<PAGE>
[LOGO OF Investing
EATON VANCE for the
APPEARS 21st [PHOTO OF DESK
HERE] Century W/BONDS
APPEARS HERE]
Annual Report January 31, 1998
EV
MARATHON
[PHOTO OF HIGH YIELD
A STATUE
APPEARS MUNICIPALS
HERE]
FUND
Eaton Vance
Global Management-Global Distribution
M a r a t h o n
[PHOTO OF DOWNTOWN
BOSTON APPEARS HERE]
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
LETTER TO SHAREHOLDERS
[PHOTO OF THOMAS J. FETTER APPEARS HERE]
EV Marathon High Yield Municipals Fund had a total return of 14.7% for the year
ended January 31, 1998./1/ That return was the result of a rise in net asset
value per share from $10.62 on January 31, 1997 to $11.52 on January 31, 1998,
and the reinvestment of $0.61 in dividends. Based on its one-year performance,
the Fund was ranked fourth out of 45 funds in the High Yield Municipal Debt
category, as compiled by Lipper Analytical Services, Inc. - a nationally
recognized monitor of mutual fund performance. The average return for the group
was 11.0% for the same period./2/
Amid volatile global markets, more investors were drawn to municipal bonds...
1997 was a very good year for municipal bonds. Against a backdrop of moderate
economic growth and low inflation, investors again focused on the unique
features of municipals, which are among the last remaining tax-advantaged
vehicles. In addition, the municipal market attracted an increasing number of
crossover investors from other markets. Many investors bought municipals in a
flight to quality as the domestic equity market reached overvalued levels and
emerging markets were caught up in the turmoil of the Asian currency crisis.
A sound economy has resulted in improving municipal credits...
The upbeat economic climate of recent years has provided strong support for the
municipal market. Steady job growth has generated increased tax revenues for
states and local issuers. As a result, many areas hard-hit in the recessions of
the 1970s and 1980s have made a significant economic comeback, a fact reflected
in the value of their bonds. We expect to see many more such stories emerge in
the coming year.
1998 should bring more opportunities for municipal investors...
At present, there is little sign of inflation on the horizon, and, with the
Asian turmoil of recent months, it's possible that the economy may slow somewhat
in the next year. Meanwhile, the federal budget situation has improved
dramatically in the past several years. Naturally, those conditions are subject
to change over time, and we will continue to closely monitor economic progress.
As for the tax-exempt market, we believe that municipals will continue to serve
their traditional function of financing vital public works, while offering good
opportunities for tax-conscious investors.
Sincerely,
/s/ Thomas J. Fetter
Thomas J. Fetter
President
February 9, 1998
- --------------------------------------------------------------------------------
Fund Information
as of January 31, 1998
Performance/3/
Average Annual Total Returns (at net asset value)
- --------------------------------------------------------------------------------
One year 14.7%
Life of Fund (8/7/95) 12.1
SEC Average Annual Total Returns (including applicable CDSC)
- --------------------------------------------------------------------------------
One year 9.7%
Life of Fund (8/7/95) 10.7
Five Largest Sector Weightings/4/
- --------------------------------------------------------------------------------
Industrial Development Bonds 25.2%
Escrowed 12.1%
Housing 8.2%
Hospitals 7.2%
Assisted Living 6.2%
/1/ This return does not include the applicable contingent deferred sales charge
(CDSC.) /2/ Lipper rankings are based on total return and do not take sales
charges into consideration. It is not possible to invest directly in an
Average or Index. /3/ Returns are calculated by determining the percentage
change in net asset value with all distributions reinvested. SEC returns
reflect applicable CDSC based on the following schedule: 5%-1st year; 5%-2nd
year; 4%-3rd year; 3%-4th year; 2%-5th year; 1%-6th year. /4/ Five largest
sector weightings account for 58.9% of the portfolio's investments,
determined by dividing the total market value of the holdings by the total
investments of the portfolio. Holdings are subject to change.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost.
2
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
MANAGEMENT DISCUSSION
[PHOTO OF THOMAS M. METZDA APPEARS HERE]
An interview with Thomas M. Metzold, portfolio manager of High Yield Municipals
Portfolio.
Q: Tom, how would you characterize the municipal bond market in 1997?
A: The municipal market turned in a strong performance. The Lehman Brothers
Municipal Bond Index, for example, rose 9.5% in the year ended January 31./1/
The overall bond market was helped by reports of continued low inflation, as
ample labor and an increasingly global economy have held at bay most
inflationary pressures.
The municipal market did slightly underperform the Treasury market due to a
rise in municipal supply. According to the Bond Market Association, long-term
municipal issuance rose to more than $220 billion in 1997, up from around
$190 billion the previous year. All in all, though, this was an excellent
year for the tax-exempt market.
Q: The Fund again finished the year near the top of its competitive universe.
What accounted for the excellent performance?
A: Our performance was bolstered by three factors. First, the Fund maintained a
slightly longer-than-average duration than our peer group. As the good news
about inflation filtered through the market, our longer average maturity
helped the Fund participate more fully in the market rally.
Second, as interest rates declined, the Fund benefited from a number of
prerefundings, as higher-coupon bonds were advance-refunded by their issuers.
Because these escrowed bonds are backed by Treasuries, their market value
increases to reflect the fact they no longer have any credit risk.
Finally, the compression of yields between high-quality and lower-quality
bonds that has characterized the market in recent years continued in 1997.
That especially benefited lower-quality bonds, the primary investment
universe of the Portfolio.
Q: What were the Portfolio's largest sector concentrations?
A: The Portfolio remained well diversified. Among our largest sector weightings,
the Portfolio was helped by the strong performance of industrial development
bonds, as the relatively robust economy resulted in improving fundamentals
for underlying projects. The Portfolio also had a large exposure to zero
coupon bonds, which performed extremely well in a falling rate environment.
Finally, we had a wide range of
- --------------------------------------------------------------------------------
Portfolio Quality Weightings/2/
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
AAA 14.3%
AA 2.4%
A 2.2%
BBB 12.0%
BB 7.3%
B 1.3%
Non-Rated 60.5%
Portfolio Overview/2/
- --------------------------------------------------------------------------------
Number of Issues 119
Average Rating BBB-
Average Maturity 23.7 Yrs.
Effective Maturity 10.6 Yrs.
Average Call 9.2 Yrs.
Average Dollar Price $101.47
/1/ It is not possible to invest directly in an Average or Index.
/2/ Because the Portfolio is actively managed, Quality Ratings 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.
- --------------------------------------------------------------------------------
3
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
MANAGEMENT DISCUSSION CONT'D
bonds in areas such as life-care facilities, assisted living projects, and
nursing homes. These non-rated bonds also fared well as quality spreads
narrowed.
Q: Industrial development bonds remained the largest weighting in the Fund. What
did you find attractive about the IDB sector?
A: Industrial development bonds are tied to industrial activity and therefore
provide higher coupons than some other segments of the tax-exempt market.
Because they are tied to commercial enterprises, these bonds require company
research as well. That plays into one of our strengths at Eaton Vance.
The Portfolio's IDB investments included projects for paper companies,
environmental and recycling projects, retailers, airlines, metals and
utilities. In addition to producing jobs, these projects -- which include
airports, pollution control facilities, and power generating plants --
contribute to the well-being of the entire community.
Q: The prerefunding of some of its bonds continued to play a role in the Fund's
success. Could you discuss that briefly?
A: With the decline in interest rates, many municipal issuers have sought to
lower their interest costs by prerefunding their outstanding, high-coupon
debt. Because these prerefunded bonds are backed by U.S. Treasuries, they are
deemed to be of the highest quality, which is typically reflected in the
market's pricing of the bond. In addition, escrowed bonds tend to perform
much like Treasuries. In last year's market rally, that was additive to the
Fund's performance.
Q: What did you find compelling about long-term care facilities, such as
assisted living, nursing homes and life care projects?
A: We have made this area of the market an Eaton Vance specialty in recent
years. The health care industry is changing rapidly and these long-term care
facilities are playing an increasingly important role. They offer senior
citizens a large measure of independence, together with a wide range of
health care options. Accordingly, they have become popular with residents and
investors alike.
Typically, the bonds financing these facilities are non-rated and, therefore,
require very rigorous analysis. As these projects have become more "seasoned"
over time, investors have become more comfortable with the concepts and
financial fundamentals, and the bonds have appreciated in price.
Q: You mentioned the recent "spread compression" among municipal bond yields.
Could you expand on that thought?
A: Yes. Municipal quality spreads -- the difference in yields for bonds of
varying quality -- have narrowed dramatically in the last decade. Ten years
ago, the coupon for a BBB rated hospital bond would have been 300 basis
points (3%) higher than a AAA-rated hospital bond. Today, that difference may
be only around 25 basis points.
Your Investment at Work
- --------------------------------------------------------------------------------
Northwest Arkansas [GRAPHIC APPEARS HERE]
Regional Airport Authority
. These bonds were issued to finance the construction of a new airport facility
in Benton County, Arkansas.
. Bentonville is the site of the world headquarters of Wal-Mart, Inc, the
nation's leading discount retailer. The company's impressive growth in the
past decade has necessitated the construction of a facility capable of
handling jet aircraft. American Airlines, one of the nations largest domestic
carriers, is among the airlines currently serving the area.
. The bonds carry an attractive coupon of 7.625% and are an example of the
Portfolio's efforts to find good value in non-rated bonds.
4
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
MANAGEMENT DISCUSSION CONT'D
The compression in yield spreads has been the result of two related trends.
First, insured bonds have increasingly dominated new municipal issuance. The
widespread use of insurance by issuers has effectively eliminated quality
spreads for a large segment of the investment grade market and made the
municipal market increasingly generic. The second trend is a natural result
of the first. Investors have turned to lower-rated bonds in an effort to find
a yield advantage. The increasing demand for lower-rated bonds has
contributed to even narrower spreads for lower-rated bonds.
Q: What is your outlook for the municipal market in the coming year?
A: With little sign of inflation, the outlook for bonds is generally favorable,
although the economy will require watching for unexpected strength. We will
also continue to monitor the optimistic budget scenario for any sign of
deterioration.
Moreover, following a successful year in the markets, I believe it makes good
investment sense to review one's asset allocations. The equity market has
just finished a remarkable run, with 1997 marking the third consecutive year
of 20%-plus returns for the Dow Jones Industrial Average. That is well above
the historical norm of 10% annual returns. As a result of that stock market
run-up, many investors may now be over-allocated in equities.
It may be prudent to adjust those portfolios slightly in favor of bonds.
Municipal bonds represent an excellent way to diversify. And, of course,
municipals provide excellent after-tax income, one of the few remaining ways
to shelter income from taxes. I believe that municipal bonds remain a
valuable, tax-efficient part of a comprehensive investment strategy.
Comparison of Change in Value of a $10,000 Investment in EV Marathon High Yield
Municipals Fund vs. Lehman Brothers Municipal Bond Index
From August 31, 1995, through January 31, 1998
[LINE GRAPH APPEARS HERE]
EV Marathon
High Yield Lehman Brothers
Date* Municipals Fund Fund/w.CDSC** Municipal Bond Index
----- --------------- ------------- --------------------
8/31/95 $10,000 - $10,000
9/30/95 $10,183 - $10,063
10/31/95 $10,358 - $10,209
11/30/95 $10,612 - $10,379
12/31/95 $10,747 - $10,479
1/31/96 $10,764 - $10,558
2/28/96 $10,687 - $10,487
3/31/96 $10,526 - $10,353
4/30/96 $10,428 - $10,323
5/31/96 $10,564 - $10,319
6/30/96 $10,675 - $10,432
7/31/96 $10,821 - $10,526
8/31/96 $10,897 - $10,524
9/30/96 $11,049 - $10,671
10/31/96 $11,206 - $10,791
11/30/96 $11,378 - $10,989
12/31/96 $11,403 - $10,943
1/31/97 $11,403 - $10,963
2/28/97 $11,506 - $11,064
3/31/97 $11,404 - $10,917
4/30/97 $11,478 - $11,008
5/31/97 $11,598 - $11,174
6/30/97 $11,909 - $11,293
7/31/97 $12,348 - $11,605
8/31/97 $12,294 - $11,497
9/30/97 $12,408 - $11,633
10/31/97 $12,564 - $11,708
11/30/97 $12,649 - $11,777
12/31/97 $12,904 - $11,949
1/31/98 $13,075 $12,675 $12,072
Performance+
- --------------------------------------------------------------------------------
Average Annual Total Returns (at net asset value)
- --------------------------------------------------------------------------------
One year 14.7%
Life of Fund (8/7/95) 12.1
SEC Average Annual Total Returns (including applicable CDSC)
- --------------------------------------------------------------------------------
One year 9.7%
Life of Fund (8/7/95) 10.7
* Source: Towers Data Systems, Bethesda, MD.
The chart compares the Fund's total return with that of the Lehman Brothers
Municipal Bond Index, a broad-based, unmanaged market index of municipal
bonds. Returns are calculated by determining the percentage change in net
asset value (NAV) with all distributions reinvested. The lines on the chart
represent the total returns of $10,000 hypothetical investments in the Fund
and the Index. The Index's total return does not reflect commissions or
expenses that would have been incurred if an investor individually purchased
or sold the securities represented in the Index. It is not possible to invest
directly in an Index.
**This figure reflects the Fund's maximum applicable contingent deferred sales
charge (CDSC) deducted at redemption as follows: 5% - 1st and 2nd years; 4% -
3rd year; 3% - 4th year; 2% - 5th year; and 1% - 6th year.
+ Returns are calculated by determining the percentage change in net asset value
(NAV) with all distributions reinvested. SEC returns reflect applicable CDSC
according to the schedule above.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less their original cost.
- --------------------------------------------------------------------------------
Federal income tax information on distributions. For Federal income tax
purposes, 100% of the total dividends paid by the Fund from net investment
income during the year ended January 31, 1998 is designated as an
exempt-interest dividend.
- --------------------------------------------------------------------------------
5
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
As of January 31, 1998
Assets
- --------------------------------------------------------------------------------
Investment in High Yield Municipals Portfolio (Portfolio),
at value (Note 1A) (identified cost $173,417,601) $ 191,471,673
Receivable for Fund shares sold 1,081,804
Deferred organization expenses (Note 1D) 24,020
- --------------------------------------------------------------------------------
Total assets $ 192,577,497
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Dividends payable $ 436,493
Payable for Fund shares redeemed 346,922
Payable to affiliate for Trustees' fees (Note 4) 274
Accrued expenses 87,569
- --------------------------------------------------------------------------------
Total liabilities $ 871,258
- --------------------------------------------------------------------------------
Net Assets for 16,642,853 shares of
beneficial interest outstanding $ 191,706,239
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Paid-in capital $ 176,405,238
Accumulated net realized loss on investments from Portfolio
(computed on the basis of identified cost) (2,458,410)
Accumulated distributions in excess of net investment income (294,661)
Net unrealized appreciation of investments from Portfolio
(computed on the basis of identified cost) 18,054,072
- --------------------------------------------------------------------------------
Total $ 191,706,239
- --------------------------------------------------------------------------------
Net Asset Value, Offering and Redemption
Price Per Share (Note 6)
- --------------------------------------------------------------------------------
($191,706,239 / 16,642,853 shares of
beneficial interest outstanding) $ 11.52
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended
January 31, 1998
Investment Income (Note 1B)
- --------------------------------------------------------------------------------
Interest income allocated from Portfolio $ 10,998,118
Expenses allocated from Portfolio (1,029,430)
- --------------------------------------------------------------------------------
Net investment income from Portfolio $ 9,968,688
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Compensation of Trustees not members of the
Administrator's organization (Note 4) $ 1,940
Distribution and service fees (Note 5) 1,391,129
Transfer and dividend disbursing agent fees 124,877
Registration fees 72,276
Printing and postage 34,952
Legal and accounting services 20,881
Custodian fee 10,772
Amortization of organization expenses (Note 1D) 9,413
- --------------------------------------------------------------------------------
Total expenses $ 1,666,240
- --------------------------------------------------------------------------------
Net investment income $ 8,302,448
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) from Portfolio
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ 97,620
Financial futures contracts (1,690,225)
- --------------------------------------------------------------------------------
Net realized loss on investment transactions $ (1,592,605)
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments $ 15,378,056
Financial futures contracts (314,021)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ 15,064,035
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 13,471,430
- --------------------------------------------------------------------------------
Net increase in net assets from operations $ 21,773,878
- --------------------------------------------------------------------------------
See notes to financial statements
6
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
Increase (Decrease) Year Ended Year Ended
in Net Assets January 31, 1998 January 31, 1997
- --------------------------------------------------------------------------------
From operations --
Net investment income $ 8,302,448 $ 4,984,445
Net realized loss on
investment transactions (1,592,605) (865,805)
Net change in unrealized
appreciation (depreciation)
of investments 15,064,035 2,149,787
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 21,773,878 $ 6,268,427
- --------------------------------------------------------------------------------
Distributions to shareholders (Note 2) --
From net investment income $ (8,302,448) $ (4,985,320)
In excess of net investment income (269,780) (24,881)
From net realized gain
on investments -- (5,322)
- --------------------------------------------------------------------------------
Total distributions to shareholders $ (8,572,228) $ (5,015,523)
- --------------------------------------------------------------------------------
Transactions in shares of beneficial
interest (Note 3) --
Proceeds from sale of shares $ 72,750,202 $ 84,693,070
Net asset value of shares issued to
shareholders in payment of
distributions declared 2,871,887 1,648,815
Cost of shares redeemed (20,141,026) (8,090,978)
- --------------------------------------------------------------------------------
Net increase in net assets from Fund
share transactions $ 55,481,063 $ 78,250,907
- --------------------------------------------------------------------------------
Net increase in net assets $ 68,682,713 $ 79,503,811
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of year $ 123,023,526 $ 43,519,715
- --------------------------------------------------------------------------------
At end of year $ 191,706,239 $ 123,023,526
- --------------------------------------------------------------------------------
Accumulated
distributions in excess of
net investment income
included in net assets
- --------------------------------------------------------------------------------
At end of year $ (294,661) $ (24,881)
- --------------------------------------------------------------------------------
See notes to financial statements
7
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
FINANCIAL STATEMENTS CONT'D
Financial Highlights
<TABLE>
<CAPTION>
Year Ended January 31,
-------------------------------------------------
1998 1997 1996*
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value -- Beginning of year $ 10.620 $ 10.650 $ 10.000
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.594 $ 0.626 $ 0.299
Net realized and unrealized gain (loss) on investments 0.916 (0.026) 0.657
- ----------------------------------------------------------------------------------------------------------------------
Total income from operations $ 1.510 $ 0.600 $ 0.956
- ----------------------------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------------------------
From net investment income $ (0.594) $ (0.626) $ (0.299)
In excess of net investment income (0.016) (0.003) (0.007)
From net realized gain on investments -- (0.001) --
- ----------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.610) $ (0.630) $ (0.306)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value -- End of year $ 11.520 $ 10.620 $ 10.650
- ----------------------------------------------------------------------------------------------------------------------
Total Return/(1)/ 14.67% 5.90% 9.40%
- ----------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data++
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $191,706 $123,024 $ 43,520
Ratio of net expenses to average daily net assets/(2)/ 1.76% 1.36% 0.88%+
Ratio of net expenses to average daily net assets
after custodian fee reduction/(2)/ 1.74% 1.32% 0.88%+
Ratio of net investment income to average daily net assets 5.36% 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
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 reinvestment 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
8
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
NOTES TO FINANCIAL STATEMENTS
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 (63.1% at January 31, 1998). The
performance of the Fund is directly affected by the performance of the
Portfolio. The financial statements of the Portfolio, including the portfolio
of investments, are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements. 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.
On June 23, 1997, the Board of Trustees of the Trust adopted a multiple class
plan for the Fund which permits the Fund to issue more than one class of
shares. Initially, the Fund will offer three classes of shares and, effective
February 1, 1998 the existing shares of the Fund will be designated Class B
shares. On June 23, 1997, the Board of Trustees also approved a Plan of
Reorganization (the "Plan") for the Trust. Under the terms of the Plan, the
Fund will acquire substantially all of the assets and liabilities of EV
Traditional High Yield Municipals Fund (the Traditional Fund) and EV Classic
High Yield Municipals Fund (the Classic Fund). The transaction will be
structured for tax purposes to qualify as a tax-free reorganization under the
Internal Revenue Code. As a result of the reorganization, shareholders of the
Traditional Fund will receive Class A shares and shareholders of the Classic
Fund will receive Class C shares of the Fund. The reorganization will occur
after the close of business, January 31, 1998.
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 (if any) and
tax-exempt income, including any net realized gain on investments.
Accordingly, no provision for federal income or excise tax is necessary. At
January 31, 1998, the Fund, for federal income tax purposes, had a capital
loss carryover of $2,343,916, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of
distributions to shareholders which would otherwise be necessary to relieve
the Fund of any liability for federal income or excise tax. Such capital loss
carryover will expire January 31, 2005 ($79,992) and January 31, 2006
($2,263,924). Additionally, at January 31, 1998, net capital losses of
$582,489 attributable to security transactions incurred after October 31,
1997, are treated as arising on the first day of the Fund's next taxable
year. 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 operating expenses in the Statement of
Operations.
9
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
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.
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 net realized gain on investments. Permanent differences
between book and tax accounting relating to distributions are reclassified to
paid-in capital.
3 Shares of Beneficial Interest
-----------------------------------------------------------------------------
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Year Ended
January 31,
----------------------
1998 1997
--------------------------------------------------------------------
Sales 6,630,440 8,113,649
Issued to shareholders electing to 261,353 158,020
receive payments of distributions in
Fund shares
Redemptions (1,832,927) (772,805)
----------------------------------------------------------------------
Net increase 5,058,866 7,498,864
----------------------------------------------------------------------
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 is accrued on such day as a liability of the Fund and,
accordingly, reduces the Fund's net assets. The Fund paid $1,160,366 to EVD
for the year ended January 31, 1998, representing 0.75% of average daily net
assets. At January 31, 1998, the amount of Uncovered Distribution Charges of
EVD calculated under the Plan was approximately $7,433,000.
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
Authorized Firms in amounts not expected to exceed 0.25%
10
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
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 year ended January 31,
1998, the Fund paid or accrued service fees to or payable to EVD under the
Plan in the amount of $230,763.
6 Contingent Deferred Sales Charge
-----------------------------------------------------------------------------
A contingent deferred sales charge (CDSC) is imposed on any redemption of
Fund shares made within six years of purchase. Generally, the CDSC is based
upon the lower of the net asset value at date of redemption or date of
purchase. No charge is levied on shares acquired by reinvestment of dividends
or capital 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 $514,000 of CDSC paid by
shareholders for the year ended January 31, 1998.
7 Investment Transactions
-----------------------------------------------------------------------------
Increases and decreases in the Fund's investment in the Portfolio for the
year ended January 31, 1998 aggregated $73,295,918 and $27,805,809,
respectively.
8 Subsequent Event
-----------------------------------------------------------------------------
Effective February 1, 1998, the Fund changed its name to Eaton Vance High
Yield Municipals Fund and shares of the Fund are designated Class B shares.
Additional classes of shares are also offered.
11
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders
of Eaton Vance Municipals Trust II:
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities of EV
Marathon High Yield Municipals Fund (one of the series of Eaton Vance Municipals
Trust II) as of January 31, 1998, the related statement of operations for the
year then ended, the statements of changes in net assets for the two years ended
January 31, 1998 and 1997 and the financial highlights for the two years ended
January 31, 1998 and 1997 and for the period from the start of business, August
7, 1995 to January 31, 1996. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the EV Marathon High
Yield Municipals Fund (one of the series of Eaton Vance Municipals Trust II) at
January 31, 1998, and the results of its operations, the changes in its net
assets and its financial highlights for the respective stated periods, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 13, 1998
See notes to financial statements
12
<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
PORTFOLIO OF INVESTMENTS
Tax-Exempt Investments -- 100.0%
Principal
Amount
Security (000's Omitted) Value
- --------------------------------------------------------------------------------
Assisted Living -- 6.2%
- --------------------------------------------------------------------------------
Arizona Health Facilities Authority, Care
Institute-Mesa Project, 7.625%, 1/1/26 $ 2,500 $ 2,583,950
Chester County, PA, IDA, Senior Life-
Choice of Paoli, (AMT), 8.05%, 1/1/24 2,000 2,222,200
Chester, PA, IDA, Senior Life-Choice of
Kimberton, (AMT), 8.50%, 9/1/25 1,000 1,144,800
Delaware, PA, IDA, Glen Riddle Project,
(AMT), 8.625%, 9/1/25 1,600 1,838,320
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/13 1,000 266,990
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/13 1,000 255,430
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/14 1,000 244,370
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/14 1,000 233,790
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/15 1,000 224,030
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/15 1,000 214,350
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/16 1,000 205,080
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/16 1,000 196,210
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/17 1,000 187,720
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/17 1,000 179,600
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/18 1,000 171,840
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/18 1,000 164,410
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/19 1,000 157,300
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/19 1,000 150,490
Illinois Development Finance Authority, Care
Institute, Inc., 7.80%, 6/1/25 3,740 4,138,983
New Jersey Economic Development Authority,
The Chelsea at East Brunswick Project, (AMT),
8.25%, 10/1/20 3,500 3,902,465
- --------------------------------------------------------------------------------
$ 18,682,328
- --------------------------------------------------------------------------------
Cogeneration -- 4.8%
- --------------------------------------------------------------------------------
Maryland Energy Cogeneration, AES Warrior
Run Project, (AMT), 7.40%, 9/1/19/(1)/ $ 3,500 $ 3,886,470
Palm Beach County, FL, Okeelanta Power L.P.,
(AMT), 6.85%, 2/15/21/(2)/ 3,500 2,695,000
Palm Beach County, FL, Osceola Power Project,
(AMT), 6.95%, 1/1/22/(2)/ 4,000 3,040,000
Pennsylvania Economic Development Financing
Authority, Northampton Generating Project
Subordinated, (AMT), 6.875%, 1/1/11 1,000 1,048,810
Pennsylvania Economic Development Financing
Authority, Northampton Generating Project,
(AMT), 6.60%, 1/1/19 3,500 3,682,840
- --------------------------------------------------------------------------------
$ 14,353,120
- --------------------------------------------------------------------------------
Colleges and Universities -- 2.4%
- --------------------------------------------------------------------------------
New Hampshire Higher Educational and Health
Facilities Authority, Colby-Sawyer College,
7.50%, 6/1/26 $ 2,000 $ 2,195,740
New York State Dormitory Authority,
5.25%, 7/1/17 5,000 4,999,750
- --------------------------------------------------------------------------------
$ 7,195,490
- --------------------------------------------------------------------------------
Electric Utilities -- 2.2%
- --------------------------------------------------------------------------------
Intermountain Power Agency, UT, Variable
Rate, 7/1/11/(3)/ $ 3,500 $ 3,832,500
New York State Energy, Research and
Development Authority, Long Island
Lighting Co., (AMT), 7.15%, 9/1/19 2,500 2,729,350
- --------------------------------------------------------------------------------
$ 6,561,850
- --------------------------------------------------------------------------------
Escrowed / Prerefunded -- 12.1%
- --------------------------------------------------------------------------------
Colorado Health Facilities Authority,
Liberty Heights Project, 0.00%, 7/15/20 $ 8,410 $ 2,609,118
Colorado Health Facilities Authority,
Liberty Heights Project, 0.00%, 7/15/24 19,115 4,814,304
Colorado Health Facilities Authority,
Liberty Heights Project, 0.00%, 7/15/22 13,445 3,758,281
Cuyahoga County, OH, Judson Retirement
Community, 8.875%, 11/15/19 1,500 1,670,550
Dawson Ridge, Metropolitan District #1,
Douglas County, CO, 0.00%, 10/1/22 3,500 974,645
Dawson Ridge, Metropolitan District
Number 1, Douglas County, CO,
Escrowed to Maturity, 0.00%, 10/1/22 10,000 2,784,700
Greene County, OH, IDA, Fairview Extended
Care, 10.125%, 1/1/11 1,175 1,399,954
See notes to financial statements
13
<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
Principal
Amount
Security (000's Omitted) Value
- --------------------------------------------------------------------------------
Escrowed / Prerefunded (continued)
- --------------------------------------------------------------------------------
Illinois Development Finance Authority,
Regency Park Project, 0.00%, 7/15/25 $ 3,295 $ 766,944
Maricopa County, AZ, IDA, Place Five and
The Greenery Projects, 6.625%, 1/1/27 2,500 2,940,575
Maricopa County, AZ, IDA, Place Five and
The Greenery Projects, 8.625%, 1/1/11 1,725 2,280,381
Massachusetts HEFA, Fairview Extended Care,
10.125%, 1/1/11 1,730 2,061,209
Montgomery County, PA, United Hospitals,
8.375%, 11/1/11 1,000 1,096,060
Montgomery County, PA, United Hospitals,
7.50%, 11/1/15 1,000 1,062,630
San Joaquin Hills, CA, Toll Road Revenue
Bonds, 0.00%, 1/1/25 10,000 2,581,100
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Bonds,
0.00%, 1/1/26 10,000 2,454,500
Scranton-Lackawanna, PA, Health and Welfare
Authority, Moses Taylor Hospital,
8.50%, 7/1/20 1,500 1,739,070
Wilkins Area, PA, IDA, (Fairview Extended
Care), 10.25%, 1/1/2 1,250 1,493,500
- --------------------------------------------------------------------------------
$36,487,521
- --------------------------------------------------------------------------------
Hospitals -- 7.2%
- --------------------------------------------------------------------------------
Hidalgo County, TX, Health Services Corp.,
Mission Hospital, Inc., 6.875%, 8/15/26 $ 2,500 $ 2,767,925
Louisiana PFA, General Health Systems
Project, 6.80%, 11/1/16 3,000 3,332,760
Massachusetts HEFA, Milford-Whitinsville
Hospital, 7.75%, 7/15/17 3,000 3,299,160
Philadelphia, PA, (Graduate Health System), 2,205 2,185,420
6.625%, 7/1/21
Philadelphia, PA, (Graduate Health System),
7.00%, 7/1/05 3,170 3,194,124
Prince George's, MD, Greater Southeast
Healthcare System, 6.375%, 1/1/23 2,650 2,781,811
San Bernadino, CA, San Bernadino Community
Hospital, 7.875%, 12/1/08 1,000 1,050,760
San Bernadino, CA, San Bernadino Community
Hospital, 7.875%, 12/1/19 1,325 1,392,257
Wells County, IN, Caylor-Nickel Medical
Center, 8.75%, 4/15/12 1,500 1,752,270
- --------------------------------------------------------------------------------
$ 21,756,487
- --------------------------------------------------------------------------------
Housing -- 8.2%
- --------------------------------------------------------------------------------
Colorado Housing and Finance Authority, Single
Family Housing, (AMT), 7.65%, 12/1/25 $ 4,395 $ 4,976,634
Cuyahoga County, OH, Rolling Hills Apartment
Project, (AMT), 8.00%, 1/1/28 2,450 2,459,065
Florence, KY, Housing Facilities, (Blue Grass
Housing), 7.625%, 5/1/27 2,430 2,657,740
Lucas County, OH, CountyCreek Project, (AMT),
8.00%, 7/1/26 3,765 3,739,549
Maricopa County, AZ, IDA, Multifamily,
(National Health Facilities II Project),
Series B, 6.625%, 7/1/33 1,500 1,497,855
Maricopa County, AZ, IDA, Multifamily,
(National Health Facilities II
Project), Series B, 6.375%, 1/1/19 4,500 4,494,555
North Little Rock, AR, Residential Housing
Facilities, (Parkstone Place), 9.75%, 8/1/21 4,710 4,952,706
- --------------------------------------------------------------------------------
$24,778,104
- --------------------------------------------------------------------------------
Industrial Development Revenue / Pollution
Control Revenue -- 25.2%
- --------------------------------------------------------------------------------
ABIA Development Corp., Austin Cargoport
Development, L.L.C Project, (AMT),
9.25%, 10/1/21 $ 2,815 $ 3,225,117
Camden County, NJ, Holt Hauling and
Warehousing System, Inc. Project,
(AMT), 9.875%, 1/1/21 2,000 2,436,060
Carbon County, UT,(Laidlaw Environmental
Services Inc.), 7.45%, 7/1/17 3,900 4,302,831
Clark County, NV, (Nevada Power Co.),
(AMT), 5.90%, 10/1/30 7,000 7,182,629
Florence County, SC, Stone Container Company,
7.375%, 2/1/07 1,735 1,893,006
Hancock County, KY, Southwire Co., (AMT),
7.75%, 7/1/26 2,700 2,924,046
Iowa Finance Authority, Commercial Development
Revenue, (Southbridge Mall), 6.375%, 12/1/13 3,715 3,754,490
Kansas City, Industrial Development Authority,
(Airline Cargo Facilities), 8.50%, 1/1/17 4,030 4,575,944
Kimball, NE, Economic Development Authority,
Clean Harbors Inc., (AMT), 10.75%, 9/1/26 3,000 3,297,090
Michigan State Strategic Fund, (Credon Paper),
(AMT), 6.50%, 8/1/21 1,200 1,234,968
Michigan Strategic Fund, (S.D. Warren Co.),
(AMT), 7.375%, 1/15/22 3,500 3,894,975
Mobile, AL, Mobile Energy Project,
6.95%, 1/1/20 1,000 1,120,100
Morgantown, KY, IMCO Recycling Inc.,
7.45%, 5/1/22 3,400 3,615,356
New Albany, IN, IDA, K-Mart Co.,
7.40%, 6/1/06 1,095 1,179,611
See notes to financial statements
14
<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
Principal
Amount
Security (000's Omitted) Value
- --------------------------------------------------------------------------------
Industrial Development Revenue / Pollution
Control Revenue (continued)
- --------------------------------------------------------------------------------
New Hampshire Business Finance Authority,
Crown Paper Co., (AMT), 7.875%, 7/1/26 $ 2,750 $ 3,164,645
New Hampshire, Public Service Co. of NH,
7.65%, 5/1/21 3,420 3,664,085
New Jersey EDA, (777 Pattison Ave., Inc.),
8.95%, 12/15/18 500 560,610
New Jersey EDA, (Holt Hauling and Warehousing
System, Inc.), 7.90%, 3/1/27 4,000 4,538,560
Ohio Solid Waste Revenue, Republic Engineered
Steels Inc., (AMT), 9.00%, 6/1/21 4,000 4,310,000
Perry County, KY, TJ International Inc.,
(AMT), 6.55%, 4/15/27 2,000 2,186,680
Philadelphia, PA, (Refrigerated Enterprises),
(AMT), 9.05%, 12/1/19 500 566,700
Riverdale Village, IL, ACME Metals, Inc.
Project, (AMT), 7.95%, 4/1/25 3,345 3,764,028
Robbins, IL, Resource Recovery-96A, (AMT),
8.375%, 10/15/16 3,500 3,704,540
Robbins, IL, Resources Recovery-96A, (AMT),
8.375%, 10/15/10 1,500 1,587,660
Skowhegan, ME, S. D. Warren Co., (AMT),
6.65%, 10/15/15 3,000 3,205,500
- --------------------------------------------------------------------------------
$75,889,231
- --------------------------------------------------------------------------------
Insured-Housing -- 3.4%
- --------------------------------------------------------------------------------
Alaska State Housing Finance Corp., (MBIA),
(AMT), 5.75%, 6/1/24 $ 5,250 $ 5,385,608
Maricopa County, AZ, IDA, Multifamily,
(National Health Facilities II Project),
(FSA), 5.50%, 1/1/24 4,600 4,875,816
- --------------------------------------------------------------------------------
$10,261,424
- --------------------------------------------------------------------------------
Insured-Water and Sewer -- 1.1%
- --------------------------------------------------------------------------------
Detroit, MI, Sewer Revenue, (FGIC), Variable
Rate, 7/1/23/(3)/ $ 3,000 $ 3,311,250
- --------------------------------------------------------------------------------
$ 3,311,250
- --------------------------------------------------------------------------------
Lease Revenue / Certificates of Participation -- 2.4%
- --------------------------------------------------------------------------------
Hardeman County, TN, Correctional Facilities
Corp., 7.75%, 8/1/17 $ 4,000 $ 4,510,320
Los Angeles, CA, COP, Disney Parking Project,
0.00%, 9/1/19 9,190 2,708,844
- --------------------------------------------------------------------------------
$ 7,219,164
- --------------------------------------------------------------------------------
Life Care -- 6.4%
- --------------------------------------------------------------------------------
Delaware County, PA, White Horse Village,
7.30%, 7/1/14 $ 3,500 $ 3,744,300
Kansas City, MO, IDA, Kingswood United 3,840 4,452,134
Methodist Manor, 9.00%, 11/15/13
Louisiana Housing Finance Agency, (HCC
Assisted Living Group 1), (AMT),
9.00%, 3/1/25 3,545 3,984,793
New Hampshire Higher Educational and Health
Facilities, (Monadnock Community Hospital),
5.70%, 10/1/20 2,580 2,602,988
Saint Tammany, LA, Public Finance, Christwood
Project, 9.00%, 11/15/25 3,955 4,602,038
- --------------------------------------------------------------------------------
$19,386,253
- --------------------------------------------------------------------------------
Miscellaneous -- 9.4%
- --------------------------------------------------------------------------------
Atlanta, GA, Downtown Development Authority,
Central Atlanta Hospitality Childcare, Inc.,
8.00%, 1/1/26 $ 3,765 $ 4,178,058
Osceola County, IDA, Community Pooled
Loan-93, 7.75%, 7/1/17 2,000 2,179,080
Pittsfield Township, MI, (Arbor Hospice),
8.125%, 8/15/17 1,350 1,424,264
Santa Fe, NM, 1st Interstate Plaza Project,
8.00%, 7/1/13 3,344 3,665,149
Santa Fe, NM, Crow Hobbs Project, 3,300 3,694,086
8.50%, 9/1/16
Tax Exempt Securities Trust, 8.50%, 12/1/36 2,382 2,628,823
Tax Exempt Securities Trust, 8.81%, 12/1/36 2,000 2,289,860
Tax Exempt Securities Trust, 7.00%, 12/1/36 1,330 1,480,277
Tax Exempt Securities Trust, 8.70%, 12/1/36 1,000 1,136,610
Tax Exempt Securities Trust, 7.00%, 12/1/36 1,100 1,224,289
Tax Exempt Securities Trust, 8.875%, 12/1/36 600 689,022
Tax Exempt Securities Trust, 6.75%, 12/1/36 2,580 2,824,378
Tax Exempt Securities Trust, 8.375%, 12/1/36 860 958,169
- --------------------------------------------------------------------------------
$28,372,065
- --------------------------------------------------------------------------------
Nursing Homes -- 4.7%
- --------------------------------------------------------------------------------
Clovis, NM, Industrial Development Revenue,
(Retirement Ranches, Inc.), 7.75%, 4/1/19 $ 3,530 $ 3,584,927
Kansas City, MO, IDA, Beverly Enterprises,
8.00%, 12/1/02 2,175 2,347,913
Massachusetts IFA, (Age Institute of
Massachusetts), 8.05%, 11/1/25 2,500 2,816,725
Mississippi Business Finance Corp., Magnolia
Healthcare, 7.99%, 7/1/25 1,200 1,301,472
See notes to financial statements
15
<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
Principal
Amount
Security (000's Omitted) Value
- --------------------------------------------------------------------------------
Nursing Homes (continued)
- --------------------------------------------------------------------------------
Westmoreland, PA, (Highland Health Systems,
Inc.), 9.25%, 6/1/22 $ 3,500 $ 4,026,155
- --------------------------------------------------------------------------------
$ 14,077,192
- --------------------------------------------------------------------------------
Special Tax Revenue -- 1.4%
- --------------------------------------------------------------------------------
Cottonwood Water & Sanitation District,
General Obligation, 7.75%, 12/1/20 $ 3,800 $ 4,069,192
- --------------------------------------------------------------------------------
$ 4,069,192
- --------------------------------------------------------------------------------
Transportation -- 2.1%
- --------------------------------------------------------------------------------
Eagle County, CO, Airport
Terminal Project, 7.50%, 5/1/21 $ 500 $ 546,820
Northwest Arkansas Regional Airport
Authority, (AMT), 7.625%, 2/1/27 5,250 5,869,814
- --------------------------------------------------------------------------------
$ 6,416,634
- --------------------------------------------------------------------------------
Utilities -- 0.8%
- --------------------------------------------------------------------------------
Southern California Public Power Authority,
Variable Rate, 7/1/12/(3)/ $ 2,000 $ 2,315,000
- --------------------------------------------------------------------------------
$ 2,315,000
- --------------------------------------------------------------------------------
Total Tax-Exempt Investments -- 100%
(identified cost $272,715,017) $301,132,305
- --------------------------------------------------------------------------------
AMT - Interest earned from these securities may be considered a tax preference
item for purpose of the Federal Alternative Minimum Tax.
At January 31, 1998, 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)/ Non-income producing security.
/(3)/ Security has been issued as an inverse floater bond.
See notes to financial statements
16
<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
As of January 31, 1998
Assets
- --------------------------------------------------------------------------------
Investments, at value (Note 1A)
(identified cost, $272,715,017) $301,132,305
Cash 455
Receivable for investments sold 200,510
Interest receivable 4,586,294
Deferred organization expenses (Note 1D) 7,792
- --------------------------------------------------------------------------------
Total assets $305,927,356
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Demand note payable (Note 5) $ 2,502,000
Payable for daily variation margin on open
financial futures contracts (Note 1E and 6) 203,125
Payable to affiliate for Trustees' fees (Note 2) 1,274
Accrued expenses 11,792
- --------------------------------------------------------------------------------
Total liabilities $ 2,718,191
- --------------------------------------------------------------------------------
Net Assets applicable to investors'
interest in Portfolio $303,209,165
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Net proceeds from capital
contributions and withdrawals $275,673,002
Net unrealized appreciation of investments (computed on
the basis of identified cost) 27,536,163
- --------------------------------------------------------------------------------
Total $303,209,165
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended
January 31, 1998
Investment Income (Note 1B)
- --------------------------------------------------------------------------------
Interest income $ 16,704,001
- --------------------------------------------------------------------------------
Total income $ 16,704,001
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 1,403,747
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 8,849
Custodian fee (Note 1H) 112,693
Legal and accounting services 24,500
Amortization of organization expenses (Note 1D) 1,460
Miscellaneous 51,148
- --------------------------------------------------------------------------------
Total expenses $ 1,602,397
- --------------------------------------------------------------------------------
Deduct --
Reduction of custodian fee (1H) $ 40,972
- --------------------------------------------------------------------------------
Total expense reductions $ 40,972
- --------------------------------------------------------------------------------
Net expenses $ 1,561,425
- --------------------------------------------------------------------------------
Net investment income $ 15,142,576
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified
cost basis) $ 112,078
Financial futures contracts (2,545,268)
- --------------------------------------------------------------------------------
Net realized loss on investment transactions $ (2,433,190)
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
Investments (identified cost basis) $ 23,518,510
Financial futures contracts (538,381)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ 22,980,129
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 20,546,939
- --------------------------------------------------------------------------------
Net increase in net assets from operations $ 35,689,515
- --------------------------------------------------------------------------------
See notes to financial statements
17
<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
Increase (Decrease) Year Ended Year Ended
in Net Assets January 31, 1998 January 31, 1997
- --------------------------------------------------------------------------------
From operations --
Net investment income $ 15,142,576 $ 8,918,825
Net realized loss on
investment transactions (2,433,190) (1,259,590)
Net change in unrealized
appreciation (depreciation)
of investments 22,980,129 2,904,425
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 35,689,515 $ 10,563,660
- --------------------------------------------------------------------------------
Capital transactions --
Contributions $128,845,777 $118,977,124
Withdrawals (42,026,586) (20,917,792)
- --------------------------------------------------------------------------------
Net increase in net assets from
capital transactions $ 86,819,191 $ 98,059,332
- --------------------------------------------------------------------------------
Net increase in net assets $122,508,706 $108,622,992
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of year $180,700,459 $ 72,077,467
- --------------------------------------------------------------------------------
At end of year $303,209,165 $180,700,459
- --------------------------------------------------------------------------------
See notes to financial statements
18
<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Year Ended January 31,
-----------------------------------------------------------
1998 1997 1996*
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratios to average daily net assets++
- --------------------------------------------------------------------------------------------------------------------------
Net expenses 0.68% 0.34% 0.06%+
Net expenses after custodian fee reduction 0.66% 0.30% 0.06%+
Net investment income 6.43% 6.96% 6.95%+
Portfolio Turnover 8% 41% 32%
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $303,209 $180,700 $72,077
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
++ The operating expenses of the Portfolio reflect a reduction of the Investment
Adviser fee, an allocation of expenses to the Adviser, or both. 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
19
<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
NOTES TO FINANCIAL STATEMENTS
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 the 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
operating expenses in the Statement of Operations.
20
<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
NOTES TO FINANCIAL STATEMENTS 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.
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 year ended January 31, 1998, the fee was equivalent to
0.60% of the Portfolio's average net assets for such period and amounted to
$1,403,747. 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 year ended January 31, 1998, no
significant amounts have been deferred.
3 Investments
-----------------------------------------------------------------------------
Purchases and sales of investments, other than U.S. Government securities and
short-term obligations, aggregated $116,143,507 and $17,403,200,
respectively, for the year ended January 31, 1998.
4 Federal Income Tax Basis of Investments
-----------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the investments
owned at January 31, 1998, as computed on a federal income tax basis, were as
follows:
Aggregate cost $272,858,131
-----------------------------------------------------------------------------
Gross unrealized appreciation 28,922,058
Gross unrealized depreciation (647,884)
-----------------------------------------------------------------------------
Net unrealized appreciation 28,274,174
-----------------------------------------------------------------------------
5 Line of Credit
-----------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR and
EVM and its affiliates in a $100 million unsecured line of credit agreement
with a group of banks. 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 an amount above either the Eurodollar rate or
federal funds rate. In addition, a fee computed at an annual rate of 0.10% on
the daily unused portion of the line of credit is allocated among the
participating portfolios and funds at the end of each quarter. At January 31,
1998, the Portfolio had a balance outstanding pursuant to the line of credit
of $2,502,000.
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 January 31, 1998 is as
follows:
Futures
Contracts
Expiration Net Unrealized
Date Contracts Position Depreciation
----------------------------------------------------------------------------
3/98 500 U.S. Treasury Bonds Short $ 881,125
21
<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
INDEPENDENT AUDITORS' REPORT
To the Trustees and Investors
of High Yield Municipals Portfolio:
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of High Yield Municipals Portfolio as of January
31, 1998, the related statement of operations for the year then ended, the
statements of changes in net assets for the years ended January 31, 1998 and
1997 and the supplementary data for the two years ended January 31, 1998 and for
the period from the start of business, August 7, 1995, to January 31, 1996.
These financial statements and supplementary data are the responsibility of the
Portfolio's management. Our responsibility is to express an opinion on these
financial statements and supplementary data based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and supplementary
data are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and supplementary data present fairly,
in all material respects, the financial position of the High Yield Municipals
Portfolio at January 31, 1998, and the results of its operations, the changes in
its net assets and its supplementary data for the respective stated periods, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 13, 1998
22
<PAGE>
EV Marathon High Yield Municipals Fund as of January 31, 1998
INVESTMENT MANAGEMENT
EV Marathon High Yield Municipals Fund
Officers
Thomas J. Fetter
President
James B. Hawkes
Vice President and Trustee
Robert B. MacIntosh
Vice President
James L. O'Connor
Treasurer
Alan R. Dynner
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Banking, Harvard University Graduate School of
Business Administration
Norton H. Reamer
President and Director, United Asset
Management Corporation
John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
High Yield Municipals Portfolio
Officers
Thomas J. Fetter
President
James B. Hawkes
Vice President and Trustee
Thomas Metzold
Vice President and
Portfolio Manager
James L. O'Connor
Treasurer
Alan R. Dynner
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Banking, Harvard University Graduate School of
Business Administration
Norton H. Reamer
President and Director, United Asset
Management Corporation
John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
23
<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 Municipal 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-3/98
