<PAGE>
[LOGO OF EATON VANCE Investing
MUTUAL FUNDS APPEARS for the
HERE] 21st
Century(R)
[PICTURE PHONE
WITH PAPERS IN
BOTTOM HALF
APPEARS HERE]
Annual Report March 31, 1998
EV
MARATHON
HIGH INCOME
FUND
[PICTURE
OF STATUE
APPEARS HERE]
Eaton Vance
Global Management-Global Distribution
[PICTURE OF CITY &
WATERFRONT APPEARS HERE]
Marathon
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
LETTER TO SHAREHOLDERS
[PHOTO OF M. DOZIER GARDNER APPEARS HERE]
EV Marathon High Income Fund had a total return of 20.6% for the year ended
March 31, 1998./1/ That return was the result of a rise in net asset value per
share from $7.22 on March 31, 1997 to $8.03 on March 31, 1998, and the
reinvestment of $0.622 in dividends. By comparison, the average return for the
same period of the 199 funds in the High Current Yield category, as compiled by
Lipper Analytical Services, Inc. - a nationally recognized monitor of mutual
fund performance - was 16.9% for the same period./2/
Based on the Fund's closing net asset value per share of $8.03 on March 31,
1998, the Fund had a distribution rate of 7.8%./3/ The Fund's SEC 30-day yield
at March 31, 1998 was 7.6%./4/
Lower interest rates and a strong stock market
bolstered the high-yield market...
The past fiscal year witnessed another strong performance by the high-yield
market, with continued improvement in credit quality. Lower interest rates
provided a strong backdrop for the high-yield sector, with ten-year Treasury
yields declining from 6.8% a year ago to 5.6% at March 31, 1998. The market was
further supported by a strong stock market, which provided a warm welcome for
the initial public offerings of many high-yield companies and a coincident
improvement in the credit quality of these issuers.
The Fund's performance again earned
high marks from Morningstar...
As we've noted, the fiscal year was another successful period for EV Marathon
High Income Fund. The Fund's risk-adjusted performance through March 31, 1998
earned it a Five-Star Overall rating among taxable bond funds covered by
Morningstar, Inc. /5/ - a nationally recognized monitor of mutual fund
performance.
High Income Portfolio adds to its
research strengths...
While the growth in recent years of the high-yield market presents new
opportunities, it also expands the required industry and individual credit
analysis. Eaton Vance recently has added to its high-yield research team, thus
broadening its resources. Within the past year, two new analysts have brought
their special expertise in the telecommunications and media sectors. With that
strengthened commitment, High Income Portfolio will continue to search for
attractive high-yield opportunities. In the pages that follow, portfolio manager
Michael Weilheimer reviews the past year in the high-yield markets and offers
his outlook for the year ahead.
Sincerely,
/s/ M. Dozier Gardner
M. Dozier Gardner
President
May 8, 1998
- --------------------------------------------------------------------------------
Fund Information
as of March 31, 1998
Performance/6/
- --------------------------------------------------------------------------------
Average Annual Total Returns (at net asset value)
- --------------------------------------------------------------------------------
One year 20.6%
Five years 11.4
Ten years 10.3
SEC Average Annual Total Returns (including CDSC)
- --------------------------------------------------------------------------------
One year 15.6%
Five years 11.1
Ten years 10.3
Ten Largest Holdings/7/ By total net assets
- --------------------------------------------------------------------------------
Nextlink Communications, Inc. 2.1%
Dobson Communications Corp. 1.6
Adelphia Communications Corp. 1.4
Extended Stay America 1.4
Unisys Corp. 1.4
IXC Communications, Inc. 1.4
Winstar Communications, Inc. 1.3
Pricellular Wireless Communications Corp. 1.2
Marcus Cable Co. 1.1
Dial Call Communications, Inc. 1.1
/1/ This return does not include the applicable contingent deferred sales charge
(CDSC.). /2/ Lipper averages are based on total return and do not take sales
charges into consideration. It is not possible to invest directly in an
average. /3/ The Fund's distribution rate represents actual distributions
paid to shareholders and is calculated daily by dividing the last
distribution per share (annualized) by the net asset value. /4/ The Fund's
SEC yields are calculated by dividing the net investment income per share
for the 30-day period by the net asset value at the end of the period and
annualizing the result. /5/ Morningstar ratings reflect historical risk-
adjusted performance through 3/31/98 and are subject to change. Funds are
assigned ratings from 1 star (lowest) to 5 stars (highest). Ratings are
calculated from the Fund's 3-,5-, and 10-year returns (with fee adjustment)
in excess of 90-day Treasury bill returns. The top 10% of the funds in a
category receive 5 stars; the next 22.5% receive 4 stars. For the 3-year
period, the Fund was rated 5 stars (1403 funds), for the 5-year period, 5
stars (831 funds); and for the 10-year period, 4 stars (329 funds) /6/
Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested. SEC returns reflect applicable CDSC
based on the following schedule: 5%-1st year; 5%-2nd year; 4%-3rd year; 3%-
4th year; 2%-5th year; 1%-6th year. /7/ Ten largest holdings account for
14.0% of the Portfolio's investments, determined by dividing the total
market value of the holdings by the total investments of the portfolio.
Holdings are subject to change.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost.
2
- --------------------------------------------------------------------------------
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
MANAGEMENT DISCUSSION
Michael W. Weilheimer,
Portfolio Manager
An interview with
Michael W. Weilheimer,
portfolio manager of
High Income Portfolio.
Q: Mike, how would you characterize the high yield bond market in 1997?
A: The high-yield market turned in another strong performance over the past
fiscal year, propelled by low inflation, declining interest rates, and a
continued strong economy.
The market's strong performance was especially impressive in light of record
issuance, which reached $127 billion in 1997, according to Securities Data
Corp. Telecommunications and media companies again dominated the ranks of new
issuers, as these companies sought to finance their build-out of
state-of-the-art delivery platforms and next-generation product offerings.
The large supply met with a warm reception from investors, with mutual funds,
pension funds and other institutional buyers remaining very active in the
high-yield sector.
Q: The Fund had another excellent year. What accounted for the strong
performance?
A: We continued to focus on companies with good underlying business
fundamentals. These were typically B-rated credits with the potential of
future upgrades. From a sector standpoint, we shifted our emphasis somewhat.
In the middle of last year, we reduced the Portfolio's weightings in cyclical
issues, such as paper and steel companies. Capacity in some commodity
industries had increased significantly at a time when the U.S. economy faced
the possibility of a slowdown. That risk was heightened by the increasing
difficulties in Asia in late fall. In the meantime, defensive credits like
telecommunications, cable, and food continued to enjoy strong fundamentals
while remaining less vulnerable to a slowing in aggregate demand.
Going forward, I have charted a relatively neutral sector mix for the
Portfolio. But as I indicated earlier, telecommunications and media bonds
remain very prominent in the market, and represented the Portfolio's largest
weightings at March 31, 1998. The industry has seen a number of mergers that
are implementing greater economies of scale while delivering a larger target
audience. Revenue growth has been strong and several high-yield companies
have been taken over by investment grade companies. That has further boosted
the performance of the sector.
- --------------------------------------------------------------------------------
Portfolio Quality Weightings/1/
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
Aaa 1.4%
Non-Rated 12.0%
Caa 6.9%
B3 41.6%
B2 19.8%
B1 12.7%
Ba 3.7%
Five Largest Sector Weightings/1/
- --------------------------------------------------------------------------------
Wireline Communications Services 14.9%
Broadcasting & Cable 12.1%
Wireless Communications Services 12.0%
Manufacturing 7.3%
Business Services 6.6%
/1/ Because the Portfolio is actively managed, Industry Weightings and Quality
Ratings are subject to change. Five largest sector holdings account for 52.9% of
the Portfolio.
- --------------------------------------------------------------------------------
Mutual fund shares are not insured by the FDIC and are not deposits or other
obligations of, or guaranteed by, any depository institution. Shares are subject
to investment risks, including possible loss of principal invested.
- --------------------------------------------------------------------------------
3
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
MANAGEMENT DISCUSSION CONT'D
Q: You indicated that you were increasingly selective in the past year. What
kind of profile do you look for in new issues?
A: As the volume of offerings has increased in the past year, we've naturally
become increasingly selective. Where new issues are concerned, it's
especially important for a company to possess a good business plan. The
technology and communications sectors tend to attract a large number of
start-up companies. These fields are enormously competitive and subject to
rapid change, and for companies without demonstrated success, the risks are
very high. Therefore, we prefer to see companies with seasoned management and
a track record of attracting and retaining customers.
Q: Cable companies represented a large investment at March 31, 1998. Could you
discuss some of the Portfolio's cable holdings?
A: Yes. Marcus Cable has been a long-time holding of the Portfolio. The Dallas-
based company is the largest privately-owned cable company in the U.S. and
has enjoyed good subscriber growth in the southwest. The company recently
agreed to be purchased by Paul Allen, a co-founder of Microsoft. The deal has
caused excitement within the industry because Allen, clearly a heavyweight in
the technology area, has been exploring ways to combine cable with the
Internet.
We also owned United International Holdings. The growth of cable abroad has
been equally as impressive as in the U.S., and United International is a
major foreign cable player. However, because many of the company's cable
properties are in Europe, it has tended to be misunderstood by analysts, and,
in our estimation, undervalued. The company refinanced an outstanding issue
in January through a tender offer and subsequently issued new bonds. The
Fund's investment in the original bonds performed very well and we currently
own the new bonds.
Q: You mentioned having increased your exposure to some defensive sectors.
Could you expand on that theme?
A: Yes. AFC Enterprises is the parent company of the Church's Fried Chicken and
Popeye's restaurant chains. Management has effected an excellent turnaround
in recent years, and the company is among the few established fast-food
chains today that are enjoying strong growth in same-store sales. In
addition, the company has developed new fast-food concepts that should
further contribute to revenue growth. AFC continues to deleverage its balance
sheet and appears close to an initial public offering of common stock.
Another food-related company, DelMonte Foods, a leading producer of canned
fruits and vegetables, remains a large holding. The company has announced
plans for an initial public offering, which will improve its balance sheet
and credit rating.
Q: Did the Portfolio pursue investments in any new sectors during the year?
A: Yes. As I indicated earlier, the technology sector and communications sectors
are expanding rapidly. That is certainly true of cellular phone use. With the
rapid expansion of digital, cellular and wireless communications, there is an
increased need for tower-sites for transmitters. As a result, the tower
management industry has become an interesting real estate play.
Companies like Crown Castle, SBA Communications, and Pinnacle Corp. have
bought or constructed hundreds of towers that are leased to phone company-
tenants such as Sprint or Nextel. Cities and towns around the country have
severely limited tower construction and are increasingly mandating the co-
locating of competing wireless phone companies on the same tower. That makes
existing facilities more valuable and improves the pricing power of the tower
management companies. The tower management industry is in its infancy, but
with the increase in wireless services like cellular and paging devices,
there is clear growth potential.
4
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
MANAGEMENT DISCUSSION CONT'D
Q: What is your outlook for the high-yield market in the coming year?
A: With little sign of inflation on the horizon, the economy continues to post
fairly strong growth. That is certainly a good climate for the market. It's
worth pointing out that there have been some earnings shortfalls and the
implications of the downturn in Asia have yet to be fully understood.
However, while selectivity will become increasingly important, the outlook
for high-yield bonds is generally favorable.
It's clear that the high-yield market will continue its historical role of
attracting capital to developing industries. Beginning in the 1980s, high-
yield bonds were used to finance the infrastructure for cable television.
Today, the market is playing an equally important part in the build-out of
the next generation of cellular and fiber optic networks. While these
innovations and technologies are absolutely essential to improving
productivity for businesses, they also improve the quality of life for
consumers and provide excellent opportunities for entrepreneurs and investors
alike. In my view, the future is likely to present many more such
opportunities. I believe that High Income Portfolio is well-positioned to
share in that growth.
Comparison of Change in Value of a $10,000 Investment in EV Marathon High Income
Fund vs. the Lehman Brothers High Yield Bond Index
March 31, 1988, through March 31, 1998
[LINE GRAPH APPEARS HERE]
Date EV Marathon Lehman High Yield Bond
High Income Fund Index
3/31/88 $10,000 $10,000
4/30/88 $10,103 $10,076
5/31/88 $10,163 $10,091
6/30/88 $10,319 $10,238
7/31/88 $10,477 $10,306
8/31/88 $10,561 $10,291
9/30/88 $10,669 $10,420
10/31/88 $10,793 $10,546
11/30/88 $10,874 $10,609
12/31/88 $11,040 $10,658
1/31/89 $11,099 $10,846
2/28/89 $11,186 $10,870
3/31/89 $11,158 $10,785
4/30/89 $11,174 $10,830
5/31/89 $11,331 $11,040
6/30/89 $11,462 $11,177
7/31/89 $11,500 $11,163
8/31/89 $11,513 $11,201
9/30/89 $11,497 $11,013
10/31/89 $11,286 $10,752
11/30/89 $11,160 $10,730
12/31/89 $11,165 $10,747
1/31/90 $10,905 $10,516
2/28/90 $10,429 $10,300
3/31/90 $10,249 $10,569
4/30/90 $10,333 $10,551
5/31/90 $10,530 $10,755
6/30/90 $10,739 $11,015
7/31/90 $10,977 $11,312
8/31/90 $10,467 $10,668
9/30/90 $9,752 $9,889
10/31/90 $9,429 $9,370
11/30/90 $9,221 $9,662
12/31/90 $9,105 $9,717
1/31/91 $9,001 $9,984
2/28/91 $9,529 $11,076
3/31/91 $9,958 $11,728
4/30/91 $10,703 $12,209
5/31/91 $10,738 $12,231
6/30/91 $11,090 $12,593
7/31/91 $11,518 $12,996
8/31/91 $11,656 $13,295
9/30/91 $11,903 $13,480
10/31/91 $12,335 $13,930
11/30/91 $12,477 $14,003
12/31/91 $12,596 $14,204
1/31/92 $13,103 $14,704
2/28/92 $13,444 $15,067
3/31/92 $13,763 $15,254
4/30/92 $13,912 $15,312
5/31/92 $14,119 $15,528
6/30/92 $14,313 $15,674
7/31/92 $14,505 $15,911
8/31/92 $14,692 $16,119
9/30/92 $14,784 $16,284
10/31/92 $14,565 $16,054
11/30/92 $14,633 $16,256
12/31/92 $14,836 $16,442
1/31/92 $15,089 $16,920
2/28/93 $15,422 $17,218
3/31/93 $15,609 $17,440
4/30/93 $15,734 $17,592
5/31/93 $15,970 $17,801
6/30/93 $16,279 $18,175
7/31/93 $16,459 $18,351
8/31/93 $16,499 $18,505
9/30/93 $16,485 $18,553
10/31/93 $16,847 $18,928
11/30/93 $17,061 $19,019
12/31/93 $17,347 $19,255
1/31/94 $17,689 $19,673
2/28/94 $17,799 $19,622
3/31/94 $17,214 $18,880
4/30/94 $17,012 $18,752
5/31/94 $17,112 $18,761
6/30/94 $17,153 $18,819
7/31/94 $17,078 $18,979
8/31/94 $17,054 $19,113
9/30/94 $17,054 $19,114
10/31/94 $17,059 $19,160
11/30/94 $16,852 $18,918
12/31/94 $17,033 $19,058
1/31/95 $17,106 $19,316
2/28/95 $17,544 $19,978
3/31/95 $17,646 $20,193
4/30/95 $18,131 $20,707
5/31/95 $18,522 $21,287
6/30/95 $18,542 $21,429
7/31/95 $18,827 $21,694
8/31/95 $18,731 $21,761
9/30/95 $18,856 $22,029
10/31/95 $18,876 $22,101
11/30/95 $19,053 $22,360
12/31/95 $19,395 $22,712
1/31/96 $19,690 $23,111
2/28/96 $19,982 $23,130
3/31/96 $19,905 $23,114
4/30/96 $20,064 $23,165
5/31/96 $20,274 $23,304
6/30/96 $20,274 $23,497
7/31/96 $20,420 $23,606
8/31/96 $20,724 $23,861
9/30/96 $21,270 $24,436
10/31/96 $21,303 $24,624
11/30/96 $21,674 $25,110
12/31/96 $22,068 $25,290
1/31/97 $22,239 $25,537
2/28/97 $22,665 $25,959
3/31/97 $22,168 $25,572
4/30/97 $22,420 $25,842
5/31/97 $23,011 $26,395
6/30/97 $23,460 $26,761
7/31/97 $24,118 $27,496
8/31/97 $24,253 $27,433
9/30/97 $24,868 $27,977
10/31/97 $24,804 $28,002
11/30/97 $25,017 $28,270
12/31/97 $25,455 $28,518
1/31/98 $25,965 $29,031
2/28/98 $26,313 $29,201
3/31/98 $26,731 $29,475
Performance+
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Average Annual Total Returns (at net asset value)
- --------------------------------------------------------------------------------
One year 20.6%
Five years 11.4
Ten years 10.3
SEC Average Annual Total Returns (including applicable CDSC)
- --------------------------------------------------------------------------------
One year 15.6%
Five years 11.1
Ten years 10.3
* Source: Towers Data Systems, Bethesda, MD.
The chart compares the Fund's total return with that of the Lehman Brothers
High Yield Bond Index, a broad-based, unmanaged market index of high-yield
corporate bonds. Returns are calculated by determining the percentage change
in net asset value (NAV) with all distributions reinvested. The lines on the
chart represent the total returns of $10,000 hypothetical investments in the
Fund and the Index. The Index's total return does not reflect commissions or
expenses that would have been incurred if an investor individually purchased
or sold the securities represented in the Index. It is not possible to invest
directly in an Index.
** This figure reflects the Fund's maximum applicable contingent deferred sales
charge (CDSC) deducted at redemption as follows: 5% - 1st and 2nd years; 4% -
3rd year; 3% - 4th year; 2% - 5th year; and 1% - 6th year.
+ Returns are calculated by determining the percentage change in net asset
value (NAV) with all distributions reinvested. SEC returns reflect applicable
CDSC according to the schedule above.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less their original cost.
5
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
As of March 31, 1998
Assets
- ------------------------------------------------------------------------
Investment in High Income Portfolio (Portfolio), at
value (Note 1A) (identified cost, $654,106,434) $696,744,106
Receivable for Fund shares sold 1,243,786
- ------------------------------------------------------------------------
Total assets $697,987,892
- ------------------------------------------------------------------------
Liabilities
- ------------------------------------------------------------------------
Dividends payable $ 2,235,768
Payable for Fund shares redeemed 1,467,828
Payable to affiliate for Trustees' fees (Note 4) 946
Accrued expenses 465,739
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Total liabilities $ 4,170,281
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Net Assets for 86,382,388 shares of beneficial
interest outstanding $693,817,611
- ------------------------------------------------------------------------
Sources of Net Assets
- ------------------------------------------------------------------------
Paid-in capital $687,729,234
Accumulated undistributed net realized loss on
investments from Portfolio (computed on the
basis of identified cost) (37,488,351)
Accumulated undistributed net investment income 939,056
Net unrealized appreciation of investments from
Portfolio (computed on the basis of identified
cost) 42,637,672
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Total $693,817,611
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Net Asset Value, Offering and Redemption
Price Per Share (Note 6)
- ------------------------------------------------------------------------
($693,817,611 / 86,382,388 shares of
beneficial interest outstanding) $ 8.03
- ------------------------------------------------------------------------
Statement of Operations
For the Year Ended
March 31, 1998
Investment Income (Note 1B)
- ------------------------------------------------------------------------
Interest income allocated from Portfolio $ 63,068,188
Dividend income allocated from Portfolio 2,810,982
Miscellaneous income allocated from Portfolio 1,104,073
Expenses allocated from Portfolio (4,087,705)
- ------------------------------------------------------------------------
Net investment income from Portfolio $ 62,895,538
- ------------------------------------------------------------------------
Expenses
- ------------------------------------------------------------------------
Compensation of Trustees not members of the
Administrator's organization (Note 4) $ 3,482
Distribution and service fees (Note 5) 6,215,050
Transfer and dividend disbursing agent fees 712,297
Printing and postage 65,094
Registration fees 37,317
Custodian fee 26,900
Legal and accounting services 26,754
Miscellaneous 41,550
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Total expenses $ 7,128,444
- ------------------------------------------------------------------------
Net investment income $ 55,767,094
- ------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) from Portfolio
- ------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ 33,998,876
- ------------------------------------------------------------------------
Net realized gain on investment transactions $ 33,998,876
- ------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments $ 31,499,701
- ------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ 31,499,701
- ------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 65,498,577
- ------------------------------------------------------------------------
Net increase in net assets from operations $121,265,671
- ------------------------------------------------------------------------
See notes to financial statements
6
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
Increase (Decrease) Year Ended Year Ended
in Net Assets March 31, 1998 March 31, 1997
- -------------------------------------------------------------------------------
From operations --
Net investment income $ 55,767,094 $ 49,873,683
Net realized gain (loss)
on investment transactions 33,998,876 (3,889,847)
Net change in unrealized
appreciation (depreciation) of
investments 31,499,701 13,832,420
- -------------------------------------------------------------------------------
Net increase in net assets
from operations $ 121,265,671 $ 59,816,256
- -------------------------------------------------------------------------------
Distributions to shareholders (Note 2) --
From net investment income $ (52,767,916) $ (49,873,683)
In excess of net investment income -- (446,941)
- -------------------------------------------------------------------------------
Total distributions to shareholders $ (52,767,916) $ (50,320,624)
- -------------------------------------------------------------------------------
Transactions in shares of beneficial
interest (Note 3)
Proceeds from sale of shares $ 134,879,881 $ 175,363,195
- -------------------------------------------------------------------------------
Net asset value of shares issued to
shareholders in payment of
distributions declared 16,511,135 15,276,268
Cost of shares redeemed (124,344,122) (98,827,713)
- -------------------------------------------------------------------------------
Net increase in net assets from Fund
share transactions $ 27,046,894 $ 91,811,750
- -------------------------------------------------------------------------------
Net increase in net assets $ 95,544,649 $ 101,307,382
- -------------------------------------------------------------------------------
Net Assets
- -------------------------------------------------------------------------------
At beginning of year $ 598,272,962 $ 496,965,580
- -------------------------------------------------------------------------------
At end of year $ 693,817,611 $ 598,272,962
- -------------------------------------------------------------------------------
Accumulated undistributed
(distributions in excess of)
net investment income
included in net assets
- -------------------------------------------------------------------------------
At end of year $ 939,056 $ (2,060,122)
- -------------------------------------------------------------------------------
See notes to financial statements
7
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
FINANCIAL STATEMENTS CONT'D
Financial Highlights
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value -- Beginning of year $ 7.220 $ 7.100 $ 6.920 $ 7.450 $ 7.480
- ------------------------------------------------------------------------------------------------------------------------------------
Income from operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.658 $ 0.652 $ 0.665 $ 0.671 $ 0.697
Net realized and unrealized gain (loss) on investments 0.774 0.120 0.189 (0.507) 0.047
- ------------------------------------------------------------------------------------------------------------------------------------
Total income from operations $ 1.432 $ 0.772 $ 0.854 $ 0.164 $ 0.744
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income $ (0.622) $ (0.646) $ (0.665) $ (0.671) $ (0.697)
In excess of net investment income -- (0.006) (0.009) (0.023) (0.077)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.622) $ (0.652) $ (0.674) $ (0.694) $ (0.774)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value -- End of year $ 8.030 $ 7.220 $ 7.100 $ 6.920 $ 7.450
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return/(1)/ 20.59% 11.37% 12.80% 2.51% 10.28%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $693,818 $ 598,273 $496,966 $ 439,171 $ 399,259
Ratio of expenses to average daily net assets/(2)/ 1.73% 1.77% 1.78% 1.78% 1.82%
Ratio of investment income to average daily net assets 8.58% 8.97% 9.38% 9.52% 9.09%
Portfolio Turnover/(3)/ -- -- -- 11% 96%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Total return is calculated assuming a purchase at the net asset value on
the first day and a sale at the net asset value on the last day of each
period reported. Dividends and distributions, if any, are assumed to be
reinvested at the net asset value on the reinvestment date. Total return
is not computed on an annualized basis.
/(2)/ Includes the Fund's share of its corresponding Portfolio's allocated
expenses.
/(3)/ Portfolio Turnover represents the rate of portfolio activity for the
period while the Fund was making investments directly in securities. The
portfolio turnover rate for the period since the Fund transferred
substantially all of its investable assets to the Portfolio is shown in
the Portfolio's financial statements which are included elsewhere in this
report.
See notes to financial statements
8
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
NOTES TO FINANCIAL STATEMENTS
1 Significant Accounting Policies
------------------------------------------------------------------------------
EV Marathon High Income Fund (the Fund) is a diversified series of Eaton Vance
Mutual Funds Trust (the Trust). The Trust is an entity of the type commonly
known as a Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. The Fund invests all of its investable assets in interests in the
High Income Portfolio (the Portfolio), a New York Trust, having the same
investment objective as the Fund. The value of the Fund's investment in the
Portfolio reflects the Fund's proportionate interest in the net assets of the
Portfolio (72.5% at March 31, 1998). 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.
On June 23, 1997, the Board of Trustees of the Trust adopted a multiple class
plan for the Fund which permits the Fund to issue more than one class of
shares. Initially, the Fund will offer two classes of shares and, effective
April 1, 1998, the existing shares of the Fund will be designated Class B
shares. On June 23, 1997, the Board of Trustees also approved a Plan of
Reorganization (the "Plan") for the Trust. Under the terms of the Plan, the
Fund will acquire substantially all of the assets and liabilities of EV
Classic High Income Fund. The transaction will be structured for tax purposes
to qualify as a tax-free reorganization under the Internal Revenue Code. As a
result of the reorganization, shareholders of the Classic Fund will receive
Class C shares of the Fund. The reorganization will occur after the close of
business, March 31, 1998.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A Investment Valuations -- Valuation of securities by the Portfolio is
discussed in Note 1A of the Portfolio's Notes to Financial Statements which
are included elsewhere in this report.
B Income -- The Fund's net investment income consists of the Fund's pro rata
share of the net investment income of the Portfolio, less all actual and
accrued expenses of the Fund, determined in accordance with generally accepted
accounting principles.
C Federal Taxes -- The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year all of its taxable income, including any
net realized gain on investments. Accordingly, no provision for federal income
or excise tax is necessary. At March 31, 1998, the Fund, for federal income
tax purposes, had a capital loss carryover of $37,116,868 which will reduce
the Fund's taxable income arising from future net realized gain on
investments, if any, to the extent permitted by the Internal Revenue Code and
thus will reduce the amount of distributions to shareholders which would
otherwise be necessary to relieve the Fund of any liability for federal income
or excise tax. Such capital loss carryover will expire on March 31, 2000
($11,538,107), 2003 ($12,690,352), 2004 ($5,868,015) and 2005 ($7,020,394),
respectively.
D Other -- Investment transactions are accounted for on a trade date basis.
E Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expense during the reporting period. Actual results could
differ from those estimates.
F Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian to the Fund and the Portfolio. Pursuant to the respective custodian
agreements, IBT receives a fee reduced by credits which are determined based
on the average daily cash balances the Fund or the Portfolio maintains with
IBT. All significant credit balances used to reduce the Fund's custodian fees
are reported as a reduction of expenses on the Statement of Operations.
2 Distributions to Shareholders
------------------------------------------------------------------------------
The net income of the Fund is determined daily and substantially all of the
net income so determined is declared as a dividend to shareholders of record
at the time of declaration. Such daily dividends will be paid monthly.
Distributions of realized capital gains, if any, are made at least annually.
Shareholders may reinvest capital gain
9
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
distributions in additional shares of the Fund at the net asset value as of
the ex-dividend date. Distributions are paid in the form of additional shares
of the Fund or, at the election of the shareholder, in cash. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis. Generally accepted accounting principles require that only
distributions in excess of tax basis earnings and profits be reported in the
financial statements as a return of capital. Differences in the recognition or
classification of income between the financial statements and tax earnings and
profits which result in over distributions for financial statement purposes
only are classified as distributions in excess of net investment income or
accumulated net realized gains. Permanent differences between book and tax
accounting relating to distributions are reclassified to paid-in capital.
3 Shares of Beneficial Interest
------------------------------------------------------------------------------
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Year Ended March 31,
------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------
Sales 17,727,309 24,377,723
Issued to shareholders electing to
receive payments of distributions
in Fund shares 2,155,159 2,122,410
Redemptions (16,307,730) (13,725,000)
------------------------------------------------------------------------------
Net increase 3,574,738 12,775,133
------------------------------------------------------------------------------
4 Transactions with Affiliates
------------------------------------------------------------------------------
Eaton Vance Management (EVM) serves as the administrator of the Fund, but
receives no compensation. The Portfolio has engaged Boston Management and
Research (BMR), a subsidiary of EVM, to render investment advisory services.
See Note 2 of the Portfolio's Notes to Financial Statements which are included
elsewhere in this report. Except as to Trustees of the Fund and the Portfolio
who are not members of EVM's or BMR's organization, officers and Trustees
receive remuneration for their services to the Fund out of such investment
adviser fee. Certain of the officers and Trustees of the Fund and the
Portfolio are officers and directors/trustees of the above organizations.
5 Distribution Plan
------------------------------------------------------------------------------
The Fund has adopted a distribution plan (the Plan) pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Plan requires the Fund to pay
the Principal Underwriter, Eaton Vance Distributors, Inc. (EVD), amounts equal
to 1/365 of 0.75% of the Fund's daily net assets, for providing ongoing
distribution services and facilities to the Fund. The Fund will automatically
discontinue payments to EVD during any period in which there are no
outstanding Uncovered Distribution Charges, which are equivalent to the sum of
(i) 5% of the aggregate amount received by the Fund for the shares sold plus,
(ii) distribution fees calculated by applying the rate of 1% over the
prevailing prime rate to the outstanding balance of Uncovered Distribution
Charges of EVD reduced by the aggregate amount of contingent deferred sales
charges (see Note 6) and daily amounts theretofore paid to EVD. The amount
payable to EVD with respect to each day is accrued on such day as a liability
of the Fund and, accordingly, reduces the Fund's net assets. The Fund paid
$4,873,159 to EVD for the year ended March 31, 1998, representing 0.75% of
average daily net assets. At March 31, 1998 the amount of Uncovered
Distribution Charges of EVD calculated under the Plan was approximately
$16,865,000.
In addition, the Plan authorizes the Fund to make payments of service fees to
the Principal Underwriter, Authorized Firms and other persons in amounts not
exceeding 0.25% of the Fund's average daily net assets for each fiscal year.
The Trustees have initially implemented the Plan by authorizing the Fund to
make quarterly payments of service fees to the Principal Underwriter and
Authorized Firms in amounts not to exceed 0.25% per annum of the Fund's
average daily net assets based on the value of Fund shares sold by such
persons and remaining outstanding for at least one year. The Fund paid or
accrued service fees to or payable to EVD for the year ended March 31, 1998,
in the amount of $1,341,891. Service fee payments are made for personal
services and/or the maintenance of shareholder accounts. Service fees paid to
EVD and Authorized Firms are separate and distinct from the sales commissions
and distribution fees payable by the Fund to EVD, and, as such are not subject
to automatic discontinuance where there are no outstanding Uncovered
Distribution Charges of EVD.
Certain officers and Trustees of the Fund are officers or directors of EVD.
10
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
6 Contingent Deferred Sales Charge
------------------------------------------------------------------------------
A contingent deferred sales charge (CDSC) is imposed on any redemption of Fund
shares made within six years of purchase. Generally, the CDSC is based upon
the lower of the net asset value at date of redemption or date of purchase. No
charge is levied on shares acquired by reinvestment of dividends or capital
gains distributions. The CDSC is imposed at declining rates that begin at 5%
in the case of redemptions in the first and second year after purchase,
declining one percentage point each subsequent year. No CDSC is levied on
shares which have been sold to the Investment Advisor or its affiliates or to
their respective employees. CDSC is paid to EVD to reduce the amount of
Uncovered Distribution Charges calculated under the Fund's Distribution Plan.
CDSC charges received when no Uncovered Distribution Charges exist will be
credited to the Fund. For the year ended March 31, 1998, EVD received
approximately $1,638,000 of CDSC paid by shareholders.
7 Investment Transactions
------------------------------------------------------------------------------
Increases and decreases in the Fund's investment in the Portfolio for the year
ended March 31, 1998, aggregated $139,357,380 and $171,284,246, respectively.
8 Subsequent Event
------------------------------------------------------------------------------
Effective April 1, 1998, the Fund changed its name to Eaton Vance High Income
Fund and shares of the Fund are designated Class B shares. Additional classes
of shares are also offered.
11
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders
of EV Marathon High Income Fund
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities of EV
Marathon High Income Fund (the Fund) as of March 31, 1998, the related statement
of operations for the year then ended, the statements of changes in net assets
for the years ended March 31, 1998 and 1997, and the financial highlights for
each of the years in the five-year period ended March 31, 1998. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund at March
31, 1998, the results of its operations, the changes in its net assets and its
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
May 8, 1998
12
<PAGE>
High Income Portfolio as of March 31, 1998
PORTFOLIO OF INVESTMENTS
(Expressed in United States Dollars)
Corporate Bonds & Notes -- 89.7%
Principal
Amount
(000's
Security omitted) Value
- -------------------------------------------------------------------------------
Aerospace and Defense -- 0.5%
- -------------------------------------------------------------------------------
Alliant Tech Systems Inc., Sr.
Sub. Notes, 11.75%, 3/1/03 $ 4,000 $ 4,400,000
- -------------------------------------------------------------------------------
$ 4,400,000
- -------------------------------------------------------------------------------
Apparel -- 1.2%
- -------------------------------------------------------------------------------
Glenoit Corp., Sr. Sub. Notes,
11.00%, 4/15/07/(1)/ $ 4,800 $ 5,184,000
William Carter Co., Sr. Sub. Note,
10.375%, 12/1/06 6,275 6,729,938
- -------------------------------------------------------------------------------
$ 11,913,938
- -------------------------------------------------------------------------------
Auto and Parts -- 1.4%
- -------------------------------------------------------------------------------
Cambridge Industries, Inc., Sr.
Sub. Notes, 10.25%, 7/15/07 $ 2,520 $ 2,620,800
Key Plastics, Inc., Sr. Notes,
14.00%, 11/15/99 5,500 6,105,000
Walbro Corp., Sr. Notes,
10.125%, 12/15/07 4,590 4,498,200
- -------------------------------------------------------------------------------
$ 13,224,000
- -------------------------------------------------------------------------------
Banks - Regional -- 1.0%
- -------------------------------------------------------------------------------
First Nationwide Holdings, Inc.,
Sr. Sub Note, 10.625%, 10/1/03 $ 7,200 $ 8,082,000
First Nationwide, Inc., Sr. Notes,
12.50%, 4/15/03 1,600 1,832,000
- -------------------------------------------------------------------------------
$ 9,914,000
- -------------------------------------------------------------------------------
Broadcasting and Cable -- 8.5%
- -------------------------------------------------------------------------------
21st Century Telecom Group, Sr.
Disc. Notes, 12.25%, (0% until
2003), 2/15/08/(1)/ $ 8,000 $ 4,710,000
Adelphia Communications Corp., Sr.
Notes, 9.875%, 3/1/07 4,480 4,872,000
Adelphia Communications Corp., Sr.
Notes, 10.50%, 7/15/04 2,640 2,897,400
Century Communications, Sr. Notes,
8.75%, 10/1/07 2,400 2,496,000
CSC Holdings, Inc., Sr. Sub. Notes,
9.25%, 11/1/05 3,150 3,346,875
Diamond Cable Communications Co.,
Sr. Disc. Notes, 11.75%, (0% until
2000), 12/15/05 1,400 1,113,000
Diamond Cable Communications Co.,
Sr. Disc. Notes, 13.25%, (0% until
1999), 9/30/04 1,600 1,476,000
Digital Television Services, Inc.,
Guaranteed Notes, 12.50%, 8/1/07 6,410 7,387,525
Echostar DBS Corp., Sr. Sec. Notes,
12.50%, 7/1/02 5,000 5,650,000
Intermedia Capital Partners, Sr.
Sub. Note, 11.25%, 8/1/06 2,625 2,953,125
Marcus Cable Operating Co., Sr.
Debs., 11.875%, 10/1/05 2,800 3,045,000
Marcus Cable Operating Co., Sr.
Disc. Notes, 14.25%, (0% until
2000), 12/15/05 8,500 7,713,750
NTL, Inc., 10.00%, 2/15/07 4,400 4,774,000
NTL, Inc., Sr. Notes, 9.75%,
(0% until 2003), 4/1/08/(1)/ 4,400 2,871,000
Star Choice Communications, Sr.
Sec. Notes, 13.00%, 12/15/05/(1)/ 2,400 2,508,000
Sullivan Broadcasting Co., Inc.,
Sr. Sub. Notes, 10.25%, 12/15/05 4,800 5,292,000
Telewest PLC, Debs., 11.00%,
(0% until 2002), 10/1/07 7,000 5,635,000
UIH Australia/Pacific, Inc., Sr.
Disc. Note, 14.00%, (0% until
2001), 5/15/06 1,600 1,104,000
UIH Australia/Pacific, Inc., Sr.
Disc. Notes, 14.00%,
(0% until 2001), 5/15/06 2,000 1,380,000
United International Holdings,
Inc., Sr. Disc. Notes, 10.75%,
(0% until 2003), 2/15/08 15,300 9,562,500
- -------------------------------------------------------------------------------
$ 80,787,175
- -------------------------------------------------------------------------------
Building Materials -- 0.4%
- -------------------------------------------------------------------------------
Tarkett International, AG., Sr.
Sub. Notes, 9.00%, 3/1/02 $ 3,600 $ 3,681,000
- -------------------------------------------------------------------------------
$ 3,681,000
- -------------------------------------------------------------------------------
Business Services -- 1.9%
- -------------------------------------------------------------------------------
AP Holdings, Inc., Sr. Disc.
Notes, 11.25%,
(0% until 2003), 3/15/08/(1)/ $ 4,800 $ 2,892,000
Apcoa, Inc., Sr. Sub. Notes,
9.25%, 3/15/08/(1)/ 1,200 1,203,000
Federal Data Corp., Sr. Sub. Notes,
10.125%, 8/1/05 4,320 4,492,800
Intertek Finance PLC, Sr. Sub.
Note, 10.25%, 11/1/06 5,600 5,992,000
Sitel Corp., Sr. Sub. Notes,
9.25%, 3/15/06/(1)/ 3,000 3,075,000
- -------------------------------------------------------------------------------
$ 17,654,800
- -------------------------------------------------------------------------------
See notes to financial statements
13
<PAGE>
High Income Portfolio as of March 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
Principal
Amount
(000's
Security omitted) Value
- -------------------------------------------------------------------------------
Business Services - Miscellaneous -- 4.6%
- -------------------------------------------------------------------------------
Allied Waste Industries, Inc., Sr.
Disc. Notes, 11.30%, (0% until
2002), 6/1/07 $ 6,550 $ 4,814,250
Allied Waste North America, Inc.,
Sr. Sub. Note, LOC, 10.25%,
12/1/06 8,200 9,102,000
Crown Castle International Corp.,
Sr. Disc. Notes, 10.625%,
(0% until 2002), 11/15/07/(1)/ 3,800 2,565,000
Pinnacle Holdings, Inc., Sr. Disc.
Notes, 10.00%, (0% until
2003), 3/15/08/(1)/ 4,020 2,512,500
Richmont Marketing Special, Sr.
Sub. Notes, 10.125%, 12/15/07/(1)/ 7,475 7,774,000
SBA Communications Corp., Sr.
Disc. Notes, 12.00%, (0% until
2003), 3/1/08/(1)/ 13,600 8,041,000
Unicco Service/Finance, Inc., Sr.
Sub. Notes, 9.875%, 10/15/07 4,040 4,135,950
Unisite, Inc., Sub. Notes,
0.00%, 12/15/04/(1)/ 4,500 4,671,450
- -------------------------------------------------------------------------------
$ 43,616,150
- -------------------------------------------------------------------------------
Chemicals -- 1.3%
- -------------------------------------------------------------------------------
Huntsman Corp., Sr. Sub. Note,
9.50%, 7/1/07/(1)/ $ 3,350 $ 3,475,625
NL Industries, Inc., Sr. Notes,
11.75%, 10/15/03 5,040 5,607,000
Sterling Chemical Holdings, Inc.,
0.00%, 8/15/08 6,400 3,808,000
- -------------------------------------------------------------------------------
$ 12,890,625
- -------------------------------------------------------------------------------
Communications Equipment -- 0.7%
- -------------------------------------------------------------------------------
Jordan Telecom Products, Inc., Sr.
Disc. Notes, 11.75%, (0% until
2000), 8/1/07/(1)/ $ 7,700 $ 6,545,000
- -------------------------------------------------------------------------------
$ 6,545,000
- -------------------------------------------------------------------------------
Computer Equipment -- 1.8%
- -------------------------------------------------------------------------------
Merisel, Inc., Sr. Notes, 12.50%,
12/31/04 $ 4,000 $ 4,460,000
Unisys Corp., Debs., 9.75%,
9/15/16 3,600 3,726,000
Unisys Corp., Sr. Notes, 11.75%,
10/15/04 2,600 3,009,500
Unisys Corp., Sr. Notes, 12.00%,
4/15/03 5,600 6,342,000
- -------------------------------------------------------------------------------
$ 17,537,500
- -------------------------------------------------------------------------------
Containers and Packaging -- 1.6%
- -------------------------------------------------------------------------------
Applied Extrusion Inc., Sr. Notes,
11.50%, 4/1/02 $ 6,000 $ 6,420,000
Consumers International, Inc., Sr.
Sub. Note, 10.25%, 4/1/05/(1)/ 3,935 4,348,175
S.D. Warren Co., Sr. Sub. Notes,
12.00%, 12/15/04 3,800 4,246,500
- -------------------------------------------------------------------------------
$ 15,014,675
- -------------------------------------------------------------------------------
Electric Utilities -- 0.9%
- -------------------------------------------------------------------------------
AES Corp., 8.375%, 8/15/07 $ 1,200 $ 1,233,000
AES Corp., Sr. Sub. Notes,
10.25%, 7/15/06 1,600 1,768,000
Cal Energy Company, Inc., Sr.
Notes, 9.50%, 9/15/06 5,500 5,907,165
- -------------------------------------------------------------------------------
$ 8,908,165
- -------------------------------------------------------------------------------
Electrical Equipment -- 0.4%
- -------------------------------------------------------------------------------
Wavetek Corp., Sr. Sub. Notes,
10.125%, 6/15/07 $ 3,360 $ 3,519,600
- -------------------------------------------------------------------------------
$ 3,519,600
- -------------------------------------------------------------------------------
Electronics - Instruments -- 0.4%
- -------------------------------------------------------------------------------
HCC Industries, Inc., Sr. Sub.
Notes, 10.75%, 5/15/07 $ 3,975 $ 4,153,875
- -------------------------------------------------------------------------------
$ 4,153,875
- -------------------------------------------------------------------------------
Entertainment -- 1.1%
- -------------------------------------------------------------------------------
Australis Media Ltd., Sub. Disc.
Notes, 15.75%, (0% until
2000), 5/15/03 $ 4,490 $ 897,919
Fox Kids Worldwide, Inc., Sr.
Disc. Notes, 10.25%, (0% until
2002), 11/1/07/(1)/ 7,700 4,908,750
Premier Parks, Inc., Sr. Disc.
Notes, 10.00%, (0% until
2003), 4/1/08 3,200 2,040,000
Premier Parks, Inc., Sr. Notes,
9.25%, 4/1/06 1,640 1,676,900
SFX Entertainment, Inc., Sr. Sub.
Notes, 9.125%, 2/1/08/(1)/ 1,480 1,457,800
- -------------------------------------------------------------------------------
$ 10,981,369
- -------------------------------------------------------------------------------
Foods -- 4.2%
- -------------------------------------------------------------------------------
B & G Foods, Inc., Sub. Notes,
9.625%, 8/1/07/(1)/ $ 3,925 $ 4,023,125
Del Monte Corp., Sr. Note,
12.25%, 4/15/07 4,400 5,016,000
Del Monte Foods Co., Sr. Disc.
Notes, 12.50%, (0% until
1998), 12/15/07/(1)/ 7,000 4,593,750
Grupo Azucarero Mexico, Sr. Notes,
11.50%, 1/15/05/(1)/ 3,200 3,176,000
See notes to financial statements
14
<PAGE>
High Income Portfolio as of March 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
Principal
Amount
(000's
Security omitted) Value
- -------------------------------------------------------------------------------
Foods (continued)
- -------------------------------------------------------------------------------
International Home Foods, Inc.,
Sr. Sub. Note, 10.375%, 11/1/06 $ 9,000 $ 10,012,500
Keebler Corp., Sr. Sub. Notes,
10.75%, 7/1/06 5,720 6,492,200
Van De Kamps, Inc., Sr. Sub. Notes,
12.00%, 9/15/05 6,100 6,801,500
- -------------------------------------------------------------------------------
$ 40,115,075
- -------------------------------------------------------------------------------
Health Services -- 1.2%
- -------------------------------------------------------------------------------
Dade International, Inc., Sr. Sub.
Notes, 11.125%, 5/1/06 $ 4,800 $ 5,364,000
Genesis Eldercare Acquisition
Corp., Sr. Sub. Note, 9.00%,
8/1/07/(1)/ 6,120 6,273,000
- -------------------------------------------------------------------------------
$ 11,637,000
- -------------------------------------------------------------------------------
Household Products -- 2.9%
- -------------------------------------------------------------------------------
Amscan Holdings, Inc., Sr. Sub.
Notes, 9.875%, 12/15/07/(1)/ $ 4,480 $ 4,692,800
Coleman Holdings, Inc., Sr. Disc.
Notes, 0.00%, 5/15/01 4,000 3,140,000
Icon Health and Fitness, Inc., Sr.
Sub. Note, 13.00%, 7/15/02 4,000 4,360,000
IHF Holdings, Inc., 15.00%,
(0% until 1999), 11/15/04 2,960 2,486,400
Ridell Sports, Inc., Sr. Note,
10.50%, 7/15/07 3,160 3,318,000
Selmer Co., Inc., Sr. Sub. Notes,
11.00%, 5/15/05 5,300 5,816,750
Werner Holdings Co., Inc., Sr.
Sub. Notes, 10.00%, 11/15/07 3,600 3,802,500
- -------------------------------------------------------------------------------
$ 27,616,450
- -------------------------------------------------------------------------------
Information Services -- 1.7%
- -------------------------------------------------------------------------------
Cellnet Data Systems, Inc., Sr.
Disc. Notes, 14.00%, (0% until
2002), 10/1/07 $ 10,400 $ 6,136,000
Concentric Network Corp., Sr.
Notes, 12.75%, 12/15/07/(1)/ 3,200 3,792,000
Orbital Imaging Corp., Sr. Notes,
11.625%, 3/1/05/(1)/ 3,760 4,117,200
Verio, Inc., Sr. Notes, 10.375%,
4/1/05/(1)/ 2,160 2,246,400
- -------------------------------------------------------------------------------
$ 16,291,600
- -------------------------------------------------------------------------------
Lodging and Gaming -- 4.8%
- -------------------------------------------------------------------------------
Aztar Corp., Sr. Sub. Notes,
13.75%, 10/1/04 $ 5,000 $ 5,762,500
Extended Stay America, Sr. Sub.
Notes, 9.15%, 3/15/08/(1)/ 13,200 13,364,999
Harvey Casinos Resorts, Sr. Sub.
Notes, 10.625%, 6/1/06 8,550 9,597,375
Horseshoe Gaming L.L.C., Sr. Sub.
Notes, 9.375%, 6/15/07 3,200 3,456,000
Showboat Marina Casino, 1st Mtg.
Notes, 13.50%, 3/15/03 6,000 7,080,000
Trump Atlantic City Associates,
Co., 1st Mtg. Notes, 11.25%,
5/1/06 5,900 6,062,250
- -------------------------------------------------------------------------------
$ 45,323,124
- -------------------------------------------------------------------------------
Machinery -- 0.3%
- -------------------------------------------------------------------------------
Alvey Systems, Inc., Sr. Sub.
Notes, 11.375%, 1/31/03 $ 2,400 $ 2,580,000
- -------------------------------------------------------------------------------
$ 2,580,000
- -------------------------------------------------------------------------------
Manufacturing -- 7.3%
- -------------------------------------------------------------------------------
Amtrol Acquisition, Inc., Sr. Sub.,
10.625%, 12/31/06 $ 3,600 $ 3,699,000
Clark-Schwebel Holdings, Inc.,
Debs., 12.50%, 7/15/07 4,277 4,598,247
Details, Inc., Sr. Sub. Notes,
10.00%, 11/15/05 5,650 5,918,375
FWT, Inc., Sr. Sub. Notes,
9.875%, 11/15/07/(1)/ 5,360 5,092,000
GSI Group, Inc., Sr. Sub. Notes,
10.25%, 11/1/07/(1)/ 3,680 3,882,400
IMO Industries, Sr. Sub. Notes,
11.75%, 5/1/06 8,680 9,808,400
MCMS, Inc., Sr. Sub. Notes,
9.75%, 3/1/08/(1)/ 7,400 7,474,000
Motors and Gears, Inc., Sr. Notes,
10.75%, 11/15/06 6,600 7,128,000
RBX Corp., Sr. Notes, 12.00%,
1/15/03/(1)/ 2,200 2,288,000
Roller Bearing Co. America, Inc.,
Sr. Sub. Notes, 9.625%, 6/15/07 1,600 1,644,000
Roller Bearing Holdings Co.,
13.00%, (0% until 2002), 6/15/09/(1)/ 12,875 8,433,125
Viasystems, Inc., Sr. Sub. Notes,
9.75%, 6/1/07/(1)/ 5,000 5,225,000
Viasystems, Inc., Sr. Sub. Notes,
9.75%, 6/1/07 3,600 3,762,000
- -------------------------------------------------------------------------------
$ 68,952,547
- -------------------------------------------------------------------------------
See notes to financial statements
15
<PAGE>
High Income Portfolio as of March 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
Principal
Amount
(000's
Security omitted) Value
- -------------------------------------------------------------------------------
Medical Products -- 1.2%
- -------------------------------------------------------------------------------
Alliance Imaging, Sr. Sub. Notes,
9.625%, 12/15/05 $ 2,700 $ 2,821,500
Maxxim Medical, Inc., Sr. Sub.
Notes, 10.50%, 8/1/06 5,200 5,772,000
Physician Sales and Service, Sr.
Sub. Notes, 8.50%, 10/1/07 2,680 2,787,200
- -------------------------------------------------------------------------------
$ 11,380,700
- -------------------------------------------------------------------------------
Metals - Industrial -- 1.5%
- -------------------------------------------------------------------------------
GS Technologies Corp., Sr. Notes,
12.25%, 10/1/05 $ 7,100 $ 8,058,500
Kaiser Aluminum and Chemical,
Inc., Sr. Notes, 10.875%, 10/15/06 2,500 2,712,500
WHX Corp., 10.50%, 4/15/05/(1)/ 3,600 3,600,000
- -------------------------------------------------------------------------------
$ 14,371,000
- -------------------------------------------------------------------------------
Oil and Gas - Equipment and Services -- 2.7%
- -------------------------------------------------------------------------------
Dailey International, Inc., Sr.
Notes, 9.50%, 2/15/08/(1)/ $ 9,120 $ 9,177,000
Grant Geophysical, Inc., Sr. Notes,
9.75%, 2/15/08/(1)/ 5,600 5,516,000
Hvide Marine, Inc., Sr. Notes,
8.375%, 2/15/08/(1)/ 4,800 4,680,000
Universal Compression, Inc., Sr.
Disc. Notes, 9.875%, (0% until
2003), 2/15/08/(1)/ 9,400 5,875,000
- -------------------------------------------------------------------------------
$ 25,248,000
- -------------------------------------------------------------------------------
Oil and Gas - Exploration
and Production -- 2.9%
- -------------------------------------------------------------------------------
Energy Corp. of America, Sr. Sub.
Notes, 9.50%, 5/15/07 $ 5,400 $ 5,400,000
Mariner Energy Corp., Sr. Sub.
Notes, 10.50%, 8/1/06 4,600 4,784,000
Michael Petroleum Corp., Sr. Notes,
11.50%, 4/1/05 3,655 3,618,450
Rutherford-Moran Oil Corp., Sr.
Sub. Notes, 10.75%, 10/1/04 6,515 6,971,050
Transamerican Energy, Sr. Notes,
11.50%, 6/15/02 3,200 3,168,000
United Refining Co., Sr. Notes,
10.75%, 6/15/07 3,200 3,376,000
- -------------------------------------------------------------------------------
$ 27,317,500
- -------------------------------------------------------------------------------
Paper and Forest Products -- 1.4%
- -------------------------------------------------------------------------------
Asia Pulp and Paper, 12.00%,
12/29/49 $ 6,000 $ 4,920,000
Indah Kiat Finance Mauritius, Sr.
Unsec. Notes, 10.00%, 7/1/07 3,400 2,813,500
Pindo Deli Finance Mauritius,
Ltd., Guaranteed Sr. Note,
10.75%, 10/1/07 2,400 2,004,000
Tjiwi Kimia Finance Mauritus,
Ltd., Guaranteed Sr. Sub. Notes,
10.00%, 8/1/04 3,800 3,154,000
- -------------------------------------------------------------------------------
$ 12,891,500
- -------------------------------------------------------------------------------
Printing and Business Products -- 1.1%
- -------------------------------------------------------------------------------
American Pad and Paper Co., Sr.
Sub. Notes, 13.00%, 11/15/05 $ 3,250 $ 3,542,500
MDC Communications Corp., Sr. Sub.
Notes, 10.50%, 12/1/06 6,600 7,161,000
- -------------------------------------------------------------------------------
$ 10,703,500
- -------------------------------------------------------------------------------
Publishing -- 1.6%
- -------------------------------------------------------------------------------
American Lawyer Media Corp., Sr.
Disc. Notes, 12.25%, (0% until
2002) 12/15/08 $ 2,920 $ 1,854,200
American Lawyer Media Corp., Sr.
Notes, 9.75%, 12/15/07/(1)/ 2,000 2,100,000
Newsquest Capital Corp., Sr. Sub.
Note, 11.00%, 5/1/06 605 679,113
Newsquest Capital Corp., Sr. Sub.
Notes, 11.00%, 5/1/06 4,441 4,985,023
Von Hoffman Press, Inc., Sr. Sub.
Note, 10.375%, 5/15/07/(1)/ 4,800 5,184,000
- -------------------------------------------------------------------------------
$ 14,802,336
- -------------------------------------------------------------------------------
Retail - Food and Drug -- 2.4%
- -------------------------------------------------------------------------------
AFC Enterprises, Inc., Sr. Sub.
Notes, 10.25%, 5/15/07 $ 9,600 $ 10,176,000
Pantry, Inc., Sr. Sub. Notes,
10.25%, 10/15/07 5,200 5,427,500
Star Markets Co., Sr. Sub. Notes,
13.00%, 11/1/04 6,200 7,068,000
- -------------------------------------------------------------------------------
$ 22,671,500
- -------------------------------------------------------------------------------
Retail - General -- 1.9%
- -------------------------------------------------------------------------------
Big 5 Corp., Sr. Notes,
10.875%, 11/15/07 $ 4,320 $ 4,417,200
See notes to financial statements
16
<PAGE>
High Income Portfolio as of March 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
Principal
Amount
(000's
Security omitted) Value
- -------------------------------------------------------------------------------
Retail - General (continued)
- -------------------------------------------------------------------------------
Franks Nursery and Crafts, Sr.
Sub. Notes, 10.25%, 3/1/08/(1)/ $ 4,000 $ 3,980,000
Kindercare Learning Ctrs., Inc.,
Sr. Sub. Note, 9.50%, 2/15/09 6,500 6,670,625
Tuesday Morning Corp., Sr. Sub.
Notes, 11.00%, 12/15/07/(1)/ 3,000 3,112,500
- -------------------------------------------------------------------------------
$ 18,180,325
- -------------------------------------------------------------------------------
Transportation -- 0.4%
- -------------------------------------------------------------------------------
International Logistics, Ltd., Sr.
Notes, 9.75%, 10/15/07 $ 3,680 $ 3,652,400
- -------------------------------------------------------------------------------
$ 3,652,400
- -------------------------------------------------------------------------------
Wireless Communication Services -- 10.9%
- -------------------------------------------------------------------------------
America Mobile/ AMSC Acquisition
Corp., Sr. Notes, 12.25%, 4/1/08 $ 5,400 $ 5,616,000
Dial Call Communications Inc., Sr.
Red. Notes, 12.25%, (0% until
1999), 4/15/04 10,720 10,666,400
Dobson Communications Corp., Sr.
Note, 11.75%, 4/15/07 9,675 10,642,500
Iridium L.L.C. Capital Corp., Sr.
Notes, 11.25%, 7/15/05 9,000 9,540,000
Microcell Telecommunication, Sr.
Disc. Notes, 14.00%, (0% until
2001), 6/1/06 5,640 4,187,700
Millicom International Cellular,
Sr. Disc Notes, 13.50%, (0% until
2001), 6/1/06 7,200 5,616,000
Nextel Communications, Inc., Sr.
Disc. Notes, 9.75%, (0% until
1999), 8/15/04 4,000 3,850,000
Nextel Communications, Inc., Sr.
Disc. Notes, 10.65%, (0% until
2002), 9/15/07 250 167,500
Nextel International, Inc., Sr.
Disc. Notes, 12.125%, (0% until
2003), 4/15/08/(1)/ 9,000 5,400,000
Omnipoint Corp., Sr. Note,
11.625%, 8/15/06 2,580 2,838,000
Orion Network Systems, Inc., Sr.
Disc. Notes, 12.50%, (0% until
2002), 1/15/07 1,600 1,256,000
Orion Network Systems, Inc., Sr.
Note, 11.25%, 1/15/07 5,600 6,496,000
Pricellular Wireless
Communications Corp., Sr. Notes,
10.75%, 11/1/04 3,200 3,600,000
Pricellular Wireless
Communications Corp., Sr. Sub.
Disc. Nts., 12.25%, (0% until
1998), 10/1/03 6,980 7,468,600
Satelites Mexicanos SA, Sr. Notes,
10.125%, 11/1/04 2,800 2,898,000
Telesystem International Wireless,
Sr. Disc. Notes, 10.50%, (0% until
2002), 11/1/07 4,000 2,540,000
Telesystem International Wireless,
Sr. Disc. Notes, 13.25%, (0% until
2002), 6/30/07 3,800 2,650,500
Teligent, Inc., Sr. Notes,
11.50%, 12/1/07 4,800 5,040,000
Winstar Communications, Inc., Sr.
Disc. Notes, 14.00%, (0% until
2000), 10/15/05 2,400 3,552,000
Winstar Communications, Inc., Sr.
Sub. Notes, 10.00%, 3/15/08/(1)/ 9,100 9,236,500
- -------------------------------------------------------------------------------
$ 103,261,700
- -------------------------------------------------------------------------------
Wireline Communication Services -- 11.6%
- -------------------------------------------------------------------------------
Allegiance Telecom, Inc., Sr.
Disc. Notes, 11.75%, (0% until
2003), 2/15/08/(1)/ $ 12,500 $ 7,250,000
Econophone, Inc., Sr. Disc. Notes,
11.00%, (0% until 2003), 2/15/08/(1)/ 4,000 2,290,000
Esat Telecom Group PLC, Sr.
Deferred Coupon Note, 12.50%, (0%
until 2002), 2/1/07 3,875 2,886,875
Esat Telecom Group PLC, Sr.
Deferred Coupon Notes, 12.50%, (0%
until 2002), 2/1/07 3,600 2,682,000
Esprit Telecom Group PLC, Sr.
Notes, 11.50%, 12/15/07 3,000 3,285,000
Facilicom International, Sr. Notes,
10.50%, 1/15/08/(1)/ 7,040 7,356,800
Focal Communications Corporate
Purpose, Sr. Disc. Notes, 12.125%,
(0% until 2003), 2/15/08/(1)/ 15,600 9,165,000
GST Equipment Funding, Sr. Notes,
13.25%, 5/1/07 4,900 5,806,500
GST Telecommunications, Sr. Sub.
Notes, 12.75%, 11/15/07 1,600 1,936,000
GST USA, Inc., Sr. Disc. Notes,
13.875%, (0% until 2000), 12/15/05 3,180 2,639,400
Icg Holdings, Inc., Sr. Disc. Note,
10.00%, 3/15/07 7,075 5,235,500
Icg Services, Inc., Sr. Disc.
Notes, 10.00%, (0% until
2002), 2/15/08/(1)/ 6,920 4,498,000
IDT Corp., Sr. Notes, 8.75%,
2/15/06/(1)/ 1,440 1,432,800
Intermedia Communications, Inc.,
Sr. Notes, 8.50%, 1/15/08 4,800 4,992,000
Metronet Communications, Sr. Disc.
Notes, 10.75%, (0% until
2002), 11/1/07 4,800 3,192,000
Metronet Communications, Sr.
Notes, 12.00%, 8/15/07 1,800 2,079,000
MGC Communications, Inc., Sr.
Notes, 13.00%, 10/1/04 5,680 6,084,700
Netia Holdings B.V., Sr. Notes,
10.25%, 11/1/07/(1)/ 2,400 2,466,000
Netia Holdings B.V., Sr. Notes,
11.25%, (0% until 2001), 11/1/07/(1)/ 1,200 819,000
Nextlink Communications, Inc., Sr.
Discount Notes, 9.45%, (0% until
2003), 4/15/08 8,000 5,050,000
Nextlink Communications, Inc., Sr.
Notes, 9.00%, 3/15/08/(1)/ 5,700 5,842,500
See notes to financial statements
17
<PAGE>
High Income Portfolio as of March 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
Principal
Amount
(000's
Security omitted) Value
- -------------------------------------------------------------------------------
Wireline Communication Services (continued)
- -------------------------------------------------------------------------------
Nextlink Communications, Inc., Sr.
Notes, 12.50%, 4/15/06 $ 6,720 $ 7,728,000
Primus Telecom Group, Sr. Notes,
11.75%, 8/1/04 4,600 5,140,500
Qwest Communications
International, Sr. Disc. Notes,
9.47%, (0% until 2002),10/15/07 3,525 2,590,875
RSL Commerce, Ltd., Sr. Notes,
12.25%, 11/15/06 6,525 7,438,500
- -------------------------------------------------------------------------------
$ 109,886,950
- -------------------------------------------------------------------------------
Total Corporate Bonds & Notes
(identified cost $810,506,202) $ 851,625,079
- -------------------------------------------------------------------------------
Common Stocks, Warrants and Rights -- 0.3%
Security Shares Value
- -------------------------------------------------------------------------------
Broadcasting and Cable -- 0.0%
- -------------------------------------------------------------------------------
American Telecasting, Inc.
Warrants*+ 2,600 $ 26
Australis Media Ltd., Warrants*+ 3,600 --
CS Wireless Systems, Inc., Common
/(1)/* 902 --
UIH Australia/Pacific, Inc.,
Warrants*+ 3,600 36
United International Holdings,
Inc., Warrants Exp. 11/15/99*+ 7,840 130,536
- -------------------------------------------------------------------------------
$ 130,598
- -------------------------------------------------------------------------------
Business Services - Miscellaneous -- 0.0%
- -------------------------------------------------------------------------------
Unisite, Inc., Warrants*+ 2,252 $ --
- -------------------------------------------------------------------------------
$ --
- -------------------------------------------------------------------------------
Chemicals -- 0.0%
- -------------------------------------------------------------------------------
Crompton & Knowles Corp., Common 9,489 $ 274,583
Sterling Chemicals Holdings, Warrants*+ 3,200 73,600
- -------------------------------------------------------------------------------
$ 348,183
- -------------------------------------------------------------------------------
Communications Equipment -- 0.0%
- -------------------------------------------------------------------------------
In Flight Phone Corp., Warrants
Exp. 8/31/02*+ 1,600 $ --
Jordan Telecommunications, Common/(1)/ 2,500 --
- -------------------------------------------------------------------------------
$ --
- -------------------------------------------------------------------------------
Foods -- 0.0%
- -------------------------------------------------------------------------------
Servam Corp., $2.00 Warrant
Exp. 4/1/01*+ 12,276 $ --
Servam Corp., $4.50 Warrant
Exp. 4/1/01*+ 2,760 --
Servam Corp., Common*+ 1,380 --
Specialty Foods Acquisition Corp.,
Common*+ 48,000 12,000
- -------------------------------------------------------------------------------
$ 12,000
- -------------------------------------------------------------------------------
Information Services -- 0.0%
- -------------------------------------------------------------------------------
Cellnet Data Systems, Inc.,
Warrants Exp. 10/1/07*+ 8,000 $ 80
- -------------------------------------------------------------------------------
$ 80
- -------------------------------------------------------------------------------
Machinery -- 0.0%
- -------------------------------------------------------------------------------
Thermadyne Holdings Corp., Common*+ 40,000 $ 400
- -------------------------------------------------------------------------------
$ 400
- -------------------------------------------------------------------------------
Metals - Industrial -- 0.0%
- -------------------------------------------------------------------------------
Gulf States Steel, Warrants*+ 2,400 $ 120
Terex Corp., Warrants Exp. 5/15/02*+ 20,000 340,000
- -------------------------------------------------------------------------------
$ 340,120
- -------------------------------------------------------------------------------
Wireless Communication Services -- 0.2%
- -------------------------------------------------------------------------------
Microcell Telecommunication, Warrants*+ 58,400 $ 1,124,200
Nextel Communications, Inc., Class A
Common/(1)/* 11,154 376,448
Nextel Communications, Warrants
Exp. 4/25/99*+ 7,200 25,200
Orion Network Warrants Exp. 1/15/07*+ 1,600 20,000
Orion Network, Warrants Exp.1/15/07*+ 5,600 84,000
- -------------------------------------------------------------------------------
$ 1,629,848
- -------------------------------------------------------------------------------
Wireline Communication Services -- 0.1%
- -------------------------------------------------------------------------------
Esat Holdings, Ltd., Warrants*+ 3,600 $ 126,000
Hyperion Communications, Inc.,
Warrants Exp. 4/15/01*+ 4,000 280,000
Intermedia Communications, Inc.,
Common/(1)/* 1,310 104,309
Metronet Communications, Warrants
Exp. 8/15/07*+ 1,800 79,200
MGC Communications, Inc., Warrants
Exp. 10/01/04* 5,680 --
See notes to financial statements
18
<PAGE>
High Income Portfolio as of March 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
Security Shares Value
- -------------------------------------------------------------------------------
Wireline Communication Services (continued)
- -------------------------------------------------------------------------------
Optel, Inc., Common/(1)/* 5,840 $ 6
Primus Telecommunications Warrants,
Exp. 8/1/04 *+ 4,600 161,000
- -------------------------------------------------------------------------------
$ 750,515
- -------------------------------------------------------------------------------
Total Common Stocks, Warrants and Rights
(identified cost $1,365,884) $ 3,211,744
- -------------------------------------------------------------------------------
Preferred Stocks-- 8.7%
Security Shares Value
- -------------------------------------------------------------------------------
Broadcasting and Cable -- 3.6%
- -------------------------------------------------------------------------------
21st Century Telecom Group,
13.75% /(PIK) (1)/ 8,000 $ 896,000
Adelphia Communications Corp.,
13% /(PIK) (1)/ 48,000 5,724,000
Chancellor Radio Broadcasting,
Inc., 12% /(PIK) (1)/ 89,194 10,837,070
CSC Holdings, Inc., Series M,
11.125% /(PIK) (1)/ 110,642 12,972,774
Echostar Communications, 12.125%
/(PIK) (1)/ 3,296 3,674,951
- -------------------------------------------------------------------------------
$ 34,104,795
- -------------------------------------------------------------------------------
Business Services - Miscellaneous -- 0.2%
- -------------------------------------------------------------------------------
Unisite, Inc., 8.5% /(PIK)/ 3,239 $ 1,538,288
- -------------------------------------------------------------------------------
$ 1,538,288
- -------------------------------------------------------------------------------
Communications Equipment -- 0.3%
- -------------------------------------------------------------------------------
Jordan Telecom Products, Inc.,
13.25% /(PIK) (1)/ 2,500 $ 3,325,000
- -------------------------------------------------------------------------------
$ 3,325,000
- -------------------------------------------------------------------------------
Machinery -- 0.4%
- -------------------------------------------------------------------------------
MMH Holdings, Inc., 12% /(PIK) (1)/ 3,230 $ 3,391,500
- -------------------------------------------------------------------------------
$ 3,391,500
- -------------------------------------------------------------------------------
Manufacturing -- 0.0%
- -------------------------------------------------------------------------------
MCMS, Inc., 12.50% /(PIK) (1)/ 400 $ 404,000
- -------------------------------------------------------------------------------
$ 404,000
- -------------------------------------------------------------------------------
Wireless Communication Services -- 1.0%
- -------------------------------------------------------------------------------
Dobson Communications, 12.25%
/(PIK) (1)/ 3,800 $ 4,189,500
Nextel Communications, Inc.,
11.125% /(PIK) (1)/ 4,800 5,100,000
- -------------------------------------------------------------------------------
$ 9,289,500
- -------------------------------------------------------------------------------
Wireline Communication Services -- 3.2%
- -------------------------------------------------------------------------------
America Communications Services,
12.75% /(PIK) (1)/ 4,153 $ 5,025,130
Global Telesystem Holdings, 14%
/(PIK) (1)/ 4,400 5,038,000
Intermedia Communications, Inc.,
7% /(PIK) (1)/ 185,000 6,475,000
IXC Communications, Inc., Series B,
12.5% /(PIK) (1)/ 10,620 12,956,170
Nextlink Communications, 14% /(PIK) (1)/ 19,509 1,229,067
- -------------------------------------------------------------------------------
$ 30,723,367
- -------------------------------------------------------------------------------
Total Preferred Stocks
(identified cost $73,764,688) $ 82,776,450
- -------------------------------------------------------------------------------
Short-Term Investments -- 1.3%
Principal
Amount
(000's
Security omitted) Value
- -------------------------------------------------------------------------------
General Electric Capital Corp.,
6.00%, 4/1/98 $ 12,130 $ 12,130,000
- -------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $12,130,000) $ 12,130,000
- -------------------------------------------------------------------------------
Total Investments -- 100.0%
(identified cost $897,766,774) $ 949,743,273
- -------------------------------------------------------------------------------
/(PIK)/ Payment-in-kind.
/(1)/ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. It is the
Portfolio's intention to hold the security until maturity.
* Non-income producing security.
+ Restricted security (see Note 8).
See notes to financial statements
19
<PAGE>
High Income Portfolio as of March 31, 1998
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
As of March 31, 1998
(Expressed in United States Dollars)
Assets
- --------------------------------------------------------------------------
Investments, at value (Note 1A)
(identified cost, $897,766,774) $949,743,273
Cash 37,489
Receivable for investments sold 15,053,856
Interest receivable 18,640,640
Deferred organization expenses (Note 1D) 5,254
- --------------------------------------------------------------------------
Total assets $983,480,512
- --------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------
Payable for investments purchased $ 22,898,859
Payable to affiliate for Trustees' fees (Note 2) 6,695
Accrued expenses 74,248
- --------------------------------------------------------------------------
Total liabilities $ 22,979,802
- --------------------------------------------------------------------------
Net Assets applicable to investors' interest in Portfolio $960,500,710
- --------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------
Net proceeds from capital contributions and withdrawals $908,524,211
Net unrealized appreciation of investments (computed
on the basis of identified cost) 51,976,499
- --------------------------------------------------------------------------
Total $960,500,710
- --------------------------------------------------------------------------
Statement of Operations
For the Year Ended
March 31, 1998
(Expressed in United States Dollars)
Investment Income (Note 1B)
- --------------------------------------------------------------------------
Interest income $ 78,984,054
Dividends 3,499,128
Miscellaneous income 1,390,266
- --------------------------------------------------------------------------
Total income $ 83,873,448
- --------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 4,736,709
Compensation of Trustees not members of the
Investment adviser's organization (Note 2) 23,579
Custodian fee 265,007
Legal and accounting services 52,234
Amortization of organization expenses (Note 1D) 4,519
Miscellaneous 39,495
- --------------------------------------------------------------------------
Total expenses $ 5,121,543
- --------------------------------------------------------------------------
Net investment income $ 78,751,905
- --------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- --------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ 40,197,991
- --------------------------------------------------------------------------
Net realized gain on investment transactions $ 40,197,991
- --------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments (identified cost basis) $ 41,198,260
- --------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ 41,198,260
- --------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 81,396,251
- --------------------------------------------------------------------------
Net increase in net assets from operations $160,148,156
- --------------------------------------------------------------------------
See notes to financial statements
20
<PAGE>
High Income Portfolio as of March 31, 1998
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets (Expressed in United States Dollars)
Increase (Decrease) Year Ended Year Ended
in Net Assets March 31, 1998 March 31, 1997
- --------------------------------------------------------------------------
From operations --
Net investment income $ 78,751,905 $ 60,083,973
Net realized gain (loss)
on investment transactions 40,197,991 (4,056,681)
Net change in unrealized
appreciation (depreciation)
of investments 41,198,260 13,401,858
- --------------------------------------------------------------------------
Net increase in net assets
from operations $ 160,148,156 $ 69,429,150
- --------------------------------------------------------------------------
Capital transactions --
Contributions $ 306,797,835 $ 280,137,284
Withdrawals (213,156,743) (154,202,111)
- --------------------------------------------------------------------------
Net increase in net assets
from capital transactions $ 93,641,092 $ 125,935,173
- --------------------------------------------------------------------------
Net increase in net assets $ 253,789,248 $ 195,364,323
- --------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------
At beginning of year $ 706,711,462 $ 511,347,139
- --------------------------------------------------------------------------
At end of year $ 960,500,710 $ 706,711,462
- --------------------------------------------------------------------------
See notes to financial statements
21
<PAGE>
High Income Portfolio as of March 31, 1998
FINANCIAL STATEMENTS CONT'D
Supplementary Data (Expressed in United States Dollars)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------------
1998 1997 1996 1995*
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ratios to average daily net assets
- --------------------------------------------------------------------------------------------------------------------------
Expenses 0.63% 0.67% 0.71% 0.70%+
Net investment income 9.63% 10.02% 10.41% 10.63%+
Portfolio Turnover 137% 78% 88% 53%
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $960,501 $706,711 $511,347 $442,552
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, June 1, 1994, to March 31, 1995.
See notes to financial statements
22
<PAGE>
High Income Portfolio as of March 31, 1998
NOTES TO FINANCIAL STATEMENTS
(Expressed in United States Dollars)
1 Significant Accounting Policies
----------------------------------------------------------------------------
High Income Portfolio (the Portfolio) is registered under the Investment
Company Act of 1940 as a diversified open-end management investment company
which was organized as a trust under the laws of the State of New York on
May 1, 1992. The Declaration of Trust permits the Trustees to issue
interests in the Portfolio. The following is a summary of significant
accounting policies of the Portfolio. The policies are in conformity with
accounting principles generally accepted in the United States of America.
A Investment Valuations -- Investments listed on securities exchanges or in
the NASDAQ National Market are valued at closing sale prices. Listed or
unlisted investments for which closing sale prices are not available are
valued at the mean between the latest bid and asked prices. Fixed income
investments (other than short-term obligations), including listed
investments and investments for which price quotations are available, will
normally be valued on the basis of market valuations furnished by a pricing
service. Financial futures contracts listed on commodity exchanges are
valued at closing settlement prices. Short-term obligations, maturing in
sixty days or less, are valued at amortized cost, which approximates value.
Investments for which there are no quotations or valuations are valued at
fair value using methods determined in good faith by or at the direction of
the Trustees.
B Income -- Interest income is determined on the basis of interest accrued,
adjusted for amortization of premium or discount when required for federal
income tax purposes. Dividend income is recorded on the ex-dividend date for
dividends received in cash and/or securities.
C Income Taxes -- The Portfolio has elected to be treated as a partnership
for United States Federal tax purposes. No provision is made by the
Portfolio for federal or state taxes on any taxable income of the Portfolio
because each investor in the Portfolio is ultimately responsible for the
payment of any taxes. Since some of the Portfolio's investors are regulated
investment companies that invest all or substantially all of their assets in
the Portfolio, the Portfolio normally must satisfy the applicable source of
income and diversification requirements (under the Internal Revenue Code) in
order for its investors to satisfy them. The Portfolio will allocate at
least annually among its investors each investor's distributive share of the
Portfolio's net taxable investment income, net realized capital gains, and
any other items of income, gain, loss, deduction or credit.
D Deferred Organization Expenses -- Costs incurred by the Portfolio in
connection with its organization are being amortized on the straight-line
basis over five years.
E Financial Futures Contracts -- Upon the entering of a financial futures
contract, the Portfolio is required to deposit ("initial margin") either in
cash or securities an amount equal to a certain percentage of the purchase
price indicated in the financial futures contract. Subsequent payments are
made or received by the Portfolio ("margin maintenance") each day, dependent
on the daily fluctuations in the value of the underlying security, and are
recorded for book purposes as unrealized gains or losses by the Portfolio.
The Portfolio's investment in financial futures contracts is designed only
to hedge against anticipated future changes in interest rates. Should
interest rates move unexpectedly, the Portfolio may not achieve the
anticipated benefits of the financial futures contracts and may realize a
loss.
F Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
G Other -- Investment transactions are accounted for on a trade date basis.
H Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian of the Portfolio. Pursuant to the custodian agreement, IBT
receives a fee reduced by credits which are determined based on the average
daily cash balances the Portfolio maintains with IBT. All significant credit
balances used to reduce the Portfolio's custodian fees are reflected as a
reduction of expenses on the Statement of Operations.
23
<PAGE>
High Income Portfolio as of March 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
(Expressed in United States Dollars)
2 Investment Adviser Fee and Other Transactions with Affiliates
----------------------------------------------------------------------------
The investment adviser fee is earned by Boston Management and Research
(BMR), a wholly-owned subsidiary of Eaton Vance Management (EVM), as
compensation for management and investment advisory services rendered to the
Portfolio. The fee is based upon a percentage of average daily net assets
plus a percentage of gross income (i.e., income other than gains from the
sale of securities). For the year ended March 31, 1998, the fee was
equivalent to 0.58% of the Portfolio's average daily net assets and amounted
to $4,736,709. Except as to Trustees of the Portfolio who are not members of
EVM's or BMR's organization, officers and Trustees receive remuneration for
their services to the Portfolio out of such investment adviser fee. Certain
of the officers and Trustees of the Portfolio are officers and
directors/trustees of the above organizations. Trustees of the Portfolio
that are not affiliated with the Investment Adviser may elect to defer
receipt of all or a portion of their annual fees in accordance with the
terms of the Trustees Deferred Compensation Plan. For the year ended March
31, 1998, no significant amounts have been deferred.
3 Investments
----------------------------------------------------------------------------
The Portfolio invests primarily in debt securities. The ability of the
issuers of the debt securities held by the Portfolio to meet their
obligations may be affected by economic developments in a specific industry.
Purchases and sales of investments, other than U.S. Government securities
and short-term obligations, aggregated $1,242,718,480 and $1,077,138,003,
respectively, for the year ended March 31, 1998.
4 Line of Credit
----------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR
and EVM and its affiliates in a $100 million unsecured line of credit
agreement with a group of banks. The Portfolio may temporarily borrow from
the line of credit to satisfy redemption requests or settle investment
transactions. Interest is charged to each portfolio or fund based on its
borrowings at an amount above either the Eurodollar rate or federal funds
rate. In addition, a fee computed at an annual rate of 0.10% on the daily
unused portion of the line of credit is allocated among the participating
portfolios and funds at the end of each quarter. The Portfolio did not have
any significant borrowings or allocated fees during the year ended March 31,
1998.
5 Federal Income Tax Basis of Investments
----------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the
investments owned at March 31, 1998, as computed on a federal income tax
basis, were as follows:
Aggregate cost $ 897,971,060
----------------------------------------------------------------------------
Gross unrealized appreciation $ 57,845,171
Gross unrealized depreciation (6,072,958)
----------------------------------------------------------------------------
Net unrealized appreciation $ 51,772,213
----------------------------------------------------------------------------
6 Restricted Securities
----------------------------------------------------------------------------
At March 31, 1998, the Portfolio owned the following securities
(constituting 0.22% of net assets) which were restricted as to public resale
and not registered under the Securities Act of 1933 (excluding Rule 144A
Securities). The Portfolio has various registration rights (exercisable
under a variety of circumstances) with respect to certain of these
securities. The fair value of these securities is determined based on
valuations provided by brokers when available, or if not available, they are
valued at fair value using methods determined in good faith by or at the
direction of the Trustees.
Date of
Description Acquisition Shares/Face Cost Fair Value
----------------------------------------------------------------------------
Common Stocks, Warrants, and Rights
----------------------------------------------------------------------------
American Telecasting,
Inc., Wts. 1/16/96 2,600 $ 71,500 $ 26
Australis Media Ltd.,
Wts. 5/26/95 3,600 0 0
Cellnet Data Systems,
Inc., Wts., Exp.
10/1/07 8,000 0 80
Esat Holdings, Ltd.,
Wts. 6/19/97 3,600 0 126,000
Gulf States Steel, Wts. 8/22/95 2,400 0 120
Hyperion Communications,
Inc., Exp. 4/15/01 4,000 90,000 280,000
In Flight Phone Corp.,
Wts., Exp. 8/31/02 11/28/95 1,600 0 0
Metronet Communications,
Wts., Exp. 8/15/07 1,800 0 79,200
Microcell
Telecommunication, Wts. 10/30/96 58,400 647,700 1,124,200
Nextel Communications,
Wts., Exp. 4/25/99 10/04/96 7,200 0 25,200
Orion Network, Wts.,
Exp. 1/15/07 1,600 0 20,000
Orion Network, Wts.,
Exp. 1/15/07 5,600 0 84,000
24
<PAGE>
High Income Portfolio as of March 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
(Expressed in United States Dollars)
Date of
Description Acquisition Shares/Face Cost Fair Value
----------------------------------------------------------------------------
Common Stocks, Warrants, and Rights (continued)
----------------------------------------------------------------------------
Primus Telecommunications,
Wts., Exp. 8/1/04 4,600 $ 0 $161,000
Servam Corp., $2.00
Wts., Exp. 4/1/01 12/15/87 12,276 0 0
Servam Corp., $4.50
Wts., Exp. 4/1/01 12/15/87 2,760 0 0
Servam Corp., Common 12/15/87 1,380 0 0
Specialty Foods Acq.
Corp., Common 8/10/93 48,000 34,886 12,000
Sterling Chemicals
Holdings, Wts. 10/07/96 3,200 0 73,600
Thermadyne Holdings
Corp., Common 4/03/89 40,000 28,800 400
UIH Australia/Pacific,
Inc., Wts. 3,600 0 36
Unisite, Inc., Wts. 2,252 0 0
United International
Holdings, Inc., Wts.,
Exp. 11/15/99 11/16/94 7,840 222,186 130,536
----------------------------------------------------------------------------
$1,095,072 $2,116,398
----------------------------------------------------------------------------
25
<PAGE>
High Income Portfolio as of March 31, 1998
INDEPENDENT AUDITORS' REPORT
To the Trustees and Investors
of High Income Portfolio
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of High Income Portfolio (the Portfolio) as of
March 31, 1998, and the related statement of operations for the year then ended,
the statements of changes in net assets for the years ended March 31, 1998 and
1997 and the supplementary data for each of the years in the three-year period
ended March 31, 1998 and for the period from the start of business, June 1,
1994, to March 31, 1995 (all expressed in United States dollars). These
financial statements and supplementary data are the responsibility of the
Portfolio's management. Our responsibility is to express an opinion on these
financial statements and supplementary data based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and supplementary data are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities held as of March 31, 1998 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and supplementary data present fairly,
in all material respects, the financial position of the Portfolio at March 31,
1998, the results of its operations, the changes in its net assets and the
supplementary data for the respective stated periods in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE
Grand Cayman, Cayman Islands
British West Indies
May 8, 1998
26
<PAGE>
EV Marathon High Income Fund as of March 31, 1998
INVESTMENT MANAGEMENT
<TABLE>
EV Marathon High Income Fund
<S> <C>
Officers Independent Trustees
M. Dozier Gardner Donald R. Dwight
President and Trustee President, Dwight Partners, Inc.
James B. Hawkes Samuel L. Hayes, III
Vice President and Trustee Jacob H. Schiff Professor of Investment
Banking, Harvard University Graduate School of
William H. Ahern, Jr. Business Administration
Vice President
Norton H. Reamer
Thomas J. Fetter President and Director, United Asset
Vice President Management Corporation
Robert B. MacIntosh John L. Thorndike
Vice President Formerly Director, Fiduciary Company Incorporated
Michael B. Terry Jack L. Treynor
Vice President Investment Adviser and Consultant
James L. O'Connor
Treasurer
Alan R. Dynner
Secretary
High Income Portfolio
Officers Independent Trustees
M. Dozier Gardner Donald R. Dwight
President and Trustee President, Dwight Partners, Inc.
James B. Hawkes Samuel L. Hayes, III
Vice President and Trustee Jacob H. Schiff Professor of Investment
Banking, Harvard University Graduate School of
Michael W. Weilheimer Business Administration
Vice President and
Portfolio Manager Norton H. Reamer
President and Director, United Asset
Raymond O'Neill Management Corporation
Vice President
John L. Thorndike
Michel Normandeau Formerly Director, Fiduciary Company Incorporated
Vice President
Jack L. Treynor
James L. O'Connor Investment Adviser and Consultant
Treasurer
Alan R. Dynner
Secretary
</TABLE>
27
<PAGE>
Investment Adviser of
High Income Portfolio
Boston Management and Research
24 Federal Street
Boston, MA 02110
Administrator of
EV Marathon High Income Fund
Eaton Vance Management
24 Federal Street
Boston, MA 02110
Principal Underwriter
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(617)482-8260
Custodian
Investors Bank & Trust Company
200 Claredon Street
Boston, MA 02116
Transfer Agent
First Data Investor Services Group, Inc.
Attention: Eaton Vance Funds
P.O. Box 5123
Westborough, MA 01581-5123
Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02109
EV Marathon High Income Fund
24 Federal Street
Boston, MA 02110
- --------------------------------------------------------------------------------
This report must be preceded or accompanied by a current prospectus which
contains more complete information on the Fund, including its sales charges and
expenses. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
M-HISRC-5/98
