<PAGE>
[LOGO OF EATON VANCE [PHOTO OF STOCK CERTIFICATE
APPEARS HERE] APPEARS HERE]
Semiannual Report July 31, 1997
EV
MARATHON
[PHOTO OF STATUE OF HIGH YIELD
PAUL REVERE APPEARS
HERE] MUNICIPALS FUND
Eaton Vance
Global Management-Global Distribution
[PHOTO OF BOSTON HARBOR
APPEARS HERE]
Marathon
<PAGE>
EV Marathon High Yield Municipals Fund as of July 31, 1997
INVESTMENT UPDATE
[PHOTO OF THOMAS M. METZOLD, PORTFOLIO MANAGER APPEARS HERE]
Investment Environment
- --------------------------------------------------------------------------------
The Economy
. The U.S. economy posted solid growth in the first half of the year. Gross
domestic product advanced a robust 3.6% in the second quarter, while
unemployment fell to a 24-year low of 4.8%. Despite the strong economic
climate, inflation remained in the 2-to-3% range.
. While inflation seemed generally in check, the Federal Reserve nonetheless
maintained a vigilant policy. In March, the Fed raised its Federal funds
target rate - a key short-term rate barometer - to 5.5%.
. The municipal market modestly outperformed the Treasury market in the first
half of 1997. In a volatile interest rate environment, the high-yield segment
of the municipal market fared slightly better than the investment grade
sector.
Management Update
- --------------------------------------------------------------------------------
. Industrial development bonds remained the largest market sector weighting in
the Portfolio. Within that sector, we were diversified across a wide spectrum
of economic activity, including the paper industry, waste disposal, resource
recovery, and energy projects.
. We continued to find value in assisted living and life care bonds. These non-
rated issues require especially intensive research - a specialty at Eaton
Vance- and have provided excellent income for the Fund.
. In a highly volatile period, the Fund benefitted from its credit-driven bonds,
which, unlike more interest rate-sensitive bonds, tend to ignore rate
fluctuations and respond to the underlying fundamentals of issuers.
The Fund
- --------------------------------------------------------------------------------
. During the six months ended July 31, 1997, the Fund had a total return of
8.3%./1/ This return resulted from a rise in net asset value per share to
$11.18 on July 31, 1997 from $10.62 on January 31, 1997, and the reinvestment
of $0.302 per share in tax-free income./2/
. Based on the Fund's most recent dividend, and a net asset value of $11.18 per
share, the Fund's distribution rate on July 31, 1997 was 5.46%. To equal 5.46%
in a taxable investment, a couple in the 36.00% federal tax bracket would need
a yield of 8.53%. The Fund's SEC yield at July 31 was 5.27%./3/
. The Fund's one-year return of 14.1% ranked it #4 among 47 High Yield Municipal
Debt funds, according to Lipper Analytical Services, Inc./4/
Your Investment at Work
- --------------------------------------------------------------------------------
Glen Cove NY Industrial Development Agency [ARTWORK APPEARS
The Regency at Glen Cove HERE]
. These bonds were issued to finance the construction of an Adult Home for
elderly residents who require assistance with daily living activities and
other rehabilitation care.
. Consisting of 96 living units, the Regency is a good example of municipal
bonds funding a novel approach to serving the life care needs of older
citizens.
. These non-rated, zero-coupon bonds afforded the Portfolio additional capital
appreciation potential while providing a good balance to the Portfolio's
predominantly higher-yielding holdings.
- --------------------------------------------------------------------------------
/1/ This return does not include the Fund's maximum 5% contingent deferred
sales charge (CDSC).
/2/ A portion of the Fund's income could be subject to federal income tax or
alternative minimum tax.
/3/ The Fund's SEC yield is calculated by dividing the net investment income
per share for the 30-day period by the net asset value at the end of the
period and annualizing the result.
/4/ Lipper rankings are based on total return and do not take sales charges
into consideration.
/5/ Returns are calculated by determining the percentage change in net asset
value (NAV) with all distributions reinvested. SEC average annual returns
reflect applicable CDSC on the following schedule: 5%-1st and 2nd years;
4%-3rd year; 3%-4th year; 2%-5th year; 1%-6th year. Past performance is not
indicative of future results. The value of an investment in the Fund will
fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
/6/ Because the Fund is actively managed, sector weightings and Portfolio
overview are subject to change.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Mutual fund shares are not insured by the FDIC and are not deposits or other
obligations of, or guaranteed by, any depository institution. Shares are subject
to investment risks, including possible loss of principal invested.
- --------------------------------------------------------------------------------
Fund Information
as of July 31, 1997
Performance/5/
- --------------------------------------------------------------------------------
Average Annual Total Returns (at net asset value)
- --------------------------------------------------------------------------------
One Year 14.1%
Life of Fund (8/7/95) 12.1
SEC Average Annual Total Returns (including applicable CDSC)
- --------------------------------------------------------------------------------
One Year 9.1%
Life of Fund (8/7/95) 9.9
5 Largest Sectors/6/
- --------------------------------------------------------------------------------
By total investments
[BARGRAPH APPEARS HERE]
Industrial Development Bonds 26.8%
Housing 11.2%
Life Care 10.7%
Assisted Living 9.2%
Hospitals 8.6%
Portfolio Overview/6/
- --------------------------------------------------------------------------------
Number of Issues 106
Average Maturity 24.2 Yrs.
Effective Maturity 11.8 Yrs.
Average Rating BB+
Average Call 9.6 Yrs.
Average Dollar Price $98.56
2
<PAGE>
EV Marathon High Yield Municipals Fund as of July 31, 1997
FINANCIAL STATEMENTS (Unaudited)
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
As of July 31, 1997
Assets
- --------------------------------------------------------------------------------
<S> <C>
Investment in High Yield Municipals Portfolio, at value (Note 1A)
(identified cost, $146,193,874) $157,767,636
Receivable for Fund shares sold 541,659
Deferred organization expenses (Note 1D) 28,752
- --------------------------------------------------------------------------------
Total assets $158,338,047
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Dividends payable $ 373,578
Payable for Fund shares redeemed 282,004
Payable to affiliate for Trustees' fees (Note 4) 277
Accrued expenses 36,729
- --------------------------------------------------------------------------------
Total liabilities $ 692,588
- --------------------------------------------------------------------------------
Net Assets for 14,099,042 shares of
beneficial interest outstanding $157,645,459
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Paid-in capital $147,747,619
Accumulated net realized loss on investments
(computed on the basis of identified cost) (1,618,770)
Accumulated distributions in excess of net
investment income (57,152)
Net unrealized appreciation of investments (computed
on the basis of identified cost) 11,573,762
- --------------------------------------------------------------------------------
Total $157,645,459
- --------------------------------------------------------------------------------
Net Asset Value, Offering and Redemption
Price Per Share (Note 6)
- --------------------------------------------------------------------------------
($157,645,459 / 14,099,042 shares of
beneficial interest outstanding) $ 11.18
- --------------------------------------------------------------------------------
Statement of Operations
For the Six Months Ended
July 31, 1997
Investment Income (Note 1B)
- --------------------------------------------------------------------------------
Interest income allocated from Portfolio $ 5,111,573
Expenses allocated from Portfolio (489,745)
- --------------------------------------------------------------------------------
Net investment income from Portfolio $ 4,621,828
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Compensation of Trustees not members of the
Administrator's organization (Note 4) $ 1,817
Distribution fees (Note 5) 605,482
Transfer and dividend disbursing agent fees 60,218
Registration fees 35,922
Printing and postage 21,428
Legal and accounting services 11,107
Custodian fee 7,331
Amortization of organization expenses (Note 1D) 4,681
Miscellaneous 3,911
- --------------------------------------------------------------------------------
Total expenses $ 751,897
- --------------------------------------------------------------------------------
Net investment income $ 3,869,931
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) from Portfolio
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ 63,765
Financial futures contracts (816,730)
- --------------------------------------------------------------------------------
Net realized loss on investment transactions $ (752,965)
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments $ 8,531,682
Financial futures contracts 52,043
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ 8,583,725
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 7,830,760
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 11,700,691
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
3
<PAGE>
EV Marathon High Yield Municipals Fund as of July 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended
Increase (Decrease) July 31, 1997 Year Ended
in Net Assets (Unaudited) January 31, 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 3,869,931 $ 4,984,445
Net realized loss on investments (752,965) (865,805)
Change in unrealized
appreciation (depreciation) 8,583,725 2,149,787
- ---------------------------------------------------------------------------------
Net increase in net assets
from operations $ 11,700,691 $ 6,268,427
- ---------------------------------------------------------------------------------
Distributions to shareholders (Note 2) --
From net investment income $ (3,869,931) $ (4,985,320)
In excess of net investment income (32,271) (24,881)
From net realized gain
on investments -- (5,322)
- ---------------------------------------------------------------------------------
Total distributions to
shareholders $ (3,902,202) $ (5,015,523)
- ---------------------------------------------------------------------------------
Transactions in shares of beneficial
interest (Note 3) --
Proceeds from sale of shares $ 34,940,040 $ 84,693,070
Net asset value of shares issued to
shareholders in payment of
distributions declared 1,288,100 1,648,815
Cost of shares redeemed (9,404,696) (8,090,978)
- ---------------------------------------------------------------------------------
Net increase in net assets
from Fund share transactions $ 26,823,444 $ 78,250,907
- ---------------------------------------------------------------------------------
Net increase in net assets $ 34,621,933 $ 79,503,811
- ---------------------------------------------------------------------------------
Net Assets
- ---------------------------------------------------------------------------------
At beginning of period $ 123,023,526 $ 43,519,715
- ---------------------------------------------------------------------------------
At end of period $ 157,645,459 $ 123,023,526
- ---------------------------------------------------------------------------------
Accumulated
distributions in excess of
net investment income
included in net assets
- ---------------------------------------------------------------------------------
At end of period $ (57,152) $ (24,881)
- ---------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
4
<PAGE>
EV Marathon High Yield Municipals Fund as of July 31, 1997
FINANCIAL STATEMENTS CONT'D
Financial Highlights
<TABLE>
<CAPTION>
Six Months
Ended Year Ended January 31,
July 31, 1997 ----------------------------------
(Unaudited) 1997 1996*
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value -- Beginning of period $ 10.620 $ 10.650 $ 10.000
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.300 $ 0.626 $ 0.299
Net realized and unrealized gain (loss) on investments 0.562 (0.026) 0.657
- ------------------------------------------------------------------------------------------------------------------------------
Total income from operations $ 0.862 $ 0.600 $ 0.956
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ------------------------------------------------------------------------------------------------------------------------------
From net investment income $ (0.300) $ (0.626) $ (0.299)
In excess of net investment income (0.002) (0.003) (0.007)
From net realized gain on investments -- (0.001) --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.302) $ (0.630) $ (0.306)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value -- End of period $ 11.180 $ 10.620 $ 10.650
- ------------------------------------------------------------------------------------------------------------------------------
Total Return/(1)/ 8.29% 5.90% 9.40%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data++
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 157,645 $ 123,024 $ 43,520
Ratio of net expenses to average daily net assets/(2)/ 1.83%+ 1.36% 0.88%+
Ratio of net expenses to average daily net assets after custodian fee
reduction/(2)/ 1.81%+ 1.32% 0.88%+
Ratio of net investment income to average daily net assets 5.64%+ 5.91% 5.86%+
</TABLE>
++ The operating expenses of the Fund and the Portfolio may reflect a reduction
of the Investment Adviser fee, an allocation of expenses to the Investment
Adviser or Administrator, or both. Had such actions not been taken, the
ratios and net investment income per share would have been as follows:
<TABLE>
<CAPTION>
Ratios (As a percentage of average daily net assets):
<S> <C> <C>
Expenses/(2)/ 1.73% 1.77%+
Expenses after custodian fee reduction/(2)/ 1.69% 1.77%+
Net investment income 5.54% 4.97%+
Net investment income per share $ 0.587 $ 0.254
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, August 7, 1995 to January 31,
1996.
/(1)/ Total return is calculated assuming a purchase at the net asset value on
the first day and a sale at the net asset value on the last day of each
period reported. Dividends and distributions, if any, are assumed to be
reinvested at the net asset value on the payable date. Total return is not
computed on an annualized basis.
/(2)/ Includes the Fund's share of its corresponding Portfolio's allocated
expenses.
See notes to financial statements
5
<PAGE>
EV Marathon High Yield Municipals Fund as of July 31, 1997
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1 Significant Accounting Policies
------------------------------------------------------------------------------
EV Marathon High Yield Municipals Fund (the Fund) is a non-diversified series
of Eaton Vance Municipals Trust II (the Trust). The Trust is an entity of the
type commonly known as a Massachusetts business trust and is registered under
the Investment Company Act of 1940, as amended, as an open-end, management
investment company. The Fund invests all of its investable assets in interests
in High Yield Municipals Portfolio (the Portfolio), a New York Trust, having
the same investment objective as the Fund. The value of the Fund's investment
in the Portfolio reflects the Fund's proportionate interest in the net assets
of the Portfolio (66.1% at July 31, 1997). The performance of the Fund is
directly affected by the performance of the Portfolio. The financial
statements of the Portfolio, including the portfolio of investments, are
included elsewhere in this report and should be read in conjunction with the
Fund's financial statements. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of
its financial statements. The policies are in conformity with generally
accepted accounting principles.
A Investment Valuations -- Valuation of securities by the Portfolio is
discussed in Note 1A of the Portfolio's Notes to Financial Statements which
are included elsewhere in this report.
B Income -- The Fund's net investment income consists of the Fund's pro rata
share of the net investment income of the Portfolio, less all actual and
accrued expenses of the Fund determined in accordance with generally accepted
accounting principles.
C Federal Taxes -- The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year all of its taxable and tax-exempt income,
including any net realized gain on investments, options and financial future
transactions. Accordingly, no provision for federal income or excise tax is
necessary. At January 31, 1997, the Fund, for federal income tax purposes, had
a capital loss carryover of $79,992, expiring on January 31, 2005, which will
reduce the Fund's taxable income arising from future net realized gain on
investments, if any, to the extent permitted by the Internal Revenue Code, and
thus will reduce the amount of distributions to shareholders which would
otherwise be necessary to relieve the Fund of any liability for federal income
or excise tax. Dividends paid by the Fund from net tax-exempt interest on
municipal bonds allocated from the Portfolio are not includable by
shareholders as gross income for federal income tax purposes because the Fund
and Portfolio intend to meet certain requirements of the Internal Revenue Code
applicable to regulated investment companies which will enable the Fund to pay
exempt-interest dividends. The portion of such interest, if any, earned on
private activity bonds issued after August 7, 1986, may be considered a tax
preference item to shareholders.
D Deferred Organization Expenses -- Costs incurred by the Fund in connection
with its organization are being amortized on the straight-line basis over five
years.
E Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian to the Fund and the Portfolio. Pursuant to the respective custodian
agreements, IBT receives a fee reduced by credits which are determined based
on the average daily cash balances the Fund or the Portfolio maintain with
IBT. All significant credit balances used to reduce the Fund's custodian fees
are reported as a reduction of expenses in the Statement of Operations.
F Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expense during the reporting period. Actual results could
differ from those estimates.
G Other -- Investment transactions are accounted for on a trade date basis.
H Interim Financial Information -- The interim financial statements relating
to July 31, 1997 and for the six months then ended have not been audited by
independent certified public accountants, but in the opinion of the Fund's
management reflect all adjustments consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial statements.
6
<PAGE>
EV Marathon High Yield Municipals Fund as of July 31, 1997
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
2 Distributions to Shareholders
------------------------------------------------------------------------------
The net income of the Fund is determined daily, and substantially all of the
net income so determined is declared as a dividend to shareholders of record
at the time of declaration. Distributions are paid monthly. Distributions of
allocated realized capital gains, if any, are made at least annually.
Shareholders may reinvest capital gain distributions in additional shares of
the Fund at the net asset value as of the ex-dividend date. Distributions are
paid in the form of additional shares or, at the election of the shareholder,
in cash. The Fund distinguishes between distributions on a tax basis and a
financial reporting basis.
Generally accepted accounting principles require that only distributions in
excess of tax basis earnings and profits be reported in the financial
statements as a return of capital. Differences in the recognition or
classification of income between the financial statements and tax earnings and
profits which result in temporary over-distributions for financial statement
purposes are classified as distributions in excess of net investment income or
accumulated net realized gains. Permanent differences between book and tax
accounting relating to distributions are reclassified to paid-in capital.
3 Shares of Beneficial Interest
------------------------------------------------------------------------------
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follow:
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
July 31, 1997 January 31,
(Unaudited) 1997
----------------------------------------------------------------------
<S> <C> <C>
Sales 3,272,129 8,113,649
Issued to shareholders electing to
receive payments of distributions in
Fund shares 120,453 158,020
Redemptions (877,527) (772,805)
----------------------------------------------------------------------
Net increase 2,515,055 7,498,864
----------------------------------------------------------------------
</TABLE>
4 Investment Adviser Fee and Other Transactions with Affiliates
------------------------------------------------------------------------------
Eaton Vance Management (EVM) serves as the administrator of the Fund, but
receives no compensation. The Portfolio has engaged Boston Management and
Research (BMR), a subsidiary of EVM, to render investment advisory services
(See Note 2 of the Portfolio's Notes to Financial Statements which are
included elsewhere in this report). Except as to Trustees of the Fund and the
Portfolio who are not members of EVM's or BMR's organization, officers and
Trustees receive remuneration for their services to the Fund out of the
investment advisor fee earned by BMR. Certain of the officers and Trustees of
the Fund and the Portfolio are officers and directors/trustees of EVM and BMR.
5 Distribution Plan
------------------------------------------------------------------------------
The Fund has adopted a Distribution plan (the Plan) pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Plan requires the Fund to pay
the Principal Underwriter, Eaton Vance Distributors, Inc. (EVD) amounts equal
to 1/365 of 0.75% of the Fund's daily net assets, for providing ongoing
distribution services and facilities to the Fund. The Fund will automatically
discontinue payments to EVD during any period in which there are no
outstanding Uncovered Distribution Charges, which are equivalent to the sum of
(i) 5% of the aggregate amount received by the Fund for the shares sold plus,
(ii) distribution fees calculated by applying the rate of 1% over the
prevailing prime rate to the outstanding balance of Uncovered Distribution
Charges of EVD, reduced by amounts of contingent deferred sales charges (see
Note 6) and amounts theretofore paid to EVD. The amount payable to EVD with
respect to each day in accrued on such day as a liability of the Fund and,
accordingly, reduces the Fund's net assets. The Fund paid $513,823 to EVD for
the six months ended July 31, 1997, representing 0.75% (annualized) of average
daily net assets. At July 31, 1997, the amount of Uncovered Distribution
Charges of EVD calculated under the Plan was approximately $6,370,000.
In addition, the Plan authorizes the Fund to make payments of service fees to
the Principal Underwriter, Authorized Firms and other persons in amounts not
exceeding 0.25% of the Fund's average daily net assets for any fiscal year.
The Trustees have initially implemented the Plan by authorizing the Fund to
make quarterly payments of service fees to the Principal Underwriter and
7
<PAGE>
EV Marathon High Yield Municipals Fund as of July 31, 1997
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
Authorized Firms in amounts not expected to exceed 0.25% of the Fund's average
daily net assets for each fiscal year based on the value of Fund shares sold
by such persons and remaining outstanding for at least one year. Service fees
are separate and distinct from the sales commissions and distribution fees
payable by the Fund to EVD and, as such, are not subject to automatic
discontinuance where there are no outstanding Uncovered Distribution Charges
of EVD. During the six months ended July 31, 1997, the Fund paid or accrued
service fees to or payable to EVD under the Plan in the amount of $91,659.
6 Contingent Deferred Sales Charge
------------------------------------------------------------------------------
A contingent deferred sales charge (CDSC) is imposed on any redemption of Fund
share made within six years of purchase. Generally, the CDSC is based upon the
lower of the net assets value at date of redemption or date of purchase. No
charge is levied on shares acquired by reinvestment of dividends or capital
gain distributions. The CDSC is imposed at declining rates that begin at 5% in
the first and second year of redemption after purchase, declining one
percentage point each subsequent year. No CDSC is levied on shares which have
been sold to EVM or its affiliates or to their respective employees or
clients. CDSC charges are paid to EVD to reduce the amount of Uncovered
Distribution Charges calculated under the Fund's Distribution Plan. CDSC
charges received when no Uncovered Distribution Charges exist will be credited
to the Fund. EVD received approximately $264,000 of CDSC paid by shareholders
for the six months ended July 31, 1997.
7 Investment Transactions
------------------------------------------------------------------------------
Increases and decreases in the Fund's investment in the Portfolio for the six
months ended July 31, 1997 aggregated $35,651,152 and $12,877,550,
respectively.
8
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
PORTFOLIO OF INVESTMENTS (Unaudited)
Tax-Exempt Investments-- 100.0%
<TABLE>
<CAPTION>
Principal
Amount
Security (000 Omitted) Value
- --------------------------------------------------------------------------------
Assisted Living -- 9.2%
- --------------------------------------------------------------------------------
<S> <C> <C>
Arizona Health Facilities
Authority, Care Institute-Mesa
Project, 7.625%, 1/1/26 $ 2,500 $ 2,503,150
Chester County, PA, IDA, Senior
Life-Choice of Paoli, (AMT), 8.05%,
1/1/24 2,000 2,141,660
Chester, PA, IDA, Senior
Life-Choice of Kimberton, (AMT),
8.50%, 9/1/25 1,000 1,095,390
Delaware, PA, IDA, Glen Riddle
Project, (AMT), 8.625%, 9/1/25 1,600 1,768,992
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 1/1/13 1,000 249,900
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 7/1/13 1,000 238,910
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 1/1/14 1,000 228,410
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 7/1/14 1,000 218,360
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 1/1/15 1,000 208,760
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 7/1/15 1,000 199,580
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 1/1/16 1,000 190,800
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 7/1/16 1,000 182,410
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 1/1/17 1,000 174,390
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 7/1/17 1,000 166,720
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 1/1/18 1,000 159,390
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 7/1/18 1,000 152,380
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 1/1/19 1,000 145,680
Glen Cove Industrial Development
Agency, NY, The Regency at Glen
Cove, 0.00%, 7/1/19 1,000 139,270
Illinois Development Finance
Authority, Care Institute, Inc.,
7.80%, 6/1/25 3,740 3,864,430
Louisiana Housing Finance Agency,
(HCC Assisted Living Group 1)
(AMT),
9.00%, 3/1/25 3,545 3,871,175
New Jersey Economic Development
Authority, The Chelsea at East
Brunswick Project, (AMT), 8.25%,
10/1/20 3,500 3,629,395
- --------------------------------------------------------------------------------
$ 21,529,152
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cogeneration -- 5.3%
- --------------------------------------------------------------------------------
Maryland Energy Cogeneration, AES
Warrior Run Project (AMT), 7.40%,
9/1/19 /(1)/ $ 3,500 $ 3,791,200
Palm Beach County, FL, Okeelanta
Power L.P. (AMT), 6.85%, 2/15/21 3,500 2,730,000
Palm Beach County, FL, Osceola
Power Project (AMT), 6.95%, 1/1/22 2,000 1,350,000
Pennsylvania Economic Development
Financing Authority, Northampton
Generating Project (AMT), 6.60%,
1/1/19 3,500 3,619,455
Pennsylvania Economic Development
Financing Authority, Northampton
Generating Project Subordinated,
(AMT), 6.875%, 1/1/11 1,000 1,034,080
- --------------------------------------------------------------------------------
$ 12,524,735
- --------------------------------------------------------------------------------
Colleges and Universities -- 0.9%
- --------------------------------------------------------------------------------
New Hampshire Higher Educational
and Health Facilities Authority,
Colby-Sawyer College, 7.50%, 6/1/26 $ 2,000 $ 2,155,200
- --------------------------------------------------------------------------------
$ 2,155,200
- --------------------------------------------------------------------------------
Economic Development Revenue -- 0.6%
- --------------------------------------------------------------------------------
Pittsfield Township, MI, 8.125%,
8/15/17 $ 1,350 $ 1,318,815
- --------------------------------------------------------------------------------
$ 1,318,815
- --------------------------------------------------------------------------------
Electric Utilities -- 2.3%
- --------------------------------------------------------------------------------
Intermountain Power Agency, UT,
Variable Rate, 7/1/11 /(2)/ $ 2,500 $ 2,640,625
New York State Energy, Research and
Development Authority, Long Island
Lighting Co. (AMT), 7.15%, 9/1/19 2,500 2,711,825
- --------------------------------------------------------------------------------
$ 5,352,450
- --------------------------------------------------------------------------------
Escrowed / Prerefunded -- 7.3%
- --------------------------------------------------------------------------------
Colorado Health Facilities
Authority, Liberty Heights Project,
0.00%, 7/15/20 $ 5,575 $ 1,615,245
Colorado Health Facilities
Authority, Liberty Heights Project,
0.00%, 7/15/24 17,000 3,969,160
Colorado Health Facilities
Authority, Liberty Heights Project,
0.00%, 7/15/22 13,445 3,496,910
Cuyahoga County, OH, Judson
Retirement Community, 8.875%,
11/15/19 1,500 1,694,970
Dawson Ridge Metropolitan District
#1, Douglas County, CO, (AMT),
0.00%, 10/1/22 10,000 2,496,900
Dawson Ridge, Metropolitan District
#1, Douglas County, CO, 0.00%,
10/1/22 3,500 873,915
</TABLE>
See notes to financial statements
9
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
PORTFOLIO OF INVESTMENTS (Unaudited) CONT'D
<TABLE>
<CAPTION>
Principal
Amount
Security (000 Omitted) Value
- --------------------------------------------------------------------------------
Escrowed / Prerefunded (continued)
- --------------------------------------------------------------------------------
<S> <C> <C>
Illinois Development Finance
Authority, Regency Park Project,
0.00%, 7/15/25 $ 3,295 $ 709,348
Montgomery County, PA, United
Hospitals, 8.375%, 11/1/11 1,000 1,111,460
Montgomery County, PA, United
Hospitals, 7.50%, 11/1/15 1,000 1,075,070
- --------------------------------------------------------------------------------
$ 17,042,978
- --------------------------------------------------------------------------------
Hospitals -- 8.6%
- --------------------------------------------------------------------------------
Hidalgo County, TX, Health Services
Corp., Mission Hospital, Inc.,
6.875%, 8/15/26/(1)/ $ 2,500 $ 2,672,575
Louisiana PFA, General Health
Systems Project, 6.80%, 11/1/16/(1)/ 3,000 3,252,780
Massachusetts HEFA,
Milford-Whitinsville Hospital,
7.75%, 7/15/17 3,000 3,284,820
Philadelphia, PA, (Graduate Health
System), 6.625%, 7/1/21 2,205 2,294,126
Prince George's, MD, Greater
Southeast Healthcare System,
6.375%, 1/1/23/(1)/ 2,650 2,715,614
San Bernadino, CA, San Bernadino
Community Hospital, 7.875%, 12/1/08 1,000 1,046,260
San Bernadino, CA, San Bernadino
Community Hospital, 7.875%, 12/1/19 1,325 1,386,295
Scranton-Lackawanna, PA, Health and
Welfare Authority, Moses Taylor
Hospital, 8.50%, 7/1/20/(1)/ 1,500 1,754,340
Wells County, IN, Caylor-Nickel
Medical Center, 8.75%, 4/15/12 1,500 1,751,010
- --------------------------------------------------------------------------------
$ 20,157,820
- --------------------------------------------------------------------------------
Housing -- 11.2%
- --------------------------------------------------------------------------------
Colorado Housing and Finance
Authority, Single Family Housing,
(AMT), 7.65%, 12/1/25 $ 4,735 $ 5,333,314
Cuyahoga County, OH, Rolling Hills
Apartment Project, 8.00%, 1/1/28 2,450 2,449,731
Florence, KY Housing Facilities,
7.625%, 5/1/27 2,430 2,464,385
Lucas County, OH, County Creek
Project (AMT), 8.00%, 7/1/26 3,780 3,733,468
Maricopa County, AZ, IDA, Place
Five and The Greenery Projects,
6.625%, 1/1/27 2,500 2,625,525
Maricopa County, AZ, IDA, Place
Five and The Greenery Projects,
8.625%, 1/1/11 1,725 1,757,620
Santa Fe, NM, 1st Interstate Plaza
Project, 8.00%, 7/1/13 3,388 3,650,738
Santa Fe, NM, Crow Hobbs Project,
8.50%, 9/1/16 3,300 3,637,260
Texas Department of Housing and
Community Affairs, NHP
Foundation-Asmara Project,
6.40%, 1/1/27 550 575,372
- --------------------------------------------------------------------------------
$ 26,227,413
- --------------------------------------------------------------------------------
Industrial Development Revenue / Pollution
Control Revenue -- 26.8%
- --------------------------------------------------------------------------------
ABIA Development Corp., Austin
Cargoport Development, L.L.C.
Project (AMT), 9.25%, 10/1/21 $ 2,815 $ 3,102,102
Camden County, NJ, Holt Hauling and
Warehousing System, Inc. Project
(AMT), 9.875%, 1/1/21 2,000 2,350,120
Carbon County, UT, (Laidlaw
Environmental Services Inc.),
7.45%, 7/1/17 3,900 4,036,110
Florence County, SC, Stone
Container Company, 7.375%, 2/1/07 1,895 2,014,631
Hancock County, KY, Southwire Co.,
(AMT), 7.75%, 7/1/26 2,700 2,868,021
Kansas City, MO, IDA, AFCO Cargo
(AMT), 8.50%, 1/1/17 4,095 4,588,201
Kimball, NE, Economic Development
Authority, Clean Harbors Inc.
(AMT), 10.75%, 9/1/26 3,000 3,256,260
Michigan Strategic Fund, (S.D.
Warren Co.) (AMT), 7.375%, 1/15/22 3,500 3,761,940
Mobile, AL, Mobile Energy Project,
6.95%, 1/1/20 1,000 1,097,120
Morgantown, KY, IMCO Recyclying
Inc., 7.45%, 5/1/22 3,400 3,538,618
New Albany, IN, IDA, K-Mart Co.,
7.40%, 6/1/06 1,095 1,176,895
New Hampshire Business Finance
Authority, Crown Paper Co. (AMT),
7.875%, 7/1/26 2,750 3,020,930
New Hampshire, Public Service Co.
of NH, 7.65%, 5/1/21 3,420 3,577,081
New Jersey EDA, (777 Pattison Ave.,
Inc.), (AMT), 8.95%, 12/15/18 500 552,530
New Jersey EDA, Holt Hauling and
Warehousing System, Inc., 7.90%,
3/1/27 4,000 4,320,200
Ohio Solid Waste Revenue, Republic
Engineered Steels Inc., (AMT),
9.00%, 6/1/21 4,000 4,159,080
Osceola County, IDA, Community
Pooled Loan-93, 7.75%, 7/1/17 2,000 2,112,920
Perry County, KY, TJ International
Inc., 6.55%, 4/15/27 2,000 2,119,840
Philadelphia, PA, (Refrigerated
Enterprises) (AMT), 9.05%, 12/1/19 500 554,455
</TABLE>
See notes to financial statements
10
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
PORTFOLIO OF INVESTMENTS (Unaudited) CONT'D
<TABLE>
<CAPTION>
Principal
Amount
Security (000 Omitted) Value
- --------------------------------------------------------------------------------
Industrial Development Revenue / Pollution
Control Revenue (continued)
- --------------------------------------------------------------------------------
<S> <C> <C>
Riverdale Village, IL, ACME Metals,
Inc. Project (AMT), 7.95%, 4/1/25 $ 3,345 $ 3,589,921
Robbins, IL, Resource Recovery,
8.375%, 10/15/16 3,500 3,746,925
Skowhegan, ME, S. D. Warren Co.,
6.65%, 10/15/15 3,000 3,084,270
- --------------------------------------------------------------------------------
$ 62,628,170
- --------------------------------------------------------------------------------
Insured-Water and Sewer -- 1.3%
- --------------------------------------------------------------------------------
Detroit, MI, Sewer Revenue, (FGIC),
Variable Rate, 7/1/23/(2)/ $ 3,000 $ 3,165,000
- --------------------------------------------------------------------------------
$ 3,165,000
- --------------------------------------------------------------------------------
Lease Revenue / Certificates of Participation -- 1.9%
- --------------------------------------------------------------------------------
Hardeman County, TN, Correctional
Facilities Corp., 7.75%, 8/1/17 $ 4,000 $ 4,373,120
- --------------------------------------------------------------------------------
$ 4,373,120
- --------------------------------------------------------------------------------
Lease Revenue / Certificates of Participation -- 1.1%
- --------------------------------------------------------------------------------
Los Angeles, CA, COP, Disney
Parking Project, 0.00%, 9/1/19 $ 9,190 $ 2,517,601
- --------------------------------------------------------------------------------
$ 2,517,601
- --------------------------------------------------------------------------------
Life Care -- 10.7%
- --------------------------------------------------------------------------------
Delaware County, PA, White Horse
Village, 7.30%, 7/1/14 $ 3,500 $ 3,694,635
Kansas City, MO, IDA, Kingswood
United Methodist Manor, 9.00%,
11/15/13 4,000 4,429,399
Saint Tammany, LA, Public Finance,
Christwood Project, 9.00%, 11/15/25 3,955 4,335,708
Tax Exempt Securities Trust, 8.50%,
12/1/36 2,382 2,526,587
Tax Exempt Securities Trust, 8.81%,
12/1/36 2,000 2,197,200
Tax Exempt Securities Trust, 7.00%,
12/1/36 1,330 1,400,796
Tax Exempt Securities Trust, 8.70%,
12/1/36 1,000 1,088,640
Tax Exempt Securities Trust, 7.00%,
12/1/36 1,100 1,100,000
Tax Exempt Securities Trust, 8.875%,
12/1/36 600 600,000
Tax Exempt Securities Trust, 6.75%,
12/1/36 2,580 2,663,669
Tax Exempt Securities Trust, 8.375%,
12/31/36 860 914,722
- --------------------------------------------------------------------------------
$ 24,951,356
- --------------------------------------------------------------------------------
Miscellaneous -- 1.6%
- --------------------------------------------------------------------------------
Atlanta, GA, Downtown Development
Authority, Central Atlanta
Hospitality Childcare, Inc., 8.00%,
1/1/26 $ 3,765 $ 3,846,211
- --------------------------------------------------------------------------------
$ 3,846,211
- --------------------------------------------------------------------------------
Nursing Homes -- 6.5%
- --------------------------------------------------------------------------------
Greene County, OH, IDA, Fairview
Extended Care, 10.125%, 1/1/11 $ 1,220 $ 1,446,676
Kansas City, MO, IDA, Beverly
Enterprises, 8.00%, 12/1/02 2,175 2,315,048
Massachusetts HEFA, Fairview
Extended Care, 10.125%, 1/1/11 1,790 2,028,285
Massachusetts IFA, AGE, Institute
of Massachusetts, 8.05%, 11/1/25 2,500 2,642,950
Mississippi Business Finance Corp.,
Magnolia Healthcare, 7.99%, 7/1/25 1,200 1,258,164
Westmoreland, PA, (Highland Health
Systems, Inc.), 9.25%, 6/1/22 3,500 3,922,590
Wilkins Area, PA, IDA, (Fairview
Extended Care), 10.25%, 1/1/21 1,250 1,487,100
- --------------------------------------------------------------------------------
$ 15,100,813
- --------------------------------------------------------------------------------
Special Tax Revenue -- 1.7%
- --------------------------------------------------------------------------------
Cottonwood Water & Sanitation
District, General Obligation,
7.75%, 12/1/20 $ 3,800 $ 3,944,552
- --------------------------------------------------------------------------------
$ 3,944,552
- --------------------------------------------------------------------------------
Transportation -- 2.0%
- --------------------------------------------------------------------------------
Eagle County, CO, Airport Terminal
Project, 7.50%, 5/1/21 $ 500 $ 530,760
San Joaquin Hills, CA, Toll Road
Revenue Bonds, 0.00%, 1/1/25 10,000 2,139,000
San Joaquin Hills, CA, Toll Road
Revenue Bonds, 0.00%, 1/1/26 10,000 2,022,000
- --------------------------------------------------------------------------------
$ 4,691,760
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
11
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
PORTFOLIO OF INVESTMENTS (Unaudited) CONT'D
<TABLE>
<CAPTION>
Principal
Amount
Security (000 Omitted) Value
- --------------------------------------------------------------------------------
Utilities -- 1.0%
- --------------------------------------------------------------------------------
<S> <C> <C>
Southern California Public Power
Authority, Variable Rate, 7/1/12/(2)/ $ 2,000 $ 2,257,500
- --------------------------------------------------------------------------------
$ 2,257,500
- --------------------------------------------------------------------------------
Total Tax-Exempt Investments -- 100%
(identified cost $216,107,640) $233,784,646
- --------------------------------------------------------------------------------
</TABLE>
AMT - Interest earned from these securities may be considered a tax
preference item for purpose of the Federal Alternative Minimum Tax.
At July 31, 1997, the concentration of the Portfolio's investments in
various states determined as a percentage of total investments is as
follows:
Pennsylvania 10%
Others, representing less than 10% individually 90%
/(1)/ Security (or a portion thereof) has been segregated to cover margin
requirements on open financial futures contracts.
/(2)/ Security has been issued as an inverse floater bond.
See notes to financial statements
12
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
FINANCIAL STATEMENTS (Unaudited)
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
As of July 31, 1997
Assets
- --------------------------------------------------------------------------------
<S> <C>
Investments, at value (Note 1A)
(identified cost, $216,107,640) $233,784,646
Cash 2,519,299
Interest receivable 3,378,120
Deferred organization expenses (Note 1D) 8,526
- --------------------------------------------------------------------------------
Total assets $239,690,591
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Payable for investments purchased $ 856,681
Payable for daily variation margin on open
financial futures contracts (Note 1E) 37,500
Payable to affiliate -
Trustees' fees (Note 2) 956
Accrued expenses 22,162
- --------------------------------------------------------------------------------
Total liabilities $ 917,299
- --------------------------------------------------------------------------------
Net Assets applicable to investors' interest in
Portfolio $238,773,292
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Net proceeds from capital contributions and withdrawals $221,375,604
Net unrealized appreciation of investments (computed
on the basis of identified cost) 17,397,688
- --------------------------------------------------------------------------------
Total $238,773,292
- --------------------------------------------------------------------------------
Statement of Operations
For the Six Months Ended
July 31, 1997
Investment Income (Note 1B)
- --------------------------------------------------------------------------------
Interest income $ 7,583,522
- --------------------------------------------------------------------------------
Total income $ 7,583,522
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 621,102
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 5,940
Custodian fee (Note 1H) 55,962
Legal and accounting services 25,133
Amortization of organization expenses (Note 1D) 726
Miscellaneous 32,357
- --------------------------------------------------------------------------------
Total expenses $ 741,220
- --------------------------------------------------------------------------------
Deduct --
Reduction of custodian fee (1H) $ 14,928
- --------------------------------------------------------------------------------
Total expense reductions $ 14,928
- --------------------------------------------------------------------------------
Net expenses $ 726,292
- --------------------------------------------------------------------------------
Net investment income $ 6,857,230
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ 94,218
Financial futures contracts (1,212,846)
- --------------------------------------------------------------------------------
Net realized loss on investments $ (1,118,628)
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments (identified cost basis) $ 12,778,228
Financial futures contracts 63,426
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) $ 12,841,654
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 11,723,026
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 18,580,256
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
13
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended
Increase (Decrease) July 31, 1997 Year Ended
in Net Assets (Unaudited) January 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 6,857,230 $ 8,918,825
Net realized loss
on investments (1,118,628) (1,259,590)
Change in unrealized
appreciation (depreciation) 12,841,654 2,904,425
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 18,580,256 $ 10,563,660
- --------------------------------------------------------------------------------
Capital transactions --
Contributions $ 60,248,452 $ 118,977,124
Withdrawals (20,755,875) (20,917,792)
- --------------------------------------------------------------------------------
Net increase in net assets
from capital transactions $ 39,492,577 $ 98,059,332
- --------------------------------------------------------------------------------
Net increase in net assets $ 58,072,833 $ 108,622,992
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of period $180,700,459 $ 72,077,467
- --------------------------------------------------------------------------------
At end of period $238,773,292 $ 180,700,459
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
14
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Six Months Ended Year Ended January 31,
July 31, 1997 -------------------------------
(Unaudited) 1997 1996*
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to average daily net assets++
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expenses 0.73%+ 0.34% 0.06%+
Expenses after custodian fee reduction 0.71%+ 0.30% 0.06%+
Net investment income 6.73%+ 6.96% 6.95%+
Portfolio Turnover 4% 41% 32%
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $238,773 $ 180,700 $ 72,077
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
++ The operating expenses of the Portfolio may reflect a reduction of the
Investment Adviser fee. Had such action not been taken, the ratios would
have been as follows:
<TABLE>
<S> <C> <C>
Expenses 0.71% 0.71%+
Expenses after custodian fee reduction 0.67% 0.71%+
Net investment income 6.59% 6.30%+
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, August 7, 1995 to January 31, 1996
See notes to financial statements
15
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1 Significant Accounting Policies
------------------------------------------------------------------------------
High Yield Municipals Portfolio (the Portfolio) is registered under the
Investment Company Act of 1940, as a non-diversified open-end management
investment company. The Portfolio, which was organized as a trust under the
laws of the State of New York on May 1, 1995, seeks to provide high current
income exempt from regular federal income tax. The Declaration of Trust
permits the Trustees to issue interests in the Portfolio. The following is a
summary of significant accounting policies of the Portfolio. The policies are
in conformity with generally accepted accounting principles.
A Investment Valuation -- Municipal bonds are normally valued on the basis of
valuations furnished by a pricing service. Taxable obligations, if any, for
which price quotations are readily available are normally valued at the mean
between latest bid and asked prices. Futures contracts listed on commodity
exchanges are valued at closing settlement prices. Short-term obligations
maturing in sixty days or less, are valued at amortized cost, which
approximates value. Investments for which valuations or market quotations are
unavailable are valued at fair value using methods determined in good faith by
or at the direction of the Trustees.
B Income -- Interest income is determined on the basis of interest accrued,
adjusted for amortization of premium or discount when required for federal
income tax purposes.
C Income Taxes -- The Portfolio is treated as a partnership for federal tax
purposes. No provision is made by the Portfolio for federal or state taxes on
any taxable income of the Portfolio because each investor in the Portfolio is
ultimately responsible for the payment of any taxes. Since some of the
Portfolio's investors are regulated investment companies that invest all or
substantially all of their assets in the Portfolio, the Portfolio normally
must satisfy the applicable source of the income and diversification
requirements (under the Internal Revenue Code) in order for its investors to
satisfy them. The Portfolio will allocate at least annually among its
investors each investor's distributive share of the Portfolio's net taxable
(if any) and tax-exempt investment income, net realized capital gains, and any
other items of income, gain, loss, deduction or credit. Interest income
received by the Portfolio on investments in municipal bonds, which is
excludable from gross income under the Internal Revenue Code, will retain its
status as income exempt from Federal income tax when allocated to the
Portfolio's investors. The portion of such interest, if any, earned on private
activity bonds issued after August 7, 1986 may be considered a tax preference
item for investors.
D Deferred Organization Expenses -- Costs incurred by the Portfolio in
connection with its organization are being amortized on the straight-line
basis over five years.
E Financial Futures Contracts -- Upon the entering of a financial futures
contract, the Portfolio is required to deposit ("initial margin") either in
cash or securities an amount equal to a certain percentage of the purchase
price indicated in the financial futures contract. Subsequent payments are
made or received by the Portfolio ("margin maintenance") each day, dependent
on the daily fluctuations in the value of the underlying security, and are
recorded for book purposes as unrealized gains or losses by the Portfolio. The
Portfolio's investment in financial futures contracts is designed only to
hedge against anticipated futures changes in interest rates. Should interest
rates move unexpectedly, the Portfolio may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss.
F Legal Fees -- Legal fees and other related expenses incurred as part of
negotiations of the terms and requirements of capital infusions, or that are
expected to result in the restructuring of or a plan of reorganization for an
investment are recorded as realized losses. Ongoing expenditures to protect or
enhance an investment are treated as operating expenses.
G When-issued and Delayed Delivery Transactions -- The Portfolio may engage in
when-issued and delayed delivery transactions. The Portfolio records when-
issued securities on trade date and maintains security positions such that
sufficient liquid assets will be available to make payments for the securities
purchased. Securities purchased on when-issued or delayed delivery basis are
marked to market daily and begin accruing interest on settlement date.
H Expense Reduction -- Investors Bank & Trust Company (IBT) serves as
custodian of the Portfolio. Pursuant to the custodian agreement, IBT receives
a fee reduced by credits which are determined based on the average daily cash
balances the Portfolio maintains with IBT. All significant credit balances
used to reduce the Portfolio's custodian fees are reported as a reduction of
expenses in the Statement of Operations.
16
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
I Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expense during the reporting period. Actual results
could differ from those estimates.
J Other -- Investment transactions are accounted for on a trade date basis.
K Interim Financial Information -- The interim financial statements relating
to July 31, 1997 and for the six months then ended have not been audited by
independent certified public accountants, but in the opinion of the
Portfolio's management reflect all adjustments consisting only of normal
recurring adjustments, necessary for the fair presentation of the financial
statements.
2 Investment Adviser Fee and Other Transactions with Affiliates
------------------------------------------------------------------------------
The investment adviser fee is earned by Boston Management and Research (BMR),
a wholly-owned subsidiary of Eaton Vance Management (EVM), as compensation for
management and investment advisory services rendered to the Portfolio. The fee
is based upon a percentage of average daily net assets plus a percentage of
gross income (i.e. income other than gains from the sales of securities). For
the six months ended July 31, 1997, the fee was equivalent to 0.60%
(annualized) of the Portfolio's average net assets for such period and
amounted to $621,102. Except as to Trustees of the Portfolio who are not
members of EVM's or BMR's organization, officers and Trustees receive
remuneration for their services to the Portfolio out of such investment
adviser fee. Certain of the officers and Trustees of the Portfolio are
officers and directors/trustees of the above organizations. Trustees of the
Portfolio that are not affiliated with the Investment Adviser may elect to
defer receipt of all or a percentage of their annual fees in accordance with
the terms of the Trustees Deferred Compensation Plan. For the period ended
July 31, 1997, no significant amounts have been deferred.
3 Investments
------------------------------------------------------------------------------
Purchases and sales of investments, other than U.S. Government securities and
short-term obligations, aggregated $51,038,720 and $8,436,955, respectively,
for the six months ended July 31, 1997.
4 Federal Income Tax Basis of Investments
------------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the investments
owned at July 31, 1997, as computed on a federal income tax basis, were as
follows:
<TABLE>
<S> <C>
Aggregate cost $216,107,640
------------------------------------------------------------------------------
Gross unrealized appreciation $18,611,032
Gross unrealized depreciation 934,026
------------------------------------------------------------------------------
Net unrealized appreciation $17,677,006
------------------------------------------------------------------------------
</TABLE>
5 Line of Credit
------------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR and
EVM and its affiliates in a $120 million unsecured line of credit agreement
with a group of banks. Borrowings will be made by the Portfolio solely to
facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Interest is charged to each participating portfolio or fund
based on its borrowings at the bank's base rate or at an amount above either
the bank's adjusted certificate of deposit rate, Eurodollar rate, or a federal
funds effective rate. In addition, a fee computed at an annual rate of 0.15%
on the daily unused portion of the line of credit is allocated among the
participating portfolios and funds at the end of each quarter. The Portfolio
did not have any significant borrowings or allocated fees during the six-
months ended July 31, 1997.
6 Financial Instruments
------------------------------------------------------------------------------
The Portfolio regularly trades in financial instruments with off-balance sheet
risk in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include futures
contracts and may involve, to a varying degree, elements of risk in excess of
the amounts recognized for financial statement purposes. The notional or
contractual amounts of these instruments represent the investment the
Portfolio has in particular classes of financial instruments and do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered. A summary of obligations
under these financial instruments at July 31, 1997 is as follows:
<TABLE>
<CAPTION>
Futures
Contracts Net Unrealized
Expiration Appreciation
Date Contracts Position (Depreciation)
------------------------------------------------------------------------------
<S> <C> <C> <C>
9/97 100 U.S. Treasury Bonds Short $(279,318)
</TABLE>
17
<PAGE>
EV Marathon High Yield Municipals Fund as of July 31, 1997
INVESTMENT MANAGEMENT
<TABLE>
<S> <C>
EV Marathon High Yield Municipals Fund
Officers Independent Trustees
Thomas J. Fetter Donald R. Dwight
President President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
James B. Hawkes
Vice President and Trustee Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Robert B. MacIntosh, CFA Banking, Harvard University Graduate School of
Vice President Business Administration
James L. O'Connor Norton H. Reamer
Treasurer President and Director, United Asset
Management Corporation
Alan R. Dyner
Secretary John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
High Yield Municipals Portfolio
Officers Independent Trustees
Thomas J. Fetter Donald R. Dwight
President President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
James B. Hawkes
Vice President and Trustee Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Thomas Metzold Banking, Harvard University Graduate School of
Vice President and Portfolio Business Administration
Manager
Norton H. Reamer
James L. O'Connor President and Director, United Asset
Treasurer Management Corporation
Alan R. Dynner John L. Thorndike
Secretary Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
</TABLE>
18
<PAGE>
This Page Intentionally Left Blank
<PAGE>
Investment Advisor of
High Yield Municipals Portfolio
Boston Management and Research
24 Federal Street
Boston, MA 02110
Administrator of
EV Marathon High Yield Municipals Fund
Eaton Vance Management
24 Federal Street
Boston, MA 02110
Principal Underwriter
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(617) 482-8260
Custodian
Investors Bank & Trust Company
200 Clarendon Street, 16th Floor
Boston, MA 02116
Transfer Agent
First Data Investor Services Group
Attention: Eaton Vance Funds
P.O. Box 5123
Westborough, MA 01581-5123
EV Marathon High Yield Fund
24 Federal Street
Boston, MA 02110
- --------------------------------------------------------------------------------
This report must be preceded or accompanied by a current prospectus which
contains more complete information on the Fund, including its distribution plan,
sales charges and expenses. Please read the prospectus carefully before you
invest or send money.
- --------------------------------------------------------------------------------
M-HYSRC-9/97
