<PAGE>
High Yield Municipals Portfolio as of January 31, 1998
PORTFOLIO OF INVESTMENTS
Tax-Exempt Investments -- 100.0%
Principal
Amount
(000's
Security 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 $ 3,500 $ 3,832,500
Rate, 7/1/11/(3)/
New York State Energy, Research and
Development Authority, Long Island Co.,
Lighting Co., (AMT), 7.15%, 9/1/19 2,500 2,729,350
- ---------------------------------------------------------------------------
$ 6,561,850
- ---------------------------------------------------------------------------
Escrowed/Prerefunded -- 12.1%
- ---------------------------------------------------------------------------
Colorado Health Facilities Authority, $ 8,410 $ 2,609,118
Liberty Heights Project, 0.00%, 7/15/20
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
(000's
Security 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%, 1/1/21 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),
6.625%, 7/1/21 2,205 2,185,420
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, County Creek 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
(000's
Security 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, $ 3,500 $ 3,744,300
7.30%, 7/1/14
Kansas City, MO, IDA, Kingswood United
Methodist Manor, 9.00%, 11/15/13 3,840 4,452,134
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,
8.50%, 9/1/16 3,300 3,694,086
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, $ 3,530 $ 3,584,927
(Retirement Ranches, Inc.), 7.75%, 4/1/19
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*
- ----------------------------------------------------------------------------------------------------------------------
Ratios to average daily net assets++
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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>
<CAPTION>
<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 High Yield Municipals Portfolio as of January 31, 1998
INVESTMENT MANAGEMENT
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
