<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
