston, MA 02104
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
This report must be preceded or accompanied by a current prospectus which
contains more complete information on the Fund, including its distribution plan,
sales charges and expenses. Please read the prospectus carefully before you
invest or send money.
EV MARATHON HIGH INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
EV MARATHON
HIGH INCOME
FUND
ANNUAL
SHAREHOLDER REPORT
MARCH 31, 1996
M-HISRC-5/96
<PAGE>
EV CLASSIC
TAX-MANAGED GROWTH FUND
- ------------------------------------------------------------------------------
EV CLASSIC TAX-MANAGED GROWTH FUND (THE "FUND") IS A MUTUAL FUND SEEKING LONG-
TERM, AFTER-TAX RETURNS FOR ITS SHAREHOLDERS THROUGH INVESTING IN A DIVERSIFIED
PORTFOLIO OF EQUITY SECURITIES. THE FUND CURRENTLY INTENDS TO PURSUE ITS
INVESTMENT OBJECTIVE BY INVESTING ITS ASSETS IN TAX-MANAGED GROWTH PORTFOLIO
(THE "PORTFOLIO"), A DIVERSIFIED OPEN-END INVESTMENT COMPANY HAVING THE SAME
INVESTMENT OBJECTIVE AS THE FUND, RATHER THAN BY INVESTING DIRECTLY IN AND
MANAGING ITS OWN PORTFOLIO OF SECURITIES AS WITH AN HISTORICALLY STRUCTURED
MUTUAL FUND. THE FUND IS A SEPARATE 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 in the Fund. Please retain this document for future reference.
A Statement of Additional Information for the Fund dated August 1, 1996, as
supplemented from time to time, has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The 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. 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.
- -------------------------------------------------------------------------------
PAGE PAGE
Shareholder and Fund Expenses ....... 2 How to Buy Fund Shares ........... 10
The Fund's Investment Objective ..... 3 How to Redeem Fund Shares ........ 11
The Tax-Managed Mutual Fund Reports to Shareholders .......... 13
Advantage ......................... 3 The Lifetime Investing Account
Investment Policies and Risks ....... 4 Distribution Options ........... 13
Organization of the Fund and the The Eaton Vance Exchange
Portfolio ......................... 6 Privilege ...................... 14
Management of the Fund and the Eaton Vance Shareholder
Portfolio ......................... 8 Services ....................... 14
Distribution Plan ................... 9 Distributions and Taxes .......... 15
Valuing Fund Shares ................. 10 Performance Information .......... 16
- -------------------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1996
<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
Contingent Deferred Sales Charges Imposed on Redemptions
During the First Year (as a percentage of redemption
proceeds exclusive of all reinvestments and capital
appreciation in the account) 1.00%
ANNUAL FUND AND ALLOCATED PORTFOLIO OPERATING EXPENSES
(as a percentage of average daily net assets)
-----------------------------------------------------------------------------
Investment Adviser Fee 0.625%
Rule 12b-1 Distribution (and Service) Fees 1.000%
Other Expenses 0.250%
------
Total Operating Expenses 1.875%
======
EXAMPLE 1 YEAR 3 YEARS
------ -------
An investor would pay the following expenses
(including a contingent deferred sales charge in
the case of redemption during the first year
after purchase) on a $1,000 investment, assuming
(a) 5% annual return and (b) redemption at the
end of each period: $29 $59
An investor would pay the following expenses on
the same investment, assuming (a) 5% annual
return and (b) no redemptions: $19 $59
NOTES:
The table and Example 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. Other Expenses
are estimated for the current fiscal year because the Fund was only recently
organized.
The Fund invests exclusively in the Portfolio. The Trustees believe the
aggregate per share expenses of the Fund and the Portfolio should be
approximate, and over time may be less than, the per share expenses the Fund
would incur if the Trust retained the services of an investment adviser for the
Fund and the Fund's assets were invested directly in the type of securities
being held by the Portfolio.
The Example 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 Example 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." Because the Fund makes payments under its Distribution Plan
adopted under Rule 12b-1, a long-term shareholder 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.
No contingent deferred sales charge is imposed on (a) shares purchased more than
one year prior to 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". In the Example above, expenses would be $10 less in the
first year if there was no redemption.
Other investment companies with different distribution arrangements and fees are
investing in the Portfolio and additional such companies and other investors may
do so in the future. See "Organization of the Fund and the Portfolio."
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE
- -------------------------------------------------------------------------------
THE FUND'S INVESTMENT OBJECTIVE IS TO ACHIEVE LONG-TERM, AFTER-TAX RETURNS FOR
ITS SHAREHOLDERS THROUGH INVESTING IN A DIVERSIFIED PORTFOLIO OF EQUITY
SECURITIES. THE FUND CURRENTLY INTENDS TO PURSUE ITS INVESTMENT OBJECTIVE BY
INVESTING ITS ASSETS IN TAX-MANAGED GROWTH PORTFOLIO (THE "PORTFOLIO"), A
SEPARATE REGISTERED INVESTMENT COMPANY WITH THE SAME INVESTMENT OBJECTIVE AND
POLICIES AS THE FUND. THIS INVESTMENT STRUCTURE IS COMMONLY REFERRED TO AS A
"MASTER/FEEDER" STRUCTURE. USING THIS STRUCTURE ENABLES THE FUND TO PARTICIPATE
IN A WELL-ESTABLISHED INVESTMENT PORTFOLIO WITHOUT EXPOSING THE FUND TO THE
UNREALIZED GAINS ACCRUED PRIOR TO THE FUND'S OPERATIONS.
In its operations, the Portfolio seeks to achieve after-tax returns for its
shareholders in part by minimizing the taxes they incur in connection with the
Portfolio's investment income and realized capital gains. Taxes on investment
income are minimized by investing primarily in lower yielding securities.
Realized capital gains are minimized by maintaining relatively low portfolio
turnover, and by employing a variety of tax-efficient management strategies. See
"Investment Policies and Risks" for further information.
The Fund is designed for long-term taxable investors. The Fund is not intended
to be a complete investment program. Prospective investors should take into
account their objectives and other investments when considering the purchase of
Fund shares. The Fund cannot assure achievement of its investment objective.
While the Fund seeks to minimize investor taxes associated with the Fund's
investment income and realized capital gains, the Fund may have taxable
investment income and may realize taxable gains from time to time. The Fund's
and the Portfolio's investment objectives are nonfundamental and may be changed
when authorized by a vote of the Trustees of the Trust or the Portfolio,
respectively, without obtaining the approval of the Fund's shareholders or the
investors in the Portfolio, as the case may be. The Trustees of the Trust have
no present intention to change the Fund's objective and intend to submit any
proposed material change in the objective to shareholders for their approval.
THE TAX-MANAGED MUTUAL FUND ADVANTAGE
- -------------------------------------------------------------------------------
Taxes are a major influence on the net returns that investors receive on their
taxable investments. Today, dividends and short-term capital gains distributed
by mutual funds are taxed at federal income tax rates as high as 39.6% and
distributions of long-term capital gains are taxed at federal tax rates of up to
28%. Including state taxes and the federal itemized deduction phaseout, the top
tax rates in high-tax states such as California, New York, and Massachusetts are
in a range of 45-48% on dividend income and short-term gains and 33-36% on
long-term capital gains. There is legislation before Congress that may reduce
federal tax rates on long-term capital gains, but its status is uncertain.
Most equity mutual funds are managed to maximize PRE-TAX returns, largely
ignoring the considerable impact on returns of taxes incurred by investors in
connection with distributions of income and capital gains. In contrast, the Fund
seeks to achieve long-term, AFTER-TAX returns for its shareholders.
The Fund is similar to retirement planning instruments (such as IRAs and
variable annuities) in that it is a long-term investment that seeks to maximize
after-tax returns. As a mutual fund, however, the Fund avoids a number of
structural disadvantages inherent in an IRA or a variable annuity-- including
the limitations and penalties on early withdrawals, the taxing of all income and
gain upon withdrawal at ordinary income rates, and the inability to gain a step
up in basis at death. A variable annuity may also have higher annual expenses
than the Fund due to the embedded insurance features. Annual deductions for
contributions to IRAs are limited.
An analysis of long-term hypothetical returns achievable from a tax-managed
equity fund compared to a conventional equity mutual fund and a variable annuity
or an IRA can illustrate the fundamental soundness of a tax-managed equity fund
approach. Assuming identical annual pre-tax returns, over a holding period of
several years a tax-managed fund can generate liquidation proceeds higher than a
conventional managed equity mutual fund and higher than a variable annuity or
IRA. If the investments are passed into an estate (thereby triggering a step-up
in basis), the relative performance advantage of a tax-managed fund compared to
a conventional fund, or to a variable annuity or an IRA, can be substantial,
again assuming equivalent annual returns before taxes. Of course, actual returns
achieved by long-term investors in the Fund cannot be predicted.
INVESTMENT POLICIES AND RISKS
- ------------------------------------------------------------------------------
It is the policy of the Portfolio to invest in a broadly diversified selection
of equity securities, emphasizing common stocks of domestic and foreign growth
companies that are considered to be high in quality and attractive in their
long-term investment prospects. Under normal market conditions, the Portfolio
will invest at least 65% of its assets in common stocks. Although the Portfolio
may invest in investment-grade preferred stocks and debt securities, purchase of
such securities will normally be limited to securities convertible into common
stocks and temporary investments in short-term notes or government obligations.
The Portfolio's holdings will represent a number of different industries, and
less than 25% of the Portfolio's total assets will be invested in any one
industry. During defensive periods in which the Investment Adviser believes that
returns on common stock investments may be unfavorable, the Fund may temporarily
invest up to 65% of its assets in U.S. government obligations and high quality
short-term notes.
In its operations, the Portfolio seeks to achieve after-tax returns for its
shareholders in part by minimizing the taxes they incur in connection with the
Portfolio's investment income and realized capital gains. Taxes on investment
income are minimized by investing primarily in lower yielding securities. The
Fund can be expected to distribute relatively low levels of taxable investment
income, if any.
Realized capital gains are minimized in part by maintaining relatively low
portfolio turnover, investing primarily in established companies with
characteristics of above-average growth, predictability and stability that are
acquired with the expectation of being held for a period of years. The Portfolio
will generally seek to avoid realizing short-term capital gains. When a decision
is made to sell a particular appreciated security, the Portfolio will select for
sale those share lots with holding periods sufficient to qualify for long-term
capital gains treatment and among those, the share lots with the highest cost
basis. The Portfolio may, when prudent, sell securities to realize capital
losses that can be used to offset realized capital gains.
To protect against price declines in securities holdings with large accumulated
capital gains, the Portfolio may use hedging techniques such as short sales
against-the-box of securities held, the purchase of put options, the sale of
stock index futures contracts, and equity swaps. By using these techniques
rather than selling such securities the Portfolio can reduce its exposure to
price declines in the securities without realizing substantial capital gains
under current tax law. To avoid the sale of appreciated securities and the
realization of capital gains, the Portfolio and the Fund may adopt in the future
a policy of meeting redemptions in whole or in part through the distribution of
readily marketable securities. The practice of distributing securities to meet
shareholder redemptions may provide the Portfolio with a useful management tool,
allowing appreciated stock positions to be reduced without causing capital gains
to be realized. A redeeming shareholder who received securities would incur no
more or less taxable gain than if the redemption had been paid in cash, and
could elect to sell the distributed securities through Eaton Vance to the
Custodian or a broker-dealer at no cost. Shareholders would be notified in
writing of this procedure before it was implemented. See "How to Redeem Fund
Shares." It is expected that by employing these strategies for tax-efficient
management, the Portfolio can minimize the extent to which net capital gains are
realized each year, and the extent to which shareholders incur taxes as a result
of these realized gains. The Portfolio may nevertheless realize taxable gains
from time to time.
An investment in the Fund entails the risk that the principal value of Fund
shares may not increase or may decline. The Portfolio will be managed for
long-term, after-tax returns. In managing the Portfolio, the Investment Adviser
will generally avoid selling securities with large accumulated capital gains.
Such securities are expected to comprise a substantial portion of the assets of
the Portfolio. Although the Portfolio may utilize certain hedging strategies in
lieu of selling appreciated securities, the Fund's exposure to losses during
stock market declines may nonetheless be higher than that of other funds that do
not follow a general policy of avoiding sales of highly- appreciated securities.
The Portfolio may temporarily borrow up to 5% of the value of its total assets
to satisfy redemption requests or settle securities transactions.
INVESTING IN FOREIGN SECURITIES. Investing in securities issued by foreign
companies involves considerations and possible risks not typically associated
with investing in securities issued by U.S. companies. The value of foreign
investments to U.S. investors may be adversely affected by changes in currency
exchange rates. Foreign brokerage commissions, custody fees and other costs of
investing are generally higher than in the United States, and foreign securities
markets may be less liquid, more volatile and less subject to government
supervision than in the United States. Investments in foreign securities could
be adversely affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards, and potential difficulties in enforcing contractual
obligations. To reduce some of these risks, the Portfolio will only invest in
issuers located in developed countries whose securities are traded in
established markets.
DERIVATIVE INVESTMENTS. The Portfolio may purchase or sell derivative
instruments to hedge against securities price declines and currency movements
and to enhance returns (which may be considered speculative). The Portfolio may
engage in transactions in derivative instruments (which derive their value by
reference to other securities, indices, instruments, or currencies) in the U.S.
and abroad. Such transactions may include the purchase and sale of stock index
futures contracts and options on stock index futures; the purchase of put
options and the sale of call options on securities held in the Portfolio; equity
swaps; and the purchase and sale of forward currency exchange contracts and
currency futures. The Portfolio may use transactions in derivative instruments
as a substitute for the purchase and sale of securities. Derivative transactions
may be more advantageous in a given circumstance than transactions involving
securities due to more favorable current tax treatment, lower transaction costs,
or greater liquidity. While many derivative instruments have built-in leveraging
characteristics, the Portfolio will not use them to leverage its net assets.
The purchase and sale of derivative instruments is a highly specialized activity
that can expose the Portfolio to a significant risk of loss. The built-in
leveraging inherent to many derivative instruments can result in losses that
substantially exceed the initial amount paid or received. Equity swaps and
over-the-counter options are private contracts in which there is a risk of loss
in the event of a default on an obligation to pay by a counterparty. Derivative
instruments may be difficult to value, may be illiquid, and may be subject to
wide swings in valuation caused by changes in the value of an underlying
security, index, instrument, or currency. There can be no assurance that the use
of derivative instruments will be advantageous to the Portfolio.
The Portfolio will only enter into equity swaps and over-the-counter options
contracts with counterparties whose credit quality or claims paying ability are
considered to be investment grade by the Investment Adviser. In addition, at the
time of entering into a transaction, the Portfolio's credit exposure to any one
counterparty will be limited to 5% or less of the net assets of the Portfolio.
The Portfolio's investment in illiquid assets, which generally will include
equity swaps and over-the-counter options, may not represent more than 15% of
net assets at the time any such illiquid assets are acquired.
All futures contracts entered into by the Portfolio will be traded on exchanges
or boards of trade that are licensed and regulated by the Commodities Futures
Trading Commission (the "CFTC") and must be executed through a futures
commission merchant or brokerage firm that is a member of the relevant exchange.
Under CFTC regulations, the Portfolio may only enter into futures contracts if,
immediately thereafter, the value of the aggregate initial margin with respect
to all currently outstanding non-hedging positions in futures contracts does not
exceed 5% of the Fund's net asset value, after taking into account unrealized
profits and losses on such positions.
SHORT SALES AGAINST-THE-BOX. The Portfolio may sell securities short where it
owns at least an equal amount of the security sold short or another security
convertible or exchangeable for an equal amount of the security sold short
without payment of further compensation (a short sale against-the-box). Under
current tax law, short sale against-the-box transactions enable the Portfolio to
hedge its exposure to securities that it holds without selling the securities
and recognizing gains. A short sale against-the-box requires that the short
seller absorb certain costs so long as the position is open. In a short sale
against-the-box, the short seller is exposed to the risk of being forced to
deliver appreciated stock to close the position if the borrowed stock is called
in, causing a gain to be recognized. The Portfolio expects normally to close its
short sale against-the-box transactions by delivering newly-acquired stock.
RESTRICTED SECURITIES. Securities that are not freely tradeable or which are
subject to restrictions on sale under the Securities Act of 1933 are considered
restricted. Such securities are illiquid and may be difficult to properly value.
The Portfolio's holdings of illiquid securities may not exceed 15% of its net
assets. Illiquid securities include securities legally restricted as to resale,
and securities eligible for resale pursuant to Rule 144A under the Securities
Act of 1933. Rule 144A securities may, however, be treated as liquid by the
Investment Adviser pursuant to procedures adopted by the Trustees, which require
consideration of factors such as trading activity, availability of market
quotations and number of dealers willing to purchase the security. Moreover,
liquid Rule 144A securities may increase the level of fund illiquidity to the
extent qualified institutional buyers become uninterested in purchasing such
securities.
LENDING OF PORTFOLIO SECURITIES. The Portfolio may seek to earn income by
lending portfolio securities to broker-dealers or other institutional borrowers.
As with other extensions of credit there are risks of delay in recovery or even
loss of rights in the securities loaned if the borrower of the securities fails
financially. However, the loans will be made only to organizations deemed by the
Investment Adviser to be sufficiently creditworthy and when, in the judgment of
the Investment Adviser, the consideration which can be earned from securities
loans of this type justifies the attendant risk.
CERTAIN INVESTMENT POLICIES. 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 and an investor vote, respectively. Among the
fundamental restrictions, neither the Fund nor the Portfolio may (a) borrow
money, except as permitted by the 1940 Act, or (b) with respect to 75% of its
total assets, invest more than 5% of total assets (taken at current value) in
the securities of any one issuer, or invest in more than 10% of total assets in
the outstanding voting securities of any one issuer, except obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities and
except securities of other investment companies. Investment restrictions (except
with respect to the borrowing of money and issuing of senior securities) are
considered at the time of acquisition of assets; the sale of portfolio assets is
not required in the event of a subsequent change in circumstances.
Except for the fundamental investment restrictions and policies specifically
identified above and enumerated in the Statement of Additional Information, the
policies of the Fund and the Portfolio are not fundamental policies and
accordingly may be changed by the Trustees of the Trust and the Portfolio
without obtaining the approval of the shareholders of the Fund or the investors
in the Portfolio, as the case may be. If any changes were made, 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
- ------------------------------------------------------------------------------
The Fund is a diversified series of Eaton Vance Mutual Funds Trust, a business
trust established under Massachusetts law pursuant to a Declaration of Trust
dated May 7, 1984, as amended. The Trust is a mutual fund - an open-end
management investment company. THE TRUSTEES OF THE TRUST ARE 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. Each share represents an equal proportionate beneficial
interest in the Fund. When issued and outstanding, the shares are fully paid and
nonassessable by the Trust 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 provides that
the Fund and other entities permitted to invest in the Portfolio (e.g., other
U.S. and foreign investment companies, common and commingled trust funds and
other accredited investors) 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,
which is a separate investment company with an identical investment objective
(although the Fund may temporarily hold a de minimis amount of cash). Therefore,
the Fund's interest in 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 and other 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
investment companies investing in the Portfolio either do not sell their shares
or 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 "How the Fund and the Portfolio Invest their
Assets." Further information regarding the investment practices of the Portfolio
may also 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 by investing in
the Portfolio, the Fund can participate in a substantially larger and more
diverse pool of equity investments than if it were to invest its assets
directly.
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 Portfolio without obtaining the approval of the
shareholders of the Fund or the investors in the Portfolio, as the case may be.
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, such Trustees 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 funds or investors that 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 funds which have large or institutional investors.
Until 1992, the Administrator sponsored and advised only 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, or the
Trustees of the Portfolio, by written instrument consented to by a majority of
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 most of the Trustees of the
Trust and the Trustees of the Portfolio are the same. Such procedures require
each Board to take action 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
- ------------------------------------------------------------------------------
THE PORTFOLIO ENGAGES BOSTON MANAGEMENT AND RESEARCH ("BMR" OR THE "INVESTMENT
ADVISER"), 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.
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 the investment
advisory agreement with the Portfolio, BMR receives a monthly advisory fee of
5/96 of 1% (equivalent to 0.625% annually) of the average daily net assets of
the Portfolio up to $500 million. On net assets of $500 million and over the
annual fee is reduced and the advisory fee is computed as follows:
ANNUALIZED FEE RATE
AVERAGE DAILY NET ASSETS FOR THE MONTH (FOR EACH LEVEL)
----------------------------------------------------------------------
$500 million but less than $1 billion 0.5625%
$1 billion but less than $1.5 billion 0.5000%
$1.5 billion and over 0.4375%
For the period from the start of business, December 1, 1995, to April 30, 1996,
the Portfolio paid BMR advisory fees equivalent to 0.625% (annualized) of the
Portfolio's average daily net assets for such period.
BMR places the portfolio securities transactions of the Portfolio with many
broker-dealer firms and uses its best efforts to obtain execution of such
transactions at prices which are advantageous to the Portfolio and at reasonably
competitive commission rates. 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 broker-dealer firms to execute portfolio
transactions.
Duncan W. Richardson has acted as a portfolio manager of the Portfolio since it
commenced operations. He has been a Vice President of Eaton Vance since 1990, a
Vice President of BMR since 1992 and an employee of Eaton Vance since 1987.
BMR OR EATON VANCE ACTS AS INVESTMENT ADVISER TO INVESTMENT COMPANIES AND
VARIOUS INDIVIDUAL AND INSTITUTIONAL CLIENTS WITH ASSETS UNDER MANAGEMENT OF
OVER $16 BILLION. EATON VANCE HAS BEEN MANAGING INVESTMENT COMPANIES WITH
OBJECTIVES SIMILAR TO THAT OF THE FUND SINCE 1961, AND CURRENTLY MANAGES FUNDS
WITH SUCH SIMILAR OBJECTIVES HAVING ASSETS OF OVER $700 MILLION. Eaton Vance is
a wholly-owned subsidiary of Eaton Vance Corp., a publicly held holding company
which through its subsidiaries and affiliates engages primarily in investment
management, administration and marketing activities.
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 Fund and the Portfolio, as the case may be, will each be responsible for all
respective costs and expenses not expressly stated to be payable by BMR under
the investment advisory agreement, by Eaton Vance under the administrative
services agreement, or by EVD under the distribution agreement. Such costs and
expenses to be borne by the Fund or the Portfolio, as the case may be, include,
without limitation: custody and transfer agency fees and expenses, including
those incurred for determining net asset value and keeping accounting books and
records; expenses of pricing and valuation services; the cost of share
certificates; membership dues in investment company organizations; brokerage
commissions and fees; fees and expenses of registering under the securities
laws; expenses of reports to shareholders and investors; proxy statements, and
other expenses of shareholders' or investors' 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 or Eaton Vance; and investment advisory fees, and, if any, administrative
services fees. The Fund and the Portfolio, as the case may be, will also each
bear expenses incurred in connection with litigation in which the Fund or the
Portfolio, as the case may be, is a party and any legal obligation to indemnify
its respective officers and Trustees with respect thereto.
DISTRIBUTION PLAN
- -------------------------------------------------------------------------------
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 6.25% 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 to an Authorized Firm (a) sales commissions (except on
exchange transactions and reinvestments) at the time of sale equal to .75% of
the purchase price of the shares sold by such Firm, and (b) monthly sales
commissions approximately equivalent to 1/12 of .75% of the value of shares sold
by such Firm and remaining outstanding for at least one year. The Plan is
designed to permit an investor to purchase Fund shares through an Authorized
Firm without incurring an initial sales charge and at the same time permit the
Principal Underwriter to compensate Authorized Firms in connection with the sale
of Fund shares.
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 made to the Principal
Underwriter 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 commission 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.
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 initially implemented this provision of the Plan by
authorizing the Fund to make monthly service fee payments 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. The Fund accrues the
service fee daily at the rate of 1/365 of .25% of the Fund's net assets. The
Principal Underwriter currently expects to pay to an Authorized Firm (a) a
service fee (except on exchange transactions and reinvestments) at the time of
sale equal to .25% of the purchase price of the shares sold by such Firm, and
(b) monthly service fees approximately equivalent to 1/12 of .25% of the value
of shares sold by such Firm and remaining outstanding for at least one year.
During the first year after a purchase of Fund shares, the Principal Underwriter
will retain the service fee as reimbursement for the service fee payment made to
the Authorized Firm at the time of sale. As permitted by the NASD Rule, all
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 the Principal
Underwriter, and as such are not subject to automatic discontinuance when there
are no outstanding Uncovered Distribution Charges of the Principal Underwriter.
The Principal Underwriter may, from time to time, at its own expense, provide
additional incentives to Authorized Firms which employ registered
representatives who sell Fund 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 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 Fund 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) based
on market or fair value 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. Securities listed on securities
exchanges or in the NASDAQ National Market are valued at closing sale prices.
For further information regarding the valuation of the Portfolio's assets, see
"Determination of Net Asset Value" in the Statement of Additional Information.
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
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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. An Authorized Firm may charge its customers a fee in connection with
transactions executed by that Firm. The Fund may suspend the offering of shares
at any time and may refuse an order for the purchase of shares.
An initial investment in the Fund must be at least $5,000. Once an account has
been established the investor may send investments of $500 or more at any time
directly to the Fund's transfer agent (the "Transfer Agent") as follows: First
Data Investor Services Group, BOS725, P.O. Box 1559, Boston, MA 02104. The
$5,000 minimum initial investment is waived for Bank Automated Investing
accounts, which may be established with an investment of $500 or more. See
"Eaton Vance Shareholder Services."
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 acquired at their net asset value as determined above. The minimum
value of securities (or securities and cash) accepted for deposit is $5,000. The
number of Fund shares to be issued to an investor exchanging securities that are
retained by the Portfolio will be the value of the securities, as determined by
the Portfolio's valuation procedures, divided by the applicable net asset value
per Fund share on the day such securities are accepted. BMR may request that the
Portfolio retain the securities for investment purposes. Securities accepted for
exchange may also be sold for the account of their owner on the day of their
receipt or as soon thereafter as possible. The number of Fund shares acquired to
be issued in exchange for securities will be the aggregate value of or 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 Classic Tax-Managed Growth Fund
IN THE CASE OF PHYSICAL DELIVERY:
Investors Bank & Trust Company
Attention: EV Classic Tax-Managed Growth 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. 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.
IF YOU DON'T HAVE AN AUTHORIZED FIRM, EATON VANCE CAN RECOMMEND ONE.
HOW TO REDEEM FUND SHARES
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A SHAREHOLDER MAY REDEEM FUND SHARES BY DELIVERING TO FIRST DATA INVESTOR
SERVICES GROUP, P.O. BOX 5123, WESTBOROUGH, MA 01581-5123, on any business day a
written request for redemption in good order, plus any share 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 First Data Investor
Services Group. 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 First
Data Investor Services Group, the Fund will make payment for the net asset value
of the shares as of the date determined above, reduced by the amount of any
applicable contingent deferred sales charges (described below) and any federal
income tax required to be withheld.
MEETING REDEMPTIONS BY DISTRIBUTING PORTFOLIO SECURITIES. The Portfolio and the
Fund currently will meet redemptions in cash, but in the future may adopt a
policy of meeting redemption requests in whole or in part by distributing
appreciated securities held in the Portfolio chosen by the Investment Adviser to
reduce the realization of capital gains. At the request of a redeeming investor
who is to receive securities, the Portfolio might, at the discretion of the
Investment Adviser, provide the redeeming investor with a diversified selection
of securities. The Fund would only distribute readily marketable securities
valued pursuant to the Portfolio's valuation procedures. Even if an in-kind
redemption policy were adopted, many redemptions would still be paid in cash.
Sufficient quantities of appreciated securities may not be available for
distribution. Moreover, during periods of volatile market conditions, the Fund
could be expected to meet redemptions primarily through distributions of cash.
If a redeeming shareholder received securities, a procedure would be implemented
whereby the shareholder could elect to sell them through Eaton Vance to the
Custodian or a broker-dealer at no cost and at a price equal to the price used
in determining the redemption value of the distributed securities. This election
would need to be made in a letter of instruction which would be provided to
shareholders before the policy was implemented. Shareholders not making an
affirmative election to sell distributed securities to the designated
broker-dealer, would be required to take delivery of any securities distributed
upon a redemption of shares. Such shareholders could incur brokerage charges and
other costs and may be exposed to market risk in selling the distributed
securiies.
ADDITIONAL REDEMPTION INFORMATION. To sell Fund 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 next computed 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 a 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 $4,000. Prior to such a
redemption, shareholders will be given 60 days' written notice to make an
additional purchase. However, no such redemption 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 year of their
purchase (except shares acquired through the reinvestment of distributions)
generally will be subject to a contingent deferred sales charge equal to 1% of
the net asset value of the redeemed shares. 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 one year prior to the redemption, (b) all shares in the account acquired
through reinvestment of distributions, and (c) the increase, if any, of value in
the other shares in the account (namely those purchased within the year
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. As described under "Distribution Plan", the contingent deferred sales
charge will be paid to the Principal Underwriter or the Fund.
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 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"), (2)
as part of a distribution from a retirement plan qualified under Section 401,
403(b) or 457 of the Internal Revenue Code of 1986, as amended (the "Code"), or
(3) as part of a minimum required distribution from other tax-sheltered
retirement plans.
REPORTS TO SHAREHOLDERS
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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 certified public accountants. Shortly
after the end of each calendar year, the Fund will furnish all shareholders with
information necessary for preparing federal and state income tax returns.
THE LIFETIME INVESTING ACCOUNT/DISTRIBUTION OPTIONS
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AFTER AN INVESTOR MAKES AN INITIAL PURCHASE OF FUND SHARES, THE FUND'S TRANSFER
AGENT, FIRST DATA INVESTOR SERVICES GROUP, 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.
Each time a transaction takes place in a shareholder's account, the shareholder
will receive a statement showing complete details of the transaction and the
current balance in the account. (Under certain investment plans, statements may
be sent only quarterly.) THE LIFETIME INVESTING ACCOUNT PERMITS A SHAREHOLDER TO
MAKE ADDITIONAL INVESTMENTS IN SHARES BY SENDING A CHECK FOR $500 OR MORE to
First Data Investor Services Group.
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 First Data Investor Services Group, P.O. Box 5123,
Westborough, MA 01581-5123 (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, First Data Investor Services Group, P.O. Box 5123,
Westborough, MA 01581-5123. 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, if any, 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.
THE EATON VANCE EXCHANGE PRIVILEGE
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Shares of the Fund currently may be exchanged for shares of one or more other
funds in the Eaton Vance Classic Group of Funds or Eaton Vance Money Market
Fund, which are distributed subject to a contingent deferred sales charge (or
equivalent early withdrawal charge), on the basis of the net asset value per
share of each fund at the time of the exchange, provided that such exchange
offers are available only in states where shares of the fund being acquired may
be legally 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.
First Data Investor Services Group makes exchanges at the next determined net
asset value after receiving an exchange request in good order (see "How to
Redeem Fund Shares"). Consult First Data Investor Services Group for additional
information concerning the exchange privilege. Applications and prospectuses of
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 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.
Shares of the other funds in the Eaton Vance Classic Group of Funds (and shares
of Eaton Vance Money Market Fund acquired as the result of an exchange from an
EV Classic 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 First Data Investor Services Group
provided that the investor has not disclaimed in writing the use of the
privilege. To effect such exchanges, call First Data Investor Services Group
at 800-262-1122 Monday through Friday, 9:00 a.m. to 4:00 p.m. (Eastern
Standard Time). Shares acquired by telephone exchange 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 First Data Investor Services
Group 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, and if such
procedures are not followed, the Fund, the Principal Underwriter or First Data
Investor Services Group may be liable for any losses due to unauthorized or
fraudulent telephone instructions. If such procedures are not followed, the
Fund, the Principal Underwriter or the Transfer Agent may be liable for any
losses due to unauthorized or fraudulent telephone instructions. 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
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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 $5,000 minimum
investment has been made, checks of $500 or more payable to the order of EV
Classic Tax-Managed Growth Fund may be mailed directly to First Data Investor
Services Group, P.O. Box 5123, Westborough, MA 01581-5123 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
$500 or more may be made automatically each month or quarter from the
shareholder's bank account. The $5,000 minimum initial investment and small
account redemption policy are waived for these accounts.
SYSTEMATIC WITHDRAWAL PLAN: The Fund will make available to shareholders making
a deposit of at least $20,000 a systematic withdrawal plan through which they
can make regular quarterly redemptions to yield them either a specified dollar
amount of at least $800 per year or a specified percentage of net asset value of
at least 4% but not more than 12% annually. Such amount will not be subject to a
contingent deferred sales charge. See "How to Redeem Fund Shares." These
redemptive distributions will be paid in cash. Such distributions would be paid
at the option of each shareholder and would reduce the number of Fund shares
held by any shareholder electing to receive them. Distributions would consist of
an untaxed return of capital component and a taxable capital gain or capital
loss. The all-in tax rate on the amount of cash received in such redemptions
(equal to the capital gains rate multiplied by the percentage of the
distribution that is gain rather than return of capital) would be substantially
below the rate payable by mutual fund investors on dividend distributions (equal
to the ordinary income tax rate).
REINVESTMENT PRIVILEGE: A shareholder who has repurchased or redeemed shares may
reinvest, with credit for any contingent deferred sales charges paid on the
repurchased or redeemed 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 net asset value
next determined 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 of the Fund 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
the 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.
DISTRIBUTIONS AND TAXES
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The Portfolio will be managed toward an objective of achieving long-term,
after-tax returns in part by minimizing shareholders taxes. Because
distributions of net investment income and realized capital gains give rise to
shareholder taxes, the Portfolio will generally seek to select and manage its
investments so as to minimize net investment income and net realized gains and
associated distributions. The Fund can be expected to generally distribute a
lesser percentage of returns each year than other equity mutual funds. There can
be no assurance, however, that the Portfolio can be managed to avoid taxable
distributions. The Portfolio's ability to utilize various tax management
techniques may be curtailed or eliminated by future tax and other legislation,
regulations, administrative interpretations, or court decisions. As of the date
of this Prospectus, the Clinton administration had proposed legislation that
would have the effect of substantially eliminating the tax advantages of short
sales against-the-box, equity swaps, and certain options transactions. If the
legislation were to be enacted in the form proposed, use of these techniques by
the Portfolio would effectively be precluded.
DISTRIBUTIONS. To the extent that the Fund has net investment income and net
realized capital gains in any year, the Fund's present policy is to make (A) at
least one distribution annually (normally in December) of all or substantially
all of the investment income (if any) allocated to the Fund by the Portfolio,
less the Fund's direct and allocated expenses and (B) at least one distribution
annually of all or substantially all of the net realized capital gains (if any)
allocated to the Fund by the Portfolio (reduced by any available capital loss
carryforwards from prior years).
Shareholders may reinvest all distributions in shares of the Fund without a
sales charge at the net asset value per share as of the close of business on the
record date.
The Fund's net investment income consists of the Fund's allocated 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.
The Portfolio's net investment income consists of all income accrued on the
Portfolio's assets, less all actual and accrued expenses of the Portfolio
determined in accordance with generally accepted accounting principles. The
Fund's net realized capital gains, if any, consist of the net realized capital
gains (if any) allocated to the Fund by the Portfolio for tax purposes, after
taking into account any available capital loss carryovers.
TAXES. Distributions by 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 received in cash or reinvested in additional shares of the Fund. The
Fund's distributions will generally not qualify for the dividends- received
deduction for corporate shareholders.
Capital gains referred to in clause (B) above, if any, realized by the Portfolio
and allocated to the Fund for the Fund's fiscal year, which ends on October 31,
will usually be distributed by the Fund prior to the end of December.
Distributions by the Fund of long-term capital gains allocated to the Fund by
the Portfolio are taxable to shareholders as long-term capital gains, whether
paid in cash or reinvested in additional shares of the Fund and regardless of
the length of time Fund shares have been owned by the shareholder.
The Fund will provide its shareholders annually with tax information notices and
Forms 1099 to assist in the preparation of their federal and state tax returns
for the prior calendar year's distributions, proceeds from the redemption or
exchange of Fund shares, and federal income tax (if any) withheld by the Fund's
Transfer Agent.
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. The amount, timing and character of
the Fund's distributions to shareholders may be affected by special tax rules
governing the Portfolio's activities in options, futures and forward foreign
currency exchange transactions or certain other investments.
Certain distributions, if declared by the Fund 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.
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 timing
requirements imposed by the Code. As a partnership under the Code, the Portfolio
does not pay federal income or excise taxes.
PERFORMANCE INFORMATION
- ------------------------------------------------------------------------------
FROM TIME TO TIME, THE FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN. The
Fund's average annual total return is determined by multiplying a hypothetical
initial purchase order of $1,000 invested at the maximum public offering price
(net asset value) by the average annual compounded rate of return (including
capital appreciation/depreciation, and distributions paid and reinvested) for
the stated period and annualizing the result. The average annual total return
calculation assumes a complete redemption of the investment and the deduction of
any 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 use such total return figures, together with comparisons with the Consumer
Price Index, various domestic and foreign securities indices and performance
studies prepared by independent organizations, in advertisements and in
information furnished to present or prospective shareholders. The Fund may use
total return figures showing after-tax returns, including comparisons to
tax-deferred vehicles. The Fund may also quote total return for the period prior
to commencement of operations which would reflect the Portfolio's total return
(or that of its predecessor) adjusted to reflect any applicable Fund sales
charge.
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.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's total return for any prior period
should not be considered a representation of what an investment may earn or what
the Fund's total return may be in any future period. The Fund's investment
results are based on many factors, including market conditions, the composition
of the security holdings of the Portfolio and the operating expenses of the Fund
and the Portfolio. Investment results also often reflect the risks associated
with the particular investment objective and policies of the Fund and the
Portfolio. Among others, these factors should be considered when comparing the
Fund's investment results to those of other mutual funds and other investment
vehicles. If the expenses related to the operation of the Fund or the Portfolio
are allocated to Eaton Vance, the Fund's performance will be higher.
<PAGE>
[LOGO: EATON VANCE]
EV CLASSIC
TAX-MANAGED GROWTH FUND
- --------------------------------------------------------------------------------
PROSPECTUS
AUGUST 1, 1996
EV CLASSIC
TAX-MANAGED GROWTH FUND
24 FEDERAL STREET
BOSTON, MA 02110
- --------------------------------------------------------------------------------
INVESTMENT ADVISER OF TAX-MANAGED GROWTH PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV CLASSIC TAX-MANAGED GROWTH PORTFOLIO
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, 89 South Street, Boston, MA 02111
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, MA 02110
C-TGP
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
August 1, 1996
EV CLASSIC TAX-MANAGED GROWTH FUND
24 Federal Street
Boston, Massachusetts 02110
(800) 225-6265
This Statement of Additional Information consists of two parts. Part I
provides information about EV Classic Tax-Managed Growth Fund (the "Fund"),
Tax-Managed Growth Portfolio (the "Portfolio") and certain other series of Eaton
Vance Mutual Funds Trust (the "Trust"). The Fund's Part II (the "Part II")
provides information solely about the Fund. Where appropriate, Part I includes
cross-references to the relevant sections of Part II that provide additional,
Fund-specific information. This Statement of Additional Information is sometimes
referred herein to as the "SAI".
TABLE OF CONTENTS
PART I
Additional Information about Investment Policies .......................... 2
Investment Restrictions ................................................... 4
Trustees and Officers ..................................................... 6
Investment Adviser and Administrator ...................................... 8
Custodian ................................................................. 10
Service for Withdrawal .................................................... 10
Determination of Net Asset Value .......................................... 11
Investment Performance .................................................... 11
Taxes ..................................................................... 14
Portfolio Security Transactions ........................................... 15
Other Information ......................................................... 17
Independent Certified Public Accountants .................................. 18
PART II
Fees and Expenses ......................................................... a-1
Distribution Plan ......................................................... a-1
Performance Information ................................................... a-3
Control Persons and Principal Holders of Securities ....................... a-4
Financial Statements ...................................................... a-5
Independent Auditors' Report .............................................. a-6
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE FUND'S PROSPECTUS DATED AUGUST 1, 1996, AS SUPPLEMENTED FROM
TIME TO TIME, WHICH IS INCORPORATED HEREIN BY REFERENCE. 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>
STATEMENT OF ADDITIONAL INFORMATION
PART I
This Part I provides information about the Fund, certain other series of the
Trust and the Portfolio. Capitalized terms used in this SAI and not otherwise
defined have the meanings given to them in the Fund's Prospectus. The Fund is
subject to the same investment policies as those of the Portfolio. The Fund
currently seeks to achieve its objective by investing in the Portfolio.
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
Foreign Securities. Investing in securities issued by companies whose principal
business activities are outside the United States may involve significant risks
not present in domestic investments. For example, there is generally less
publicly available information about foreign companies, particularly those not
subject to the disclosure and reporting requirements of the U.S. securities
laws. Foreign issuers are generally not bound by uniform accounting, auditing,
and financial reporting requirements and standards of practice comparable to
those applicable to domestic issuers. Investments in foreign securities also
involve the risk of possible adverse changes in investment or exchange control
regulations, expropriation or confiscatory taxation, limitation on the removal
of funds or other assets of the Portfolio, political or financial instability or
diplomatic and other developments which could affect such investments. Further,
economies of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States. It is anticipated that in
most cases the best available market for foreign securities will be on exchanges
or in over-the-counter markets located outside of the United States. Foreign
stock markets, while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less liquid and more
volatile than securities of comparable U.S. companies. In addition, foreign
brokerage commissions are generally higher than commissions on securities traded
in the United States and may be non-negotiable. In general, there is less
overall governmental supervision and regulation of foreign securities markets,
broker-dealers, and issuers than in the United States.
Foreign Currency Transactions. The value of foreign assets of the Portfolio as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations. Currency
exchange rates can also be affected unpredictably by intervention by U.S. or
foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad. The Portfolio
may conduct its foreign currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market or
through entering into swaps, forward contracts, options or futures on currency.
On spot transactions, foreign exchange dealers do not charge a fee for
conversion, but they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Portfolio at one
rate, while offering a lesser rate of exchange should the Portfolio desire to
resell that currency to the dealer.
Risks Associated With Derivative Instruments. Entering into a derivative
instrument involves a risk that the applicable market will move against the
Portfolio's position and that the Portfolio will incur a loss. For derivative
instruments other than purchased options, this loss may exceed the amount of the
initial investment made or the premium received by the Portfolio. Derivative
instruments may sometimes increase or leverage the Portfolio's exposure to a
particular market risk. Leverage enhances the Portfolio's exposure to the price
volatility of derivative instruments it holds. The Portfolio's success in using
derivative instruments to hedge portfolio assets depends on the degree of price
correlation between the derivative instruments and the hedged asset. Imperfect
correlation may be caused by several factors, including temporary price
disparities among the trading markets for the derivative instrument, the assets
underlying the derivative instrument and the Portfolio assets. Over-the-counter
("OTC") derivative instruments involve an enhanced risk that the issuer or
counterparty will fail to perform its contractual obligations. Some derivative
instruments are not readily marketable or may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in an exchange-traded derivative
instrument, which may make the contract temporarily illiquid and difficult to
price. Commodity exchanges may also establish daily limits on the amount that
the price of a futures contract or futures option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Portfolio from
closing out positions and limiting its losses. The staff of the Securities and
Exchange Commission (the "Commission") takes the position that purchased OTC
options, and assets used as cover for written OTC options, are subject to the
Portfolio's 15% limit on illiquid investments. However, with respect to options
written with primary dealers in U.S. Government securities 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 formula
price. The Portfolio's ability to terminate OTC derivative instruments may
depend on the cooperation of the counterparties to such contracts. For thinly
traded derivative instruments, the only source of price quotations may be the
selling dealer or counterparty. In addition, certain provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), limit the extent to which the
Portfolio may purchase and sell derivative instruments. 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 Code for
maintaining the qualification of the Fund as a regulated investment company for
federal income tax purposes. See "Taxes".
Asset Coverage for Derivative Instruments. Transactions using forward contracts,
futures contracts and options (other than options that the Portfolio has
purchased) expose the Portfolio to an obligation to another party. The Portfolio
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, currencies, or other options or
futures contracts or forward contracts, or (2) cash, receivables, and short-term
debt securities with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. The Portfolio will comply with
Commission guidelines regarding cover for these instruments and, if the
guidelines so require, set aside cash, U.S. Government securities or other
liquid, high-grade debt securities in a segregated account with its custodian in
the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding forward contract, futures contract or option
is open, unless they are replaced with other appropriate assets. As a result,
the commitment of a large portion of the Portfolio's assets to cover or
segregated accounts could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
Limitations on Futures Contracts and Options. The Portfolio may enter into
futures contracts, and options on futures contracts, traded on an exchange
regulated by the CFTC and on foreign exchanges, but, with respect to foreign
exchange-traded futures contracts and options on such futures contracts, only if
the Investment Adviser determines that trading on each such foreign exchange
does not subject the Portfolio to risks, including credit and liquidity risks,
that are materially greater than the risks associated with trading on
CFTC-regulated exchanges.
In order to hedge its current or anticipated portfolio positions, the
Portfolio may use futures contracts on securities held in its Portfolio or on
securities with characteristics similar to those of the securities held by the
Portfolio. 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.
All call options on securities written by the Portfolio will be covered.
This means that, the Portfolio will own the securities subject to the call
option or an offsetting call option so long as the call option is outstanding.
Repurchase Agreements. Under a repurchase agreement the Portfolio buys a
security at one price and simultaneously promises to sell that same security
back to the seller at a higher price. At no time will the Portfolio commit more
than 15% of its net assets to repurchase agreements which mature in more than
seven days and other illiquid securities. The Portfolio's repurchase agreements
will provide that the value of the collateral underlying the repurchase
agreement will always be at least equal to the repurchase price, including any
accrued interest earned on the repurchase agreement, and will be marked to
market daily.
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 expects that it
will enter into reverse repurchase agreements when it is able to invest the cash
so acquired at a rate higher than the cost of the agreement, which would
increase the income earned by the Portfolio. 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 Portfolio's net asset value, 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 Portfolio's yield.
At all times that a reverse repurchase agreement 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. Although the Investment Adviser does not
consider reverse repurchase agreements to involve a traditional borrowing of
money, reverse repurchase agreements will be included within the aggregate
limitation on "borrowings" contained in the Portfolio's investment restriction
(1) set forth below.
Portfolio Turnover. The Portfolio cannot accurately predict its portfolio
turnover rate, but it is anticipated that the annual turnover rate will
generally be lower than that of most other equity mutual funds and 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 in the portfolio were replaced once in a period of one year. A
high turnover rate (100% or more) necessarily involves greater expenses to the
Portfolio.
Lending Portfolio Securities. If the Investment Adviser decides to make
securities loans, 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 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 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 financial
condition of the borrower will be monitored by the Investment Adviser on an
ongoing basis. The Portfolio would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and would also
receive a fee, or all or a portion of the interest on investment of the
collateral. 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. The Portfolio
would not have the right to vote any securities having voting rights during the
existence of a loan, but could call the loan in anticipation of an important
vote to be taken among holder of the securities or the giving or holding of
their consent on a material matter affecting the investment. If the Investment
Adviser decides to make securities loans, it is intended that the value of the
securities loaned would not exceed 30% of the Portfolio's total assets.
Securities lending involves administration expenses, including finders' fees.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund 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 SAI means the lesser of (a) 67% or more of the outstanding voting
securities of the Fund or the Portfolio, as the case may be, present or
represented by proxy at a meeting if the holders of more than 50% of the
outstanding voting securities of the Fund or the Portfolio are present or
represented at the meeting or (b) more than 50% of the outstanding voting
securities of the Fund or investors of the Portfolio. Neither the Fund nor the
Portfolio may:
(1) Borrow money or issue senior securities except as permitted by the
Investment Company Act of 1940;
(2) Purchase any securities or evidences of interest therein on
"margin," that is to say in a transaction in which it has borrowed all or a
portion of the purchase price and pledged the purchased securities or
evidences of interest therein as collateral for the amount so borrowed;
(3) Engage in the underwriting of securities; or
(4) Buy 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), commodities or commodity contracts for
the purchase or sale of physical commodities;
(5) Make loans to other persons, except by (a) the acquisition of debt
securities and making portfolio investments, (b) entering into repurchase
agreements and (c) lending portfolio securities;
(6) With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at current value) in the securities of any one issuer,
or invest in more than 10% of the outstanding voting securities of any one
issuer, except obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and except securities of other investment
companies; or
(7) Concentrate its investments in any particular industry, but, if
deemed appropriate for the Fund's objective, up to 25% of the value of its
assets may be invested in any one industry.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset, such percentage limitation shall be
determined immediately after and as a result of the Fund's or the Portfolio's
acquisition of such security or other asset. Accordingly, any later increase or
decrease resulting from a change in values, assets or other circumstances, will
not compel the Fund or the Portfolio, as the case may be, to dispose of such
security or other asset.
Notwithstanding the investment policies and restrictions of the Fund, the
Fund may invest its assets in an open-end management investment company with
substantially the same investment objective, policies and restrictions as the
Fund. Notwithstanding the investment policies and restrictions of the Portfolio,
the Portfolio may invest part of its assets in another investment company
consistent with the Investment Company Act of 1940 (the "1940 Act").
The Fund and the Portfolio have each adopted the following investment
policies which may be changed without shareholder or investor approval. Neither
the Fund nor the Portfolio may invest more than 15% of its net assets in
investments which are not readily marketable, including restricted securities
and repurchase agreements with a maturity longer than seven days. Restricted
securities for the purposes of this limitation do not include securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933 and
commercial paper issued pursuant to Section 4(2) of said Act that the Board of
Trustees of the Trust or the Portfolio, or their delegate, determines to be
liquid. Neither the Fund nor the Portfolio will purchase securities of any
issuer which has a record of less than three (3) years' continuous operation
including, however, in such three (3) years the operation of any predecessor
company or companies, partnership or individual enterprise if the issuer whose
securities are proposed as an investment for funds of the Trust has come into
existence as a result of a merger, consolidation, reorganization, or the
purchase of substantially all the assets of such predecessor company or
companies, partnership or individual enterprise, provided that nothing in this
provision shall prevent (a) the purchase of securities of a company
substantially all of whose assets are (i) securities of one or more companies
which have had a record of three (3) years' continuous operation, or (ii) assets
of an independent division of another company, which division has had a record
of three (3) years' continuous operation; (b) the purchase of securities of (i)
a public utility subject to supervision or regulation as to its rates or charges
by a commission or board or officer of the United States or of any state or
territory thereof, or of the government of Canada or of any province or
territory of Canada or (ii) companies operating or formed for the purpose of
operating pipe or transmission lines for the transmission of oil, gas or
electric energy or like products; provided that no security shall be purchased
pursuant to exception (a) or (b) of this provision if such purchase at the time
thereof will cause more than five per cent (5%) of the total assets of the Fund
(taken at market value) to be invested in securities of companies which would
not then be eligible for purchase but for those exceptions. Neither the Fund nor
the Portfolio will sell or contract to sell any security which it does not own
unless by virtue of its ownership of other securities it has at the time of sale
a right to obtain securities equivalent in kind and amount to the securities
sold and provided that if such right is conditional the sale is made upon the
same conditions. Neither the Fund nor the Portfolio will invest for the purpose
of exercising control or management of other companies. Neither the Fund nor the
Portfolio will purchase oil, gas or other mineral leases or purchase partnership
interests in oil, gas or other mineral exploration or development programs.
Neither the Fund nor the Portfolio will 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 the 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 or securities together own
beneficially more than 5% of such shares or securities or both (all taken at
market value).
Neither the Fund nor the Portfolio will purchase an option on any security
if, after such transaction, more than 5% of its net assets, as measured by the
aggregate of all premiums paid for all such options held by the Portfolio, would
be so invested.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset, such percentage limitation shall be
determined immediately after and as a result of the Fund's or the Portfolio's
acquisition of such security or asset. Accordingly, any later increase or
decrease resulting from a change in values, assets or other circumstances, will
not compel the Fund or the Portfolio, as the case may be, to dispose of such
security or other asset. Notwithstanding the foregoing, under normal market
conditions the Fund and the Portfolio must take actions necessary to comply with
the policy of investing at least 65% of total assets in equity securities.
Notwithstanding the foregoing, the Fund and Portfolio must always be in
compliance with the borrowing policies set forth above.
In order to permit the sale of shares of the Fund in certain states, the
Fund and the Portfolio 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.
Although permissible under the Fund's investment restrictions, the Fund has
no present intention during the coming fiscal year to: borrow money; pledge its
assets; or make loans to other persons.
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"); of Eaton Vance's parent,
Eaton Vance Corp. ("EVC"); and of Eaton Vance's and BMR's trustee, Eaton Vance,
Inc. ("EV"). Eaton Vance and EV are both wholly-owned subsidiaries of EVC. Those
Trustees and officers who are "interested persons" of the Trust, Eaton Vance,
BMR, EVC or EV as defined in the 1940 Act by virtue of their affiliation with
any one or more of the Trust, the Portfolio Eaton Vance, BMR, EVC or EV, are
indicated by an asterisk(*).
TRUSTEES OF THE TRUST AND THE PORTFOLIO
M. DOZIER GARDNER (63), 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 or Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
LANDON T. CLAY (70), President and Trustee of the Portfolio*
Chairman of Eaton Vance, BMR, 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.
JAMES B. HAWKES (54), Vice President of the Portfolio and the Trust and
Trustee of the Trust*
Executive Vice President of Eaton Vance, BMR, 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 (65), Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company) founded in 1988. 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 (61), Trustee
Jacob H. Schiff Professor of Investment Banking, Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard University Graduate School of Business Administration,
Soldiers Field Road, Boston, Massachusetts 02163
NORTON H. REAMER (60), Trustee
President and Director, United Asset Management Corporation, a holding company
owning institutional investment management firms). Chairman, President and
Director, UAM Funds (mutual funds). Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
JOHN L. THORNDIKE (69), 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 (66), 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
DUNCAN W. RICHARDSON (38), Vice President of the Portfolio
Vice President of Eaton Vance and EV since January 19, 1990 and of BMR since
August 11, 1992. Officer of various investment companies managed by Eaton
Vance or BMR. Mr. Richardson was elected Vice President of the Portfolio on
October 23, 1995.
H. DAY BRIGHAM, JR. (69) Vice President of the Trust
Chairman of the Management Committee, Vice President of Eaton Vance, BMR, EVC
and EV and Director of EVC and EV, Director, Trustee and officer of various
investment companies managed by Eaton Vance or BMR.
WILLIAM H. AHERN, JR. (36), Vice President of the Trust
Assistant Vice President of BMR, Eaton Vance and EV and an employee of Eaton
Vance since July 17, 1989. Officer of various investment companies managed by
Eaton Vance or BMR. Mr. Ahern was elected Vice President of the Trust on June
19, 1995.
MICHAEL B. TERRY (53), Vice President of the Trust
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
JAMES L. O'CONNOR (51), Treasurer
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
M. KATHERINE KREIDER (35), Assistant Treasurer
Assistant Vice President of Eaton Vance, BMR and EV since February 5, 1996.
Senior Audit Manager (1993-1996), Audit Manager (1991-1993) -- Financial
Services Industry Practice, Deloitte & Touche (1987-1996). Officer of various
investment companies managed by Eaton Vance or BMR. Ms. Kreider was elected
Assistant Treasurer of the Trust on February 21, 1996.
THOMAS OTIS (64), Secretary
Vice President and Secretary of Eaton Vance, BMR, EVC and EV. Officer of various
investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (60), Assistant Treasurer and Assistant Secretary
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
A. JOHN MURPHY (33), Assistant Secretary
Assistant Vice President of BMR, Eaton Vance and EV since March 1, 1994;
employee of Eaton Vance since March 1993. State Regulations Supervisor, The
Boston Company (1991-1993) and Registration Specialist, Fidelity Management &
Research Co. (1986-1991). Officer of various investment companies managed by
Eaton Vance or BMR. Mr. Murphy was elected Assistant Secretary of the Trust on
March 27, 1995 and of the Portfolio on October 23, 1995.
JOHN P. RYNNE (54), Assistant Secretary of the Trust
Corporate Controller and Vice President of EVC. Vice President of Eaton Vance,
EVD and BMR, and Treasurer of Energex Energy Corporation. Mr. Rynne became
an officer of the Trust on June 19, 1995.
ERIC G. WOODBURY (39), Assistant Secretary
Vice President of BMR, Eaton Vance and EV since February 1993; formerly,
associate attorney at Dechert, Price & Rhoads and Gaston & Snow. Mr. Woodbury
was elected Assistant Secretary of the Trust on June 19, 1995 and of the
Portfolio on October 23, 1995.
Messrs. Thorndike (Chairman), Hayes and Reamer are members of the Special
Committee of the Board of Trustees of the Trust and of the Portfolio. The
purpose of the Special Committee is to consider, evaluate and make
recommendations to the full Board of Trustees concerning (i) all contractual
arrangements with service providers to the Fund, including administrative
services, transfer agency, custodial and fund accounting and distribution
services, and (ii) all other matters in which Eaton Vance or its affiliates has
any actual or potential conflict of interest with the Fund or its shareholders.
The Nominating Committee is comprised of four Trustees who are not
"interested persons" as that term is defined under the Investment Company Act of
1940 ("noninterested Trustees"). The Committee has four-year staggered terms,
with one member rotating off the Committee to be replaced by another
noninterested Trustee of the Trust. Messrs. Hayes (Chairman), Reamer, Thorndike
and Treynor are currently serving on the Committee. The purpose of the Committee
is to recommend to the Board nominees for the position of noninterested Trustee
and to assure that at least a majority of the Board of Trustees is independent
of Eaton Vance and its affiliates.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees of the Trust and of the Portfolio. The Audit Committee's
functions include making recommendations to the Board of Trustees regarding the
selection of the independent certified public accountants, and reviewing with
such accountants and the Treasurer of the Trust and of the Portfolio matters
relative to trading and brokerage policies and practices, accounting and
auditing practices and procedures, accounting records, internal accounting
controls, and the functions performed by the custodian and transfer agent of the
Fund and of the Portfolio.
Trustees of the Portfolio who 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. Neither the Portfolio nor the
Fund has a retirement plan for its Trustees.
The fees and expenses of those Trustees of the Trust and 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. For the compensation received by the noninterested Trustees of the
Trust and the Portfolio, see "Fees and Expenses" in Part II.
INVESTMENT ADVISER AND ADMINISTRATOR
The Portfolio engages BMR as investment adviser pursuant to an Investment
Advisory Agreement dated October 23, 1995. BMR or Eaton Vance acts as investment
adviser to investment companies and various individual and institutional clients
with combined assets under management of over $16 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,
and U.S. Government securities. The equity division cover stocks ranging from
blue chip to emerging growth companies.
Eaton Vance and its affiliates act as adviser to over 150 mutual funds,
individual and various institutional accounts, including corporations,
hospitals, retirement plans, universities, foundations and trusts. Eaton Vance
mutual funds feature international equities, domestic equities, tax-free
municipal bonds, and U.S. government and corporate bonds. Lloyd George
Management has advised Eaton Vance's international equity funds since 1992.
Founded in 1991, Lloyd George is headquartered in Hong Kong with offices in
London and Mumbai, India. It has established itself as a leader in investment
management in Asian equities and other global markets. Lloyd George features an
experience team of investment professionals that began working together in the
mid-1980s. Lloyd George's staff includes 11 highly qualified investment
professionals who manage U.S. $1.3 billion. Lloyd George analysts cover East
Asia, the India subcontinent, Russia and Eastern Europe, Latin America,
Australia and New Zealand from offices in Hong Kong, London and Mumbai. Together
Eaton Vance and Lloyd George manage over $18 billion in assets. Eaton Vance
mutual funds are distributed by Eaton Vance Distributors both within the United
States and offshore.
Eaton Vance Distributors believes that an investment professional can
provide valuable services to you to help you reach your investment goals.
Meeting investment goals requires time, objectivity and investment savvy. Before
making an investment recommendation, a representative can help you carefully
consider your "short-term" and "long-term" financial goals, your tolerance for
investment risk, your investment time frame, and other investments you may
already own. Your professional investment representatives are knowledgeable
about financial markets, as well as the wide range of investment opportunities
available. A representative can provide you with tailored financial advice and
help you decide when to buy, sell or persevere with your investments.
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)
commission, 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 interest 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 registration 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, officer 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.
The Investment Advisory Agreement with BMR remains in effect until February
28, 1997. It may be continued indefinitely thereafter so long as such
continuance after February 28, 1997 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. 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.
As indicated in the Prospectus, Eaton Vance serves as Administrator of the
Fund, but currently 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. For additional information about the Administrator, see
"Fees and Expenses" in the Fund's Part II.
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) commission, 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 purpose and for distribution of the same to shareholders
and investors, and fees and expenses of registering and maintaining registration
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 registrar 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 officer
with respect thereto.
BMR is a wholly-owned subsidiary of Eaton Vance. Eaton Vance and EV are both
wholly-owned subsidiaries of EVC. Eaton Vance and BMR are both Massachusetts
business trusts, and EV is the trustee of Eaton Vance and BMR. 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, Eaton Vance, BMR and EV. All of
the issued and outstanding shares of Eaton Vance and of 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 December 31, 1996, the Voting Trustees of which are Messrs.
Brigham, Clay, 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 Eaton Vance and BMR who are also officers and
Directors of EVC and EV. As of May 1, 1996, 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. Clay,
Gardner, Hawkes and Otis, who are officers or Trustees of the Trust and/or the
Portfolio, are members of the EVC, Eaton Vance, BMR and EV organizations.
Messrs. Ahern, Murphy, O'Connor, Richardson, Rynne, Terry and Woodbury, and Ms.
Kreider and Ms. Sanders are officers of the Trust and/or the Portfolio and are
also members of the Eaton Vance, BMR and EV organizations. BMR will receive the
fees paid under the Investment Advisory Agreement.
EVC owns all of the stock of Energex Energy Corporation, which engages in
oil and gas exploration and development. In addition, Eaton Vance owns all the
stock of Northeast Properties, Inc., which is engaged in real estate investment.
EVC also owns 24% of the Class A shares of Lloyd George Management (B.V.I.)
Limited, a registered investment adviser. EVC owns all the stock of Fulcrum
Management, Inc. and MinVen, Inc., which are engaged in the development of
precious metal mining, venture investment and management. EVC, Eaton Vance, BMR
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 will not be influenced by existing
or potential custodial or other relationships between the Trust or the Portfolio
and such banks.
CUSTODIAN
Investors Bank & Trust Company ("IBT"), 89 South Street, Boston,
Massachusetts 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 disburse all funds and performs various other ministerial duties
upon receipt of proper instruction from the Fund and the Portfolio. IBT charges
fees which are competitive within the industry. A portion of the fee relates to
custody, bookkeeping and valuation services and is based upon a percentage of
Fund and Portfolio net assets and a portion of the fee relates to activity
charges, primarily the number of portfolio transactions. These fees are then
reduced by a credit for cash balances of the particular investment company at
the custodian equal to 75% of the 91-day, U.S. Treasury Bill auction rate
applied to the particular investment company's average daily collected balances
for the week. In view of Mr. Clay's interest in IBT, the Portfolio is treated as
a self-custodian pursuant to Rule 17f-2 under the Investment Company Act of
1940, 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.
SERVICE FOR WITHDRAWAL
By a standard agreement, the Trust's Transfer Agent will send to the
shareholder regular quarterly payments of any permitted amount designated by the
shareholder (see "Eaton Vance Shareholder Services - Systematic Withdrawal Plan"
in the Fund's current Prospectus) based upon the value of the shares held. The
checks will be drawn from share redemptions and hence, are a return of
principal. Income dividends and capital gain 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. A shareholder may not have a withdrawal plan in effect at the same time
he or she has authorized Bank Automated 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 (as agent and custodian for the Fund and the Portfolio) in the manner
described under "Valuing Fund Shares" in the Fund's current Prospectus. The Fund
and Portfolio will be closed for business and will not price their shares 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.
The Trustees of the Portfolio have established the following procedures for
the fair valuation of the Portfolio's assets under normal market conditions.
Securities listed on foreign or U.S. securities exchanges or in the NASDAQ
National Market System generally are valued at closing sale prices or, if there
were no sales, at the mean between the closing bid and asked prices therefor on
the exchange where such securities are principally traded or on such National
Market System. Unlisted or listed securities for which closing sale prices are
not available are valued at the mean between the latest bid and asked prices. An
option is valued at the last sale price as quoted on the principal exchange or
board of trade on which such option or contract is traded, or in the absence of
a sale, at the mean between the last bid and asked prices. Futures positions on
securities or currencies are generally valued at closing settlement prices.
Short-term debt securities with a remaining maturity of 60 days or less are
valued at amortized cost. If securities were acquired with a remaining maturity
of more than 60 days, their amortized cost value will be based on their value on
the sixty-first day prior to maturity. Other fixed income and debt securities,
including listed securities and securities for which price quotations are
available, will normally be valued on the basis of valuations furnished by a
pricing service. All other securities are valued at fair value as determined in
good faith by or at the direction of the Trustees.
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 represents 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. Each investor's
percentage of the aggregate interest in the Portfolio will then be recomputed as
a percentage equal to a 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, that 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.
Generally, trading in the foreign securities owned by the Portfolio is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of the Portfolio's share are computed as of such times. Occasionally, events
affecting the value of foreign securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of the
Portfolio's net asset value (unless the Portfolio deems that such events would
materially affect its net asset value, in which case an adjustment would be made
and reflected in such computation). Foreign securities and currency held by the
Portfolio will be valued in U.S. dollars; such values will be computed by the
custodian based on foreign currency exchange rate quotations supplied by Reuters
Information Service.
INVESTMENT PERFORMANCE
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 distributions paid and
reinvested) for the stated period and annualizing the result. The calculation
assumes that all distributions are reinvested at net asset value on the
reinvestment dates during the period.
The Fund may use total return figures showing after-tax returns, including
comparisons to tax-deferred vehicles such as Individual Retirement Accounts
("IRAs") and variable annuities. In calculating after-tax returns, the Fund
will, in general, assume that its shareholders are U.S. individual taxpayers
subject to federal income taxes at the highest marginal rate then applicable to
ordinary income and long-term capital gains. After-tax returns may also be
calculated using different tax rate assumptions and taking into account state
and local income taxes as well as federal taxes. In calculating after-tax
returns, distributions made by the Fund are assumed to be reduced by the amount
of taxes payable on the distribution, and the after-tax proceeds of the
distribution are reinvested in the Fund at net asset value on the reinvestment
date.
The Fund's total return may be compared to relevant indices, such as the
Consumer Price Index and various domestic and foreign securities indices, for
example: Standard & Poor's Index of 400 Common Stocks, Standard & Poor's Index
of 500 Common Stocks, Merrill Lynch U.S. Treasury (15-year plus) Index, Lehman
Brothers Government/Corporate Bond Index, the Dow Jones Industrial Average and
Morgan Stanley Global Equity. 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, and other investment companies.
Information used in advertisements and in materials furnished to present or
prospective shareholders may include statistics, data and performance studies
prepared by independent organizations (e.g. Ibbotson Associates, Standard &
Poor's Ratings Group, Merrill Lynch Private Client Group, Bloomberg, L.P., Dow
Jones & Company, Inc., and the Federal Reserve Board) or included in various
publications (e.g. The Wall Street Journal, Barron's and The Decade: Wealth of
Investments in U.S. Stocks, Bonds, Bills & Inflation) reflecting the investment
performance or return achieved by various classes and types of investments (e.g.
common stocks, small company stocks, long-term corporate bonds, long-term
government bonds, intermediate-term government bonds, U.S. Treasury bills) over
various periods of time. This information may be used to illustrate the benefits
of long-term investments in common stocks.
Information about the allocation and holdings of investments in the
Portfolio may be included in advertisements and other material furnished to
present and prospective shareholders.
Evaluations of the Fund's performance or rankings of mutual funds (which
include the Fund) made by independent sources (e.g., Lipper Analytical Services,
Inc., CDA/Weisenberger and Morningstar, Inc.) may be used in advertisements and
in information furnished to present or prospective shareholders. Information,
charts and illustrations showing the effect of compounding interest or relating
to inflation and taxes (including their effects on the dollar and the return on
stocks and other investment vehicles) may also be included in advertisements and
materials furnished to present and prospective investors.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
-- costs associated with aging parents;
-- funding a college education (including its actual and estimated cost);
-- health care expenses (including actual and projected expenses);
-- long-term disabilities (including the availability of, and coverage
provided by, disability insurance); and
-- retirement (including the availability of social security benefits, the
tax treatment of such benefits and statistics and other information
relating to maintaining a particular standard of living and outliving
existing assets).
Such information may also address different methods for saving money and the
results of such methods, as well as the benefits of investing in equity
securities. Such information may describe: the potential for growth; the
performance of equities as compared to other investment vehicles; and the value
of investing as early as possible and regularly, as well as staying invested.
The benefits of investing in equity securities by means of a mutual fund may
also be included (such benefits may include diversification, professional
management and the variety of equity mutual fund products).
Information in advertisements and materials furnished to present and
prospective investors may include profiles of different types of investors
(i.e., investors with different goals and assets) and different investment
strategies for meeting specific financial goals. Such information may provide
hypothetical illustrations which include: results of various investment
strategies; performance of an investment in the Fund over various time periods;
and results of diversifying assets among several investments with varying
performance. Information in advertisements and materials furnished to present
and prospective investors may also include quotations (including editorial
comments) and statistics concerning investing in securities, as well as
investing in particular types of securities and the performance of such
securities.
The Fund may provide information about Eaton Vance, its affiliates and other
investment advisers to the funds in the Eaton Vance Family of Funds in sales
material or advertisements provided to investors or prospective investors. Such
material or advertisements may also provide information on the use of investment
professionals by such investors.
HYPOTHETICAL RETURNS
The following analysis compares the after-tax returns achieved from three
hypothetical investments with identical pre-tax returns of 10% per year. The
first hypothetical investment is a tax-managed equity mutual fund whose returns
consist entirely of deferred gains (no dividend income and no realized capital
gains). Note - It is anticipated the Fund will distribute some net investment
income and capital gains in some years, so the hypothetical may not be entirely
applicable. The second hypothetical investment is a conventional equity mutual
fund, managed without regard to investor tax considerations, whose 10% annual
returns consist of 2% return from dividend income and 8% return from realized
capital gains, three-quarters of which are long-term gains and one-quarter of
which are short-term gains. The third hypothetical investment is a variable
annuity fund, which by its structure defers taxation on all income and gains.
The third hypothetical investment is a variable annuity fund, which by its
structure defers taxation on all income and gains. The investor is amused to pay
federal taxes at the highest rate applicable to individual income and gains,
including the effect of the itemized deduction phaseout. this rate is 40.8% for
dividend income and short-term capital gains and 29.2% for long-term capital
gains. The investor is assumed to pay no state or local taxes.
An initial investment of $10,000 in each of the three hypothetical funds
would grow in value to:
CONVENTIONAL EQUITY VARIABLE
TAX-MANAGED FUND MUTUAL FUND ANNUITY FUND
---------------- ------------------- ------------
After 10 years: $25,937 $18,942 $25,937
After 20 years: $67,275 $35,881 $67,275
The returns from the tax-managed fund and the variable annuity fund are the
same since the pre-tax returns are assumed to be identical and no taxes have
been paid in either case. The returns from the conventional fund are
substantially lower due to the taxes paid each year in connection with the funds
dividend income and realized long-term and short-term capital gains.
If the hypothetical fund investments were each to be sold, the amount
realized from the sale, net of taxes, would be:
CONVENTIONAL EQUITY VARIABLE
TAX-MANAGED FUND MUTUAL FUND ANNUITY FUND
---------------- ------------------- ------------
After 10 years: $21,286 $18,942 $19,437
After 20 years: $50,558 $35,881 $43,914
The proceeds from selling the conventional fund, net of taxes, equals the
value of the shares (from above), since no gain is recognized at sale. The
net-of-tax proceeds of the tax-managed fund position is reduced by the capital
gains taxes due on the accumulated gain. The net-of-tax proceeds of the variable
annuity is reduced by taxes on the accumulated income and gain, all of which is
taxed as ordinary income.
If the holder of the hypothetical fund investments were to die, the value of
the investment passing to the estate would be:
CONVENTIONAL EQUITY VARIABLE
TAX-MANAGED FUND MUTUAL FUND ANNUITY FUND
---------------- ------------------- ------------
After 10 years: $25,937 $18,942 $19,437
After 20 years: $67,275 $35,881 $43,914
The value of the tax-managed fund and the conventional fund would pass
through to the estate without being taxed and their tax basis would be adjusted
upward to the value at the time of death. The value of the variable annuity
would be reduced by taxes at the ordinary income rate on the accumulated income
and gain, as if the investor had sold the position.
TAXES
See also "Distribution and Taxes" in the Fund's current Prospectus.
The Fund, as a series of a Massachusetts business trust, will be treated as
a separate entity for accounting and tax purposes. The Fund intends to elect to
be treated, and to qualify each year as a regulated investment company ("RIC")
under 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 on the Fund. Because the Fund invests 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 investment
income, net realized capital gains, and any other items of income, gain, loss,
deduction or credit. The Portfolio will make allocations to the Fund in
accordance with the Code and applicable regulations and will make moneys
available for withdrawal at appropriate times and in sufficient amounts to
enable the Fund to satisfy the tax distribution requirements that apply to the
Fund and that must be satisfied in order to avoid federal income and/or excise
tax on the Fund. For purposes of applying the requirements of the Code regarding
qualification as a RIC, 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 (or be deemed to have distributed) 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 and capital gains from the prior year (as
previously computed) that was not paid out during such year and on which the
Fund was not taxed. Further, under current law, provided that the Fund qualifies
as a RIC for federal income tax purposes and the Portfolio is treated as a
partnership for Massachusetts and federal tax purposes, neither the Fund nor the
Portfolio is liable for any income, corporate excise or franchise tax in the
Commonwealth of Massachusetts.
Foreign exchange gains and losses realized by the Portfolio and allocated to
the Fund in connection with the Portfolio's investments in foreign securities
and certain options, futures or forward contracts or foreign currency may be
treated as ordinary income and losses under special tax rules. Certain options,
futures or forward contracts of the Portfolio may be required to be marked to
market (i.e., treated as if closed out) on the last day of each taxable year,
and any gain or loss realized with respect to these contracts may be required to
be treated as 60% long-term and 40% short-term gain or loss. Positions of the
Portfolio in securities and offsetting options, swaps, futures or forward
contracts may be treated as "straddles" and be subject to other special rules
that may, upon allocation of the Portfolio's income, gain or loss to the Fund,
affect the amount, timing and character of the Fund's distributions to
shareholders. Certain uses of foreign currency and foreign currency derivatives
such as options, futures, forward contracts and 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 RIC or avoid imposition of a tax on the Fund.
The Portfolio will allocate at least annually to the Fund and its other
investors their respective distributive shares of any net investment income and
net capital gains which have been recognized for federal income tax purposes
(including unrealized gains at the end of the Portfolio's fiscal year on certain
options and futures transactions that are required to be marked-to-market). Such
amounts will be distributed by the Fund to its shareholders in cash or
additional shares, as they elect. Shareholders of the Fund will be advised of
the nature of the distributions.
Certain investors in the Portfolio, including RICs, have acquired interests
in the Portfolio by contributing securities. Due to tax considerations, during
the first five years following the contribution of securities to the Portfolio
by an investor, such securities will not be distributed to any investor other
than the investor who contributed those securities. Investors who acquire an
interest in the Portfolio by contributing securities and who redeem that
interest within five years thereafter will generally receive back one or more of
the securities they contributed. In partial redemptions by such investors during
this period, the Portfolio will attempt to accommodate requests to distribute
initially those contributed securities and share lots with the highest cost
basis.
The Portfolio has significant holdings of highly appreciated securities that
were contributed to the Portfolio by investors other than the Fund. If such
securities were to be sold, the resulting capital gain would be allocated
disproportionately among the Portfolio's investors, with the result that the
Fund would not be subject to taxation on any gain arising prior to the
contribution of the securities to the Portfolio.
Distributions by the Fund of the excess of net long-term capital gains over
short-term capital losses earned by the Portfolio and allocated to the Fund,
taking into account any capital loss carryforwards that may be available to the
Fund in years after its first taxable year, 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 have been held. Certain
distributions, if declared in October, November or December and paid the
following January, will be taxed to shareholders as if received on December 31
of the year in which they are declared.
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 a loss realized upon a taxable disposition of
Fund shares may be disallowed under "wash sale" rules if other Fund shares are
purchased (whether through reinvestment of dividends or otherwise) within 30
days before or after the disposition. Any disallowed loss will result in an
adjustment to the shareholder's tax basis in some or all of the other shares
acquired.
The Fund will not be subject to Massachusetts income, corporate excise or
franchise taxation as long as it qualifies as a RIC under the Code.
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 certifications required by the Internal Revenue Service (the "IRS"), as
well as shareholders with respect to whom the Fund has received notification
from the IRS 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, foreign corporations and certain other
foreign 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 foregoing discussion does not describe many of the tax rules applicable
to IRAs nor does it address the special tax rules applicable to certain other
classes of investors, such as other retirement plans, tax-exempt entities,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to these or other 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.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions by the
Portfolio, including the selection of the market and the broker-dealer 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
certain other accounts managed by it for execution with many broker-dealer
firms. BMR uses its best efforts to obtain execution of portfolio transactions
at prices which are advantageous to the Portfolio and (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 general
execution and operational capabilities of the broker-dealer, the nature and
character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the reputation,
reliability, experience and financial condition of the broker-dealer, the value
and quality of services rendered by the broker-dealer in other transactions, and
the reasonableness of the commission, if any. Transactions on stock exchanges
and other agency transactions involve the payment by the Portfolio of negotiated
brokerage commissions. Such commissions vary among different broker-dealer
firms, and a particular broker-dealer may charge different commissions according
to such factors as the difficulty and size of the transaction and the volume of
business done with such broker-dealer. Transactions in foreign securities
usually involve the payment of fixed brokerage commissions, which are generally
higher than those in the United States. There is generally no stated commission
in the case of securities traded in the over-the-counter markets, but the price
paid or received by the Portfolio usually includes an undisclosed dealer markup
or markdown. In an underwritten offering the price paid by the Portfolio
includes a disclosed fixed commission or discount retained by the underwriter or
dealer. Although commissions paid on portfolio 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 broker-dealers who were selected to execute transactions on behalf of
the Portfolio and BMR's other clients in part 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 it exercises 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; and 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 for 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-dealers 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 may receive Research Services from broker-dealer firms with which
BMR places the portfolio transactions of the Portfolio and from third parties
with which these broker-dealers have arrangements. These Research Services may
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 to
execute portfolio security transactions of the Portfolio at advantageous prices
and at reasonably competitive commission rates or spreads, BMR is authorized to
consider as a factor in the selection of any broker-dealer 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 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 transactions among the Portfolio
and the portfolios of its other investment accounts 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 Portfolio that the benefits available from BMR's
organization outweigh any disadvantage that may arise from exposure to
simultaneous transactions. For the brokerage commissions paid by the Portfolio
on portfolio transactions, see "Fees and Expenses" in Part II.
OTHER INFORMATION
On July 10, 1995, the Trust changed its name from Eaton Vance Government
Obligations Trust to Eaton Vance Mutual Funds Trust. The Trust is organized as a
business trust under the laws of the Commonwealth of Massachusetts under a
Declaration of Trust dated May 7, 1984, as amended. Eaton Vance, pursuant to its
agreement with the Trust, controls the use of the words "Eaton Vance" and "EV"
in the Fund's name and may use the words "Eaton Vance" or "EV" in other
connections and for other purposes.
The Declaration of Trust may be amended by the Trustees when authorized by a
majority of the outstanding voting securities of the Trust 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 rights
or interests of shareholders or if they deem it necessary to conform the
Declaration to the requirements of federal laws 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 meetings 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 shareholder's 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 office 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 set 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 holding
office have been elected by investors. In such an event the Trustees of the
Portfolio 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 interest
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 shares of the Fund can be suspended and the payment of
the redemption price deferred when 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 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 CERTIFIED PUBLIC ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, are the
independent certified public accountants of the Fund, providing audit services,
tax return preparation, and assistance and consultation with respect to the
preparation of filings with the Securities and Exchange Commission.
For the financial statements of the Portfolio see "Financial Statements" in
Part II.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
This Part II provides information about EV CLASSIC TAX-MANAGED GROWTH FUND.
The Fund became a series of the Trust on June 24, 1996.
FEES AND EXPENSES
INVESTMENT ADVISER
As of April 30, 1996, the Portfolio had net assets of $209,444,667. For the
period from the start of business, December 1, 1995, to April 30, 1996, the
Portfolio paid BMR advisory fees of $356,359 (equivalent to 0.625% (annualized)
of the Portfolio's average daily net assets for such period).
DISTRIBUTION PLAN
The Fund has not made any sales commission payments to the Principal
Underwriter under the Plan to date.
PRINCIPAL UNDERWRITER
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares at the rate of $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.
BROKERAGE
No fees paid to date.
TRUSTEES
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.) For the fiscal year ending October 31, 1996, it is estimated that
the noninterested Trustees of the Trust and the Portfolio will receive the
following compensation in their capacities as Trustees of the Trust and the
Portfolio and, during the one year period ended March 31, 1996, the
noninterested Trustees of the Trust and the Portfolio earned the following
compensation in their capacities as Trustees of the other funds in the Eaton
Vance fund complex\1/:
ESTIMATED ESTIMATED TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM TRUST AND
NAME FROM FUND FROM PORTFOLIO FUND COMPLEX
- ---- ------------ -------------- ------------------
Donald R. Dwight $50 $1,600 $137,500\2/
Samuel L. Hayes, III 50 1,600 153,750\3/
Norton H. Reamer 50 1,600 137,500
John L. Thorndike 50 1,600 142,500
Jack L. Treynor 50 1,600 142,500
- ----------
\1/ The Eaton Vance fund complex consists of 219 registered investment
companies or series thereof.
\2/ Includes $35,313 of deferred compensation.
\3/ Includes $37,500 of deferred compensation.
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 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 by the Fund to the Principal Underwriter pursuant to
the Plan as sales commissions and distribution fees 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 assets 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, the expenses of the Fund and the Portfolio accrued and
allocated to the Fund on such day, income on portfolio investments of the
Portfolio accrued and allocated to the Fund on such day, and any distributions
declared on Fund shares. 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 such a liability under 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 by the Fund to the Principal Underwriter whenever there exist
Uncovered Distributions Charges under the Plan.
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.
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 or payable
under the Plan by the Fund to the Principal Underwriter and contingent deferred
sales charges theretofore paid or 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 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.
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 in the Eaton Vance Classic Group of Funds 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.
As currently implemented by the Trustees, the Plan authorizes payments of
sales commissions, distribution fees and service fees to the Principal
Underwriter 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.
For the sales commission and service fee payments made by the Fund and the
outstanding uncovered distribution charges of the Principal Underwriter, see
"Fees and Expenses -- Distribution Plan" in this Part II. 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 many 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 and service
fees 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 management fee payable to Eaton Vance by
the Fund and the administration fee payable to Eaton Vance by the Portfolio)
resulting from sale of Fund shares and through the sales commissions,
distribution fees and contingent deferred sales charges paid to the Principal
Underwriter. The Eaton Vance organization may be considered to have realized a
profit in distributing shares of the Fund if at any point in time the aggregate
amounts theretofore received by the Principal Underwriter from the Fund 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.
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 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") and (ii) all of
the Trustees then in office, and the Distribution Agreement contains a similar
provision. The Plan and the Distribution Agreement may each be terminated at any
time by 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. 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 Rule 12b-1
Trustees. 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 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 of the Trust believe that the Plan will be a significant
factor in the expected growth of the Fund's assets, and will result in
increased investment flexibility and advantages which will 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 Authorized Firms under the Plan would 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 of the Trust have
determined that in their judgment there is a reasonable likelihood that the
Plan will benefit the Fund and its shareholders.
PERFORMANCE INFORMATION
The table below indicates the cumulative and average annual total return
on a hypothetical investment of $1,000 in the Fund covering the 1, 5, and 10
year periods ended April 30, 1996. The total return for the period prior to
the Fund's commencement of operations reflects the Portfolio's total return
(or that of its predecessor) adjusted to reflect any applicable Fund
contingent deferred sales charge ("CDSC"). The total return for such prior
period has not been adjusted to reflect the Fund's distribution fees and
certain other expenses.
VALUE OF A $1,000 INVESTMENT
<TABLE>
<CAPTION>
VALUE OF VALUE OF TOTAL RETURN BEFORE TOTAL RETURN AFTER
INVESTMENT INVESTMENT DEDUCTING CDSC DEDUCTING CDSC*
INVESTMENT INVESTMENT BEFORE CDSC AFTER CDSC ----------------------------- --------------------------
PERIOD DATE ON 4/30/96 ON 4/30/96 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
- ----------------- ----------- ----------- -------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
10 years ended
4/30/96 4/30/86 $3,643.10 $3,643.10 264.31% 13.80% 264.31% 13.80%
5 years ended
4/30/96 4/30/91 $1,995.62 $1,995.62 99.56% 14.82% 99.56% 14.82%
1 year ended
4/30/96 4/30/95 $1,286.16 $1,276.16 28.62% 28.62% 27.62% 27.62%
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 their original cost.
- ----------
*No CDSC is imposed on certain redemptions. See the Fund's current Prospectus.
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of July 31, 1996, Eaton Vance owned one share of the Fund, being the
only share of the Fund outstanding on such date. Eaton Vance is a
Massachusetts business trust and a wholly-owned subsidiary of EVC.
<PAGE>
FINANCIAL STATEMENTS
TAX-MANAGED GROWTH PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 23, 1995
ASSETS:
Cash ............................................................. $100,010
Deferred organization expenses ................................... 6,850
--------
Total assets ................................................. $106,860
LIABILITIES:
Accrued organization expenses .................................... 6,850
--------
NET ASSETS ....................................................... $100,010
--------
NOTES:
(1) Tax-Managed Growth Portfolio (the "Portfolio") was organized as a New York
Trust on October 23, 1995 and has been inactive since that date, except
for matters relating to its organization and registration as an investment
company under the Investment Company Act of 1940 and the sale of interests
therein at the purchase price of $100,000 to Eaton Vance Management and
the sale of interest therein at the purchase price of $10 to Boston
Management & Research (the "Initial Interests").
(2) Organization expenses are being deferred and will be amortized on a
straight-line basis over a period not to exceed five years, commencing on
the effective date of the Portfolio's initial offering of its interests.
The amount paid by the Portfolio on any withdrawal by the holders of the
Initial Interests of any of the respective Initial Interests will be
reduced by a portion of any unamortized organization expenses, determined
by the proportion of the amount of the Initial Interests withdrawn to the
Initial Interests then outstanding.
(3) At 4:00 p.m., New York City time, on each business day of the Portfolio,
the value of an investor's interest in the Portfolio is equal to the
product of (1) the aggregate net asset value of the Portfolio multiplied
by (ii) the percentage representing that investor's share of the aggregate
interest in the Portfolio effective for that day.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Investors of
Tax-Managed Growth Portfolio:
We have audited the accompanying statement of assets and liabilities of
Tax-Managed Growth Portfolio (a New York Trust) as of October 23, 1995. This
financial statement is the responsibility of the Trust's management. Our
responsibility is to express an opinion on this financial statement 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 statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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, such statement of assets and liabilities presents fairly,
in all material respects, the financial position of Tax-Managed Growth
Portfolio as of October 23, 1995, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 24, 1995
<PAGE>
[LOGO:EATON VANCE]
EV CLASSIC
TAX-MANAGED GROWTH FUND
- --------------------------------------------------------------------------------
STATEMENT OF
ADDITIONAL INFORMATION
AUGUST 1, 1996
EV CLASSIC
TAX-MANAGED GROWTH FUND
24 FEDERAL STREET
BOSTON, MA 02110
- --------------------------------------------------------------------------------
INVESTMENT ADVISER OF TAX-MANAGED GROWTH PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
FUND ADMINISTRATOR
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, 89 South Street, Boston, MA 02111
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, MA 02110
C-TGSAI
<PAGE>
--------------------------------
TAX-MANAGED GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
APRIL 30, 1996
(UNAUDITED)
- ------------------------------------------------------------------------------
COMMON STOCKS - 96.4%
- ------------------------------------------------------------------------------
NAME OF COMPANY SHARES VALUE
- ------------------------------------------------------------------------------
ADVERTISING - 1.5%
Interpublic Group Cos. 66,000 $ 3,085,500
------------
AEROSPACE/DEFENSE - 4.3%
Boeing Co. 60,370 $ 4,957,886
Raytheon 80,000 4,050,000
------------
$ 9,007,886
------------
BEVERAGES - 7.0%
Anheuser-Busch Cos., Inc. 35,820 $ 2,404,418
Coca-Cola Co. 67,206 5,477,289
PepsiCo Inc. 106,985 6,793,547
------------
$ 14,675,254
------------
BUSINESS PRODUCTS AND SERVICES - 5.2%
Manpower Inc. 110,000 $ 4,070,000
Reuters Holdings PLC, ADR 100,420 6,790,903
------------
$ 10,860,903
------------
CHEMICALS - 1.4%
Monsanto Co. 19,336 $ 2,929,404
------------
COMPUTER & BUSINESS EQUIPMENT - 7.0%
Digital Equipment Corp.* 8,325 $ 497,419
International Business Machines 14,400 1,548,000
Hewlett-Packard Co. 118,570 12,553,599
------------
$ 14,599,018
------------
CONSTRUCTION AND REAL ESTATE - 2.5%
Dover Corp. 101,580 $ 5,231,370
------------
CONSUMER PRODUCTS - 1.9%
Procter & Gamble Co. 48,000 $ 4,056,000
------------
COSMETICS AND TOILETRIES - 2.0%
International Flavors & Fragrances, Inc. 88,101 $ 4,327,962
------------
HEALTH CARE - 14.1%
Astra AB - Series A 80,000 $ 3,548,576
Bristol-Myers Squibb Co. 29,000 2,385,250
Genentech Inc.* (Redeemable Common) 16,500 872,438
Johnson & Johnson 69,575 6,435,688
Merck & Co., Inc. 72,045 4,358,722
Pfizer Inc. 144,952 9,983,569
SmithKline Beecham PLC 37,520 2,026,080
------------
$ 29,610,323
------------
ELECTRONICS - 6.0%
AMP Inc. 61,530 $ 2,753,467
Intel Corp. 104,278 7,064,835
Texas Instruments Inc. 48,000 2,712,000
------------
$ 12,530,302
------------
FINANCIAL - MISC. - 0.9%
Federal National Mortgage Association 62,620 $ 1,917,738
------------
FINANCIAL SERVICES - 2.4%
American Express Co. 56,798 $ 2,754,703
Marsh & McLennan Cos., Inc. 24,000 2,256,000
------------
$ 5,010,703
------------
FOOD PROCESSING - 1.5%
Earthgrains Co. 1,433 $ 46,387
McCormick & Co., Inc., Non-voting 145,120 3,228,920
------------
$ 3,275,307
------------
FOREST PRODUCTS - 2.0%
Kimberly-Clark Corp. 57,310 $ 4,162,139
------------
INDUSTRIAL EQUIPMENT - 0.5%
Parker Hannifin Corp. 22,369 $ 945,090
------------
INSTRUMENTATION AND CONTROLS - 1.7%
Dionex Corp.* 100,000 $ 3,662,500
------------
INSURANCE - 5.1%
American International Group Inc. 50,625 $ 4,625,859
General Re Corp. 31,920 4,560,570
St. Paul Cos., Inc. 27,620 1,467,313
------------
$ 10,653,742
------------
MACHINERY AND EQUIPMENT - 2.9%
Dexter Corp. 47,829 $ 1,285,404
Gould Pumps, Inc. 78,830 1,832,797
Tecumseh Products Co. Class B 13,320 705,960
Tecumseh Products Co. Class A 39,960 2,257,740
------------
$ 6,081,901
------------
MEDICAL PRODUCTS - 1.3%
Baxter International Inc. 23,950 $ 1,059,787
Sofamor/Danek Group, Inc.* 50,000 1,637,500
------------
$ 2,697,287
------------
METALS & MINING - 0.7%
Nucor Corp. 25,000 $ 1,406,250
------------
MISCELLANEOUS - 0.0%
Schweitzer-Maudit International Inc. 5,731 $ 155,453
------------
OIL - 3.8%
Atlantic Richfield Co. 6,880 $ 810,120
Exxon Corp. 63,774 5,420,790
Andarko Petroleum Corp. 29,000 1,689,250
------------
$ 7,920,160
------------
OIL & GAS - EQUIPMENT & SERVICE - 3.6%
Baker Hughes Inc. 39,234 $ 1,245,679
Dresser Industries, Inc. 79,800 2,543,625
Schlumberger Ltd. 42,819 3,778,777
------------
$ 7,568,081
------------
PAPER & FOREST PRODUCTS - 0.5%
Champion International Corp. 1,438 $ 69,383
Weyerhaeuser Co. 19,380 959,310
------------
$ 1,028,693
------------
PHOTOGRAPHIC PRODUCTS - 1.4%
Eastman Kodak Co. 37,181 $ 2,844,347
------------
PRINTING & BUSINESS FORMS - 1.8%
Bowne & Co., Inc. 91,770 $ 1,651,860
Donnelley (R.R.) & Sons Co. 47,896 1,724,256
Moore Corp., Ltd. 19,075 348,119
------------
$ 3,724,235
------------
PUBLISHING AND PRINTING - 3.1%
Dun & Bradstreet Corp. 21,098 $ 1,284,341
Harcourt General, Inc. 50,000 2,200,000
Houghton Mifflin Co. 63,700 2,954,087
------------
$ 6,438,428
------------
RESTAURANTS - 1.6%
McDonald's Corp. 72,000 $ 3,447,000
------------
RETAIL - 4.6%
Albertson's, Inc. 156,048 $ 6,007,848
Wal-Mart Stores, Inc. 148,700 3,550,213
------------
$ 9,558,061
------------
RETAIL - SPECIALTY & APPAREL - 1.9%
Home Depot, Inc. (The) 40,000 $ 1,895,000
Toys "R" Us, Inc. 72,000 2,007,000
------------
$ 3,902,000
------------
TRANSPORTATION - 2.2%
CSX Corp. 15,270 $ 782,587
Flightsafety International Ltd. 15,000 830,625
Union Pacific Corp. 44,530 3,033,606
------------
$ 4,646,818
------------
TOTAL COMMON STOCKS
(IDENTIFIED COST, $28,531,980) $201,959,855
----------- ------------
- --------------------------------------------------------------------------
SHORT-TERM OBLIGATION - 3.1%
- --------------------------------------------------------------------------
FACE AMOUNT
(000 OMITTED) VALUE
- --------------------------------------------------------------------------
Ford Motor Credit Corp., 5.27%
due 5/01/96, at amortized cost $ 6,400 $ 6,400,000
------------
TOTAL INVESTMENTS
(IDENTIFIED COST, $34,931,980) - 99.5% $208,359,855
OTHER ASSETS, LESS LIABILITIES - 0.5% 1,084,812
------------
NET ASSETS - 100% $209,444,667
============
*Non-income producing security.
See notes to financial statements
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
April 30, 1996 (Unaudited)
- ------------------------------------------------------------------------------
ASSETS:
Investments, at value (Note 1A) (identified cost,
$34,931,980) $208,359,855
Cash 908,206
Dividends and interest receivable 170,736
Deferred organization expenses (Note 1C) 6,280
Other assets 8,360
------------
Total assets $209,453,437
LIABILITIES:
Payable to affiliate --
Trustees' fees $1,104
Accrued expenses 7,666
------
Total liabilities 8,770
------------
NET ASSETS APPLICABLE TO INVESTORS' INTEREST IN PORTFOLIO $209,444,667
============
SOURCES OF NET ASSETS:
Net proceeds from capital contributions and
withdrawals $ 36,016,792
Unrealized appreciation of investments (computed on
the basis of identified cost) 173,427,875
------------
Total $209,444,667
============
See notes to financial statements
<PAGE>
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
For the period from the start of business, December 1, 1995, to April 30, 1996
(Unaudited)
- ------------------------------------------------------------------------------
INVESTMENT INCOME:
Income --
Dividends (net of foreign withholding tax of
$7,541) $ 864,332
Interest 47,216
-----------
Total income $ 911,548
Expenses --
Investment adviser fee (Note 2) $ 356,359
Compensation of Directors not members of the
Investment Adviser's organization (Note 2) 3,293
Custodian fees 24,502
Amortization of organization expenses (Note 1C) 570
Miscellaneous 712
-----------
Total expenses 385,436
-----------
Net investment income $ 526,112
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments, computed on
the basis of identified cost $ 1,907,186
Increase in unrealized appreciation of
investments 12,138,526
-----------
Net realized and unrealized gain on
investments 14,045,712
-----------
Net increase in net assets from
operations $14,571,824
===========
See notes to financial statements
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
For the period from the start of business, December 1, 1995, to April 30, 1996
(Unaudited)
- ------------------------------------------------------------------------------
INCREASE IN NET ASSETS:
From operations --
Net investment income $ 526,112
Net realized gain on investments 1,907,186
Increase in unrealized appreciation of investments 12,138,526
------------
Net increase in net assets from operations $ 14,571,824
------------
Capital transactions --
Contributions $197,452,649
Withdrawals (2,679,816)
------------
Increase in net assets from capital transactions $194,772,833
------------
Total increase in net assets $209,344,657
NET ASSETS:
At beginning of period 100,010
------------
At end of period $209,444,667
============
SUPPLEMENTARY DATA
- ------------------------------------------------------------------------------
For the period from the start of business, December 1, 1995, to April 30, 1996
(Unaudited)
- ------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Expenses 0.68%+
Net investment income 1.35%+
PORTFOLIO TURNOVER 0%
+Annualized.
See notes to financial statements
<PAGE>
--------------------------------
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES
Tax-Managed Growth Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940 as a diversified, open-end investment company.
The Portfolio, which was organized as a trust under the laws of the State of
New York on December 1, 1995, seeks to provide long-term after-tax returns by
investing in a diversified portfolio of equity securities. The Declaration of
Trust permits the Trustees to issue interests in the Portfolio. Investment
operations began on December 1, 1995, with the acquisition of investments with
a value of $115,586,248, including unrealized appreciation of $96,618,064, in
exchange for an interest in the Portfolio by one of the Portfolio's investors.
During the period, additional investors contributed securities with a value of
$77,830,309, including unrealized appreciation of $64,671,645. The following
is a summary of the significant accounting policies of the Portfolio. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS -- Marketable securities, including options, that are
listed on foreign or U.S. securities exchanges or in the NASDAQ National
Market System are valued at closing sale prices, on the exchange where such
securities are principally traded. Futures positions on securities or
currencies are generally valued at closing settlement prices. Unlisted or
listed securities for which closing sale prices are not available are valued
at the mean between the latest bid and asked prices. Short-term debt
securities with a remaining maturity of 60 days or less are valued at
amortized cost. Other fixed income and debt securities, including listed
securities and securities for which price quotations are available, will
normally be valued on the basis of valuations furnished by a pricing service.
Investments for which valuations or market quotations are unavailable are
valued at fair value using methods determined in good faith by or at the
direction of the Trustees.
B. FEDERAL 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 on its share of such
income. Since some of the Portfolio's investors are regulated investment
companies that invest all or substantially all of their assets in the
Portfolio, the Portfolio normally must satisfy the applicable source of income
and diversification requirements, (under the Internal Revenue Code), in order
for its investors to satisfy them. The Portfolio will allocate, at least
annually among its investors, each investor's distributive share of the
Portfolio's net investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit.
C. DEFERRED ORGANIZATION EXPENSES -- Costs incurred by the Portfolio in
connection with its organization, including registration costs, are being
amortized on the straight-line basis over five years.
D. FUTURES CONTRACTS -- Upon the entering of a financial futures contract, the
Portfolio is required to deposit either in cash or securities an amount
("initial margin") equal to a certain percentage of the purchase price indicated
in the financial futures contract. Subsequent payments are made or received by
the Portfolio ("margin maintenance") each day, dependent on daily fluctuations
in the value of the underlying security, and are recorded for book purposes as
unrealized gains or losses by the Portfolio. The Portfolio's investment in
financial futures contracts is designed to hedge against anticipated future
changes in price of current or anticipated portfolio positions. Should prices
move unexpectedly, the Portfolio may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss.
E. OTHER -- Investment transactions are accounted for on the date the
investments are purchased or sold. Dividend income is recorded on the ex-
dividend date. However, if the ex-dividend date has passed, certain dividends
from foreign securities are recorded as the Portfolio is informed of the ex-
dividend date. Interest income is recorded on the accrual basis.
F. USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from those estimates.
G. INTERIM FINANCIAL INFORMATION -- The interim financial statements relating to
April 30, 1996 and for the period then ended have not been audited by
independent certified public accountants, but in the opinion of the Portfolio's
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial statements.
- ------------------------------------------------------------------------------
(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. Under the
advisory agreement, BMR receives a monthly advisory fee of 5/96 of 1% (0.625%
annually) of the average daily net assets of the Portfolio up to $500,000,000,
and at reduced rates as daily net assets exceed that level. For the period from
the start of business, December 1, 1995, to April 30, 1996 the adviser fee was
0.625% of average net assets. Except as to Trustees of the Portfolio who are not
members of EVM's organization, officers and Trustees receive remuneration for
their services to the Portfolio out of such investment adviser and
administrative fees. Certain of the officers and Trustees of the Portfolio are
officers or directors/trustees of the above organizations.
- ------------------------------------------------------------------------------
(3) INVESTMENT TRANSACTIONS
Purchases and sales of investments, other than short-term obligations,
aggregated $54,486 and $96,714, respectively.
- ------------------------------------------------------------------------------
(4) FEDERAL INCOME TAX BASIS OF INVESTMENT
The cost and unrealized appreciation (depreciation) in value of the
investments owned at April 30, 1996, as computed on a federal income tax
basis, are as follows:
Aggregate cost $ 34,931,980
============
Gross unrealized appreciation $173,427,875
Gross unrealized depreciation --
-----------
Net unrealized appreciation $173,427,875
============
- ------------------------------------------------------------------------------
(5) FINANCIAL INSTRUMENTS
The Portfolio may trade 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.
The Portfolio did not have any open obligations under these financial
instruments at April 30, 1996.
- ------------------------------------------------------------------------------
(6) LINE OF CREDIT
The Portfolio participates with other portfolios and funds managed by BMR and
EVM and its affiliates 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 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
funds and portfolios at the end of each quarter. The Portfolio did not have
any significant borrowings or allocated fees during the period.
<PAGE>
-----------------------------
INVESTMENT MANAGEMENT FOR TAX-MANAGED GROWTH PORTFOLIO
OFFICERS INDEPENDENT TRUSTEES
LANDON T. CLAY DONALD R. DWIGHT
President, Trustee President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
JAMES B. HAWKES
Vice President SAMUEL L. HAYES, III
Jacob H. Schiff Professor of
DUNCAN W. RICHARDSON Investment Banking, Harvard University
Vice President and Graduate School of Business Administration
Portfolio Manager
NORTON H. REAMER
JAMES L. O'CONNOR President and Director, United Asset
Treasurer Management Corporation
THOMAS OTIS JOHN L. THORNDIKE
Secretary Director, Fiduciary Company Incorporated
JACK L. TREYNOR
Investment Adviser and Consultant
