<PAGE>
EV CLASSIC
STRATEGIC INCOME FUND
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EV CLASSIC STRATEGIC INCOME FUND (THE "FUND") IS A MUTUAL FUND SEEKING A HIGH
LEVEL OF INCOME AND TOTAL RETURN BY INVESTING IN A GLOBAL PORTFOLIO CONSISTING
PRIMARILY OF HIGH GRADE DEBT SECURITIES. THE FUND INVESTS ITS ASSETS IN
STRATEGIC INCOME PORTFOLIO (THE "PORTFOLIO"), A NON-DIVERSIFIED OPEN-END
INVESTMENT COMPANY HAVING THE SAME INVESTMENT OBJECTIVE AS THE FUND, RATHER THAN
BY DIRECTLY INVESTING IN AND MANAGING ITS OWN PORTFOLIO OF SECURITIES. THE
PORTFOLIO'S INVESTMENT ADVISER WILL INVEST IN A VARIETY OF INCOME PRODUCING
SECURITIES, INCLUDING THOSE OF BELOW INVESTMENT GRADE QUALITY. THE VALUE OF FUND
SHARES WILL FLUCTUATE BECAUSE OF CHANGES IN CURRENCY EXCHANGE RATES, CREDIT
QUALITY AND INTEREST RATES, AND OTHER FACTORS. THE FUND IS A SERIES OF EATON
VANCE MUTUAL FUNDS TRUST (THE "TRUST").
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank or other insured depository institution, and are not federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency. Shares of the Fund involve investment risks,
including fluctuations in value and the possible loss of some or all of the
principal investment.
This Prospectus is designed to provide you with information you should know
before investing. Please retain this document for future reference. A Statement
of Additional Information dated March 3, 1997 for the Fund, as supplemented from
time to time, has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. This Statement of Additional Information is
available without charge from the Fund's principal underwriter, Eaton Vance
Distributors, Inc. (the "Principal Underwriter"), 24 Federal Street, Boston, MA
02110 (telephone (800) 225-6265). The Portfolio's investment adviser is Boston
Management and Research (the "Investment Adviser"), a wholly-owned subsidiary of
Eaton Vance Management, and Eaton Vance Management is the administrator (the
"Administrator") of the Fund and the Portfolio. The offices of the Investment
Adviser and the Administrator are located at 24 Federal Street, Boston, MA
02110.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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PAGE PAGE
<S> <C> <C>
Shareholder and Fund Expenses ............. 2 How to Redeem Fund Shares .................. 13
The Fund's Financial Highlights ............ 3 Reports to Shareholders .................... 14
The Fund's Investment Objective ............ 4 The Lifetime Investing Account/Distribution
Investment Policies and Risks .............. 4 Options ................................... 15
Organization of the Fund and the Portfolio . 8 The Eaton Vance Exchange Privilege .......... 15
Management of the Fund and the Portfolio ... 9 Eaton Vance Shareholder Services ............ 16
Distribution Plan .......................... 10 Distributions and Taxes ..................... 17
Valuing Fund Shares ........................ 12 Performance Information ..................... 18
How to Buy Fund Shares ..................... 12 Appendix .................................... 19
</TABLE>
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PROSPECTUS DATED MARCH 3, 1997
<PAGE>
SHAREHOLDER AND FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES
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Sales Charges Imposed on Purchases of Shares None
Sales Charges Imposed on Reinvested Distributions None
Fees to Exchange Shares None
Contingent Deferred Sales Charge Imposed on Redemptions During
the First Year (as a percentage of redemption proceeds exclusive
of all reinvestments and capitalappreciation in the account) 1.00%
ANNUAL FUND AND ALLOCATED PORTFOLIO OPERATING EXPENSES
(as a percentage of average daily net assets)
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Investment Adviser Fee 0.54%
Rule 12b-1 Distribution (and Service) Fees 1.00%
Other Expenses (including the Portfolio's administration fee of
.15%) (after expense allocation) 0.87%
----
Total Operating Expenses (after allocation) 2.41%
====
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
An investor would pay the following
expenses (including a contingent
deferred sales charge in the case of
redemption during the first year after
purchase) on a $1,000 investment,
assuming (a) 5% annual return and
(b) redemption at the end of each period: $34 $75 $129 $275
NOTES:
The table and Example summarize the aggregate expenses of the Fund and the
Portfolio and are designed to help investors understand the costs and expenses
they will bear, directly or indirectly, by investing in the Fund. Information
for the Fund is based on its expenses for the most recent fiscal year, except
that Service Fees have been estimated. Absent an expense allocation, Other
Expenses and Total Operating Expenses would have been 7.20% and 8.74%,
respectively.
The Example should not be considered a representation of past or future expenses
and actual expenses may be greater or less than those shown. Federal regulations
require the Example to assume a 5% annual return, but actual return will vary.
For further information regarding the expenses of both the Fund and the
Portfolio, see "The Fund's Financial Highlights", "Management of the Fund and
the Portfolio" and "How to Redeem Fund Shares". A long-term shareholder in the
Fund may pay more than the economic equivalent of the maximum front-end sales
charge permitted by a rule of the National Association of Securities Dealers,
Inc. See "Distribution Plan".
No contingent deferred sales charge is imposed on (a) shares purchased more than
one year prior to redemption, (b) shares acquired through the reinvestment of
dividends and distributions or (c) any appreciation in value of other shares in
the account (see "How to Redeem Fund Shares"), and no such charge is imposed on
exchanges of Fund shares for shares of one or more other funds listed under "The
Eaton Vance Exchange Privilege". In the Example above, expenses would be $10
less in the first full year if there was no redemption.
The Portfolio's monthly advisory fee has two components, a fee based on daily
net assets and a fee based on daily gross income, as set forth in the fee
schedule on page 9.
The Fund invests in the Portfolio and, at times, in another registered
investment company. Other investment companies with different distribution
arrangements and fees are investing in the Portfolio and others may do so in the
future. See "Organization of the Fund and the Portfolio".
<PAGE>
THE FUND'S FINANCIAL HIGHLIGHTS
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The following information should be read in conjunction with the audited
financial statements included in the Fund's annual report to shareholders
which is incorporated by reference into the Statement of Additional
Information in reliance upon the report of Coopers & Lybrand L.L.P.,
independent accountants, as experts in accounting and auditing. Further
information regarding the performance of the Fund is contained in its annual
report to shareholders which may be obtained without charge by contacting the
Principal Underwriter.
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<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------
1996 1995++ 1994*++
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<S> <C> <C> <C>
NET ASSET VALUE, beginning of year $11.330 $ 9.750 $ 10.000
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INCOME (LOSS) FROM OPERATIONS:
Net investment income $ 0.804 $ 1.021 $ 0.348
Net realized and unrealized gain (loss) on investments 0.865 0.559 (0.495)
------- -------- ---------
Total income (loss) from operations $ 1.669 $ 1.580 $ (0.147)
------- -------- ---------
LESS DISTRIBUTIONS:
From net investment income $(0.804) $ -- $ (0.103)
In excess of net investment income(3) (0.105) -- --
------- -------- ---------
Total distributions $(0.909) $ -- $ (0.103)
------- -------- ---------
NET ASSET VALUE, end of year $12.090 $ 11.330 $ 9.750
======= ======== =========
TOTAL RETURN(1) 15.09% 16.21% (1.41%)
RATIOS/SUPPLEMENTAL DATA**:
Net assets, end of period (000's omitted) $ 1,693 $ 11 $ 10
Ratio of net expenses to average net assets(2) 2.38% 0.90% 0.76%+
Ratio of net investment income to average daily net assets 7.08% 9.84% 7.74%+
**For the years ended October 31, 1996 and 1995 and for the period from the
start of business, May 25, 1994, to October 31, 1994, the operating expenses
of the Fund reflect an allocation of expenses to the Administrator. Had such
action not been taken, net investment income gain (loss) per share and the
ratios would have been as follows:
NET INVESTMENT INCOME GAIN (LOSS) PER SHARE $ 0.085 $(13.000) $ (6.900)
======= ======== ========
RATIOS (As a percentage of average net assets):
Expenses(2) 8.71% 131.85% 160.83%+
Net investment income gain (loss) 0.75% (121.12%) (152.33%)+
+Computed on an annualized basis.
++Per share amounts have been computed using average shares outstanding
during the period.
(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. Distributions, if any,
are assumed to be reinvested at the net asset value on the payable date. Total return is
calculated on a non-annualized basis.
(2)Includes the Fund's share of the Portfolio's allocated expenses.
(3)The Fund has followed the Statement of Position (SOP) 93-2: Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributi
on by Investment Companies. The SOP requires that differences in the recognition or
classification of income between the financial statements and tax earnings and profits that
result in temporary over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized gains.
*For the period from the start of business, May 25, 1994, through October 31, 1994.
</TABLE>
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE
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THE FUND'S INVESTMENT OBJECTIVE IS A HIGH LEVEL OF INCOME AND TOTAL RETURN BY
INVESTING IN A GLOBAL PORTFOLIO CONSISTING PRIMARILY OF HIGH GRADE DEBT
SECURITIES. The Investment Adviser will allocate investments among different
countries, currencies and credits, including those of below investment grade
quality, based on the perception of the most favorable markets and issuers, the
relative yield and appreciation potential of a particular country's securities
and the relationship of a country's currency to the U.S. dollar. Changes in
exchange rates for the foreign currencies in which the investments and forward
contracts are denominated may adversely affect the value of Fund shares. The
Fund's investment objective may be changed by the Trustees of the Trust without
shareholder approval.
INVESTMENT POLICIES AND RISKS
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THE FUND CURRENTLY SEEKS ITS OBJECTIVE BY INVESTING IN STRATEGIC INCOME
PORTFOLIO (THE "PORTFOLIO"), WHICH IS ITSELF AN OPEN-END INVESTMENT COMPANY
HAVING THE SAME INVESTMENT OBJECTIVE AS THE FUND. The Portfolio, in turn,
invests primarily in a portfolio of high grade debt securities of issuers
located anywhere in the world.
The Investment Adviser adjusts the Portfolio's investments and engages in active
management techniques to take advantage of differences in interest rates and
currency exchange rates in markets around the world, and other differences among
countries and markets. By allocating the Portfolio's assets actively among
issuers in different countries, and among securities denominated in different
currencies, the Investment Adviser attempts to achieve a higher level of current
income than might be available from a portfolio invested only in the securities
of one country or denominated in one currency. This strategy requires the
Investment Adviser to identify countries and currencies where the Portfolio's
investments will outperform comparable investments in other countries and
currencies and in many cases to predict changes in economies, markets, political
conditions, and other factors. The success of this strategy will, of course,
involve the risk that the Investment Adviser's predictions may be untimely or
incorrect. The Investment Adviser also seeks to identify markets and securities
which appear to be undervalued and make investments to profit from increases in
value.
The Portfolio will invest primarily in high grade debt securities. "High grade"
debt securities include securities issued or guaranteed as to principal or
interest by the U.S. Government or any of its agencies or instrumentalities, and
debt securities, rated at least A by Standard & Poor's Ratings Group, Moody's
Investors Service, Inc. or Duff & Phelps Inc., of foreign governmental and
private issuers. They may also include commercial paper or other short-term debt
instruments rated in one of the two highest short-term rating categories by any
of those rating services (or by Fitch Investors Service, Inc.), and certificates
of deposit and bankers' acceptances issued or guaranteed by, or time deposits
maintained at, banks having total assets of more than $500 million and
determined by the Investment Adviser to be of comparable credit quality to
short-term securities with those ratings. An unrated security will be considered
to be a high grade security if the Investment Adviser determines that it is of
comparable quality to any of the securities described above. In making such
determinations, the Adviser will consider any rating of the issuer of unrated
securities.
The Portfolio may invest the remainder of its assets in lower-rated debt
securities, although less than 35% of the Portfolio's assets will be invested in
securities rated below BBB-/Baa3 (commonly referred to as "junk bonds").
Lower-rated securities generally offer higher current yields and appreciation
potential than do higher-rated securities, but are subject to greater risks.
Securities in the lower categories are considered to be of poor standing and
predominantly speculative; securities in the lowest rating categories may be in
default and are generally regarded by the rating agencies as having extremely
poor prospects of ever attaining any real investment standing. The values of
lower-rated fixed income securities generally fluctuate more than those of
higher-rated fixed-income securities.
In lieu of having the Portfolio invest in lower-rated debt securities, the Fund
may invest up to 35% of its assets in High Income Portfolio ("HI Portfolio"), a
separate registered investment company advised by the Investment Adviser. The
investment objective of HI Portfolio is to provide a high level of current
income and it may invest in the same types of debt securities (with the same
risks) as the Portfolio. HI Portfolio normally invests at least 65% of its
assets in debt securities of the lowest investment grade, lower-rated
obligations and unrated obligations; at least 80% of its net assets in
fixed-income securities, including convertible securities; and up to 20% of its
net assets in common stocks and other equity securities when consistent with its
objective or acquired as part of a unit combined fixed-income and equity
securities. The Fund will not invest in the HI Portfolio when such Portfolio is
not so invested. Foreign investments of HI Portfolio may not exceed 25% of total
assets. HI Portfolio may purchase and sell derivative instruments similar to
those described in this Prospectus, except for swaps. At January 31, 1997, HI
Portfolio had 97.6% of its assets invested in high yield, high risk bonds, and
held no obligations in default. For more detailed information about the risks
associated with investing in lower-rated securities, see "Additional Risk and
Investment Information" below.
The income producing securities in which the Portfolio invests may have fixed,
variable or floating interest rates, constitute a broad mix of asset classes,
and may include convertible bonds, securities of real estate investment trusts
and natural resource companies, stripped debt obligations, closed-end investment
companies (that invest primarily in debt securities the Portfolio could invest
in), preferred, preference and convertible stocks, equipment lease certificates,
equipment trust certificates, conditional sales contracts and debt obligations
collateralized by, or representing interests in pools of, mortgages and other
types of loans ("asset-backed obligations"). The Portfolio may invest a portion
of its assets in fixed and floating rate loans and loan interests. The Portfolio
will normally invest in securities of issuers located in at least three
different countries (which may include the United States), and will not normally
invest more than 25% of its assets in securities of issuers located in a single
foreign country or denominated in any single foreign currency, except the U.S.
dollar. Nevertheless, through "Active Management Strategies" discussed below,
the entire Fund may be exposed to foreign currency risks. For temporary
defensive purposes, such as during abnormal market or economic conditions, the
Portfolio may hold all or any portion of its assets in securities of issuers
located in the United States and in cash or money market instruments. It is
impossible to predict when, or for how long, the Portfolio will engage in such
strategies.
THE MARKET VALUE OF THE PORTFOLIO'S (AND HI PORTFOLIO'S) INVESTMENTS WILL CHANGE
IN RESPONSE TO CHANGES IN CURRENCY EXCHANGE AND INTEREST RATES, CREDIT QUALITY
CHANGES OF ISSUERS AND OTHER FACTORS. Changes in the values of portfolio
securities will not affect interest income derived from those securities, but
will affect the Fund's net asset value. See "Additional Risk and Investment
Information" below.
ACTIVE MANAGEMENT TECHNIQUES
CURRENCY AND OTHER DERIVATIVE INSTRUMENTS. The Portfolio may purchase or sell
derivative instruments (which are instruments that derive their value from
another instrument, security, index or currency) to enhance return, to hedge
against fluctuations in securities prices, interest rates or currency exchange
rates, or as a substitute for the purchase or sale of securities or currencies.
The Portfolio's transactions in derivative instruments may be in the U.S. or
abroad and may include the purchase or sale of futures contracts on securities,
securities indices, other indices, other financial instruments or currencies;
options on futures contracts; exchange-traded and over-the-counter options on
securities, indices or currencies; forward foreign currency exchange contracts;
and interest rate and currency swaps. The Portfolio's transactions in derivative
instruments involve a risk of loss or depreciation due to: unanticipated adverse
changes in securities prices, interest rates, the other financial instruments'
prices or currency exchange rates; the inability to close out a position;
default by the counterparty; imperfect correlation between a position and the
desired hedge; tax constraints on closing out positions; and portfolio
management constraints on securities subject to such transactions. The loss on
derivative instruments (other than purchased options) may substantially exceed
the Portfolio's initial investment in these instruments. In addition, the
Portfolio may lose the entire premium paid for purchased options that expire
before they can be profitably exercised by the Portfolio. The Portfolio incurs
transaction costs in opening and closing positions in derivative instruments.
There can be no assurance that the Investment Adviser's use of derivative
instruments will be advantageous to the Portfolio.
The Portfolio will only enter into equity swaps and over-the-counter options
contracts with counterparties whose credit quality or claims paying ability are
considered to be investment grade by the Investment Adviser. In addition, at the
time of entering into a transaction, the Portfolio's credit exposure to any one
counterparty will be limited to 5% or less of the net assets of the Portfolio.
The Portfolio's investment in illiquid assets, which generally will include
equity swaps and over-the-counter options, may not represent more than 15% of
net assets at the time any such illiquid assets are acquired.
To the extent that the Portfolio enters into futures contracts, options on
futures contracts and options on foreign currencies traded on an exchange
regulated by the Commodity Futures Trading Commission ("CFTC"), in each case
that are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish these positions
(excluding the amount by which options are "in-the-money") may not exceed 5% of
the liquidation value of the Portfolio's investments, after taking into account
unrealized profits and unrealized losses on any contracts the Portfolio has
entered into.
Forward contracts are individually negotiated and privately traded by currency
traders and their customers. A forward contract involves an obligation to
purchase or sell a specific currency (or basket of currencies) for an agreed
price at a future date, which may be any fixed number of days from the date of
the contract. The Portfolio may engage in cross-hedging by using forward
contracts in one currency (or basket of currencies) to hedge against
fluctuations in the value of securities denominated in a different currency if
the Investment Adviser determines that there is an established historical
pattern or correlation between the two currencies (or the basket of currencies
and the underlying currency). Use of a different foreign currency magnifies the
Portfolio's exposure to foreign currency exchange rate fluctuations. The
Portfolio may also use forward contracts to shift its exposure to foreign
currency exchange rate changes from one currency to another. In addition, the
Portfolio may purchase forward contracts for non-hedging purposes when the
Investment Adviser anticipates that the foreign currency will appreciate in
value.
SECURITIES LOANS, REPURCHASE AGREEMENTS, FORWARD COMMITMENTS AND REVERSE
REPURCHASE AGREEMENTS. The Portfolio may lend its portfolio securities to
broker-dealers and may enter into repurchase agreements. These transactions must
be fully collateralized at all times, but involve some risk to the Portfolio if
the other party should default on its obligations and the lender is delayed or
prevented from recovering the collateral. The Portfolio may also purchase or
sell securities for future delivery by means of "forward commitments."
The Portfolio may also enter into "reverse" repurchase agreements which
generally involve the sale of securities held and an agreement to repurchase the
securities at an agreed-upon price, date, and interest payment. The Portfolio
can invest the cash it receives or use it to meet redemption requests. Reverse
repurchase agreements and forward commitments to purchase securities may
increase the overall investment exposure of the Portfolio and involve investment
leverage. Use of investment leverage may increase the amount of any losses
incurred by the Portfolio in the case of adverse changes in market conditions or
the failure of the issuer of a security or financial instrument to meet its
obligations. The Portfolio may also enter into reverse repurchase agreements as
a hedge against a possible decline in the value of the foreign currency in which
a debt security is denominated by converting the foreign currency cash proceeds
from the sale of the debt security into U.S. dollars.
ADDITIONAL RISK AND INVESTMENT INFORMATION
INVESTMENTS IN FOREIGN SECURITIES. Because foreign securities involve foreign
currencies, the values of the assets of the Portfolio (and HI Portfolio) and
their net investment income available for distribution may be affected favorably
or unfavorably by changes in currency exchange rates and exchange control
regulations. There may be less information publicly available about a foreign
issuer than about a U.S. issuer, and foreign issuers are not generally subject
to accounting, auditing, and financial reporting standards and practices
comparable to those in the United States. The willingness and ability of
sovereign issuers to pay principal and interest on government securities depends
on various economic factors, including among others the issuer's balance of
payments, overall debt level, and cash flow considerations related to the
availability of tax or other revenues to satisfy the issuer's obligations. The
securities of some foreign issuers are less liquid and at times more volatile
than securities of comparable U.S. issuers. Foreign brokerage commissions and
fees are also generally higher than in the United States. Foreign settlement
procedures and trade regulations may involve certain risks (such as delay in the
payment or delivery of securities or in the recovery of the assets held abroad)
and expenses not present in the settlement of domestic investments. Investments
may include securities issued by the governments of lesser-developed countries,
which are sometimes referred to as "emerging markets", and other issuers located
in such countries. As a result, the Portfolio may be exposed to greater risk and
will be more dependent on the Investment Adviser's ability to assess such risk
than if the Portfolio invested solely in more developed countries.
In addition, there may be a possibility of nationalization or expropriation of
assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, armed conflict and diplomatic developments
which could affect the values of a Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries,
including remedies available in bankruptcy proceedings, may be more limited than
those available with respect to investments in the United States or in other
foreign countries. The laws of some foreign countries may limit a Portfolio's
ability to invest in securities of certain issuers located in those foreign
countries. Special tax considerations apply to foreign securities.
INVESTING IN LOWER-RATED SECURITIES. Lower quality debt securities are subject
to the risk of an issuer's inability to meet principal and interest payments on
the obligations (credit risk) and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk). Lower
rated and comparable unrated securities are also more likely to react to real or
perceived developments affecting market and credit risk than are prices of
higher-rated securities, which react primarily to movements in the general level
of interest rates. The Portfolio (and HI Portfolio) may invest a substantial
portion of their assets in lower-rated securities issued in connection with
mergers, acquisitions, leveraged buy-outs, recapitalizations and other highly
leveraged transactions, which pose a higher risk of default or bankruptcy of the
issuer than other fixed-income securities particularly during periods of
deteriorating economic conditions and contraction in the credit markets. The
Portfolio (and HI Portfolio) may also invest in debt securities not paying
current income in anticipation of possible future income or capital
appreciation. The issuer of such securities may be in bankruptcy or undergoing a
debt restructuring or reorganization. Defaulted securities may be retained. In
the case of a defaulted security, the Portfolio (or HI Portfolio) may incur
additional expense seeking recovery of its investment. In the event the rating
of a security held by the Portfolio (or HI Portfolio) is downgraded, causing the
Fund to have indirectly 35% or more of its total assets in securities rated
below investment grade, the Investment Adviser will (in an orderly fashion
within a reasonable period of time) dispose of such securities of the Portfolio
(or reduce the Fund's investment in HI Portfolio) as it deems necessary in order
to comply with this limitation. See the Appendix to this Prospectus for the
asset composition of the Portfolio for the fiscal year ended October 31, 1996.
For a description of securities ratings, see the Statement of Additional
Information.
INTEREST RATE RISK. The value of Fund shares will reflect the value of the
Fund's interest in the Portfolio (which in turn, reflects the underlying value
of the Portfolio's assets and liabilities), and any interest in HI Portfolio and
will change in response to interest rate fluctuations. When interest rates
decline, the value of debt securities held by the Portfolios can be expected to
rise. Conversely, when interest rates rise, the value of debt securities held by
the Portfolios can be expected to decline.
OTHER PRACTICES. The Portfolio may at times invest in so-called "zero-coupon"
bonds (deferred interest bonds) and "payment-in-kind" bonds. Zero-coupon bonds
are issued at a significant discount from their principal amount and interest is
paid only at maturity rather than at intervals during the life of the security.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. The values of
zero-coupon bonds and payment-in-kind bonds are subject to greater fluctuation
in response to changes in market interest rates than bonds which pay interest in
cash currently. Because these instruments allow an issuer to avoid the need to
generate cash to meet current interest payments, they may involve greater credit
risks than bonds paying interest currently. Even though such bonds do not pay
current interest in cash, a Portfolio is nonetheless required to accrue interest
income on such investments and the Fund is required to distribute its share of
such amounts at least annually to shareholders. Thus, a Portfolio could be
required at times to liquidate other investments to obtain cash in order to
enable the Fund to satisfy its distribution requirements.
The Portfolio may hold up to 15% of net assets in illiquid securities, including
securities legally restricted as to resale such as commercial paper issued
pursuant to Section 4(2) of the Securities Act of 1933, and securities eligible
for resale pursuant to Rule 144A thereunder. Rule 144A securities may, however,
be treated as liquid by the Investment Adviser pursuant to procedures adopted by
the Trustees, which require consideration of factors such as trading activity,
availability of market quotations and number of dealers willing to purchase the
security. Rule 144A securities may increase illiquidity if qualified
institutional buyers become uninterested in purchasing such securities.
The Portfolio may also temporarily borrow up to 5% of the value of its total
assets to satisfy redemption requests or settle securities transactions. Certain
securities held by the Portfolio may permit the issuer at its option to "call",
or redeem, its securities. If an issuer were to redeem securities held by the
Portfolio during a time of declining interest rates, the Portfolio may not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed.
NON-DIVERSIFIED STATUS. As a "non-diversified" investment company, the Portfolio
may invest, with respect to 50% of its total assets, more than 5%, (but not more
than 25%) of its total assets in securities of any one issuer, other than U.S.
government securities. The Portfolio is likely to invest a greater percentage of
its assets in the securities of a single issuer than would a diversified fund.
Therefore, the Portfolio is more susceptible to any single adverse or political
occurence or development affecting issuers in which the Portfolio invests. HI
Portfolio is diversified.
INVESTMENT RESTRICTIONS. The Fund, the Portfolio (and HI Portfolio) have adopted
certain fundamental investment restrictions and policies which are enumerated in
detail in the Statement of Additional Information and which may not be changed
unless authorized by a shareholder vote or an investor vote, respectively.
Except for such enumerated restrictions and as otherwise indicated in this
Prospectus, the investment objective and policies of the Fund and the Portfolio
are not fundamental policies and accordingly may be changed by the Trustees of
the Trust and the affected Portfolio without obtaining the approval of the
Fund's shareholders or the investors of the Portfolio, as the case may be.
ORGANIZATION OF THE FUND AND THE PORTFOLIO
- --------------------------------------------------------------------------------
THE FUND IS A NON-DIVERSIFIED SERIES OF EATON VANCE MUTUAL FUNDS TRUST, A
BUSINESS TRUST ESTABLISHED UNDER MASSACHUSETTS LAW PURSUANT TO A DECLARATION OF
TRUST DATED MAY 7, 1984, AS AMENDED. THE TRUST IS A MUTUAL FUND - AN OPEN- END
MANAGEMENT INVESTMENT COMPANY. The Trustees of the Trust are responsible for the
overall management and supervision of its affairs. The Trust may issue an
unlimited number of shares of beneficial interest (no par value per share) in
one or more series (such as the Fund). Each share represents an equal
proportionate beneficial interest in the Fund. When issued and outstanding, the
shares are fully paid and nonassessable by the Trust and redeemable as described
under "How to Redeem Fund Shares". There are no annual meetings of shareholders,
but special meetings may be held as required by law to elect Trustees and
consider certain other matters. Shareholders are entitled to one vote for each
full share held. Fractional shares may be voted proportionately. Shares have no
preemptive or conversion rights and are freely transferable. In the event of the
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets of the Fund available for distribution to shareholders.
THE PORTFOLIO (AND HI PORTFOLIO) ARE ORGANIZED AS TRUSTS UNDER THE LAWS OF THE
STATE OF NEW YORK AND INTEND TO BE TREATED AS PARTNERSHIPS FOR FEDERAL TAX
PURPOSES. Each Portfolio, as well as the Trust, intends to comply with all
applicable federal and state securities laws. Each Portfolio's Declaration of
Trust, as amended, provides that the Fund and other entities permitted to invest
in the Portfolio (e.g., other U.S. and foreign investment companies, and common
and commingled trust funds) will each be liable for all obligations of the
Portfolio. However, the risk of the Fund incurring financial loss on account of
such liability is limited to circumstances in which both inadequate insurance
exists and a Portfolio itself is unable to meet its obligations. Accordingly,
the Trustees of the Trust believe that neither the Fund nor its shareholders
will be adversely affected by reason of the Fund investing in the Portfolios.
The Trustees of the Trust have considered the advantages and disadvantages of
investing the assets of the Fund in the Portfolios, as well as the advantages
and disadvantages of the two-tier format. The Trustees believe that the
structure offers opportunities for substantial growth in the assets of the
Portfolios, affords the potential for economies of scale for the Fund (at least
when the assets of a Portfolio exceed $500 million) and may over time result in
lower expenses for the Fund.
In addition to selling an interest to the Fund, a Portfolio may sell interests
to other affiliated and non-affiliated mutual funds or institutional investors.
Such investors will invest in a Portfolio on the same terms and conditions and
will pay a proportionate share of the Portfolio's expenses. However, the other
investors investing in a Portfolio are not required to sell their shares at the
same public offering price as the Fund due to variations in sales commissions
and other operating expenses. Therefore, investors in the Fund should be aware
that these differences may result in differences in returns experienced by
investors in the various funds that invest in a Portfolio. Such differences in
returns are also present in other mutual fund structures, including funds that
have multiple classes of shares. Information regarding other pooled investment
entities or funds which invest in a Portfolio may be obtained by contacting the
Principal Underwriter, 24 Federal Street, Boston, MA 02110, (617) 482-8260.
Whenever the Fund as an investor in a Portfolio is requested to vote on matters
pertaining to the Portfolio (other than the termination of the Portfolio's
business, which may be determined by the Trustees of the Portfolio without
investor approval), the Fund will hold a meeting of Fund shareholders and will
vote its interest in the Portfolio for or against such matters proportionately
to the instructions to vote for or against such matters received from Fund
shareholders. The Fund shall vote shares for which it receives no voting
instructions in the same proportion as the shares for which it receives voting
instructions. Other investors in a Portfolio may alone or collectively acquire
sufficient voting interests in the Portfolio to control matters relating to the
operation of the Portfolio, which may require the Fund to withdraw its
investment in the Portfolio or take other appropriate action. Any such
withdrawal could result in a distribution "in kind" of portfolio securities (as
opposed to a cash distribution from a Portfolio). If securities are distributed,
the Fund could incur brokerage, tax or other charges in converting the
securities to cash. In addition, the distribution in kind may result in a less
diversified portfolio of investments or adversely affect the liquidity of the
Fund. Notwithstanding the above, there are other means for meeting shareholder
redemption requests, such as borrowing.
The Fund may withdraw (completely redeem) all its assets from either or both
Portfolios at any time if the Board of Trustees of the Trust determines that it
is in the best interest of the Fund to do so. In the event the Fund withdraws
all of its assets from both Portfolios, or the Board of Trustees of the Trust
determines that the investment objective of the Portfolios are no longer
consistent with the investment objective of the Fund, such Trustees would
consider what action might be taken, including investing the assets of the Fund
in another pooled investment entity or retaining an investment adviser to manage
the Fund's assets in accordance with its investment objective. The Fund's
investment performance may be affected by a withdrawal of all its assets from a
Portfolio.
MANAGEMENT OF THE FUND AND THE PORTFOLIO
- --------------------------------------------------------------------------------
THE PORTFOLIO ENGAGES BOSTON MANAGEMENT AND RESEARCH ("BMR"), A WHOLLY-OWNED
SUBSIDIARY OF EATON VANCE MANAGEMENT ("EATON VANCE"), AS ITS INVESTMENT ADVISER.
EATON VANCE, ITS AFFILIATES AND ITS PREDECESSOR COMPANIES HAVE BEEN MANAGING
ASSETS OF INDIVIDUALS AND INSTITUTIONS SINCE 1924 AND MANAGING INVESTMENT
COMPANIES SINCE 1931. BMR's expertise in the management of fixed-income
securities ranges from government obligations, high-grade corporate and
municipal securities, foreign debt and bank loan interests to higher yielding
instruments. BMR's fixed-income division is armed with the research and
technical ability to gain immediate access to interest rate data around the
world.
Acting under the general supervision of the Board of Trustees of the Portfolio,
BMR manages the Portfolio's investments and affairs. BMR also furnishes for the
use of the Portfolio office space and all necessary office facilities, equipment
and personnel for servicing the investments of the Portfolio. Under its
investment advisory agreement with the Portfolio, BMR receives a monthly
advisory fee equal to the aggregate of
(a) a daily asset based fee computed by applying the annual asset rate
applicable to that portion of the total daily net assets in each
Category as indicated below, plus
(b) a daily income based fee computed by applying the daily income rate
applicable to that portion of the total daily gross income (which
portion shall bear the same relationship to the total daily gross income
on such day as that portion of the total daily net assets in the same
Category bears to the total daily net assets on such day) in each
Category as indicated below:
ANNUAL DAILY
CATEGORY DAILY NET ASSETS ASSET RATE INCOME RATE
--------------------------------------------------------------------------
1 up to $500 million 0.275% 2.75%
2 $500 million but less than $1 billion 0.250% 2.50%
3 $1 billion but less than $1.5 billion 0.225% 2.25%
4 $1.5 billion but less than $2 billion 0.200% 2.00%
5 $2 billion but less than $3 billion 0.175% 1.75%
6 $3 billion and over 0.150% 1.50%
Total daily gross income is the total gross investment income, exclusive of
capital gains and losses on investments and before deduction of expenses, earned
each day by the Portfolio.
As of October 31, 1996, the Portfolio had net assets of $132,406,799. For the
fiscal year ended October 31, 1996, the Portfolio paid BMR advisory fees
equivalent to 0.54% of the Portfolio's average daily net assets for such year.
HI Portfolio also engages BMR to act as its investment adviser pursuant to a fee
schedule similar to but slightly higher than the above. For the fiscal year
ending March 31, 1997, BMR will pay estimated advisory fees equivalent to 0.62%
of HI Portfolio's average daily net assets. The portion of the Fund's assets
invested in the HI Portfolio will be subject to such Portfolio's advisory fee,
but will not be subject to Strategic Income Portfolio's advisory or
administration fee, or a Fund advisory fee.
BMR OR EATON VANCE ACTS AS INVESTMENT ADVISER TO INVESTMENT COMPANIES AND
VARIOUS INDIVIDUAL AND INSTITUTIONAL CLIENTS WITH ASSETS UNDER MANAGEMENT OF
OVER $17 BILLION. Eaton Vance is a wholly-owned subsidiary of Eaton Vance Corp.,
a publicly-held holding company which through its subsidiaries and affiliates
engages primarily in investment management, administration and marketing
activities. The Principal Underwriter is a wholly-owned subsidiary of Eaton
Vance.
Mark S. Venezia has acted as the portfolio manager of the Portfolio since it
commenced operations. He has been a Vice President of Eaton Vance since 1987 and
of BMR since 1992. Hooker Talcott, Jr. has acted as portfolio manager of the HI
Portfolio since it commenced operations. Mr. Talcott has been a Vice President
of Eaton Vance since 1987 and of BMR since 1992. Michael Weilheimer has been a
Vice President of Eaton Vance since 1992 and co-portfolio manager since January
1, 1997.
The Portfolio (and HI Portfolio) believes that most of the obligations which it
will acquire will be normally traded on a net basis (without commission) through
broker-dealers and banks acting for their own account. Such firms attempt to
profit from such transactions by buying at the bid price and selling at the
higher asked price of the market, and the difference is customarily referred to
as the spread. In selecting firms which will execute portfolio transactions, BMR
judges their professional ability and quality of service and uses its best
efforts to obtain execution at prices which are advantageous and at reasonably
competitive spreads. Subject to the foregoing, BMR may consider sales of shares
of the Fund or of other investment companies sponsored by BMR or Eaton Vance as
a factor in the selection of firms to execute portfolio transactions. The Fund,
the Portfolios and BMR have adopted Codes of Ethics relating to personal
securities transactions. The Codes permit Eaton Vance personnel to invest in
securities (including securities that may be purchased or held by the
Portfolios) for their own accounts, subject to certain pre-clearance, reporting
and other restrictions and procedures contained in such Codes.
The Portfolio also engages BMR as its administrator under an administration
agreement. Under the administration agreement, BMR is responsible for reviewing
and supervising the provision of custody services to the Portfolio and making
related reports and recommendations to the Board of Trustees of the Portfolio;
for providing certain valuation, legal, accounting and tax services in
connection with investments with foreign issuers or guarantors, investments
denominated in foreign currencies and transactions in derivative instruments;
and for such other special services as the Board may direct. BMR also furnishes
the office facilities and personnel necessary for providing these services. As
compensation for these services, BMR receives a monthly administration fee at an
annual rate of .15% of the Portfolio's average daily net assets. For the fiscal
year ended October 31, 1996, the Portfolio paid BMR administration fees
equivalent to .15% of the Portfolio's average daily net assets for such year.
The Trust has retained the services of Eaton Vance to act as Administrator of
the Fund. The Trust has not retained the services of an investment adviser since
the Trust seeks to achieve the investment objective of the Fund by investing the
Fund's assets in the Portfolio. As Administrator, Eaton Vance provides the Fund
with general office facilities and supervises the overall administration of the
Fund. For these services, Eaton Vance currently receives no compensation. The
Trustees of the Trust may determine, in the future, to compensate Eaton Vance
for such services.
The Portfolio and the Fund, as the case may be, will each be responsible for all
of its respective costs and expenses not expressly stated to be payable by BMR
under the investment advisory agreement and the administration agreement, by
Eaton Vance under the administrative services agreement, or by the Principal
Underwriter under the distribution agreement.
DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
THE FUND FINANCES DISTRIBUTION ACTIVITIES AND HAS ADOPTED A DISTRIBUTION PLAN
(THE "PLAN") PURSUANT TO RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE "1940 ACT"). Rule 12b-1 permits a mutual fund, such as the Fund, to finance
distribution activities and bear expenses associated with the distribution of
its shares provided that any payments made by the fund are made pursuant to a
written plan adopted in accordance with the Rule. The Plan is subject to, and
complies with, the sales charge rule of the National Association of Securities
Dealers, Inc. (the "NASD Rule"). The Plan is described further in the Statement
of Additional Information, and the following is a description of the salient
features of the Plan. The Plan provides that the Fund, subject to the NASD Rule,
will pay sales commissions and distribution fees to the Principal Underwriter
only after and as a result of the sale of shares of the Fund. On each sale of
Fund shares (excluding reinvestment of distributions) the Fund will pay the
Principal Underwriter amounts representing (i) sales commissions equal to 6.25%
of the amount received by the Fund for each share sold and (ii) distribution
fees calculated by applying the rate of 1% over the prime rate then reported in
The Wall Street Journal to the outstanding balance of Uncovered Distribution
Charges (as described below) of the Principal Underwriter. The Principal
Underwriter currently expects to pay to a financial service firm (an "Authorized
Firm") (a) sales commissions (except on exchange transactions and reinvestments)
at the time of sale equal to .75% of the purchase price of the shares sold by
such Firm, and (b) monthly sales commissions approximately equivalent to 1/12 of
.75% of the value of shares sold by such Firm and remaining outstanding for at
least one year. The Plan is designed to permit an investor to purchase Fund
shares through an Authorized Firm without incurring an initial sales charge and
at the same time permit the Principal Underwriter to compensate Authorized Firms
in connection with the sale of Fund shares.
THE NASD RULE REQUIRES THE FUND TO LIMIT ITS ANNUAL PAYMENTS OF SALES
COMMISSIONS AND DISTRIBUTION FEES TO AN AMOUNT NOT EXCEEDING .75% OF THE FUND'S
AVERAGE DAILY NET ASSETS FOR EACH FISCAL YEAR. Under its Plan, the Fund accrues
daily an amount at the rate of 1/365 of .75% of the Fund's net assets, and pays
such accrued amounts monthly to the Principal Underwriter. The Plan requires
such accruals to be automatically discontinued during any period in which there
are no outstanding Uncovered Distribution Charges under the Plan. Uncovered
Distribution Charges are calculated daily and, briefly, are equivalent to all
unpaid sales commissions and distribution fees to which the Principal
Underwriter is entitled under the Plan less all contingent deferred sales
charges theretofore paid to the Principal Underwriter. The Eaton Vance
organization may be considered to have realized a profit under the Plan if at
any point in time the aggregate amounts of all payments made to the Principal
Underwriter pursuant to the Plan, including any contingent deferred sales
charges, have exceeded the total expenses theretofore incurred by such
organization in distributing shares of the Fund. Total expenses for this purpose
will include an allocable portion of the overhead costs of such organization and
its branch offices.
Because of the NASD Rule limitation on the amount of sales commissions and
distribution fees paid during any fiscal year, a high level of sales of Fund
shares during the initial years of the Fund's operations would cause a large
portion of the sales commissions attributable to a sale of Fund shares to be
accrued and paid by the Fund to the Principal Underwriter in fiscal years
subsequent to the year in which such shares were sold. This spreading of sales
commissions payments under the Plan over an extended period would result in the
incurrence and payment of increased distribution fees under the Plan.
During the fiscal year ended October 31, 1996, the Fund paid or accrued sales
commissions under the Plan equivalent to .75% of the Fund's average daily net
assets for such year. As at October 31, 1996, the outstanding Uncovered
Distribution Charges of the Principal Underwriter calculated under the Plan
amounted to approximately $90,000 (which amount was equivalent to 5.3% of the
Fund's net assets on such day).
THE PLAN ALSO AUTHORIZES THE FUND TO MAKE PAYMENTS OF SERVICE FEES TO THE
PRINCIPAL UNDERWRITER, AUTHORIZED FIRMS AND OTHER PERSONS IN AMOUNTS NOT
EXCEEDING .25% OF THE FUND'S AVERAGE DAILY NET ASSETS FOR EACH FISCAL YEAR. The
Trustees of the Trust have initially implemented this provision of the Plan by
authorizing the Fund to make monthly service fee payments to the Principal
Underwriter and Authorized Firms in amounts not expected to exceed .25% of the
Fund's average daily net assets for any fiscal year. The Fund accrues the
service fee daily at the rate of 1/365 of .25% of the Fund's net assets. The
Principal Underwriter currently expects to pay to an Authorized Firm (a) a
service fee (except on exchange transactions and reinvestments) at the time of
sale equal to .25% of the purchase price of the shares sold by such Firm, and
(b) monthly service fees approximately equivalent to 1/12 of .25% of the value
of shares sold by such Firm and remaining outstanding for at least one year.
During the first year after a purchase of Fund shares, the Principal Underwriter
will retain the service fee as reimbursement for the service fee payment made to
the Authorized Firm at the time of sale. As permitted by the NASD Rule, all
service fee payments are made for personal services and/or the maintenance of
shareholder accounts. Service fees are separate and distinct from the sales
commissions and distribution fees payable by the Fund to the Principal
Underwriter, and as such are not subject to automatic discontinuance when there
are no outstanding Uncovered Distribution Charges of the Principal Underwriter.
For the fiscal year ended October 31, 1996, the Fund paid or accrued service
fees under the Plan equivalent to .25% of the Fund's average daily net assets.
The Principal Underwriter may, from time to time, at its own expense, provide
additional incentives to Authorized Firms which employ registered
representatives who sell the Fund's shares and/or shares of other funds
distributed by the Principal Underwriter. In some instances, such additional
incentives may be offered only to certain Authorized Firms whose representatives
sell or are expected to sell significant amounts of shares. In addition, the
Principal Underwriter may from time to time increase or decrease the sales
commissions payable to Authorized Firms.
The Fund may, in its absolute discretion, suspend, discontinue or limit the
offering of its shares at any time. In determining whether any such action
should be taken, the Fund's management intends to consider all relevant factors,
including without limitation the size of the Fund, the investment climate and
market conditions, the volume of sales and redemptions of Fund shares, and the
amount of Uncovered Distribution Charges of the Principal Underwriter. The Plan
may continue in effect and payments may be made under the Plan following any
such suspension, discontinuance or limitation of the offering of Fund shares;
however, the Fund is not contractually obligated to continue the Plan for any
particular period of time. Suspension of the offering of Fund shares would not,
of course, affect a shareholder's ability to redeem shares.
VALUING FUND SHARES
- --------------------------------------------------------------------------------
THE FUND VALUES ITS SHARES ONCE ON EACH DAY THE NEW YORK STOCK EXCHANGE (THE
"EXCHANGE") IS OPEN FOR TRADING, as of the close of regular trading on the
Exchange (normally 4:00 p.m. New York time). The Fund's net asset value per
share is determined by its custodian, Investors Bank & Trust Company ("IBT"),
(as agent for the Fund) in the manner authorized by the Trustees of the Trust.
Net asset value is computed by dividing the value of the Fund's total assets,
less its liabilities, by the number of shares outstanding. Because the Fund
invests its assets in an interest in the Portfolio (and at times in HI Portfolio
as well), the Fund's net asset value will reflect the value of its interest in
the Portfolios (which, in turn, reflects the underlying value of the Portfolios'
assets and liabilities).
Authorized Firms must communicate an investor's order to the Principal
Underwriter prior to the close of the Principal Underwriter's business day to
receive that day's net asset value per Fund share. It is the Authorized Firms'
responsibility to transmit orders promptly to the Principal Underwriter.
Each Portfolio's net asset value is also determined as of the close of regular
trading on the Exchange by IBT (as custodian and agent for the Portfolio) in the
manner authorized by the Trustees of the Portfolio. Net asset value is computed
by subtracting the liabilities of a Portfolio from the value of its total
assets. Most debt securities are valued on the basis of market valuations
furnished by pricing services. For further information regarding the valuation
of a Portfolio's assets, see "Determination of Net Asset Value" in the Statement
of Additional Information.
SHAREHOLDERS MAY DETERMINE THE VALUE OF THEIR INVESTMENT BY MULTIPLYING THE
NUMBER OF FUND SHARES OWNED BY THE CURRENT NET ASSET VALUE PER SHARE.
HOW TO BUY FUND SHARES
- --------------------------------------------------------------------------------
SHARES OF THE FUND MAY BE PURCHASED FOR CASH OR MAY BE ACQUIRED IN EXCHANGE FOR
SECURITIES. Investors may purchase shares of the Fund through Authorized Firms
at the net asset value per share of the Fund next determined after an order is
effective. An Authorized Firm may charge its customers a fee in connection with
transactions executed by that Firm. The Fund may suspend the offering of shares
at any time and may refuse an order for the purchase of shares.
An initial investment in the Fund must be at least $1,000. Once an account has
been established, the investor may send investments of $50 or more at any time
directly to the Fund's transfer agent (the "Transfer Agent") as follows: First
Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123. The
$1,000 minimum initial investment is waived for Bank Automated Investing
accounts, which may be established with an investment of $50 or more. See "Eaton
Vance Shareholder Services".
In connection with employee benefit or other continuous group purchase plans
under which the average initial purchase by a participant of the plan is $1,000
or more, the Fund may accept initial investments of less than $1,000 on the part
of an individual participant. In the event a shareholder who is a participant of
such a plan terminates participation in the plan, his or her shares will be
transferred to a regular individual account. However, such account will be
subject to the right of redemption by the Fund as described below under "How to
Redeem Fund Shares."
ACQUIRING FUND SHARES IN EXCHANGE FOR SECURITIES. IBT, as escrow agent, will
receive securities acceptable to Eaton Vance, as Administrator, in exchange for
Fund shares at their net asset value as determined above. The minimum value of
securities (or securities and cash) accepted for deposit is $5,000. Securities
accepted will be sold on the day of their receipt or as soon thereafter as
possible. The number of Fund shares to be issued in exchange for securities will
be the aggregate proceeds from the sale of such securities, divided by the
applicable net asset value per Fund share on the day such proceeds are received.
Eaton Vance will use reasonable efforts to obtain the then current market price
for such securities but does not guarantee the best available price. Eaton Vance
will absorb any transaction costs, such as commissions, on the sale of
securities.
Securities determined to be acceptable should be transferred via book entry or
physically delivered, in proper form for transfer, through an Authorized Firm,
together with a completed and signed Letter of Transmittal in approved form
(available from Authorized Firms), as follows:
IN THE CASE OF BOOK ENTRY:
Deliver through Depository Trust Co.
Broker #2212
Investors Bank & Trust Company
For A/C EV Classic Strategic Income Fund
IN THE CASE OF PHYSICAL DELIVERY:
Investors Bank & Trust Company
Attention: EV Classic Strategic Income Fund
Physical Securities Processing Settlement Area
89 South Street
Boston, MA 02111
Investors who are contemplating an exchange of securities for shares of the
Fund, or their representatives, must contact Eaton Vance to determine whether
the securities are acceptable before forwarding such securities. Eaton Vance
reserves the right to reject any securities. Exchanging securities for Fund
shares may create a taxable gain or loss. Each investor should consult his or
her tax adviser with respect to the particular federal, state and local tax
consequences of exchanging securities for Fund shares.
IF YOU DON'T HAVE AN AUTHORIZED FIRM, EATON VANCE CAN RECOMMEND ONE.
HOW TO REDEEM FUND SHARES
- --------------------------------------------------------------------------------
A SHAREHOLDER MAY REDEEM FUND SHARES IN ONE OF THREE WAYS -- BY MAIL, BY
TELEPHONE OR THROUGH AN AUTHORIZED FIRM. The redemption price will be based on
the net asset value per Fund share next computed after a redemption request is
received in the proper form as described below.
REDEMPTION BY MAIL: Shares may be redeemed by delivering to the Transfer Agent,
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123,
during its business hours a written request for redemption in good order, plus
any share certificates with executed stock powers. Good order means that all
relevant documents must be endorsed by the record owner(s) exactly as the shares
are registered and the signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program, or certain banks, savings and loan institutions,
credit unions, securities dealers, securities exchanges, clearing agencies and
registered securities associations as required by a regulation of the Securities
and Exchange Commission (the "Commission") and acceptable to the Transfer Agent.
In addition, in some cases, good order may require the furnishing of additional
documents such as where shares are registered in the name of a corporation,
partnership or fiduciary.
REDEMPTION BY TELEPHONE: Shares may be redeemed by telephone provided the
investor has not disclaimed in writing the use of the privilege. Such
redemptions can be effected by calling the Transfer Agent at 800-262-1122,
Monday through Friday, 9:00 a.m. to 4:00 p.m. (Eastern Standard Time). The
proceeds of a telephone redemption may be no greater than the maximum amount
established by the Principal Underwriter (currently $50,000) and may be mailed
only to the account address of record. Shares held by corporations, trusts or
certain other entities, or subject to fiduciary arrangements, may not be
redeemed by telephone. Neither the Fund, the Principal Underwriter nor the
Transfer Agent will be responsible for the authenticity of redemption
instructions received by telephone, provided that reasonable procedures to
confirm that instructions communicated by telephone are genuine have been
followed. Telephone instructions will be tape recorded. In times of drastic
economic or market changes, a telephone redemption may be difficult to
implement.
REDEMPTION THROUGH AN AUTHORIZED FIRM: To sell shares at their net asset value
through an Authorized Firm (a repurchase), a shareholder can place a repurchase
order with the Authorized Firm, which may charge a fee. The value of such shares
is based upon the net asset value calculated after the Principal Underwriter, as
the Fund's agent, receives the order. It is the Authorized Firm's responsibility
to transmit promptly repurchase orders to the Principal Underwriter. Throughout
this Prospectus, the word "redemption" is generally meant to include a
repurchase.
Within seven days after receipt of a redemption request in good order by the
Transfer Agent, the Fund will make payment in cash for the net asset value of
the shares as of the date determined above, reduced by the amount of any
applicable contingent deferred sales charges (described below) and any federal
income tax required to be withheld. Although the Fund normally expects to make
payment in cash for redeemed shares, the Trust, subject to compliance with
applicable regulations, has reserved the right to pay the redemption price of
shares of the Fund, either totally or partially, by a distribution in kind of
readily marketable securities withdrawn by the Fund from the Portfolio. The
securities so distributed would be valued pursuant to the Portfolio's valuation
procedures. If a shareholder received a distribution in kind, the shareholder
could incur brokerage or other charges in converting the securities to cash.
If shares were recently purchased, the proceeds of redemption will not be sent
until the check (including a certified or cashier's check) received for the
shares purchased has cleared. Payment for shares tendered for redemption may be
delayed up to 15 days from the purchase date when the purchase check has not yet
cleared. Redemptions may result in a taxable gain or loss.
Due to the high cost of maintaining small accounts, the Fund reserves the right
to redeem accounts with balances of less than $750. Prior to such a redemption,
shareholders will be given 60 days' written notice to make an additional
purchase. However, no such redemptions would be required by the Fund if the
cause of the low account balance was a reduction in the net asset value of Fund
shares. No contingent deferred sales charge will be imposed with respect to such
involuntary redemptions.
CONTINGENT DEFERRED SALES CHARGE. Shares redeemed within the first year of their
purchase (except shares acquired through the reinvestment of distributions)
generally will be subject to a contingent deferred sales charge ("CDSC") equal
to 1% of the net asset value of the redeemed shares. This CDSC is imposed on any
redemption the amount of which exceeds the aggregate value at the time of
redemption of (a) all shares in the account purchased more than one year prior
to the redemption, (b) all shares in the account acquired through reinvestment
of distributions, and (c) the increase, if any, in the value of all other shares
in the account (namely those purchased within the year preceding the redemption)
over the purchase price of such shares. Redemptions are processed in a manner to
maximize the amount of redemption proceeds which will not be subject to a CDSC.
That is, each redemption will be assumed to have been made first from the exempt
amounts referred to in clauses (a), (b) and (c) above, and second through
liquidation of those shares in the account referred to in clause (c) on a
first-in-first out basis. As described under "Distribution Plan", the CDSC will
be paid to the Principal Underwriter or the Fund.
In calculating the CDSC upon the redemption of Fund shares acquired in an
exchange for shares of a fund currently listed under "The Eaton Vance Exchange
Privilege," the purchase of shares acquired in the exchange is deemed to have
occurred at the time of the original purchase of the exchanged shares.
No CDSC will be imposed on Fund shares which have been sold to Eaton Vance or
its affiliates, or to their respective employees or clients. The CDSC will also
be waived for shares redeemed (1) pursuant to a Withdrawal Plan (see "Eaton
Vance Shareholder Services"), (2) as part of a distribution from a retirement
plan qualified under Section 401, 403(b) or 457 of the Code, or (3) as part of a
minimum required distribution from other tax-sheltered retirement plans.
REPORTS TO SHAREHOLDERS
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THE FUND WILL ISSUE TO ITS SHAREHOLDERS SEMI-ANNUAL AND ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS. Financial statements included in annual reports
are audited by the Fund's independent accountants. Shortly after the end of each
calendar year, the Fund will furnish all shareholders with information necessary
for preparing federal and state income tax returns.
THE LIFETIME INVESTING ACCOUNT/DISTRIBUTION OPTIONS
- --------------------------------------------------------------------------------
AFTER AN INVESTOR MAKES AN INITIAL PURCHASE OF FUND SHARES, THE TRANSFER AGENT,
WILL SET UP A LIFETIME INVESTING ACCOUNT FOR THE INVESTOR ON THE FUND'S RECORDS.
This account is a complete record of all transactions between the investor and
the Fund which at all times shows the balance of shares owned. The Fund will not
issue share certificates except upon request.
At least quarterly, shareholders will receive a statement showing complete
details of any transaction and the current share balance in the account. THE
LIFETIME INVESTING ACCOUNT ALSO PERMITS A SHAREHOLDER TO MAKE ADDITIONAL
INVESTMENTS IN SHARES BY SENDING A CHECK FOR $50 OR MORE to the Transfer Agent.
Any questions concerning a shareholder's account or services available may also
be directed by telephone to EATON VANCE SHAREHOLDER SERVICES at 800-225-6265,
extension 2, or in writing to the Transfer Agent, First Data Investor Services
Group, P.O. Box 5123, Westborough, MA 01581-5123 (Please provide the name of the
shareholder, the Fund and the account number).
THE FOLLOWING DISTRIBUTION OPTIONS WILL BE AVAILABLE TO ALL LIFETIME INVESTING
ACCOUNTS and may be changed as often as desired by written notice to the Fund's
dividend disbursing agent, First Data Investor Services Group, P.O. Box 5123,
Westborough, MA 01581-5123. The currently effective option will appear on each
account statement.
Share Option -- Dividends and capital gains will be reinvested in additional
shares.
Income Option -- Dividends will be paid in cash, and capital gains will be
reinvested in additional shares.
Cash Option -- Dividends and capital gains will be paid in cash.
The Share Option will be assigned if no other option is specified.
Distributions, including those reinvested, will be reduced by any withholding
required under the federal income tax laws.
If the Income Option or Cash Option has been selected, dividend and/or capital
gains distribution checks which are returned by the United States Postal Service
as not deliverable or which remain uncashed for six months or more will be
reinvested in the account in shares at the then current net asset value.
Furthermore, the distribution option on the account will be automatically
changed to the Share Option until such time as the shareholder selects a
different option.
DISTRIBUTION INVESTMENT OPTION. In addition to the distribution options set
forth above, dividends and/or capital gains may be invested in additional shares
of another Eaton Vance fund. Before selecting this option, a shareholder should
obtain a prospectus of the other Eaton Vance fund and consider its objectives
and policies carefully.
"STREET NAME" ACCOUNTS. If shares of the Fund are held in a "street name"
account with an Authorized Firm, all recordkeeping, transaction processing and
payments of distributions relating to the beneficial owner's account will be
performed by the Authorized Firm, and not by the Fund and its Transfer Agent.
Since the Fund will have no record of the beneficial owner's transactions, a
beneficial owner should contact the Authorized Firm to purchase, redeem or
exchange shares, to make changes in or give instructions concerning the account,
or to obtain information about the account. The transfer of shares in a "street
name" account to an account with another dealer or to an account directly with
the Fund involves special procedures and will require the beneficial owner to
obtain historical purchase information about the shares in the account from the
Authorized Firm. Before establishing a "street name" account with an investment
firm, or transferring the account to another investment firm, an investor
wishing to reinvest distributions should determine whether the firm which will
hold the shares allows reinvestment of distributions in "street name" accounts.
THE EATON VANCE EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shares of the Fund currently may be exchanged for shares of one or more other
funds in the Eaton Vance Classic Group of Funds or Eaton Vance Money Market
Fund, which are distributed subject to a CDSC (or equivalent early withdrawal
charge) on the basis of the net asset value per share of each fund at the time
of exchange. Exchange offers are available only in states where shares of the
fund being acquired may legally be sold.
Each exchange must involve shares which have a net asset value of at least
$1,000. The exchange privilege may be changed or discontinued without penalty.
Shareholders will be given sixty (60) days' notice prior to any termination or
material amendment of the exchange privilege. The Fund does not permit the
exchange privilege to be used for "Market Timing" and may terminate the exchange
privilege for any shareholder account engaged in Market Timing activity. Any
shareholder account for which more than two round-trip exchanges are made within
any twelve month period will be deemed to be engaged in Market Timing.
Furthermore, a group of unrelated accounts for which exchanges are entered
contemporaneously by a financial intermediary will be considered to be engaged
in Market Timing.
The Transfer Agent makes exchanges at the next determined net asset value after
receiving an exchange request in good order (see "How to Redeem Fund Shares").
Consult the Transfer Agent for additional information concerning the exchange
privilege. Applications and prospectuses of the other funds are available from
Authorized Firms or the Principal Underwriter. The prospectus for each fund
describes its investment objectives and policies, and shareholders should obtain
a prospectus and consider these objectives and policies carefully before
requesting an exchange.
No CDSC is imposed on exchanges. For purposes of calculating the CDSC upon the
redemption of shares acquired in an exchange, the purchase of shares acquired in
one or more exchanges is deemed to have occurred at the time of the original
purchase of the exchanged shares.
Shares of the other funds in the Eaton Vance Classic Group of Funds (and shares
of Eaton Vance Money Market Fund acquired as the result of an exchange from an
EV Classic Fund) may be exchanged for Fund shares on the basis of the net asset
value per share of each fund at the time of the exchange, but subject to any
restrictions or qualifications set forth in the current prospectus of any such
fund.
Telephone exchanges are accepted by the Transfer Agent provided the investor has
not disclaimed in writing the use of the privilege. To effect such exchanges,
call the Transfer Agent at 800-262-1122, Monday through Friday, 9:00 A.M. to
4:00 P.M. (Eastern Standard Time). Shares acquired by telephone exchange must be
registered in the same name(s) and with the same address as the shares being
exchanged. Neither the Fund, the Principal Underwriter nor the Transfer Agent
will be responsible for the authenticity of exchange instructions received by
telephone, provided that reasonable procedures to confirm that instructions
communicated are genuine have been followed. Telephone instructions will be tape
recorded. In times of drastic economic or market changes, a telephone exchange
may be difficult to implement. An exchange may result in a taxable gain or loss.
EATON VANCE SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
THE FUND OFFERS THE FOLLOWING SERVICES, WHICH ARE VOLUNTARY, INVOLVE NO EXTRA
CHARGE, AND MAY BE CHANGED OR DISCONTINUED WITHOUT PENALTY AT ANY TIME. Full
information on each of the services described below and an application, where
required, are available from Authorized Firms or the Principal Underwriter. The
cost of administering such services for the benefit of shareholders who
participate in them is borne by the Fund as an expense to all shareholders.
INVEST-BY-MAIL -- FOR PERIODIC SHARE ACCUMULATION: Once the $1,000 minimum
investment has been made, checks of $50 or more payable to the order of EV
Classic Strategic Income Fund may be mailed directly to the Transfer Agent,
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123 at
any time -- whether or not dividends are reinvested. The name of the
shareholder, the Fund and the account number should accompany each investment.
BANK AUTOMATED INVESTING -- FOR REGULAR SHARE ACCUMULATION: Cash investments of
$50 or more may be made automatically each month or quarter from a shareholder's
bank account. The $1,000 minimum initial investment and small account redemption
policy are waived for these accounts.
WITHDRAWAL PLAN: A shareholder may draw on shareholdings systematically with
monthly or quarterly checks in an aggregate amount that does not exceed annually
12% of the account balance at the time the plan is established. Such amount will
not be subject to a CDSC. See "How to Redeem Fund Shares". A minimum deposit of
$5,000 in shares is required.
REINVESTMENT PRIVILEGE: A shareholder who has redeemed shares may reinvest, with
credit for any CDSCs paid on the redeemed shares, any portion or all of the
redemption proceeds (plus that amount necessary to acquire a fractional share to
round off the purchase to the nearest full share) in shares of the Fund,
provided that the reinvestment is effected within 60 days after such redemption,
and the privilege has not been used more than once in the prior 12 months.
Shares are sold to a reinvesting shareholder at the next determined net asset
value following timely receipt of a written purchase order by the Principal
Underwriter or by the Fund (or by the Fund's Transfer Agent). To the extent that
any shares are sold at a loss and the proceeds are reinvested in shares of the
Fund (or other shares of the Fund are acquired) within the period beginning 30
days before and ending 30 days after the date of the redemption, some or all of
the loss generally will not be allowed as a tax deduction. Shareholders should
consult their tax advisers concerning the tax consequences of reinvestments.
TAX-SHELTERED RETIREMENT PLANS: Shares of the Fund are available for purchase in
connection with certain tax-sheltered retirement plans. Detailed information
concerning these plans, including certain exceptions to minimum investment
requirements, and copies of the plans are available from the Principal
Underwriter. This information should be read carefully and consultation with an
attorney or tax adviser may be advisable. The information sets forth the service
fee charged for retirement plans and describes the federal income tax
consequences of establishing a plan. Participant accounting services (including
trust fund reconciliation services) will be offered only through third party
recordkeepers and not by the Principal Underwriter. Under these plans, all
distributions will be automatically reinvested in additional shares.
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
SUBSTANTIALLY ALL OF THE INVESTMENT INCOME ALLOCATED TO THE FUND BY A PORTFOLIO,
LESS THE FUND'S DIRECT AND ALLOCATED EXPENSES, WILL BE DECLARED DAILY AS A
DISTRIBUTION TO FUND SHAREHOLDERS OF RECORD AT THE TIME OF DECLARATION. Such
distributions, whether taken in cash or reinvested in additional shares, will
ordinarily be paid on the twenty-second day of each month or the next business
day thereafter. Daily distribution crediting will commence on the business day
after collected funds for the purchase of Fund shares are available at the
Transfer Agent. The Fund's net realized capital gains, if any, consist of the
net realized capital gains allocated to the Fund by a Portfolio for tax
purposes, after taking into account any available capital loss carryovers; the
Fund's net realized capital gains, if any, will be distributed at least once a
year, usually in December. Shareholders will receive timely federal income tax
information relating to all distributions made by the Fund during the calendar
year.
Distributions of the Fund from net investment income, net short-term capital
gains and certain net foreign exchange gains are taxable to shareholders as
ordinary income, whether paid in cash or reinvested in additional shares of the
Fund. The Fund's distributions will generally not qualify to any significant
extent for any dividends-received deduction available to corporate shareholders.
Certain distributions, if declared in October, November or December and paid the
following January, will be taxable to shareholders as if received on December 31
of the year in which they are declared.
Capital gains, if any, realized on sales of investments and on options and
futures transactions during the fiscal year, which ends on October 31, will be
offset by any capital losses, including any capital loss carryovers, and will be
distributed annually, usually in December, in compliance with the distribution
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
Distributions that the Fund designates as from its long-term capital gains are
taxable to shareholders as long-term capital gains, whether paid in cash or
additional shares of the Fund and regardless of the length of time Fund shares
have been owned by the shareholder. If shares are purchased shortly before the
record date of such a distribution, the shareholder will pay the full price for
the shares and then receive some portion of the price back as a taxable
distribution.
Income (possibly including in some cases, capital gains) realized by a Portfolio
from certain investments may be subject to foreign income or other foreign taxes
and the Fund may make an election under Section 853 of the Code that would allow
Fund shareholders to claim a credit or deduction on their federal income tax
returns for (and treat as additional amounts distributed to them) their pro rata
portion of the Fund's allocated share of qualified taxes paid by the Portfolio
to foreign countries. This election may be made annually only if more than 50%
of the assets of the Fund, including its allocable share of the Portfolio
assets, at the close of the Fund's taxable year consists of stock or securities
in foreign corporations. The Fund will send a written notice of any such
election (not later than 60 days after the close of its taxable year) to each
shareholder indicating the amount to be treated as the shareholder's
proportionate share of such taxes. Availability of foreign tax credits or
deductions for shareholders is subject to certain additional restrictions and
limitations under the Code.
The Fund intends to qualify as a regulated investment company under the Code and
to satisfy all requirements necessary to be relieved of federal taxes on income
and gains it distributes to shareholders. In satisfying these requirements, the
Fund will treat itself as owning its proportionate share of Portfolio assets and
as entitled to the income of each Portfolio properly attributable to such share.
As a regulated investment company under the Code, the Fund does not pay federal
income or excise tax to the extent that it distributes to shareholders its net
investment income and net realized capital gains in accordance with the timing
requirements imposed by the Code. As partnerships under the Code, the Portfolios
also do not pay federal income or excise tax.
Shareholders should consult their own tax advisers with respect to the local,
state, federal and foreign tax consequences of investing in the Fund.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
FROM TIME TO TIME, THE FUND MAY ADVERTISE ITS YIELD AND/OR AVERAGE ANNUAL TOTAL
RETURN. The Fund's current yield is calculated by dividing the net investment
income per share earned during a recent 30-day period by the maximum offering
price per share (net asset value) of the Fund on the last day of the period and
annualizing the resulting figure. The Fund's average annual total return is
determined by computing the average annual percentage change in value of $1,000
invested at the maximum public offering price (net asset value) for specified
periods, assuming reinvestment of all distributions. The average annual total
return calculation assumes a complete redemption of the investment and the
deduction of any applicable CDSC at the end of the period. The Fund may publish
annual and cumulative total return figures from time to time. The Fund may also
quote total return for the period prior to commencement of operations which
would reflect the Portfolio's total return (or that of its predecessor) adjusted
to reflect any applicable Fund sales charge.
The Fund may also publish total return figures which do not take into account
any CDSC which may be imposed upon redemptions at the end of the specified
period. Any performance figure which does not take into account the CDSC would
be reduced to the extent such charge is imposed upon a redemption.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's current yield or total return for
any prior period should not be considered as a representation of what an
investment may earn or what the Fund's yield or total return may be in any
future period. If the expenses of the Fund or a Portfolio are allocated to Eaton
Vance, the Fund's performance will be higher.
The following chart reflects the annual investment returns of the Fund for one
year periods ending October 31 and does not take into account any sales charge
which investors may bear. The total return for the period prior to the Fund's
commencement of operations on May 24, 1994 reflects the total return of the
Portfolio (or that of its predecessor) which had different operating expenses.
5 YEAR AVERAGE ANNUAL TOTAL RETURN -- 6.64%
1991(1) 7.97%
1992 (1.45)%
1993 10.51%
1994 (5.33)%
1995* 16.20%
1996* 15.09%
*If a portion of the Fund's expenses had not been allocated to the
Administrator, the Fund would have had lower returns.
(1)For the period from the start of business, November 26, 1990 to October 31,
1991.
<PAGE>
APPENDIX
STRATEGIC INCOME PORTFOLIO
ASSET COMPOSITION INFORMATION
FOR FISCAL YEAR ENDED OCTOBER 31, 1996
PERCENT OF
NET ASSETS
Debt Securities -- Moody's Rating
Aaa ................................................ 36.7%
Aa1 ................................................ 11.3
Aa2 ................................................ 11.2
A1 ................................................. 7.9
A3 ................................................. 2.7
B1 ................................................. 12.0
B2 ................................................. 0.8
B3 ................................................. 1.6
Baa3 ............................................... 14.3
Unrated ............................................ 1.5
-----
Total .............................................. 100.0%
The chart above indicates the weighted average composition for the fiscal year
ended October 31, 1996 with the debt securities rated by Moody's separated into
the indicated categories. The weighted averages indicated above were calculated
on a dollar weighted basis and were computed as at the end of each month during
the period. The chart does not necessarily indicate what the composition of the
Portfolio will be in the current and subsequent fiscal years.
For the description of Moody's ratings of debt securities, see Appendix to the
Statement of Additional Information.
<PAGE>
[LOGO]
EATON VANCE
-----------
Mutual Funds
EV CLASSIC STRATEGIC INCOME FUND
- -------------------------------------------------------------------------------
PROSPECTUS
MARCH 3, 1997
EV CLASSIC
STRATEGIC INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
- -------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR OF STRATEGIC INCOME PORTFOLIO
INVESTMENT ADVISER OF HIGH INCOME PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV CLASSIC STRATEGIC INCOME FUND
Eaton Vance Management, 24 Federal Street, Boston, MA 02110
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc., 24 Federal Street, Boston, MA 02110
(800) 225-6265
CUSTODIAN
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA 02109
C-SIP
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
March 3, 1997
EV CLASSIC STRATEGIC INCOME FUND
24 Federal Street
Boston, Massachusetts 02110
(800) 225-6265
This Statement of Additional Information consists of two parts. Part I
provides information about EV Classic Strategic Income Fund (the "Fund"), the
Portfolio, HI Portfolio and certain other series of Eaton Vance Mutual Funds
Trust (the "Trust"). Part II provides information solely about the Fund. Where
appropriate, Part I includes cross-references to the relevant sections of Part
II that provide additional Fund-specific information. This Statement of
Additional Information is sometimes referred to herein as the "SAI."
TABLE OF CONTENTS
Page
PART I
Additional Information about Investment Policies ................. 1
Investment Restrictions .......................................... 5
Trustees and Officers ............................................ 6
Investment Adviser and Administrator ............................. 8
Custodian ........................................................ 12
Service for Withdrawal ........................................... 12
Determination of Net Asset Value ................................. 12
Investment Performance ........................................... 13
Taxes ............................................................ 15
Portfolio Security Transactions .................................. 17
Other Information ................................................ 18
Independent Accountants .......................................... 19
Financial Statements ............................................. 20
Appendix ......................................................... 21
PART II
Fees and Expenses ................................................ a-1
Principal Underwriter ............................................ a-1
Distribution Plan ................................................ a-2
Performance Information .......................................... a-3
Control Persons and Principal Holders of Securities .............. a-4
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE FUND'S PROSPECTUS DATED MARCH 3, 1997, AS SUPPLEMENTED FROM
TIME TO TIME, WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH SUCH PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING EATON VANCE
DISTRIBUTORS, INC. (THE "PRINCIPAL UNDERWRITER") (SEE BACK COVER FOR ADDRESS AND
PHONE NUMBER).
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Capitalized terms used in this SAI and not otherwise defined have the
meanings given them in the Fund's Prospectus. The Fund is subject to the same
investment policies as those of the Portfolio.
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
INCOME PRODUCING SECURITIES
Included in the income producing securities in which the Portfolio may
invest are preferred and preference stocks, convertible bonds, securities of
real estate investment trusts and natural resource companies, stripped debt
obligations, closed-end investment companies (that invest primarily in debt
securities the Portfolio could invest in), equipment lease certificates,
equipment trust certificates and conditional sales contracts. Preference stocks
are stocks that have many characteristics of preferred stocks, but are typically
junior to an existing class of preferred stocks. Securities of real estate
investment trusts, such as debentures, are affected by conditions in the real
estate industry and interest rates. Securities of natural resource companies are
subject to price fluctuation based upon inflationary pressures and demand for
natural resources. Stripped debt obligations are comprised of principal only or
interest only obligations. The value of closed-end investment company
securities, which are generally traded on an exchange, is affected by demand for
those securities regardless of the demand for the underlying portfolio assets.
Equipment lease certificates are debt obligations secured by leases on equipment
(such as railroad cars, airplanes or office equipment), with the issuer of the
certificate being the owner and lessor of the equipment. The issuers of
equipment lease certificates tend to be industrial, transportation and leasing
companies. Equipment trust certificates are debt obligations secured by an
interest in property (such as railroad cars or airplanes), the title of which is
held by a trustee while the property is being used by the borrower. Conditional
sales contracts are agreements under which the seller of property continues to
hold title to the property until the purchase price is fully paid or other
conditions are met by the buyer. The Portfolio has no current intention of
investing more than 5% of its total assets in any of these types of securities.
HI Portfolio may also invest in all of the foregoing.
The Portfolio (and HI Portfolio) may purchase fixed-rate bonds which have a
demand feature allowing the holder to redeem the bonds at specified times. These
bonds are more defensive than conventional long-term bonds (protecting to some
degree against a rise in interest rates) while providing greater opportunity
than comparable intermediate term bonds, since a Portfolio may retain the bond
if interest rates decline. By acquiring these kinds of bonds a Portfolio obtains
the contractual right to require the issuer of the bonds to purchase the
security at an agreed upon price, which right is contained in the obligation
itself rather than in a separate agreement or instrument. Since this right is
assignable only with the bond, a Portfolio will not assign any separate value to
such right. A Portfolio may also purchase floating or variable rate obligations
and warrants when such warrants are part of a unit with other securities.
The Portfolio's (and HI Portfolio's) investments in high yield, high risk
obligations rated below investment grade, which have speculative
characteristics, bear special risks. They are subject to greater credit risks,
including the possibility of default or bankruptcy of the issuer. The value of
such investments may also be subject to a greater degree of volatility in
response to interest rate fluctuations, economic downturns and changes in the
financial condition of the issuer. These securities generally are less liquid
than higher quality securities. During periods of deteriorating economic
conditions and contractions in the credit markets, the ability of such issuers
to service their debt, meet projected goals or obtain additional financing may
be impaired. Each Portfolio will take such action as it considers appropriate in
the event of anticipated financial difficulties default or bankruptcy of either
the issuer of any such obligation or of the underlying source of funds for debt
service. Such action may include retaining the services of various persons and
firms (including affiliates of the Investment Adviser) to evaluate or protect
any real estate, facilities or other assets securing any such obligation or
acquired by each Portfolio as a result of any such event. A Portfolio will incur
additional expenditures in taking protective action with respect to portfolio
obligations in default and assets securing such obligations.
The Portfolio may invest in obligations of domestic and foreign companies in
the group consisting of the banking and the financial services industries.
Companies in the banking industry include U.S. and foreign commercial banking
institutions (including their parent holding companies). Companies in the
financial services industry include finance companies, diversified financial
services companies and insurance and insurance holding companies. Companies
engaged primarily in the investment banking, securities, investment advisory or
investment company business are not deemed to be in the financial services
industry for this purpose. The securities held by the Portfolio may be affected
by economic or regulatory developments in or related to such industries.
Sustained increases in interest rates can adversely affect the availability and
cost of funds for an institution's lending activities, and a deterioration in
general economic conditions could increase the institution's exposure to credit
losses.
A bank from whom a Portfolio acquires a loan participation interest may be
treated as a co-issuer for tax diversification purposes to the extent that the
Portfolio does not have direct recourse against the borrower of the underlying
loan and is therefore relying on the credit of such bank. For industry
concentration purposes, the Investment Adviser will consider all relevant
factors in determining the issuer of a loan interest, including: the credit
quality of the borrower, the amount and quality of the collateral, the terms of
the loan agreement and the other relevant agreements (including inter- creditor
agreements), the degree to which the credit of such interpositioned person was
deemed material to the decision to purchase the loan interest, the interest rate
environment, and general economic conditions applicable to the borrower and such
interpositioned person.
MORTGAGE ROLLS
The Portfolio may enter into mortgage "dollar rolls" in which the Portfolio
sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Portfolio foregoes principal and interest paid on the mortgage-backed
securities. The Portfolio is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position or a cash equivalent security position which
matures on or before the forward settlement date of the dollar roll transaction.
The Portfolio will only enter into covered rolls. Covered rolls are not treated
as a borrowing or other senior security and will be excluded from the
calculation of the Portfolio's borrowings and other senior securities.
LENDING OF PORTFOLIO SECURITIES
Each Portfolio may seek to increase its income by lending portfolio
securities to broker-dealers or other institutional borrowers. Under present
regulatory policies of the Commission, such loans are required to be secured
continuously by collateral in cash, cash equivalents or U.S. Government
securities held by the Portfolio's custodian and maintained on a current basis
at an amount at least equal to the market value of the securities loaned, which
will be marked to market daily. Cash equivalents include certificates of
deposit, commercial paper and other short-term money market instruments. A
Portfolio would have the right to call a loan and obtain the securities loaned
at any time on up to five business days' notice. During the existence of a loan,
a Portfolio will continue to receive the equivalent of the interest paid by the
issuer on the securities loaned and will also receive a fee or all of a portion
of the interest on investment of the collateral, if any. However, a Portfolio
may pay lending fees to such borrowers. A Portfolio would not have the right to
vote any securities having voting rights during the existence of a loan, but
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovery or even loss of rights in the securities by
the Investment Adviser to be of good standing and when the consideration which
can be earned from securities loans of this type justifies the attendant risk.
Securities lending involves administration expenses, including finders' fees.
The financial condition of the borrower will be monitored by the Investment
Adviser on an ongoing basis. If the Investment Adviser determines to make
securities loans, it is not intended that the value of the securities loaned
would exceed 30% of a Portfolio's total assets. As of the present time, the
Trustees of neither Portfolio have made a determination to engage in this
activity, and have no present intention of making such a determination during
the current fiscal year.
FOREIGN INVESTMENTS
Since foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a domestic company. Volume and liquidity in
most foreign bond markets is less than in the United States and securities of
some foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on U.S. exchanges, although each
Portfolio endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, broker-dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. A Portfolio may be required to pay for securities before
delivery. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect a Portfolio's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
FOREIGN CURRENCY TRANSACTIONS
The value of the assets of a Portfolio as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations. Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments
in the U.S. or abroad. A Portfolio may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into swaps, forward
contracts, options or futures on currency. In spot transactions, foreign
exchange dealers do not charge a fee for conversion, but they do realize a
profit based on the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
Currency swaps require maintenance of a segregated account as described
under "Asset Coverage Requirements" below. The Portfolio will not enter into any
currency swap unless the credit quality of the unsecured senior debt or the
claims-paying ability of the other party thereto is considered to be investment
grade by the Investment Adviser.
Each Portfolio may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a
Portfolio anticipates the receipt in a foreign currency of dividend or interest
payments on such a security which it holds, the Portfolio may desire to "lock
in" the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying transactions, the Portfolio will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of a Portfolio believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the securities held by the Portfolio denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Portfolio's
foreign assets. Each Portfolio generally will not enter into a forward contract
with a term of greater than one year.
RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS
Entering into a derivative instrument involves a risk that the applicable
market will move against a Portfolio's position and that the Portfolio will
incur a loss. For derivative instruments other than purchased options, this loss
may exceed the amount of the initial investment made or the premium received by
the Portfolio. Derivative instruments may sometimes increase or leverage a
Portfolio's exposure to a particular market risk. Leverage enhances a
Portfolio's exposure to the price volatility of derivative instruments it holds.
Success in using derivative instruments to hedge portfolio assets depends on the
degree of price correlation between the derivative instruments and the hedged
asset. Imperfect correlation may be caused by several factors, including
temporary price disparities among the trading markets for the derivative
instrument, the assets underlying the derivative instrument and a Portfolio's
assets. Over-the-counter ("OTC") derivative instruments involve an enhanced risk
that the issuer or counterparty will fail to perform its contractual
obligations. Some derivative instruments are not readily marketable or may
become illiquid under adverse market conditions. In addition, during periods of
market volatility, a commodity exchange may suspend or limit trading in an
exchange-traded derivative instrument, which may make the contract temporarily
illiquid and difficult to price. Commodity exchanges may also establish daily
limits on the amount that the price of a futures contract or futures option can
vary from the previous day's settlement price. Once the daily limit is reached,
no trades may be made that day at a price beyond the limit. This may prevent a
Portfolio from closing out positions and limiting its losses. The staff of the
Commission takes the position that certain purchased OTC options, and assets
used as cover for written OTC options, are subject to each Portfolio's 15% limit
on illiquid investments. A Portfolio's ability to terminate OTC derivative
instruments may depend on the cooperation of the counterparties to such
contracts. For thinly traded derivative instruments, the only source of price
quotations may be the selling dealer or counterparty. In addition, certain
provisions of the Code, limit the extent to which a Portfolio may purchase and
sell derivative instruments. Each Portfolio will engage in transactions in
futures contracts and related options only to the extent such transactions are
consistent with the requirements of the Code for maintaining the qualification
of the Fund as a regulated investment company ("RIC") for federal income tax
purposes. See "Taxes".
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS
Each Portfolio may enter into futures contracts (and options thereon) traded
on a foreign exchange if it is determined by the Investment Adviser that trading
on such exchange does not subject the Portfolio to risks, including credit and
liquidity risks, that are materially greater than the risks associated with
trading on United States exchanges regulated by the CFTC.
A Portfolio will only write a put option on a security which it intends to
ultimately acquire for its portfolio. The Portfolio does not intend to purchase
any options if after such transaction more than 5% of its net assets, as
measured by the aggregate of all premiums paid for all such options held by the
Portfolio, would be so invested.
INTEREST RATE AND CURRENCY SWAPS
Interest rate swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an exchange of
fixed rate payments for floating rate payments. Currency swaps involve the
exchange of their respective rights to make or receive payments in specified
currencies. The Portfolio will only enter into interest rate swaps on a net
basis, i.e., the two payment streams are netted out with the Portfolio receiving
or paying, as the case may be, only the net amount of the two payments. If the
other party to an interest rate swap defaults, the Portfolio's risk of loss
consists of the net amount of interest payments that the Portfolio is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire payment stream in one designated currency in exchange
for the entire payment stream in the other designated currency. Therefore, the
entire principal value of a currency swap is subject to the risk that the other
party to the swap will default on its contractual delivery obligations. The net
amount of the excess, if any, of the Portfolio's obligations over its
entitlements will be maintained in a segregated account by the Portfolio's
custodian. The Portfolio will not enter into any interest rate or currency swap
unless the credit quality of the unsecured senior debt or the claims-paying
ability of the other party thereto is considered to be investment grade by the
Investment Adviser. If there is a default by the other party to such a
transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
REVERSE REPURCHASE AGREEMENTS
Each Portfolio may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, a Portfolio temporarily transfers possession of a
portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash. At the same time, a Portfolio agrees to repurchase the
instrument at an agreed upon time (normally within seven days) and price, which
reflects an interest payment. A Portfolio may enter into such agreements when it
is able to invest the cash acquired at a rate higher than the cost of the
agreement, which would increase earned income. A Portfolio could also enter into
reverse repurchase agreements as a means of raising cash to satisfy redemption
requests without the necessity of selling portfolio assets.
When a Portfolio enters into a reverse repurchase agreement, any
fluctuations in the market value of either the securities transferred to another
party or the securities in which the proceeds may be invested would affect the
market value of the Portfolio's assets. As a result, such transactions may
increase fluctuations in the market value of the Portfolio's assets. While there
is a risk that large fluctuations in the market value of the Portfolio's assets
could affect the Fund's net asset value per share, this risk is not
significantly increased by entering into reverse repurchase agreements, in the
opinion of the Investment Adviser. Because reverse repurchase agreements may be
considered to be the practical equivalent of borrowing funds, they constitute a
form of leverage. If the Portfolio reinvests the proceeds of a reverse
repurchase agreement at a rate lower than the cost of the agreement, entering
into the agreement will lower the Fund's yield. Reverse repurchase agreements
will be included within "borrowings" contained in the Fund's investment
restriction (2) set forth below.
ASSET COVERAGE REQUIREMENTS
Transactions involving reverse repurchase agreements, swaps, forward
contracts or futures contracts and options (other than options that the
Portfolio has purchased) expose a Portfolio to an obligation to another party. A
Portfolio will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options, forward
contracts or futures contracts, or (2) cash or liquid securities (including
equities and debt) with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. (Only the net obligation of a
swap will be covered). Assets used as cover or held in a segregated account
maintained by the Fund's custodian cannot be sold while the position requiring
coverage or segregation is outstanding unless they are replaced with other
appropriate assets. As a result, the commitment of a large portion of a
Portfolio's assets to segregated accounts or to cover could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
PORTFOLIO TURNOVER
Neither Portfolio can accurately predict its portfolio turnover rate, but it
is anticipated that the annual turnover rate will generally not exceed 100%
(excluding turnover of securities having a maturity of one year or less). A 100%
annual turnover rate would occur, for example, if all the securities held by a
Portfolio were replaced in a period of one year. A high turnover rate (such as
100% or more) necessarily involves greater expenses to a Portfolio and may
result in the realization of substantial net short-term capital gains. The
Portfolio may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for fixed
income securities of different countries, to seek short-term profits during
periods of fluctuating interest rates, or for other reasons. Such trading will
increase the Portfolio's rate of turnover and may increase the incidence of net
short-term capital gains allocated to the Fund by the Portfolio which, upon
distribution by the Fund, are taxable to Fund shareholders as ordinary income.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are designated as
fundamental policies and as such cannot be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, which as used
in this SAI means the lesser of (a) 67% of the shares of the Fund present or
represented by proxy at a meeting if the holders of more than 50% of the shares
are present or represented at the meeting or (b) more than 50% of the shares of
the Fund. Accordingly, the Fund may not:
(1) Purchase any security (other than securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities) if such purchase,
at the time thereof, would cause 25% or more of the Fund's total assets (taken
at market value) to be invested in the securities of issuers in any single
industry, provided that the electric, gas and telephone utility industries shall
be treated as separate industries for purposes of this restriction;
(2) Borrow money or issue senior securities except as permitted by the
Investment Company Act of 1940;
(3) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities). The deposit or payment by the Fund of initial, maintenance or
variation margin in connection with all types of options and futures contract
transactions is not considered the purchase of a security on margin;
(4) Underwrite or participate in the marketing of securities of others,
except insofar as it may technically be deemed to be an underwriter in selling a
portfolio security under circumstances which may require the registration of the
same under the Securities Act of 1933;
(5) Purchase or sell real estate, although it may purchase and sell
securities which are secured by real estate and securities of companies which
invest or deal in real estate;
(6) Purchase or sell physical commodities or futures contracts for the
purchase or sale of physical commodities, provided that the Fund may enter into
all types of futures and forward contracts on currency, securities and
securities, economic and other indices and may purchase and sell options on such
futures contracts; or
(7) Make loans to any person, except by (a) the acquisition of debt
instruments and making portfolio investments, (b) entering into repurchase
agreements, and (c) lending portfolio securities.
Notwithstanding the investment policies and restrictions of the Fund, the
Fund may invest its investable assets in an open-end management investment
company (a Portfolio) with substantially the same investment objective, policies
and restrictions as the Fund; moreover, subject to Trustee approval the Fund may
invest its investable assets in other open-end management investment companies
in the same group of investment companies with the same investment adviser as
the Portfolio (or an affiliate) if, with respect to such assets, the other
companies' permitted investments are substantially the same as those of the
Fund.
The Portfolio has adopted substantially the same fundamental investment
restrictions as the foregoing investment restrictions adopted by the Fund; such
restrictions cannot be changed without the approval of a "majority of the
outstanding voting securities" of the Portfolio.
The Fund and the Portfolio have adopted the following investment policies
which may be changed by the Trust with respect to the Fund without approval by
the Fund's shareholders or by the Portfolio with respect to the Portfolio
without approval by the Fund or its other investors. As a matter of
nonfundamental policy, the Fund and the Portfolio may not: (a) invest more than
15% of net assets in investments which are not readily marketable, including
restricted securities and repurchase agreements with a maturity longer than
seven days. Restricted securities for the purposes of this limitation do not
include securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 and commercial paper issued pursuant to Section 4(2) of
said Act that the Board of Trustees of the Trust or the Portfolio, or their
delegate, determines to be liquid; (b) make short sales of securities or
maintain a short position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for securities of
the same issue as, and equal in amount to, the securities sold short, and unless
no more than 25% of its net assets (taken at current value) is held as
collateral for such sales at any one time. It is the present intention of
management to make such sales only for the purpose of deferring realization of
gain or loss for Federal income tax purposes); (c) purchase or retain in its
portfolio any securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Trust or is a
member, officer, director or trustee of any investment adviser of the Trust or
the Portfolio if after the purchase of the securities of such issuer by the Fund
or the Portfolio one or more of such persons owns beneficially more than 1/2 of
1% of the shares or securities or both (all taken at market value) of such
issuer and such persons owning more than 1/2 of 1% of such shares of securities
together own beneficially more than 5% of such shares or securities or both (all
taken at market value); and (d) purchase warrants with a value in excess of 5%
of net assets, or warrants which are not listed on the New York or American
Stock Exchange with a value in excess of 2% of its net assets. The Portfolio has
no current intention during the current year of engaging in short sales.
HI Portfolio has substantially the same fundamental and nonfundamental
policies as the Fund and the Portfolio except that HI Portfolio has the
following additional fundamental policy: With respect to 75% of total assets of
the Portfolio, the Portfolio may not purchase any security if such purchase, at
the time thereof, would cause more than 5% of the total assets of the Portfolio
(taken at market value) to be invested in the securities of a single issuer, or
cause more than 10% of the total outstanding voting securities of such issuer to
be held by the Portfolio, except obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and except securities of other
investment companies.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset, or describes a policy regarding quality
standards, such percentage limitation or standard shall be determined
immediately after and as a result of the Fund's or a Portfolio's acquisition of
such security or asset. Accordingly, any later increase or decrease resulting
from a change in values, assets or other circumstances, other than a subsequent
rating change below investment grade made by a rating service, will not compel
the Fund or a Portfolio, as the case may be, to dispose of such security or
other asset. Notwithstanding the foregoing, under normal market conditions the
Fund and the Portfolio must take actions necessary to comply with the policy of
investing at least 65% of total assets in debt securities. Moreover, the Fund
and each Portfolio must always be in compliance with the borrowing policy set
forth above.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and the Portfolio are listed below.
Except as indicated, each individual has held the office shown or other offices
in the same company for the last five years. Unless otherwise noted, the
business address of each Trustee and officer is 24 Federal Street, Boston,
Massachusetts 02110, which is also the address of the Portfolio's investment
adviser, Boston Management and Research ("BMR"), a wholly-owned subsidiary of
Eaton Vance Management ("Eaton Vance"); Eaton Vance's parent, Eaton Vance Corp.
("EVC"); and of BMR's and Eaton Vance's trustee, Eaton Vance, Inc. ("EV"). Eaton
Vance and EV are both wholly-owned subsidiaries of EVC. Those Trustees who are
"interested persons" of the Trust or the Portfolio, as defined in the 1940 Act
by virtue of their affiliation with BMR, Eaton Vance, EVC, or EV, are indicated
by an asterisk(*).
TRUSTEES OF THE TRUST AND THE PORTFOLIO
M. DOZIER GARDNER (63), President and Trustee of the Trust*
Vice Chairman of BMR, Eaton Vance, EVC and EV, and a Director of EVC and EV.
Director, Trustee and officer of various investment companies managed by Eaton
Vance or BMR.
JAMES B. HAWKES (55), President of the Portfolio, Vice President of the Trust
and Trustee*
President and Chief Executive Officer of BMR, Eaton Vance, EVC and EV and a
Director of EVC and EV. Director, Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
DONALD R. DWIGHT (65), Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company) founded in 1988; Chairman of the Board of Newspapers of New England,
Inc., since 1983. Director or Trustee of various investment companies managed
by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
SAMUEL L. HAYES, III (62), Trustee
Jacob H. Schiff, Professor of Investment Banking, at Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard University Graduate School of Business Administration,
Soldiers Field Road, Boston, Massachusetts 02163
NORTON H. REAMER (61), Trustee
President and Director, United Asset Management Corporation, a holding company
owning institutional investment management firms. Chairman, President and
Director, UAM Funds (mutual funds). Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
JOHN L. THORNDIKE (70), Trustee
Former Director of Fiduciary Company Incorporated. Director or Trustee of
various investment companies managed by Eaton Vance or BMR.
Address: 175 Federal Street, Boston, Massachusetts 02110
JACK L. TREYNOR (67), Trustee
Investment Adviser and Consultant. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
OFFICERS OF THE TRUST AND THE PORTFOLIO
WILLIAM H. AHERN, JR. (37), Vice President of the Trust
Assistant Vice President of Eaton Vance and BMR. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Ahern was elected Vice
President of the Trust on June 19, 1995.
MARK VENEZIA (47), Vice President of the Portfolio
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
MICHAEL B. TERRY (54), Vice President of the Trust
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Terry was elected Vice
President of the Trust on December 17, 1990.
JAMES L. O'CONNOR (51), Treasurer
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
THOMAS OTIS (65), Secretary
Vice President and Secretary of BMR, Eaton Vance, EVC and EV. Officer of various
investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (61), Assistant Treasurer and Assistant Secretary
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
A. JOHN MURPHY (34), Assistant Secretary
Assistant Vice President of BMR, Eaton Vance and EV since March 1, 1994;
employee of Eaton Vance since March 1993. Officer of various investment
companies managed by Eaton Vance or BMR. State Regulations Supervisor, The
Boston Company, (1991-1993). Mr. Murphy was elected Assistant Secretary of the
Trust and the Portfolio on March 27, 1995.
JOHN P. RYNNE (54), Assistant Secretary of the Trust
Corporate Controller and Vice President of EVC. Vice President of Eaton Vance,
EVD and BMR, and Treasurer of Energex Energy Corporation. Mr. Rynne was
elected an officer of the Trust on June 19, 1995.
ERIC G. WOODBURY (39), Assistant Secretary
Vice President of Eaton Vance since February 1993; formerly, associate attorney
at Dechert, Price & Rhoades and Gaston & Snow. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Woodbury was elected Assistant
Secretary of the Trust and the Portfolio on June 19, 1995.
Messrs. Hayes (Chairman), Reamer and Thorndike are members of the Special
Committee of the Board of Trustees of the Trust and of the Portfolio. The
purpose of the Special Committee is to consider, evaluate and make
recommendations to the full Board of Trustees concerning (i) all contractual
arrangements with service providers to the Fund, including administrative
services, transfer agency, custodial and fund accounting and distribution
services, and (ii) all other matters in which Eaton Vance or its affiliates has
any actual or potential conflict of interest with the Fund or its shareholders.
The Nominating Committee of the Board of Trustees of the Trust and the
Portfolio is comprised of four Trustees who are not "interested persons" as that
term is defined under the 1940 Act ("noninterested Trustees"). The Committee has
four-year staggered terms, with one member rotating off the Committee to be
replaced by another noninterested Trustee of the Trust. The purpose of the
Committee is to recommend to the Board nominees for the position of
noninterested Trustee and to assure that at least a majority of the Board of
Trustees is independent of Eaton Vance and its affiliates.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees of the Trust and of the Portfolio. The Audit Committee's
functions include making recommendations to the Trustees regarding the selection
of the independent accountants, and reviewing matters relative to trading and
brokerage policies and practices, accounting and auditing practices and
procedures, accounting records, internal accounting controls, and the functions
performed by the custodian and transfer agent of the Trust and of the Portfolio.
Trustees of the Portfolio who are not affiliated with the Investment Adviser
may elect to defer receipt of all or a percentage of their annual fees in
accordance with the terms of a Trustees Deferred Compensation Plan (the
"Trustees" Plan"). Under the Trustees' Plan, an eligible Trustee may elect to
have his deferred fees invested by the Portfolio in the shares of one or more
funds in the Eaton Vance Family of Funds, and the amount paid to the Trustees
under the Trustees' Plan will be determined based upon the performance of such
investments. Deferral of Trustees' fees in accordance with the Trustees' Plan
will have a negligible effect on the Portfolio's assets, liabilities, and net
income per share, and will not obligate the Portfolio to retain the services of
any Trustee or obligate the Portfolio to pay any particular level of
compensation to the Trustee. Neither the Trust nor the Portfolio has a
retirement plan for its Trustees.
The fees and expenses of those Trustees of the Trust and the Portfolio who
are not members of the Eaton Vance organization (the noninterested Trustees) are
paid by the Fund (and the other series of the Trust) and the Portfolio,
respectively. For the compensation received by the noninterested Trustees of the
Trust and the Portfolio, see "Fees and Expenses" in Part II.
The noninterested Trustees of HI Portfolio are the same persons as those of
the Portfolio and M. Dozier Gardner and James B. Hawkes are the only interested
Trustees. The Committee structure and compensation policies of HI Portfolio are
identical to that of the Portfolio.
INVESTMENT ADVISER AND ADMINISTRATOR
The Portfolio engages BMR as investment adviser pursuant to an Investment
Advisory Agreement dated March 1, 1994. BMR or Eaton Vance acts as investment
adviser to investment companies and various individual and institutional clients
with combined assets under management of over $17 billion.
Eaton Vance, its affiliates and its predecessor companies have been managing
assets of individuals and institutions since 1924 and managing investment
companies since 1931. They maintain a large staff of experienced fixed-income
and equity investment professionals to service the needs of their clients. The
fixed-income division focuses on all kinds of taxable investment- grade and
high-yield securities, tax-exempt investment-grade and high-yield securities,
foreign debt, and U.S. Government securities. The equity division covers stocks
ranging from blue chip to emerging growth companies.
Eaton Vance and its affiliates act as adviser to over 150 mutual funds,
individual and various institutional accounts, including corporations,
hospitals, retirement plans, universities, foundations and trusts. Eaton Vance
mutual funds feature international equities, domestic equities, municipal bonds
and tax-free U.S. government and corporate bonds. Lloyd George Management has
advised Eaton Vance's international equity funds since 1992. Founded in 1991,
Lloyd George is headquartered in Hong Kong with offices in London and Mumbai,
India. It has established itself as a leader in investment management in Asian
equities and other global markets. Lloyd George features an experienced team of
investment professionals that began working together in the mid-1980's. Lloyd
George analysts cover East Asia, the India subcontinent, Russia and Eastern
Europe, Latin America, Australia and New Zealand from offices in Hong Kong,
London and Mumbai. Together Eaton Vance and Lloyd George manage over $18 billion
in assets. Eaton Vance mutual funds are distributed by Eaton Vance Distributors
both within the United States and offshore.
Eaton Vance Distributors believes that an investment professional can
provide valuable services to you to help you reach your investment goals.
Meeting investment goals requires time, objectivity and investment savvy. Before
making an investment recommendation, a representative can help you carefully
consider your short- and long-term financial goals, your tolerance for
investment risk, your investment time frame, and other investments you may
already own. Your professional investment representatives are knowledgeable
about financial markets, as well as the wide range of investment opportunities
available. A representative can provide you with tailored financial advice and
help you decide when to buy, sell or persevere with your investments.
BMR manages the investments and affairs of the Portfolio subject to the
supervision of the Portfolio's Board of Trustees. BMR furnishes to the Portfolio
investment research, advice and supervision, furnishes an investment program and
determines what securities will be purchased, held or sold by the Portfolio and
what portion, if any, of the Portfolio's assets will be held uninvested. The
Investment Advisory Agreement requires BMR to pay the salaries and fees of all
officers and Trustees of the Portfolio who are members of the BMR organization
and all personnel of BMR performing services relating to research and investment
activities. The Portfolio is responsible for all expenses not expressly stated
to be payable by BMR under the Investment Advisory Agreement, including, without
implied limitation, (i) expenses of maintaining the Portfolio and continuing its
existence, (ii) registration of the Portfolio under the 1940 Act, (iii)
commissions, fees and other expenses connected with the acquisition, holding and
disposition of securities and other investments, (iv) auditing, accounting and
legal expenses, (v) taxes and interest, (vi) governmental fees, (vii) expenses
of issue, sale and redemption of interests in the Portfolio, (viii) expenses of
registering and qualifying the Portfolio and interests in the Portfolio under
federal and state securities laws and of preparing and printing registration
statements or other offering statements or memoranda for such purposes and for
distributing the same to investors, and fees and expenses of registering and
maintaining registrations of the Portfolio and of the Portfolio's placement
agent as broker-dealer or agent under state securities laws, (ix) expenses of
reports and notices to investors and of meetings of investors and proxy
solicitations therefor, (x) expenses of reports to governmental officers and
commissions, (xi) insurance expenses, (xii) association membership dues, (xiii)
fees, expenses and disbursements of custodians and subcustodians for all
services to the Portfolio (including without limitation safekeeping of funds,
securities and other investments, keeping of books, accounts and records, and
determination of net asset values, book capital account balances and tax capital
account balances), (xiv) fees, expenses and disbursements of transfer agents,
dividend disbursing agents, investor servicing agents and registrars for all
services to the Portfolio, (xv) expenses for servicing the accounts of
investors, (xvi) any direct charges to investors approved by the Trustees of the
Portfolio, (xvii) compensation and expenses of Trustees of the Portfolio who are
not members of BMR's organization, and (xviii) such non-recurring items as may
arise, including expenses incurred in connection with litigation, proceedings
and claims and any legal obligation of the Portfolio to indemnify its Trustees,
officers and investors with respect thereto to the extent not covered by
insurance.
For a description of the compensation that the Portfolio pays BMR under the
Investment Advisory Agreement, see the Fund's current Prospectus. As of October
31, 1996, the Portfolio had net assets of $132,406,799. For the fiscal years
ended 1996 and 1995 and for the period from the start of business March 1, 1994
to October 31, 1994, the Portfolio paid BMR advisory fees of $744,744, $992,620
and $1,004,670, respectively, (equivalent to 0.54%, 0.55% and 0.49%,
respectively, (annualized) of the Portfolio's average daily net assets for each
such period).
The Investment Advisory Agreement with BMR continues in effect from year to
year so long as such continuance is approved at least annually (i) by the vote
of a majority of the Trustees of the Portfolio who are not interested persons of
the Portfolio or of BMR cast in person at a meeting specifically called for the
purpose of voting on such approval and (ii) by the Board of Trustees of the
Portfolio or by vote of a majority of the outstanding voting securities of the
Portfolio. The Agreement may be terminated at any time without penalty on sixty
(60) days' written notice by the Board of Trustees of either party, or by vote
of the majority of the outstanding voting securities of the Portfolio, and the
Agreement will terminate automatically in the event of its assignment. The
Agreement provides that BMR may render services to others. The Agreement also
provides that BMR shall not be liable for any loss incurred in connection with
the performance of its duties, or action taken or omitted under that Agreement,
in the absence of willful misfeasance, bad faith, gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties thereunder, or for any losses sustained in the
acquisition, holding or disposition of any security or other investment.
The investment advisory agreement of HI Portfolio with BMR is substantially
the same as that of the Portfolio. With respect to assets of the Fund invested
in HI Portfolio, BMR's monthly fee is equal to the aggregate of
(a) a daily asset based fee computed by applying the annual asset rate
applicable to that portion of the total daily net assets in each
Category as indicated below, plus
(b) a daily income based fee computed by applying the daily income rate
applicable to that portion of the total daily gross income (which
portion shall bear the same relationship to the total daily gross income
on such day as that portion of the total daily net assets in the same
Category bears to the total daily net assets on such day) in each
Category as indicated below:
ANNUAL DAILY
CATEGORY DAILY NET ASSETS ASSET RATE INCOME RATE
----------------------------------------------------------------------------
1 up to $500 million 0.300% 3.00%
2 $500 million but less than $1 billion 0.275% 2.75%
3 $1 billion but less than $1.5 billion 0.250% 2.50%
4 $1.5 billion but less than $2 billion 0.225% 2.25%
5 $2 billion but less than $3 billion 0.200% 2.00%
6 $3 billion and over 0.175% 1.75%
For the fiscal year ending March 31, 1997, HI Portfolio advisory fees are
estimated to be 0.62% of average daily net assets. For the fiscal years ended
March 31, 1996, 1995 and 1994, HI Portfolio advisory fees equaled .63%, .63% and
.64%, respectively of average daily net assets.
The Portfolio has also engaged BMR to act as its Administrator under an
Administration Agreement. The Administration Agreement with BMR continues in
effect from year to year so long as such continuance is approved at least
annually (i) by the Trustees of the Portfolio and (ii) by the vote of a majority
of those Trustees of the Portfolio who are not interested persons of the
Portfolio or of the Administrator. Under the Administration Agreement, BMR is
obligated to (a) review and supervise the provision of all domestic and foreign
custodial services to the Portfolio, and to make such reports and
recommendations to the Board of Trustees of the Portfolio concerning the
provision of such services as the Board deems appropriate; (b) provide to the
Portfolio certain valuation, legal, accounting and tax assistance and services
in connection with the Portfolio's (i) investments in (a) securities,
obligations and commercial paper that are denominated in foreign currencies or
the European Currency Unit ("ECU"), or that are issued or guaranteed by foreign
entities, (b) certificates of deposit and bankers' acceptances issued or
guaranteed by, or time deposits maintained at, foreign banks or foreign branches
of U.S. banks, and (c) participation interests in loans by U.S. or foreign banks
that are made to foreign borrowers or that are denominated in foreign currencies
or the ECU; and (ii) transactions in derivative instruments, including
instruments indexed to foreign exchange rates, forward foreign currency exchange
contracts, put and call options on foreign currencies, futures contracts and
options on such contracts, and interest rate and currency swaps; and (c) provide
to the Portfolio such other special administrative services as the Board from
time to time shall instruct BMR to furnish under the Administration Agreement.
In return for these special services, the Portfolio pays BMR as compensation
under the Administration Agreement a monthly fee in the amount of .0125%
(equivalent to .15% annually) of the average daily net assets of the Portfolio.
For the fiscal years ended October 31, 1996 and 1995 and for the period from the
start of business March 1, 1994, to October 31, 1994, the Portfolio paid BMR
administration fees of $208,657, $273,545 and $284,828, respectively.
The Portfolio will be responsible for all costs and expenses not expressly
stated to be payable by BMR under the Administration Agreement. Such costs and
expenses to be borne by the Portfolio include, without limitation, the fees and
expenses of the Portfolio's custodian and transfer agent, including those
incurred for determining the Portfolio's net asset value and keeping the
Portfolio's books; expenses of pricing and valuation services; membership dues
in investment company organizations; brokerage commissions and fees;
registration of the Portfolio under the 1940 Act; expenses of reports to
investors, proxy statements, and other expenses of investor's meetings;
insurance premiums; printing and mailing expenses; interest, taxes and
governmental fees; legal and accounting expenses; compensation and expenses of
Trustees not affiliated with BMR; and investment advisory and administration
fees. The Portfolio will also bear expenses incurred in connection with
litigation in which the Portfolio is a party and any legal obligation the
Portfolio may have to indemnify its officers and Trustees with respect thereto,
to the extent not covered by insurance.
As indicated in the Prospectus, Eaton Vance serves as administrator of the
Fund but currently receives no compensation for providing administrative
services to the Fund. Under its agreement with the Fund, Eaton Vance has been
engaged to administer the Fund's affairs, subject to the supervision of the
Trustees of the Trust, and shall furnish for the use of the Fund office space
and all necessary office facilities, equipment and personnel for administering
the affairs of the Fund. For additional information about the Administrator, see
"Fees and Expenses" in Part II.
IBT Trust Company (Cayman), Ltd. maintains HI Portfolio's principal office
and certain of its records and provides administrative assistance in
connection with meetings of its Trustees and interestholders.
The Fund pays all of its own expenses including, without limitation, (i)
expenses of maintaining the Fund and continuing its existence, (ii) registration
of the Trust under the 1940 Act, (iii) commissions, fees and other expenses
connected with the purchase or sale of securities and other investments, (iv)
auditing, accounting and legal expenses, (v) taxes and interest, (vi)
governmental fees, (vii) expenses of issue, sale, repurchase and redemption of
shares, (viii) expenses of registering and qualifying the Fund and its shares
under Federal and state securities laws and of preparing and printing
prospectuses for such purposes and for distributing the same to shareholders and
investors, and fees and expenses of registering and maintaining registrations of
the Fund and of the Fund's principal underwriter, if any, as broker-dealer or
agent under state securities laws, (ix) expenses of reports and notices to
shareholders and of meetings of shareholders and proxy solicitations therefor,
(x) expenses of reports to governmental officers and commissions, (xi) insurance
expenses, (xii) association membership dues, (xiii) fees, expenses and
disbursements of custodians and subcustodians for all services to the Fund
(including without limitation safekeeping of funds, securities and other
investments, keeping of books and accounts and determination of net asset
values), (xiv) fees, expenses and disbursements of transfer agents, dividend
disbursing agents, shareholder servicing agents and registrars for all services
to the Fund, (xv) expenses for servicing shareholder accounts, (xvi) any direct
charges to shareholders approved by the Trustees of the Trust, (xvii)
compensation and expenses of Trustees of the Trust who are not members of the
Eaton Vance organization, and (xviii) such non-recurring items as may arise,
including expenses incurred in connection with litigation, proceedings and
claims and any legal obligation of the Trust to indemnify its Trustees and
officers with respect thereto, to the extent not covered by insurance.
BMR is a wholly-owned subsidiary of Eaton Vance. Eaton Vance and EV are both
wholly-owned subsidiaries of EVC. BMR and Eaton Vance are both Massachusetts
business trusts, and EV is the trustee of BMR and Eaton Vance. The Directors of
EV are Landon T. Clay, M. Dozier Gardner, James B. Hawkes and Benjamin A.
Rowland, Jr. The Directors of EVC consist of the same persons and John G. L.
Cabot and Ralph Z. Sorenson. Mr. Clay is chairman, Mr. Gardner is vice chairman
and Mr. Hawkes is president and chief executive officer of EVC, BMR, Eaton Vance
and EV. All of the issued and outstanding shares of Eaton Vance and EV are owned
by EVC. All of the issued and outstanding shares of BMR are owned by Eaton
Vance. All shares of the outstanding Voting Common Stock of EVC are deposited in
a Voting Trust which expires on December 31, 1997, the Voting Trustees of which
are Messrs. Clay, Gardner, Hawkes and Rowland and Thomas E. Faust, Jr. The
Voting Trustees have unrestricted voting rights for the election of Directors of
EVC. All of the outstanding voting trust receipts issued under said Voting Trust
are owned by certain of the officers of BMR and Eaton Vance who are also
officers or officers and Directors of EVC and EV. As of February 28, 1997,
Messrs. Clay, Gardner and Hawkes each owned 24% of such voting trust receipts,
and Messrs. Rowland and Faust, owned 15% and 13%, respectively, of such voting
trust receipts. Messrs. Gardner, Hawkes and Otis are officers or Trustees of the
Trust and the Portfolio and are members of the EVC, BMR, Eaton Vance and EV
organizations. Messrs. Woodbury, Murphy, Venezia, O'Connor, Ahern and Rynne and
Ms. Sanders who are officers or Trustees of the Trust and/or the Portfolio, are
also members of the BMR, Eaton Vance and EV organizations. BMR will receive the
fees paid under the Investment Advisory Agreement and the Administration
Agreement.
EVC owns all of the stock of Energex Energy Corporation, which engages in
oil and gas exploration and development operations. In addition, Eaton Vance
owns all the stock of Northeast Properties, Inc., which is engaged in real
estate investment. EVC owns all the stock of Fulcrum Management, Inc. and
MinVen, Inc., which are engaged in precious metal mining, venture investment and
management. EVC also owns 24% of the Class A shares of Lloyd George Management
(B.V.I.) Limited, a registered investment adviser. Eaton Vance, BMR, EVC and EV
may also enter into other businesses.
EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Fund and
the Portfolios, IBT. It is Eaton Vance's opinion that the terms and conditions
of such transactions were not and will not be influenced by existing or
potential custodial or other relationships between the Fund or the Portfolios
and such banks.
CUSTODIAN
IBT acts as custodian for the Fund and each Portfolio. IBT has the custody
of all cash and securities representing the Fund's interest in the Portfolios,
has custody of all the Portfolios' assets, maintains the general ledger of the
Portfolios and the Fund and computes the daily net asset value of interests in
the Portfolios and the net asset value of shares of the Fund. In such capacity
it attends to details in connection with the sale, exchange, substitution,
transfer or other dealings with the Portfolios' investments, receives and
disburses all funds and performs various other ministerial duties upon receipt
of proper instructions from the Fund and the Portfolios. IBT charges custody
fees which are competitive within the industry. The fees for the Portfolios
relate to 1) bookkeeping and valuation services provided at an annual rate, 2)
activity charges based upon the volume of investment related transactions, and
3) reimbursement of out-of-pocket expenses. These fees are then reduced by a
credit for cash balances of the Portfolios at the custodian equal to 75% of the
91-day, U.S. Treasury Bill auction rate applied to the Portfolios' average daily
collected balances. The fee for the Fund relates to bookkeeping and valuation
services and is based upon a percentage of the Fund's net assets. IBT also
provides services in connection with the preparation of shareholder reports and
the electronic filing of such reports with the Commission for which it receives
a separate fee. Landon T. Clay, a Director of EVC and an officer, Trustee or
Director of other entities in the Eaton Vance organization, owns approximately
13% of the voting stock of Investors Financial Services Corp., the holding
company parent of IBT. Management believes that such ownership does not create
an affiliated person relationship between the Fund or either Portfolio and IBT
under the 1940 Act.
SERVICE FOR WITHDRAWAL
The Transfer Agent will send to the shareholder regular monthly or quarterly
payments of any permitted amount designated by the shareholder (see "Eaton Vance
Shareholder Services -- Withdrawal Plan" in the Fund's current Prospectus) based
upon the value of the shares held. The checks will be drawn from share
redemptions and hence, although they are a return of principal, may require the
recognition of taxable gain or loss. Income dividends and capital gains
distributions in connection with withdrawal accounts will be credited at net
asset value as of the record date for each distribution. Continued withdrawals
in excess of current income will eventually use up principal, particularly in a
period of declining market prices. A shareholder may not have a withdrawal plan
in effect at the same time he or she has authorized Bank Automated Investing or
is otherwise making regular purchases of Fund shares. The shareholder, the
Transfer Agent or the Principal Underwriter will be able to terminate the
withdrawal plan at any time without penalty.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined by IBT (as agent
and custodian for the Fund) in the manner described under "Valuing Fund Shares"
in the Fund's current Prospectus. The net asset value of the Portfolio is also
computed by IBT (as agent and custodian for the Portfolio) by subtracting the
liabilities of the Portfolio from the value of its total assets. IBT Fund
Services (Canada) Inc. determines the net asset value of HI Portfolio. The Fund
and the Portfolios will be closed for business and will not price their
respective shares or interests on the following business holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Debt securities (other than mortgage-backed, "pass-through" securities and
short-term obligations maturing in sixty days or less), including listed
securities and securities for which price quotations are available and forward
contracts, will normally be valued on the basis of market valuations furnished
by pricing services. Mortgage-backed "pass-through" securities are valued using
a matrix pricing system which takes into account closing bond valuations, yield
differentials, anticipated prepayments and interest rates. Financial futures
contracts listed on commodity exchanges and exchange-traded options are valued
at closing settlement prices. Over-the-counter options are valued at the mean
between the bid and asked prices provided by dealers. Short-term obligations and
money market securities maturing in sixty days or less are valued at amortized
cost which approximates value. Non-U.S. dollar denominated short-term
obligations maturing in sixty days or less are valued at amortized cost as
calculated in the base currency and translated into U.S. dollars at the current
exchange rate. Investments for which market quotations are unavailable are
valued at fair value using methods determined in good faith by or at the
direction of the Trustees of the Portfolio.
The value of all assets and liabilities expressed in foreign currencies will
be converted into U.S. dollar values at the mean between the buying and selling
rates of such currencies against U.S. dollars last quoted on one of the
principal markets for such currencies. Generally, trading in foreign securities,
derivative instruments and currencies is substantially completed each day at
various times prior to the time a Portfolio calculates its net asset value. If
an event materially affecting the values of such securities, instruments or
currencies occurs between the time such values are determined and the time net
asset value is calculated, such securities, instruments or currencies may be
valued at fair value.
Each investor in a Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each day the Exchange is open for trading
("Portfolio Business Day") as of the close of regular trading on the Exchange
(the "Portfolio Valuation Time"). The value of each investor's interest in a
Portfolio will be determined by multiplying the net asset value of the Portfolio
by the percentage, determined on the prior Portfolio Business Day, which
represented that investor's share of the aggregate interests in the Portfolio on
such prior day. Any additions or withdrawals for the current Portfolio Business
Day will then be recorded. Each investor's percentage of the aggregate interest
in a Portfolio will then be recomputed as a percentage equal to a fraction (i)
the numerator of which is the value of such investor's investment in the
Portfolio as of the Portfolio Valuation Time on the prior Portfolio Business Day
plus or minus, as the case may be, the amount of any additions to or withdrawals
from the investor's investment in the Portfolio on the current Portfolio
Business Day and (ii) the denominator of which is the aggregate net asset value
of the Portfolio as of the Portfolio Valuation Time on the prior Portfolio
Business Day plus or minus, as the case may be, the amount of the net additions
to or withdrawals from the aggregate investment in the Portfolio on the current
Portfolio Business Day by all investors in the Portfolio. The percentage so
determined will then be applied to determine the value of the investor's
interest in a Portfolio for the current Portfolio Business Day.
INVESTMENT PERFORMANCE
Average annual total return is determined by multiplying a hypothetical
initial purchase order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation, and dividends and distributions
paid and reinvested) for the stated period and annualizing the results. The
calculation assumes that all distributions are reinvested at net asset value on
the reinvestment dates during the period, and a complete redemption of the
investment and, if applicable, the deduction of a CDSC at the end of the period.
For further information concerning the total return of the Fund, see
"Performance Information" in Part II.
Yield is computed pursuant to a standardized formula by dividing the net
investment income per share earned during a recent 30-day period by the maximum
offering price per share on the last day of the period and annualizing the
resulting figure. Net investment income per share is calculated from the yields
to maturity of all debt obligations held by a Portfolio based on prescribed
methods, reduced by accrued Fund expenses for the period, with the resulting
number being divided by the average daily number of Fund shares outstanding and
entitled to receive distributions during the period. This yield figure does not
reflect the deduction of any CDSCs (if applicable) imposed upon certain
redemptions at the rates set forth under "How to Redeem Fund Shares" in the
Fund's current Prospectus. For the yield of the Fund, see "Performance
Information" in Part II.
The Principal Underwriter may publish to Authorized Firms the Fund's
distribution rate and/or its effective distribution rate. The Fund's
distribution rate is computed by dividing the most recent monthly distribution
per share annualized, by the current net asset value per share. The Fund's
effective distribution rate is computed by dividing the distribution rate by the
ratio (the days in a year divided by the accrual days of the monthly period)
used to annualize the most recent monthly distribution and reinvesting the
resulting amount for a full year on the basis of such ratio. The effective
distribution rate will be higher than the distribution rate because of the
compounding effect of the assumed reinvestment. Investors should note that the
Fund's yield is calculated using a standardized formula, the income component of
which is computed from the yields to maturity of all debt obligations held by a
Portfolio based on prescribed methods (with all purchases and sales of
securities during such period included in the income calculation on a settlement
date basis), whereas the distribution rate is based on the Fund's last monthly
distribution, which tends to be relatively stable and may be more or less than
the amount of net investment income and short-term capital gain actually earned
by the Fund during the month.
The Fund's total return may be compared to various domestic, international
and global securities indices, such as the Commodity Research Bureau Futures
Price Index. The Fund's yield may also be compared to the yields of other
fixed-income securities, such as U.S. Treasuries, mortgage-backed securities,
and corporate bonds or other securities comparable to the securities held by a
Portfolio as reported by various independent sources (such as Bloomberg L.P.).
In making such comparisons, the Fund may provide information concerning the
nature of such indices or securities. This information may be used in
advertisements and in information furnished to present or prospective
shareholders. The Fund's performance may differ from that of other investors in
the Portfolio, including other investment companies.
Evaluations of the Fund's performance (including rankings) made by
independent sources, e.g., Lipper Analytical Services, Inc., CDA/Wiesenberger
and Morningstar, Inc., may be used in advertisements and in information
furnished to present or prospective shareholders. In addition, information
showing the effects of compounding interest may be included in advertisements
and other material furnished to present and prospective shareholders.
Compounding is the process of earning interest on principal plus interest that
was earned earlier. Interest can be compounded annually, semi-annually,
quarterly or daily. Examples of compounding will be used for illustration
purposes only.
The Fund may also provide investors and prospective investors with
information on the Fund's duration and duration's relationship to the stability
or volatility of a security's price. The Fund may also provide information
concerning the diversification of the Portfolios (on such basis as country of
issuer's origin, industry sector or security type), as well as the allocation of
securities held by the Portfolios across various rating categories. In addition,
information on the Portfolios' turnover rate may be provided to investors and
prospective investors.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
-- cost associated with aging parents;
-- funding a college education (including its actual and estimated
cost);
-- health care expenses (including actual and projected expenses);
-- long-term disabilities (including the availability of, and coverage
provided by, disability insurance); and
-- retirement (including the availability of social security benefits,
the tax treatment of such benefits and statistics and other
information relating to maintaining a particular standard of living
and outliving existing assets).
Such information may also address different methods for saving money and the
results of such methods, as well as the benefits of investing in equity
securities. Such information may describe: the potential for growth; the
performance of equities as compared to other investment vehicles; and the value
of investing as early as possible and regularly, as well as staying invested.
The benefits of investing in equity securities by means of a mutual fund may
also be included (such benefits may include diversification, professional
management and the variety of equity mutual fund products).
Information in advertisements and materials furnished to present and
prospective investors may include profiles of different types of investors
(i.e., investors with different goals and assets) and different investment
strategies for meeting specific financial goals. Such information may provide
hypothetical illustrations which include: results of various investment
strategies; performance of an investment in the Fund over various time periods;
and results of diversifying assets among several investments with varying
performance. Information in advertisements and materials furnished to present
and prospective investors may also include quotations (including editorial
comments) and statistics concerning investing in securities, as well as
investing in particular types of securities and the performance of such
securities.
Eaton Vance Distributors believes that an investment professional can
provide valuable services to you to help you reach your investment goals.
Meeting investment goals requires time, objectivity and investment savvy. Before
making an investment recommendation, a representative can help you carefully
consider your short- and long-term financial goals, your tolerance for
investment risk, your investment time frame, and other investments you may
already own. Your professional investment representatives are knowledgeable
about financial markets, as well as the wide range of investment opportunities
available. A representative can help you decide when to buy, sell or persevere
with your investments. A professional investment representative can provide you
with tailored financial advice. Information about investment professionals may
appear in sales literature and advertisements used by the Fund.
The Fund may provide information about Eaton Vance, its affiliates and other
investment advisers to the funds in the Eaton Vance Family of Funds in sales
material or advertisements provided to investors or prospective investors. Such
material or advertisements may also provide information on the use of investment
professionals by such investors.
TAXES
FEDERAL INCOME TAXES
Each series of the Trust is treated as a separate entity for federal income
tax purposes. The Fund has elected to be treated, has qualified, and intends to
continue to qualify each year as a RIC under the Code. Accordingly, the Fund
intends to satisfy certain requirements relating to sources of its income and
diversification of its assets and to distribute all of its net investment income
and net realized capital gains in accordance with the timing requirements
imposed by the Code, so as to avoid any federal income or excise tax to the
Fund. The Fund so qualified for its fiscal year ended October 31, 1996. (see the
Notes to Financial Statements incorporated by reference into this SAI). Because
the Fund invests substantially all of its assets in the Portfolios, the
Portfolios normally must satisfy the applicable source of income and
diversification requirements in order for the Fund to satisfy them. Each
Portfolio will allocate at least annually among its investors, including the
Fund, each investor's distributive share of the Portfolio's net taxable and
tax-exempt (if any) investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit. For purposes of applying the
requirements of the Code regarding qualification as a RIC, the Fund will be
deemed (i) to own its proportionate share of each of the assets of a Portfolio
and (ii) to be entitled to the gross income of a Portfolio attributable to such
share.
In order to avoid federal excise tax, the Code requires that the Fund
distribute by December 31 of each calendar year at least 98% of its ordinary
income (not including tax-exempt income) for such year, at least 98% of the
excess of its realized capital gains over its realized capital losses, generally
computed on the basis of the one-year period ending on October 31 of such year,
after reduction by any available capital loss carryforwards, and 100% of any
income from the prior year (as previously computed) that was not paid out during
such year and on which the Fund paid no federal income tax. Under current law,
provided that the Fund qualifies as a RIC for federal income tax purposes and
the Portfolios are treated as a partnership for Massachusetts and federal tax
purposes, neither the Fund nor a Portfolio is liable for any income, corporate
excise or franchise tax in the Commonwealth of Massachusetts.
A Portfolio's transactions in options, futures contracts and forward
contracts will be subject to special tax rules that may affect the amount,
timing and character of Fund distributions to shareholders. For example, certain
positions held by a Portfolio on the last business day of each taxable year will
be marked to market (i.e., treated as if closed out on such day), and any
resulting gain or loss will generally be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by a Portfolio that
substantially diminish the Portfolio's risk of loss with respect to other
positions in its portfolio may constitute "straddles," which are subject to tax
rules that may cause deferral of Portfolio losses, adjustments in the holding
periods of Portfolio securities and conversion of short-term into long-term
capital losses. A Portfolio may make certain elections to mitigate adverse
consequences of these tax rules and may have to limit its activities in options,
futures contracts and forward contracts in order to enable the Fund to maintain
its qualification as a RIC.
The Portfolio may be subject to foreign withholding or other foreign taxes
with respect to income (possibly including, in some cases, capital gains)
derived from foreign securities. These taxes may be reduced or eliminated under
the terms of an applicable U.S. income tax treaty. Since it is expected that
more than 50% of the value of the total assets of the Fund taking into account
its allocable share of the Portfolios' total assets, at the close of any taxable
year may consist of securities issued by foreign corporations, the Fund may be
eligible to pass through to shareholders their proportionate shares of foreign
taxes paid by the Portfolio and allocated to the Fund, with the result that
shareholders would include such proportionate shares in income subject to
federal income tax and would be entitled to take a foreign tax credit or
deduction for such foreign taxes, subject to certain limitations. Certain
foreign exchange gains and losses realized by the Portfolio and allocated to the
Fund will be treated as ordinary income and losses. Certain uses of foreign
currency, foreign currency options, futures and forward contracts, and interest
rate and currency swaps, and investment by the Portfolios in certain "passive
foreign investment companies" may be limited or a tax election may be made, if
available, in order to preserve the Fund's qualification as a RIC and/or avoid
imposition of a tax on the Fund.
A Portfolio's investment in zero coupon, deferred interest and payment in
kind securities will cause it to realize income prior to the receipt of cash
payments with respect to these securities. Such income will be allocated daily
to interests in a Portfolio, and in order to distribute its proportionate share
of this income and avoid a tax payable by the Fund, the Portfolio may be
required to liquidate portfolio securities that it might otherwise have
continued to hold in order to generate cash that the Fund may withdraw from the
Portfolio for subsequent distribution to Fund shareholders.
The appropriate tax accounting for dollar rolls is also uncertain in some
respects, and the Portfolio's use of such rolls may accordingly be limited in
order to preserve the Fund's qualification as a RIC.
Investments in lower-rated or unrated securities may present special tax
issues for a Portfolio and hence for the Fund to the extent actual or
anticipated defaults may be more likely with respect to such securities. Tax
rules are not entirely clear about issues such as when a Portfolio may cease to
accrue interest, original issue discount, or market discount; when and to what
extent deductions may be taken for bad debts or worthless securities; how
payments received on obligations in default should be allocated between
principal and income; and whether exchanges of debt obligations in a workout
context are taxable.
The Fund's distributions of taxable net investment income, the excess of net
short-term capital gain over net long-term capital loss and certain foreign
exchange gains earned by a Portfolio and allocated to the Fund are taxable to
shareholders of the Fund as ordinary income whether received in cash or
reinvested in additional shares. Only a small portion, if any, of such
distributions of net investment income made by the Fund may qualify for the
dividends-received deduction for corporations, subject to applicable limitations
under the Code. The Fund's distributions of the excess of net long-term capital
gain over net short-term capital loss (including any capital losses carried
forward from prior years) earned by a Portfolio and allocated to the Fund are
taxable to shareholders of the Fund as long-term capital gains, whether received
in cash or in additional shares and regardless of the length of time their
shares of the Fund have been held.
Any loss realized upon the redemption or exchange of shares of the Fund with
a tax holding period of 6 months or less will be treated as a long-term capital
loss to the extent of any distribution of net long-term capital gains with
respect to such shares. All or a portion of any loss realized upon a taxable
disposition of Fund shares may be disallowed under "wash sale" rules if other
shares of the Fund are purchased (whether through the reinvestment of
distributions or otherwise) within 30 days before or after such disposition.
Special tax rules apply to Individual Retirement Accounts ("IRAs") and other
retirement plans, and persons investing through such plans should consult their
tax advisers for more information. The deductibility of contributions to IRAs
may be restricted or eliminated for particular shareholders.
Amounts paid by the Fund to individuals and certain other shareholders who
have not provided the Fund with their correct taxpayer identification number and
certain certifications required by the Internal Revenue Service ("IRS"), as well
as shareholders with respect to whom the Fund has received notification from the
IRS or a broker, may be subject to "backup" withholding of federal income tax
from the Fund's taxable dividends and distributions and the proceeds of
redemptions (including repurchases and exchanges), at a rate of 31%. An
individual's taxpayer identification number is generally his or her social
security number.
Non-resident alien individuals, foreign corporations and certain other
foreign entities generally will be subject to a U.S. withholding tax at a rate
of 30% on the Fund's distributions from its ordinary income and the excess of
its net short-term capital gain over its net long-term capital loss, unless the
tax is reduced or eliminated by an applicable tax treaty. Distributions from the
excess of the Fund's net long-term capital gain over its net short-term capital
loss received by such shareholders and any gain from the sale or other
disposition of shares of the Fund generally will not be subject to U.S. federal
income taxation, provided that non-resident alien status has been certified by
the shareholder. Different U.S. tax consequences may result if the shareholder
is engaged in a trade or business in the United States, is present in the United
States for a sufficient period of time during a taxable year to be treated as a
U.S. resident, or fails to provide any required certifications regarding status
as a non-resident alien investor. Foreign shareholders should consult their tax
advisers regarding the U.S. and foreign tax consequences of an investment in the
Fund.
The Fund had qualified to do business in the Commonwealth of Pennsylvania
and, therefore, was subject to the Pennsylvania foreign franchise and corporate
net income tax in respect of its business activities in Pennsylvania. The amount
of such taxes was $28,080 for the fiscal year ended October 31, 1994. In 1995,
however, the Fund took actions to cease doing business in Pennsylvania and does
not intend to pay Pennsylvania foreign franchise and corporate net income tax in
Pennsylvania. Accordingly, Fund shareholders should consult their tax advisers
regarding the applicability of Pennsylvania local and county personal property
taxes.
The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as retirement plans, tax-exempt entities,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to special tax rules that may apply in their
particular situations, as well as the state, local or foreign tax consequences
of investing in the Fund.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the executing firm, are made by BMR.
BMR is also responsible for the execution of transactions for all other accounts
managed by it.
BMR places the portfolio security transactions of each Portfolio and of all
other accounts managed by it for execution with many firms. BMR uses its best
efforts to obtain execution of portfolio security transactions at prices which
are advantageous to a Portfolio and at reasonably competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, BMR will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the executing firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions, and
the reasonableness of the spread or commission, if any. The debt securities and
obligations purchased and sold by a Portfolio are generally traded in the
domestic or foreign over-the-counter markets on a net basis (i.e. without
commission) through broker-dealers and banks acting for their own account rather
than as brokers, or otherwise involve transactions directly with the issuer of
such obligations. Such firms attempt to profit from such transactions by buying
at the bid price and selling at the higher asked price of the market for such
obligations, and the difference between the bid and asked price is customarily
referred to as the spread. A Portfolio may also purchase debt securities from
domestic and foreign underwriters, the cost of which may include undisclosed
fees and concessions to the underwriters. Transactions in foreign obligations
usually involve the payment of fixed brokerage commissions when executed on
foreign securities exchanges, which commissions are generally higher than those
in the United States. Although commissions on portfolio security transactions
will, in the judgment of BMR, be reasonable in relation to the value of the
services provided, commissions exceeding those which another firm might charge
may be paid to firms who were selected to execute transactions on behalf of the
Portfolio and BMR's other clients for providing brokerage and research services
to BMR.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of a Portfolio
may receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if BMR
determines in good faith that such commission was reasonable in relation to the
value of the brokerage and research services provided. This determination may be
made on the basis of either that particular transaction or on the basis of
overall responsibilities which BMR and its affiliates have for accounts over
which they exercise investment discretion. In making any such determination, BMR
will not attempt to place a specific dollar value on the brokerage and research
services provided or to determine what portion of the commission should be
related to such services. Brokerage and research services may include advice as
to the value of securities, the advisability of investing in, purchasing, or
selling securities, and the availability of securities or purchasers or sellers
of securities; furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement); and the "Research
Services" referred to in the next paragraph.
It is a common practice of the investment advisory industry and of the
advisers of investment companies, institutions and other investors to receive
research, statistical and quotation services, data, information and other
services, products and materials which assist such advisers in the performance
of their investment responsibilities ("Research Services") from broker-dealer
firms which execute portfolio transactions for the clients of such advisers and
from third parties with which such broker-dealers have arrangements. Consistent
with this practice, BMR receives Research Services from many broker-dealer firms
with which BMR places the Portfolio transactions and from third parties with
which these broker-dealers have arrangements. These Research Services include
such matters as general economic and market reviews, industry and company
reviews, evaluations of securities and portfolio strategies and transactions and
recommendations as to the purchase and sale of securities and other portfolio
transactions, financial, industry and trade publications, news and information
services, pricing and quotation equipment and services, and research oriented
computer hardware, software, data bases and services. Any particular Research
Service obtained through a broker-dealer may be used by BMR in connection with
client accounts other than those accounts which pay commissions to such
broker-dealer. Any such Research Service may be broadly useful and of value to
BMR in rendering investment advisory services to all or a significant portion of
its clients, or may be relevant and useful for the management of only one
client's account or of a few clients' accounts, or may be useful for the
management of merely a segment of certain clients' accounts, regardless of
whether any such account or accounts paid commissions to the broker-dealer
through which such Research Service was obtained. The advisory fee paid by the
Portfolios is not reduced because BMR receives such Research Services. BMR
evaluates the nature and quality of the various Research Services obtained
through broker-dealer firms and attempts to allocate sufficient commissions to
such firms to ensure the continued receipt of Research Services which BMR
believes are useful or of value to it in rendering investment advisory services
to its clients.
Subject to the requirement that BMR shall use its best efforts to seek and
execute portfolio security transactions at advantageous prices and at reasonably
competitive spreads or commission rates, BMR is authorized to consider as a
factor in the selection of any firm with whom portfolio orders may be placed the
fact that such firm has sold or is selling shares of the Fund or of other
investment companies sponsored by BMR or Eaton Vance. This policy is not
inconsistent with a rule of the National Association of Securities Dealers,
Inc., which rule provides that no firm which is a member of the Association
shall favor or disfavor the distribution of shares of any particular investment
company or group of investment companies on the basis of brokerage commissions
received or expected by such firm from any source.
Securities considered as investments for the Portfolio may also be
appropriate for other investment accounts managed by BMR or its affiliates.
Whenever decisions are made to buy or sell securities by the Portfolio and one
or more of such other accounts simultaneously, BMR will allocate the security
transactions (including "hot" issues) in a manner which it believes to be
equitable under the circumstances. As a result of such allocations, there may be
instances where the Portfolio will not participate in a transaction that is
allocated among other accounts. If an aggregate order cannot be filled
completely, allocations will generally be made on a pro rata basis. An order may
not be allocated on a pro rata basis where, for example: (i) consideration is
given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account
with specialized investment policies that coincide with the particulars of a
specific investment; (iii) pro rata allocation would result in odd-lot or de
minimis amounts being allocated to a portfolio or other client; or (iv) where
BMR reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Portfolio from time to time, it is the opinion of the Trustees of the Trust and
the Portfolio that the benefits from the BMR organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
BROKERAGE
For the fiscal year ended October 31, 1996, the Portfolio paid brokerage
commissions of $23,792 on portfolio security transactions aggregating
$245,268,131 to firms which provided some research services to BMR or its
affiliates (although many of such firms may have been selected in any particular
transaction primarily because of their execution capabilities). For the fiscal
year ended October 31, 1995, the Portfolio paid brokerage commissions of $11,700
with respect to portfolio transactions. Of this amount, approximately $11,357
was paid in respect of portfolio security transactions aggregating approximately
$148,774,532 to firms which provided some research services to BMR's
organization. For the period from the start of business, March 1, 1994 to
October 31, 1994, the Portfolio paid foreign brokerage commissions on its
portfolio security transactions amounting to $6,875.
OTHER INFORMATION
The Trust changed its name from Eaton Vance Government Obligations Trust on
July 10, 1995. On October 31, 1995, the Fund was reorganized as a series of the
Trust. Prior thereto, the Fund was a series of Eaton Vance Investment Fund, Inc.
Eaton Vance, pursuant to its agreement with the Trust, controls the use of the
words "Eaton Vance" and "EV" in the Fund's name and may use the words "Eaton
Vance" or "EV" in other connections and for other purposes.
As permitted by Massachusetts law, there will normally be no meeting of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees of the Trust holding office have been
elected by shareholders. In such an event the Trustees then in office will call
a shareholders' meeting for the election of Trustees. Except for the foregoing
circumstances and unless removed by action of the shareholders in accordance
with the Trust's By-laws, the Trustees shall continue to hold and may appoint
successor Trustees.
The Trust's Amended and Restated Declaration of Trust may be amended by the
Trustees when authorized by vote of a majority of the outstanding voting
securities of the Trust and any other outstanding series of shares, the
financial interests of which are affected by the amendment. The Trustees may
also amend the Declaration of Trust without the vote or consent of shareholders
to change the name of the Trust or any series or to make such other changes as
do not have a materially adverse effect on the financial interests of
shareholders or if they deem it necessary to conform it to applicable Federal or
state laws or regulations. The Trust or any series or class thereof may be
terminated by: (1) the affirmative vote of the holders of not less than
two-thirds of the shares outstanding and entitled to vote at any meeting of
shareholders of the Trust or the appropriate series or class thereof, or by an
instrument or instruments in writing without a meeting, consented to by the
holders of two-thirds of the shares of the Trust or a series or class thereof,
provided, however, that, if such termination is recommended by the Trustees, the
vote of a majority of the outstanding voting securities of the Trust or a series
or class thereof entitled to vote thereon shall be sufficient authorization; or
(2) by means of an instrument in writing signed by a majority of the Trustees,
to be followed by a written notice to shareholders stating that a majority of
the Trustees has determined that the continuation of the Trust or a series or a
class thereof is not in the best interest of the Trust, such series or class or
of their respective shareholders.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office. In addition, the By-Laws of the Trust provide that no natural person
shall serve as a Trustee of the Trust after the holders of record of not less
than two-thirds of the outstanding shares have declared that he be removed from
office either by declaration in writing filed with the custodian of the assets
of the Trust or by votes cast in person or by proxy at a meeting called for the
purpose. The By-laws further provide that under certain circumstances the
shareholders may call a meeting to remove a Trustee and that the Trust is
required to provide assistance in communicating with shareholders about such a
meeting. The By-Laws also provide that the Trustees shall promptly call a
meeting of shareholders for the purpose of voting upon a question of removal of
a Trustee when requested so to do by the record holders of not less than 10 per
centum of the outstanding shares.
In accordance with the Declaration of Trust of each Portfolio, there will
normally be no meetings of the investors for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by investors. In such an event the Trustees of a
Portfolio then in office will call an investors' meeting for the election of
Trustees. Except for the foregoing circumstances and unless removed by action of
the investors in accordance with a Portfolio's Declaration of Trust, the
Trustees shall continue to hold office and may appoint successor Trustees.
The Declaration of Trust of each Portfolio provides that no person shall
serve as a Trustee if investors holding two-thirds of the outstanding interests
have removed him from that office either by a written declaration filed with the
Portfolios' Chairman or by votes cast at a meeting called for that purpose. The
Declaration of Trust further provides that under certain circumstances the
investors may call a meeting to remove a Trustee and that the Portfolio is
required to provide assistance in communicating with investors about such a
meeting.
Each Portfolio's Declaration of Trust provides that the Portfolio will
terminate 120 days after the complete withdrawal of the Fund or any other
investor in the Portfolio, unless either the remaining investors by unanimous
vote at a meeting of such investors, or a majority of the Trustees of the
Portfolio, by written instrument consented to by all investors, agree to
continue the business of the Portfolio. This provision is consistent with
treatment of the Portfolio as a partnership for federal income tax purposes. The
right to redeem can be suspended and the payment of the redemption price
deferred when the Exchange is closed (other than for customary weekend and
holiday closings), during periods when trading on the Exchange is restricted as
determined by the Commission, or during any emergency as determined by the
Commission which makes it impracticable for a Portfolio to dispose of its
securities or value its assets, or during any other period permitted by order of
the Commission for the protection of investors.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, are the independent accountants for the Fund and the Portfolio providing
audit services, tax return preparation, and assistance and consultation with
respect to the preparation of filings with the Commission. Deloitte & Touche,
Grand Cayman, Cayman Islands, British West Indies, are the independent certified
public accountants of the HI Portfolio.
FINANCIAL STATEMENTS
The financial statements of the Fund and the Portfolio, which are included
in the Fund's annual report to shareholders, are incorporated by reference into
this SAI and have been so incorporated in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, as experts in accounting and auditing.
A copy of the Fund's most recent Annual Report accompanies this SAI.
<PAGE>
APPENDIX
DESCRIPTION OF SECURITIES RATINGS(1)
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safe-guarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporated bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
one year.
Issuers rated PRIME-1 or P-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 or P-1
repayment ability will often be evidenced by many of the following
characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 or P-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S CORPORATE BOND RATINGS:
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P's rating because no public rating has been requested,
because there is insufficient information on which to base a rating, or because
S&P's does not rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER
A: S&P's commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
FITCH INVESTORS SERVICE, INC.
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligors ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
HIGH YIELD BOND RATINGS
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default of interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and"D" represents
the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the addition
of a plus or minus sign to indicate the relative position of a credit within the
rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the "F-1+" and "F-1" categories.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
DUFF & PHELPS
INVESTMENT GRADE BOND RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AND AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, AND A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, AND BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
HIGH YIELD BOND RATINGS
BB+, BB, AND BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, AND B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
Preferred stocks are rated on the same scale as bonds but the preferred rating
gives weight to its more junior position in the capital structure. Structured
Financings are also rated on this scale.
COMMERCIAL PAPER/CERTIFICATES OF DEPOSIT
CATEGORY 1: TOP GRADE
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity including
internal operating factors and/or ready access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
CATEGORY 2: GOOD GRADE
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
CATEGORY 3: SATISFACTORY GRADE
DUFF 3: Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless timely payment is expected.
No ratings are issued for companies whose paper is not deemed to be of
investment grade.
* * * *
NOTES:
(1) The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated do
not necessarily represent ratings which would be given to these securities
on the date of the Portfolio's fiscal year end.
Bonds which are unrated expose the investor to risks with respect to capacity to
pay interest or repay principal which are similar to the risks of lower- rated
bonds. The Portfolio is dependent on the Investment Adviser's judgment, analysis
and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
This Part II provides information about EV CLASSIC STRATEGIC INCOME FUND.
The Fund became a series of the Trust on October 31, 1995.
FEES AND EXPENSES
ADMINISTRATOR
As stated under "Investment Adviser and Administrator" in Part I of this
SAI, the Administrator currently receives no compensation for providing
administrative services to the Fund. For the fiscal years ended October 31, 1996
and 1995 and for the period from the start of business, May 25, 1994, to October
31, 1994, $61,756, $13,723 and $7,345, respectively, of the Fund's operating
expenses were allocated to the Administrator.
DISTRIBUTION PLAN
During the fiscal year ended October 31, 1996, the Principal Underwriter
paid to Authorized Firms sales commissions of $807 on sales of Fund shares.
During the same period, the Fund made sales commission payments under the Plan
to the Principal Underwriter aggregating $7,225 and the Principal Underwriter
received no CDSCs. These sales commissions reduced Uncovered Distribution
Charges under the Plan. As at October 31, 1996, the outstanding Uncovered
Distribution Charges of the Principal Underwriter calculated under the Plan
amounted to approximately $90,000 (which was equivalent to 5.3% of the Fund's
net assets on such date). During the fiscal year ended October 31, 1996, the
Fund paid or accrued service fees under the Plan aggregating $2,216 of which
$263 was paid to Authorized Firms and the balance of which was retained by the
Principal Underwriter.
PRINCIPAL UNDERWRITER
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares at the rate of $2.50 for each repurchase transaction handled
by the Principal Underwriter. The Principal Underwriter estimates that the
expenses incurred by it in acting as repurchase agent for the Fund will exceed
the amounts paid therefor by the Fund. For the fiscal year ended October 31,
1996 there were no repurchase transactions.
TRUSTEES
The fees and expenses of those Trustees of the Trust and of the Portfolio
who are not members of the Eaton Vance organization (the noninterested Trustees)
are paid by the Fund (and the other series of the Trust) and the Portfolio,
respectively. (The Trustees of the Trust and the Portfolio who are members of
the Eaton Vance organization receive no compensation from the Fund or the
Portfolio.) During the fiscal year ended October 31, 1996, the noninterested
Trustees of the Trust and the Portfolio received the following compensation in
their capacities as Trustees from the Fund and the Portfolio, and, for the year
ended December 31, 1996, earned the following compensation in their capacities
as Trustees of the funds in the Eaton Vance fund complex (1):
AGGREGATE AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM TRUST AND
NAME FROM FUND FROM PORTFOLIO FUND COMPLEX
- ---- ------------ -------------- ------------------
Donald R. Dwight .... $0 $1,668(2) $142,500(4)
Samuel L. Hayes, III 0 1,846(3) 153,750(5)
Norton H. Reamer .... 0 1,783 142,500
John L. Thorndike ... 0 1,885 147,500
Jack L. Treynor ..... 0 1,850 147,500
(1) The Eaton Vance fund complex consists of 228 registered investment companies
or series thereof.
(2) Includes $647 of deferred compensation.
(3) Includes $689 of deferred compensation.
(4) Includes $42,500 of deferred compensation.
(5) Includes $37,500 of deferred compensation.
PRINCIPAL UNDERWRITER
Under the Distribution Agreement the Principal Underwriter acts as principal
in selling shares of the Fund. The expenses of printing copies of prospectuses
used to offer shares to Authorized Firms or investors and other selling
literature and of advertising is borne by the Principal Underwriter. The fees
and expenses of qualifying and registering and maintaining qualifications and
registrations of the Fund and its shares under federal and state securities laws
is borne by the Fund. In addition, the Fund makes payments to the Principal
Underwriter pursuant to its Distribution Plan as described in the Fund's current
Prospectus; the provisions of the Fund's Distribution Plan relating to such
payments are included in the Distribution Agreement. The Distribution Agreement
is renewable annually by the Trust's Board of Trustees (including a majority of
its Trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of the Fund's Distribution Plan
or the Distribution Agreement), may be terminated on sixty days' notice either
by such Trustees or by vote of a majority of the outstanding voting securities
of the Fund or on six months' notice by the Principal Underwriter and is
automatically terminated upon assignment. The Principal Underwriter distributes
Fund shares on a "best efforts" basis under which it is required to take and pay
for only such shares as may be sold.
DISTRIBUTION PLAN
The Distribution Plan (the "Plan") is described in the Prospectus and is
designed to meet the requirements of Rule 12b-1 under the 1940 Act and the NASD
Rule. The purpose of the Plan is to compensate the Principal Underwriter for its
distribution services and facilities provided to the Fund by paying the
Principal Underwriter sales commissions and a separate distribution fee in
connection with sales of Fund shares. The following supplements the discussion
of the Plan contained in the Fund's Prospectus.
The amount payable by the Fund to the Principal Underwriter pursuant to the
Plan as sales commissions and distribution fees with respect to each day will be
accrued on such day as a liability of the Fund and will accordingly reduce the
Fund's net assets upon such accrual, all in accordance with generally accepted
accounting principles. The amount payable on each day is limited to 1/365 of
.75% of the Fund's net assets on such day. The level of the Fund's net assets
changes each day and depends upon the amount of sales and redemptions of Fund
shares, the changes in the value of the investments held by the Portfolio, the
expenses of the Fund and the Portfolio accrued and allocated to the Fund on such
day, income on portfolio investments of the Portfolio accrued and allocated to
the Fund on such day, and any dividends and distributions declared on Fund
shares. The Fund does not accrue possible future payments as a liability of the
Fund or reduce the Fund's current net assets in respect of unknown amounts which
may become payable under the Plan in the future because the standards for
accrual of such a liability under accounting principles have not been satisfied.
The Plan provides that the Fund will receive all CDSCs and will make no
payments to the Principal Underwriter in respect of any day on which there are
no outstanding Uncovered Distribution Charges of the Principal Underwriter.
CDSCs and accrued amounts will be paid by the Fund to the Principal Underwriter
whenever there exist Uncovered Distribution Charges under the Fund's Plan.
Periods with a high level of sales of Fund shares accompanied by a low level
of early redemptions of Fund shares resulting in the imposition of CDSCs will
tend to increase the time during which there will exist Uncovered Distribution
Charges of the Principal Underwriter. Conversely, periods with a low level of
sales of Fund shares accompanied by a high level of early redemptions of Fund
shares resulting in the imposition of CDSCs will tend to reduce the time during
which there will exist Uncovered Distribution Charges of the Principal
Underwriter.
In calculating daily the amount of Uncovered Distribution Charges,
distribution charges will include the aggregate amount of sales commissions and
distribution fees theretofore paid plus the aggregate amount of sales
commissions and distribution fees which the Principal Underwriter is entitled to
be paid under the Plan since its inception. Payments theretofore paid or payable
under the Plan by the Fund to the Principal Underwriter and CDSCs theretofore
paid or payable to the Principal Underwriter will be subtracted from such
distribution charges; if the result of such subtraction is positive, a
distribution fee (computed at 1% over the prime rate then reported in The Wall
Street Journal) will be computed on such amount and added thereto, with the
resulting sum constituting the amount of outstanding Uncovered Distribution
Charges with respect to such day. The amount of outstanding Uncovered
Distribution Charges of the Principal Underwriter calculated on any day does not
constitute a liability recorded on the financial statements of the Fund.
The amount of Uncovered Distribution Charges of the Principal Underwriter at
any particular time depends upon various changing factors, including the level
and timing of sales of Fund shares, the nature of such sales (i.e., whether they
result from exchange transactions, reinvestments or from cash sales through
Authorized Firms), the level and timing of redemptions of Fund shares upon which
a CDSC will be imposed, the level and timing of redemptions of Fund shares upon
which no CDSC will be imposed (including redemptions involving exchanges of Fund
shares pursuant to the exchange privilege which result in a reduction of
Uncovered Distribution Charges), changes in the level of the net assets of the
Fund, and changes in the interest rate used in the calculation of the
distribution fee under the Plan.
As currently implemented by the Trustees, the Plan authorizes payments of
sales commissions, distribution fees and service fees to the Principal
Underwriter which may be equivalent, on an aggregate basis during any fiscal
year of the Fund, to 1% of the Fund's average daily net assets for such year.
For the sales commissions and service fee payments made by the Fund and the
outstanding Uncovered Distribution Charges of the Principal Underwriter, see
"Fees and Expenses -- Distribution Plan" in this Part II. The Fund believes that
the combined rate of all these payments may be higher than the rate of payments
made under distribution plans adopted by other investment companies pursuant to
Rule 12b-1. Although the Principal Underwriter will use its own funds (which may
be borrowed from banks) to pay sales commissions at the time of sale, it is
anticipated that the Eaton Vance organization will profit by reason of the
operation of the Plan through an increase in the Fund's assets (thereby
increasing the advisory fee payable to BMR by the Portfolio) resulting from sale
of Fund shares and through the amounts paid to the Principal Underwriter,
including CDSCs, pursuant to the Plan. The Eaton Vance organization may be
considered to have realized a profit under the Plan if at any point in time the
aggregate amounts theretofore received by the Principal Underwriter pursuant to
the Plan and from CDSCs have exceeded the total expenses theretofore incurred by
such organization in distributing shares of the Fund. Total expenses for this
purpose will include an allocable portion of the overhead costs of such
organization and its branch offices, which costs will include without limitation
leasing expense, depreciation of building and equipment, utilities,
communication and postage expense, compensation and benefits of personnel,
travel and promotional expense, stationery and supplies, literature and sales
aids, interest expense, data processing fees, consulting and temporary help
costs, insurance, taxes other than income taxes, legal and auditing expense and
other miscellaneous overhead items. Overhead is calculated and allocated for
such purpose by the Eaton Vance organization in a manner deemed equitable to the
Fund.
Pursuant to Rule 12b-1, the Plan has been approved by the Fund's initial
sole shareholder (Eaton Vance) and by the Board of Trustees of the Trust,
including the Rule 12b-1 Trustees. The Plan continues in effect from year to
year so long as such continuance is approved at least annually by the vote of
both a majority of (i) the Trustees of the Trust who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Plan or any agreements related to the Plan (the "Rule 12b-1
Trustees") and (ii) all of the Trustees then in office, and the Distribution
Agreement contains a similar provision. The Plan and Distribution Agreement may
be terminated at any time by vote of a majority of the Rule 12b-1 Trustees or by
vote of a majority of the outstanding voting securities of the Fund. The
provisions of the Plan relating to payments of sales commissions and
distribution fees to the Principal Underwriter are also included in the
Distribution Agreement between the Trust on behalf of the Fund and the Principal
Underwriter. Under the Plan, the President or a Vice President of the Trust
shall provide to the Trustees for their review, and the Trustees shall review at
least quarterly, a written report of the amount expended under the Plan and the
purposes for which such expenditures were made. The Plan may not be amended to
increase materially the payments described therein without approval of the
shareholders of the Fund, and all material amendments of the Plan must also be
approved by the Trustees as required by Rule 12b-1. So long as the Plan is in
effect, the selection and nomination of Trustees who are not interested persons
of the Trust shall be committed to the discretion of the Trustees who are not
such interested persons.
The Trustees of the Trust believe that the Plan will be a significant factor
in the expected growth of the Fund's assets, and will result in increased
investment flexibility and advantages which have benefited and will continue to
benefit the Fund and its shareholders. Payments for sales commissions and
distribution fees made to the Principal Underwriter under the Plan will
compensate the Principal Underwriter for its services and expenses in
distributing shares of the Fund. Service fee payments made to the Principal
Underwriter and Authorized Firms under the Plan provide incentives to provide
continuing personal services to investors and the maintenance of shareholder
accounts. By providing incentives to the Principal Underwriter and Authorized
Firms, the Plan is expected to result in the maintenance of, and possible future
growth in, the assets of the Fund. Based on the foregoing and other relevant
factors, the Trustees of the Trust have determined that in their judgment there
is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
PERFORMANCE INFORMATION
The table below indicates the cumulative and average annual total return on
a hypothetical investment of $1,000 in the Fund from November 26, 1990 through
October 31, 1996 and for the five- and one-year periods ended October 31, 1996.
The total return for the period prior to the Fund's commencement of operations
on May 25, 1994 reflects the Portfolio's total return (or that of its
predecessor) adjusted to reflect any applicable Fund CDSC. The total return for
such prior period has not been adjusted to reflect the Fund's distribution
and/or service fees and certain other expenses. If such an adjustment were made,
the performance would be lower.
<TABLE>
<CAPTION>
VALUE BEFORE VALUE AFTER TOTAL RETURN TOTAL RETURN AFTER
DEDUCTING THE DEDUCTING THE BEFORE DEDUCTING THE CDSC DEDUCTING THE CDSC*
INVESTMENT INVESTMENT AMOUNT OF CDSC ON CDSC* ON ------------------------- ------------------------
PERIOD DATE INVESTMENT 10/31/96 10/31/96 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
- ---------------- ------------ ----------- --------------- --------------- ---------- ---------- ---------- ----------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Life of the
Fund 11/26/90 $1,000 $1,488.84 $1,488.84 48.88% 6.94% 48.88% 6.94%
5 Years
Ended
10/31/96 10/31/91 $1,000 $1,378.84 $1,378.84 37.88% 6.64% 37.88% 6.64%
1 Year
Ended
10/31/96** 10/31/95 $1,000 $1,150.88 $1,140.88 15.09% 15.09% 14.09% 14.09%
Past performance is not indicative of future results. Investment return and principal value will fluctuate; shares, when
redeemed, may be worth more or less than their original cost.
- ------------
*No CDSC is imposed on certain redemptions. See the Fund's current Prospectus.
**If a portion of the Fund's expenses had not been subsidized, the Fund would have had lower returns.
</TABLE>
The Fund's yield for the 30-day period ended October 31, 1996 was 6.67%. If
a portion of the Fund's expenses had not been allocated to the Administrator,
the Fund would have had a lower yield.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As at December 2, 1996, the Trustees and officers of the Trust, as a group,
owned in the aggregate less than 1% of the outstanding shares of the Fund. As of
December 2, 1996, the following shareholder owned of record the percentage of
outstanding shares indicated after its name: MLPF&S for the Sole Benefit of its
customers, Jacksonville, FL 32246 (8.4%). In addition, as of such date, the
following shareholder owned beneficially and of record the percentage of
outstanding shares indicated after its name: River Distributing Co., Inc., Eagle
Bay, NY (76.5%). To the knowledge of the Trust, no other person owned of record
or beneficially 5% or more of the Fund's outstanding shares as of such date.
<PAGE>
[LOGO]
EATON VANCE
- ------------
Mutual Funds
EV CLASSIC STRATEGIC INCOME FUND
- -------------------------------------------------------------------------------
Statement of Additional Information
MARCH 3, 1997
EV CLASSIC
STRATEGIC INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
- -------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR OF STRATEGIC INCOME PORTFOLIO
INVESTMENT ADVISER OF HIGH INCOME PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV CLASSIC STRATEGIC INCOME FUND
Eaton Vance Management, 24 Federal Street, Boston, MA 02110
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc., 24 Federal Street, Boston, MA 02110
(800) 225-6265
CUSTODIAN
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA 02109
C-SISAI
<PAGE>
[LOGO: HOUSE]
EV Classic
Strategic Income
Fund
Annual
Shareholder Report
October 31, 1996
To Shareholders
I am happy to report that EV Classic Strategic Income Fund had a
total return of 15.1% during the year ended October 31, 1996. That
return was the result of a rise in net asset value per share to
$12.09 from $11.33 on October 31, 1995, and the reinvestment of
$0.883 in dividends. It does not include the effect of the 1%
contingent deferred sales charges incurred by shareholders redeeming
within the first year. Based on the October dividend and the
closing net asset value of $12.09, the Fund's distribution rate was
8.23%.
1996: Robust performance for the global bond market and a record
year for global bond issuance...
Paced by the strong showing of Brady bonds and lower interest rates
in Europe, 1996 has been a banner year for the global bond markets.
Driven by falling rates and improving credit quality, foreign bond
markets have drawn increasing interest from institutional and
individual investors alike. Not surprisingly, given the excellent
fixed-income climate, 1996 is also shaping up as a record year for
the issuance of global bonds. Through June 30 alone, $350 billion in
new bonds had come to market, a 60% increase over the same period
last year. Several forces have been driving the trend, including
high levels of government borrowing as emerging economies raise the
capital necessary to fund economic development. The increased global
supply has met with a warm reception from investors. More than $115
billion of dollar-denominated bonds are scheduled to mature in 1996,
according to the Euromoney Capital Market Data Base, and a good
portion of that capital is being redirected into high-yield global
bonds.
Meanwhile, the U.S. bond market, while on the defensive, provided
some selective opportunities...
The U.S. market was generally under pressure throughout the period,
as yields for 5-year Treasuries rose from 5.81% on October 31, 1995
to 6.0% on October 31, 1996. While many investors had anticipated an
economic slowdown in the second half of the year, the economy not
only maintained its momentum but actually proved somewhat stronger
than expected. The economy's strength in the face of weaker
expectations contributed to increasing volatility throughout the
period.
Nonetheless, the Fund benefited from the response of its high-yield
corporate bonds to continued economic growth, while its mortgage-
backed securities outperformed the Treasury market. Thus, in a
difficult fixed-income environment, shareholders again benefited
from the Fund's flexible investment approach. We believe that this
time-tested strategy will continue to provide good fixed income
opportunities - both domestic and global - in the years ahead. In
the pages that follow, portfolio manager Mark Venezia reviews the
Fund's successful fiscal year and gives his outlook for the global
bond market.
[PHOTO OF JAMES B. HAWKES OMITTED]
Sincerely,
/S/ James B. Hawkes
James B. Hawkes
President
December 20, 1996
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.
Management Discussion
An interview with Mark S. Venezia,
vice president and manager of
Strategic Income Portfolio.
Q. Mark, the Fund had an excellent performance during the fiscal
year ended October 31, 1996. To what do you attribute the Fund's
strong showing?
A. Generally, this was a period when many global market trends
worked in the Fund's favor. Our Brady bonds (see Question on page 4)
were the largest contributors to the Fund's performance, as emerging
markets rallied very strongly during the period. Second, we
benefited from our exposure to Europe, as interest rates fell during
the period. Third, yields in the so-called "Dollar Bloc" nations
fell dramatically, causing our Canadian, Australian, and New Zealand
positions to outperform the U.S. Fourth, while the U.S. Treasury
market remained under some pressure, the Fund benefited from a
narrowing of spreads in our U.S. mortgage-backed securities and
high-yield corporate bonds. And finally, the Fund achieved currency
gains as a result of the strength of the dollar against the yen and
the German mark.
Q. Why did the Brady markets do so well?
A. There were several reasons. With the currency crises and market
turbulence of 1994 and early 1995 behind them, global bond investors
focused on the progress emerging countries have made in implementing
economic reforms, fighting inflation and reducing current account
deficits. Moreover, with interest rates in the U.S., Europe, and
Japan still relatively low, the attractive yields on Brady bonds
drew increasing attention. Finally, these emerging economies have
shown that they can sustain growth rates well above those of the
industrialized nations. As a result, we saw some improvement in
credit quality among most Brady issuers. These strong fundamentals
all gave a lift to the Brady markets.
[PHOTO OF MARK S. VENEZIA OMITTED]
Q. Which Brady markets were the best performers for the Fund?
A. Predominantly the Latin American markets, although all emerging
markets tended to fare well. In the first half of the fiscal year,
Poland and Argentina were good positions for the Fund. Investors
gave a warm reception to Argentina's Second Reform of the State,
which promised tax reform and spending cuts. Meanwhile, the Polish
market responded well to the election of President Kwasniewski and
the likelihood of a more stable government still dedicated to
economic reform. Moody's and Standard & Poor's, major bond-rating
agencies, assigned Polish Bradys investment grade ratings, sparking
a sharp rally in the bonds.
In the second half of the period, we focused increasingly on Brazil
and Ecuador, each of which has made remarkable economic progress.
Brazil, for example, reported zero inflation for the month of
September and continued to make progress on administrative reforms.
Ecuador fared well as oil prices firmed throughout the year. In
addition, newly-elected President Bucaram has proven more sensitive
to the needs of business and foreign investorsthan his populist
campaign suggested. That has further encouraged investors.
Q. You've referred to the importance of Brady bonds to the Fund's
performance. Could you briefly explain the mechanics of the Brady
bond markets?
A. Certainly. As some investors already know, Brady bonds are named
after former U.S. Treasury secretary Nicholas Brady, the architect
of a U.S. plan to ensure the medium-term economic stability of
debtor emerging nations. The basic concept behind the Brady Plan was
to restructure these nations' commercial bank loans into bonds,
thereby providing debt relief for the borrowers while creating a
relatively liquid market for the new debt securities.
Portfolio Investments:
Top five weightings according to...
...Regional Credit Exposure
allocations based U.S. 42.2%
on the location Ireland 10.3
of the issurer of each Brazil 7.3
security. This shows Poland 6.4
that the Portfolio's Norway 5.3
largest holdings
were in the U.S.
and Ireland.
...The Portfolio's Currency Allocation
holdings broken U.S. 40.4%
down by country Ireland 10.5
of currency Czech Republic 9.8
denomination. Indonesia 7.7
This shows where Philippines 7.2
movements in
foreign exchange
on the Fund's
share price.
...The contribution Interest Rate
of a country's Sensitivity*
positive weighting to the U.S. 38.6%
Portfolio's duration. Germany 28.8
This shows where Ireland 21.2
changing interest Norway 10.4
rates will have the Canada 9.4
greatest impact
on share prices.
* Calculated by determinging the interest rate sensitivity fo the
Portfolio's positions in each country and dividing by the
Portfolio's overall interest rate sensitivity.
[GRAPHIC CHART OMITTED: The Brady Bond Market:]
Brady issuers demonstrate
improving economic fundamentals*...
1995
GDP Reserves
----- --------
Argentina $276 B $14.3 B
Brazil 689 B 51.8 B
Ecuador 18 B 1.6 B
Mexico 279 B 16.9 B
Philippines 74 B 7.0 B
Poland 116 B 15.0 B
Venezuela 79 B 6.3 B
Footnote reads:
*Data for 1995; Source: J.P. Morgan, Inc.
[GRAPHIC VERTICAL BAR CHART WITH IMAGE OF PAPER SCROLL IN BACKROUND
OMITTED: While Brady trading volume continues to surge.]
'91 $200B
'92 $730B
'93 $1,979B
'94 $2,766B
'95 $3,000B
Footnote reads:
Source: Emerging Markets Traders Association.
The first such plan, featuring an agreement with Mexico, went into
effect in 1990. Although there have been many variations on this
early theme, this first agreement provided the basic precedent for
future efforts: 1) securitization, or transforming bank loans into
bonds; 2) collateralized principal, whereby the principal portion of
some newly created bonds is backed by zero-coupon U.S. Treasuries;
3) discounted exchanges, whereby loans are exchanged at a discount
in return for long-term, floating-rate bonds; and 4) below-market
fixed coupons, whereby loans are exchanged at par value, but with
below-market coupons. These various structures have been used to
improve economic stability for a wide range of emerging markets in
Latin America, Southeast Asia, the Middle East and Eastern Europe.
Q. What are the overall benefits of the Brady market?
A. There are several. First, for emerging econo-mies, the use of
Brady bonds provides debt relief through lower interest rates,
longer maturities, and principal reduction. Often, that debt relief
gives these nations additional breathing room in the critical early
transition to a market economy. Second, the underlying credit of
some of the new debt is improved through guarantees of principal
repayment, which is very important from the investors' point of
view. Finally, the process helps to broaden the investor base for
the bonds and thereby improve their liquidity. As a measure of that
liquidity, trading in Brady bonds will far exceed $1 trillion in
1996.
[GRAPHIC PIE CHART OMITTED: Strategic Allocation:*]
High-Yield 16.4%
Foreign
Investment Grade 39.3%
U.S. Investment
Grade 44.3%
Footnote reads:
*Based on market valkue as of 10/31/96
Because the Fund is actively managed, country
and sector allocations are subject to change.
Q. Why did the Fund benefit from a strong dollar?
A. In fiscal year 1996, the dollar was very strong relative to the
Japanese yen. The Fund maintained short positions versus the yen
throughout the period, which helped the Fund's performance.
Meanwhile, in Europe, the Fund benefited from the relative strength
of the dollar against the German mark. Typically, when the mark is
weak versus the dollar, the other western European countries
benefit. Therefore, our strategy in Europe was to hold bond
positions in peripheral European countries, while maintaining short
positions in mark-related currencies. That strategy was doubly
effective because we not only realized the "carry" - the yield
difference between our bond holdings and our short currency
positions - but also benefited from a strong outperformance by the
European bond markets. Yields fell throughout Europe as countries
prepared to meet the strict economic criteria for monetary union.
Q. Looking forward, Mark, what is your outlook for the global
markets in the coming year?
A. I'm optimistic about the coming year forseveral reasons. First,
the emerging nations are likely to continue their progress toward
economic reform. While it's unreasonable to expect a repeat of this
year's remarkable returns from the Brady markets, the emerging
markets should still present good investment opportunities. Second,
some global markets - Germany is a good example - still have
relatively steep yield curves, so they may have room for further
appreciation in those markets. Finally, - and perhaps most
fundamentally - inflation is still in decline around the world. That
is certainly a favorable development for global bond investors.
Naturally, past trends do not guarantee future performance. And of
course, investing in global markets and high-yield markets may
involve currency and political risk. But foreign bonds continue to
represent unique vehicles for fixed-income investors. In the coming
year, EV Classic Strategic Income Fund will continue to pursue those
opportunities.
Comparison of Change in Value of a $10,000 Investment in EV Marathon
Strategic Income Fund, the J.P. Morgan Hedged Short-Term Global Index and
the Lipper Short World Multi-Market Income Funds average
From November 30, 1990, through October 31, 1996
AVERAGE 1 Life of Value of
ANNUAL RETURNS Year Fund* Investment at 10/31
- ----------------------------------------------------------
Including CDSC 14.1% 12.0% $13,212
Without CDSC 15.1% 12.0% $13,212
EV Classic Strategic Income Fund vs. Lipper Short World Multi-Market
Income Funds average and J.P. Morgan Hedged Short-Term Global Index
Date Fund Lipper JP Morgan
5/31/94 $10,000 $10,000 $10,000
6/30/94 $9,631 $9,928 $10,002
7/31/94 $9,697 $9,961 $10,073
8/31/94 $9,859 $10,001 $10,073
9/30/94 $9,859 $10,032 $10,073
10/31/94 $9,879 $10,063 $10,112
11/30/94 $9,980 $10,080 $10,123
12/31/94 $9,980 $9,809 $10,134
1/31/95 $9,859 $9,745 $10,258
2/28/95 $9,838 $9,786 $10,380
3/31/95 $9,808 $9,766 $10,462
4/30/95 $10,406 $9,930 $10,562
5/31/95 $10,923 $10,063 $10,746
6/30/95 $10,821 $10,089 $10,785
7/31/95 $10,923 $10,180 $10,863
8/31/95 $11,166 $10,225 $10,950
9/30/95 $11,399 $10,324 $11,027
10/31/95 $11,480 $10,391 $11,121
11/30/95 $11,632 $10,461 $11,242
12/31/95 $11,765 $10,564 $11,338
1/31/96 $12,039 $10,691 $11,450
2/28/96 $11,818 $10,638 $11,415
3/31/96 $11,903 $10,680 $11,435
4/30/96 $12,160 $10,776 $11,507
5/31/96 $12,227 $10,830 $11,546
6/30/96 $12,418 $10,916 $11,608
7/31/96 $12,429 $11,004 $11,669
8/31/96 $12,634 $11,092 $11,747
9/30/96 $13,028 $11,247 $11,874
10/31/96 $13,212 $11,360 $11,999
Footnote reads:
Past performance is not indicative of future results. Investment returns and
principal will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Source: Towers Data Systems,
Bethesda, MD Lipper Analytical Services, Inc. **Investment operations
commenced 11/26/90. +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. It is not possible to invest
directly in the index.
Fund performance
In accordance with guidelines issued by the Securities and Exchange
Commission, we are including a performance chart comparing your
Fund's total return with that of a broad-based investment index. The
lines on the chart represent the total returns of $10,000
hypothetical investments in EV Classic Strategic Income Fund and the
unmanaged J.P. Morgan Hedged Short-Term Global Index.
The total return figures
The heavy solid 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 light solid line represents the performance of the J.P. Morgan
Hedged Short-Term Global Index. The Index's return does not reflect
any commissions or expenses that would be incurred if an investor
individually purchased or sold the securities represented in the
Index. It is not possible to invest in the Index itself. The dotted
line represents the average performance of Short World Multi-Market
Income Funds, as compiled by Lipper Analytical Services, Inc., a
mutual fund ranking service, and is included to show how the Fund
has performed relative to its universe.
EV Classic Strategic Income Fund
Financial Statements
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Statement of Assets and Liabilities
October 31, 1996
<S> <C> <C>
Assets:
Investment in Strategic Income Portfolio (Portfolio),
at value (Note 1A) $ 1,681,181
Receivable from the Administrator (Note 4) 36,776
Deferred organization expenses (Note 1D) 19,611
-------------
Total assets $ 1,737,568
Liabilities:
Dividends payable $ 3,441
Accrued organization expense 39,263
Accrued expenses 1,601
-------------
Total liabilities 44,305
-------------
Net Assets for 140,099 shares of beneficial
interest outstanding $ 1,693,263
=============
Sources of Net Assets:
Paid-in capital $ 1,594,400
Accumulated net realized gain on investment transactions
(computed on the basis of identified cost) 11,596
Unrealized appreciation of investments from Portfolio
(computed on the basis of identified cost) 73,778
Accumulated undistributed net investment income 13,489
-------------
Total $ 1,693,263
=============
Net Asset Value, Offering and Redemption Price Per Share
($1,693,263 (divided by) 140,099 shares of beneficial interest) $12.09
======
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1996
<S> <C> <C>
Investment Income (Note 1B):
Interest income allocated from Portfolio $ 92,313
Expenses allocated from Portfolio (8,519)
-------------
Total investment income $ 83,794
Expenses --
Custodian fees $ 2,491
Distribution costs (Note 5) 9,441
Transfer and dividend disbursing agent fees 935
Printing and postage 22,294
Legal and accounting services 12,937
Registration fees 16,538
Amortization of organization expenses (Note 1D) 8,886
Miscellaneous 2,944
------------
Total expenses $ 76,466
Deduct allocation of expenses to the Administrator
(Note 4) (61,756)
------------
Net expenses 14,710
-------------
Net investment income $ 69,084
-------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) from Portfolio (identified
cost basis) (including net loss due to foreign currency
rate fluctuations of $8,601) --
Investment transactions $ 18,095
Financial futures contracts 1,230
Written option transactions 258
Foreign currency and forward foreign
currency exchange contracts 14,556
------------
Net realized gain on investments $ 34,139
Change in unrealized appreciation of investments 72,758
-------------
Net realized and unrealized gain on investments $ 106,897
-------------
Net increase in net assets from operations $ 175,981
=============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Year Ended October 31,
------------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $ 69,084 $ 1,031
Net realized gain (loss) on investments 34,139 (441)
Change in unrealized appreciation of investments 72,758 1,001
------------- -------------
Net increase in net assets from operations $ 175,981 $ 1,591
------------- -------------
Distributions to shareholders (Note 2) --
From net investment income $ (69,084) $ --
In excess of net investment income (9,026) --
------------- -------------
Total distributions $ (78,110) $ --
------------- -------------
Transactions in shares of capital stock (Note 3) --
Proceeds from sale of shares $ 1,623,722 $ --
Net asset value of shares issued to shareholders
in payment of distributions declared 65,510 --
Cost of shares redeemed (105,245) (62)
------------- -------------
Increase (decrease) in net assets
from Fund share transactions $ 1,583,987 $ (62)
------------- -------------
Net increase in net assets $ 1,681,858 $ 1,529
Net Assets:
At beginning of year 11,405 9,876
------------- -------------
At end of year (including accumulated
undistributed net investment income of $13,489
and $590, respectively) $ 1,693,263 $ 11,405
============= =============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Year Ended October 31,
--------------------------------------------------
1996 1995++ 1994*++
-------------- ------------ ------------
<S> <C> <C> <C>
Net asset value -- Beginning of year $ 11.330 $ 9.750 $ 10.000
-------- -------- --------
Income from operations:
Net investment income ** $ 0.804 $ 1.021 $ 0.348
Net realized and unrealized gain
(loss) on investments 0.865 0.559 (0.495)
-------- -------- --------
Total income (loss) from operations $ 1.669 $ 1.580 $ (0.147)
-------- -------- --------
Less distributions:
From net investment income $ (0.804) $ -- $ (0.103)
In excess of net investment income (0.105) -- --
-------- -------- --------
Total distributions $ (0.909) $ -- $ (0.103)
-------- -------- --------
Net asset value -- End of year $ 12.090 $ 11.330 $ 9.750
======== ======== ========
Total Return (2) 15.09% 16.21% (1.41%)
Ratios/Supplemental Data **
Ratio of net expenses to average net assets (1) 2.38% 0.90% 0.76%+
Ratio of net investment income to average net assets 7.08% 9.84% 7.74%+
Net assets, end of period (000's omitted) $ 1,693 $ 11 $ 10
** The operating expenses of the Fund reflect an allocation of expenses to the Administrator. Had such
action not been taken, net investment income (loss) per share and the ratios would have been as follows:
Net investment income (loss) per share $ 0.085 $(13.000) $ (6.900)
======== ======== ========
Ratios (As a percentage of average net assets):
Expenses (1) 8.71% 131.85% 160.83%+
Net investment income (loss) 0.75% (121.12%) (152.33%)+
+ Computed on an annualized basis
++ Per share amounts have been computed using average share outstanding during the period.
* For the period from the start of business, May 25, 1994, to October 31, 1994.
(1) Includes the Fund's share of Strategic Income Portfolio's allocated expenses.
(2) Total investment return is calculated assuming a purchase at the net asset value on the first day and
a sale at the net asset value on the last day of each period reported. Dividends and distributions,
if any, are assumed to be reinvested at the net asset value on the payable date. Total return is not
computed on an annualized basis.
The accompanying notes are an integral part of the financial statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(1) Significant Accounting Policies
EV Classic Strategic Income Fund (the Fund), is a non-diversified
series of Eaton Vance Mutual Funds Trust (the Trust). The Fund is
registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company. The Fund invests all of
its investable assets in interests in the Strategic Income Portfolio
(the Portfolio), a New York Trust having the same investment
objective as the Fund. The value of the Fund's investment in the
Portfolio reflects the Fund's proportionate interest in the net
assets of the Portfolio (1.3% at October 31, 1996.) The performance
of the Fund is directly affected by the performance of the
Portfolio. The financial statements of the Portfolio, including the
portfolio of investments, are included elsewhere in this report and
should be read in conjunction with the Fund's financial statements.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its
financial statements. The policies are in conformity with generally
accepted accounting principles.
A. Investment Valuation -- Valuation of securities by the Portfolio
is discussed in Note 1 of the Portfolio's Notes to Financial
Statements which are included elsewhere in this report.
B. Income -- The Fund's net investment income consists of the Fund's
pro rata share of the net investment income of the Portfolio, less
all actual and accrued expenses of the Fund determined in accordance
with generally accepted accounting principles.
C. Federal Taxes -- The Fund's policy is to comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies and to distribute to shareholders 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.
D. Deferred Organization Expenses -- Costs incurred by the Fund in
connection with its organization, including registration costs, are
being amortized on the straight-line basis over five years beginning
on the date the Fund commenced operations.
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 income and expenses
during the reporting period. Actual results could differ from those
estimates.
F. Expense Reduction -- Investors Bank & Trust Company (IBT) serves
as custodian to the Fund and the Portfolio. Pursuant to the
custodian agreement, IBT receives a fee reduced by credits which is
determined based on the average cash balance the Fund or the
Portfolio maintains with IBT. All significant credit balances used
to reduce the Fund's custodian fees are reflected as a reduction of
operating expenses on the Statement of Operations.
(2) Distributions to Shareholders
The net income of the Fund is determined daily and substantially all
of the net income so determined is declared as a dividend to
shareholders of record at the time of declaration. Distributions, if
any, are paid monthly. Distributions of allocated realized capital
gains, if any, are made at least annually. Shareholders may reinvest
capital gain distributions in additional shares of the Fund at the
net asset value as of the ex-dividend date. Distributions are paid
in the form of additional shares or, at the election of the
shareholder, in cash. The Fund distinguishes between distributions
on a tax basis and a financial reporting basis. Generally accepted
accounting principles require that only distributions in excess of
tax basis earnings and profits be reported in the financial
statements as a return of capital. Differences in the recognition or
classification of income between the financial statements and tax
earnings and profits which result in temporary over distributions
for financial statement purposes are classified as distributions in
excess of net investment income or accumulated net realized gains.
Permanent differences between book and tax accounting relating to
distributions are reclassified to paid-in capital. During the year
ended October 31, 1996, reclassifications were made among the Fund's
capital accounts primarily due to differences in book and tax
accounting for investments in forward contracts and foreign
denominated investments. Net investment income, net realized gains
and net assets were not affected by this reclassification.
(3) Capital Stock
At October 31, 1996 there were one billion shares of $0.0001 par
value capital stock authorized. Transactions in capital stock were
as follows:
Year Ended October 31,
----------------------------
1996 1995
----------- ----------
Sales 142,327 --
Issued to shareholders
electing to receive
payments of
distributions in
capital stock 5,582 --
Redemptions (8,817) (6)
------------ ----------
Net increase (decrease) 139,092 (6)
============ ==========
(4) Transactions with Affiliates
Eaton Vance Management (EVM) serves as the administrator of the
Fund, but currently receives no compensation for these services. The
Portfolio has engaged Boston Management and Research (BMR), a
subsidiary of EVM, to render investment advisory services. See Note
2 of the Portfolio's Notes to Financial Statements which are
included elsewhere in this report. To enhance the net income of the
Fund, $61,756, of expenses related to the operation of the Fund were
allocated to EVM. Certain of the officers and Trustees of the Fund
and Portfolio are officers and directors/trustees of the above
organizations (Note 5). Except as to Trustees of the Fund and the
Portfolio who are not members of EVM's or BMR's organization,
officers and Trustees receive remuneration for their services to the
Fund out of such investment adviser fee earned by BMR.
(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, which is
approved annually, requires the Fund to pay the Principal
Underwriter, Eaton Vance Distributors, Inc. (EVD), amounts equal to
1/365 of 0.75% of the Fund's daily net assets, for providing ongoing
distribution services and facilities to the Fund. The Fund will
automatically discontinue payments to EVD during any period in which
there are no outstanding Uncovered Distribution Charges, which are
equivalent to the sum of (i) 6.25% of the aggregate amount received
by the Fund for 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 amounts theretofore paid to EVD. The amount payable to
EVD with respect to each day is accrued on such day as a liability
of the Fund and, accordingly, reduces the Fund's net assets. The
Fund paid or accrued $7,225, to EVD for the year ended October 31,
1996. At October 31, 1996, the amount of Uncovered Distributions
Charges of EVD calculated under the Plan was approximately $90,000.
In addition, the Plan permits the Fund to make monthly payments of
service fees to the Principal Underwriter in amounts not expected to
exceed 0.25% of the Fund's average daily net assets for any fiscal
year. The Trustees of the Trust have initially implemented the Plan
by authorizing the Fund to make monthly service fee payments to the
Principal Underwriter in amounts not expected to exceed 0.25% of the
Fund's average daily net assets for any fiscal year. The Fund paid
or accrued service fees to or payable to EVD for the year ended
October 31, 1996, in the amount of $2,216. EVD makes monthly service
fee payments to Authorized Firms in amounts anticipated to be
equivalent to 0.25%, annualized, of the assets maintained in the
Fund by their customers.
On sales of shares made on January 30, 1995 and thereafter, EVD pays
to an Authorized Firm a service fee at the time of sale equal to
0.25% of the purchase price of the shares sold by such Firm and
monthly payments of service fees in amounts not expected to exceed
0.25% per annum of the Fund's average daily net assets based on the
value of Fund shares sold by such Firm and remaining outstanding for
at least one year. During the first year after a purchase of Fund
shares, EVD will retain the service fee as reimbursement for the
service fee payment made to the Authorized Firm at the time of sale.
Service fee payments are made for personal services and/or
maintenance of shareholder accounts. Service fees paid to EVD and
Authorized Firms are separate and distinct from the sales
commissions and distribution fees payable by the Fund to EVD, and as
such are not subject to automatic discontinuance when there are no
outstanding Uncovered Distribution Charges of EVD.
Certain of the officers and Trustees of the Fund are officers or
directors of EVD.
(6) Contingent Deferred Sales Charge
For shares purchased on or after January 30, 1995, a contingent
deferred sales charge (CDSC) of 1% is imposed on any redemption of
Fund shares made within one year of purchase. Generally the CDSC is
based upon the lower of the net asset value at date of redemption or
date of purchase. No charge is levied on shares acquired by
reinvestment of dividend or capital gain distributions. No CDSC is
levied on shares which have been sold to EVD or its affiliates or to
their respective employees or clients. CDSC charges are paid to EVD
to reduce the amount of Uncovered Distribution Charges calculated
under the Fund's Distribution Plan. CDSC charges received when no
Uncovered Distribution Charges exist will be credited to the Fund.
For the year ended October 31, 1996, no CDSC was received by EVD
from shareholders.
(7) Investment Transactions
Increases and decreases in the Fund's investment in the Portfolio
for the year ended October 31, 1996 aggregated $1,639,512 and
$160,174, respectively.
Report of Independent Accountants
To the Board of Trustees of Eaton Vance Mutual Funds Trust and
Shareholders of EV Classic Strategic Income Fund:
We have audited the accompanying statement of assets and liabilities
of EV Classic Strategic Income Fund, a series of Eaton Vance Mutual
Funds Trust, as of October 31, 1996, the related statement of
operations for the year then ended, the statements of changes in net
assets for each of the two years then ended and the financial
highlights for each of the two years then ended and for the period
from May 25, 1994 (start of business) to October 31, 1994. 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.
Our procedures included confirmation of securities owned as of
October 31, 1996, 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, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of EV Classic Strategic Income Fund, a series of
Eaton Vance Mutual Funds Trust, as of October 31, 1996, the results
of its operations for the year then ended, the changes in its net
assets for each of the two years then ended and the financial
highlights for each of the two years then ended and for the period
from May 25, 1994 (start of business) to October 31, 1994, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 2, 1996
Strategic Income Portfolio
Portfolio of Investments
October 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Principal U.S. $ Value
- ------------------------------------------------------------------------------------------------
Bonds & Notes -- 90.8%
- ------------------------------------------------------------------------------------------------
ARGENTINA, 4.2% U.S. Dollars
Argentina Discount Bond (Brady), 6.4375%, 3/31/23
(identified cost $5,119,445) 7,700,000 $ 5,563,250
---------------
AUSTRALIA, 0.6% Australian Dollars
State Electricity - Victoria, 9.25%, 9/18/03
(identified cost $733,564) 1,000,000 $ 851,231
---------------
BRAZIL, 7.3% U.S. Dollars
Brazil Discount Bond (Brady), 6.5%, 4/15/24
(identified cost $7,844,804) 13,200,000 $ 9,718,500
---------------
COLOMBIA, 2.7% U.S. Dollars
FEN, 9.375%, 6/15/06
(identified cost $3,552,500) 3,500,000 $ 3,609,375
---------------
CZECH REPUBLIC, 4.6% Czech Korunas
CEZ (Czech Electric Company), 14.375%, 1/27/01
(identified cost $6,022,084) 159,710,000 $ 6,137,439
---------------
DENMARK, 1.4% Danish Krone
Denmark Government, 8%, 3/15/06
(identified cost $1,869,421) 10,000,000 $ 1,849,713
---------------
ECUADOR 1.4% U.S. Dollars
Ecuador Discount Bond (Brady), 6.50%, 2/28/25
(identified cost $1,625,211) 2,900,000 $ 1,901,313
---------------
IRELAND, 10.3% Irish Pound
Irish Government, 8%, 8/18/06 3,000,000 $ 5,243,751
Irish Government, 9.25%, 7/11/03 4,500,000 8,411,749
---------------
Total Ireland (identified cost $12,681,571) $ 13,655,500
---------------
NEW ZEALAND, 4.2% New Zealand Dollars
New Zealand Government, 6.5%, 2/15/00 4,000,000 $ 2,769,047
New Zealand Government, 8%, 11/15/06 3,800,000 2,819,933
---------------
Total New Zealand (identified cost $5,317,623) $ 5,588,980
---------------
NORWAY, 5.3% Norwegian Krones
Norway Government, 6.75%, 1/15/07 20,000,000 $ 3,121,289
Norway Government, 7.0%, 5/31/01 24,000,000 3,914,686
---------------
Total Norway (identified cost $6,814,190) $ 7,035,975
---------------
POLAND, 6.4% Polish Zloty
Polish Government T-Bill, 0%, 11/6/96 4,640,000 $ 1,645,932
Polish Government T-Bill, 0%, 12/18/96 3,670,000 1,274,691
Polish Government T-Bill, 0%, 1/1/97 5,860,000 2,021,571
Polish Government T-Bill, 0%, 1/29/97 10,420,000 3,545,081
---------------
Total Poland (identified cost $8,560,401) $ 8,487,275
---------------
UNITED STATES, 42.2% U.S. Dollars
Corporate Bonds & Notes, 5.4%
Agricultural Minerals & Chemicals,
Sr. Notes, 10.75%, 9/30/03 1,000,000 $ 1,065,000
Applied Extrusion, Sr. Notes, 11.5%, 4/1/02 1,000,000 1,045,000
Dayton Hudson Medium Term Note, 9.5%, 6/10/15 665,000 767,769
Dayton Hudson Medium Term Note, 9.52%, 6/10/15 350,000 404,583
Overhead Door Corp., Sr. Notes, 12.25%, 2/1/00 500,000 540,000
TRW Inc., Medium Term Note, 9.35%, 6/4/20 1,900,000 2,288,417
United International Holdings Inc.,
Sr. Sec. Disc. Notes, 0%, 11/15/99 1,500,000 1,035,000
---------------
Total United States Corporate Bonds & Notes
(identified cost $6,740,638) $ 7,145,769
---------------
Mortgage Pass-Throughs, 34.9% U.S. Dollars
Federal Home Loan Mortgage Corp.
Participation Certificates:
4.75%, with various maturities to 2003 40,582 $ 39,776
5.5%, with maturity at 2019 22,409 22,429
8%, with various maturities to 2021 4,438,216 4,591,223
8.5%, with various maturities to 2024 5,428,489 5,711,766
9%, with maturity at 2019 996,142 1,061,484
12.5%, with maturity at 2011 126,267 143,651
12.75%, with maturity at 2013 201,306 229,027
13%, with maturity at 2013 146,828 171,027
13.5%, with maturity at 2019 552,700 649,918
---------------
$ 12,620,301
---------------
Federal National Mortgage Association
Mortgage-Backed Securities:
4.75%, with maturity at 1999 65,853 $ 65,200
5%, with maturity at 2003 156,521 153,070
5.5%, with various maturities to 2012 133,861 133,327
7.5%, with maturity at 2002 939,228 958,609
8%, with various maturities to 2013 4,029,758 4,177,277
8.5%, with various maturities to 2026 3,637,468 3,823,635
9%, with various maturities to 2017 8,292,458 8,814,032
12.75%, with maturity at 2014 197,178 230,626
13%, with various maturities to 2015 1,408,664 1,643,333
13.25%, with maturity at 2014 303,799 360,103
13.5%, with various maturities to 2015 1,235,267 1,438,421
14.75%, with various maturities to 2012 2,942,240 3,555,441
---------------
$ 25,353,074
---------------
Government National Mortgage Association: U.S. Dollars
6.5%, with various maturities to 2007 1,292,604 $ 1,298,318
8%, with maturity at 2017 4,781,543 4,978,231
9%, with maturity at 2016 1,240,467 1,323,852
13.5%, with various maturities to 2014 562,280 673,444
---------------
$ 8,273,845
---------------
Total Mortgage Pass-Throughs (identified cost, $45,801,731) $ 46,247,220
---------------
U.S. Treasury Bond, 11.75%, 2/15/01+ U.S. Dollars
(identified cost, $2,603,438) 2,000,000 $ 2,422,180
---------------
Total United States (identified cost, $55,145,807) $ 55,815,169
---------------
Total Bonds & Notes (identified cost, $115,286,631) $ 120,213,720
---------------
- ------------------------------------------------------------------------------------------------
Short-Term Obligations -- 3.8%
- ------------------------------------------------------------------------------------------------
Banque National De Paris, Euro Time-Deposit U.S. Dollars
Cayman Islands, 5.50%, 11/1/96
(at amortized cost) 5,000,000 $ 5,000,000
---------------
Total Investments (identified cost, $120,286,631) $ 125,213,720
Other Assets, less Liabilities, 5.4% 7,193,079
---------------
Net Assets, 100% $ 132,406,799
===============
+Security pledged as collateral on financial futures contracts.
The accompanying notes are an integral part of the financial statements
</TABLE>
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1996
<S> <C>
Assets:
Investments, at value (Note 1A) (identified
cost, $120,286,631) $ 125,213,720
Cash 659
Foreign currency, at value (identified cost, $7,952) 7,744
Receivable for investments sold 1,896,365
Interest receivable 2,359,131
Deferred organization expenses (Note 1J) 10,963
Receivable for foreign
forward currency exchange contracts 2,971,260
-------------
Total assets $ 132,459,842
Liabilities:
Payable for daily variation margin on open
financial futures contracts (Note 1E) $ 29,359
Payable to affiliate --
Trustees' fees 681
Accrued expenses 23,003
-------------
Total liabilities 53,043
-------------
Net Assets applicable to investors'
interest in Portfolio $ 132,406,799
=============
Sources of Net Assets:
Net proceeds from capital contributions
and withdrawals $ 124,488,477
Unrealized appreciation of investments, futures,
options and foreign currency (computed on the
basis of identified cost) 7,918,322
-------------
Total $ 132,406,799
=============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1996
<S> <C>
Investment Income:
Interest Income -- $ 13,181,562
Expenses --
Investment adviser fee (Note 2) $ 744,744
Administration fee (Note 2) 208,657
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 8,663
Custodian fees 138,046
Legal and accounting services 87,414
Amortization of organization expenses (Note 1J) 4,721
Miscellaneous 7,025
-------------
Total expenses 1,199,270
-------------
Net investment income $ 11,982,292
-------------
Realized and Unrealized Gain (Loss) on Investments,
Futures, Options and Foreign Currency:
Net realized gain (loss) (identified cost basis)
(including net loss due to foreign currency rate
fluctuations of $775,003) --
Investment transactions $ 9,066,256
Financial futures contracts (115,205)
Written options 23,385
Foreign currency and forward foreign
currency exchange contracts 598,763
-------------
Net realized gain on investments,
futures, options and foreign currency $ 9,573,199
Change in unrealized appreciation (depreciation) --
Investments $ (2,027,026)
Financial futures contracts 426,241
Foreign currency and forward foreign
currency exchange contracts 5,421,373
-------------
Net change in unrealized appreciation
of investments, futures, options and
foreign currency $ 3,820,588
-------------
Net realized and unrealized gain on investments,
futures, options and foreign currency 13,393,787
-------------
Net increase in net assets resulting from operations $ 25,376,079
=============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Year Ended October 31,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $ 11,982,292 $ 16,533,049
Net realized gain (loss) on investments, futures,
options and foreign currency 9,573,199 (11,886,837)
Change in unrealized appreciation
of investments, futures, options and foreign currency 3,820,588 15,637,070
------------- -------------
Net increase in net assets resulting from operations $ 25,376,079 $ 20,283,282
------------- -------------
Capital transactions --
Contributions $ 10,557,996 $ 7,892,611
Withdrawals (56,110,565) (112,061,370)
------------- -------------
Net decrease in net assets resulting
from capital transactions $ (45,552,569) $(104,168,759)
------------- -------------
Total decrease in net assets $ (20,176,490) $ (83,885,477)
Net Assets:
At beginning of year 152,583,289 236,468,766
------------- -------------
At end of year $ 132,406,799 $ 152,583,289
============= =============
<CAPTION>
- ----------------------------------------------------------------------------------------------
Supplementary Data
Year Ended October 31,
------------------------------------------
1996 1995 1994*
---------- ----------- ----------
<S> <C> <C> <C>
Ratios (as a percentage of average net assets):
Expenses 0.86% 0.84% 0.82%+
Net investment income 8.62% 9.08% 8.41%+
Portfolio Turnover 97% 78% 71%
+Computed on an annualized basis.
*For the period from the start of business, March 1, 1994, to October 31, 1994.
The accompanying notes are an integral part of the financial statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(1) Significant Accounting Policies
Strategic Income Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940 as a non-diversified open-end
investment company. The Portfolio, which was organized as a trust
under the laws of the State of New York in 1992, seeks to provide a
high level of income by investing in a global portfolio consisting
primarily of high grade debt securities. The Declaration of Trust
permits the Trustees to issue beneficial interests in the Portfolio.
The following is a summary of significant accounting policies of the
Portfolio. The policies are in conformity with generally accepted
accounting principles.
A. Investment Valuations - Debt securities (other than mortgage-
backed, "pass-through," securities and short-term obligations
maturing in sixty days or less), including listed securities and
securities for which price quotations are available and forward
contracts, will normally be valued on the basis of market valuations
furnished by pricing services. Mortgage backed, "pass through,"
securities are valued using a matrix pricing system which takes into
account yield differentials, anticipated prepayments and interest
rates. Financial futures contracts listed on commodity exchanges and
exchange-traded options are valued at closing settlement price.
Short-term obligations and money-market securities maturing in sixty
days or less are valued at amortized cost which approximates value.
Non-U.S. dollar denominated short-term obligations are valued at
amortized cost as calculated in the base currency and translated
into U.S. dollars at the current exchange rate. Investments for
which market quotations are unavailable are valued at fair value
using methods determined in good faith by or at the direction of the
Trustees.
B. Income - Interest income is determined on the basis of interest
accrued and discount earned, adjusted for amortization of discount
when required for federal income tax purposes.
C. Gains and Losses From Investment Transactions - Realized gains
and losses from investment transactions are recorded on the basis of
identified cost. For book purposes, gains and losses are not recognized
until disposition. For federal tax purposes, the Fund is subject to
special tax rules that may affect the amount, timing, and character of
gains recognized on certain of the Portfolio's investments. The Portfolio
has elected, under Section 1092 of the Internal Revenue Code (the "Code"),
to utilize mixed straddle accounting for certain designated classes of
activities involving domestic options and domestic financial futures
contracts in determining recognized gains and losses. Under this
method, Section 1256 positions (financial futures contracts and
options on investments or financial futures contracts) and non-
Section 1256 positions (bonds, etc.) are marked-to-market on a daily
basis resulting in the recognition of taxable gains and losses on a
daily basis. Such gains or losses are categorized as short-term or
long-term based on aggregation rules provided in the Code.
D. Income Taxes - The Portfolio is treated as a partnership for
federal tax purposes. No provision is made by the Portfolio for
federal or state taxes on any taxable income of the Portfolio
because each investor in the Portfolio is ultimately responsible for
the payment of any taxes. Since some of the Portfolio's investors
are regulated investment companies that invest all or substantially
all of their assets in the Portfolio, the Portfolio normally must
satisfy the applicable source of income and diversification
requirements (under the Code) in order for its investors to satisfy
them. The Portfolio will allocate at least annually among its
investors each investor's distributive share of the Portfolio's net
investment income, net realized capital gains, and any other items
of income, gain, loss, deduction or credit.
E. Financial Futures Contracts - Upon entering into a financial
futures contract, the Portfolio is required to deposit an amount
("initial margin"), either in cash or securities, equal to a certain
percentage of the purchase price indicated in the financial futures
contract. Subsequent payments are made or received by the Portfolio
("variation margin") 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 to
hedge against anticipated future changes in interest or currency
exchange rates. Should interest or currency exchange rates move
unexpectedly, the Portfolio may not achieve the anticipated benefits
of the financial futures contracts and may realize a loss. If the
Portfolio enters into a closing transaction, the Portfolio will
realize, for book purposes, a gain or loss equal to the difference
between the value of the financial futures contract to sell and
financial futures contract to buy.
F. Foreign Currency Translation - Investment valuations, other
assets, and liabilities initially expressed in foreign currencies
are converted each business day into U.S. dollars based upon current
exchange rates. Purchases and sales of foreign investment securities
and income and expenses are converted into U.S. dollars based upon
currency exchange rates prevailing on the respective dates of such
transactions. Recognized gains and losses on investment transactions
attributable to foreign currency rates are recorded for financial
statement purposes as net realized gains and losses on investments.
That portion of unrealized gains and losses on investments that
result from fluctuations in foreign currency exchange rates are not
separately disclosed.
G. Written Options - The Portfolio may write call or put options for
which premiums are received and are recorded as liabilities, and are
subsequently adjusted to the current value of the options written.
Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are
exercised or are closed are offset against the proceeds or amount
paid on the transaction to determine the realized gain or loss. If a
put option is exercised, the premium reduces the cost basis of the
securities purchased by the Portfolio. The Portfolio as a writer of
an option may have no control over whether the underlying securities
may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the securities
underlying the written option.
H. Forward Foreign Currency Exchange Contracts - The Portfolio may
enter into forward foreign currency exchange contracts for the
purchase or sale of a specific foreign currency at a fixed price on
a future date. Risks may arise upon entering these contracts from
the potential inability of counterparties to meet the terms of their
contracts and from movements in the value of a foreign currency
relative to the U.S. dollar. The Portfolio will enter into forward
contracts for hedging purposes as well as non-hedging purposes. The
forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized
until such time as the contracts have been closed.
I. Reverse Repurchase Agreements - The Portfolio may enter into
reverse repurchase agreements. Under such an agreement, the
Portfolio temporarily transfers possession, but not ownership, of a
security to a counterparty, in return for cash. At the same time,
the Portfolio agrees to repurchase the security at an agreed-upon
price and time in the future. The Portfolio may enter into reverse
repurchase agreements for temporary purposes, such as to fund
withdrawals, or for use as hedging instruments where the underlying
security is denominated in a foreign currency. As a form of
leverage, reverse repurchase agreements may increase the risk of
fluctuation in the market value of the Portfolio's assets or in its
yield. Liabilities to counterparties under reverse repurchase
agreements are recognized in the statement of assets and liabilities
at the same time at which cash is received by the Portfolio. The
securities underlying such agreements continue to be treated as
owned by the Portfolio and remain in the Portfolio of investments.
Interest charged on amounts borrowed by the Portfolio under reverse
repurchase agreements is accrued daily and offset against interest
income for financial statement purposes.
J. Deferred Organization Expense - Costs incurred by the Portfolio
in connection with its organization are being amortized on the
straight-line basis over five years.
K. Expense Reduction - Investors Bank & Trust Company (IBT) serves
as custodian to the Portfolio. Pursuant to the custodian agreement,
IBT receives a fee reduced by credit which is determined based on
the average cash balance the Portfolio maintains with IBT. All
significant credit balances used to reduce the Portfolio's custodian
fees are reflected as a reduction of operation expenses on the
Statement of Operations.
L. 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 income and expenses
during the reporting period. Actual results could differ from those
estimates.
M. Other - Investment transactions are accounted for on a trade date
basis.
(2) Investment Adviser Fee and Other
Transactions with Affiliates
The investment adviser fee is earned by Boston Management and
Research (BMR), a wholly-owned subsidiary of Eaton Vance Management
(EVM), as compensation for management and investment advisory
services rendered to the Portfolio. The fee is based upon a
percentage of average daily net assets plus a percentage of gross
investment income (i.e., income other than gains from the sale of
investments). Such percentages are reduced as average daily net
assets exceed certain levels. For the year ended October 31, 1996,
the fee was equivalent to 0.54% (annualized) of the Portfolio's
average net assets for such period and amounted to $744,744. An
administration fee, computed at an effective annual rate of 0.15% of
average daily net assets was also paid to BMR for administrative
services and office facilities. Such fee amounted to $208,657 for
the year ended October 31, 1996.
Except for Trustees of the Portfolio who are not members of EVM's or
BMR's organization, officers and Trustees receive remuneration for
their services to the Portfolio out of such investment adviser fee.
Certain officers of the Portfolio and Trustees of the Trust are
officers and directors/trustees of the above organizations. Trustees
of the Portfolio 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 October 31, 1996, no
significant amounts have been deferred.
(3) Line of Credit
The Portfolio participates with other portfolios and funds managed
by BMR or EVM in a $120 million unsecured line of credit agreement
with a bank. 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, a
Eurodollar rate, or a federal funds effective rate. In addition, a
fee computed at an annual rate of 0.15% on the daily unused portion
of the facility is allocated among the participating portfolios and
funds at the end of each quarter. The Portfolio did not have any
significant borrowings or allocated fees during the year.
(4) Investment Transactions
The Portfolio invests primarily in foreign government and U.S.
Government debt securities. The ability of the issuers of the debt
securities to meet their obligations may be affected by economic
developments in a specific industry or country. Purchases and sales
of investments, other than short-term obligations, for the year
ended October 31, 1996 were as follows:
Purchases -
Investments (non-U.S. Government) $ 88,108,189
U.S. Government Securities 34,398,490
------------
$122,506,679
============
Sales -
Investments (non-U.S. Government) $146,483,894
U.S. Government Securities 1,284,688
------------
$147,768,582
============
(5) Financial Instruments
The Portfolio regularly trades in financial instruments with off-
balance sheet risk in the normal course of its investing activities
to assist in managing exposure to various market risks. These
financial instruments include written options, forward foreign
currency exchange contracts and financial futures contracts and may
involve, to a varying degree, elements of risk in excess of the
amounts recognized for financial statement purposes. The notional or
contractual amounts of these instruments represent the investment
the Portfolio has in particular classes of financial instruments and
does not necessarily represent the amounts potentially subject to
risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are
considered.
<TABLE>
<CAPTION>
A summary of obligations under these financial instruments at
October 31, 1996 is as follows:
Forward Foreign Currency Exchange Contracts
Sales
- ------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ---------------- --------------
<S> <C> <C> <C> <C>
11/25/96 Australian Dollar 4,000,000 $ 3,145,400 $ (23,233)
11/5/96-11/29/96 Belgian Franc 1,112,959,031 38,049,468 2,304,779
11/5/96-1/22/97 Swiss Franc 12,184,273 9,980,904 250,731
11/22/96-12/24/96 Japanese Yen 726,000,000 6,814,064 408,016
12/10/96 New Zealand Dollars 809,921 556,739 (13,202)
---------------- --------------
$ 58,546,575 $ 2,927,091
================ ==============
<CAPTION>
Purchases
- ----------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ---------------- --------------
<S> <C> <C> <C>
11/25/96-11/29/96 Belgian Franc 209,500,272 $ 6,812,444 $ (80,640)
1/27/97 Canadian Dollar 3,750,000 2,801,958 10,008
1/31/97 Czech Koruna 169,905,000 6,237,335 (33,434)
11/6/96-12/6/96 Indonesian Rupiah 23,750,000,000 10,049,138 98,232
11/26/96 Indian Rupee 73,260,000 2,000,000 40,555
11/13/96-3/25/97 Philippine Peso 252,505,000 9,500,000 13,497
11/08/96 Thai Baht 63,700,000 2,500,000 (4,049)
---------------- --------------
$ 39,900,875 $ 44,169
================ ==============
<CAPTION>
Futures Contracts
Net Unrealized
Appreciation
Expiration Date Contracts Position (Depreciation)
- --------------- --------- ---------- --------------
<S> <C> <C> <C>
12/96 47 U.S. 5 year Treasury Bond Futures Short $ (58,345)
12/96 39 U.S. 10 year Treasury Bond Futures Short (43,443)
12/96 28 U.S. 30 year Treasury Bond Futures Short (117,411)
12/96 22 Australian 10 year Bond Futures Long 110,629
12/96 70 Canadian 10 year Bond Futures Long 328,220
12/96 107 French 10 year Bond Futures Short (420,629)
12/96 97 German 10 year Bond Futures Long 297,127
12/96 4 Japanese 10 year Bond Futures Short (164,969)
--------------
$ (68,821)
==============
At October 31, 1996, the Portfolio had sufficient cash and/or securities
to cover margin requirements on open futures contracts.
</TABLE>
Written Option Transactions
Transactions in written options for the period ended
October 31, 1996 were as follows:
Number
of Contracts Premiums
------------- ------------
Outstanding, beginning of year -- --
Options written 3,000 $23,385
Options exercised -- --
Options expired (3,000) ($23,385)
----- -------
Outstanding, end of year -- --
===== =======
(6) Federal Income Tax Basis of Investments
The cost and unrealized appreciation/depreciation in value of the
investments owned at October 31, 1996, as computed on a federal
income tax basis, were as follows:
Aggregate cost $ 120,786,543
=============
Gross unrealized appreciation $ 4,520,011
Gross unrealized depreciation 92,834
-------------
Net unrealized appreciation $ 4,427,177
=============
Report of Independent Accountants
To the Trustees and Investors of Strategic
Income Portfolio:
We have audited the accompanying statement of assets and liabilities
of Strategic Income Portfolio, including the portfolio of
investments, as of October 31, 1996, the related statement of
operations for the year then ended and the statements of changes in
net assets for each of the two years then ended, and supplementary
data for each of the two years then ended and for the period from
March 1, 1994 (start of business) to October 31, 1994. These
financial statements and supplementary data are the responsibility
of the Portfolio's management. Our responsibility is to express an
opinion on these financial statements and supplementary data based
on our 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 supplementary data are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October
31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and supplementary data
referred to above present fairly, in all material respects, the
financial position of Strategic Income Portfolio as of October 31,
1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years then ended, and
the supplementary data for each of the two years then ended and for
the period from March 1, 1994 (start of business) to October 31,
1994, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 2, 1996
This page intentionally left blank.
Investment Management
EV Classic
Strategic Income Fund
- ---------------------
Officers
M. Dozier Gardner
President, Trustee
James B. Hawkes
Vice President, Trustee
H. Day Brigham, Jr.
Vice President
William H. Ahern, Jr.
Vice President
Michael B. Terry
Vice President
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment Banking,
Harvard University Graduate School of Business
Administration
Norton H. Reamer
President and Director, United Asset Management
Corporation
John L. Thorndike
Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
Strategic
Income Portfolio
- ----------------
Officers
James B. Hawkes
President, Trustee
Mark S. Venezia
Vice President
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment Banking,
Harvard University Graduate School of Business
Administration
Norton H. Reamer
President and Director, United Asset Management
Corporation
John L. Thorndike
Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
Investment Adviser of
Strategic Income Portfolio
Boston Management and Research
24 Federal Street
Boston, MA 02110
Administrator of EV Classic
Strategic 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 15374
Boston, MA 02205-1537
Transfer and Dividend Disbursing Agent
First Data Investor Services Group, Inc.
BOS725
P.O. Box 1559
Boston, MA 02104
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
This report must be preceded or accompanied by
a current prospectus which contains more complete
information on the Fund, including its distribution plan,
sales charges and expenses. Please read the prospectus
carefully before you invest or send money.
C-SGSRC-12/96
EV Classic Strategic
Income Fund
24 Federal Street
Boston, MA 02110
<PAGE>
EV MARATHON
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
EV MARATHON STRATEGIC INCOME FUND (THE "FUND") IS A MUTUAL FUND SEEKING A HIGH
LEVEL OF INCOME AND TOTAL RETURN BY INVESTING IN A GLOBAL PORTFOLIO CONSISTING
PRIMARILY OF HIGH GRADE DEBT SECURITIES. THE FUND INVESTS ITS ASSETS IN
STRATEGIC INCOME PORTFOLIO (THE "PORTFOLIO"), A NON-DIVERSIFIED OPEN-END
INVESTMENT COMPANY HAVING THE SAME INVESTMENT OBJECTIVE AS THE FUND, RATHER THAN
BY DIRECTLY INVESTING IN AND MANAGING ITS OWN PORTFOLIO OF SECURITIES. THE
PORTFOLIO'S INVESTMENT ADVISER WILL INVEST IN A VARIETY OF INCOME PRODUCING
SECURITIES, INCLUDING THOSE OF BELOW INVESTMENT GRADE QUALITY. THE VALUE OF FUND
SHARES WILL FLUCTUATE BECAUSE OF CHANGES IN CURRENCY EXCHANGE RATES, CREDIT
QUALITY AND INTEREST RATES, AND OTHER FACTORS. THE FUND IS A SERIES OF EATON
VANCE MUTUAL FUNDS TRUST (THE "TRUST").
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank or other insured depository institution, and are not federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency. Shares of the Fund involve investment risks,
including fluctuations in value and the possible loss of some or all of the
principal investment.
This Prospectus is designed to provide you with information you should know
before investing. Please retain this document for future reference. A
Statement of Additional Information dated March 3, 1997 for the Fund, as
supplemented from time to time, has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. This Statement of
Additional Information is available without charge from the Fund's principal
underwriter, Eaton Vance Distributors, Inc. (the "Principal Underwriter"), 24
Federal Street, Boston, MA 02110 (telephone (800) 225-6265). The Portfolio's
investment adviser is Boston Management and Research (the "Investment
Adviser"), a wholly-owned subsidiary of Eaton Vance Management, and Eaton
Vance Management is the administrator (the "Administrator") of the Fund and
the Portfolio. The offices of the Investment Adviser and the Administrator are
located at 24 Federal Street, Boston, MA 02110.
- ------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C>
Shareholder and Fund Expenses ................ 2 How to Redeem Fund Shares ..................... 13
The Fund's Financial Highlights ............. 3 Reports to Shareholders ....................... 15
The Fund's Investment Objective .............. 4 The Lifetime Investing Account/Distribution
Investment Policies and Risks ................ 4 Options ..................................... 15
Organization of the Fund and the Portfolio ... 8 The Eaton Vance Exchange Privilege ............ 16
Management of the Fund and the Portfolio ..... 9 Eaton Vance Shareholder Services .............. 17
Distribution Plan ............................ 10 Distributions and Taxes ....................... 17
Valuing Fund Shares .......................... 12 Performance Information ....................... 18
How to Buy Fund Shares ....................... 12 Appendix ...................................... 19
</TABLE>
- --------------------------------------------------------------------------------
PROSPECTUS DATED MARCH 3, 1997
<PAGE>
SHAREHOLDER AND FUND EXPENSES
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
----------------------------------------------------------------------------
Sales Charges Imposed on Purchases of Shares None
Sales Charges Imposed on Reinvested Distributions None
Fees to Exchange Shares None
Range of Declining Contingent Deferred Sales Charges
Imposed on Redemptions During the First Five Years
(as a percentage of redemption proceeds exclusive of
all reinvestments and capital appreciation in the account) 3.00%-0%
ANNUAL FUND AND ALLOCATED PORTFOLIO OPERATING EXPENSES
(as a percentage of average daily net assets)
----------------------------------------------------------------------------
Investment Adviser Fee 0.54%
Rule 12b-1 Distribution (and Service) Fees 0.92%
Other Expenses (including the Portfolio's administration
fee of 0.15%) 0.71%
====
Total Operating Expenses 2.17%
====
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following contingent deferred
sales charge and expenses on a $1,000 investment, assuming
(a) 5% annual return and (b) redemption at the end of each
period: $52 $88 $116 $250
An investor would pay the following expenses on the same
investment, assuming (a) 5% annual return and (b) no
redemptions: $22 $68 $116 $250
</TABLE>
NOTES:
The table and Example summarize the aggregate expenses of the Fund and the
Portfolio and are designed to help investors understand the costs and expenses
they will bear, directly or indirectly, by investing in the Fund. Information
for the Fund is based on its expenses for the most recent fiscal year.
The Example should not be considered a representation of past or future expenses
and actual expenses may be greater or less than those shown. Federal regulations
require the Example to assume a 5% annual return, but actual annual return will
vary. For further information regarding the expenses of both the Fund and the
Portfolio, see "The Fund's Financial Highlights," "Management of the Fund and
the Portfolio" and "How to Redeem Fund Shares". A long-term shareholder in the
Fund may pay more than the economic equivalent of the maximum front-end sales
charge permitted by a rule of the National Association of Securities Dealers,
Inc. See "Distribution Plan".
No contingent deferred sales charge is imposed on (a) shares purchased more than
four years prior to redemption, (b) shares acquired through the reinvestment of
distributions or (c) any appreciation in value of other shares in the account
(see "How to Redeem Fund Shares"), and no such charge is imposed on exchanges of
Fund shares for shares of one or more other funds listed under "The Eaton Vance
Exchange Privilege".
The Portfolio's monthly advisory fee has two components, a fee based on daily
net assets and a fee based on daily gross income, as set forth in the fee
schedule on page 9.
The Fund invests in the Portfolio and, at times, in another registered
investment company. Other investment companies with different distribution
arrangements and fees are investing in the Portfolio and others may do so in the
future. See "Organization of the Fund and the Portfolio".
<PAGE>
THE FUND'S FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following information should be read in conjunction with the audited
financial statements included in the Fund's annual report to shareholders which
is incorporated by reference into the Statement of Additional Information in
reliance upon the report of Coopers & Lybrand L.L.P., independent accountants,
as experts in accounting and auditing. Further information regarding the
performance of the Fund is contained in its annual report to shareholders which
may be obtained without charge by contacting the Principal Underwriter.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994++++ 1993 1992 1991++
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, beginning of
year $ 8.500 $ 8.290 $ 9.410 $ 9.120 $ 9.920 $ 10.000
-------- -------- -------- -------- -------- --------
INCOME FROM OPERATIONS:
Net investment income $ 0.655 $ 0.726 $ 0.645 $ 0.239 $ 0.816 $ 0.786
Net realized and unrealized
gain (loss) on investments 0.858 0.167 (1.135) 0.683 (0.943) (0.022)+++
-------- -------- -------- -------- -------- --------
Total income (loss) from
operations $ 1.513 $ 0.893 $ (0.490) $ 0.922 $ (0.127) $ 0.764
-------- -------- --------- -------- --------- --------
LESS DISTRIBUTIONS:
From net investment income $ (0.655) $ (0.361) $ (0.343) $ (0.632) $ (0.673) $ (0.786)
In excess of net investment
income(2) (0.048) -- -- -- -- --
From tax return of capital -- (0.322) (0.290) -- -- --
From paid-in capital -- -- -- -- -- (0.058)
-------- -------- -------- -------- --------- --------
Total distributions $ (0.703) $ (0.683) $ (0.633) $ (0.632) $ (0.673) $ (0.844)
-------- -------- -------- -------- --------- --------
NET ASSET VALUE -- end of year $ 9.310 $ 8.500 $ 8.290 $ 9.410 $ 9.120 $ 9.920
======== ======== ======== ======== ========= ========
TOTAL RETURN(1) 18.48% 11.34% (5.33%) 10.51% (1.45%) 7.97%
RATIOS/SUPPLEMENTAL DATA
(to average daily net assets):
Expenses* 2.17% 2.18% 2.00% 1.99% 1.95% 2.11%+
Net investment income 7.38% 7.85% 7.24% 7.53% 8.20% 8.24%+
PORTFOLIO TURNOVER** -- -- 55% 55% 56% 20%
NET ASSETS AT END OF PERIOD
(000's omitted) $129,671 $150,767 $233,139 $381,227 $533,253 $589,182
*Includes the Fund's share of the Portfolio's allocated expenses for the years ended October 31, 1996 and 1995, and
for the period from March 31, 1994 to October 31, 1994.
**Portfolio Turnover represents the rate of portfolio activity for the period while the Fund was making investments
directly in securities. The portfolio turnover 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 in the
Fund's annual report to shareholders.
+Computed on an annualized basis.
++For the period from the start of business, November 26, 1990, to October 31, 1991.
+++The per share amount is not in accord with the net realized and unrealized gain for the period due to the timing of
the sales of Fund shares and the amount of per-share realized and unrealized gains and losses at such time.
++++Per share amounts have been calculated using the monthly average share method which more approximately presents the
per share data for the period, since the use of the undistributed method does not accord with the results of
operations.
(1)Total investment return is calculated assuming a purchase at the net asset value on the first day and a sale at the
net asset value on the last day of each period reported. Distributions, if any, are assumed to be reinvested at the
net asset value on the payable date. Total return is calculated on a non-annualized basis.
(2)The Fund has followed the Statement of Position (SOP) 93-2: Determination, Disclosure and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distribution by Investment Companies. The SOP requires
that differences in the recognition or classification of income between the financial statements and tax earnings
and profits that result in temporary over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized gains.
</TABLE>
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
THE FUND'S INVESTMENT OBJECTIVE IS A HIGH LEVEL OF INCOME AND TOTAL RETURN BY
INVESTING IN A GLOBAL PORTFOLIO CONSISTING PRIMARILY OF HIGH GRADE DEBT
SECURITIES. The Investment Adviser will allocate investments among different
countries, currencies and credits, including those of below investment grade
quality, based on the perception of the most favorable markets and issuers, the
relative yield and appreciation potential of a particular country's securities
and the relationship of a country's currency to the U.S. dollar. Changes in
exchange rates for the foreign currencies in which the investments and forward
contracts are denominated may adversely affect the value of Fund shares. The
Fund's investment objective may be changed by the Trustees of the Trust without
shareholder approval.
INVESTMENT POLICIES AND RISKS
- --------------------------------------------------------------------------------
THE FUND CURRENTLY SEEKS ITS OBJECTIVE BY INVESTING IN STRATEGIC INCOME
PORTFOLIO ( THE "PORTFOLIO"), WHICH IS ITSELF AN OPEN-END INVESTMENT COMPANY
HAVING THE SAME INVESTMENT OBJECTIVE AS THE FUND. The Portfolio, in turn,
invests primarily in a portfolio of high grade debt securities of issuers
located anywhere in the world.
The Investment Adviser adjusts the Portfolio's investments and engages in active
management techniques to take advantage of differences in interest rates and
currency exchange rates in markets around the world, and other differences among
countries and markets. By allocating the Portfolio's assets actively among
issuers in different countries, and among securities denominated in different
currencies, the Investment Adviser attempts to achieve a higher level of current
income than might be available from a portfolio invested only in the securities
of one country or denominated in one currency. This strategy requires the
Investment Adviser to identify countries and currencies where the Portfolio's
investments will outperform comparable investments in other countries and
currencies and in many cases to predict changes in economies, markets, political
conditions, and other factors. The success of this strategy will, of course,
involve the risk that the Investment Adviser's predictions may be untimely or
incorrect. The Investment Adviser also seeks to identify markets and securities
which appear to be undervalued and make investments to profit from increases in
value.
The Portfolio will invest primarily in high grade debt securities. "High grade"
debt securities include securities issued or guaranteed as to principal or
interest by the U.S. Government or any of its agencies or instrumentalities and
debt securities, rated at least A by Standard & Poor's Ratings Group, Moody's
Investors Service, Inc. or Duff & Phelps Inc., of foreign governmental and
private issuers. They may also include commercial paper or other short-term debt
instruments rated in one of the two highest short-term rating categories by any
of those rating services (or by Fitch Investors Service, Inc.), and certificates
of deposit and bankers' acceptances issued or guaranteed by, or time deposits
maintained at, banks having total assets of more than $500 million and
determined by the Investment Adviser to be of comparable credit quality to
short-term securities with those ratings. An unrated security will be considered
to be a high grade security if the Investment Adviser determines that it is of
comparable quality to any of the securities described above. In making such
determinations, the Adviser will consider any rating of the issuer of unrated
securities.
The Portfolio may invest the remainder of its assets in lower-rated debt
securities, although less than 35% of the Portfolio's assets will be invested in
securities rated below BBB-/Baa3 (commonly referred to as "junk bonds").
Lower-rated securities generally offer higher current yields and appreciation
potential than do higher-rated securities, but are subject to greater risks.
Securities in the lower categories are considered to be of poor standing and
predominantly speculative; securities in the lowest rating categories may be in
default and are generally regarded by the rating agencies as having extremely
poor prospects of ever attaining any real investment standing. The values of
lower-rated fixed income securities generally fluctuate more than those of
higher-rated fixed-income securities.
In lieu of having the Portfolio invest in lower-rated debt securities, the Fund
may invest up to 35% of its assets in High Income Portfolio ("HI Portfolio"), a
separate registered investment company advised by the Investment Adviser. The
investment objective of HI Portfolio is to provide a high level of current
income and it may invest in the same types of debt securities (with the same
risks) as the Portfolio. HI Portfolio normally invests at least 65% of its
assets in debt securities of the lowest investment grade, lower-rated
obligations and unrated obligations; at least 80% of its net assets in
fixed-income securities, including convertible securities; and up to 20% of its
net assets in common stocks and other equity securities when consistent with its
objective or acquired as part of a unit combining fixed-income and equity
securities. The Fund will not invest in the HI Portfolio when such Portfolio is
not so invested. Foreign investments of HI Portfolio may not exceed 25% of total
assets. HI Portfolio may purchase and sell derivative instruments similar to
those described in this Prospectus, except for swaps. At January 31, 1997, HI
Portfolio had 97.6% of its assets invested in high yield, high risk bonds, and
held no obligations in default. For more detailed information about the risks
associated with investing in lower-rated securities, see "Additional Risk and
Investment Information" below.
The income producing securities in which the Portfolio invests may have fixed,
variable or floating interest rates, constitute a broad mix of asset classes,
and may include convertible bonds, securities of real estate investment trusts
and natural resource companies, stripped debt obligations, closed-end investment
companies (that invest primarily in debt securities the Portfolio could invest
in), preferred, preference and convertible stocks, equipment lease certificates,
equipment trust certificates, conditional sales contracts and debt obligations
collateralized by, or representing interests in pools of, mortgages and other
types of loans ("asset-backed obligations"). The Portfolio may invest a portion
of its assets in fixed and floating rate loans and loan interests. The Portfolio
will normally invest in securities of issuers located in at least three
different countries (which may include the United States), and will not normally
invest more than 25% of its assets in securities of issuers located in a single
foreign country or denominated in any single foreign currency, except the U.S.
dollar. Nevertheless, through "Active Management Strategies" discussed below,
the entire Fund may be exposed to foreign currency risks. For temporary
defensive purposes, such as during abnormal market or economic conditions, the
Portfolio may hold all or any portion of its assets in securities of issuers
located in the United States and in cash or money market instruments. It is
impossible to predict when, or for how long, the Portfolio will engage in such
strategies.
THE MARKET VALUE OF THE PORTFOLIO'S (AND HI PORTFOLIO'S) INVESTMENTS WILL CHANGE
IN RESPONSE TO CHANGES IN CURRENCY EXCHANGE AND INTEREST RATES, CREDIT QUALITY
CHANGES OF ISSUERS AND OTHER FACTORS. Changes in the values of portfolio
securities will not affect interest income derived from those securities, but
will affect the Fund's net asset value. See "Additional Risk and Investment
Information" below.
ACTIVE MANAGEMENT TECHNIQUES
CURRENCY AND OTHER DERIVATIVE INSTRUMENTS. The Portfolio may purchase or sell
derivative instruments (which are instruments that derive their value from
another instrument, security, index or currency) to enhance return, to hedge
against fluctuations in securities prices, interest rates or currency exchange
rates, or as a substitute for the purchase or sale of securities or currencies.
The Portfolio's transactions in derivative instruments may be in the U.S. or
abroad and may include the purchase or sale of futures contracts on securities,
securities indices, other indices, other financial instruments or currencies;
options on futures contracts; exchange-traded and over-the-counter options on
securities, indices or currencies; forward foreign currency exchange contracts;
and interest rate and currency swaps. The Portfolio's transactions in derivative
instruments involve a risk of loss or depreciation due to: unanticipated adverse
changes in securities prices, interest rates, the other financial instruments'
prices or currency exchange rates; the inability to close out a position;
default by the counterparty; imperfect correlation between a position and the
desired hedge; tax constraints on closing out positions; and portfolio
management constraints on securities subject to such transactions. The loss on
derivative instruments (other than purchased options) may substantially exceed
the Portfolio's initial investment in these instruments. In addition, the
Portfolio may lose the entire premium paid for purchased options that expire
before they can be profitably exercised by the Portfolio. The Portfolio incurs
transaction costs in opening and closing positions in derivative instruments.
There can be no assurance that the Investment Adviser's use of derivative
instruments will be advantageous to the Portfolio.
The Portfolio will only enter into equity swaps and over-the-counter options
contracts with counterparties whose credit quality or claims paying ability are
considered to be investment grade by the Investment Adviser. In addition, at the
time of entering into a transaction, the Portfolio's credit exposure to any one
counterparty will be limited to 5% or less of the net assets of the Portfolio.
The Portfolio's investment in illiquid assets, which generally will include
equity swaps and over-the-counter options, may not represent more than 15% of
net assets at the time any such illiquid assets are acquired.
To the extent that the Portfolio enters into futures contracts, options on
futures contracts and options on foreign currencies traded on an exchange
regulated by the Commodity Futures Trading Commission ("CFTC"), in each case
that are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish these positions
(excluding the amount by which options are "in-the-money") may not exceed 5% of
the liquidation value of the Portfolio's investments, after taking into account
unrealized profits and unrealized losses on any contracts the Portfolio has
entered into.
Forward contracts are individually negotiated and privately traded by currency
traders and their customers. A forward contract involves an obligation to
purchase or sell a specific currency (or basket of currencies) for an agreed
price at a future date, which may be any fixed number of days from the date of
the contract. The Portfolio may engage in cross-hedging by using forward
contracts in one currency (or basket of currencies) to hedge against
fluctuations in the value of securities denominated in a different currency if
the Investment Adviser determines that there is an established historical
pattern or correlation between the two currencies (or the basket of currencies
and the underlying currency). Use of a different foreign currency magnifies the
Portfolio's exposure to foreign currency exchange rate fluctuations. The
Portfolio may also use forward contracts to shift its exposure to foreign
currency exchange rate changes from one currency to another. In addition, the
Portfolio may purchase forward contracts for non-hedging purposes when the
Investment Adviser anticipates that the foreign currency will appreciate in
value.
SECURITIES LOANS, REPURCHASE AGREEMENTS, FORWARD COMMITMENTS AND REVERSE
REPURCHASE AGREEMENTS. The Portfolio may lend its portfolio securities to
broker-dealers and may enter into repurchase agreements. These transactions must
be fully collateralized at all times, but involve some risk to the Portfolio if
the other party should default on its obligations and the lender is delayed or
prevented from recovering the collateral. The Portfolio may also purchase or
sell securities for future delivery by means of "forward commitments."
The Portfolio may also enter into "reverse" repurchase agreements which
generally involve the sale of securities held and an agreement to repurchase the
securities at an agreed-upon price, date, and interest payment. The Portfolio
can invest the cash it receives or use it to meet redemption requests. Reverse
repurchase agreements and forward commitments to purchase securities may
increase the overall investment exposure of the Portfolio and involve investment
leverage. Use of investment leverage may increase the amount of any losses
incurred by the Portfolio in the case of adverse changes in market conditions or
the failure of the issuer of a security or financial instrument to meet its
obligations. The Portfolio may also enter into reverse repurchase agreements as
a hedge against a possible decline in the value of the foreign currency in which
a debt security is denominated by converting the foreign currency cash proceeds
from the sale of the debt security into U.S. dollars.
ADDITIONAL RISK AND INVESTMENT INFORMATION
INVESTMENTS IN FOREIGN SECURITIES. Because foreign securities involve foreign
currencies, the values of the assets of the Portfolio (and HI Portfolio) and
their net investment income available for distribution may be affected favorably
or unfavorably by changes in currency exchange rates and exchange control
regulations. There may be less information publicly available about a foreign
issuer than about a U.S. issuer, and foreign issuers are not generally subject
to accounting, auditing, and financial reporting standards and practices
comparable to those in the United States. The willingness and ability of
sovereign issuers to pay principal and interest on government securities depends
on various economic factors, including among others the issuer's balance of
payments, overall debt level, and cash flow considerations related to the
availability of tax or other revenues to satisfy the issuer's obligations. The
securities of some foreign issuers are less liquid and at times more volatile
than securities of comparable U.S. issuers. Foreign brokerage commissions and
fees are also generally higher than in the United States. Foreign settlement
procedures and trade regulations may involve certain risks (such as delay in the
payment or delivery of securities or in the recovery of assets held abroad) and
expenses not present in the settlement of domestic investments. Investments may
include securities issued by the governments of lesser-developed countries,
which are sometimes referred to as "emerging markets", and other issuers located
in such countries. As a result, the Portfolio may be exposed to greater risk and
will be more dependent on the Investment Adviser's ability to assess such risk
than if the Portfolio invested solely in more developed countries.
In addition, there may be a possibility of nationalization or expropriation of
assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, armed conflict and diplomatic developments
which could affect the values of a Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries,
including remedies available in bankruptcy proceedings, may be more limited than
those available with respect to investments in the United States or in other
foreign countries. The laws of some foreign countries may limit a Portfolio's
ability to invest in securities of certain issuers located in those foreign
countries. Special tax considerations apply to foreign securities.
INVESTING IN LOWER-RATED SECURITIES. Lower quality debt securities are subject
to the risk of an issuer's inability to meet principal and interest payments on
the obligations (credit risk) and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk). The
prices of lower-rated and comparable unrated securities are also more likely to
react to real or perceived developments affecting market and credit risk than
are prices of higher-rated securities, which react primarily to movements in the
general level of interest rates. The Portfolio (and HI Portfolio) may invest a
substantial portion of their assets in lower-rated securities issued in
connection with mergers, acquisitions, leveraged buy-outs, recapitalizations and
other highly leveraged transactions, which pose a higher risk of default or
bankruptcy of the issuer than other fixed-income securities particularly during
periods of deteriorating economic conditions and contraction in the credit
markets. The Portfolio (and HI Portfolio) may also invest in debt securities not
paying current income in anticipation of possible future income or capital
appreciation. The issuer of such securities may be in bankruptcy or undergoing a
debt restructuring or reorganization. Defaulted securities may be retained. In
the case of a defaulted security, the Portfolio (or HI Portfolio) may incur
additional expense seeking recovery of its investment. In the event the rating
of a security held by the Portfolio (or HI Portfolio) is downgraded, causing the
Fund to have indirectly 35% or more of its total assets in securities rated
below investment grade, the Investment Adviser will (in an orderly fashion
within a reasonable period of time) dispose of such securities of the Portfolio
(or reduce the Fund's investment in HI Portfolio) as it deems necessary in order
to comply with this limitation. See the Appendix to this Prospectus for the
asset composition of the Portfolio for the fiscal year ended October 31, 1996.
For a description of securities ratings, see the Statement of Additional
Information.
INTEREST RATE RISK. The value of Fund shares will reflect the value of the
Fund's interest in the Portfolio (which in turn, reflects the underlying value
of the Portfolio's assets and liabilities), and any interest in HI Portfolio and
will change in response to interest rate fluctuations. When interest rates
decline, the value of debt securities held by the Portfolios can be expected to
rise. Conversely, when interest rates rise, the value of debt securities held by
the Portfolios can be expected to decline.
OTHER PRACTICES. The Portfolio may at times invest in so-called "zero-coupon"
bonds (deferred interest bonds) and "payment-in-kind" bonds. Zero-coupon bonds
are issued at a significant discount from their principal amount and interest is
paid only at maturity rather than at intervals during the life of the security.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. The values of
zero-coupon bonds and payment-in-kind bonds are subject to greater fluctuation
in response to changes in market interest rates than bonds which pay interest in
cash currently. Because these instruments allow an issuer to avoid the need to
generate cash to meet current interest payments, they may involve greater credit
risks than bonds paying interest currently. Even though such bonds do not pay
current interest in cash, a Portfolio is nonetheless required to accrue interest
income on such investments and the Fund is required to distribute its share of
such amounts at least annually to shareholders. Thus, a Portfolio could be
required at times to liquidate other investments to obtain cash in order to
enable the Fund to satisfy its distribution requirements.
The Portfolio may hold up to 15% of net assets in illiquid securities, including
securities legally restricted as to resale such as commercial paper issued
pursuant to Section 4(2) of the Securities Act of 1933, and securities eligible
for resale pursuant to Rule 144A thereunder. Rule 144A securities may, however,
be treated as liquid by the Investment Adviser pursuant to procedures adopted by
the Trustees, which require consideration of factors such as trading activity,
availability of market quotations and number of dealers willing to purchase the
security. Rule 144A securities may increase illiquidity if qualified
institutional buyers become uninterested in purchasing such securities.
The Portfolio may also temporarily borrow up to 5% of the value of its total
assets to satisfy redemption requests or settle securities transactions. Certain
securities held by the Portfolio may permit the issuer at its option to "call",
or redeem, its securities. If an issuer were to redeem securities held by the
Portfolio during a time of declining interest rates, the Portfolio may not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed.
NON-DIVERSIFIED STATUS. As a "non-diversified" investment company, the Portfolio
may invest, with respect to 50% of its total assets, more than 5% (but not more
than 25%) of its total assets in securities of any one issuer, other than U.S.
government securities. The Portfolio is likely to invest a greater percentage of
its assets in the securities of a single issuer than would a diversified fund.
Therefore, the Portfolio is more susceptible to any single adverse or political
occurence or development affecting issuers in which the Portfolio invests. HI
Portfolio is diversified.
INVESTMENT RESTRICTIONS. The Fund, the Portfolio (and HI Portfolio) have adopted
certain fundamental investment restrictions and policies which are enumerated in
detail in the Statement of Additional Information and which may not be changed
unless authorized by a shareholder vote or an investor vote, respectively.
Except for such enumerated restrictions and as otherwise indicated in this
Prospectus, the investment objective and policies of the Fund and a Portfolio
are not fundamental policies and accordingly may be changed by the Trustees of
the Trust and the affected Portfolio without obtaining the approval of the
Fund's shareholders or the investors of the Portfolio, as the case may be.
ORGANIZATION OF THE FUND AND THE PORTFOLIO
- --------------------------------------------------------------------------------
THE FUND IS A NON-DIVERSIFIED SERIES OF EATON VANCE MUTUAL FUNDS TRUST, A
BUSINESS TRUST ESTABLISHED UNDER MASSACHUSETTS LAW PURSUANT TO A DECLARATION OF
TRUST DATED MAY 7, 1984, AS AMENDED. THE TRUST IS A MUTUAL FUND - AN OPEN- END
MANAGEMENT INVESTMENT COMPANY. The Trustees of the Trust are responsible for the
overall management and supervision of its affairs. The Trust may issue an
unlimited number of shares of beneficial interest (no par value per share) in
one or more series (such as the Fund). Each share represents an equal
proportionate beneficial interest in the Fund. When issued and outstanding, the
shares are fully paid and nonassessable by the Trust and redeemable as described
under "How to Redeem Fund Shares". There are no annual meetings of shareholders,
but special meetings may be held as required by law to elect Trustees and
consider certain other matters. Shareholders are entitled to one vote for each
full share held. Fractional shares may be voted proportionately. Shares have no
preemptive or conversion rights and are freely transferable. In the event of the
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets of the Fund available for distribution to shareholders.
THE PORTFOLIO (AND HI PORTFOLIO) ARE ORGANIZED AS TRUSTS UNDER THE LAWS OF THE
STATE OF NEW YORK AND INTEND TO BE TREATED AS PARTNERSHIPS FOR FEDERAL TAX
PURPOSES. Each Portfolio, as well as the Trust, intends to comply with all
applicable federal and state securities laws. Each Portfolio's Declaration of
Trust, as amended, provides that the Fund and other entities permitted to invest
in the Portfolio (e.g., other U.S. and foreign investment companies, and common
and commingled trust funds) will each be liable for all obligations of the
Portfolio. However, the risk of the Fund incurring financial loss on account of
such liability is limited to circumstances in which both inadequate insurance
exists and a Portfolio itself is unable to meet its obligations. Accordingly,
the Trustees of the Trust believe that neither the Fund nor its shareholders
will be adversely affected by reason of the Fund investing in the Portfolios.
The Trustees of the Trust have considered the advantages and disadvantages of
investing the assets of the Fund in the Portfolios, as well as the advantages
and disadvantages of the two-tier format. The Trustees believe that the
structure offers opportunities for substantial growth in the assets of the
Portfolios, affords the potential for economies of scale for the Fund, (at least
when the assets of a Portfolio exceed $500 million) and may over time result in
lower expenses for the Fund.
In addition to selling an interest to the Fund, each Portfolio may sell
interests to other affiliated and non-affiliated mutual funds or institutional
investors. Such investors will invest in a Portfolio on the same terms and
conditions and will pay a proportionate share of the Portfolio's expenses.
However, the other investors investing in a Portfolio are not required to sell
their shares at the same public offering price as the Fund due to variations in
sales commissions and other operating expenses. Therefore, investors in the Fund
should be aware that these differences may result in differences in returns
experienced by investors in the various funds that invest in a Portfolio. Such
differences in returns are also present in other mutual fund structures,
including funds that have multiple classes of shares. Information regarding
other pooled investment entities or funds which invest in a Portfolio may be
obtained by contacting the Principal Underwriter, 24 Federal Street, Boston, MA
02110, (617) 482-8260.
Whenever the Fund as an investor in a Portfolio is requested to vote on matters
pertaining to the Portfolio (other than the termination of the Portfolio's
business, which may be determined by the Trustees of the Portfolio without
investor approval), the Fund will hold a meeting of Fund shareholders and will
vote its interest in the Portfolio for or against such matters proportionately
to the instructions to vote for or against such matters received from Fund
shareholders. The Fund shall vote shares for which it receives no voting
instructions in the same proportion as the shares for which it receives voting
instructions. Other investors in a Portfolio may alone or collectively acquire
sufficient voting interests in the Portfolio to control matters relating to the
operation of the Portfolio, which may require the Fund to withdraw its
investment in the Portfolio or take other appropriate action. Any such
withdrawal could result in a distribution "in kind" of portfolio securities (as
opposed to a cash distribution from a Portfolio). If securities are distributed,
the Fund could incur brokerage, tax or other charges in converting the
securities to cash. In addition, the distribution in kind may result in a less
diversified portfolio of investments or adversely affect the liquidity of the
Fund. Notwithstanding the above, there are other means for meeting shareholder
redemption requests, such as borrowing.
The Fund may withdraw (completely redeem) all its assets from either or both
Portfolios at any time if the Board of Trustees of the Trust determines that it
is in the best interest of the Fund to do so. In the event the Fund withdraws
all of its assets from both Portfolios, or the Board of Trustees of the Trust
determines that the investment objective of the Portfolios are no longer
consistent with the investment objective of the Fund, such Trustees would
consider what action might be taken, including investing the assets of the Fund
in another pooled investment entity or retaining an investment adviser to manage
the Fund's assets in accordance with its investment objective. The Fund's
investment performance may be affected by a withdrawal of all its assets from a
Portfolio.
MANAGEMENT OF THE FUND AND THE PORTFOLIO
- --------------------------------------------------------------------------------
THE PORTFOLIO ENGAGES BOSTON MANAGEMENT AND RESEARCH ("BMR"), A WHOLLY-OWNED
SUBSIDIARY OF EATON VANCE MANAGEMENT ("EATON VANCE"), AS ITS INVESTMENT ADVISER.
EATON VANCE, ITS AFFILIATES AND ITS PREDECESSOR COMPANIES HAVE BEEN MANAGING
ASSETS OF INDIVIDUALS AND INSTITUTIONS SINCE 1924 AND MANAGING INVESTMENT
COMPANIES SINCE 1931. BMR's expertise in the management of fixed-income
securities ranges from government obligations, high-grade corporate and
municipal securities, foreign debt and bank loan interests to higher yielding
instruments. BMR's fixed-income division is armed with the research and
technical ability to gain immediate access to interest rate data around the
world.
Acting under the general supervision of the Board of Trustees of the Portfolio,
BMR manages the Portfolio's investments and affairs. BMR also furnishes for the
use of the Portfolio office space and all necessary office facilities, equipment
and personnel for servicing the investments of the Portfolio. Under its
investment advisory agreement with the Portfolio, BMR receives a monthly
advisory fee equal to the aggregate of
(a) a daily asset based fee computed by applying the annual asset rate
applicable to that portion of the total daily net assets in each
Category as indicated below, plus
(b) a daily income based fee computed by applying the daily income rate
applicable to that portion of the total daily gross income (which
portion shall bear the same relationship to the total daily gross income
on such day as that portion of the total daily net assets in the same
Category bears to the total daily net assets on such day) in each
Category as indicated below:
DAILY
ANNUAL INCOME
CATEGORY DAILY NET ASSETS ASSET RATE RATE
----------------------------------------------------------------------------
1 up to $500 million 0.275% 2.75%
2 $500 million but less than $1 billion 0.250% 2.50%
3 $1 billion but less than $1.5 billion 0.225% 2.25%
4 $1.5 billion but less than $2 billion 0.200% 2.00%
5 $2 billion but less than $3 billion 0.175% 1.75%
6 $3 billion and over 0.150% 1.50%
Total daily gross income is the total gross investment income, exclusive of
capital gains and losses on investments and before deduction of expenses, earned
each day by the Portfolio.
As of October 31, 1996, the Portfolio had net assets of $132,406,799. For the
fiscal year ended October 31, 1996, the Portfolio paid BMR advisory fees
equivalent to 0.54% of the Portfolio's average daily net assets for such year.
HI Portfolio also engages BMR to act as its investment adviser pursuant to a fee
schedule similar to but slightly higher than the above. For the fiscal year
ending March 31, 1997, BMR will pay estimated advisory fees equivalent to 0.62%
of HI Portfolio's average daily net assets. The portion of the Fund's assets
invested in the HI Portfolio will be subject to such Portfolio's advisory fee,
but will not be subject to Strategic Income Portfolio's advisory or
administration fee, or a Fund advisory fee.
BMR OR EATON VANCE ACTS AS INVESTMENT ADVISER TO INVESTMENT COMPANIES AND
VARIOUS INDIVIDUAL AND INSTITUTIONAL CLIENTS WITH ASSETS UNDER MANAGEMENT OF
OVER $17 BILLION. Eaton Vance is a wholly-owned subsidiary of Eaton Vance Corp.,
a publicly-held holding company which through its subsidiaries and affiliates
engages primarily in investment management, administration and marketing
activities. The Principal Underwriter is a wholly-owned subsidiary of Eaton
Vance.
Mark S. Venezia has acted as the portfolio manager of the Portfolio since it
commenced operations. He has been a Vice President of Eaton Vance since 1987 and
of BMR since 1992. Hooker Talcott, Jr. has acted as portfolio manager of the HI
Portfolio since it commenced operations. Mr. Talcott has been a Vice President
of Eaton Vance since 1987 and of BMR since 1992. Michael Weilheimer has been a
Vice President of Eaton Vance since 1992 and co-portfolio manager since January
1, 1997.
The Portfolio (and HI Portfolio) believes that most of the obligations which it
will acquire will normally be traded on a net basis (without commission) through
broker-dealers and banks acting for their own account. Such firms attempt to
profit from such transactions by buying at the bid price and selling at the
higher asked price of the market, and the difference is customarily referred to
as the spread. In selecting firms which will execute portfolio transactions, BMR
judges their professional ability and quality of service and uses its best
efforts to obtain execution at prices which are advantageous and at reasonably
competitive spreads. Subject to the foregoing, BMR may consider sales of shares
of the Fund or of other investment companies sponsored by BMR or Eaton Vance as
a factor in the selection of firms to execute portfolio transactions. The Fund,
the Portfolios and BMR have adopted Codes of Ethics relating to personal
securities transactions. The Codes permit Eaton Vance personnel to invest in
securities (including securities that may be purchased or held by the
Portfolios) for their own accounts, subject to certain pre-clearance, reporting
and other restrictions and procedures contained in such Codes.
The Portfolio also engages BMR as its administrator under an administration
agreement. Under the administration agreement, BMR is responsible for reviewing
and supervising the provision of custody services to the Portfolio and making
related reports and recommendations to the Board of Trustees of the Portfolio;
for providing certain valuation, legal, accounting and tax services in
connection with investments with foreign issuers or guarantors, investments
denominated in foreign currencies and transactions in derivative instruments;
and for such other special services as the Board may direct. BMR also furnishes
the office facilities and personnel necessary for providing these services. As
compensation for these services, BMR receives a monthly administration fee at an
annual rate of .15% of the Portfolio's average daily net assets. For the fiscal
year ended October 31, 1996, the Portfolio paid BMR administration fees
equivalent to .15% of the Portfolio's average daily net assets for such year.
The Trust has retained the services of Eaton Vance to act as Administrator of
the Fund. The Trust has not retained the services of an investment adviser since
the Trust seeks to achieve the investment objective of the Fund by investing the
Fund's assets in the Portfolios. As Administrator, Eaton Vance provides the Fund
with general office facilities and supervises the overall administration of the
Fund. For these services, Eaton Vance currently receives no compensation. The
Trustees of the Trust may determine, in the future, to compensate Eaton Vance
for such services.
The Portfolio and the Fund, as the case may be, will each be responsible for all
of its respective costs and expenses not expressly stated to be payable by BMR
under the investment advisory agreement and the administration agreement, by
Eaton Vance under the administrative services agreement, or by the Principal
Underwriter under the distribution agreement.
DISTRIBUTION PLAN
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THE FUND FINANCES DISTRIBUTION ACTIVITIES AND HAS ADOPTED A DISTRIBUTION PLAN
(THE "PLAN") PURSUANT TO RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE "1940 ACT"). Rule 12b-1 permits a mutual fund, such as the Fund, to finance
distribution activities and bear expenses associated with the distribution of
its shares provided that any payments made by the fund are made pursuant to a
written plan adopted in accordance with the Rule. The Plan is subject to, and
complies with, the sales charge rule of the National Association of Securities
Dealers, Inc. (the "NASD Rule"). The Plan is described further in the Statement
of Additional Information, and the following is a description of the salient
features of the Plan. The Plan provides that the Fund, subject to the NASD Rule,
will pay sales commissions and distribution fees to the Principal Underwriter
only after and as a result of the sale of shares of the Fund. On each sale of
Fund shares (excluding reinvestment of distributions) the Fund will pay the
Principal Underwriter amounts representing (i) sales commissions equal to 4.5%
of the amount received by the Fund for each share sold and (ii) distribution
fees calculated by applying the rate of 1% over the prime rate then reported in
The Wall Street Journal to the outstanding balance of Uncovered Distribution
Charges (as described below) of the Principal Underwriter. The Principal
Underwriter currently expects to pay sales commissions (except on exchange
transactions and reinvestments) to a financial services firm (an "Authorized
Firm") at the time of sale equal to 3.5% of the purchase price of the shares
sold by such Firm. The Principal Underwriter will use its own funds (which may
be borrowed from banks) to pay such commissions. Because the payment of the
sales commissions and distribution fees to the Principal Underwriter is subject
to the NASD Rule described below, it will take the Principal Underwriter a
number of years to recoup the sales commissions paid by it to Authorized Firms
from the payments received by it from the Fund pursuant to the Plan.
THE NASD RULE REQUIRES THE FUND TO LIMIT ITS ANNUAL PAYMENTS OF SALES
COMMISSIONS AND DISTRIBUTION FEES TO AN AMOUNT NOT EXCEEDING .75% OF THE FUND'S
AVERAGE DAILY NET ASSETS FOR EACH FISCAL YEAR. Under its Plan, the Fund accrues
daily an amount at the rate of 1/365 of .75% of the Fund's net assets, and pays
such accrued amounts monthly to the Principal Underwriter. The Plan requires
such accruals to be automatically discontinued during any period in which there
are no outstanding Uncovered Distribution Charges under the Plan. Uncovered
Distribution Charges are calculated daily and, briefly, are equivalent to all
unpaid sales commissions and distribution fees to which the Principal
Underwriter is entitled under the Plan less all contingent deferred sales
charges theretofore paid to the Principal Underwriter. The Eaton Vance
organization may be considered to have realized a profit under the Plan if at
any point in time the aggregate amounts of all payments received by the
Principal Underwriter from the Fund pursuant to the Plan, including any
contingent deferred sales charges, have exceeded the total expenses theretofore
incurred by such organization in distributing shares of the Fund. Total expenses
for this purpose will include an allocable portion of the overhead costs of such
organization and its branch offices.
Because of the NASD Rule limitation on the amount of sales commissions and
distribution fees paid during any fiscal year, a high level of sales of Fund
shares during the initial years of the Fund's operations would cause a large
portion of the sales commissions attributable to a sale of Fund shares to be
accrued and paid by the Fund to the Principal Underwriter in fiscal years
subsequent to the year in which such shares were sold. This spreading of sales
commissions payments under the Plan over an extended period would result in the
incurrence and payment of increased distribution fees under the Plan.
During the fiscal year ended October 31, 1996, the Fund paid or accrued sales
commissions under the Plan equivalent to .75% of the Fund's average daily net
assets. As at October 31, 1996, the outstanding Uncovered Distribution Charges
of the Principal Underwriter on such day calculated under the Plan amounted to
approximately, $18,063,000 (which amount was equivalent to 13.9% of the Fund's
net assets on such day).
THE PLAN ALSO AUTHORIZES THE FUND TO MAKE PAYMENTS OF SERVICE FEES TO THE
PRINCIPAL UNDERWRITER, AUTHORIZED FIRMS AND OTHER PERSONS IN AMOUNTS NOT
EXCEEDING .25% OF THE FUND'S AVERAGE DAILY NET ASSETS FOR EACH FISCAL YEAR. The
Trustees of the Trust have initially implemented this provision of the Plan by
authorizing the Fund to make quarterly payments of service fees to the Principal
Underwriter and Authorized Firms in amounts not expected to exceed .25% of the
Fund's average daily net assets for any fiscal year based on the value of Fund
shares sold by such persons and remaining outstanding for at least twelve
months. As permitted by the NASD Rule, such payments are made for personal
services and/or the maintenance of shareholder accounts. Service fees are
separate and distinct from the sales commissions and distribution fees payable
by the Fund to the Principal Underwriter, and as such are not subject to
automatic discontinuance when there are no outstanding Uncovered Distribution
Charges of the Principal Underwriter. For the fiscal year ended October 31,
1996, the Fund paid or accrued service fees equivalent to .17% of the Fund's
average daily net assets.
The Principal Underwriter may, from time to time, at its own expense, provide
additional incentives to Authorized Firms which employ registered
representatives who sell the Fund's shares and/or shares of other funds
distributed by the Principal Underwriter. In some instances, such additional
incentives may be offered only to certain Authorized Firms whose representatives
sell or are expected to sell significant amounts of shares. In addition, the
Principal Underwriter may from time to time increase or decrease the sales
commissions payable to Authorized Firms.
The Fund may, in its absolute discretion, suspend, discontinue or limit the
offering of its shares at any time. In determining whether any such action
should be taken, the Fund's management intends to consider all relevant factors,
including without limitation the size of the Fund, the investment climate and
market conditions, the volume of sales and redemptions of Fund shares, and the
amount of Uncovered Distribution Charges of the Principal Underwriter. The Plan
may continue in effect and payments may be made under the Plan following any
such suspension, discontinuance or limitation of the offering of Fund shares;
however, the Fund is not contractually obligated to continue the Plan for any
particular period of time. Suspension of the offering of Fund shares would not,
of course, affect a shareholder's ability to redeem shares.
VALUING FUND SHARES
- --------------------------------------------------------------------------------
THE FUND VALUES ITS SHARES ONCE ON EACH DAY THE NEW YORK STOCK EXCHANGE (THE
"EXCHANGE") IS OPEN FOR TRADING, as of the close of regular trading on the
Exchange (normally 4:00 p.m. New York time). The Fund's net asset value per
share is determined by its custodian, Investors Bank & Trust Company ("IBT"),
(as agent for the Fund) in the manner authorized by the Trustees of the Trust.
Net asset value is computed by dividing the value of the Fund's total assets,
less its liabilities, by the number of shares outstanding. Because the Fund
invests its assets in an interest in the Portfolio (and at times in HI Portfolio
as well), the Fund's net asset value will reflect the value of its interest in
the Portfolios (which, in turn, reflects the underlying value of the Portfolios'
assets and liabilities).
Authorized Firms must communicate an investor's order to the Principal
Underwriter prior to the close of the Principal Underwriter's business day to
receive that day's net asset value per Fund share. It is the Authorized Firms'
responsibility to transmit orders promptly to the Principal Underwriter.
Each Portfolio's net asset value is also determined as of the close of regular
trading on the Exchange by IBT (as custodian and agent for the Portfolio) in the
manner authorized by the Trustees of the Portfolio. Net asset value is computed
by subtracting the liabilities of a Portfolio from the value of its total
assets. Most debt securities are valued on the basis of market valuations
furnished by pricing services. For further information regarding the valuation
of a Portfolio's assets, see "Determination of Net Asset Value" in the Statement
of Additional Information.
SHAREHOLDERS MAY DETERMINE THE VALUE OF THEIR INVESTMENT BY MULTIPLYING THE
NUMBER OF FUND SHARES OWNED BY THE CURRENT NET ASSET VALUE PER SHARE.
HOW TO BUY FUND SHARES
- --------------------------------------------------------------------------------
SHARES OF THE FUND MAY BE PURCHASED FOR CASH OR MAY BE ACQUIRED IN EXCHANGE FOR
SECURITIES. Investors may purchase shares of the Fund through Authorized Firms
at the net asset value per share of the Fund next determined after an order is
effective. An Authorized Firm may charge its customers a fee in connection with
transactions executed by that Firm. The Fund may suspend the offering of shares
at any time and may refuse an order for the purchase of shares.
An initial investment in the Fund must be at least $1,000. Once an account has
been established the investor may send investments of $50 or more at any time
directly to the Fund's transfer agent (the "Transfer Agent") as follows: First
Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123. The
$1,000 minimum initial investment is waived for Bank Automated Investing
accounts, which may be established with an investment of $50 or more. See "Eaton
Vance Shareholder Services".
In connection with employee benefit or other continuous group purchase plans
under which the average initial purchase by a participant of the plan is $1,000
or more, the Fund may accept initial investments of less than $1,000 on the part
of an individual participant. In the event a shareholder who is a participant of
such a plan terminates participation in the plan, his or her shares will be
transferred to a regular individual account. However, such account will be
subject to the right of redemption by the Fund as described below under "How to
Redeem Fund Shares."
ACQUIRING FUND SHARES IN EXCHANGE FOR SECURITIES. IBT, as escrow agent, will
receive securities acceptable to Eaton Vance, as Administrator, in exchange for
Fund shares at their net asset value as determined above. The minimum value of
securities (or securities and cash) accepted for deposit is $5,000. Securities
accepted will be sold on the day of their receipt or as soon thereafter as
possible. The number of Fund shares to be issued in exchange for securities will
be the aggregate proceeds from the sale of such securities, divided by the
applicable net asset value per Fund share on the day such proceeds are received.
Eaton Vance will use reasonable efforts to obtain the then current market price
for such securities, but does not guarantee the best available price. Eaton
Vance will absorb any transaction costs, such as commissions, on the sale of the
securities.
Securities determined to be acceptable should be transferred via book entry or
physically delivered, in proper form for transfer, through an Authorized Firm,
together with a completed and signed Letter of Transmittal in approved form
(available from Authorized Firms), as follows:
IN THE CASE OF BOOK ENTRY:
Deliver through Depository Trust Co.
Broker #2212
Investors Bank & Trust Company
For A/C EV Marathon Strategic Income Fund
IN THE CASE OF PHYSICAL DELIVERY:
Investors Bank & Trust Company
Attention: EV Marathon Strategic Income Fund
Physical Securities Processing Settlement Area
89 South Street
Boston, MA 02111
Investors who are contemplating an exchange of securities for shares of the
Fund, or their representatives, must contact Eaton Vance to determine whether
the securities are acceptable before forwarding such securities. Eaton Vance
reserves the right to reject any securities. Exchanging securities for Fund
shares may create a taxable gain or loss. Each investor should consult his or
her tax adviser with respect to the particular federal, state and local tax
consequences of exchanging securities for Fund shares.
IF YOU DON'T HAVE AN AUTHORIZED FIRM, EATON VANCE CAN RECOMMEND ONE.
HOW TO REDEEM FUND SHARES
- --------------------------------------------------------------------------------
A SHAREHOLDER MAY REDEEM FUND SHARES IN ONE OF THREE WAYS -- BY MAIL, BY
TELEPHONE OR THROUGH AN AUTHORIZED FIRM. The redemption price will be based on
the net asset value per Fund share next computed after a redemption request is
received in the proper form as described below.
REDEMPTION BY MAIL: Shares may be redeemed by delivering to the Transfer Agent,
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123,
during its business hours a written request for redemption in good order, plus
any share certificates with executed stock powers. Good order means that all
relevant documents must be endorsed by the record owner(s) exactly as the shares
are registered and the signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program, or certain banks, savings and loan institutions,
credit unions, securities dealers, securities exchanges, clearing agencies and
registered securities associations as required by a regulation of the Securities
and Exchange Commission (the "Commission") and acceptable to the Transfer Agent.
In addition, in some cases, good order may require the furnishing of additional
documents such as where shares are registered in the name of a corporation,
partnership or fiduciary.
REDEMPTION BY TELEPHONE: Shares may be redeemed by telephone provided the
investor has not disclaimed in writing the use of the privilege. Such
redemptions can be effected by calling the Transfer Agent at 800-262-1122,
Monday through Friday, 9:00 a.m. to 4:00 p.m. (Eastern Standard Time). The
proceeds of a telephone redemption may be no greater than the maximum amount
established by the Principal Underwriter (currently $50,000) and may be mailed
only to the account address of record. Shares held by corporations, trusts or
certain other entities, or subject to fiduciary arrangements, may not be
redeemed by telephone. Neither the Fund, the Principal Underwriter nor the
Transfer Agent will be responsible for the authenticity of redemption
instructions received by telephone, provided that reasonable procedures to
confirm that instructions communicated by telephone are genuine have been
followed. Telephone instructions will be tape recorded. In times of drastic
economic or market changes, a telephone redemption may be difficult to
implement.
REDEMPTION THROUGH AN AUTHORIZED FIRM: To sell shares at their net asset value
through an Authorized Firm (a repurchase), a shareholder can place a repurchase
order with the Authorized Firm, which may charge a fee. The value of such shares
is based upon the net asset value calculated after the Principal Underwriter, as
the Fund's agent, receives the order. It is the Authorized Firm's responsibility
to transmit promptly repurchase orders to the Principal Underwriter. Throughout
this Prospectus, the word "redemption" is generally meant to include a
repurchase.
Within seven days after receipt of a redemption request in good order by the
Transfer Agent, the Fund will make payment in cash for the net asset value of
the shares as of the date determined above, reduced by the amount of any
applicable contingent deferred sales charges (described below) and any federal
income tax required to be withheld. Although the Fund normally expects to make
payment in cash for redeemed shares, the Trust, subject to compliance with
applicable regulations, has reserved the right to pay the redemption price of
shares of the Fund, either totally or partially, by a distribution in kind of
readily marketable securities withdrawn by the Fund from the Portfolio. The
securities so distributed would be valued pursuant to the Portfolio's valuation
procedures. If a shareholder received a distribution in kind, the shareholder
could incur brokerage or other charges in converting the securities to cash.
If shares were recently purchased, the proceeds of redemption will not be sent
until the check (including a certified or cashier's check) received for the
shares purchased has cleared. Payment for shares tendered for redemption may be
delayed up to 15 days from the purchase date when the purchase check has not yet
cleared. Redemptions may result in a taxable gain or loss.
Due to the high cost of maintaining small accounts, the Fund reserves the right
to redeem accounts with balances of less than $750. Prior to such a redemption,
shareholders will be given 60 days' written notice to make an additional
purchase. However, no such redemptions would be required by the Fund if the
cause of the low account balance was a reduction in the net asset value of Fund
shares. No contingent deferred sales charge will be imposed with respect to such
involuntary redemptions.
CONTINGENT DEFERRED SALES CHARGE. Shares redeemed within the first four years of
their purchase (except shares acquired through the reinvestment of
distributions) generally will be subject to a contingent deferred sales charge
("CDSC"). This CDSC is imposed on any redemption the amount of which exceeds the
aggregate value at the time of redemption of (a) all shares in the account
purchased more than four years prior to the redemption, (b) all shares in the
account acquired through reinvestment of distributions, and (c) the increase, if
any, in the value of all other shares in the account (namely those purchased
within the four years preceding the redemption) over the purchase price of such
shares. Redemptions are processed in a manner to maximize the amount of
redemption proceeds which will not be subject to a CDSC. That is, each
redemption will be assumed to have been made first from the exempt amounts
referred to in clauses (a), (b) and (c) above, and second through liquidation of
those shares in the account referred to in clause (c) on a first-in-first-out
basis. As described under "Distribution Plan", the CDSC will be paid to the
Principal Underwriter or the Fund. Any CDSC which is required to be imposed on
share redemptions will be made in accordance with the following schedule:
YEAR OF REDEMPTION
AFTER PURCHASE CDSC
----------------------------------------------------
First 3.0%
Second 2.5%
Third 2.0%
Fourth 1.0%
Fifth and following 0.0%
In calculating the CDSC upon the redemption of Fund shares acquired in an
exchange for shares of a fund currently listed under "The Eaton Vance Exchange
Privilege", the CDSC schedule applicable to the shares at the time of purchase
will apply and the purchase of shares acquired in the exchange is deemed to have
occurred at the time of the original purchase of the exchanged shares.
No CDSC will be imposed on Fund shares which have been sold to Eaton Vance or
its affiliates, or to their respective employees or clients. The CDSC will be
waived for shares redeemed (1) pursuant to a Withdrawal Plan (see "Eaton Vance
Shareholder Services") or (2) as part of a required distribution from a
tax-sheltered retirement plan. The charge will also be waived on redemptions of
shares purchased on or after January 27, 1995 following the death of all
beneficial owners of such shares, provided the redemption is requested within
one year of death (a death certificate and other applicable documents may be
required). In addition, shares acquired as a result of a merger or liquidation
of another Eaton Vance sponsored fund will have a CDSC imposed at the same rate
as would have been imposed in the prior fund.
THE FOLLOWING EXAMPLE ILLUSTRATES THE OPERATION OF THE CDSC. ASSUME THAT AN
INVESTOR PURCHASES $10,000 OF THE FUND'S SHARES AND THAT 16 MONTHS LATER THE
VALUE OF THE ACCOUNT HAS GROWN THROUGH INVESTMENT PERFORMANCE AND REINVESTMENT
OF DIVIDENDS TO $12,000. THE INVESTOR THEN MAY REDEEM UP TO $2,000 OF SHARES
WITHOUT INCURRING A CDSC. IF THE INVESTOR SHOULD REDEEM $3,000 OF SHARES, A
CDSC WOULD BE IMPOSED ON $1,000 OF THE REDEMPTION. THE RATE WOULD BE 2.5%
BECAUSE THE REDEMPTION WAS MADE IN THE SECOND YEAR AFTER THE PURCHASE WAS MADE
AND THE CHARGE WOULD BE $25.
REPORTS TO SHAREHOLDERS
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THE FUND WILL ISSUE TO ITS SHAREHOLDERS SEMI-ANNUAL AND ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS. Financial statements included in annual reports
are audited by the Fund's independent accountants. Shortly after the end of each
calendar year, the Fund will furnish all shareholders with information necessary
for preparing federal and state tax returns.
THE LIFETIME INVESTING ACCOUNT/DISTRIBUTION OPTIONS
- --------------------------------------------------------------------------------
AFTER AN INVESTOR MAKES AN INITIAL PURCHASE OF FUND SHARES, THE TRANSFER AGENT
WILL SET UP A LIFETIME INVESTING ACCOUNT FOR THE INVESTOR ON THE FUND'S RECORDS.
This account is a complete record of all transactions between the investor and
the Fund which at all times shows the balance of shares owned. The Fund will not
issue share certificates except upon request.
At least quarterly, shareholders will receive a statement showing complete
details of any transaction and the current share balance in the account. THE
LIFETIME INVESTING ACCOUNT ALSO PERMITS A SHAREHOLDER TO MAKE ADDITIONAL
INVESTMENTS IN SHARES BY SENDING A CHECK FOR $50 OR MORE to the Transfer Agent.
Any questions concerning a shareholder's account or services available may be
directed by telephone to EATON VANCE SHAREHOLDER SERVICES at 800-225-6265,
extension 2, or in writing to the Transfer Agent, First Data Investor Services
Group, P.O. Box 5123, Westborough, MA 01581-5123 (Please provide the name of the
shareholder, the Fund and the account number).
THE FOLLOWING DISTRIBUTION OPTIONS WILL BE AVAILABLE TO ALL LIFETIME INVESTING
ACCOUNTS and may be changed as often as desired by written notice to the Fund's
dividend disbursing agent, First Data Investor Services Group, P.O. Box 5123,
Westborough, MA 01581-5123. The currently effective option will appear on each
account statement.
Share Option -- Dividends and capital gains will be reinvested in additional
shares.
Income Option -- Dividends will be paid in cash, and capital gains will be
reinvested in additional shares.
Cash Option -- Dividends and capital gains will be paid in cash.
The Share Option will be assigned if no other option is specified.
Distributions, including those reinvested, will be reduced by any withholding
required under the federal income tax laws.
If the Income Option or Cash Option has been selected, dividend and/or capital
gains distribution checks which are returned by the United States Postal Service
as not deliverable or which remain uncashed for six months or more will be
reinvested in the account in shares at the then current net asset value.
Furthermore, the distribution option on the account will be automatically
changed to the Share Option until such time as the shareholder selects a
different option.
DISTRIBUTION INVESTMENT OPTION. In addition to the distribution options set
forth above, dividends and/or capital gains may be invested in additional shares
of another Eaton Vance fund. Before selecting this option, a shareholder should
obtain a prospectus of the other Eaton Vance fund and consider its objectives
and policies carefully.
"STREET NAME" ACCOUNTS. If shares of the Fund are held in a "street name"
account with an Authorized Firm, all recordkeeping, transaction processing and
payments of distributions relating to the beneficial owner's account will be
performed by the Authorized Firm, and not by the Fund and its Transfer Agent.
Since the Fund will have no record of the beneficial owner's transactions, a
beneficial owner should contact the Authorized Firm to purchase, redeem or
exchange shares, to make changes in or give instructions concerning the account,
or to obtain information about the account. The transfer of shares in a "street
name" account to an account with another dealer or to an account directly with
the Fund involves special procedures and will require the beneficial owner to
obtain historical purchase information about the shares in the account from the
Authorized Firm. Before establishing a "street name" account with an investment
firm, or transferring the account to another investment firm, an investor
wishing to reinvest distributions should determine whether the firm which will
hold the shares allows reinvestment of distributions in "street name" accounts.
THE EATON VANCE EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shares of the Fund currently may be exchanged for one or more other funds in the
Eaton Vance Marathon Group of Funds (including Class I shares of any EV Marathon
Limited Maturity Fund) or Eaton Vance Money Market Fund which are subject to a
CDSC. Shares of the Fund may also be exchanged for shares of Eaton Vance Prime
Rate Reserves, which are subject to an early withdrawal charge, and shares of
money market fund sponsored by an Authorized Firm and approved by the Principal
Underwriter (an "Authorized Firm fund"). Any such exchange will be made on the
basis of the net asset value per share of each fund at the time of exchange.
Exchange offers are available only in states where shares of the fund being
acquired may legally be sold.
Each exchange must involve shares which have a net asset value of at least
$1,000. The exchange privilege may be changed or discontinued without penalty.
Shareholders will be given sixty (60) days' notice prior to any termination or
material amendment of the exchange privilege. The Fund does not permit the
exchange privilege to be used for "Market Timing" and may terminate the exchange
privilege for any shareholder account engaged in Market Timing activity. Any
shareholder account for which more than two round-trip exchanges are made within
any twelve month period will be deemed to be engaged in Market Timing.
Furthermore, a group of unrelated accounts for which exchanges are entered
contemporaneously by a financial intermediary will be considered to be engaged
in Market Timing.
The Transfer Agent makes exchanges at the next determined net asset value after
receiving an exchange request in good order (see "How to Redeem Fund Shares").
Consult the Transfer Agent for additional information concerning the exchange
privilege. Applications and prospectuses of the other funds are available from
Authorized Firms or the Principal Underwriter. The prospectus for each fund
describes its investment objectives and policies, and shareholders should obtain
a prospectus and consider these objectives and policies carefully before
requesting an exchange.
No CDSC is imposed on exchanges. For purposes of calculating the CDSC upon the
redemption of shares acquired in an exchange, the CDSC schedule applicable to
the shares at the time of purchase will apply and the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares, except that time during which shares
are held in an Authorized Firm fund will not be credited toward completion of
the CDSC period. For the CDSC or early withdrawal charge schedule applicable to
the Fund, Eaton Vance Prime Rate Reserves and Class I shares of any EV Marathon
Limited Maturity Fund, see "How to Redeem Fund Shares". The CDSC schedule or
early withdrawal charge schedule applicable to the other EV Marathon funds is
5%, 5%, 4%, 3%, 2%, or 1% in the event of a redemption occurring in the first,
second, third, fourth, fifth or sixth year, respectively, after the original
share purchase.
Shares of the funds listed above may be exchanged for Fund shares on the basis
of the net asset value per share of each fund at the time of the exchange, but
subject to any restrictions or qualifications set forth in the current
prospectus of any such fund.
Telephone exchanges are accepted by the Transfer Agent provided that the
investor has not disclaimed in writing the use of the privilege. To effect such
exchanges, call the Transfer Agent at 800-262-1122, Monday through Friday, 9:00
A.M. to 4:00 P.M. (Eastern Standard Time). Shares acquired by telephone exchange
must be registered in the same name(s) and with the same address as the shares
being exchanged. Neither the Fund, the Principal Underwriter nor the Transfer
Agent will be responsible for the authenticity of exchange instructions received
by telephone; provided that reasonable procedures to confirm that instructions
communicated are genuine have been followed. Telephone instructions will be tape
recorded. In times of drastic economic or market changes, a telephone exchange
may be difficult to implement. An exchange may result in a taxable gain or loss.
EATON VANCE SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
THE FUND OFFERS THE FOLLOWING SERVICES, WHICH ARE VOLUNTARY, INVOLVE NO EXTRA
CHARGE, AND MAY BE CHANGED OR DISCONTINUED WITHOUT PENALTY AT ANY TIME. Full
information on each of the services described below and an application, where
required, are available from Authorized Firms or the Principal Underwriter. The
cost of administering such services for the benefit of shareholders who
participate in them is borne by the Fund as an expense to all shareholders.
INVEST-BY-MAIL -- FOR PERIODIC SHARE ACCUMULATION: Once the $1,000 minimum
investment has been made, checks of $50 or more payable to the order of EV
Marathon Strategic Income Fund may be mailed directly to the Transfer Agent,
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123 at
any time -- whether or not distributions are reinvested. The name of the
shareholder, the Fund and the account number should accompany each investment.
BANK AUTOMATED INVESTING -- FOR REGULAR SHARE ACCUMULATION: Cash investments of
$50 or more may be made automatically each month or quarter from a shareholder's
bank account. The $1,000 minimum initial investment and small account redemption
policy are waived for these accounts.
WITHDRAWAL PLAN: A shareholder may draw on shareholdings systematically with
monthly or quarterly checks in an aggregate amount that does not exceed
annually 12% of the account balance at the time the Plan is established. Such
amount will not be subject to a CDSC. See "How to Redeem Fund Shares". A
minimum deposit of $5,000 in shares is required.
REINVESTMENT PRIVILEGE: A shareholder who has redeemed shares may reinvest, with
credit for any CDSC paid on the redeemed shares, any portion or all of the
redemption proceeds (plus that amount necessary to acquire a fractional share to
round off the purchase to the nearest full share) in shares of the Fund,
provided that the reinvestment is effected within 60 days after such redemption,
and the privilege has not been used more than once in the prior 12 months.
Shares are sold to a reinvesting shareholder at the next determined net asset
value following timely receipt of a written purchase order by the Principal
Underwriter or by the Fund (or by the Fund's Transfer Agent). To the extent that
any shares are sold at a loss and the proceeds are reinvested in shares of the
Fund (or other shares of the Fund are acquired) within the period beginning 30
days before and ending 30 days after the date of redemption, some or all of the
loss generally will not be allowed as a tax deduction. Shareholders should
consult their tax advisers concerning the tax consequences of reinvestments.
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
SUBSTANTIALLY ALL OF THE INVESTMENT INCOME ALLOCATED TO THE FUND BY A PORTFOLIO,
LESS THE FUND'S DIRECT AND ALLOCATED EXPENSES, WILL BE DECLARED DAILY AS A
DISTRIBUTION TO FUND SHAREHOLDERS OF RECORD AT THE TIME OF DECLARATION. Such
distributions, whether taken in cash or reinvested in additional shares, will
ordinarily be paid on the last day of each month or the next business day
thereafter. Daily distribution crediting will commence on the business day after
collected funds for the purchase of Fund shares are available at the Transfer
Agent. The Fund's net realized capital gains, if any, consist of the net
realized capital gains allocated to the Fund by a Portfolio for tax purposes,
after taking into account any available capital loss carryovers; the Fund's net
realized capital gains, if any, will be distributed at least once a year,
usually in December. Shareholders of the Fund will receive timely federal income
tax information relating to all distributions made by the Fund during the
calendar year.
Distributions of the Fund from net investment income, net short-term capital
gains and certain net foreign exchange gains are taxable to shareholders as
ordinary income, whether paid in cash or reinvested in additional shares of the
Fund. The Fund's distributions will generally not qualify to any significant
extent for any dividends-receiving deductions available to corporate
shareholders.
Certain distributions, if declared in October, November or December and paid the
following January, will be taxable to shareholders as if received on December 31
of the year in which they are declared.
Capital gains, if any, realized on sales of investments and on options and
futures transactions during the fiscal year, which ends on October 31, will be
offset by any capital losses, including any capital loss carryovers, and will be
distributed annually, usually in December, in compliance with the distribution
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
Distributions that the Fund designates as from its long-term capital gains are
taxable to shareholders as long-term capital gains, whether paid in cash or
additional shares of the Fund and regardless of the length of time Fund shares
have been owned by the shareholder. If shares are purchased shortly before the
record date of such a distribution, the shareholder will pay the full price for
the shares and then receive some portion of the price back as a taxable
distribution.
Income (possibly including, in some cases, capital gains) realized by a
Portfolio from certain investments may be subject to foreign income or other
foreign taxes and the Fund may make an election under Section 853 of the Code
that would allow Fund shareholders to claim a credit or deduction on their
federal income tax returns for (and treat as additional amounts distributed to
them) their pro rata portion of the Fund's allocated share of qualified taxes
paid by the Portfolio to foreign countries. This election may be made annually
only if more than 50% of the assets of the Fund, including its allocable share
of the Portfolio assets, at the close of the Fund's taxable year consists of
stock or securities in foreign corporations. The Fund will send a written notice
of any such election (not later than 60 days after the close of its taxable
year) to each shareholder indicating the amount to be treated as the
shareholder's proportionate share of such taxes. Availability of foreign tax
credits or deductions for shareholders is subject to certain additional
restrictions and limitations under the Code.
The Fund intends to qualify as a regulated investment company under the Code and
to satisfy all requirements necessary to be relieved of federal taxes on income
and gains it distributes to shareholders. In satisfying these requirements, the
Fund will treat itself as owning its proportionate share of Portfolio assets and
as entitled to the income of each Portfolio properly attributable to such share.
As a regulated investment company under the Code, the Fund does not pay federal
income or excise tax to the extent that it distributes to shareholders its net
investment income and net realized capital gains in accordance with the timing
requirements imposed by the Code. As a partnerships under the Code, the
Portfolios also do not pay federal income or excise tax.
Shareholders should consult their own tax advisers with respect to the local,
state, federal and foreign tax consequences of investing in the Fund.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
FROM TIME TO TIME, THE FUND MAY ADVERTISE ITS YIELD AND/OR AVERAGE ANNUAL TOTAL
RETURN. The Fund's current yield is calculated by dividing the net investment
income per share earned during a recent 30-day period by the maximum offering
price per share (net asset value) of the Fund on the last day of the period and
annualizing the resulting figure. The Fund's average annual total return is
determined by computing the average annual percentage change in value of $1,000
invested at the maximum public offering price (net asset value) for specified
periods, assuming reinvestment of all distributions. The average annual total
return calculation assumes a complete redemption of the investment and the
deduction of any applicable CDSC at the end of the period. The Fund may also
publish annual and cumulative total return figures from time to time.
The Fund may also publish total return figures which do not take into account
any CDSC which may be imposed upon redemptions at the end of the specified
period. Any performance figure which does not take into account the CDSC would
be reduced to the extent such charge is imposed upon a redemption.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's yield or total return for any
prior period should not be considered as a representation of what an investment
may earn or what the Fund's yield or total return may be in any future period.
The following chart reflects the annual investment returns of the Fund for one
year periods ending October 31 and does not take into account any sales charge
which investors may bear.
5 Year Average Annual Total Return -- 6.34%
1991(1) 7.97 %
1992 (1.45)%
1993 10.51 %
1994 (5.33)%
1995 11.34 %
1996 18.48 %
(1) For the period from the start of business, November 20, 1990
to October 31, 1991.
<PAGE>
APPENDIX
STRATEGIC INCOME PORTFOLIO
ASSET COMPOSITION INFORMATION
FOR FISCAL YEAR ENDED OCTOBER 31, 1996
PERCENTAGE OF
NET ASSETS
-------------
Debt Securities -- Moody's Rating
Aaa ............................................ 36.7%
Aa1 ............................................ 11.3
Aa2 ............................................ 11.2
A1 ............................................. 7.9
A3 ............................................. 2.7
B1 ............................................. 12.0
B2 ............................................. 0.8
B3 ............................................. 1.6
Baa3 ........................................... 14.3
Unrated ........................................ 1.5
-----
Total .......................................... 100.0%
The chart above indicates the weighted average composition for the fiscal year
ended October 31, 1996 with the debt securities rated by Moody's separated into
the indicated categories. The weighted averages indicated above were calculated
on a dollar weighted basis and were computed as at the end of each month during
the period. The chart does not necessarily indicate what the composition of the
Portfolio will be in the current and subsequent fiscal years.
For the description of Moody's ratings of debt securities, see Appendix to the
Statement of Additional Information.
<PAGE>
[LOGO]
EATON VANCE
-----------
Mutual Funds
EV MARATHON
STRATEGIC INCOME
FUND
PROSPECTUS
MARCH 3, 1997
EV MARATHON
STRATEGIC INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
- -------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR OF STRATEGIC INCOME PORTFOLIO
INVESTMENT ADVISER OF HIGH INCOME PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV MARATHON STRATEGIC INCOME FUND
Eaton Vance Management, 24 Federal Street, Boston, MA 02110
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc., 24 Federal Street, Boston, MA 02110
(800) 225-6265
CUSTODIAN
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA 02109
M-SIP
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
March 3, 1997
EV MARATHON STRATEGIC INCOME FUND
24 Federal Street
Boston, Massachusetts 02110
(800) 225-6265
This Statement of Additional Information consists of two parts. Part I
provides information about EV Marathon Strategic Income Fund (the "Fund"), the
Portfolio, HI Portfolio and certain other series of Eaton Vance Mutual Funds
Trust (the "Trust"). Part II provides information solely about the Fund. Where
appropriate, Part I includes cross-references to the relevant sections of Part
II that provide additional Fund-specific information. This Statement of
Additional Information is sometimes referred to herein as the "SAI."
TABLE OF CONTENTS
Page
PART I
Additional Information about Investment Policies ................. 1
Investment Restrictions .......................................... 5
Trustees and Officers ............................................ 6
Investment Adviser and Administrator ............................. 8
Custodian ........................................................ 12
Service for Withdrawal ........................................... 12
Determination of Net Asset Value ................................. 12
Investment Performance ........................................... 13
Taxes ............................................................ 15
Portfolio Security Transactions .................................. 17
Other Information ................................................ 18
Independent Accountants .......................................... 19
Financial Statements ............................................. 20
Appendix ......................................................... 21
PART II
Fees and Expenses ................................................ a-1
Principal Underwriter ............................................ a-2
Distribution Plan ................................................ a-2
Performance Information .......................................... a-4
Control Persons and Principal Holders of Securities .............. a-4
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE FUND'S PROSPECTUS DATED MARCH 3, 1997, AS SUPPLEMENTED FROM
TIME TO TIME, WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH SUCH PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING EATON VANCE
DISTRIBUTORS, INC. (THE "PRINCIPAL UNDERWRITER") (SEE BACK COVER FOR ADDRESS
AND PHONE NUMBER).
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Capitalized terms used in this SAI and not otherwise defined have the
meanings given them in the Fund's Prospectus. The Fund is subject to the same
investment policies as those of the Portfolio.
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
INCOME PRODUCING SECURITIES
Included in the income producing securities in which the Portfolio may
invest are preferred and preference stocks, convertible bonds, securities of
real estate investment trusts and natural resource companies, stripped debt
obligations, closed-end investment companies (that invest primarily in debt
securities the Portfolio could invest in), equipment lease certificates,
equipment trust certificates and conditional sales contracts. Preference stocks
are stocks that have many characteristics of preferred stocks, but are typically
junior to an existing class of preferred stocks. Securities of real estate
investment trusts, such as debentures, are affected by conditions in the real
estate industry and interest rates. Securities of natural resource companies are
subject to price fluctuation based upon inflationary pressures and demand for
natural resources. Stripped debt obligations are comprised of principal only or
interest only obligations. The value of closed-end investment company
securities, which are generally traded on an exchange, is affected by demand for
those securities regardless of the demand for the underlying portfolio assets.
Equipment lease certificates are debt obligations secured by leases on equipment
(such as railroad cars, airplanes or office equipment), with the issuer of the
certificate being the owner and lessor of the equipment. The issuers of
equipment lease certificates tend to be industrial, transportation and leasing
companies. Equipment trust certificates are debt obligations secured by an
interest in property (such as railroad cars or airplanes), the title of which is
held by a trustee while the property is being used by the borrower. Conditional
sales contracts are agreements under which the seller of property continues to
hold title to the property until the purchase price is fully paid or other
conditions are met by the buyer. The Portfolio has no current intention of
investing more than 5% of its total assets in any of these types of securities.
HI Portfolio may also invest in all of the foregoing.
The Portfolio (and HI Portfolio) may purchase fixed-rate bonds which have a
demand feature allowing the holder to redeem the bonds at specified times. These
bonds are more defensive than conventional long-term bonds (protecting to some
degree against a rise in interest rates) while providing greater opportunity
than comparable intermediate term bonds, since a Portfolio may retain the bond
if interest rates decline. By acquiring these kinds of bonds a Portfolio obtains
the contractual right to require the issuer of the bonds to purchase the
security at an agreed upon price, which right is contained in the obligation
itself rather than in a separate agreement or instrument. Since this right is
assignable only with the bond, a Portfolio will not assign any separate value to
such right. A Portfolio may also purchase floating or variable rate obligations
and warrants when such warrants are part of a unit with other securities.
The Portfolio's (and HI Portfolio's) investments in high yield, high risk
obligations rated below investment grade, which have speculative
characteristics, bear special risks. They are subject to greater credit risks,
including the possibility of default or bankruptcy of the issuer. The value of
such investments may also be subject to a greater degree of volatility in
response to interest rate fluctuations, economic downturns and changes in the
financial condition of the issuer. These securities generally are less liquid
than higher quality securities. During periods of deteriorating economic
conditions and contractions in the credit markets, the ability of such issuers
to service their debt, meet projected goals or obtain additional financing may
be impaired. Each Portfolio will take such action as it considers appropriate in
the event of anticipated financial difficulties default or bankruptcy of either
the issuer of any such obligation or of the underlying source of funds for debt
service. Such action may include retaining the services of various persons and
firms (including affiliates of the Investment Adviser) to evaluate or protect
any real estate, facilities or other assets securing any such obligation or
acquired by each Portfolio as a result of any such event. A Portfolio will incur
additional expenditures in taking protective action with respect to portfolio
obligations in default and assets securing such obligations.
The Portfolio may invest in obligations of domestic and foreign companies in
the group consisting of the banking and the financial services industries.
Companies in the banking industry include U.S. and foreign commercial banking
institutions (including their parent holding companies). Companies in the
financial services industry include finance companies, diversified financial
services companies and insurance and insurance holding companies. Companies
engaged primarily in the investment banking, securities, investment advisory or
investment company business are not deemed to be in the financial services
industry for this purpose. The securities held by the Portfolio may be affected
by economic or regulatory developments in or related to such industries.
Sustained increases in interest rates can adversely affect the availability and
cost of funds for an institution's lending activities, and a deterioration in
general economic conditions could increase the institution's exposure to credit
losses.
A bank from whom a Portfolio acquires a loan participation interest may be
treated as a co-issuer for tax diversification purposes to the extent that the
Portfolio does not have direct recourse against the borrower of the underlying
loan and is therefore relying on the credit of such bank. For industry
concentration purposes, the Investment Adviser will consider all relevant
factors in determining the issuer of a loan interest, including: the credit
quality of the borrower, the amount and quality of the collateral, the terms of
the loan agreement and the other relevant agreements (including inter- creditor
agreements), the degree to which the credit of such interpositioned person was
deemed material to the decision to purchase the loan interest, the interest rate
environment, and general economic conditions applicable to the borrower and such
interpositioned person.
MORTGAGE ROLLS
The Portfolio may enter into mortgage "dollar rolls" in which the Portfolio
sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Portfolio foregoes principal and interest paid on the mortgage-backed
securities. The Portfolio is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position or a cash equivalent security position which
matures on or before the forward settlement date of the dollar roll transaction.
The Portfolio will only enter into covered rolls. Covered rolls are not treated
as a borrowing or other senior security and will be excluded from the
calculation of the Portfolio's borrowings and other senior securities.
LENDING OF PORTFOLIO SECURITIES
Each Portfolio may seek to increase its income by lending portfolio
securities to broker-dealers or other institutional borrowers. Under present
regulatory policies of the Commission, such loans are required to be secured
continuously by collateral in cash, cash equivalents or U.S. Government
securities held by the Portfolio's custodian and maintained on a current basis
at an amount at least equal to the market value of the securities loaned, which
will be marked to market daily. Cash equivalents include certificates of
deposit, commercial paper and other short-term money market instruments. A
Portfolio would have the right to call a loan and obtain the securities loaned
at any time on up to five business days' notice. During the existence of a loan,
a Portfolio will continue to receive the equivalent of the interest paid by the
issuer on the securities loaned and will also receive a fee or all of a portion
of the interest on investment of the collateral, if any. However, a Portfolio
may pay lending fees to such borrowers. A Portfolio would not have the right to
vote any securities having voting rights during the existence of a loan, but
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovery or even loss of rights in the securities by
the Investment Adviser to be of good standing and when the consideration which
can be earned from securities loans of this type justifies the attendant risk.
Securities lending involves administration expenses, including finders' fees.
The financial condition of the borrower will be monitored by the Investment
Adviser on an ongoing basis. If the Investment Adviser determines to make
securities loans, it is not intended that the value of the securities loaned
would exceed 30% of a Portfolio's total assets. As of the present time, the
Trustees of neither Portfolio have made a determination to engage in this
activity, and have no present intention of making such a determination during
the current fiscal year.
FOREIGN INVESTMENTS
Since foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a domestic company. Volume and liquidity in
most foreign bond markets is less than in the United States and securities of
some foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on U.S. exchanges, although each
Portfolio endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, broker-dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. A Portfolio may be required to pay for securities before
delivery. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect a Portfolio's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
FOREIGN CURRENCY TRANSACTIONS
The value of the assets of a Portfolio as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations. Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments
in the U.S. or abroad. A Portfolio may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into swaps, forward
contracts, options or futures on currency. In spot transactions, foreign
exchange dealers do not charge a fee for conversion, but they do realize a
profit based on the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
Currency swaps require maintenance of a segregated account as described
under "Asset Coverage Requirements" below. The Portfolio will not enter into any
currency swap unless the credit quality of the unsecured senior debt or the
claims-paying ability of the other party thereto is considered to be investment
grade by the Investment Adviser.
Each Portfolio may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a
Portfolio anticipates the receipt in a foreign currency of dividend or interest
payments on such a security which it holds, the Portfolio may desire to "lock
in" the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying transactions, the Portfolio will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of a Portfolio believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the securities held by the Portfolio denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Portfolio's
foreign assets. Each Portfolio generally will not enter into a forward contract
with a term of greater than one year.
RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS
Entering into a derivative instrument involves a risk that the applicable
market will move against a Portfolio's position and that the Portfolio will
incur a loss. For derivative instruments other than purchased options, this loss
may exceed the amount of the initial investment made or the premium received by
the Portfolio. Derivative instruments may sometimes increase or leverage a
Portfolio's exposure to a particular market risk. Leverage enhances a
Portfolio's exposure to the price volatility of derivative instruments it holds.
Success in using derivative instruments to hedge portfolio assets depends on the
degree of price correlation between the derivative instruments and the hedged
asset. Imperfect correlation may be caused by several factors, including
temporary price disparities among the trading markets for the derivative
instrument, the assets underlying the derivative instrument and a Portfolio's
assets. Over-the-counter ("OTC") derivative instruments involve an enhanced risk
that the issuer or counterparty will fail to perform its contractual
obligations. Some derivative instruments are not readily marketable or may
become illiquid under adverse market conditions. In addition, during periods of
market volatility, a commodity exchange may suspend or limit trading in an
exchange-traded derivative instrument, which may make the contract temporarily
illiquid and difficult to price. Commodity exchanges may also establish daily
limits on the amount that the price of a futures contract or futures option can
vary from the previous day's settlement price. Once the daily limit is reached,
no trades may be made that day at a price beyond the limit. This may prevent a
Portfolio from closing out positions and limiting its losses. The staff of the
Commission takes the position that certain purchased OTC options, and assets
used as cover for written OTC options, are subject to each Portfolio's 15% limit
on illiquid investments. A Portfolio's ability to terminate OTC derivative
instruments may depend on the cooperation of the counterparties to such
contracts. For thinly traded derivative instruments, the only source of price
quotations may be the selling dealer or counterparty. In addition, certain
provisions of the Code, limit the extent to which a Portfolio may purchase and
sell derivative instruments. Each Portfolio will engage in transactions in
futures contracts and related options only to the extent such transactions are
consistent with the requirements of the Code for maintaining the qualification
of the Fund as a regulated investment company ("RIC") for federal income tax
purposes. See "Taxes".
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS
Each Portfolio may enter into futures contracts (and options thereon) traded
on a foreign exchange if it is determined by the Investment Adviser that trading
on such exchange does not subject the Portfolio to risks, including credit and
liquidity risks, that are materially greater than the risks associated with
trading on United States exchanges regulated by the CFTC.
A Portfolio will only write a put option on a security which it intends to
ultimately acquire for its portfolio. The Portfolio does not intend to purchase
any options if after such transaction more than 5% of its net assets, as
measured by the aggregate of all premiums paid for all such options held by the
Portfolio, would be so invested.
INTEREST RATE AND CURRENCY SWAPS
Interest rate swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an exchange of
fixed rate payments for floating rate payments. Currency swaps involve the
exchange of their respective rights to make or receive payments in specified
currencies. The Portfolio will only enter into interest rate swaps on a net
basis, i.e., the two payment streams are netted out with the Portfolio receiving
or paying, as the case may be, only the net amount of the two payments. If the
other party to an interest rate swap defaults, the Portfolio's risk of loss
consists of the net amount of interest payments that the Portfolio is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire payment stream in one designated currency in exchange
for the entire payment stream in the other designated currency. Therefore, the
entire principal value of a currency swap is subject to the risk that the other
party to the swap will default on its contractual delivery obligations. The net
amount of the excess, if any, of the Portfolio's obligations over its
entitlements will be maintained in a segregated account by the Portfolio's
custodian. The Portfolio will not enter into any interest rate or currency swap
unless the credit quality of the unsecured senior debt or the claims-paying
ability of the other party thereto is considered to be investment grade by the
Investment Adviser. If there is a default by the other party to such a
transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
REVERSE REPURCHASE AGREEMENTS
Each Portfolio may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, a Portfolio temporarily transfers possession of a
portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash. At the same time, a Portfolio agrees to repurchase the
instrument at an agreed upon time (normally within seven days) and price, which
reflects an interest payment. A Portfolio may enter into such agreements when it
is able to invest the cash acquired at a rate higher than the cost of the
agreement, which would increase earned income. A Portfolio could also enter into
reverse repurchase agreements as a means of raising cash to satisfy redemption
requests without the necessity of selling portfolio assets.
When a Portfolio enters into a reverse repurchase agreement, any
fluctuations in the market value of either the securities transferred to another
party or the securities in which the proceeds may be invested would affect the
market value of the Portfolio's assets. As a result, such transactions may
increase fluctuations in the market value of the Portfolio's assets. While there
is a risk that large fluctuations in the market value of the Portfolio's assets
could affect the Fund's net asset value per share, this risk is not
significantly increased by entering into reverse repurchase agreements, in the
opinion of the Investment Adviser. Because reverse repurchase agreements may be
considered to be the practical equivalent of borrowing funds, they constitute a
form of leverage. If the Portfolio reinvests the proceeds of a reverse
repurchase agreement at a rate lower than the cost of the agreement, entering
into the agreement will lower the Fund's yield. Reverse repurchase agreements
will be included within "borrowings" contained in the Fund's investment
restriction (2) set forth below.
ASSET COVERAGE REQUIREMENTS
Transactions involving reverse repurchase agreements, swaps, forward
contracts or futures contracts and options (other than options that the
Portfolio has purchased) expose a Portfolio to an obligation to another party. A
Portfolio will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options, forward
contracts or futures contracts, or (2) cash or liquid securities (including
equities and debt) with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. (Only the net obligation of a
swap will be covered). Assets used as cover or held in a segregated account
maintained by the Fund's custodian cannot be sold while the position requiring
coverage or segregation is outstanding unless they are replaced with other
appropriate assets. As a result, the commitment of a large portion of a
Portfolio's assets to segregated accounts or to cover could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
PORTFOLIO TURNOVER
Neither Portfolio can accurately predict its portfolio turnover rate, but it
is anticipated that the annual turnover rate will generally not exceed 100%
(excluding turnover of securities having a maturity of one year or less). A 100%
annual turnover rate would occur, for example, if all the securities held by a
Portfolio were replaced in a period of one year. A high turnover rate (such as
100% or more) necessarily involves greater expenses to a Portfolio and may
result in the realization of substantial net short-term capital gains. The
Portfolio may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for fixed
income securities of different countries, to seek short-term profits during
periods of fluctuating interest rates, or for other reasons. Such trading will
increase the Portfolio's rate of turnover and may increase the incidence of net
short-term capital gains allocated to the Fund by the Portfolio which, upon
distribution by the Fund, are taxable to Fund shareholders as ordinary income.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are designated as
fundamental policies and as such cannot be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, which as used
in this SAI means the lesser of (a) 67% of the shares of the Fund present or
represented by proxy at a meeting if the holders of more than 50% of the shares
are present or represented at the meeting or (b) more than 50% of the shares of
the Fund. Accordingly, the Fund may not:
(1) Purchase any security (other than securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities) if such purchase,
at the time thereof, would cause 25% or more of the Fund's total assets (taken
at market value) to be invested in the securities of issuers in any single
industry, provided that the electric, gas and telephone utility industries shall
be treated as separate industries for purposes of this restriction;
(2) Borrow money or issue senior securities except as permitted by the
Investment Company Act of 1940;
(3) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities). The deposit or payment by the Fund of initial, maintenance or
variation margin in connection with all types of options and futures contract
transactions is not considered the purchase of a security on margin;
(4) Underwrite or participate in the marketing of securities of others,
except insofar as it may technically be deemed to be an underwriter in selling a
portfolio security under circumstances which may require the registration of the
same under the Securities Act of 1933;
(5) Purchase or sell real estate, although it may purchase and sell
securities which are secured by real estate and securities of companies which
invest or deal in real estate;
(6) Purchase or sell physical commodities or futures contracts for the
purchase or sale of physical commodities, provided that the Fund may enter into
all types of futures and forward contracts on currency, securities and
securities, economic and other indices and may purchase and sell options on such
futures contracts; or
(7) Make loans to any person, except by (a) the acquisition of debt
instruments and making portfolio investments, (b) entering into repurchase
agreements, and (c) lending portfolio securities.
Notwithstanding the investment policies and restrictions of the Fund, the
Fund may invest its investable assets in an open-end management investment
company (a Portfolio) with substantially the same investment objective, policies
and restrictions as the Fund; moreover, subject to Trustee approval the Fund may
invest its investable assets in other open-end management investment companies
in the same group of investment companies with the same investment adviser as
the Portfolio (or an affiliate) if, with respect to such assets, the other
companies' permitted investments are substantially the same as those of the
Fund.
The Portfolio has adopted substantially the same fundamental investment
restrictions as the foregoing investment restrictions adopted by the Fund; such
restrictions cannot be changed without the approval of a "majority of the
outstanding voting securities" of the Portfolio.
The Fund and the Portfolio have adopted the following investment policies
which may be changed by the Trust with respect to the Fund without approval by
the Fund's shareholders or by the Portfolio with respect to the Portfolio
without approval by the Fund or its other investors. As a matter of
nonfundamental policy, the Fund and the Portfolio may not: (a) invest more than
15% of net assets in investments which are not readily marketable, including
restricted securities and repurchase agreements with a maturity longer than
seven days. Restricted securities for the purposes of this limitation do not
include securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 and commercial paper issued pursuant to Section 4(2) of
said Act that the Board of Trustees of the Trust or the Portfolio, or their
delegate, determines to be liquid; (b) make short sales of securities or
maintain a short position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for securities of
the same issue as, and equal in amount to, the securities sold short, and unless
no more than 25% of its net assets (taken at current value) is held as
collateral for such sales at any one time. It is the present intention of
management to make such sales only for the purpose of deferring realization of
gain or loss for Federal income tax purposes); (c) purchase or retain in its
portfolio any securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Trust or is a
member, officer, director or trustee of any investment adviser of the Trust or
the Portfolio if after the purchase of the securities of such issuer by the Fund
or the Portfolio one or more of such persons owns beneficially more than 1/2 of
1% of the shares or securities or both (all taken at market value) of such
issuer and such persons owning more than 1/2 of 1% of such shares of securities
together own beneficially more than 5% of such shares or securities or both (all
taken at market value); and (d) purchase warrants with a value in excess of 5%
of net assets, or warrants which are not listed on the New York or American
Stock Exchange with a value in excess of 2% of its net assets. The Portfolio has
no current intention during the current year of engaging in short sales.
HI Portfolio has substantially the same fundamental and nonfundamental
policies as the Fund and the Portfolio except that HI Portfolio has the
following additional fundamental policy: With respect to 75% of total assets of
the Portfolio, the Portfolio may not purchase any security if such purchase, at
the time thereof, would cause more than 5% of the total assets of the Portfolio
(taken at market value) to be invested in the securities of a single issuer, or
cause more than 10% of the total outstanding voting securities of such issuer to
be held by the Portfolio, except obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and except securities of other
investment companies.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset, or describes a policy regarding quality
standards, such percentage limitation or standard shall be determined
immediately after and as a result of the Fund's or a Portfolio's acquisition of
such security or asset. Accordingly, any later increase or decrease resulting
from a change in values, assets or other circumstances, other than a subsequent
rating change below investment grade made by a rating service, will not compel
the Fund or a Portfolio, as the case may be, to dispose of such security or
other asset. Notwithstanding the foregoing, under normal market conditions the
Fund and the Portfolio must take actions necessary to comply with the policy of
investing at least 65% of total assets in debt securities. Moreover, the Fund
and each Portfolio must always be in compliance with the borrowing policy set
forth above.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and the Portfolio are listed below.
Except as indicated, each individual has held the office shown or other offices
in the same company for the last five years. Unless otherwise noted, the
business address of each Trustee and officer is 24 Federal Street, Boston,
Massachusetts 02110, which is also the address of the Portfolio's investment
adviser, Boston Management and Research ("BMR"), a wholly-owned subsidiary of
Eaton Vance Management ("Eaton Vance"); Eaton Vance's parent, Eaton Vance Corp.
("EVC"); and of BMR's and Eaton Vance's trustee, Eaton Vance, Inc. ("EV"). Eaton
Vance and EV are both wholly-owned subsidiaries of EVC. Those Trustees who are
"interested persons" of the Trust or the Portfolio, as defined in the 1940 Act
by virtue of their affiliation with BMR, Eaton Vance, EVC, or EV, are indicated
by an asterisk(*).
TRUSTEES OF THE TRUST AND THE PORTFOLIO
M. DOZIER GARDNER (63), President and Trustee of the Trust*
Vice Chairman of BMR, Eaton Vance, EVC and EV, and a Director of EVC and EV.
Director, Trustee and officer of various investment companies managed by Eaton
Vance or BMR.
JAMES B. HAWKES (55), President of the Portfolio, Vice President of the Trust
and Trustee*
President and Chief Executive Officer of BMR, Eaton Vance, EVC and EV and a
Director of EVC and EV. Director, Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
DONALD R. DWIGHT (65), Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company) founded in 1988; Chairman of the Board of Newspapers of New England,
Inc., since 1983. Director or Trustee of various investment companies managed
by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
SAMUEL L. HAYES, III (62), Trustee
Jacob H. Schiff, Professor of Investment Banking, at Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard University Graduate School of Business Administration,
Soldiers Field Road, Boston, Massachusetts 02163
NORTON H. REAMER (61), Trustee
President and Director, United Asset Management Corporation, a holding company
owning institutional investment management firms. Chairman, President and
Director, UAM Funds (mutual funds). Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
JOHN L. THORNDIKE (70), Trustee
Former Director of Fiduciary Company Incorporated. Director or Trustee of
various investment companies managed by Eaton Vance or BMR.
Address: 175 Federal Street, Boston, Massachusetts 02110
JACK L. TREYNOR (67), Trustee
Investment Adviser and Consultant. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
OFFICERS OF THE TRUST AND THE PORTFOLIO
WILLIAM H. AHERN, JR. (37), Vice President of the Trust
Assistant Vice President of Eaton Vance and BMR. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Ahern was elected Vice
President of the Trust on June 19, 1995.
MARK VENEZIA (47), Vice President of the Portfolio
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
MICHAEL B. TERRY (54), Vice President of the Trust
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Terry was elected Vice
President of the Trust on December 17, 1990.
JAMES L. O'CONNOR (51), Treasurer
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
THOMAS OTIS (65), Secretary
Vice President and Secretary of BMR, Eaton Vance, EVC and EV. Officer of various
investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (61), Assistant Treasurer and Assistant Secretary
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
A. JOHN MURPHY (34), Assistant Secretary
Assistant Vice President of BMR, Eaton Vance and EV since March 1, 1994;
employee of Eaton Vance since March 1993. Officer of various investment
companies managed by Eaton Vance or BMR. State Regulations Supervisor, The
Boston Company, (1991-1993). Mr. Murphy was elected Assistant Secretary of the
Trust and the Portfolio on March 27, 1995.
JOHN P. RYNNE (54), Assistant Secretary of the Trust
Corporate Controller and Vice President of EVC. Vice President of Eaton Vance,
EVD and BMR, and Treasurer of Energex Energy Corporation. Mr. Rynne was
elected an officer of the Trust on June 19, 1995.
ERIC G. WOODBURY (39), Assistant Secretary
Vice President of Eaton Vance since February 1993; formerly, associate attorney
at Dechert, Price & Rhoades and Gaston & Snow. Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Woodbury was elected Assistant
Secretary of the Trust and the Portfolio on June 19, 1995.
Messrs. Hayes (Chairman), Reamer and Thorndike are members of the Special
Committee of the Board of Trustees of the Trust and of the Portfolio. The
purpose of the Special Committee is to consider, evaluate and make
recommendations to the full Board of Trustees concerning (i) all contractual
arrangements with service providers to the Fund, including administrative
services, transfer agency, custodial and fund accounting and distribution
services, and (ii) all other matters in which Eaton Vance or its affiliates has
any actual or potential conflict of interest with the Fund or its shareholders.
The Nominating Committee of the Board of Trustees of the Trust and the
Portfolio is comprised of four Trustees who are not "interested persons" as that
term is defined under the 1940 Act ("noninterested Trustees"). The Committee has
four-year staggered terms, with one member rotating off the Committee to be
replaced by another noninterested Trustee of the Trust. The purpose of the
Committee is to recommend to the Board nominees for the position of
noninterested Trustee and to assure that at least a majority of the Board of
Trustees is independent of Eaton Vance and its affiliates.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees of the Trust and of the Portfolio. The Audit Committee's
functions include making recommendations to the Trustees regarding the selection
of the independent accountants, and reviewing matters relative to trading and
brokerage policies and practices, accounting and auditing practices and
procedures, accounting records, internal accounting controls, and the functions
performed by the custodian and transfer agent of the Trust and of the Portfolio.
Trustees of the Portfolio who are not affiliated with the Investment Adviser
may elect to defer receipt of all or a percentage of their annual fees in
accordance with the terms of a Trustees Deferred Compensation Plan (the
"Trustees" Plan"). Under the Trustees' Plan, an eligible Trustee may elect to
have his deferred fees invested by the Portfolio in the shares of one or more
funds in the Eaton Vance Family of Funds, and the amount paid to the Trustees
under the Trustees' Plan will be determined based upon the performance of such
investments. Deferral of Trustees' fees in accordance with the Trustees' Plan
will have a negligible effect on the Portfolio's assets, liabilities, and net
income per share, and will not obligate the Portfolio to retain the services of
any Trustee or obligate the Portfolio to pay any particular level of
compensation to the Trustee. Neither the Trust nor the Portfolio has a
retirement plan for its Trustees.
The fees and expenses of those Trustees of the Trust and the Portfolio who
are not members of the Eaton Vance organization (the noninterested Trustees) are
paid by the Fund (and the other series of the Trust) and the Portfolio,
respectively. For the compensation received by the noninterested Trustees of the
Trust and the Portfolio, see "Fees and Expenses" in Part II.
The noninterested Trustees of HI Portfolio are the same persons as those of
the Portfolio and M. Dozier Gardner and James B. Hawkes are the only interested
Trustees. The Committee structure and compensation policies of HI Portfolio are
identical to that of the Portfolio.
INVESTMENT ADVISER AND ADMINISTRATOR
The Portfolio engages BMR as investment adviser pursuant to an Investment
Advisory Agreement dated March 1, 1994. BMR or Eaton Vance acts as investment
adviser to investment companies and various individual and institutional clients
with combined assets under management of over $17 billion.
Eaton Vance, its affiliates and its predecessor companies have been managing
assets of individuals and institutions since 1924 and managing investment
companies since 1931. They maintain a large staff of experienced fixed-income
and equity investment professionals to service the needs of their clients. The
fixed-income division focuses on all kinds of taxable investment- grade and
high-yield securities, tax-exempt investment-grade and high-yield securities,
foreign debt, and U.S. Government securities. The equity division covers stocks
ranging from blue chip to emerging growth companies.
Eaton Vance and its affiliates act as adviser to over 150 mutual funds,
individual and various institutional accounts, including corporations,
hospitals, retirement plans, universities, foundations and trusts. Eaton Vance
mutual funds feature international equities, domestic equities, municipal bonds
and tax-free U.S. government and corporate bonds. Lloyd George Management has
advised Eaton Vance's international equity funds since 1992. Founded in 1991,
Lloyd George is headquartered in Hong Kong with offices in London and Mumbai,
India. It has established itself as a leader in investment management in Asian
equities and other global markets. Lloyd George features an experienced team of
investment professionals that began working together in the mid-1980's. Lloyd
George analysts cover East Asia, the India subcontinent, Russia and Eastern
Europe, Latin America, Australia and New Zealand from offices in Hong Kong,
London and Mumbai. Together Eaton Vance and Lloyd George manage over $18 billion
in assets. Eaton Vance mutual funds are distributed by Eaton Vance Distributors
both within the United States and offshore.
Eaton Vance Distributors believes that an investment professional can
provide valuable services to you to help you reach your investment goals.
Meeting investment goals requires time, objectivity and investment savvy. Before
making an investment recommendation, a representative can help you carefully
consider your short- and long-term financial goals, your tolerance for
investment risk, your investment time frame, and other investments you may
already own. Your professional investment representatives are knowledgeable
about financial markets, as well as the wide range of investment opportunities
available. A representative can provide you with tailored financial advice and
help you decide when to buy, sell or persevere with your investments.
BMR manages the investments and affairs of the Portfolio subject to the
supervision of the Portfolio's Board of Trustees. BMR furnishes to the Portfolio
investment research, advice and supervision, furnishes an investment program and
determines what securities will be purchased, held or sold by the Portfolio and
what portion, if any, of the Portfolio's assets will be held uninvested. The
Investment Advisory Agreement requires BMR to pay the salaries and fees of all
officers and Trustees of the Portfolio who are members of the BMR organization
and all personnel of BMR performing services relating to research and investment
activities. The Portfolio is responsible for all expenses not expressly stated
to be payable by BMR under the Investment Advisory Agreement, including, without
implied limitation, (i) expenses of maintaining the Portfolio and continuing its
existence, (ii) registration of the Portfolio under the 1940 Act, (iii)
commissions, fees and other expenses connected with the acquisition, holding and
disposition of securities and other investments, (iv) auditing, accounting and
legal expenses, (v) taxes and interest, (vi) governmental fees, (vii) expenses
of issue, sale and redemption of interests in the Portfolio, (viii) expenses of
registering and qualifying the Portfolio and interests in the Portfolio under
federal and state securities laws and of preparing and printing registration
statements or other offering statements or memoranda for such purposes and for
distributing the same to investors, and fees and expenses of registering and
maintaining registrations of the Portfolio and of the Portfolio's placement
agent as broker-dealer or agent under state securities laws, (ix) expenses of
reports and notices to investors and of meetings of investors and proxy
solicitations therefor, (x) expenses of reports to governmental officers and
commissions, (xi) insurance expenses, (xii) association membership dues, (xiii)
fees, expenses and disbursements of custodians and subcustodians for all
services to the Portfolio (including without limitation safekeeping of funds,
securities and other investments, keeping of books, accounts and records, and
determination of net asset values, book capital account balances and tax capital
account balances), (xiv) fees, expenses and disbursements of transfer agents,
dividend disbursing agents, investor servicing agents and registrars for all
services to the Portfolio, (xv) expenses for servicing the accounts of
investors, (xvi) any direct charges to investors approved by the Trustees of the
Portfolio, (xvii) compensation and expenses of Trustees of the Portfolio who are
not members of BMR's organization, and (xviii) such non-recurring items as may
arise, including expenses incurred in connection with litigation, proceedings
and claims and any legal obligation of the Portfolio to indemnify its Trustees,
officers and investors with respect thereto to the extent not covered by
insurance.
For a description of the compensation that the Portfolio pays BMR under the
Investment Advisory Agreement, see the Fund's current Prospectus. As of October
31, 1996, the Portfolio had net assets of $132,406,799. For the fiscal years
ended 1996 and 1995 and for the period from the start of business March 1, 1994
to October 31, 1994, the Portfolio paid BMR advisory fees of $744,744, $992,620
and $1,004,670, respectively, (equivalent to 0.54%, 0.55% and 0.49%,
respectively, (annualized) of the Portfolio's average daily net assets for each
such period).
The Investment Advisory Agreement with BMR continues in effect from year to
year so long as such continuance is approved at least annually (i) by the vote
of a majority of the Trustees of the Portfolio who are not interested persons of
the Portfolio or of BMR cast in person at a meeting specifically called for the
purpose of voting on such approval and (ii) by the Board of Trustees of the
Portfolio or by vote of a majority of the outstanding voting securities of the
Portfolio. The Agreement may be terminated at any time without penalty on sixty
(60) days' written notice by the Board of Trustees of either party, or by vote
of the majority of the outstanding voting securities of the Portfolio, and the
Agreement will terminate automatically in the event of its assignment. The
Agreement provides that BMR may render services to others. The Agreement also
provides that BMR shall not be liable for any loss incurred in connection with
the performance of its duties, or action taken or omitted under that Agreement,
in the absence of willful misfeasance, bad faith, gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties thereunder, or for any losses sustained in the
acquisition, holding or disposition of any security or other investment.
The investment advisory agreement of HI Portfolio with BMR is substantially
the same as that of the Portfolio. With respect to assets of the Fund invested
in HI Portfolio, BMR's monthly fee is equal to the aggregate of
(a) a daily asset based fee computed by applying the annual asset rate
applicable to that portion of the total daily net assets in each
Category as indicated below, plus
(b) a daily income based fee computed by applying the daily income rate
applicable to that portion of the total daily gross income (which
portion shall bear the same relationship to the total daily gross income
on such day as that portion of the total daily net assets in the same
Category bears to the total daily net assets on such day) in each
Category as indicated below:
ANNUAL DAILY
CATEGORY DAILY NET ASSETS ASSET RATE INCOME RATE
----------------------------------------------------------------------------
1 up to $500 million 0.300% 3.00%
2 $500 million but less than $1 billion 0.275% 2.75%
3 $1 billion but less than $1.5 billion 0.250% 2.50%
4 $1.5 billion but less than $2 billion 0.225% 2.25%
5 $2 billion but less than $3 billion 0.200% 2.00%
6 $3 billion and over 0.175% 1.75%
For the fiscal year ending March 31, 1997, HI Portfolio advisory fees are
estimated to be 0.62% of average daily net assets. For the fiscal years ended
March 31, 1996, 1995 and 1994, HI Portfolio advisory fees equaled .63%, .63% and
.64%, respectively of average daily net assets.
The Portfolio has also engaged BMR to act as its Administrator under an
Administration Agreement. The Administration Agreement with BMR continues in
effect from year to year so long as such continuance is approved at least
annually (i) by the Trustees of the Portfolio and (ii) by the vote of a majority
of those Trustees of the Portfolio who are not interested persons of the
Portfolio or of the Administrator. Under the Administration Agreement, BMR is
obligated to (a) review and supervise the provision of all domestic and foreign
custodial services to the Portfolio, and to make such reports and
recommendations to the Board of Trustees of the Portfolio concerning the
provision of such services as the Board deems appropriate; (b) provide to the
Portfolio certain valuation, legal, accounting and tax assistance and services
in connection with the Portfolio's (i) investments in (a) securities,
obligations and commercial paper that are denominated in foreign currencies or
the European Currency Unit ("ECU"), or that are issued or guaranteed by foreign
entities, (b) certificates of deposit and bankers' acceptances issued or
guaranteed by, or time deposits maintained at, foreign banks or foreign branches
of U.S. banks, and (c) participation interests in loans by U.S. or foreign banks
that are made to foreign borrowers or that are denominated in foreign currencies
or the ECU; and (ii) transactions in derivative instruments, including
instruments indexed to foreign exchange rates, forward foreign currency exchange
contracts, put and call options on foreign currencies, futures contracts and
options on such contracts, and interest rate and currency swaps; and (c) provide
to the Portfolio such other special administrative services as the Board from
time to time shall instruct BMR to furnish under the Administration Agreement.
In return for these special services, the Portfolio pays BMR as compensation
under the Administration Agreement a monthly fee in the amount of .0125%
(equivalent to .15% annually) of the average daily net assets of the Portfolio.
For the fiscal years ended October 31, 1996 and 1995 and for the period from the
start of business March 1, 1994, to October 31, 1994, the Portfolio paid BMR
administration fees of $208,657, $273,545 and $284,828, respectively.
The Portfolio will be responsible for all costs and expenses not expressly
stated to be payable by BMR under the Administration Agreement. Such costs and
expenses to be borne by the Portfolio include, without limitation, the fees and
expenses of the Portfolio's custodian and transfer agent, including those
incurred for determining the Portfolio's net asset value and keeping the
Portfolio's books; expenses of pricing and valuation services; membership dues
in investment company organizations; brokerage commissions and fees;
registration of the Portfolio under the 1940 Act; expenses of reports to
investors, proxy statements, and other expenses of investor's meetings;
insurance premiums; printing and mailing expenses; interest, taxes and
governmental fees; legal and accounting expenses; compensation and expenses of
Trustees not affiliated with BMR; and investment advisory and administration
fees. The Portfolio will also bear expenses incurred in connection with
litigation in which the Portfolio is a party and any legal obligation the
Portfolio may have to indemnify its officers and Trustees with respect thereto,
to the extent not covered by insurance.
As indicated in the Prospectus, Eaton Vance serves as administrator of the
Fund but currently receives no compensation for providing administrative
services to the Fund. Under its agreement with the Fund, Eaton Vance has been
engaged to administer the Fund's affairs, subject to the supervision of the
Trustees of the Trust, and shall furnish for the use of the Fund office space
and all necessary office facilities, equipment and personnel for administering
the affairs of the Fund. For additional information about the Administrator, see
"Fees and Expenses" in Part II.
IBT Trust Company (Cayman), Ltd. maintains HI Portfolio's principal office
and certain of its records and provides administrative assistance in
connection with meetings of its Trustees and interestholders.
The Fund pays all of its own expenses including, without limitation, (i)
expenses of maintaining the Fund and continuing its existence, (ii) registration
of the Trust under the 1940 Act, (iii) commissions, fees and other expenses
connected with the purchase or sale of securities and other investments, (iv)
auditing, accounting and legal expenses, (v) taxes and interest, (vi)
governmental fees, (vii) expenses of issue, sale, repurchase and redemption of
shares, (viii) expenses of registering and qualifying the Fund and its shares
under Federal and state securities laws and of preparing and printing
prospectuses for such purposes and for distributing the same to shareholders and
investors, and fees and expenses of registering and maintaining registrations of
the Fund and of the Fund's principal underwriter, if any, as broker-dealer or
agent under state securities laws, (ix) expenses of reports and notices to
shareholders and of meetings of shareholders and proxy solicitations therefor,
(x) expenses of reports to governmental officers and commissions, (xi) insurance
expenses, (xii) association membership dues, (xiii) fees, expenses and
disbursements of custodians and subcustodians for all services to the Fund
(including without limitation safekeeping of funds, securities and other
investments, keeping of books and accounts and determination of net asset
values), (xiv) fees, expenses and disbursements of transfer agents, dividend
disbursing agents, shareholder servicing agents and registrars for all services
to the Fund, (xv) expenses for servicing shareholder accounts, (xvi) any direct
charges to shareholders approved by the Trustees of the Trust, (xvii)
compensation and expenses of Trustees of the Trust who are not members of the
Eaton Vance organization, and (xviii) such non-recurring items as may arise,
including expenses incurred in connection with litigation, proceedings and
claims and any legal obligation of the Trust to indemnify its Trustees and
officers with respect thereto, to the extent not covered by insurance.
BMR is a wholly-owned subsidiary of Eaton Vance. Eaton Vance and EV are both
wholly-owned subsidiaries of EVC. BMR and Eaton Vance are both Massachusetts
business trusts, and EV is the trustee of BMR and Eaton Vance. The Directors of
EV are Landon T. Clay, M. Dozier Gardner, James B. Hawkes and Benjamin A.
Rowland, Jr. The Directors of EVC consist of the same persons and John G. L.
Cabot and Ralph Z. Sorenson. Mr. Clay is chairman, Mr. Gardner is vice chairman
and Mr. Hawkes is president and chief executive officer of EVC, BMR, Eaton Vance
and EV. All of the issued and outstanding shares of Eaton Vance and EV are owned
by EVC. All of the issued and outstanding shares of BMR are owned by Eaton
Vance. All shares of the outstanding Voting Common Stock of EVC are deposited in
a Voting Trust which expires on December 31, 1997, the Voting Trustees of which
are Messrs. Clay, Gardner, Hawkes and Rowland and Thomas E. Faust, Jr. The
Voting Trustees have unrestricted voting rights for the election of Directors of
EVC. All of the outstanding voting trust receipts issued under said Voting Trust
are owned by certain of the officers of BMR and Eaton Vance who are also
officers or officers and Directors of EVC and EV. As of February 28, 1997,
Messrs. Clay, Gardner and Hawkes each owned 24% of such voting trust receipts,
and Messrs. Rowland and Faust, owned 15% and 13%, respectively, of such voting
trust receipts. Messrs. Gardner, Hawkes and Otis are officers or Trustees of the
Trust and the Portfolio and are members of the EVC, BMR, Eaton Vance and EV
organizations. Messrs. Woodbury, Murphy, Venezia, O'Connor, Ahern and Rynne and
Ms. Sanders who are officers or Trustees of the Trust and/or the Portfolio, are
also members of the BMR, Eaton Vance and EV organizations. BMR will receive the
fees paid under the Investment Advisory Agreement and the Administration
Agreement.
EVC owns all of the stock of Energex Energy Corporation, which engages in
oil and gas exploration and development operations. In addition, Eaton Vance
owns all the stock of Northeast Properties, Inc., which is engaged in real
estate investment. EVC owns all the stock of Fulcrum Management, Inc. and
MinVen, Inc., which are engaged in precious metal mining, venture investment and
management. EVC also owns 24% of the Class A shares of Lloyd George Management
(B.V.I.) Limited, a registered investment adviser. Eaton Vance, BMR, EVC and EV
may also enter into other businesses.
EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Fund and
the Portfolios, IBT. It is Eaton Vance's opinion that the terms and conditions
of such transactions were not and will not be influenced by existing or
potential custodial or other relationships between the Fund or the Portfolios
and such banks.
CUSTODIAN
IBT acts as custodian for the Fund and each Portfolio. IBT has the custody
of all cash and securities representing the Fund's interest in the Portfolios,
has custody of all the Portfolios' assets, maintains the general ledger of the
Portfolios and the Fund and computes the daily net asset value of interests in
the Portfolios and the net asset value of shares of the Fund. In such capacity
it attends to details in connection with the sale, exchange, substitution,
transfer or other dealings with the Portfolios' investments, receives and
disburses all funds and performs various other ministerial duties upon receipt
of proper instructions from the Fund and the Portfolios. IBT charges custody
fees which are competitive within the industry. The fees for the Portfolios
relate to 1) bookkeeping and valuation services provided at an annual rate, 2)
activity charges based upon the volume of investment related transactions, and
3) reimbursement of out-of-pocket expenses. These fees are then reduced by a
credit for cash balances of the Portfolios at the custodian equal to 75% of the
91-day, U.S. Treasury Bill auction rate applied to the Portfolios' average daily
collected balances. The fee for the Fund relates to bookkeeping and valuation
services and is based upon a percentage of the Fund's net assets. IBT also
provides services in connection with the preparation of shareholder reports and
the electronic filing of such reports with the Commission for which it receives
a separate fee. Landon T. Clay, a Director of EVC and an officer, Trustee or
Director of other entities in the Eaton Vance organization, owns approximately
13% of the voting stock of Investors Financial Services Corp., the holding
company parent of IBT. Management believes that such ownership does not create
an affiliated person relationship between the Fund or either Portfolio and IBT
under the 1940 Act.
SERVICE FOR WITHDRAWAL
The Transfer Agent will send to the shareholder regular monthly or quarterly
payments of any permitted amount designated by the shareholder (see "Eaton Vance
Shareholder Services -- Withdrawal Plan" in the Fund's current Prospectus) based
upon the value of the shares held. The checks will be drawn from share
redemptions and hence, although they are a return of principal, may require the
recognition of taxable gain or loss. Income dividends and capital gains
distributions in connection with withdrawal accounts will be credited at net
asset value as of the record date for each distribution. Continued withdrawals
in excess of current income will eventually use up principal, particularly in a
period of declining market prices. A shareholder may not have a withdrawal plan
in effect at the same time he or she has authorized Bank Automated Investing or
is otherwise making regular purchases of Fund shares. The shareholder, the
Transfer Agent or the Principal Underwriter will be able to terminate the
withdrawal plan at any time without penalty.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined by IBT (as agent
and custodian for the Fund) in the manner described under "Valuing Fund Shares"
in the Fund's current Prospectus. The net asset value of the Portfolio is also
computed by IBT (as agent and custodian for the Portfolio) by subtracting the
liabilities of the Portfolio from the value of its total assets. IBT Fund
Services (Canada) Inc. determines the net asset value of HI Portfolio. The Fund
and the Portfolios will be closed for business and will not price their
respective shares or interests on the following business holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Debt securities (other than mortgage-backed, "pass-through" securities and
short-term obligations maturing in sixty days or less), including listed
securities and securities for which price quotations are available and forward
contracts, will normally be valued on the basis of market valuations furnished
by pricing services. Mortgage-backed "pass-through" securities are valued using
a matrix pricing system which takes into account closing bond valuations, yield
differentials, anticipated prepayments and interest rates. Financial futures
contracts listed on commodity exchanges and exchange-traded options are valued
at closing settlement prices. Over-the-counter options are valued at the mean
between the bid and asked prices provided by dealers. Short-term obligations and
money market securities maturing in sixty days or less are valued at amortized
cost which approximates value. Non-U.S. dollar denominated short-term
obligations maturing in sixty days or less are valued at amortized cost as
calculated in the base currency and translated into U.S. dollars at the current
exchange rate. Investments for which market quotations are unavailable are
valued at fair value using methods determined in good faith by or at the
direction of the Trustees of the Portfolio.
The value of all assets and liabilities expressed in foreign currencies will
be converted into U.S. dollar values at the mean between the buying and selling
rates of such currencies against U.S. dollars last quoted on one of the
principal markets for such currencies. Generally, trading in foreign securities,
derivative instruments and currencies is substantially completed each day at
various times prior to the time a Portfolio calculates its net asset value. If
an event materially affecting the values of such securities, instruments or
currencies occurs between the time such values are determined and the time net
asset value is calculated, such securities, instruments or currencies may be
valued at fair value.
Each investor in a Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each day the Exchange is open for trading
("Portfolio Business Day") as of the close of regular trading on the Exchange
(the "Portfolio Valuation Time"). The value of each investor's interest in a
Portfolio will be determined by multiplying the net asset value of the Portfolio
by the percentage, determined on the prior Portfolio Business Day, which
represented that investor's share of the aggregate interests in the Portfolio on
such prior day. Any additions or withdrawals for the current Portfolio Business
Day will then be recorded. Each investor's percentage of the aggregate interest
in a Portfolio will then be recomputed as a percentage equal to a fraction (i)
the numerator of which is the value of such investor's investment in the
Portfolio as of the Portfolio Valuation Time on the prior Portfolio Business Day
plus or minus, as the case may be, the amount of any additions to or withdrawals
from the investor's investment in the Portfolio on the current Portfolio
Business Day and (ii) the denominator of which is the aggregate net asset value
of the Portfolio as of the Portfolio Valuation Time on the prior Portfolio
Business Day plus or minus, as the case may be, the amount of the net additions
to or withdrawals from the aggregate investment in the Portfolio on the current
Portfolio Business Day by all investors in the Portfolio. The percentage so
determined will then be applied to determine the value of the investor's
interest in a Portfolio for the current Portfolio Business Day.
INVESTMENT PERFORMANCE
Average annual total return is determined by multiplying a hypothetical
initial purchase order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation, and dividends and distributions
paid and reinvested) for the stated period and annualizing the results. The
calculation assumes that all distributions are reinvested at net asset value on
the reinvestment dates during the period, and a complete redemption of the
investment and, if applicable, the deduction of a CDSC at the end of the period.
For further information concerning the total return of the Fund, see
"Performance Information" in Part II.
Yield is computed pursuant to a standardized formula by dividing the net
investment income per share earned during a recent 30-day period by the maximum
offering price per share on the last day of the period and annualizing the
resulting figure. Net investment income per share is calculated from the yields
to maturity of all debt obligations held by a Portfolio based on prescribed
methods, reduced by accrued Fund expenses for the period, with the resulting
number being divided by the average daily number of Fund shares outstanding and
entitled to receive distributions during the period. This yield figure does not
reflect the deduction of any CDSCs (if applicable) imposed upon certain
redemptions at the rates set forth under "How to Redeem Fund Shares" in the
Fund's current Prospectus. For the yield of the Fund, see "Performance
Information" in Part II.
The Principal Underwriter may publish to Authorized Firms the Fund's
distribution rate and/or its effective distribution rate. The Fund's
distribution rate is computed by dividing the most recent monthly distribution
per share annualized, by the current net asset value per share. The Fund's
effective distribution rate is computed by dividing the distribution rate by the
ratio (the days in a year divided by the accrual days of the monthly period)
used to annualize the most recent monthly distribution and reinvesting the
resulting amount for a full year on the basis of such ratio. The effective
distribution rate will be higher than the distribution rate because of the
compounding effect of the assumed reinvestment. Investors should note that the
Fund's yield is calculated using a standardized formula, the income component of
which is computed from the yields to maturity of all debt obligations held by a
Portfolio based on prescribed methods (with all purchases and sales of
securities during such period included in the income calculation on a settlement
date basis), whereas the distribution rate is based on the Fund's last monthly
distribution, which tends to be relatively stable and may be more or less than
the amount of net investment income and short-term capital gain actually earned
by the Fund during the month.
The Fund's total return may be compared to various domestic, international
and global securities indices, such as the Commodity Research Bureau Futures
Price Index. The Fund's yield may also be compared to the yields of other
fixed-income securities, such as U.S. Treasuries, mortgage-backed securities,
and corporate bonds or other securities comparable to the securities held by a
Portfolio as reported by various independent sources (such as Bloomberg L.P.).
In making such comparisons, the Fund may provide information concerning the
nature of such indices or securities. This information may be used in
advertisements and in information furnished to present or prospective
shareholders. The Fund's performance may differ from that of other investors in
the Portfolio, including other investment companies.
Evaluations of the Fund's performance (including rankings) made by
independent sources, e.g., Lipper Analytical Services, Inc., CDA/Wiesenberger
and Morningstar, Inc., may be used in advertisements and in information
furnished to present or prospective shareholders. In addition, information
showing the effects of compounding interest may be included in advertisements
and other material furnished to present and prospective shareholders.
Compounding is the process of earning interest on principal plus interest that
was earned earlier. Interest can be compounded annually, semi-annually,
quarterly or daily. Examples of compounding will be used for illustration
purposes only.
The Fund may also provide investors and prospective investors with
information on the Fund's duration and duration's relationship to the stability
or volatility of a security's price. The Fund may also provide information
concerning the diversification of the Portfolios (on such basis as country of
issuer's origin, industry sector or security type), as well as the allocation of
securities held by the Portfolios across various rating categories. In addition,
information on the Portfolios' turnover rate may be provided to investors and
prospective investors.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
-- cost associated with aging parents;
-- funding a college education (including its actual and estimated
cost);
-- health care expenses (including actual and projected expenses);
-- long-term disabilities (including the availability of, and coverage
provided by, disability insurance); and
-- retirement (including the availability of social security benefits,
the tax treatment of such benefits and statistics and other
information relating to maintaining a particular standard of living
and outliving existing assets).
Such information may also address different methods for saving money and the
results of such methods, as well as the benefits of investing in equity
securities. Such information may describe: the potential for growth; the
performance of equities as compared to other investment vehicles; and the value
of investing as early as possible and regularly, as well as staying invested.
The benefits of investing in equity securities by means of a mutual fund may
also be included (such benefits may include diversification, professional
management and the variety of equity mutual fund products).
Information in advertisements and materials furnished to present and
prospective investors may include profiles of different types of investors
(i.e., investors with different goals and assets) and different investment
strategies for meeting specific financial goals. Such information may provide
hypothetical illustrations which include: results of various investment
strategies; performance of an investment in the Fund over various time periods;
and results of diversifying assets among several investments with varying
performance. Information in advertisements and materials furnished to present
and prospective investors may also include quotations (including editorial
comments) and statistics concerning investing in securities, as well as
investing in particular types of securities and the performance of such
securities.
Eaton Vance Distributors believes that an investment professional can
provide valuable services to you to help you reach your investment goals.
Meeting investment goals requires time, objectivity and investment savvy. Before
making an investment recommendation, a representative can help you carefully
consider your short- and long-term financial goals, your tolerance for
investment risk, your investment time frame, and other investments you may
already own. Your professional investment representatives are knowledgeable
about financial markets, as well as the wide range of investment opportunities
available. A representative can help you decide when to buy, sell or persevere
with your investments. A professional investment representative can provide you
with tailored financial advice. Information about investment professionals may
appear in sales literature and advertisements used by the Fund.
The Fund may provide information about Eaton Vance, its affiliates and other
investment advisers to the funds in the Eaton Vance Family of Funds in sales
material or advertisements provided to investors or prospective investors. Such
material or advertisements may also provide information on the use of investment
professionals by such investors.
TAXES
FEDERAL INCOME TAXES
Each series of the Trust is treated as a separate entity for federal income
tax purposes. The Fund has elected to be treated, has qualified, and intends to
continue to qualify each year as a RIC under the Code. Accordingly, the Fund
intends to satisfy certain requirements relating to sources of its income and
diversification of its assets and to distribute all of its net investment income
and net realized capital gains in accordance with the timing requirements
imposed by the Code, so as to avoid any federal income or excise tax to the
Fund. The Fund so qualified for its fiscal year ended October 31, 1996. (see the
Notes to Financial Statements incorporated by reference into this SAI). Because
the Fund invests substantially all of its assets in the Portfolios, the
Portfolios normally must satisfy the applicable source of income and
diversification requirements in order for the Fund to satisfy them. Each
Portfolio will allocate at least annually among its investors, including the
Fund, each investor's distributive share of the Portfolio's net taxable and
tax-exempt (if any) investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit. For purposes of applying the
requirements of the Code regarding qualification as a RIC, the Fund will be
deemed (i) to own its proportionate share of each of the assets of a Portfolio
and (ii) to be entitled to the gross income of a Portfolio attributable to such
share.
In order to avoid federal excise tax, the Code requires that the Fund
distribute by December 31 of each calendar year at least 98% of its ordinary
income (not including tax-exempt income) for such year, at least 98% of the
excess of its realized capital gains over its realized capital losses, generally
computed on the basis of the one-year period ending on October 31 of such year,
after reduction by any available capital loss carryforwards, and 100% of any
income from the prior year (as previously computed) that was not paid out during
such year and on which the Fund paid no federal income tax. Under current law,
provided that the Fund qualifies as a RIC for federal income tax purposes and
the Portfolios are treated as a partnership for Massachusetts and federal tax
purposes, neither the Fund nor a Portfolio is liable for any income, corporate
excise or franchise tax in the Commonwealth of Massachusetts.
A Portfolio's transactions in options, futures contracts and forward
contracts will be subject to special tax rules that may affect the amount,
timing and character of Fund distributions to shareholders. For example, certain
positions held by a Portfolio on the last business day of each taxable year will
be marked to market (i.e., treated as if closed out on such day), and any
resulting gain or loss will generally be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by a Portfolio that
substantially diminish the Portfolio's risk of loss with respect to other
positions in its portfolio may constitute "straddles," which are subject to tax
rules that may cause deferral of Portfolio losses, adjustments in the holding
periods of Portfolio securities and conversion of short-term into long-term
capital losses. A Portfolio may make certain elections to mitigate adverse
consequences of these tax rules and may have to limit its activities in options,
futures contracts and forward contracts in order to enable the Fund to maintain
its qualification as a RIC.
The Portfolio may be subject to foreign withholding or other foreign taxes
with respect to income (possibly including, in some cases, capital gains)
derived from foreign securities. These taxes may be reduced or eliminated under
the terms of an applicable U.S. income tax treaty. Since it is expected that
more than 50% of the value of the total assets of the Fund taking into account
its allocable share of the Portfolios' total assets, at the close of any taxable
year may consist of securities issued by foreign corporations, the Fund may be
eligible to pass through to shareholders their proportionate shares of foreign
taxes paid by the Portfolio and allocated to the Fund, with the result that
shareholders would include such proportionate shares in income subject to
federal income tax and would be entitled to take a foreign tax credit or
deduction for such foreign taxes, subject to certain limitations. Certain
foreign exchange gains and losses realized by the Portfolio and allocated to the
Fund will be treated as ordinary income and losses. Certain uses of foreign
currency, foreign currency options, futures and forward contracts, and interest
rate and currency swaps, and investment by the Portfolios in certain "passive
foreign investment companies" may be limited or a tax election may be made, if
available, in order to preserve the Fund's qualification as a RIC and/or avoid
imposition of a tax on the Fund.
A Portfolio's investment in zero coupon, deferred interest and payment in
kind securities will cause it to realize income prior to the receipt of cash
payments with respect to these securities. Such income will be allocated daily
to interests in a Portfolio, and in order to distribute its proportionate share
of this income and avoid a tax payable by the Fund, the Portfolio may be
required to liquidate portfolio securities that it might otherwise have
continued to hold in order to generate cash that the Fund may withdraw from the
Portfolio for subsequent distribution to Fund shareholders.
The appropriate tax accounting for dollar rolls is also uncertain in some
respects, and the Portfolio's use of such rolls may accordingly be limited in
order to preserve the Fund's qualification as a RIC.
Investments in lower-rated or unrated securities may present special tax
issues for a Portfolio and hence for the Fund to the extent actual or
anticipated defaults may be more likely with respect to such securities. Tax
rules are not entirely clear about issues such as when a Portfolio may cease to
accrue interest, original issue discount, or market discount; when and to what
extent deductions may be taken for bad debts or worthless securities; how
payments received on obligations in default should be allocated between
principal and income; and whether exchanges of debt obligations in a workout
context are taxable.
The Fund's distributions of taxable net investment income, the excess of net
short-term capital gain over net long-term capital loss and certain foreign
exchange gains earned by a Portfolio and allocated to the Fund are taxable to
shareholders of the Fund as ordinary income whether received in cash or
reinvested in additional shares. Only a small portion, if any, of such
distributions of net investment income made by the Fund may qualify for the
dividends-received deduction for corporations, subject to applicable limitations
under the Code. The Fund's distributions of the excess of net long-term capital
gain over net short-term capital loss (including any capital losses carried
forward from prior years) earned by a Portfolio and allocated to the Fund are
taxable to shareholders of the Fund as long-term capital gains, whether received
in cash or in additional shares and regardless of the length of time their
shares of the Fund have been held.
Any loss realized upon the redemption or exchange of shares of the Fund with
a tax holding period of 6 months or less will be treated as a long-term capital
loss to the extent of any distribution of net long-term capital gains with
respect to such shares. All or a portion of any loss realized upon a taxable
disposition of Fund shares may be disallowed under "wash sale" rules if other
shares of the Fund are purchased (whether through the reinvestment of
distributions or otherwise) within 30 days before or after such disposition.
Special tax rules apply to Individual Retirement Accounts ("IRAs") and other
retirement plans, and persons investing through such plans should consult their
tax advisers for more information. The deductibility of contributions to IRAs
may be restricted or eliminated for particular shareholders.
Amounts paid by the Fund to individuals and certain other shareholders who
have not provided the Fund with their correct taxpayer identification number and
certain certifications required by the Internal Revenue Service ("IRS"), as well
as shareholders with respect to whom the Fund has received notification from the
IRS or a broker, may be subject to "backup" withholding of federal income tax
from the Fund's taxable dividends and distributions and the proceeds of
redemptions (including repurchases and exchanges), at a rate of 31%. An
individual's taxpayer identification number is generally his or her social
security number.
Non-resident alien individuals, foreign corporations and certain other
foreign entities generally will be subject to a U.S. withholding tax at a rate
of 30% on the Fund's distributions from its ordinary income and the excess of
its net short-term capital gain over its net long-term capital loss, unless the
tax is reduced or eliminated by an applicable tax treaty. Distributions from the
excess of the Fund's net long-term capital gain over its net short-term capital
loss received by such shareholders and any gain from the sale or other
disposition of shares of the Fund generally will not be subject to U.S. federal
income taxation, provided that non-resident alien status has been certified by
the shareholder. Different U.S. tax consequences may result if the shareholder
is engaged in a trade or business in the United States, is present in the United
States for a sufficient period of time during a taxable year to be treated as a
U.S. resident, or fails to provide any required certifications regarding status
as a non-resident alien investor. Foreign shareholders should consult their tax
advisers regarding the U.S. and foreign tax consequences of an investment in the
Fund.
The Fund had qualified to do business in the Commonwealth of Pennsylvania
and, therefore, was subject to the Pennsylvania foreign franchise and corporate
net income tax in respect of its business activities in Pennsylvania. The amount
of such taxes was $28,080 for the fiscal year ended October 31, 1994. In 1995,
however, the Fund took actions to cease doing business in Pennsylvania and does
not intend to pay Pennsylvania foreign franchise and corporate net income tax in
Pennsylvania. Accordingly, Fund shareholders should consult their tax advisers
regarding the applicability of Pennsylvania local and county personal property
taxes.
The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as retirement plans, tax-exempt entities,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to special tax rules that may apply in their
particular situations, as well as the state, local or foreign tax consequences
of investing in the Fund.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the executing firm, are made by BMR.
BMR is also responsible for the execution of transactions for all other accounts
managed by it.
BMR places the portfolio security transactions of each Portfolio and of all
other accounts managed by it for execution with many firms. BMR uses its best
efforts to obtain execution of portfolio security transactions at prices which
are advantageous to a Portfolio and at reasonably competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, BMR will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the executing firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions, and
the reasonableness of the spread or commission, if any. The debt securities and
obligations purchased and sold by a Portfolio are generally traded in the
domestic or foreign over-the-counter markets on a net basis (i.e. without
commission) through broker-dealers and banks acting for their own account rather
than as brokers, or otherwise involve transactions directly with the issuer of
such obligations. Such firms attempt to profit from such transactions by buying
at the bid price and selling at the higher asked price of the market for such
obligations, and the difference between the bid and asked price is customarily
referred to as the spread. A Portfolio may also purchase debt securities from
domestic and foreign underwriters, the cost of which may include undisclosed
fees and concessions to the underwriters. Transactions in foreign obligations
usually involve the payment of fixed brokerage commissions when executed on
foreign securities exchanges, which commissions are generally higher than those
in the United States. Although commissions on portfolio security transactions
will, in the judgment of BMR, be reasonable in relation to the value of the
services provided, commissions exceeding those which another firm might charge
may be paid to firms who were selected to execute transactions on behalf of the
Portfolio and BMR's other clients for providing brokerage and research services
to BMR.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of a Portfolio
may receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if BMR
determines in good faith that such commission was reasonable in relation to the
value of the brokerage and research services provided. This determination may be
made on the basis of either that particular transaction or on the basis of
overall responsibilities which BMR and its affiliates have for accounts over
which they exercise investment discretion. In making any such determination, BMR
will not attempt to place a specific dollar value on the brokerage and research
services provided or to determine what portion of the commission should be
related to such services. Brokerage and research services may include advice as
to the value of securities, the advisability of investing in, purchasing, or
selling securities, and the availability of securities or purchasers or sellers
of securities; furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement); and the "Research
Services" referred to in the next paragraph.
It is a common practice of the investment advisory industry and of the
advisers of investment companies, institutions and other investors to receive
research, statistical and quotation services, data, information and other
services, products and materials which assist such advisers in the performance
of their investment responsibilities ("Research Services") from broker-dealer
firms which execute portfolio transactions for the clients of such advisers and
from third parties with which such broker-dealers have arrangements. Consistent
with this practice, BMR receives Research Services from many broker-dealer firms
with which BMR places the Portfolio transactions and from third parties with
which these broker-dealers have arrangements. These Research Services include
such matters as general economic and market reviews, industry and company
reviews, evaluations of securities and portfolio strategies and transactions and
recommendations as to the purchase and sale of securities and other portfolio
transactions, financial, industry and trade publications, news and information
services, pricing and quotation equipment and services, and research oriented
computer hardware, software, data bases and services. Any particular Research
Service obtained through a broker-dealer may be used by BMR in connection with
client accounts other than those accounts which pay commissions to such
broker-dealer. Any such Research Service may be broadly useful and of value to
BMR in rendering investment advisory services to all or a significant portion of
its clients, or may be relevant and useful for the management of only one
client's account or of a few clients' accounts, or may be useful for the
management of merely a segment of certain clients' accounts, regardless of
whether any such account or accounts paid commissions to the broker-dealer
through which such Research Service was obtained. The advisory fee paid by the
Portfolios is not reduced because BMR receives such Research Services. BMR
evaluates the nature and quality of the various Research Services obtained
through broker-dealer firms and attempts to allocate sufficient commissions to
such firms to ensure the continued receipt of Research Services which BMR
believes are useful or of value to it in rendering investment advisory services
to its clients.
Subject to the requirement that BMR shall use its best efforts to seek and
execute portfolio security transactions at advantageous prices and at reasonably
competitive spreads or commission rates, BMR is authorized to consider as a
factor in the selection of any firm with whom portfolio orders may be placed the
fact that such firm has sold or is selling shares of the Fund or of other
investment companies sponsored by BMR or Eaton Vance. This policy is not
inconsistent with a rule of the National Association of Securities Dealers,
Inc., which rule provides that no firm which is a member of the Association
shall favor or disfavor the distribution of shares of any particular investment
company or group of investment companies on the basis of brokerage commissions
received or expected by such firm from any source.
Securities considered as investments for the Portfolio may also be
appropriate for other investment accounts managed by BMR or its affiliates.
Whenever decisions are made to buy or sell securities by the Portfolio and one
or more of such other accounts simultaneously, BMR will allocate the security
transactions (including "hot" issues) in a manner which it believes to be
equitable under the circumstances. As a result of such allocations, there may be
instances where the Portfolio will not participate in a transaction that is
allocated among other accounts. If an aggregate order cannot be filled
completely, allocations will generally be made on a pro rata basis. An order may
not be allocated on a pro rata basis where, for example: (i) consideration is
given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account
with specialized investment policies that coincide with the particulars of a
specific investment; (iii) pro rata allocation would result in odd-lot or de
minimis amounts being allocated to a portfolio or other client; or (iv) where
BMR reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Portfolio from time to time, it is the opinion of the Trustees of the Trust and
the Portfolio that the benefits from the BMR organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
BROKERAGE
For the fiscal year ended October 31, 1996, the Portfolio paid brokerage
commissions of $23,792 on portfolio security transactions aggregating
$245,268,131 to firms which provided some research services to BMR or its
affiliates (although many of such firms may have been selected in any particular
transaction primarily because of their execution capabilities). For the fiscal
year ended October 31, 1995, the Portfolio paid brokerage commissions of $11,700
with respect to portfolio transactions. Of this amount, approximately $11,357
was paid in respect of portfolio security transactions aggregating approximately
$148,774,532 to firms which provided some research services to BMR's
organization. For the period from the start of business, March 1, 1994 to
October 31, 1994, the Portfolio paid foreign brokerage commissions on its
portfolio security transactions amounting to $6,875.
OTHER INFORMATION
The Trust changed its name from Eaton Vance Government Obligations Trust on
July 10, 1995. On October 31, 1995, the Fund was reorganized as a series of the
Trust. Prior thereto, the Fund was a series of Eaton Vance Investment Fund, Inc.
Eaton Vance, pursuant to its agreement with the Trust, controls the use of the
words "Eaton Vance" and "EV" in the Fund's name and may use the words "Eaton
Vance" or "EV" in other connections and for other purposes.
As permitted by Massachusetts law, there will normally be no meeting of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees of the Trust holding office have been
elected by shareholders. In such an event the Trustees then in office will call
a shareholders' meeting for the election of Trustees. Except for the foregoing
circumstances and unless removed by action of the shareholders in accordance
with the Trust's By-laws, the Trustees shall continue to hold and may appoint
successor Trustees.
The Trust's Amended and Restated Declaration of Trust may be amended by the
Trustees when authorized by vote of a majority of the outstanding voting
securities of the Trust and any other outstanding series of shares, the
financial interests of which are affected by the amendment. The Trustees may
also amend the Declaration of Trust without the vote or consent of shareholders
to change the name of the Trust or any series or to make such other changes as
do not have a materially adverse effect on the financial interests of
shareholders or if they deem it necessary to conform it to applicable Federal or
state laws or regulations. The Trust or any series or class thereof may be
terminated by: (1) the affirmative vote of the holders of not less than
two-thirds of the shares outstanding and entitled to vote at any meeting of
shareholders of the Trust or the appropriate series or class thereof, or by an
instrument or instruments in writing without a meeting, consented to by the
holders of two-thirds of the shares of the Trust or a series or class thereof,
provided, however, that, if such termination is recommended by the Trustees, the
vote of a majority of the outstanding voting securities of the Trust or a series
or class thereof entitled to vote thereon shall be sufficient authorization; or
(2) by means of an instrument in writing signed by a majority of the Trustees,
to be followed by a written notice to shareholders stating that a majority of
the Trustees has determined that the continuation of the Trust or a series or a
class thereof is not in the best interest of the Trust, such series or class or
of their respective shareholders.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office. In addition, the By-Laws of the Trust provide that no natural person
shall serve as a Trustee of the Trust after the holders of record of not less
than two-thirds of the outstanding shares have declared that he be removed from
office either by declaration in writing filed with the custodian of the assets
of the Trust or by votes cast in person or by proxy at a meeting called for the
purpose. The By-laws further provide that under certain circumstances the
shareholders may call a meeting to remove a Trustee and that the Trust is
required to provide assistance in communicating with shareholders about such a
meeting. The By-Laws also provide that the Trustees shall promptly call a
meeting of shareholders for the purpose of voting upon a question of removal of
a Trustee when requested so to do by the record holders of not less than 10 per
centum of the outstanding shares.
In accordance with the Declaration of Trust of each Portfolio, there will
normally be no meetings of the investors for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by investors. In such an event the Trustees of a
Portfolio then in office will call an investors' meeting for the election of
Trustees. Except for the foregoing circumstances and unless removed by action of
the investors in accordance with a Portfolio's Declaration of Trust, the
Trustees shall continue to hold office and may appoint successor Trustees.
The Declaration of Trust of each Portfolio provides that no person shall
serve as a Trustee if investors holding two-thirds of the outstanding interests
have removed him from that office either by a written declaration filed with the
Portfolios' Chairman or by votes cast at a meeting called for that purpose. The
Declaration of Trust further provides that under certain circumstances the
investors may call a meeting to remove a Trustee and that the Portfolio is
required to provide assistance in communicating with investors about such a
meeting.
Each Portfolio's Declaration of Trust provides that the Portfolio will
terminate 120 days after the complete withdrawal of the Fund or any other
investor in the Portfolio, unless either the remaining investors by unanimous
vote at a meeting of such investors, or a majority of the Trustees of the
Portfolio, by written instrument consented to by all investors, agree to
continue the business of the Portfolio. This provision is consistent with
treatment of the Portfolio as a partnership for federal income tax purposes. The
right to redeem can be suspended and the payment of the redemption price
deferred when the Exchange is closed (other than for customary weekend and
holiday closings), during periods when trading on the Exchange is restricted as
determined by the Commission, or during any emergency as determined by the
Commission which makes it impracticable for a Portfolio to dispose of its
securities or value its assets, or during any other period permitted by order of
the Commission for the protection of investors.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, are the independent accountants for the Fund and the Portfolio providing
audit services, tax return preparation, and assistance and consultation with
respect to the preparation of filings with the Commission. Deloitte & Touche,
Grand Cayman, Cayman Islands, British West Indies, are the independent certified
public accountants of the HI Portfolio.
FINANCIAL STATEMENTS
The financial statements of the Fund and the Portfolio, which are included
in the Fund's annual report to shareholders, are incorporated by reference into
this SAI and have been so incorporated in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, as experts in accounting and auditing.
A copy of the Fund's most recent Annual Report accompanies this SAI.
<PAGE>
APPENDIX
DESCRIPTION OF SECURITIES RATINGS(1)
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safe-guarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporated bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
one year.
Issuers rated PRIME-1 or P-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 or P-1
repayment ability will often be evidenced by many of the following
characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 or P-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S CORPORATE BOND RATINGS:
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P's rating because no public rating has been requested,
because there is insufficient information on which to base a rating, or because
S&P's does not rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER
A: S&P's commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
FITCH INVESTORS SERVICE, INC.
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligors ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
HIGH YIELD BOND RATINGS
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default of interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and"D" represents
the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the addition
of a plus or minus sign to indicate the relative position of a credit within the
rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the "F-1+" and "F-1" categories.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
DUFF & PHELPS
INVESTMENT GRADE BOND RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AND AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, AND A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, AND BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
HIGH YIELD BOND RATINGS
BB+, BB, AND BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, AND B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
Preferred stocks are rated on the same scale as bonds but the preferred rating
gives weight to its more junior position in the capital structure. Structured
Financings are also rated on this scale.
COMMERCIAL PAPER/CERTIFICATES OF DEPOSIT
CATEGORY 1: TOP GRADE
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity including
internal operating factors and/or ready access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
CATEGORY 2: GOOD GRADE
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
CATEGORY 3: SATISFACTORY GRADE
DUFF 3: Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless timely payment is expected.
No ratings are issued for companies whose paper is not deemed to be of
investment grade.
* * * *
NOTES:
(1) The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated do
not necessarily represent ratings which would be given to these securities
on the date of the Portfolio's fiscal year end.
Bonds which are unrated expose the investor to risks with respect to capacity to
pay interest or repay principal which are similar to the risks of lower- rated
bonds. The Portfolio is dependent on the Investment Adviser's judgment, analysis
and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
This Part II provides information about EV MARATHON STRATEGIC INCOME FUND.
The Fund became a series of the Trust on October 31, 1995.
FEES AND EXPENSES
ADMINISTRATOR
As stated under "Investment Adviser and Administrator" in Part I of this
SAI, the Fund's Administrator currently receives no compensation for providing
administrative services to the Fund. Prior to March 1, 1994 (when the Fund
transferred substantially all of its assets to the Portfolio in exchange for an
interest in the Portfolio), the Fund retained Eaton Vance as its administrator
under its Administration Agreement (which is no longer in effect) for which
Eaton Vance received a monthly administration fee at an annual rate of .15% of
the Fund's average daily net assets. For the period November 1, 1993 to March 1,
1994, the Fund paid Eaton Vance administration fees of $182,735.
DISTRIBUTION PLAN
During the fiscal year ended October 31, 1996, the Principal Underwriter
paid to Authorized Firms sales commissions of $118,170 on sales of Fund shares.
During the same period, the Fund made sales commission payments under the Plan
to the Principal Underwriter aggregating $1,028,723 and the Principal
Underwriter received approximately $76,000 in CDSCs imposed on early redeeming
shareholders. These sales commissions and CDSCs payments reduced Uncovered
Distribution Charges under the Plan. As at October 31, 1996, the outstanding
Uncovered Distribution Charges of the Principal Underwriter calculated under the
Plan amounted to approximately $18,063,000 (which was equivalent to 13.9% of the
Fund's net assets on such date). During the fiscal year ended October 31, 1996,
the Fund paid or accrued service fees under the Plan aggregating $231,933 of
which $229,952 was paid to Authorized Firms and the balance of which was
retained by the Principal Underwriter.
PRINCIPAL UNDERWRITER
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares at the rate of $2.50 for each repurchase transaction handled
by the Principal Underwriter. The Principal Underwriter estimates that the
expenses incurred by it in acting as repurchase agent for the Fund will exceed
the amounts paid therefor by the Fund. For the fiscal year ended October 31,
1996, the Fund paid the Principal Underwriter $6,415.00 for repurchase
transactions handled by the Principal Underwriter.
TRUSTEES
The fees and expenses of those Trustees of the Trust and of the Portfolio
who are not members of the Eaton Vance organization (the noninterested Trustees)
are paid by the Fund (and the other series of the Trust) and the Portfolio,
respectively. (The Trustees of the Trust and the Portfolio who are members of
the Eaton Vance organization receive no compensation from the Trust or the
Portfolio.) During the fiscal year ended October 31, 1996, the noninterested
Trustees of the Trust and the Portfolio received the following compensation in
their capacities as Trustees from the Fund and the Portfolio, and, for the year
ended December 31, 1996, earned the following compensation in their capacities
as Trustees of the funds in the Eaton Vance fund complex (1):
AGGREGATE AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM TRUST AND
NAME FROM FUND FROM PORTFOLIO FUND COMPLEX
- ---- ------------ -------------- ------------------
Donald R. Dwight ....... $687 $1,668(2) $142,500(4)
Samuel L. Hayes, III ... 625 1,846(3) 153,750(5)
Norton H. Reamer ....... 619 1,783 142,500
John L. Thorndike ...... 634 1,885 147,500
Jack L. Treynor ........ 679 1,850 147,500
(1) The Eaton Vance fund complex consists of 228 registered investment companies
or series thereof.
(2) Includes $647 of deferred compensation.
(3) Includes $689 of deferred compensation.
(4) Includes $42,500 of deferred compensation.
(5) Includes $37,500 of deferred compensation.
PRINCIPAL UNDERWRITER
Under the Distribution Agreement the Principal Underwriter acts as principal
in selling shares of the Fund. The expenses of printing copies of prospectuses
used to offer shares to Authorized Firms or investors and other selling
literature and of advertising is borne by the Principal Underwriter. The fees
and expenses of qualifying and registering and maintaining qualifications and
registrations of the Fund and its shares under federal and state securities laws
is borne by the Fund. In addition, the Fund makes payments to the Principal
Underwriter pursuant to its Distribution Plan as described in the Fund's current
Prospectus; the provisions of the Fund's Distribution Plan relating to such
payments are included in the Distribution Agreement. The Distribution Agreement
is renewable annually by the Trust's Board of Trustees (including a majority of
its Trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of the Fund's Distribution Plan
or the Distribution Agreement), may be terminated on sixty days' notice either
by such Trustees or by vote of a majority of the outstanding voting securities
of the Fund or on six months' notice by the Principal Underwriter and is
automatically terminated upon assignment. The Principal Underwriter distributes
Fund shares on a "best efforts" basis under which it is required to take and pay
for only such shares as may be sold.
DISTRIBUTION PLAN
The Distribution Plan (the "Plan") is described in the Prospectus and is
designed to meet the requirements of Rule 12b-1 under the 1940 Act and the NASD
Rule. The purpose of the Plan is to compensate the Principal Underwriter for its
distribution services and facilities provided to the Fund by paying the
Principal Underwriter sales commissions and a separate distribution fee in
connection with sales of Fund shares. The following supplements the discussion
of the Plan contained in the Fund's Prospectus.
The amount payable to the Principal Underwriter pursuant to the Plan as
sales commissions and distribution fees with respect to each day will be accrued
on such day as a liability of the Fund and will accordingly reduce the Fund's
net assets upon such accrual, all in accordance with generally accepted
accounting principles. The amount payable on each day is limited to 1/365 of
.75% of the Fund's net assets on such day. The level of the Fund's net assets
changes each day and depends upon the amount of sales and redemptions of Fund
shares, the changes in the value of the investments held by the Portfolio, the
expenses of the Fund and the Portfolio accrued and allocated to the Fund on such
day, income on portfolio investments of the Portfolio accrued and allocated to
the Fund on such day, and any dividends and distributions declared on Fund
shares. The Fund does not accrue possible future payments as a liability of the
Fund or reduce the Fund's current net assets in respect of unknown amounts which
may become payable under the Plan in the future because the standards for
accrual of such a liability under accounting principles have not been satisfied.
The Plan provides that the Fund will receive all CDSCs and will make no
payments to the Principal Underwriter in respect of any day on which there are
no outstanding Uncovered Distribution Charges of the Principal Underwriter.
CDSCs and accrued amounts will be paid by the Fund to the Principal Underwriter
whenever there exist Uncovered Distribution Charges under the Fund's Plan.
Periods with a high level of sales of Fund shares accompanied by a low level
of early redemptions of Fund shares resulting in the imposition of CDSCs will
tend to increase the time during which there will exist Uncovered Distribution
Charges of the Principal Underwriter. Conversely, periods with a low level of
sales of Fund shares accompanied by a high level of early redemptions of Fund
shares resulting in the imposition of CDSCs will tend to reduce the time during
which there will exist Uncovered Distribution Charges of the Principal
Underwriter.
In calculating daily the amount of Uncovered Distribution Charges,
distribution charges will include the aggregate amount of sales commissions and
distribution fees theretofore paid plus the aggregate amount of sales
commissions and distribution fees which the Principal Underwriter is entitled to
be paid under the Plan since its inception. Payments theretofore paid or payable
under the Plan by the Fund to the Principal Underwriter and CDSCs theretofore
paid or payable to the Principal Underwriter will be subtracted from such
distribution charges; if the result of such subtraction is positive, a
distribution fee (computed at 1% over the prime rate then reported in The Wall
Street Journal) will be computed on such amount and added thereto, with the
resulting sum constituting the amount of outstanding Uncovered Distribution
Charges with respect to such day. The amount of outstanding Uncovered
Distribution Charges of the Principal Underwriter calculated on any day does not
constitute a liability recorded on the financial statements of the Fund.
The amount of Uncovered Distribution Charges of the Principal Underwriter at
any particular time depends upon various changing factors, including the level
and timing of sales of Fund shares, the nature of such sales (i.e., whether they
result from exchange transactions, reinvestments or from cash sales through
Authorized Firms), the level and timing of redemptions of Fund shares upon which
a CDSC will be imposed, the level and timing of redemptions of Fund shares upon
which no CDSC will be imposed (including redemptions involving exchanges of Fund
shares pursuant to the exchange privilege which result in a reduction of
Uncovered Distribution Charges), changes in the level of the net assets of the
Fund, and changes in the interest rate used in the calculation of the
distribution fee under the Plan.
As currently implemented by the Trustees, the Plan authorizes payments of
sales commissions and distribution fees to the Principal Underwriter and service
fees to the Principal Underwriter and Authorized Firms which may be equivalent,
on an aggregate basis during any fiscal year of the Fund, to 1% of the Fund's
average daily net assets for such year. For the sales commissions and service
fee payments made by the Fund and the outstanding Uncovered Distribution Charges
of the Principal Underwriter, see "Fees and Expenses -- Distribution Plan" in
this Part II. The Fund believes that the combined rate of all these payments may
be higher than the rate of payments made under distribution plans adopted by
other investment companies pursuant to Rule 12b-1. Although the Principal
Underwriter will use its own funds (which may be borrowed from banks) to pay
sales commissions at the time of sale, it is anticipated that the Eaton Vance
organization will profit by reason of the operation of the Plan through an
increase in the Fund's assets (thereby increasing the advisory fee payable to
BMR by the Portfolio) resulting from sale of Fund shares and through the amounts
paid to the Principal Underwriter, including CDSCs, pursuant to the Plan. The
Eaton Vance organization may be considered to have realized a profit under the
Plan if at any point in time the aggregate amounts theretofore received by the
Principal Underwriter pursuant to the Plan and from CDSCs have exceeded the
total expenses theretofore incurred by such organization in distributing shares
of the Fund. Total expenses for this purpose will include an allocable portion
of the overhead costs of such organization and its branch offices, which costs
will include without limitation leasing expense, depreciation of building and
equipment, utilities, communication and postage expense, compensation and
benefits of personnel, travel and promotional expense, stationery and supplies,
literature and sales aids, interest expense, data processing fees, consulting
and temporary help costs, insurance, taxes other than income taxes, legal and
auditing expense and other miscellaneous overhead items. Overhead is calculated
and allocated for such purpose by the Eaton Vance organization in a manner
deemed equitable to the Fund.
Pursuant to Rule 12b-1, the Plan has been approved by the Fund's initial
sole shareholder (Eaton Vance) and by the Board of Trustees of the Trust,
including the Rule 12b-1 Trustees. The Plan continues in effect from year to
year so long as such continuance is approved at least annually by the vote of
both a majority of (i) the Trustees of the Trust who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Plan or any agreements related to the Plan (the "Rule 12b-1
Trustees") and (ii) all of the Trustees then in office, and the Distribution
Agreement contains a similar provision. The Plan and Distribution Agreement may
be terminated at any time by vote of a majority of the Rule 12b-1 Trustees or by
a vote of a majority of the outstanding voting securities of the Fund. The
provisions of the Plan relating to payments of sales commissions and
distribution fees to the Principal Underwriter are also included in the
Distribution Agreement between the Trust on behalf of the Fund and the Principal
Underwriter. Under the Plan, the President or a Vice President of the Trust
shall provide to the Trustees for their review, and the Trustees shall review at
least quarterly, a written report of the amount expended under the Plan and the
purposes for which such expenditures were made. The Plan may not be amended to
increase materially the payments described therein without approval of the
shareholders of the Fund, and all material amendments of the Plan must also be
approved by the Trustees as required by Rule 12b-1. So long as the Plan is in
effect, the selection and nomination of Trustees who are not interested persons
of the Trust shall be committed to the discretion of the Trustees who are not
such interested persons.
The Trustees of the Trust believe that the Plan will be a significant factor
in the expected growth of the Fund's assets, and will result in increased
investment flexibility and advantages which have benefited and will continue to
benefit the Fund and its shareholders. Payments for sales commissions and
distribution fees made to the Principal Underwriter under the Plan will
compensate the Principal Underwriter for its services and expenses in
distributing shares of the Fund. Service fee payments made to the Principal
Underwriter and Authorized Firms under the Plan provide incentives to provide
continuing personal services to investors and the maintenance of shareholder
accounts. By providing incentives to the Principal Underwriter and Authorized
Firms, the Plan is expected to result in the maintenance of, and possible future
growth in, the assets of the Fund. Based on the foregoing and other relevant
factors, the Trustees have determined that in their judgment there is a
reasonable likelihood that the Plan will benefit the Fund and its shareholders.
PERFORMANCE INFORMATION
The table below indicates the cumulative and average total return on a
hypothetical investment of $1,000 in the Fund covering the life of the Fund from
November 26, 1990 through October 31, 1996 and for the five- and one-year
periods ended October 31, 1996.
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INVEST- INVEST-
MENT BEFORE MENT AFTER TOTAL RETURN BEFORE TOTAL RETURN AFTER
DEDUCTING THE DEDUCTING THE DEDUCTING THE CDSC DEDUCTING THE CDSC**
INVESTMENT INVESTMENT AMOUNT OF CDSC ON CDSC** ON ------------------------ ------------------------
PERIOD DATE INVESTMENT 10/31/96 10/31/96 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
- ----------------- ---------- ---------- --------------- -------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of the
Fund* 11/26/90 $1,000 $1,468.48 $1,468.48 46.85% 6.69% 46.85% 6.69%
5 Years Ended
10/31/96 10/31/91 $1,000 $1,360.00 $1,360.00 36.00% 6.34% 36.00% 6.34%
1 Year Ended
10/31/96 10/31/95 $1,000 $1,184.83 $1,154.83 18.48% 18.48% 15.48% 15.48%
Past performance is not indicative of future results. Investment return and principal value will fluctuate; shares, when
redeemed, may be worth more or less than their original cost.
- ------------
*Investment operations began on November 26, 1990.
**No CDSC is imposed on certain redemptions. See the Fund's current Prospectus.
</TABLE>
The Fund's yield for the 30-day period ended October 31, 1996 was 6.81%.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As at December 2, 1996, the Trustees and officers of the Trust, as a group,
owned in the aggregate less than 1% of the outstanding shares of the Fund. As of
December 2, 1996, Merrill Lynch, Pierce, Fenner & Smith, Inc., Jacksonville, FL
was the record owner of approximately 34.5% of the outstanding shares, which
were held on behalf of its customers who are the beneficial owners of such
shares, and as to which it had voting power under certain limited circumstances.
To the knowledge of the Trust, no other person owned of record or beneficially
5% or more of the Fund's outstanding shares as of such date.
<PAGE>
[LOGO]
EATON VANCE
-----------
Mutual Funds
EV MARATHON
STRATEGIC INCOME
FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 3, 1997
EV MARATHON
STRATEGIC INCOME FUND
24 FEDERAL STREET
BOSTON, MA 02110
- -------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR OF STRATEGIC INCOME PORTFOLIO
INVESTMENT ADVISER OF HIGH INCOME PORTFOLIO
Boston Management and Research, 24 Federal Street, Boston, MA 02110
ADMINISTRATOR OF EV MARATHON STRATEGIC INCOME FUND
Eaton Vance Management, 24 Federal Street, Boston, MA 02110
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc., 24 Federal Street, Boston, MA 02110
(800) 225-6265
CUSTODIAN
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111
TRANSFER AGENT
First Data Investor Services Group, P.O. Box 5123, Westborough, MA 01581-5123
(800) 262-1122
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA 02109
M-SISAI
<PAGE>
[LOGO]
EV Marathon Strategic
Income Fund
Annual
Shareholder Report
October 31, 1996
To Shareholders
I am happy to report that EV Marathon Strategic Income Fund had a total
return of 18.5% during the year ended October 31, 1996. That return was
the result of a rise in net asset value per share to $9.31 from $8.50 on
October 31, 1995, and the reinvestment of $0.703 in income dividends. It
does not include the effect of contingent deferred sales charges on
certain redeeming shareholders. Based on the October dividend and the
closing net asset value of $9.31, the Fund's distribution rate
was 8.23%. By any measure, fiscal 1996 was an outstanding year for EV
Marathon Strategic Income Fund. As Mark Venezia discusses on page 2, the
Fund's strong results ranked it 2nd of 89 funds in the "Short-Term World
Income Fund" category, according to Morningstar, Inc. an independent
mutual fund ranking service.*
1996: Robust performance and a record year for global issuance...
Paced by the strong showing of Brady bonds and lower interest rates in
Europe, 1996 has been a banner year for the global bond markets. Not
surprisingly, 1996 is also shaping up as a record year for the issuance
of global bonds. Through June 30 alone, $350 billion in new bonds had
come to market, a 60% increase over the same period last year. Several
forces have been driving the trend, including high levels of government
borrowing as emerging economies raise the capital necessary to fund
economic development. The increased global supply has met with a warm
reception from investors. More than $115 billion of dollar-denominated
bonds are scheduled to mature in 1996, according to the Euromoney
Capital Market Data Base, and a good portion of that capital is being
redirected into high-yield global bonds.
* Morningstar rankings reflect historical performance through 10/31/96.
For the 3-year and 5 year periods ending 10/31/96, the fund was ranked
6th of 50 funds and 18th of 31 funds, respectively. Rankings are based
on the fund's total returns and do not take sales charges into
consideration. Past performance is no guarantee of future results.
Meanwhile, the U.S. bond market, provided selective opportunities...
The U.S. market was generally under pressure throughout the period, as
yields for 5-year Treasuries rose from 5.81% on October 31, 1995 to
6.07% on October 31, 1996. While many investors had anticipated an
economic slowdown in the second half of the year, the economy not only
maintained its momentum but proved somewhat stronger than expected. The
economy's strength in the face of weaker expectations contributed to
rising volatility throughout the period.
Nonetheless, the Fund benefited from the response of its high-yield
corporate bonds to the continued economic growth, while its mortgage-
backed securities outperformed the Treasury market. Thus, in a difficult
fixed-income environment, shareholders again benefited from the Fund's
flexible investment approach. We believe that this time-tested strategy
will continue to provide good fixed income opportunities - both domestic
and global - in the years ahead. In the pages that follow, portfolio
manager Mark Venezia reviews the Fund's successful fiscal year and gives
his outlook for the global bond market.
[PHOTO OF JAMES B. HAWKES OMITTED]
Sincerely,
/S/James B. Hawkes
James B. Hawkes
President
December 20, 1996
Management Discussion
An interview with Mark S. Venezia, vice president and manager of Strategic
Income Portfolio.
Q. Mark, the Fund was ranked 2nd of 89 similar funds in the "Short-Term
World Income Fund" category for the year ended October 31, 1996, according
to Morningstar, an independent mutual fund ranking service. To what do you
attribute the Fund's strong showing?
A. Generally, this was a period when many global market trends worked
in the Fund's favor. Our Brady bonds were the largest contributors to
the Fund's performance, as emerging markets rallied very strongly during
the period. Second, we benefited from our exposure to Europe, as
interest rates fell during the period. Third, yields in the so-called
"Dollar Bloc" nations fell dramatically, causing our Canadian,
Australian, and New Zealand positions to outperform the U.S. Fourth,
while the U.S. Treasury market remained under some pressure, the
Fund benefited from a narrowing of spreads in our U.S. mortgage-backed
securities and high-yield corporate bonds. And finally, the Fund
achieved currency gains as a result of the strength of the dollar
against the yen and the German mark.
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.
Q. Why did the Brady markets do so well?
A. There were several reasons. With the currency crises and market
turbulence of 1994 and early 1995 behind them, global bond investors
focused on the progress emerging countries have made in implementing
economic reforms, fighting inflation and reducing current account
deficits. Moreover, with interest rates in the U.S., Europe, and Japan
still relatively low, the attractive yields on Brady bonds drew increasing
attention. Finally, these emerging economies have shown that they can
sustain growth rates well above those of the industrialized nations.
As a result, we saw some improvement in credit quality among most Brady
issuers. These strong fundamentals all gave a lift to the Brady markets.
[PHOTO OF MARK S. VENEZIA OMITTED]
Caption reads: Mark S. Venezia
Q. Which Brady markets were the best performers for the Fund?
A. Predominantly the Latin American markets, although all emerging
markets tended to fare well. In the first half of the fiscal year,
Poland and Argentina were good positions for the Fund. Investors gave a
warm reception to Argentina's Second Reform of the State, which promised
tax reform and spending cuts. Meanwhile, the Polish market responded
well to the election of President Kwasniewski and the likelihood of a
more stable government still dedicated to economic reform. Moody's and
Standard & Poor's, major bond-rating agencies, assigned Polish Bradys
investment grade ratings, sparking a sharp rally in the bonds.
In the second half of the period, we focused increasingly on Brazil and
Ecuador, each of which has made remarkable economic progress. Brazil,
for example, reported zero inflation for the month of September and
continued to make progress on administrative reforms. Ecuador fared well
as oil prices firmed throughout the year. In addition, newly-elected
President Bucaram has proven more sensitive to the needs of business and
foreign investors than his populist campaign suggested. That has further
encouraged investors.
Q. You've referred to the importance of Brady bonds to the Fund's
performance. Could you briefly explain the mechanics of the Brady bond
markets?
A. Certainly. As some investors already know, Brady bonds are named
after former U.S. Treasury secretary Nicholas Brady, the architect of a
U.S. plan to ensure the medium-term economic stability of debtor
emerging nations. The basic concept behind the Brady Plan was to
restructure these nations' commercial bank loans into bonds, thereby
providing debt relief for the borrowers while creating a relatively
liquid market for the new debt securities.
Top five weightings according to...
...Regional Credit Exposure
allocations based U.S. 42.2%
on the location Ireland 10.3
of the issuer of each Brazil 7.3
security. This shows Poland 6.4
that the Portfolio's Norway 5.3
largest holdings
were in the U.S.
and Ireland.
...The Portfolio's Currency Allocation
holdings broken U.S. 40.4%
down by country Ireland 10.5
of currency Czech Republic 9.8
denomination. Indonesia 7.7
This shows where Philippines 7.2
movement in
foreign exchange
rates will have the
greatest impact
on the Fund's
share price.
...The contribution Interest Rate
of a country's Sensitivity*
positive weighting to the U.S. 38.6%
Portfolio's duration. Germany 28.8
This shows where Ireland 21.2
changing interest Norway 10.4
rates will have the Canada 9.4
greatest impact
on share prices.
Footnote reads:
* Calculated by determining the interest rate sensitivity of
the Portfolio's positions in each country and dividing by the
Portfolio's overall interest rate sensitivity.
[GRAPHIC CHART OMITTED: The Brady Bond Market:]
Brady issuers demonstrate
improving economic fundamentals*...
1995
GDP Reserves
----- --------
Argentina $276 B $14.3 B
Brazil 689 B 51.8 B
Ecuador 18 B 1.6 B
Mexico 279 B 16.9 B
Philippines 74 B 7.0 B
Poland 116 B 15.0 B
Venezuela 79 B 6.3 B
Footnote reads:
*Data for 1995; Source: J.P. Morgan, Inc.
[GRAPHIC VERTICAL BAR CHART WITH IMAGE OF PAPER SCROLL IN BACKROUND
OMITTED: While Brady trading volume continues to surge.]
'91 $200B
'92 $730B
'93 $1,979B
'94 $2,766B
'95 $3,000B
Footnote reads:
Source: Emerging Markets Traders Association.
The first such plan, featuring an agreement with Mexico, went into
effect in 1990. Although there have been many variations on this early
theme, this first agreement provided the basic precedent for future
efforts: 1) securitization, or transforming bank loans into bonds; 2)
collateralized principal, whereby the principal portion of some newly
created bonds is backed by zero-coupon U.S. Treasuries; 3) discounted
exchanges, whereby loans are exchanged at a discount in return for long-
term, floating-rate bonds; and 4) below-market fixed coupons, whereby
loans are exchanged at par value, but with below-market coupons. These
various structures have been used to improve economic stability for a
wide range of emerging markets in Latin America, Southeast Asia, the
Middle East and Eastern Europe.
Q. What are the overall benefits of the Brady market?
A. There are several. First, for emerging economies, the use of Brady
bonds provides debt relief through lower interest rates, longer
maturities, and principal reduction. Often, that debt relief gives these
nations additional breathing room in the critical early transition to a
market economy. Second, the underlying credit of some of the new debt is
improved through guarantees of principal repayment, which is very
important from the investors' point of view. Finally, the process helps
to broaden the investor base for the bonds and thereby improve their
liquidity. As a measure of that liquidity, trading in Brady bonds will
far exceed $1 trillion in 1996.
[GRAPHIC PIE CHART OMITTED: Strategic Allocation:*]
High-Yield 16.4%
Foreign
Investment Grade 39.3%
U.S. Investment
Grade 44.3%
Footnote reads:
*Based on market value as of 10/31/96
Because the Fund is actively managed, country
and sector allocations are subject to change.
Q. Why did the Fund benefit from a strong dollar?
A. In fiscal year 1996, the dollar was very strong relative to the
Japanese yen. The Fund maintained short positions versus the yen
throughout the period, which helped the Fund's performance. Meanwhile,
in Europe, the Fund benefited from the relative strength of the dollar
against the German mark. Typically, when the mark is weak versus the
dollar, the other western European countries benefit. Therefore, our
strategy in Europe was to hold bond positions in peripheral European
countries, while maintaining short positions in mark-related currencies.
That strategy was doubly effective because we not only realized the
"carry" - the yield difference between our bond holdings and our short
currency positions - but also benefited from a strong outperformance by
the European bond markets. Yields fell throughout Europe as countries
prepared to meet the strict economic criteria for monetary union.
Q. Looking forward, Mark, what is your outlook for the global markets in
the coming year?
A. I'm optimistic about the coming year for several reasons. First, the
emerging nations are likely to continue their progress toward economic
reform. While it's unreasonable to expect a repeat of this year's
remarkable returns from the Brady markets, the emerging markets should
still present good investment opportunities. Second, some global
markets - Germany is a good example - still have relatively steep yield
curves, so they may have room for further appreciation in those markets.
Finally - and perhaps most fundamentally - inflation is still in decline
around the world. That is certainly a favorable development for global
bond investors.
Naturally, past trends do not guarantee future performance. And of
course, investing in global markets and high-yield markets may involve
currency and political risk. But foreign bonds continue to represent
unique vehicles for fixed-income investors. In the coming year,
EV Marathon Strategic Income Fund will continue to pursue those
opportunities.
Comparison of Change in Value of a $10,000 Investment in EV Marathon
Strategic Income Fund, the J.P. Morgan Hedged Short-Term Global Index and
the Lipper Short World Multi-Market Income Funds average
From November 30, 1990, through October 31, 1996
AVERAGE 1 5 Life of Value of
ANNUAL RETURNS Year Years Fund* Investment at 10/31
- ---------------------------------------------------------------------
Including CDSC 15.5% 6.3% 6.7% $14,710
Without CDSC 18.5% 6.3% 6.7% $14,710
EV Marathon Strategic Income Fund vs. Lipper Short World Multi-Market
Income Funds average and J.P. Morgan Hedged Short-Term Global Index
Date Fund Fund w/ CD Lipper JP Morgan
11/30/90 $10,000 NA $10,000 $10,000
12/31/90 $9,970 NA $10,024 $10,098
1/31/91 $10,090 NA $10,189 $10,191
2/28/91 $10,200 NA $10,201 $10,279
3/31/91 $10,340 NA $9,975 $10,341
4/30/91 $10,440 NA $10,070 $10,431
5/31/91 $10,580 NA $10,086 $10,507
6/30/91 $10,550 NA $10,046 $10,529
7/31/91 $10,550 NA $10,170 $10,595
8/31/91 $10,640 NA $10,254 $10,732
9/30/91 $10,740 NA $10,411 $10,833
10/31/91 $10,820 NA $10,508 $10,931
11/30/91 $10,730 NA $10,511 $11,013
12/31/91 $10,790 NA $10,670 $11,151
1/31/92 $10,840 NA $10,625 $11,176
2/28/92 $10,950 NA $10,687 $11,206
3/31/92 $10,960 NA $10,703 $11,189
4/30/92 $11,110 NA $10,798 $11,274
5/31/92 $11,180 NA $10,911 $11,360
6/30/92 $11,220 NA $10,978 $11,439
7/31/92 $11,240 NA $11,010 $11,520
8/31/92 $11,080 NA $10,969 $11,573
9/30/92 $10,720 NA $10,662 $11,697
10/31/92 $10,660 NA $10,649 $11,713
11/30/92 $10,630 NA $10,570 $11,707
12/31/92 $10,720 NA $10,590 $11,806
1/31/93 $10,760 NA $10,643 $11,900
2/28/93 $11,010 NA $10,725 $12,003
3/31/93 $11,100 NA $10,771 $12,042
4/30/93 $11,190 NA $10,832 $12,108
5/31/93 $11,260 NA $10,914 $12,111
6/30/93 $11,340 NA $10,952 $12,222
7/31/93 $11,540 NA $10,978 $12,263
8/31/93 $11,600 NA $11,018 $12,351
9/30/93 $11,490 NA $11,000 $12,380
10/31/93 $11,780 NA $11,070 $12,444
11/30/93 $11,740 NA $11,032 $12,469
12/31/93 $11,880 NA $11,134 $12,543
1/31/94 $12,070 NA $11,213 $12,591
2/28/94 $11,740 NA $11,048 $12,493
3/31/94 $11,100 NA $10,899 $12,452
4/30/94 $11,180 NA $10,895 $12,418
5/31/94 $11,350 NA $10,906 $12,421
6/30/94 $10,920 NA $10,827 $12,424
7/31/94 $10,970 NA $10,863 $12,513
8/31/94 $11,140 NA $10,907 $12,516
9/30/94 $11,130 NA $10,941 $12,513
10/31/94 $11,150 NA $10,975 $12,562
11/30/94 $11,280 NA $10,993 $12,576
12/31/94 $11,250 NA $10,697 $12,590
1/31/95 $11,050 NA $10,627 $12,744
2/28/95 $11,020 NA $10,672 $12,896
3/31/95 $10,990 NA $10,650 $12,998
4/30/95 $11,470 NA $10,829 $13,122
5/31/95 $11,920 NA $10,974 $13,350
6/30/95 $11,800 NA $11,002 $13,399
7/31/95 $11,900 NA $11,101 $13,496
8/31/95 $12,110 NA $11,150 $13,604
9/30/95 $12,350 NA $11,258 $13,700
10/31/95 $12,420 NA $11,331 $13,817
11/30/95 $12,660 NA $11,407 $13,967
12/31/95 $12,880 NA $11,519 $14,086
1/31/96 $13,390 NA $11,657 $14,225
2/28/96 $13,130 NA $11,599 $14,181
3/31/96 $13,220 NA $11,645 $14,206
4/30/96 $13,500 NA $11,750 $14,296
5/31/96 $13,570 NA $11,809 $14,345
6/30/96 $13,780 NA $11,903 $14,429
7/31/96 $13,810 NA $11,999 $14,505
8/31/96 $14,050 NA $12,095 $14,602
9/30/96 $14,490 NA $12,264 $14,760
10/31/96 $14,710 $13,780 $12,387 $14,915
Footnote reads:
Past performance is not indicative of future results. Investment returns and
principal will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Source: Towers Data Systems,
Bethesda, MD Lipper Analytical Services, Inc. **Investment operations
commenced 11/26/90. +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. It is not possible to invest
directly in the index.
Fund performance
In accordance with guidelines issued by the Securities and Exchange
Commission, we are including a performance chart comparing 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 Strategic Income Fund and the unmanaged J.P.
Morgan Hedged Short-Term Global Index.
The total return figures
The blue solid 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 total return figures for the Fund
reflect the Fund's maximum applicable deferred sales charge (CDSC),
deducted at redemption as follows: 3% - 1st year; 2.5% - 2nd year; 2% -
3rd year; 1% - 4th year.
The black line represents the performance of the J.P. Morgan Hedged
Short-Term Global Index. The Index's return does not reflect any
commissions or expenses that would be incurred if an investor
individually purchased or sold the securities represented in the Index.
It is not possible to invest in the Index itself. The dotted line
represents the average performance of Short World Multi-Market Income
Funds, as compiled by Lipper Analytical Services, Inc., a mutual fund
ranking service, and is included to show how the Fund has performed
relative to its universe.
<TABLE>
<CAPTION>
EV Marathon Strategic Income Fund
Financial Statements
Statement of Assets and Liabilities
October 31, 1996
<S> <C> <C>
Assets:
Investment in Strategic Income Portfolio (Portfolio), at value (Note 1A) $130,725,618
Receivable for Fund shares sold 22,222
------------
Total assets $130,747,840
Liabilities:
Dividends payable $605,914
Payable for Fund shares redeemed 423,659
Payable to affiliate --
Trustees' fees 278
Accrued expenses 46,800
------------
Total liabilities 1,076,651
------------
Net Assets for 13,932,253 shares of beneficial interest outstanding $129,671,189
============
Sources of Net Assets:
Paid-in capital $135,298,105
Accumulated net realized loss on investment transactions
(computed on the basis of identified cost) (12,949,190)
Unrealized appreciation of investments from Portfolio
(computed on the basis of identified cost) 7,844,544
Distributions in excess of net investment income (522,270)
------------
Total net assets $129,671,189
============
Net Asset Value, Offering and Redemption Price (Note 7) Per Share
($129,671,189 (divided by) 13,932,253 shares of beneficial interest) $9.31
======
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1996
<S> <C> <C>
Investment Income (Note 1B):
Interest income allocated from Portfolio $13,089,249
Expenses allocated from Portfolio (1,190,751)
-----------
Total investment income $11,898,498
Expenses --
Compensation of Trustees not members of the
Investment Adviser's organization (Note 5) $3,238
19,354
Distribution costs (Note 6) 1,260,656
Transfer and dividend disbursing agent fees 152,360
Printing and postage 92,802
Legal and accounting services 19,711
Registration fees 18,836
State taxes 200,000
Amortization of organization expenses (Note 1D) 4,633
Miscellaneous 16,677
-----------
Total expenses 1,788,267
-----------
Net investment income $10,110,231
-----------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) from Portfolio (identified cost basis) (including net
loss due to foreign currency rate fluctuations of $766,402) --
Investment transactions $9,048,161
Financial futures contracts (116,435)
Written option transactions 23,127
Foreign currency and forward foreign currency exchange contracts 584,207
-----------
Net realized gain on investments $9,539,060
Change in unrealized appreciation of investments 3,747,829
-----------
Net realized and unrealized gain on investments $13,286,889
-----------
Net increase in net assets resulting from operations $23,397,120
===========
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Year Ended October 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $10,110,231 $14,128,443
Net realized gain (loss) on investments 9,539,060 (11,886,396)
Change in unrealized appreciation of investments 3,747,829 15,636,069
----------- -----------
Net increase in net assets from operations $23,397,120 $17,878,116
----------- -----------
Distributions to shareholders (Note 2 ) --
From net investment income ($10,110,231) ($7,936,820)
In excess of net investment income (748,802) --
From tax return of capital -- (7,061,789)
----------- -----------
Total distributions ($10,859,033) ($14,998,609)
----------- -----------
Transactions in shares of capital stock (Note 3) --
Proceeds from sale of shares $7,147,913 $4,881,401
Net asset value of shares issued to shareholders
in payment of distributions declared 5,396,728 7,134,341
Cost of shares redeemed (46,178,157) (97,267,733)
----------- -----------
Decrease in net assets from capital stock transactions ($33,633,516) ($85,251,991)
----------- -----------
Net decrease in net assets ($21,095,429) ($82,372,484)
Net Assets:
At beginning of year 150,766,618 233,139,102
----------- -----------
At end of year (including distributions in excess of net
investment income of $522,270 and
$1,254,659, respectively) $129,671,189 $150,766,618
============ ============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Year Ended October 31,
--------------------------------------------------
1996 1995 1994+ 1993 1992
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value -- Beginning of year $8.500 $8.290 $9.410 $9.120 $9.920
-------- -------- -------- -------- --------
Income from operations:
Net investment income $0.655 $0.726 $0.645 $0.239 $0.816
Net realized and unrealized gain
(loss) on investments $0.858 $0.167 ($1.135) $0.683 ($0.943)
-------- -------- -------- -------- --------
Total income (loss) from operations $1.513 $0.893 ($0.490) $0.922 ($0.127)
-------- -------- -------- -------- --------
Less distributions:
From net investment income ($0.655) ($0.361) ($0.343) ($0.632) ($0.673)
In excess of net investment income (0.048) -- -- -- --
From tax return of capital -- (0.322) (0.290) -- --
-------- -------- -------- -------- --------
Total distributions ($0.703) ($0.683) ($0.633) ($0.632) ($0.673)
-------- -------- -------- -------- --------
Net asset value -- End of year $9.310 $8.500 $8.290 $9.410 $9.120
Total Return * 18.48% 11.34% (5.33%) 10.51% (1.45%)
Ratios/Supplemental Data
(to average daily net assets):
Expenses (1) 2.17% 2.18% 2.00% 1.99% 1.95%
Net investment income 7.38% 7.85% 7.24% 7.53% 8.20%
Portfolio Turnover * * -- -- 55% 55% 56%
Net assets at the end of period
(000's omitted) $129,671 $150,767 $233,139 $381,227 $533,253
* Total investment return is calculated assuming a purchase at the net asset value on the
first day and a sale at the net asset value on the last day of each period reported.
Dividends and distributions, if any, are assumed to be reinvested at the net asset value
on the payable date. Total return is not computed on an annualized basis.
** Portfolio Turnover represents the rate of portfolio activity for the period while the Fund
was making investments directly in securities. The portfolio turnover for the period since the
Fund transferred substantially all of its investable assets to the Portfolio is shown in the
Portfolio's financial statements which are included elsewhere in this report.
+ Per share amounts have been calculated using the monthly average share method which more
approximately presents the per share data for the period, since the use of the undistributed
method does not accord with the results of operations.
(1) Includes the Fund's share of Strategic Income Portfolio's allocated expenses for the years
ended October 31, 1996 and 1995 and for the period from March 31, 1994 to October 31, 1994.
The accompanying notes are an integral part of the financial statements
</TABLE>
Notes to Financial Statements
(1) Significant Accounting Policies
EV Marathon Strategic Income Fund (the Fund) is a non-diversified series
of Eaton Vance Mutual Funds Trust (the Trust). The Fund is registered
under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund invests all of its investable
assets in interests in the Strategic Income Portfolio (the Portfolio), a
New York Trust, having the same investment objective as the Fund. The
value of the Fund's investment in the Portfolio reflects the Fund's
proportionate interest in the net assets of the Portfolio (98.7% at
October 31, 1996). The performance of the Fund is directly affected by
the performance of the Portfolio. The financial statements of the
Portfolio, including the portfolio of investments, are included
elsewhere in this report and should be read in conjunction with the
Fund's financial statements. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation
of its financial statements. The policies are in conformity with
generally accepted accounting principles.
A. Investment Valuation -- Valuation of securities by the Portfolio is
discussed in Note 1 of the Portfolio's Notes to Financial Statements
which are included elsewhere in this report.
B. Income -- The Fund's net investment income consists of the Fund's pro
rata share of the net investment income of the Portfolio, less all
actual and accrued expenses of the Fund determined in accordance with
generally accepted accounting principles.
C. Federal Taxes -- The Fund's policy is to comply with the provisions
of the Internal Revenue Code applicable to regulated investment
companies and to distribute to shareholders each year all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is necessary. At October 31, 1996,
the Fund, for federal income tax purposes, had a capital loss carryover of
$12,344,850, which will reduce the Fund's taxable income arising from
future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount
of the distributions to shareholders which would otherwise be necessary
to relieve the Fund of any liability for federal income or excise tax.
Such capital loss carryovers will expire on, October 31, 2001
($1,847,613), October 31, 2002 ($5,884,118) and October 31, 2003
($4,613,119).
D. Deferred Organization Expenses -- Costs incurred by the Fund in
connection with its organization, including registration costs, have
been amortized on the straight-line basis over five years.
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 income and expenses during the
reporting period. Actual results could differ from those estimates.
F. Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian to the Fund and the Portfolio. Pursuant to the custodian
agreement, IBT receives a fee reduced by credits which are determined
based on the average cash balance the Fund or the Portfolio maintains
with IBT. All significant credit balances used to reduce the Fund's
custodian fees are reflected as a reduction of operating expenses on the
statement of operations.
(2) Distributions to Shareholders
The net investment income of the Fund is determined daily and
substantially all of the net investment income so determined is declared
daily as a dividend to shareholders of record at the time of
declaration. Distributions are paid monthly. Distributions of allocated
realized capital gains, if any, are made at least annually. Shareholders
may reinvest capital gain distributions in additional shares of the Fund
at the net asset value as of the ex-dividend date. Distributions are
paid in the form of additional shares or, at the election of the
shareholder, in cash. The Fund distinguishes between distributions on a
tax basis and a financial reporting basis. Generally accepted accounting
principles require that only distributions in excess of tax basis
earnings and profits be reported in the financial statements as a return of
capital. Differences in the recognition or classification of income
between the financial statements and tax earnings and profits which
result in over-distributions for financial statement purposes only are
classified as distributions in excess of net investment income or
accumulated net realized gains. Permanent differences between book and
tax accounting relating to distributions are reclassified to paid-in
capital. During the year ended October 31, 1996, reclassifications were
made among the Fund's capital accounts primarily due to differences in
book and tax accounting for investments in forward contracts and foreign
denominated investments. Net investment income, net realized gains and
net assets were not affected by this reclassification.
(3) Capital Stock
At October 31, 1996, there were one billion shares of $0.0001 par value
capital stock authorized. Transactions in capital stock were as follows:
Year Ended October 31,
-----------------------------
1996 1995
-------------- -------------
Sales 801,649 587,219
Issued to shareholders
electing to receive payment of
distributions in capital stock 608,806 867,130
Redemptions (5,223,821) (11,841,595)
-------------- -------------
Net decrease (3,813,366) (10,387,246)
============== =============
(4) Investment Transactions
Increases and decreases in the Fund's investment in the Portfolio for
the year ended October 31, 1996 aggregated $8,918,484 and $55,950,391,
respectively.
(5) Investment Adviser Fee and Other Transactions with Affiliates
Eaton Vance Management (EVM) serves as the administrator of the Fund,
but receives no compensation. The Portfolio has engaged Boston
Management and Research (BMR), a subsidiary of EVM, to render investment
advisory services. See Note 2 of the Portfolio's Notes to Financial
Statements which are included elsewhere in this report. Certain of the
officers and Trustees of the Fund and Portfolio are officers and directors/
trustees of the above organizations (Note 6). Except as to Trustees of the
Fund and the Portfolio who are not members of EVM's organization, officers
and Trustees receive remuneration for their services to the Fund out of such
investment adviser fee.
(6) Distribution Plan
The Fund has adopted a distribution plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. The Plan, which is
approved annually, requires the Fund to pay the Principal Underwriter,
Eaton Vance Distributors, Inc. (EVD), amounts equal to 1/365th of 0.75%
of the Fund's daily net assets, for providing ongoing distribution
services and facilities to the Fund. The Fund will automatically
discontinue payments to EVD during any period in which there are no
outstanding Uncovered Distribution Charges, which are equivalent to the
sum of (i) 4.50% of the aggregate amount received by the Fund for shares
sold plus (ii) distribution fees calculated by applying the rate of 1%
over the prevailing prime rate to the outstanding balance of Uncovered
Distribution Charges of EVD, reduced by the aggregate amount of
contingent deferred sales charges (see Note 7) and daily amounts
theretofore paid to EVD. The amount payable to EVD with respect to each
day is accrued on such day as a liability of the Fund and, accordingly,
reduces the Fund's net assets. The Fund accrued $1,028,723 as payable to
EVD for the year ended October 31, 1996 representing 0.75% (annualized)
of average daily net assets. At October 31, 1996, the amount of
Uncovered Distribution Charges of EVD calculated under the Plan was
approximately $18,063,000.
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 of the Trust have implemented the
Plan by authorizing the Fund to make quarterly payments of service fees
to the Principal Underwriter and Authorized Firms in amounts not
expected to exceed 0.25% of the Fund's average daily net assets for each
fiscal year based on the value of Fund shares sold by such persons and
remaining outstanding for at least twelve months. The Fund paid or
accrued service fees to or payable to EVD for the year ended October 31,
1996 in the amount of $231,933. Service fee payments are made for
personal services and/or the maintenance of shareholder accounts.
Service fees are separate and distinct from the sales commissions and
distribution fees payable by the Fund to EVD, and as such are not
subject to automatic discontinuance when there are no outstanding
Uncovered Distribution Charges of EVD.
Certain of the officers and Trustees of the Fund are officers or
directors of EVD.
(7) Contingent Deferred Sales Charge
A contingent deferred sales charge (CDSC) is imposed on any redemption
of Fund shares made within four years of purchase. Generally, the CDSC
is based upon the lower of the net asset value at date of redemption or
date of purchase. No charge is levied on shares acquired by reinvestment
of dividends or capital gain distributions. The CDSC is imposed at
declining rates that begin at 3% in the first year of redemption after
purchase, declining one-half of one percentage point in the second and
third years and one percentage point in the fourth and fifth years. No
CDSC is levied on shares which have been sold to EVM or its affiliates or
to their respective employees or clients. CDSC charges are paid to EVD
to reduce the amount of Uncovered Distribution Charges calculated under
the Fund's Distribution Plan. CDSC charges received when no Uncovered
Distribution Charges exist will be credited to the Fund. EVD received
approximately $76,000 of CDSC paid by shareholders for the year ended
October 31, 1996.
Report of Independent Accountants
To the Board of Trustees of Eaton Vance Mutual Funds Trust and
Shareholders of EV Marathon Strategic Income Fund:
We have audited the accompanying statement of assets and liabilities of
EV Marathon Strategic Income Fund, a series of Eaton Vance Mutual Funds
Trust, as of October 31, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for
each of the two years then ended and the financial highlights for each
of the five years then ended. 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. Our procedures included
confirmation of securities owned as of October 31, 1996 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, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of EV Marathon Strategic Income Fund, a series of
Eaton Vance Mutual Funds Trust, as of October 31, 1996, the results of
its operations for the year then ended, the changes in its net assets
for each of the two years then ended, and the financial highlights for
each of the five years then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 2, 1996
<TABLE>
<CAPTION>
Strategic income portfolio
Portfolio of investments
October 31, 1996
<S> <C> <C>
Principal U.S. $ Value
- ------------------------------------------------------------------------------------------------
Bonds & Notes -- 90.8%
- ------------------------------------------------------------------------------------------------
ARGENTINA, 4.2% U.S. Dollars
Argentina Discount Bond (Brady), 6.4375%, 3/31/23
(identified cost $5,119,445) 7,700,000 $ 5,563,250
---------------
AUSTRALIA, 0.6% Australian Dollars
State Electricity - Victoria, 9.25%, 9/18/03
(identified cost $733,564) 1,000,000 $ 851,231
---------------
BRAZIL, 7.3% U.S. Dollars
Brazil Discount Bond (Brady), 6.5%, 4/15/24
(identified cost $7,844,804) 13,200,000 $ 9,718,500
---------------
COLOMBIA, 2.7% U.S. Dollars
FEN, 9.375%, 6/15/06
(identified cost $3,552,500) 3,500,000 $ 3,609,375
---------------
CZECH REPUBLIC, 4.6% Czech Korunas
CEZ (Czech Electric Company), 14.375%, 1/27/01
(identified cost $6,022,084) 159,710,000 $ 6,137,439
---------------
DENMARK, 1.4% Danish Krone
Denmark Government, 8%, 3/15/06
(identified cost $1,869,421) 10,000,000 $ 1,849,713
---------------
ECUADOR 1.4% U.S. Dollars
Ecuador Discount Bond (Brady), 6.50%, 2/28/25
(identified cost $1,625,211) 2,900,000 $ 1,901,313
---------------
IRELAND, 10.3% Irish Pound
Irish Government, 8%, 8/18/06 3,000,000 $ 5,243,751
Irish Government, 9.25%, 7/11/03 4,500,000 8,411,749
---------------
Total Ireland (identified cost $12,681,571) $ 13,655,500
---------------
NEW ZEALAND, 4.2% New Zealand Dollars
New Zealand Government, 6.5%, 2/15/00 4,000,000 $ 2,769,047
New Zealand Government, 8%, 11/15/06 3,800,000 2,819,933
---------------
Total New Zealand (identified cost $5,317,623) $ 5,588,980
---------------
NORWAY, 5.3% Norwegian Krones
Norway Government, 6.75%, 1/15/07 20,000,000 $ 3,121,289
Norway Government, 7.0%, 5/31/01 24,000,000 3,914,686
---------------
Total Norway (identified cost $6,814,190) $ 7,035,975
---------------
POLAND, 6.4% Polish Zloty
Polish Government T-Bill, 0%, 11/6/96 4,640,000 $ 1,645,932
Polish Government T-Bill, 0%, 12/18/96 3,670,000 1,274,691
Polish Government T-Bill, 0%, 1/1/97 5,860,000 2,021,571
Polish Government T-Bill, 0%, 1/29/97 10,420,000 3,545,081
---------------
Total Poland (identified cost $8,560,401) $ 8,487,275
---------------
UNITED STATES, 42.2% U.S. Dollars
Corporate Bonds & Notes, 5.4%
Agricultural Minerals & Chemicals,
Sr. Notes, 10.75%, 9/30/03 1,000,000 $ 1,065,000
Applied Extrusion, Sr. Notes, 11.5%, 4/1/02 1,000,000 1,045,000
Dayton Hudson Medium Term Note, 9.5%, 6/10/15 665,000 767,769
Dayton Hudson Medium Term Note, 9.52%, 6/10/15 350,000 404,583
Overhead Door Corp., Sr. Notes, 12.25%, 2/1/00 500,000 540,000
TRW Inc., Medium Term Note, 9.35%, 6/4/20 1,900,000 2,288,417
United International Holdings Inc.,
Sr. Sec. Disc. Notes, 0%, 11/15/99 1,500,000 1,035,000
---------------
Total United States Corporate Bonds & Notes
(identified cost $6,740,638) $ 7,145,769
---------------
Mortgage Pass-Throughs, 34.9% U.S. Dollars
Federal Home Loan Mortgage Corp.
Participation Certificates:
4.75%, with various maturities to 2003 40,582 $ 39,776
5.5%, with maturity at 2019 22,409 22,429
8%, with various maturities to 2021 4,438,216 4,591,223
8.5%, with various maturities to 2024 5,428,489 5,711,766
9%, with maturity at 2019 996,142 1,061,484
12.5%, with maturity at 2011 126,267 143,651
12.75%, with maturity at 2013 201,306 229,027
13%, with maturity at 2013 146,828 171,027
13.5%, with maturity at 2019 552,700 649,918
---------------
$ 12,620,301
---------------
Federal National Mortgage Association
Mortgage-Backed Securities:
4.75%, with maturity at 1999 65,853 $ 65,200
5%, with maturity at 2003 156,521 153,070
5.5%, with various maturities to 2012 133,861 133,327
7.5%, with maturity at 2002 939,228 958,609
8%, with various maturities to 2013 4,029,758 4,177,277
8.5%, with various maturities to 2026 3,637,468 3,823,635
9%, with various maturities to 2017 8,292,458 8,814,032
12.75%, with maturity at 2014 197,178 230,626
13%, with various maturities to 2015 1,408,664 1,643,333
13.25%, with maturity at 2014 303,799 360,103
13.5%, with various maturities to 2015 1,235,267 1,438,421
14.75%, with various maturities to 2012 2,942,240 3,555,441
---------------
$ 25,353,074
---------------
Government National Mortgage Association: U.S. Dollars
6.5%, with various maturities to 2007 1,292,604 $ 1,298,318
8%, with maturity at 2017 4,781,543 4,978,231
9%, with maturity at 2016 1,240,467 1,323,852
13.5%, with various maturities to 2014 562,280 673,444
---------------
$ 8,273,845
---------------
Total Mortgage Pass-Throughs (identified cost, $45,801,731) $ 46,247,220
---------------
U.S. Treasury Bond, 11.75%, 2/15/01+ U.S. Dollars
(identified cost, $2,603,438) 2,000,000 $ 2,422,180
---------------
Total United States (identified cost, $55,145,807) $ 55,815,169
---------------
Total Bonds & Notes (identified cost, $115,286,631) $ 120,213,720
---------------
- ------------------------------------------------------------------------------------------------
Short-Term Obligations -- 3.8%
- ------------------------------------------------------------------------------------------------
Banque National De Paris, Euro Time-Deposit U.S. Dollars
Cayman Islands, 5.50%, 11/1/96
(at amortized cost) 5,000,000 $ 5,000,000
---------------
Total Investments (identified cost, $120,286,631) $ 125,213,720
Other Assets, less Liabilities, 5.4% 7,193,079
---------------
Net Assets, 100% $ 132,406,799
===============
+Security pledged as collateral on financial futures contracts.
The accompanying notes are an integral part of the financial statements
</TABLE>
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1996
<S> <C>
Assets:
Investments, at value (Note 1A) (identified
cost, $120,286,631) $ 125,213,720
Cash 659
Foreign currency, at value (identified cost, $7,952) 7,744
Receivable for investments sold 1,896,365
Interest receivable 2,359,131
Deferred organization expenses (Note 1J) 10,963
Receivable for foreign
forward currency exchange contracts 2,971,260
-------------
Total assets $ 132,459,842
Liabilities:
Payable for daily variation margin on open
financial futures contracts (Note 1E) $ 29,359
Payable to affiliate --
Trustees' fees 681
Accrued expenses 23,003
-------------
Total liabilities 53,043
-------------
Net Assets applicable to investors'
interest in Portfolio $ 132,406,799
=============
Sources of Net Assets:
Net proceeds from capital contributions
and withdrawals $ 124,488,477
Unrealized appreciation of investments, futures,
options and foreign currency (computed on the
basis of identified cost) 7,918,322
-------------
Total $ 132,406,799
=============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1996
<S> <C>
Investment Income:
Interest Income -- $ 13,181,562
Expenses --
Investment adviser fee (Note 2) $ 744,744
Administration fee (Note 2) 208,657
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 8,663
Custodian fees 138,046
Legal and accounting services 87,414
Amortization of organization expenses (Note 1J) 4,721
Miscellaneous 7,025
-------------
Total expenses 1,199,270
-------------
Net investment income $ 11,982,292
-------------
Realized and Unrealized Gain (Loss) on Investments,
Futures, Options and Foreign Currency:
Net realized gain (loss) (identified cost basis)
(including net loss due to foreign currency rate
fluctuations of $775,003) --
Investment transactions $ 9,066,256
Financial futures contracts (115,205)
Written options 23,385
Foreign currency and forward foreign
currency exchange contracts 598,763
-------------
Net realized gain on investments,
futures, options and foreign currency $ 9,573,199
Change in unrealized appreciation (depreciation) --
Investments $ (2,027,026)
Financial futures contracts 426,241
Foreign currency and forward foreign
currency exchange contracts 5,421,373
-------------
Net change in unrealized appreciation
of investments, futures, options and
foreign currency $ 3,820,588
-------------
Net realized and unrealized gain on investments,
futures, options and foreign currency 13,393,787
-------------
Net increase in net assets resulting from operations $ 25,376,079
=============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Year Ended October 31,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $ 11,982,292 $ 16,533,049
Net realized gain (loss) on investments, futures,
options and foreign currency 9,573,199 (11,886,837)
Change in unrealized appreciation
of investments, futures, options and foreign currency 3,820,588 15,637,070
------------- -------------
Net increase in net assets resulting from operations $ 25,376,079 $ 20,283,282
------------- -------------
Capital transactions --
Contributions $ 10,557,996 $ 7,892,611
Withdrawals (56,110,565) (112,061,370)
------------- -------------
Net decrease in net assets resulting
from capital transactions $ (45,552,569) $(104,168,759)
------------- -------------
Total decrease in net assets $ (20,176,490) $ (83,885,477)
Net Assets:
At beginning of year 152,583,289 236,468,766
------------- -------------
At end of year $ 132,406,799 $ 152,583,289
============= =============
<CAPTION>
- ----------------------------------------------------------------------------------------------
Supplementary Data
Year Ended October 31,
------------------------------------------
1996 1995 1994*
---------- ----------- ----------
<S> <C> <C> <C>
Ratios (as a percentage of average net assets):
Expenses 0.86% 0.84% 0.82%+
Net investment income 8.62% 9.08% 8.41%+
Portfolio Turnover 97% 78% 71%
+Computed on an annualized basis.
*For the period from the start of business, March 1, 1994, to October 31, 1994.
The accompanying notes are an integral part of the financial statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(1) Significant Accounting Policies
Strategic Income Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940 as a non-diversified open-end
investment company. The Portfolio, which was organized as a trust
under the laws of the State of New York in 1992, seeks to provide a
high level of income by investing in a global portfolio consisting
primarily of high grade debt securities. The Declaration of Trust
permits the Trustees to issue beneficial interests in the Portfolio.
The following is a summary of significant accounting policies of the
Portfolio. The policies are in conformity with generally accepted
accounting principles.
A. Investment Valuations - Debt securities (other than mortgage-
backed, "pass-through," securities and short-term obligations
maturing in sixty days or less), including listed securities and
securities for which price quotations are available and forward
contracts, will normally be valued on the basis of market valuations
furnished by pricing services. Mortgage backed, "pass through,"
securities are valued using a matrix pricing system which takes into
account yield differentials, anticipated prepayments and interest
rates. Financial futures contracts listed on commodity exchanges and
exchange-traded options are valued at closing settlement price.
Short-term obligations and money-market securities maturing in sixty
days or less are valued at amortized cost which approximates value.
Non-U.S. dollar denominated short-term obligations are valued at
amortized cost as calculated in the base currency and translated
into U.S. dollars at the current exchange rate. Investments for
which market quotations are unavailable are valued at fair value
using methods determined in good faith by or at the direction of the
Trustees.
B. Income - Interest income is determined on the basis of interest
accrued and discount earned, adjusted for amortization of discount
when required for federal income tax purposes.
C. Gains and Losses From Investment Transactions - Realized gains
and losses from investment transactions are recorded on the basis of
identified cost. For book purposes, gains and losses are not recognized
until disposition. For federal tax purposes, the Fund is subject to
special tax rules that may affect the amount, timing, and character of
gains recognized on certain of the Portfolio's investments. The Portfolio
has elected, under Section 1092 of the Internal Revenue Code (the "Code"),
to utilize mixed straddle accounting for certain designated classes of
activities involving domestic options and domestic financial futures
contracts in determining recognized gains and losses. Under this
method, Section 1256 positions (financial futures contracts and
options on investments or financial futures contracts) and non-
Section 1256 positions (bonds, etc.) are marked-to-market on a daily
basis resulting in the recognition of taxable gains and losses on a
daily basis. Such gains or losses are categorized as short-term or
long-term based on aggregation rules provided in the Code.
D. Income Taxes - The Portfolio is treated as a partnership for
federal tax purposes. No provision is made by the Portfolio for
federal or state taxes on any taxable income of the Portfolio
because each investor in the Portfolio is ultimately responsible for
the payment of any taxes. Since some of the Portfolio's investors
are regulated investment companies that invest all or substantially
all of their assets in the Portfolio, the Portfolio normally must
satisfy the applicable source of income and diversification
requirements (under the Code) in order for its investors to satisfy
them. The Portfolio will allocate at least annually among its
investors each investor's distributive share of the Portfolio's net
investment income, net realized capital gains, and any other items
of income, gain, loss, deduction or credit.
E. Financial Futures Contracts - Upon entering into a financial
futures contract, the Portfolio is required to deposit an amount
("initial margin"), either in cash or securities, equal to a certain
percentage of the purchase price indicated in the financial futures
contract. Subsequent payments are made or received by the Portfolio
("variation margin") 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 to
hedge against anticipated future changes in interest or currency
exchange rates. Should interest or currency exchange rates move
unexpectedly, the Portfolio may not achieve the anticipated benefits
of the financial futures contracts and may realize a loss. If the
Portfolio enters into a closing transaction, the Portfolio will
realize, for book purposes, a gain or loss equal to the difference
between the value of the financial futures contract to sell and
financial futures contract to buy.
F. Foreign Currency Translation - Investment valuations, other
assets, and liabilities initially expressed in foreign currencies
are converted each business day into U.S. dollars based upon current
exchange rates. Purchases and sales of foreign investment securities
and income and expenses are converted into U.S. dollars based upon
currency exchange rates prevailing on the respective dates of such
transactions. Recognized gains and losses on investment transactions
attributable to foreign currency rates are recorded for financial
statement purposes as net realized gains and losses on investments.
That portion of unrealized gains and losses on investments that
result from fluctuations in foreign currency exchange rates are not
separately disclosed.
G. Written Options - The Portfolio may write call or put options for
which premiums are received and are recorded as liabilities, and are
subsequently adjusted to the current value of the options written.
Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are
exercised or are closed are offset against the proceeds or amount
paid on the transaction to determine the realized gain or loss. If a
put option is exercised, the premium reduces the cost basis of the
securities purchased by the Portfolio. The Portfolio as a writer of
an option may have no control over whether the underlying securities
may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the securities
underlying the written option.
H. Forward Foreign Currency Exchange Contracts - The Portfolio may
enter into forward foreign currency exchange contracts for the
purchase or sale of a specific foreign currency at a fixed price on
a future date. Risks may arise upon entering these contracts from
the potential inability of counterparties to meet the terms of their
contracts and from movements in the value of a foreign currency
relative to the U.S. dollar. The Portfolio will enter into forward
contracts for hedging purposes as well as non-hedging purposes. The
forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized
until such time as the contracts have been closed.
I. Reverse Repurchase Agreements - The Portfolio may enter into
reverse repurchase agreements. Under such an agreement, the
Portfolio temporarily transfers possession, but not ownership, of a
security to a counterparty, in return for cash. At the same time,
the Portfolio agrees to repurchase the security at an agreed-upon
price and time in the future. The Portfolio may enter into reverse
repurchase agreements for temporary purposes, such as to fund
withdrawals, or for use as hedging instruments where the underlying
security is denominated in a foreign currency. As a form of
leverage, reverse repurchase agreements may increase the risk of
fluctuation in the market value of the Portfolio's assets or in its
yield. Liabilities to counterparties under reverse repurchase
agreements are recognized in the statement of assets and liabilities
at the same time at which cash is received by the Portfolio. The
securities underlying such agreements continue to be treated as
owned by the Portfolio and remain in the Portfolio of investments.
Interest charged on amounts borrowed by the Portfolio under reverse
repurchase agreements is accrued daily and offset against interest
income for financial statement purposes.
J. Deferred Organization Expense - Costs incurred by the Portfolio
in connection with its organization are being amortized on the
straight-line basis over five years.
K. Expense Reduction - Investors Bank & Trust Company (IBT) serves
as custodian to the Portfolio. Pursuant to the custodian agreement,
IBT receives a fee reduced by credit which is determined based on
the average cash balance the Portfolio maintains with IBT. All
significant credit balances used to reduce the Portfolio's custodian
fees are reflected as a reduction of operation expenses on the
Statement of Operations.
L. 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 income and expenses
during the reporting period. Actual results could differ from those
estimates.
M. Other - Investment transactions are accounted for on a trade date
basis.
(2) Investment Adviser Fee and Other
Transactions with Affiliates
The investment adviser fee is earned by Boston Management and
Research (BMR), a wholly-owned subsidiary of Eaton Vance Management
(EVM), as compensation for management and investment advisory
services rendered to the Portfolio. The fee is based upon a
percentage of average daily net assets plus a percentage of gross
investment income (i.e., income other than gains from the sale of
investments). Such percentages are reduced as average daily net
assets exceed certain levels. For the year ended October 31, 1996,
the fee was equivalent to 0.54% (annualized) of the Portfolio's
average net assets for such period and amounted to $744,744. An
administration fee, computed at an effective annual rate of 0.15% of
average daily net assets was also paid to BMR for administrative
services and office facilities. Such fee amounted to $208,657 for
the year ended October 31, 1996.
Except for Trustees of the Portfolio who are not members of EVM's or
BMR's organization, officers and Trustees receive remuneration for
their services to the Portfolio out of such investment adviser fee.
Certain officers of the Portfolio and Trustees of the Trust are
officers and directors/trustees of the above organizations. Trustees
of the Portfolio 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 October 31, 1996, no
significant amounts have been deferred.
(3) Line of Credit
The Portfolio participates with other portfolios and funds managed
by BMR or EVM in a $120 million unsecured line of credit agreement
with a bank. 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, a
Eurodollar rate, or a federal funds effective rate. In addition, a
fee computed at an annual rate of 0.15% on the daily unused portion
of the facility is allocated among the participating portfolios and
funds at the end of each quarter. The Portfolio did not have any
significant borrowings or allocated fees during the year.
(4) Investment Transactions
The Portfolio invests primarily in foreign government and U.S.
Government debt securities. The ability of the issuers of the debt
securities to meet their obligations may be affected by economic
developments in a specific industry or country. Purchases and sales
of investments, other than short-term obligations, for the year
ended October 31, 1996 were as follows:
Purchases -
Investments (non-U.S. Government) $ 88,108,189
U.S. Government Securities 34,398,490
------------
$122,506,679
============
Sales -
Investments (non-U.S. Government) $146,483,894
U.S. Government Securities 1,284,688
------------
$147,768,582
============
(5) Financial Instruments
The Portfolio regularly trades in financial instruments with off-
balance sheet risk in the normal course of its investing activities
to assist in managing exposure to various market risks. These
financial instruments include written options, forward foreign
currency exchange contracts and financial futures contracts and may
involve, to a varying degree, elements of risk in excess of the
amounts recognized for financial statement purposes. The notional or
contractual amounts of these instruments represent the investment
the Portfolio has in particular classes of financial instruments and
does not necessarily represent the amounts potentially subject to
risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are
considered.
<TABLE>
<CAPTION>
A summary of obligations under these financial instruments at
October 31, 1996 is as follows:
Forward Foreign Currency Exchange Contracts
Sales
- ------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ---------------- --------------
<S> <C> <C> <C> <C>
11/25/96 Australian Dollar 4,000,000 $ 3,145,400 $ (23,233)
11/5/96-11/29/96 Belgian Franc 1,112,959,031 38,049,468 2,304,779
11/5/96-1/22/97 Swiss Franc 12,184,273 9,980,904 250,731
11/22/96-12/24/96 Japanese Yen 726,000,000 6,814,064 408,016
12/10/96 New Zealand Dollars 809,921 556,739 (13,202)
---------------- --------------
$ 58,546,575 $ 2,927,091
================ ==============
<CAPTION>
Purchases
- ----------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ---------------- --------------
<S> <C> <C> <C>
11/25/96-11/29/96 Belgian Franc 209,500,272 $ 6,812,444 $ (80,640)
1/27/97 Canadian Dollar 3,750,000 2,801,958 10,008
1/31/97 Czech Koruna 169,905,000 6,237,335 (33,434)
11/6/96-12/6/96 Indonesian Rupiah 23,750,000,000 10,049,138 98,232
11/26/96 Indian Rupee 73,260,000 2,000,000 40,555
11/13/96-3/25/97 Philippine Peso 252,505,000 9,500,000 13,497
11/08/96 Thai Baht 63,700,000 2,500,000 (4,049)
---------------- --------------
$ 39,900,875 $ 44,169
================ ==============
<CAPTION>
Futures Contracts
Net Unrealized
Appreciation
Expiration Date Contracts Position (Depreciation)
- --------------- --------- ---------- --------------
<S> <C> <C> <C>
12/96 47 U.S. 5 year Treasury Bond Futures Short $ (58,345)
12/96 39 U.S. 10 year Treasury Bond Futures Short (43,443)
12/96 28 U.S. 30 year Treasury Bond Futures Short (117,411)
12/96 22 Australian 10 year Bond Futures Long 110,629
12/96 70 Canadian 10 year Bond Futures Long 328,220
12/96 107 French 10 year Bond Futures Short (420,629)
12/96 97 German 10 year Bond Futures Long 297,127
12/96 4 Japanese 10 year Bond Futures Short (164,969)
--------------
$ (68,821)
==============
At October 31, 1996, the Portfolio had sufficient cash and/or securities
to cover margin requirements on open futures contracts.
</TABLE>
Written Option Transactions
Transactions in written options for the period ended
October 31, 1996 were as follows:
Number
of Contracts Premiums
------------- ------------
Outstanding, beginning of year -- --
Options written 3,000 $23,385
Options exercised -- --
Options expired (3,000) ($23,385)
----- -------
Outstanding, end of year -- --
===== =======
(6) Federal Income Tax Basis of Investments
The cost and unrealized appreciation/depreciation in value of the
investments owned at October 31, 1996, as computed on a federal
income tax basis, were as follows:
Aggregate cost $ 120,786,543
=============
Gross unrealized appreciation $ 4,520,011
Gross unrealized depreciation 92,834
-------------
Net unrealized appreciation $ 4,427,177
=============
Report of Independent Accountants
To the Trustees and Investors of Strategic
Income Portfolio:
We have audited the accompanying statement of assets and liabilities
of Strategic Income Portfolio, including the portfolio of
investments, as of October 31, 1996, the related statement of
operations for the year then ended and the statements of changes in
net assets for each of the two years then ended, and supplementary
data for each of the two years then ended and for the period from
March 1, 1994 (start of business) to October 31, 1994. These
financial statements and supplementary data are the responsibility
of the Portfolio's management. Our responsibility is to express an
opinion on these financial statements and supplementary data based
on our 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 supplementary data are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October
31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and supplementary data
referred to above present fairly, in all material respects, the
financial position of Strategic Income Portfolio as of October 31,
1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years then ended, and
the supplementary data for each of the two years then ended and for
the period from March 1, 1994 (start of business) to October 31,
1994, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 2, 1996
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Investment Management
EV Marathon
Strategic Income Fund
- --------------------------
Officers
M. Dozier Gardner
President, Trustee
James B. Hawkes
Vice President, Trustee
H. Day Brigham, Jr.
Vice President
William H. Ahern, Jr.
Vice President
Michael B. Terry
Vice President
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
- -------------------------
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment Banking,
Harvard University Graduate School of Business Administration
Norton H. Reamer
President and Director, United Asset Management Corporation
John L. Thorndike
Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
Strategic
Income Portfolio
- --------------
Officers
James B. Hawkes
President, Trustee
Mark S. Venezia
Vice President and Portfolio Manager
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment Banking,
Harvard University Graduate School of Business Administration
Norton H. Reamer
President and Director, United Asset Management Corporation
John L. Thorndike
Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
Investment Adviser of
Strategic Income Portfolio
Boston Management and Research
24 Federal Street
Boston, MA 02110
Administrator of EV Marathon
Strategic Income Fund
Eaton Vance Management
24 Federal Street
Boston, MA 02110
Principal Underwriter
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(617) 482-8260
Custodian
Investors Bank & Trust Company
89 South Street
P.O. Box 1537
Boston, MA 02205-1537
Transfer Agent
First Data Investor Services Group, Inc.
BOS725
P.O. Box 1559
Boston, MA 02104
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
October 31, 1996
This report must be preceded or accompanied by
a current prospectus which contains more complete
information on the Fund, including its distribution plan,
sales charges and expenses. Please read the prospectus
carefully before you invest or send money.
EV Marathon Strategic
Income Fund
24 Federal Street
Boston, MA 02110 M-SGSRC-12/96
