As filed with the Securities and Exchange Commission on July __, 1996
File No. 811-8464
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 2 [X]
HIGH INCOME PORTFOLIO
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(Exact Name of Registrant as Specified in Charter)
The Bank of Nova Scotia Building
P.O. Box 501, George Town, Grand Cayman
Cayman Islands, British West Indies
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (809) 949-2001
H. Day Brigham, Jr.
24 Federal Street, Boston, Massachusetts 02110
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(Name and Address of Agent for Service)
EXPLANATORY NOTE
This Registration Statement, as amended, has been filed by the
Registrant pursuant to Section 8(b) of the Investment Company Act of 1940,
as amended. However, interests in the Registrant have not been registered
under the Securities Act of 1933, as amended (the "1933 Act"), because
such interests will be issued solely in private placement transactions
that do not involve any "public offering" within the meaning of Section
4(2) of the 1933 Act. Investments in the Registrant may be made only by
U.S. and foreign investment companies, common or commingled trust funds,
organizations or trusts described in Sections 401(a) or 501(a) of the
Internal Revenue Code of 1986, as amended, or similar organizations or
entities that are "accredited investors" within the meaning of Regulation
D under the 1933 Act. This Registration Statement, as amended, does not
constitute an offer to sell, or the solicitation of an offer to buy, any
interest in the Registrant.
PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant
to Paragraph 4 of Instruction F of the General Instructions to Form N-1A.
Item 4. General Description of Registrant
High Income Portfolio (the "Portfolio") is 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. Interests in the
Portfolio are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"). Investments in the
Portfolio may be made only by U.S. and foreign investment companies,
common or commingled trust funds, organizations or trusts described in
Sections 401(a) or 501(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), or similar organizations or entities that are "accredited
investors" within the meaning of Regulation D under the 1933 Act. This
Registration Statement, as amended, does not constitute an offer to sell,
or the solicitation of an offer to buy, any "security" within the meaning
of the 1933 Act.
The Portfolio's investment objective is to provide a high level
of current income. The Portfolio seeks to achieve its investment objective
by investing a significant portion of its assets in high-yielding, high
risk, fixed-income securities (commonly referred to as "junk bonds").
Additional information about the investment policies of the
Portfolio appears in Part B. The Portfolio is not intended to be a
complete investment program, and a prospective investor should take into
account its objectives and other investments when considering the purchase
of interests in the Portfolio. The Portfolio cannot assure achievement of
its investment objective. The Portfolio may not be appropriate for
investors who cannot assume the greater risk of capital depreciation or
loss inherent in seeking higher yields.
Investment Policies and Risks
The Portfolio normally invests at least 80% of its net assets in
fixed-income securities, including convertible securities, and up to 20%
of its net assets in common stocks and other equity securities when
consistent with its objective or acquired as part of a unit combining
fixed-income and equity securities.
The Portfolio will normally invest at least 65% of its assets in
the lowest investment grade and lower rated obligations (rated Baa or
lower by Moody's Investors Service, Inc. ("Moody's") or BBB or lower by
Standard & Poor's ("S&P")) and unrated obligations. For a description of
Moody's and S&P's ratings of fixed-income securities, see Appendix A to
this Part A. Unrated bonds are generally regarded as being speculative and
expose the investor to risks with respect to the issuer's capacity to pay
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interest and repay principal, which are similar to the risks of lower
rated bonds. At March 31, 1996, the Portfolio had approximately 94.8% of
its assets invested in high yield, high risk bonds that were rated lower
than investment grade or unrated. See Appendix B to this Part A for the
Portfolio's asset composition information for its most recent fiscal year.
The Portfolio invests a substantial portion of its assets in high
yield, high risk securities issued in connection with mergers,
acquisitions, leveraged buy-outs, recapitalizations and other highly
leveraged transactions. These securities are subject to substantially
greater credit risks than some of the other fixed-income securities in
which the Portfolio may invest. These credit risks include the possibility
of default or bankruptcy of the issuer. These securities are less liquid
than other fixed-income securities. During periods of deteriorating
economic conditions and contraction in the credit markets, the ability of
issuers of such securities to service their debt, meet projected goals, or
obtain additional financing may be impaired. For more detailed
information about the risks associated with investing in such securities,
see "Additional Risk Considerations" below.
The Portfolio may also invest a portion of its assets in debt
securities that are not paying current income in anticipation of the
receipt of possible future income or capital appreciation. Interest and/or
principal payments thereon could be in arrears when such securities are
acquired, and the issuer may be in bankruptcy or undergoing a debt
restructuring or reorganization. Such securities may be unrated or the
lowest rated obligations (rated C by Moody's or D by S&P). Bonds rated C
by Moody's are regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated D by S&P are in
payment default or a bankruptcy petition has been filed and debt service
payments are jeopardized. The Portfolio may retain defaulted obligations
in its portfolio when such retention is considered desirable by the
Portfolio's investment adviser, Boston Management and Research ("BMR" or
the "Investment Adviser"). The Portfolio may also acquire other
securities issued in exchange for such obligations or issued in connection
with the debt restructuring or reorganization of the issuers, or where
such acquisition, in the judgment of the Investment Adviser, may enhance
the value of such obligations or would otherwise be consistent with the
Portfolio's investment policies.
Although the Investment Adviser considers security ratings when
making investment decisions, it performs its own credit and investment
analysis and does not rely primarily on the ratings assigned by the rating
services. In evaluating the quality of a particular issue, whether rated
or unrated, the Investment Adviser will normally take into consideration,
among other things, the issuer's financial resources and operating
history, its sensitivity to economic conditions and trends, the ability of
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its management, its debt maturity schedules and borrowing requirements,
and relative values based on anticipated cash flow, interest and asset
coverages, and earnings prospects. Because of the greater number of
investment considerations involved in investing in high yield, high risk
bonds, the achievement of the Portfolio's objective depends more on the
Investment Adviser's judgment and analytical abilities than would be the
case if the Portfolio were investing primarily in securities in the higher
rating categories.
When the Investment Adviser believes that it is appropriate to do
so, for defensive purposes, more than 35% of the Portfolio's assets may be
temporarily invested in securities rated A or better by Moody's or S&P.
All or a portion of the Portfolio's assets may be invested temporarily in
cash or short-term obligations including, but not limited to, certificates
of deposit, commercial paper, short-term notes, obligations issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities, and repurchase agreements.
Fixed-Income Obligations. The fixed-income securities in which
the Portfolio may invest include preferred and preference stocks and all
types of debt obligations of both domestic and foreign issuers, such as
bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper, and
obligations issued or guaranteed by the U.S. Government, any state or
territory of the United States, any foreign government or any of their
respective political subdivisions, agencies or instrumentalities. Debt
securities may bear fixed, fixed and contingent, variable or floating
rates of interest. Investments in foreign securities may not exceed 25%
of total assets.
The Portfolio may also invest a portion of its assets in loan
interests, which are interests in amounts owed by a corporate,
governmental or other borrower to lenders or lending syndicates. Loan
interests purchased by the Portfolio may have a maturity of any number of
days or years, may be secured or unsecured, and may be of any credit
quality. Loan interests, which may take the form of participation
interests in, assignments of or novations of a loan, may be acquired from
U.S. and foreign banks, insurance companies, finance companies or other
financial institutions that have made loans or are members of a lending
syndicate or from the holders of loan interests. Loan interests involve
the risk of loss in the case of default or bankruptcy of the borrower and,
in the case of participation interests, involve a risk of insolvency of
the agent lending bank or other financial intermediary.
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The Portfolio may hold up to 15% of net assets in illiquid
securities, including securities legally restricted as to resale, and
securities eligible for resale pursuant to Rule 144A under the 1933 Act.
Rule 144A securities may, however, be treated as liquid by the Investment
Adviser pursuant to procedures adopted by the Trustees of the Portfolio,
which require consideration of factors such as trading activity,
availability of market quotations and number of dealers willing to
purchase the security.
Investment Practices
Derivative Instruments. The Portfolio may purchase or sell
derivative instruments (which are instruments that derive their value from
another instrument, security, index or currency) to hedge against
fluctuations in securities prices, interest rates or currency exchange
rates, to change the duration of the Portfolio's fixed-income portfolio,
or as a substitute for the purchase or sale of securities or currencies.
Options may be written to enhance income. The Portfolio's transactions in
derivative instruments may include the purchase or sale of futures
contracts on securities (such as U.S. Government securities), indices,
other financial instruments (such as certificates of deposit, Eurodollar
time deposits, and economic indices) or currencies; options on futures
contracts; exchange-traded and over-the-counter options on securities,
indices or currencies; and forward contracts to purchase or sell
currencies. All of the Portfolio's transactions in derivative instruments
involve a risk of loss or depreciation due to: unanticipated adverse
changes in interest rates, securities prices or currency exchange rates;
the inability to close out a position; default by the counterparty;
imperfect correlation between a position and the desired hedge; tax
constraints on closing out positions; and portfolio management constraints
on disposing of securities subject to such transactions. The loss on
derivative instruments (other than purchased options) may substantially
exceed the Portfolio's initial investment in these instruments. In
addition, the Portfolio may lose the entire premium paid for purchased
options that expire before they can be profitably exercised by the
Portfolio. The Portfolio incurs transaction costs in opening and closing
positions in derivative instruments. There can be no assurance that the
Investment Adviser's use of derivative instruments will be advantageous to
the Portfolio.
The Portfolio's success in using derivative instruments to hedge
portfolio assets depends on the degree of price correlation between the
derivative instrument and the hedged asset. Imperfect correlation may be
caused by several factors, including temporary price disparities among the
trading markets for the derivative instrument, the assets underlying the
derivative instrument and the Portfolio's assets.
The Portfolio may write (sell) covered call and put options only
with respect to up to 25% of its net assets. To the extent that the
Portfolio enters into future contracts, options on futures contracts and
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options on foreign currencies traded on an exchange regulated by the
Commodity Futures Trading Commission ("CFTC"), in each case that are not
for bona fide hedging purposes (as defined by the CFTC), the aggregate
initial margin and premiums required to establish these positions
(excluding the amount by which options are "in-the-money") may not exceed
5% of the liquidation value of the Portfolio's portfolio, after taking
into account unrealized profits and unrealized losses on any contracts the
Portfolio has entered into. The Portfolio did not engage in such
transactions during the period from June 1, 1994 (commencement of
operations) to March 31, 1996, and there is no assurance that it will
engage in such transactions in the future.
Additional Risk Considerations
Investors should carefully consider their ability to assume the
risks of owning interests of a mutual fund that invests in below
investment grade debt obligations (commonly referred to as "junk bonds")
before making an investment in the Portfolio. The lower ratings of
certain securities held by the Portfolio reflect a greater possibility
that adverse changes in the financial condition of an issuer, or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest
and principal. The inability (or perceived inability) of issuers to make
timely payment of interest and principal would likely make the values of
securities held by the Portfolio more volatile and could limit the
Portfolio's ability to sell its securities at prices approximating the
values the Portfolio has placed on such securities. It is possible that
legislation may be adopted in the future limiting the ability of certain
financial institutions to purchase such securities; such legislation may
adversely affect the liquidity of such securities. In the absence of a
liquid trading market for securities held by it, the Portfolio may be
unable at times to establish the fair market value of such securities.
The rating assigned to a security by a rating agency does not
reflect an assessment of the volatility of the security's market value or
of the liquidity of an investment in the security. Credit ratings are
based largely on the issuer's historical financial condition and the
rating agency's investment analysis at the timing of rating, and the
rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition. Credit quality in the high
yield, high risk bond market can change from time to time, and recently
issued credit ratings may not fully reflect the actual risks posed by a
particular high yield security.
While the Investment Adviser will attempt to reduce the risks of
investing in lower rated or unrated securities through active portfolio
management, diversification, credit analysis and attention to current
developments and trends in the economy and the financial markets, there
can be no assurance that a broadly diversified portfolio of such
securities would substantially lessen the risks of defaults brought about
by an economic downturn or recession.
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The net asset value of the Portfolio will change in response to
fluctuations in prevailing interest rates and changes in the value of the
securities held by the Portfolio. When interest rates decline, the value
of securities already held by the Portfolio can be expected to rise.
Conversely, when interest rates rise, the value of existing portfolio
security holdings can be expected to decline. Changes in the credit
quality of issuers of debt obligations held by the Portfolio will affect
the principal value (and possibly the income earned) on such obligations.
In addition, the values of such securities are affected by changes in
general economic conditions and business conditions affecting the specific
industries of their issuers. Changes by recognized rating services in
their ratings of any fixed-income security and in the ability of an issuer
to make payments of interest and principal may also affect the value of
these investments. The Portfolio will not dispose of a security solely
because its rating is reduced below its rating at the time of purchase,
although the Investment Adviser will monitor the investment to determine
whether continued investment in the security will assist in meeting the
Portfolio's investment objective.
Interest and/or principal payments on securities in default may
be in arrears when such securities are acquired, and the issuer may be in
bankruptcy or undergoing a debt restructuring or reorganization. In order
to enforce its rights in the event of a default under such securities, the
Portfolio may be required to take possession of and manage assets securing
the issuer's obligation on such securities, which may increase the
Portfolio's operating expenses and adversely affect the Portfolio's net
asset value. As at March 31, 1996, the Portfolio held one issue in
default. The Seven-Up/RC Bottling Company of California Senior Secured
Notes 11.5% due August 1, 1999 ceased making interest payments on August
1, 1995. The last block of shares was sold from the Portfolio on April
24, 1996.
Certain securities held by the Portfolio may permit the issuer at
its option to "call", or redeem, its securities. If an issuer were to
redeem securities held by the Portfolio during a time of declining
interest rates, the Portfolio may not be able to reinvest the proceeds in
securities providing the same investment return as the securities
redeemed. In addition, the Portfolio may temporarily borrow up to 5% of
the value of its total assets to satisfy redemption requests or settle
securities transactions.
Loan interests generally are not rated by any nationally
recognized rating service and are, at present, not readily marketable and
may be subject to contractual restrictions on resale. An investment in
restricted securities may involve relatively greater risk and cost to the
Portfolio because of their illiquidity. Moreover, Rule 144A securities
treated as liquid investments may increase the level of Portfolio
illiquidity to the extent qualified institutional buyers become
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uninterested in purchasing such securities.
Fixed-income securities in which the Portfolio may invest also
include zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations which are issued at a significant
discount from face value. While zero coupon bonds do not require the
periodic payment of interest, deferred interest bonds provide for a period
of delay before the regular payment of interest begins. PIK bonds are
debt obligations which provide that the issuer thereof may, at its option,
pay interest on such bonds in cash or in the form of additional debt
obligations. Such investments may experience greater volatility in market
value due to changes in interest rates than debt obligations which make
regular payments of interest. The Portfolio will accrue income on such
investments for tax and accounting purposes, in accordance with applicable
law, which income is distributable to interestholders. Because no cash is
received at the time such income is accrued, the Portfolio may be required
to liquidate other portfolio securities to satisfy its distribution
obligations.
Investing in foreign securities may represent a greater degree of
risk than investing in domestic securities, because of the possibility of
exchange rate fluctuations, less publicly-available financial and other
information, more volatile and less liquid markets, less securities
regulation, higher brokerage costs, imposition of foreign withholding and
other taxes, war, expropriation or other adverse governmental actions.
The Portfolio has adopted certain fundamental investment
restrictions that are enumerated in detail in Part B and that may
not be changed unless authorized by an investor vote. Except for
such enumerated restrictions and as otherwise indicated in this
Part A, the investment objective and policies of the Portfolio
are not fundamental policies and accordingly may be changed by
the Trustees of the Portfolio without obtaining the approval of
the investors in the Portfolio. If any changes were made in the
Portfolio's investment objective, the Portfolio might have an
investment objective different from the objective that an
investor considered appropriate at the time the investor became
an interestholder in the Portfolio.
Item 5. Management of the Portfolio
The Portfolio is organized as a trust under the laws of the State
of New York. The Portfolio intends to comply with all applicable federal
and state securities laws.
Investment Adviser. The Portfolio engages Boston Management and
Research ("BMR" or the "Investment Adviser"), a wholly-owned subsidiary of
Eaton Vance Management ("Eaton Vance"), as its investment adviser. Eaton
Vance, its affiliates and its predecessor companies have been managing
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assets of individuals and institutions since 1924 and managing investment
companies since 1931.
Acting under the general supervision of the Board of Trustees of
the Portfolio, BMR manages the Portfolio's investments and affairs. BMR
also furnishes for the use of the Portfolio office space and all necessary
office facilities, equipment and personnel for servicing the investments
of the Portfolio. Under its investment advisory agreement with the
Portfolio, BMR receives a monthly advisory fee equal to the aggregate of:
(a) a daily asset-based fee computed by applying the annual asset
rate applicable to that portion of the total daily net assets
in each Category as indicated below, plus
(b) a daily income-based fee computed by applying the daily income
rate applicable to that portion of the total daily gross income
(which portion shall bear the same relationship to the total
daily gross income on such day as that portion of the total
daily net assets in the same Category bears to the total daily
net assets on such day) in each Category as indicated below:
Annual Daily
Asset Income
Category Daily Net Assets Rate Rate
1 Up to $500 million 0.300% 3.00%
2 $500 million but less than $1 billion 0.275% 2.75%
3 $1 billion but less than $1.5 billion 0.250% 2.50%
4 $1.5 billion but less than $2 billion 0.225% 2.25%
5 $2 billion but less than $3 billion 0.200% 2.00%
6 $3 billion and over 0.175% 1.75%
As of March 31, 1996, the Portfolio had net assets of $511,347,139.
For the fiscal year ended March 31, 1996, the Portfolio paid BMR advisory
fees equivalent to 0.63% of the Portfolio's average daily net assets for
such year.
BMR or Eaton Vance acts as investment adviser to investment companies
and various individual and institutional clients with assets under
management of over $16 billion. Eaton Vance is a wholly-owned subsidiary
of Eaton Vance Corp., a publicly-held holding company that, through its
subsidiaries and affiliates, engages primarily in investment management,
administration and marketing activities.
Hooker Talcott, Jr. has acted as the portfolio manager of the
Portfolio since it commenced operations. Mr. Talcott has been a Vice
President of Eaton Vance since 1987 and of BMR since 1992. Michael
Weilheimer is the co-portfolio manager and has been a Vice President of
Eaton Vance since 1992.
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BMR places the portfolio security transactions of the Portfolio for
execution with many broker-dealers firms. Fixed-income securities are
normally traded on a net basis (without commission) through broker-dealers
and banks acting for their own account. Such firms attempt to profit from
such transactions by buying at the bid price and selling at the higher
asked price of the market, and the difference is customarily referred to
as the spread. In selecting firms to execute portfolio transactions, BMR
judges their professional ability and quality of service and uses its best
efforts to obtain execution at prices which are advantageous to the
Portfolio and at reasonably competitive spreads. Subject to the foregoing,
BMR may consider sales of shares of other investment companies sponsored
by BMR or Eaton Vance as a factor in the selection of firms to execute
portfolio transactions.
The Portfolio and BMR have adopted Codes of Ethics relating to
personal securities transactions. The Codes permit Eaton Vance personnel
to invest in securities (including securities that may be purchased or
held by the Portfolio) for their own accounts, subject to certain pre-
clearance, reporting and other restrictions and procedures contained in
such Codes.
The Portfolio is responsible for the payment of all of its costs and
expenses not expressly stated to be payable by BMR under the investment
advisory agreement.
Administrator. IBT Trust Company (Cayman) Ltd., The Bank of Nova
Scotia Building, P.O. Box 501, George Town, Grand Cayman, Cayman Islands,
British West Indies, maintains the Portfolio's principal office and
certain of its records and provides administrative assistance in
connection with meetings of the Portfolio's Trustees and interestholders.
Transfer Agent. IBT Fund Services (Canada) Inc., 1 First Canadian
Place, King Street West, Suite 2800, P.O. Box 231, Toronto, Ontario,
Canada M5X 1C8, a subsidiary of Investors Bank & Trust Company, the
Portfolio's custodian, serves as transfer agent and dividend-paying agent
for the Portfolio and computes the daily net asset value of interests in
the Portfolio.
Item 6. Capital Stock and Other Securities
The Portfolio is organized as a trust under the laws of the State of
New York and intends to be treated as a partnership for federal tax
purposes. Under the Declaration of Trust, the Trustees are authorized to
issue interests in the Portfolio. Each investor is entitled to a vote in
proportion to the amount of its investment in the Portfolio. Investments
in the Portfolio may not be transferred, but an investor may withdraw all
or any portion of its investment at any time at net asset value. Investors
in the Portfolio will each be liable for all obligations of the Portfolio.
However, the risk of an investor in the Portfolio incurring financial loss
on account of such liability is limited to circumstances in which both
inadequate insurance exists and the Portfolio itself is unable to meet its
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obligations.
The Declaration of Trust provides that the Portfolio will terminate
120 days after the complete withdrawal of any investor in the Portfolio
unless either the remaining investors, by unanimous vote at a meeting of
such investors, or a majority of the Trustees of the Portfolio, by written
instrument consented to by all investors, agree to continue the business
of the Portfolio. This provision is consistent with the treatment of the
Portfolio as a partnership for federal income tax purposes.
Investments in the Portfolio have no preemptive or conversion rights
and are fully paid and nonassessable by the Portfolio, except as set forth
above. The Portfolio is not required and has no current intention to hold
annual meetings of investors, but the Portfolio may hold special meetings
of investors when in the judgment of the Trustees it is necessary or
desirable to submit matters for an investor vote. Changes in fundamental
policies or restrictions will be submitted to investors for approval. The
investment objective and all nonfundamental investment policies of the
Portfolio may be changed by the Trustees of the Portfolio without
obtaining the approval of the investors in the Portfolio. Investors have
under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of
investors) the right to communicate with other investors in connection
with requesting a meeting of investors for the purpose of removing one or
more Trustees. Any Trustee may be removed by the affirmative vote of
holders of two-thirds of the interests in the Portfolio.
Information regarding pooled investment entities or funds that invest
in the Portfolio may be obtained by contacting Eaton Vance Distributors,
Inc., 24 Federal Street, Boston, MA 02110, (617) 482-8260. Smaller
investors in the Portfolio may be adversely affected by the actions of a
larger investor in the Portfolio. For example, if a large investor
withdraws from the Portfolio, the remaining investors may experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, the Portfolio may hold fewer securities, resulting in
increased portfolio risk, and experience decreasing economies of scale.
However, this possibility exists as well for historically structured funds
that have large or institutional investors.
As of July 1, 1996, EV Marathon High Income Fund controlled the
Portfolio by virtue of owning more than 96.6% of the outstanding voting
interests in the Portfolio.
The Portfolio's net asset value is determined each day on which the
New York Stock Exchange (the "Exchange") is open for trading ("Portfolio
Business Day"). This determination is made each Portfolio Business Day as
of the close of regular trading on the Exchange (normally 4:00 p.m., New
York time) (the "Portfolio Valuation Time").
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Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each Portfolio Business Day as of the Portfolio Valuation
Time. The value of each investor's interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, determined on the prior Portfolio Business Day, which
represented that investor's share of the aggregate interest in the
Portfolio on such prior day. Any additions or withdrawals for the current
Portfolio Business Day will then be recorded. Each investor's percentage
of the aggregate interest in the Portfolio will then be recomputed as a
percentage equal to a fraction (i) the numerator of which is the value of
such investor's investment in the Portfolio as of the Portfolio Valuation
Time on the prior Portfolio Business Day plus or minus, as the case may
be, the amount of any additions to or withdrawals from the investor's
investment in the Portfolio on the current Portfolio Business Day and (ii)
the denominator of which is the aggregate net asset value of the Portfolio
as of the Portfolio Valuation Time on the prior Portfolio Business Day
plus or minus, as the case may be, the amount of the net additions to or
withdrawals from the aggregate investment in the Portfolio on the current
Portfolio Business Day by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the
investor's interest in the Portfolio for the current Portfolio Business
Day. See Item 7 regarding the pricing of investments in the Portfolio.
The Portfolio will allocate at least annually among its investors its
net investment income, net realized capital gains, and any other items of
income, gain, loss, deduction or credit. The Portfolio's net investment
income consists of all income accrued on the Portfolio's assets, less all
actual and accrued expenses of the Portfolio, determined in accordance
with generally accepted accounting principles.
Under the anticipated method of operation of the Portfolio, the
Portfolio will not be subject to any federal income tax. (See Part B, Item
20.) However, each investor in the Portfolio will take into account its
allocable share of the Portfolio's ordinary income and capital gain in
determining its federal income tax liability. The determination of each
such share will be made in accordance with the governing instruments of
the Portfolio, which are intended to comply with the requirements of the
Code and the regulations promulgated thereunder.
It is intended that the Portfolio's assets and income will be managed
in such a way that an investor in the Portfolio that seeks to qualify as a
regulated investment company under the Code will be able to satisfy the
requirements for such qualification.
Item 7. Purchase of Interests in the Portfolio
Interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning
of Section 4(2) of the 1933 Act. See "General Description of Registrant"
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above.
An investment in the Portfolio will be made without a sales load. All
investments received by the Portfolio will be effected as of the next
Portfolio Valuation Time. The net asset value of the Portfolio is
determined at the Portfolio Valuation Time on each Portfolio Business Day.
The Portfolio will be closed for business and will not determine its net
asset value on the following business holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The Portfolio's net asset value is
computed in accordance with procedures established by the Portfolio's
Trustees.
The Portfolio's net asset value is determined by IBT Fund Services
(Canada) Inc. (as agent for the Portfolio) in the manner authorized by the
Trustees of the Portfolio. The net asset value is computed by subtracting
the liabilities of the Portfolio from the value of its total assets.
Fixed-income securities (other than short-term obligations), including
listed securities and securities for which price quotations are available,
will normally be valued on the basis of market valuations furnished by a
pricing service. For further information regarding the valuation of the
Portfolio's assets, see Part B, Item 19.
There is no minimum initial or subsequent investment in the Portfolio.
The Portfolio reserves the right to cease accepting investments at any
time or to reject any investment order.
The placement agent for the Portfolio is Eaton Vance Distributors,
Inc. ("EVD"). The principal business address of EVD is 24 Federal Street,
Boston, Massachusetts 02110. EVD receives no compensation for serving as
the placement agent for the Portfolio.
Item 8. Redemption or Decrease of Interest
An investor in the Portfolio may withdraw all of (redeem) or any
portion of (decrease) its interest in the Portfolio if a withdrawal
request in proper form is furnished by the investor to the Portfolio. All
withdrawals will be effected as of the next Portfolio Valuation Time. The
proceeds of a withdrawal will be paid by the Portfolio normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days. The Portfolio reserves the right to pay the proceeds of a
withdrawal (whether a redemption or decrease) by a distribution in kind of
portfolio securities (instead of cash). The securities so distributed
would be valued at the same amount as that assigned to them in calculating
the net asset value for the interest (whether complete or partial) being
withdrawn. If an investor received a distribution in kind upon such
withdrawal, the investor could incur brokerage and other charges in
converting the securities to cash. The Portfolio has filed with the
Commission a notification of election on Form N-18F-1 committing to pay in
cash all requests for withdrawals by any investor, limited in amount with
A-12
respect to such investor during any 90-day period to the lesser of (a)
$250,000 or (b) 1% of the net asset value of the Portfolio at the
beginning of such period.
Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds
postponed during any period in which the Exchange is closed (other than
weekends or holidays) or trading on the Exchange is restricted or, to the
extent otherwise permitted by the 1940 Act, if an emergency exists, or
during any other period permitted by order of the Commission for the
protection of investors.
Item 9. Pending Legal Proceedings
Not applicable.
A-13
APPENDIX A
Description of Moody's Investors Service, Inc.'s Corporate Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long term risk appear
somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Securities in which the Portfolio may invest will include those in the
following categories:
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
a-1
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating
system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Description of Standard & Poor's Corporate Bond Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and differs
from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
Securities in which the Portfolio may invest will include those in the
following categories:
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest. While such
debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
a-2
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
NR: Bonds may lack a Standard & Poor's rating because no public rating has
been requested, because there is insufficient information on which to base
a rating, or because Standard & Poor's does not rate a particular type of
obligation as a matter of policy.
Notes: Bonds that are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks
of lower-rated speculative bonds. The Portfolio is dependent on the
Investment Adviser's judgment, analysis and experience in the evaluation
of such bonds.
a-3
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the
issuer's ability to make interest and principal payments.
a-4
APPENDIX B
High Income Portfolio
Asset Composition Information
For the Fiscal Year Ended March 31, 1996
Percent of Net Assets
Preferred Stocks and
Other Equity Securities 1.7%
Short-Term Obligations 3.5%
Debt Securities -- Moody's Rating
Ba 5.4%
B1 12.9%
B2 25.5%
B3 40.5%
Caa 7.2%
Unrated 3.3%
------
Total 100.0%
The chart above indicates the weighted average composition of the
securities held by the Portfolio for the fiscal year ended March 31, 1996,
with the debt securities rated by Moody's Investors Service, Inc.
("Moody's") separated into the indicated categories. The weighted average
indicated above was calculated on a dollar weighted basis and was computed
as at the end of each month during the fiscal year. The chart does not
necessarily indicate what the composition of the Portfolio will be in the
current and subsequent fiscal years.
For a description of Moody's ratings of fixed-income securities, see
Appendix A to this Part A.
b-1
PART B
Item 10. Cover Page.
Not applicable.
Item 11. Table of Contents.
Page
----
General Information and History . . . . . . . . . . . . B-1
Investment Objectives and Policies . . . . . . . . . . B-1
Management of the Portfolio . . . . . . . . . . . . . . B-10
Control Persons and Principal Holder of Securities . . B-14
Investment Advisory and Other Services . . . . . . . . B-14
Brokerage Allocation and Other Practices . . . . . . . B-17
Capital Stock and Other Securities . . . . . . . . . . B-19
Purchase, Redemption and Pricing of Securities . . . . B-21
Tax Status . . . . . . . . . . . . . . . . . . . . . . B-22
Underwriters . . . . . . . . . . . . . . . . . . . . . B-25
Calculation of Performance Data . . . . . . . . . . . . B-25
Financial Statements . . . . . . . . . . . . . . . . . B-25
Item 12. General Information and History.
Not applicable.
Item 13. Investment Objectives and Policies.
Part A contains additional information about the investment objective
and policies of High Income Portfolio (the "Portfolio"). This Part B
should be read in conjunction with Part A. Capitalized terms used in this
Part B and not otherwise defined have the meanings given them in Part A.
Other Fixed-Income Securities
Included in the fixed-income securities in which the Portfolio may
invest are preferred, preference and convertible stocks, equipment lease
certificates, equipment trust certificates and conditional sales
contracts. Preference stocks are stocks that have many characteristics of
preferred stocks, but are typically junior to an existing class of
preferred stocks. Equipment lease certificates are debt obligations
secured by leases on equipment (such as railroad cars, airplanes or office
equipment), with the issuer of the certificate being the owner and lessor
of the equipment. Equipment trust certificates are debt obligations
secured by an interest in property (such as railroad cars or airplanes),
the title of which is held by a trustee while the property is being used
by the borrower. Conditional sales contracts are agreements under which
the seller of property continues to hold title to the property until the
purchase price is fully paid or other conditions are met by the buyer.
The Portfolio may purchase fixed-rate bonds that have a demand feature
allowing the holder to redeem the bonds at specified times. These bonds
are more defensive than conventional long-term bonds (protecting to some
degree against a rise in interest rates) while providing greater
opportunity than comparable intermediate term bonds, because the Portfolio
may retain the bond if interest rates decline. By acquiring these kinds of
B-1
bonds the Portfolio obtains the contractual right to require the issuer of
the bonds to purchase the security at an agreed upon price, which right is
contained in the obligation itself rather than in a separate agreement or
instrument. Because this right is assignable only with the bond, the
Portfolio will not assign any separate value to such right. The Portfolio
may also purchase floating or variable rate obligations, which it would
anticipate using as short-term investments pending longer term investment
of its funds.
Concentration
Although there is no current intention to do so, the Portfolio may
invest up to 25% of its assets in securities of issuers in each of the
electric, gas and telephone utility industries if, in the opinion of the
Investment Adviser, the relative return available from such securities and
the relative risk, marketability, quality or availability of securities of
issuers in such industry justifies such an investment. The value of such
investments may be affected to a greater degree by adverse developments in
such industries. Industry-wide problems include the effects of
fluctuating economic conditions, energy conservation practices,
environmental regulations, high capital expenditures, construction delays
due to pollution control and environmental considerations, uncertainties
as to fuel availability and costs, increased competition in deregulated
sectors of such industries and difficulties in obtaining timely and
adequate rate relief from regulatory commissions. If applications for
rate increases are not granted or are not acted upon promptly, the market
prices of and interest or dividend payments on utility securities may be
adversely affected.
Loan Interests
A loan in which the Portfolio may acquire a loan interest (a "Loan
Interest") is typically originated, negotiated and structured by a U.S. or
foreign commercial bank, insurance company, finance company or other
financial institution (the "Agent") for a lending syndicate of financial
institutions. The Agent typically administers and enforces the loan on
behalf of the other lenders in the syndicate. In addition, an institution,
typically but not always the Agent (the "Collateral Bank"), holds
collateral (if any) on behalf of the lenders. These Loan Interests may
take the form of participation interests in, assignments of or novations
of a loan during its secondary distribution, or direct interests during a
primary distribution. Such Loan Interests may be acquired from U.S. or
foreign banks, insurance companies, finance companies or other financial
institutions who have made loans or are members of a lending syndicate or
from other holders of Loan Interests. The Portfolio may also acquire Loan
Interests under which the Portfolio derives its rights directly from the
borrower. Such Loan Interests are separately enforceable by the Portfolio
against the borrower and all payments of interest and principal are
typically made directly to the Portfolio from the borrower. In the event
that the Portfolio and other lenders become entitled to take possession of
shared collateral, it is anticipated that such collateral would be held in
the custody of a Collateral Bank for their mutual benefit. The Portfolio
may not act as an Agent, a Collateral Bank, a guarantor or sole negotiator
B-2
or structurer with respect to a loan.
The Portfolio's investment adviser, Boston Management and Research
("BMR" or the "Investment Adviser"), will analyze and evaluate the
financial condition of the borrower in connection with the acquisition of
any Loan Interest. BMR also analyzes and evaluates the financial condition
of the Agent and, in the case of Loan Interests in which the Portfolio
does not have privity with the borrower, those institutions from or
through whom the Portfolio derives its rights in a loan (the "Intermediate
Participants"). From time to time BMR and its affiliates may borrow money
from various banks in connection with their business activities. Such
banks may also sell interests in loans to or acquire such interests from
the Portfolio or may be Intermediate Participants with respect to loans in
which the Portfolio owns interests. Such banks may also act as Agents for
loans in which the Portfolio owns interests.
In a typical loan the Agent administers the terms of the loan
agreement. In such cases, the Agent is normally responsible for the
collection of principal and interest payments from the borrower and the
apportionment of these payments to the credit of all institutions that are
parties to the loan agreement. The Portfolio will generally rely upon the
Agent or an Intermediate Participant to receive and forward to the
Portfolio its portion of the principal and interest payments on the loan.
Furthermore, unless under the terms of a participation agreement the
Portfolio has direct recourse against the borrower, the Portfolio will
rely on the Agent and the other members of the lending syndicate to use
appropriate credit remedies against the borrower. The Agent is typically
responsible for monitoring compliance with covenants contained in the loan
agreement based upon reports prepared by the borrower. The seller of the
Loan Interest usually does, but is often not obligated to, notify holders
of Loan Interests of any failures of compliance. The Agent may monitor the
value of the collateral and, if the value of the collateral declines, may
accelerate the loan, may give the borrower an opportunity to provide
additional collateral or may seek other protection for the benefit of the
participants in the loan. The Agent is compensated by the borrower for
providing these services under a loan agreement, and such compensation may
include special fees paid upon structuring and funding the loan and other
fees paid on a continuing basis. With respect to Loan Interests for which
the Agent does not perform such administrative and enforcement functions,
the Portfolio will perform such tasks on its own behalf, although a
Collateral Bank will typically hold any collateral on behalf of the
Portfolio and the other lenders pursuant to the applicable loan agreement.
A financial institution's appointment as Agent may usually be
terminated in the event that it fails to observe the requisite standard of
care or becomes insolvent, enters Federal Deposit Insurance Corporation
("FDIC") receivership, or, if not FDIC insured, enters into bankruptcy
proceedings. A successor Agent would generally be appointed to replace the
terminated Agent, and assets held by the Agent under the loan agreement
should remain available to holders of Loan Interests. However, if assets
held by the Agent for the benefit of the Portfolio were determined to be
B-3
subject to the claims of the Agent's general creditors, the Portfolio
might incur certain costs and delays in realizing payment on a loan
interest, or suffer a loss of principal and/or interest. In situations
involving Intermediate Participants similar risks may arise.
Purchasers of loan interests depend primarily upon the
creditworthiness of the borrower for payment of principal and interest. If
the Portfolio does not receive scheduled interest or principal payments on
such indebtedness, the Portfolio's share price and yield could be
adversely affected. Loans that are fully secured offer the Portfolio more
protections than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the borrower's
obligation, or that the collateral can be liquidated. Indebtedness of
borrowers whose creditworthiness is poor involves substantially greater
risks, and may be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness, or may pay only a
small fraction of the amount owed. Direct indebtedness of developing
countries will also involve a risk that the governmental entities
responsible for the repayment of the debt may be unable, or unwilling, to
pay interest and repay principal when due.
The Portfolio limits the amount of total assets that it will invest in
any one issuer or in issuers within the same industry. See Investment
Restrictions (1) and (5) below. For purposes of these restrictions, the
Portfolio generally will treat the borrower as the "issuer" of a Loan
Interest held by the Portfolio. In the case of loan participations where
the Agent or Intermediate Participant serves as financial intermediary
between the Portfolio and the borrower, the Portfolio, in appropriate
circumstances, will treat both the Agent or Intermediate Participant and
the borrower as "issuers" for the purposes of determining whether the
Portfolio has invested more than 5% of its total assets in a single
issuer. Treating a financial intermediary as an issuer of indebtedness may
restrict the Portfolio's ability to invest in indebtedness related to a
single intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different
companies and industries.
Foreign Investments
Investing in foreign issuers involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. issuers. Because investments in foreign issuers may
involve currencies of foreign countries, and because the Portfolio may
temporarily hold funds in bank deposits in foreign currencies during
completion of investment programs, the Portfolio may be affected favorably
or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between
various currencies.
Because foreign companies are not generally subject to uniform
B-4
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies, there may
be less publicly available information about a foreign company than about
a domestic company. Foreign stock markets, while growing in volume of
trading activity, have substantially less volume than the New York Stock
Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable U.S. companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the
United States and, at times, volatility of price can be greater than in
the United States. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on U.S. exchanges, although
the Portfolio endeavors to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the
United States. Mail service between the United States and foreign
countries may be slower or less reliable than within the United States,
thus increasing the risk of delayed settlements of portfolio transactions
or loss of certificates for portfolio securities. In addition, with
respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability,
or diplomatic developments which could affect the Portfolio's investments
in those countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Forward Foreign Currency Exchange Transactions
The Portfolio may enter into forward foreign currency exchange
contracts. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions
are charged at any stage for trades.
At the maturity of a forward contract the Portfolio may either accept
or make delivery of the currency specified in the contract or, at or prior
to maturity, enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to
forward contracts are usually effected with the currency trader who is a
party to the original forward contract.
The Portfolio does not intend to enter into such forward contracts to
protect the value of its portfolio securities on a regular continuous
basis, and will not do so if, as a result, the Portfolio will have more
than 15% of the value of its total assets committed to the consummation of
such contracts. The Portfolio also will not enter into such forward
B-5
contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Portfolio to deliver an
amount of foreign currency in excess of the value of the securities held
by the Portfolio or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities
will be incorporated into the long-term investment decisions made with
regard to overall diversification strategies. However, the Portfolio
believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the
Portfolio will be served. The Portfolio generally will not enter into a
forward contract with a term of greater than one year.
Options on Securities
An options position may be closed out only on an options exchange that
provides a secondary market for an option of the same series. Although the
Portfolio will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an exchange will exist for any particular
option, or at any particular time. For some options no secondary market on
an exchange may exist. In such event, it might not be possible to effect
closing transactions in particular options, with the result that the
Portfolio would have to exercise its options in order to realize any
profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If the Portfolio as a
covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an exchange on
opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that exchange (or in that class or series of
options) would cease to exist, although outstanding options on that
exchange that had been issued by the Options Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the
facilities of the Options Clearing Corporation inadequate, and thereby
result in the institution by an exchange of special procedures that may
B-6
interfere with the timely execution of customers' orders.
Futures Contracts
All futures contracts entered into by the Portfolio are traded on
exchanges or boards of trade that are licensed and regulated by the CFTC.
The Portfolio may purchase and write call and put options on futures
contracts which are traded on a United States exchange or board of trade.
The Portfolio will engage in futures and related options transactions
for bona fide hedging or non-hedging purposes as defined in or permitted
by CFTC regulations. The Portfolio will determine that the price
fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in
securities held by the Portfolio or that it expects to purchase. Except as
stated below, the Portfolio's futures transactions will be entered into
for traditional hedging purposes -- i.e., contracts will be sold to
protect against a decline in the price of securities that the Portfolio
owns, or futures contracts will be purchased to protect the Portfolio
against an increase in the price of securities it intends to purchase. As
evidence of this hedging intent, the Portfolio expects that on 75% or more
of the occasions on which it takes a long futures (or option) position
(involving the purchase of futures contracts), the Portfolio will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities in the cash market at the time when the futures (or
option) position is closed out. However, in particular cases, when it is
economically advantageous for the Portfolio to do so, a long futures
position may be terminated (or an option may expire) without the
corresponding purchase of securities. As an alternative to compliance with
the bona fide hedging definition, a CFTC regulation permits the Portfolio
to elect to comply with a different test, under which the aggregate
initial margin and premiums required to establish non-hedging positions in
futures contracts and options on futures will not exceed 5% of the
Portfolio's net asset value after taking into account unrealized profits
and losses on such positions and excluding the in-the-money amount of such
options. The Portfolio will engage in transactions in futures and related
options contracts only to the extent such transactions are consistent with
the requirements of the Internal Revenue Code for maintaining the
qualification of each of the Portfolio's investment company investors as a
regulated investment company for Federal income tax purposes (see "Tax
Status").
Asset Coverage for Derivative Instruments
Transactions using forward contracts, futures contracts and options
(other than options that the Portfolio has purchased) expose the Portfolio
to an obligation to another party. The Portfolio will not enter into any
B-7
such transactions unless it owns either (1) an offsetting ("covered")
position in securities, currencies, or other options or futures contracts
or forward contracts, or (2) cash, receivables and short-term debt
securities with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. The Portfolio will
comply with Commission guidelines regarding cover for these instruments
and, if the guidelines so require, set aside cash, U.S. Government
securities or other liquid, high-grade debt securities in a segregated
account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding forward contract, futures contract
or option is open, unless they are replaced with other appropriate assets.
As a result, the commitment of a large portion of the Portfolio's assets
to cover or segregated accounts could impede portfolio management or the
Portfolio's ability to meet redemption requests or other current
obligations.
Lending Portfolio Securities
The Portfolio may seek to increase its income by lending portfolio
securities to broker-dealers or other institutional borrowers. Under
present regulatory policies of the Commission, such loans are required to
be secured continuously by collateral in cash, cash equivalents or U.S.
Government securities held by the Portfolio's custodian and maintained on
a current basis at an amount at least equal to the market value of the
securities loaned, which will be marked to market daily. Cash equivalents
include short-term municipal obligations as well as taxable certificates
of deposit, commercial paper and other short-term money market
instruments. The Portfolio would have the right to call a loan and obtain
the securities loaned at any time on up to five business days' notice.
During the existence of a loan, the Portfolio will continue to receive the
equivalent of the interest paid by the issuer on the securities loaned and
will also receive a fee, or all or a portion of the interest on investment
of the collateral, if any. However, the Portfolio may pay lending fees to
such borrowers. The Portfolio would not have the right to vote any
securities having voting rights during the existence of the loan, but
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on
a material matter affecting the investment. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
securities loaned if the borrower of the securities fails financially.
However, the loans will be made only to organizations deemed by the
Portfolio's management to be of good standing and when, in the judgment of
the Portfolio's management, the consideration that can be earned from
securities loans justifies the attendant risk. Securities lending involves
administration expenses, including finders' fees. The financial condition
of the borrower will be monitored by the Investment Adviser on an ongoing
basis. If the Investment Adviser determines to make securities loans, it
is not intended that the value of the securities loaned would exceed 30%
of the Portfolio's total assets. As of the present time, the Trustees of
B-8
the Portfolio have not made a determination to engage in this activity,
and have no present intention of making such a determination during the
current fiscal year.
Portfolio Turnover
The Portfolio cannot accurately predict its portfolio turnover rate,
but it is anticipated that the annual turnover rate will generally not
exceed 100% (excluding turnover of securities having a maturity of one
year or less). A 100% annual turnover rate would occur, for example, if
all the securities in the portfolio were replaced once in a period of one
year. A high turnover rate (100% or more) necessarily involves greater
expenses to the Portfolio. The Portfolio engages in portfolio trading
(including short-term trading) if it believes that a transaction including
all costs will help in achieving its investment objective. The
Portfolio's portfolio turnover rates for the fiscal year ended March 31,
1996, and for the period from the start of business, June 1, 1994, to
March 31, 1995, were 88% and 53%, respectively.
Securities may be sold in anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline
in interest rates) and later sold. In addition, a security may be sold
and another purchased at approximately the same time to take advantage of
what the Portfolio believes to be a temporary disparity in the normal
yield relationship between the two securities. Yield disparities may
occur for reasons not directly related to the investment quality of
particular issues or the general movement of interest rates, such as
changes in the overall demand for or supply of various types of fixed-
income securities or changes in the investment objectives of investors.
Such trading may be expected to increase the portfolio turnover rate and
the expenses incurred in connection with such trading.
Investment Restrictions
The Portfolio has adopted the following investment restrictions which
may not be changed without the approval of the holders of a "majority of
the outstanding voting securities" of the Portfolio, which as used in this
Part B means the lesser of (a) 67% or more of the outstanding voting
securities of the Portfolio present or represented by proxy at a meeting
if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented at the meeting or (b) more than
50% of the outstanding voting securities of the Portfolio. The term
"voting securities" as used in this paragraph has the same meaning as in
the Investment Company Act of 1940 (the "1940 Act"). As a matter of
fundamental policy, the Portfolio may not:
(1) With respect to 75% of total assets of the Portfolio, purchase any
security if such purchase, at the time thereof, would cause more than 5%
of the total assets of the Portfolio (taken at market value) to be
invested in the securities of a single issuer, or cause more than 10% of
the total outstanding voting securities of such issuer to be held by the
B-9
Portfolio, except obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and except securities of other
investment companies;
(2) Borrow money or issue senior securities except as permitted by the
Investment Company Act of 1940;
(3) Purchase securities on margin (but the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities). The deposit or payment by the Portfolio of initial,
maintenance or variation margin in connection with all types of options
and futures contract transactions is not considered the purchase of a
security on margin;
(4) Underwrite or participate in the marketing of securities of
others, except insofar as it may technically be deemed to be an
underwriter in selling a portfolio security under circumstances which may
require the registration of the same under the Securities Act of 1933;
(5) Purchase or sell real estate, although it may purchase and sell
securities which are secured by real estate and securities of companies
which invest or deal in real estate;
(6) Purchase or sell physical commodities or contracts for the
purchase or sale of physical commodities;
(7) Make loans to any person except by (i) the acquisition of debt
securities and making portfolio investments, (ii) entering into repurchase
agreements or (iii) lending portfolio securities; or
(8) Purchase any security if such purchase, at the time thereof, would
cause more than 25% of the Portfolio's total assets to be invested in any
single industry, provided that the electric, gas and telephone utility
industries shall be treated as separate industries for purposes of this
restriction and further provided that there is no limitation with respect
to obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities.
The Portfolio has adopted the following nonfundamental investment
policies which may be changed by the Trustees of the Portfolio with or
without the approval of the Portfolio's investors. As a matter of
nonfundamental policy, the Portfolio may not: (a) invest more than 15% of
its net assets in investments which are not readily marketable, including
restricted securities and repurchase agreements maturing in more than
seven days. Restricted securities for the purposes of this limitation do
not include securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 and commercial paper issued pursuant to Section
4(2) of said Act that the Board of Trustees, or its delegate, determines
to be liquid; (b) invest more than 5% of its total assets (taken at
current value) in the securities of issuers which, including their
predecessors, have been in operation for less than three years; (c)
B-10
purchase put or call options on securities if after such purchase more
than 5% of its net assets, as measured by the aggregate of the premiums
paid by such options, would be so invested; (d) purchase warrants in
excess of 5% of its net assets, of which 2% may be warrants which are not
listed on the New York or American Stock Exchange; (e) make short sales of
securities or maintain a short position, unless at all times when a short
position is open it owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount
to, the securities sold short, and unless not more than 25% of its net
assets (taken at current value) is held as collateral for such sales at
any one time. (The Portfolio will make such sales only for the purpose of
deferring realization of gain or loss for federal income tax purposes.);
(f) purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Portfolio or is a member, officer, director or
trustee of or person interested in any investment adviser of the
Portfolio, if after the purchase of the securities of such issuer by the
Portfolio one or more of such persons owns beneficially more than 1/2 of
1% of the shares or securities or both (all taken at market value) of such
issuer and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities or both (all taken at market value); or (g) purchase oil, gas
or other mineral leases or purchase partnership interests in oil, gas or
other mineral exploration or development programs.
Whenever an investment policy or investment restriction set forth in
Part A or this Part B states a maximum percentage of assets that may be
invested in any security or other asset, such percentage limitation shall
be determined immediately after and as a result of the Portfolio's
acquisition of such security or other asset. Accordingly, any later
increase or decrease resulting from a change in values, assets or other
circumstances will not compel the Portfolio to dispose of such security or
other asset. Notwithstanding the foregoing, under normal market
conditions the Portfolio must take actions necessary to comply with the
policy of investing at least 65% of its total assets in the lowest
investment grade and lower rated obligations and unrated obligations.
Moreover, the Portfolio must always be in compliance with the borrowing
policy set forth above.
In order to permit the sale in certain states of shares of certain
open-end investment companies that are investors in the Portfolio, the
Portfolio may make commitments more restrictive than the policies
described above. Should the Portfolio determine that any such commitment
is no longer in the best interests of the Portfolio and its investors, it
will revoke such commitment.
Item 14. Management of the Portfolio
The Trustees and officers of the Portfolio are listed below. Except as
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indicated, each individual has held the office shown or other offices in
the same company for the last five years. Unless otherwise noted, the
business address of each Trustee and officer is 24 Federal Street, Boston,
Massachusetts 02110, which is also the address of the Portfolio's
investment adviser, Boston Management and Research ("BMR" or the
"Investment Adviser"), a wholly-owned subsidiary of Eaton Vance Management
("Eaton Vance"); of Eaton Vance's parent, Eaton Vance Corp. ("EVC"); and
of BMR's and Eaton Vance's trustee, Eaton Vance, Inc. ("EV"). Eaton Vance
and EV are both wholly-owned subsidiaries of EVC. Those Trustees who are
"interested persons" of the Portfolio, BMR, Eaton Vance, EVC or EV, as
defined in the 1940 Act, by virtue of their affiliation with any one or
more of the Portfolio, BMR, Eaton Vance, EVC or EV, are indicated by an
asterisk(*).
TRUSTEES OF THE PORTFOLIO
M. DOZIER GARDNER (63), President and Trustee*
President and Chief Executive Officer of BMR, Eaton Vance, EVC and EV, and
a Director of EVC and EV. Director or Trustee and officer of various
investment companies managed by Eaton Vance or BMR.
JAMES B. HAWKES (54), Vice President and Trustee*
Executive Vice President of BMR, Eaton Vance, EVC and EV, and a Director
of EVC and EV. Director or Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
DONALD R. DWIGHT (65), Trustee
President of Dwight Partners, Inc. (a corporate relations and
communications company) founded in 1988; Chairman of the Board of
Newspapers of New England. Inc. since 1983. Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
SAMUEL L. HAYES, III (61), Trustee
Jacob H. Schiff Professor of Investment Banking at Harvard University
Graduate School of Business Administration. Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: Harvard University Graduate School of Business Administration,
Soldiers Field Road, Boston, Massachusetts 02163
NORTON H. REAMER (60), Trustee
President and Director, United Asset Management Corporation, a holding
company owning institutional investment management firms. Chairman,
President and Director, UAM Funds, Inc. (mutual funds). Director or
Trustee of various investment companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
B-12
JOHN L. THORNDIKE (69), Trustee
Director, Fiduciary Company Incorporated. Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: 175 Federal Street, Boston, Massachusetts 02110
JACK L. TREYNOR (66), Trustee
Investment Adviser and Consultant. Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
OFFICERS OF THE PORTFOLIO
WILLIAM CHISHOLM (35), Vice President
Senior Trust Officer of IBT Trust Company (Cayman) Limited. Officer of
various investment companies managed by Eaton Vance or BMR.
Address: IBT Trust Company (Cayman) Ltd., The Bank of Nova Scotia
Building, P.O. Box 501, George Town, Grand Cayman, Cayman Islands, British
West Indies.
MICHAEL WEILHEIMER (35), Vice President
Vice President of Eaton Vance since 1992; employee of Eaton Vance since
November 26, 1990. Mr. Weilheimer was elected Vice President of the
Portfolio on December 18, 1995.
SUSAN SCHIFF (35), Vice President
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
MARK S. VENEZIA (47), Vice President
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
MICHAEL NORMANDEAU (44), Vice President
Assistant Manager--Trust Services of IBT Trust Company (Cayman) Limited.
Officer of various investment companies managed by Eaton Vance or BMR.
Address: IBT Trust Company (Cayman) Ltd., The Bank of Nova Scotia
Building, P.O. Box 501, George Town, Grand Cayman, Cayman Islands, British
West Indies.
RAYMOND O'NEILL (34), Vice President
Managing Director of IBT Trust and Custodian Services (Ireland) Limited
since January, 1995. Vice President, Atlantic Corporate Management
Limited, Warwick, Bermuda (1991-1994). Officer, The Bank of Bermuda
Limited, Hamilton, Bermuda (1987-1991). Officer of various investment
companies managed by Eaton Vance or BMR.
Address: Earlsfort Terrace, Dublin 2, Ireland.
B-13
HOOKER TALCOTT, Jr. (54), Vice President
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
JAMES L. O'CONNOR (51), Treasurer
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
THOMAS OTIS (64), Secretary
Vice President and Secretary of BMR, Eaton Vance, EVC and EV. Officer of
various investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (60), Assistant Treasurer and Assistant Secretary
Vice President of BMR, Eaton Vance and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
A. JOHN MURPHY (33), Assistant Secretary
Assistant Vice President of BMR, Eaton Vance and EV since March 1, 1994;
employee of Eaton Vance since March 1993. State Regulations Supervisor,
The Boston Company (1991-1993) and Registration Specialist, Fidelity
Management & Research Co. (1986-1991). Officer of various investment
companies managed by Eaton Vance or BMR. Mr. Murphy was elected Assistant
Secretary of the Portfolio on June 19, 1995.
ERIC G. WOODBURY (39), Assistant Secretary
Vice President of BMR, Eaton Vance and EV since February 1993; formerly,
associate attorney at Dechert Price & Rhoads and Gaston & Snow. Officer
of various investment companies managed by Eaton Vance or BMR. Mr.
Woodbury was elected Assistant Secretary of the Portfolio on June 19,
1995.
Messrs. Thorndike (Chairman), Hayes and Reamer are members of the
Special Committee of the Board of Trustees of the Portfolio. The purpose
of the Special Committee is to consider, evaluate and make recommendations
to the full Board of Trustees concerning (i) all contractual arrangements
with service providers to the Portfolio, including investment advisory,
custodial and fund accounting services, and (ii) all other matters in
which Eaton Vance or its affiliates has any actual or potential conflict
of interest with the Portfolio or its interestholders.
The Nominating Committee is compromised of four Trustees who are not
"interested persons" as that term is defined under the 1940 Act
("noninterested Trustees"). The Committee has four-year staggered terms,
B-14
with one member rotating off the Committee to be replaced by another
noninterested Trustee of the Portfolio. Messrs. Hayes (Chairman), Reamer,
Thorndike and Treynor are currently serving on the Committee. The purpose
of the Committee is to recommend to the Board nominees for the position of
noninterested Trustee and to assure that at least a majority of the Board
of Trustees is independent of Eaton Vance and its affiliates.
Messrs. Treynor (Chairman) and Dwight are members of the Audit
Committee of the Board of Trustees. The Audit Committee's functions
include making recommendations to the Trustees regarding the selection of
the independent certified public accountants, and reviewing with such
accountants and the Treasurer of the Portfolio matters relative to trading
and brokerage policies and practices, accounting and auditing practices
and procedures, accounting records, internal accounting controls, and the
functions performed by the custodian and transfer agent of the Portfolio.
The fees and expenses of those Trustees of the Portfolio who are not
members of the Eaton Vance organization (the noninterested Trustees) are
paid by the Portfolio. (The Trustees of the Portfolio who are members of
the Eaton Vance organization receive no compensation from the Portfolio).
During the fiscal year ended March 31, 1996, the noninterested Trustees of
the Portfolio earned the following compensation in their capacities as
Trustees of the Portfolio and in their capacities as trustees of the funds
in the Eaton Vance fund complex(1):
Aggregate Total Compensation
Compensation from Portfolio
Name from Portfolio and Fund Complex
---- -------------- ------------------
Donald R.
Dwight $3,740(2) $137,500(4)
Samuel L.
Hayes, III 3,693(3) 153,750(5)
Norton H.
Reamer 3,662 137,500
John L.
Thorndike 3,774 142,500
Jack L.
Treynor 3,869 142,500
(1) The Eaton Vance fund complex consists of 217 registered investment
companies or series thereof.
(2) Includes $1,253 of deferred compensation.
B-15
(3) Includes $1,272 of deferred compensation.
(4) Includes $35,312 of deferred compensation.
(5) Includes $37,500 of deferred compensation.
Trustees of the Portfolio who are not affiliated with BMR may elect to
defer receipt of all or a percentage of their annual fees in accordance
with the terms of a Trustees Deferred Compensation Plan (the "Plan").
Under the Plan, an eligible Trustee may elect to have his deferred fees
invested by the Portfolio in the shares of one or more funds in the Eaton
Vance Family of Funds, and the amount paid to the Trustee under the Plan
will be determined based upon the performance of such investments.
Deferral of Trustees' fees in accordance with the Plan will have a
negligible effect on the Portfolio's assets, liabilities and net income
per share, and will not obligate the Portfolio to retain the services of
any Trustee or obligate the Portfolio to pay any particular level of
compensation to the Trustee. The Portfolio does not have a retirement
plan for its Trustees.
The Portfolio's Declaration of Trust provides that it will indemnify
its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Portfolio, unless, as to liability to the Portfolio or
its investors, it is finally adjudicated that they engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in their offices, or unless with respect to any other
matter it is finally adjudicated that they did not act in good faith in
the reasonable belief that their actions were in the best interests of the
Portfolio. In the case of settlement, such indemnification will not be
provided unless it has been determined by a court or other body approving
the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
noninterested Trustees or in a written opinion of independent counsel,
that such officers or Trustees have not engaged in wilful misfeasance, bad
faith, gross negligence or reckless disregard of their duties.
Messrs. Chisholm, Normandeau and O'Neill are not U.S. residents. It
may be difficult to effect service of process within the United States or
to realize judgments of U.S. courts upon them. It is uncertain whether
courts in other countries would entertain original actions against them.
Item 15. Control Persons and Principal Holder of Securities
As of July 1, 1996, EV Marathon High Income Fund (the "Marathon
Fund"), a series of Eaton Vance Mutual Funds Trust, owned approximately
96.6% of the value of the outstanding interests in the Portfolio. Because
the Marathon Fund controls the Portfolio, the Marathon Fund may take
actions without the approval of any other investor. The Marathon Fund has
informed the Portfolio that whenever it is requested to vote on matters
pertaining to the fundamental policies of the Portfolio, it will hold a
B-16
meeting of shareholders and will cast its vote as instructed by its
shareholders. It is anticipated that any other investor in the Portfolio
that is an investment company registered under the 1940 Act would follow
the same or a similar practice. Eaton Vance Mutual Funds Trust is an
open-end management investment company organized as a business trust under
the laws of the Commonwealth of Massachusetts.
Item 16. Investment Advisory and Other Services
Investment Adviser. The Portfolio engages BMR as investment adviser
pursuant to an Investment Advisory Agreement dated May 31, 1994. BMR or
Eaton Vance acts as investment adviser to investment companies and various
individual and institutional clients with combined assets under management
of over $16 billion.
BMR manages the investments and affairs of the Portfolio subject to
the supervision of the Portfolio's Board of Trustees. BMR furnishes to the
Portfolio investment research, advice and supervision, furnishes an
investment program, and determines what securities will be purchased, held
or sold by the Portfolio and what portion, if any, of the Portfolio's
assets will be held uninvested. The Investment Advisory Agreement requires
BMR to pay the salaries and fees of all officers and Trustees of the
Portfolio who are members of the BMR organization and all personnel of BMR
performing services relating to research and investment activities. The
Portfolio is responsible for all expenses not expressly stated to be
payable by BMR under the Investment Advisory Agreement, including, without
implied limitation, (i) expenses of maintaining the Portfolio and
continuing its existence, (ii) registration of the Portfolio under the
1940 Act, (iii) commissions, fees and other expenses connected with the
acquisition, holding and disposition of securities and other investments,
(iv) auditing, accounting and legal expenses, (v) taxes and interest, (vi)
governmental fees, (vii) expenses of issue, sale and redemption of
interests in the Portfolio, (viii) expenses of registering and qualifying
the Portfolio and interests in the Portfolio under federal and state
securities laws and of preparing and printing registration statements or
other offering statements or memoranda for such purposes and for
distributing the same to investors, and fees and expenses of registering
and maintaining registrations of the Portfolio and of the Portfolio's
placement agent as broker-dealer or agent under state securities laws,
(ix) expenses of reports and notices to investors and of meetings of
investors and proxy solicitations therefor, (x) expenses of reports to
governmental officers and commissions, (xi) insurance expenses, (xii)
association membership dues, (xiii) fees, expenses and disbursements of
custodians and subcustodians for all services to the Portfolio (including
without limitation safekeeping for funds, securities and other
investments, keeping of books, accounts and records, and determination of
net asset values, book capital account balances and tax capital account
balances), (xiv) fees, expenses and disbursements of transfer agents,
dividend disbursing agents, investor servicing agents and registrars for
all services to the Portfolio, (xv) expenses for servicing the accounts of
investors, (xvi) any direct charges to investors approved by the Trustees
B-17
of the Portfolio, (xvii) compensation and expenses of Trustees of the
Portfolio who are not members of the BMR organization, and (xviii) such
non-recurring items as may arise, including expenses incurred in
connection with litigation, proceedings and claims and the obligation of
the Portfolio to indemnify its Trustees, officers and investors with
respect thereto.
For a description of the compensation that the Portfolio pays BMR
under the Investment Advisory Agreement, see "Management of the Portfolio"
in Part A. As of March 31, 1996, the Portfolio had net assets of
$511,347,139. For the fiscal year ended March 31, 1996, the Portfolio paid
BMR advisory fees of $3,094,793 (equivalent to 0.63% of the Portfolio's
average daily net assets for such year). For the period from the start of
business, June 1, 1994, to March 31, 1995, the Portfolio paid BMR advisory
fees of $2,260,748 (equivalent to 0.64% (annualized) of the Portfolio's
average daily net assets for such period).
The Investment Advisory Agreement with BMR remains in effect until
February 28, 1997. It may be continued indefinitely thereafter so long as
such continuance is approved at least annually (i) by the vote of a
majority of the Trustees of the Portfolio who are not interested persons
of the Portfolio or of BMR cast in person at a meeting specifically called
for the purpose of voting on such approval and (ii) by the Board of
Trustees of the Portfolio or by vote of a majority of the outstanding
voting securities of the Portfolio. The Agreement may be terminated at
any time without penalty on sixty (60) days' written notice by the Board
of Trustees of either party, or by vote of the majority of the outstanding
voting securities of the Portfolio, and the Agreement will terminate
automatically in the event of its assignment. The Agreement provides that
BMR may render services to others. The Agreement also provides that BMR
shall not be liable for any loss incurred in connection with the
performance of its duties, or action taken or omitted under that
Agreement, in the absence of willful misfeasance, bad faith, gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties thereunder, or for any losses
sustained in the acquisition, holding or disposition of any security or
other investment.
BMR is a wholly-owned subsidiary of Eaton Vance. Eaton Vance and EV
are both wholly-owned subsidiaries of EVC. BMR and Eaton Vance are both
Massachusetts business trusts, and EV is the trustee of BMR and Eaton
Vance. The Directors of EV are Landon T. Clay, H. Day Brigham, Jr., M.
Dozier Gardner, James B. Hawkes, and Benjamin A. Rowland, Jr. The
Directors of EVC consist of the same persons and John G.L. Cabot and Ralph
Z. Sorenson. Mr. Clay is chairman and Mr. Gardner is president and chief
executive officer of EVC, BMR, Eaton Vance and EV. All of the issued and
outstanding shares of Eaton Vance and EV are owned by EVC. All of the
issued and outstanding shares of BMR are owned by Eaton Vance. All shares
of the outstanding Voting Common Stock of EVC are deposited in a Voting
B-18
Trust which expires on December 31, 1996, the Voting Trustees of which are
Messrs. Clay, Brigham, Gardner, Hawkes and Rowland. The Voting Trustees
have unrestricted voting rights for the election of Directors of EVC. All
of the outstanding voting trust receipts issued under said Voting Trust
are owned by certain of the officers of BMR and Eaton Vance who are also
officers and Directors of EVC and EV. As of June 30, 1996, Messrs. Clay,
Gardner and Hawkes each owned 24% of such voting trust receipts, and
Messrs. Rowland and Brigham owned 15% and 13%, respectively, of such
voting trust receipts. Messrs. Gardner, Hawkes and Otis are officers or
Trustees of the Portfolio and are members of the EVC, BMR, Eaton Vance and
EV organizations. Messrs. Murphy, O'Connor, Talcott, Venezia, Weilheimer
and Woodbury and Ms. Sanders and Ms. Schiff are officers of the Portfolio
and are members of the BMR, Eaton Vance and EV organizations. BMR will
receive the fees paid under the Investment Advisory Agreement.
EVC owns all of the stock of Energex Energy Corporation, which is
engaged in oil and gas exploration and development. In addition, Eaton
Vance owns all of the stock of Northeast Properties, Inc., which is
engaged in real estate investment. EVC also owns 24% of the Class A
shares of Lloyd George Management (B.V.I.) Limited, a registered
investment adviser. EVC owns all of the stock of Fulcrum Management, Inc.
and MinVen Inc., which are engaged in precious metal mining venture
investment and management. EVC, BMR, Eaton Vance and EV may also enter
into other businesses.
EVC and its affiliates and their officers and employees from time to
time have transactions with various banks, including the custodian of the
Portfolio, Investors Bank & Trust Company. It is Eaton Vance's opinion
that the terms and conditions of such transactions were not and will not
be influenced by existing or potential custodial or other relationships
between the Portfolio and such banks.
Custodian. Investors Bank & Trust Company ("IBT"), 89 South Street,
Boston, Massachusetts, acts as custodian for the Portfolio. IBT has the
custody of all of the Portfolio's assets, and its subsidiary, IBT Fund
Services (Canada) Inc., One First Canadian Place, King Street West,
Toronto, Ontario, Canada, maintains the general ledger of the Portfolio
and computes the daily net asset value of interests in the Portfolio. In
its capacity as custodian, IBT attends to details in connection with the
sale, exchange, substitution, or transfer of or other dealings with the
Portfolio's investments, receives and disburses all funds, and performs
various other ministerial duties upon receipt of proper instructions from
the Portfolio. IBT charges fees that are competitive within the industry.
A portion of the fee relates to custody, bookkeeping and valuation
services and is based upon a percentage of Portfolio net assets, and a
portion of the fee relates to activity charges, primarily the number of
portfolio transactions. These fees are then reduced by a credit for cash
balances of the Portfolio at the custodian equal to 75% of the 91-day,
U.S. Treasury Bill auction rate applied to the Portfolio's average daily
B-19
collected balances for the week. Landon T. Clay, a Director of EVC and an
officer, Trustee or Director of other entities in the Eaton Vance
organization, owns approximately 13% of the voting stock of Investors
Financial Services Corp., the holding company parent of IBT. Management
believes that such ownership does not create an affiliated person
relationship between the Portfolio and IBT under the 1940 Act.
Independent Certified Public Accountants. Deloitte & Touche, Grand
Cayman, Cayman Islands, British West Indies, are the independent certified
public accountants of the Portfolio, providing audit services, tax return
preparation, and assistance and consultation with respect to the
preparation of filings with the Securities and Exchange Commission.
Item 17. Brokerage Allocation and Other Practices
Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the executing firm, are made by
BMR. BMR is also responsible for the execution of transactions for all
other accounts managed by it.
BMR places the portfolio security transactions of the Portfolio and of
all other accounts managed by it for execution with many firms. BMR uses
its best efforts to obtain execution of portfolio security transactions at
prices that are advantageous to the Portfolio and (when a disclosed
commission is being charged) at reasonably competitive commission rates.
In seeking such execution, BMR will use its best judgment in evaluating
the terms of a transaction and will give consideration to various relevant
factors including, without limitation, the size and type of the
transaction, the nature and character of the market for the security, the
confidentiality, speed and certainty of effective execution required for
the transaction, the general execution and operational capabilities of the
executing firm, the reputation, reliability, experience and financial
condition of the firm, the value and quality of the services rendered by
the firm in this and other transactions, and the reasonableness of the
spread or commission, if any. Transactions on United States stock
exchanges and other agency transactions involve the payment by the
Portfolio of negotiated brokerage commissions. Such commissions vary among
different broker-dealer firms, and a particular broker-dealer may charge
different commissions according to such factors as the difficulty and size
of the transaction and the volume of business done with such
broker-dealer. Transactions in foreign securities usually involve the
payment of fixed brokerage commissions, which are generally higher than
those in the United States. There is generally no stated commission in the
case of securities traded in the over-the-counter markets, but the price
paid or received by the Portfolio usually includes an undisclosed dealer
markup or markdown. In an underwritten offering the price paid by the
Portfolio includes a disclosed fixed commission or discount retained by
the underwriter or dealer. Although commissions on portfolio security
transactions will, in the judgment of BMR, be reasonable in relation to
the value of the services provided, commissions exceeding those that
another firm might charge may be paid to firms who were selected to
execute transactions on behalf of the Portfolio and BMR's other clients
for providing brokerage and research services to BMR.
B-20
As authorized in Section 28(e) of the Securities Exchange Act of 1934,
a broker or dealer who executes a portfolio transaction on behalf of the
Portfolio may receive a commission that is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if BMR determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided. This determination may be made either on the basis of that
particular transaction or on the basis of overall responsibilities that
BMR and its affiliates have for accounts over which they exercise
investment discretion. In making any such determination, BMR will not
attempt to place a specific dollar value on the brokerage and research
services provided or to determine what portion of the commission should be
related to such services. Brokerage and research services may include
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; effecting securities
transactions and performing functions incidental thereto (such as
clearance and settlement); and the "Research Services" referred to in the
next paragraph.
It is a common practice of the investment advisory industry and of the
advisers of investment companies, institutions and other investors to
receive research, statistical and quotation services, data, information
and other services, products and materials that assist such advisers in
the performance of their investment responsibilities ("Research Services")
from broker-dealer firms that execute portfolio transactions for the
clients of such advisers and from third parties with which such
broker-dealers have arrangements. Consistent with this practice, BMR
receives Research Services from many broker-dealer firms with which BMR
places the Portfolio's transactions and from third parties with which
these broker-dealers have arrangements. These Research Services include
such matters as general economic and market reviews, industry and company
reviews, evaluations of securities and portfolio strategies and
transactions and recommendations as to the purchase and sale of securities
and other portfolio transactions, financial, industry and trade
publications, news and information services, pricing and quotation
equipment and services, and research oriented computer hardware, software,
data bases and services. Any particular Research Service obtained through
a broker-dealer may be used by BMR in connection with client accounts
other than those accounts that pay commissions to such broker-dealer. Any
such Research Service may be broadly useful and of value to BMR in
rendering investment advisory services to all or a significant portion of
its clients, or may be relevant and useful for the management of only one
client's account or of only a few clients' accounts, or may be useful for
the management of merely a segment of certain clients' accounts,
regardless of whether any such account or accounts paid commissions to the
broker-dealer through which such Research Service was obtained. The
B-21
advisory fee paid by the Portfolio is not reduced because BMR receives
such Research Services. BMR evaluates the nature and quality of the
various Research Services obtained through broker-dealer firms and
attempts to allocate sufficient commissions to such firms to ensure the
continued receipt of Research Services that BMR believes are useful or of
value to it in rendering investment advisory services to its clients.
Subject to the requirement that BMR shall use its best efforts to seek
and execute portfolio security transactions at advantageous prices and at
reasonably competitive spreads or commission rates, BMR is authorized to
consider as a factor in the selection of any broker-dealer firm with whom
portfolio orders may be placed the fact that such firm has sold or is
selling shares of any investment company sponsored by BMR or Eaton Vance.
This policy is not inconsistent with a rule of the National Association of
Securities Dealers, Inc. ("NASD"), which rule provides that no firm that
is a member of the NASD shall favor or disfavor the distribution of shares
of any particular investment company or group of investment companies on
the basis of brokerage commissions received or expected by such firm from
any source.
Securities considered as investments for the Portfolio may also be
appropriate for other investment accounts managed by BMR or its
affiliates. BMR will attempt to allocate equitably portfolio security
transactions among the Portfolio and the portfolios of its other
investment accounts whenever decisions are made to purchase or sell
securities by the Portfolio and one or more of such other accounts
simultaneously. In making such allocations, the main factors to be
considered are the respective investment objectives of the Portfolio and
such other accounts, the relative size of portfolio holdings of the same
or comparable securities, the availability of cash for investment by the
Portfolio and such accounts, the size of investment commitments generally
held by the Portfolio and such accounts and the opinions of the persons
responsible for recommending investments to the Portfolio and such
accounts. While this procedure could have a detrimental effect on the
price or amount of the securities available to the Portfolio from time to
time, it is the opinion of the Trustees of the Portfolio that the benefits
available from the BMR organization outweigh any disadvantage that may
arise from exposure to simultaneous transactions. For the fiscal year
ended March 31, 1996, the Portfolio paid no brokerage commissions on
portfolio transactions. For the period from the start of business, June
1, 1994, to March 31, 1995, the Portfolio paid brokerage commissions of
$3,684 on portfolio security transactions, of which $569 was paid in
respect of portfolio security transactions aggregating approximately
$206,198 to firms that provided some research services to BMR or its
affiliates (although many of such firms may have been selected in any
particular transaction primarily because of their execution capabilities).
Item 18. Capital Stock and Other Securities
Under the Portfolio's Declaration of Trust, the Trustees are
B-22
authorized to issue interests in the Portfolio. Investors are entitled to
participate pro rata in distributions of taxable income, loss, gain and
credit of the Portfolio. Upon dissolution of the Portfolio, the Trustees
shall liquidate the assets of the Portfolio and apply and distribute the
proceeds thereof as follows: (a) first, to the payment of all debts and
obligations of the Portfolio to third parties including, without
limitation, the retirement of outstanding debt, including any debt owed to
holders of record of interests in the Portfolio ("Holders") or their
affiliates, and the expenses of liquidation, and to the setting up of any
reserves for contingencies which may be necessary; and (b) second, in
accordance with the Holders' positive Book Capital Account balances after
adjusting Book Capital Accounts for certain allocations provided in the
Declaration of Trust and in accordance with the requirements described in
Treasury Regulations Section 1.704-1(b)(2)(ii)(b)(2). Notwithstanding the
foregoing, if the Trustees shall determine that an immediate sale of part
or all of the assets of the Portfolio would cause undue loss to the
Holders, the Trustees, in order to avoid such loss, may, after having
given notification to all the Holders, to the extent not then prohibited
by the law of any jurisdiction in which the Portfolio is then formed or
qualified and applicable in the circumstances, either defer liquidation of
and withhold from distribution for a reasonable time any assets of the
Portfolio except those necessary to satisfy the Portfolio's debts and
obligations or distribute the Portfolio's assets to the Holders in
liquidation. Interests in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except
as set forth below. Interests in the Portfolio may not be transferred.
Certificates representing an investor's interest in the Portfolio are
issued only upon the written request of a Holder.
Each Holder is entitled to vote in proportion to the amount of its
interest in the Portfolio. Holders do not have cumulative voting rights.
The Portfolio is not required and has no current intention to hold annual
meetings of Holders but the Portfolio will hold meetings of Holders when
in the judgment of the Portfolio's Trustees it is necessary or desirable
to submit matters to a vote of Holders at a meeting. Any action which may
be taken by Holders may be taken without a meeting if Holders holding more
than 50% of all interests entitled to vote (or such larger proportion
thereof as shall be required by any express provision of the Declaration
of Trust of the Portfolio) consent to the action in writing and the
consents are filed with the records of meetings of Holders.
The Portfolio's Declaration of Trust may be amended by vote of Holders
of more than 50% of all interests in the Portfolio at any meeting of
Holders or by an instrument in writing without a meeting, executed by a
majority of the Trustees and consented to by the Holders of more than 50%
of all interests. The Trustees may also amend the Declaration of Trust
(without the vote or consent of Holders) to change the Portfolio's name or
the state or other jurisdiction whose law shall be the governing law, to
supply any omission or cure, correct or supplement any ambiguous,
defective or inconsistent provision, to conform the Declaration of Trust
to applicable federal law or regulations or the requirements of the Code,
or to change, modify or rescind any provision, provided that such change,
B-23
modification or rescission is determined by the Trustees to be necessary
or appropriate and not to have a materially adverse effect on the
financial interests of the Holders. No amendment of the Declaration of
Trust which would change any rights with respect to any Holder's interest
in the Portfolio by reducing the amount payable thereon upon liquidation
of the Portfolio may be made, except with the vote or consent of the
Holders of two-thirds of all interests. References in the Declaration of
Trust and in Part A or this Part B to a specified percentage of, or
fraction of, interests in the Portfolio, means Holders whose combined Book
Capital Account balances represent such specified percentage or fraction
of the combined Book Capital Account balance of all, or a specified group
of, Holders.
In accordance with the Declaration of Trust, there normally will be no
meetings of the investors for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office
have been elected by investors. In such an event, the Trustees of the
Portfolio then in office will call an investors' meeting for the election
of Trustees. Except for the foregoing circumstances, and unless removed
by action of the investors in accordance with the Portfolio's Declaration
of Trust, the Trustees shall continue to hold office and may appoint
successor Trustees.
The Declaration of Trust provides that no person shall serve as a
Trustee if investors holding two-thirds of the outstanding interests have
removed him from that office either by a written declaration filed with
the Portfolio's custodian or by votes cast at a meeting called for that
purpose. The Declaration of Trust further provides that under certain
circumstances, the investors may call a meeting to remove a Trustee and
that the Portfolio is required to provide assistance in communicating with
investors about such a meeting.
The Portfolio may merge or consolidate with any other corporation,
association, trust or other organization or may sell or exchange all or
substantially all of its assets upon such terms and conditions and for
such consideration when and as authorized by the Holders of (a) 67% or
more of the interests in the Portfolio present or represented at the
meeting of Holders, if Holders of more than 50% of all interests are
present or represented by proxy, or (b) more than 50% of all interests,
whichever is less. The Portfolio may be terminated (i) by the affirmative
vote of Holders of not less than two-thirds of all interests at any
meeting of Holders or by an instrument in writing without a meeting,
executed by a majority of the Trustees and consented to by Holders of not
less than two-thirds of all interests, or (ii) by the Trustees by written
notice to the Holders.
The Portfolio is organized as a trust under the laws of the State of
New York. Investors in the Portfolio will be held personally liable for
its obligations and liabilities, subject, however, to indemnification by
the Portfolio in the event that there is imposed upon an investor a
greater portion of the liabilities and obligations of the Portfolio than
its proportionate interest in the Portfolio. The Portfolio intends to
B-24
maintain fidelity and errors and omissions insurance deemed adequate by
the Trustees. Therefore, the risk of an investor incurring financial loss
on account of investor liability is limited to circumstances in which both
inadequate insurance exists and the Portfolio itself is unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the
Portfolio are not binding upon the Trustees individually but only upon the
property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects
a Trustee against any liability to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Item 19. Purchase, Redemption and Pricing of Securities
Interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning
of Section 4(2) of the Securities Act of 1933. See "Purchase of Interests
in the Portfolio" and "Redemption or Decrease of Interest" in Part A.
The Portfolio's net asset value is determined by IBT Fund Services
(Canada) Inc. (as agent for the Portfolio) in the manner described in Part
A. The net asset value is computed by subtracting the liabilities of the
Portfolio from the value of its total assets. Fixed-income securities
(other than short-term obligations), including listed securities and
securities for which price quotations are available, will normally be
valued on the basis of valuations furnished by a pricing service. The
pricing service uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable
securities, various relationships between securities, and yield to
maturity in determining value. Securities listed on securities exchanges
or in the NASDAQ National Market are valued at closing sale prices.
Unlisted or listed securities for which closing sale prices are not
available are valued at the mean between the latest bid and asked prices.
Short-term obligations maturing in sixty days or less are valued at
amortized cost, which approximates market. Other assets are valued at fair
value using methods determined in good faith by or at the direction of the
Trustees.
Item 20. Tax Status
The Portfolio has been advised by tax counsel that, provided the
Portfolio is operated at all times during its existence in accordance with
certain organizational and operational documents, the Portfolio should be
classified as a partnership under the Internal Revenue Code of 1986, as
amended (the "Code"), and it should not be a "publicly traded partnership"
within the meaning of Section 7704 of the Code. Consequently, the
Portfolio does not expect that it will be required to pay any federal
income tax, and a Holder will be required to take into account in
determining its federal income tax liability its share of the Portfolio's
income, gains, losses and deductions.
B-25
Under Subchapter K of the Code, a partnership is considered to be
either an aggregate of its members or a separate entity depending upon the
factual and legal context in which the question arises. Under the
aggregate approach, each partner is treated as an owner of an undivided
interest in partnership assets and operations. Under the entity approach,
the partnership is treated as a separate entity in which partners have no
direct interest in partnership assets and operations. The Portfolio has
been advised by tax counsel that, in the case of a Holder that seeks to
qualify as a regulated investment company (a "RIC"), the aggregate
approach should apply, and each such Holder should accordingly be deemed
to own a proportionate share of each of the assets of the Portfolio and to
be entitled to the gross income of the Portfolio attributable to that
share for purposes of all requirements of Sections 851(b) and 852(b)(5) of
the Code. Further, the Portfolio has been advised by tax counsel that each
Holder that seeks to qualify as a RIC should be deemed to hold its
proportionate share of the Portfolio's assets for the period the Portfolio
has held the assets or for the period the Holder has been an investor in
the Portfolio, whichever is shorter. Investors should consult their tax
advisers regarding whether the entity or the aggregate approach applies to
their investment in the Portfolio in light of their particular tax status
and any special tax rules applicable to them.
In order to enable a Holder in the Portfolio that is otherwise
eligible to qualify as a RIC, the Portfolio intends to satisfy the
requirements of Subchapter M of the Code relating to sources of income and
diversification of assets as if they were applicable to the Portfolio and
to allocate and permit withdrawals in a manner that will enable a Holder
which is a RIC to comply with those requirements. The Portfolio will
allocate at least annually to each Holder its distributive share of the
Portfolio's net investment income, net realized capital gains, and any
other items of income, gain, loss, deduction or credit in a manner
intended to comply with the Code and applicable Treasury regulations. Tax
counsel has advised the Portfolio that the Portfolio's allocations of
taxable income and loss should have "economic effect" under applicable
Treasury regulations.
To the extent the cash proceeds of any withdrawal (or, under certain
circumstances, such proceeds plus the value of any marketable securities
distributed to an investor) ("liquid proceeds") exceed a Holder's adjusted
basis of his interest in the Portfolio, the Holder will generally realize
a gain for federal income tax purposes. If, upon a complete withdrawal
(redemption of the entire interest), the Holder's adjusted basis of his
interest exceeds the liquid proceeds of such withdrawal, the Holder will
generally realize a loss for federal income tax purposes. The tax
consequences of a withdrawal of property (instead of or in addition to
liquid proceeds) will be different and will depend on the specific factual
circumstances. A Holder's adjusted basis of an interest in the Portfolio
will generally be the aggregate prices paid therefor (including the
adjusted basis of contributed property and any gain recognized on such
B-26
contribution), increased by the amounts of the Holder's distributive share
of items of income (including interest income exempt from federal income
tax) and realized net gain of the Portfolio, and reduced, but not below
zero, by (i) the amounts of the Holder's distributive share of items of
Portfolio loss, and (ii) the amount of any cash distributions (including
distributions of interest income exempt from federal income tax and cash
distributions on withdrawals from the Portfolio) and the basis to the
Holder of any property received by such Holder other than in liquidation,
and (iii) the Holder's distributive share of the Portfolio's nondeductible
expenditures not properly chargeable to capital account. Increases or
decreases in a Holder's share of the Portfolio's liabilities may also
result in corresponding increases or decreases in such adjusted basis.
Distributions of liquid proceeds in excess of a Holder's adjusted basis in
its interest in the Portfolio immediately prior thereto generally will
result in the recognition of gain to the Holder in the amount of such
excess.
The Portfolio may be subject to foreign withholding or other foreign
taxes with respect to income (possibly including, in some cases, capital
gains) on certain foreign securities. These taxes may be reduced or
eliminated under the terms of an applicable U.S. income tax treaty in some
cases. As it is not expected that more than 50% of the value of the total
assets of the Portfolio at the close of any taxable year will consist of
securities issued by foreign corporations, the Portfolio will not be
eligible to pass through to investors any foreign tax credits or
deductions for foreign taxes paid by the Portfolio. Certain foreign
exchange gains and losses realized by the Portfolio will be treated as
ordinary income and losses. Certain uses of foreign currency and foreign
currency options, futures and forward contracts and investment by the
Portfolio in the stock of certain passive foreign investment companies may
be limited or a tax election may be made, if available, in order to enable
an investor that is a RIC to preserve its qualification as a RIC or avoid
imposition of a tax on such an investor.
The Portfolio's investment in zero coupon and certain other securities
will cause it to realize income prior to the receipt of cash payments with
respect to these securities. Such income will be allocated daily to
interests in the Portfolio. To enable an investor that is a RIC to
distribute its proportionate share of this income and avoid a tax on such
investor, the Portfolio may be required to liquidate portfolio securities
that it might otherwise have continued to hold, in order to generate cash
for distribution to the RIC.
Investments in lower rated or unrated securities may present special
tax issues for the Portfolio and hence to an investor in the Portfolio to
the extent actual or anticipated defaults may be more likely with respect
to such securities. Tax rules are not entirely clear about issues such as
when the Portfolio may cease to accrue interest, original issue discount,
or market discount; when and to what extent deductions may be taken for
bad debts or worthless securities; how payments received on obligations in
B-27
default should be allocated between principal and income; and whether
exchanges of debt obligations in a workout context are taxable.
The Portfolio's transactions in options, futures contracts and forward
contracts will be subject to special tax rules that may affect the amount,
timing and character of its items of income, gain or loss and hence the
allocations of such items to investors. For example, certain positions
held by the Portfolio on the last business day of each taxable year will
be marked to market (i.e., treated as if closed out on such day), and any
resulting gain or loss will generally be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Portfolio
that substantially diminish the Portfolio's risk of loss with respect to
other positions in its portfolio may constitute "straddles," which are
subject to tax rules that may cause deferral of Portfolio losses,
adjustments in the holding periods of Portfolio securities and conversion
of short-term into long-term capital losses.
Income from transactions in options and futures contracts derived by
the Portfolio with respect to its business of investing in securities will
qualify as permissible income for its Holders that are RICs under the
requirement that at least 90% of a RIC's gross income each taxable year
consist of specified types of income. However, income from the dispo-
sition by the Portfolio of options and futures contracts held for less
than three months will be subject to the requirement applicable to those
Holders that less than 30% of a RIC's gross income each taxable year
consist of certain short-term gains ("Short-Short Limitation").
If the Portfolio satisfies certain requirements, any increase in value
of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining
whether the Holders that are RICs satisfy the Short-Short Limitation.
Thus, only the net gain (if any) from the designated hedge will be
included in gross income for purposes of that limitation. The Portfolio
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Portfolio does not so qualify, it
may be forced to defer the closing out of options and futures contracts
beyond the time when it otherwise would be advantageous to do so, in order
for Holders that are RICs to continue to qualify as such.
An entity that is treated as a partnership under the Code, such as the
Portfolio, is generally treated as a partnership under state and local tax
laws, but certain states may have different entity classification criteria
and may therefore reach a different conclusion. Entities that are
classified as partnerships are not treated as separate taxable entities
under most state and local tax laws, and the income of a partnership is
considered to be income of partners both in timing and in character. The
laws of the various states and local taxing authorities vary with respect
to the taxation of such interest income, as well as to the status of a
partnership interest under state and local tax laws, and each holder of an
interest in the Portfolio is advised to consult his own tax adviser.
B-28
The foregoing discussion does not address the special tax rules
applicable to certain classes of investors, such as tax-exempt entities,
insurance companies and financial institutions. Investors should consult
their own tax advisers with respect to special tax rules that may apply in
their particular situations, as well as the state, local or foreign tax
consequences of investing in the Portfolio.
Item 21. Underwriters
The placement agent for the Portfolio is Eaton Vance Distributors,
Inc., which receives no compensation for serving in this capacity.
Investment companies, common and commingled trust funds and similar
organizations and entities may continuously invest in the Portfolio.
Item 22. Calculation of Performance Data
Not applicable.
Item 23. Financial Statements
The following audited financial statements of the Portfolio are
incorporated by reference into this Part B and have been so incorporated
in reliance upon the report of Deloitte & Touche, independent certified
public accountants, as experts in accounting and auditing.
Portfolio of Investments as of March 31, 1996
Statement of Assets and Liabilities as of March 31, 1996
Statement of Operations for the fiscal year ended March 31, 1996
Statement of Changes in Net Assets for the fiscal year ended March 31,
1996, and for the period from the start of business, June 1, 1994, to
March 31, 1995
Supplementary Data for the fiscal year ended March 31, 1996, and for
the period from the start of business, June 1, 1994, to March 31, 1995
Notes to Financial Statements
Independent Auditors' Report
For purposes of the EDGAR filing of this amendment to the Portfolio's
registration statement, the Portfolio incorporates by reference the above
audited financial statements, as previously filed electronically with the
Commission (Accession Number 0000950156-96-000510).
B-29
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
The financial statements called for by this Item are incorporated by
reference into Part B and listed in Item 23 hereof.
(b) Exhibits
1. (a) Declaration of Trust dated May 1, 1992 filed as
Exhibit No. 1(a) to Amendment No. 1 (filed electronically
with the Commission on July 28, 1995) (Accession No.
0000898432-95-000290) and incorporated herein by
reference.
(b) Amendment to Declaration of Trust dated June 14,
1993 filed as Exhibit No. 1(b) to Amendment No. 1 are
incorporated herein by reference.
2. By-Laws of the Registrant adopted May 1, 1992 filed as
Exhibit No. 2 to Amendment No. 1 and incorporated herein
by reference.
5. Investment Advisory Agreement between the Registrant and
Boston Management and Research dated May 31, 1994 filed
as Exhibit No. 5 to Amendment No. 1 and incorporated
herein by reference.
6. Placement Agent Agreement with Eaton Vance Distributors,
Inc. dated May 31, 1994 filed as Exhibit No. 6 to
Amendment No. 1 and incorporated herein by reference.
7. The Securities and Exchange Commission has granted the
Registrant an exemptive order that permits the Registrant
to enter into deferred compensation arrangements with its
independent Trustees. See In the Matter of Capital
Exchange Fund, Inc., Release No. IC-20671 (November 1,
1994).
8. (a) Custodian Agreement with Investors Bank & Trust
Company dated May 31, 1994 filed as Exhibit No. 8 to
Amendment No. 1 and incorporated herein by reference.
(b) Amendment to Custodian Agreement with Investors Bank
C-1
& Trust Company dated October 23, 1995 filed herewith.
9. (a) Accounting and Interestholder Services Agreement
with IBT Fund Services (Canada) Inc. dated as of March
31, 1995 filed as Exhibit No. 9(a) to Amendment No. 1 and
incorporated herein by reference.
(b) Administration Agreement with The Bank of Nova
Scotia Trust Company (Cayman) Ltd. dated as of March 31,
1995 filed as Exhibit No. 9(b) to Amendment No. 1 and
incorporated herein by reference.
13. Investment representation letter of Eaton Vance High
Income Trust dated March 14, 1994 filed as Exhibit No. 13
to Amendment No. 1 and incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 26. Number of Holders of Securities
(1) (2)
Number of
Title of Class Record Holders
Interests As of July 1, 1996
5
Item 27. Indemnification
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as Exhibit 1(a) to Amendment No. 1 and incorporated herein
by reference.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also
insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940.
Item 28. Business and Other Connections
To the knowledge of the Portfolio, none of the trustees or officers of
the Portfolio's investment adviser, except as set forth on its Form ADV as
filed with the Securities and Exchange Commission, is engaged in any other
business, profession, vocation or employment of a substantial nature,
except that certain trustees and officers also hold various positions
with and engage in business for affiliates of the investment adviser.
C-2
Item 29. Principal Underwriters
Not applicable.
Item 30. Location of Accounts and Records
All applicable accounts, books and documents required to be maintained
by the Registrant by Section 31(a) of the Investment Company Act of 1940,
as amended, and the Rules promulgated thereunder are in the possession and
custody of the Registrant's custodian, Investors Bank & Trust Company, 89
South Street, Boston, MA 02110, with the exception of certain corporate
documents and portfolio trading documents that are in the possession and
custody of the Registrant's investment adviser, Boston Management and
Research, 24 Federal Street, Boston, MA 02110. Certain corporate documents
are also maintained by IBT Trust Company (Cayman) Ltd., The Bank of Nova
Scotia Building, P.O. Box 501, George Town, Grand Cayman, Cayman Islands,
British West Indies, and certain investor account and Portfolio accounting
records are held by IBT Fund Services (Canada) Inc., 1 First Canadian
Place, King Street West, Suite 2800, P.O. Box 231, Toronto, Ontario,
Canada M5X 1C8. The Registrant is informed that all applicable accounts,
books and documents required to be maintained by registered investment
advisers are in the custody and possession of the Registrant's investment
adviser.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Not applicable.
C-3
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant has duly caused this Amendment to its Registration
Statement on Form N-1A to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Hamilton, Bermuda on the 19th day
of July, 1996.
HIGH INCOME PORTFOLIO
By /s/ M. Dozier Gardner
-------------------------------
M. Dozier Gardner
President
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
8(b) Amendment to Custodian Agreement with Investors Bank &
Trust Company dated October 23, 1995.
AMENDMENT TO
CUSTODIAN AGREEMENT
between
HIGH INCOME AND SENIOR DEBT PORTFOLIOS
and
INVESTORS BANK & TRUST COMPANY
This Amendment, dated as of October 23, 1995, is made to the
CUSTODIAN AGREEMENT dated December 30, 1994 (the "Agreement") between High
Income and Senior Debt Portfolios (the "Trusts") and Investors Bank &
Trust Company (the "Custodian") pursuant to Section 9 of the Agreement.
The Trusts and the Custodian agree that Section 9 of the
Agreement shall, as of October 23, 1995, be amended to read as follows:
Unless otherwise defined herein, terms which are defined in the
Agreement and used herein are so used as so defined.
9. Effective Period, Termination and Amendment; Successor Custodian
This Agreement shall become effective as of its execution, shall
continue in full force and effect until terminated by either party after
August 31, 2000 by an instrument in writing delivered or mailed, postage
prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
that the Trust may at any time by action of its Board, (i) substitute
another bank or trust company for the Custodian by giving notice as
described above to the Custodian in the event the Custodian assigns this
Agreement to another party without consent of the noninterested Trustees
of the Trust, or (ii) immediately terminate this Agreement in the event of
the appointment of a conservator or receiver for the Custodian by the
Federal Deposit Insurance Corporation or by the Banking Commissioner of
The Commonwealth of Massachusetts or upon the happening of a like event at
the direction of an appropriate regulatory agency or court of competent
jurisdiction. Upon termination of the Agreement, the Trust shall pay to
the Custodian such compensation as may be due as of the date of such
termination (and shall likewise reimburse the Custodian for its costs,
expenses and disbursements).
This Agreement may be amended at any time by the written
agreement of the parties hereto. If a majority of the non-interested
trustees of any of the Trusts determines that the performance of the
Custodian has been unsatisfactory or adverse to the interests of Trust
holders of any Trust or Trusts or that the terms of the Agreement are no
longer consistent with publicly available industry standards, then the
Trust or Trusts shall give written notice to the Custodian of such
determination and the Custodian shall have 60 days to (1) correct such
performance to the satisfaction of the non-interested trustees or (2)
renegotiate terms which are satisfactory to the non-interested trustees of
the Trusts. If the conditions of the preceding sentence are not met then
the Trust or Trusts may terminate this Agreement on sixty (60) days
written notice.
The Board of the Trust shall, forthwith, upon giving or receiving
notice of termination of this Agreement, appoint as successor custodian, a
bank or trust company having the qualifications required by the Investment
Company Act of 1940 and the Rules thereunder. The Bank, as Custodian,
Agent or otherwise, shall, upon termination of the Agreement, deliver to
such successor custodian, all securities then held hereunder and all funds
or other properties of the Trust deposited with or held by the Bank
hereunder and all books of account and records kept by the Bank pursuant
to this Agreement, and all documents held by the Bank relative thereto.
In the event that no written order designating a successor custodian shall
have been delivered to the Bank on or before the date when such
termination shall become effective, then the Bank shall not deliver the
securities, funds and other properties of the Trust to the Trust but shall
have the right to deliver to a bank or trust company doing business in
Boston, Massachusetts of its own selection meeting the above required
qualifications, all funds, securities and properties of the Fund held by
or deposited with the Bank, and all books of account and records kept by
the Bank pursuant to this Agreement, and all documents held by the Bank
relative thereto. Thereafter such bank or trust company shall be the
successor of the Custodian under this Agreement.
Except as expressly provided herein, the Agreement shall remain
unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their duly authorized officers, as of the day and year
first above written.
HIGH INCOME PORTFOLIO
By: /s/ M. Dozier Gardner
------------------------------
M. Dozier Gardner, President
SENIOR DEBT PORTFOLIO
By: /s/ James B. Hawkes
------------------------------
James B. Hawkes, President
Executed in Bermuda
INVESTORS BANK & TRUST COMPANY
By: /s/ Michael Rogers
------------------------------
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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<PER-SHARE-NAV-BEGIN> 0
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