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STATEMENT OF
ADDITIONAL INFORMATION
August 1, 1997
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"), High Income
Portfolio (the "Portfolio") 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 that provide additional, Fund-specific information. This Statement of
Additional Information is sometimes referred to herein as the "SAI."
TABLE OF CONTENTS Page
PART I
Additional Information about Investment Policies .................... 2
Investment Restrictions ............................................. 6
Trustees and Officers ............................................... 7
Investment Adviser and Administrator ............................... 10
Custodian ........................................................... 12
Service for Withdrawal .............................................. 12
Determination of Net Asset Value .................................... 12
Investment Performance .............................................. 13
Taxes ............................................................... 14
Principal Underwriter ............................................... 16
Portfolio Security Transactions ..................................... 16
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-3
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, 1997, 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).
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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 INFORMATION ABOUT INVESTMENT 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. 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 or liquid securities (such as readily marketable
obligations and money market instruments) 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. The securities in the segregated
account will be marked to market daily. Assets used as cover or held in a
segregated account maintained by the Portfolio's custodian 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, net of
administrative expenses and any finder's fees, justifies the attendant risk. 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.
For the fiscal years ended March 31, 1997 and 1996, the portfolio turnover
rates of the Portfolio were 78% and 88%, respectively.
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 exceed 100%
(excluding turnover of securities having a maturity of one year or less).
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. As a matter of fundamental policy, 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
1940 Act;
(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 adopted the following investment policies
which may be changed with respect to the Fund by the Trustees of the Trust
without approval by the Fund's shareholders or with respect to the Portfolio by
the Trustees of the Portfolio without 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) 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.); or (c) purchase or retain in its
portfolio any securities issued by an issuer, any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Trust or 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).
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, or any 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.
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 Investment Adviser, BMR, a
wholly-owned subsidiary of Eaton Vance; of Eaton Vance's parent, Eaton Vance
Corp. ("EVC"); and of BMR's and Eaton Vance's trustee, Eaton Vance, Inc. ("EV").
Eaton Vance and EV are both wholly-owned subsidiaries of EVC. Those Trustees who
are "interested persons" of the Trust or the Portfolio, as defined in the 1940
Act, by virtue of their affiliation with BMR, Eaton Vance, EVC or EV, are
indicated by an asterisk(*).
TRUSTEES OF THE TRUST AND THE PORTFOLIO
M. DOZIER GARDNER (64), President and Trustee*
Vice Chairman of BMR, Eaton Vance, EVC and EV, and Director of EVC and EV.
Director or Trustee and officer of various investment companies managed by
Eaton Vance or BMR.
DONALD R. DWIGHT (66), Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company); Chairman of the Board of Newspapers of New England, Inc. Director
or Trustee of various investment companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
JAMES B. HAWKES (55), Vice President and Trustee*
President and Chief Executive Officer 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 Trustee of the
Trust on December 16, 1991.
SAMUEL L. HAYES, III (62), 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 (61), 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 (70), Trustee
Former Director of 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 (67), 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. (38), Vice President of the Trust
Vice President of BMR and Eaton Vance. Officer of various investment companies
managed by Eaton Vance or BMR. Mr. Ahern was elected Vice President of the
Trust on June 19, 1995.
WILLIAM CHISHOLM (36), 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 (36), Vice President of the Portfolio
Vice President of Eaton Vance since 1992; employee of Eaton Vance since November
26, 1990. Mr. Weilheimer was elected Vice President of Portfolio on December
18, 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. Mr. Rynne was elected an officer of the Trust on June 19, 1995.
MICHEL NORMANDEAU (45), 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 (35), 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 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 JR. (65), 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 (54), 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 (52), Treasurer
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
ALAN R. DYNNER (56), Secretary
Vice President and Chief Legal Officer of BMR, Eaton Vance, EVC and EV since
November 1, 1996. Previously, he was a Partner of the law firm of Kirkpartrick
& Lockhart LLP, New York and Washington, D.C., and was Executive Vice
President of Neuberger & Berman Management, Inc., a mutual fund management
company. Officer of various investment companies managed by Eaton Vance or
BMR. Mr. Dynner was elected Secretary on June 23, 1997.
JANET E. SANDERS (61), 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 (34), 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). 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 June 19, 1995.
ERIC G. WOODBURY (40), Assistant Secretary
Vice President of BMR, Eaton Vance and EV since February 1993; formerly,
associate attorney at Dechert, Price & Rhoads. Mr. Woodbury was elected
Assistant Secretary of the Trust and the Portfolio on June 19, 1995. Officer
of various investment companies managed by Eaton Vance or BMR.
Messrs. Hayes (Chairman), Reamer and Thorndike 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 and the Portfolio, including
investment advisory (Portfolio only), administrative, 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, the Portfolio or investors therein.
The Nominating Commitee of the Board of Trustees of the Trust and the
Portfolio 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. 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 certified public accountants, and reviewing 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, transfer agent and dividend disbursing
agent of the Trust 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
"Trustees" Plan"). Under the Trustees' 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 Trustees' Plan will be determined based upon the performance of such
investments. Deferral of Trustees' fees in accordance with the Trustees' 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 the noninterested Trustees of the Trust and the
Portfolio are paid by the Fund (and the other series of the Trust) and the
Portfolio, respectively. For the compensation earned by the noninterested
Trustees, 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 $17 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, and
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
experienced team of investment professionals that began working together in the
mid-1980s. 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 the Principal
Underwriter both within the United States and offshore.
The Principal Underwriter 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)
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 any legal obligation of the Portfolio to indemnify its Trustees,
officers and investors with respect thereto, to the extent not covered by
insurance.
For a description of the compensation that the Portfolio pays BMR under the
Investment Advisory Agreement, see the Fund's current Prospectus. As at March
31, 1997, the Portfolio had net assets of $706,711,462. For the fiscal years
ended March 31, 1997 and 1996, and for the period from the Portfolio's start of
business, June 1, 1994 to March 31, 1995, the Portfolio paid BMR advisory fees
of $3,683,894 $3,094,793, and $2,260,748, respectively (equivalent to 0.61%,
0.63% and 0.64% annualized of the Portfolio's average daily net assets for each
such period).
The Investment Advisory Agreement with BMR continues in effect from year to
year so long as such continuance is approved at least annually (i) by the vote
of a majority of the noninterested Trustees of the Portfolio 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.
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 agreement with the Fund, Eaton Vance has been
engaged to administer the Fund's affairs, subject to the supervision of the
Trustees of the Trust, and shall furnish for the use of the Fund office space
and all necessary office facilities, equipment and personnel for administering
the affairs of the Fund.
The Fund pays all of its own expenses including, without limitation, (i)
expenses of maintaining the Fund and continuing its existence, (ii) its pro rata
share of the Trust's registration 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 any legal obligation of the Trust to indemnify its Trustees and
officers with respect thereto, to the extent not covered by insurance.
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, 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, Mr. Gardner
is vice chairman and Mr. Hawkes 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,
1997, the Voting Trustees of which are Messrs. Clay, Gardner, Hawkes and
Rowland and Thomas E. Faust, Jr. 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 or officers and
Directors of EVC and EV. As of July 31, 1997, Messrs. Clay, Gardner and Hawkes
each owned 24% of such voting trust receipts, and Messrs. Rowland and Faust
owned 15% and 13%, respectively, of such voting trust receipts. Messrs.
Dynner, Gardner and Hawkes 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, Murphy, O'Connor, Rynne,
Talcott, Terry, Weilheimer 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.
Eaton Vance owns all the stock of Northeast Properties, Inc., which is
engaged in real estate investment. EVC also owns 22% 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 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 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 entities in 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 the Portfolio and IBT under the 1940 Act.
IBT also provides services in connection with the preparation of shareholder
reports and the electronic filing of such reports with the Commission, for which
it receives a separate fee.
SERVICE FOR WITHDRAWAL
The 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 current Prospectus) based
upon the value of the shares held. The checks will be drawn from share
redemptions and, hence, although they are a return of principal, may require the
recognition of a taxable gain or loss. 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 is also computed by IBT (as agent and
custodian for the Portfolio) by subtracting the liabilities of the Portfolio
from the value of its total assets. Fixed-income securities (other than
short-term obligations), 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 or at the direction of the Trustees of the
Portfolio. 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, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
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 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 the 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 is 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, and various domestic securities indicies, 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 including ratings and rankings 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
Each series of the Trust is treated as a separate entity for federal income
tax purposes. The Fund has elected to be treated and intends 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 substantially all of its
ordinary income and net income in accordance with the timing requirements
imposed by the Code, so as to maintain its RIC status and to avoid paying any
federal income or excise tax. The Fund so qualified for its fiscal year ended
March 31, 1997. 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 also satisfy these
requirements. 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 RIC, the Fund
(i) will be deemed to own its proportionate share of each of the assets of the
Portfolio and (ii) will be entitled to the gross income of the Portfolio
attributable to such share.
In order to avoid incurring a federal excise tax obligation, 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 its capital gain net income which is 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 (i)
any available capital loss carryforwards and (ii) 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 and the Portfolio is treated as a partnership for
Massachusetts and federal tax purposes, neither the Fund nor the Portfolio
should be 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 capital losses
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 status.
The Portfolio may be subject to foreign income tax withholding or other
foreign taxes with respect to income (possibly including, in some cases, capital
gains) arising from certain transactions in foreign securities. These taxes may
be reduced or eliminated under the terms of an applicable tax convention between
certain countries and the U.S. 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. Accordingly under the
Code, the Fund will not be eligible to pass through to its 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" ("PFICs") may be limited or a tax election may be made, if
available, in order to seek to preserve the Fund's qualification as a RIC and/or
avoid imposition of an income 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 securities that it might otherwise have continued to hold in order to
generate cash that the Fund may withdraw from the Portfolio to make
distributions 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 that the
issuers of these securities default on their obligations pertaining thereto. The
Code is not entirely clear regarding the federal income tax consequences of the
Fund's taking certain positions in connection with ownership of such distressed
securities. For example, the Code is unclear regarding: (i) when the Portfolio
may cease to accrue interest, original issue discount, or market discount; (ii)
when and to what extent deductions may be taken for bad debts or worthless
securities; (iii) how payments received on obligations in default should be
allocated between principal and income; and (iv) 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.
Amounts paid by the Fund to individuals and certain other shareholders who
have not provided the Fund with their correct taxpayer identification number
("TIN") and certain certifications required by the Internal Revenue Service (the
"IRS"), as well as shareholders with respect to whom the Fund has received
certain information from the IRS or a broker, may be subject to "backup"
withholding of federal income tax arising from the Fund's dividends and other
distributions as well as the proceeds of redemption transactions (including
repurchases and exchanges), at a rate of 31%. An individual's TIN 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 convention. 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 arise if: (i) the
shareholder is engaged in a trade or business in the United States, (ii) the
shareholder is present in the United States for a sufficient period of time
during a taxable year to be treated as a U.S. resident, (generally 180 days or
more); or (iii) the shareholder fails to provide any required certifications
regarding its 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, and, where applicable,
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 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 the
noninterested Trustees 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 executing firm, are made by BMR.
BMR is also responsible for the execution of transactions for all other accounts
managed by it.
BMR places the portfolio security transactions of the Portfolio and of all
other accounts managed by it for execution with many firms. BMR uses its best
efforts to obtain execution of portfolio security transactions at prices which
are advantageous to the Portfolio and (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 executing firm, 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 firm, the value and quality of services rendered by
the firm 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 executing firms, and a
particular firm 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 firms who were selected to execute transactions on behalf of the
Portfolio and BMR's other clients for providing brokerage and research services
to BMR.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Portfolio
may receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if BMR
determines in good faith that such compensation 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. (the "NASD"), which rule provides that no firm which is a member of the
NASD 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.
Whenever decisions are made to buy or sell securities by the Portfolio and one
or more of such other accounts simultaneously, BMR will allocate the security
transactions (including "hot" issues) in a manner which it believes to be
equitable under the circumstances. As a result of such allocations, there may be
instances where the Portfolio will not participate in a transaction that is
allocated among other accounts. If an aggregated order cannot be filled
completely, allocations will generally be made on a pro rata basis. An order may
not be allocated on a pro rata basis where, for example: (i) consideration is
given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account
with specialized investment policies that coincide with the particulars of a
specific investment; (iii) pro rata allocation would result in odd-lot or de
minimis amounts being allocated to a portfolio or other client; or (iv) where
BMR reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Portfolio from time to time, it is the opinion of the Trustees of the Trust and
the Portfolio that the benefits from the BMR organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
For the fiscal years ended March 31, 1997 and 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
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).
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.
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 shareholders' meeting for the election of Trustees. Except for the foregoing
circumstances and unless removed by action of the shareholders in accordance
with the Trust's by-laws, the Trustees shall continue to hold office and may
appoint successor Trustees.
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 (such as reclassifying series or classes of shares or restructuring the
Trust) 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.
Under Massachusetts law, if certain conditions prevail, shareholders of a
Massachusetts business trust (such as the Trust) could be deemed to have
personal liability for the obligations of the Trust. Numerous investment
companies registered under the 1940 Act have been formed as Massachusetts
business trusts, and management is not aware of an instance where such liability
has been imposed. The Trust's Declaration of Trust contains an express
disclaimer of liability on the part of the Fund shareholders and the Trust's
By-laws provide that the Trust shall assume the defense on behalf of any Fund
shareholders. (The Declaration of Trust also contains provisions limiting the
liability of a series or class to that series or class.) Moreover, the Trust's
By-laws also provide for indemnification out of the property of the Fund of any
shareholder held personally liable solely by reason of being or having been a
shareholder for all loss or expense arising from such liability. The assets of
the Fund are readily marketable and will ordinarily substantially exceed its
liabilities. In light of the nature of the Fund's business and the nature of its
assets, management believes that the possibility of the Fund's liability
exceeding its assets, and therefore the shareholder's risk of personal
liability, is extremely remote.
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 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 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.
The Portfolio's Declaration of Trust 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.
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
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 Commission. Deloitte & Touche, Grand Cayman,
Cayman Islands, British West Indies, are the independent certified public
accountants of the Portfolio.
FINANCIAL STATEMENTS
The audited financial statements of, and the independent auditors' report
for, the Fund and the Portfolio appear in the Fund's most recent annual report
to shareholders and are incorporated by reference into this SAI. A copy of the
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
ADMINISTRATOR
As stated under "Investment Adviser and Administrator" in Part I of this
SAI, the Administrator currently receives no compensation for providing
administrative services to the Fund. For the fiscal years ended March 31, 1997
and 1996 and for the period from the start of business, June 1, 1994, to March
31, 1995, $67,984, $79,084 and $37,087, respectively, of the Fund's operating
expenses were allocated to the Administrator.
DISTRIBUTION PLAN
During the fiscal year ended March 31, 1997, the Principal Underwriter paid
to Authorized Firms sales commissions of $44,157 on sales of Fund shares. During
the same period, the Fund paid or accrued sales commissions under the Plan
aggregating $90,450, and the Principal Underwriter received approximately
$15,000 in CDSCs which were imposed on early redeeming shareholders. These
payments reduced uncovered distribution charges under the Plan. As at March 31,
1997, the outstanding uncovered distribution charges of the Principal
Underwriter calculated under the Plan amounted to approximately $1,471,000.
During the fiscal year ended March 31, 1997, the Fund made service fee payments
to the Principal Underwriter and Authorized Firms aggregating $30,259, of which
$14,689 was paid to Authorized Firms, and the balance of which was 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, 1997,
the Fund paid the Principal Underwriter $332.50 for repurchase transactions
handled by the Principal Underwriter.
TRUSTEES
The fees and expenses of the noninterested Trustees of the Trust and of the
Portfolio 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, 1997, 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 funds in the
Eaton Vance fund complex(1):
AGGREGATE AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM TRUST AND
NAME FROM FUND FROM PORTFOLIO FUND COMPLEX
- ---- --------- -------------- ------------
Donald R. Dwight ..... $35 $4,190(2) $145,000(5)
Samuel L. Hayes, III . 31 4,200(3) 155,000(6)
Noton H. Reamer ...... 31 4,064 145,000
John L. Thorndike .... 32 4,267(4) 148,750(7)
Jack L. Treynor ...... 35 4,390 150,000
- ----------
(1) The Eaton Vance fund complex consists of 213 registered investment companies
or series thereof.
(2) Includes $1,846 of deferred compensation.
(3) Includes $707 of deferred compensation.
(4) Includes $2,120 of deferred compensation.
(5) Includes $47,187 of deferred compensation.
(6) Includes $19,062 of deferred compensation.
(7) Includes $55,276 of deferred compensation.
DISTRIBUTION PLAN
The Plan is designed to meet the requirements of Rule 12b-1 under the 1940
Act and the sales charge rule of the NASD. The purpose of the Plan is to
compensate the Principal Underwriter for its distribution services and
facilities provided to the Fund.
The Plan provides that the Fund 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 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 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 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.
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 CDSCs 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 of Fund shares pursuant to
the exchange privilege 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.
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 CDSCs will tend
to increase the time during which there will exist uncovered distribution
charges of the Principal Underwriter.
Currently, payments of sales commissions and distribution fees and of
service fees may equal 1% of the Fund's average daily net assets per annum. For
the actual 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 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
paid to the Principal Underwriter under the Plan, and from 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.
The Plan continues in effect from year to year for so long as such
continuance is approved at least annually by the vote of both a majority of (i)
the noninterested Trustees of the Trust 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 Plan requires quarterly Trustees review of 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 the Trustees. So
long as the Plan is in effect, the selection and nomination of the noninterested
Trustees shall be committed to the discretion of such Trustees.
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 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 1-, 5- and 10- year
periods ended March 31, 1997. 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. Total return for this time period has not been adjusted to reflect the
Fund's distribution and/or service fees and certain other expenses. If such
adjustments were made, the performance would have been lower.
<PAGE>
VALUE OF A $1,000 INVESTMENT
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INVESTMENT INVESTMENT
BEFORE AFTER TOTAL RETURN BEFORE TOTAL RETURN AFTER
DEDUCTING DEDUCTING DEDUCTING THE CDSC DEDUCTING THE CDSC*
INVESTMENT INVESTMENT AMOUNT OF THE CDSC THE CDSC* ---------------------------------- ---------------------
PERIOD DATE INVESTMENT ON 3/31/97 ON 3/31/97 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
------ ---- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 Years Ended
3/31/97** 3/31/88 $1,000 $2,220.08 $2,220.08 122.01% 8.30% 122.01% 8.30%
5 Years Ended
3/31/97** 3/31/92 $1,000 $1,588.87 $1,588.87 58.89% 9.70% 58.89% 9.70%
1 Year Ended
3/31/97** 3/31/96 $1,000 $1,114.35 $1,104.35 11.44% 11.44% 10.44% 10.44%
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.
** If a portion of the Fund's expenses had not been subsidized, the Fund would have had lower returns.
</TABLE>
For the thirty-day period ended March 31, 1997, the yield of the Fund was
7.14%. 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 30, 1997, 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 30, 1997, Merrill Lynch, Pierce, Fenner & Smith, Inc. New Brunswick, NJ was
the record owner of approximately 29.8% 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
- -----------------------
Mutual Funds
EV CLASSIC HIGH INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1997
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, 200 Clarendon Street, Boston, MA 02116
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>
[LOGO OF EATON VANCE APPEARS HERE] Investing
for the
21st
Century
[PHOTO OF PHONE STOCK CERTIFICATES APPEARS HERE]
Annual Report March 31, 1997
[PHOTO OF PAUL REVERE STATUE APPEARS HERE]
EV
CLASSIC
HIGH INCOME
FUND
Eaton Vance
Global Management-Global Distribution
[PHOTO OF ROWES WHARF SKYLINE BOSTON FROM THE WATER APPEARS HERE]
Classic
<PAGE>
EV Classic High Income Fund as of March 31, 1997
LETTER TO SHAREHOLDERS
[PHOTO OF M. DOZIER GARDNER, PRESIDENT APPEARS HERE]
EV Classic High Income Fund had a total return of 11.4% for the year ended March
31, 1997. That return was the result of a rise in net asset value per share from
$9.65 on March 31, 1996 to $9.84 on March 31, 1997, and the reinvestment of
$0.874 in dividends. The return does not include the effect of the Fund's 1%
contingent deferred sales charge on shareholders redeeming within the first
year. By comparison, the Lehman Brothers High Yield Bond Index-a widely
recognized, unmanaged index of high-yield corporate bond-had a total return
of 10.6% for the same period.*
Based on the Fund's most recent dividend and a net asset value of $9.84, the
Fund had a distribution rate of 8.81% at March 31.
While a strong economy upset the Treasury market, high-yield bonds turned in a
solid performance...
Most data showed the economy continuing to advance at a fairly strong pace in
the past year. Job creation was stronger than expected, while consumers remained
confident. While the strong U.S. dollar somewhat dampened export trade,
industrial activity was fairly robust, with few signs of excess inventories. Not
surprisingly, the Treasury bond market reacted negatively to the strong economic
news. However, the high-yield market benefited as the relatively strong economy
led to good corporate earnings and improved interest coverage.
The high-yield market grew during the fiscal year, accompanied by strong
investor demand...
While high-yield bond issuance was again formidable-$74 billion in 1996 alone
- -demand from investors was more than sufficient to meet the increased supply.
Meanwhile, market capitalization grew from $300 billion to $354 billion, the
largest market growth in more than a decade. Finally, as the liquidity and
trading characteristics of high-yield bonds continued to improve, they again
attracted a widening universe of investors, drawing new buyers, for example,
from insurance companies and pension funds.
1997 should bring more opportunities in the high-yield markets...
The trends we've noted above contributed to an excellent climate for high-yield
bonds during the past year, and we believe this market continues to represent
outstanding long-term opportunities. In the pages that follow, portfolio
managers Hooker Talcott, Jr. and Michael Weilheimer review the past year and
comment on the year ahead.
Sincerely,
/s/ M. Dozier Gardner
M. Dozier Gardner
President
May 9, 1997
- --------------------------------------------------------------------------------
Fund Information
as of March 31, 1997
<TABLE>
<CAPTION>
Performance/1/ - Average Annual Total Returns
- ---------------------------------------------
At net asset value
- ---------------------------------
<S> <C>
One year 11.4%
Life of Fund (6/8/94) 9.0
<CAPTION>
SEC Average Annual Total Returns
- ---------------------------------
<S> <C>
One year 10.4%
Life of Fund (6/8/94) 9.0
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Holdings/2/ By total net assets
- --------------------------------------------
<S> <C>
United International Holdings 1.6%
Specialty Foods Acquisition Corp. 1.5
Allied Waste NA 1.4
Kaiser Aluminum & Chemical Corp. 1.4
Marcus Cable Operating Co. 1.3
Overhead Door Corp. 1.3
Diamond Cable Communications Co. 1.2
Newsquest Capital Corp. 1.2
Imo Industries 1.2
Shared Tech/Fairchild Inc. 1.2
</TABLE>
/1/Average annual total returns are calculated by determining the percentage
change in net asset value with all distributions reinvested. SEC average
annual returns reflect 1% redemption fee incurred by shareholders redeeming
within first year.
/2/Ten largest holdings account for 13.3% of the Portfolio's investments,
determined by dividing the total market value of the holdings by the total
net assets of the Portfolio. Holdings are subject to change.
*It is not possible to invest directly in the Index.
Past performance is no guarantee of future results. The value of an
investment in the Fund may fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
2
<PAGE>
EV Classic High Income Fund as of March 31, 1997
Management Discussion
An interview with Hooker Talcott, Jr., and Michael Weilheimer, co-portfolio
managers of High Income Portfolio.
Q: Hooker, how would you characterize the high-yield market during the past
year?
A: Mr. Talcott: The past year was generally characterized by strong performance
and volatile interest rates. Quality spreads - the yield differential
between high-yield bonds and U.S. Treasury bonds - narrowed to record lows
during the period. By the end of the fiscal year on March 31, spreads were
as low as 300 basis points (3%), as narrow as we've ever seen. The dramatic
outperformance of the high-yield sector can be seen by comparing the Fund's
11.4% total return with the 4.2% return of the Lehman Brothers U.S. Treasury
Index,/1/ an unmanaged index of U.S. Treasury securities. The strong showing
of the high-yield market was a function of several trends, most notably, a
growing economy and continued low-inflation.
[PHOTO OF HOOKER TALCOTT, JR. PORTFOLIO MANAGER APPEARS HERE]
Toward the very end of the period, the market gave ground somewhat as
inflation concerns, a continuing Fed watch, and a selloff in some of the
media and communications sectors pulled the market lower. Given the strength
of the market earlier in the year, the correction was not at all unexpected.
Q: You indicated that the market was volatile. What contributed to that
volatility?
A: Mr. Weilheimer: The market's volatility was due, in part, to the shifting
views on inflation. Investors tempered their relative optimism over the
inflation outlook with concern that inflation might reawaken at some point.
A look at the numbers is helpful.
On March 31, 1996, ten-year Treasury yields were 6.31%; by August, inflation
concerns pushed those yields up to 6.92%; by November, investor sentiment
had shifted, with lower inflation numbers prompting a rally and sending
yields falling to 6.05%; that rally was short-lived, however, as renewed
fears of inflation and intervention by the Federal Reserve pushed yields
back up to 6.90% at the end of March. Thus, it was clearly a very active
period on the interest rate front.
[PHOTO OF MICHAEL WEILHEIMER PORTFOLIO MANAGER APPEARS HERE]
Q: Where were your largest investments?
A: Mr. Talcott: Media and communications bonds - including telecommunications,
cable, cellular,
- --------------------------------------------------------------------------------
Five Largest Sectors By total net assets
- --------------------------------------------
[BAR GRAPH APPEARS HERE]
<TABLE>
<S> <C>
Broadcast/Cable 10.9%
Communication Services 9.5%
Oil/Gas 7.6%
Foods 6.9%
Chemicals 6.0%
</TABLE>
Ratings Distribution/2/By total net assets
- --------------------------------------------
[PIE GRAPH APPEARS HERE]
<TABLE>
<S> <C>
Aaa 3.9%
Ba 9.3%
B1 13.9%
B2 23.8%
B3 38.0%
Caa 6.2%
Non-Rated 4.3%
</TABLE>
/1/It is not possible to invest directly in the Index.
/2/Ratings are issued by Moody's Investors Service, a major independent
ratings agency.
Because the Fund is actively managed, ratings and weightings are subject to
change.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
3
<PAGE>
EV Classic High Income Fund as of March 31, 1997
MANAGEMENT DISCUSSION CONT'D
broadcasting, radio and media - remained our largest sector weightings.
Telecom and media bonds have represented an increasingly large segment of
the high-yield market in recent months, over 35% of total market
capitalization. And in terms of new issuance, the sector has accounted for
around 40% of new supply. While the sector has performed well in recent
years, it underwent a correction in March. Typically, telecom companies,
which initially have large capital expenditures and therefore little in the
way of earnings, are valued on a discounted cash flow basis. In the past
year, market sentiment pushed valuations to high levels. The subsequent
correction in the telecom group contributed to the decline in the broader
market. However, at these lower levels, telecom bonds represent value, and
we remain positive about our positions.
Q: Have you made any adjustments to the Portfolio in recent months?
A: Mr. Weilheimer: Yes. We've reduced our exposure to cyclicals, paring our
investments in sectors such as steels, chemicals, and papers. While the
economy has fared relatively well in recent months, we're increasingly
sensitive to the Federal Reserve's bias for higher interest rates. Given the
fact that the economy has not undergone a recession in six years, it's
impossible to rule out a somewhat slower economy in a rising interest rate
environment. Therefore, we've added recession-resistant names to the mix.
Q: In what areas have you increased your investments?
A: Mr. Weilheimer: We've added to the Portfolio's investments in sectors such
as food processing and grocery chains. These businesses tend to be less
dependent on the economic cycle and, therefore, less vulnerable to a
possible slowdown. Star Market, a leading New England-based supermarket
chain, is a good example. Given their unequalled store locations, Star is
very well positioned in an increasingly competitive marketplace. The company
has recently installed a new management team that has enlarged and remodeled
stores, improved the company's merchandizing strategy, and streamlined
operations. Over time, we expect those changes to make a positive impact on
the company's operations and its balance sheet.
Q: Were there any other areas where you made new commitments?
A: Mr. Talcott: Yes. One recent investment was Allied Waste, the fourth largest
waste management company in the U.S. The waste industry is not as GDP-
sensitive as the deep cyclicals, and has undergone a good deal of
consolidation in recent years. For its part, Allied recently purchased a
division of Laidlaw Industries, a competitor in the waste hauling business.
Through strategic purchases and consolidations, Allied is matching its
hauling routes with landfills in specific geographic areas. That strategy
has afforded the company good business synergies and helped cut costs. The
company has improved its balance sheet and could very well see a rating
upgrade within the next year. So we're enthusiastic about the company's
prospects.
Q: Any other examples of new investments?
A: Mr. Weilheimer: Yes. Unlike many manufacturing sectors, aircraft components
makers like Hawk Corporation are less sensitive to the ebb and flow of the
economy than to their own industry product cycle; that is, domestic and
foreign demand for new aircraft. Accordingly, with the debut of a new
generation of aircraft in the U.S. and Europe, as well as rising demand from
emerging economies, there has been a surge in orders for aircraft
components. Hawk makes components in aircraft braking systems, and the
company has been a major beneficiary of large new orders to Boeing.
Q: There was a good deal of corporate finance activity during the year,
including mergers and IPOs. Did they have an impact on the Fund?
A: Mr. Talcott: Yes. We have long maintained a focus on companies with the
ability to improve their balance sheets, and the rise in corporate finance
activity has created many new opportunities. The large volume of initial
public offerings (IPOs) was helpful to the high-yield market in that
companies with sustainable earnings power have issued stock, thus improving
their balance sheets. That, in turn, has made their outstanding bonds more
attractive.
The Fund was also a beneficiary of a number of buyouts during the past year,
in which some issuers of high-yield bonds, including Overhead
4
<PAGE>
EV Classic High Income Fund as of March 31, 1997
MANAGEMENT DISCUSSION CONT'D
Door and Monarch Marking, each a holding of the Portfolio, have been bought
by investment-grade companies. Typically, when companies like these are
bought by investment-grade companies, the outstanding debt of the acquired
company is upgraded. That is, naturally, a positive development for the
Fund. Currently, another Portfolio investment, Videotron UK, is in the
process of being merged into a subsidiary of Cable & Wireless, a large U.K.-
based telecom company.
Q: Looking ahead, what is your outlook for the high-yield market?
A: Mr. Talcott: I believe that the outlook for the high yield market is sound.
Following a strong performance through much of the past year, the high-yield
market corrected slightly late in the period. In my view, that is a healthy
development, as value has now returned to the market. Naturally, past trends
cannot guarantee future performance. But with the economy continuing to
generate growth, and inflation seemingly under control, the climate appears
positive for the high-yield sector. Importantly, the large supply of new
issues continues to receive a warm welcome from income-oriented investors.
The Portfolio remains well-positioned to uncover value and opportunities for
those investors in the year ahead.
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
Classic High Income Fund and the unmanaged Lehman Brothers High Yield Bond
Index.
The green 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 municipal 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 directly in the Index.
Comparison of Change in Value of a $10,000
Investment in EV Classic High Income Fund vs.
Lehman Brothers High Yield Bond Index
from June 30, 1994 through March 31, 1997
[LINE GRAPH APPEARS HERE]
EV Classic High Income Fund vs.
Lehman High Yield Bond Index
<TABLE>
<CAPTION>
Date Fund LHYBI
<S> <C> <C>
6/30/94 $10,000 $10,000
7/31/94 $10,009 $10,085
8/31/94 $9,980 $10,156
9/30/94 $9,982 $10,157
10/31/94 $9,987 $10,181
11/30/94 $9,867 $10,053
12/31/94 $9,937 $10,127
1/31/95 $10,008 $10,264
2/28/95 $10,260 $10,616
3/31/95 $10,302 $10,730
4/30/95 $10,576 $11,003
5/31/95 $10,795 $11,312
6/30/95 $10,791 $11,387
7/31/95 $10,934 $11,527
8/31/95 $10,879 $11,563
9/30/95 $10,954 $11,705
10/31/95 $10,960 $11,744
11/30/95 $11,045 $11,882
12/31/95 $11,226 $12,068
1/31/96 $11,417 $12,281
2/28/96 $11,600 $12,290
3/31/96 $11,564 $12,282
4/30/96 $11,666 $12,309
5/31/96 $11,777 $12,383
6/30/96 $11,788 $12,485
7/31/96 $11,859 $12,544
8/31/96 $12,048 $12,679
9/30/96 $12,355 $12,985
10/31/96 $12,391 $13,085
11/30/96 $12,597 $13,343
12/31/96 $12,804 $13,438
1/31/97 $12,948 $13,569
2/28/97 $13,191 $13,794
3/31/97 $12,886 $13,588
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns
- ----------------------------------------------
At Net Asset Value
- ----------------------------------------------
<S> <C>
One year 11.4%
Life of Fund (6/8/94) 9.0
Value at 3/31/97 $12,886
<CAPTION>
Including Maximum Applicable CDSC
- -----------------------------------------------
<S> <C>
One year 10.4%
Life of Fund (5/22/92) 9.0
Value at 3/31/97 $12,886
</TABLE>
Source: Towers Data Systems, Bethesda, MD.
* 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.
Past performance is not indicative of future results. Investment returns and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost.
5
<PAGE>
EV Classic High Income Fund as of March 31, 1997
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
As of March 31, 1997
Assets
- --------------------------------------------------------------------------
<S> <C>
Investment in High Income Portfolio, at value (Note 1A)
(identified cost, $17,278,545) $17,488,872
Receivable from Administrator (Note 4) 67,984
Deferred organization expenses (Note 1D) 12,966
- --------------------------------------------------------------------------
Total assets $17,569,822
- --------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------
Dividends payable $ 29,375
Payable for Fund shares redeemed 240,529
Accrued expenses 8,005
- --------------------------------------------------------------------------
Total liabilities $ 277,909
- --------------------------------------------------------------------------
Net Assets for 1,756,793 shares of
beneficial interest outstanding $17,291,913
- --------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------
Paid-in capital $17,138,700
Accumulated net realized loss on investments
(computed on the basis of identified cost) (63,668)
Accumulated net investment income 6,554
Net unrealized appreciation of investments (computed
on the basis of identified cost) 210,327
- --------------------------------------------------------------------------
Total $17,291,913
- --------------------------------------------------------------------------
Net Asset Value, Offering and Redemption
Price Per Share (Note 6)
- --------------------------------------------------------------------------
($17,291,913 / 1,756,793 shares of
beneficial interest outstanding) $ 9.84
- --------------------------------------------------------------------------
<CAPTION>
Statement of Operations
For the Year Ended
March 31, 1997
Investment Income (Note 1B)
- --------------------------------------------------------------------------
<S> <C>
Interest income allocated from Portfolio $1,296,684
Dividend income allocated from Portfolio 921
Expenses allocated from Portfolio (81,132)
- --------------------------------------------------------------------------
Net investment income from Portfolio $1,216,473
- --------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------
Compensation of Trustees not members of the
Administrator's organization (Note 4) $ 123
Distribution fees (Note 5) 121,979
Printing and postage 24,549
Registration fees 23,780
Transfer and dividend disbursing agent fees 11,793
Amortization of organization expenses (Note 1D) 9,603
Legal and accounting services 4,667
Custodian fee 2,799
- --------------------------------------------------------------------------
Total expenses $ 199,293
- --------------------------------------------------------------------------
Less Allocations --
Allocation of expenses to the Administrator (Note 4) $ 67,984
- --------------------------------------------------------------------------
Total expense reductions $ 67,984
- --------------------------------------------------------------------------
Net expenses $ 131,309
- --------------------------------------------------------------------------
Net investment income $1,085,164
- --------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) from Portfolio
- --------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ (23,804)
- --------------------------------------------------------------------------
Net realized loss on investment transactions $ (23,804)
- --------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investment transactions $ 160,339
- --------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ 160,339
- --------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 136,535
- --------------------------------------------------------------------------
Net increase in net assets from operations $1,221,699
- --------------------------------------------------------------------------
</TABLE>
See notes to financial statements
6
<PAGE>
EV Classic High Income Fund as of March 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended Year Ended
in Net Assets March 31, 1997 March 31, 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 1,085,164 $ 468,165
Net realized loss on
investment transactions (23,804) (23,568)
Net change in unrealized
appreciation (depreciation)
of investments 160,339 79,727
- ---------------------------------------------------------------------------
Net increase in net assets from
operations $ 1,221,699 $ 524,324
- ---------------------------------------------------------------------------
Distributions to shareholders
(Note 2) --
From net investment income $(1,074,911) $ (468,165)
In excess of net investment
income -- (2,671)
- ---------------------------------------------------------------------------
Total distributions to shareholders $(1,074,911) $ (470,836)
- ---------------------------------------------------------------------------
Transactions in shares of
beneficial interest (Note 3) --
Proceeds from sale of shares $14,569,442 $ 9,629,383
Net asset value of shares issued
to shareholders in payment of
distributions declared 556,369 285,803
Cost of shares redeemed (5,594,937) (4,430,879)
- ---------------------------------------------------------------------------
Net increase in net assets from
Fund share transactions $ 9,530,874 $ 5,484,307
- ---------------------------------------------------------------------------
Net increase in net assets $ 9,677,662 $ 5,537,795
- ---------------------------------------------------------------------------
Net Assets
- ---------------------------------------------------------------------------
At beginning of year $ 7,614,251 $ 2,076,456
- ---------------------------------------------------------------------------
At end of year $17,291,913 $ 7,614,251
- ---------------------------------------------------------------------------
Accumulated undistributed
(distributions in excess of)
net investment income
included in net assets
- ---------------------------------------------------------------------------
At end of year $ 6,554 $ (3,688)
- ---------------------------------------------------------------------------
</TABLE>
See notes to financial statements
7
<PAGE>
EV Classic High Income Fund as of March 31, 1997
FINANCIAL STATEMENTS CONT'D
Financial Highlights
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1997 1996 1995 *
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value -- Beginning of year $ 9.650 $ 9.430 $10.000
- -------------------------------------------------------------------------------------------------------
Income from operations
- -------------------------------------------------------------------------------------------------------
Net investment income $ 0.878 $ 0.888 $ 0.735
Net realized and unrealized gain (loss) on investments 0.181 0.225 (0.544)
- -------------------------------------------------------------------------------------------------------
Total income from operations $ 1.059 $ 1.113 $ 0.191
- -------------------------------------------------------------------------------------------------------
Less distributions
- -------------------------------------------------------------------------------------------------------
From net investment income $ (0.869) $(0.888) $(0.735)
In excess of net investment income -- (0.005) (0.026)
- -------------------------------------------------------------------------------------------------------
Total distributions $ (0.869) $(0.893) $(0.761)
- -------------------------------------------------------------------------------------------------------
Net asset value -- End of year $ 9.840 $ 9.650 $ 9.430
- -------------------------------------------------------------------------------------------------------
Total Return /(1)/ 11.44% 12.25% 1.89%
- -------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data +++
- -------------------------------------------------------------------------------------------------------
Net assets, end of year (000 omitted) $ 17,292 $ 7,614 $ 2,076
Ratio of net expenses to average daily net assets /(2)/ 1.74% 1.69% 2.04%+
Ratio of net investment income to average daily net assets 8.88% 9.17% 9.17%+
+++ The operating expenses of the Fund may reflect an allocation of expenses to
the Administrator. Had such actions not been taken, the ratios and net
investment income per share would have been as follows:
<CAPTION>
Ratios (As a percentage of average daily net assets):
<S> <C> <C> <C>
Expenses /(2)/ 2.29% 3.24% 5.20%+
Net investment income 8.32% 7.62% 6.01%+
Net investment income per share $ 0.823 $ 0.738 $ 0.482
</TABLE>
+ Annualized.
* For the period from the start of business, June 8, 1994, to March 31,
1995.
/(1)/ Total return is calculated assuming a purchase at the net asset value on
the first day and a sale at the net asset value on the last day of each
period reported. Dividends and distributions, if any, are assumed to be
reinvested at the net asset value on the payable date. Total return is not
computed on an annualized basis.
/(2)/ Includes the Fund's share of its corresponding Portfolio's allocated
expenses.
See notes to financial statements
8
<PAGE>
EV Classic High Income Fund as of March 31, 1997
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 (2.5% at March 31, 1997). The performance of
the Fund is directly affected by the performance of the Portfolio. The
financial statements of the Portfolio, including the portfolio of
investments, are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements. The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The policies are in conformity with
generally accepted accounting principles.
A Investment Valuations -- 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 each year all of its taxable income,
including any net realized gain on investments. Accordingly, no provision
for federal income or excise tax is necessary. At March 31, 1997, the Fund,
for federal income tax purposes, had a capital loss carryover of $26,240,
which will reduce the 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, 2003 ($3,625) and March 31, 2005 ($22,615), respectively.
Additionally, net losses of $50,019 attributable to security
transactions incurred after October 31, 1996, 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.
G Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian to the Fund and the Portfolio. Pursuant to the respective
custodian agreements, IBT receives a fee reduced by credits which
are determined based on the average daily cash balances the Fund or the
Portfolio maintains with IBT. All significant credit balances used to reduce
the Fund's custodian fees are reported as a reduction of expenses on the
statement of operations.
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
gain distributions in additional shares of the Fund at the net asset value
as of the ex-dividend date. Distributions are paid in the form of additional
shares or, at the election of the shareholder, in cash. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis 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 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.
9
<PAGE>
EV Classic High Income Fund as of March 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
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,
---------------------------------
1997 1996
------------------------------------------------------------------------
<S> <C> <C>
Sales 1,478,448 998,958
Issued to shareholders electing to
receive payments of 56,546 29,289
distributions in Fund shares
Redemptions (567,383) (459,261)
------------------------------------------------------------------------
Net increase 967,611 568,986
------------------------------------------------------------------------
</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. To enhance the net income of the Fund,
$67,984 of expenses related to the operation of the Fund were allocated to
EVM.
Except as 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 the investment advisor fee. Certain of the
officers and Trustees of the Fund and the 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 1/365 of 0.75% of the Fund's daily net assets, for providing
ongoing distribution services and facilities to the Fund. The Fund will
automatically discontinue payments to EVD during any period in which there
are no outstanding Uncovered Distribution Charges, which are equivalent to
the sum of (i) 6.25% of the aggregate amount received by the Fund for the
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 $91,484 to or payable to EVD for the year ended March
31, 1997, representing 0.75% (annualized) of average daily net assets.
At March 31, 1997, the amount of Uncovered Distribution Charges EVD
calculated under the Plan was approximately $1,471,000.
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 payments of
service fees 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, 1997
in the amount of $30,495. 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 shares sold by such Firm and monthly
service payments in amounts not 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 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 where 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) 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.
10
<PAGE>
EV Classic High Income Fund as of March, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
No CDSC is levied on shares which have been sold to EVD or its affiliates or
to their respective employees. CDSC charges are paid to EVD to reduce the
amount of Uncovered Distribution Charges calculated under the Fund's
Distribution Plan. CDSC charges received when no Uncovered Distribution
Charges exist will be credited to the Fund. For the year ended March 31,
1997, EVD received approximately $15,000 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, 1997, aggregated $14,818,377 and $6,212,687,
respectively.
11
<PAGE>
EV Classic High Income Fund as of March 31, 1997
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders
of EV Classic High Income Fund
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities of EV
Classic High Income Fund (the Fund) as of March 31, 1997, and the related
statement of operations for the year then ended, the statements of changes in
net assets for the years ended March 31, 1997 and 1996 and the financial
highlights for the years ended March 31, 1997 and 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 Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund at March
31, 1997, the results of its operations, the changes in net assets and its
financial highlights for the respective stated periods, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
May 9, 1997
12
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS
(Expressed in United States Dollars)
Corporate Bonds & Notes-- 93.7%
<TABLE>
<CAPTION>
Principal
Amount
(000
Security omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Apparel -- 3.0%
- --------------------------------------------------------------------------------
Anvil Knitwear, Inc., Sr. Notes,
10.875%, 3/15/07(1) $ 3,600 $ 3,546,000
Collins & Aikman Corp., Sr. Sub.
Notes, 11.50%, 4/15/06 2,550 2,817,750
Dan River Inc., Sr. Sub. Notes,
10.125%, 12/15/03 5,800 5,858,000
Glenoit Corp., Sr. Sub. Notes,
11.00%, 4/15/07/(1)/ 4,800 4,782,000
William Carter, Sr. Sub. Notes,
10.375%, 12/1/06(1) 4,000 4,040,000
- --------------------------------------------------------------------------------
$ 21,043,750
- --------------------------------------------------------------------------------
Auto and Parts -- 1.8%
- --------------------------------------------------------------------------------
Key Plastics, Inc., Sr. Notes,
10.25%, 3/15/07 $ 800 $ 794,000
Key Plastics, Inc., Sr. Notes,
14.00%, 11/15/99 5,500 6,105,000
Terex Corp., Sr. Sub. Notes,
13.25%, 5/15/02 5,000 5,500,000
- --------------------------------------------------------------------------------
$ 12,399,000
- --------------------------------------------------------------------------------
Banks - Regional -- 1.4%
- --------------------------------------------------------------------------------
First Nationwide, Inc., Sr. Notes,
12.50%, 4/15/03 $ 1,600 $ 1,744,000
First Nationwide, Inc., Sr. Sub.
Notes, 10.625%, 10/1/03 7,200 7,632,000
- --------------------------------------------------------------------------------
$ 9,376,000
- --------------------------------------------------------------------------------
Banks and Money Services -- 1.3%
- --------------------------------------------------------------------------------
Hawk Corp., Sr. Notes, 10.25%,
12/1/03/(1)/ $ 4,400 $ 4,444,000
Intertek Finance PLC, Sr. Sub.
Notes, 10.25%, 11/1/06/(1)/ 4,800 4,872,000
- --------------------------------------------------------------------------------
$ 9,316,000
- --------------------------------------------------------------------------------
Broadcasting and Cable -- 10.9%
- --------------------------------------------------------------------------------
Australis Holdings Pty Ltd., Sr.
Disc. Notes, 15.00%, (0% until
2000)11/1/02/(1)/ $ 3,600 $ 2,106,000
Cablevision Systems Corp., Sr.
Sub. Notes, 9.25%, 11/1/05 2,800 2,660,000
Cablevision Systems Corp., Sr.
Sub. Notes, 10.75%, 4/1/04 2,000 2,055,000
Diamond Cable Communications Co.,
Sr. Disc. Notes, 10.75%, (0% until
2002), 2/15/07 4,800 2,592,000
Diamond Cable Communications Co.,
Sr. Disc. Notes, 11.75%, (0% until
2000), 12/15/05 7,800 4,992,000
Diamond Cable Communications Co.,
Sr. Disc. Notes, 13.25%, (0% until
1999), 9/30/04 1,600 1,248,000
Dobson Communications Corp., Sr.
Notes, 11.75%, 4/15/07(1) 2,000 1,920,000
EZ Communications Inc., Sr. Sub.
Notes, 9.75%, 12/1/05 7,100 7,313,000
Groupe Videotron Ltd., Sr. Notes,
10.625%, 2/15/05 3,470 3,817,000
ICG Holdings, Inc., Sr. Sub.
Notes, 11.625%, (0% until
2002), 3/15/07/(1)/ 5,600 3,038,000
International Cabletel, Inc., Sr.
Disc. Notes, 11.50%, (0% until
2001), 2/1/06 3,800 2,356,000
International Cabletel, Inc., Sr.
Notes, 10.00%, 2/15/07/(1)/ 4,000 3,760,000
Marcus Cable Operating Co., Sr.
Debs., 11.875%, 10/1/05 2,800 2,912,000
Marcus Cable Operating Co., Sr.
Disc. Notes, 13.50%, (0% until
1999), 8/1/04 800 636,000
Marcus Cable Operating Co., Sr.
Disc. Notes, 14.25%, (0% until
2000), 12/15/05 8,500 5,865,000
Sullivan Broadcasting Co., Inc.,
Sr. Sub. Notes, 10.25%, 12/15/05 4,800 4,728,000
TCI Satellite Entertainment, Sr.
Sub. Notes, 10.875%, 2/15/07(1) 2,400 2,112,000
United International -Series B,
0%, 11/15/99 800 584,000
United International Holdings
Inc., Sr. Sec. Disc. Notes, 0%,
11/15/99 14,953 10,915,836
Videotron Holdings PLC, Inc., Sr.
Disc. Notes, 11.00%, (0% until
1999), 8/15/05 8,400 6,636,000
Young Broadcasting Corp., Sr. Sub.
Notes, 10.125%, 2/15/05 4,000 3,960,000
- --------------------------------------------------------------------------------
$ 76,205,836
- --------------------------------------------------------------------------------
Building Materials -- 2.9%
- --------------------------------------------------------------------------------
Building Materials Corp., Sr.
Notes, 8.625%, 12/15/06 $ 800 $ 800,000
Building Materials Corp., Sr. Sub.
Notes, 11.75%, (0% until
2000), 7/1/04 5,250 4,659,375
Overhead Door Corp., Sr. Notes,
12.25%, 2/1/00 8,450 8,999,250
Southdown, Inc., Sr. Sub. Notes.,
10.00%, 3/1/06 1,750 1,872,500
</TABLE>
See notes to financial statements
13
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Principal
Amount
(000
Security omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Building Materials (continued)
- --------------------------------------------------------------------------------
Tarkett International, AG., Sr.
Sub. Notes, 9.00%, 3/1/02 $ 3,600 $ 3,663,000
- --------------------------------------------------------------------------------
$ 19,994,125
- --------------------------------------------------------------------------------
Business Services -- 0.8%
- --------------------------------------------------------------------------------
Kindercare Learning Centers, Sr.
Sub. Notes, 9.50%, 2/15/09/(1)/ $ 6,000 $ 5,790,000
- --------------------------------------------------------------------------------
$ 5,790,000
- --------------------------------------------------------------------------------
Business Services - Miscellaneous -- 1.4%
- --------------------------------------------------------------------------------
Allied Waste NA, Sr. Sub Notes,
10.25%, 12/1/06/(1)/ $ 9,600 $ 9,792,000
- --------------------------------------------------------------------------------
$ 9,792,000
- --------------------------------------------------------------------------------
Chemicals -- 6.0%
- --------------------------------------------------------------------------------
Agricultural Minerals & Chemicals
Inc., Sr. Notes, 10.75%, 9/30/03 $ 5,000 $ 5,275,000
ISP Holdings, Inc., Sr. Notes,
9.75%, 2/15/02 5,750 5,980,000
NL Industries, Inc., Sr. Notes,
11.75%, 10/15/03 4,000 4,200,000
Pioneer Americas Acq. Corp., Sr.
Notes, 13.375%, 4/1/05 6,250 7,281,250
Plastic Containers, Inc., Sr.
Notes, 10.00%, 12/15/06 2,400 2,424,000
Plastic Specialties and Tech.,
Inc., Sr. Sec. Notes, 11.25%,
12/1/03 7,950 8,586,000
Terra Industries Inc., Sr. Notes,
10.50%, 6/15/05 3,800 4,028,000
UCC Investors, Inc., Sr. Sub.
Notes, 11.00%, 5/1/03 3,700 3,922,000
- --------------------------------------------------------------------------------
$ 41,696,250
- --------------------------------------------------------------------------------
Communications Equipment -- 1.7%
- --------------------------------------------------------------------------------
Omnipoint Corp., Sr. Notes,
11.625%, 8/15/06 $ 3,800 $ 3,306,000
Pricellular Wireless
Communications Corp., Sr. Notes,
10.75%, 11/1/04 2,400 2,430,000
Pricellular Wireless
Communications Corp., Sr. Sub.
Disc. Nts., 12.25%, (0% until
1998), 10/1/03 6,500 5,785,000
- --------------------------------------------------------------------------------
$ 11,521,000
- --------------------------------------------------------------------------------
Communications Services -- 9.5%
- --------------------------------------------------------------------------------
Australis Media Ltd., Sub. Disc.
Notes, 14.00%, (0% until 2000),
5/15/03 $ 6,004 $ 3,482,371
Brooks Fiber Properties, Inc., Sr.
Disc. Notes, 11.875%, (0% until
2001), 11/1/06 4,800 2,856,000
Brooks Fiber Properties. Inc., Sr.
Disc. Notes, 10.875%, (0% until
2001), 3/1/06 5,500 3,410,000
CS Wireless Systems, Inc.,
11.375%, (0% until 2001), 3/1/06 3,280 1,016,800
Dial Call Communications Inc., Sr.
Red. Notes, 12.25%, (0% until
1999), 4/15/04 7,200 5,184,000
Echostar Satellite Broadcasting
Corp., Sr. Disc. Notes, 13.125%,
(0% until 2000), 3/15/04 4,800 3,792,000
Esat Holdings, Ltd., Sr. Notes,
12.50%, (0% until 2002), 2/1/07/(1)/ 3,200 1,760,000
Galaxy Telecom LP., Sr. Sub.
Notes, 12.375%, 10/1/05 3,400 3,502,000
McCaw International, Ltd., 13.00%,
(0% until 2002), 4/15/07/(1)/ 6,800 3,179,000
McLeod Inc., Sr. Disc. Notes,
10.50%, (0% until 2002), 3/1/07/(1)/ 6,400 3,520,000
Microcell Telecommunication, Sr.
Disc. Notes, 14.00%, (0% until
2001), 6/1/06 11,200 5,488,000
Millicom International Cellular,
Sr. Disc Notes, 13.50%, (0% until
2001), 6/1/06 7,200 4,680,000
Nextlink Communications, Inc., Sr.
Notes, 12.50%, 4/15/06 5,600 5,684,000
Orion Network Systems, Inc., Sr.
Notes, 11.25%, 1/15/07 5,600 5,432,000
Orion Network Systems, Inc., Sr.
Notes, 12.50%, (0% until 2002),
1/15/07 3,200 1,600,000
Shared Tech / Fairchild, Inc., Sr.
Disc. Notes, 12.25%, (0% until
1999), 3/1/06 10,500 8,636,250
Telewest PLC, Debs., 11.00%, (0%
until 2002), 10/1/07 4,800 3,120,000
- --------------------------------------------------------------------------------
$ 66,342,421
- --------------------------------------------------------------------------------
Computer Software -- 1.2%
- --------------------------------------------------------------------------------
Unisys Corp., Sr. Notes, 11.75%, $ 2,600 $ 2,717,000
10/15/04
Unisys Corp., Sr. Notes, 12.00%, 5,600 5,852,000
4/15/03
- --------------------------------------------------------------------------------
$ 8,569,000
- --------------------------------------------------------------------------------
Containers and Packaging -- 5.7%
- --------------------------------------------------------------------------------
American Pad and Paper Co., Sr.
Sub. Notes, 13.00%, 11/15/05 $ 3,250 $ 3,770,000
Asia Pulp and Paper, 12.00%, 6,000 5,790,000
12/29/49
Container Corp., Sr. Notes, 3,250 3,510,000
10.75%, 5/1/02
Fort Howard Corp., Sr. Sec. Notes,
11.00%, 1/2/02 3,765 3,840,176
</TABLE>
14
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Principal
Amount
(000
Security omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Containers and Packaging (continued)
- --------------------------------------------------------------------------------
Gaylord Container Corp., Sr. Sub.
Disc. Debs., 12.75%, (0% until
1996), 5/15/05 $ 5,700 $ 6,213,000
Repap New Brunswick, Inc., Sr.
Notes, 10.625%, 4/15/05 1,600 1,600,000
Repap Wisconsin, Inc., 2nd Party
Sr. Sec. Notes, 9.875%, 5/1/06 165 163,350
Repap Wisconsin, Inc., Sr. Notes,
9.25%, 2/1/02 3,200 3,168,000
S.D. Warren Co., Sr. Sub. Notes,
12.00%, 12/15/04 3,800 4,142,000
Silgan Corp., Sr. Sub. Notes,
11.75%, 6/15/02 1,500 1,605,000
Stone Container Corp., 1st Mtg.
Notes, 10.75%, 10/1/02 4,500 4,477,500
US Can Corp., Sr. Sub. Notes,
10.125%, 10/15/06 1,600 1,664,000
- --------------------------------------------------------------------------------
$ 39,943,026
- --------------------------------------------------------------------------------
Electronics - Instruments -- 1.4%
- --------------------------------------------------------------------------------
Blue Bell Funding Inc., Sec. Ext.
Notes, 11.85%, 5/1/99 $ 4,304 $ 4,260,960
GS Technologies Corp., Sr. Notes,
12.25%, 10/1/05 5,500 5,720,000
- --------------------------------------------------------------------------------
$ 9,980,960
- --------------------------------------------------------------------------------
Entertainment -- 1.3%
- --------------------------------------------------------------------------------
All American Communications, Inc.,
Sr. Sub. Notes, 10.875%, 10/15/01 $ 4,400 $ 4,532,000
Cinemark USA, Sr. Sub. Notes,
9.625%, 8/1/08 4,800 4,800,000
- --------------------------------------------------------------------------------
$ 9,332,000
- --------------------------------------------------------------------------------
Foods -- 6.9%
- --------------------------------------------------------------------------------
Inflo Holdings Corp., Promissory
Notes, 10.00%, (0% until 1999),
1/27/07+++ $ 4,400 $ 3,696,000
International Home Foods, Inc.,
Sr. Sub. Notes, 10.375%, 11/1/06 8,000 8,060,000
Keebler Corp., Sr. Sub. Notes,
10.75%, 7/1/06 5,720 6,234,800
MBW Foods, Inc., Sr. Sub. Notes,
9.875%, 2/15/07/(1)/ 4,800 4,752,000
PM Holdings Corp., Sr. Sub. Notes,
11.50%, (0% until 2000), 9/1/05 2,837 2,042,640
Purina Mills, Inc., Sr. Sec. Sub.
Notes, 10.25%, 9/1/03 5,775 5,948,250
Specialty Foods Acquisition Corp.,
Sr. Sub Notes, 13.00%, (0% until
1999), 8/15/05 1,600 744,000
Specialty Foods Acquisition Corp.,
Sr. Sub. Notes, 10.25%, 8/15/01 7,000 6,842,500
Specialty Foods Acquisition Corp.,
Sr. Sub. Notes, 11.25%, 8/15/03 3,200 2,832,000
Van De Kamps, Inc., Sr. Sub.
Notes, 12.00%, 9/15/05 6,100 6,649,000
- --------------------------------------------------------------------------------
$ 47,801,190
- --------------------------------------------------------------------------------
Health Services -- 2.1%
- --------------------------------------------------------------------------------
Dade International, Inc., Sr. Sub.
Notes, 11.125%, 5/1/06 $ 4,800 $ 5,448,000
Owens & Minor, Inc., Sr. Sub.
Notes, 10.875%, 6/1/06 3,200 3,448,000
Tenet Healthcare Corp., Sr. Sub.
Notes, 8.625%, 1/15/07 5,600 5,460,000
- --------------------------------------------------------------------------------
$ 14,356,000
- --------------------------------------------------------------------------------
Household Products -- 1.6%
- --------------------------------------------------------------------------------
Lifestyle Furnishings, Inc.,
10.875%, 8/1/06 $ 4,000 $ 4,400,000
Pillowtex Corp., 10.00%, 11/15/06 2,400 2,484,000
Renaisance Cosmetics, Sr. Notes,
11.75%, 2/15/04/(1)/ 500 502,500
Revlon Worldwide, Inc., Sr. Disc
Notes, 0%, 3/15/01/(1)/ 3,200 1,984,000
Scholastic Brands, Inc., Sr. Sub.
Notes, 11.00%, 1/15/07/(1)/ 2,000 2,060,000
- --------------------------------------------------------------------------------
$ 11,430,500
- --------------------------------------------------------------------------------
Investment Services -- 0.6%
- --------------------------------------------------------------------------------
DVI, Inc., Sr. Notes, 9.875%,
2/1/04 $ 4,400 $ 4,389,000
- --------------------------------------------------------------------------------
$ 4,389,000
- --------------------------------------------------------------------------------
Lodging and Gaming -- 4.0%
- --------------------------------------------------------------------------------
Aztar Corp., Sr. Sub. Notes,
13.75%, 10/1/04 $ 5,000 $ 5,600,000
Courtyard By Marriot, Sr. Notes,
10.75%, 2/1/08 3,850 4,032,875
Harvey Casinos Resorts, Sr. Sub.
Notes, 10.625%, 6/1/06 6,000 6,330,000
Showboat Marina Casino, 1st Mtg.
Notes, 13.50%, 3/15/03 4,000 4,500,000
Trump Atlantic City Associates,
Co., 1st Mtg. Notes, 11.25%,
5/1/06 4,000 3,640,000
</TABLE>
15
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Principal
Amount
(000
Security omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Lodging and Gaming (continued)
- --------------------------------------------------------------------------------
Trump Holdings & Funding Inc., Sr.
Notes, 15.50%, 6/15/05 $ 3,000 $ 3,390,000
- --------------------------------------------------------------------------------
$ 27,492,875
- --------------------------------------------------------------------------------
Machinery -- 2.7%
- --------------------------------------------------------------------------------
Alvey Systems, Inc., Sr. Sub.
Notes, 11.375%, 1/31/03 $ 2,400 $ 2,496,000
Amtrol Acquisition, Inc., Sr.
Sub., 10.625%, 12/31/06 3,600 3,708,000
Imo Industries, Sr. Sub. Notes,
11.75%, 5/1/06 8,680 8,680,000
Motors And Gears, Inc., Sr. Notes,
10.75%, 11/15/06/(1)/ 4,000 4,050,000
- --------------------------------------------------------------------------------
$ 18,934,000
- --------------------------------------------------------------------------------
Medical Products -- 0.8%
- --------------------------------------------------------------------------------
Maxxim Medical, Inc., Sr. Sub.
Notes, 10.50%, 8/1/06 $ 5,200 $ 5,388,500
- --------------------------------------------------------------------------------
$ 5,388,500
- --------------------------------------------------------------------------------
Metals - Industrial -- 4.8%
- --------------------------------------------------------------------------------
AK Steel Corp., Senior Notes,
9.125%, 12/15/06 $ 5,200 $ 5,122,000
Applied Extrusion Inc., Sr. Notes,
11.50%, 4/1/02 6,000 6,210,000
Essex Group, Inc., Sr. Notes,
10.00%, 5/1/03 3,225 3,354,000
Howmet Corp., Sr. Sub. Notes,
10.00%, 12/1/03 2,850 3,035,250
Kaiser Aluminum and Chemical
Corp., Sr. Notes, 10.875%,
10/15/06 2,500 2,600,000
Kaiser Aluminum and Chemical
Corp., Sr. Sub. Notes, 12.75%,
2/1/03 6,600 7,095,000
Newflo Corp., Sub. Notes, 13.25%,
11/15/02 5,500 5,967,500
- --------------------------------------------------------------------------------
$ 33,383,750
- --------------------------------------------------------------------------------
Miscellaneous -- 3.5%
- --------------------------------------------------------------------------------
Alliant Tech Systems Inc., Sr.
Sub. Notes, 11.75%, 3/1/03 $ 4,000 $ 4,280,000
Clark-Schwebel, Sr. Notes,
10.50%, 4/15/06 5,200 5,434,000
Day International Group, Inc., Sr.
Sub. Notes, 11.125%, 6/1/05 3,300 3,432,000
Imax Corp., Sr. Notes, 10.00%,
(7% until 1997), 3/1/01 2,400 2,424,000
Selmer Co., Inc., Sr. Sub. Notes,
11.00%, 5/15/05 5,300 5,790,250
Webb Delaware Corp., Sr. Sub.
Notes, 9.75%, 1/15/08 3,200 3,200,000
- --------------------------------------------------------------------------------
$ 24,560,250
- --------------------------------------------------------------------------------
Oil and Gas - Equipment and Services -- 7.6%
- --------------------------------------------------------------------------------
AES Corp., Sr. Sub. Notes,
10.25%, 7/15/06 $ 1,600 $ 1,732,000
Cal Energy Company, Inc., Sr.
Notes, 9.50%, 9/15/06 5,500 5,857,500
Chesapeake Energy Corp., Sr.
Notes, 9.125%, 4/15/06 3,200 3,280,000
Clark USA, Inc., Sr. Notes,
10.875%, 12/1/05 2,900 2,972,500
Coda Energy Inc., Sr. Sub. Notes,
10.50%, 4/1/06 4,000 4,220,000
Dawson Product Services, Inc., Sr.
Notes, 9.375%, 2/1/07 2,800 2,772,000
El Paso Electric Co., 1st Mtg.
Notes, 9.40%, 5/1/11 2,850 3,055,143
Kelley Oil and Natural Gas Corp.,
10.375%, 10/15/06 1,600 1,648,000
Mariner Energy Corp., Sr. Sub.
Notes, 10.50%, 8/1/06 6,300 6,552,000
Midland Cogeneration Venture, Sr.
Sec. Lease Oblig., 10.33%, 7/23/02 2,734 2,898,384
Midland Funding II, Sec. Lease
Oblig., 11.75%, 7/23/05 2,200 2,498,870
Parker Drilling Corp., Sr. Sub.
Notes, 9.75%, 11/15/06 2,400 2,532,000
Perez Companc, S.A., 9.00%,
1/30/04/(1)/ 4,000 3,940,000
Trans Texas Gas Corp., Sr. Sec.
Notes, 11.50%, 6/15/02 5,400 5,913,000
Veritas DGC, Inc., Sr. Notes,
9.75%, 10/15/03 3,200 3,248,000
- --------------------------------------------------------------------------------
$ 53,119,397
- --------------------------------------------------------------------------------
Printing and Business Products -- 1.7%
- --------------------------------------------------------------------------------
MDC Communications Corp., Sr. Sub.
Notes, 10.50%, 12/1/06 $ 5,200 $ 5,434,000
Monarch Acquisition Corp., Sr.
Notes, 12.50%, 7/1/03 5,550 6,479,625
- --------------------------------------------------------------------------------
$ 11,913,625
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
16
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Principal
Amount
(000
Security omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Publishing -- 1.8%
- --------------------------------------------------------------------------------
Hollinger International
Publications, Inc., Sr. Sub.
Notes, 9.25%, 3/15/07 $ 3,600 $ 3,456,000
Newsquest Capital Corp., Sr. Sub.
Notes, 11.00%, 5/1/06 8,400 8,736,000
- --------------------------------------------------------------------------------
$ 12,192,000
- --------------------------------------------------------------------------------
Retail - Food and Drug -- 3.4%
- --------------------------------------------------------------------------------
Dominicks Finer Foods, Inc., Sr.
Sub. Notes, 10.875%, 5/1/05 $ 1,600 $ 1,720,000
Duane Reade, G.P., Sr. Notes,
12.00%, 9/15/02 6,200 6,556,500
Ralphs Grocery Co., Inc., Sr. Sub.
Notes, 13.75%, 6/15/05 5,500 5,885,000
Smith's Food and Drug Corp., Sr.
Sub. Notes, 11.25%, 5/15/07 2,400 2,628,000
Star Markets Co., Sr. Sub. Notes,
13.00%, 11/1/04 6,200 6,944,000
- --------------------------------------------------------------------------------
$ 23,733,500
- --------------------------------------------------------------------------------
Retail - General -- 1.9%
- --------------------------------------------------------------------------------
Knoll, Inc., Sr. Sub. Notes,
10.875%, 3/15/06 $ 3,600 $ 3,960,000
Levitz Furniture Corp., Sr. Sub.
Notes, 9.625%, 7/15/03 3,850 2,829,750
Levitz Furniture Corp., Sr. Sub.
Notes, 13.375%, 10/15/98 800 792,000
Specialty Retailers, Inc., Sr.
Sub. Notes, 11.00%, 8/15/03 5,530 5,875,625
- --------------------------------------------------------------------------------
$ 13,457,375
- --------------------------------------------------------------------------------
Total Corporate Bonds & Notes
(identified cost $641,051,162) $ 653,453,330
- --------------------------------------------------------------------------------
<CAPTION>
Common Stocks, Warrants and Rights-- 0.7%
Security Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Auto and Parts -- 0.3%
- --------------------------------------------------------------------------------
Bucyrus - Erie Co., Common* 214,839 $ 1,718,712
- --------------------------------------------------------------------------------
$ 1,718,712
- --------------------------------------------------------------------------------
Broadcasting and Cable -- 0.0%
- --------------------------------------------------------------------------------
American Telecasting, Inc.
Warrants+* 2,600 $ 5,200
United International Holdings,
Inc., Warrants Exp. 11/15/99+* 7,840 56,840
- --------------------------------------------------------------------------------
$ 62,040
- --------------------------------------------------------------------------------
Building Materials -- 0.1%
- --------------------------------------------------------------------------------
Southdown, Inc. 13,500 $ 465,750
- --------------------------------------------------------------------------------
$ 465,750
- --------------------------------------------------------------------------------
Chemicals -- 0.0%
- --------------------------------------------------------------------------------
Crompton & Knowles Corp., Common* 9,489 $ 190,964
Sterling Chemicals Holdings -
Warrants+* 3,200 112,000
- --------------------------------------------------------------------------------
$ 302,964
- --------------------------------------------------------------------------------
Communications Equipment -- 0.0%
- --------------------------------------------------------------------------------
In Flight Phone Corp., Warrants
Exp. 8/31/02+* 1,600 $ --
- --------------------------------------------------------------------------------
$ --
- --------------------------------------------------------------------------------
Communications Services -- 0.1%
- --------------------------------------------------------------------------------
CS Wireless Systems, Inc., Common+* 902 $ --
Microcell Telecommunication,
Warrants+* 44,800 448,000
Microcell Telecommunication,
Warrants+* 44,800 30,240
Nextel Communications Warrants
Exp. 4/25/99+* 7,200 1,800
- --------------------------------------------------------------------------------
$ 480,040
- --------------------------------------------------------------------------------
Containers and Packaging -- 0.0%
- --------------------------------------------------------------------------------
SD Warren Company, Warrants Exp.
12/15/06+* 48,000 $ 192,000
- --------------------------------------------------------------------------------
$ 192,000
- --------------------------------------------------------------------------------
Foods -- 0.0%
- --------------------------------------------------------------------------------
Servam Corp., $2.00 Warrant Exp.
4/1/01+* 12,276 $ --
Servam Corp., $4.50 Warrant Exp.
4/1/01+* 2,760 --
Servam Corp., Common+* 1,380 --
Specialty Foods Acquisition Corp.,
Common/(1)/* 48,000 12,000
- --------------------------------------------------------------------------------
$ 12,000
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
17
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States dollars)
<TABLE>
<CAPTION>
Security Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Industrial Development Revenue / Pollution Control Revenue -- 0.0%
- --------------------------------------------------------------------------------
Thermadyne Holdings Corp., Common+* 40,000 $ 400
- --------------------------------------------------------------------------------
$ 400
- --------------------------------------------------------------------------------
Metals - Industrial -- 0.2%
- --------------------------------------------------------------------------------
Gulf States Steel, Warrants+* 2,400 $ 120
Terex Corp., Rights, Exp. 7/1/97+* 5,371 537
Terex Corp., Warrants Exp.
12/31/00+* 32,000 1,024,000
Terex Corp., Warrants Exp.
5/15/02+* 20,000 100,000
Triangle Wire & Cable, Inc.,
Common+* 95,000 190,000
- --------------------------------------------------------------------------------
$ 1,314,657
- --------------------------------------------------------------------------------
Miscellaneous -- 0.0%
- --------------------------------------------------------------------------------
Australis Media Ltd., Warrants+* 5,200 $ --
- --------------------------------------------------------------------------------
$ --
- --------------------------------------------------------------------------------
Total Common Stocks, Warrants and Rights
(identified cost $6,595,495) $ 4,548,563
- --------------------------------------------------------------------------------
Preferred Stocks -- 1.9%
Broadcasting and Cable -- 1.3%
- --------------------------------------------------------------------------------
American Radio Systems Corp.,
11.375%/(1)/ 24,000 $ 2,412,000
Cablevision Systems Corp., 11.125%
(PIK) 33,971 3,040,386
Chancellor Radio Broadcasting Corp.,
12.00%/(1)/ 40,000 3,940,000
- -------------------------------------------------------------------------------
$ 9,392,386
- --------------------------------------------------------------------------------
Communications Services -- 0.2%
- --------------------------------------------------------------------------------
Nextlink Communications, 14.00%
(PIK)/(1)/ 24,500 $ 1,102,500
- --------------------------------------------------------------------------------
$ 1,102,500
- --------------------------------------------------------------------------------
Containers and Packaging -- 0.3%
- --------------------------------------------------------------------------------
S.D. Warren Co. w / Warrants, 14%,
12/15/06 48,000 $ 1,872,000
- --------------------------------------------------------------------------------
$ 1,872,000
- --------------------------------------------------------------------------------
Oil and Gas - Equipment and Services -- 0.1%
- --------------------------------------------------------------------------------
Kelley Oil and Natural Gas Corp.* 42,240 $ 1,098,240
- --------------------------------------------------------------------------------
$ 1,098,240
- --------------------------------------------------------------------------------
Total Preferred Stocks
(identified cost $13,042,123) $ 13,465,126
- --------------------------------------------------------------------------------
</TABLE>
Short-Term Investments -- 3.7%
<TABLE>
<CAPTION>
Principal
Amount
(000
Security omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Associates Corp. of North America,
6.80%, 4/1/97 $ 16,008 $ 16,008,000
General Electric Capital Co., 10,000 9,987,444
5.65%, 4/9/97
- --------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $25,995,444) $ 25,995,444
- --------------------------------------------------------------------------------
Total Investments -- 100.0%
(identified cost $686,684,224) $ 697,462,463
- --------------------------------------------------------------------------------
</TABLE>
/(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,
1997, the value of these securities amounted to $83,416,000 or 12.0% of
net assets.
+ Restricted security (Note 6).
* Non-income producing security.
(PIK) Payment in-kind.
18
<PAGE>
High Income Portfolio as of March 31, 1997
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
As of March 31, 1997
(Expressed in United States Dollars)
Assets
- -------------------------------------------------------------------------
<S> <C>
Investments, at value (Note 1A)
(identified cost, $686,684,224) $697,462,463
Cash 17,527
Receivable for investments sold 1,464,283
Interest receivable 17,048,513
Miscellaneous receivable 2,124
Prepaid expenses 7,071
Deferred organization expenses (Note 1D) 9,773
- -------------------------------------------------------------------------
Total assets $716,011,754
- -------------------------------------------------------------------------
Liabilities
- -------------------------------------------------------------------------
Payable for investments purchased $ 9,254,554
Payable to affiliate
Trustees' fees 5,300
Accrued expenses 40,438
- -------------------------------------------------------------------------
Total liabilities $ 9,300,292
- -------------------------------------------------------------------------
Net Assets applicable to investors' interest in
Portfolio $706,711,462
- -------------------------------------------------------------------------
Sources of Net Assets
- -------------------------------------------------------------------------
Net proceeds from capital contributions and
withdrawals $695,933,223
Net unrealized appreciation on investments (computed
on the basis of identified cost) 10,778,239
- -------------------------------------------------------------------------
Total $706,711,462
- -------------------------------------------------------------------------
</TABLE>
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
March 31, 1997
(Expressed in United States Dollars)
Investment Income (Note 1B)
- -------------------------------------------------------------------------
<S> <C>
Interest income $64,033,245
Dividend income 59,560
- -------------------------------------------------------------------------
Total income $64,092,805
- -------------------------------------------------------------------------
Expenses
- -------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 3,683,894
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 20,598
Custodian fee 232,684
Legal and accounting services 49,843
Amortization of organization expenses (Note 1D) 4,519
Miscellaneous 17,294
- -------------------------------------------------------------------------
Total expenses $ 4,008,832
- -------------------------------------------------------------------------
Net investment income $60,083,973
- -------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- -------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $(4,056,681)
- -------------------------------------------------------------------------
Net realized loss on investments $(4,056,681)
- -------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investment transactions (identified cost basis) $13,401,858
- -------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $13,401,858
- -------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 9,345,177
- -------------------------------------------------------------------------
Net increase in net assets from operations $69,429,150
- -------------------------------------------------------------------------
</TABLE>
See notes to financial statements
19
<PAGE>
High Income Portfolio as of March 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets (Expressed in United States Dollars)
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended Year Ended
in Net Assets March 31, 1997 March 31, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 60,083,973 $ 50,896,652
Net realized loss on investments (4,056,681) (5,151,523)
Net change in unrealized
appreciation (depreciation)
of investments 13,401,858 17,257,761
- -------------------------------------------------------------------------------
Net increase in net assets
from operations $ 69,429,150 $ 63,002,890
- -------------------------------------------------------------------------------
Capital transactions --
Contributions $ 280,137,284 $ 172,948,713
Withdrawals (154,202,111) (167,156,279)
- -------------------------------------------------------------------------------
Net increase in net assets from
capital transactions $ 125,935,173 $ 5,792,434
- -------------------------------------------------------------------------------
Net increase in net assets $ 195,364,323 $ 68,795,324
- -------------------------------------------------------------------------------
Net Assets
- -------------------------------------------------------------------------------
At beginning of year $ 511,347,139 $ 442,551,815
- -------------------------------------------------------------------------------
At end of year $ 706,711,462 $ 511,347,139
- -------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
20
<PAGE>
High Income Portfolio as of March 31, 1997
FINANCIAL STATEMENTS CONT'D
Supplementary Data (Expressed in United States Dollars)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------
1997 1996 1995*
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratios to average daily net assets
- --------------------------------------------------------------------------------------------------------------------
Expenses 0.67% 0.71% 0.70%+
Net investment income 10.02% 10.41% 10.63%+
Portfolio Turnover 78% 88% 53%
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000s omitted) $ 706,711 $511,347 $442,552
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, June 1, 1994, to March 31, 1995.
See notes to financial statements
21
<PAGE>
High Income Portfolio as of March 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
(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 quotations or valuations 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 taxable 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 & 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
balances the Portfolio maintains with IBT. All significant credit balances
used to reduce the Portfolio's custodian fees are reported as a reduction of
expenses on the Statement of Operations.
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, 1997, the fee was equivalent to 0.61% of the
Portfolio's average daily net
22
<PAGE>
High Income Portfolio as of March 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
(Expressed in United States Dollars)
assets and amounted to $3,683,894. 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 Trustees Deferred Compensation Plan. For the year ended March 31,
1997, 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 $591,877,399 and $446,278,324, respectively, for the
year ended March 31, 1997.
4 Line of Credit
------------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR and
EVM and its affiliates in a committed $120 million unsecured line of credit
agreement with a group of banks. Borrowings will be made by the Portfolio
solely to facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Interest is charged to each portfolio or fund based on its
borrowings at the bank's base rate or at an amount above either the bank's
adjusted certificate of deposit rate, Eurodollar rate or federal funds
effective rate. In addition, a fee computed at an annual rate of 0.15% on the
daily unused portion of the line of credit is allocated among the
participating portfolios and funds at the end of each quarter. The Portfolio
did not have any significant borrowings or allocated fees during the period.
5 Federal Income Tax Basis of Investments
------------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the investments
owned at March 31, 1997, as computed on a federal income tax basis, were as
follows:
<TABLE>
<S> <C>
Aggregate cost $ 686,684,224
------------------------------------------------------------------------------
Gross unrealized appreciation $ 25,029,413
Gross unrealized depreciation (14,251,174)
------------------------------------------------------------------------------
Net unrealized appreciation $ 10,778,239
------------------------------------------------------------------------------
</TABLE>
6 Restricted Securities
------------------------------------------------------------------------------
At March 31, 1997, the Portfolio owned the following securities (constituting
0.83% 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>
Date of
Description Acquisition Shares/Face Cost Fair Value
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Note
------------------------------------------------------------------------------
Inflo Holdings Corp.,
Promissory Notes, 10%
(0% until 1999),
1/27/07 9/13/96 4,400,000 $2,884,000 $3,696,000
Common Stocks, Warrants, and Rights
------------------------------------------------------------------------------
American Telecasting,
Inc. Warrants 01/16/96 2,600 $ 71,500 $ 5,200
Australis Media Ltd.,
Warrants 05/26/95 5,200 - -
CS Wireless Systems,
Inc., Common 01/14/97 902 - -
Gulf States Steel,
Warrants 08/22/95 2,400 - 120
In Flight Phone
Corp., Warrants
Exp. 8/31/02 11/28/95 1,600 - -
Microcell
Telecommunication, 10/30/96 44,800 - 448,000
Warrants
Microcell
Telecommunication,
Contingent Warrants 10/30/96 44,800 - 30,240
Nextel Communications
Warrants Exp. 4/25/99 10/04/96 7,200 - 1,800
SD Warren Company,
Warrants Exp. 12/15/06 05/15/95 48,000 - 192,000
Servam Corp., $2.00
Warrant Exp. 4/1/01 12/15/87 12,276 - -
Servam Corp., $4.50
Warrant Exp. 4/1/01 12/15/87 2,760 - -
Servam Corp., Common 12/15/87 1,380 - -
Sterling Chemicals
Holdings, Warrants 10/07/96 3,200 - 112,000
Terex Corp., Rights,
Exp. 7/1/97 11/07/94 5,371 - 537
Terex Corp., Warrants
Exp. 12/31/00 12/15/93 32,000 6,400 1,024,000
Terex Corp., Warrants
Exp. 5/15/02 11/07/96 20,000 - 100,000
Thermadyne Holdings
Corp., Common 4/03/89 40,000 28,800 400
Triangle Wire &
Cable, Inc., Common 05/02/94 95,000 2,250,000 190,000
United International
Holdings, Inc.,
Warrants Exp. 11/15/99 11/16/94 7,840 222,186 56,840
------------------------------------------------------------------------------
$5,462,886 $5,857,137
------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
High Income Portfolio as of March 31, 1997
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 (the Portfolio) as of
March 31, 1997, and the related statement of operations for the year then ended,
the statements of changes in net assets for the years ended March 31, 1997 and
1996 and the supplementary data for the two years 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 held as of March 31, 1997 by correspondence with the custodian. 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 the Portfolio at March 31,
1997, the results of its operations, changes in net assets and 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
May 9, 1997
24
<PAGE>
EV Classic High Income Fund as of March 31, 1997
INVESTMENT MANAGEMENT
EV Classic High Income Fund
Officers
M. Dozier Gardner
President and Trustee
James B. Hawkes
Vice President and Trustee
William H. Ahern, Jr.
Vice President
Michael B. Terry
Vice President
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Banking, Harvard University Graduate School of
Business Administration
Norton H. Reamer
President and Director, United Asset
Management Corporation
John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
High Income Portfolio
Officers
M. Dozier Gardner
President and Trustee
James B. Hawkes
Vice President and Trustee
Hooker Talcott, Jr.
Vice President and
Co-Portfolio Manager
Michael W. Weilheimer
Vice President and
Co-Portfolio Manager
William Chisholm
Vice President
Raymond O'Neill
Vice President
Michel Normandeau
Vice President
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Banking, Harvard University Graduate School of
Business Administration
Norton H. Reamer
President and Director, United Asset
Management Corporation
John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
<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.
Attention: Eaton Vance Funds
P.O. Box 5123
Westborough, MA 01581-5123
Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
EV Classic High Income Fund
24 Federal 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.
- --------------------------------------------------------------------------------
C-HISRC-5/97
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
August 1, 1997
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"). 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 to herein as the
"SAI".
TABLE OF CONTENTS
Page
PART I
Additional Information about Investment Policies ..................... 2
Investment Restrictions .............................................. 6
Trustees and Officers ................................................ 7
Investment Adviser and Administrator ................................. 10
Custodian ............................................................ 12
Service for Withdrawal ............................................... 12
Determination of Net Asset Value ..................................... 12
Investment Performance ............................................... 13
Taxes ................................................................ 14
Principal Underwriter ................................................ 16
Portfolio Security Transactions ...................................... 16
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-3
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, 1997, 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 INFORMATION ABOUT INVESTMENT 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. 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 or liquid securities (such as readily marketable
obligations and money market instruments) 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. The securities in the segregated
account will be marked to market daily. Assets used as cover or held in a
segregated account maintained by the Portfolio's custodian 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, net of
administrative expenses and any finder's fees, justifies the attendant risk. 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.
For the fiscal years ended March 31, 1997 and 1996, the portfolio turnover
rates of the Portfolio were 78% and 88%, respectively.
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 exceed 100%
(excluding turnover of securities having a maturity of one year or less).
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. As a matter of fundamental policy, 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
1940 Act;
(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 adopted the following investment policies
which may be changed with respect to the Fund by the Trustees of the Trust
without approval by the Fund's shareholders or with respect to the Portfolio by
the Trustees of the Portfolio without 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) 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.); or (c) purchase or retain in its
portfolio any securities issued by an issuer, any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Trust or 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).
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, or any 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.
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 Investment Adviser, BMR, a
wholly-owned subsidiary of Eaton Vance; of Eaton Vance's parent, Eaton Vance
Corp. ("EVC"); and of BMR's and Eaton Vance's trustee, Eaton Vance, Inc. ("EV").
Eaton Vance and EV are both wholly-owned subsidiaries of EVC. Those Trustees who
are "interested persons" of the Trust or the Portfolio, as defined in the 1940
Act, by virtue of their affiliation with BMR, Eaton Vance, EVC or EV, are
indicated by an asterisk(*).
TRUSTEES OF THE TRUST AND THE PORTFOLIO
M. DOZIER GARDNER (64), President and Trustee*
Vice Chairman of BMR, Eaton Vance, EVC and EV, and Director of EVC and EV.
Director or Trustee and officer of various investment companies managed by
Eaton Vance or BMR.
DONALD R. DWIGHT (66), Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company); Chairman of the Board of Newspapers of New England, Inc. Director
or Trustee of various investment companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
JAMES B. HAWKES (55), Vice President and Trustee*
President and Chief Executive Officer 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 Trustee of the
Trust on December 16, 1991.
SAMUEL L. HAYES, III (62), 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 (61), 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 (70), Trustee
Former Director of 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 (67), 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. (38), Vice President of the Trust
Vice President of BMR and Eaton Vance. Officer of various investment companies
managed by Eaton Vance or BMR. Mr. Ahern was elected Vice President of the
Trust on June 19, 1995.
WILLIAM CHISHOLM (36), 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 (36), Vice President of the Portfolio
Vice President of Eaton Vance since 1992; employee of Eaton Vance since November
26, 1990. Mr. Weilheimer was elected Vice President of Portfolio on December
18, 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. Mr. Rynne was elected an officer of the Trust on June 19, 1995.
MICHEL NORMANDEAU (45), 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 (35), 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 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 JR. (65), 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 (54), 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 (52), Treasurer
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
ALAN R. DYNNER (56), Secretary
Vice President and Chief Legal Officer of BMR, Eaton Vance, EVC and EV since
November 1, 1996. Previously, he was a Partner of the law firm of Kirkpartrick
& Lockhart LLP, New York and Washington, D.C., and was Executive Vice
President of Neuberger & Berman Management, Inc., a mutual fund management
company. Officer of various investment companies managed by Eaton Vance or
BMR. Mr. Dynner was elected Secretary on June 23, 1997.
JANET E. SANDERS (61), 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 (34), 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). 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 June 19, 1995.
ERIC G. WOODBURY (40), Assistant Secretary
Vice President of BMR, Eaton Vance and EV since February 1993; formerly,
associate attorney at Dechert, Price & Rhoads. Mr. Woodbury was elected
Assistant Secretary of the Trust and the Portfolio on June 19, 1995. Officer
of various investment companies managed by Eaton Vance or BMR.
Messrs. Hayes (Chairman), Reamer and Thorndike 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 and the Portfolio, including
investment advisory (Portfolio only), administrative, 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, the Portfolio or investors therein.
The Nominating Commitee of the Board of Trustees of the Trust and the
Portfolio 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. 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 certified public accountants, and reviewing 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, transfer agent and dividend disbursing
agent of the Trust 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
"Trustees" Plan"). Under the Trustees' 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 Trustees' Plan will be determined based upon the performance of such
investments. Deferral of Trustees' fees in accordance with the Trustees' 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 the noninterested Trustees of the Trust and the
Portfolio are paid by the Fund (and the other series of the Trust) and the
Portfolio, respectively. For the compensation earned by the noninterested
Trustees, 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 $17 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, and
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
experienced team of investment professionals that began working together in the
mid-1980s. 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 the Principal
Underwriter both within the United States and offshore.
The Principal Underwriter 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)
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 any legal obligation of the Portfolio to indemnify its Trustees,
officers and investors with respect thereto, to the extent not covered by
insurance.
For a description of the compensation that the Portfolio pays BMR under the
Investment Advisory Agreement, see the Fund's current Prospectus. As at March
31, 1997, the Portfolio had net assets of $706,711,462. For the fiscal years
ended March 31, 1997 and 1996, and for the period from the Portfolio's start of
business, June 1, 1994 to March 31, 1995, the Portfolio paid BMR advisory fees
of $3,683,894 $3,094,793, and $2,260,748, respectively (equivalent to 0.61%,
0.63% and 0.64% annualized of the Portfolio's average daily net assets for each
such period).
The Investment Advisory Agreement with BMR continues in effect from year to
year so long as such continuance is approved at least annually (i) by the vote
of a majority of the noninterested Trustees of the Portfolio 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.
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 agreement with the Fund, Eaton Vance has been
engaged to administer the Fund's affairs, subject to the supervision of the
Trustees of the Trust, and shall furnish for the use of the Fund office space
and all necessary office facilities, equipment and personnel for administering
the affairs of the Fund.
The Fund pays all of its own expenses including, without limitation, (i)
expenses of maintaining the Fund and continuing its existence, (ii) its pro rata
share of the Trust's registration 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 any legal obligation of the Trust to indemnify its Trustees and
officers with respect thereto, to the extent not covered by insurance.
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, 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, Mr. Gardner
is vice chairman and Mr. Hawkes 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,
1997, the Voting Trustees of which are Messrs. Clay, Gardner, Hawkes and
Rowland and Thomas E. Faust, Jr. 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 or officers and
Directors of EVC and EV. As of July 31, 1997, Messrs. Clay, Gardner and Hawkes
each owned 24% of such voting trust receipts, and Messrs. Rowland and Faust
owned 15% and 13%, respectively, of such voting trust receipts. Messrs.
Dynner, Gardner and Hawkes 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, Murphy, O'Connor, Rynne,
Talcott, Terry, Weilheimer 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.
Eaton Vance owns all the stock of Northeast Properties, Inc., which is
engaged in real estate investment. EVC also owns 22% 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 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 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 entities in 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 the Portfolio and IBT under the 1940 Act.
IBT also provides services in connection with the preparation of shareholder
reports and the electronic filing of such reports with the Commission, for which
it receives a separate fee.
SERVICE FOR WITHDRAWAL
The 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 current Prospectus) based
upon the value of the shares held. The checks will be drawn from share
redemptions and, hence, although they are a return of principal, may require the
recognition of a taxable gain or loss. 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 is also computed by IBT (as agent and
custodian for the Portfolio) by subtracting the liabilities of the Portfolio
from the value of its total assets. Fixed-income securities (other than
short-term obligations), 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 or at the direction of the Trustees of the
Portfolio. 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, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
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 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 the 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 is 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, and various domestic securities indicies, 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 including ratings and rankings 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
Each series of the Trust is treated as a separate entity for federal income
tax purposes. The Fund has elected to be treated and intends 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 substantially all of its
ordinary income and net income in accordance with the timing requirements
imposed by the Code, so as to maintain its RIC status and to avoid paying any
federal income or excise tax. The Fund so qualified for its fiscal year ended
March 31, 1997. 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 also satisfy these
requirements. 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 RIC, the Fund
(i) will be deemed to own its proportionate share of each of the assets of the
Portfolio and (ii) will be entitled to the gross income of the Portfolio
attributable to such share.
In order to avoid incurring a federal excise tax obligation, 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 its capital gain net income which is 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 (i)
any available capital loss carryforwards and (ii) 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 and the Portfolio is treated as a partnership for
Massachusetts and federal tax purposes, neither the Fund nor the Portfolio
should be 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 capital losses
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 status.
The Portfolio may be subject to foreign income tax withholding or other
foreign taxes with respect to income (possibly including, in some cases, capital
gains) arising from certain transactions in foreign securities. These taxes may
be reduced or eliminated under the terms of an applicable tax convention between
certain countries and the U.S. 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. Accordingly under the
Code, the Fund will not be eligible to pass through to its 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" ("PFICs") may be limited or a tax election may be made, if
available, in order to seek to preserve the Fund's qualification as a RIC and/or
avoid imposition of an income 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 securities that it might otherwise have continued to hold in order to
generate cash that the Fund may withdraw from the Portfolio to make
distributions 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 that the
issuers of these securities default on their obligations pertaining thereto. The
Code is not entirely clear regarding the federal income tax consequences of the
Fund's taking certain positions in connection with ownership of such distressed
securities. For example, the Code is unclear regarding: (i) when the Portfolio
may cease to accrue interest, original issue discount, or market discount; (ii)
when and to what extent deductions may be taken for bad debts or worthless
securities; (iii) how payments received on obligations in default should be
allocated between principal and income; and (iv) 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.
Amounts paid by the Fund to individuals and certain other shareholders who
have not provided the Fund with their correct taxpayer identification number
("TIN") and certain certifications required by the Internal Revenue Service (the
"IRS"), as well as shareholders with respect to whom the Fund has received
certain information from the IRS or a broker, may be subject to "backup"
withholding of federal income tax arising from the Fund's dividends and other
distributions as well as the proceeds of redemption transactions (including
repurchases and exchanges), at a rate of 31%. An individual's TIN 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 convention. 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 arise if: (i) the
shareholder is engaged in a trade or business in the United States, (ii) the
shareholder is present in the United States for a sufficient period of time
during a taxable year to be treated as a U.S. resident, (generally 180 days or
more); or (iii) the shareholder fails to provide any required certifications
regarding its 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, and, where applicable,
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 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 the
noninterested Trustees 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 executing firm, are made by BMR.
BMR is also responsible for the execution of transactions for all other accounts
managed by it.
BMR places the portfolio security transactions of the Portfolio and of all
other accounts managed by it for execution with many firms. BMR uses its best
efforts to obtain execution of portfolio security transactions at prices which
are advantageous to the Portfolio and (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 executing firm, 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 firm, the value and quality of services rendered by
the firm 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 executing firms, and a
particular firm 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 firms who were selected to execute transactions on behalf of the
Portfolio and BMR's other clients for providing brokerage and research services
to BMR.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Portfolio
may receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if BMR
determines in good faith that such compensation 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. (the "NASD"), which rule provides that no firm which is a member of the
NASD 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.
Whenever decisions are made to buy or sell securities by the Portfolio and one
or more of such other accounts simultaneously, BMR will allocate the security
transactions (including "hot" issues) in a manner which it believes to be
equitable under the circumstances. As a result of such allocations, there may be
instances where the Portfolio will not participate in a transaction that is
allocated among other accounts. If an aggregated order cannot be filled
completely, allocations will generally be made on a pro rata basis. An order may
not be allocated on a pro rata basis where, for example: (i) consideration is
given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account
with specialized investment policies that coincide with the particulars of a
specific investment; (iii) pro rata allocation would result in odd-lot or de
minimis amounts being allocated to a portfolio or other client; or (iv) where
BMR reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Portfolio from time to time, it is the opinion of the Trustees of the Trust and
the Portfolio that the benefits from the BMR organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
For the fiscal years ended March 31, 1997 and 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
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).
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.
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 shareholders' meeting for the election of Trustees. Except for the foregoing
circumstances and unless removed by action of the shareholders in accordance
with the Trust's by-laws, the Trustees shall continue to hold office and may
appoint successor Trustees.
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 (such as reclassifying series or classes of shares or restructuring the
Trust) 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.
Under Massachusetts law, if certain conditions prevail, shareholders of a
Massachusetts business trust (such as the Trust) could be deemed to have
personal liability for the obligations of the Trust. Numerous investment
companies registered under the 1940 Act have been formed as Massachusetts
business trusts, and management is not aware of an instance where such liability
has been imposed. The Trust's Declaration of Trust contains an express
disclaimer of liability on the part of the Fund shareholders and the Trust's
By-laws provide that the Trust shall assume the defense on behalf of any Fund
shareholders. (The Declaration of Trust also contains provisions limiting the
liability of a series or class to that series or class.) Moreover, the Trust's
By-laws also provide for indemnification out of the property of the Fund of any
shareholder held personally liable solely by reason of being or having been a
shareholder for all loss or expense arising from such liability. The assets of
the Fund are readily marketable and will ordinarily substantially exceed its
liabilities. In light of the nature of the Fund's business and the nature of its
assets, management believes that the possibility of the Fund's liability
exceeding its assets, and therefore the shareholder's risk of personal
liability, is extremely remote.
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 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 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.
The Portfolio's Declaration of Trust 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.
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
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 Commission. Deloitte & Touche, Grand Cayman,
Cayman Islands, British West Indies, are the independent certified public
accountants of the Portfolio.
FINANCIAL STATEMENTS
The audited financial statements of, and the independent auditors' report
for, the Fund and the Portfolio appear in the Fund's most recent annual report
to shareholders and are incorporated by reference into this SAI. A copy of the
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
DISTRIBUTION PLAN
During the fiscal year ended March 31, 1997, the Principal Underwriter paid
to Authorized Firms sales commissions of $3,889,686 on sales of Fund shares.
During the same period, the Fund made payments under the Plan to the Principal
Underwriter aggregating $4,169,802, and the Principal Underwriter received
approximately $1,289,000 in CDSCs imposed on early redeeming shareholders. These
payments reduced uncovered distribution charges under the Plan. As at March 31,
1997 the outstanding uncovered distribution charges of the Principal Underwriter
calculated under the Plan amounted to approximately $17,708,000. During the
fiscal year ended March 31, 1997, the Fund made service fee payments to the
Principal Underwriter and Authorized Firms aggregating $1,016,419 of which
$1,010,359 was paid to Authorized Firms and the balance of which was 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, 1997,
the Fund paid the Principal Underwriter $12,092.50 for repurchase transactions
handled by the Principal Underwriter.
TRUSTEES
The fees and expenses of the noninterested Trustees of the Trust and of the
Portfolio are paid by the Fund (and the other series of the Trust) and the
Portfolio, respectively. (The Trustees of the Trust and the Portfolio who are
members of the Eaton Vance organization receive no compensation from the Fund or
the Portfolio.) During the fiscal year ended March 31, 1997, 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 funds in the
Eaton Vance fund complex(1):
AGGREGATE AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM TRUST AND
NAME FROM FUND FROM PORTFOLIO FUND COMPLEX
- ---- --------- -------------- ------------
Donald R. Dwight ...... $693 $4,190(2) $145,000(5)
Samuel L. Hayes, III .. 629 4,200(3) 155,000(6)
Norton H. Reamer ...... 626 4,060 145,000
John L. Thorndike ..... 644 4,267(4) 148,750(7)
Jack L. Treynor ....... 692 4,390 150,000
- ------------
(1) The Eaton Vance fund complex consists of 213 registered investment companies
or series thereof.
(2) Includes $1,846 of deferred compensation.
(3) Includes $707 of deferred compensation.
(4) Includes $2,120 of deferred compensation.
(5) Includes $47,187 of deferred compensation.
(6) Includes $19,062 of deferred compensation.
(7) Includes $55,276 of deferred compensation.
DISTRIBUTION PLAN
The Plan is designed to meet the requirements of Rule 12b-1 under the 1940
Act and the sales charge rule of the NASD. The purpose of the Plan is to
compensate the Principal Underwriter for its distribution services and
facilities provided to the Fund.
The Plan provides that the Fund 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 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 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.
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 CDSCs 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 of Fund shares pursuant to
the exchange privilege 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.
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 CDSCs will tend
to increase the time during which there will exist uncovered distribution
charges of the Principal Underwriter.
Currently, payments of sales commissions and distribution fees and of
service fees may equal 1% of the Fund's average daily net assets per annum. For
actual 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 of these
payments may be higher than the rate of payments made under distribution plans
adopted by other investment companies pursuant to Rule 12b-1. Although the
Principal Underwriter will use its own funds (which may be borrowed from banks)
to pay sales commissions at the time of sale, it is anticipated that the Eaton
Vance organization will profit by reason of the operation of the Plan through an
increase in the Fund's assets (thereby increasing the advisory fee payable to
BMR by the Portfolio) resulting from the 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 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.
The Plan continues in effect from year to year for so long as such
continuance is approved at least annually by the vote of both a majority of (i)
the noninterested Trustees of the Trust 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 Plan requires quarterly Trustee review of 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 the Trustees. So
long as the Plan is in effect, the selection and nomination of the noninterested
Trustees shall be committed to the discretion of such Trustees.
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 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 1-, 5-, and 10-year
periods ended March 31, 1997.
VALUE OF A $1,000 INVESTMENT
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INVESTMENT INVESTMENT
BEFORE AFTER TOTAL RETURN TOTAL RETURN
DEDUCTING DEDUCTING BEFORE DEDUCTING THE CDSC AFTER DEDUCTING THE CDSC
INVESTMENT INVESTMENT AMOUNT OF THE CDSC THE CDSC* ------------------------- ------------------------
PERIOD DATE INVESTMENT ON 3/31/97 ON 3/31/97 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
------ ---- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 Years
Ended 3/31/97 3/31/88 $1,000 $2,250.41 $2,250.41 125.04% 8.45% 125.04% 8.45%
5 Years
Ended 3/31/97 3/31/92 $1,000 $1,610.68 $1,591.11 61.07% 10.00% 59.11% 9.73%
1 Year
Ended 3/31/97 3/31/96 $1,000 $1,113.67 $1,063.67 11.37% 11.37% 6.37% 6.37%
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>
For the thirty-day period ended March 31, 1997, the yield of the Fund was
8.65%.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of June 30, 1997, 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 30, 1997, Merrill Lynch, Pierce, Fenner & Smith, Inc., New Brunswick, NJ
was the record owner of approximately 26.5% 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
- -----------------------
Mutual Funds
EV MARATHON
HIGH INCOME
FUND
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1997
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, 200 Clarendon Street, Boston, MA 02116
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>
[LOGO OF EATON VANCE Investing
APPEARS HERE]
for the
21st
Century
[PHOTO OF PHONE-STOCK
CERTIFICATE APPEARS HERE]
Annual Report March 31, 1997
[PHOTO OF THE STATUE OF
PAUL REVERE APPEARS HERE]
EV
MARATHON
HIGH INCOME
FUND
Eaton Vance
Global Management-Global Distribution
[PHOTO OF ROWES WHARF BOSTON
FROM THE WATER APPEARS HERE]
M a r a t h o n
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
LETTER TO SHAREHOLDERS
[PHOTO OF M. DOZIER GARDNER, PRESIDENT APPEARS HERE]
EV Marathon High Income Fund had a total return of 11.4% for the year ended
March 31, 1997. That return was the result of a rise in net asset value per
share from $7.10 on March 31, 1996 to $7.22 on March 31, 1997, and the
reinvestment of $0.657 in dividends. The return does not include the effect of
the Fund's contingent deferred sales charge on certain redeeming shareholders.
By comparison, the Lehman Brothers High Yield Bond Index - a widely recognized,
unmanaged index of high-yield corporate bonds - had a total return of 10.6% for
the same period.*
Based on the Fund's most recent dividend and a net asset value of $7.22, the
Fund had a distribution rate of 9.0% at March 31.
While a strong economy upset the Treasury market, high-yield bonds turned in a
solid performance...
Most data showed the economy continuing to advance at a fairly strong pace in
the past year. Job creation was stronger than expected, while consumers remained
confident. While the strong U.S. dollar somewhat dampened export trade,
industrial activity was fairly robust, with few signs of excess inventories. Not
surprisingly, the Treasury bond market reacted negatively to the strong economic
news. However, the high-yield market benefited as the relatively strong economy
led to good corporate earnings and improved interest coverage.
The high-yield market grew during the fiscal year, accompanied by strong
investor demand...
While high-yield bond issuance was again formidable - $74 billion in 1996 alone
- - demand from investors was more than sufficient to meet the increased supply.
Meanwhile, market capitalization grew from $300 billion to $354 billion, the
largest market growth in more than a decade. Finally, as the liquidity and
trading characteristics of high-yield bonds continued to improve, they again
attracted a widening universe of investors, drawing new buyers, for example,
from insurance companies and pension funds.
1997 should bring more opportunities in the high-yield market...
The trends we've noted above contributed to an excellent climate for high-yield
bonds during the past year, and we believe this market continues to represent
outstanding long-term opportunities. In the pages that follow, portfolio
managers Hooker Talcott, Jr. and Michael Weilheimer review the past year and
comment on the year ahead.
Sincerely,
/s/ M. Dozier Gardner
M. Dozier Gardner
President
May 9, 1997
- --------------------------------------------------------------------------------
Fund Information
as of March 31, 1997
<TABLE>
<CAPTION>
Performance/1/ - Average Annual Total Returns
- -----------------------------------------------------------------------
At net asset value
- -----------------------------------------------------------------------
<S> <C>
One year 11.4%
Five year 10.0
Ten year 8.5
<CAPTION>
SEC Average Annual Total Returns (including applicable CDSC)
- -----------------------------------------------------------------------
<S> <C>
One year 6.4%
Five year 9.7
Ten year 8.5
<CAPTION>
Ten Largest Holdings/2/By total net assets
- -----------------------------------------------------------------------
<S> <C>
United International Holdings 1.6%
Specialty Foods Acquisition Corp. 1.5
Allied Waste NA 1.4
Kaiser Aluminum & Chemical Corp. 1.4
Marcus Cable Operating Co. 1.3
Overhead Door Corp. 1.3
Diamond Cable Communications Co. 1.2
Newsquest Capital Corp. 1.2
Imo Industries 1.2
Shared Tech/Fairchild Inc. 1.2
</TABLE>
/1/ Average annual total returns are calculated by determining the percentage
change in net asset value with all distributions reinvested. SEC average
annual returns reflect applicable CDSC on following schedule: 5% - 1st year;
5% - 2nd year; 4% - 3rd year; 3% - 4th year; 2% - 5th year; 1% - 6th year..
/2/ Ten largest holdings account for 13.3% of the Portfolio's investments,
determined by dividing the total market value of the holdings by the total
net assets of the Portfolio. Holdings are subject to change.
* It is not possible to invest directly in the Index.
Past performance is no guarantee of future results. The value of an
investment in the Fund may fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
2
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
Management Discussion
An interview with Hooker Talcott, Jr., and Michael Weilheimer, co-portfolio
managers of High Income Portfolio.
Q: Hooker, how would you characterize the high-yield market during the past
year?
A: Mr. Talcott: The past year was generally characterized by strong performance
and volatile interest rates. Quality spreads -- the yield differential
between high-yield bonds and U.S. Treasury bonds -- narrowed to record lows
during the period. By the end of the fiscal year on March 31, spreads were
as low as 300 basis points (3%), as narrow as we've ever seen. The dramatic
outperformance of the high-yield sector can be seen by comparing the Fund's
11.4% total return with the 4.2% return of the Lehman Brothers U.S. Treasury
Index,/1/ an unmanaged index of U.S. Treasury securities. The strong showing
of the high-yield market was a function of several trends, most notably, a
growing economy and continued low-inflation.
[PHOTO OMITTED]
Hooker Talcott, Jr.
Portfolio Manager
Toward the very end of the period, the market gave ground somewhat as
inflation concerns, a continuing Fed watch, and a selloff in some of the
media and communications sectors pulled the market lower. Given the strength
of the market earlier in the year, the correction was not at all unexpected.
Q: You indicated that the market was volatile. What contributed to that
volatility?
A: Mr. Weilheimer: The market's volatility was due, in part, to the shifting
views on inflation. Investors tempered their relative optimism over the
inflation outlook with concern that inflation might reawaken at some point.
A look at the numbers is helpful.
On March 31, 1996, ten-year Treasury yields were 6.31%; by August, inflation
concerns pushed those yields up to 6.92%; by November, investor sentiment
had shifted, with lower inflation numbers prompting a rally and sending
yields falling to 6.05%; that rally was short-lived, however, as renewed
fears of inflation and intervention by the Federal Reserve pushed yields
back up to 6.90% at the end of March. Thus, it was clearly a very active
period on the interest rate front.
[PHOTO OMITTED]
Michael Weilheimer
Portfolio Manager
Q: Where were your largest investments?
A: Mr. Talcott: Media and communications bonds -- including telecommunications,
cable, cellular,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five Largest Industry Positions
- ----------------------------------------
By total net assets
<S> <C>
Broadcast/Cable 10.9%
Communication Services 9.5%
Oil/Gas 7.6%
Foods 6.9%
Chemicals 6.0%
</TABLE>
Ratings Distribution/2/
- ----------------------------------------
By total net assets
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Aaa 3.9%
Ba 9.3%
B1 13.9%
B2 23.8%
B3 38.0%
Caa 6.2%
Non-Rated 4.3%
</TABLE>
/1/ It is not possible to invest directly in the Index.
/2/ Ratings are issued by Moody's Investors Service, a major independent ratings
agency.
Because the Fund is actively managed, ratings and weightings are subject to
change.
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.
3
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
MANAGEMENT DISCUSSION CONT'D
broadcasting, radio and media - remained our largest sector weightings.
Telecom and media bonds have represented an increasingly large segment of
the high-yield market in recent months, over 35% of total market
capitalization. And in terms of new issuance, the sector has accounted for
around 40% of new supply. While the sector has performed well in recent
years, it underwent a correction in March. Typically, telecom companies,
which initially have large capital expenditures and therefore little in the
way of earnings, are valued on a discounted cash flow basis. In the past
year, market sentiment pushed valuations to high levels. The subsequent
correction in the telecom group contributed to the decline in the broader
market. However, at these lower levels, telecom bonds represent value, and
we remain positive about our positions.
Q: Have you made any adjustments to the Portfolio in recent months?
A: Mr. Weilheimer: Yes. We've reduced our exposure to cyclicals, paring our
investments in sectors such as steels, chemicals, and papers. While the
economy has fared relatively well in recent months, we're increasingly
sensitive to the Federal Reserve's bias for higher interest rates. Given the
fact that the economy has not undergone a recession in six years, it's
impossible to rule out a somewhat slower economy in a rising interest rate
environment. Therefore, we've added recession-resistant names to the mix.
Q: In what areas have you increased your investments?
A: Mr. Weilheimer: We've added to the Portfolio's investments in sectors such
as food processing and grocery chains. These businesses tend to be less
dependent on the economic cycle and, therefore, less vulnerable to a
possible slowdown. Star Market, a leading New England-based supermarket
chain, is a good example. Given their unequalled store locations, Star is
very well positioned in an increasingly competitive marketplace. The company
has recently installed a new management team that has enlarged and remodeled
stores, improved the company's merchandizing strategy, and streamlined
operations. Over time, we expect those changes to make a positive impact on
the company's operations and its balance sheet.
Q: Were there any other areas where you made new commitments?
A: Mr. Talcott: Yes. One recent investment was Allied Waste, the fourth largest
waste management company in the U.S. The waste industry is not as GDP-
sensitive as the deep cyclicals, and has undergone a good deal of
consolidation in recent years. For its part, Allied recently purchased a
division of Laidlaw Industries, a competitor in the waste hauling business.
Through strategic purchases and consolidations, Allied is matching its
hauling routes with landfills in specific geographic areas. That strategy
has afforded the company good business synergies and helped cut costs. The
company has improved its balance sheet and could very well see a rating
upgrade within the next year. So we're enthusiastic about the company's
prospects.
Q: Any other examples of new investments?
A: Mr. Weilheimer: Yes. Unlike many manufacturing sectors, aircraft components
makers like Hawk Corporation are less sensitive to the ebb and flow of the
economy than to their own industry product cycle; that is, domestic and
foreign demand for new aircraft. Accordingly, with the debut of a new
generation of aircraft in the U.S. and Europe, as well as rising demand from
emerging economies, there has been a surge in orders for aircraft
components. Hawk makes components in aircraft braking systems, and the
company has been a major beneficiary of large new orders to Boeing.
Q: There was a good deal of corporate finance activity during the year,
including mergers and IPOs. Did they have an impact on the Fund?
A: Mr. Talcott: Yes. We have long maintained a focus on companies with the
ability to improve their balance sheets, and the rise in corporate finance
activity has created many new opportunities. The large volume of initial
public offerings (IPOs) was helpful to the high yield market in that
companies with sustainable earnings power have issued stock, thus improving
their balance sheets. That, in turn, has made their outstanding bonds more
attractive.
The Fund was also a beneficiary of a number of buyouts during the past year,
in which some issuers of high-yield bonds, including Overhead
4
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
MANAGEMENT DISCUSSION CONT'D
Door and Monarch Marking, each a holding of the Portfolio, have been bought
by investment-grade companies. Typically, when companies like these are
bought by investment-grade companies, the outstanding debt of the acquired
company is upgraded. That is, naturally, a positive development for the
Fund. Currently, another Portfolio investment, Videotron UK, is in the
process of being merged into a subsidiary of Cable & Wireless, a large U.K.-
based telecom company.
Q: Looking ahead, what is your outlook for the high-yield market?
A: Mr. Talcott: I believe that the outlook for the high yield market is sound.
Following a strong performance through much of the past year, the high-yield
market corrected slightly late in the period. In my view, that is a healthy
development, as value has now returned to the market. Naturally, past trends
cannot guarantee future performance. But with the economy continuing to
generate growth, and inflation seemingly under control, the climate appears
positive for the high-yield sector. Importantly, the large supply of new
issues continues to receive a warm welcome from income-oriented investors.
The Portfolio remains well-positioned to uncover value and opportunities for
those investors in the year ahead.
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 green 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 municipal 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 directly in the Index.
Comparison of Change in Value of a $10,000 Investment in EV Marathon High Income
Fund vs. Lehman Brothers High Yield Bond Index
From March 31, 1987, through March 31, 1997
[LINE GRAPH APPEARS HERE]
EV Marathon High Income Fund vs.
Lehman High Yield Bond Index
<TABLE>
<CAPTION>
EV Marathon High Income Fund High Yield Bond Index
Date Fund LHYBI
<S> <C> <C>
3/31/87 $10,000 $10,000
4/30/87 $9,804 $9,652
5/31/87 $9,719 $9,721
6/30/87 $9,830 $9,846
7/31/87 $9,842 $9,873
8/31/87 $9,923 $9,934
9/30/87 $9,728 $9,621
10/31/87 $9,326 $9,306
11/30/87 $9,520 $9,574
12/31/87 $9,636 $9,805
1/31/88 $9,813 $10,132
2/28/88 $10,069 $10,461
3/31/88 $10,152 $10,352
4/30/88 $10,256 $10,431
5/31/88 $10,317 $10,446
6/30/88 $10,476 $10,599
7/31/88 $10,636 $10,669
8/31/88 $10,722 $10,653
9/30/88 $10,831 $10,787
10/31/88 $10,958 $10,917
11/30/88 $11,039 $10,982
12/31/88 $11,208 $11,034
1/31/89 $11,268 $11,228
2/28/89 $11,356 $11,252
3/31/89 $11,327 $11,165
4/30/89 $11,344 $11,212
5/31/89 $11,503 $11,429
6/30/89 $11,636 $11,571
7/31/89 $11,674 $11,556
8/31/89 $11,688 $11,595
9/30/89 $11,672 $11,400
10/31/89 $11,458 $11,130
11/30/89 $11,330 $11,108
12/31/89 $11,335 $11,126
1/31/90 $11,071 $10,886
2/28/90 $10,588 $10,662
3/31/90 $10,405 $10,941
4/30/90 $10,490 $10,923
5/31/90 $10,691 $11,134
6/30/90 $10,902 $11,403
7/31/90 $11,144 $11,710
8/31/90 $10,626 $11,044
9/30/90 $9,900 $10,237
10/31/90 $9,572 $9,700
11/30/90 $9,361 $10,003
12/31/90 $9,243 $10,059
1/31/91 $9,138 $10,335
2/28/91 $9,674 $11,466
3/31/91 $10,110 $12,141
4/30/91 $10,865 $12,639
5/31/91 $10,901 $12,662
6/30/91 $11,259 $13,036
7/31/91 $11,694 $13,454
8/31/91 $11,833 $13,763
9/30/91 $12,084 $13,954
10/31/91 $12,522 $14,420
11/30/91 $12,666 $14,495
12/31/91 $12,787 $14,704
1/31/92 $13,302 $15,222
2/28/92 $13,648 $15,598
3/31/92 $13,973 $15,791
4/30/92 $14,124 $15,851
5/31/92 $14,334 $16,075
6/30/92 $14,531 $16,226
7/31/92 $14,726 $16,471
8/31/92 $14,915 $16,687
9/30/92 $15,009 $16,857
10/31/92 $14,787 $16,619
11/30/92 $14,855 $16,828
12/31/92 $15,062 $17,020
1/31/93 $15,319 $17,516
2/28/93 $15,656 $17,824
3/31/93 $15,847 $18,054
4/30/93 $15,973 $18,211
5/31/93 $16,213 $18,428
6/30/93 $16,527 $18,815
7/31/93 $16,710 $18,997
8/31/93 $16,749 $19,157
9/30/93 $16,736 $19,206
10/31/93 $17,103 $19,594
11/30/93 $17,321 $19,688
12/31/93 $17,611 $19,933
1/31/94 $17,958 $20,365
2/28/94 $18,070 $20,312
3/31/94 $17,476 $19,544
4/30/94 $17,271 $19,412
5/31/94 $17,372 $19,422
6/30/94 $17,414 $19,482
7/31/94 $17,338 $19,647
8/31/94 $17,314 $19,786
9/30/94 $17,314 $19,787
10/31/94 $17,319 $19,834
11/30/94 $17,108 $19,584
12/31/94 $17,292 $19,728
1/31/95 $17,366 $19,996
2/28/95 $17,811 $20,681
3/31/95 $17,914 $21,904
4/30/95 $18,407 $21,436
5/31/95 $18,804 $22,037
6/30/95 $18,824 $22,184
7/31/95 $19,113 $22,457
8/31/95 $19,015 $22,527
9/30/95 $19,143 $22,804
10/31/95 $19,163 $22,879
11/30/95 $19,343 $23,147
12/31/95 $19,690 $23,511
1/31/96 $19,989 $23,925
2/28/96 $20,286 $23,944
3/31/96 $20,208 $23,927
4/30/96 $20,369 $23,980
5/31/96 $20,583 $24,124
6/30/96 $20,582 $24,324
7/31/96 $20,730 $24,437
8/31/96 $21,039 $24,701
9/30/96 $21,594 $25,296
10/31/96 $21,627 $25,491
11/30/96 $22,004 $25,994
12/31/96 $22,404 $26,180
1/31/97 $22,578 $26,435
2/28/97 $23,010 $26,873
3/31/97 $22,505 $26,472
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns
- -------------------------------------------------
At Net Asset Value
- -------------------------------------------------
<S> <C>
One year 11.4%
Five years 10.0
Ten years 8.5
Value at 3/31/97 $22,505
<CAPTION>
Including Maximum Applicable CDSC
- -------------------------------------------------
<S> <C>
One year 6.4%
Five years 9.7
Ten years 8.5
Value at 3/31/97 $22,505
</TABLE>
Source: Towers Data Systems, Bethesda, MD.
* 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.
Past performance is not indicative of future results. Investment returns and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost.
5
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
<TABLE>
As of March 31, 1997
Assets
- --------------------------------------------------------------------------------
<S> <C>
Investment in High Income Portfolio, at value (Note 1A)
(identified cost, $589,138,886) $600,276,857
Receivable for Fund shares sold 1,546,292
- --------------------------------------------------------------------------------
Total assets $601,823,149
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Dividends payable $ 2,060,122
Payable for Fund shares redeemed 1,096,908
Payable to affiliate for Trustees' fees 800
Accrued expenses 392,357
- --------------------------------------------------------------------------------
Total liabilities $ 3,550,187
- --------------------------------------------------------------------------------
Net Assets for 82,807,650 shares of
beneficial interest outstanding $598,272,962
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Paid-in capital $660,682,340
Accumulated net realized loss on investments
(computed on the basis of identified cost) (71,487,227)
Accumulated distributions in excess of net (2,060,122)
investment income
Net unrealized appreciation of investments (computed
on the basis of identified cost) 11,137,971
- --------------------------------------------------------------------------------
Total $598,272,962
- --------------------------------------------------------------------------------
Net Asset Value, Offering and Redemption
Price Per Share (Note 6)
- --------------------------------------------------------------------------------
($598,272,962 / 82,807,650 shares of
beneficial interest outstanding) $ 7.22
- --------------------------------------------------------------------------------
</TABLE>
Statement of Operations
<TABLE>
For the Year Ended
March 31, 1997
Investment Income (Note 1B)
- --------------------------------------------------------------------------------
<S> <C>
Interest income allocated from Portfolio $ 59,656,201
Dividend income allocated from Portfolio 57,845
Expenses allocated from Portfolio (3,735,080)
- --------------------------------------------------------------------------------
Net investment income from Portfolio $ 55,978,966
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Compensation of Trustees not members of the
Administrator's organization (Note 4) $ 3,245
Distribution fees (Note 5) 5,261,749
Transfer and dividend disbursing agent fees 550,343
Printing and postage 146,061
Registration fees 70,048
Custodian fee 24,750
Legal and accounting services 14,073
Miscellaneous 35,014
- --------------------------------------------------------------------------------
Total expenses $ 6,105,283
- --------------------------------------------------------------------------------
Net investment income $ 49,873,683
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) from Portfolio
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ (3,889,847)
- --------------------------------------------------------------------------------
Net realized loss on investment transactions $ (3,889,847)
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investment transactions $ 13,832,420
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ 13,832,420
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 9,942,573
- --------------------------------------------------------------------------------
Net increase in net assets from operations $ 59,816,256
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
6
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended Year Ended
in Net Assets March 31, 1997 March 31, 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 49,873,683 $ 44,975,939
Net realized loss on
investment transactions (3,889,847) (5,110,133)
Net change in unrealized
appreciation
(depreciation)
of investments 13,832,420 17,157,192
- ----------------------------------------------------------------------------
Net increase in net assets
from operations $ 59,816,256 $ 57,022,998
- ----------------------------------------------------------------------------
Distributions to shareholders
(Note 2) --
From net investment income $ (49,873,683) $ (44,975,939)
In excess of net
investment income (446,941) (625,821)
- ----------------------------------------------------------------------------
Total distributions to
shareholders $ (50,320,624) $ (45,601,760)
- ----------------------------------------------------------------------------
Transactions in shares of
beneficial interest (Note 3) --
Proceeds from sale of shares $ 175,363,195 $ 153,699,352
Net asset value of shares
issued to shareholders
in payment of
distributions declared 15,276,268 14,446,691
Cost of shares redeemed (98,827,713) (121,772,551)
- ----------------------------------------------------------------------------
Net increase in net assets
from Fund share
transactions $ 91,811,750 $ 46,373,492
- ----------------------------------------------------------------------------
Net increase in net assets $ 101,307,382 $ 57,794,730
- ----------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------
At beginning of year $ 496,965,580 $ 439,170,850
- ----------------------------------------------------------------------------
At end of year $ 598,272,962 $ 496,965,580
- ----------------------------------------------------------------------------
Accumulated distributions
in excess of net investment
income included in
net assets
- ----------------------------------------------------------------------------
At end of year $ (2,060,122) $ (2,044,407)
- ----------------------------------------------------------------------------
</TABLE>
See notes to financial statements
7
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
FINANCIAL STATEMENTS CONT'D
Financial Highlights
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value -- Beginning of year $ 7.100 $ 6.920 $ 7.450 $ 7.480 $ 7.380
- ------------------------------------------------------------------------------------------------------------------------------------
Income from operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.652 $ 0.665 $ 0.671 $ 0.697 $ 0.767
Net realized and unrealized gain (loss) on investments 0.120 0.189 (0.507) 0.047 0.170
- ------------------------------------------------------------------------------------------------------------------------------------
Total income from operations $ 0.772 $ 0.854 $ 0.164 $ 0.744 $ 0.937
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income $ (0.646) $ (0.665) $ (0.671) $ (0.697) $ (0.767)
In excess of net investment income (0.006) (0.009) (0.023) (0.077) (0.070)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.652) $ (0.674) $ (0.694) $ (0.774) $ (0.837)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value -- End of year $ 7.220 $ 7.100 $ 6.920 $ 7.450 $ 7.480
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return /(1)/ 11.37% 12.80% 2.51% 10.28% 13.41%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000 omitted) $598,273 $496,966 $439,171 $399,259 $332,854
Ratio of net expenses to average daily net assets /(2)/ 1.77% 1.78% 1.78% 1.82% 2.09%
Ratio of net investment income to average daily net assets 8.97% 9.38% 9.52% 9.09% 10.31%
Portfolio Turnover /(3)/ -- -- 11% 96% 91%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Total return is calculated assuming a purchase at the net asset value on
the first day and a sale at the net asset value on the last day of each
period reported. Dividends and distributions, if any, are assumed to be
reinvested at the net asset value on the payable date. Total return is not
computed on an annualized basis.
/(2)/ Includes the Fund's share of its corresponding Portfolio's allocated
expenses.
/(3)/ Portfolio Turnover represents the rate of portfolio activity for the
period while the Fund was making investments directly in securities. The
portfolio turnover rate for the period since the Fund transferred
substantially all of its investable assets to the Portfolio is shown in
the Portfolio's financial statements which are included elsewhere in this
report.
See notes to financial statements
8
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
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 (84.9% at March 31, 1997). The performance
of the Fund is directly affected by the performance of the Portfolio. The
financial statements of the Portfolio, including the portfolio of
investments, are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements. The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The policies are in conformity with
generally accepted accounting principles.
A Investment Valuations -- 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 each year all of its taxable income, including
any net realized gain on investments. Accordingly, no provision for federal
income or excise tax is necessary. At March 31, 1997, the Fund, for federal
income tax purposes, had a capital loss carryover of $69,870,385, 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), 2004
($5,868,015) and 2005 ($7,020,394), respectively. Additionally, net losses
of $1,523,133 attributable to security transactions incurred after October
31, 1996, 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 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 respective
custodian agreements, IBT receives a fee reduced by credits which are
determined based on the average daily cash balances the Fund or the
Portfolio maintains with IBT. All significant credit balances used to reduce
the Fund's custodian fees are reported as a reduction of expenses on the
Statement of Operations.
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. 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.
9
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
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,
---------------------------------------
1997 1996
-------------------------------------------------------------------------
<S> <C> <C>
Sales 24,377,723 21,673,656
Issued to shareholders electing to
receive payments of distributions in
Fund shares 2,122,410 2,037,734
Redemptions (13,725,000) (17,161,486)
-------------------------------------------------------------------------
Net increase 12,775,133 6,549,904
-------------------------------------------------------------------------
</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 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 advisor fee. Certain of the officers and Trustees of the Fund and
the 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 1/365 of 0.75% of the Fund's daily net assets, for providing
ongoing distribution services and facilities to the Fund. The Fund will
automatically discontinue payments to EVD during any period in which there
are no outstanding Uncovered Distribution Charges, which are equivalent to
the sum of (i) 5% of the aggregate amount received by the Fund for the
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 $4,169,802 to EVD for the year ended March 31, 1997,
representing 0.75% of average daily net assets. At March 31, 1997, the
amount of Uncovered Distribution Charges EVD calculated under the Plan was
approximately $17,708,000.
In addition, the Plan authorizes the Fund to make payments of service fees
to the Principal Underwriter, Authorized Firms and other persons in amounts
not exceeding 0.25% of the Fund's average daily net assets for each fiscal
year. The 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 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, 1997,
in the amount of $1,091,947. 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 where 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 gains 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 Advisor 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. CDSC charges received when no Uncovered
Distribution Charges exist will be credited to the Fund. For the year ended
March 31, 1997, EVD received approximately $1,289,000 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, 1997, aggregated $178,952,087 and $143,198,515,
respectively.
10
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders
of EV Marathon High Income Fund
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities of EV
Marathon High Income Fund (the Fund) as of March 31, 1997, the related statement
of operations for the year then ended, the statements of changes in net assets
for the years ended March 31, 1997 and 1996, and the financial highlights for
each of the years in the five-year period ended March 31, 1997. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund at March
31, 1997, 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
May 9, 1997
11
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS
(Expressed in United States Dollars)
Corporate Bonds & Notes-- 93.7%
<TABLE>
<CAPTION>
Principal
Amount
Security (000 omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Apparel -- 3.0%
- --------------------------------------------------------------------------------
Anvil Knitwear, Inc., Sr. Notes, 10.875%,
3/15/07 /(1)/ $ 3,600 $ 3,546,000
Collins & Aikman Corp., Sr. Sub. Notes,
11.50%, 4/15/06 2,550 2,817,750
Dan River Inc., Sr. Sub. Notes, 10.125%,
12/15/03 5,800 5,858,000
Glenoit Corp., Sr. Sub. Notes, 11.00%,
4/15/07 /(1)/ 4,800 4,782,000
William Carter, Sr. Sub. Notes,
10.375%, 12/1/06 /(1)/ 4,000 4,040,000
- --------------------------------------------------------------------------------
$ 21,043,750
- --------------------------------------------------------------------------------
Auto and Parts -- 1.8%
- --------------------------------------------------------------------------------
Key Plastics, Inc., Sr. Notes, 10.25%,
3/15/07 $ 800 $ 794,000
Key Plastics, Inc., Sr. Notes, 14.00%,
11/15/99 5,500 6,105,000
Terex Corp., Sr. Sub. Notes, 13.25%,
5/15/02 5,000 5,500,000
- --------------------------------------------------------------------------------
$ 12,399,000
- --------------------------------------------------------------------------------
Banks - Regional -- 1.4%
- --------------------------------------------------------------------------------
First Nationwide, Inc., Sr. Notes, 12.50%,
4/15/03 $ 1,600 $ 1,744,000
First Nationwide, Inc., Sr. Sub. Notes,
10.625%, 10/1/03 7,200 7,632,000
- --------------------------------------------------------------------------------
$ 9,376,000
- --------------------------------------------------------------------------------
Banks and Money Services -- 1.3%
- --------------------------------------------------------------------------------
Hawk Corp., Sr. Notes, 10.25%,
12/1/03 /(1)/ $ 4,400 $ 4,444,000
Intertek Finance PLC, Sr. Sub.
Notes, 10.25%, 11/1/06 /(1)/ 4,800 4,872,000
- --------------------------------------------------------------------------------
$ 9,316,000
- --------------------------------------------------------------------------------
Broadcasting and Cable -- 10.9%
- --------------------------------------------------------------------------------
Australis Holdings Pty Ltd., Sr. Disc. Notes,
15.00%, (0% until 2000) 11/1/02 /(1)/ $ 3,600 $ 2,106,000
Cablevision Systems Corp., Sr. Sub. Notes,
9.25%, 11/1/05 2,800 2,660,000
Cablevision Systems Corp., Sr. Sub. Notes,
10.75%, 4/1/04 2,000 2,055,000
Diamond Cable Communications Co., Sr. Disc.
Notes, 10.75%, (0% until 2002), 2/15/07 4,800 2,592,000
Diamond Cable Communications Co., Sr. Disc.
Notes, 11.75%, (0% until 2000), 12/15/05 7,800 4,992,000
Diamond Cable Communications Co., Sr. Disc.
Notes, 13.25%, (0% until 1999), 9/30/04 1,600 1,248,000
Dobson Communications Corp., Sr. Notes,
11.75%, 4/15/07 /(1)/ 2,000 1,920,000
EZ Communications Inc., Sr. Sub. Notes,
9.75%, 12/1/05 7,100 7,313,000
Groupe Videotron Ltd., Sr. Notes, 10.625%,
2/15/05 3,470 3,817,000
ICG Holdings, Inc., Sr. Sub. Notes, 11.625%,
(0% until 2002), 3/15/07 /(1)/ 5,600 3,038,000
International Cabletel, Inc., Sr. Disc. Notes,
11.50%, (0% until 2001), 2/1/06 3,800 2,356,000
International Cabletel, Inc., Sr. Notes,
10.00%, 2/15/07 /(1)/ 4,000 3,760,000
Marcus Cable Operating Co., Sr. Debs.,
11.875%, 10/1/05 2,800 2,912,000
Marcus Cable Operating Co., Sr. Disc. Notes,
13.50%, (0% until 1999), 8/1/04 800 636,000
Marcus Cable Operating Co., Sr. Disc. Notes,
14.25%, (0% until 2000), 12/15/05 8,500 5,865,000
Sullivan Broadcasting Co., Inc., Sr. Sub.
Notes, 10.25%, 12/15/05 4,800 4,728,000
TCI Satellite Entertainment, Sr. Sub. Notes,
10.875%, 2/15/07 /(1)/ 2,400 2,112,000
United International -Series B, 0%,
11/15/99 800 584,000
United International Holdings Inc., Sr. Sec.
Disc. Notes, 0%, 11/15/99 14,953 10,915,836
Videotron Holdings PLC, Inc., Sr. Disc. Notes,
11.00%, (0% until 1999), 8/15/05 8,400 6,636,000
Young Broadcasting Corp., Sr. Sub. Notes,
10.125%, 2/15/05 4,000 3,960,000
- --------------------------------------------------------------------------------
$ 76,205,836
- --------------------------------------------------------------------------------
Building Materials -- 2.9%
- --------------------------------------------------------------------------------
Building Materials Corp., Sr. Notes,
8.625%, 12/15/06 $ 800 $ 800,000
Building Materials Corp., Sr. Sub. Notes,
11.75%, (0% until 2000), 7/1/04 5,250 4,659,375
Overhead Door Corp., Sr. Notes, 12.25%,
2/1/00 8,450 8,999,250
</TABLE>
See notes to financial statements
12
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Principal
Amount
Security (000 omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Building Materials (continued)
- --------------------------------------------------------------------------------
Southdown, Inc., Sr. Sub. Notes., 10.00%,
3/1/06 $ 1,750 $ 1,872,500
Tarkett International, AG., Sr. Sub. Notes,
9.00%, 3/1/02 3,600 3,663,000
- --------------------------------------------------------------------------------
$ 19,994,125
- --------------------------------------------------------------------------------
Business Services -- 0.8%
- --------------------------------------------------------------------------------
Kindercare Learning Centers, Sr.
Sub. Notes, 9.50%, 2/15/09 /(1)/ $ 6,000 $ 5,790,000
- --------------------------------------------------------------------------------
$ 5,790,000
- --------------------------------------------------------------------------------
Business Services - Miscellaneous -- 1.4%
- --------------------------------------------------------------------------------
Allied Waste NA, Sr. Sub Notes, 10.25%,
12/1/06 /(1)/ $ 9,600 $ 9,792,000
- --------------------------------------------------------------------------------
$ 9,792,000
- --------------------------------------------------------------------------------
Chemicals -- 6.0%
- --------------------------------------------------------------------------------
Agricultural Minerals & Chemicals Inc., Sr.
Notes, 10.75%, 9/30/03 $ 5,000 $ 5,275,000
ISP Holdings, Inc., Sr. Notes, 9.75%,
2/15/02 5,750 5,980,000
NL Industries, Inc., Sr. Notes, 11.75%,
10/15/03 4,000 4,200,000
Pioneer Americas Acq. Corp., Sr. Notes,
13.375%, 4/1/05 6,250 7,281,250
Plastic Containers, Inc., Sr. Notes,
10.00%, 12/15/06 2,400 2,424,000
Plastic Specialties and Tech., Inc., Sr. Sec.
Notes, 11.25%, 12/1/03 7,950 8,586,000
Terra Industries Inc., Sr. Notes, 10.50%,
6/15/05 3,800 4,028,000
UCC Investors, Inc., Sr. Sub. Notes,
11.00%, 5/1/03 3,700 3,922,000
- --------------------------------------------------------------------------------
$ 41,696,250
- --------------------------------------------------------------------------------
Communications Equipment -- 1.7%
- --------------------------------------------------------------------------------
Omnipoint Corp., Sr. Notes, 11.625%,
8/15/06 $ 3,800 $ 3,306,000
Pricellular Wireless Communications Corp., Sr.
Notes, 10.75%, 11/1/04 2,400 2,430,000
Pricellular Wireless Communications Corp., Sr.
Sub. Disc. Nts., 12.25%, (0% until 1998),
10/1/03 6,500 5,785,000
- --------------------------------------------------------------------------------
$ 11,521,000
- --------------------------------------------------------------------------------
Communications Services -- 9.5%
- --------------------------------------------------------------------------------
Australis Media Ltd., Sub. Disc. Notes,
14.00%, (0% until 2000), 5/15/03 $ 6,004 $ 3,482,371
Brooks Fiber Properties, Inc., Sr. Disc. Notes,
11.875%, (0% until 2001), 11/1/06 4,800 2,856,000
Brooks Fiber Properties. Inc., Sr. Disc. Notes,
10.875%, (0% until 2001), 3/1/06 5,500 3,410,000
CS Wireless Systems, Inc., 11.375%, (0%
until 2001), 3/1/06 3,280 1,016,800
Dial Call Communications Inc., Sr. Red. Notes,
12.25%, (0% until 1999), 4/15/04 7,200 5,184,000
Echostar Satellite Broadcasting Corp., Sr. Disc.
Notes, 13.125%, (0% until 2000), 3/15/04 4,800 3,792,000
Esat Holdings, Ltd., Sr. Notes, 12.50%, (0%
until 2002), 2/1/07 /(1)/ 3,200 1,760,000
Galaxy Telecom LP., Sr. Sub. Notes,
12.375%, 10/1/05 3,400 3,502,000
McCaw International, Ltd., 13.00%, (0% until
2002), 4/15/07 /(1)/ 6,800 3,179,000
McLeod Inc., Sr. Disc. Notes, 10.50%, (0%
until 2002), 3/1/07 /(1)/ 6,400 3,520,000
Microcell Telecommunication, Sr. Disc. Notes,
14.00%, (0% until 2001), 6/1/06 11,200 5,488,000
Millicom International Cellular, Sr. Disc Notes,
13.50%, (0% until 2001), 6/1/06 7,200 4,680,000
Nextlink Communications, Inc., Sr. Notes,
12.50%, 4/15/06 5,600 5,684,000
Orion Network Systems, Inc., Sr. Notes,
11.25%, 1/15/07 5,600 5,432,000
Orion Network Systems, Inc., Sr. Notes,
12.50%, (0% until 2002) 1/15/07 3,200 1,600,000
Shared Tech/Fairchild, Inc., Sr. Disc. Notes,
12.25%, (0% until 1999), 3/1/06 10,500 8,636,250
Telewest PLC, Debs., 11.00%, (0% until
2002), 10/1/07 4,800 3,120,000
- --------------------------------------------------------------------------------
$ 66,342,421
- --------------------------------------------------------------------------------
Computer Software -- 1.2%
- --------------------------------------------------------------------------------
Unisys Corp., Sr. Notes, 11.75%, $ 2,600 $ 2,717,000
10/15/04
Unisys Corp., Sr. Notes, 12.00%, 4/15/03 5,600 5,852,000
- --------------------------------------------------------------------------------
$ 8,569,000
- --------------------------------------------------------------------------------
Containers and Packaging -- 5.7%
- --------------------------------------------------------------------------------
American Pad and Paper Co., Sr. Sub. Notes,
13.00%, 11/15/05 $ 3,250 $ 3,770,000
Asia Pulp and Paper, 12.00%, 12/29/49 6,000 5,790,000
Container Corp., Sr. Notes, 10.75%, 3,250 3,510,000
5/1/02
</TABLE>
See notes to financial statements
13
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Principal
Amount
Security (000 omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Containers and Packaging (continued)
- --------------------------------------------------------------------------------
Fort Howard Corp., Sr. Sec. Notes, 11.00%,
1/2/02 $ 3,765 $ 3,840,176
Gaylord Container Corp., Sr. Sub. Disc. Debs.,
12.75%, (0% until 1996), 5/15/05 5,700 6,213,000
Repap New Brunswick, Inc., Sr. Notes,
10.625%, 4/15/05 1,600 1,600,000
Repap Wisconsin, Inc., 2nd Party Sr. Sec.
Notes, 9.875%, 5/1/06 165 163,350
Repap Wisconsin, Inc., Sr. Notes, 9.25%,
2/1/02 3,200 3,168,000
S.D. Warren Co., Sr. Sub. Notes, 12.00%,
12/15/04 3,800 4,142,000
Silgan Corp., Sr. Sub. Notes, 11.75%,
6/15/02 1,500 1,605,000
Stone Container Corp., 1st Mtg. Notes,
10.75%, 10/1/02 4,500 4,477,500
US Can Corp., Sr. Sub. Notes, 10.125%,
10/15/06 1,600 1,664,000
- --------------------------------------------------------------------------------
$ 39,943,026
- --------------------------------------------------------------------------------
Electronics - Instruments -- 1.4%
- --------------------------------------------------------------------------------
Blue Bell Funding Inc., Sec. Ext. Notes,
11.85%, 5/1/99 $ 4,304 $ 4,260,960
GS Technologies Corp., Sr. Notes, 12.25%,
10/1/05 5,500 5,720,000
- --------------------------------------------------------------------------------
$ 9,980,960
- --------------------------------------------------------------------------------
Entertainment -- 1.3%
- --------------------------------------------------------------------------------
All American Communications, Inc., Sr. Sub.
Notes, 10.875%, 10/15/01 $ 4,400 $ 4,532,000
Cinemark USA, Sr. Sub. Notes, 9.625%,
8/1/08 4,800 4,800,000
- --------------------------------------------------------------------------------
$ 9,332,000
- --------------------------------------------------------------------------------
Foods -- 6.9%
- --------------------------------------------------------------------------------
Inflo Holdings Corp., Promissory Notes,
10.00%, (0% until 1999), 1/27/07+++ $ 4,400 $ 3,696,000
International Home Foods, Inc., Sr. Sub.
Notes, 10.375%, 11/1/06 8,000 8,060,000
Keebler Corp., Sr. Sub. Notes, 10.75%,
7/1/06 5,720 6,234,800
MBW Foods, Inc., Sr. Sub. Notes, 9.875%,
2/15/07 /(1)/ 4,800 4,752,000
PM Holdings Corp., Sr. Sub. Notes, 11.50%,
(0% until 2000), 9/1/05 2,837 2,042,640
Purina Mills, Inc., Sr. Sec. Sub. Notes,
10.25%, 9/1/03 5,775 5,948,250
Specialty Foods Acquisition Corp., Sr. Sub
Notes, 13.00%, (0% until 1999), 8/15/05 1,600 744,000
Specialty Foods Acquisition Corp., Sr. Sub.
Notes, 10.25%, 8/15/01 7,000 6,842,500
Specialty Foods Acquisition Corp., Sr. Sub.
Notes, 11.25%, 8/15/03 3,200 2,832,000
Van De Kamps, Inc., Sr. Sub. Notes, 12.00%,
9/15/05 6,100 6,649,000
- --------------------------------------------------------------------------------
$ 47,801,190
- --------------------------------------------------------------------------------
Health Services -- 2.1%
- --------------------------------------------------------------------------------
Dade International, Inc., Sr. Sub. Notes,
11.125%, 5/1/06 $ 4,800 $ 5,448,000
Owens & Minor, Inc., Sr. Sub. Notes,
10.875%, 6/1/06 3,200 3,448,000
Tenet Healthcare Corp., Sr. Sub. Notes,
8.625%, 1/15/07 5,600 5,460,000
- --------------------------------------------------------------------------------
$ 14,356,000
- --------------------------------------------------------------------------------
Household Products -- 1.6%
- --------------------------------------------------------------------------------
Lifestyle Furnishings, Inc., 10.875%,
8/1/06 $ 4,000 $ 4,400,000
Pillowtex Corp., 10.00%, 11/15/06 2,400 2,484,000
Renaisance Cosmetics, Sr. Notes, 11.75%,
2/15/04 /(1)/ 500 502,500
Revlon Worldwide, Inc., Sr. Disc Notes, 0%,
3/15/01 /(1)/ 3,200 1,984,000
Scholastic Brands, Inc., Sr. Sub. Notes,
11.00%, 1/15/07 /(1)/ 2,000 2,060,000
- --------------------------------------------------------------------------------
$ 11,430,500
- --------------------------------------------------------------------------------
Investment Services -- 0.6%
- --------------------------------------------------------------------------------
DVI, Inc., Sr. Notes, 9.875%, 2/1/04 $ 4,400 $ 4,389,000
- --------------------------------------------------------------------------------
$ 4,389,000
- --------------------------------------------------------------------------------
Lodging and Gaming -- 4.0%
- --------------------------------------------------------------------------------
Aztar Corp., Sr. Sub. Notes, 13.75%,
10/1/04 $ 5,000 $ 5,600,000
Courtyard By Marriot, Sr. Notes, 10.75%,
2/1/08 3,850 4,032,875
Harvey Casinos Resorts, Sr. Sub. Notes,
10.625%, 6/1/06 6,000 6,330,000
Showboat Marina Casino, 1st Mtg. Notes,
13.50%, 3/15/03 4,000 4,500,000
</TABLE>
See notes to financial statements
14
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Principal
Amount
Security (000 omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Lodging and Gaming (continued)
- --------------------------------------------------------------------------------
Trump Atlantic City Associates, Co., 1st Mtg.
Notes, 11.25%, 5/1/06 $ 4,000 $ 3,640,000
Trump Holdings & Funding Inc., Sr. Notes,
15.50%, 6/15/05 3,000 3,390,000
- --------------------------------------------------------------------------------
$ 27,492,875
- --------------------------------------------------------------------------------
Machinery -- 2.7%
- --------------------------------------------------------------------------------
Alvey Systems, Inc., Sr. Sub. Notes,
11.375%, 1/31/03 $ 2,400 $ 2,496,000
Amtrol Acquisition, Inc., Sr. Sub.,
10.625%, 12/31/06 3,600 3,708,000
Imo Industries, Sr. Sub. Notes, 11.75%,
5/1/06 8,680 8,680,000
Motors And Gears, Inc., Sr. Notes, 10.75%,
11/15/06 /(1)/ 4,000 4,050,000
- --------------------------------------------------------------------------------
$ 18,934,000
- --------------------------------------------------------------------------------
Medical Products -- 0.8%
- --------------------------------------------------------------------------------
Maxxim Medical, Inc., Sr. Sub. Notes,
10.50%, 8/1/06 $ 5,200 $ 5,388,500
- --------------------------------------------------------------------------------
$ 5,388,500
- --------------------------------------------------------------------------------
Metals - Industrial -- 4.8%
- --------------------------------------------------------------------------------
AK Steel Corp., Senior Notes, 9.125%,
12/15/06 $ 5,200 $ 5,122,000
Applied Extrusion Inc., Sr. Notes, 11.50%,
4/1/02 6,000 6,210,000
Essex Group, Inc., Sr. Notes, 10.00%,
5/1/03 3,225 3,354,000
Howmet Corp., Sr. Sub. Notes, 10.00%,
12/1/03 2,850 3,035,250
Kaiser Aluminum and Chemical Corp., Sr.
Notes, 10.875%, 10/15/06 2,500 2,600,000
Kaiser Aluminum and Chemical Corp., Sr. Sub.
Notes, 12.75%, 2/1/03 6,600 7,095,000
Newflo Corp., Sub. Notes, 13.25%,
11/15/02 5,500 5,967,500
- --------------------------------------------------------------------------------
$ 33,383,750
- --------------------------------------------------------------------------------
Miscellaneous -- 3.5%
- --------------------------------------------------------------------------------
Alliant Tech Systems Inc., Sr. Sub. Notes,
11.75%, 3/1/03 $ 4,000 $ 4,280,000
Clark-Schwebel, Sr. Notes, 10.50%,
4/15/06 5,200 5,434,000
Day International Group, Inc., Sr. Sub. Notes,
11.125%, 6/1/05 3,300 3,432,000
Imax Corp., Sr. Notes, 10.00%, (7% until
1997), 3/1/01 2,400 2,424,000
Selmer Co., Inc., Sr. Sub. Notes, 11.00%,
5/15/05 5,300 5,790,250
Webb Delaware Corp., Sr. Sub. Notes, 9.75%,
1/15/08 3,200 3,200,000
- --------------------------------------------------------------------------------
$ 24,560,250
- --------------------------------------------------------------------------------
Oil and Gas - Equipment and Services -- 7.6%
- --------------------------------------------------------------------------------
AES Corp., Sr. Sub. Notes, 10.25%,
7/15/06 $ 1,600 $ 1,732,000
Cal Energy Company, Inc., Sr. Notes, 9.50%,
9/15/06 5,500 5,857,500
Chesapeake Energy Corp., Sr. Notes, 9.125%,
4/15/06 3,200 3,280,000
Clark USA, Inc., Sr. Notes, 10.875%,
12/1/05 2,900 2,972,500
Coda Energy Inc., Sr. Sub. Notes, 10.50%,
4/1/06 4,000 4,220,000
Dawson Product Services, Inc., Sr. Notes,
9.375%, 2/1/07 2,800 2,772,000
El Paso Electric Co., 1st Mtg. Notes, 9.40%,
5/1/11 2,850 3,055,143
Kelley Oil and Natural Gas Corp., 10.375%,
10/15/06 1,600 1,648,000
Mariner Energy Corp., Sr. Sub. Notes,
10.50%, 8/1/06 6,300 6,552,000
Midland Cogeneration Venture, Sr. Sec. Lease
Oblig., 10.33%, 7/23/02 2,734 2,898,384
Midland Funding II, Sec. Lease Oblig.,
11.75%, 7/23/05 2,200 2,498,870
Parker Drilling Corp., Sr. Sub. Notes, 9.75%,
11/15/06 2,400 2,532,000
Perez Companc, S.A., 9.00%, 1/30/04 /(1)/ 4,000 3,940,000
Trans Texas Gas Corp., Sr. Sec. Notes,
11.50%, 6/15/02 5,400 5,913,000
Veritas DGC, Inc., Sr. Notes, 9.75%,
10/15/03 3,200 3,248,000
- --------------------------------------------------------------------------------
$ 53,119,397
- --------------------------------------------------------------------------------
Printing and Business Products -- 1.7%
- --------------------------------------------------------------------------------
MDC Communications Corp., Sr. Sub. Notes,
10.50%, 12/1/06 $ 5,200 $ 5,434,000
Monarch Acquisition Corp., Sr. Notes, 12.50%,
7/1/03 5,550 6,479,625
- --------------------------------------------------------------------------------
$ 11,913,625
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
15
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Principal
Amount
Security (000 omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Publishing -- 1.8%
- --------------------------------------------------------------------------------
Hollinger International Publications, Inc., Sr.
Sub. Notes, 9.25%, 3/15/07 $ 3,600 $ 3,456,000
Newsquest Capital Corp., Sr. Sub. Notes,
11.00%, 5/1/06 8,400 8,736,000
- --------------------------------------------------------------------------------
$ 12,192,000
- --------------------------------------------------------------------------------
Retail - Food and Drug -- 3.4%
- --------------------------------------------------------------------------------
Dominicks Finer Foods, Inc., Sr.
Sub. Notes, 10.875%, 5/1/05 $ 1,600 $ 1,720,000
Duane Reade, G.P., Sr. Notes,
12.00%, 9/15/02 6,200 6,556,500
Ralphs Grocery Co., Inc., Sr. Sub.
Notes, 13.75%, 6/15/05 5,500 5,885,000
Smith's Food and Drug Corp., Sr.
Sub. Notes, 11.25%, 5/15/07 2,400 2,628,000
Star Markets Co., Sr. Sub. Notes,
13.00%, 11/1/04 6,200 6,944,000
- --------------------------------------------------------------------------------
$ 23,733,500
- --------------------------------------------------------------------------------
Retail - General -- 1.9%
- --------------------------------------------------------------------------------
Knoll, Inc., Sr. Sub. Notes,
10.875%, 3/15/06 $ 3,600 $ 3,960,000
Levitz Furniture Corp., Sr. Sub.
Notes, 9.625%, 7/15/03 3,850 2,829,750
Levitz Furniture Corp., Sr. Sub.
Notes, 13.375%, 10/15/98 800 792,000
Specialty Retailers, Inc., Sr.
Sub. Notes, 11.00%, 8/15/03 5,530 5,875,625
- --------------------------------------------------------------------------------
$ 13,457,375
- --------------------------------------------------------------------------------
Total Corporate Bonds & Notes
(identified cost $641,051,162) $ 653,453,330
- --------------------------------------------------------------------------------
Common Stocks, Warrants and
Rights-- 0.7%
<CAPTION>
Security Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Auto and Parts -- 0.3%
- --------------------------------------------------------------------------------
Bucyrus - Erie Co., Common* 214,839 $ 1,718,712
- --------------------------------------------------------------------------------
$ 1,718,712
- --------------------------------------------------------------------------------
Broadcasting and Cable -- 0.0%
- --------------------------------------------------------------------------------
American Telecasting, Inc. Warrants+* 2,600 $ 5,200
United International Holdings,
Inc., Warrants Exp. 11/15/99+* 7,840 56,840
- --------------------------------------------------------------------------------
$ 62,040
- --------------------------------------------------------------------------------
Building Materials -- 0.1%
- --------------------------------------------------------------------------------
Southdown, Inc. 13,500 $ 465,750
- --------------------------------------------------------------------------------
$ 465,750
- --------------------------------------------------------------------------------
Chemicals -- 0.0%
- --------------------------------------------------------------------------------
Crompton & Knowles Corp., Common* 9,489 $ 190,964
Sterling Chemicals Holdings-Warrants+* 3,200 112,000
- --------------------------------------------------------------------------------
$ 302,964
- --------------------------------------------------------------------------------
Communications Equipment -- 0.0%
- --------------------------------------------------------------------------------
In Flight Phone Corp., Warrants
Exp. 8/31/02+* 1,600 $ --
- --------------------------------------------------------------------------------
$ --
- --------------------------------------------------------------------------------
Communications Services -- 0.1%
- --------------------------------------------------------------------------------
CS Wireless Systems, Inc., Common+* 902 $ --
Microcell Telecommunication, Warrants+* 44,800 448,000
Microcell Telecommunication, Warrants+* 44,800 30,240
Nextel Communications Warrants
Exp. 4/25/99+* 7,200 1,800
- --------------------------------------------------------------------------------
$ 480,040
- --------------------------------------------------------------------------------
Containers and Packaging -- 0.0%
- --------------------------------------------------------------------------------
SD Warren Company, Warrants Exp.
12/15/06+* 48,000 $ 192,000
- --------------------------------------------------------------------------------
$ 192,000
- --------------------------------------------------------------------------------
Foods -- 0.0%
- --------------------------------------------------------------------------------
Servam Corp., $2.00 Warrant Exp.
4/1/01+* 12,276 $ --
Servam Corp., $4.50 Warrant Exp.
4/1/01+* 2,760 --
Servam Corp., Common+* 1,380 --
Specialty Foods Acquisition Corp.,
Common /(1)/* 48,000 12,000
- --------------------------------------------------------------------------------
$ 12,000
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
16
<PAGE>
High Income Portfolio as of March 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Security Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Industrial Development Revenue / Pollution
Control Revenue--0.0%
- --------------------------------------------------------------------------------
Thermadyne Holdings Corp., Common+* 40,000 $ 400
- --------------------------------------------------------------------------------
$ 400
- --------------------------------------------------------------------------------
Metals - Industrial -- 0.2%
- --------------------------------------------------------------------------------
Gulf States Steel, Warrants+* 2,400 $ 120
Terex Corp., Rights, Exp. 7/1/97+* 5,371 537
Terex Corp., Warrants Exp. 12/31/00+* 32,000 1,024,000
Terex Corp., Warrants Exp. 5/15/02+* 20,000 100,000
Triangle Wire & Cable, Inc., Common+* 95,000 190,000
- --------------------------------------------------------------------------------
$ 1,314,657
- --------------------------------------------------------------------------------
Miscellaneous -- 0.0%
- --------------------------------------------------------------------------------
Australis Media Ltd., Warrants+* 5,200 $ --
- --------------------------------------------------------------------------------
$ --
- --------------------------------------------------------------------------------
Total Common Stocks, Warrants and Rights
(identified cost $6,595,495) $ 4,548,563
- --------------------------------------------------------------------------------
Preferred Stocks-- 1.9%
Broadcasting and Cable -- 1.3%
- --------------------------------------------------------------------------------
American Radio Systems Corp., 11.375%/(1)/ 24,000 $ 2,412,000
Cablevision Systems Corp., 11.125% (PIK) 33,971 3,040,386
Chancellor Radio Broadcasting Corp., 12.00%/(1)/ 40,000 3,940,000
- --------------------------------------------------------------------------------
$ 9,392,386
- --------------------------------------------------------------------------------
Communications Services -- 0.2%
- --------------------------------------------------------------------------------
Nextlink Communications, 14.00% (PIK)/(1)/ 24,500 $ 1,102,500
- --------------------------------------------------------------------------------
$ 1,102,500
- --------------------------------------------------------------------------------
Containers and Packaging -- 0.3%
- --------------------------------------------------------------------------------
S.D. Warren Co. w / Warrants, 14%,
12/15/06 48,000 $ 1,872,000
- --------------------------------------------------------------------------------
$ 1,872,000
- --------------------------------------------------------------------------------
Oil and Gas - Equipment and Services -- 0.1%
- --------------------------------------------------------------------------------
Kelley Oil and Natural Gas Corp.* 42,240 $ 1,098,240
- --------------------------------------------------------------------------------
$ 1,098,240
- --------------------------------------------------------------------------------
Total Preferred Stocks
(identified cost $13,042,123) $ 13,465,126
- --------------------------------------------------------------------------------
Short-Term Investments -- 3.7%
<CAPTION>
Principal
Amount
(000
Security omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Associates Corp. of North America,
6.80%, 4/1/97 $ 16,008 $ 16,008,000
General Electric Capital Co.,
5.65%, 4/9/97 10,000 9,987,444
- --------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $25,995,444) $ 25,995,444
- --------------------------------------------------------------------------------
Total Investments -- 100.0%
(identified cost $686,684,224) $ 697,462,463
- --------------------------------------------------------------------------------
</TABLE>
/(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,
1997, the value of these securities amounted to $83,416,000 or 12.0% of
net assets.
+ Restricted security (Note 6).
* Non-income producing security.
(PIK) Payment in-kind.
See notes to financial statements
17
<PAGE>
High Income Portfolio as of March 31, 1997
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
As of March 31, 1997
(Expressed in United States Dollars)
Assets
- --------------------------------------------------------------------------
<S> <C>
Investments, at value (Note 1A)
(identified cost, $686,684,224) $697,462,463
Cash 17,527
Receivable for investments sold 1,464,283
Interest receivable 17,048,513
Miscellaneous receivable 2,124
Prepaid expenses 7,071
Deferred organization expenses (Note 1D) 9,773
- --------------------------------------------------------------------------
Total assets $716,011,754
- --------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------
Payable for investments purchased $ 9,254,554
Payable to affiliate
Trustees' fees 5,300
Accrued expenses 40,438
- --------------------------------------------------------------------------
Total liabilities $ 9,300,292
- --------------------------------------------------------------------------
Net Assets applicable to investors' interest in $706,711,462
Portfolio
- --------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------
Net proceeds from capital contributions and $695,933,223
withdrawals
Net unrealized appreciation on investments (computed
on the basis of identified cost) 10,778,239
- --------------------------------------------------------------------------
Total $706,711,462
- --------------------------------------------------------------------------
</TABLE>
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
March 31, 1997
(Expressed in United States Dollars)
Investment Income (Note 1B)
- --------------------------------------------------------------------------
<S> <C>
Interest income $ 64,033,245
Dividend income 59,560
- --------------------------------------------------------------------------
Total income $ 64,092,805
- --------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 3,683,894
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 20,598
Custodian fee 232,684
Legal and accounting services 49,843
Amortization of organization expenses (Note 1D) 4,519
Miscellaneous 17,294
- --------------------------------------------------------------------------
Total expenses $ 4,008,832
- --------------------------------------------------------------------------
Net investment income $ 60,083,973
- --------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- --------------------------------------------------------------------------
Net realized gain (loss) --
- --------------------------------------------------------------------------
Investment transactions (identified cost basis) $ (4,056,681)
- --------------------------------------------------------------------------
Net realized loss on investments $ (4,056,681)
- --------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investment transactions (identified cost basis) $ 13,401,858
- --------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ 13,401,858
- --------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 9,345,177
- --------------------------------------------------------------------------
Net increase in net assets from operations $ 69,429,150
- --------------------------------------------------------------------------
</TABLE>
See notes to financial statements
18
<PAGE>
High Income Portfolio as of March 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets (Expressed in United States Dollars)
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended Year Ended
in Net Assets March 31, 1997 March 31, 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 60,083,973 $ 50,896,652
Net realized loss on (4,056,681) (5,151,523)
investments
Net change in unrealized
appreciation
(depreciation) 13,401,858 17,257,761
of investments
- ----------------------------------------------------------------------------
Net increase in net assets
from operations $ 69,429,150 $ 63,002,890
- ----------------------------------------------------------------------------
Capital transactions --
Contributions $ 280,137,284 $ 172,948,713
Withdrawals (154,202,111) (167,156,279)
- ----------------------------------------------------------------------------
Net increase in net assets
from capital transactions $ 125,935,173 $ 5,792,434
- ----------------------------------------------------------------------------
Net increase in net assets $ 195,364,323 $ 68,795,324
- ----------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------
At beginning of year $ 511,347,139 $ 442,551,815
- ----------------------------------------------------------------------------
At end of year $ 706,711,462 $ 511,347,139
- ----------------------------------------------------------------------------
</TABLE>
See notes to financial statements
19
<PAGE>
High Income Portfolio as of March 31, 1997
FINANCIAL STATEMENTS CONT'D
Supplementary Data (Expressed in United States Dollars)
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------
1997 1996 1995*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratios to average daily net assets
- --------------------------------------------------------------------------------
Expenses 0.67% 0.71% 0.70%+
Net investment income 10.02% 10.41% 10.63%+
Portfolio Turnover 78% 88% 53%
- --------------------------------------------------------------------------------
Net assets, end of year (000s omitted) $706,711 $511,347 $442,552
- --------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, June 1, 1994, to March 31, 1995.
See notes to financial statements
20
<PAGE>
High Income Portfolio as of March 31, 1997
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 quotations or valuations 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 taxable 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 & 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 balances the Portfolio maintains with IBT. All significant credit
balances used to reduce the Portfolio's custodian fees are reported as a
reduction of expenses on the Statement of Operations.
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, 1997, the fee was
equivalent to 0.61% of the Portfolio's average daily net
21
<PAGE>
High Income Portfolio as of March 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
(Expressed in United States Dollars)
assets and amounted to $3,683,894. 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 Trustees Deferred Compensation Plan. For
the year ended March 31, 1997, 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 $591,877,399 and $446,278,324,
respectively, for the year ended March 31, 1997.
4 Line of Credit
----------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR
and EVM and its affiliates in a committed $120 million unsecured line of
credit agreement with a group of banks. Borrowings will be made by the
Portfolio solely to facilitate the handling of unusual and/or unanticipated
short-term cash requirements. Interest is charged to each portfolio or fund
based on its borrowings at the bank's base rate or at an amount above either
the bank's adjusted certificate of deposit rate, Eurodollar rate or federal
funds effective rate. In addition, a fee computed at an annual rate of 0.15%
on the daily unused portion of the line of credit is allocated among the
participating portfolios and funds at the end of each quarter. The Portfolio
did not have any significant borrowings or allocated fees during the period.
5 Federal Income Tax Basis of Investments
----------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the
investments owned at March 31, 1997, as computed on a federal income tax
basis, were as follows:
<TABLE>
<S> <C>
Aggregate cost $ 686,684,224
----------------------------------------------------------------------------
Gross unrealized appreciation $ 25,029,413
Gross unrealized depreciation (14,251,174)
----------------------------------------------------------------------------
Net unrealized appreciation $ 10,778,239
----------------------------------------------------------------------------
</TABLE>
6 Restricted Securities
----------------------------------------------------------------------------
At March 31, 1997, the Portfolio owned the following securities
(constituting 0.83% 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>
Date of
Description Acquisition Shares/Face Cost Fair Value
----------------------------------------------------------------------------
Corporate Note
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inflo Holdings Corp.,
Promissory Notes, 10%
(0% until 1999),
1/27/07 9/13/96 4,400,000 $2,884,000 $3,696,000
<CAPTION>
Common Stocks, Warrants, and Rights
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Telecasting,
Inc. Warrants 01/16/96 2,600 $ 71,500 $ 5,200
Australis Media Ltd.,
Warrants 05/26/95 5,200 - -
CS Wireless Systems,
Inc., Common 01/14/97 902 - -
Gulf States Steel,
Warrants 08/22/95 2,400 - 120
In Flight Phone
Corp., Warrants
Exp. 8/31/02 11/28/95 1,600 - -
Microcell
Telecommunication,
Warrants 10/30/96 44,800 - 448,000
Microcell
Telecommunication,
Contingent Warrants 10/30/96 44,800 - 30,240
Nextel Communications
Warrants Exp.
4/25/99 10/04/96 7,200 - 1,800
SD Warren Company,
Warrants Exp.
12/15/06 05/15/95 48,000 - 192,000
Servam Corp., $2.00
Warrant Exp. 4/1/01 12/15/87 12,276 - -
Servam Corp., $4.50
Warrant Exp. 4/1/01 12/15/87 2,760 - -
Servam Corp., Common 12/15/87 1,380 - -
Sterling Chemicals
Holdings, Warrants 10/07/96 3,200 - 112,000
Terex Corp., Rights,
Exp. 7/1/97 11/07/94 5,371 - 537
Terex Corp., Warrants
Exp. 12/31/00 12/15/93 32,000 6,400 1,024,000
Terex Corp., Warrants
Exp. 5/15/02 11/07/96 20,000 - 100,000
Thermadyne Holdings
Corp., Common 4/03/89 40,000 28,800 400
Triangle Wire &
Cable, Inc., Common 05/02/94 95,000 2,250,000 190,000
United International
Holdings, Inc.,
Warrants Exp.
11/15/99 11/16/94 7,840 222,186 56,840
-----------------------------------------------------------------------------
$5,462,886 $5,857,137
-----------------------------------------------------------------------------
</TABLE>
22
<PAGE>
High Income Portfolio as of March 31, 1997
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 (the Portfolio) as of
March 31, 1997, and the related statement of operations for the year then ended,
the statements of changes in net assets for the years ended March 31, 1997 and
1996 and the supplementary data for the two years 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 held as of March 31, 1997 by correspondence with the custodian. 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 the Portfolio at March 31,
1997, the results of its operations, changes in net assets and 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
May 9, 1997
23
<PAGE>
EV Marathon High Income Fund as of March 31, 1997
INVESTMENT MANAGEMENT
<TABLE>
<CAPTION>
EV Marathon High Income Fund
<S> <C>
Officers Independent Trustees
M. Dozier Gardner Donald R. Dwight
President and Trustee President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
James B. Hawkes
Vice President and Trustee Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
William H. Ahern, Jr. Banking, Harvard University Graduate School of
Vice President Business Administration
Michael B. Terry Norton H. Reamer
Vice President President and Director, United Asset
Management Corporation
James L. O'Connor
Treasurer John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Thomas Otis
Secretary Jack L. Treynor
Investment Adviser and Consultant
</TABLE>
<TABLE>
<CAPTION>
High Income Portfolio
<S> <C>
Officers Independent Trustees
M. Dozier Gardner Donald R. Dwight
President and Trustee President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
James B. Hawkes
Vice President and Trustee Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Hooker Talcott, Jr. Banking, Harvard University Graduate School of
Vice President and Business Administration
Co-Portfolio Manager
Norton H. Reamer
Michael W. Weilheimer President and Director, United Asset
Vice President and Management Corporation
Co-Portfolio Manager
John L. Thorndike
William Chisholm Formerly Director, Fiduciary Company Incorporated
Vice President
Jack L. Treynor
Raymond O'Neill Investment Adviser and Consultant
Vice President
Michel Normandeau
Vice President
James L. O'Connor
Treasurer
Thomas Otis
Secretary
</TABLE>
24
<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.
Attention: Eaton Vance Funds
P.O. Box 5123
Westborough, MA 01581-5123
Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
EV Marathon High Income Fund
24 Federal 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.
- --------------------------------------------------------------------------------
M-HISRC-5/95
