<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
Attn: Eaton Vance Funds
P.O. Box 5123
Westborough, MA 01581-5123
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
M-HISRC-11/96
[LOGO]
EV MARATHON
HIGH INCOME
FUND
SEMI-ANNUAL
SHAREHOLDER REPORT
SEPTEMBER 30, 1996
[Graphic Omitted]
<PAGE>
TO SHAREHOLDERS
EV Marathon High Income Fund had a total return of 6.9% for the six months ended
September 30, 1996. That was the result of a rise in net asset value per share
to $7.24 on September 30, 1996, from $7.10 on March 31, 1996, and the
reinvestment of $0.333 per share in income dividends. It does not include
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 5.7% for the same period. Based on the Fund's most
recent dividend and a net asset value of $7.24, the Fund had a distribution rate
of 8.98% at September 30.
RECORD HIGH-YIELD ISSUANCE HAS MET WITH STRONG INVESTOR DEMAND...
The high-yield market has witnessed another strong year for new issuance in
1996, with more than $55 billion of securities coming to market in the first
nine months alone. That far exceeds the pace set during the same period in 1995,
when $35 billion in new bonds were issued. Equally impressive has been the
demand by investors for high-yield bonds. A record $11 billion flowed into
high-yield bond funds from January through September, according to the
Investment Company Institute.
CROSSOVER BUYERS AND MERGERS HAVE PROVIDED FURTHER SUPPORT...
The high-yield market has received a further boost from non-traditional,
crossover buyers - pension funds, insurance companies, and other institutional
investors - that have historically focused on the investment-grade market. The
growing maturation of the high-yield market has attracted these yield-conscious
investors. Finally, an active merger-and-acquisition scene has contributed to
the market rise as several companies with outstanding high-yield debt were
acquired by investment-grade companies. Those acquisitions helped lift overall
bond prices while relieving supply pressures. In the pages that follow,
co-portfolio managers Hooker Talcott, Jr. and Michael Weilheimer review these
market trends, discuss recent changes within the Portfolio, and share their
outlook for the coming year.
- -------------------------------------------------------------------------------
HIGH INCOME PORTFOLIO: RATINGS BREAKDOWN OF BOND HOLDINGS*
NON-RATED ..................................... 2.4%
Aaa ........................................... 2.2%
Ba ............................................ 9.1%
B1 ........................................... 11.2%
B2 ........................................... 23,7%
B3 ........................................... 43.1%
* Moody's Investors Service ratings; percentages
based on market value as of September 30, 1996.
Portfolio is activity managed and percentages are
subject to change.
Source: Eaton Vance Management
- -------------------------------------------------------------------------------
Sincerely,
/s/ M. Dozier Gardner
M. Dozier Gardner
President
November 20, 1996
[Photo of M. Dozier Gardner]
*It is not possible to invest directly in the Index.
<PAGE>
MANAGEMENT DISCUSSION
An interview with Hooker Talcott, Jr. and Michael Weilheimer, Vice Presidents
and Co-Portfolio Managers of High Income Portfolio.
Q. HOOKER, HOW WOULD YOU EVALUATE THE HIGH-YIELD MARKET DURING THE PERIOD?
MR. TALCOTT: Interestingly, while the past nine months did not present a very
good environment for the Treasury market, high-yield bonds continued to post
positive returns. A look at the numbers is helpful. Ten-year maturity U.S.
Treasury yields - which stood at 6.3% at the end of March - climbed to 6.7%
at September 30. However, yield spreads - the difference between Treasury
yields and high-yield bonds of comparable maturity narrowed appreciably
during that same period, from 370 basis points in March to roughly 300 at
the end of September, according to Merrill Lynch High-Yield Master Index.
That tightening of spreads represented a strong outperformance by the
high-yield sector and kept the wind to our back during this period.
- ------------------------------------
[Photo of Hooker Talcott, Jr.]
HOOKER TALCOTT, JR.
- ------------------------------------
Q. HAS THE ECONOMY SHAPED UP WELL FOR THE HIGH-YIELD MARKET?
MR. WEILHEIMER: It certainly has. Despite the rise in interest rates, economic
conditions have been favorable for high-yield bonds. The economy, while far
from robust, has grown steadily, while inflation has remained well in check.
Not surprisingly, companies in the high-yield universe have fared well,
because a steady-growth, low-inflation economy tends to lead to improving
fundamentals.
Q. SUPPLY HAS BEEN VERY HEAVY IN 1996. HOW HAS THAT AFFECTED THE MARKET?
MR. TALCOTT: That's right. Through September 30, $55 billion in new issues came
to market, a sharp increase from the same period in 1995. Meanwhile, total
capitalization of the high-yield market has grown to around $325 billion
from $288 billion at the end of 1995. That is a fairly dramatic increase.
But investor demand has been more than adequate to balance the surge in
supply.
Q. WHERE HAVE YOU BEEN INVESTING?
MR. WEILHEIMER: During most of 1995, we were somewhat overweighted in cyclical
industrial companies. At the turn of the year, we lightened up considerably
on those companies, sensing an economic slowdown. However, as the year
progressed, we took note of the unexpected strength of the economy - called
by some a "mini-boom," - and benefited from a renewed commitment to
cyclicals. Some of our largest holdings during this period were chemicals
and paper and packaging companies, which responded well to the recovery we
saw through the third quarter of 1996. More recently, with some signs of
weakness re-appearing in the economy, we have made another mid-course
correction, reaccentuating more defensive sectors.
------------------------------------
[Photo of Michael Weilheimer]
MICHAEL WEILHEIMER
------------------------------------
- ------------------------------------------------------------------------------
Fund shares are not guaranteed by the FDIC and are not deposits or other
obligations of, or guaranteed by, any depository institution. Shares are subject
to investment risks, including possible loss of principal invested.
- ------------------------------------------------------------------------------
Another area where we had a significant investment was telecommunications
and media companies. These companies lagged the market early in the year due
to supply pressures, as many companies came to market to help finance the
enormous investment required in the construction of new paging, wireless and
cellular networks. However, with those supply pressures having eased, we've
recently seen better performance from media bonds.
Q. COULD YOU NAME SOME OF THE FUND'S RECENT PURCHASES?
MR. TALCOTT: Yes. Some of our recent purchases are well-known names, including:
CalEnergy Company, the world's largest independent geothermal power
producer; First Nationwide Holdings, which owns the fourth largest thrift in
the U.S.; and Keebler Corporation, a nationally-known producer of cookies
and baked goods. A lesser-known company, Echostar Satellite Broadcasting
Corp. is active in direct-to-home satellite broadcasting and is becoming
increasingly well-known to users of direct broadcast services.
Q. COULD YOU FOCUS ON WHAT ATTRACTED YOU TO THESE BONDS?
MR. WEILHEIMER: Yes. We found the Keebler deal especially attractive. Keebler is
the nation's second largest maker of cookies and crackers behind Nabisco.
The company was purchased from United Biscuits, a U.K. company, by a joint
venture vehicle of Artal Group S.A., a European food products company, and
Flowers Industries, Inc., a large U.S. NYSE-listed food distributor. In a
second transaction, the company purchased Sunshine Biscuits, the
third-ranked U.S. cookie maker. By merging these two units, the new Keebler
expects to increase market share and improve pricing flexibility, while
achieving additional manufacturing and distribution efficiencies. There is
also a possibility of taking the combined company public at some point. In
summary, this deal encompassed many of the qualities that we find attractive
in a new issue: good business synergies, operating cost savings, improved
market visibility, and the potential for equitization down the road.
Q. THE ECONOMY POSTED A RELATIVELY WEAK 2.2% GROWTH RATE IN THE THIRD QUARTER.
ARE YOU BECOMING ANY MORE DEFENSIVE?
MR. TALCOTT: Yes, we have become somewhat more selective in recent months.
Clearly, the Federal Reserve was not impressed enough with the second
quarter's 4.6% surge to raise rates. The third-quarter report seemed to more
accurately reflect the actual level of business activity. Recent economic
reports - including the Fed's Beige Book, an anecdotal survey of the
nation's economic areas have detected signs of weakness in the economy.
Given the strong levels of new issuance year-to-date and the torrent of new
investment, there may be occasions when the differences in credit levels may
be blurred. That would become more obvious if the economy were to weaken
significantly at some point.
Q. TO WHAT DEGREE ARE YOUR INVESTMENT CHOICES AFFECTED BY ECONOMIC CHANGES?
MR. WEILHEIMER: Naturally, we are, first and foremost, bottom-up investors and
focus predominantly on individual credits. But we also monitor the economy
closely for an upturn that might favor economically-sensitive cyclical
companies or a slowdown that might signal the need for a more defensive
posture. Industries respond differently to changes in the economic cycle and
we are sensitive to those changes. Finally, we may occasionally alter the
quality mix of the Portfolio. For example, in September, we noted a
narrowing of spreads between B-rated and BB-rated bonds. With signs of a
weakening economy on the horizon, we slightly increased our holdings of
BB-rated bonds for defensive purposes.
Q. GOING FORWARD, HOOKER, WHAT IS YOUR OUTLOOK FOR THE HIGH-YIELD MARKET?
MR. TALCOTT: We believe the high-yield market should continue to do fairly well.
It now appears that the economy is not nearly as strong as some investors
feared in mid-summer. That should keep inflation from gaining momentum and
slow growth will continue to benefit some sectors of the economy. But from a
valuation standpoint, we believe it is wise to be selective.
Longer-term, the high-yield market remains very attractive. Naturally, past
trends don't guarantee future performance and investors should remember that
high-yield bonds carry a higher degree of risk than many other investments.
But in my view, the high-yield sector will continue to offer unusual
opportunities for income-oriented investors.
<PAGE>
-----------------------------------
EV MARATHON HIGH INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
September 30, 1996 (Unaudited)
- ------------------------------------------------------------------------------
ASSETS:
Investment in High Income Portfolio, at value
(Note 1A) - (identified cost, $547,815,067) $558,456,000
Receivable for Fund shares sold 2,330,670
------------
Total assets $560,786,670
LIABILITIES:
Dividends payable $1,903,438
Payable for Fund shares redeemed 1,010,412
Payable to affiliates --
Trustees' fees 634
Accrued expenses 389,711
----------
Total liabilities 3,304,195
------------
NET ASSETS for 76,995,452 shares of beneficial
interest outstanding $557,482,475
============
SOURCES OF NET ASSETS:
Paid-in capital $618,731,788
Accumulated distributions in excess of net
investment income (2,265,287)
Accumulated undistributed net realized loss on
investment and financial futures transactions
(computed on the basis of identified cost) (69,624,959)
Unrealized appreciation of investments from
Portfolio (computed on the basis of identified
cost) 10,640,933
------------
Total $557,482,475
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION
PRICE (NOTE 6) PER SHARE
($557,482,475 / 76,995,452 shares of beneficial interest) $7.24
======
See notes to financial statements
<PAGE>
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
For the Six Months Ended September 30, 1996 (Unaudited)
- ------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1B):
Income allocated from Portfolio $28,761,568
Expenses allocated from Portfolio (1,782,571)
-----------
Net investment income from Portfolio $26,978,997
Expenses --
Compensation of Trustees not members of the
Administrator's organization (Note 4) $ 1,633
Distribution costs (Note 5) 2,476,769
Transfer and dividend disbursing agent fees 321,142
Printing and postage 27,220
Registration costs 24,807
Legal and accounting services 15,130
Custodian fee 19,822
Miscellaneous 19,703
----------
Total expenses 2,906,226
-----------
Net investment income $24,072,771
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from Portfolio on investment
transactions (identified cost basis) $(2,022,734)
Change in unrealized appreciation of investments 13,335,382
-----------
Net realized and unrealized gain $11,312,648
-----------
Net increase in net assets from operations $35,385,419
===========
See notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------
SIX MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED
1996 MARCH 31,
(UNAUDITED) 1996
------------ ------------
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 24,072,771 $ 44,975,939
Net realized loss on investments (2,022,734) (5,110,133)
Change in unrealized appreciation of
investments 13,335,382 17,157,192
------------ ------------
Net increase in net assets from
operations $ 35,385,419 $ 57,022,998
------------ ------------
Distributions to shareholders (Note 2) --
From net investment income $(24,072,771) $(44,975,939)
In excess of net investment income (220,880) (625,821)
------------ ------------
Total distributions to shareholders $(24,293,651) $(45,601,760)
------------ ------------
Transactions in shares of beneficial
interest (Note 3) --
Proceeds from sales of shares $ 91,533,483 $153,699,352
Net asset value of shares issued to
shareholders in payment of distributions
declared 7,494,276 14,446,691
Cost of shares redeemed (49,602,632) (121,772,551)
------------ ------------
Increase in net assets from Fund share
transactions $ 49,425,127 $ 46,373,492
------------ ------------
Net increase in net assets $ 60,516,895 $ 57,794,730
NET ASSETS:
At beginning of period 496,965,580 439,170,850
------------ ------------
At end of period (including accumulated
distributions in excess of net investment
income of $2,265,287 and $2,044,407,
respectively) $557,482,475 $496,965,580
============ ============
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, 1996 ---------------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
------------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, beginning of
period $ 7.100 $ 6.920 $ 7.450 $ 7.480 $ 7.380 $ 6.120
------- ------- ------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS:
Net investment income $ 0.326 $ 0.665 $ 0.671 $ 0.697 $ 0.767 $ 0.825
Net realized and unrealized gain
(loss) on investments 0.143 0.189 (0.507) 0.047 0.170 1.356
------- ------- ------- ------- ------- -------
Total income from operations $ 0.469 $ 0.854 $ 0.164 $ 0.744 $ 0.937 $ 2.181
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
From net investment income $(0.326) $(0.665) $(0.671) $(0.697) $(0.767) $(0.825)
In excess of net investment
income (0.003) (0.009) (0.023) (0.077) (0.070) (0.096)
------- ------- ------- ------- ------- -------
Total distributions $(0.329) $(0.674) $(0.694) $(0.774) $(0.837) $(0.921)
------- ------- ------- ------- ------- -------
NET ASSET VALUE, end of period $ 7.240 $ 7.100 $ 6.920 $ 7.450 $ 7.480 $ 7.380
======= ======= ======= ======= ======= =======
TOTAL RETURN(3) 6.86% 12.80% 2.51% 10.28% 13.41% 38.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period
(000 omitted) $557,482 $496,966 $439,171 $399,259 $332,854 $252,967
Ratio of expenses to average
daily net assets(1) 1.78%+ 1.78% 1.78% 1.82% 2.09% 2.19%
Ratio of net investment income to
average daily net assets 9.15%+ 9.38% 9.52% 9.09% 10.31% 12.00%
PORTFOLIO TURNOVER(2) -- -- 11% 96% 91% 82%
<FN>
(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 investment return is calculated assuming a purchase at the net asset value on the first day and a sale at the net
asset value on the last day of each period reported. Dividends and distributions, if any, are assumed to be reinvested
at the net asset value on the payable date. Total return is calculated on a non-annualized basis. Computed on an
annualized basis.
</TABLE>
See notes to financial statements
<PAGE>
------------------------------
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
(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
(95.3% at September 30, 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 1A 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 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
current taxable year.
D. OTHER -- Investment transactions are accounted for on a trade date basis.
E. USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expense during the reporting period. Actual results could
differ from those estimates.
F. EXPENSE REDUCTION -- Investors Bank & Trust Company (IBT) serves as
custodian to the Fund and the Portfolio. Pursuant to the custodian agreements.
IBT receives a fee reduced by credits which are determined based on the
average cash balance the Fund or the Portfolio maintain with IBT. Any
significant credit balance used to reduce the Fund's custodian fee is
reflected as a reduction of operating expenses in the Statement of Operations.
G. INTERIM FINANCIAL INFORMATION -- The interim financial statements relating
to September 30, 1996 and for the six months then ended have not been audited
by independent certified public accountants, but in the opinion of the Fund's
management reflect all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial statements.
- ------------------------------------------------------------------------------
(2) DISTRIBUTIONS TO SHAREHOLDERS
The net income of the Fund is determined daily and substantially all of the
net income so determined is declared 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:
SIX MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED
1996 MARCH 31,
(UNAUDITED) 1996
------------- -----------
Sales 12,902,016 21,673,656
Issued to shareholders electing to receive
payment of distributions in Fund shares 1,058,605 2,037,734
Redemptions (6,997,686) (17,161,486)
---------- -----------
Net increase 6,962,935 6,549,904
========== ===========
- ------------------------------------------------------------------------------
(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. Certain of the officers and Trustees of the Fund and Portfolio
are officers and directors/trustees of the above organizations.
- ------------------------------------------------------------------------------
(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
$1,971,134 to or payable to EVD for the six months ended September 30, 1996,
representing 0.75% (annualized) of average daily net assets. At September 30,
1996, the amount of Uncovered Distribution Charges of EVD calculated under the
Plan was approximately $16,494,000.
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 initially 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 six months ended September
30, 1996, in the amount of $505,635. 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 $690,000 of CDSC paid by shareholders for the six
months ended September 30, 1996.
- ------------------------------------------------------------------------------
(7) INVESTMENT TRANSACTIONS
Increases and decreases in the Fund's investment in the Portfolio for the six
months ended September 30, 1996, aggregated $92,480,914 and $70,918,304,
respectively.
<PAGE>
------------------------
HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES - 93.5%
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
AUTOMOTIVE/TRUCK - 2.7%
$ 4,150,000 JPS Automotive Prod. Corp.,
Sr. Notes, 11.125%, 6/15/01 $ 4,274,500
5,500,000 Key Plastics Corp., Sr. Notes, 14%, 11/15/99 5,692,500
800,000 Speedy Muffler King Inc., Senior Notes, 10.875%,
10/1/06 824,000
5,000,000 Terex Corp., Sr. Secured Notes, 13.75%, 5/15/02(1) 5,225,000
------------
$ 16,016,000
------------
BUILDING PRODUCTS - 3.1%
$ 4,250,000 Building Materials Corp., Sr. Sub. Notes,
11.75% (0% until 2000), 7/1/04 $ 3,421,250
8,450,000 Overhead Door Corp., Sr. Notes, 12.25%, 2/1/00 9,126,000
1,750,000 Southdown Inc., Sr. Sub. Notes,
10%, 3/1/06 1,767,500
3,600,000 Tarkett International, Inc., Sr. Sub. Notes,
9%, 3/1/02 3,690,000
------------
$ 18,004,750
------------
CABLE - 7.1%
$ 1,800,000 Amer Telecasting Corp., Sr. Disc. Notes, 14.5%
(0% until 2000), 8/15/05 $ 1,170,000
2,000,000 Cablevision Systems Corp., Sr. Sub. Notes, 10.75%,
4/1/04 2,055,000
2,800,000 Cablevision Systems Corp., Sr. Sub. Notes, 9.25%,
11/1/05 2,709,000
7,000,000 Diamond Cable Communications Co., Sr. Disc. Notes,
11.75% (0% until 2000), 12/15/05 4,515,000
1,600,000 Diamond Cable Communications Co., Sr. Disc. Notes,
13.25% (0% until 1999), 9/30/04 1,216,000
3,470,000 Groupe Videotron, Ltd., Senior Notes, 10.625%,
2/15/05 3,773,625
5,800,000 International CABLETEL, Inc., Sr. Disc Notes,
11.5% (0% until 2001), 2/1/06 3,480,000
8,500,000 Marcus Cable Co., Sr. Disc. Notes, 14.25%
(0% until 2000), 12/15/05 5,780,000
2,800,000 Marcus Cable Co., Senior Debs., 11.875%, 10/1/05 2,961,000
12,153,200 United International Holdings Inc., Sr. Sec. Disc.
Notes, 0%, 14%, 11/15/99 8,507,240
8,400,000 Videotron Holdings, PLC, Inc.,
Sr. Disc. Notes, 11% (0% until 2005), 8/15/05 5,565,000
------------
$ 41,731,865
------------
CHEMICALS - 6.1%
$ 5,000,000 Agricultural Minerals & Chemicals, Inc., Sr. Notes,
10.75%, 9/30/03 $ 5,300,000
5,750,000 GI Holdings Corp., Sr. Disc. Notes,
10%, 2/15/06 5,750,000
6,250,000 Pioneer Americas Acq., Senior Notes,
13.375%, 4/1/05 6,890,625
3,200,000 Sterling Chemicals Inc., Sr. Sub. Notes,
11.75%, 8/15/06 3,344,000
3,200,000 Sterling Chemical Holdings, Inc., Sr. Sub.
Disc. Notes, 13.5% (0% until 2001), 8/15/08 1,896,000
3,800,000 Terra Industries Inc., Senior Notes, 10.5%, 6/15/05 4,047,000
4,400,000 Texas Petrochemical Corporation,
Sr. Sub. Notes, 11.125%, 7/1/06(1) 4,642,000
3,700,000 UCC Investors Inc., Sr. Sub. Notes,
11%, 5/1/03 3,875,750
------------
$ 35,745,375
------------
COMMUNICATIONS - 13.6%
$ 6,250,000 Allbritton Comm. Corp., Sr. Sub. Notes
9.75%, 11/30/07 $ 6,046,875
4,000,000 Arch Communications Group, Inc.,
Sr. Disc. Notes, 10.875%
(0% until 2001), 3/15/08 2,240,000
6,800,000 Australis Media LTD., Sub. Disc. Notes, 14%
(0% until 2000), 5/13/03 3,944,000
5,500,000 Brooks Fiber Corp., Sr. Disc. Notes,
10.875% (0% until 2001), 3/1/06 3,382,500
3,280,000 CS Wireless Systems, Inc., 1st Mtg. Notes,
11.375% (0% until 2001), 3/1/06(1) 1,689,200
7,200,000 Dial Call Communications Inc.,
Sr. Red. Notes,
12.25% (0% until 1999), 4/15/04 4,968,000
3,200,000 Echostar Satellite Broadcasting Corp.,
Sr. Sub. Notes,
13.125% (0% until 2000), 3/15/04 2,184,000
7,100,000 EZ Communications Corp, Sr. Sub. Notes,
9.75%, 12/1/05 7,206,500
5,000,000 Galaxy Telecom LP., Sr. Sub. Notes,
12.375%, 10/1/05 5,350,000
4,000,000 Heartland Wireless Corp., Senior Notes
13%, 4/15/03 4,360,000
11,200,000 Microcell Telecommunication, Inc.,
Sr. Disc. Notes,
14%, (0% until 2001), 6/1/06(1) 6,272,000
4,800,000 Millicom International Cellular, Inc.,
Sr. Sub. Notes,
13.5%, (0% until 2001), 6/1/06(1) 2,742,000
3,200,000 Mobilemedia Corp., Sr. Sub. Notes, 9.375%, 11/1/07 2,560,000
6,600,000 Newsquest Cap L.P., Sr. Sub. Notes,
11%, 5/1/06 6,814,500
5,600,000 Nextlink Communications Corp.,
Senior Notes, 12.5%, 4/15/06 5,768,000
4,000,000 Orbcomm Global L.P., Senior Notes,
14%, 8/15/04(1) 4,120,000
6,500,000 Pricellular Wireless Comm. Corp.,
Sr. Sub. Disc. Notes,
12.25% (0% until 1998), 10/1/03 5,232,500
4,800,000 Sullivan Broadcasting Corp., Sr. Sub. Notes,
10.25%, 12/15/05 4,824,000
------------
$ 79,704,075
------------
ENERGY - 7.9%
$ 1,600,000 AES Corporation, Sr. Sub. Notes, 10.25%, 7/15/06 $ 1,700,000
5,500,000 Cal Energy Co., Senior Notes,
9.5%, 9/15/06(1) 5,582,500
3,200,000 Chesapeake Energy Corporation, Senior Notes,
9.125%, 4/15/06 3,160,000
2,900,000 Clark USA, Inc., Senior Notes, 10.875%, 12/1/05 2,950,750
2,400,000 Coda Energy Inc., Sr. Sub. Notes, 10.5%, 4/1/06 2,472,000
2,850,000 El Paso Electric Co., 1st Mtg. Notes, 9.4%, 5/1/11 2,935,500
6,300,000 Mariner Energy Corporation, Sr. Sub. Notes,
10.5%, 8/1/06 6,520,500
4,100,000 Mesa Operating Company, Sr. Sub. Notes,
10.625%, 7/1/06 4,305,000
2,881,985 Midland Cogeneration Venture, Sr. Sec. Lease
Oblig., 10.33%, 7/23/02 3,026,085
2,200,000 Midland Funding II, Sec. Lease Oblig.,
11.75%, 7/23/05 2,370,346
2,300,000 Plains Resources Inc., Sr. Sub. Notes,
10.25%, 3/15/06 2,392,000
5,700,000 Trans Texas Gas Corp., Sr. Sec. Notes,
11.5%, 6/15/02 6,056,250
2,420,000 Tuboscope Vetco Intl. Corp., Sr. Sub. Debs.,
10.75%, 4/15/03 2,571,250
------------
$ 46,042,181
------------
FOOD/RESTAURANTS/HOTELS - 6.2%
$ 6,600,000 Flagstar Corp., Sub. Debs.,
10.75%, 9/15/01 $ 5,857,500
4,400,000 Inflo Holdings Corp.,
Promissory Notes,
10% (0% until 1999) 1/27/07d 3,080,000
6,000,000 Keebler Corporation, Sr. Sub. Notes,
10.75%, 7/1/06(1) 6,390,000
4,437,000 PM Holdings Corp., Sr. Sub. Notes, 11.5%
(0% until 2000), 9/1/05 2,662,200
5,775,000 Purina Mills, Inc., Sr. Sec. Sub. Notes,
10.25%, 9/1/03 5,890,500
7,000,000 Specialty Foods Corp., Senior Notes,
10.25%, 8/15/01 6,440,000
5,300,000 Van De Kamps, Inc., Sr. Sub. Notes, 12%, 9/15/05 5,763,750
------------
$ 36,083,950
------------
HEALTHCARE - 4.3%
$ 4,800,000 Dade International Inc., Sr. Sub. Notes,
11.125%, 5/1/06 $ 5,136,000
5,200,000 Maxxim Medical, Inc., Sr. Sub. Notes,
10.5%, 8/1/06(1) 5,395,000
6,100,000 Ordna Corp., Sr. Sub. Notes,
11.375%, 8/15/04 6,801,500
3,200,000 Owens & Minor, Inc., Sr. Sub. Notes,
10.875%, 6/1/06 3,344,000
3,200,000 Paracelsus Healthcare Corp., Sr. Sub. Notes,
10%, 8/15/06 3,312,000
1,300,000 Unilab Corp., Senior Notes,
11%, 04/1/06 1,027,000
------------
$ 25,015,500
------------
HIGH TECH - 2.5%
$ 2,704,000 Blue Bell Funding Inc., Sec. Ext. Notes,
11.85%, 5/1/99 $ 2,704,000
5,500,000 GS Technologies Corp., Senior Notes,
12.25%, 10/1/05 5,692,500
3,000,000 Unisys Corp., Senior Notes,
15%, 7/1/97 variable 3,172,500
3,200,000 Unisys Corp., Senior Notes,
12%, 4/15/03 3,312,000
------------
$ 14,881,000
------------
METALS - 2.7%
$ 3,500,000 Euramax International PLC, Sr. Sub. Notes,
11.25%, 10/1/06(1) $ 3,587,500
4,000,000 Gulf States Steel, Inc., First Mtg. Notes,
13.5%, 4/15/03 3,560,000
3,800,000 Kaiser Aluminum Corp., Sr. Sub. Notes,
12.75%, 2/1/03 4,123,000
1,500,000 Maxxam Group Inc., Sr. Sec. Notes, 11.25%, 8/1/03 1,537,500
2,900,000 Oregon Steel Mills Corp., 1st Mtg. Notes,
11%, 6/15/03 3,048,625
------------
$ 15,856,625
------------
MFG/MACHINERY - 9.8%
$ 2,400,000 Alvey Systems, Inc., Sr. Sub. Notes
11.375%, 1/31/03 $ 2,514,000
6,000,000 Applied Extrusion Inc., Senior Notes, 11.5%, 4/1/02 6,225,000
3,300,000 Day International Group, Inc., Sr. Sub. Notes,
11.125%, 6/1/05 3,448,500
2,250,000 Dictaphone Corp., Sr. Sub. Notes, 11.75%, 8/1/05 2,047,500
3,225,000 Essex Group, Inc., Senior Notes,
10%, 5/1/03 3,305,625
2,850,000 Howmet Corp., Sr. Sub. Notes,
10%, 12/1/03 3,056,625
8,680,000 Imo Industries, Inc., Sr. Sub. Notes,
11.75%, 5/1/06 9,114,000
2,000,000 K & F Industries, Inc., Sr. Sub. Notes,
10.375%, 9/1/04 2,070,000
5,550,000 Monarch Acquisition Corp., Senior Notes,
12.5%, 7/1/03 6,160,500
5,500,000 Newflo Corp., Sub. Notes,
13.25%, 11/15/02 6,077,500
6,350,000 Plastic Specialties & Tech, Inc., Sr. Sec. Notes,
11.25%, 12/01/03 6,445,250
8,800,000 Shared Tech/Fairchild Corp.,
Sr. Disc. Notes,
12.25% (0% until 1999), 3/1/06 6,864,000
------------
$ 57,328,500
------------
MISCELLANEOUS - 5.4%
$ 2,900,000 Alliance Entertainment Corp., Sr. Sub. Notes,
11.25%, 7/15/05 $ 2,755,000
4,000,000 Alliant Tech Systems Inc., Sr. Sub. Notes,
11.75%, 3/1/03 4,330,000
5,600,000 First Nationwide Escrow, Inc., Sr. Sub. Notes,
10.625%, 10/1/03(1) 5,859,000
2,400,000 Imax Corp., Senior Notes, 7%, 3/1/01 2,394,000
800,000 Iron Mountain, Inc., Sr. Sub. Notes,
10.125%, 10/1/06 800,000
4,000,000 Lifestyle Furnishings Inc., Sr. Sub. Notes,
10.875%, 8/1/06(1) 4,140,000
6,900,000 Selmer Company, Inc., Sr. Sub. Notes, 11%, 5/15/05 7,245,000
4,000,000 Young Broadcasting Corp., Sr. Sub. Notes,
10.125%, 2/15/05 3,980,000
------------
$ 31,503,000
------------
PAPER/PACKAGING - 7.6%
$ 3,250,000 American Pad & Paper Co., Sr. Sub. Notes,
13%, 11/15/05 $ 3,729,375
3,250,000 Container Corp., Sr. Notes (Ser. B), 10.75%, 5/1/02 3,412,500
3,897,940 Fort Howard Corp., Sr. Sec. Notes, 11%, 1/2/02 4,053,856
5,700,000 Gaylord Container Corp., Sr. Sub. Disc. Debs.,
12.75% (0% until 1996), 5/15/05 6,255,750
3,665,000 Repap Wisconsin, Inc., 2nd Party
Sr. Sec. Notes, 9.875%, 5/1/06 3,591,700
6,850,000 Riverwood International Corp.,
Sr. Sub. Notes, 10.875%, 4/1/08 6,747,250
3,000,000 S.D. Warren Company Inc., Sr. Sub. Notes,
12%, 12/15/04 3,232,500
829,000 Silgan Corp., Sr. Notes, 13.25%
(0% until 1996), 12/15/02 841,435
1,500,000 Silgan Corp., Sr. Sub. Notes,
11.75%, 6/15/02 1,590,000
4,500,000 Stone Container Corp., First Mtg. Notes,
10.75%, 10/1/02 4,725,000
3,200,000 Stone Container Corp., Sr. Notes, 12.625%, 7/15/98 3,360,000
2,950,000 U.S. Can Company, Sr. Sub. Notes, 13.5%, 1/15/02 3,104,875
------------
$ 44,644,241
------------
RECREATION - 4.9%
$ 5,000,000 Aztar Corp., Sr. Sub. Notes,
13.75%, 10/1/04 $ 5,650,000
4,800,000 Cinemark, USA, Inc., Sr. Sub. Notes,
9.625%, 8/1/08(1) 4,800,000
1,200,000 E & S Holdings Corporation, Sr. Sub. Notes,
10.375%, 10/1/06(1) 1,200,000
4,000,000 Eldorado Resorts, LLC, Sr. Sub. Notes,
10.5%, 8/15/06(1) 4,140,000
6,000,000 Harvey Casinos, LLC, Sr. Sub. Notes,
10.625%, 6/1/06 6,262,500
3,400,000 Trump Atlantic City Associates, Co., 1st Mtg.
Notes, 11.25%, 5/1/06 3,349,000
3,000,000 Trump Holdings & Funding, Inc.,
Senior Notes, 15.50%, 6/15/05 3,480,000
------------
$ 28,881,500
------------
RETAILING - 6.5%
$ 5,200,000 Apparel Retailers Inc., Sr. Disc. Debs., 12.75%,
(0% until 1998) 8/15/05 $ 4,576,000
4,200,000 Duane Reade, G.P., Sr. Notes,
12%, 9/15/02 4,074,000
5,200,000 Knoll, Inc., Sr. Sub. Notes,
10.875%, 3/15/06 5,512,000
3,850,000 Levitz Furniture Corp., Sr. Sub. Notes,
9.625%, 7/15/03 2,849,000
800,000 Levitz Furniture Corp., Sr. Sub. Notes,
13.375%, 10/15/98 776,000
2,000,000 Pathmark Stores Inc., Jr. Sub., Disc. Notes,
11.625%, 6/15/02 2,045,000
3,600,000 Pathmark Stores Inc.,
Jr. Sub., Disc. Notes,
10.75%, (0% until 1999) 11/1/03 2,385,000
5,500,000 Ralphs Grocery Co., Sr. Sub Notes, 13.75%, 6/15/05 5,830,000
4,000,000 Smith's Food & Drug Corp., Sr. Sub. Notes,
11.25%, 5/15/07 4,250,000
5,530,000 Specialty Retailers, Inc., Sr. Sub. Notes,
11%, 8/15/03 5,695,900
------------
$ 37,992,900
------------
TEXTILES - 3.1%
$ 5,200,000 Clark - Schwebel, Inc., Senior Notes,
10.5%, 4/15/06 $ 5,460,000
2,500,000 Collins & Aikman Corp., Sr. Sub. Notes,
11.5%, 4/15/06 2,631,250
5,800,000 Dan River Inc., Sr. Sub. Notes, 10.125%, 12/15/03 5,742,000
4,500,000 Westpoint Stevens, Inc., Sr. Sub. Debs.,
9.375%, 12/15/05 4,511,250
------------
$ 18,344,500
------------
TOTAL CORPORATE BONDS AND NOTES
(identified cost, $534,091,572) $547,775,962
------------
- --------------------------------------------------------------------------------
PREFERRED STOCK - 0.8%
- --------------------------------------------------------------------------------
$ 29,696 Cablevision Systems Corp.,
11.125% (PIK), 2/15/96 $ 2,887,936
48,000 S.D. Warren Company W/Warrants, 14%, 12/15/06* 1,728,000
------------
TOTAL PREFERRED STOCKS
(identified cost, $4,137,205) $ 4,615,936
------------
- --------------------------------------------------------------------------------
COMMON STOCKS, WARRANTS AND RIGHTS - 0.6%
- --------------------------------------------------------------------------------
SHARES/
WARRANTS
- --------------------------------------------------------------------------------
AUTO/TRUCK - 0.3%
214,839 Bucyrus - Erie Company, Common* $ 1,906,696
------------
CHEMICALS - 0.0%
9,908 UCC Invt. Hldgs., Cl A Common(1)* $ 142,428
------------
COMMUNICATIONS - 0.1%
2,600 American Telecasting, Inc., Wts. $ 70,200
1,600 In Flight Phone Corp., Wts.
Exp. 8/31/200 0
7,200 Nextel Communications, Inc., Wts.
Exp. 4/25/99 1,800
7,840 United International Hldg. Inc., Warrants* 156,800
------------
$ 228,800
------------
FOOD - 0.0%
1,380 Servam Corp., Common* $ 0
12,276 Servam Corp., $2.00 Wts.
Exp. 4/1/01* 0
2,760 Servam Corp., $4.50 Wts.
Exp. 4/1/01* 0
48,000 Specialty Foods Acquisition Corp., Common(1)* 36,000
------------
$ 36,000
------------
INDUSTRIAL - 0.0%
40,000 Thermadyne Holdings Corp., Common+* $ 400
------------
MANUFACTURING - 0.2%
13,500 Southdown Inc., Wts.,
Exp. 10/31/96+* $ 121,500
5,371 Terex Corporation, Rights,
Exp. 7/1/97+* 537
32,000 Terex Corp., Wts. Exp. 12/31/00+* 704,000
95,000 Triangle Wire & Cable, Inc.+* 190,000
------------
$ 1,016,037
------------
METALS - 0.0%
4,000 Gulf States Steel, Inc., Warrants* $ 200
------------
MISCELLANEOUS - 0.0%
6,800 Australis Media, Ltd, Warrants+* $ 0
------------
PAPER/PACKAGING - 0.0%
48,000 S.D. Warren Company, Warrants, Exp. 12/15/06* $ 192,000
------------
TOTAL COMMON STOCKS, WARRANTS AND RIGHTS
(identified cost, $6,379,495) $ 3,522,561
------------
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 2.1%
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
COMMERCIAL PAPER
$4,756,000 Associates Corp. of North America, 5.8%, 10/1/96 $ 4,756,000
7,536,000 General Electric Capital Co.,
5.32%, 10/1/96 7,536,000
------------
TOTAL SHORT-TERM OBLIGATIONS, AT AMORTIZED COST $ 12,292,000
------------
TOTAL INVESTMENTS (identified cost, $556,900,272) $568,206,459
OTHER ASSETS, LESS LIABILITIES - 3.0% 17,681,244
------------
NET ASSETS - 100% $585,887,703
============
*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 September 30,
1996, the value of these securities amounted to $65,962,628 or 11.3% of net
assets.
The accompanying notes are an integral part of the financial statements
<PAGE>
------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
September 30, 1996 (Unaudited)
(Expressed in United States Dollars)
- ------------------------------------------------------------------------------
ASSETS:
Investments, at value (Note 1A) (identified cost,
$556,900,272) $568,206,459
Cash 1,248
Receivable for investments sold 8,933,590
Interest receivable 14,599,646
Deferred organization expenses (Note 1D) 12,026
Other receivables 2,124
------------
Total assets $591,755,093
LIABILITIES:
Payable for investments purchased $5,826,750
Payable to affiliate --
Trustees' fees 5,213
Accrued expenses 35,427
----------
Total liabilities 5,867,390
------------
NET ASSETS applicable to investors' interest in Portfolio $585,887,703
============
SOURCES OF NET ASSETS:
Net proceeds from capital contributions and withdrawals $574,581,516
Unrealized appreciation of investments (computed
on the basis of identified cost) 11,306,187
------------
Total $585,887,703
============
See notes to financial statements
<PAGE>
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
For the Six Months Ended September 30, 1996 (Unaudited)
(Expressed in United States Dollars)
- ------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest income $29,743,139
Expenses --
Investment adviser fee (Note 2) $1,701,758
Compensation of Trustees not members of the
Investment Adviser's organization 10,466
Custodian fee (Note 1H) 113,447
Legal and accounting services 7,950
Amortization of organization expenses (Note 1D) 2,266
Miscellaneous 6,858
----------
Total expenses 1,842,745
-----------
Net investment income $27,900,394
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment transactions
(identified cost basis) $(2,107,744)
Change in unrealized appreciation of investments 13,929,806
-----------
Net realized and unrealized gain on investments $11,822,062
-----------
Net increase in net assets from operations $39,722,456
===========
See notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
(Expressed in United States Dollars)
- ------------------------------------------------------------------------------
SIX MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED
1996 MARCH 31,
(UNAUDITED) 1996
------------- -----------
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 27,900,394 $ 50,896,652
Net realized loss on investment transactions (2,107,744) (5,151,523)
Change in unrealized appreciation of
investments 13,929,806 17,257,761
------------ ------------
Net increase in net assets from operations $ 39,722,456 $ 63,002,890
------------ ------------
Capital transactions --
Contributions $109,532,226 $172,948,713
Withdrawals (74,714,118) (167,156,279)
------------ ------------
Increase in net assets resulting from
capital transactions $ 34,818,108 $ 5,792,434
------------ ------------
Total increase in net assets $ 74,540,564 $ 68,795,324
NET ASSETS:
At beginning of period 511,347,139 442,551,815
------------ ------------
At end of period $585,887,703 $511,347,139
============ ============
- ------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- ------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, 1996 --------------------
(UNAUDITED) 1996 1995*
------------------ -------- --------
RATIOS (As a percentage of
average daily net assets):
Expenses 0.68%+ 0.71% 0.70%+
Net investment income 10.21%+ 10.41% 10.63%+
PORTFOLIO TURNOVER 39% 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
(UNAUDITED)
(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.
H. EXPENSE REDUCTION -- Investors Bank and Trust Company (IBT) serves as
custodian of the Portfolio. Pursuant to the custodian agreement, IBT receives
a fee reduced by credits which are determined based on the average daily cash
balance the Portfolio maintains with IBT. Any significant credit balance used
to reduce the Portfolio's custodian fee is reflected as a reduction of
operating expenses in the statement of operations.
I. INTERIM FINANCIAL INFORMATION -- The interim financial statements relating
to September 30, 1996 and for the six months 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. 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 six months ended September 30, 1996, the fee was equivalent to 0.62%
(annualized) of the Portfolio's average daily net assets and amounted to
$1,701,758. Except as to Trustees of the Portfolio who are not members of
EVM's or BMR's organization, officers and Trustees receive remuneration for
their services to the Portfolio out of such investment adviser fee. 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 six months ended September 30, 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 $253,797,449 and $204,123,816, respectively, for the six
months ended September 30, 1996.
- ------------------------------------------------------------------------------
(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, a portion
of which is discretionary. Borrowings will be made by the Portfolio solely to
facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Interest is charged to each portfolio or fund based on its
borrowings at an amount above either the bank's adjusted certificate of deposit
rate, a variable adjusted certificate of deposit rate or a federal funds
effective rate. In addition, a fee computed at an annual rate of 1/4 of 1% on
the daily unused portion of the facility is allocated among the participating
portfolios and funds at the end of each quarter. The Portfolio did not have any
significant borrowings or allocated fees during the six months ended September
30, 1996.
- ------------------------------------------------------------------------------
(5) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation/depreciation in value of the investments
owned at September 30, 1996, as computed on a federal income tax basis, were
as follows:
Aggregate cost $556,900,272
============
Gross unrealized appreciation $ 20,996,019
Gross unrealized depreciation 9,689,832
------------
Net unrealized appreciation $ 11,306,187
============
- -------------------------------------------------------------------------------
(6) RESTRICTED SECURITIES
At September 30, 1996, the Portfolio owned the following securities
(constituting 0.7% 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.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CORPORATE NOTE
- --------------
DESCRIPTION DATES OF ACQUISITION SHARES COST FAIR VALUE
- ----------- -------------------- ------ ---- ----------
<S> <C> <C> <C> <C>
Inflo Holdings Corp., Promissory Notes,
10.75%, 7/1/06 9/13/96 4,400,000 $2,884,000 $3,080,000
COMMON STOCKS, WARRANTS AND RIGHTS
- ----------------------------------
Australis Media, Wts. 5/26/95 6,800 0 0
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 13,500 40,500 121,500
Terex Corp., Rights, Exp. 7/1/97 11/07/94 5,371 0 537
Terex Corp., Wts., Exp. 12/31/00 12/15/93 32,000 6,400 704,000
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
---------- ----------
$5,209,700 $4,096,437
========== ==========
</TABLE>
<PAGE>
---------------------
INVESTMENT MANAGEMENT
EV MARATHON OFFICERS INDEPENDENT TRUSTEES
HIGH INCOME FUND
24 Federal Street M. DOZIER GARDNER DONALD R. DWIGHT
Boston, MA 02110 President, Trustee President,
Dwight Partners, Inc.
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
Investment Banking,
WILLIAM H. AHERN, JR. Harvard University
Vice President Graduate School of
Business Administration
MICHAEL B. TERRY
Vice President NORTON H. REAMER
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
24 Federal Street M. DOZIER GARDNER DONALD R. DWIGHT
Boston, MA 02110 President, Trustee President,
Dwight Partners, Inc.
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
Co-Portfolio Manager Investment Banking,
Harvard University
MICHAEL W. WEILHEIMER Graduate School of
Vice President and Business Administration
Co-Portfolio Manager
NORTON H. REAMER
WILLIAM CHISHOLM President and Director, United Asset
Vice President Management Corporation
RAYMOND O'NEILL JOHN L. THORNDIKE
Vice President Director, Fiduciary Company
Incorporated
MICHEL NORMANDEAU
Vice President JACK L. TREYNOR
Investment Adviser and Consultant
JAMES L. O'CONNOR
Treasurer
THOMAS OTIS
Secretary
