<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1997
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-6499
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------
PRE-EFFECTIVE AMENDMENT NO. [_] POST-EFFECTIVE AMENDMENT NO. [_]
(CHECK APPROPRIATE BOX OR BOXES)
--------------
MUNIYIELD CALIFORNIA FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------
(609) 282-2800
(AREA CODE AND TELEPHONE NUMBER)
--------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
--------------
ARTHUR ZEIKEL
MUNIYIELD CALIFORNIA FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
--------------
COPIES TO:
FRANK P. BRUNO, ESQ. PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER 800 SCUDDERS MILL ROAD
NEW YORK, NEW YORK 10048-0557 PLAINSBORO, NEW JERSEY 08536
--------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of 1933.
--------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED(1) PER UNIT(1) PRICE(1) FEE(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par
value) $4,056,171 $15.97 $64,777,051 $19,629.41
- -------------------------------------------------------------------------------
Auction Market Preferred
Stock, Series C 800 $25,000(2) $20,000,000 $6,060.61
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Represents the liquidation preference of a share of preferred stock after
the reorganization.
(3) Paid by wire transfer to the designated lockbox of the Securities and
Exchange Commission in Pittsburgh, Pennsylvania.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MUNIYIELD CALIFORNIA FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
PROXY STATEMENT AND
FORM N-14 ITEM NO. PROSPECTUS CAPTION
------------------ -------------------
<C> <S>
PART A
Item 1.Beginning of Registration Statement and
Outside Front Cover Page of Prospectus.. Registration Statement Cover
Page; Prospectus Cover Page
Item 2.Beginning and Outside Back Cover Page of
Prospectus.............................. Table of Contents
Item 3.Fee Table, Synopsis Information and Risk
Factors................................. The Reorganization--Summary;
The Reorganization--Risk
Factors and Special
Considerations
Item 4.Information about the Transaction....... The Reorganization--Summary;
The Reorganization--Agreement
and Plan of Reorganization
Item 5.Information about the Registrant........ Prospectus Cover Page; The
Reorganization--Summary; The
Reorganization--Comparison of
the Funds; Additional
Information
Item 6.Information about the Company Being
Acquired................................ Prospectus Cover Page; The
Reorganization--Summary; The
Reorganization--Comparison of
the Funds; Additional
Information
Item 7.Voting Information...................... The Reorganization--Summary;
The Reorganization--
Comparison of the Funds;
Information Concerning the
Meetings; Additional
Information
Item 8.Interest of Certain Persons and Experts. Not Applicable
Item 9.Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters............................ Not Applicable
PART B
Item 10.Cover Page.............................. Not Applicable
Item 11.Table of Contents....................... Not Applicable
Item 12.Additional Information about the The Reorganization--
Registrant.............................. Comparison of the Funds
Item 13.Additional Information about the Company The Reorganization--
Being Acquired.......................... Comparison of the Funds
Item 14.Financial Statements.................... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
MUNIYIELD CALIFORNIA FUND, INC.
TAURUS MUNICALIFORNIA HOLDINGS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
----------------
NOTICE OF ANNUAL MEETINGS OF STOCKHOLDERS OF MUNIYIELD CALIFORNIA FUND, INC.
AND
SPECIAL MEETING OF STOCKHOLDERS OF TAURUS MUNICALIFORNIA HOLDINGS, INC.
----------------
TO BE HELD ON OCTOBER 20, 1997
TO THE STOCKHOLDERS OF
MUNIYIELD CALIFORNIA FUND, INC.
TAURUS MUNICALIFORNIA HOLDINGS, INC.:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of MuniYield
California Fund, Inc. ("MuniYield") and a special meeting of stockholders of
Taurus MuniCalifornia Holdings, Inc. ("Taurus") (collectively, the "Meetings")
will be held at the offices of Merrill Lynch Asset Management, L.P., 800
Scudders Mill Road, Plainsboro, New Jersey on Thursday, October 20, 1997 at
9:00 a.m., New York time (for MuniYield) and 9:30 a.m., New York time (for
Taurus) for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization (the
"Agreement and Plan of Reorganization") contemplating the acquisition of
all of the assets of Taurus by MuniYield, and the assumption of all of the
liabilities of Taurus by MuniYield, in exchange solely for an equal
aggregate value of newly-issued shares of Common Stock of MuniYield
("MuniYield Common Stock") and shares of one newly-created series of
Auction Market Preferred Stock ("AMPS") of MuniYield to be designated
Series C ("MuniYield Series C AMPS") and the distribution of such MuniYield
Common Stock to the holders of Common Stock of Taurus and such MuniYield
Series C AMPS to the holders of AMPS of Taurus. A vote in favor of this
proposal also will constitute a vote in favor of the liquidation and
dissolution of Taurus and the termination of its registration under the
Investment Company Act of 1940;
(2) For the stockholders of MuniYield only:
(a) To elect a Board of Directors of MuniYield to serve for the
ensuing year;
(b) To consider and act upon a proposal to ratify the selection of
Deloitte & Touche llp to serve as independent auditors of MuniYield for
its current fiscal year ending October 31, 1997;
(3) To transact such other business as properly may come before the
Meetings or any adjournment thereof.
The Boards of Directors of MuniYield and Taurus have fixed the close of
business on August 25, 1997 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meetings or any
adjournment thereof.
A complete list of the stockholders of each of MuniYield and Taurus entitled
to vote at the Meetings will be available and open to the examination of any
stockholder of MuniYield or Taurus, respectively, for any purpose germane to
the Meetings during ordinary business hours from and after October 6, 1997, at
the offices of MuniYield, 800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meetings. STOCKHOLDERS WHO DO NOT
EXPECT TO ATTEND THE MEETINGS IN PERSON ARE REQUESTED TO COMPLETE, DATE AND
SIGN THE ENCLOSED FORM OF PROXY APPLICABLE TO THEIR FUND AND RETURN IT
PROMPTLY IN THE ENVELOPE PROVIDED FOR THAT PURPOSE. The enclosed proxy is
being solicited on behalf of the Board of Directors of MuniYield or Taurus, as
applicable.
By Order of the Boards of Directors
Philip M. Mandel
Secretary Of MuniYield California
Fund, Inc.
Patrick D. Sweeney
Secretary of Taurus MuniCalifornia
Holdings, Inc.
Plainsboro, New Jersey
Dated: September , 1997
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED AUGUST 5, 1997
MUNIYIELD CALIFORNIA FUND, INC.
TAURUS MUNICALIFORNIA HOLDINGS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
------------
ANNUAL MEETING OF STOCKHOLDERS OF MUNIYIELD CALIFORNIA FUND, INC.
AND
SPECIAL MEETING OF STOCKHOLDERS OF TAURUS MUNICALIFORNIA HOLDINGS, INC.
------------
OCTOBER 20, 1997
This Joint Proxy Statement and Prospectus (the "Proxy Statement and
Prospectus") is furnished in connection with the solicitation of proxies on
behalf of the Boards of Directors of MuniYield California Fund, Inc., a
Maryland corporation ("MuniYield"), and Taurus MuniCalifornia Holdings, Inc., a
Maryland corporation ("Taurus"), for use at the annual meeting of stockholders
of MuniYield ("MuniYield Annual Meeting") and a special meeting of stockholders
of Taurus (the "Taurus Special Meeting" and collectively with the MuniYield
Annual Meeting, the "Meetings") called to approve or disapprove the proposed
reorganization whereby (i) MuniYield will acquire all of the assets, and will
assume all of the liabilities, of Taurus, in exchange solely for an equal
aggregate value of newly-issued shares of Common Stock, par value $.10 per
share, of MuniYield ("MuniYield Common Stock") and shares of a newly-created
series of Auction Market Preferred Stock ("AMPS") of MuniYield, with a
liquidation preference of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to be
designated Series C ("MuniYield Series C AMPS") to be issued by MuniYield; and
(ii) Taurus will be deregistered and dissolved (collectively, the
"Reorganization"). MuniYield and Taurus sometimes are referred to herein
collectively as the "Funds" and individually as a "Fund," each as applicable
and each as the context requires. This Proxy Statement and Prospectus also is
being furnished to stockholders of MuniYield in connection with the election of
the Board of Directors of MuniYield and the ratification of the selection of
independent auditors for MuniYield.
(continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT AND PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement and Prospectus serves as a prospectus of MuniYield under
the Securities Act of 1933, as amended (the "Securities Act"), in connection
with the issuance of MuniYield Common Stock and MuniYield Series C AMPS in the
Reorganization.
This Proxy Statement and Prospectus sets forth concisely the information
about MuniYield and Taurus that stockholders of MuniYield and Taurus should
know before considering the Reorganization and should be retained for future
reference. MuniYield and Taurus have authorized the solicitation of proxies in
connection with the Reorganization solely on the basis of this Proxy Statement
and Prospectus and the accompanying documents.
The address of the principal executive offices of both MuniYield and Taurus
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the telephone
number is (609) 282-2800.
The date of this Proxy Statement and Prospectus is , 1997.
<PAGE>
The aggregate net asset value of the MuniYield Common Stock to be issued to
Taurus and thereafter distributed to the holders of shares of Common Stock,
par value $.10 per share, of Taurus ("Taurus Common Stock") will equal the
aggregate net asset value of the shares of Taurus Common Stock on the date of
the Reorganization. Similarly, it is intended that the aggregate liquidation
preference and value of the MuniYield Series C AMPS to be issued to Taurus and
thereafter distributed to the holders of shares of AMPS of Taurus (the "Taurus
AMPS"), with a liquidation preference of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared), will equal the aggregate liquidation preference and value of the
Taurus AMPS on the date of the Reorganization. As soon as practicable after
the receipt by MuniYield of all of Taurus' assets and the assumption by
MuniYield of all of Taurus' liabilities, Taurus will distribute the MuniYield
Common Stock and the MuniYield Series C AMPS to Taurus' stockholders as
described under "The Reorganization." Thereafter, Taurus will terminate its
registration under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and will liquidate and dissolve in accordance with
the laws of the State of Maryland.
Both MuniYield and Taurus are non-diversified, leveraged, closed-end
management investment companies with virtually identical investment
objectives. Both MuniYield and Taurus seek to provide stockholders with as
high a level of current income exempt from Federal and California income taxes
as is consistent with their respective investment policies and prudent
investment management. MuniYield and Taurus seek to achieve their respective
investment objectives by investing primarily in a portfolio of long-term
investment grade municipal obligations the interest on which, in the opinion
of bond counsel to the issuer, is exempt from Federal and California income
taxes ("California Municipal Bonds"). Under normal circumstances, at least 65%
of each Fund's total assets will be invested in California Municipal Bonds and
at least 80% of each Fund's total assets will be invested in California
Municipal Bonds and other long-term municipal obligations exempt from Federal
income taxes, but not from California income taxes. There can be no assurance
that after the Reorganization the surviving fund will achieve the investment
objective of either MuniYield or Taurus.
MuniYield Common Stock and Taurus Common Stock are listed on the New York
Stock Exchange (the "NYSE") under the symbols "MYC" and "MCF," respectively.
Subsequent to the Reorganization, shares of MuniYield Common Stock will
continue to be listed on the NYSE under the symbol "MYC." Reports, proxy
materials and other information concerning either Fund may be inspected at the
offices of the NYSE, 11 Wall Street, New York, New York 10005.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.............................................................. 5
THE REORGANIZATION........................................................ 6
SUMMARY................................................................. 6
RISK FACTORS AND SPECIAL CONSIDERATIONS................................. 13
Effects of Leverage................................................... 13
Portfolio Management.................................................. 15
Ratings Considerations................................................ 15
COMPARISON OF THE FUNDS................................................. 16
Financial Highlights.................................................. 16
Investment Objective and Policies..................................... 21
Description of Municipal Bonds........................................ 22
Other Investment Policies............................................. 23
Information Regarding Options and Futures Transactions................ 24
Investment Restrictions............................................... 27
Rating Agency Guidelines.............................................. 28
Portfolio Composition................................................. 28
Special Considerations Relating to California Municipal Bonds......... 29
Portfolio Transactions................................................ 30
Portfolio Turnover.................................................... 30
Net Asset Value....................................................... 31
Capital Stock......................................................... 31
Management of the Funds............................................... 33
Voting Rights......................................................... 34
Stockholder Inquiries................................................. 35
Dividends and Distributions........................................... 35
Automatic Dividend Reinvestment Plan.................................. 36
Liquidation Rights of Holders of AMPS................................. 38
Tax Rules Applicable to MuniYield, Taurus and Their Stockholders...... 38
AGREEMENT AND PLAN OF REORGANIZATION.................................... 41
General............................................................... 41
Procedure............................................................. 42
Terms of the Agreement and Plan of Reorganization..................... 43
Potential Benefits to MuniYield Common Stockholders and Taurus Common
Stockholders as a Result of the Reorganization....................... 44
Surrender and Exchange of Taurus Stock Certificates................... 45
Tax Consequences of the Reorganization................................ 46
Capitalization........................................................ 47
ELECTION OF DIRECTORS..................................................... 48
Committee and Board Meetings.......................................... 50
Compliance with Section 16(a) of the Securities Exchange Act of 1934.. 50
Interested Persons.................................................... 50
Compensation of Directors............................................. 50
Officers of the Funds................................................. 51
SELECTION OF INDEPENDENT AUDITORS......................................... 52
INFORMATION CONCERNING THE MEETINGS....................................... 52
Date, Time and Place of Meetings...................................... 52
Solicitation, Revocation and Use of Proxies........................... 53
Record Date and Outstanding Shares.................................... 53
Security Ownership of Certain Beneficial Owners and Management of
MuniYield and Taurus................................................. 53
Voting Rights and Required Vote....................................... 53
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ADDITIONAL INFORMATION.................................................... 55
CUSTODIAN................................................................. 56
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR................... 56
LEGAL PROCEEDINGS......................................................... 56
LEGAL OPINIONS............................................................ 56
EXPERTS................................................................... 56
STOCKHOLDER PROPOSALS..................................................... 57
INDEX TO FINANCIAL STATEMENTS............................................. F-1
EXHIBIT I--AGREEMENT AND PLAN OF REORGANIZATION........................... I-1
EXHIBIT II--RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER............... II-1
EXHIBIT III--ECONOMIC AND OTHER CONDITIONS IN CALIFORNIA.................. III-1
</TABLE>
4
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of MuniYield and
Taurus for use at the Meetings to be held at the offices of Merrill Lynch
Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New
Jersey on October 20, 1997, at 9:00 a.m., New York time (for MuniYield) and
9:30 a.m., New York time (for Taurus). The mailing address for both MuniYield
and Taurus is P.O. Box 9011, Princeton, New Jersey 08543-9011. The approximate
mailing date of this Proxy Statement and Prospectus is September , 1997.
Any person giving a proxy may revoke it at any time prior to its exercise by
executing a superseding proxy, by giving written notice of the revocation to
the Secretary of MuniYield or Taurus, as applicable, at the address indicated
above or by voting in person at the appropriate Meeting. All properly executed
proxies received prior to the Meetings will be voted at the Meetings in
accordance with the instructions marked thereon or otherwise as provided
therein. Unless instructions to the contrary are marked, (a) all proxies will
be voted "FOR" proposal (1) to approve the Agreement and Plan of
Reorganization between MuniYield and Taurus (the "Agreement and Plan of
Reorganization"); and (b) for the stockholders of MuniYield only, all proxies
submitted by MuniYield stockholders will be voted "FOR" proposal (2)(a) to
elect a Board of Directors of MuniYield to serve for the ensuing year; and
"FOR" proposal (2)(b) to consider and act upon a proposal to ratify the
selection of Deloitte & Touche LLP to serve as independent auditors of
MuniYield for the current fiscal year ending October 31, 1997.
With respect to proposal (1), approval of the Agreement and Plan of
Reorganization will require the affirmative vote of stockholders representing
(i) a majority of the outstanding shares of MuniYield Common Stock and the
outstanding shares of AMPS of MuniYield, designated Series A and Series B,
each with a liquidation preference of $25,000 per share plus an amount equal
to accumulated but unpaid dividends thereon (whether or not earned or
declared) (collectively, the "MuniYield AMPS"), voting together as a single
class; (ii) a majority of the outstanding shares of MuniYield AMPS, voting
separately as a class; (iii) a majority of the outstanding shares of Taurus
Common Stock and Taurus AMPS, voting together as a single class; (iv) and a
majority of the outstanding shares of Taurus AMPS, voting separately as a
class.
With respect to proposal (2)(a), holders of shares of MuniYield AMPS are
entitled to elect two Directors of MuniYield and holders of shares of
MuniYield Common Stock and MuniYield AMPS, voting together as a single class,
are entitled to elect the remaining Directors of MuniYield. Assuming a quorum
is present, (x) election of the two Directors of MuniYield to be elected by
the holders of MuniYield AMPS, voting separately as a class, will require the
affirmative vote of a majority of the votes cast by the holders of the
MuniYield AMPS, represented at the MuniYield Annual Meeting and entitled to
vote; and (y) election of the remaining Directors of MuniYield will require
the affirmative vote of a majority of the votes cast by the holders of shares
of MuniYield Common Stock and MuniYield AMPS, represented at the MuniYield
Annual Meeting and entitled to vote, voting together as a single class.
With respect to proposal (2)(b), approval of the ratification of the
selection of Deloitte & Touche LLP as the independent auditors of MuniYield
will require the affirmative vote of a majority of the votes cast by the
holders of shares of MuniYield Common Stock and MuniYield AMPS, represented at
the MuniYield Annual Meeting and entitled to vote, voting together as a single
class.
The Boards of Directors of MuniYield and Taurus have fixed the close of
business on August 25, 1997 as the record date (the "Record Date") for the
determination of stockholders entitled to notice of, and to vote at, the
Meetings or any adjournment thereof. Stockholders on the Record Date will be
entitled to one vote for each share held, with no shares having cumulative
voting rights. As of the Record Date, there were issued and outstanding
16,781,559 shares of MuniYield Common Stock, 4,800 shares of MuniYield AMPS in
two series, 5,175,539 shares of Taurus Common Stock and 800 shares of Taurus
AMPS in one series. To the knowledge of the management of each of MuniYield
and Taurus, no person owned beneficially more than 5% of the respective
outstanding shares of either class of capital stock of MuniYield or Taurus at
the Record Date.
5
<PAGE>
The Boards of Directors of MuniYield and Taurus know of no business other
than that discussed in proposals 1 and 2 above that will be presented for
consideration at the Meetings. If any other matter is properly presented, it
is the intention of the persons named in the enclosed proxy to vote in
accordance with their best judgment.
THE REORGANIZATION
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus and is qualified in its entirety by
reference to the more complete information contained herein and in the
Agreement and Plan of Reorganization, attached hereto as Exhibit I.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of all of the assets and the assumption of
all of the liabilities of Taurus by MuniYield and the subsequent distribution
of MuniYield Common Stock and MuniYield Series C AMPS to the holders of Taurus
Common Stock and Taurus AMPS, respectively, and (ii) the subsequent
deregistration and dissolution of Taurus.
At a meeting of the Board of Directors of MuniYield held on June 20, 1997,
and at a meeting of the Board of Directors of Taurus held on July 7, 1997, the
Boards of Directors of MuniYield and Taurus unanimously approved a proposal
that MuniYield acquire all of the assets, and assume all of the liabilities,
of Taurus in exchange solely for MuniYield Common Stock and MuniYield Series C
AMPS to be issued to Taurus and thereafter distributed to the stockholders of
Taurus. Subject to obtaining the necessary approvals from the MuniYield and
Taurus stockholders, the Board of Directors of Taurus deemed advisable the
deregistration of Taurus under the Investment Company Act and its dissolution
under the laws of the State of Maryland.
If the MuniYield and Taurus stockholders approve the Reorganization,
MuniYield Common Stock and MuniYield Series C AMPS will be issued to Taurus in
exchange for the assets of Taurus and, thereafter, Taurus will distribute
these shares to its stockholders as provided in the Agreement and Plan of
Reorganization. After the Reorganization, Taurus will terminate its
registration under the Investment Company Act and its incorporation under
Maryland law.
MuniYield and Taurus are both non-diversified, leveraged, closed-end
management investment companies registered under the Investment Company Act.
Both MuniYield and Taurus seek to provide stockholders with as high a level of
current income exempt from Federal and California income taxes as is
consistent with their respective investment policies and prudent investment
management. Both MuniYield and Taurus seek to achieve their investment
objectives by investing primarily in a portfolio of California Municipal
Bonds. Under normal circumstances, at least 65% of each Fund's total assets
will be invested in California Municipal Bonds and at least 80% of each Fund's
assets will be invested in California Municipal Bonds and other long-term
municipal obligations exempt from Federal income taxes, but not from
California income taxes.
Based upon their evaluation of all relevant information, the Directors of
MuniYield and Taurus have determined that the Reorganization will potentially
benefit the holders of Common Stock of both MuniYield and Taurus.
Specifically, after the Reorganization, Taurus stockholders will remain
invested in a closed-end fund that has an investment objective and policies
virtually identical to those of Taurus and that utilizes essentially the same
management personnel. In addition, it is anticipated that both MuniYield and
Taurus common stockholders will be subject to a reduced overall operating
expense ratio based on the combined assets of the surviving fund after the
Reorganization. It is not anticipated that the Reorganization will directly
benefit the holders of shares of MuniYield AMPS or Taurus AMPS; however, the
Reorganization will not adversely affect the holders of shares of AMPS of
either Fund and the expenses of the Reorganization will not be borne by the
holders of shares of AMPS of either Fund.
6
<PAGE>
In deciding to recommend the Reorganization, the Boards of Directors of
MuniYield and Taurus took into account the investment objective and policies
of both MuniYield and Taurus, the expenses incurred both due to the
Reorganization and on an ongoing basis by the new and existing stockholders of
MuniYield and the potential benefits, including economies of scale, to the
holders of Common Stock and AMPS of MuniYield and Taurus as a result of the
Reorganization. The Boards of Directors of MuniYield and Taurus, including all
of the Directors who are not "interested persons," as defined in the
Investment Company Act, of MuniYield or Taurus, have determined that the
Reorganization is in the best interests of each of the Funds and of the
holders of Common Stock and AMPS of MuniYield and Taurus and that the
interests of such stockholders will not be diluted as a result of effecting
the Reorganization.
If all of the requisite approvals are obtained, it is anticipated that the
Reorganization will occur as soon as practicable after such approval, provided
that the Funds have obtained prior to that time a favorable private letter
ruling from the Internal Revenue Service (the "IRS") concerning the tax
consequences of the Reorganization as set forth in the Agreement and Plan of
Reorganization. Under the Agreement and Plan of Reorganization, however, the
Board of Directors of either MuniYield or Taurus may cause the Reorganization
to be postponed or abandoned should either Board determine that it is in the
best interests of the stockholders of either MuniYield or Taurus,
respectively, to do so. The Agreement and Plan of Reorganization may be
terminated, and the Reorganization abandoned, whether before or after approval
by the Funds' stockholders, at any time prior to the Exchange Date (as defined
below), (i) by mutual consent of the Boards of Directors of MuniYield and
Taurus; (ii) by the Board of Directors of MuniYield if any condition to
MuniYield's obligations has not been fulfilled or waived by such Board; or
(iii) by the Board of Directors of Taurus if any condition to Taurus'
obligations has not been fulfilled or waived by such Board.
7
<PAGE>
PRO FORMA FEE TABLE FOR COMMON STOCKHOLDERS OF MUNIYIELD, TAURUS
AND THE COMBINED FUND AS OF APRIL 30, 1997 (UNAUDITED) (A)
<TABLE>
<CAPTION>
ACTUAL PRO
------------------ FORMA
MUNIYIELD TAURUS COMBINED
--------- ------ --------
<S> <C> <C> <C>
COMMON STOCKHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of the
offering price) imposed on purchases of Common
Stock......................................... 5.50%(b) 5.50%(b) (c)
Dividend Reinvestment and Cash Purchase Plan
Fees.......................................... None None None
ANNUAL FUND OPERATING EXPENSES (as a percentage
of average net assets attributable to Common
Stock; annualized)(d):
Investment Advisory Fees....................... 0.73% 0.67% 0.71%
Other Expenses
Transfer Agent Fees.......................... 0.02% 0.06% 0.02%
Custodian Fee................................ 0.01% 0.01% 0.01%
Miscellaneous................................ 0.22% 0.46% 0.20%
---- ---- ----
Total Other Expenses....................... 0.25% 0.53% 0.23%
---- ---- ----
Total Annual Operating Expenses............ 0.98% 1.20% 0.94%
==== ==== ====
</TABLE>
- --------
(a) No information is presented with respect to AMPS because neither Fund's
expenses nor the expenses of the Reorganization will be borne by the
holders of AMPS of either Fund. Generally AMPS are sold at a fixed
liquidation preference of $25,000 per share and investment return is set
at an auction.
(b) Sales load charged in the Fund's initial offering, subject to reductions
for bulk purchases. Shares of Common Stock purchased on the secondary
market are not subject to sales loads, but may be subject to brokerage
commissions or other charges.
(c) No sales load will be charged on the issuance of shares in the
Reorganization. Shares of Common Stock are not available for purchase
directly from the Funds but may be purchased through a broker-dealer
subject to individually negotiated commission rates.
(d) The actual annual fund operating expenses were derived from each Fund's
stockholder report dated as of April 30, 1997. The pro forma annual
operating expenses for the combined fund are projections for a 12-month
period.
EXAMPLE:
CUMULATIVE EXPENSES PAID ON SHARES OF COMMON STOCK
FOR THE PERIODS INDICATED:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, including the maximum sales
load of $55 and assuming (1) an operating expense
ratio of 0.98% for MuniYield Common Stock, 1.20%
for Taurus Common Stock and 0.94% for shares of
the combined fund and (2) a 5% annual return
throughout the period:
MuniYield........................................ $64 $85 $106 $169
Taurus........................................... $67 $91 $117 $192
Combined Fund*................................... $64 $83 $104 $164
</TABLE>
- --------
* Assumes that the Reorganization had taken place on April 30, 1997.
8
<PAGE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a MuniYield or Taurus common stockholder will bear
directly or indirectly as compared to the costs and expenses that would be
borne by such investors taking into account the Reorganization. The Example
set forth above assumes that shares of Common Stock were purchased in the
initial offerings and the reinvestment of all dividends and distributions and
utilizes a 5% annual rate of return as mandated by Securities and Exchange
Commission (the "Commission") regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. See "The Reorganization--Comparison
of the Funds" and "Agreement and Plan of Reorganization--Potential Benefits to
MuniYield Common Stockholders and Taurus Common Stockholders as a Result of
the Reorganization."
BUSINESS OF MUNIYIELD.......... MuniYield was incorporated under the laws of
the State of Maryland on December 17, 1991
and commenced operations on February 28,
1992. Like Taurus, MuniYield is a non-diver-
sified, leveraged, closed-end management in-
vestment company whose investment objective
is to provide stockholders with as high a
level of current income exempt from Federal
and California income taxes as is consistent
with its investment policies and prudent in-
vestment management. Furthermore, like Tau-
rus, MuniYield seeks to achieve its invest-
ment objective by investing primarily in a
portfolio of California Municipal Bonds. See
"The Reorganization--Comparison of the
Funds--Investment Objective and Policies."
Like Taurus, MuniYield has outstanding both
Common Stock and AMPS. As of June 30, 1997,
MuniYield had net assets of $381,613,283.
BUSINESS OF TAURUS............. Taurus was incorporated under the laws of the
State of Maryland on October 26, 1989 and
commenced operations on February 1, 1990.
Like MuniYield, Taurus is a non-diversified,
leveraged, closed-end management investment
company whose investment objective is to pro-
vide stockholders with as high a level of
current income exempt from Federal and Cali-
fornia income taxes as is consistent with its
investment policies and prudent investment
management. Furthermore, like MuniYield, Tau-
rus seeks to achieve its investment objective
by investing primarily in a portfolio of Cal-
ifornia Municipal Bonds.
Like MuniYield, Taurus has outstanding both
Common Stock and AMPS. As of June 30, 1997,
Taurus had net assets of $80,314,157.
COMPARISON OF THE FUNDS........ Investment Objective and Policies. MuniYield
and Taurus have virtually identical invest-
ment objectives and policies. Each Fund seeks
to pay interest exempt from Federal and Cali-
fornia income taxes and to maintain at least
65% of its total assets invested in Califor-
nia Municipal Bonds and at least 80% of its
assets in California Municipal Bonds and
other long-term municipal obligations exempt
from Federal income taxes, but not from Cali-
fornia income taxes. See "The Reorganiza-
tion--Comparison of the Funds--Investment Ob-
jective and Policies."
9
<PAGE>
Capital Stock. MuniYield and Taurus each has
outstanding both Common Stock and AMPS. Like
Taurus Common Stock, MuniYield Common Stock
is traded on the NYSE. As of June 30, 1997,
the net asset value per share of MuniYield
Common Stock was $15.59 and the market price
per share was $15.125, and as of the same
date, the net asset value per share of the
Taurus Common Stock was $11.65 and the market
price per share was $11.375. MuniYield AMPS
and Taurus AMPS each have a liquidation pref-
erence of $25,000 per share and are sold
principally at auctions. See "The Reorganiza-
tion--Comparison of the Funds--Capital
Stock."
Auctions generally have been held and will be
held every 28 days in the case of the
MuniYield Series A AMPS and every seven days
in the case of the MuniYield Series B AMPS
unless MuniYield elects, subject to certain
limitations, to have a special dividend peri-
od. As of the auction held on June 25, 1997,
the dividend rate on the MuniYield Series A
AMPS was 3.696%; as of the auction held on
June 25, 1997, the dividend rate on the
MuniYield Series B AMPS was 3.7%. Auctions
generally have been held and will be held ev-
ery 28 days in the case of the Taurus AMPS
unless Taurus elects, subject to certain lim-
itations, to have a special dividend period.
As of the auction held on June 18, 1997, the
dividend rate on the Taurus AMPS was 3.5%.
Advisory Fees. The investment adviser for
both MuniYield and Taurus is Fund Asset Man-
agement, L.P. ("FAM"). FAM is an affiliate of
MLAM, and both FAM and MLAM are owned and
controlled by Merrill Lynch & Co., Inc. ("ML
& Co."). The principal business address of
FAM is 800 Scudders Mill Road, Plainsboro,
New Jersey 08536. MLAM or FAM acts as the in-
vestment adviser for more than 140 registered
investment companies. FAM also offers portfo-
lio management and portfolio analysis serv-
ices to individuals and institutions.
FAM is responsible for the management of each
Fund's investment portfolio and for providing
administrative services to each Fund. Similar
personnel manage the portfolios of both
MuniYield and Taurus. Walter C. O'Connor and
Robert Roffo serve as the portfolio managers
for MuniYield and Taurus, respectively.
Pursuant to separate investment advisory
agreements between each Fund and FAM, each
Fund pays FAM a monthly fee at the annual
rate of 0.50% of such Fund's average weekly
net assets, including proceeds from the issu-
ance of AMPS. Subsequent to the Reorganiza-
tion, FAM will continue to receive compensa-
tion at the rate of 0.50% of the average
weekly net assets of the surviving Fund. See
"The Reorganization--Comparison of the
Funds--Management of the Funds."
Other Significant Fees. The Bank of New York
is the transfer agent, dividend disbursing
agent and registrar for both MuniYield and
Taurus in connection with their respective
Common Stock.
10
<PAGE>
The Bank of New York is also the custodian
for the assets of MuniYield and Taurus. IBJ
Schroder Bank and Trust Company is the trans-
fer agent, registrar and auction agent for
both MuniYield and Taurus in connection with
their respective AMPS. The principal business
addresses are as follows: The Bank of New
York (in its capacity as custodian), 90 Wash-
ington Street, New York, New York 10286; The
Bank of New York (in its capacity as transfer
agent, dividend disbursing agent and regis-
trar), 101 Barclay Street, New York, New York
10286; and IBJ Schroder Bank and Trust Compa-
ny, One State Street, New York, New York
10004. See "The Reorganization--Comparison of
the Funds--Management of the Funds."
Overall Expense Ratio. As of April 30, 1997,
the total operating expense ratio for
MuniYield was 0.67%, based on average net as-
sets of approximately $378.9 million includ-
ing proceeds from the issuance of AMPS, and
0.98%, based on average net assets of approx-
imately $258.9 million excluding proceeds
from the issuance of AMPS, and the total op-
erating expense ratio for Taurus was 0.90%
based on average net assets of approximately
$79.7 million including proceeds from the is-
suance of AMPS, and 1.20%, based on average
net assets of approximately $59.7 million ex-
cluding proceeds from the issuance of AMPS.
If the Reorganization had taken place on
April 30, 1997, the total operating expense
ratio for the combined fund on a pro forma
basis would have been 0.65%, based on average
net assets of approximately $458.7 million
including proceeds from the issuance of AMPS,
and 0.94%, based on average net assets of ap-
proximately $318.7 million excluding proceeds
from the issuance of AMPS.
Purchases and Sales of Common Stock and
AMPS. Purchase and sale procedures for both
MuniYield Common Stock and Taurus Common
Stock are identical, and investors typically
purchase and sell shares of Common Stock of
such Funds through a registered broker-dealer
on the NYSE, thereby incurring a brokerage
commission set by the broker-dealer. Alterna-
tively, investors may purchase or sell shares
of Common Stock of such Funds through pri-
vately negotiated transactions with existing
stockholders.
Purchase and sale procedures for MuniYield
AMPS and Taurus AMPS also are identical. Such
AMPS generally are purchased and sold at sep-
arate auctions conducted on a regular basis
by IBJ Schroder Bank and Trust Company, as
the auction agent for each Fund's AMPS (the
"Auction Agent"). Unless otherwise permitted
by the Funds, existing and potential holders
of AMPS only may participate in auctions
through their broker-dealers. Broker-dealers
submit the orders of their respective custom-
ers who are existing and potential holders of
AMPS to the Auction Agent. On or prior to
each auction date for the AMPS (the business
day next preceding the first day of each div-
idend period), each holder may submit orders
to buy, sell or hold AMPS to its broker-deal-
er.
11
<PAGE>
Outside of these auctions, shares of
MuniYield AMPS or Taurus AMPS may be pur-
chased or sold through broker-dealers for the
AMPS in a secondary trading market maintained
by the broker-dealers. However, there can be
no assurance that a secondary market actually
will be developed and maintained by the bro-
ker-dealers for the AMPS of either Fund.
Ratings of AMPS. The MuniYield AMPS and the
Taurus AMPS have each been assigned a rating
of AAA from Standard & Poor's Ratings Serv-
ices ("S&P") and "Aaa" from Moody's Investors
Service, Inc. ("Moody's"). See "The Reorgani-
zation--Comparison of the Funds--Rating
Agency Guidelines."
Portfolio Transactions. The portfolio trans-
actions in which MuniYield and Taurus may en-
gage are identical, as are the procedures for
such transactions. See "Comparison of the
Funds--Portfolio Transactions."
Dividends and Distributions. The methods of
dividend payment and distributions are iden-
tical for MuniYield and Taurus, both with re-
spect to the Common Stock and the AMPS of
each Fund. See "The Reorganization--Compari-
son of the Funds--Dividends and Distribu-
tions."
Net Asset Value. The net asset value per
share of Common Stock of each Fund is deter-
mined as of 15 minutes after the close of
business on the NYSE (generally, 4:00 p.m.,
New York time) on the last business day of
each week. For purposes of determining the
net asset value of a share of Common Stock of
each Fund, the value of the securities held
by the Fund plus any cash or other assets
(including interest accrued but not yet re-
ceived) minus all liabilities (including ac-
crued expenses) and the aggregate liquidation
value of the outstanding shares of AMPS of
the Fund is divided by the total number of
shares of Common Stock of the Fund outstand-
ing at such time. Expenses, including the
fees payable to FAM, are accrued daily. See
"The Reorganization--Comparison of the
Funds--Net Asset Value."
Voting Rights. The corresponding voting
rights of the holders of shares of MuniYield
Common Stock and Taurus Common Stock are
identical. Similarly, the corresponding vot-
ing rights of the holders of shares of
MuniYield AMPS and Taurus AMPS are identical.
See "The Reorganization--Comparison of the
Funds--Capital Stock."
Stockholder Services. An automatic dividend
reinvestment plan is available both to the
holders of shares of MuniYield Common Stock
and the holders of shares of Taurus Common
Stock. The plans are identical for the two
Funds. See "The Reorganization--Comparison of
the Funds--Automatic Dividend Reinvestment
Plan." Other stockholder services, including
the provision of annual and semi-annual re-
ports, are the same for the two Funds.
12
<PAGE>
OUTSTANDING SECURITIES OF MUNIYIELD AND TAURUS
AS OF APRIL 30, 1997
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT
AMOUNT FUND FOR ITS SHOWN IN
TITLE OF CLASS AUTHORIZED OWN ACCOUNT PREVIOUS COLUMN
-------------- ----------- -------------- -------------------
<S> <C> <C> <C>
MUNIYIELD
Common Stock................ 199,995,200 -0- 16,781,559
Series A AMPS............... 2,400 -0- 2,400
Series B AMPS............... 2,400 -0- 2,400
TAURUS
Common Stock................ 199,999,200 -0- 5,175,539
AMPS........................ 800 -0- 800
</TABLE>
TAX CONSIDERATIONS............. MuniYield and Taurus have jointly requested a
private letter ruling from the IRS with re-
spect to the Reorganization to the effect
that, among other things, neither MuniYield
nor Taurus will recognize gain or loss on the
transaction, and Taurus stockholders will not
recognize gain or loss on the exchange of
their Taurus shares for shares of MuniYield
Common Stock (except to the extent that a
Taurus Common Stockholder receives cash rep-
resenting an interest in less than a full
share of MuniYield Common Stock in the Reor-
ganization) or MuniYield Series C AMPS. The
consummation of the Reorganization is subject
to the receipt of such ruling. The Reorgani-
zation will not affect the status of
MuniYield as a regulated investment company
(a "RIC") under the Internal Revenue Code of
1986, as amended (the "Code"). Taurus will
liquidate pursuant to the Reorganization. See
"Agreement and Plan of Reorganization--Tax
Consequences of the Reorganization."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Because both MuniYield and Taurus invest primarily in a portfolio of
California Municipal Bonds and Municipal Bonds, any risks inherent in such
investments are equally applicable to both Funds and will be similarly
pertinent to the combined fund after the Reorganization. It is expected that
the Reorganization itself will not adversely affect the rights of holders of
shares of Common Stock or AMPS of either Fund or create additional risks.
EFFECTS OF LEVERAGE
Utilization of leverage, through the issuance of AMPS, involves certain
risks to holders of MuniYield Common Stock and Taurus Common Stock. For
example, each Fund's issuance of AMPS may result in higher volatility of the
net asset value of its Common Stock and potentially more volatility in the
market value of its Common Stock. In addition, fluctuations in the short-term
and medium-term dividend rates on, and the amount of taxable income allocable
to, the AMPS affect the yield to holders of Common Stock. So long as each
Fund, taking into account the costs associated with its AMPS and the Fund's
operating expenses, is able to realize a higher net return on its investment
portfolio than the then-current dividend rate on the AMPS, the effect of
leverage is to cause holders of the Fund's Common Stock to realize a higher
current rate of return than if the Fund were not leveraged. Similarly, because
a pro rata portion of each Fund's net realized capital gains on its investment
assets generally is payable to holders of the Fund's Common Stock, if
increased net capital gains are
13
<PAGE>
realized by the Fund because of increased capital for investment, the effect
of leverage will be to increase the amount of such gains distributed to
holders of the Fund's Common Stock. However, short-term, medium-term and long-
term interest rates change from time to time as does their relationship to
each other (i.e., the slope of the yield curve) depending upon such factors as
supply and demand forces, monetary and tax policies and investor expectations.
Changes in such factors could cause the relationship between short-term,
medium-term and long-term rates to change (i.e., to flatten or to invert the
slope of the yield curve) so that short-term and medium-term rates may
increase substantially relative to the long-term obligations in which each
Fund may be invested. To the extent that the current dividend rate on the AMPS
approaches the net return on a Fund's investment portfolio, the benefit of
leverage to holders of Common Stock is reduced, and if the current dividend
rate on the AMPS were to exceed the net return on a Fund's portfolio, the
Fund's leveraged capital structure would result in a lower rate of return to
holders of Common Stock than if the Fund were not leveraged. Similarly,
because both the costs associated with the issuance of AMPS and any decline in
the value of a Fund's investments (including investments purchased with the
proceeds from any AMPS offering) are borne entirely by holders of the Fund's
Common Stock, the effect of leverage in a declining market would result in a
greater decrease in net asset value to holders of Common Stock than if the
Fund were not leveraged. Such decrease in net asset value likely would be
reflected in a greater decline in the market price for shares of Common Stock.
In an extreme case, a decline in net asset value could affect each Fund's
ability to pay dividends on its Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification for the special tax
treatment afforded RICs under the Code. See "Agreement and Plan of
Reorganization--Tax Consequences of the Reorganization." Each Fund intends,
however, to take all measures necessary to continue to make Common Stock
dividend payments. If a Fund's current investment income were not sufficient
to meet dividend requirements on either the Common Stock or the AMPS, it could
be necessary for the Fund to liquidate certain of its investments. In
addition, each Fund has the authority to redeem its AMPS for any reason and
may redeem all or part of its AMPS if (i) the Fund anticipates that its
leveraged capital structure will result in a lower rate of return for any
significant amount of time to holders of the Common Stock than that obtainable
if the Common Stock were unleveraged or (ii) the asset coverage (as defined in
the Investment Company Act) for the AMPS declines below 200% or the Fund fails
to satisfy the guidelines specified by Moody's and S&P in connection with
their respective ratings of the AMPS. Redemption of the AMPS or insufficient
investment income to make dividend payments may reduce the net asset value of
the Common Stock and require the Fund to liquidate a portion of its
investments at a time when it may be disadvantageous, in the absence of such
extraordinary circumstances, to do so.
The dividend rates on the outstanding AMPS are established through an
auction process. The dividend rates on the MuniYield Series A and Series B
AMPS are set every 28 and seven days, respectively. The dividend rates on
Taurus AMPS are set every 28 days. The dividend rate has fluctuated at small
premiums over and discounts to the 30 day commercial paper rate. At June 30,
1997, the annual dividend rates on the MuniYield Series A and Series B AMPS
were 3.696% and 3.7%, respectively, and the annual dividend rate on the Taurus
AMPS was 3.5%. At such rates, the annual return each Fund's portfolio must
experience (net of expenses) in order to cover dividend payments on its AMPS
is 0.90% and 0.70%, respectively.
The following table is designed to illustrate the effect on return to a
holder of Common Stock of each of the Funds and of the Combined Fund of the
leverage obtained by the issuance of the AMPS, assuming hypothetical annual
returns on the Fund's portfolio of minus 10 to plus 10 percent. As can be
seen, leverage generally increases the return to common stockholders when
portfolio return is positive and decreases return when the portfolio return is
negative. Actual returns may be greater or less than those appearing in the
table.
14
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
HYPOTHETICAL ANNUAL RETURN MUNIYIELD
Assumed Portfolio Return (net of expenses)......... (10)% (5)% 0% 5% 10%
Corresponding Common Share Return(1)............... (14)% (8)% (1)% 5% 12%
TAURUS
Assumed Portfolio Return (net of expenses)......... (10)% (5)% 0% 5% 10%
Corresponding Common Share Return(1)............... (13)% (7)% (1)% 5% 12%
PRO FORMA FOR COMBINED FUND
Assumed Portfolio Return (net of expenses)......... (10)% (5)% 0% 5% 10%
Corresponding Common Share Return(1)............... (14)% (8)% (1)% 5% 12%
</TABLE>
- --------
(1) In order to compute "Corresponding Common Share Return" the "Assumed
Portfolio Return" is multiplied by the total value of the Fund assets as
of the beginning of the fiscal year (November 1, 1995) to obtain an
assumed return to the Fund. This return is then reduced by the value of
the AMPS dividends that would be paid during the year based on the
dividend rates in effect at the beginning of the fiscal year in order to
determine the return available to holders of the Funds' Common Stock.
Return available to holders of the Funds' Common Stock is then divided by
the total value of the relevant Fund's assets as of the beginning of the
fiscal year to determine "Corresponding Common Share Return."
PORTFOLIO MANAGEMENT
The portfolio management strategies of MuniYield and Taurus are
substantially the same. In the event of an increase in short-term or medium-
term rates or other change in market conditions to the point where a Fund's
leverage could adversely affect holders of Common Stock as noted above, or in
anticipation of such changes, each Fund may attempt to shorten the average
maturity of its investment portfolio, which would tend to offset the negative
impact of leverage on holders of its Common Stock. Each Fund also may attempt
to reduce the degree to which it is leveraged by redeeming AMPS pursuant to
the provisions of the Fund's Articles Supplementary establishing the rights
and preferences of the AMPS or otherwise purchasing shares of AMPS. Purchases
and sales or redemptions of AMPS, whether on the open market or in negotiated
transactions, are subject to limitations under the Investment Company Act. If
market conditions subsequently change, each Fund may sell previously unissued
shares of AMPS or shares of AMPS that the Fund previously issued but later
repurchased or redeemed.
RATINGS CONSIDERATIONS
MuniYield and Taurus have received ratings of their AMPS of AAA from S&P and
"Aaa" from Moody's. In order to maintain these ratings, the Funds are required
to maintain portfolio holdings meeting specified guidelines of such rating
agencies. These guidelines may impose asset coverage requirements that are
more stringent than those imposed by the Investment Company Act.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings of the AMPS are not recommendations to purchase, hold
or sell shares of AMPS, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor, nor do the rating agency
guidelines address the likelihood that a holder of shares of AMPS will be able
to sell such shares in an auction. The ratings are based on current
information furnished to Moody's and S&P by the Funds and FAM and information
obtained from other sources. The ratings may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such
information. Neither the MuniYield Common Stock nor the Taurus Common Stock
has been rated by a nationally recognized statistical rating organization.
The Board of Directors of each of MuniYield and Taurus, as the case may be,
without stockholder approval, may amend, alter or repeal certain definitions
or restrictions that have been adopted by the Fund pursuant to the rating
agency guidelines, in the event the Fund receives confirmation from the rating
agencies that any such amendment, alteration or repeal would not impair the
ratings then assigned to shares of AMPS.
15
<PAGE>
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
MuniYield
The financial information in the table below, except for the six-month period
ended April 30, 1997 which is unaudited and has been provided by FAM, has been
audited in conjunction with the annual audits of the financial statements of
the Fund by Deloitte & Touche LLP, independent auditors. The following per
share data and ratios have been derived from information provided in the
financial statements of the Fund.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS PERIOD
ENDED FEB. 28,
APRIL 30, FOR THE YEAR ENDED OCTOBER 31, 1992+ TO
1997 ----------------------------------- OCT. 31,
(UNAUDITED) 1996 1995 1994 1993 1992
----------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $15.44 $ 15.18 $ 13.91 $ 16.60 $ 14.03 $14.18
------ ------- ------- ------- ------- ------
Investment income--net.. .58 1.16 1.18 1.23 1.22 .77
Realized and unrealized
gain (loss) on
investments--net....... (.23) .28 1.53 (2.65) 2.62 (.07)
------ ------- ------- ------- ------- ------
Total from investment
operations............. .35 1.44 2.71 (1.42) 3.84 .70
------ ------- ------- ------- ------- ------
Less dividends and
distributions to Common
Stock shareholders:
Investment income--net. (.47) (.93) (.90) (1.00) (.99) (.55)
Realized gain on
investments--net...... -- -- (.25) (.07) (.08) --
------ ------- ------- ------- ------- ------
Total dividends and
distributions to Common
Stock shareholders..... (.47) (.93) (1.15) (1.07) (1.07) (.55)
------ ------- ------- ------- ------- ------
Capital charge resulting
from issuance of Common
Stock.................. -- -- -- -- -- (.02)
------ ------- ------- ------- ------- ------
Effect of Preferred
Stock activity:++
Dividends and
distributions to
Preferred Stock
shareholders:
Investment income--net. (.13) (.25) (.25) (.19) (.18) (.14)
Realized gain on
investments--net...... -- -- (.04) (.01) (.02) --
Capital charge
resulting from
issuance of Preferred
Stock................. -- -- -- -- -- (.14)
------ ------- ------- ------- ------- ------
Total effect of
Preferred Stock
activity............... (.13) (.25) (.29) (.20) (.20) (.28)
------ ------- ------- ------- ------- ------
Net asset value, end of
period................. $15.19 $ 15.44 $ 15.18 $ 13.91 $ 16.60 $14.03
====== ======= ======= ======= ======= ======
Market price per share,
end of period.......... $14.75 $14.875 $13.375 $12.125 $15.625 $14.50
====== ======= ======= ======= ======= ======
TOTAL INVESTMENT RETURN
**
Based on market price
per share.............. 2.31%# 18.68% 20.62% (16.36)% 15.56% .43%#
====== ======= ======= ======= ======= ======
Based on net asset value
per share.............. 1.51%# 8.54% 19.33% (9.69)% 26.88% 2.79%#
====== ======= ======= ======= ======= ======
RATIOS TO AVERAGE NET
ASSETS:***
Expenses, net of
reimbursement.......... .67%* .67% .69% .66% .69% .54%*++++
====== ======= ======= ======= ======= ======
Expenses................ .67%* .67% .69% .66% .69% .71%*
====== ======= ======= ======= ======= ======
Investment income--net.. 5.19%* 5.16% 5.48% 5.44% 5.35% 5.65%*
====== ======= ======= ======= ======= ======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS PERIOD
ENDED FEB. 28,
APRIL 30, FOR THE YEAR ENDED OCTOBER 31, 1992+ TO
1997 -------------------------------------- OCT. 31,
(UNAUDITED) 1996 1995 1994 1993 1992
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets, net of
Preferred Stock, end of
period (in thousands).. $254,928 $259,082 $254,742 $233,425 $278,522 $233,502
======== ======== ======== ======== ======== ========
Preferred Stock
outstanding, end of
period (in thousands).. $120,000 $120,000 $120,000 $120,000 $120,000 $120,000
======== ======== ======== ======== ======== ========
Portfolio turnover...... 43.33% 67.48% 69.59% 78.89% 21.68% 28.75%
======== ======== ======== ======== ======== ========
DIVIDENDS PER SHARE ON
PREFERRED STOCK
OUTSTANDING:+++
Series A--Investment
income--net............ $ 449 $ 875 $ 882 $ 694 $ 547 $ 449
======== ======== ======== ======== ======== ========
Series B--Investment
income--net............ $ 429 $ 860 $ 864 $ 615 $ 688 $ 481
======== ======== ======== ======== ======== ========
LEVERAGE:
Asset coverage per
$1,000................. $ 3,124 $ 3,159 $ 3,123 $ 2,945 $ 3,321 $ 2,946
======== ======== ======== ======== ======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result in
substantially different returns. Total investment returns exclude the
effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on April 10, 1992.
+++ Dividends per share have been adjusted to reflect a two-for-one stock
split that occurred on December 1, 1994.
++++ For the period February 28, 1992 (commencement of operations) to October
31, 1992, FAM earned fees of $1,137,921 of which $373,960 was voluntarily
waived.
# Aggregate total investment return.
17
<PAGE>
Taurus
The financial information in the table below, except for the six-month
period ended April 30, 1997, which is unaudited and has been provided by FAM,
has been audited in conjunction with the annual audits of the financial
statements of the Fund by Ernst & Young LLP, independent auditors. The
following per share data and ratios have been derived from information
provided in the financial statements of the Fund.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS PERIOD
ENDED FEBRUARY 1,
APRIL 30, FOR THE YEAR ENDED OCTOBER 31, 1990++ TO
1997 ---------------------------------------------- OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990
----------- ------ ------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $11.59 $11.39 $10.25 $12.51 $11.53 $11.66 $11.05 $ 11.16
------- ------ ------ ------ ------ ------ ------ -------
Investment income--net.. .40 .80 .81 .84 .91 .99 1.01 .67
Realized and unrealized
gain (loss) on invest-
ments--net............. (.17) .20 1.14 (2.08) 1.13 (.05) .62 --
------- ------ ------ ------ ------ ------ ------ -------
Total from investment
operations............. .23 1.00 1.95 (1.24) 2.04 .94 1.63 .67
------- ------ ------ ------ ------ ------ ------ -------
Less dividends and dis-
tributions to Common
Stock shareholders:
Investment income--net. (.35) (.67) (.66) (.71) (.82) (.88) (.82) (.49)
Realized gain on in-
vestments--net........ -- -- -- (.20) (.14) (.06) (.01) --
Total dividends and dis-
tributions to Common
Stock shareholders..... (.35) (.67) (.66) (.91) (.96) (.94) (.83) (.49)
------- ------ ------ ------ ------ ------ ------ -------
Capital charge result-
ing from issuance of
Common Stock.......... -- -- -- -- -- -- -- (.07)
------- ------ ------ ------ ------ ------ ------ -------
Effect of Preferred
Stock activity:
Dividends and distribu-
tions to Preferred
Stock shareholders:
Investment income--net. (.07) (.13) (.15) (.09) (.08) (.12) (.19) (.11)
Realized gain on in-
vestments--net........ -- -- -- (.02) (.02) (.01) -- --
Capital charge result-
ing from issuance of
Preferred Stock....... -- -- -- -- -- -- -- (.11)
------- ------ ------ ------ ------ ------ ------ -------
Total effect of Pre-
ferred Stock activity.. (.07) (.13) (.15) (.11) (.10) (.13) (.19) (.22)
------- ------ ------ ------ ------ ------ ------ -------
Net asset value, end of
period................. $11.40 $11.59 $11.39 $10.25 $12.51 $11.53 $11.66 $ 11.05
======= ====== ====== ====== ====== ====== ====== =======
Market price per share,
end of period.......... $10.625 $10.75 $ 9.50 $ 9.25 $13.00 $12.50 $12.25 $11.125
======= ====== ====== ====== ====== ====== ====== =======
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS PERIOD
ENDED FEBRUARY 1,
APRIL 30, FOR THE YEAR ENDED OCTOBER 31, 1990++ TO
1997 ----------------------------------------------------- OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990
----------- ------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL INVESTMENT RE-
TURN:**
Based on market price
per share.............. 1.98%# 20.63% 10.03% (22.57%) 12.52% 10.18% 18.41% (3.04)%#
======= ======= ======= ======= ======= ======= ======= =======
Based on net asset value
per share.............. 1.49%# 8.48% 19.05% (10.84%) 17.39% 6.77% 13.47% 3.56%#
======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:***
Expenses................ .90%* .88% .93% .89% .94% .88% .91% .82%*
======= ======= ======= ======= ======= ======= ======= =======
Investment income--net.. 5.09%* 5.27% 5.50% 5.49% 5.76% 6.36% 6.60% 6.65%*
======= ======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, net of Pre-
ferred Stock, end of
period (in thousands).. $59,023 $59,960 $58,936 $53,032 $64,720 $59,030 $58,543 $54,500
======= ======= ======= ======= ======= ======= ======= =======
Preferred Stock out-
standing, end of period
(in thousands)......... $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000
======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover...... 51.77% 55.58% 107.20% 87.83% 52.04% 50.50% 27.89% 85.91%
======= ======= ======= ======= ======= ======= ======= =======
DIVIDENDS PER SHARE ON
PREFERRED STOCK OUT-
STANDING:+
Investment income--net.. $ 421 $ 870 $ 944 $ 557 $ 514 $ 769 $ 1,179 $ 662
======= ======= ======= ======= ======= ======= ======= =======
LEVERAGE:
Asset coverage per
$1,000................. $ 3,951 $ 3,998 $ 3,947 $ 3,652 $ 4,236 $ 3,952 $ 3,927 $ 3,725
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Dividends per share have been adjusted to reflect a two-for-one stock split
that occurred on December 1, 1994.
# Aggregate total investment return.
++Commencement of Operations.
19
<PAGE>
PER SHARE DATA FOR COMMON STOCK*
TRADED ON THE NEW YORK STOCK EXCHANGE
MUNIYIELD
<TABLE>
<CAPTION>
PREMIUM
(DISCOUNT) TO
MARKET PRICE** NET ASSET VALUE NET ASSET VALUE
---------------- --------------- -----------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- -------- ------- --------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
January 31, 1993........... $14.875 $14.25 $ 14.83 $ 14.05 4.09 % (2.14)%
April 30, 1993............. 15.50 14.625 16.00 14.53 (0.46) (4.90)
July 31, 1993.............. 15.50 14.625 15.96 15.49 (1.84) (6.79)
October 31, 1993........... 16.375 15.125 16.80 15.80 (1.77) (7.38)
January 31, 1994........... 15.875 15.00 16.68 16.07 (1.70) (7.74)
April 30, 1994............. 15.875 13.125 16.62 14.35 (2.73) (10.11)
July 31, 1994.............. 14.00 13.00 15.41 14.40 (5.61) (11.76)
October 31, 1994........... 13.875 12.00 15.11 13.90 (7.19) (16.43)
January 31, 1995........... 12.75 11.25 14.02 12.76 (1.70) (14.05)
April 30, 1995............. 13.625 12.625 14.82 14.03 (5.99) (12.77)
July 31, 1995.............. 13.50 12.625 15.33 14.49 (9.21) (16.00)
October 31, 1995........... 13.375 12.50 15.25 14.52 (10.71) (14.87)
January 31, 1996........... 14.125 13.125 15.69 15.24 (9.05) (15.12)
April 30, 1996............. 14.625 13.625 15.94 14.73 (3.98) (10.88)
July 31, 1996.............. 14.50 14.00 15.09 14.64 (1.89) (6.54)
October 31, 1996........... 14.88 14.38 15.45 14.97 (1.36) (6.96)
January 31, 1997........... 15.00 14.63 15.70 15.30 (2.66) (5.57)
April 30, 1997............. 15.13 14.25 15.78 14.99 (2.60) (5.75)
July 31, 1997.............. 15.875 14.75 16.05 15.22 0.99 (4.46)
TAURUS
<CAPTION>
PREMIUM
(DISCOUNT) TO
MARKET PRICE** NET ASSET VALUE NET ASSET VALUE
---------------- --------------- -----------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- -------- ------- --------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
January 31, 1993........... $13.125 $12.00 $ 11.92 $ 11.53 1.99 % 1.61 %
April 30, 1993............. 13.375 12.125 12.40 11.82 8.48 1.29
July 31, 1993.............. 13.625 12.125 12.34 12.08 8.56 (0.29)
October 31, 1993........... 13.00 12.375 12.66 12.20 4.25 (0.40)
January 31, 1994........... 12.875 11.25 12.46 12.11 4.00 (7.48)
April 30, 1994............. 12.25 10.00 12.33 10.56 12.90 (9.21)
July 31, 1994.............. 10.875 9.50 11.18 10.60 0.51 (12.52)
October 31, 1994........... 9.875 8.875 11.02 10.23 (9.57) (16.82)
January 31, 1995........... 9.50 8.125 10.56 9.56 (5.54) (16.58)
April 30, 1995............. 10.00 9.25 11.05 10.57 (7.06) (14.43)
July 31, 1995.............. 9.875 9.25 11.49 10.75 (9.30) (18.45)
October 31, 1995........... 9.75 9.125 11.44 10.84 (12.60) (16.89)
January 31, 1996........... 10.625 9.625 11.92 11.43 (9.50) (16.16)
April 30, 1996............. 10.75 9.875 12.04 11.08 (7.24) (13.83)
July 31, 1996.............. 10.375 9.875 11.40 11.00 (7.41) (12.28)
October 31, 1996........... 10.75 10.125 11.62 11.23 (5.89) (11.42)
January 31, 1997........... 11.125 10.625 11.79 11.41 (3.85) (8.56)
April 30, 1997............. 11.25 10.375 11.74 11.26 (1.64) (8.10)
July 31, 1997.............. 11.8125 10.75 11.99 11.42 (0.98) (7.60)
</TABLE>
- --------
* Calculations are based upon shares of Common Stock outstanding at the end of
each quarter.
** As reported in the consolidated transaction reporting system.
20
<PAGE>
As indicated in the tables above, since November 1, 1992 the MuniYield
Common Stock and the Taurus Common Stock generally have traded at market
prices that represent a discount to net asset value. Since November 1, 1992,
share prices for MuniYield Common Stock have fluctuated between a maximum
premium of 4.09% and a maximum discount of (16.43)% and share prices for
Taurus Common Stock have fluctuated between a maximum premium of 12.90% and a
maximum discount of (18.45)%. Although there is no reason to believe that this
pattern should be affected by the Reorganization, it is not possible to state
whether shares of the surviving fund will trade at a premium or discount to
net asset value following the Reorganization, or what the extent of any such
premium or discount might be.
INVESTMENT OBJECTIVE AND POLICIES
The structure, organization, and investment objective and policies of
MuniYield and Taurus are virtually identical, with the minor differences
between the two Funds set forth below. Each Fund seeks as a fundamental
investment objective as high a level of current income exempt from Federal and
California income taxes as is consistent with the Fund's investment policies
and prudent investment management.
Each Fund seeks to achieve its investment objective by investing primarily
in a portfolio of California Municipal Bonds. The investment objective of each
Fund is a fundamental policy that may not be changed without a vote of a
majority of the Fund's outstanding voting securities. Under normal
circumstances, at least 65% of each Fund's total assets will be invested in
California Municipal Bonds and at least 80% of each Fund's total assets will
be invested in California Municipal Bonds and other long-term municipal
obligations exempt from Federal income taxes, but not necessarily from
California income taxes.
Ordinarily, neither Fund intends to realize significant investment income
not exempt from Federal or California income taxes. Each Fund seeks to invest
substantially all (80%) of its total assets in Municipal Bonds except at times
when, in the judgment of FAM, Municipal Bonds of sufficient quality and
quantity are unavailable for investment by the Fund. Each Fund may invest all
or a portion of its assets in certain tax-exempt securities classified as
"private activity bonds" (in general, bonds that benefit non-governmental
entities) that may subject certain investors in the Fund to an alternative
minimum tax.
The investment grade Municipal Bonds in which each Fund invests are those
Municipal Bonds rated at the date of purchase within the four highest rating
categories of S&P, Moody's or Fitch Investors Service, Inc. ("Fitch") or, if
unrated, are considered to be of comparable quality by FAM. In the case of
long-term debt, the investment grade rating categories are AAA through BBB-
for S&P, "Aaa" through "Baa3" for Moody's and AAA through BBB- for Fitch. In
the case of short-term notes, the investment grade rating categories are SP-1
through SP-3 for S&P, "MIG-1" through "MIG-4" for Moody's and F-1+ through F-4
for Fitch. In the case of tax-exempt commercial paper, the investment grade
rating categories are A through A-3 for S&P, "Prime-l" through "Prime-3" for
Moody's and F-l+ through F-4 for Fitch. Obligations ranked in the fourth
highest rating category assigned long-term debt or in an equivalent short-term
rating category (BBB, SP-3 and A-3 for S&P; "Baa", "MIG-4" and "Prime-3" for
Moody's; and BBB, F-3 and F-4 for Fitch), while considered "investment grade,"
may have certain speculative characteristics. See Exhibit II--"Ratings of
Municipal Bonds and Commercial Paper."
MuniYield may invest in variable rate demand obligations ("VRDOs") and VRDOs
in the form of participation interests ("Participating VRDOs") in variable
rate tax-exempt obligations held by a financial institution, typically a
commercial bank. The VRDOs in which each Fund may invest are tax-exempt
obligations (in the opinion of counsel to the issuer) that contain a floating
or variable interest rate adjustment formula and an unconditional right of
demand on the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest on a short notice period not to exceed
seven days. Participating VRDOs provide the Funds with a specified undivided
interest (up to 100%) in the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution on a specified number of
days' notice, not to exceed seven days. There is, however, the possibility
that because of default or insolvency, the demand feature of VRDOs or
Participating VRDOs may not be honored. MuniYield and Taurus have been advised
by their counsel that the Funds should be entitled to treat the income
received on Participating VRDOs as interest from tax-exempt obligations.
21
<PAGE>
The average maturity of each Fund's portfolio securities varies based upon
FAM's assessment of economic and market conditions. The net asset value of the
shares of common stock of a closed-end investment company, such as each Fund,
which invests primarily in fixed-income securities, changes as the general
levels of interest rates fluctuate. When interest rates decline, the value of
a fixed-income portfolio can be expected to rise. Conversely, when interest
rates rise, the value of a fixed-income portfolio can be expected to decline.
Prices of longer-term securities generally fluctuate more in response to
interest rate changes than do short-term or medium-term securities. These
changes in net asset value are likely to be greater in the case of a fund
having a leveraged capital structure, such as the Funds.
On a temporary basis, each Fund may invest in short-term tax-exempt
securities, short-term U.S. Government securities, repurchase agreements or
cash. Such securities or cash will not exceed 20% of each Fund's total assets
except during interim periods pending investment of the net proceeds from
public offerings of the Fund's securities and temporary defensive periods
when, in the opinion of FAM, prevailing market or economic conditions warrant.
Each Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act
in the proportion of its total assets that it may invest in securities of a
single issuer. However, each Fund's investments are limited so as to qualify
the Fund for the special tax treatment afforded RICs under the Code. See
"Agreement and Plan of Reorganization--Tax Consequences of the
Reorganization." To qualify, among other requirements, each Fund limits its
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Fund's total assets is invested in
the securities (other than U.S. Government securities) of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets is invested in the securities
(other than U.S. Government securities) of a single issuer. A fund that elects
to be classified as "diversified" under the Investment Company Act must
satisfy the foregoing 5% requirement with respect to 75% of its total assets.
To the extent that MuniYield or Taurus assumes large positions in the
securities of a small number of issuers, the Fund's yield may fluctuate to a
greater extent than that of a diversified company as a result of changes in
the financial condition or in the market's assessment of the issuers.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to finance various privately operated facilities, including
pollution control facilities. For purposes of this Proxy Statement and
Prospectus, such obligations are Municipal Bonds if the interest paid thereon
is exempt from Federal income tax, even though such bonds may be "private
activity bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" or "special obligation" bonds. General
obligation bonds are secured by the issuer's pledge of faith, credit and
taxing power for the payment of principal and interest. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds from a
special excise tax or other specific revenue source such as from the user of
the facility being financed. Industrial development bonds are in most cases
revenue bonds and generally do not constitute the pledge of the credit or
taxing power of the issuer of such bonds. The payment of the principal and
interest on such industrial development bonds depends solely on the ability of
the user of the facility financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed
as security for such payment. Municipal Bonds also may include "moral
obligation" bonds, which normally are issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
22
<PAGE>
Each Fund may purchase Municipal Bonds classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities). Interest
received on certain tax-exempt securities that are classified as "private
activity bonds" may subject certain investors in the Fund to an alternative
minimum tax. There is no limitation on the percentage of each Fund's assets
that may be invested in Municipal Bonds that may subject certain investors to
an alternative minimum tax. See "The Reorganization--Summary--Tax
Considerations" and "The Reorganization--Agreement and Plan of
Reorganization--Tax Consequences of the Reorganization."
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Funds.
OTHER INVESTMENT POLICIES
Both MuniYield and Taurus have adopted certain other policies as set forth
below:
Borrowings. Each Fund is authorized to borrow amounts of up to 5% of the
value of its total assets at the time of such borrowings; provided,
however, that each Fund is authorized to borrow money in excess of 5% of
the value of its total assets for the purpose of repurchasing its Common
Stock or redeeming its AMPS. Borrowings by each Fund create an opportunity
for greater total return but, at the same time, increase exposure to
capital risk. In addition, borrowed funds are subject to interest costs
that may offset or exceed the return earned on the borrowed funds. For so
long as shares of a Fund's AMPS are rated by Moody's or S&P, unless it
receives written confirmation from Moody's or S&P, as the case may be, that
such action would not impair the ratings then assigned to the shares of
AMPS by Moody's or S&P, the issuing Fund will not borrow money except for
the purpose of clearing portfolio securities transactions (which borrowings
under any circumstances shall be limited to the lesser of $10 million and
an amount equal to 5% of the market value of the Fund's assets at the time
of such borrowings and further in the case of Taurus, which borrowings
shall be repaid within 60 days and not be extended or renewed).
When-Issued Securities and Delayed Delivery Transactions. MuniYield and
Taurus may purchase or sell Municipal Bonds on a delayed delivery basis or
on a when-issued basis at fixed purchase or sale terms. These transactions
arise when securities are purchased or sold by a Fund with payment and
delivery taking place in the future. The purchase will be recorded on the
date that the Fund enters into the commitment, and the value of the
obligation thereafter will be reflected in the calculation of the Fund's
net asset value. The value of the obligation on the delivery day may be
more or less than its purchase price. A separate account of the Fund will
be established with its custodian consisting of cash, cash equivalents or
liquid Municipal Bonds having a market value at all times at least equal to
the amount of the commitment.
Indexed and Inverse Floating Obligations. MuniYield and Taurus may invest
in Municipal Bonds the return on which is based on a particular index of
value or interest rates. For example, each Fund may invest in Municipal
Bonds that pay interest based on an index of Municipal Bond interest rates
or based on the value of gold or some other product. The principal amount
payable upon maturity of certain Municipal Bonds also may be based on the
value of an index. To the extent a Fund invests in these types of Municipal
Bonds, the Fund's return on such Municipal Bonds will be subject to risk
with respect to the value of the particular index. Also, a Fund may invest
in so-called "inverse floating rate bonds" or "residual interest bonds" on
which the interest rates typically vary inversely with a short-term
floating rate (which may be reset periodically by a dutch auction, by a
remarketing agent, or by reference to a short-term tax-exempt interest rate
index). Each Fund may purchase original issue inverse floating rate bonds
in both the primary and secondary markets and also may purchase in the
secondary market synthetically-created inverse floating rate bonds
evidenced by custodial or trust receipts. Generally, interest rates on
inverse floating rate bonds will decrease when short-term rates increase,
and will increase when short-term rates decrease. Such securities have the
effect of providing a degree of investment leverage, since they may
increase or decrease in value in response to changes, as an illustration,
in market interest rates at a rate that is a multiple (typically two) of
the rate at which fixed-rate, long-term, tax-exempt securities increase or
decrease in response to such changes. As a result, the market values of
such securities generally will be more volatile
23
<PAGE>
than the market values of fixed-rate tax-exempt securities. To seek to
limit the volatility of these securities, a Fund may purchase inverse
floating rate bonds with shorter-term maturities or that contain
limitations on the extent to which the interest rate may vary. FAM believes
that indexed and inverse floating obligations represent a flexible
portfolio management instrument for the Funds that allow FAM to vary the
degree of investment leverage relatively efficiently under different market
conditions.
Call Rights. MuniYield and Taurus may purchase a Municipal Bond issuer's
right to call all or a portion of such Municipal Bond for mandatory tender
for purchase (a "Call Right"). A holder of a Call Right may exercise such
right to require a mandatory tender for the purchase of the related
Municipal Bonds, subject to certain conditions. A Call Right that is not
exercised prior to the maturity of the related Municipal Bond will expire
without value. The economic effect of holding both the Call Right and the
related Municipal Bond is identical to holding a Municipal Bond as a non-
callable security.
INFORMATION REGARDING OPTIONS AND FUTURES TRANSACTIONS
Each Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts ("financial futures contracts") and options
thereon. While each Fund's use of hedging strategies is intended to reduce the
volatility of the net asset value of its Common Stock, the net asset value of
its Common Stock fluctuates. There can be no assurance that a Fund's hedging
transactions will be effective. In addition, because of the leveraged nature
of each Fund's Common Stock, hedging transactions will result in a larger
impact on the net asset value of the Common Stock than would be the case if
the Common Stock were not leveraged. For so long as a Fund's AMPS are rated by
Moody's or S&P, as the case may be, the Fund's use of options and financial
futures contracts and options thereon will be subject to certain limitations
mandated by the rating agencies. Furthermore, a Fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in interest rates occur.
Certain Federal income tax requirements may limit a Fund's ability to engage
in hedging transactions. Gains from transactions in financial futures
contracts or options thereon distributed to stockholders are taxable as
ordinary income or, in certain circumstances, as long-term capital gains to
stockholders.
The following is a description of the transactions involving options and
financial futures contracts and options thereon in which each Fund may engage,
limitations on the use of such transactions and risks associated therewith.
The investment policies with respect to the hedging transactions of a Fund are
not fundamental policies and may be modified by the Board of Directors of the
Fund without the approval of the Fund's stockholders.
Writing Covered Call Options. Each Fund is authorized to write (i.e., sell)
covered call options with respect to Municipal Bonds it owns, thereby giving
the holder of the option the right to buy the underlying security covered by
the option from the Fund at the stated exercise price until the option
expires. Each Fund writes only covered call options, which means that so long
as the Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option. The Fund may not write covered
call options on underlying securities in an amount exceeding 15% of the market
value of its total assets. Each Fund receives a premium from writing a call
option, which increases the Fund's return on the underlying security in the
event the option expires unexercised or is closed out at a profit. By writing
a call, a Fund limits its opportunity to profit from an increase in the market
value of the underlying security above the exercise price of the option for as
long as the Fund's obligation as a writer continues. Covered call options
serve as a partial hedge against a decline in the price of the underlying
security. Each Fund may engage in closing transactions in order to terminate
outstanding options that it has written.
Purchase of Options. Each Fund is authorized to purchase put options in
connection with its hedging activities. By buying a put, the Fund has a right
to sell the underlying security at the exercise price, thus limiting the
Fund's risk of loss through a decline in the market value of the security
until the put expires. The amount of any appreciation in the value of the
underlying security will be partially offset by the amount of the premium
24
<PAGE>
terminated by entering into the closing sale transaction. In certain
circumstances, the Fund may purchase call options on securities held in its
portfolio on which it has written call options, or on securities that it
intends to purchase. A Fund will not purchase options on securities if, as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Financial Futures Contracts and Options Thereon. Each Fund is authorized to
purchase and sell certain financial futures contracts and options thereon
solely for the purposes of hedging its investments in Municipal Bonds against
declines in value and hedging against increases in the cost of securities it
intends to purchase. A financial futures contract obligates the seller of a
contract to deliver and the purchaser of a contract to take delivery of the
type of financial instrument covered by the contract or, in the case of index-
based financial futures contracts, to make and accept a cash settlement, at a
specific future time for a specified price. A sale of financial futures
contracts or options thereon may provide a hedge against a decline in the
value of portfolio securities because such depreciation may be offset, in
whole or in part, by an increase in the value of the position in the financial
futures contracts or options. A purchase of financial futures contracts or
options thereon may provide a hedge against an increase in the cost of
securities intended to be purchased, because such appreciation may be offset,
in whole or in part, by an increase in the value of the position in the
financial futures contracts or options.
The purchase or sale of a financial futures contract or option thereon
differs from the purchase or sale of a security in that no price or premium is
paid or received. Instead, an amount of cash or securities acceptable to the
broker equal to approximately 5% of the contract amount must be deposited with
the broker. This amount is known as initial margin. Subsequent payments to and
from the broker, called variation margin, are made on a daily basis as the
price of the financial futures contract or option thereon fluctuates making
the long and short positions in the financial futures contract or option
thereon more or less valuable.
Each Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value
of 40 large tax-exempt issues, and purchase and sell put and call options on
such financial futures contracts for the purpose of hedging Municipal Bonds
that the Fund holds or anticipates purchasing against adverse changes in
interest rates.
Each Fund also may purchase and sell financial futures contracts on U.S.
Government securities and purchase and sell put and call options on such
financial futures contracts for such hedging purposes. With respect to U.S.
Government securities, currently there are financial futures contracts based
on long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and
three-month U.S. Treasury bills.
Subject to policies adopted by its Board of Directors, each Fund also may
engage in transactions in other financial futures contracts or options
thereon, such as financial futures contracts or options on other municipal
bond indices that may become available, if FAM should determine that there
normally is sufficient correlation between the prices of such financial
futures contracts or options thereon and the Municipal Bonds in which the Fund
invests to make such hedging appropriate.
Over-The-Counter Options. Each Fund is authorized to engage in transactions
involving financial futures contracts or options thereon on exchanges and in
the over-the-counter markets ("OTC options"). In general, exchange-traded
contracts are third-party contracts (i.e., performance of the parties'
obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
Restrictions on OTC Options. Each Fund is authorized to engage in
transactions in OTC options only with member banks of the Federal Reserve
System and primary dealers in U.S. Government securities or with affiliates of
such banks or dealers which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50
million. OTC options and assets used to cover OTC options written by the Funds
are considered by the staff of the Commission to be illiquid. The illiquidity
of such options or assets
25
<PAGE>
may prevent a successful sale of such options or assets, result in a delay of
sale, or reduce the amount of proceeds that otherwise might be realized.
Risk Factors in Financial Futures Contracts and Options Thereon. Utilization
of financial futures contracts and options thereon involves the risk of
imperfect correlation in movements in the price of financial futures contracts
and options thereon and movements in the price of the security which is the
subject of the hedge. If the price of the financial futures contract or option
thereon moves more or less than the price of the security that is the subject
of the hedge, a Fund will experience a gain or loss that may not be completely
offset by movements in the price of such security. There is a risk of
imperfect correlation where the securities underlying financial futures
contracts or options thereon have different maturities, ratings, geographic
compositions or other characteristics than the security being hedged. In
addition, the correlation may be affected by additions to or deletions from
the index which serves as a basis for a financial futures contract or option
thereon. Finally, in the case of financial futures contracts on U.S.
Government securities and options on such financial futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the financial futures contracts or options and Municipal
Bonds may be adversely affected by economic, political, legislative or other
developments which have a disparate impact on the respective markets for such
securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in a Fund's being deemed a
"commodity pool," as defined under such regulations, provided that the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
Margin deposits may consist of cash or securities acceptable to the broker and
the relevant contract market.
When a Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
other liquid securities in a segregated account with the Fund's custodian, so
that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the financial
futures contract, thereby ensuring that the use of such financial futures
contract is unleveraged.
Although certain risks are involved in financial futures contracts and
options thereon, FAM believes that, because each Fund will engage in
transactions involving financial futures contracts and options thereon only
for hedging purposes, the options and futures portfolio strategies of a Fund
will not subject the Fund to certain risks frequently associated with
speculation in financial futures contracts and options thereon. A Fund may be
restricted in engaging in transactions involving financial futures contracts
and options thereon due to the Federal tax requirement that less than 30% of
its gross income in each taxable year be derived from the sale or other
disposition of securities held for less than three months.
The volume of trading in the exchange markets with respect to Municipal Bond
options may be limited, and it is impossible to predict the amount of trading
interest that may exist in such options. In addition, there can be no
assurance that viable exchange markets will continue to be available.
Each Fund intends to enter into financial futures contracts and options
thereon, on an exchange or in the over-the-counter market, only if there
appears to be a liquid secondary market for such financial futures contracts
or options. There can be no assurance, however, that a liquid secondary market
will exist at any specific time. Thus, it may not be possible to close a
financial futures contract position or the related option. The inability to
close financial futures contract positions or the related options also could
have an adverse impact on a Fund's ability to hedge effectively its portfolio.
There is also the risk of loss by a Fund of margin deposits or collateral in
the event of bankruptcy of a broker with which the Fund has an open position
in a financial futures contract or the related option.
26
<PAGE>
The liquidity of a secondary market in a financial futures contract or
option thereon may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges that limit the amount of fluctuation in a
financial futures contract or option price during a single trading day. Once
the daily limit has been reached in the financial futures contract or option,
no trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open financial futures contract positions or the related
options. Prices in the past have reached or exceeded the daily limit on a
number of consecutive trading days.
If it is not possible to close a financial futures contract position or the
related option entered into by a Fund, the Fund would continue to be required
to make daily cash payments of variation margin in the event of adverse price
movements. In such a situation, if the Fund has insufficient cash, it may have
to sell portfolio securities to meet daily variation margin requirements at a
time when it may be disadvantageous to do so.
The successful use of these transactions also depends on the ability of FAM
to forecast correctly the direction and extent of interest rate movements
within a given time frame. To the extent interest rates remain stable during
the period in which a financial futures contract or option thereon is held by
a Fund or moves in a direction opposite to that anticipated, the Fund may
realize a loss on the hedging transaction that is not fully or partially
offset by an increase in the value of portfolio securities. As a result, the
Fund's total return for such period may be less than if it had not engaged in
the hedging transaction.
INVESTMENT RESTRICTIONS
MuniYield and Taurus have identical investment restrictions. The following
are fundamental investment restrictions of each Fund and may not be changed
without the approval of the holders of a majority of the outstanding shares of
Common Stock and the outstanding shares of AMPS and any other preferred stock,
voting together as a single class, and a majority of the outstanding shares of
AMPS and any other preferred stock, voting separately as a class. (For this
purpose and under the Investment Company Act, "majority" means for each such
class the lesser of (i) 67% of the shares of each class of capital stock
represented at a meeting at which more than 50% of the outstanding shares of
each class of capital stock are represented or (ii) more than 50% of the
outstanding shares of each class of capital stock.) Neither Fund may:
1. Make investments for the purpose of exercising control or management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies and only if immediately thereafter not more than 10% of the
Fund's total assets would be invested in such securities.
3. Purchase or sell real estate, real estate limited partnerships,
commodities or commodity contracts; provided, however, that the Fund may
invest in securities secured by real estate or interests therein or issued
by companies that invest in real estate or interests therein, and the Fund
may purchase and sell financial futures contracts and options thereon.
4. Issue senior securities other than preferred stock or borrow amounts
in excess of 5% of its total assets taken at market value; provided,
however, that the Fund is authorized to borrow money in excess of 5% of the
value of its total assets for the purpose of repurchasing shares of Common
Stock or redeeming shares of preferred stock.
5. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
6. Make loans to other persons, except that the Fund may purchase
Municipal Bonds and other debt securities in accordance with its investment
objective, policies and limitations.
7. Purchase any securities on margin, except that (subject to investment
restriction (4) above) the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities
(the deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts and options thereon is not
considered the purchase of a security on margin).
27
<PAGE>
8. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on Municipal Bonds, U.S. Government
obligations and related indices or otherwise in connection with bona fide
hedging activities.
9. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided, however, that for purposes of this restriction, states,
municipalities and their political subdivisions are not considered to be
part of any industry.
An additional investment restriction adopted by each Fund, which may be
changed by the Board of Directors, provides that the Fund may not mortgage,
pledge, hypothecate or in any manner transfer, as security for indebtedness,
any securities owned or held by the Fund except as may be necessary in
connection with borrowings mentioned in investment restriction (4) above or
except as may be necessary in connection with transactions in financial
futures contracts and options thereon.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
RATING AGENCY GUIDELINES
Each Fund intends that, so long as shares of its AMPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's
and S&P in connection with the Fund's receipt of a rating for such shares on
their date of original issue of AAA from S&P and "Aaa" from Moody's. Moody's
and S&P, which are nationally recognized statistical rating organizations,
issue ratings for various securities reflecting the perceived creditworthiness
of such securities. The guidelines for rating AMPS have been developed by
Moody's and S&P in connection with issuances of asset-backed and similar
securities, including debt obligations and variable rate preferred stocks,
generally on a case-by-case basis through discussions with the issuers of
these securities. The guidelines are designed to ensure that assets underlying
outstanding debt or preferred stock will be varied sufficiently and will be of
sufficient quality and amount to justify investment-grade ratings. The
guidelines do not have the force of law but have been adopted by each Fund in
order to satisfy current requirements necessary for Moody's and S&P to issue
the above-described ratings for shares of AMPS, which ratings generally are
relied upon by institutional investors in purchasing such securities. The
guidelines provide a set of tests for portfolio composition and asset coverage
that supplement (and in some cases are more restrictive than) the applicable
requirements under the Investment Company Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of the ratings altogether. In addition, any
rating agency providing a rating for the shares of AMPS, at any time, may
change or withdraw any such rating. As set forth in the Articles Supplementary
of each Fund, the Board of Directors, without stockholder approval, may modify
certain definitions or restrictions that have been adopted by the Fund
pursuant to the rating agency guidelines, provided the Board of Directors has
obtained written confirmation from Moody's and S&P that any such change would
not impair the ratings then assigned by Moody's and S&P to the AMPS. See "The
Reorganization--Risk Factors and Special Considerations--Ratings
Considerations."
For so long as any shares of a Fund's AMPS are rated by Moody's or S&P, as
the case may be, a Fund's use of options and financial futures contracts and
options thereon will be subject to certain limitations mandated by the rating
agencies.
PORTFOLIO COMPOSITION
Although the investment portfolios of both Funds must satisfy the same
standards of credit quality, the actual securities owned by each Fund are
different, as a result of which there are certain differences in the
composition of the two investment portfolios. Of the California Municipal
Bonds and Municipal Bonds owned
28
<PAGE>
by MuniYield as of June 30, 1997, 69% are rated in the highest grade by Moody's
or S&P, 87% are rated in the highest two grades, 99% are rated in the highest
three grades, 100% are rated in the highest four grades, and 0% are unrated.
The comparable percentages for Taurus are 60% in the highest grade, 79% in the
highest two grades, 87% in the highest three grades, 97% in the highest four
grades and 3% unrated.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL BONDS
MuniYield and Taurus ordinarily invest substantially all of their total
assets in California Municipal Bonds and, therefore, they are more susceptible
to factors adversely affecting issuers of California Municipal Bonds than is a
municipal bond investment company that is not concentrated in issuers of
California Municipal Bonds to this degree. Economic activity in California, as
in many other industrially developed states, tends to be more cyclical than in
some other states and in the nation as a whole. FAM does not believe that the
current economic conditions in California will have a significant adverse
effect on either Fund's ability to invest prudently in California Municipal
Bonds. See Exhibit III--"Economic Conditions in California."
MuniYield
As of June 30, 1997, approximately 97% of the market value of MuniYield's
portfolio was invested in long-term municipal obligations and approximately 3%
of the market value of MuniYield's portfolio was invested in short-term
municipal obligations. The following table sets forth certain information with
respect to the composition of MuniYield's long-term municipal obligation
investment portfolio as of June 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 40 $249,599 69%
AA Aa 16 68,111 18
A A 10 39,961 11
BBB Baa 3 5,854 2
--- -------- ---
69 $363,525 100%
=== ======== ===
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's municipal
obligations. S&P's rating categories may be modified further by a plus (+) or
minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating categories may
be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings. See
Exhibit II--"Ratings of Municipal Bonds and Commercial Paper."
Taurus
As of June 30, 1997, approximately 93% of the market value of Taurus'
portfolio was invested in long-term municipal obligations and approximately 7%
of the market value of Taurus' portfolio was invested in short-term municipal
obligations. The following table sets forth certain information with respect to
the composition of Taurus' long-term municipal obligation investment portfolio
as of June 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 25 $44,206 60%
AA Aa 8 13,416 19
A A 4 5,960 8
BBB Baa 4 7,053 10
NR NR 2 2,482 3
--- ------- ---
43 $73,117 100%
=== ======= ===
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's municipal
obligations. S&P's rating categories may be modified further by a plus (+) or
minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating categories may
be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings. See
Exhibit II--"Ratings of Municipal Bonds and Commercial Paper."
29
<PAGE>
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are the same for both
MuniYield and Taurus. Subject to policies established by the Board of
Directors of each Fund, FAM is primarily responsible for the execution of each
Fund's portfolio transactions. In executing such transactions, FAM seeks to
obtain the best results for each Fund, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While FAM
generally seeks reasonably competitive commission rates, MuniYield and Taurus
do not necessarily pay the lowest commission or spread available.
Neither Fund has any obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provide supplemental
investment research to FAM, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), may receive orders for transactions by a Fund.
Supplemental information so received will be in addition to, and not in lieu
of, the services required to be performed by FAM under its investment advisory
agreements with the Funds, and the expenses of FAM will not necessarily be
reduced as a result of the receipt of such supplemental information.
The securities in which each Fund primarily invests are traded in the over-
the-counter markets, and each Fund normally deals directly with the dealers
who make markets in the securities involved, except in those circumstances
where better prices and execution are available elsewhere. Under the
Investment Company Act, except as permitted by exemptive order, persons
affiliated with a Fund are prohibited from dealing with the Fund as principals
in the purchase and sale of securities. Because transactions in the over-the-
counter markets usually involve transactions with dealers acting as principals
for their own account, a Fund will not deal with affiliated persons, including
Merrill Lynch and its affiliates, in connection with such transactions, except
that pursuant to an exemptive order obtained by FAM, a Fund may engage in
principal transactions with Merrill Lynch in high quality, short-term, tax-
exempt securities. An affiliated person of a Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis.
MuniYield and Taurus may also purchase tax-exempt instruments in
individually negotiated transactions with the issuer. Because an active
trading market may not exist for such securities, the prices that the Funds
may pay for these securities or receive on their resale may be lower than that
for similar securities with a more liquid market.
The Board of Directors of each Fund has considered the possibility of
recapturing, for the benefit of the Fund, the brokerage commissions, dealer
spreads and other expenses of possible portfolio transactions, such as
underwriting commissions, by conducting portfolio transactions through
affiliated entities, including Merrill Lynch. For example, brokerage
commissions received by Merrill Lynch could be offset against the investment
advisory fees paid by the Fund to FAM. After considering all factors deemed
relevant, the Directors made a determination not to seek such recapture. The
Directors will reconsider this matter from time to time.
Periodic auctions are conducted for the MuniYield AMPS and the Taurus AMPS
by the Auction Agent for the Funds. The auctions require the participation of
one or more broker-dealers, each of whom enters into an agreement with the
Auction Agent. After each auction, the Auction Agent pays a service charge,
from funds provided by the issuing Fund, to each broker-dealer at the annual
rate of 1/4 of 1%, calculated on the basis of the purchase price of shares of
the relevant AMPS placed by such broker-dealer at such auction.
PORTFOLIO TURNOVER
Generally, neither MuniYield nor Taurus purchases securities for short-term
trading profits. However, either Fund may dispose of securities without regard
to the time that they have been held when such action, for defensive or other
reasons, appears advisable to FAM. The portfolio turnover rate is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the
30
<PAGE>
value of the portfolio securities owned by a Fund during the particular fiscal
year. For purposes of determining this rate, all securities whose maturities
at the time of acquisition are one year or less are excluded. The portfolio
turnover rate for each of the years ended October 31, 1996 and 1995 was 67.48%
and 69.59%, respectively, for MuniYield and 55.58% and 107.20%, respectively,
for Taurus.
NET ASSET VALUE
The net asset value per share of Common Stock of each Fund is determined as
of 15 minutes after the close of business on the NYSE (generally, 4:00 p.m.,
New York time) on the last business day of each week. For purposes of
determining the net asset value of a share of Common Stock of each Fund, the
value of the securities held by the Fund plus any cash or other assets
(including interest accrued but not yet received) minus all liabilities
(including accrued expenses) and the aggregate liquidation value of the
outstanding shares of AMPS of the Fund is divided by the total number of
shares of Common Stock of the Fund outstanding at such time. Expenses,
including the fees payable to FAM, are accrued daily.
The California Municipal Bonds and Municipal Bonds in which each Fund
invests are traded primarily in the over-the-counter markets. In determining
net asset value, each Fund utilizes the valuations of portfolio securities
furnished by a pricing service approved by the Board of Directors. The pricing
service typically values portfolio securities at the bid price or the yield
equivalent when quotations are readily available. California Municipal Bonds
and Municipal Bonds for which quotations are not readily available are valued
at fair market value on a consistent basis as determined by the pricing
service using a matrix system to determine valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of each Fund
under the general supervision of the Board of Directors of the Fund. The Board
of Directors of each Fund has determined in good faith that the use of a
pricing service is a fair method of determining the valuation of portfolio
securities. Obligations with remaining maturities of 60 days or less are
valued at amortized cost, unless this method no longer produces fair
valuations. Positions in futures contracts are valued at closing prices for
such contracts established by the exchange on which they are traded, or if
market quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Board of
Directors of each Fund.
CAPITAL STOCK
MuniYield and Taurus each has outstanding both Common Stock and AMPS.
MuniYield Common Stock and Taurus Common Stock both are traded on the NYSE.
The shares of MuniYield Common Stock commenced trading on the NYSE on March
16, 1992. As of June 30, 1997, the net asset value per share of the MuniYield
Common Stock was $15.59 and the market price per share was $15.125. The shares
of Taurus Common Stock commenced trading on the NYSE on January 26, 1990. As
of June 30, 1997, the net asset value per share of the Taurus Common Stock was
$11.65 and the market price per share was $11.375.
Each Fund is authorized to issue 200,000,000 shares of capital stock, all of
which shares initially were classified as Common Stock. The Board of Directors
of each Fund is authorized to classify or reclassify any unissued shares of
capital stock by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption. In connection with each
Fund's offering of shares of AMPS, MuniYield reclassified 4,800 shares of
unissued capital stock as AMPS, and Taurus reclassified 800 shares of unissued
capital stock as AMPS.
Common Stock
Holders of each Fund's Common Stock are entitled to share equally in
dividends declared by the Fund's Board of Directors payable to holders of the
Common Stock and in the net assets of the Fund available for distribution to
holders of the Common Stock after payment of the preferential amounts payable
to holders of any outstanding preferred stock. Holders of a Fund's Common
Stock do not have preemptive or conversion rights and shares of a Fund's
Common Stock are not redeemable. The outstanding shares of Common Stock of
each Fund are fully paid and nonassessable.
31
<PAGE>
So long as any shares of a Fund's AMPS or any other preferred stock are
outstanding, holders of the Fund's Common Stock will not be entitled to
receive any dividends of or other distributions from the Fund unless all
accumulated dividends on outstanding shares of the Fund's AMPS and any other
preferred stock have been paid, and unless asset coverage (as defined in the
Investment Company Act) with respect to such AMPS and any other preferred
stock would be at least 200% after giving effect to such distributions.
Preferred Stock
MuniYield AMPS are structured identically to Taurus AMPS. The AMPS of each
Fund are shares of preferred stock of the Fund that entitle their holders to
receive dividends when, as and if declared by the Board of Directors, out of
funds legally available therefor, at a rate per annum that may vary for the
successive dividend periods. MuniYield AMPS and Taurus AMPS both have
liquidation preferences of $25,000 per share; neither Fund's AMPS are traded
on any stock exchange or over-the-counter. Each Fund's AMPS can be purchased
at an auction or through broker-dealers who maintain a secondary market in the
AMPS.
Auctions generally have been held and will be held every 28 days in the case
of the MuniYield Series A AMPS and every seven days in the case of the
MuniYield Series B AMPS unless MuniYield elects, subject to certain
limitations, to have a special dividend period. As of the auction held on June
25, 1997, the dividend rate on the MuniYield Series A AMPS was 3.696%; as of
the auction held on June 25, 1997, the dividend rate on the MuniYield Series B
AMPS was 3.7%.
Similarly, auctions generally have been held and will be held every 28 days
in the case of the Taurus AMPS unless Taurus elects, subject to certain
limitations, to have a special dividend period. In connection with the auction
held on June 18, 1997, the dividend rate on the Taurus AMPS was 3.5%.
Under the Investment Company Act, each Fund is permitted to have outstanding
more than one series of preferred stock as long as no single series has
priority over another series as to the distribution of assets of the Fund or
the payment of dividends. Holders of a Fund's preferred stock do not have
preemptive rights to purchase any shares of AMPS or any other preferred stock
that might be issued. The net asset value per share of a Fund's AMPS equals
its liquidation preference plus accumulated dividends per share.
Certain Provisions of the Charter
Each Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving stockholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director may be removed from office
with or without cause by a vote of the holders of at least 66 2/3% of the
votes entitled to be voted on the matter. A Director elected by the holders of
Common Stock, AMPS and any other preferred stock may be removed only by action
of such holders, and a Director elected by the holders of AMPS and any other
preferred stock may be removed only by action of the holders of AMPS and any
other preferred stock. In addition, the Charter of each Fund requires the
affirmative vote of the holders of at least 66 2/3% of all of the Fund's
shares of capital stock, then entitled to be voted, voting as a single class,
to approve, adopt or authorize the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with any other corporation or entity,
(ii) a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the entire Board of Directors, in which case
the affirmative vote of a majority of all of the votes entitled to be cast by
stockholders of the Fund, voting as a single class, is required. Such
approval, adoption or authorization of the
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foregoing also would require the favorable vote of the holders of a majority
of shares of preferred stock entitled to be voted thereon, including the AMPS,
voting as a separate class.
In addition, conversion of a Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to stockholders. Such an amendment would require the affirmative
vote of the holders of at least 66 2/3% of the Fund's outstanding shares of
capital stock (including the AMPS and any other preferred stock) entitled to
be voted on the matter, voting as a single class (or a majority of such shares
if the amendment was previously approved, adopted or authorized by at least
two-thirds of the entire Board of Directors) and the affirmative vote of a
majority of the votes entitled to be cast by holders of shares of preferred
stock (including the AMPS), voting separately as a class. Such a vote also
would satisfy a separate requirement in the Investment Company Act that the
change be approved by the stockholders. Stockholders of an open-end investment
company may require the company to redeem their shares of common stock at any
time (except in certain circumstances as authorized by or under the Investment
Company Act) at their net asset value, less such redemption charge, if any, as
might be in effect at the time of a redemption. All redemptions will be made
in cash. If the Fund is converted to an open-end investment company, it could
be required to liquidate portfolio securities to meet requests for redemption
and the Common Stock no longer would be listed on a stock exchange. Conversion
to an open-end investment company also would require redemption of all
outstanding shares of preferred stock (including the AMPS) and would require
changes in certain of the Fund's investment policies and restrictions, such as
those relating to the issuance of senior securities, the borrowing of money
and the purchase of illiquid securities.
The Board of Directors of each Fund has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the Investment Company Act, are in the best interests of
stockholders generally. Reference should be made to the Charter of each Fund
on file with the Commission for the full text of these provisions.
MANAGEMENT OF THE FUNDS
Directors and Officers. The Boards of Directors of each of MuniYield and
Taurus currently consist of six persons, five of whom are not "interested
persons," as defined in the Investment Company Act, of either Fund. The
Directors are responsible for the overall supervision of the operations of
MuniYield and Taurus and perform the various duties imposed on the directors
of investment companies by the Investment Company Act and under applicable
Maryland law. MuniYield and Taurus have many of the same officers. For further
information about the Directors and officers of each of the Funds, see
"Election of Directors."
Management and Advisory Arrangements. FAM serves as the investment adviser
for both MuniYield and Taurus pursuant to separate investment advisory
agreements that, except for their termination dates, are identical. FAM is an
affiliate of MLAM, and both FAM and MLAM are owned and controlled by ML & Co.
FAM provides each Fund with the same investment advisory and management
services. FAM or MLAM acts as the investment adviser for more than 140
registered investment companies. FAM also offers portfolio management and
portfolio analysis services to individuals and institutions. As of June 30,
1997, FAM and MLAM had a total of approximately $256.6 billion in investment
company and other portfolio assets under management (approximately $32 billion
of which were invested in municipal securities), including accounts of certain
affiliates of FAM. The principal business address of FAM is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
Each Fund's investment advisory agreement with FAM provides that, subject to
the direction of the Board of Directors of the Fund, FAM is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security for each Fund rests with
FAM, subject to review by the Board of Directors of the Fund.
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FAM provides the portfolio management for MuniYield and Taurus. Such
portfolio management considers analyses from various sources (including
brokerage firms with which each Fund does business), makes the necessary
investment decisions and places orders for transactions accordingly. FAM also
is responsible for the performance of certain administrative and management
services for each Fund.
For the services provided by FAM under each Fund's investment advisory
agreement, the Fund pays a monthly fee at an annual rate of .50 of 1% of the
Fund's average weekly net assets (i.e., the average weekly value of the total
assets of the Fund, including proceeds from the issuance of AMPS, minus the sum
of accrued liabilities of the Fund and accumulated dividends on its shares of
AMPS). For purposes of this calculation, average weekly net assets are
determined at the end of each month on the basis of the average net assets of
the Fund for each week during the month. The assets for each weekly period are
determined by averaging the net assets at the last business day of a week with
the net assets at the last business day of the prior week.
Each Fund's investment advisory agreement obligates FAM to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the
compensation of all Directors of the Fund who are affiliated persons of FAM or
any of its affiliates. Each Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, expenses for legal and
auditing services, taxes, costs of printing proxies, listing fees, stock
certificates and stockholder reports, charges of the custodian and the transfer
agent, dividend disbursing agent and registrar, fees and expenses with respect
to the issuance of AMPS, Commission fees, fees and expenses of unaffiliated
Directors, accounting and pricing costs, insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, mailing and other
expenses properly payable by the Fund. FAM provides accounting services to each
Fund, and each Fund reimburses FAM for its respective costs in connection with
such services.
Unless earlier terminated as described below, the investment advisory
agreement between MuniYield and FAM will continue from year to year if approved
annually (a) by the Board of Directors of MuniYield or by a majority of the
outstanding shares of MuniYield Common Stock and MuniYield AMPS, voting
together as a single class, and (b) by a majority of the Directors of MuniYield
who are not parties to such contract or "interested persons," as defined in the
Investment Company Act, of any such party. The contract is not assignable and
it may be terminated without penalty on 60 days' written notice at the option
of either party thereto or by the vote of the stockholders of MuniYield.
Similarly, unless earlier terminated as described below, the investment
advisory agreement between Taurus and FAM will continue from year to year if
approved annually (a) by the Board of Directors of Taurus or by a majority of
the outstanding shares of Taurus Common Stock and Taurus AMPS, voting together
as a single class, and (b) by a majority of the Directors of Taurus who are not
parties to such contract or "interested persons" of any such party. The
contract is not assignable and it may be terminated without penalty on 60 days'
written notice at the option of either party thereto or by the vote of the
stockholders of Taurus.
VOTING RIGHTS
Voting rights are identical for the holders of shares of MuniYield Common
Stock and the holders of shares of Taurus Common Stock. Holders of each Fund's
Common Stock are entitled to one vote for each share held and will vote with
the holders of any outstanding shares of the Fund's AMPS or other preferred
stock on each matter submitted to a vote of holders of Common Stock, except as
set forth below. The shares of each Fund's Common Stock, AMPS and any other
preferred stock do not have cumulative voting rights, which means that the
holders of more than 50% of the shares of a Fund's Common Stock, AMPS and any
other preferred stock voting for the election of Directors can elect all of the
Directors standing for election by such holders, and, in such event, the
holders of the remaining shares of a Fund's Common Stock, AMPS and any other
preferred stock will not be able to elect any of such Directors.
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Voting rights of the holders of MuniYield AMPS are identical to voting
rights of the holders of Taurus AMPS. Except as otherwise indicated below, and
except as otherwise required by applicable law, holders of shares of a Fund's
AMPS will be entitled to one vote per share on each matter submitted to a vote
of the Fund's stockholders and will vote together with the holders of shares
of the Fund's Common Stock as a single class.
In connection with the election of a Fund's Directors, holders of shares of
a Fund's AMPS and any other preferred stock, voting separately as a class,
shall be entitled at all times to elect two of the Fund's Directors, and the
remaining Directors will be elected by holders of shares of the Fund's Common
Stock and shares of the Fund's AMPS and any other preferred stock, voting
together as a single class. In addition, if at any time dividends on
outstanding shares of a Fund's AMPS shall be unpaid in an amount equal to at
least two full years' dividends thereon or if at any time holders of any
shares of a Fund's preferred stock are entitled, together with the holders of
shares of the Fund's AMPS, to elect a majority of the Directors of the Fund
under the Investment Company Act, then the number of Directors constituting
the Board of Directors automatically shall be increased by the smallest number
that, when added to the two Directors elected exclusively by the holders of
shares of AMPS and any other preferred stock as described above, would
constitute a majority of the Board of Directors as so increased by such
smallest number, and at a special meeting of stockholders, which will be
called and held as soon as practicable, and at all subsequent meetings at
which Directors are to be elected, the holders of shares of the Fund's AMPS
and any other preferred stock, voting separately as a class, will be entitled
to elect the smallest number of additional Directors that, together with the
two Directors that such holders in any event will be entitled to elect,
constitutes a majority of the total number of Directors of the Fund as so
increased. The terms of office of the persons who are Directors at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment in full, all dividends payable on all outstanding shares
of AMPS and any other preferred stock for all past dividend periods, the
additional voting rights of the holders of shares of AMPS and any other
preferred stock as described above shall cease, and the terms of office of all
of the additional Directors elected by the holders of shares of AMPS and any
other preferred stock (but not of the Directors with respect to whose election
the holders of shares of Common Stock were entitled to vote or the two
Directors the holders of shares of AMPS and any other preferred stock have the
right to elect in any event) will terminate automatically.
STOCKHOLDER INQUIRIES
Stockholder inquiries with respect to MuniYield and Taurus may be addressed
to either Fund by telephone at (609) 282-2800 or at the address set forth on
the cover page of this Proxy Statement and Prospectus.
DIVIDENDS AND DISTRIBUTIONS
MuniYield's current policy with respect to dividends and distributions
relating to shares of MuniYield Common Stock is identical to Taurus' policy
with respect to shares of Taurus Common Stock. Each Fund intends to distribute
all of its net investment income. Dividends from such net investment income
are declared and paid monthly to holders of a Fund's Common Stock. Monthly
distributions to holders of a Fund's Common Stock normally consist of
substantially all of the net investment income remaining after the payment of
dividends on the Fund's AMPS. All net realized long-term or short-term capital
gains, if any, are distributed at least annually, pro rata to holders of
shares of a Fund's Common Stock and AMPS. While any shares of a Fund's AMPS
are outstanding, the Fund may not declare any cash dividend or other
distribution on the Fund's Common Stock, unless at the time of such
declaration (1) all accumulated dividends on the Fund's AMPS have been paid,
and (2) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200%
of the liquidation value of the Fund's outstanding shares of AMPS. This
limitation on a Fund's ability to make distributions on its Common Stock under
certain circumstances could impair the ability of the Fund to maintain its
qualification for taxation as a RIC. See "The Reorganization--Agreement and
Plan of Reorganization--Tax Consequences of the Reorganization."
Similarly, MuniYield's current policy with respect to dividends and
distributions relating to shares of MuniYield AMPS is identical to Taurus'
current policy with respect to shares of Taurus AMPS. The holders of
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shares of a Fund's AMPS are entitled to receive, when, as and if declared by
the Board of Directors of the Fund, out of funds legally available therefor,
cumulative cash dividends on their shares. Dividends on a Fund's shares of AMPS
so declared and payable shall be paid (i) in preference to and in priority over
any dividends so declared and payable on the Fund's Common Stock and (ii) to
the extent permitted under the Code and to the extent available, out of net
tax-exempt income earned on the Fund's investments. Dividends for the MuniYield
AMPS and the Taurus AMPS are paid through The Depository Trust Company ("DTC")
(or a successor securities depository) on each dividend payment date. DTC's
normal procedures now provide for it to distribute dividends in same-day funds
to agent members, who in turn are expected to distribute such dividends to the
person for whom they are acting as agent in accordance with the instructions of
such person. Prior to each dividend payment date, the relevant Fund is required
to deposit with the Auction Agent sufficient funds for the payment of such
declared dividends. Neither Fund intends to establish any reserves for the
payment of dividends, and no interest will be payable in respect of any
dividend payment or payment on the shares of a Fund's AMPS that may be in
arrears.
Dividends paid by each Fund, to the extent paid from tax-exempt income earned
on California Municipal Bonds, are exempt from Federal and California income
taxes, subject to the possible application of the alternative minimum tax.
However, each Fund is required to allocate net capital gains and other income
subject to regular Federal income taxes, if any, proportionately between shares
of its Common Stock and shares of its AMPS in accordance with the current
position of the IRS described herein. Each Fund notifies the Auction Agent of
the amount of any net capital gains or other taxable income to be included in
any dividend on shares of AMPS prior to the auction establishing the applicable
rate for such dividend. The Auction Agent in turn notifies each broker-dealer
whenever it receives any such notice from a Fund, and each broker-dealer then
notifies its customers who are holders of the Fund's AMPS. Each Fund also may
include such income in a dividend on shares of its AMPS without giving advance
notice thereof if it increases the dividend by an additional amount to offset
the tax effect thereof. The amount of taxable income allocable to shares of a
Fund's AMPS will depend upon the amount of such income realized by the Fund and
other factors, but generally is not expected to be significant.
For information concerning the manner in which dividends and distributions to
holders of each Fund's Common Stock may be reinvested automatically in shares
of the Fund's Common Stock, see "Automatic Dividend Reinvestment Plan" below.
Dividends and distributions may be taxable to stockholders under certain
circumstances as discussed below, whether they are reinvested in shares of a
Fund or received in cash.
If MuniYield or Taurus, as the case may be, retroactively allocates any net
capital gains or other income subject to regular Federal income taxes to shares
of its AMPS without having given advance notice thereof as described above,
which only may happen when such allocation is made as a result of the
redemption of all or a portion of the outstanding shares of its AMPS or the
liquidation of the Fund, the Fund will make certain payments to holders of
shares of its AMPS to which such allocation was made to offset substantially
the tax effect thereof. In no other instances will the Fund be required to make
payments to holders of shares of its AMPS to offset the tax effect of any
reallocation of net capital gains or other taxable income.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to each Fund's Automatic Dividend Reinvestment Plan (each, the
"Plan"), unless a holder of a Fund's Common Stock elects otherwise, all
dividend and capital gains distributions are reinvested automatically by The
Bank of New York, as agent for stockholders in administering the Plan (the
"Plan Agent"), in additional shares of the Fund's Common Stock. Holders of a
Fund's Common Stock who elect not to participate in the Plan receive all
distributions in cash paid by check mailed directly to the stockholder of
record (or, if the shares are held in street or other nominee name, then to
such nominee) by The Bank of New York, as dividend paying agent. Such
stockholders may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to The Bank of New York, as dividend paying agent, at the address
set forth below. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if received
by the Plan Agent not less than ten days prior to any dividend record date,
otherwise such termination will be effective with respect to any subsequently
declared dividend or capital gains distribution.
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Whenever a Fund declares an ordinary income dividend or a capital gain
dividend (collectively referred to as "dividends") payable either in shares or
in cash, non-participants in the Plan receive cash, and participants in the
Plan receive the equivalent in shares of the Fund's Common Stock. The shares
are acquired by the Plan Agent for the participant's account, depending upon
the circumstances described below, either (i) through receipt of additional
unissued but authorized shares of the Fund's Common Stock from the Fund
("newly-issued shares") or (ii) by purchase of outstanding shares of the
Fund's Common Stock on the open market ("open-market purchases"), on the NYSE
or elsewhere. If on the payment date for the dividend, the net asset value per
share of the Fund's Common Stock is equal to or less than the market price per
share of the Fund's Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent
invests the dividend amount in newly-issued shares on behalf of the
participant. The number of newly-issued shares of the Fund's Common Stock to
be credited to the participant's account is determined by dividing the dollar
amount of the dividend by the net asset value per share on the date the shares
are issued, provided that the maximum discount from the then-current market
price per share on the date of issuance may not exceed 5%. If on the dividend
payment date, the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Plan Agent
invests the dividend amount in shares acquired on behalf of the participant in
open-market purchases.
In the event of a market discount on the dividend payment date, the Plan
Agent has until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. Each Fund intends to pay monthly
income dividends. Therefore, the period during which open-market purchases can
be made exists only from the payment date on the dividend through the date
before the next "ex-dividend" date, which typically is approximately ten days.
If, before the Plan Agent has completed its open-market purchases, the market
price of a share of a Fund's Common Stock exceeds the net asset value per
share, the average per share purchase price paid by the Plan Agent may exceed
the net asset value of the Fund's shares, resulting in the acquisition of
fewer shares than if the dividend had been paid in newly-issued shares on the
dividend payment date. Because of the foregoing difficulty with respect to
open-market purchases, the Plan provides that if the Plan Agent is unable to
invest the full dividend amount in open-market purchases during the purchase
period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent ceases making open-market purchases and
invests the uninvested portion of the dividend amount in newly-issued shares
at the close of business on the last purchase date.
The Plan Agent maintains all stockholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by stockholders for tax records. Shares in the account of
each Plan participant are held by the Plan Agent in non-certificated form in
the name of the participant, and each stockholder's proxy includes those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of stockholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record stockholders as representing the total amount registered
in the record stockholder's name and held for the account of beneficial owners
who are to participate in the Plan.
There are no brokerage charges with respect to shares issued directly by
MuniYield or Taurus as a result of dividends or capital gains distributions
payable either in shares or in cash. However, each participant pays a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open-
market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions does not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "The Reorganization--Tax
Consequences of the Reorganization."
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Stockholders participating in the Plan may receive benefits not available to
stockholders not participating in the Plan. If the market price plus
commissions of a Fund's shares of Common Stock is above the net asset value,
participants in the Plan receive shares of the Fund's Common Stock at less
than they otherwise could purchase them and have shares with a cash value
greater than the value of any cash distribution they would have received on
their shares. If the market price plus commissions is below the net asset
value, participants receive distributions in shares with a net asset value
greater than the value of any cash distribution they would have received on
their shares. However, there may be insufficient shares available in the
market to make distributions in shares at prices below the net asset value.
Also, since neither Fund normally redeems its shares, the price on resale may
be more or less than the net asset value.
Each Fund reserves the right to amend or terminate its Plan. There is no
direct service charge to participants in the Plan; however, each Fund reserves
the right to amend its Plan to include a service charge payable by the
participants.
LIQUIDATION RIGHTS OF HOLDERS OF AMPS
Upon any liquidation, dissolution or winding up of MuniYield or Taurus, as
the case may be, whether voluntary or involuntary, the holders of shares of
the Fund's AMPS will be entitled to receive, out of the assets of the Fund
available for distribution to stockholders, before any distribution or payment
is made upon any shares of the Fund's Common Stock or any other capital stock
of the Fund ranking junior in right of payment upon liquidation to AMPS,
$25,000 per share together with the amount of any dividends accumulated but
unpaid (whether or not earned or declared) thereon to the date of
distribution, and after such payment the holders of AMPS will be entitled to
no other payments except for any additional dividends. If such assets of the
Fund shall be insufficient to make the full liquidation payment on the AMPS
and liquidation payments on any other outstanding class or series of preferred
stock of the Fund ranking on a parity with the AMPS as to payment upon
liquidation, then such assets will be distributed among the holders of shares
of AMPS and the holders of shares of such other class or series ratably in
proportion to the respective preferential amounts to which they are entitled.
After payment of the full amount of liquidation distribution to which they are
entitled, the holders of shares of a Fund's AMPS will not be entitled to any
further participation in any distribution of assets by the Fund except for any
additional dividends. A consolidation, merger or share exchange of a Fund with
or into any other entity or entities or a sale, whether for cash, shares of
stock, securities or properties, of all or substantially all or any part of
the assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
TAX RULES APPLICABLE TO MUNIYIELD, TAURUS AND THEIR STOCKHOLDERS
The tax consequences associated with investment in shares of MuniYield
Common Stock are identical to the tax consequences associated with investment
in shares of Taurus Common Stock. Similarly, the tax consequences associated
with investment in shares of MuniYield AMPS are identical to the tax
consequences associated with investment in shares of Taurus AMPS. MuniYield
and Taurus have elected and qualified for the special tax treatment afforded
RICs under the Code. As a result, in any taxable year in which they distribute
an amount equal to at least 90% of taxable net income and 90% of tax-exempt
net income (see below), the Funds (but not their stockholders) are not subject
to Federal income tax to the extent that they distribute their net investment
income and net realized capital gains. In prior taxable years and in the
taxable year of the Reorganization, each Fund has distributed substantially
all of its income. MuniYield intends to continue to distribute substantially
all of its income in the taxable years following the Reorganization. If, at
any time when shares of a Fund's AMPS are outstanding the Fund does not meet
the asset coverage requirements of the Investment Company Act, the Fund is
required to suspend distributions to holders of shares of its Common Stock
until the asset coverage is restored. This can prevent the Fund from
distributing at least 90% of its net income and therefore can jeopardize the
Fund's qualification for taxation as a RIC. Upon any failure to meet the asset
coverage requirements, the Funds may, and under certain circumstances are
required to, redeem shares of AMPS in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences of failing to
qualify as a RIC.
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The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
it does not distribute 98% of its ordinary income, determined on a calendar
year basis, and 98% of its capital gains, determined in general, on an October
31 year-end, plus certain undistributed amounts from previous years. The
required distributions, however, are based only on the taxable income of a
regulated investment company. The excise tax, therefore, generally does not
apply to the tax-exempt income of RICs, such as the Funds, that pay exempt-
interest dividends.
Each Fund is qualified to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section, if, at the close of each
quarter of its taxable year, at least 50% of the value of a Fund's total
assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund is qualified to
pay exempt-interest dividends to its stockholders. Exempt-interest dividends
are dividends or any part thereof paid by a Fund that are attributable to
interest on tax-exempt obligations and designated by the Fund as exempt-
interest dividends in a written notice mailed to stockholders within 60 days
after the close of its taxable year. To the extent that the dividends
distributed to a Fund's stockholders are derived from interest income exempt
from Federal income tax under Code Section 103(a) and are properly designated
as exempt-interest dividends, they are excludable from a stockholder's gross
income for Federal income tax purposes. Exempt-interest dividends are
included, however, in determining the portion, if any, of a person's social
security benefits and railroad retirement benefits subject to Federal income
taxes. Interest on indebtedness incurred or continued to purchase or carry a
Fund's shares is not deductible for Federal income tax purposes to the extent
attributable to exempt-interest dividends. A tax adviser should be consulted
with respect to whether exempt-interest dividends retain the exclusion under
Code Section 103(a) if a stockholder would be treated as a "substantial user"
or "related person" under Code Section 147(a) with respect to property
financed with the proceeds from an issue of "industrial development bonds" or
"private activity bonds," if any, held by a Fund.
The portion of exempt-interest dividends paid from interest received by each
Fund from California Municipal Bonds also will be exempt from California
income tax. However, exempt-interest dividends paid to a corporate stockholder
subject to California State franchise tax will not be exempt from California
taxation. Stockholders subject to income taxation by states other than
California will realize a lower after-tax rate of return than California
stockholders since the dividends distributed by each Fund generally will not
be exempt, to any significant degree, from income taxation by such other
states. Each Fund will inform stockholders annually as to the portion of the
Fund's distributions, which constitutes exempt-interest dividends and the
portion, which is exempt from California income taxes. If legislation recently
adopted by Congress is enacted into law, it is anticipated that regulations
will require a Fund to designate the amounts of various categories of capital
gain income included in capital gain dividends. Interest on indebtedness
incurred or continued to purchase or carry a Fund's shares is not deductible
for Federal or California income tax purposes to the extent attributable to
exempt-interest dividends.
To the extent that a Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered taxable ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the stockholder has owned Fund shares and, for California
income tax purposes, are treated as capital gains which are taxed at ordinary
income tax rates. Recent legislation creates additional categories of capital
gains, taxable at different rates. Distributions by a Fund, whether from
exempt-interest income, ordinary income or capital gains, will not be eligible
for the dividends received deduction for corporations under the Code.
All or a portion of a Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary income
dividends received by stockholders. Any loss upon the sale or exchange of Fund
shares held for six months or less will be disallowed to the extent of any
exempt-interest dividends received by the stockholder.
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In addition, any such loss that is not disallowed under the rule stated above
will be treated as long-term capital loss to the extent of capital gain
dividends received by the stockholder. Distributions in excess of a Fund's
earnings and profits first will reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
If a Fund pays a dividend in January that was declared in the previous October,
November or December to stockholders of record on a specified date in one of
such months, then such dividend is treated for tax purposes as paid by the Fund
and received by its stockholders on December 31 of the year in which such
dividend was declared.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the MuniYield AMPS and the
Taurus AMPS are substantially similar, but not identical, to the AMPS discussed
in the revenue ruling, and in the opinion of Brown & Wood LLP, counsel to both
Funds, the shares of each Fund's AMPS constitute stock and distributions with
respect to shares of such AMPS (other than distributions in redemption of
shares of AMPS subject to Section 302(b) of the Code) constitute dividends to
the extent of current and accumulated earnings and profits as calculated for
Federal income tax purposes. Nevertheless, the IRS could take a contrary
position, asserting, for example, that the shares of AMPS constitute debt. If
this position were upheld, the discussion of the treatment of distributions
below would not apply to holders of shares of AMPS. Instead, distributions by
each Fund to holders of shares of its AMPS would constitute interest, whether
or not they exceed the earnings and profits of the Fund, would be included in
full in the income of the recipient and taxed as ordinary income. Counsel
believes that such a position, if asserted by the IRS, would be unlikely to
prevail.
The IRS has taken the position in a revenue ruling that if a RIC has two
classes of shares it may designate distributions made to each class in any year
as consisting of no more than such class' proportionate share of particular
types of income, including exempt-interest dividends and capital gain
dividends. Thus, each Fund is required to allocate a portion of its net capital
gains and other taxable income to the shares of its AMPS. Each Fund may notify
the Auction Agent of the amount of any net capital gains and other taxable
income to be included in any dividend on shares of its AMPS prior to the
auction establishing the applicable rate for such dividend. Except for the
portion of any dividend that a Fund informs the Auction Agent will be treated
as capital gains or other taxable income, the dividends paid on the shares of
AMPS constitute exempt-interest dividends. Alternatively, each Fund may include
such income in a dividend on shares of its AMPS without giving advance notice
thereof if it increases the dividend by an additional amount to offset the tax
effect thereof. The amount of net capital gains and ordinary income allocable
to shares of a Fund's AMPS (the "taxable distribution") depends upon the amount
of such gains and income realized by the Fund and the total dividends paid by
the Fund on shares of its Common Stock and shares of its AMPS during a taxable
year, but the taxable distribution generally is not significant.
In the opinion of Brown & Wood LLP, counsel to both Funds, under current law
the manner in which each Fund allocates items of tax-exempt income, net capital
gains and other taxable income, if any, between shares of its Common Stock and
shares of its AMPS will be respected for Federal income tax purposes. However,
the tax treatment of additional dividends may affect a Fund's calculation of
each class' allocable share of capital gains and other taxable income. In
addition, there is currently no direct guidance from the IRS or other sources
specifically addressing whether a Fund's method for allocating tax-exempt
income, net capital gains and other taxable income between shares of its Common
Stock and shares of its AMPS will be respected for Federal income tax purposes,
and it is possible that the IRS could disagree with counsel's opinion and
attempt to reallocate a Fund's net capital gains or other taxable income. In
the event of a reallocation, some of the dividends identified by a Fund as
exempt-interest dividends to holders of shares of its AMPS could be
recharacterized as additional capital gains or other taxable income. In the
event of such recharacterization, a Fund is not required to make payments to
such stockholders to offset the tax effect of such reallocation. In addition, a
reallocation could cause a Fund to be liable for income tax and excise tax on
any reallocated taxable income. Brown & Wood LLP has advised each Fund that, in
its opinion, if the IRS were to challenge in court the Fund's allocations of
income and gain, the IRS would be unlikely to prevail. The opinion of Brown &
Wood LLP, however, represents only its best legal judgment and is not binding
on the IRS or the courts.
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The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
"Private activity bonds" that, although tax-exempt, are used for purposes other
than those generally performed by governmental units and that benefit non-
governmental entities (e.g., bonds used for industrial development or housing
purposes). Income received on such bonds is classified as an item of "tax
preference," which could subject certain investors in such bonds, including
stockholders of the Funds, to an increased alternative minimum tax. Each Fund
purchases such "private activity bonds" and reports to stockholders within 60
days after its fiscal year-end the portion of its dividends declared during the
year that constitutes an item of tax preference for alternative minimum tax
purposes. The Code further provides that corporations are subject to an
alternative minimum tax based, in part, on certain differences between taxable
income as adjusted for other tax preferences and the corporation's "adjusted
current earnings," which more closely reflect a corporation's economic income.
Because an exempt-interest dividend paid by a Fund is included in adjusted
current earnings, a corporate stockholder may be required to pay an alternative
minimum tax on exempt-interest dividends paid by such Fund.
Under certain provisions of the Code, some stockholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
stockholders subject to backup withholding will be those for whom no taxpayer
identification number is on file with a Fund or who, to the Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that such
stockholder is not otherwise subject to backup withholding.
Ordinary income dividends paid to stockholders who are nonresident aliens or
foreign entities are subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law.
A loss realized on a sale or exchange of shares of a Fund is disallowed if
other Fund shares are acquired (whether under the Automatic Dividend
Reinvestment Plan or otherwise) within a 61-day period beginning 30 days before
and ending 30 days after the date that the shares are disposed of. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code provides that every stockholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Funds) during the taxable
year.
AGREEMENT AND PLAN OF REORGANIZATION
GENERAL
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
I), MuniYield will acquire all of the assets, and will assume all of the
liabilities, of Taurus, in exchange solely for an equal aggregate value of
MuniYield Common Stock and MuniYield Series C AMPS to be issued by MuniYield.
Upon receipt by Taurus of such shares, Taurus will distribute the shares of
MuniYield Common Stock to the holders of Taurus Common Stock and the shares of
MuniYield Series C AMPS to the holders of Taurus AMPS in exchange for their
respective shares in Taurus. Separate Articles Supplementary to the Articles of
Incorporation of MuniYield establishing the powers, rights and preferences of
the MuniYield Series C AMPS will have been filed with the State Department of
Assessments and Taxation of Maryland (the "Maryland Department") prior to the
closing of the Reorganization. As soon as practicable after the date that the
Reorganization takes place (the "Exchange Date"), Taurus will file Articles of
Dissolution with the Maryland Department to effect the formal dissolution.
Taurus will distribute the shares of MuniYield Common Stock and MuniYield
Series C AMPS received by it pro rata to its holders of record of Taurus Common
Stock and Taurus AMPS, respectively, in exchange for such stockholders' shares
in Taurus. Such distribution would be accomplished by opening new accounts on
the
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books of MuniYield in the names of the common and preferred stockholders of
Taurus and transferring to those stockholder accounts the MuniYield Common
Stock and MuniYield Series C AMPS previously credited on those books to the
account of Taurus. Each newly-opened account on the books of MuniYield for the
previous holders of Taurus Common Stock would represent the respective pro rata
number of shares of MuniYield Common Stock (rounded down, in the case of
fractional shares, to the next largest number of whole shares) due such holder
of Taurus Common Stock. No fractional shares of MuniYield Common Stock will be
issued. In lieu thereof, MuniYield's transfer agent, The Bank of New York, will
aggregate all fractional shares of MuniYield Common Stock and sell the
resulting whole shares on the NYSE for the account of all holders of fractional
interests, and each such holder will be entitled to a pro rata share of the
proceeds from such sale upon surrender of the Taurus Common Stock certificates.
Similarly, each newly-opened account on the books of MuniYield for the previous
holders of Taurus AMPS would represent the respective pro rata number of shares
of MuniYield Series C AMPS due such holder of Taurus AMPS. See "Surrender and
Exchange of Taurus Stock Certificates" below for a description of the
procedures to be followed by Taurus stockholders to obtain their MuniYield
Common Stock (and cash in lieu of fractional shares, if any) or MuniYield
Series C AMPS, as the case may be.
Accordingly, as a result of the Reorganization, every holder of Taurus Common
Stock would own shares of MuniYield Common Stock that (except for cash payments
received in lieu of fractional shares) would have an aggregate net asset value
immediately after the Exchange Date equal to the aggregate net asset value of
that stockholder's Taurus Common Stock immediately prior to the Exchange Date.
Because the MuniYield Common Stock would be issued at net asset value in
exchange for the net assets of Taurus having a value equal to the aggregate net
asset value of those shares of MuniYield Common Stock, the net asset value per
share of MuniYield Common Stock should remain virtually unchanged by the
Reorganization. Similarly, because the MuniYield Series C AMPS would be issued
at a liquidation preference and value per share equal to the liquidation
preference and value per share of the Taurus AMPS, the liquidation preference
and value per share of the MuniYield Series C AMPS will remain unchanged by the
Reorganization. Thus, the Reorganization will result in no dilution of net
asset value of the MuniYield Common Stock, other than to reflect the costs of
the Reorganization, and will result in no dilution of liquidation preference
and value of the MuniYield Series C AMPS. However, as a result of the
Reorganization, a stockholder of either Fund likely will hold a reduced
percentage of ownership in the larger combined entity than he or she did in
either of the constituent Funds.
PROCEDURE
At meetings of the Boards of Directors of MuniYield and Taurus held on June
20, 1997 and July 7, 1997, respectively, the Boards of Directors of MuniYield
and Taurus, respectively, including all of the Directors who are not
"interested persons," as defined in the Investment Company Act, of MuniYield
and Taurus unanimously approved the Agreement and Plan of Reorganization and
the submission of such Agreement and Plan of Reorganization to the Fund's
respective stockholders for approval.
Also on June 20, 1997, the Board of Directors of MuniYield approved the
creation of a new series of MuniYield AMPS to be designated Series C and the
filing of separate Articles Supplementary to MuniYield's Articles of
Incorporation establishing the powers, rights and preferences of the MuniYield
Series C AMPS and the issuance of MuniYield Series C AMPS to Taurus as part of
the Reorganization.
As a result of such Board approvals, MuniYield and Taurus jointly filed a
proxy statement with the Commission soliciting a vote of the stockholders of
MuniYield and Taurus to approve the Reorganization. The costs of such
solicitation are to be paid by MuniYield after the Reorganization so as to be
borne equally and exclusively on a per share basis by the holders of MuniYield
Common Stock and Taurus Common Stock. It is anticipated that the Meetings will
be held on October 20, 1997. If the stockholders of both MuniYield and Taurus
approve the Reorganization, the Reorganization will take place as soon as
practicable after such approval, provided that the Funds have obtained prior to
that time a favorable private letter ruling from the IRS concerning the tax
consequences of the Reorganization as set forth in the Agreement and Plan of
Reorganization.
THE BOARDS OF DIRECTORS OF MUNIYIELD AND TAURUS RECOMMEND THAT THE
STOCKHOLDERS OF THE RESPECTIVE FUNDS APPROVE THE AGREEMENT AND PLAN OF
REORGANIZATION.
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TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION
The following is a summary of the significant terms of the Agreement and Plan
of Reorganization. This summary is qualified in its entirety by reference to
the Agreement and Plan of Reorganization, attached hereto as Exhibit I.
Valuation of Assets and Liabilities. The respective assets of MuniYield and
Taurus will be valued on the business day immediately prior to the Exchange
Date (the "Valuation Date"). The valuation procedures are the same for both
Funds: net asset value per share of the MuniYield Common Stock and the Taurus
Common Stock will be determined as of 15 minutes after the close of business on
the NYSE (generally, 4:00 p.m., New York time) on the Valuation Date. For the
purpose of determining the net asset value of a share of the MuniYield Common
Stock or the Taurus Common Stock, the value of the securities held by the
issuing Fund plus any cash or other assets (including interest accrued but not
yet received) minus all liabilities (including accrued expenses) and the
aggregate liquidation value of the outstanding shares of AMPS of the issuing
Fund is divided by the total number of shares of Common Stock of the issuing
Fund outstanding at such time. Daily expenses, including the fees payable to
FAM, will accrue on the Valuation Date.
The California Municipal Bonds and Municipal Bonds in which each Fund invests
are traded primarily in the over-the-counter markets. In determining net asset
value on the Valuation Date, each Fund will utilize the valuations of portfolio
securities furnished by a pricing service approved by the Boards of Directors
of the Funds. The pricing service typically values portfolio securities at the
bid price or the yield equivalent when quotations are readily available.
California Municipal Bonds and Municipal Bonds for which quotations are not
readily available will be valued at fair market value on a consistent basis as
determined by the pricing service using a matrix system to determine
valuations. The Board of Directors of each Fund has determined in good faith
that the use of a pricing service is a fair method of determining the valuation
of portfolio securities. Positions in financial futures contracts will be
valued on the Valuation Date at closing prices for such contracts established
by the exchange on which they are traded, or if market quotations are not
readily available, will be valued at fair value on a consistent basis using
methods determined in good faith by the Board of Directors of each Fund.
Distribution of MuniYield Common Stock and MuniYield Series C AMPS. On the
Exchange Date, MuniYield will issue to Taurus a number of shares of MuniYield
Common Stock the aggregate net asset value of which will equal the aggregate
net asset value of shares of Taurus Common Stock on the Valuation Date. Each
holder of Taurus Common Stock will receive the number of shares of MuniYield
Common Stock corresponding to his or her proportionate interest in the
aggregate net asset value of the Taurus Common Stock.
On the Exchange Date, MuniYield also will issue to Taurus a number of shares
of MuniYield Series C AMPS, the aggregate liquidation preference and value of
which will equal the aggregate liquidation preference of Taurus AMPS on the
Valuation Date. Each holder of Taurus AMPS will receive the number of shares of
MuniYield Series C AMPS corresponding to his or her proportionate interest in
the aggregate liquidation preference and value of the Taurus AMPS. No sales
charge or fee of any kind will be charged to Taurus stockholders in connection
with their receipt of MuniYield Common Stock and MuniYield Series C AMPS in the
Reorganization. It is anticipated that the MuniYield Series C AMPS will follow
an auction schedule and procedures similar to those presently followed by the
Taurus AMPS. As a result of the Reorganization, the last dividend period for
the Taurus AMPS prior to the Exchange Date may be shorter than the dividend
period for such AMPS determined as set forth in the applicable Articles
Supplementary.
Expenses. MuniYield shall pay, subsequent to the Exchange Date, all expenses
incurred in connection with the Reorganization, including, but not limited to,
all costs related to the preparation and distribution of materials distributed
to each Fund's Board of Directors, expenses incurred in connection with the
preparation of the Agreement and Plan of Reorganization, a registration
statement on Form N-14 and a private letter ruling request submitted to the
IRS, Commission and state securities commission filing fees and legal and audit
fees in connection with the Reorganization, costs of printing and distributing
this Proxy Statement and Prospectus, legal fees incurred preparing each Fund's
Board materials, attending each Fund's Board meetings and preparing the
minutes, accounting fees associated with each Fund's financial statements,
stock exchange fees, rating agency
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fees, portfolio transfer taxes (if any), and any similar expenses incurred in
connection with the Reorganization. In this regard, expenses of the
Reorganization will be deducted from the assets of the combined fund so as to
be borne equally and exclusively on a per share basis by the holders of
MuniYield Common Stock and Taurus Common Stock. Neither MuniYield nor Taurus
shall pay any expenses of its respective stockholders arising out of or in
connection with the Reorganization.
Required Approvals. Under MuniYield's Articles of Incorporation (as amended
to date and including Articles Supplementary establishing the powers, rights
and preferences of the MuniYield AMPS), relevant Maryland law and the rules of
the NYSE, stockholder approval of the Agreement and Plan of Reorganization
requires the affirmative vote of stockholders representing more than 50% of the
outstanding shares of MuniYield Common Stock and MuniYield AMPS, voting
together as a single class, and of the MuniYield AMPS, voting separately as a
class. Similarly, under Taurus' Articles of Incorporation (as amended to date
and including Articles Supplementary establishing the powers, rights and
preferences of the Taurus AMPS), relevant Maryland law and the rules of the
NYSE, stockholder approval of the Agreement and Plan of Reorganization requires
the affirmative vote of stockholders representing more than 50% of the
outstanding shares of Taurus Common Stock and Taurus AMPS, voting together as a
single class, and of the Taurus AMPS, voting separately as a class.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of Taurus to MuniYield and the distribution of shares of MuniYield
Common Stock and MuniYield Series C AMPS to Taurus stockholders, Taurus will
terminate its registration under the Investment Company Act and its
incorporation under Maryland law and will withdraw its authority to do business
in any state where it is required to do so.
Amendments and Conditions. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the terms
therein. The obligations of MuniYield and Taurus pursuant to the Agreement and
Plan of Reorganization are subject to various conditions, including a
registration statement on Form N-14 being declared effective by the Commission,
approval of the Reorganization by the stockholders of MuniYield and Taurus, a
favorable IRS ruling being received as to tax matters, an opinion of counsel as
to securities matters being received and the continuing accuracy of various
representations and warranties of MuniYield and Taurus being confirmed by the
respective parties.
Postponement, Termination. Under the Agreement and Plan of Reorganization,
the Board of Directors of either Fund may cause the Reorganization to be
postponed or abandoned should either Board determine that it is in the best
interests of the stockholders of its respective Fund to do so. The Agreement
and Plan of Reorganization may be terminated, and the Reorganization abandoned
at any time (whether before or after adoption thereof by the stockholders of
either Fund), prior to the Exchange Date, or the Exchange Date may be
postponed: (i) by mutual consent of the Boards of Directors of MuniYield and
Taurus; (ii) by the Board of Directors of MuniYield if any condition to
MuniYield's obligations set forth in Section 8 of the Agreement and Plan of
Reorganization has not been fulfilled or waived by such Board; or (iii) by the
Board of Directors of Taurus if any condition to Taurus' obligations set forth
in Section 9 of the Agreement and Plan of Reorganization has not been fulfilled
or waived by such Board.
POTENTIAL BENEFITS TO MUNIYIELD COMMON STOCKHOLDERS AND TAURUS COMMON
STOCKHOLDERS AS A RESULT OF THE REORGANIZATION
In approving the Reorganization, the Board of Directors of each Fund
identified certain benefits that are likely to result from the Reorganization,
including lower expenses per share of Common Stock, greater efficiency and
flexibility in portfolio management and a more liquid trading market for the
shares of Common Stock of the combined fund. With respect to Taurus, following
the Reorganization Taurus stockholders will remain invested in a closed-end
fund that has an investment objective and policies similar to that of Taurus.
The Boards also considered the possible risks and costs of combining the Funds,
and examined the relative credit strength, maturity characteristics, mix of
type and purpose, and yield of the Funds' portfolios and the costs involved in
a transaction such as the Reorganization. The Boards noted the many
similarities between the Funds, including their virtually identical investment
objective and investment policies, their common management and their similar
portfolios. Based on these factors, the Boards concluded that the
Reorganization (i) presents no significant risks that would outweigh the
benefits discussed above and (ii) involves minimal costs (including relatively
minor legal, accounting and administrative costs).
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The surviving fund that would result from the Reorganization would have a
larger asset base than either Fund has currently. Based on data presented by
FAM, the Board of each Fund believes that administrative expenses for a larger
combined fund would be less than the aggregate expenses for the individual
Funds, resulting in a lower expense ratio for common stockholders of the
combined fund and higher earnings per common share. In particular, certain
fixed costs, such as costs of printing stockholder reports and proxy
statements, legal expenses, audit fees, mailing costs and other expenses will
be spread across a larger asset base, thereby lowering the expense ratio for
the combined fund. To illustrate the potential economies of scale, as of April
30, 1997, the total annualized operating expense ratio for MuniYield was 0.67%,
based on average net assets of approximately $378.9 million including proceeds
from the issuance of AMPS, and 0.98%, based on average net assets of
approximately $258.9 million excluding proceeds from issuance of AMPS, and the
total annualized operating expense ratio for Taurus was 0.90%, based on average
net assets of approximately $79.7 million including proceeds from the issuance
of AMPS, and 1.20%, based on average net assets of approximately $59.7 million
excluding proceeds from the issuance of AMPS. If the Reorganization had taken
place on April 30, 1997, the overall operating expense ratio for the combined
fund on a pro forma basis would have been 0.65%, based on average net assets of
approximately $458.7 million including proceeds from the issuance of AMPS, and
0.94%, based on average net assets of approximately $318.7 million excluding
proceeds from the issuance of AMPS.
Management projections estimate that MuniYield will have net assets of
approximately $454 million upon completion of the Reorganization. A larger
asset base should provide benefits in portfolio management. After the
Reorganization, MuniYield should be able to purchase large amounts of Municipal
Bonds at more favorable prices than either of the Funds separately and, with
this greater purchasing power, request improvements in the terms of the
Municipal Bonds (e.g., added indenture provisions covering call protection,
sinking funds and audits for the benefit of large holders) prior to purchase.
In approving the Reorganization, the Board of Directors of each Fund
determined that, with respect to net asset value and liquidation preference,
the interests of existing stockholders of the Fund would not be diluted as a
result of the Reorganization. Although the Reorganization is expected to result
in a reduction in net asset value per share of the combined fund after the
Reorganization of approximately $.01 as a result of the estimated costs of the
Reorganization, management of each Fund advised its Board that it expects that
such costs would be recovered within 18 months after the Exchange Date due to a
decrease in the operating expense ratio.
It is not anticipated that the Reorganization directly would benefit the
holders of shares of MuniYield AMPS or Taurus AMPS; however, the Reorganization
will not adversely affect the holders of shares of AMPS of either Fund and the
expenses of the Reorganization will not be borne by the holders of shares of
AMPS of either Fund.
SURRENDER AND EXCHANGE OF TAURUS STOCK CERTIFICATES
After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing shares of Taurus Common Stock or Taurus
AMPS, as the case may be, will be entitled to receive, upon surrender of his or
her certificate or certificates, a certificate or certificates representing the
number of shares of MuniYield Common Stock or MuniYield Series C AMPS
distributable with respect to such holder's shares of Taurus Common Stock or
Taurus AMPS, together with cash in lieu of any fractional shares. Promptly
after the Exchange Date, the transfer agent for the MuniYield Common Stock or
the MuniYield Series C AMPS, as the case may be, will mail to each holder of
certificates formerly representing shares of Taurus Common Stock or Taurus
AMPS, as the case may be, a letter of transmittal for use in surrendering his
or her certificates for certificates representing shares of MuniYield Common
Stock or MuniYield Series C AMPS, as the case may be, and cash in lieu of any
fractional shares.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. UPON CONSUMMATION
OF THE REORGANIZATION, HOLDERS OF TAURUS COMMON STOCK AND AMPS WILL BE
FURNISHED WITH INSTRUCTIONS FOR EXCHANGING THEIR TAURUS STOCK CERTIFICATES FOR
MUNIYIELD STOCK CERTIFICATES AND, IF APPLICABLE, CASH IN LIEU OF FRACTIONAL
SHARES.
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From and after the Exchange Date, certificates formerly representing shares
of Taurus Common Stock or Taurus AMPS, as the case may be, will be deemed for
all purposes to evidence ownership of the number of full shares of MuniYield
Common Stock or MuniYield Series C AMPS distributable with respect to such
shares of Taurus in the Reorganization, provided that, until such Taurus stock
certificates have been so surrendered, no dividends payable to the holders of
record of MuniYield Common Stock or MuniYield Series C AMPS, as the case may
be, as of any date subsequent to the Exchange Date will be paid to the holders
of such outstanding Taurus stock certificates. Dividends payable to holders of
record of shares of MuniYield Common Stock or MuniYield Series C AMPS, as the
case may be, as of any date after the Exchange Date and prior to the exchange
of certificates by any Taurus stockholder will be paid to such stockholder,
without interest, at the time such stockholder surrenders his or her Taurus
stock certificates for exchange.
From and after the Exchange Date, there will be no transfers on the stock
transfer books of Taurus. If, after the Exchange Date, certificates
representing shares of Taurus Common Stock or Taurus AMPS are presented to
MuniYield, they will be canceled and exchanged for certificates representing
MuniYield Common Stock or MuniYield Series C AMPS, as the case may be, and
cash in lieu of fractional shares, if any, distributable with respect to such
Taurus Common Stock or Taurus AMPS in the Reorganization.
TAX CONSEQUENCES OF THE REORGANIZATION
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. MuniYield and Taurus each has elected and
qualified for the special tax treatment afforded RICs under the Code, and
MuniYield intends to continue to so qualify after the Reorganization.
MuniYield and Taurus have jointly requested a private letter ruling from the
IRS that for Federal income tax purposes: (i) the Reorganization, as
described, will constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and MuniYield and Taurus will each be deemed a
"party" to a Reorganization within the meaning of Section 368(b) of the Code;
(ii) in accordance with Section 361(a) of the Code, no gain or loss will be
recognized to Taurus as a result of the Reorganization or on the distribution
of MuniYield Common Stock and MuniYield Series C AMPS to Taurus stockholders
under Section 361(c)(1) of the Code; (iii) under Section 1032 of the Code, no
gain or loss will be recognized to MuniYield as a result of the
Reorganization; (iv) in accordance with Section 354(a)(1) of the Code, no gain
or loss will be recognized to the stockholders of Taurus on the receipt of
MuniYield Common Stock and MuniYield Series C AMPS in exchange for their
corresponding Taurus Common Stock and Taurus AMPS (except to the extent that
Taurus Common Stockholders receive cash representing an interest in fractional
shares of MuniYield in the Reorganization); (v) in accordance with Section
362(b) of the Code, the tax basis of the Taurus assets in the hands of
MuniYield will be the same as the tax basis of such assets in the hands of
Taurus immediately prior to the consummation of the Reorganization; (vi) in
accordance with Section 358 of the Code, immediately after the Reorganization,
the tax basis of the MuniYield Common Stock and MuniYield Series C AMPS
received by the stockholders of Taurus in the Reorganization will be equal, in
the aggregate, to the tax basis of the Taurus Common Stock and Taurus AMPS
surrendered in exchange; (vii) in accordance with Section 1223 of the Code, a
stockholder's holding period for the MuniYield Common Stock and MuniYield
Series C AMPS will be determined by including the period for which such
stockholder held the Taurus Common Stock or Taurus AMPS exchanged therefor,
provided, that such Taurus shares were held as a capital asset; (viii) in
accordance with Section 1223 of the Code, MuniYield's holding period with
respect to the Taurus assets transferred will include the period for which
such assets were held by Taurus; (ix) the payment of cash to Taurus
stockholders in lieu of fractional shares of MuniYield will be treated as
though the fractional shares were distributed as part of the Reorganization
and then redeemed, with the result that such Taurus stockholders will have
short-term or long-term capital gain or loss to the extent that the cash
distribution differs from the basis allocable to the MuniYield fractional
shares; and (x) the taxable year of Taurus will end on the effective date of
the Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, MuniYield will succeed to and take into account certain tax
attributes of Taurus, such as earnings and profits, capital loss carryovers
and method of accounting.
46
<PAGE>
As noted in the discussion under "Comparison of the Funds--Tax Rules
Applicable to MuniYield, Taurus and Their Stockholders," a Fund must
distribute annually at least 90% of its net taxable and tax-exempt income. A
distribution only will be counted for this purpose if it qualifies for the
dividends paid deduction under the Code. In the opinion of Brown & Wood LLP,
the issuance of MuniYield Series C AMPS pursuant to the Reorganization in
addition to the already existing MuniYield Series A AMPS and Series B AMPS
will not cause distributions on any series of AMPS to be treated as
preferential dividends ineligible for the dividends paid deduction. It is
possible that the IRS may assert that, because there are several series of
AMPS, distributions on such shares are preferential under the Code and
therefore not eligible for the dividends paid deduction. If the IRS
successfully disallowed the dividends paid deduction for dividends on the
AMPS, MuniYield could lose the special tax treatment afforded RICs. In this
case, dividends on the shares of AMPS would not be exempt from Federal income
tax. Additionally, MuniYield would be subject to the alternative minimum tax.
Stockholders should consult their tax advisers regarding the effect of the
Reorganization in light of their individual circumstances. As the foregoing
relates only to Federal income tax consequences, stockholders also should
consult their tax advisers as to the foreign, state and local tax consequences
of the Reorganization.
Status as a Regulated Investment Company. Both MuniYield and Taurus have
elected and qualified since inception for taxation as RICs under Sections 851
through 855 of the Code, and after the Reorganization MuniYield intends to
continue to so qualify.
CAPITALIZATION
The following table sets forth as of April 30, 1997 (i) the capitalization
of MuniYield, (ii) the capitalization of Taurus and (iii) the pro forma
capitalization of MuniYield as adjusted to give effect to the Reorganization.
PRO FORMA CAPITALIZATION OF MUNIYIELD, TAURUS AND THE COMBINED FUND
AS OF APRIL 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA COMBINED FUND
MUNIYIELD TAURUS ADJUSTMENT AS ADJUSTED(A)
------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Net Assets:............. $374,928,458 $79,022,948 ($3,570,931) $450,380,475
Net Assets
Attributable to
Common Stock......... $254,928,458 $59,022,948 ($3,570,931) $310,380,475
Net Assets
Attributable to AMPS. $120,000,000 $20,000,000 -- $140,000,000
Shares Outstanding:
Common Stock.......... 16,781,559 5,175,539 -- 20,669,036(b)
AMPS
Series A............ 2,400 800 -- 2,400
Series B............ 2,400 -- -- 2,400
Series C............ -- -- -- 800(b)
Net Asset Value Per
Share:
Common Stock.......... $15.19 $11.40 -- $15.02(c)
AMPS.................. $25,000 $25,000 -- $25,000
</TABLE>
- --------
(a) The adjusted balances are presented as if the Reorganization had been
consummated on April 30, 1997 and are for informational purposes only.
Assumes distributions of undistributed net investment income and accrual
of estimated Reorganization expenses of $200,000. No assurance can be
given as to how many shares of MuniYield Common Stock that Taurus
stockholders will receive on the Exchange Date, and the foregoing should
not be relied upon to reflect the number of shares of MuniYield Common
Stock that actually will be received on or after such date.
(b) Assumes the issuance of 3,887,477 shares of MuniYield Common Stock and one
newly-created series of AMPS consisting of 800 shares in exchange for the
net assets of Taurus. The number of shares of Common Stock issued was
based on the net asset value of each Fund, net of distributions on April
30, 1997.
(c) Net Asset Value Per Share of Common Stock after Reorganization-related
expenses and distribution of undistributed net investment income.
47
<PAGE>
ELECTION OF DIRECTORS
At the MuniYield Annual Meeting, the Board of Directors of MuniYield will be
elected to serve until the next annual meeting of stockholders and until their
successors are elected and qualified. If the stockholders of both MuniYield
and Taurus approve the Reorganization, then the Board of Directors of
MuniYield elected at the MuniYield Annual Meeting will serve as the Board of
the combined fund until its next annual meeting of stockholders. If the
stockholders of either MuniYield or Taurus vote against the Reorganization,
then the Board of Directors of MuniYield elected at the MuniYield Annual
Meeting and the Board of Directors of Taurus elected at the Taurus annual
meeting of stockholders held on June 19, 1997 will continue to serve until the
next annual meeting of stockholders of the respective Fund. It is intended
that all properly executed proxies will be voted (unless such authority has
been withheld in the proxy) as follows:
With respect to the proxies of MuniYield stockholders:
(1) All proxies of the holders of shares of MuniYield AMPS, voting
separately as a class, will be voted in favor of the two persons designated
as Directors to be elected by the holders of shares of MuniYield AMPS; and
(2) All proxies of the holders of shares of MuniYield Common Stock and
MuniYield AMPS, voting together as a single class, will be voted in favor
of the four persons designated as Directors to be elected by the holders of
MuniYield Common Stock and MuniYield AMPS.
The Board of Directors of MuniYield knows of no reason why any of these
nominees will be unable to serve, but in the event of any such unavailability,
the proxies received will be voted for such substitute nominee or nominees as
the Board of Directors may recommend.
Certain information concerning the nominees for the Board of Directors of
MuniYield, including their designated classes, is set forth below.
TO BE ELECTED BY HOLDERS OF MUNIYIELD AMPS,
VOTING SEPARATELY AS A CLASS
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED ON THE
RECORD DATE
NAME AND PRINCIPAL OCCUPATIONS DURING ---------------------
ADDRESS OF THE PAST FIVE YEARS AND DIRECTOR COMMON
NOMINEE AGE PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
---------- --- ---------------------------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Joseph L. May(1)(2)..... 68 Attorney in private practice 1992 0 0
424 Church Street, since 1984; President, May and
Suite 2000 Athens Hosiery Mills Division,
Nashville, Tennessee Wayne-Gossard Corporation from
37219 1954 to 1983; Vice President,
Wayne-Gossard Corporation from
1972 to 1983; Chairman, The May
Corporation (personal holding
company) from 1972 to 1983;
Director, Signal Apparel Co. from
1972 to 1989.
Andre F. Perold(1)(2)... 45 Professor, Harvard Business 1992 0 0
Morgan Hall School since 1989 and Associate
Soldiers Field Professor from 1983 to 1989;
Boston, Massachusetts Trustee, The Common Fund since
02163 1989; Director, Quantec Limited
since 1991 and TIBCO from 1994 to
1996.
</TABLE>
(See footnotes on next page)
48
<PAGE>
TO BE ELECTED BY HOLDERS OF MUNIYIELD AMPS AND MUNIYIELD COMMON STOCK,
VOTING TOGETHER AS A SINGLE CLASS
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED ON THE
RECORD DATE
NAME AND PRINCIPAL OCCUPATIONS DURING ---------------------
ADDRESS OF THE PAST FIVE YEARS AND DIRECTOR COMMON
NOMINEE AGE PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
---------- --- ---------------------------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
James H. Bodurtha(1)(2). 53 Director and Executive Vice 1995 0 0
36 Popponesset Road President, The China Business
Cotuit, Massachusetts Group, Inc. since 1996; Chairman
02635 and Chief Executive Officer, China
Enterprise Management Corporation
from 1993 to 1996; Chairman,
Berkshire Corporation since 1980;
Partner, Squire, Sanders & Dempsey
from 1980 to 1993.
Herbert I. London(1)(2). 57 Dean, Gallatin Division of New 1992 0 0
113-115 University York University from 1978 to 1993
Place and Director from 1975 to 1976;
New York, New York John M. Olin Professor of
10003 Humanities since 1993 and
Professor thereof since 1973;
Distinguished Fellow, Herman Kahn
Chair, Hudson Institute from 1984
to 1985; Overseer, Center for
Naval Analyses from 1983 to 1993;
Director, Damon Corporation since
1991; Limited Partner, Hypertech
L.P. since 1996.
Robert R. Martin(1)(2).. 69 Chairman and Chief Executive 1994 0 0
513 Grand Hill Officer, Kinnard Investments, Inc.
St. Paul, Minnesota from 1990 to 1993, Executive Vice
55102 President, Dain Bosworth from 1974
to 1989; Director, Carnegie
Capital Management from 1977 to
1985 and Chairman thereof in 1979;
Director, Securities Industry
Association from 1981 to 1982 and
Public Securities Association from
1979 to 1980; Chairman of the
Board, WTC Industries, Inc. in
1994; Trustee, Northland College
since 1992.
Arthur Zeikel(1)(3)..... 65 President of FAM (which term as 1992 0 0
800 Scudders Mill Road used herein includes its corporate
Plainsboro, New Jersey predecessors) since 1977;
08536 President of MLAM (which term as
used herein includes its corporate
predecessors) since 1977;
President and Director of
Princeton Services since 1993;
Executive Vice President of ML &
Co. since 1990; Director of
Merrill Lynch Funds Distributor,
Inc. ("MLFD") since 1977.
</TABLE>
- --------
(1) Each of the nominees is a director, trustee or member of an advisory board
of certain other investment companies for which FAM or MLAM acts as
investment advisor. See "Compensation of Directors" below.
(2) Member of the Audit Committee of the Board of Directors.
(3) Interested person, as defined in the Investment Company Act, of the Fund.
49
<PAGE>
COMMITTEE AND BOARD MEETINGS
The Board of Directors of MuniYield has a standing Audit Committee, which
consists of the Directors who are not "interested persons," as defined in the
Investment Company Act, of the Fund. The principal purpose of the Audit
Committee is to review the scope of the annual audit conducted by MuniYield's
independent auditors and the evaluation by such auditors of the accounting
procedures followed by the Fund. The non-interested Directors have retained
independent legal counsel to assist them in connection with these duties. The
MuniYield Board of Directors does not have a nominating committee. During the
fiscal year ended October 31, 1996, the Board of Directors and the Audit
Committee of MuniYield held four quarterly meetings. All of the Directors of
MuniYield then in office attended at least 75% of the aggregate of the total
number of meetings of the Board of Directors and the total number of meetings
held by all of the committees of the Board on which they served during such
period.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), requires MuniYield's officers, Directors and
persons who own more than ten percent of a registered class of the Fund's
equity securities, to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the Commission and the NYSE. Officers, Directors and
greater than ten percent stockholders are required by Commission regulations to
furnish MuniYield with copies of all Forms 3, 4 and 5 that they file.
Based solely on MuniYield's review of the copies of such forms, and
amendments thereto, furnished to it during or with respect to its most recent
fiscal year, and written representations from certain reporting persons that
they were not required to file Form 5 with respect to the most recent fiscal
year, MuniYield believes that all of its officers, Directors, greater than ten
percent beneficial owners and other persons subject to Section 16 of the
Securities Exchange Act because of the requirements of Section 30 of the
Investment Company Act (i.e., any advisory board member, investment adviser or
affiliated person of the Fund's investment adviser), have complied with all
filing requirements applicable to them with respect to transactions during the
Fund's most recent fiscal year.
INTERESTED PERSONS
Each Fund considers Mr. Zeikel to be an "interested person" of the Fund
within the meaning of Section 2(a) (19) of the Investment Company Act as a
result of the positions he holds with FAM and its affiliates. Mr. Zeikel is the
President of each Fund, the President of FAM and the President of MLAM.
COMPENSATION OF DIRECTORS
FAM, the investment adviser for MuniYield, pays all compensation of all
officers of the Fund and all Directors of the Fund who are affiliated with ML &
Co. or its subsidiaries. MuniYield pays each Director who is not affiliated
with FAM (each a "non-affiliated Director") a fee of $2,500 per year plus $250
per regular meeting attended, together with such Director's actual out-of-
pocket expenses relating to attendance at meetings. MuniYield also pays each
member of its Audit Committee, which consists of all of the non-affiliated
Directors, a fee of $500 per year plus $125 per meeting attended, together with
such Director's out-of-pocket expenses relating to attendance at meetings.
These fees and expenses for the fiscal year ended October 31, 1996 aggregated
$11,130 for MuniYield.
The following table sets forth, for the fiscal year ended October 31, 1996,
compensation paid by MuniYield to the non-affiliated Directors, and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies advised by FAM and its affiliate, MLAM
("FAM/MLAM Advised Funds"), to the non-affiliated Directors.
50
<PAGE>
<TABLE>
<CAPTION>
PENSION OR AGGREGATE COMPENSATION
RETIREMENT BENEFITS FROM MUNIYIELD AND
COMPENSATION ACCRUED AS PART OF FAM/MLAM ADVISED
NAME OF DIRECTOR FROM MUNIYIELD FUND EXPENSES FUNDS PAID TO DIRECTORS
- ---------------- -------------- ------------------- -----------------------
<S> <C> <C> <C>
James H. Bodurtha(1).... $4,500 None $148,500
Herbert I. London(1).... $4,500 None $148,500
Robert R. Martin(1)..... $4,500 None $148,500
Joseph L. May(1)........ $4,500 None $148,500
Andre F. Perold(1)...... $4,500 None $148,500
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Bodurtha (22 registered investment companies consisting of 46
portfolios); Mr. London (22 registered investment companies consisting of
46 portfolios); Mr. Martin (22 registered investment companies consisting
of 46 portfolios); Mr. May (22 registered investment companies consisting
of 46 portfolios); and Mr. Perold (22 registered investment companies
consisting of 46 portfolios). For purposes of this table, each series of a
series investment company is treated as a separate fund.
OFFICERS OF THE FUNDS
The Boards of Directors of MuniYield and Taurus have elected the following
officers of each Fund. The principal business address of each officer is 800
Scudders Mill Road, Plainsboro, New Jersey 08536. The following sets forth
information concerning each of these officers:
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
----------------------------- ------ --- -------
<S> <C> <C> <C>
Arthur Zeikel.................................. President 65 1992
President of FAM since 1977; President of MLAM
since 1977; President and Director of
Princeton Services since 1993; Executive Vice
President of ML & Co. since 1990; Director of
MLFD since 1977.
Terry K. Glenn................................. Executive Vice 56 1992
Executive Vice President of FAM and of MLAM President
since 1983; Executive Vice President and
Director of Princeton Services since 1993;
President of MLFD since 1986 and Director
thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
Vincent R. Giordano............................ Senior Vice 52 1992
Senior Vice President of FAM and of MLAM since President
1984; Senior Vice President of Princeton
Services since 1993.
Kenneth A. Jacob............................... Vice President 46 1992
Vice President of FAM and of MLAM since 1984.
Walter C. O'Connor(1).......................... Vice President 35 1995
Vice President of MLAM since 1993; Assistant
Vice President of MLAM from 1991 to 1993;
Assistant Vice President of Prudential
Securities from 1984 to 1991.
Roberto W. Roffo(1)............................ Vice President 31 1996
Vice President of MLAM since 1996 and
Portfolio Manager thereof since 1992.
Donald C. Burke................................ Vice President 37 1993
Vice President and Director of Taxation of
MLAM since 1990.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
----------------------------- ------ --- -------
<S> <C> <C> <C>
Gerald M. Richard................................... Treasurer 48 1992
Senior Vice President and Treasurer of FAM and of
MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993;
Treasurer of MLFD since 1981 and Vice President
thereof since 1984.
Patrick D. Sweeney.................................. Secretary 43 1997
Vice President of MLAM since 1990; Vice President
and Associate Counsel of Security Pacific Merchant
Bank from 1988 to 1990; Lawyer in private practice
from 1981 to 1988.
</TABLE>
- --------
(1) The MuniYield portfolio is managed by Mr. O'Connor and the Taurus
portfolio is managed by Mr. Roffo.
SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of MuniYield, including a majority of the Directors
who are not "interested persons," as defined in the Investment Company Act, of
MuniYield, has selected the firm of Deloitte & Touche LLP as independent
auditors, to audit the financial statements of MuniYield for the current
fiscal year ending October 31, 1997.
MuniYield knows of no direct or indirect financial interest of such firm in
MuniYield. Such appointment is subject to ratification or rejection by the
stockholders of MuniYield. If the stockholders of both MuniYield and Taurus
approve the Reorganization, then the independent auditors selected at the
MuniYield Annual Meeting will serve as the independent auditors of the
combined fund until its next annual meeting of stockholders. If the
stockholders of either MuniYield or Taurus vote against the Reorganization,
then the independent auditors selected at the MuniYield Annual Meeting and the
independent auditors selected at the Taurus annual meeting of stockholders,
held on June 19, 1997, will continue to serve until the next annual meeting of
stockholders of each Fund respectively. Ernst & Young LLP was the firm
selected as the independent auditors for Taurus at that meeting. Unless a
contrary specification is made, the accompanying proxy of each MuniYield
stockholder will be voted in favor of ratification of the selection of
Deloitte & Touche LLP as independent auditors for MuniYield.
Deloitte & Touche LLP also acts as independent auditors for ML & Co. and all
of its subsidiaries and for most other investment companies for which FAM or
MLAM acts as investment adviser. The fees received by Deloitte & Touche LLP
from these other entities are substantially greater, in the aggregate, than
the total fees received by it from MuniYield. The Board of Directors of
MuniYield considered the fact that Deloitte & Touche LLP has been retained as
the independent auditors of ML & Co. and the other entities described above in
its evaluation of the independence of Deloitte & Touche LLP with respect to
MuniYield.
Representatives of Deloitte & Touche LLP are expected to be present at the
MuniYield Annual Meeting and will have the opportunity to make a statement if
they so desire and to respond to questions from stockholders.
INFORMATION CONCERNING THE MEETINGS
DATE, TIME AND PLACE OF MEETINGS
The Meetings will be held on October 20, 1997 at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey at 9:00 a.m., New York time (for
MuniYield) and 9:30 a.m., New York time (for Taurus).
52
<PAGE>
SOLICITATION, REVOCATION AND USE OF PROXIES
A stockholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy or by
submitting a notice of revocation to the Secretary of MuniYield or Taurus, as
the case may be. Although mere attendance at the Meetings will not revoke a
proxy, a stockholder present at the Meetings may withdraw his proxy and vote
in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meetings in accordance with
the directions on the proxies; if no direction is indicated, the shares will
be voted "FOR" (1) the approval of the Agreement and Plan of Reorganization,
and with respect to proxies submitted by MuniYield stockholders, "FOR" (2)(a)
the election of Directors and (b) the ratification of the selection of
Deloitte & Touche LLP as independent auditors.
It is not anticipated that any matters other than (1) the adoption of the
Agreement and Plan of Reorganization; and (2) for the stockholders of
MuniYield only: (a) the election of Directors and (b) the ratification of the
selection of Deloitte & Touche LLP will be brought before the Meetings. If,
however, any other business properly is brought before the Meetings, proxies
will be voted in accordance with the judgment of the persons designated on
such proxies.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of MuniYield Common Stock, MuniYield AMPS,
Taurus Common Stock and Taurus AMPS at the close of business on the Record
Date are entitled to vote at the Meetings or any adjournment thereof. At the
close of business on the Record Date, there were 16,781,559 shares of
MuniYield Common Stock, 4,800 shares of MuniYield AMPS, 5,175,539 shares of
Taurus Common Stock and 800 shares of Taurus AMPS issued and outstanding and
entitled to vote.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF MUNIYIELD
AND TAURUS
To the knowledge of MuniYield and Taurus, at the date hereof, no person or
entity owns beneficially 5% or more of the shares of any of the MuniYield
Common Stock, the MuniYield AMPS, the Taurus Common Stock or the Taurus AMPS.
On the Record Date, the Directors and officers of MuniYield as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of
MuniYield Common Stock and MuniYield AMPS.
On the Record Date, the Directors and officers of Taurus as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of
Taurus Common Stock and Taurus AMPS.
On the Record Date, Mr. Zeikel, a Director and officer of each of the Funds,
and the other Directors and officers of each Fund owned an aggregate of less
than 1% of the outstanding shares of Common Stock of ML & Co.
VOTING RIGHTS AND REQUIRED VOTE
For purposes of this Proxy Statement and Prospectus, each share of MuniYield
Common Stock, MuniYield AMPS, Taurus Common Stock and Taurus AMPS is entitled
to one vote. Approval of the Agreement and Plan of Reorganization requires the
affirmative vote of stockholders representing a majority of the outstanding
shares of MuniYield Common Stock and MuniYield AMPS, voting together as a
single class, and of the MuniYield AMPS, voting separately as a class, as well
as the affirmative vote of stockholders representing a majority of the
outstanding shares of Taurus Common Stock and Taurus AMPS, voting together as
a single class, and of the Taurus AMPS, voting separately as a class.
Under Maryland law, stockholders of a registered investment company whose
shares are traded publicly on a national securities exchange, such as Taurus,
are not entitled to demand the fair value of their shares upon a transfer of
assets; therefore, the Taurus Common Stockholders will be bound by the terms
of the Reorganization,
53
<PAGE>
if approved at the Meetings. However, any Common Stockholder of Taurus may
sell his or her shares of Common Stock at any time on the NYSE. Conversely,
because the Taurus AMPS are not traded publicly on a national securities
exchange, shareholders of Taurus AMPS will be entitled to appraisal rights
upon the consummation of the Reorganization. As stockholders of the
corporation acquiring the assets of Taurus, neither holders of MuniYield
Common Stock nor holders of MuniYield AMPS are entitled to appraisal rights
under Maryland law.
Under Maryland law, a holder of Taurus AMPS desiring to receive payment of
the fair value of his or her stock (an "objecting stockholder") (i) must file
with Taurus a written objection to the Reorganization at or before the
Meeting, (ii) must not vote in favor of the Reorganization and (iii) must make
written demand on MuniYield for payment of his or her stock stating the number
and class of shares for which he or she demands payment, within 20 days after
the Maryland Department of Assessments and Taxation accepts for filing the
Articles of Transfer with respect to the Reorganization (MuniYield is required
promptly to give written notice to all objecting stockholders of the date that
the Articles of Transfer are accepted for record). An objecting stockholder
who fails to adhere to this procedure will be bound by the terms of the
Reorganization. An objecting stockholder ceases to have any rights as a
stockholder except the right to receive fair value for his or her shares and
has no right to receive any dividends or distributions payable to such holders
on a record date after the close of business on the date on which fair value
is to be determined, which, for these purposes will be the date of the
Meeting. A demand for payment of fair market value may not be withdrawn,
except upon the consent of MuniYield. Within 50 days after the Articles of
Transfer have been accepted for filing, an objecting stockholder who has not
received payment for his or her shares may petition a court located in
Baltimore, Maryland for an appraisal to determine the fair market value of his
or her stock.
For purposes of each Meeting, a quorum consists of a majority of the shares
entitled to vote at the Meeting, present in person or by proxy. If, by the
time scheduled for each Meeting, a quorum of the applicable Fund's
stockholders is not present or if a quorum is present but sufficient votes in
favor of the Agreement and Plan of Reorganization are not received from the
stockholders of the applicable Fund, the persons named as proxies may propose
one or more adjournments of the Meeting to permit further solicitation of
proxies from stockholders. Any such adjournment will require the affirmative
vote of a majority of the shares of the applicable Fund present in person or
by proxy and entitled to vote at the session of the Meeting to be adjourned.
The persons named as proxies will vote in favor of any such adjournment if
they determine that adjournment and additional solicitation are reasonable and
in the interests of the applicable Fund's stockholders.
With respect to the election of Directors, holders of shares of MuniYield
AMPS voting separately as a class are entitled to elect two Directors of
MuniYield and holders of shares of MuniYield Common Stock and MuniYield AMPS,
voting together as a single class, are entitled to elect the remaining
Directors of MuniYield. Assuming a quorum is present, (x) election of the two
Directors of MuniYield to be elected by the holders of shares of MuniYield
AMPS, voting separately as a class, will require the affirmative vote of a
majority of the votes cast by the holders of MuniYield AMPS, represented at
the MuniYield Annual Meeting and entitled to vote; and (y) election of the
remaining Directors of MuniYield will require the affirmative vote of a
majority of the votes cast by the holders of MuniYield Common Stock and
MuniYield AMPS, represented at the MuniYield Annual Meeting and entitled to
vote, voting together as a single class.
Approval of the ratification of the selection of Deloitte & Touche LLP as
the independent auditors of MuniYield will require the affirmative vote of a
majority of the votes cast by the holders of MuniYield Common Stock and
MuniYield AMPS represented at the MuniYield Annual Meeting and entitled to
vote, voting together as a single class.
54
<PAGE>
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by MuniYield, the surviving fund after the Reorganization, so as to be
borne equally and exclusively on a per share basis by the holders of MuniYield
Common Stock and Taurus Common Stock.
MuniYield and Taurus likewise will reimburse banks, brokers and others for
their reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of MuniYield and Taurus and certain persons that
MuniYield or Taurus may employ for their reasonable expenses in assisting in
the solicitation of proxies from such beneficial owners of shares of capital
stock of MuniYield or Taurus.
In order to obtain the necessary quorum at the Meetings (i.e., a majority of
the shares of each class of each Fund's securities entitled to vote at the
Meetings, present in person or by proxy), supplementary solicitation may be
made by mail, telephone, telegraph or personal interview by officers of the
Fund. The Funds also may hire proxy solicitors at the expense of MuniYield. It
is anticipated that the cost of such supplementary solicitation, if any, will
be nominal.
Broker-dealer firms, including Merrill Lynch, holding Fund shares in "street
name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares on each
proposal before the Meetings. The Funds understand that, under the rules of
the NYSE, such broker-dealer firms may, without instructions from their
customers and clients, grant authority to the proxies designated to vote on
the election of a Board of Directors of MuniYield to serve for the ensuing
year (proposal 2(a)) and the ratification of the selection of Deloitte &
Touche LLP as independent auditors for MuniYield for the current fiscal year
(proposal 2(b)) if no instructions have been received prior to the date
specified in the broker-dealer firm's request for voting instructions. With
respect to MuniYield Common Stock and Taurus Common Stock, broker-dealer
firms, including Merrill Lynch, will not be permitted to grant voting
authority without instructions with respect to the approval of the Agreement
and Plan of Reorganization (proposal 1). Shares of MuniYield AMPS and Taurus
AMPS held in "street name," however, may be voted, pursuant to rules of the
NYSE, by broker-dealer firms, including Merrill Lynch, with respect to the
approval of the Agreement and Plan of Reorganization (proposal 1) and counted
for purposes of establishing a quorum if no instructions are received one
business day before the Meetings, or, if adjourned, one business day before
the day to which the Meetings are adjourned. In such instances, the broker-
dealer firm will vote those shares on proposal 1 in the same proportion as the
votes cast by all holders of AMPS of the relevant Fund who have voted on
proposal 1. The Funds will include shares held of record by broker-dealers as
to which such authority has been granted in its tabulation of the total number
of shares present for purposes of determining whether the necessary quorum of
stockholders of each Fund exists. Proxies that are returned to a Fund but that
are marked "abstain" or on which a broker-dealer has declined to vote on any
proposal ("broker non-votes") will be counted as present for the purposes of
determining a quorum. Merrill Lynch has advised the Funds that it intends to
exercise discretion over shares held in its name for which no instructions
have been received by voting such shares on proposals 1 (in the case of AMPS
only), 2(a) and 2(b) in the same proportion as it has voted such shares for
which it has received instructions. However, abstentions and broker non-votes
will not be counted as votes cast. Abstentions and broker non-votes will not
have an effect on the vote on proposals 2(a) and 2(b); however, abstentions
and broker non-votes will have the same effect as a vote against proposal 1.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statement and the exhibits relating thereto
which MuniYield has filed with the Commission under the Securities Act and the
Investment Company Act, to which reference is hereby made.
MuniYield and Taurus both are subject to the informational requirements of
the Securities Exchange Act, and in accordance therewith file reports and
other information with the Commission. Reports, proxy statements, registration
statements and other information filed by MuniYield and Taurus can be
inspected and copied at the public reference facilities of the Commission in
Washington, D.C. and at the New York Regional Office of the
55
<PAGE>
Commission at Seven World Trade Center, New York, New York 10048. Copies of
such materials also can be obtained by mail from the Public Reference Branch,
Office of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549, at prescribed rates. The Commission
maintains a web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Funds, that file electronically with the Commission.
CUSTODIAN
The Bank of New York acts as the custodian for cash and securities of both
MuniYield and Taurus. The principal business address of The Bank of New York
in such capacity is 90 Washington Street, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Bank of New York serves as the transfer agent, dividend disbursing agent
and registrar with respect to the MuniYield Common Stock and the Taurus Common
Stock, at the same rate for each Fund, pursuant to separate registrar,
transfer agency and service agreements with each of the Funds. The principal
business address of The Bank of New York in such capacity is 101 Barclay
Street, New York, New York 10286.
IBJ Schroder Bank and Trust Company serves as the transfer agent, registrar
and auction agent to MuniYield and Taurus, in connection with their respective
AMPS, at the same rate for each Fund, pursuant to separate registrar, transfer
agency and service agreements with each of the Funds. The principal business
address of IBJ Schroder Bank and Trust Company is One State Street, New York,
New York 10004.
LEGAL PROCEEDINGS
There are no material legal proceedings to which MuniYield or Taurus is a
party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for MuniYield and Taurus by Brown & Wood LLP, New York, New York.
EXPERTS
The financial statements as of October 31, 1996 of MuniYield included in
this Proxy Statement and Prospectus have been so included in reliance on the
report of Deloitte & Touche LLP, independent auditors, given on their
authority as experts in auditing and accounting. The principal business
address of Deloitte & Touche LLP is 117 Campus Drive, Princeton, New Jersey
08540.
The statement of assets, liabilities and capital of Taurus at October 31,
1996 and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period
then ended and financial highlights for each of the years indicated therein
included in this Proxy Statement and Prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The principal business address of Ernst & Young LLP is 202 Carnegie Center,
Princeton, New Jersey 08543.
56
<PAGE>
STOCKHOLDER PROPOSALS
If a stockholder of MuniYield intends to present a proposal at the 1998
Annual Meeting of Stockholders of MuniYield, which is anticipated to be held
in September 1998, and desires to have the proposal included in the Fund's
proxy statement and form of proxy for that meeting, the stockholder must
deliver the proposal to the offices of MuniYield by May , 1998.
By Order of the Boards of Directors
Philip M. Mandel
Secretary of MuniYield California
Fund, Inc.
Patrick D. Sweeney
Secretary of Taurus MuniCalifornia
Holdings, Inc.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements for MuniYield California Fund, Inc. for the
Fiscal Year Ended October 31, 1996....................................... F-2
Unaudited Financial Statements for MuniYield California Fund, Inc. for the
Six-Month Period Ended April 30, 1997.................................... F-13
Audited Financial Statements for Taurus MuniCalifornia Holdings, Inc. for
the Fiscal Year Ended October 31, 1996................................... F-25
Unaudited Financial Statements for Taurus MuniCalifornia Holdings, Inc.
for the Six-Month Period Ended April 30, 1997............................ F-34
Unaudited Financial Statements for the Combined Fund on a Pro Forma Basis,
as of April 30, 1997..................................................... F-43
</TABLE>
F-1
<PAGE>
Audited Financial Statements for MuniYield California Fund, Inc. for the Fiscal
Year Ended October 31, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
MUNIYIELD CALIFORNIA FUND, INC.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniYield California Fund, Inc, as
of October 31, 1996, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the four-
year period then ended and the period February 28, 1992 (commencement of
operations) to October 31, 1992. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the 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 the
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. Our procedures included confirmation of securities
owned at October 31, 1996 by correspondence with the custodian. 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 MuniYield
California Fund, Inc, as of October 31, 1996, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 3, 1996
F-3
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California--95.7%
<S> <S> <C> <S> <C>
California Health Facilities Financing Authority Revenue Bonds:
AA Aa3 $ 1,000 (Kaiser Permanente), Series A, 7% due 12/01/2010 $ 1,096
AAA Aaa 2,000 (Kaiser Permanente), Series A, 7% due 10/01/2018 (c) 2,166
A1+ VMIG1++ 1,200 (Pooled Loan Program), VRDN, Series 85-B, 3.35% due 10/01/2010 (a)(d) 1,200
AAA Aaa 1,000 Refunding (Adventist Health), Series A, 6.50% due 3/01/2014 (c) 1,071
A1+ VMIG1++ 1,200 Refunding (Catholic West), VRDN, Series C, 3.35% due 7/01/2011 (a)(c) 1,200
AAA Aaa 4,085 (San Diego Hospital Association), Series A, 6.70% due 10/01/2010 (c) 4,482
NR* A 2,835 (Scripps Research Institute), Series A, 6.625% due 7/01/2018 3,023
A+ A 3,600 (Sutter Health Hospital), Series 89-A, 6.70% due 1/01/2013 3,755
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 1,920 AMT, Series C, 7.45% due 8/01/2011 2,015
AA- Aa 2,585 AMT, Series E-1, 6.70% due 8/01/2025 2,680
AA- Aa 4,955 AMT, Series F-1, 7% due 8/01/2026 5,263
AA- Aa 1,200 Series D, 7.25% due 8/01/2017 1,272
AA- Aa 760 Series F, 7.875% due 8/01/2019 793
AA- Aa 2,900 California HFA, Revenue Bonds, RIB, AMT, 8.856% due 8/01/2023 (h) 3,067
A1 NR* 770 California Pollution Control Financing Authority, PCR, Refunding
(Pacific Gas and Electric Co.), VRDN, AMT, Series G, 3.60% due
2/01/2016 (a) 770
NR* Aa3 700 California Pollution Control Financing Authority, Resource Recovery Revenue
Bonds (Honey Lake Power Project), VRDN, AMT, 3.55% due 9/01/2018 (a) 700
California State Public Works Board, Lease Revenue Bonds:
A A 3,000 (California Community College), Series A, 6.75% due 9/01/2001 (g) 3,354
A A 6,800 (Department of Corrections--Monterey County), Series A, 7% due 11/01/2004 (g) 7,957
A A 9,800 (Various California State University Projects), Series A, 6.70% due
10/01/2002 (g) 11,066
A A 5,100 (Various California State University Projects), Series A, 6.625% due
10/01/2010 5,511
A A 5,085 (Various Community College Projects), Series B, 7% due 3/01/2004 (g) 5,889
A1+ VMIG1++ 5,400 California State, RAN, VRDN, Series C-1, 3.35% due 6/30/1997 (a) 5,400
AAA Aaa 13,250 California State Veterans, GO, UT, AMT, Series BD, BE and BF, 6.375% due
2/01/2027 (b) 13,601
AA Aa 4,750 California Statewide Community Development Authority Revenue Bonds,
COP (Saint Joseph Health System Group), 6.625% due 7/01/2021 5,087
A+ A1 3,000 Contra Costa County, California, COP (Merrithew Memorial Hospital),
6.60% due 11/01/2012 3,164
BBB NR* 1,000 Contra Costa County, California, Public Financing Authority,
Tax Allocation Revenue Refunding Bonds, Series A, 7.10% due 8/01/2022 1,060
AAA Aaa 2,365 Contra Costa County, California, Transportation Authority,
Sales Tax Revenue Bonds, Series A, 6% due 3/01/2006 (d) 2,552
AAA Aaa 2,000 Cucamonga County, California, Water District Facilities Refinancing Bonds,
COP, 6.50% due 9/01/2022 (d) 2,164
AAA Aaa 395 Culver City, California, Redevelopment Finance Authority Revenue Bonds
(Senior Lien Project Loans), Series A, 6.75% due 11/01/2015 (b) 426
AAA Aaa 3,500 East Bay, California, Municipal Utility District, Water System Subordinated
Revenue Refunding Bonds, 6% due 6/01/2012 (c) 3,629
AAA Aaa 1,000 El Cajon, California, Redevelopment Agency, Tax Allocation Bonds
(El Cajon Redevelopment Project), 6.60% due 10/01/2022 (b) 1,091
BBB Baa 1,905 Inglewood, California, Public Financing Authority Revenue Bonds (Manchester-
Prairie-North Inglewood Industrial Park Project), Series B, 7% due 5/01/2022 2,025
</TABLE>
F-4
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
AAA Aaa $ 3,645 Los Angeles, California, Community Redevelopment Agency, Tax Allocation
Refunding Bonds (Bunker Hill), Series H, 6.50% due 12/01/2015 (f) $ 3,955
Los Angeles, California, Department of Water and Power, Waterworks
Revenue Bonds:
AAA Aaa 3,925 6.30% due 7/01/2024 (c) 4,194
AA Aa 4,000 Refunding, 6.40% due 5/15/2028 4,190
Los Angeles, California, Harbor Department Revenue Bonds, AMT, Series B:
AA Aa 4,240 6.60% due 8/01/2015 4,511
AA Aa 6,855 6.625% due 8/01/2019 7,282
AAA Aaa 3,000 Los Angeles, California, Wastewater System Revenue Bonds, Series D, 6.625%
due 12/01/2012 (c) 3,254
AAA Aaa 5,000 Los Angeles County, California, COP (Correctional Facilities Project), 6.50%
due 9/01/2000 (c)(g) 5,484
Los Angeles County, California, Metropolitan Transportation Authority, Sales
Tax Revenue Refunding Bonds:
AAA Aaa 5,720 Proposition A, Series A, 5% due 7/01/2021 (d) 5,179
A1+ VMIG1++ 3,800 Proposition C, VRDN, Second Senior Series A, 3.40% due 7/01/2020 (a)(c) 3,800
AAA Aaa 10,660 Los Angeles County, California, Public Works Financing Authority, Lease
Revenue Refunding Bonds, Series A, 6% due 9/01/2004 (c) 11,486
AA- Aaa 6,500 Los Angeles County, California, Transportation Commission, Sales Tax
Revenue Bonds, Series A, 6.75% due 7/01/2001 (g) 7,267
M-S-R Public Power Agency, California, Revenue Bonds (San Juan Project):
A A 5,000 Series C, 6.875% due 7/01/2019 5,118
AAA Aaa 6,155 Series E, 6.50% due 7/01/2017 (c) 6,643
AA Aa 6,000 Metropolitan Water District, Southern California Waterworks Revenue Bonds,
6.625% due 7/01/2001 (g) 6,659
AAA Aaa 2,500 Northern California Power Agency, Multiple Capital Facilities Revenue Bonds,
RIB, 9.142% due 9/02/2025 (c)(h) 2,863
AAA Aaa 1,955 Northern California Power Agency, Public Power Revenue Bonds
(Hydroelectric Project Number 1), Series E, 7.15% due 7/01/2024 (c) 2,083
AAA Aaa 16,000 Orange County, California, Local Transportation Authority,
Sales Tax Revenue Bonds, Second Series, 6.10% due 2/14/2011 (d) 16,602
A NR* 5,000 Palmdale, California, Civic Authority, Revenue Refunding Bonds
(Merged Redevelopment Project), Series A, 6.60% due 9/01/2034 5,414
AAA Aaa 3,905 Rancho Cucamonga, California, Redevelopment Agency, Tax Allocation Bonds
(Rancho Redevelopment Project), 6.75% due 9/01/2020 (c) 4,193
NR* A 3,750 Rancho Mirage, California, Joint Powers Financing Authority, COP
(Eisenhower Memorial Hospital), 7% due 3/01/2022 4,050
Redwood City, California, Public Financing Authority, Local Agency
Revenue Bonds:
AAA Aaa 5,025 Refunding, Series A, 6.50% due 7/15/2011 (b) 5,437
A- NR* 1,500 Series B, 7.25% due 7/15/2011 1,639
AAA Aaa 7,950 Riverside County, California, Transportation Commission,
Sales Tax Revenue Refunding Bonds, Series A, 6% due 6/01/2005 (d) 8,632
A+ Aaa 18,000 Sacramento, California, City Financing Authority Revenue Bonds, 6.80% due
11/01/2001 (g) 20,279
Sacramento, California, Municipal Utility District, Electric Revenue Bonds,
Series B (c):
AAA Aaa 3,180 6.25% due 8/15/2011 3,375
AAA Aaa 4,865 6.375% due 8/15/2022 5,176
AAA Aaa 5,000 San Diego, California, Public Facilities Financing Authority,
Sewer Revenue Bonds, 5% due 5/15/2020 (d) 4,586
</TABLE>
F-5
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (concluded)
<S> <S> <C> <S> <C>
San Francisco, California, City and County Airport Commission, International
Airport Revenue Bonds, Second Series:
AAA Aaa $ 1,500 AMT, Issue 5, 6.50% due 5/01/2019 (d) $ 1,601
AAA Aaa 4,525 AMT, Issue 6, 6.60% due 5/01/2020 (b) 4,899
AAA Aaa 11,000 Refunding, Issue 1, 6.50% due 5/01/2013 (b) 11,919
AA- A1 5,480 San Francisco, California, City and County, GO (Variable Purpose Projects),
UT, Series A, 6.50% due 12/15/2010 5,784
AA Aa 5,000 San Francisco, California, City and County Public Utilities Commission,
Water Revenue Bonds, Series A, 6.50% due 11/01/2017 5,258
AAA Aaa 4,715 San Francisco, California, City and County Redevelopment Agency, Lease
Revenue Bonds (George R. Moscone Convention Center), 6.80% due 7/01/2019 (f) 5,234
AAA Aaa 3,180 Santa Clara, California, Electric Revenue Bonds, Series A, 6.50% due
7/01/2021 (c) 3,432
AAA Aaa 9,525 Santa Clara County, California, Financing Authority, Lease Revenue Bonds
(VMC Facility Replacement Project), Series A, 6.75% due 11/15/2020 (b) 10,591
AA A1 5,000 Santa Clara County, California, Transportation District, Sales Tax Revenue
Bonds, Series A, 6.75% due 6/01/2011 5,451
AAA Aaa 3,000 Santa Fe Springs, California, Redevelopment Agency, Tax Allocation Bonds
(Conservation Redevelopment Project), Series A, 6% due 9/01/2014 (c) 3,085
AAA Aaa 7,750 Santa Rosa, California, Wastewater Revenue Bonds (Sub-Regional Wastewater
Project), Series A, 6.50% due 9/01/2002 (d)(g) 8,665
AAA NR* 1,125 Southern California Home Financing Authority, S/F Mortgage Revenue Bonds,
AMT, Series A, 6.75% due 9/01/2022 (e) 1,161
AAA Aaa 5,000 Stockton, California, Revenue Bonds (Wastewater Treatment Plant Expansion),
COP, Series A, 6.80% due 9/01/2024 (d) 5,603
University of California Revenue Bonds (Multiple Purpose Projects):
A NR* 3,300 Refunding, Series A, 6.875% due 9/01/2002 (g) 3,751
AAA Aaa 13,560 Series D, 6.375% due 9/01/2019 (c) 14,448
Puerto Rico--2.7%
A Baa1 5,500 Puerto Rico Commonwealth, Highway and Transportation Authority,
Highway Revenue Refunding Bonds, Series V, 6.625% due 7/01/2012 5,908
A1+ VMIG1++ 1,600 Puerto Rico Commonwealth, Revenue Refunding Bonds (Government Development
Bank), VRDN, 3.30% due 12/01/2015 (a) 1,600
BBB+ Baa1 2,600 Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series T, 6.375% due 7/01/2024 2,727
Total Investments (Cost--$348,418)--98.4% 372,997
Other Assets Less Liabilities--1.6% 6,085
--------
Net Assets--100.0% $379,082
========
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1996.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)FGIC Insured.
(e)FNMA/GNMA Collateralized.
(f)FSA Insured.
(g)Prerefunded.
(h)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at October 31, 1996.
++Highest short-term rating by Moody's Investors Service, Inc.
*Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
</TABLE>
F-6
<PAGE>
<TABLE>
FINANCIAL INFORMATION
<CAPTION>
Statement of Assets, Liabilities and Capital as of October 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$348,418,146) (Note 1a) $372,996,680
Cash 72,103
Interest receivable 6,593,159
Deferred organization expenses (Note 1e) 1,859
Prepaid expenses and other assets 14,186
------------
Total assets 379,677,987
------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) $ 342,117
Investment adviser (Note 2) 160,108 502,225
------------
Accrued expenses and other liabilities 94,261
------------
Total liabilities 596,486
------------
Net Assets: Net assets $379,081,501
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (4,800 shares
of AMPS* issued and outstanding at $25,000 per share
liquidation preference) $120,000,000
Common Stock, par value $.10 per share (16,781,559 shares
issued and outstanding) $ 1,678,156
Paid-in capital in excess of par 233,789,454
Undistributed investment income--net 2,952,622
Accumulated realized capital losses on investments--net
(Note 5) (3,917,265)
Unrealized appreciation on investments--net 24,578,534
------------
Total--Equivalent to $15.44 net asset value per Common Stock
(market price--$14.875) 259,081,501
------------
Total capital $379,081,501
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
F-7
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
October 31, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 21,942,622
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 1,875,520
Commission fees (Note 4) 303,840
Professional fees 79,003
Accounting services (Note 2) 64,467
Transfer agent fees 54,508
Printing and shareholder reports 43,314
Custodian fees 30,347
Listing fees 24,635
Directors' fees and expenses 23,107
Pricing fees 10,829
Amortization of organization expenses (Note 1e) 5,814
Other 21,547
------------
Total expenses 2,536,931
------------
Investment income--net 19,405,691
------------
Realized & Realized gain on investments--net 279,008
Unrealized Gain on Change in unrealized appreciation on investments--net 4,438,485
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 24,123,184
============
See Notes to Financial Statements.
</TABLE>
F-8
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 19,405,691 $ 19,809,357
Realized gain (loss) on investments--net 279,008 (4,196,257)
Change in unrealized appreciation/depreciation on
investments--net 4,438,485 29,929,032
------------ ------------
Net increase in net assets resulting from operations 24,123,184 45,542,132
------------ ------------
Dividends & Investment income--net:
Distributions to Common Stock (15,619,604) (15,159,571)
Shareholders Preferred Stock (4,164,120) (4,189,584)
(Note 1f): Realized gain on investments--net:
Common Stock -- (4,134,976)
Preferred Stock -- (741,300)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (19,783,724) (24,225,431)
------------ ------------
Net Assets: Total increase in net assets 4,339,460 21,316,701
Beginning of year 374,742,041 353,425,340
------------ ------------
End of year* $379,081,501 $374,742,041
============ ============
<FN>
*Undistributed investment income--net $ 2,952,622 $ 3,330,655
============ ============
See Notes to Financial Statements.
</TABLE>
F-9
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
For the Period
The following per share data and ratios have been derived Feb. 28,
from information provided in the financial statements. For the 1992++ to
Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.18 $ 13.91 $ 16.60 $ 14.03 $ 14.18
Operating -------- -------- -------- -------- --------
Performance: Investment income--net 1.16 1.18 1.23 1.22 .77
Realized and unrealized gain (loss) on
investments--net .28 1.53 (2.65) 2.62 (.07)
-------- -------- -------- -------- --------
Total from investment operations 1.44 2.71 (1.42) 3.84 .70
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.93) (.90) (1.00) (.99) (.55)
Realized gain on investments--net -- (.25) (.07) (.08) --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders (.93) (1.15) (1.07) (1.07) (.55)
-------- -------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock -- -- -- -- (.02)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.25) (.25) (.19) (.18) (.14)
Realized gain on investments--net -- (.04) (.01) (.02) --
Capital charge resulting from issuance of
Preferred Stock -- -- -- -- (.14)
Total effect of Preferred Stock activity (.25) (.29) (.20) (.20) (.28)
-------- -------- -------- -------- --------
Net asset value, end of period $ 15.44 $ 15.18 $ 13.91 $ 16.60 $ 14.03
======== ======== ======== ======== ========
Market price per share, end of period $ 14.875 $ 13.375 $ 12.125 $ 15.625 $ 14.50
======== ======== ======== ======== ========
Total Investment Based on market price per share 18.68% 20.62% (16.36%) 15.56% .43%+++
Return:** ======== ======== ======== ======== ========
Based on net asset value per share 8.54% 19.33% (9.69%) 26.88% 2.79%+++
======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .67% .69% .66% .69% .54%*
Net Assets:*** ======== ======== ======== ======== ========
Expenses .67% .69% .66% .69% .71%*
======== ======== ======== ======== ========
Investment income--net 5.16% 5.48% 5.44% 5.35% 5.65%*
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end of
Data: period (in thousands) $259,082 $254,742 $233,425 $278,522 $233,502
======== ======== ======== ======== ========
Preferred Stock outstanding, end of period
(in thousands) $120,000 $120,000 $120,000 $120,000 $120,000
======== ======== ======== ======== ========
Portfolio turnover 67.48% 69.59% 78.89% 21.68% 28.75%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,159 $ 3,123 $ 2,945 $ 3,321 $ 2,946
======== ======== ======== ======== ========
Dividends Per Share Series A--Investment income--net $ 875 $ 882 $ 694 $ 547 $ 449
On Preferred Stock ======== ======== ======== ======== ========
Outstanding:++++++ Series B--Investment income--net $ 860 $ 864 $ 615 $ 688 $ 481
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value,
may result in substantially different returns. Total investment
returns exclude the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Commencement of Operations.
++++The Fund's Preferred Stock was issued on April 10, 1992.
++++++Dividends per share have been adjusted to reflect a two-for-
one stock split that occurred on December 1, 1994.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield California Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund determines and makes
available for publication the net asset value of its Common Stock on
a weekly basis. The Fund's Common Stock is listed on the New York
Stock Exchange under the symbol MYC. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options, which are traded on exchanges, are valued
at their last sale price as of the close of such exchanges or,
lacking any sales, at the last available bid price. Securities with
remaining maturities of sixty days or less are valued at amortized
cost, which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the
Board of Directors of the Fund, including valuations furnished by a
pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the
general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
F-11
<PAGE>
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1996 were $239,863,386 and
$235,521,062, respectively.
Net realized and unrealized gains (losses) as of October 31, 1996
were as follows:
Realized Unrealized
Gains Gains
(Losses)
Long-term investments $ 1,286,129 $24,578,534
Short-term investments (1,215) --
Financial futures contracts (1,005,906) --
----------- -----------
Total $ 279,008 $24,578,534
=========== ===========
As of October 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $24,578,534, all of which related to
appreciated securities. The aggregate cost of investments at
October 31, 1996 for Federal income tax purposes was $348,418,146.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of the holders of Common Stock.
Common Stock
For the year ended October 31, 1996, shares issued and outstanding
remained constant at 16,781,559. At October 31, 1996, total paid-in
capital amounted to $235,467,610.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund that entitle their holders to receive cash
dividends at an annual rate that may vary for the successive
dividend periods. The yields in effect at October 31, 1996 were as
follows: Series A, 3.25% and Series B, 3.00%.
As of October 31, 1996, there were 4,800 AMPS shares authorized,
issued and outstanding with a liquidation preference of $25,000 per
share.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the year ended
October 31, 1996, MLPF&S, an affiliate of FAM, earned $200,611 as
commissions.
5. Capital Loss Carryforward:
At October 31, 1996, the Fund had a net capital loss carryforward of
approximately $2,658,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
6. Subsequent Event:
On November 8, 1996, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.078926 per share, payable on November 27, 1996 to shareholders
of record as of November 18, 1996.
F-12
<PAGE>
Unaudited Financial Statements for MuniYield California Fund, Inc. for the Six-
Month Period Ended April 30, 1997
F-13
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California--96.3%
<S> <S> <C> <S> <C>
Anaheim, California, Public Financing Authority, Lease Revenue Bonds (Public
Improvement Project), Sub-Series C (f):
AAA Aaa $22,750 5.95%** due 9/01/2022 $ 5,087
AAA Aaa 10,000 5.98%** due 9/01/2023 2,105
AAA Aaa 5,000 6%** due 9/01/2025 932
AAA Aaa 19,430 6%** due 9/01/2026 3,389
AAA Aaa 10,000 6.05%** due 9/01/2029 1,456
California Health Facilities Financing Authority Revenue Bonds:
AA Aa3 1,000 (Kaiser Permanente), Series A, 7% due 12/01/2010 1,091
AAA Aaa 2,000 (Kaiser Permanente), Series A, 7% due 10/01/2018 (c) 2,131
AAA Aaa 1,000 Refunding (Adventist Health), Series A, 6.50% due 3/01/2014 (c) 1,060
AAA Aaa 2,000 Refunding (Insured Catholic Health Facility), Series B, 5% due 7/01/2014 (b) 1,838
AAA Aaa 4,085 (San Diego Hospital Association), Series A, 6.70% due 10/01/2010 (c) 4,396
NR* A 2,835 (Scripps Research Institute), Series A, 6.625% due 7/01/2018 3,022
A+ A 3,600 (Sutter Health Hospital), Series 89-A, 6.70% due 1/01/2013 3,732
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 1,105 AMT, Series C, 7.45% due 8/01/2011 1,138
AA- Aa 2,585 AMT, Series E-1, 6.70% due 8/01/2025 2,674
AA- Aa 4,955 AMT, Series F-1, 7% due 8/01/2026 5,226
AA- Aa 970 Series D, 7.25% due 8/01/2017 1,020
AA- Aa 2,850 California HFA, Revenue Bonds, RIB, AMT, 9.112% due 8/01/2023 (h) 2,982
A1+ NR* 100 California Pollution Control Financing Authority, PCR, Refunding (Pacific Gas
and Electric Co.), VRDN, Series C, 4.15% due 11/01/2026 (a) 100
California Pollution Control Financing Authority, PCR (Southern California Edison),
VRDN (a):
A1 VMIG1++ 700 Series A, 4.10% due 2/28/2008 700
A1 VMIG1++ 800 Series B, 4.10% due 2/28/2008 800
NR* P1 2,100 California Pollution Control Financing Authority, Resource Recovery Revenue Bonds
(Delano Project), VRDN, AMT, Series 1991, 4.45% due 8/01/2019 (a) 2,100
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield California Fund, Inc.'s
portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-14
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
A1+ VMIGI++ $1,400 California Pollution Control Financing Authority, Solid Waste Disposal
Revenue Bonds (Shell Oil Co.--Martinez Project), VRDN, AMT, Series A,
4.15% due 10/01/2024 (a) $ 1,400
AA Aa 5,000 California State Department of Water Resources, Water System Revenue Bonds
(Central Valley Project), Series O, 5% due 12/01/2022 4,482
California State Public Works Board, Lease Revenue Bonds (g):
A Aaa 3,000 (California Community College), Series A, 6.75% due 9/01/2001 3,295
A Aaa 6,800 (Department of Corrections--Monterey County, Soledad II), Series A, 7%
due 11/01/2004 7,805
A A 3,600 (Various California State University Projects), Series A, 6.625% due 10/01/2002 3,964
A Aaa 9,800 (Various California State University Projects), Series A, 6.70% due 10/01/2002 10,860
A Aaa 3,535 (Various Community College Projects), Series B, 7% due 3/01/2004 4,023
SP1+ MIG1++ 2,200 California State, RAN, Series A, 4.50% due 6/30/1997 2,202
AA Aa 4,750 California Statewide Community Development Authority Revenue Bonds, COP
(Saint Joseph Health System Group), 6.625% due 7/01/2021 5,133
A+ Aaa 3,000 Contra Costa County, California, COP (Merrithew Memorial Hospital),
6.60% due 11/01/2002 (g) 3,303
BBB NR* 1,000 Contra Costa County, California, Public Financing Authority, Tax Allocation Revenue
Refunding Bonds, Series A, 7.10% due 8/01/2022 1,061
AAA Aaa 2,000 Cucamonga County, California, Water District Facilities Refinancing Bonds, COP,
6.50% due 9/01/2022 (d) 2,132
AAA Aaa 395 Culver City, California, Redevelopment Finance Authority Revenue Bonds (Senior Lien
Project Loans), Series A, 6.75% due 11/01/2015 (b) 422
East Bay, California, Municipal Utility District, Water System Subordinated Revenue
Refunding Bonds (d):
AAA Aaa 1,750 5% due 6/01/2016 1,607
AAA Aaa 2,000 5% due 6/01/2026 1,789
AAA Aaa 1,000 El Cajon, California, Redevelopment Agency, Tax Allocation Bonds (El Cajon
Redevelopment Project), 6.60% due 10/01/2022 (b) 1,074
BBB Baa 1,875 Inglewood, California, Public Financing Authority Revenue Bonds (Manchester-
Prairie-North Inglewood Industrial Park Project), Series B, 7% due 5/01/2022 1,990
AAA Aaa 3,645 Los Angeles, California, Community Redevelopment Agency, Tax Allocation Refunding
Bonds (Bunker Hill), Series H, 6.50% due 12/01/2015 (f) 3,918
A+ Aa3 3,600 Los Angeles, California, Department of Water and Power, Electric Plant Revenue
Refunding Bonds, 6.375% due 2/01/2020 3,744
AAA Aaa 3,925 Los Angeles, California, Department of Water and Power, Waterworks Revenue Bonds,
6.30% due 7/01/2024 (c) 4,097
Los Angeles, California, Harbor Department Revenue Bonds:
AA Aa 4,240 AMT, Series B, 6.60% due 8/01/2015 4,532
AA Aa 6,855 AMT, Series B, 6.625% due 8/01/2019 7,295
AAA Aaa 4,000 RITR, 8.345% due 11/01/2026 (c)(h) 4,230
AAA Aaa 3,000 Los Angeles, California, Wastewater System Revenue Bonds, Series D, 6.625% due
12/01/2012 (c) 3,213
AAA Aaa 5,000 Los Angeles County, California, COP (Correctional Facilities Project), 6.50% due
9/01/2000 (c)(g) 5,388
</TABLE>
F-15
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
Los Angeles County, California, Metropolitan Transportation Authority, Sales
Tax Revenue Bonds:
AAA Aaa $ 7,875 (Proposition C), Second Series A, 5% due 7/01/2025 (b) $ 7,035
AAA Aaa 5,000 Refunding (Proposition A), Series A, 5% due 7/01/2021 (d) 4,436
AA- Aaa 6,500 Los Angeles County, California, Transportation Commission, Sales Tax Revenue
Bonds, Series A, 6.75% due 7/01/2001 (g) 7,121
M-S-R Public Power Agency, California, Revenue Bonds (San Juan Project):
A A3 5,000 Refunding, Series H, 5.90% due 7/01/2020 4,950
AAA Aaa 6,155 Series E, 6.50% due 7/01/2017 (c) 6,584
Metropolitan Water District, Southern California Waterworks Revenue Bonds:
AA Aa 6,000 6.625% due 7/01/2001(g) 6,538
AAA Aaa 2,000 Refunding, Series B, 5% due 7/01/2014 (c) 1,858
AA Aa 6,100 Series C, 5% due 7/01/2027 5,448
AAA Aaa 5,000 Mountain View, California, Tax Allocation Bonds (Shoreline Regional Community
Park), Series A, 5.50% due 8/01/2021 (c) 4,818
AAA Aaa 2,500 Northern California Power Agency, Multiple Capital Facilities Revenue Bonds, RIB,
9.04% due 9/02/2025 (c)(h) 2,831
AAA Aaa 7,840 Orange County, California, Local Transportation Authority, Sales Tax Revenue
Bonds, RITR, Series B, 8.27% due 2/14/2011 (d)(h) 8,310
A NR* 5,000 Palmdale, California, Civic Authority, Revenue Refunding Bonds (Merged
Redevelopment Project), Series A, 6.60% due 9/01/2034 5,304
AAA Aaa 3,700 Pittsburg, California, Public Financing Authority, Wastewater Revenue Refunding
Bonds, Series A, 5.125% due 6/01/2015 (d) 3,454
AAA Aaa 3,905 Rancho Cucamonga, California, Redevelopment Agency, Tax Allocation Bonds
(Rancho Redevelopment Project), 6.75% due 9/01/2020 (c) 4,163
NR* A2 3,750 Rancho Mirage, California, Joint Powers Financing Authority, COP (Eisenhower
Memorial Hospital), 7% due 3/01/2002 (g) 4,160
AAA Aaa 2,225 Redding, California, Joint Powers Financing Authority, Lease Revenue Bonds (Civic
Center Project), Series A, 5.25% due 3/01/2026 (c) 2,069
Redwood City, California, Public Financing Authority, Local Agency Revenue Bonds:
AAA Aaa 5,025 Refunding, Series A, 6.50% due 7/15/2011 (b) 5,377
A- NR* 1,500 Series B, 7.25% due 7/15/2011 1,630
AAA Aaa 7,950 Riverside County, California, Transportation Commission, Sales Tax Revenue
Refunding Bonds, Series A, 6% due 6/01/2005 (d) 8,511
A+ Aaa 18,000 Sacramento, California, City Financing Authority Revenue Bonds, 6.80% due
11/01/2001(g) 19,856
Sacramento, California, Municipal Utility District, Electric Revenue Bonds,
Series B (c):
AAA Aaa 3,180 6.25% due 8/15/2011 3,349
AAA Aaa 4,865 6.375% due 8/15/2022 5,106
AAA Aaa 4,890 San Diego, California, Public Facilities Financing Authority, Sewer Revenue
Bonds, Series B, 5.25% due 5/15/2027 (d) 4,542
</TABLE>
F-16
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (concldued)
<S> <S> <C> <S> <C>
San Francisco, California, City and County Airport Commission, International
Airport Revenue Bonds, Second Series:
AAA Aaa $ 1,500 AMT, Issue 5, 6.50% due 5/01/2019 (d) $ 1,572
AAA Aaa 4,525 AMT, Issue 6, 6.60% due 5/01/2020 (b) 4,773
AAA Aaa 11,000 Refunding, Issue 1, 6.50% due 5/01/2013 (b) 11,803
AA- A1 5,480 San Francisco, California, City and County, GO (Various Purpose Projects), UT,
Series A, 6.50% due 12/15/2010 5,760
San Francisco, California, City and County Public Utilities Commission, Water
Revenue Bonds, Series A:
AA- Aaa 5,000 6.50% due 11/01/2001 (g) 5,455
AA- Aa 2,000 Refunding, 5% due 11/01/2015 1,846
AAA Aaa 4,715 San Francisco, California, City and County Redevelopment Agency, Lease Revenue
Bonds (George R. Moscone Convention Center), 6.80% due 7/01/2019 (f) 5,167
AAA Aaa 1,310 San Jose, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Merged Area Redevelopment Project), 5.50% due 8/01/2017 (c) 1,273
AAA Aaa 3,180 Santa Clara, California, Electric Revenue Bonds, Series A, 6.50% due 7/01/2021 (c) 3,389
AAA Aaa 9,525 Santa Clara County, California, Financing Authority, Lease Revenue Bonds (VMC
Facility Replacement Project), Series A, 6.75% due 11/15/2020 (b) 10,440
AA A1 5,000 Santa Clara County, California, Transportation District, Sales Tax Revenue
Bonds, Series A, 6.75% due 6/01/2011 5,414
AAA Aaa 3,000 Santa Fe Springs, California, Redevelopment Agency, Tax Allocation Bonds
(Conservation Redevelopment Project), Series A, 6% due 9/01/2014 (c) 3,069
AAA Aaa 7,750 Santa Rosa, California, Wastewater Revenue Bonds (Sub-Regional Wastewater
Project), Series A, 6.50% due 9/01/2002 (d)(g) 8,476
AAA NR* 1,125 Southern California Home Financing Authority, S/F Mortgage Revenue Bonds, AMT,
Series A, 6.75% due 9/01/2022 (e) 1,157
A A 2,700 Southern California Public Power Authority, Power Project Revenue Refunding Bonds,
5.50% due 7/01/2020 2,516
AAA Aaa 5,000 Stockton, California, Revenue Bonds, COP (Wastewater Treatment Plant Expansion),
Series A, 6.80% due 9/01/2024 (d) 5,487
AAA Aaa 1,730 Stockton, California, Unified School District, COP (Capital Financing Projects),
5.375% due 2/01/2022 (c) 1,638
AAA Aaa 3,750 Tracy, California, Area Public Facilities Financing Agency, Special Tax Community
Facilities District, 5.50% due 10/01/2021 (c) 3,613
University of California Revenue Bonds:
A NR* 3,300 Refunding (Multiple Purpose Projects), Series A, 6.875% due 9/01/2002 (g) 3,668
AAA Aaa 6,645 RITR, Series 13, 8% due 9/01/2019 (c)(h) 7,168
</TABLE>
F-17
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Puerto Rico--2.3%
<S> <S> <C> <S> <C>
A Baa1 $5,500 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway Revenue
Refunding Bonds, Series V, 6.625% due 7/01/2012 $ 5,870
BBB+ Baa1 2,600 Puerto Rico Electric Power Authority, Power Revenue Bonds, Series T, 6.375%
due 7/01/2024 2,728
Total Investments (Cost--$350,369)--98.6% 369,670
Other Assets Less Liabilities--1.4% 5,258
--------
Net Assets--100.0% $374,928
========
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at April 30, 1997.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)FGIC Insured.
(e)FNMA/GNMA Collateralized.
(f)FSA Insured.
(g)Prerefunded.
(h)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at April 30, 1997.
++Highest short-term ratings by Moody's Investors Service, Inc.
*Not rated.
**Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
See Notes to Financial Statements.
</TABLE>
F-18
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of April 30, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$350,368,631) (Note 1a) $369,670,419
Cash 18,153
Receivables:
Securities sold $ 14,071,041
Interest receivable 6,476,262 20,547,303
------------
Deferred organization expenses (Note 1e) 1,859
Prepaid expenses and other assets 14,186
------------
Total assets 390,251,920
------------
Liabilities: Payables:
Securities purchased 14,566,290
Dividends to shareholders (Note 1f) 542,468
Investment adviser (Note 2) 152,976 15,261,734
------------
Accrued expenses and other liabilities 61,728
------------
Total liabilities 15,323,462
------------
Net Assets: Net assets $374,928,458
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (4,800 shares of
AMPS* issued and outstanding at $25,000 per share liquidation
preference) $120,000,000
Common Stock, par value $.10 per share (16,781,559 shares issued
and outstanding) $ 1,678,156
Paid-in capital in excess of par 233,789,454
Undistributed investment income--net 2,762,686
Accumulated realized capital losses on investments--net (Note 5) (2,603,626)
Unrealized appreciation on investments--net 19,301,788
------------
Total--Equivalent to $15.19 net asset value per share Common Stock
(market price--$14.75) 254,928,458
------------
Total capital $374,928,458
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
F-19
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
For the Six Months Ended
April 30, 1997
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 11,005,795
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 939,162
Commission fees (Note 4) 149,544
Professional fees 36,705
Accounting services (Note 2) 34,936
Transfer agent fees 28,115
Printing and shareholder reports 19,818
Custodian fees 14,311
Listing fees 11,939
Directors' fees and expenses 11,130
Pricing fees 4,022
Amortization of organization expenses (Note 1e) 915
Other 11,723
------------
Total expenses 1,262,320
------------
Investment income--net 9,743,475
------------
Realized & Realized gain on investments--net 1,313,639
Unrealized Gain Change in unrealized appreciation on investments--net (5,276,746)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 5,780,368
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
F-20
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 9,743,475 $ 19,405,691
Realized gain on investments--net 1,313,639 279,008
Change in unrealized appreciation on investments--net (5,276,746) 4,438,485
------------ ------------
Net increase in net assets resulting from operations 5,780,368 24,123,184
------------ ------------
Dividends to Investment income--net:
Shareholders Common Stock (7,825,946) (15,619,604)
(Note 1f): Preferred Stock (2,107,465) (4,164,120)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (9,933,411) (19,783,724)
------------ ------------
Net Assets: Total increase (decrease) in net assets (4,153,043) 4,339,460
Beginning of period 379,081,501 374,742,041
------------ ------------
End of period* $374,928,458 $379,081,501
============ ============
<FN>
*Undistributed investment income--net $ 2,762,686 $ 2,952,622
============ ============
See Notes to Financial Statements.
</TABLE>
F-21
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended For the
April 30, Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.44 $ 15.18 $ 13.91 $ 16.60 $ 14.03
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .58 1.16 1.18 1.23 1.22
Realized and unrealized gain (loss) on
investments--net (.23) .28 1.53 (2.65) 2.62
-------- -------- -------- -------- --------
Total from investment operations .35 1.44 2.71 (1.42) 3.84
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.47) (.93) (.90) (1.00) (.99)
Realized gain on investments--net -- -- (.25) (.07) (.08)
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders (.47) (.93) (1.15) (1.07) (1.07)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.13) (.25) (.25) (.19) (.18)
Realized gain on investments--net -- -- (.04) (.01) (.02)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.13) (.25) (.29) (.20) (.20)
-------- -------- -------- -------- --------
Net asset value, end of period $ 15.19 $ 15.44 $ 15.18 $ 13.91 $ 16.60
======== ======== ======== ======== ========
Market price per share, end of period $ 14.75 $ 14.875 $ 13.375 $ 12.125 $ 15.625
======== ======== ======== ======== ========
Total Investment Based on market price per share 2.31%+++ 18.68% 20.62% (16.36%) 15.56%
Return:** ======== ======== ======== ======== ========
Based on net asset value per share 1.51%+++ 8.54% 19.33% (9.69%) 26.88%
======== ======== ======== ======== ========
Ratios to Average Expenses .67%* .67% .69% .66% .69%
Net Assets:*** ======== ======== ======== ======== ========
Investment income--net 5.19%* 5.16% 5.48% 5.44% 5.35%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end of
Data: period (in thousands) $254,928 $259,082 $254,742 $233,425 $278,522
======== ======== ======== ======== ========
Preferred Stock outstanding, end of period
(in thousands) $120,000 $120,000 $120,000 $120,000 $120,000
======== ======== ======== ======== ========
Portfolio turnover 43.33% 67.48% 69.59% 78.89% 21.68%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,124 $ 3,159 $ 3,123 $ 2,945 $ 3,321
======== ======== ======== ======== ========
Dividends Series A--Investment income--net $ 449 $ 875 $ 882 $ 694 $ 547
Per Share on ======== ======== ======== ======== ========
Preferred Stock Series B--Investment income--net $ 429 $ 860 $ 864 $ 615 $ 688
Outstanding:++ ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may
result in substantially different returns. Total investment returns
exclude the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Dividends per share have been adjusted to reflect a two-for-one
stock split that occurred on December 1, 1994.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield California Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature.
The Fund determines and makes available for publication the net
asset value of its Common Stock on a weekly basis. The Fund's Common
Stock is listed on the New York Stock Exchange under the symbol MYC.
The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options, which are traded on exchanges, are valued
at their last sale price as of the close of such exchanges or,
lacking any sales, at the last available bid price. Securities with
remaining maturities of sixty days or less are valued at amortized
cost, which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the
Board of Directors of the Fund, including valuations furnished by a
pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the
general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on secur-ity transactions are
determined on the identified cost basis.
F-23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
(e) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended April 30, 1997 were $157,168,731 and
$169,164,741, respectively.
Net realized and unrealized gains (losses) as of April 30, 1997 were
as follows:
Realized Unrealized
Gains Gains (Losses)
Long-term investments $ 1,313,639 $19,303,388
Short-term investments -- (1,600)
----------- -----------
Total $ 1,313,639 $19,301,788
=========== ===========
As of April 30, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $19,301,788, of which $19,850,811 related to
appreciated securities and $549,023 related to depreciated
securities. The aggregate cost of investments at April 30, 1997 for
Federal income tax purposes was $350,368,631.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of the holders of Common Stock.
Common Stock
For the six months ended April 30, 1997, shares issued and
outstanding remained constant at 16,781,559. At April 30, 1997,
total paid-in capital amounted to $235,467,610.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund that entitle their holders to receive cash
dividends at an annual rate that may vary for the successive
dividend periods. The yields in effect at April 30, 1997 were as
follows: Series A, 3.585% and Series B, 4.00%.
As of April 30, 1997, there were 4,800 AMPS shares authorized,
issued and outstanding with a liquidation preference of $25,000 per
share.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the six months ended
April 30, 1997, Merrill Lynch, Pierce, Fenner & Smith Inc., an
affiliate of FAM, earned $88,176 as commissions.
5. Capital Loss Carryforward:
At April 30, 1997, the Fund had a net capital loss carryforward of
approximately $2,658,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
6. Subsequent Event:
On May 9, 1997, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.074230 per share, payable on May 29, 1997 to shareholders of
record as of May 19, 1997.
F-24
<PAGE>
Audited Financial Statements for Taurus MuniCalifornia Holdings, Inc. for the
Fiscal Year Ended October 31, 1996
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS,
TAURUS MUNICALIFORNIA HOLDINGS, INC.
We have audited the accompanying statement of assets, liabilities and capital
of Taurus MuniCalifornia Holdings, Inc., including the schedule of
investments, as of October 31, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended and financial highlights for each of
the years indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of October 31, 1996, by correspondence with the custodian. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Taurus MuniCalifornia Holdings, Inc. at October 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and financial highlights for each of
the indicated years, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Princeton, New Jersey
November 25, 1996
F-26
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note la)
California--98.1%
<S> <S> <C> <S> <C>
California Health Facilities Financing Authority Revenue Bonds, Series A:
AA Aa3 $3,500 (Kaiser Permanente), 6.50% due 12/01/2020 $ 3,682
NR* Aaa 1,500 Refunding (Good Samaritan Health System), 7.50% due 5/01/2000 (i) 1,682
AAA Aaa 2,180 (San Francisco Children's Hospital), 7.50% due 10/01/2000 (d)(i) 2,462
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 535 AMT, Series C, 7.60% due 8/01/2030 565
AA- Aa 1,165 AMT, Series D, 7.75% due 8/01/2010 1,234
AA- Aa 1,975 AMT, Series F-1, 7% due 8/01/2026 2,098
AA- Aa 1,750 Series A, 8.20% due 8/01/2017 1,818
AA- Aa 1,650 Series D, 7.25% due 8/01/2017 1,750
AA- Aa 1,000 California HFA, Revenue Bonds, RIB, AMT, 8.856% due 8/01/2023 (h) 1,058
California Pollution Control Financing Authority, PCR:
A+ A2 1,285 AMT (Southern California Edison Co.), Series B, 6.40% due 12/01/2024 1,330
A1 NR* 300 Refunding (Pacific Gas and Electric Co.), VRDN, AMT, Series G, 3.60%
due 2/01/2016 (g) 300
A1 A2 1,500 Refunding (San Diego Gas and Electric Co.), Series A, 5.90% due 6/01/2014 1,563
California Pollution Control Financing Authority, Resource Recovery
Revenue Bonds, VRDN, AMT (g):
A1 VMIG1++ 200 (Atlantic Richfield Company Project), Series A, 3.65% due 12/01/2024 200
NR* NR* 1,000 (Delano Project), 3.55% due 8/01/2019 1,000
NR* P1 1,100 Refunding (Ultra Power Malaga Project), Series B, 3.60% due 4/01/2017 1,100
A1+ VMIG1++ 500 California Pollution Control Financing Authority, Solid Waste Disposal
Revenue Bonds (Shell Oil Co.--Martinez Project), VRDN, AMT, Series A, 3.60%
due 10/01/2024 (g) 500
NR* Aaa 1,215 California Rural Home Mortgage Finance Authority, S/F Mortgage Revenue
Bonds (Mortgage-Backed Securities Program), AMT, Series A-1, 6.90% due
12/01/2024 (e)(j) 1,305
California State Public Works Board, Lease Revenue Bonds (Department of
Corrections--Monterey County), Series A (i):
A A 1,000 6.875% due 11/01/2004 1,157
A A 2,500 7% due 11/01/2004 2,925
NR* Aa2 400 California Statewide Community Development Authority, Solid Waste Facility
Revenue Bonds (Chevron U.S.A. Inc. Project), VRDN, AMT, 3.60% due 12/15/2024 (g) 400
AAA Aaa 3,000 Cerritos, California, Public Financing Authority, Revenue Refunding Bonds
(Los Coyotes Redevelopment Project Loan), Series A, 6.50% due 11/01/2023 (a) 3,429
NR* Baa 1,000 Clovis, California, COP, 7.20% due 8/01/2011 1,079
AAA Aaa 2,200 Compton, California, Community Redevelopment Agency, Tax Allocation Refunding
Bonds (Walnut Industrial Park), Series A, 7.50% due 8/01/1999 (a)(i) 2,436
BBB NR* 2,000 Contra Costa County, California, Public Financing Authority, Tax Allocation
Revenue Refunding Bonds, Series A, 7.10% due 8/01/2022 2,119
AAA Aaa 2,700 Cucamonga County, California, Water District Facilities Refinancing Bonds,
COP, 6.50% due 9/01/2022 (b) 2,921
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Taurus MuniCalifornia Holdings, Inc.'s
portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of ParticipationHFAHousing Finance Agency
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
F-27
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note la)
California (concluded)
<S> <S> <C> <S> <C>
NR* NR* $ 810 Cypress, California, S/F Residential Mortgage Revenue Refunding Bonds,
Series B, 7.25% due 1/01/2012 (c) $ 926
AAA Aaa 2,010 Fresno, California, Sewer Revenue Bonds, Series A-1, 6.25% due 9/01/2014 (a) 2,206
Los Angeles, California, Department of Water and Power, Electric Plant
Revenue Bonds:
A+ Aa 1,000 Refunding, 6.375% due 2/01/2020 1,052
AAA Aaa 1,000 Refunding, Second Issue, 5.25% due 11/15/2026 (b) 929
A+ Aa 1,350 RITR, 8.327% due 2/01/2020 (h) 1,494
AA Aa 2,000 Los Angeles, California, Harbor Department Revenue Bonds, AMT, Series B,
6.625% due 8/01/2019 2,125
AAA NR* 230 Los Angeles, California, S/F Home Mortgage Revenue Bonds, AMT, Issue A,
7.55% due 12/01/2023 (e) 242
A A 1,000 Los Angeles, California, State Building Authority, Lease Revenue Refunding
Bonds (California State Department of General Services), Series A, 5.625%
due 5/01/2011 1,027
AA Aa 6,200 Metropolitan Water District, Southern California Waterworks Revenue
Refunding Bonds, RIB, 6.912% due 10/30/2020 (h) 5,791
A+ A1 2,000 Pasadena, California, COP, Refunding (Old Pasadena Package Facility Project),
6.25% due 1/01/2018 2,155
AAA Aaa 1,000 Port Oakland, California, Port Revenue Bonds, AMT, Series E, 6.50% due
11/01/2016 (d) 1,071
BBB+ Baa1 1,300 San Diego, California, Redevelopment Agency Refunding Bonds, Series B, 6.625%
due 11/01/2017 1,360
San Francisco, California, City and County Airport Commission, International
Airport Revenue Bonds, Second Series:
AAA Aaa 1,500 AMT, Issue 5, 6.50% due 5/01/2019 (b) 1,601
AAA Aaa 1,650 Refunding, Issue 1, 6.30% due 5/01/2011 (a) 1,751
AAA Aaa 1,000 Refunding, Issue 1, 6.50% due 5/01/2013 (a) 1,084
AAA Aaa 2,000 Refunding, Issue 2, 6.75% due 5/01/2013 (d) 2,212
AAA Aaa 1,000 San Francisco, California, City and County Sewer Revenue Refunding Bonds, 6%
due 10/01/2011 (a) 1,041
AAA NR* 110 San Francisco, California, City and County, S/F Mortgage Revenue Bonds
(Mortgage-Backed Securities Program), AMT, 7.45% due 1/01/2024 (f) 115
AAA Aaa 500 San Mateo County, California, Joint Powers Financing Authority, Lease
Revenue Refunding Bonds (Capital Projects Program), 5% due 7/01/2021 (d) 464
AAA Aaa 2,000 Santa Clara County, California, Financing Authority, Lease Revenue Bonds
(VMC Facility Replacement Project), Series A, 6.875% due 11/15/2014 (a) 2,248
Southern California Home Financing Authority, S/F Mortgage Revenue Bonds, AMT:
AAA NR* 2,945 (Mortgage-Backed Securities Program), Series A, 7.625% due 10/01/2023 (e) 3,111
AAA NR* 175 Series B, 7.75% due 3/01/2024 (f) 185
BBB+ NR* 2,420 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste
Facility Revenue Refunding Bonds (Ogden Martin System Inc. Project), 7.625%
due 1/01/2010 2,611
A NR* 1,405 Torrance, California, Hospital Revenue Refunding Bonds (Little Company of
Mary Hospital), 6.875% due 7/01/2015 1,498
Total Investments (Cost--$74,384)--98.1% 78,412
Other Assets Less Liabilities--1.9% 1,548
-------
Net Assets--100.0% $79,960
=======
<FN>
(a)AMBAC Insured.
(b)FGIC Insured.
(c)Escrowed to Maturity.
(d)MBIA Insured.
(e)GNMA Collateralized.
(f)GNMA/FNMA Collateralized.
(g)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1996.
(h)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at October 31, 1996.
(i)Prerefunded.
(j)FHLMC Collateralized.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by
Ernst & Young LLP.
See Notes to
Financial Statements.
</TABLE>
F-28
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of October 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$74,384,463) (Note 1a) $78,411,675
Cash 16,144
Interest receivable 1,684,890
Prepaid expenses 5,783
-----------
Total assets 80,118,492
-----------
Liabilities: Payables:
Dividends to shareholders (Note 1e) $ 51,512
Investment adviser (Note 2) 33,712 85,224
-----------
Accrued expenses and other liabilities 73,761
-----------
Total liabilities 158,985
-----------
Net Assets: Net assets $79,959,507
===========
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (800 shares of AMPS*
issued and outstanding at $25,000 per share liquidation $20,000,000
preference)
Common Stock, par value $.10 per share (5,175,539
shares issued and outstanding) $ 517,554
Paid-in capital in excess of par 56,531,915
Undistributed investment income--net 722,334
Accumulated realized capital losses on investments--net (Note 5) (1,839,508)
Unrealized appreciation on investments--net 4,027,212
-----------
Total--Equivalent to $11.59 net asset value per share of
Common Stock (market price--$10.75) 59,959,507
-----------
Total capital $79,959,507
===========
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
F-29
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the
Year Ended
October 31, 1996
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 4,874,758
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 396,335
Professional fees 79,351
Commission fees (Note 4) 51,655
Transfer agent fees 37,238
Accounting services (Note 2) 35,689
Printing and shareholder reports 34,912
Directors' fees and expenses 19,245
Listing fees 16,670
Custodian fees 9,294
Pricing fees 7,313
Other 10,701
-----------
Total expenses 698,403
-----------
Investment income--net 4,176,355
-----------
Realized & Realized gain on investments--net 1,315,836
Unrealized Gain Change in unrealized appreciation on investments--net (314,866)
(Loss) on -----------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 5,177,325
(Notes 1b, 1d & 3): ===========
See Notes to Financial Statements.
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 4,176,355 $ 4,163,470
Realized gain (loss) on investments--net 1,315,836 (803,306)
Change in unrealized appreciation/depreciation on
investments--net (314,866) 6,705,589
----------- -----------
Net increase in net assets resulting from operations 5,177,325 10,065,753
----------- -----------
Dividends to Investment income--net:
Shareholders Common Stock (3,457,027) (3,406,959)
(Note 1e): Preferred Stock (696,352) (755,392)
----------- -----------
Net decrease in net assets resulting from dividends to
shareholders (4,153,379) (4,162,351)
----------- -----------
Net Assets: Total increase in net assets 1,023,946 5,903,402
Beginning of year 78,935,561 73,032,159
----------- -----------
End of year* $79,959,507 $78,935,561
=========== ===========
<FN>
*Undistributed investment income--net $ 722,334 $ 699,358
=========== ===========
See Notes to Financial Statements.
</TABLE>
F-30
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.39 $ 10.25 $ 12.51 $ 11.53 $ 11.66
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .80 .81 .84 .91 .99
Realized and unrealized gain (loss) on
investments--net .20 1.14 (2.08) 1.13 (.05)
-------- -------- -------- -------- --------
Total from investment operations 1.00 1.95 (1.24) 2.04 .94
-------- -------- -------- -------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.67) (.66) (.71) (.82) (.88)
Realized gain on investments--net -- -- (.20) (.14) (.06)
-------- -------- -------- -------- --------
Total dividends and distributions to
Common Stock shareholders (.67) (.66) (.91) (.96) (.94)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Dividends and distributions to
Preferred Stock shareholders:
Investment income--net (.13) (.15) (.09) (.08) (.12)
Realized gain on investments--net -- -- (.02) (.02) (.01)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.13) (.15) (.11) (.10) (.13)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.59 $ 11.39 $ 10.25 $ 12.51 $ 11.53
======== ======== ======== ======== ========
Market price per share, end of year $ 10.75 $ 9.50 $ 9.25 $ 13.00 $ 12.50
======== ======== ======== ======== ========
Total Investment Based on market price per share 20.63% 10.03% (22.57%) 12.52% 10.18%
Return:* ======== ======== ======== ======== ========
Based on net asset value per share 8.48% 19.05% (10.84%) 17.39% 6.77%
======== ======== ======== ======== ========
Ratios to Average Expenses .88% .93% .89% .94% .88%
Net Assets:** ======== ======== ======== ======== ========
Investment income--net 5.27% 5.50% 5.49% 5.76% 6.36%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end
Data: of year (in thousands) $ 59,960 $ 58,936 $ 53,032 $ 64,720 $ 59,030
======== ======== ======== ======== ========
Preferred Stock outstanding, end of year
(in thousands) $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000
======== ======== ======== ======== ========
Portfolio turnover 55.58% 107.20% 87.83% 52.04% 50.50%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,998 $ 3,947 $ 3,652 $ 4,236 $ 3,952
======== ======== ======== ======== ========
Dividends Per Investment income--net $ 870 $ 944 $ 557 $ 514 $ 769
Share On ======== ======== ======== ======== ========
Preferred Stock
Outstanding:++
<FN>
*Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may
result in substantially different returns. Total investment
returns exclude the effects of sales loads.
**Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Dividends per share have been adjusted to reflect a two-for-one
stock split that occurred on December 1, 1994.
See Notes to Financial Statements.
</TABLE>
F-31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Taurus MuniCalifornia Holdings, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified,
closed-end management investment company. The Fund determines and
makes available for publication the net asset value of its Common
Stock on a weekly basis. The Fund's Common Stock is listed on the
New York Stock Exchange under the symbol MCF. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options, which are traded on exchanges, are valued
at their last sale price as of the close of such exchanges or,
lacking any sales, at the last available bid price. Short-term
securities with a remaining maturity of sixty days or less are
valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margins as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
* Options--The Fund is authorized to write covered call options and
purchase put and call options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
F-32
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1996 were $41,604,041 and
$49,738,071, respectively.
Net realized and unrealized gains as of October 31, 1996 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $ 869,763 $4,027,212
Financial futures contracts 446,073 --
---------- ----------
Total $1,315,836 $4,027,212
========== ==========
As of October 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $4,026,347, of which $4,335,847
related to appreciated securities and $309,500 related to
depreciated securities. The aggregate cost of investments at October
31, 1996 for Federal income tax purposes was $74,385,328.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of the holders of Common Stock.
Common Stock
For the year ended October 31, 1996, shares issued and outstanding
remained constant at 5,175,539. At October 31, 1996, total paid-in
capital amounted to $57,049,469.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund that entitle their holders to receive cash
dividends at an annual rate that may vary for the successive
dividend periods. The yield in effect at October 31, 1996 was 3.30%.
As of October 31, 1996, there were 800 AMPS shares authorized,
issued and outstanding with a liquidation preference of $25,000 per
share.
The Fund pays commissions to certain broker-dealers at the end of
each auction at the annual rate of one-quarter of 1%, calculated on
the proceeds of each auction.
For the year ended October 31, 1996, MLPF&S, a subsidiary of ML &
Co., earned $42,729 as commissions.
5. Capital Loss Carryforward:
At October 31, 1996, the Fund had a capital loss carryforward of
approximately $944,000, of which $924,000 expires in 2002 and
$20,000 expires in 2003. This amount will be available to offset
like amounts of any future taxable gains.
6. Subsequent Event:
On November 8, 1996, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.058251 per share, payable on November 27, 1996 to shareholders
of record as of November 18, 1996.
F-33
<PAGE>
Unaudited Financial Statements for Taurus MuniCalifornia Holdings, Inc. for the
Six-Month Period Ended April 30, 1997
F-34
<PAGE>
Taurus MuniCalifornia Holdings, Inc. April 30, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
California -- 91.9%
California Health Facilities Financing Authority Revenue Bonds, Series A:
AA Aa3 $3,500 (Kaiser Permanente), 6.50% due 12/01/2020 $3,719
BB Aaa 1,500 Refunding (Good Samaritan Health System), 7.50% due 5/01/2000 (i) 1,649
AAA Aaa 2,180 (San Francisco Children's Hospital), 7.50% due 10/01/2000 (d)(i) 2,418
AAA Aaa 1,750 California Health Facilities Financing Authority, Revenue Refunding Bonds (Catholic
Insured Healthcare-West), Series E, 5.25% due 7/01/2016 (a) 1,643
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 515 AMT, Series C, 7.60% due 8/01/2030 541
AA- Aa 965 AMT, Series D, 7.75% due 8/01/2010 1,018
AA- Aa 1,975 AMT, Series F-1, 7% due 8/01/2026 2,083
AA- Aa 1,650 Series D, 7.25% due 8/01/2017 1,734
AA- AA 1,000 California HFA, Revenue Bonds, RIB, AMT, 9.112% due 8/01/2023 (h) 1,046
California Pollution Control Financing Authority, PCR, Refunding (Pacific Gas and
Electric), VRDN (g):
A1 NR* 300 AMT, Series G, 4.20% due 2/01/2016 300
A1+ NR* 1,000 Series C, 3.90% due 11/01/2026 1,000
A1+ NR* 1,800 Series F, 4.20% due 11/01/2026 1,800
AAA Aaa 1,500 California Pollution Control Financing Authority, PCR, Refunding (San Diego Gas and
Electric Co.), Series A, 5.90% due 6/01/2014 (d) 1,558
California Pollution Control Financing Authority, PCR (Southern California Edison Co.):
A+ A2 1,285 AMT, Series B, 6.40% due 12/01/2024 1,322
A1 VMIG1+ 700 VRDN, Series C, 4.10% due 2/28/2008 (g) 700
NR* Aaa 1,215 California Rural Home Mortgage Finance Authority, S/F Mortgage Revenue Bonds
(Mortgage-Backed Securities Program), AMT, Series A-1, 6.90% due 12/01/2024 (e)(j) 1,296
A Aaa 1,000 California State Public Works Board, Lease Revenue Bonds (Department of
Corrections-Monterey County), Series A, 6.875% due 11/01/2004 (i) 1,140
NR* Aa2 400 California Statewide Community Development Authority, Solid Waste Facility Revenue
Bonds (Chevron U.S.A. Inc. Project), VRDN, AMT, 4.15% due 12/15/2024 (g) 400
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Taurus MuniCalifornia Holdings, Inc. portfolio
holdings in the Schedule of Investments, we have abbreviated the names of
many of the securities according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
HFA Housing Finance Agency
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
F-35
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
AAA Aaa 3,000 Cerritos, California, Public Financing Authority, Revenue Refunding Bonds
(Los Coyotes Redevelopment Project Loan), Series A, 6.50% due 11/01/2023 (a) 3,344
A1 VMIG1+ 200 Chula Vista, California, IDR, Refunding (San Diego Gas), VRDN, Series A, 4.25%
due 7/01/2021 (g) 200
BBB NR* 2,000 Contra Costa County, California, Public Financing Authority, Tax Allocation Revenue
Refunding Bonds, Series A, 7.10% due 8/01/2022 2,123
AAA Aaa 2,700 Cucamonga County, California, Water District Facilities Refinancing Bonds, COP,
6.50% due 9/01/2022 (b) 2,878
NR* NR* 810 Cypress, California, S/F Residential Mortgage Revenue Refunding Bonds, Series B,
7.25% due 1/01/2012 (c) 907
AAA Aaa 2,010 Fresno, California, Sewer Revenue Bonds, Series A-1, 6.25% due 9/01/2014 (a) 2,172
Los Angeles, California, Department of Water and Power, Electric Plant Revenue Bonds:
A+ Aa3 1,350 RITR, 8.687% due 2/01/2020 (h) 1,460
A+ Aa3 1,000 Refunding, 6.375% due 2/01/2020 1,040
AA Aa 2,000 Los Angeles, California, Harbor Department Revenue Bonds, AMT, Series B, 6.625%
due 8/01/2019 2,128
AAA NR* 230 Los Angeles, California, S/F Home Mortgage Revenue Bonds, AMT, Issue A, 7.55%
due 12/01/2023 (e) 242
Metropolitan Water District, Southern California Waterworks Revenue Bonds, Series C:
AA Aa 1,500 5% due 7/01/2027 1,340
AAA Aaa 1,000 5% due 7/01/2027 (d) 894
A+ A1 2,000 Pasadena, California, COP, Refunding (Old Pasadena Package Facility Project),
6.25% due 1/01/2018 2,093
AAA Aaa 1,000 Port Oakland, California, Port Revenue Bonds, AMT, Series E, 6.50% due 11/01/2016 (d) 1,048
AAA Aaa 1,720 San Diego, California, IDR, RITR, 8.135% due 9/01/2018 (h) 1,795
BBB+ Baa1 1,300 San Diego, California, Redevelopment Agency Refunding Bonds (Horton Project),
Series B, 6.625% due 11/01/2017 1,370
San Francisco, California, City and County Airport Commission, International Airport
Revenue Bonds, Second Series:
AAA Aaa 1,500 AMT, Issue 5, 6.50% due 5/01/2019 (b) 1,572
AAA Aaa 1,000 Refunding, Issue 1, 6.50% due 5/01/2013 (a) 1,073
AAA Aaa 2,000 Refunding, Issue 2, 6.75% due 5/01/2013 (d) 2,177
AAA NR* 110 San Francisco, California, City and County, S/F Mortgage Revenue Bonds
(Mortgage-Backed Securities Program), AMT, 7.45% due 1/01/2024 (f) 115
AAA Aaa 1,250 San Jose, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Merged Area Redevelopment Project), 5.50% due 8/01/2017 (d) 1,214
AAA Aaa 3,500 San Mateo County, California, Joint Powers Financing Authority, Lease Revenue
Refunding Bonds (Capital Projects Program), 5% due 7/01/2021 (d) 3,193
AAA Aaa 2,000 Santa Clara County, California, Financing Authority, Lease Revenue Bonds (VMC
Facility Replacement Project), Series A, 6.875% due 11/15/2014 (a) 2,207
AAA Aaa 3,850 Santa Cruz County, California, COP, Refunding (Capital Facilities Project),
5.60% due 9/01/2023 (d) 3,813
</TABLE>
F-36
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Southern California Home Financing Authority, S/F Mortgage Revenue Bonds, AMT:
AAA NR* 2,615 (Mortgage-Backed Securities Program), Series A, 7.625% due 10/01/2023 (e) 2,751
AAA NR* 175 Series B, 7.75% due 3/01/2024 (f) 185
BBB+ NR* 2,305 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste Facility Revenue
Refunding Bonds (Ogden Martin System Inc. Project), 7.625% due 1/01/2010 2,467
A NR* 1,405 Torrance, California, Hospital Revenue Refunding Bonds (Little Company of Mary
Hospital), 6.875% due 7/01/2015 1,494
Puerto Rico -- 6.1%
A Baa1 735 Puerto Rico Commonwealth, 5.40% due 7/01/2025 685
A Baa1 2,500 Puerto Rico Commonwealth, Aqueduct and Sewer Authority Revenue Refunding Bonds,
5% due 7/01/2019 2,226
A Baa1 2,000 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway Revenue
Bonds, Series Y, 5.50% due 7/01/2036 1,878
Total Investments (Cost -- $74,496) -- 98.0% 77,451
Other Assets Less Liabilities -- 2.0% 1,572
---------
Net Assets -- 100.0% $79,023
=========
</TABLE>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) Escrowed to Maturity.
(d) MBIA Insured.
(e) GNMA Collateralized.
(f) GNMA/FNMA Collateralized.
(g) The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at April 30, 1997.
(h) The interest rate is subject to change periodically and inversely
based upon market rates. The interest rate shown is the rate in
effect at April 30, 1997.
(i) Prerefunded.
(j) FHLMC Collateralized.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
F-37
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets, Liabilities and Capital as of April 30, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $74,495,831) (Note 1a) $77,451,165
Cash 173,421
Interest receivable 1,505,602
Prepaid expenses and other assets 5,782
-----------
Total assets 79,135,970
-----------
Liabilities: Payables:
Dividends to shareholders (Note 1e) $52,338
Investment adviser (Note 2) 32,233 84,571
-----------
Accrued expenses and other liabilities 28,451
-----------
Total liabilities 113,022
-----------
Net Assets: Net assets $79,022,948
===========
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (800 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) $20,000,000
Common Stock, par value $.10 per share (5,175,539 shares issued
and outstanding) $517,554
Paid-in capital in excess of par 56,531,915
Undistributed investment income -- net 608,245
Accumulated realized capital losses on investments -- net (Note 5) (1,590,100)
Unrealized appreciation on investments -- net 2,955,334
-----------
Total -- Equivalent to $11.40 net asset value per share of Common Stock
(market price -- $10.625) 59,022,948
-----------
Total capital $79,022,948
===========
* Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
F-38
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
For the Six Months Ended
April 30, 1997
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $2,368,774
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) $197,590
Professional fees 39,495
Accounting services (Note 2) 31,324
Commission fees (Note 4) 24,491
Transfer agent fees 17,655
Printing and shareholder reports 14,024
Directors' fees and expenses 9,479
Listing fees 7,835
Custodian fees 3,804
Pricing fees 2,767
Other 7,117
----------
Total expenses 355,581
------------
Investment income -- net 2,013,193
------------
Realized & Realized gain on investments -- net 249,408
Unrealized Change in unrealized appreciation on investments -- net (1,071,878)
Gain (Loss) on ------------
Investments -- Net Increase in Net Assets Resulting from Operations $1,190,723
Net (Notes 1b, ============
1d & 3):
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $2,013,193 $4,176,355
Realized gain on investments -- net 249,408 1,315,836
Change in unrealized appreciation on investments -- net (1,071,878) (314,866)
----------- -----------
Net increase in net assets resulting from operations 1,190,723 5,177,325
----------- -----------
Dividends to Investment income -- net:
Shareholders Common Stock (1,790,530) (3,457,027)
(Note 1e): Preferred Stock (336,752) (696,352)
----------- -----------
Net decrease in net assets resulting from dividends to shareholders (2,127,282) (4,153,379)
----------- -----------
Net Assets: Total increase (decrease) in net assets (936,559) 1,023,946
Beginning of period 79,959,507 78,935,561
----------- -----------
End of period* $79,022,948 $79,959,507
============ ============
*Undistributed investment income -- net $608,245 $722,334
============ ============
See Notes to Financial Statements.
</TABLE>
F-39
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
April 30, For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $11.59 $11.39 $10.25 $12.51 $11.53
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net .40 .80 .81 .84 .91
Realized and unrealized gain (loss) on
investments -- net (.17) .20 1.14 (2.08) 1.13
-------- -------- -------- -------- --------
Total from investment operations .23 1.00 1.95 (1.24) 2.04
-------- -------- -------- -------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income -- net (.35) (.67) (.66) (.71) (.82)
Realized gain on investments -- net -- -- -- (.20) (.14)
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders (.35) (.67) (.66) (.91) (.96)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Dividends and distributions to
Preferred Stock shareholders:
Investment income -- net (.07) (.13) (.15) (.09) (.08)
Realized gain on investments -- net -- -- -- (.02) (.02)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.07) (.13) (.15) (.11) (.10)
-------- -------- -------- -------- --------
Net asset value, end of period $11.40 $11.59 $11.39 $10.25 $12.51
======== ======== ======== ======== ========
Market price per share, end of period $10.625 $10.75 $9.50 $9.25 $13.00
======== ======== ======== ======== ========
Total Based on market price per share 1.98%++++ 20.63% 10.03% (22.57%) 12.52%
Investment ======== ======== ======== ======== ========
Return:** Based on net asset value per share 1.49%++++ 8.48% 19.05% (10.84%) 17.39%
======== ======== ======== ======== ========
Ratios to
Average Expenses .90%* .88% .93% .89% .94%
Net Assets:*** ======== ======== ======== ======== ========
Investment income -- net 5.09%* 5.27% 5.50% 5.49% 5.76%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end
Data: of period (in thousands) $59,023 $59,960 $58,936 $53,032 $64,720
======== ======== ======== ======== ========
Preferred Stock outstanding, end of period
(in thousands) $20,000 $20,000 $20,000 $20,000 $20,000
======== ======== ======== ======== ========
Portfolio turnover 51.77% 55.58% 107.20% 87.83% 52.04%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $3,951 $3,998 $3,947 $3,652 $4,236
======== ======== ======== ======== ========
Dividends Investment income -- net $421 $870 $994 $557 $514
Per Share on ======== ======== ======== ======== ========
Preferred Stock
Outstanding:+
* Annualized.
** Total investment returns based on market value, which can be significantly greater or lesser
than the net asset value, may result in substantially different returns. Total investment
returns exclude the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Dividends per share have been adjusted to reflect a two-for-one stock split that occurred on
December 1, 1994.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
F-40
<PAGE>
Taurus MuniCalifornia Holdings, Inc. April 30, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Taurus MuniCalifornia Holdings, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature. The
Fund determines and makes available for publication the net asset value
of its Common Stock on a weekly basis. The Fund's Common Stock
is listed on the New York Stock Exchange under the symbol MCF. The
following is a summary of significant accounting policies followed by
the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in
the over-the-counter markets and are valued at the most recent bid price
or yield equivalent as obtained by the Fund's pricing service from
dealers that make markets in such securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued
at their closing prices as of the close of such exchanges. Options,
which are traded on exchanges, are valued at their last sale price as of
the close of such exchanges or, lacking any sales, at the last available
bid price. Short-term securities with a remaining maturity of sixty days
or less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund, which
may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the
Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the counterparty
does not perform under the contract.
. Financial futures contracts -- The Fund may purchase or sell interest rate
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon entering into
a contract, the Fund deposits and maintains as collateral such initial margins
as required by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such receipts
or payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
. Options -- The Fund is authorized to write covered call options and purchase
put and call options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium paid
(or received) is added to (or deducted from) the basis of the security
acquired or deducted from (or added to) the proceeds of the security sold.
When an option expires (or the Fund enters into a closing transaction), the
Fund realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision
is required.
(d) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Interest income is recognized on the
F-41
<PAGE>
accrual basis. Discounts and market premiums are amortized into interest income.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(e) Dividends and distributions -- Dividends from net investment income
are declared and paid monthly. Distributions of capital gains are
recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50%
of the Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the six months ended April 30, 1997 were $38,251,745 and $43,211,022,
respectively.
Net realized and unrealized gains as of April 30, 1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $249,408 $2,955,334
---------- ----------
Total $249,408 $2,955,334
========== ==========
As of April 30, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $2,955,334, of which $3,074,490 related to
appreciated securities and $119,156 related to depreciated securities.
The aggregate cost of investments at April 30, 1997 for Federal income
tax purposes was $74,495,831.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which were
initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital stock
without approval of the holders of Common Stock.
Common Stock
For the six months ended April 30, 1997, shares issued and outstanding
remained constant at 5,175,539. At April 30, 1997, total paid-in capital
amounted to $57,049,469.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of
the Fund that entitle their holders to receive cash dividends at an
annual rate that may vary for the successive dividend periods. The yield
in effect at April 30, 1997 was 3.30%.
As of April 30, 1997, there were 800 AMPS shares authorized, issued and
outstanding with a liquidation preference of $25,000 per share.
The Fund pays commissions to certain broker-dealers at the end of each
auction at the annual rate of one-quarter of 1%, calculated on the
proceeds of each auction.
For the six months ended April 30, 1997, Merrill Lynch, Pierce, Fenner &
Smith Inc., an affiliate of FAM, earned $20,295 as commissions.
5. Capital Loss Carryforward:
At October 31, 1996, the Fund had a capital loss carryforward of
approximately $944,000, of which $924,000 expires in 2002 and $20,000
expires in 2003. This amount will be available to offset like amounts of
any future taxable gains.
6. Subsequent Event:
On May 9, 1997, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of $.054495
per share, payable on May 29, 1997 to shareholders of record as of May
19, 1997.
F-42
<PAGE>
Unaudited Financial Statements for the Combined Fund on a Pro Forma Basis, as
of April 30, 1997
F-43
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA FUND, INC.
AND TAURUS MUNICALIFORNIA HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
MUNIYIELD TAURUS FOR
CALIFORNIA MUNICALIFORNIA COMBINED
California--95.5% FUND, INC. HOLDINGS, INC. FUND
- -------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Anaheim, California, Public
Financing Authority, Lease
Revenue Bonds (Public
Improvement Project), Sub-
Series C(f):
$22,750 5.95%** due 9/01/2022........ $ 5,087 $ -- $ 5,087
10,000 5.98%** due 9/01/2023........ 2,105 -- 2,105
5,000 6%** due 9/01/2025........... 932 -- 932
19,430 6%** due 9/01/2026........... 3,389 -- 3,389
10,000 6.05%** due 9/01/2029........ 1,456 -- 1,456
California Health Facilities
Financing Authority Revenue
Bonds:
1,000 (Kaiser Permanente), Series
A, 7% due 12/01/2010......... 1,091 -- 1,091
2,000 (Kaiser Permanente), Series
A, 7% due 10/01/2018(c)...... 2,131 -- 2,131
3,500 (Kaiser Permanente), Series
A, 6.50% due 12/01/2020...... -- 3,719 3,719
1,000 Refunding (Adventist Health),
Series A, 6.50% due
3/01/2014(c).................. 1,060 -- 1,060
1,500 Refunding (Good Samaritan
Health System), Series A,
7.50% due 5/01/2000(g)........ -- 1,649 1,649
2,000 Refunding (Insured Catholic
Health Facility), Series B,
5.00% due 7/01/2014(b)........ 1,838 -- 1,838
4,085 (San Diego Hospital
Association), Series A,
6.70% due 10/01/2010(c)....... 4,396 -- 4,396
2,180 (San Francisco Children's
Hospital), Series A, 7.50%
due 10/01/2000(c)(g).......... -- 2,418 2,418
2,835 (Scripps Research Institute),
Series A, 6.625% due
7/01/2018..................... 3,022 -- 3,022
3,600 (Sutter Health Hospital),
Series 89-A, 6.70% due
1/01/2013..................... 3,732 -- 3,732
1,750 California Health Facilities
Financing Authority Revenue
Refunding Bonds (Catholic
Insured Healthcare-West),
Series E, 5.25% due
7/01/2016(b).................. -- 1,643 1,643
California HFA, Home Mortgage
Revenue Bonds:
1,105 AMT, Series C, 7.45% due
8/01/2011.................... 1,138 -- 1,138
515 AMT, Series C, 7.60% due
8/01/2030.................... -- 541 541
965 AMT, Series D, 7.75% due
8/01/2010.................... -- 1,018 1,018
2,585 AMT, Series E-1, 6.70% due
8/01/2025.................... 2,674 -- 2,674
6,930 AMT, Series F-1, 7% due
8/01/2026.................... 5,226 2,083 7,309
2,620 Series D, 7.25% due
8/01/2017.................... 1,020 1,734 2,754
3,850 California HFA, Revenue
Bonds, RIB, AMT, 9.112% due
8/01/2023(h)................. 2,982 1,046 4,028
California Pollution Control
Financing Authority, PCR,
Refunding (Pacific Gas and
Electric), VRDN(a):
300 AMT, Series G, 4.20% due
2/01/2016................... -- 300 300
1,000 Series C, 3.90% due
11/01/2026.................. -- 1,000 1,000
</TABLE>
F-44
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA FUND, INC.
AND TAURUS MUNICALIFORNIA HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
MUNIYIELD TAURUS FOR
CALIFORNIA MUNICALIFORNIA COMBINED
California (continued) FUND, INC. HOLDINGS, INC. FUND
- -------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 100 Series C, 4.15% due
11/01/2026................... $ 100 $ -- $ 100
1,800 Series F, 4.20% due
11/01/2026................... -- 1,800 1,800
1,500 California Pollution Control
Financing Authority, PCR,
Refunding (San Diego Gas and
Electric Co.), Series A,
5.90% due 6/01/2014(c)....... -- 1,558 1,558
California Pollution Control
Financing Authority, PCR
(Southern California Edison
Co.):
1,285 AMT, Series B, 6.40% due
12/01/2024................... -- 1,322 1,322
700 Series C, 4.10% due
2/28/2008.................... -- 700 700
California Pollution Control
Financing Authority, PCR
(Southern California
Edison), VRDN(a):
700 Series A, 4.10% due
2/28/2008.................... 700 -- 700
800 Series B, 4.10% due
2/28/2008.................... 800 -- 800
2,100 California Pollution Control
Financing Authority,
Resource Recovery Revenue
Bonds (Delano Project),
VRDN, AMT, Series 1991,
4.45% due 8/01/2019(a)....... 2,100 -- 2,100
1,400 California Pollution Control
Financing Authority, Solid
Waste Disposal Revenue Bonds
(Shell Oil Co.-Martinez
Project), VRDN, AMT, Series
A, 4.15% due 10/01/2024(a)... 1,400 -- 1,400
1,215 California Rural Home
Mortgage Finance Authority,
S/F Mortgage Revenue Bonds
(Mortgage-Backed Securities
Program), AMT, Series A-1,
6.90% due 12/01/2024(k)(j)... -- 1,296 1,296
5,000 California State Department
of Water Resources, Water
System Revenue Bonds
(Central Valley Project),
Series O, 5% due 12/01/2022.. 4,482 -- 4,482
California State Public Works
Board, Lease Revenue Bonds:
3,000 (California Community
Colleges), Series A, 6.75%
due 9/01/2001(g)............ 3,295 -- 3,295
1,000 (Department of Corrections-
Monterey County), Series A,
6.875% due 11/01/2004(g).... -- 1,140 1,140
6,800 (Department of Corrections-
Monterey County, Soledad
II), Series A, 7% due
11/01/2004(g)............... 7,805 -- 7,805
3,600 (Various California State
University Projects), Series
A, 6.625% due 10/01/2002(g). 3,964 -- 3,964
9,800 (Various California State
University Projects), Series
A, 6.70% due 10/01/2002..... 10,860 -- 10,860
3,535 (Various Community College
Projects), Series B, 7% due
3/01/2004(g)................ 4,023 -- 4,023
2,200 California State, RAN, Series
A, 4.50% due 6/30/1997(a).... 2,202 -- 2,202
4,750 California Statewide
Community Development
Authority Revenue Bonds, COP
(Saint Joseph Health System
Group), 6.625% due
7/01/2021.................... 5,133 -- 5,133
</TABLE>
F-45
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA FUND, INC.
AND TAURUS MUNICALIFORNIA HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
MUNIYIELD TAURUS FOR
CALIFORNIA MUNICALIFORNIA COMBINED
California (continued) FUND, INC. HOLDINGS, INC. FUND
- -------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 400 California Statewide
Community Development
Authority, Solid Waste
Facility Revenue Bonds
(Chevron U.S.A. Inc.
Project), VRDN, AMT, 4.15%
due 12/15/2024(a)........... $ -- $ 400 $ 400
3,000 Cerritos, California, Public
Financing Authority, Revenue
Refunding Bonds (Los Coyotes
Redevelopment Project Loan),
Series A, 6.50% due
11/01/2023(b)............... -- 3,344 3,344
200 Chula Vista, California, IDR,
Refunding (San Diego Gas),
VRDN, Series A, 4.25% due
7/01/2021(a)................ -- 200 200
3,000 Contra Costa County,
California, COP (Merrithew
Memorial Hospital), 6.60%
due 11/01/2002(g)........... 3,303 -- 3,303
3,000 Contra Costa County,
California, Public Financing
Authority, Tax Allocation
Revenue Refunding Bonds,
Series A, 7.10% due
8/01/2022................... 1,061 2,123 3,184
4,700 Cucamonga County, California,
Water District Facilities
Refinancing Bonds, COP,
6.50% due 9/01/2022......... 2,132 2,878 5,010
395 Culver City, California,
Redevelopment Finance
Authority Revenue Bonds
(Senior Lien Project Loans),
Series A, 6.75% due
11/01/2015(b)............... 422 -- 422
810 Cypress, California, S/F
Residential Mortgage Revenue
Refunding Bonds, Series B,
7.25% due 1/01/2012(i)...... -- 907 907
3,750 East Bay, California,
Municipal Utility District,
Water System Subordinated
Revenue Refunding Bonds(d),
5% due 6/01/2016-2026....... 3,396 -- 3,396
1,000 El Cajon, California,
Redevelopment Agency, Tax
Allocation Bonds (El Cajon
Redevelopment Project),
6.60% due 10/01/2022(b)..... 1,074 -- 1,074
2,010 Fresno, California, Sewer
Revenue Bonds, Series A-1,
6.25% due 9/01/2014(b)...... -- 2,172 2,172
1,875 Inglewood, California, Public
Financing Authority Revenue
Bonds (Manchester-Prairie-
North Inglewood Industrial
Park Project), Series E, 7%
due 5/01/2022............... 1,990 -- 1,990
3,645 Los Angeles, California,
Community Redevelopment
Agency, Tax Allocation
Refunding Bonds (Bunker
Hill), Series H, 6.50% due
12/01/2015(f)............... 3,918 -- 3,918
Los Angeles, California,
Department of Water and
Power, Electric Plant
Revenue Bonds:
4,600 Refunding, 6.375% due
2/01/2020................... 3,744 1,040 4,784
1,350 RITR, 8.687% due
2/01/2020(h)................ -- 1,460 1,460
3,925 Los Angeles, California,
Department of Water and
Power, Waterworks Revenue
Bonds, 6.30% due
7/01/2024(c)................ 4,097 -- 4,097
</TABLE>
F-46
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA FUND, INC.
AND TAURUS MUNICALIFORNIA HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNIYIELD TAURUS PRO FORMA
CALIFORNIA MUNICALIFORNIA FOR
California (continued) FUND, INC. HOLDINGS, INC. COMBINED FUND
- -------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- -------------------------------------------------------------------------------
Los Angeles, California, Harbor Department Revenue Bonds:
<C> <S> <C> <C> <C>
$ 8,855 AMT, Series B, 6.625%
due 8/01/2019............ $ 7,295 $ 2,128 $ 9,423
4,240 AMT, Series B, 6.60% due
8/01/2015................ 4,532 -- 4,532
4,000 RITR, 8.345% due
11/01/2026(c)(h)......... 4,230 -- 4,230
230 Los Angeles, California,
S/F Home Mortgage
Revenue
Bonds, AMT, Issue A,
7.55% due 12/01/2023(k). -- 242 242
3,000 Los Angeles, California,
Wastewater System
Revenue
Bonds, Series D, 6.625%
due 12/01/2012(c)....... 3,213 -- 3,213
5,000 Los Angeles County,
California, COP
(Correctional
Facilities Project),
6.50% due
9/01/2000(c)(g)......... 5,388 -- 5,388
Los Angeles County,
California, Metropolitan
Transportation Authority,
Sales Tax Revenue Bonds:
7,875 (Proposition C), Second
Series A, 5% due
7/01/2025(b)............ 7,035 -- 7,035
5,000 Refunding (Proposition
A), Series A, 5% due
7/01/2021(d)............ 4,436 -- 4,436
6,500 Los Angeles County,
California,
Transportation
Commission, Sales Tax
Revenue Bonds, Series A,
6.75% due 7/01/2001(g).. 7,121 -- 7,121
M-S-R Public Power
Agency, California,
Revenue Bonds (San Juan
Project):
5,000 Refunding, Series H.
5.90% due 7/01/2020..... 4,950 -- 4,950
6,155 Series E, 6.50% due
7/01/2017(c)............ 6,584 -- 6,584
Metropolitan Water
District, Southern
California Waterworks
Revenue Bonds:
6,000 6.625% due 7/01/2001(g). 6,538 -- 6,538
1,000 Insured, 5% due
7/01/2027(c)............ -- 894 894
2,000 Refunding, Series B, 5%
due 7/01/2014(c)........ 1,858 -- 1,858
7,600 Series C, 5.00% due
7/01/2027............... 5,448 1,340 6,788
5,000 Mountain View,
California, Tax
Allocation Bonds
(Shoreline Regional
Community Park), Series A,
5.50% due 8/01/2021(c).. 4,818 -- 4,818
2,500 Northern California Power
Agency, Multiple Capital
Facilities Revenue
Bonds, RIB, 9.04% due
9/02/2025(c)(h)......... 2,831 -- 2,831
7,840 Orange County,
California, Local
Transportation
Authority, Sales Tax
Revenue Bonds, 8.27% due
2/14/2011............... 8,310 -- 8,310
5,000 Palmdale, California,
Civic Authority, Revenue
Refunding Bonds (Merged
Redevelopment Project),
Series A, 6.60% due
9/01/2034............... 5,304 -- 5,304
</TABLE>
F-47
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA FUND, INC.
AND TAURUS MUNICALIFORNIA HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
MUNIYIELD TAURUS FOR
CALIFORNIA MUNICALIFORNIA COMBINED
California (continued) FUND, INC. HOLDINGS, INC. FUND
- -------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,000 Pasadena, California, COP,
Refunding (Old Pasadena
Package Facility Project),
6.25% due 1/01/2018......... $ -- $ 2,093 $ 2,093
3,700 Pittsburg, California, Public
Financing Authority,
Wastewater Revenue Refunding
Bonds, Series A, 5.125% due
6/01/2015(d)................ 3,454 -- 3,454
1,000 Port Oakland, California,
Port Revenue Bonds, AMT,
Series E, 6.50% due
11/01/2016(c)............... -- 1,048 1,048
3,905 Rancho Cucamonga, California,
Redevelopment Agency, Tax
Allocation Bonds (Rancho
Redevelopment Project),
6.75% due 9/01/2020(c)...... 4,163 -- 4,163
3,750 Rancho Mirage, California,
Joint Powers Financing
Authority, COP (Eisenhower
Memorial Hospital), 7% due
3/01/2002(g)................ 4,160 -- 4,160
2,225 Redding, California, Joint
Powers Financing Authority,
Lease Revenue Bonds (Civic
Center Project), Series A,
5.25% due 3/01/2027(c)...... 2,069 -- 2,069
Redwood City, California,
Public Financing Authority,
Local Agency Revenue Bonds:
5,025 Refunding, Series A, 6.50%
due 7/15/2011(b)............ 5,377 -- 5,377
1,500 Series B, 7.25% due
7/15/2011................... 1,630 -- 1,630
7,950 Riverside County, California,
Transportation Commission,
Sales Tax Revenue Refunding
Bonds, Series A, 6% due
6/01/2005(d)................ 8,511 -- 8,511
18,000 Sacramento, California, City
Financing Authority Revenue
Bonds, 6.80% due
11/01/2001(g)............... 19,856 -- 19,856
Sacramento, California,
Municipal Utility District,
Electric Revenue Bonds,
Series B (c):
3,180 6.25% due 8/15/2011......... 3,349 -- 3,349
4,865 6.375% due 8/15/2022........ 5,106 -- 5,106
4,890 San Diego, California, Public
Facilities Financing
Authority, Sewer Revenue
Bonds, Series B, 5.25% due
5/15/2027(d)................ 4,542 -- 4,542
1,720 San Diego, California, IDR,
RITR, 8.135% due
9/01/2018(h)................ -- 1,795 1,795
1,300 San Diego, California,
Redevelopment Agency
Refunding Bonds (Horton
Project), Series B, 6.625%
due 11/01/2017.............. -- 1,370 1,370
San Francisco, California,
City and County Airport
Commission, International
Airport Revenue Bonds,
Second Series:
3,000 AMT, Issue 5, 6.50% due
5/01/2019(d)................ 1,572 1,572 3,144
4,525 AMT, Issue 6, 6.60% due
5/01/2020(b)................ 4,773 -- 4,773
12,000 Refunding, Issue 1, 6.50% due
5/01/2013(b)................ 11,803 1,073 12,876
2,000 Refunding, Issue 2, 6.75% due
5/01/2013(c)................ -- 2,177 2,177
5,480 San Francisco, California,
City and County, GO
(Variable Purpose Projects),
UT, Series A, 6.50% due
12/15/2010.................. 5,760 -- 5,760
</TABLE>
F-48
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA FUND, INC.
AND TAURUS MUNICALIFORNIA HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
MUNIYIELD TAURUS FOR
CALIFORNIA MUNICALIFORNIA COMBINED
California (continued) FUND, INC. HOLDINGS, INC. FUND
- --------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
San Francisco, California,
City and County Public
Utilities Commission, Water
Revenue Bonds, Series A:
$ 5,000 6.50% due 11/01/2001(g)...... $ 5,455 $ -- $ 5,455
2,000 Refunding, 5% due 11/01/2015. 1,846 -- 1,846
4,715 San Francisco, California,
City and County Redevelopment
Agency, Lease Revenue Bonds
(George R. Moscone Convention
Center), 6.80% due
7/01/2019(f)................. 5,167 -- 5,167
110 San Francisco, California,
City and County, S/F Mortgage
Revenue Bonds (Mortgage-
Backed Securities Program),
AMT, 7.45% due 1/01/2024 (e). -- 115 115
2,560 San Jose, California,
Redevelopment Agency, Tax
Allocation Refunding Bonds
(Merged Area Redevelopment
Project), 5.50% due
8/01/2017(c)................. 1,273 1,214 2,487
3,500 San Mateo County, California,
Joint Powers Financing
Authority, Lease Revenue
Refunding Bonds (Capital
Projects Program), 5% due
7/01/2021(c)................. -- 3,193 3,193
3,180 Santa Clara, California,
Electric Revenue Bonds,
Series A, 6.50% due
7/01/2021(c)................. 3,389 -- 3,389
2,000 Santa Clara County,
California, Financing
Authority, Lease Revenue
Bonds (VMC Facility
Replacement Project), Series
A, 6.875% due 11/15/2014(b).. -- 2,207 2,207
9,525 Santa Clara County,
California, Financing
Authority, Lease Revenue
Bonds (VMC Facility
Replacement Project), Series
A, 6.75% due 11/15/2020(b)... 10,440 -- 10,440
5,000 Santa Clara County,
California, Transportation
District, Sales Tax Revenue
Bonds, Series A, 6.75% due
6/01/2011.................... 5,414 -- 5,414
3,850 Santa Cruz County, California,
COP, Refunding (Capital
Facilities Project), 5.60%
due 9/01/2023(c)............. -- 3,813 3,813
3,000 Santa Fe Springs, California,
Redevelopment Agency, Tax
Allocation Bonds
(Conservation Redevelopment
Project), Series A, 6% due
9/01/2014(c)................. 3,069 -- 3,069
7,750 Santa Rosa, California,
Wastewater Revenue Bonds
(Sub-Regional Wastewater
Project), Series A, 6.50% due
9/01/2002(d)(g).............. 8,476 -- 8,476
1,125 Southern California Home
Financing Authority, S/F
Mortgage Revenue Bonds, AMT,
Series A, 6.75% due
9/01/2022(e)................. 1,157 -- 1,157
Southern California Home
Financing Authority, S/F
Mortgage Revenue Bonds, AMT:
2,615 (Mortgage Backed Securities
Program), Series A, 7.625%
due 10/01/2023(c)............ -- 2,751 2,751
175 Series B, 7.75% due
3/01/2024(e)................. -- 185 185
2,700 Southern California Public
Power Authority, Power
Project Revenue Refunding
Bonds, 5.50% due 7/01/2020... 2,516 -- 2,516
</TABLE>
F-49
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIFIELD CALIFORNIA FUND, INC.
AND TAURUS MUNICALIFORNIA HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONCLUDED)
APRIL 30, 1997
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
MUNIYIELD TAURUS FOR
CALIFORNIA MUNICALIFORNIA COMBINED
California (concluded) FUND, INC. HOLDINGS, INC. FUND
- -------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,305 Stanislaus, California,
Waste-to-Energy Financing
Agency, Solid Waste Facility
Revenue Refunding Bonds
(Ogden Martin System Inc.
Project), 7.625% due
1/01/2010................... $ -- $ 2,467 $ 2,467
5,000 Stockton, California, Revenue
Bonds (Wastewater Treatment
Plant Expansion), COP,
Series A, 6.80% due
9/01/2024(d)................ 5,487 -- 5,487
1,730 Stockton, California, Unified
School District (Capital
Financing Projects), COP,
5.375% due 2/01/2022(c)..... 1,638 -- 1,638
1,405 Torrance, California,
Hospital Revenue Refunding
Bonds (Little Company of
Mary Hospital), 6.875% due
7/01/2015................... -- 1,494 1,494
3,750 Tracy, California Area,
Public Facilities Financing
Agency, Special Tax
Community Facilities
District, 5.50% due
10/01/2021(c)............... 3,613 -- 3,613
University of California
Revenue Bonds:
3,300 Refunding (Multiple Purpose
Projects), Series A, 6.875%
due 9/01/2002(g)............ 3,668 -- 3,668
6,645 RITR, Series 13, 8% due
9/01/2019(a)(c)............. 7,168 -- 7,168
- -------------------------------------------------------------------------------
<CAPTION>
Puerto Rico -- 3.0%
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
2,500 Puerto Rico Commonwealth,
Aqueduct and Sewer Authority
Revenue Refunding Bonds, 5%
due 7/01/2019............... -- 2,226 2,226
735 Puerto Rico Commonwealth, GO,
5.40% due 7/01/2025......... -- 685 685
Puerto Rico Commonwealth,
Highway and Transportation
Authority, Highway Revenue
Refunding Bonds:
5,500 Series V, 6.625% due
7/01/2012................... 5,870 -- 5,870
2,000 Series Y, 5.50% due
7/01/2036................... -- 1,878 1,878
2,600 Puerto Rico Electric Power
Authority, Power Revenue
Bonds, Series T, 6.375% due
7/01/2024................... 2,728 -- 2,728
- -------------------------------------------------------------------------------
Total Investments (Cost --
$424,865) -- 98.5%.......... $369,670 $77,451 $447,121
======== ======= ========
</TABLE>
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at April 30,
1997.
(b) AMBAC Insured.
(c) MBIA Insured.
(d) FGIC Insured.
(e) FNMA/GNMA Collateralized.
(f) FSA Insured.
(g) Prerefunded.
(h) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at April 30, 1997.
(i) Escrowed to maturity.
(j) FHLMC Collateralized.
(k) GNMA Collateralized.
** Represents a zero coupon bond; the interest rate shown is the effective
yield at the time of purchase by the Fund.
F-50
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIFIELD CALIFORNIA FUND, INC.
AND TAURUS MUNICALIFORNIA HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONCLUDED)
APRIL 30, 1997
(IN THOUSANDS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
To simplify the listings of MuniYield California Fund, Inc.'s portfolio
holdings in the Schedule of Investments, we have abbreviated the names of many
of the securities according to the list below.
<TABLE>
<S> <C>
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue
RAN Revenue Anticipation Notes
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
</TABLE>
F-51
<PAGE>
The following unaudited pro forma Combined Statement of Assets, Liabilities
and Capital for the Combined Fund has been derived from the Statements of
Assets, Liabilities and Capital of the respective Funds at April 30, 1997 and
such information has been adjusted to give effect to the Reorganization as if
the Reorganization had occurred at April 30, 1997. The pro forma Combined
Statement of Assets, Liabilities and Capital is presented for informational
purposes only and does not purport to be indicative of the financial condition
that actually would have resulted if the Reorganization had been consummated
at April 30, 1997. The pro forma Combined Statement of Assets, Liabilities and
Capital should be read in conjunction with the Funds' financial statements and
related notes thereto which are included in this Joint Proxy Statement and
Prospectus.
COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
AS OF APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MUNIYIELD TAURUS PRO FORMA
CALIFORNIA MUNICALIFORNIA FOR
FUND, INC. HOLDINGS, INC. ADJUSTMENTS COMBINED FUND
------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value... $369,670,419 $77,451,165 $ 0 $447,121,584
Cash.................... 18,153 173,421 0 191,574
Receivables:
Securities sold........ 14,071,041 0 0 14,071,041
Interest............... 6,476,262 1,505,602 0 7,981,864
Deferred organization
expenses............... 1,859 0 0 1,859
Prepaid expenses and
other assets........... 14,186 5,782 0 19,968
------------ ----------- ----------- ------------
Total assets......... 390,251,920 79,135,970 0 469,387,890
------------ ----------- ----------- ------------
LIABILITIES:
Payables:
Securities purchased... 14,566,290 0 14,566,290
Dividends to
shareholders.......... 542,468 52,338 3,370,931(1) 3,965,737
Investment adviser..... 152,976 32,233 0 185,209
Accrued expenses and
other liabilities...... 61,728 28,451 200,000(2) 290,179
------------ ----------- ----------- ------------
Total liabilities.... 15,323,462 113,022 3,570,931 19,007,415
------------ ----------- ----------- ------------
Net Assets.............. $374,928,458 $79,022,948 $(3,570,931) $450,380,475
============ =========== =========== ============
CAPITAL:
Capital Stock
(200,000,000 shares of
each fund authorized;
200,000,000 shares as
adjusted); Preferred
Stock, par value $.05
per share (4,800 shares
of MuniYield California
AMPS*, and 800 shares
of Taurus
MuniCalifornia AMPS*
issued and outstanding
at $25,000 liquidation
preference; 5,600
shares for the Combined
Fund, as adjusted)..... $120,000,000 $20,000,000 $ 0 $140,000,000
Common Stock, par value
$.10 per share
(16,781,559 shares of
MuniYield California
Common Stock and
5,175,539 shares of
Taurus MuniCalifornia
Common Stock issued and
outstanding; 20,669,036
shares for the Combined
Fund, as adjusted)..... 1,678,156 517,554 (128,806) 2,066,904
Paid-in-capital in
excess of par.......... 233,789,454 56,531,915 (71,194) 290,250,175
Undistributed investment
income -- net.......... 2,762,686 608,245 (3,370,931) 0
Accumulated realized
capital losses on
investments -- net..... (2,603,626) (1,590,100) 0 (4,193,726)
Unrealized appreciation
on investments -- net.. 19,301,788 2,955,334 0 22,257,122
------------ ----------- ----------- ------------
Total -- Equivalent to
$15.19 net asset value
per share of MuniYield
California Common
Stock, and $11.40 net
asset value per share
of Taurus
MuniCalifornia Common
Stock and 15.02 net
asset value per share
for the Combined Fund,
as adjusted............ 254,928,458 59,022,948 (3,570,931) 310,380,475
------------ ----------- ----------- ------------
Total Capital........... $374,928,458 $79,022,948 $(3,570,931) $450,380,475
============ =========== =========== ============
</TABLE>
- --------
* Auction Market Preferred Stock (AMPS).
(1) Assumes the distribution of undistributed investment income.
(2) Reflects the charge for estimated Reorganization expenses of $200,000.
F-52
<PAGE>
The following unaudited pro forma Combined Statement of Operations for the
Combined Fund has been derived from the statements of operations of the
respective Funds for the six months ended April 30, 1997, and such information
has been adjusted to give effect to the Reorganization as if the
Reorganization had occurred on April 30, 1997. The pro forma Combined
Statement of Operations is presented for informational purposes only and does
not purport to be indicative of the results of operations that actually would
have resulted if the Reorganization had been consummated on November 1, 1996
nor which may result from future operations. The pro forma Combined Statement
of Operations should be read in conjunction with the Funds' financial
statements and related notes thereto which are included in this Joint Proxy
Statement and Prospectus.
COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MUNIYIELD TAURUS PRO FORMA
CALIFORNIA MUNICALIFORNIA FOR
FUND, INC. HOLDINGS, INC. ADJUSTMENTS COMBINED FUND
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and
amortization of
premium and discount
earned................ $11,005,795 $2,368,774 $ 0 $13,374,569
EXPENSES:
Investment advisory
fees.................. 939,162 197,590 0 1,136,752
Commission fees........ 149,544 24,491 0 174,035
Transfer agent fees.... 28,115 17,655 0 45,770
Professional fees...... 36,705 39,495 0 76,200
Accounting services.... 34,936 31,324 0 66,260
Directors' fees and
expenses.............. 11,130 9,479 0 20,609
Printing and
shareholder reports... 19,818 14,024 0 33,842
Custodian fees......... 14,311 3,804 0 18,115
Listing fees........... 11,939 7,835 0 19,774
Pricing fees........... 4,022 2,767 0 6,789
Amortization of
organization expenses. 915 0 0 915
Other.................. 11,723 7,117 200,000(1) 218,840
----------- ---------- --------- -----------
Total expenses......... 1,262,320 355,581 200,000 1,817,901
----------- ---------- --------- -----------
Investment income --
net.................. 9,743,475 2,013,193 (200,000) 11,556,668
----------- ---------- --------- -----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS -- NET:
Realized gain on
investments -- net.... 1,313,639 249,408 0 1,563,047
Change in unrealized
appreciation on
investments -- net.... (5,276,746) (1,071,878) 0 (6,348,624)
----------- ---------- --------- -----------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............ $ 5,780,368 $1,190,723 $(200,000) $ 6,771,091
=========== ========== ========= ===========
</TABLE>
- --------
(1) Reflects the charge for estimated Reorganization expenses of $200,000.
F-53
<PAGE>
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the day of September , 1997, by and between MuniYield California Fund,
Inc., a Maryland corporation ("MuniYield"), and Taurus MuniCalifornia
Holdings, Inc., a Maryland corporation ("Taurus").
PLAN OF REORGANIZATION
The reorganization will comprise (a) the acquisition by MuniYield of all of
the assets, and the assumption by MuniYield of all of the liabilities, of
Taurus in exchange solely for an equal aggregate value of newly-issued shares
of (i) common stock, par value $.10 per share, of MuniYield ("MuniYield Common
Stock") and (ii) auction market preferred stock, with a liquidation preference
of $25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to be designated Series C, of
MuniYield ("MuniYield Series C AMPS"), and (b) the subsequent distribution to
Taurus stockholders of (x) all of the MuniYield Common Stock received by
Taurus in exchange for their shares of common stock, par value $.10 per share,
of Taurus ("Taurus Common Stock") and (y) all of the MuniYield Series C AMPS
received by Taurus in exchange for their shares of auction market preferred
stock, with a liquidation preference of $25,000 per share plus an amount equal
to accumulated but unpaid dividends thereon (whether or not earned or
declared) of Taurus ("Taurus AMPS"), all upon and subject to the terms
hereinafter set forth (collectively, the "Reorganization").
In the course of the Reorganization, MuniYield Common Stock and MuniYield
Series C AMPS will be distributed to Taurus stockholders as follows: (i) each
holder of Taurus Common Stock will be entitled to receive a number of shares
of MuniYield Common Stock equal to the aggregate net asset value of the Taurus
Common Stock owned by such stockholder on the Exchange Date (as defined in
Section 7(a) of this Agreement); (ii) each holder of Taurus AMPS will be
entitled to receive a number of shares of MuniYield Series C AMPS equal to the
aggregate liquidation preference (and aggregate value) of the Taurus AMPS
owned by such stockholder on the Exchange Date. In consideration therefor, on
the Exchange Date MuniYield shall acquire all of the assets of Taurus and
shall assume all of Taurus's obligations and liabilities then existing,
whether absolute, accrued, contingent or otherwise. It is intended that the
Reorganization described in this Plan shall be a reorganization within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as
amended (the "Code"), and any successor provision.
Prior to the Exchange Date, each of the Funds shall declare a dividend or
dividends which, together with all such previous dividends, shall have the
effect of distributing to its stockholders all of its net investment company
taxable income for the period from October 31, 1996 to and including the
Exchange Date, if any (computed without regard to any deduction or dividends
paid), and all of its net capital gain, if any, realized for the period from
October 31, 1996 to and including the Exchange Date. In this regard, the last
dividend period for the Taurus AMPS prior to the Exchange Date may be shorter
than the dividend period for such AMPS determined as set forth in the
applicable Articles Supplementary.
Separate Articles Supplementary to MuniYield's Articles of Incorporation
establishing the powers, rights and preferences of the MuniYield Series C AMPS
will have been filed with the State Department of Assessments and Taxation of
Maryland (the "Maryland Department") prior to the closing of the
Reorganization.
As promptly as practicable after the liquidation of Taurus pursuant to the
Reorganization, Taurus shall be dissolved in accordance with the laws of the
State of Maryland and will terminate its registration under the Investment
Company Act of 1940, as amended (the "1940 Act").
I-1
<PAGE>
AGREEMENT
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, MuniYield and Taurus hereby agree as follows:
1.REPRESENTATIONS AND WARRANTIES OF MUNIYIELD.
MuniYield represents and warrants to, and agrees with, Taurus that:
(a) MuniYield is a corporation duly organized, validly existing and in
good standing in conformity with the laws of the State of Maryland, and has
the power to own all of its assets and to carry out this Agreement.
MuniYield has all necessary Federal, state and local authorizations to
carry on its business as it is now being conducted and to carry out this
Agreement.
(b) MuniYield is duly registered under the 1940 Act as a non-diversified,
closed-end management investment company (File No. 811-6499), and such
registration has not been revoked or rescinded and is in full force and
effect. MuniYield has elected and qualified for the special tax treatment
afforded regulated investment companies ("RICs") under Sections 851-855 of
the Code at all times since its inception, and intends to continue to so
qualify both until consummation of the Reorganization and thereafter.
(c) MuniYield has full power and authority to enter into and perform its
obligations under this Agreement. The execution, delivery and performance
of this Agreement has been duly authorized by all necessary action of its
Board of Directors and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects
of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(d) Taurus has been furnished with MuniYield's Annual Report to
Stockholders for the year ended October 31, 1996, and the audited financial
statements appearing therein, having been examined by Deloitte & Touche
LLP, independent public accountants, fairly present the financial position
of MuniYield as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(e) Taurus has been furnished with MuniYield's Semi-Annual Report to
Stockholders for the six months ended April 30, 1997, and the unaudited
financial statements appearing therein fairly present the financial
position of MuniYield as of the respective dates indicated, in conformity
with generally accepted accounting principles applied on a consistent
basis.
(f) An unaudited statement of assets, liabilities and capital of
MuniYield and an unaudited schedule of investments of MuniYield, each as of
the Valuation Time (as defined in Section 3(d) of this Agreement), will be
furnished to Taurus at or prior to the Exchange Date for the purpose of
determining the number of shares of MuniYield Common Stock and MuniYield
Series C AMPS to be issued pursuant to Section 4 of this Agreement; each
will fairly present the financial position of MuniYield as of the Valuation
Time in conformity with generally accepted accounting principles applied on
a consistent basis.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of MuniYield, threatened against MuniYield
which assert liability on the part of MuniYield or which materially affect
its financial condition or its ability to consummate the Reorganization.
MuniYield is not charged with or, to the best of its knowledge, threatened
with any violation or investigation of any possible violation of any
provisions of any Federal, state or local law or regulation or
administrative ruling relating to any aspect of its business.
(h) MuniYield is not a party to or obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or any
contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under
this Agreement, except insofar as MuniYield and Taurus have mutually agreed
to amend such contract or other commitment or obligation to cure any
potential violation as a condition precedent to the Reorganization.
I-2
<PAGE>
(i) There are no material contracts outstanding to which MuniYield is a
party that have not been disclosed in the N-14 Registration Statement (as
defined in subsection (l) below) or will not otherwise be disclosed to
Taurus prior to the Valuation Time.
(j) MuniYield has no known liabilities of a material amount, contingent
or otherwise, other than those shown on MuniYield's statements of assets,
liabilities and capital referred to above, those incurred in the ordinary
course of its business as an investment company since April 30, 1997 and
those incurred in connection with the Reorganization. As of the Valuation
Time, MuniYield will advise Taurus in writing of all known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MuniYield of the
Reorganization, except such as may be required under the Securities Act of
1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the 1940 Act or state securities laws.
(l) The registration statement filed by MuniYield on Form N-14 relating
to the MuniYield Common Stock and the MuniYield Series C AMPS to be issued
pursuant to this Agreement, which includes the joint proxy statement of
MuniYield and Taurus and the prospectus of MuniYield with respect to the
transaction contemplated herein, and any supplement or amendment thereto or
to the documents therein (as amended, the "N-14 Registration Statement"),
on its effective date, at the time of the stockholders' meetings referred
to in Section 6(a) of this Agreement and at the Exchange Date, insofar as
it relates to MuniYield (i) complied or will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act
and the rules and regulations thereunder and (ii) did not or will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and the joint proxy statement and
prospectus included therein did not or will not contain any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by MuniYield for
use in the N-14 Registration Statement as provided in Section 6(e) of this
Agreement.
(m) MuniYield is authorized to issue 200,000,000 shares of capital stock,
of which 2,400 shares have been designated as Series A AMPS, 2,400 shares
have been designated as Series B AMPS (collectively, the "MuniYield AMPS"),
and 199,995,200 shares have been designated as common stock, par value $.10
per share, each outstanding share of which is fully paid, nonassessable and
has full voting rights.
(n) The MuniYield Common Stock and MuniYield Series C AMPS to be issued
to Taurus pursuant to this Agreement will have been duly authorized and,
when issued and delivered pursuant to this Agreement, will be legally and
validly issued and will be fully paid and nonassessable and will have full
voting rights, and no stockholder of MuniYield will have any preemptive
right of subscription or purchase in respect thereof.
(o) At or prior to the Exchange Date, the MuniYield Common Stock and
MuniYield Series C AMPS to be transferred to Taurus on the Exchange Date
will be duly qualified for offering to the public in all states of the
United States in which the sale of shares of Taurus presently are
qualified, and there are a sufficient number of such shares registered
under the 1933 Act and with each pertinent state securities commission to
permit the transfers contemplated by this Agreement to be consummated.
(p) At or prior to the Exchange Date, MuniYield will have obtained any
and all regulatory, Director and stockholder approvals necessary to issue
the MuniYield Common Stock and MuniYield Series C AMPS to Taurus.
2. REPRESENTATIONS AND WARRANTIES OF TAURUS.
Taurus represents and warrants to, and agrees with, MuniYield that:
I-3
<PAGE>
(a) Taurus is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland, and has the
power to own all of its assets and to carry out this Agreement. Taurus has
all necessary Federal, state and local authorizations to carry on its
business as it is now being conducted and to carry out this Agreement.
(b) Taurus is duly registered under the 1940 Act as a non-diversified,
closed-end management investment company (File No. 811-5882), and such
registration has not been revoked or rescinded and is in full force and
effect. Taurus has elected and qualified for the special tax treatment
afforded RICs under Sections 851-855 of the Code at all times since its
inception and intends to continue to so qualify through its final taxable
year ending upon liquidation.
(c) As used in this Agreement, the term "Investments" shall mean (i) the
investments of Taurus shown on the schedule of its investments as of the
Valuation Time furnished to MuniYield; and (ii) all other assets owned by
Taurus or liabilities incurred as of the Valuation Time.
(d) Taurus has full power and authority to enter into and perform its
obligations under this Agreement. The execution, delivery and performance
of this Agreement has been duly authorized by all necessary action of its
Board of Directors, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects
of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) MuniYield has been furnished with Taurus' Annual Report to
Stockholders for the year ended October 31, 1996, and the audited financial
statements appearing therein, having been examined by Ernst & Young LLP,
independent public accountants, fairly present the financial position of
Taurus as of the respective dates indicated, in conformity with generally
accepted accounting principles applied on a consistent basis.
(f) MuniYield has been furnished with Taurus' Semi-Annual Report to
Stockholders for the six months ended April 30, 1997, and the unaudited
financial statements appearing therein fairly present the financial
position of Taurus as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(g) An unaudited statement of assets, liabilities and capital of Taurus
and an unaudited schedule of investments of Taurus, each as of the
Valuation Time, will be furnished to MuniYield at or prior to the Exchange
Date for the purpose of determining the number of shares of MuniYield
Common Stock and MuniYield Series C AMPS to be issued to Taurus pursuant to
Section 4 of this Agreement; and each will fairly present the financial
position of Taurus as of the Valuation Time in conformity with generally
accepted accounting principles applied on a consistent basis.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Taurus, threatened against Taurus which
assert liability on the part of Taurus or which materially affect its
financial condition or its ability to consummate the Reorganization. Taurus
is not charged with or, to the best of its knowledge, threatened with any
violation or investigation of any possible violation of any provisions of
any Federal, state or local law or regulation or administrative ruling
relating to any aspect of its business.
(i) There are no material contracts outstanding to which Taurus is a
party that have not been disclosed in the N-14 Registration Statement or
will not otherwise be disclosed to MuniYield prior to the Valuation Time.
(j) Taurus is not a party to or obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or any
contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under
this Agreement, except insofar as MuniYield and Taurus have mutually agreed
to amend such contract or other commitment or obligation to cure any
potential violation as a condition precedent to the Reorganization.
(k) Taurus has no known liabilities of a material amount, contingent or
otherwise, other than those shown on its statements of assets, liabilities
and capital referred to above, those incurred in the ordinary
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course of its business as an investment company since April 30, 1997, and
those incurred in connection with the Reorganization. As of the Valuation
Time, Taurus will advise MuniYield in writing of all known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time.
(l) Taurus has filed, or has obtained extensions to file, all Federal,
state and local tax returns which are required to be filed by it, and has
paid or has obtained extensions to pay, all Federal, state and local taxes
shown on said returns to be due and owing and all assessments received by
it, up to and including the taxable year in which the Exchange Date occurs.
All tax liabilities of Taurus have adequately been provided for on its
books, and no tax deficiency or liability of Taurus has been asserted and
no question with respect thereto has been raised by the Internal Revenue
Service (the "IRS") or by any state or local tax authority for taxes in
excess of those already paid, up to and including the taxable year in which
the Exchange Date occurs.
(m) At both the Valuation Time and the Exchange Date, Taurus will have
full right, power and authority to sell, assign, transfer and deliver the
Investments. At the Exchange Date, subject only to the delivery of the
Investments as contemplated by this Agreement, Taurus will have good and
marketable title to all of the Investments, and MuniYield will acquire all
of the Investments free and clear of any encumbrances, liens or security
interests and without any restrictions upon the transfer thereof (except
those imposed by the Federal or state securities laws and those
imperfections of title or encumbrances as do not materially detract from
the value or use of the Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Taurus of the
Reorganization, except such as may be required under the 1933 Act, the 1934
Act, and the 1940 Act or state securities laws (which term as used herein
shall include the laws of the District of Columbia and Puerto Rico).
(o) The N-14 Registration Statement, on its effective date, at the time
of the stockholders' meetings referred to in Section 6(a) of this Agreement
and on the Exchange Date, insofar as it relates to Taurus (i) complied or
will comply in all material respects with the provisions of the 1933 Act,
the 1934 Act and the 1940 Act and the rules and regulations thereunder, and
(ii) did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading; and the joint proxy
statement and prospectus included therein did not or will not contain any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this subsection shall apply only to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by Taurus for
use in the N-14 Registration Statement as provided in Section 6(e) of this
Agreement.
(p) Taurus is authorized to issue 200,000,000 shares of capital stock, of
which 800 shares have been designated as AMPS and 199,999,200 shares have
been designated as common stock, par value $.10 per share, each outstanding
share of which is fully paid, nonassessable and has full voting rights.
(q) All of the issued and outstanding shares of Taurus Common Stock and
Taurus AMPS were offered for sale and sold in conformity with all
applicable Federal and state securities laws.
(r) The books and records of Taurus made available to MuniYield and/or
its counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of Taurus.
(s) Taurus will not sell or otherwise dispose of any of the shares of
MuniYield Common Stock or MuniYield Series C AMPS to be received in the
Reorganization, except in distribution to the stockholders of Taurus as
provided in Section 4 of this Agreement.
3. THE REORGANIZATION.
(a) Subject to receiving the requisite approvals of the stockholders of each
of MuniYield and Taurus and to the other terms and conditions contained
herein, Taurus agrees to convey, transfer and deliver to MuniYield for
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the benefit of MuniYield, and MuniYield agrees to acquire from Taurus for the
benefit of MuniYield, on the Exchange Date all of the Investments (including
interest accrued as of the Valuation Time on debt instruments) of Taurus, and
assume all of the liabilities of Taurus, in exchange solely for that number of
shares of MuniYield Common Stock and MuniYield Series C AMPS provided in
Section 4 of this Agreement. Pursuant to this Agreement, as soon as
practicable after the Exchange Date Taurus will distribute all shares of
MuniYield Common Stock and MuniYield Series C AMPS received by it to its
stockholders in exchange for their corresponding shares of Taurus Common Stock
and Taurus AMPS. Such distribution shall be accomplished by the opening of
stockholder accounts on the stock ledger records of MuniYield in the amounts
due the stockholders of Taurus based on their respective holdings in Taurus as
of the Valuation Time.
(b) Prior to the Exchange Date, each of the Funds shall declare a dividend
or dividends which, together with all such previous dividends, shall have the
effect of distributing to its stockholders all of its net investment company
taxable income for the period from October 31, 1996 to and including the
Exchange Date, if any (computed without regard to any deduction or dividends
paid), and all of its net capital gain, if any, realized for the period from
October 31, 1996 to and including the Exchange Date. In this regard, the last
dividend period for the Taurus AMPS prior to the Exchange Date may be shorter
than the dividend period for such AMPS determined as set forth in the
applicable Articles Supplementary.
(c) Taurus will pay, or cause to be paid, to MuniYield any interest it
receives on or after the Exchange Date with respect to the Investments
transferred to MuniYield hereunder.
(d) The Valuation Time shall be 4:15 p.m., New York time, on , 1997, or
such earlier or later day and time as mutually may be agreed upon in writing
(the "Valuation Time").
(e) MuniYield will acquire all of the assets of, and assume all of the known
liabilities of, Taurus, except that recourse for such liabilities will be
limited to MuniYield. The known liabilities of Taurus as of the Valuation Time
shall be confirmed in writing to MuniYield by Taurus pursuant to Section 2(k)
of this Agreement.
(f) MuniYield will file separate Articles Supplementary to its Articles of
Incorporation establishing the powers, rights and preferences of the MuniYield
Series C AMPS with the Maryland Department prior to the closing of the
Reorganization.
(g) MuniYield and Taurus will jointly file Articles of Transfer with the
Maryland Department and any such other instrument as may be required by the
State of Maryland to effect the transfer of Investments of Taurus to
MuniYield.
(h) Taurus will be dissolved following the Exchange Date by filing Articles
of Dissolution with the Maryland Department.
(i) As promptly as practicable after the liquidation of Taurus pursuant to
the Reorganization, Taurus shall terminate its registration under the 1940
Act.
4. ISSUANCE AND VALUATION OF MUNIYIELD COMMON STOCK AND MUNIYIELD SERIES C
AMPS IN THE REORGANIZATION.
Full shares of MuniYield Common Stock and MuniYield Series C AMPS of an
aggregate net asset value or liquidation preference, as the case may be, equal
(to the nearest one ten thousandth of one cent) to the value of the assets of
Taurus acquired in the Reorganization determined as hereinafter provided,
reduced by the amount of liabilities of Taurus assumed by MuniYield, shall be
issued by MuniYield in exchange for such assets of Taurus, plus cash in lieu
of fractional shares. The net asset value of MuniYield and Taurus shall be
determined as of the Valuation Time in accordance with the procedures
described in (i) the prospectus of MuniYield, dated February 21, 1992,
relating to the MuniYield Common Stock and (ii) the prospectus of MuniYield,
dated April 6, 1992, relating to the MuniYield AMPS, and no formula will be
used to adjust the net asset value so determined of either MuniYield or Taurus
to take into account differences in realized and unrealized gains and losses.
Values in all cases shall be determined as of the Valuation Time. The value of
the Investments of Taurus to be transferred to MuniYield shall be determined
by MuniYield pursuant to the procedures utilized by MuniYield in valuing its
own assets and determining its own liabilities for purposes of the
Reorganization. Such valuation and
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determination shall be made by MuniYield in cooperation with Taurus and shall
be confirmed in writing by MuniYield to Taurus. The net asset value per share
of the MuniYield Common Stock and the liquidation preference per share of the
MuniYield Series C AMPS shall be determined in accordance with such procedures
and MuniYield shall certify the computations involved. MuniYield shall issue
to Taurus separate certificates or share deposit receipts for the MuniYield
Common Stock and the MuniYield Series C AMPS, each registered in the name of
Taurus. Taurus then shall distribute the MuniYield Common Stock and the
MuniYield Series C AMPS to its corresponding stockholders of Taurus Common
Stock and Taurus AMPS, respectively, by redelivering the certificates or share
deposit receipts evidencing ownership of (i) the MuniYield Common Stock to The
Bank of New York, as the transfer agent and registrar for the MuniYield Common
Stock and (ii) the MuniYield Series C AMPS to IBJ Schroder Bank and Trust
Company, as the transfer agent and registrar for the MuniYield Series C AMPS.
With respect to any Taurus stockholder holding certificates evidencing
ownership of either the Taurus Common Stock or the Taurus AMPS as of the
Exchange Date, and subject to MuniYield being informed thereof in writing by
Taurus, MuniYield will not permit such stockholder to receive new certificates
evidencing ownership of the MuniYield Common Stock or MuniYield Series C AMPS,
exchange MuniYield Common Stock or MuniYield Series C AMPS credited to such
stockholder's account for shares of other investment companies managed by
Merrill Lynch Asset Management, L.P. or any of its affiliates, or pledge or
redeem such MuniYield Common Stock or MuniYield Series C AMPS, in any case,
until notified by Taurus or its agent that such stockholder has surrendered
his or her outstanding certificates evidencing ownership of the Taurus Common
Stock or the Taurus AMPS, or in the event of lost certificates, posted
adequate bond. Taurus, at its own expense, will request its stockholders to
surrender their outstanding certificates evidencing ownership of the Taurus
Common Stock or the Taurus AMPS, as the case may be, or post adequate bond
therefor.
Dividends payable to holders of record of shares of MuniYield Common Stock
and MuniYield Series C AMPS, as the case may be, as of any date after the
Exchange Date and prior to the exchange of certificates by any stockholder of
Taurus shall be payable to such stockholder without interest; however, such
dividends shall not be paid unless and until such stockholder surrenders his
or her stock certificates of Taurus for exchange.
No fractional shares of MuniYield Common Stock will be issued to holders of
Taurus Common Stock. In lieu thereof, MuniYield's transfer agent, The Bank of
New York, will aggregate all fractional shares of MuniYield Common Stock and
sell the resulting full shares on the New York Stock Exchange at the current
market price for shares of MuniYield for the account of all holders of
fractional interests, and each such holder will receive such holder's pro rata
share of the proceeds of such sale upon surrender of such holder's Taurus
Common Stock certificates.
5. PAYMENT OF EXPENSES.
(a) MuniYield shall pay, subsequent to the Exchange Date, all expenses
incurred in connection with the Reorganization, including, but not limited to,
all costs related to the preparation and distribution of a memorandum to the
independent Directors of each of the Funds, the N-14 Registration Statement
and the preparation and filing of a private letter ruling request with the
IRS, expenses incurred in connection with the deregistration and dissolution
of Taurus and the fees of special counsel to the Reorganization. Such fees and
expenses shall include legal, accounting and state securities or blue sky
fees, printing costs, filing fees, stock exchange fees, rating agency fees,
portfolio transfer taxes (if any), and any similar expenses incurred in
connection with the Reorganization. Neither MuniYield nor Taurus shall pay any
expenses of its respective stockholders arising out of or in connection with
the Reorganization.
(b) If for any reason the Reorganization is not consummated, no party shall
be liable to any other party for any damages resulting therefrom, including,
without limitation, consequential damages.
6. COVENANTS OF MUNIYIELD AND TAURUS.
(a) MuniYield and Taurus each agrees to call an annual or special meeting of
its respective stockholders as soon as is practicable after the effective date
of the N-14 Registration Statement for the purpose of considering the
Reorganization as described in this Agreement.
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(b) MuniYield and Taurus each covenants to operate its respective business
as presently conducted between the date hereof and the Exchange Date.
(c) Taurus agrees that following the consummation of the Reorganization, it
will liquidate and dissolve in accordance with the laws of the State of
Maryland and any other applicable law, it will not make any distributions of
any MuniYield Common Stock or MuniYield Series C AMPS other than to the
stockholders of Taurus and without first paying or adequately providing for
the payment of all of Taurus' liabilities not assumed by MuniYield, if any,
and on and after the Exchange Date it shall not conduct any business except in
connection with its liquidation and dissolution.
(d) Taurus undertakes that if the Reorganization is consummated, it will
file, or cause its agents to file, an application pursuant to Section 8(f) of
the 1940 Act for an order declaring that Taurus has ceased to be a registered
investment company.
(e) MuniYield will file the N-14 Registration Statement with the Securities
and Exchange Commission (the "Commission") and will use its best efforts to
provide that the N-14 Registration Statement becomes effective as promptly as
practicable. MuniYield and Taurus agree to cooperate fully with each other,
and each will furnish to the other the information relating to itself to be
set forth in the N-14 Registration Statement as required by the 1933 Act, the
1934 Act, the 1940 Act, and the rules and regulations thereunder and the state
securities or blue sky laws.
(f) MuniYield and Taurus each agrees that by the Exchange Date all of its
Federal and other tax returns and reports required to be filed on or before
such date shall have been filed and all taxes shown as due on said returns
either have been paid or adequate liability reserves have been provided for
the payment of such taxes. In connection with this covenant, the funds agree
to cooperate with each other in filing any tax return, amended return or claim
for refund, determining a liability for taxes or a right to a refund of taxes
or participating in or conducting any audit or other proceeding in respect of
taxes. MuniYield agrees to retain for a period of ten (10) years following the
Exchange Date all returns, schedules and work papers and all material records
or other documents relating to tax matters of Taurus for its taxable period
first ending after the Exchange Date and for all prior taxable periods. Any
information obtained under this subsection shall be kept confidential except
as otherwise may be necessary in connection with the filing of returns or
claims for refund or in conducting an audit or other proceeding. After the
Exchange Date, Taurus shall prepare, or cause its agents to prepare, any
Federal, state or local tax returns, including any Forms 1099, required to be
filed by Taurus with respect to Taurus' final taxable year ending with its
complete liquidation and for any prior periods or taxable years and further
shall cause such tax returns and Forms 1099 to be duly filed with the
appropriate taxing authorities. Notwithstanding the aforementioned provisions
of this subsection, any expenses incurred by Taurus (other than for payment of
taxes) in connection with the preparation and filing of said tax returns and
Forms 1099 after the Exchange Date shall be borne by MuniYield.
(g) MuniYield and Taurus each agrees to mail to each of its respective
stockholders of record entitled to vote at the annual or special meeting of
stockholders, as the case may be, at which action is to be considered
regarding this Agreement, in sufficient time to comply with requirements as to
notice thereof, a combined Proxy Statement and Prospectus which complies in
all material respects with the applicable provisions of Section 14(a) of the
1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations,
respectively, thereunder.
(h) Following the consummation of the Reorganization, MuniYield expects to
stay in existence and continue its business as a closed-end management
investment company registered under the 1940 Act.
7. EXCHANGE DATE.
(a) Delivery of the assets of Taurus to be transferred, together with any
other Investments, and the MuniYield Common Stock and MuniYield Series C AMPS
to be issued, shall be made at the offices of Brown & Wood LLP, One World
Trade Center, New York, New York 10048, at 10:00 a.m. on the next full
business
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day following the Valuation Time, or at such other place, time and date agreed
to by MuniYield and Taurus, the date and time upon which such delivery is to
take place being referred to herein as the "Exchange Date." To the extent that
any Investments, for any reason, are not transferable on the Exchange Date,
Taurus shall cause such Investments to be transferred to MuniYield's account
with The Bank of New York at the earliest practicable date thereafter.
(b) Taurus will deliver to MuniYield on the Exchange Date confirmations or
other adequate evidence as to the tax basis of each of the Investments
delivered to MuniYield hereunder, certified by Ernst & Young LLP.
(c) MuniYield shall have made prior arrangements for the delivery on the
Exchange Date of the Investments to The Bank of New York as the custodian for
MuniYield.
(d) As soon as practicable after the close of business on the Exchange Date,
Taurus shall deliver to MuniYield a list of the names and addresses of all of
the stockholders of record of Taurus on the Exchange Date and the number of
shares of Taurus Common Stock and Taurus AMPS owned by each such stockholder,
certified to the best of their knowledge and belief by the transfer agent for
the Taurus Common Stock and the Taurus AMPS, as applicable, or by its
President.
8. MUNIYIELD CONDITIONS.
The obligations of MuniYield hereunder shall be subject to the following
conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of two-thirds of the
members of the Board of Directors of each of MuniYield and Taurus and by
the affirmative vote of (i) the holders of (A) a majority of the MuniYield
Common Stock and MuniYield AMPS, voting together as a single class, and (B)
a majority of the MuniYield AMPS, voting separately as a class, in each
case issued and outstanding and entitled to vote thereon; and (ii) the
holders of (x) a majority of the Taurus Common Stock and the Taurus AMPS,
voting together as a single class, and (y) a majority of the Taurus AMPS,
voting separately as a class, in each case issued and outstanding and
entitled to vote thereon; and further that (iii) MuniYield shall have
delivered to Taurus a copy of the resolution approving this Agreement
adopted by MuniYield's Board of Directors, and a certificate setting forth
the vote of MuniYield's stockholders obtained, each certified by the
Secretary of MuniYield; and (iv) Taurus shall have delivered to MuniYield a
copy of the resolution approving this Agreement adopted by Taurus' Board of
Directors, and a certificate setting forth the vote of Taurus' stockholders
obtained, each certified by the Secretary of Taurus.
(b) That Taurus shall have furnished to MuniYield a statement of Taurus'
assets, liabilities and capital, with values determined as provided in
Section 4 of this Agreement, together with a schedule of investments with
their respective dates of acquisition and tax costs, all as of the
Valuation Time, certified on Taurus' behalf by its President (or any Vice
President) and its Treasurer, and a certificate of both such officers,
dated the Exchange Date, certifying that as of the Valuation Time and as of
the Exchange Date there has been no material adverse change in the
financial position of Taurus since April 30, 1997, other than changes in
the Investments since that date or changes in the market value of the
Investments.
(c) That Taurus shall have furnished to MuniYield a certificate signed by
Taurus' President (or any Vice President) and its Treasurer, dated the
Exchange Date, certifying that as of the Valuation Time and as of the
Exchange Date all representations and warranties of Taurus made in this
Agreement are true and correct in all material respects with the same
effect as if made at and as of such dates and Taurus has complied with all
of the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to such dates.
(d) That Taurus shall have delivered to MuniYield a letter from Ernst &
Young LLP, dated the Exchange Date, stating that such firm has performed a
limited review of the Federal, state and local income tax returns of Taurus
for the period ended October 31, 1996 (which returns originally were
prepared and filed by Taurus), and that based on such limited review,
nothing came to their attention which caused them
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to believe that such returns did not properly reflect, in all material
respects, the Federal, state and local income taxes of Taurus for the
period covered thereby; and that for the period from November 1, 1996 to
and including the Exchange Date and for any taxable year of Taurus ending
upon the liquidation of Taurus, such firm has performed a limited review to
ascertain the amount of applicable Federal, state and local taxes, and has
determined that either such amount has been paid or reserves established
for payment of such taxes, this review to be based on unaudited financial
data; and that based on such limited review, nothing has come to their
attention which caused them to believe that the taxes paid or reserves set
aside for payment of such taxes were not adequate in all material respects
for the satisfaction of Federal, state and local taxes for the period from
November 1, 1996 to and including the Exchange Date and for the final
taxable year of Taurus ending upon liquidation or that Taurus had not
qualified as a regulated investment company for Federal income tax purposes
for the period from November 1, 1996 through liquidation of Taurus.
(e) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(f) That MuniYield shall have received an opinion of Brown & Wood LLP, as
counsel to both MuniYield and Taurus, in form and substance satisfactory to
MuniYield and dated the Exchange Date, to the effect that (i) each of
MuniYield and Taurus is a corporation duly organized, validly existing and
in good standing in conformity with the laws of the State of Maryland; (ii)
the MuniYield Common Stock and MuniYield Series C AMPS to be issued
pursuant to this Agreement are duly authorized and, upon delivery, will be
validly issued and outstanding and fully paid and nonassessable by
MuniYield, and no stockholder of MuniYield has any preemptive right to
subscription or purchase in respect thereof (pursuant to the Articles of
Incorporation, as amended, or the by-laws of MuniYield or, to the best of
such counsel's knowledge, otherwise); (iii) this Agreement has been duly
authorized, executed and delivered by each of MuniYield and Taurus, and
represents a valid and binding contract, enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws pertaining to the enforcement of
creditors' rights generally and equitable principles; (iv) Taurus has the
power to sell, assign, transfer and deliver the assets transferred by it
hereunder and, upon consummation of the Reorganization in accordance with
the terms of this Agreement, Taurus will have duly transferred such assets
and liabilities in accordance with this Agreement; (v) to the best of such
counsel's knowledge, no consent, approval, authorization or order of any
United States federal or Maryland state court or governmental authority is
required for the consummation by MuniYield and Taurus of the
Reorganization, except such as have been obtained under the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder and under Maryland law and such as may be required
under state securities or blue sky laws; (vi) the N-14 Registration
Statement has become effective under the 1933 Act, no stop order suspending
the effectiveness of the N-14 Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act, and the N-14 Registration Statement, and
each amendment or supplement thereto, as of their respective effective
dates, appear on their face to be appropriately responsive in all material
respects to the requirements of the 1933 Act, the 1934 Act and the 1940 Act
and the published rules and regulations of the Commission thereunder; (vii)
the descriptions in the N-14 Registration Statement of statutes, legal and
governmental proceedings and contracts and other documents are accurate and
fairly present the information required to be shown; (viii) such counsel
does not know of any statutes, legal or governmental proceedings or
contracts or other documents related to the Reorganization of a character
required to be described in the N-14 Registration Statement which are not
described therein or, if required to be filed, filed as required; (ix) the
execution and delivery of this Agreement does not, and the consummation of
the Reorganization will not, violate any material provision of the Articles
of Incorporation, as amended, the by-laws, as amended, or any agreement
(known to such counsel) to which either MuniYield or Taurus is a party or
by which either MuniYield or Taurus is bound, except insofar as the parties
have agreed to amend such provision as a condition precedent to the
Reorganization; (x) neither MuniYield nor Taurus, to the knowledge of such
counsel, is required to qualify to do business as a foreign corporation in
any jurisdiction except as may be required by state securities or blue sky
laws, and except where each has so qualified or the failure so to qualify
would not have a material adverse effect on MuniYield, Taurus, or their
respective
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stockholders; (xi) to the best of such counsel's knowledge, no material
suit, action or legal or administrative proceeding is pending or threatened
against MuniYield or Taurus, the unfavorable outcome of which would
materially adversely affect MuniYield or Taurus; and (xii) all corporate
actions required to be taken by MuniYield and Taurus to authorize this
Agreement and to effect the Reorganization have been duly authorized by all
necessary corporate actions on the part of MuniYield and Taurus. Such
opinion also shall state that (A) while such counsel cannot make any
representation as to the accuracy or completeness of statements of fact in
the N-14 Registration Statement or any amendment or supplement thereto,
nothing has come to their attention that would lead them to believe that,
on the respective effective dates of the N-14 Registration Statement and
any amendment or supplement thereto, (1) the N-14 Registration Statement or
any amendment or supplement thereto contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (2)
the prospectus included in the N-14 Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (B) such counsel does not
express any opinion or belief as to the financial statements, other
financial data, statistical data or information relating to MuniYield or
Taurus contained or incorporated by reference in the N-14 Registration
Statement. In giving the opinion set forth above, Brown & Wood LLP may
state that it is relying on certificates of officers of MuniYield and
Taurus with regard to matters of fact and certain certificates and written
statements of governmental officials with respect to the good standing of
MuniYield and Taurus.
(g) That MuniYield shall have received a private letter ruling from the
IRS, to the effect that for Federal income tax purposes (i) the transfer of
all of the Investments of Taurus to MuniYield in exchange solely for
MuniYield Common Stock and MuniYield Series C AMPS as provided in this
Agreement will constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and MuniYield and Taurus will each be deemed a
"party" to a reorganization within the meaning of Section 361(b) of the
Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss
will be recognized to Taurus as a result of the Reorganization or on the
distribution of MuniYield Common Stock and MuniYield Series C AMPS to
Taurus stockholders under Section 361(c)(1) of the Code; (iii) under
Section 1032 of the Code, no gain or loss will be recognized to MuniYield
as a result of the Reorganization; (iv) in accordance with Section
354(a)(1) of the Code, no gain or loss will be recognized to the
stockholders of Taurus on the receipt of MuniYield Common Stock and
MuniYield Series C AMPS in exchange for their corresponding Taurus Common
Stock or Taurus AMPS (except to the extent that Taurus stockholders receive
cash representing an interest in fractional shares of MuniYield in the
Reorganization); (v) in accordance with Section 362(b) of the Code, the tax
basis of the Taurus assets in the hands of MuniYield will be the same as
the tax basis of such assets in the hands of Taurus immediately prior to
the consummation of the Reorganization; (vi) in accordance with Section 358
of the Code, immediately after the Reorganization, the tax basis of the
MuniYield Common Stock and MuniYield Series C AMPS received by the
stockholders of Taurus in the Reorganization will be equal, in the
aggregate, to the tax basis of the Taurus Common Stock and Taurus AMPS
surrendered in exchange; (vii) in accordance with Section 1223 of the Code,
a stockholder's holding period for the MuniYield Common Stock and MuniYield
Series C AMPS will be determined by including the period for which such
stockholder held the Taurus Common Stock and Taurus AMPS exchanged
therefor, provided, that such Taurus shares were held as a capital asset;
(viii) in accordance with Section 1223 of the Code, MuniYield's holding
period with respect to the Taurus assets transferred will include the
period for which such assets were held by Taurus; (ix) the payment of cash
to Taurus stockholders in lieu of fractional shares of MuniYield will be
treated as though the fractional shares were distributed as part of the
Reorganization and then redeemed by MuniYield, with the result that each
Taurus stockholder will have short- or long-term capital gain or loss to
the extent that the cash distribution differs from such stockholder's basis
allocable to the MuniYield fractional shares; and (x) the taxable year of
Taurus will end on the effective date of the Reorganization and pursuant to
Section 381(a) of the Code and regulations thereunder, MuniYield will
succeed to and take into account certain tax attributes of Taurus, such as
earnings and profits, capital loss carryovers and method of accounting.
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(h) That MuniYield shall have received from Ernst & Young LLP a letter
dated as of the effective date of the N-14 Registration Statement and a
similar letter dated within five days prior to the Exchange Date, in form
and substance satisfactory to MuniYield, to the effect that (i) they are
independent public accountants with respect to Taurus within the meaning of
the 1933 Act and the applicable published rules and regulations thereunder;
(ii) in their opinion, the financial statements and supplementary
information of Taurus included or incorporated by reference in the N-14
Registration Statement and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the 1933
Act and the published rules and regulations thereunder; (iii) on the basis
of limited procedures agreed upon by MuniYield and Taurus and described in
such letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim
financial statements and unaudited supplementary information of Taurus
included in the N-14 Registration Statement, and inquiries of certain
officials of Taurus responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that (a) such
unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder, (b) such unaudited financial statements are not
fairly presented in conformity with generally accepted accounting
principles, applied on a basis substantially consistent with that of the
audited financial statements, or (c) such unaudited supplementary
information is not fairly stated in all material respects in relation to
the unaudited financial statements taken as a whole; and (iv) on the basis
of limited procedures agreed upon by MuniYield and Taurus and described in
such letter (but not an examination in accordance with generally accepted
auditing standards), the information relating to Taurus appearing in the N-
14 Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) concerning Taurus (with the
exception of performance comparisons, if any), has been obtained from the
accounting records of Taurus or from schedules prepared by officials of
Taurus having responsibility for financial and reporting matters and such
information is in agreement with such records, schedules or computations
made therefrom.
(i) That the Investments to be transferred to MuniYield shall not include
any assets or liabilities which MuniYield, by reason of charter limitations
or otherwise, may not properly acquire or assume.
(j) That the N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of Taurus, contemplated by the
Commission.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act; no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of Taurus or would prohibit
the Reorganization.
(l) That MuniYield shall have received from the Commission such orders or
interpretations as Brown & Wood LLP, as counsel to MuniYield, deems
reasonably necessary or desirable under the 1933 Act and the 1940 Act in
connection with the Reorganization, provided, that such counsel shall have
requested such orders as promptly as practicable, and all such orders shall
be in full force and effect.
(m) That all proceedings taken by Taurus and its counsel in connection
with the Reorganization and all documents incidental thereto shall be
satisfactory in form and substance to MuniYield.
(n) That prior to the Exchange Date, Taurus shall declare a dividend or
dividends which, together with all such previous dividends, shall have the
effect of distributing to its stockholders all of its net investment
company taxable income for the period from October 31, 1996 to and
including the Exchange Date, if any (computed without regard to any
deduction or dividends paid), and all of its net capital gain, if any,
realized for the period from October 31, 1996 to and including the Exchange
Date. In this regard, the last dividend period for the Taurus AMPS prior to
the Exchange Date may be shorter than the dividend period for such AMPS
determined as set forth in the applicable Articles Supplementary.
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9. TAURUS CONDITIONS.
The obligations of Taurus hereunder shall be subject to the following
conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by all of the requisite votes set forth in
Section 8(a) of this Agreement, and that all such certificates as set forth
in such Section shall have been obtained.
(b) That MuniYield shall have furnished to Taurus a statement of
MuniYield's assets, liabilities and capital, with values determined as
provided in Section 4 of this Agreement, together with a schedule of its
investments, all as of the Valuation Time, certified on MuniYield's behalf
by its President (or any Vice President) and its Treasurer, and a
certificate signed by such officers dated as of the Exchange Date,
certifying that as of the Valuation Time and as of the Exchange Date there
has been no material adverse change in the financial position of MuniYield
since October 31, 1996, other than changes in its portfolio securities
since that date or changes in the market value of its portfolio securities.
(c) That MuniYield shall have furnished to Taurus a certificate signed by
MuniYield's President (or any Vice President) and its Treasurer, dated as
of the Exchange Date, certifying that as of the Valuation Time and as of
the Exchange Date all representations and warranties of MuniYield made in
this Agreement are true and correct in all material respects with the same
effect as if made at and as of such dates, and that MuniYield has complied
with all of the agreements and satisfied all of the conditions on its part
to be performed or satisfied at or prior to such date.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) That Taurus shall have received an opinion of Brown & Wood LLP, as
counsel to both MuniYield and Taurus, in form and substance satisfactory to
Taurus and dated the Exchange Date, with respect to the matters specified
in Section 8(f) of this Agreement and such other matters as Taurus
reasonably may deem necessary or desirable.
(f) That Taurus shall have received a private letter ruling from the IRS
with respect to the matters specified in Section 8(g) of this Agreement.
(g) That all proceedings taken by MuniYield and its counsel in connection
with the Reorganization and all documents incidental thereto shall be
satisfactory in form and substance to Taurus.
(h) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of MuniYield, contemplated by the
Commission.
(i) That Taurus shall have received from Deloitte & Touche LLP a letter
dated as of the effective date of the N-14 Registration Statement and a
similar letter dated within five days prior to the Exchange Date, in form
and substance satisfactory to Taurus, to the effect that (i) they are
independent public accountants with respect to MuniYield within the meaning
of the 1933 Act and the applicable published rules and regulations
thereunder; (ii) in their opinion, the financial statements and
supplementary information of MuniYield included or incorporated by
reference in the N-14 Registration Statement and reported on by them comply
as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder; (iii) on the basis of limited procedures agreed upon by
MuniYield and Taurus and described in such letter (but not an examination
in accordance with generally accepted auditing standards) consisting of a
reading of any unaudited interim financial statements and unaudited
supplementary information of MuniYield included in the N-14 Registration
Statement, and inquiries of certain officials of MuniYield responsible for
financial and accounting matters, nothing came to their attention that
caused them to believe that (A) such unaudited financial statements and
related unaudited supplementary information do not comply as to form in all
material respects with the applicable accounting requirements of the 1933
Act and the published rules and regulations thereunder, (B) such unaudited
financial statements are not fairly presented in conformity with generally
accepted accounting principles,
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applied on a basis substantially consistent with that of the audited
financial statements, or (C) such unaudited supplementary information is
not fairly stated in all material respects in relation to the unaudited
financial statements taken as a whole; and (iv) on the basis of limited
procedures agreed upon by MuniYield and Taurus and described in such letter
(but not an examination in accordance with generally accepted auditing
standards), the information relating to MuniYield appearing in the N-14
Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) concerning MuniYield (with the
exception of performance comparisons, if any), if any, has been obtained
from the accounting records of MuniYield or from schedules prepared by
officials of MuniYield having responsibility for financial and reporting
matters and such information is in agreement with such records, schedules
or computations made therefrom.
(j) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of MuniYield or would
prohibit the Reorganization.
(k) That Taurus shall have received from the Commission such orders or
interpretations as Brown & Wood LLP, as counsel to Taurus, deems reasonably
necessary or desirable under the 1933 Act and the 1940 Act in connection
with the Reorganization, provided, that such counsel shall have requested
such orders as promptly as practicable, and all such orders shall be in
full force and effect.
10. TERMINATION, POSTPONEMENT AND WAIVERS.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any time
(whether before or after adoption thereof by the stockholders of each of
MuniYield and Taurus) prior to the Exchange Date, or the Exchange Date may be
postponed, (i) by mutual consent of the Boards of Directors of MuniYield and
Taurus; (ii) by the Board of Directors of MuniYield if any condition of
MuniYield's obligations set forth in Section 8 of this Agreement has not been
fulfilled or waived by such Board; or (iii) by the Board of Directors of
Taurus if any condition of Taurus' obligations set forth in Section 9 of this
Agreement has not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by June 30, 1998, this Agreement automatically shall terminate on
that date, unless a later date is mutually agreed to by the Boards of
Directors of MuniYield and Taurus.
(c) In the event of termination of this Agreement pursuant to the provisions
hereof, the same shall become void and have no further effect, and there shall
not be any liability on the part of either MuniYield or Taurus or persons who
are their directors, trustees, officers, agents or stockholders in respect of
this Agreement.
(d) At any time prior to the Exchange Date, any of the terms or conditions
of this Agreement may be waived by the Board of Directors of either MuniYield
or Taurus, respectively (whichever is entitled to the benefit thereof), if, in
the judgment of such Board after consultation with its counsel, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement to the stockholders of their respective fund, on behalf of
which such action is taken. In addition, the Boards of Directors of MuniYield
and Taurus have delegated to Fund Asset Management, L.P. the ability to make
non-material changes to the transaction if it deems it to be in the best
interests of MuniYield and Taurus to do so.
(e) The respective representations and warranties contained in Sections 1
and 2 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and neither MuniYield nor Taurus nor any
of their officers, directors or trustees, agents or stockholders shall have
any liability with respect to such representations or warranties after the
Exchange Date. This provision shall not protect any officer, director or
trustee, agent or stockholder of MuniYield or Taurus against any liability to
the entity for which that officer, director or trustee, agent or stockholder
so acts or to its stockholders to which that officer, director or trustee,
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agent or stockholder otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
in the conduct of such office.
(f) If any order or orders of the Commission with respect to this Agreement
shall be issued prior to the Exchange Date and shall impose any terms or
conditions which are determined by action of the Boards of Directors of
MuniYield and Taurus to be acceptable, such terms and conditions shall be
binding as if a part of this Agreement without further vote or approval of the
stockholders of MuniYield and Taurus, unless such terms and conditions shall
result in a change in the method of computing the number of shares of
MuniYield Common Stock and MuniYield Series C AMPS to be issued to Taurus in
which event, unless such terms and conditions shall have been included in the
proxy solicitation materials furnished to the stockholders of MuniYield and
Taurus prior to the meetings at which the Reorganization shall have been
approved, this Agreement shall not be consummated and shall terminate unless
MuniYield and Taurus promptly shall call special meetings of stockholders at
which such conditions so imposed shall be submitted for approval.
11. OTHER MATTERS.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares to any person who at the time of the Reorganization is,
to its knowledge, an affiliate of a party to the Reorganization pursuant to
Rule 145(c), MuniYield will cause to be affixed upon the certificate(s) issued
to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES
ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO
MUNIYIELD CALIFORNIA FUND, INC. (OR ITS STATUTORY SUCCESSOR) OR ITS
PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT
THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION
IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to MuniYield's
transfer agent with respect to such shares. Taurus will provide MuniYield on
the Exchange Date with the name of any Taurus stockholder who is to the
knowledge of Taurus an affiliate of it on such date.
(b) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement shall
be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any provision of
this Agreement shall be in writing and shall be deemed to have been given if
delivered or mailed, first class postage prepaid, addressed to MuniYield or
Taurus, in either case at 800 Scudders Mill Road, Plainsboro, New Jersey
08536, Attn: Arthur Zeikel, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said state.
(e) Copies of the Articles of Incorporation, as amended, of MuniYield and
Taurus are on file with the Maryland Department and notice is hereby given
that this instrument is executed on behalf of the Directors of each Fund.
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This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered, shall be deemed to be an original but all such
counterparts together shall constitute but one instrument.
MuniYield California Fund, Inc.
By: _________________________________
ARTHUR ZEIKEL
PRESIDENT
Taurus MuniCalifornia Holdings, Inc.
By: _________________________________
ARTHUR ZEIKEL
PRESIDENT
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EXHIBIT II
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
"Aaa"--Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
"Aa"--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in "Aaa" securities.
"A"--Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
"Baa"--Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
"Ba"--Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
"B"--Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
"Caa"--Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
"Ca"--Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
"C"--Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Con.(. . . )--Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Those bonds in the "Aa," "A," "Baa," "Ba" and "B" groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols "Aal," "Al," "Baal," "Bal" and "Bl."
Short-term Notes and Variable Rate Demand Obligations: The four ratings of
Moody's for short-term notes and VRDOs are "MIG-1"/"VMIG-1," "MIG-2"/"VMIG-2,"
"MIG-3"/"VMIG-3," and "MIG-4"/ "VMIG-4;" "MIG-1"/"VMIG-1" denotes "best
quality, enjoying strong protection from established cash
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flows"; "MIG-2"/"VMIG-2" denotes "high quality" with "ample margins of
protection"; "MIG-3"/ "VMIG-3" instruments are of "favorable quality . . . but
lacking the undeniable strength of the preceding grades"; "MIG-4"/"VMIG-4"
instruments are of "adequate quality, carrying specific risk but having
protection . . . and not distinctly or predominantly speculative."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
"PRIME-1"--Issuers rated "Prime-1" (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
Prime-l repayment capacity will often be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and with established access to a range of financial
markets and assured sources of alternate liquidity.
"PRIME-2"--Issuers rated "Prime-2" (or supporting institutions) have a
strong ability for repayment of senior short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while sound,
will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
"PRIME-3"--Issuers rated "Prime-3" (or supporting institutions) have an
acceptable ability for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
to the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
"NOT PRIME"--Issuers rated "Not Prime" do not fall within any of the
Prime rating categories.
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within the parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representations and gives no opinion on the legal
validity or enforceability of any support arrangement. You are cautioned to
review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("S&P'S") MUNICIPAL DEBT
RATINGS
An S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P's from other sources S&P's considers reliable. S&P's does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information,
or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
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II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA--Debt rated "AAA" has the highest rating assigned by S&P's. Capacity
to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-
rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
BB, B, CCC, CC, C--Debt rated "BB," "B," "CCC," "CC" and "C" is regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C1--The rating "Cl" is reserved for income bonds on which no interest is
being paid.
D--Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P's believes
that such payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS
An S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-l" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-l--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-l."
A-3--Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired unless S&P's believes
that such payments will be made during such grace period.
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A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to S&P's by the issuer or obtained by S&P's from other sources it
considers reliable. S&P's does not conduct an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information or based on other circumstances.
An S&P's municipal note rating reflects the liquidity concerns and market
access risks unique to such notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment.
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given
a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
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AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-
l+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining or uncertain, as follows:
Improving UP ARROW
Stable LEFT ARROW/RIGHT ARROW
Declining DOWN ARROW
Uncertain UP ARROW/DOWN ARROW
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
NR indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive" indicating a
potential upgrade. "Negative" for potential downgrade, or "Evolving" where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within three to 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely
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payment of principal and interest in accordance with the terms of obligation
for bond issues not in default. For defaulted bonds, the rating ("DDD" to "D")
is an assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D--Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-l+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-l Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than
issues rated "F-l+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin
of safety is not as great as for issues assigned "F-l+" and "F-l"
ratings.
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F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
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EXHIBIT III
ECONOMIC AND OTHER CONDITIONS IN CALIFORNIA
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily
upon one or more publicly available offering statements relating to debt
offerings of state issuers, however, it has not been updated nor will it be
updated during the year. The Funds have not independently verified the
information.
GENERAL ECONOMIC CONDITIONS
The economy of the State of California (sometimes referred to herein as the
"State") is the largest among the 50 states and one of the largest in the
world. This diversified economy has major components in agriculture,
manufacturing, high technology, trade, entertainment, tourism, construction
and services. Total State gross domestic product is expected to exceed $1
trillion in 1997. On a stand alone basis, California's economy is larger than
all but six nations in the world.
California's July 1, 1996 population of over 32 million represented over 12%
of the total United States population. The official 1990 Census population was
29,760,021 as of April 1, 1990, which represented an increase of over 6
million persons, or 26%, during the decade of the 1980s. As of the April 1,
1990 Census, the median age of California's population was 31.5 years, younger
than the 1990 U.S. median of 32.9 years.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 Census, 96% resided in the 23 Metropolitan Statistical Areas in
the State. Overall, California's population per square mile was 191 in 1990.
As of July 1, 1995, the 5-county Los Angeles area accounted for 49%, with 15.6
million residents. The 10-county San Francisco Bay Area represented 21%, with
a population of 6.6 million.
After suffering through a severe recession, California's economy has been on
a steady recovery since the start of 1994. More than 300,000 nonfarm jobs were
added in the State in 1996, while personal income grew by more than $55
billion. California's economic expansion is being fueled by strong growth in
high-technology industries, including computer software, electronics
manufacturing and motion picture production, all of which have offset the
recession-related losses, which were heaviest in aerospace and defense-related
industries (which accounted for two-thirds of the job losses), finance and
insurance.
THE STATE
Fiscal Years Prior to 1995-96. The State's budget problems in recent years
had been caused by a combination of external economic conditions and a
structural imbalance in that the largest general fund programs--K-14
education, health, welfare and corrections--were increasing faster than the
revenue base, driven by the State's rapid population growth. These pressures
are expected to continue as population trends maintain strong demand for
health and welfare services, as the school age population continues to grow,
and as the State's corrections program responds to a "Three Strikes" law
enacted in 1994, which requires mandatory life prison terms for certain third-
time felony offenders.
As a result of these factors and others, and especially because a severe
recession between 1990-94 reduced revenues and increased expenditures for
social welfare programs, from the late 1980s until 1992-93, the State had a
period of budget imbalance. During this period, expenditures exceeded revenues
in four out of six years, and the State accumulated and sustained a budget
deficit in its budget reserve, the Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak at June 30, 1993. Starting in
the 1990-91 Fiscal Year and for each fiscal year thereafter, each budget
required multibillion dollar actions to bring projected revenues and
expenditures into balance. The State Legislature and Governor agreed on the
following principal steps to produce Budget Acts in the years 1991-92 to 1994-
95, although not all these actions were taken in each year.
. significant cuts in health and welfare program expenditures;
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. transfers of program responsibilities and funding from the State to local
governments (referred to as "realignment"), coupled with some reduction
in mandates on local government;
. transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts to
local school districts, thereby reducing State funding for schools under
Proposition 98 (discussed below);
. reduction in growth of support for higher education programs, coupled
with increases in student fees, through the 1994-95 Fiscal Year;
. maintenance of the minimum Proposition 98 funding guarantee for K-14
schools, and the disbursement of additional funds to keep a constant
level of about $4,200 per K-12 pupils through the 1993-94 Fiscal Year;
. revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;
. increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
illegal immigrants, although during this time frame, most of the
additional aid requested by the Administration was not received; and
. various one-time adjustments and accounting changes.
Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve, the SFEU, as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget
for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
State to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller issued registered warrants to pay a variety of
obligations representing prior years' or continuing appropriations, and
mandates from court order. Available funds were used to make constitutionally-
mandated payments, such as debt service on bonds and warrants. Between July 1
and September 4, 1992, when the budget was adopted, the State Controller
issued a total of approximately $3.8 billion of registered warrants.
During the past several fiscal years, the State was forced to rely
increasingly on external debt markets to meet its cash needs, as a succession
of notes and revenue anticipation warrants were issued in the period from June
1992 to July 1994, often needed to pay previously maturing notes or warrants.
These borrowings were used also in part to spread out the repayment of the
accumulated budget deficit over the end of a fiscal year, as noted earlier.
The last and largest of these borrowings was $4.0 billion of revenue
anticipation warrants which were issued in July, 1994 and matured on April 25,
1996.
1995-96 Fiscal Year. The 1995-96 Budget Act was signed by the Governor on
August 3, 1995, 34 days after the start of the fiscal year. The Budget Act
projected general fund revenues and transfers of $44.1 billion, a 3.5%
increase from the prior year. Expenditures were budgeted at $43.4 billion, a 4
percent increase. The Budget Act also projected Special Fund revenues of $12.7
billion and appropriated Special Fund expenditures of $13.0 billion.
Final data for the 1995-96 Fiscal Year showed revenues and transfers of
$46.1 billion, some $2 billion over the original fiscal year estimate, which
was attributed to the strong economic recovery. Expenditures also increased,
to an estimated $45.4 billion, as a result of the requirement to expend
revenues for schools under
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Proposition 98, and, among other things, failure of the federal government to
enact welfare reform during the fiscal year and to budget new aid for illegal
immigrant costs, both of which had been counted on to allow reductions in
State costs. SFEU had a small negative balance of about $87 million at June
30, 1996, all but eliminating the accumulated budget deficit from the early
1990's. Available internal borrowable resources (available cash, after payment
of all obligations due) on June 30, 1996 was about $3.8 billion, representing
a significant improvement in the State's cash position, and ending the need
for deficit borrowing over the end of the fiscal year. The State's improved
cash position allowed it to repay the $4.0 billion Revenue Anticipation
Warrant issue on April 25, 1996, and to issue only $2.0 billion of revenue
anticipation notes during the fiscal year, which matured on June 28, 1996.
The 1995-96 Budget Act included substantial additional funding under
Proposition 98 for schools and community colleges (about $1.0 billion general
fund and $1.2 billion total above 1994-95 levels). Because of higher than
projected revenues in 1994-95, an additional $561 million ($92 per K-12 pupil
(also called per ADA, or average daily attendance)) was appropriated to the
1994-95 Proposition 98 entitlement. A large part of this was a block grant of
about $50 per pupil for any one-time purpose. For the first time in several
years, a full 2.7 percent cost of living allowance was funded. The budget was
based on the settlement of the CTA v. Gould litigation. Cuts in health and
welfare costs totaled about $220 million, almost $700 million less than had
been anticipated, because of the failure by the federal government to approve
certain of these actions in a timely manner. The federal government also
failed to appropriate all but $31 million of an anticipated $500 million in
new federal aid for incarceration and health care costs of illegal immigrants.
Funding from the general fund for the University of California was increased
by $106 million and for the California State University system by $97 million,
with no increases in student fees.
1996-97 Fiscal Year. The 1996-97 Budget Act was signed by the Governor on
July 15, 1996, along with various implementing bills. The Governor vetoed
about $82 million of appropriations (both general fund and Special Fund). With
the signing of the Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The Department of
Finance projected that, on June 30, 1997, the State's available internal
borrowing (cash) resources will be $2.9 billion, after payment of all
obligations due by that date, so that no cross-fiscal year borrowing will be
needed.
Revenues--The Legislature rejected the Governor's proposed 15% cut in
personal income taxes (to be phased in over three years), but did approve a 5%
cut in bank and corporation taxes, to be effective for income years starting
on January 1, 1997. As a result, revenues for the Fiscal Year were estimated
to total $47.643 billion, a 3.3% increase over the final estimated 1995-96
revenues. Special Fund revenues were estimated to be $13.3 billion.
Expenditures--The Budget Act contained general fund appropriations totaling
$47.251 billion, a 4.0% increase over the final estimated 1995-96
expenditures. Special Fund expenditures were budgeted at $12.6 billion.
The following are principal features of the 1996-97 Budget Act:
Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (general fund) and $1.65 billion total
above revised 1995-96 levels. Almost half of this money was budgeted to
fund class-size reductions in kindergarten and grades 1-3. Also, for the
second year in a row, the full cost of living allowance (3.2%) was funded.
The Proposition 98 increases have brought K-12 expenditures to almost
$4,800 per ADA, an almost 15% increase over the level prevailing during the
recession years. Community colleges will receive an increase in funding of
$157 million for 1996-97 out of this $1.6 billion total.
Because of the higher than projected revenues in 1995-96, an additional
$1.1 billion ($190 per K-12 ADA and $145 million for community colleges)
was appropriated and retroactively applied towards the 1995-96 Proposition
98 guarantee, bringing K-12 expenditures in that year to over $4,600 per
ADA. These new funds were appropriated for a variety of purposes, including
block grants, allocations for each school
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site, facilities for class size reduction, and a reading initiative.
Similar retroactive increases totaling $230 million, based on final figures
on revenues and State population growth, were made to the 1991-92 and the
1994-95 Proposition 98 guarantees, most of which were allocated to each
school site.
The Budget Act assumed savings of approximately $660 million in health
and welfare costs which required changes in federal law, including federal
welfare reform. The Budget Act further assumed federal law changes in
August 1996 which would allow welfare cash grant levels to be reduced by
October 1, 1996. These cuts totaled approximately $163 million of the
anticipated $660 million savings.
A 4.9% increase in funding for the University of California ($130 million
general fund) and the California State University system ($101 million
general fund), with no increases in student fees, maintaining the second
year of the Governor's four-year "Compact" with the State's higher
education units.
The Budget Act assumed the federal government will provide approximately
$700 million in new aid for incarceration and health care costs of illegal
immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the general fund. (For purposes of
cash flow projections, the State Department of Finance expects $540 million
of this amount to be received during the 1996-97 fiscal year.)
General fund support for the State Department of Corrections was
increased by about 7% over the prior year, reflecting estimates of
increased prison population.
With respect to aid to local governments, the principal new programs
included in the Budget Act are $100 million in grants to cities and
counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile
crime.
Federal Welfare Reform--Following enactment of the 1996-97 Budget Act,
Congress passed and the President signed (on August 22, 1996) the Personal
Responsibility and Work Opportunity Act of 1996 (the "Law") making a
fundamental reform of the current welfare system. Among many provisions, the
Law includes: (i) conversion of Aid to Families with Dependent Children from
an entitlement program to a block grant titled Temporary Assistance for Needy
Families (TANF), with lifetime time limits on TANF recipients, work
requirements and other changes; (ii) provisions denying certain federal
welfare and public benefits to legal noncitizens, allowing states to elect to
deny additional benefits (including TANF) to legal noncitizens, and generally
denying almost all benefits to illegal immigrants; and (iii) changes in the
Food Stamp program, including reducing maximum benefits and imposing work
requirements.
The Law requires states to implement the new TANF program not later than
October 1, 1997 and provides California approximately $3.7 billion in block
grant funds for FY 1996-97 for the provisions of the Law. States are allowed
to implement TANF as soon as possible and will receive a prorated block grant
effective the date of application. The California State Plan was approved
November 27, 1996 to allow grant reductions to be implemented effective
January 1, 1997 and to allow the State to capture approximately $267 million
in additional federal block grant funds over the currently budgeted level.
None of the other federal changes needed to achieve the balance of the $660
million cost savings were enacted. Thus, in lieu of the $660 million savings
initially assumed, it is now projected that savings will total approximately
$320 million.
A preliminary analysis of the Laws by the State Legislative Analyst's Office
indicates that an overall assessment of how these changes will affect the
State's general fund will not be known for some time, and will depend on how
the State implements the Law. There are many choices including how quickly the
State implements the Law; the degree to which the State elects to make up for
cuts in federal aid, provide more aid to counties, or cut some of its own
existing programs for noncitizens; and the State's ability to avoid certain
penalties written into the Law.
Other Subsequent Developments--With the continued strong economic recovery
in the State, the Department of Finance has estimated, in connection with the
release of the Governor's 1997-98 Budget Proposal, that revenues for the 1996-
97 Fiscal Year will exceed initial projections by about $760 million. This
increase
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will be offset by higher expenditures for K-14 school aid (pursuant to
Proposition 98) and for health and welfare costs, because federal law changes
and other federal actions did not provide as much assistance to the State as
was initially planned in the Budget Act. The Department's updated projections
show a balance in the SFEU of $197 million, slightly lower than projected in
July, 1996. The Department also projects the State's cash position will be
stronger than originally estimated, with unused internal borrowable resources
at June 30, 1997 of about $4.3 billion.
1997-98 Fiscal Year Proposed Budget. On January 9, 1997, the Governor
released his proposed budget for the 1997-98 Fiscal Year (the "Governor's
Budget"). The Governor's Budget projects general fund revenues and transfers
in 1997-98 of $50.7 billion, a 4.6% increase from revised 1996-97 figures. The
Governor proposes expenditures of $50.3 billion, a 3.9% increase from 1996-97.
The Governor's Budget projects a balance in the SFEU of $553 million on June
30, 1998. The Governor's Budget also anticipates about $3 billion of external
borrowing for cash flow purposes during the year, with no requirement for
cross-fiscal year borrowing.
Among the major initiatives and features of the Governor's Budget are the
following:
1. A proposed 10% cut in the Bank and Corporation Tax rate, to be phased
in over two years.
2. Proposition 98 funding for K-14 schools will be increased again, as a
result of stronger revenues. Per-pupil funding for K-12 schools will reach
$5,010, compared to $4,220 as recently as the 1993-94 Fiscal Year. Part of
the new funding is proposed to be dedicated to the completion of the
current program to reduce class size to 20 pupils in lower elementary
grades, and to expand the program by one grade, so that it will cover K-3rd
grade.
3. Funding for higher education will be increased consistent with a four-
year "compact" established in 1995-96. There is not projected to be any
increase in student fees at any of the three levels of the State higher
education system.
4. The 1997-98 proposed Governor's Budget assumes approximately $500
million in savings contingent upon federal action. The Budget assumes that
federal law will be enacted to remove the maintenance-of-effort requirement
for Supplemental Security Income (SSI) payments, thereby enabling the state
to reduce grant levels pursuant to previously enacted state law ($279
million). The Budget also assumes the federal government will fund $216
million in costs of health care for illegal immigrants.
The May Revision of the Governor's Budget on May 14, 1997 projected that
revenues will be $2.3 billion higher than estimated in January. However, as
has been the case in a number of the last several years, no budget has been
adopted by the July 1 commencement of the fiscal year. On July 29, 1997 the
Governor rescinded his proposed $1 billion tax cut and ordered $1.2 billion be
paid to the State's retirement system to settle a judgment against the State.
As a result, unanticipated budget cuts to the Proposed Budget are scheduled to
be made.
LOCAL GOVERNMENTS
The primary units of local government in California are the counties,
ranging in population from 1,300 (Alpine) to over 9,000,000 (Los Angeles).
Counties are responsible for the provision of many basic services, including
indigent healthcare, welfare, courts, jails and public safety in
unincorporated areas. There are also about 480 incorporated cities and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the
future growth of property taxes and limited the ability of local governments
to impose "special taxes" (those devoted to a specific purpose) without two-
thirds voter approval.
In the aftermath of Proposition 13, the State provided aid from the general
fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated remnants of this post-Proposition 13 aid to entities other than K-
14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue
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to be under severe fiscal stress. While such stress has in recent years most
often been experienced by smaller, rural counties, larger urban counties, such
as Los Angeles, have also been affected. Orange County implemented significant
reductions in services and personnel, and continues to face fiscal constraints
in the aftermath of its bankruptcy.
Additionally, the State has not adopted legislation implementing Federal
Welfare Reform. Projections of the impact at the county level estimate
increased costs of $1.7 billion, further constraining the financial flexibility
of California counties.
On November 5, 1996, voters approved Proposition 218, entitled the "Right to
Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions enact limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges
and assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees and assessments to changes through local initiatives.
Proposition 218 does not affect the State or its ability to levy or collect
taxes. There are a number of ambiguities concerning the Proposition and its
impact on local governments and their bonded debt which will require
interpretation by the courts or the State Legislature. The State Legislature
Analyst estimated that enactment of Proposition 218 would reduce local
government revenues statewide by over $100 million a year, and that over time
revenues to local government would be reduced by several hundred million
dollars a year under this proposition.
CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT INITIATIVES; PENDING
LEGISLATION
Constitutional and Statutory Limitations. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. Article XIIIA provides
that the maximum ad valorem tax on real property cannot exceed 1% of the "full
cash value" of the property and effectively prohibits the levying of any other
ad valorem tax on real property for general purposes. However, on May 3, 1986,
Proposition 46, an amendment to Article XIIIA, was approved by the voters of
the State of California, creating a new exemption under Article XIIIA
permitting an increase in ad valorem taxes on real property in excess of 1% for
bonded indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. "Full cash value" is defined as "the County Assessor's valuation
of real property as shown on the 1975-76 tax bill under "full cash value" or,
thereafter, the appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the 1975 assessment".
The "full cash value" is subject to annual adjustment to reflect increases (not
to exceed 2%) or decreases in the consumer price index or comparable local
data, or to reflect reductions in property value caused by damage, destruction
or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has financial
responsibility for providing. To the extent that the revenues of the State
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
At the November 9, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount it shall deem reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax rates or fee schedules be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and
accountability. Proposition 98 also amends Article XVI to require that the
State of California provide a minimum level of funding for public schools and
community colleges. Commencing with the 1988-89 Fiscal Year, money to be
applied by the State for the support of school districts
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and community college districts shall not be less than the greater of: (i) the
amount which, as a percentage of the State general fund revenues which may be
appropriated pursuant to Article XIIIB, equals the percentage of such State
general fund revenues appropriated for school districts and community college
districts, respectively, in Fiscal Year 1986-87 or (ii) the amount required to
ensure that the total allocations to school districts and community college
districts from the State general fund proceeds of taxes appropriated pursuant
to Article XIIIB and allocated local proceeds of taxes shall not be less than
the total amount from these sources in the prior year, adjusted for increases
in enrollment and adjusted for changes in the cost of living pursuant to the
provisions of Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirements
for one year. As a result of Proposition 98, funds that the State might
otherwise make available to its political subdivisions may be allocated instead
to satisfy such minimum funding level.
During the recent recession, general fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlement. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay
$935 million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.
Substantially increased general fund revenues, above initial budget
projections, in the 1994-95, 1995-96 and 1996-97 fiscal years have resulted or
will result in retroactive increases in Proposition 98 appropriations from
subsequent fiscal years' budgets.
On November 8, 1994, the voters approved Proposition 187, an initiative
statute ("Proposition 187"). Proposition 187 specifically prohibits funding by
the State of social services, health care services and public school education
for the benefit of any person not verified as either a United States citizen or
a person legally admitted to the United States. Among the provisions in
Proposition 187 pertaining to public school education, the measure requires,
commencing January 1, 1995, that every school district in the State verify the
legal status of every child enrolling in the district for the first time. By
January 1, 1996, each school district must also verify the legal status of
children already enrolled in the district and of all parents or guardians of
all students. If the district "reasonably suspects" that a student, parent or
guardian is not legally in the United States, that district must report the
student to the United States Immigration and Naturalization Service and certain
other parties. The measure also prohibits a school district from providing
education to a student it does not verify as either a United States citizen or
a person legally admitted to the United States. The State Legislative Analyst
estimates that verification costs could be in the tens of millions of dollars
on a statewide level (including verification costs incurred by other local
governments), with first-year costs potentially in excess of $100 million.
The reporting requirements may violate the Family Educational Rights and
Privacy Act ("FERPA"), which generally prohibits schools that receive Federal
funds from disclosing information in student records without parental consent.
Compliance with FERPA is a condition of receiving Federal education funds,
which total $2.3 billion annually to California school districts. The Secretary
of the United States Department of Education has indicated that the reporting
requirements in Proposition 187 could jeopardize the ability of school
districts to receive these funds.
III-7
<PAGE>
Opponents of Proposition 187 have filed at least eight lawsuits challenging
the constitutionality and validity of the measure. On November 2, 1995, a
United States District Court judge struck down the central provisions of
Proposition 187 by ruling that parts of Proposition 187 conflict with Federal
power over immigration. The ruling concluded that states may not enact their
own schemes to "regulate immigration or devise immigration regulations which
run parallel or purport to supplement Federal immigration law". As a
consequence of the ruling, students may not be denied public education and may
not be asked about their immigration status when enrolling in public schools.
Further, the ruling struck down the requirements of Proposition 187 that
teachers and district employees report information on the immigrant status of
students, parents and guardians. An appeal has been filed.
Article XIIIA, Article XIIIB and a number of other propositions were adopted
pursuant to California's constitutional initiative process. From time to time,
other initiative measures could be adopted by California voters. The adoption
of any such initiatives may cause California issuers to receive reduced
revenues, or to increase expenditures, or both.
Pending Litigation. The State is a party to numerous legal proceedings, many
of which normally occur in governmental operations. Some of the more
significant lawsuits pending against the State are described herein.
The State is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to state-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates (Commission)). The Board of
Control decided in favor of local school districts' claims for reimbursement
for special education programs for handicapped students. The case was then
brought to the trial court by the State and later remanded to the Commission
for redetermination. The Commission has since expanded the claim to include
supplemental claims filed by seven other educational institutions; the issuance
of a final consolidated decision is anticipated sometime in early 1997. To
date, the Legislature has not appropriated funds. The liability to the State,
if all potentially eligible school districts pursue timely claims, has been
estimated by the Department of Finance at more than $1 billion.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J. B. Stringfellow, Jr., et al., the State is seeking recovery
for post costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts. Because the State is the present
owner of the site, the State may be found liable. Present estimates of the
cleanup range from $200 million to $800 million.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court finding of liability in inverse
condemnation and awarded damages of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 300 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion. An appeal has been filed.
In Professional Engineers in California Government v. Wilson, the petitioners
are challenging several appropriations in the 1993, 1994, and 1995 Budget Acts.
The appropriations mandate the transfer of approximately $262 million from the
State Highway Account and $113 million from the Motor Vehicle Account to the
general fund and appropriate approximately $6 million from the State Highway
Account to fund a highway-grade crossing program administered by the Public
Utilities Commission. Petitioners contend that the transfers violate several
constitutional provisions and request that the moneys be returned to the State
Highway Account and Motor Vehicle Account.
The State is a defendant in Just Say No To Tobacco Dough Campaign v. State of
California, where the petitioners challenge the appropriation of approximately
$166 million of Proposition 99 funds in the Cigarette and Tobacco Products
Surtax Fund for years ended June 30, 1990, through June 30, 1995 for programs
which were allegedly not health education or tobacco-related disease research.
If the State loses, the general fund and funds from other sources would be used
to reimburse the Cigarette and Tobacco Products Surtax Fund for approximately
$166 million.
III-8
<PAGE>
The State is a defendant in the case of Kurt Hathaway, et al. v. Wilson, et
al., where the plaintiffs are challenging the legality of various budget
action transfers and appropriations from particular special funds for years
ended June 30, 1995, and June 30, 1996. The plaintiffs allege that the
transfers and appropriations are contrary to the substantive law establishing
the funds and providing for interest accruals to the funds, violate the single
subject requirement of the State Constitution, and is an invalid "special
law." Plaintiffs seek to have monies totaling approximately $335 million
returned to the special funds.
The State is a defendant in two related cases, Beno vs. Sullivan (Beno) and
Welch v. Anderson (Welch), concerning reductions in Aid to Families with
Dependent Children (AFDC) grant payments. In the Beno case, plaintiffs seek to
invalidate AFDC grant reductions and in the Welch case, plaintiffs contend
that AFDC grant reductions are not authorized by state law. The Beno case
concerns the total grant reductions while the Welch case concerns the period
of time the State did not have a waiver for those reductions. The State's
potential liability for retroactive AFDC grant reductions is estimated at $831
million if the plaintiffs are awarded the full amount in both cases.
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
("PERS") beginning in Fiscal Year 1992-93. On January 11, 1995, the Sacramento
County Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation were found to be unconstitutional and to transfer to PERS the
1993-94 and 1994-95 contributions that are unpaid to date. On February 19,
1997, the State Court of Appeals affirmed the decision of the Superior Court.
The 1993-94 and 1994-95 transfers to PERS were made pursuant to the
legislation deferring payment. A transfer to PERS of $1.2 billion was ordered
by the Governor on July 29, 1997, representing the transfers for 1995-96 and
for a portion of the 1996-97 fiscal year, including any interest that may be
awarded.
III-9
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, Article VI of the
Registrant's By-Laws and the Registrant's Investment Advisory Agreement with
Fund Asset Management, Inc., now known as Fund Asset Management, L.P. (the
"Investment Adviser") provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be provided to directors,
officers and controlling persons of each Fund, pursuant to the foregoing
provisions or otherwise, each Fund has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and, therefore, is unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by a Fund of expenses incurred or paid by a director, officer
or controlling person of the Registrant in connection with any successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant, unless in the opinion of its counsel the matter
has been settled by controlling precedent, will submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Reference is made to (i) Section Six of the Purchase Agreement relating to
the Registrant's Common Stock, a form of which previously was filed as an
exhibit to the Common Stock Registration Statement (as defined below), and
(ii) Section Seven of the Purchase Agreement relating to the Registrant's
AMPS, a form of which previously was filed as an exhibit to the AMPS
Registration Statement (as defined below), for provisions relating to the
indemnification of the underwriter.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
(1)(a) --Articles of Incorporation of the Registrant(a)
(b) --Articles of Amendment to the Articles of Incorporation(b)
(c) --Form of Articles Supplementary creating the AMPS(c)
(d) --Form of Articles Supplementary creating the Series C AMPS
(2) --By-Laws of the Registrant(d)
(3) --Not applicable
(4) --Form of Agreement and Plan of Reorganization between the Registrant
and Taurus MuniCalifornia Holdings, Inc.(e)
(5)(a) --Specimen certificate for Common Stock(d)
(b) --Form of Certificate for AMPS(c)
(c) --Portions of the Articles of Incorporation and the By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant(f)
(6) --Form of Investment Advisory Agreement between the Registrant and the
Investment Adviser(e)
(7)(a) --Form of Purchase Agreement between the Registrant, the Investment
Adviser and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") relating to the Registrant's Common Stock(b)
(b) --Form of Purchase Agreement between the Registrant, the Investment
Adviser and Merrill Lynch relating to the Registrant's AMPS(c)
(c) --Form of Merrill Lynch Standard Dealer Agreement(a)
(8) --Not applicable
(9) --Form of Custody Agreement between the Registrant and The Bank of New
York(d)
(10) --Not applicable
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <S>
(11) --Opinion and Consent of Brown & Wood LLP, counsel for the
Registrant(g)
(12) --Private Letter Ruling from the Internal Revenue Service(g)
(13)(a) --Form of Transfer Agency and Service Agreement between the Registrant
and The Bank of New York(d)
(b) --Form of Auction Agent Agreement(c)
(c) --Form of Broker-Dealer Agreement(c)
(d) --Form of Depository Agreement(c)
(14)(a) --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant
(b) --Consent of Ernst & Young LLP, independent auditors for Taurus
MuniCalifornia Holdings, Inc.
(15) --Not applicable
(16) --Power of Attorney(h)
</TABLE>
- --------
(a) Incorporated by reference to the Registrant's registration statement on
Form N-2 relating to the Registrant's Common Stock (File Nos. 33-44445 and
811-6499), filed with the Securities and Exchange Commission (the
"Commission") on December 18, 1991 (the "Common Stock Registration
Statement").
(b) Incorporated by reference to Pre-Effective Amendment No. 1 to the Common
Stock Registration Statement filed with the Commission on January 23,
1992.
(c) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2 relating to the
Registrant's Series A and Series B Auction Market Preferred Shares (File
Nos. 33-45622 and 811-6499), filed with the Commission on March 19, 1992.
(d) Incorporated by reference to Pre-Effective Amendment No. 2 to the Common
Stock Registration Statement ("Pre-Effective Amendment No. 2"), filed with
the Commission on February 21, 1992.
(e) Included as Exhibit I to the Proxy Statement and Prospectus included in
this Registration Statement.
(f) Reference is made to Article V, Article VI (section 6), Article VII,
Article VIII, Article X, Article XI, Article XII and Article XIII of the
Registrant's Articles of Incorporation, filed as Exhibit 1 to the Common
Stock Registration Statement; and to Article II, Article III (sections 1,
3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and
Article XIV of the Registrant's By-Laws, filed as Exhibit 1 to Pre-
Effective Amendment No. 2.
(g) To be filed by amendment.
(h) Included on the signature page of this Registration Statement on Form N-
14.
ITEM 17. UNDERTAKINGS.
(a) The Registrant undertakes to suspend offering of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of Common Stock declines more than 10 percent from its net
asset value per share of Common Stock as of the effective date of this
Registration Statement, or (2) its net asset value per share of Common Stock
increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(b) The Registrant undertakes that: (1) For the purpose of determining any
liability under the Securities Act, the information omitted from the form of
prospectus filed as part of a registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant pursuant
to Rule 497(h) under the Securities Act shall be deemed to be a part of the
registration statement as of the time it was declared effective. (2) For the
purpose of determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1993, this Registration Statement has
been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 4th day of August, 1997.
MuniYield California Fund, Inc.
(Registrant)
/s/ Arthur Zeikel
By __________________________________
(ARTHUR ZEIKEL, PRESIDENT)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn and Gerald M. Richard, or any of them, as attorney-in-fact, to
sign on his behalf, individually and in each capacity stated below, any
amendments to this Registration Statement (including post-effective
amendments) and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURES TITLE DATE
/s/ Arthur Zeikel President (Principal August 4, 1997
- ------------------------------------- Executive Officer)
(ARTHUR ZEIKEL) and Director
/s/ Gerald M. Richard Treasurer (Principal August 4, 1997
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
/s/ James H. Bodurtha Director August 4, 1997
- -------------------------------------
(JAMES H. BODURTHA)
/s/ Herbert I. London Director August 4, 1997
- -------------------------------------
(HERBERT I. LONDON)
/s/ Robert R. Martin Director August 4, 1997
- -------------------------------------
(ROBERT R. MARTIN)
/s/ Joseph L. May Director August 4, 1997
- -------------------------------------
(JOSEPH L. MAY)
/s/ Andre F. Perold Director August 4, 1997
- -------------------------------------
(ANDRE F. PEROLD)
C-3
<PAGE>
[Proxy Card Front] COMMON STOCK
MUNIYIELD CALIFORNIA FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Philip
Mandel as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Common Stock of MuniYield California Fund, Inc.
(the "Fund") held of record by the undersigned on August 25, 1997 at the Annual
Meeting of Stockholders of the Fund to be held on October 20, 1997, or any
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and Taurus MuniCalifornia Holdings, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to for all nominees listed below [_]
the contrary below)[_]
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Herbert I. London, Robert R. Martin, Arthur Zeikel
3. To consider and act upon a proposal to ratify the selection of Deloitte &
Touche LLP as the independent auditors of the Fund to serve for the current
fiscal year ending October 31, 1997.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name by
authorized persons.
Dated: ______________________________, 1997
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front] AUCTION MARKET
PREFERRED STOCK
MUNIYIELD CALIFORNIA FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Philip
Mandel as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Auction Market Preferred Stock of MuniYield
California Fund, Inc. (the "Fund") held of record by the undersigned on August
25, 1997 at the Annual Meeting of Stockholders of the Fund to be held on October
20, 1997, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and Taurus MuniCalifornia Holdings, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to for all nominees listed below [_]
the contrary below) [_]
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Herbert I. London, Robert R. Martin, Joseph L. May,
Andre F. Perold, Arthur Zeikel
3. To consider and act upon a proposal to ratify the selection of Deloitte &
Touche llp as the independent auditors of the Fund to serve for the current
fiscal year ending October 31, 1997.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name by
authorized persons.
Dated: ______________________________, 1997
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front] COMMON STOCK
TAURUS MUNICALIFORNIA HOLDINGS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Patrick
D. Sweeney as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Common Stock of Taurus MuniCalifornia Holdings,
Inc. (the "Fund") held of record by the undersigned on August 25, 1997 at a
Special Meeting of Stockholders of the Fund to be held on October 20, 1997, or
any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield California Fund, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name by
authorized persons.
Dated: ______________________________, 1997
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front] AUCTION MARKET
PREFERRED STOCK
TAURUS MUNICALIFORNIA HOLDINGS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Patrick
D. Sweeney as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Auction Market Preferred Stock of Taurus
MuniCalifornia Holdings, Inc. (the "Fund") held of record by the undersigned on
August 25, 1997 at a Special Meeting of Stockholders of the Fund to be held on
October 20, 1997, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield California Fund, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name by
authorized persons.
Dated: ______________________________, 1997
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
EXHIBIT 1(d)
MUNIYIELD CALIFORNIA FUND, INC.
Articles Supplementary creating a series of
Auction Market Preferred Stock(R)
MUNIYIELD CALIFORNIA FUND, INC., a Maryland corporation having its
principal Maryland office in the City of Baltimore (the "Corporation"),
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by article fifth of its Charter, the Board of Directors has
reclassified 800 authorized and unissued shares of common stock of the
Corporation as preferred stock of the Corporation and has authorized the
issuance of two series of preferred stock, par value $.10 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) thereon, to be designated Auction
Market Preferred Stock, Series C.
SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the shares
of such series of preferred stock are as follows:
_____________________
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
DESIGNATION
A series of 800 shares of preferred stock, par value $.10 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared) thereon, is hereby
designated "Auction Market Preferred Stock, Series C." Each share of Auction
Market Preferred Stock, Series C (sometimes referred to herein as "AMPS") shall
be issued on a date to be determined by the Board of Directors of the
Corporation or pursuant to their delegated authority; have an Initial Dividend
Rate and an Initial Dividend Payment Date as shall be determined in advance of
the issuance thereof by the Board of Directors of the Corporation or pursuant to
their delegated authority; and have such other preferences, voting powers,
limitations as to dividends, qualifications and terms and conditions of
redemption as are set forth in these Articles Supplementary. The Auction Market
Preferred Stock, Series C shall constitute a separate series of preferred stock
of the Corporation, and each share of Auction Market Preferred Stock, Series C
shall be identical.
1. Definitions. (a) Unless the context or use indicates another or
-----------
different meaning or intent, in these Articles Supplementary the following terms
have the following meanings, whether used in the singular or plural:
"'AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate
2
<PAGE>
bonds are rated "AA" by S&P or "Aa" by Moody's or the equivalent of such rating
by another nationally recognized rating agency, as such rate is made available
on a discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day immediately preceding such date, or (ii) in the event that the
Federal Reserve Bank of New York does not make available such a rate, then the
arithmetic average of the Interest Equivalent of the rate on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise by
Merrill Lynch, Pierce, Fenner & Smith Incorporated or its successors that are
Commercial Paper Dealers, to the Auction Agent for the close of business on the
Business Day immediately preceding such date. If one of the Commercial Paper
Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Corporation to provide such rate or rates not being supplied by
the Commercial Paper Dealer. If the number of Dividend Period days shall be (i)
7 or more but fewer than 49 days, such rate shall be the Interest Equivalent of
the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate shall
be the arithmetic average of the Interest Equivalent on the 60-day and 90-day
rates on such
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<PAGE>
commercial paper; (iv) 85 or more days but fewer than 99 days, such rate shall
be the Interest Equivalent of the 90-day rate on such commercial paper; (v) 99
or more days but fewer than 120 days, such rate shall be the arithmetic average
of the Interest Equivalent of the 90-day and 120-day rates on such commercial
paper; (vi) 120 or more days but fewer than 141 days, such rate shall be the
Interest Equivalent of the 120-day rate on such commercial paper; (vii) 141 or
more days but fewer than 162 days, such rate shall be the arithmetic average of
the Interest Equivalent of the 120-day and 180-day rates on such commercial
paper; and (viii) 162 or more days but fewer than 183 days, such rate shall be
the Interest Equivalent of the 180-day rate on such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph
7(c) of these Articles Supplementary.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of
these Articles Supplementary.
"Adviser" means the Corporation's investment adviser which initially
shall be Fund Asset Management, L.P.
"Affiliate" means any Person, other than Merrill Lynch, Pierce, Fenner
& Smith Incorporated or its successors, known to the Auction Agent to be
controlled by, in control of, or under common control with, the Corporation.
"Agent Member" means a member of the Securities Depository that will
act on behalf of a Beneficial Owner of one or more shares of AMPS or a Potential
Beneficial Owner.
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<PAGE>
"AMPS" means the Auction Market Preferred Stock, Series C.
"AMPS Basic Maintenance Amount," as of any Valuation Date, means the
dollar amount equal to (i) the sum of (A) the product of the number of shares of
AMPS and Other AMPS Outstanding on such Valuation Date multiplied by the sum of
(a) $25,000 and (b) any applicable redemption premium attributable to the
designation of a Premium Call Period; (B) the aggregate amount of cash dividends
(whether or not earned or declared) that will have accumulated for each share of
AMPS and Other AMPS Outstanding, in each case, to (but not including) the end of
the current Dividend Period that follows such Valuation Date in the event the
then current Dividend Period will end within 49 calendar days of such Valuation
Date or through the 49th day after such Valuation Date in the event the then
current Dividend Period will not end within 49 calendar days of such Valuation
Date; (C) in the event the then current Dividend Period will end within 49
calendar days of such Valuation Date, the aggregate amount of cash dividends
that would accumulate at the Maximum Applicable Rate applicable to a Dividend
Period of 28 or fewer days on any shares of AMPS and Other AMPS Outstanding from
the end of such Dividend Period through the 49th day after such Valuation Date,
multiplied by the larger of the Moody's Volatility Factor and the S&P Volatility
Factor, determined from time to time by Moody's and S&P, respectively (except
that if such Valuation Date occurs during a Non-Payment Period, the cash
dividend for purposes of calculation would accumulate at the then current Non-
Payment Period Rate);
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(D) the amount of anticipated expenses of the Corporation for the 90 days
subsequent to such Valuation Date (including any premiums payable with respect
to a Policy); (E) the amount of the Corporation's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current liabilities as
of such Valuation Date to the extent not reflected in any of (i)(A) through
(i)(E) (including, without limitation, and immediately upon determination, any
amounts due and payable by the Corporation pursuant to repurchase agreements and
any amounts payable for California Municipal Bonds or Municipal Bonds purchased
as of such Valuation Date) less (ii) either (A) the Discounted Value of any of
the Corporation's assets, or (B) the face value of any of the Corporation's
assets if such assets mature prior to or on the date of redemption of AMPS or
payment of a liability and are either securities issued or guaranteed by the
United States Government or Deposit Securities, in both cases irrevocably
deposited by the Corporation for the payment of the amount needed to redeem
shares of AMPS subject to redemption or any of (i)(B) through (i)(F).
"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Corporation to satisfy the AMPS Basic Maintenance Amount (as required by
paragraph 7(a) of these Articles Supplementary) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.
"AMPS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any
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<PAGE>
Vice President of the Corporation which sets forth, as of the related Valuation
Date, the assets of the Corporation, the Market Value and the Discounted Value
thereof (seriatim and in aggregate), and the AMPS Basic Maintenance Amount.
"Anticipation Notes" shall mean the following California Municipal
Bonds: revenue anticipation notes, tax anticipation notes, tax and revenue
anticipation notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in p 10(a)(vii) of
these Articles Supplementary.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS or Other AMPS, as the case may be, for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Schroder Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Directors of the Corporation or a duly
authorized committee thereof enters into an agreement with the Corporation to
follow the Auction Procedures for the purpose of determining the Applicable Rate
and to act as transfer agent, registrar, dividend disbursing agent and
redemption agent for the AMPS and Other AMPS.
7
<PAGE>
"Auction Procedures" means the procedures for conducting Auctions set forth
in paragraph 10 of these Articles Supplementary.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed
on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in paragraph 10 of these
Articles Supplementary, that has been selected by the Corporation and has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a
Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of these Articles Supplementary.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York are authorized or obligated by law to close.
"California Municipal Bonds" means municipal obligations issued by or
on behalf of the State of California, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of
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<PAGE>
bond counsel to the issuer, is exempt from Federal and California income taxes.
"Charter" means the Articles of Incorporation, as amended and
supplemented (including these Articles Supplementary), of the Corporation on
file in the State Department of Assessments and Taxation of Maryland.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce,
Fenner & Smith Incorporated and such other commercial paper dealer or dealers as
the Corporation may from time to time appoint, or, in lieu of any thereof, their
respective affiliates or successors.
"Common Stock" means the common stock, par value $.10 per share, of the
Corporation.
"Corporation" means MuniYield California Fund, Inc., a Maryland
corporation.
"Date of Original Issue" means, with respect to any share of AMPS or Other
AMPS, the date on which the Corporation originally issues such share.
"Deposit Securities" means cash and California Municipal Bonds and
Municipal Bonds rated at least A2 (having a remaining maturity of 12 months or
less), P-1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12
months or less), A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the
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<PAGE>
applicable S&P Discount Factor and (ii) with respect to a Moody's Eligible
Asset, the lower of par and the quotient of the Market Value thereof divided by
the applicable Moody's Discount Factor.
"Dividend Payment Date," with respect to AMPS, has the meaning set forth in
paragraph 2(b)(i) of these Articles Supplementary and, with respect to Other
AMPS, has the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 28-Day Dividend
Period and any Special Dividend Period.
"Existing Holder" means a Broker-Dealer or any such other Person as may be
permitted by the Corporation that is listed as the holder of record of shares of
AMPS in the Stock Books.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of these
Articles Supplementary.
"Holder" means a Person identified as a holder of record of shares of AMPS
in the Stock Register.
"Independent Accountant" means a nationally recognized accountant or firm
of accountants, that is, with respect to the Corporation, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Directors of the Corporation with respect to the
AMPS.
"Initial Dividend Period," with respect to the AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Sup-
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<PAGE>
plementary and, with respect to Other AMPS, has the equivalent meaning.
"Initial Dividend Rate," with respect to the AMPS, means the rate per annum
applicable to the Initial Dividend Period for the AMPS and, with respect to
Other AMPS, has the equivalent meaning.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Long Term Dividend Period" means a Special Dividend Period consisting of a
specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of AMPS plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Corporation shall be the market value
thereof determined by the Pricing Service. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service shall value portfolio
securities at the
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<PAGE>
quoted bid prices or the mean between the quoted bid and asked price or the
yield equivalent when quotations are not readily available. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the Corporation from dealers who are
members of the National Association of Securities Dealers, Inc. and make a
market in the security, at least one of which shall be in writing. Futures
contracts and options are valued at closing prices for such instruments
established by the exchange or board of trade on which they are traded, or if
market quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Board of
Directors.
"Maximum Applicable Rate," with respect to AMPS, has the meaning set forth
in paragraph 10(a)(vii) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Maximum Potential Additional Dividend Liability," as of any Valuation Date,
means the aggregate amount of Additional
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<PAGE>
Dividends that would be due if the Corporation were to make Retroactive Taxable
Allocations, with respect to any fiscal year, estimated based upon dividends
paid and the amount of undistributed realized net capital gains and other
taxable income earned by the Corporation, as of the end of the calendar month
immediately preceding such Valuation Date and assuming such Additional Dividends
are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any California Municipal Bond or Municipal Bond which constitutes a
Moody's Eligible Asset, the percentage determined by reference to (a) the rating
by Moody's or S&P on such Bond and (b) the Moody's Exposure Period, in
accordance with the table set forth below:
<TABLE>
<CAPTION>
Rating Category
-------------------------------------------------------
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1*** SP-1+***
- -------------------------- ----- ---- ---- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less........... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven weeks.. 154 164 173 205 235 137 149
9 weeks or less but
greater than eight weeks.. 158 169 179 209 242 138 150
- ---------------
</TABLE>
* Moody's rating.
** California Municipal Bonds and Municipal Bonds not rated
by Moody's but rated BBB or BBB+ by S&P.
*** California Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1
or, if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not mature
or have a demand feature at par exercisable within the Moody's Exposure
Period and which do not have a long-term rating. For the purposes of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of "A" by Moody's.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term California Municipal Bonds and short-term Municipal Bonds,
so long as such California
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<PAGE>
Municipal Bonds and Municipal Bonds are rated at least MIG-1, VMIG-1 or P-1 by
Moody's and mature or have a demand feature at par exercisable within the
Moody's Exposure Period, and the Moody's Discount Factor for such Bonds will be
125% if such Bonds are not rated by Moody's but are rated A-1+ or SP-1+ or AA by
S&P and mature or have a demand feature at par exercisable within the Moody's
Exposure Period, and (ii) no Moody's Discount Factor will be applied to cash or
to Receivables for California Municipal Bonds or Municipal Bonds Sold.
"Receivables for California Municipal Bonds or Municipal Bonds Sold," for
purposes of calculating Moody's Eligible Assets as of any Valuation Date, means
no more than the aggregate of the following: (i) the book value of receivables
for California Municipal Bonds or Municipal Bonds sold as of or prior to such
Valuation Date if such receivables are due within five Business Days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Corporation has
received prior written authorization from Moody's or (y) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the Moody's
Discounted Value of California Municipal Bonds or Municipal Bonds sold as of or
prior to such Valuation Date which generated receivables, if such receivables
are due within five Business Days of such Valuation Date but do not comply with
either of conditions (x) or (y) of the preceding clause (i).
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<PAGE>
"Moody's Eligible Asset" means cash, Receivables for California Municipal
Bonds or Municipal Bonds Sold, a California Municipal Bond or a Municipal Bond
that (i) pays interest in cash, (ii) is publicly rated Baa or higher by Moody's
or, if not rated by Moody's but rated by S&P, is rated at least BBB by S&P
(provided that, for purposes of determining the Moody's Discount Factor
applicable to any such S&P-rated California Municipal Bond or S&P-rated
Municipal Bond, such California Municipal Bond or Municipal Bond (excluding any
short-term California Municipal Bond or Municipal Bond) will be deemed to have a
Moody's rating which is one full rating category lower than its S&P rating),
(iii) does not have its Moody's rating suspended by Moody's; and (iv) is part of
an issue of California Municipal Bonds or Municipal Bonds of at least
$10,000,000. In addition, California Municipal Bonds and Municipal Bonds in the
Corporation's portfolio must be within the following diversification
requirements in order to be included within Moody's Eligible Assets:
<TABLE>
<CAPTION>
Minimum Maximum Maximum Maximum Maximum
Issue Size Underlying Issue Type County State or Territory
Rating ($ Millions) Obligor (%)(1) Concentration(%)(1)(3) Concentration(%)(1)(4) Concentration (1)(5)
- ---------------- ------------ --------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
Aaa....... 10 100 100 100 100
Aa........ 10 20 60 60 60
A......... 10 10 40 40 40
Baa....... 10 6 20 20 20
Other(2).. 10 4 12 12 12
- -----------------
</TABLE>
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating
category.
(2) California Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to California Municipal Bonds. Territorial bonds (other
than those issued by Puerto Rico and counted collectively) are each
limited to 10% of Moody's Eligible Assets. For diversification purposes,
Puerto Rico will be treated as a state.
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<PAGE>
For purposes of the maximum underlying obligor requirement described above, any
such California Municipal Bond or Municipal Bond backed by the guaranty, letter
of credit or insurance issued by a third party will be deemed to be issued by
such third party if the issuance of such third party credit is the sole
determinant of the rating on such Bond. For purposes of the issue type
concentration requirement described above, California Municipal Bonds and
Municipal Bonds will be classified within one of the following categories:
health care issues (teaching and non-teaching hospitals, public and private),
housing issues (single- and multi-family), educational facilities issues (public
and private schools), student loan issues, resource recovery issues,
transportation issues (mass transit, airport and highway bonds), industrial
revenue/pollution control bond issues, utility issues (including water, sewer
and electricity), general obligation issues, lease obligations/certificates of
participation, escrowed bonds and other issues ("Other Issues") not falling
within one of the aforementioned categories (includes special obligations to
crossover, excise and sales tax revenue, recreation revenue, special assessment
and telephone revenue bonds). In no event shall (a) more than 10% of Moody's
Eligible Assets consist of student loan issues, (b) more than 10% of Moody's
Eligible Assets consist of resource recovery issues or (c) more than 10% of
Moody's Eligible Assets consist of Other Issues.
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<PAGE>
When the Corporation sells a California Municipal Bond or Municipal Bond and
agrees to repurchase it at a future date, the Discounted Value of such Bond will
constitute a Moody's Eligible Asset and the amount the Corporation is required
to pay upon repurchase of such Bond will count as a liability for purposes of
calculating the AMPS Basic Maintenance Amount. When the Corporation purchases a
California Municipal Bond or Municipal Bond and agrees to sell it at a future
date to another party, cash receivable by the Corporation thereby will
constitute a Moody's Eligible Asset if the long-term debt of such other party is
rated at least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such Bond will constitute a Moody's Eligible
Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward Commitment
or (iv) irrevocably deposited by the Corporation for the payment of dividends or
redemption.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and shall initially be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
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<PAGE>
"Moody's Hedging Transactions" has the meaning set forth in paragraph 8(b) of
these Articles Supplementary.
"Moody's Volatility Factor" means 272% as long as there has been no increase
enacted to the Marginal Tax Rate. If such an increase is enacted but not yet
implemented, the Moody's Volatility Factor shall be as follows:
% Change in
Marginal Tax Moody's Volatility
Rate Factor
-------------- ------------------
Less than 5% 292%
Greater than 5% but Less than or equal to 10% 313%
Greater than 10% but Less than or equal to 15% 338%
Greater than 15% but Less than or equal to 20% 364%
Greater than 20% but Less than or equal to 25% 396%
Greater than 25% but Less than or equal to 30% 432%
Greater than 30% but Less than or equal to 35% 472%
Greater than 35% but Less than or equal to 40% 520%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such other
potential dividend rate increase factor as Moody's advises the Corporation in
writing is applicable.
"Municipal Bonds" means "Municipal Bonds" as defined in the Corporation's
Registration Statement on Form N-14 (File No. 333-____) on file with the
Securities and Exchange Commission, as such Registration Statement may be
amended from time to time, as well as short-term municipal obligations.
"Municipal Index" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
"1940 Act AMPS Asset Coverage" means asset coverage, as defined in section
18(h) of the 1940 Act, of at least 200% with
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<PAGE>
respect to all outstanding senior securities of the Corporation which are stock,
including all outstanding shares of AMPS and Other AMPS (or such other asset
coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are stock of a closed-end
investment company as a condition of paying dividends on its common stock).
"1940 Act Cure Date," with respect to the failure by the Corporation to
maintain the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of these
Articles Supplementary) as of the last Business Day of each month, means the
last Business Day of the following month.
"Non-Call Period" has the meaning set forth under the definition of "Specific
Redemption Provisions".
"Non-Payment Period" means, with respect to the AMPS, any period commencing
on and including the day on which the Corporation shall fail to (i) declare,
prior to the close of business on the second Business Day preceding any Dividend
Payment Date, for payment on or (to the extent permitted by paragraph 2(c)(i) of
these Articles Supplementary) within three Business Days after such Dividend
Payment Date to the Holders as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date, the full amount of any
dividend on shares of AMPS payable on such Dividend Payment Date or (ii)
deposit, irrevocably in trust, in same-day funds, with the Auction Agent by
12:00 noon, New York City time, (A) on such Dividend Payment Date the full
amount of any cash dividend on
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<PAGE>
such shares payable (if declared) on such Dividend Payment Date or (B) on any
redemption date for any shares of AMPS called for redemption, the Mandatory
Redemption Price per share of such AMPS or, in the case of an optional
redemption, the Optional Redemption Price per share, and ending on and including
the Business Day on which, by 12:00 noon, New York City time, all unpaid cash
dividends and unpaid redemption prices shall have been so deposited or shall
have otherwise been made available to Holders in same-day funds; provided that,
a Non-Payment Period shall not end unless the Corporation shall have given at
least five days' but no more than 30 days' written notice of such deposit or
availability to the Auction Agent, all Existing Holders (at their addresses
appearing in the Stock Books) and the Securities Depository. Notwithstanding
the foregoing, the failure by the Corporation to deposit funds as provided for
by clauses (ii)(A) or (ii)(B) above within three Business Days after any
Dividend Payment Date or redemption date, as the case may be, in each case to
the extent contemplated by paragraph 2(c)(i) of these Articles Supplementary,
shall not constitute a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable Reference
Rate (or 275% of such rate if the Corporation has provided notification to the
Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend pursuant to paragraph 2(f) hereof that net capital gains or other
taxable income will be included in such dividend on shares of
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<PAGE>
AMPS), provided that the Board of Directors of the Corporation shall have the
authority to adjust, modify, alter or change from time to time the initial Non-
Payment Period Rate if the Board of Directors of the Corporation determines and
Moody's and S&P (or any Substitute Rating Agency in lieu of Moody's or S&P in
the event either of such parties shall not rate the AMPS) advise the Corporation
in writing that such adjustment, modification, alteration or change will not
adversely affect their then-current ratings on the AMPS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph 2(b)(i)
of these Articles Supplementary.
"Notice of Redemption" means any notice with respect to the redemption of
shares of AMPS pursuant to paragraph 4 of these Articles Supplementary.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii) of
these Articles Supplementary.
"Notice of Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of these Articles Supplementary.
"Optional Redemption Price" means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption and excluding Additional Dividends plus any applicable
redemption premium attributable to the designation of a Premium Call Period.
"Other AMPS" means the Auction Market Preferred Stock, Series A, Auction
Market Preferred Stock, Series B and any other
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<PAGE>
auction rate preferred stock of the Corporation, other than the AMPS.
"Outstanding" means, as of any date (i) with respect to AMPS, shares of AMPS
theretofore issued by the Corporation except, without duplication, (A) any
shares of AMPS theretofore cancelled or delivered to the Auction Agent for
cancellation, or redeemed by the Corporation, or as to which a Notice of
Redemption shall have been given and Deposit Securities shall have been
deposited in trust or segregated by the Corporation pursuant to paragraph 4(c)
and (B) any shares of AMPS as to which the Corporation or any Affiliate thereof
shall be a Beneficial Owner, provided that shares of AMPS held by an Affiliate
shall be deemed outstanding for purposes of calculating the AMPS Basic
Maintenance Amount and (ii) with respect to shares of other Preferred Stock, has
the equivalent meaning.
"Parity Stock" means the AMPS and each other outstanding series of Preferred
Stock the holders of which, together with the holders of the AMPS, shall be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
22
<PAGE>
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a Broker-
Dealer that is not a Beneficial Owner of shares of AMPS but that wishes to
purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other Person as may be
permitted by the Corporation, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing Holder,
additional shares of AMPS).
"Preferred Stock" means the preferred stock of the Corporation, and includes
AMPS and Other AMPS.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Pricing Service" means J.J. Kenny or any pricing service designated by the
Board of Directors of the Corporation provided the Corporation obtains written
assurance from S&P and Moody's that such designation will not impair the rating
then assigned by S&P and Moody's to the AMPS.
"Quarterly Valuation Date" means the twenty-first day of the last month of
each fiscal quarter of the Corporation (or, if such day is not a Business Day,
the next succeeding Business Day) in each fiscal year of the Corporation,
commencing _________, 1998.
"Receivables for California Municipal Bonds Sold" has the meaning set forth
under the definition of S&P Discount Factor.
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<PAGE>
"Receivables for California Municipal Bonds or Municipal Bonds Sold" has the
meaning set forth under the definition of Moody's Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short Term
Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or
more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv)
with respect to any Long Term Dividend Period, the applicable U.S. Treasury Note
Rate.
"Request for Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of these Articles Supplementary.
"Response" has the meaning set forth in paragraph 2(c)(iii) of these Articles
Supplementary.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph 2(e)
of these Articles Supplementary.
"Right," with respect to the AMPS, has the meaning set forth in paragraph
2(e) of these Articles Supplementary and, with respect to Other AMPS, has the
equivalent meaning.
"S&P" means Standard & Poor's Ratings Services or its successors.
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<PAGE>
"S&P Discount Factor" means, for purposes of determining the Discounted Value
of any California Municipal Bond which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a) the rating by S&P or Moody's on such
Bond (b) the S&P Exposure Period, in accordance with the tables set forth below:
<TABLE>
<CAPTION>
For California Municipal Bonds:
- -------------------------------
Rating Category
------------------------
S&P Exposure Period AAA* AA* A* BBB*
- --------------------------------- ----- ---- ---- -----
<S> <C> <C> <C> <C>
40 Business Days................. 200% 205% 220% 260%
22 Business Days................. 180 185 200 240
10 Business Days................. 165 170 185 225
7 Business Days................. 160 165 180 220
3 Business Days................. 140 145 160 200
</TABLE>
- -------------------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-
term California Municipal Bonds will be 115%, so long as such California
Municipal Bonds are rated A-1+ or SP-1+ by S&P and mature or have a demand
feature exercisable in 30 days or less, or 125% if such California Municipal
Bonds are not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's;
provided, however, such short-term California Municipal Bonds rated by Moody's
but not rated by S&P having a demand feature exercisable in 30 days or less must
be backed by a letter of credit, liquidity facility or guarantee from a bank or
other financial institution having a short-term rating of at least A-1+ from
S&P; and further provided that such short-term California Municipal Bonds rated
by Moody's but not rated by S&P may comprise no more
25
<PAGE>
than 50% of short-term California Municipal Bonds that qualify as S&P Eligible
Assets and (ii) no S&P Discount Factor will be applied to cash or to Receivables
for California Municipal Bonds Sold. "Receivables for California Municipal
Bonds Sold," for purposes of calculating S&P Eligible Assets as of any Valuation
Date, means the book value of receivables for California Municipal Bonds sold as
of or prior to such Valuation Date if such receivables are due within five
Business Days of such Valuation Date. The Corporation may adopt S&P Discount
Factors for Municipal Bonds other than California Municipal Bonds provided that
S&P advises the Corporation in writing that such action will not adversely
affect its then current rating on the AMPS. For purposes of the foregoing,
Anticipation Notes rated SP-1+ or, if not rated by S&P, rated VMIG-1 by Moody's,
which do not mature or have a demand feature exercisable in 30 days and which do
not have a long-term rating, shall be considered to be short-term California
Municipal Bonds.
"S&P Eligible Asset" means cash, Receivables for California Municipal
Bonds Sold or a California Municipal Bond that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in United States Dollars; (iii) is publicly rated BBB or higher by S&P
or, except in the case of Anticipation Notes that are grant anticipation notes
or bond anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's, is rated at least A
by Moody's (provided
26
<PAGE>
that such Moody's-rated California Municipal Bonds will be included in S&P
Eligible Assets only to the extent the Market Value of such California Municipal
Bonds does not exceed 50% of the aggregate Market Value of the S&P Eligible
Assets; and further provided that, for purposes of determining the S&P Discount
Factor applicable to any such Moody's-rated California Municipal Bond, such
California Municipal Bond will be deemed to have an S&P rating which is one full
rating category lower than its Moody's rating); (iv) is not subject to a covered
call or covered put option written by the Corporation; (v) is not part of a
private placement of California Municipal Bonds; and (vi) is part of an issue of
California Municipal Bonds with an original issue size of at least $20 million
or, if of an issue with an original issue size below $20 million (but in no
event below $10 million), is issued by an issuer with a total of at least $50
million of securities outstanding. Notwithstanding the foregoing:
(1) California Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to
the extent the Market Value of such California Municipal Bonds does not
exceed 10% of the aggregate Market Value of the S&P Eligible Assets,
provided that 2% is added to the applicable S&P Discount Factor for every
1% by which the Market Value of such California Municipal Bonds exceeds 5%
of the aggregate Market Value of the S&P Eligible Assets;
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<PAGE>
(2) California Municipal Bonds guaranteed or insured by any one bond
insurer will be considered S&P Eligible Assets only to the extent the fair
market value of such California Municipal Bonds does not exceed 25% of the
aggregate fair market value of the S&P Eligible Assets; and
(3) California Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent
the Market Value of such Bonds does not exceed 20% of the aggregate Market
Value of S&P Eligible Assets, except that California Municipal Bonds
falling within the utility issue type category will be broken down into
three sub-categories (as described below) and such California Municipal
Bonds will be considered S&P Eligible Assets to the extent the Market Value
of such Bonds in each such sub-category does not exceed 20% of the
aggregate Market Value of S&P Eligible Assets. For purposes of the issue
type category requirement described above, California Municipal Bonds will
be classified within one of the following categories: health care issues,
housing issues, educational facilities issues, student loan issues,
transportation issues, industrial development bond issues, utility issues,
general obligation issues, lease obligations, escrowed bonds and other
issues not falling within one of the aforementioned categories. For
purposes of the issue type category requirement described above, California
Municipal Bonds in the utility issue type
28
<PAGE>
category will be classified within one of the three following sub-
categories: (i) electric, gas and combination issues (if the combination
issue includes an electric issue), (ii) water and sewer utilities and
combination issues (if the combination issue does not include an electric
issue), and (iii) irrigation, resource recovery, solid waste and other
utilities, provided that California Municipal Bonds included in this sub-
category (iii) must be rated by S&P in order to be included in S&P Eligible
Assets.
The Corporation may include Municipal Bonds other than California Municipal
Bonds as S&P Eligible Assets pursuant to guidelines and restrictions to be
established by S&P provided that S&P advises the Corporation in writing that
such action will not adversely affect its then current rating on the AMPS.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance Cure
Date, that the Corporation has under these Articles Supplementary to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the AMPS Basic Maintenance Amount (as described in
paragraph 7(a) of these Articles Supplementary).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a) of
these Articles Supplementary.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Corporation in writing is applicable.
29
<PAGE>
"Securities Depository" means The Depository Trust Company or any successor
company or other entities elected by the Corporation as securities depository
for the shares of AMPS that agrees to follow the procedures required to be
followed by such securities depository in connection with the shares of AMPS.
"Service" means the United States Internal Revenue Service.
"Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days (other than 28), evenly divisible by seven and not
fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than 28), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Directors of the Corporation, after consultation with
the Auction Agent and the Broker-Dealers, during which the shares of AMPS
subject to such Dividend Period shall not be subject to redemption at the option
of the Corporation and (ii) a period (a "Premium Call Period"), consisting of a
number of whole years and determined by the Board of Directors of the
Corporation, after consultation with the Auction Agent and the Broker-Dealers,
during each year of which the shares of AMPS subject to such Dividend Period
shall
30
<PAGE>
be redeemable at the Corporation's option at a price per share equal to $25,000
plus accumulated but unpaid dividends plus a premium expressed as a percentage
of $25,000, as determined by the Board of Directors of the Corporation after
consultation with the Auction Agent and the Broker-Dealers.
"Stock Books" means the books maintained by the Auction Agent setting forth
at all times a current list, as determined by the Auction Agent, of Existing
Holders of the AMPS.
"Stock Register" means the register of Holders maintained on behalf of the
Corporation by the Auction Agent in its capacity as transfer agent and registrar
for the AMPS.
"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Corporation may from time to time appoint or, in
lieu of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and successors,
after consultation with the Corporation, to act as the substitute rating agency
or
31
<PAGE>
substitute rating agencies, as the case may be, to determine the credit ratings
of the shares of AMPS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., New York City
time, on such date by Kenny Information Systems Inc. or any successor thereto,
based upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Code of "high
grade" component issuers selected by Kenny Information Systems Inc. or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal); provided, however, that if the Kenny Index is not made
so available by 8:30 A.M., New York City time, on such date by Kenny Information
Systems Inc. or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed
on an interest equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business
32
<PAGE>
Day, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal).
The Corporation may not utilize a successor index to the Kenny Index unless
Moody's and S&P provide the Corporation with written confirmation that the use
of such successor index will not adversely affect the then-current respective
Moody's and S&P ratings of the AMPS.
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"28-Day Dividend Period" means a Dividend Period consisting of 28 days.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate"
on any date means the Interest Equivalent of the yield as calculated by
reference to the arithmetic average of the bid price quotations of the actively
traded Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time on
the Business Day immediately preceding such date, obtained from at least three
33
<PAGE>
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate"
on any date means the yield as calculated by reference to the arithmetic average
of the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the Corporation
is maintaining the AMPS Basic Maintenance Amount, each Business Day commencing
with the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Corporation, the amount of cash or securities paid
to or received from a broker (subsequent
34
<PAGE>
to the Initial Margin payment) from time to time as the price of such futures
contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Market Value, Maximum Potential Additional Dividend Liability, Moody's
Discount Factor, Moody's Eligible Asset, Moody's Exposure Period, Moody's
Hedging Transactions, Moody's Volatility Factor, S&P Discount Factor, S&P
Eligible Asset, S&P Exposure Period, S&P Hedging Transactions, S&P Volatility
Factor, Valuation Date and Variation Margin have been determined by the Board of
Directors of the Corporation in order to obtain a "aaa" rating from Moody's and
a AAA rating from S&P on the AMPS on their Date of Original Issue; and the Board
of Directors of the Corporation shall have the authority, without shareholder
approval, to amend, alter or repeal from time to time the foregoing definitions
and the restrictions and guidelines set forth thereunder if Moody's and S&P or
any Substitute Rating Agency advises the Corporation in writing that such
amendment, alteration or repeal will not adversely affect their then current
ratings on the AMPS.
2. Dividends. (a) The Holders shall be entitled to receive, when, as
---------
and if declared by the Board of Directors of the Corporation, out of funds
legally available therefor, cumulative dividends each consisting of (i) cash at
the Applicable Rate, (ii) a Right to receive cash as set forth in paragraph 2(e)
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<PAGE>
below, and (iii) any additional amounts as set forth in paragraph 2(f) below,
and no more, payable on the respective dates set forth below. Dividends on the
shares of AMPS so declared and payable shall be paid (i) in preference to and in
priority over any dividends declared and payable on the Common Stock, and (ii)
to the extent permitted under the Code and to the extent available, out of net
tax-exempt income earned on the Corporation's investments. To the extent
permitted under the Code, dividends on shares of AMPS will be designated as
exempt-interest dividends. For the purposes of this section, the term "net tax-
exempt income" shall exclude capital gains of the Corporation.
(b) (i) Cash dividends on shares of AMPS shall accumulate from the Date
of Original Issue and shall be payable, when, as and if declared by the Board of
Directors, out of funds legally available therefor, commencing on the Initial
Dividend Payment Date with respect to the AMPS. Following the Initial Dividend
Payment Date for the AMPS, dividends on the AMPS will be payable, at the option
of the Corporation, either (i) with respect to any 28-Day Dividend Period and
any Short Term Dividend Period of 35 or fewer days, on the day next succeeding
the last day thereof or (ii) with respect to any Short Term Dividend Period of
more than 35 days and with respect to any Long Term Dividend Period, monthly on
the first Business Day of each calendar month during such Short Term Dividend
Period or Long Term Dividend Period and on the day next succeeding the last day
thereof (each such date
36
<PAGE>
referred to in clause (i) or (ii) being herein referred to as a "Normal Dividend
Payment Date"), except that if such Normal Dividend Payment Date is not a
Business Day, then (i) the Dividend Payment Date shall be the first Business Day
next succeeding such Normal Dividend Payment Date if such Normal Dividend
Payment Date is a Monday, Tuesday, Wednesday or Thursday, or (ii) the Dividend
Payment Date shall be the first Business Day next preceding such Normal Dividend
Payment Date if such Normal Dividend Payment Date is a Friday. Although any
particular Dividend Payment Date may not occur on the originally scheduled date
because of the exceptions discussed above, the next succeeding Dividend Payment
Date, subject to such exceptions, will occur on the next following originally
scheduled date. If for any reason a Dividend Payment Date cannot be fixed as
described above, then the Board of Directors shall fix the Dividend Payment
Date. The Board of Directors by resolution may change a Dividend Payment Date
if such change does not adversely affect the contract rights of Holders of
shares of AMPS set forth in the Charter. The Initial Dividend Period, 28-Day
Dividend Periods and Special Dividend Periods are hereinafter sometimes referred
to as Dividend Periods. Each dividend payment date determined as provided above
is hereinafter referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the
Stock Register as of 12:00 noon, New York City time, on the Business Day
preceding the Dividend Payment Date.
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<PAGE>
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the Holders
as they appear on the Stock Register on a date, not exceeding 15 days prior to
the payment date therefor, as may be fixed by the Board of Directors of the
Corporation.
(c) (i) During the period from and including the Date of Original Issue
to but excluding the Initial Dividend Payment Date for the AMPS (the "Initial
Dividend Period"), the Applicable Rate shall be the Initial Dividend Rate.
Commencing on the Initial Dividend Payment Date for the AMPS, the Applicable
Rate for each subsequent dividend period (hereinafter referred to as a
"Subsequent Dividend Period"), which Subsequent Dividend Period shall commence
on and include a Dividend Payment Date and shall end on and include the calendar
day prior to the next Dividend Payment Date (or last Dividend Payment Date in a
Dividend Period if there is more than one Dividend Payment Date), shall be equal
to the rate per annum that results from implementation of the Auction
Procedures.
The Applicable Rate for each Dividend Period commencing during a Non-
Payment Period shall be equal to the Non-Payment Period Rate; and each Dividend
Period, commencing after the first day of, and during, a Non-Payment Period
shall be a 28-Day Dividend Period, provided that if the preceding Dividend
Period is a Special Dividend Period of less than 28 days, the Dividend Period
commencing during a Non-Payment Period will be the same
38
<PAGE>
length as such preceding Dividend Period. Except in the case of the willful
failure of the Corporation to pay a dividend on a Dividend Payment Date or to
redeem any shares of AMPS on the date set for such redemption, any amount of any
dividend due on any Dividend Payment Date (if, prior to the close of business on
the second Business Day preceding such Dividend Payment Date, the Corporation
has declared such dividend payable on such Dividend Payment Date to the Holders
of such shares of AMPS as of 12:00 noon, New York City time, on the Business Day
preceding such Dividend Payment Date) or redemption price with respect to any
shares of AMPS not paid to such Holders when due may be paid to such Holders in
the same form of funds by 12:00 noon, New York City time, on any of the first
three Business Days after such Dividend Payment Date or due date, as the case
may be, provided that, such amount is accompanied by a late charge calculated
for such period of non-payment at the Non-Payment Period Rate applied to the
amount of such non-payment based on the actual number of days comprising such
period divided by 365. In the case of a willful failure of the Corporation to
pay a dividend on a Dividend Payment Date or to redeem any shares of AMPS on the
date set for such redemption, the preceding sentence shall not apply and the
Applicable Rate for the Dividend Period commencing during the Non-Payment Period
resulting from such failure shall be the Non-Payment Period Rate. For the
purposes of the foregoing, payment to a person in same-day funds on any Business
Day at any time shall be considered equivalent to payment to such person in
39
<PAGE>
New York Clearing House (next-day) funds at the same time on the preceding
Business Day, and any payment made after 12:00 noon, New York City time, on any
Business Day shall be considered to have been made instead in the same form of
funds and to the same person before 12:00 noon, New York City time, on the next
Business Day.
(ii) The amount of cash dividends per share of any series of AMPS payable
(if declared) on the Initial Dividend Payment Date, each 28-Day Dividend Period
and each Dividend Payment Date of each Short Term Dividend Period shall be
computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and the denominator of
which will be 365, multiplying the amount so obtained by $25,000, and rounding
the amount so obtained to the nearest cent. During any Long Term Dividend
Period, the amount of cash dividends per share of AMPS payable (if declared) on
any Dividend Payment Date shall be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be such
number of days in such part of such Dividend Period that such share was
outstanding and for which dividends are payable on such Dividend Payment Date
and the denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.
40
<PAGE>
(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Corporation may, at its sole option and to the extent permitted by
law, by telephonic and written notice (a "Request for Special Dividend Period")
to the Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for the AMPS be the number of days (other than 28), evenly
divisible by seven, and not fewer than seven nor more than 364 in the case of a
Short Term Dividend Period or one whole year or more but not greater than five
years in the case of a Long Term Dividend Period, specified in such notice,
provided that the Corporation may not give a Request for Special Dividend Period
(and any such request shall be null and void) unless, for any Auction occurring
after the initial Auction, Sufficient Clearing Bids were made in the last
occurring Auction and unless full cumulative dividends, any amounts due with
respect to redemptions, and any Additional Dividends payable prior to such date
have been paid in full. Such Request for Special Dividend Period, in the case
of a Short Term Dividend Period, shall be given on or prior to the second
Business Day but not more than seven Business Days prior to an Auction Date for
AMPS and, in the case of a Long Term Dividend Period, shall be given on or prior
to the second Business Day but not more than 28 days prior to an Auction Date
for the AMPS. Upon receiving such Request for Special Dividend Period, the
Broker-Dealer(s) shall jointly determine whether, given the factors set forth
below, it is advisable that the Corporation issue a Notice of Special Dividend
41
<PAGE>
Period for the series of AMPS as contemplated by such Request for Special
Dividend Period and the Optional Redemption Price of the AMPS during such
Special Dividend Period and the Specific Redemption Provisions and shall give
the Corporation and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination the Broker-Dealer(s) will consider (1)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (2) existing market supply and demand for short-term and
long-term securities, (3) existing yield curves for short-term and long-term
securities comparable to the AMPS, (4) industry and financial conditions which
may affect the AMPS, (5) the investment objective of the Corporation, and (6)
the Dividend Periods and dividend rates at which current and potential
beneficial holders of the AMPS would remain or become beneficial holders. If
the Broker-Dealer(s) shall not give the Corporation and the Auction Agent a
Response by such second Business Day or if the Response states that given the
factors set forth above it is not advisable that the Corporation give a Notice
of Special Dividend Period for the AMPS, the Corporation may not give a Notice
of Special Dividend Period in respect of such Request for Special Dividend
Period. In the event the Response indicates that it is advisable that the
Corporation give a Notice of Special Dividend Period for the AMPS, the
Corporation may by no later than the second Business Day prior to such Auction
Date give a notice (a "Notice of
42
<PAGE>
Special Dividend Period") to the Auction Agent, the Securities Depository and
each Broker-Dealer which notice will specify (i) the duration of the Special
Dividend Period, (ii) the Optional Redemption Price as specified in the related
Response and (iii) the Specific Redemption Provisions, if any, as specified in
the related Response. The Corporation also shall provide a copy of such Notice
of Special Dividend Period to Moody's and S&P. The Corporation shall not give a
Notice of Special Dividend Period and, if the Corporation has given a Notice of
Special Dividend Period, the Corporation is required to give telephonic and
written notice of its revocation (a "Notice of Revocation") to the Auction
Agent, each Broker-Dealer, and the Securities Depository on or prior to the
Business Day prior to the relevant Auction Date if (x) either the 1940 Act AMPS
Asset Coverage is not satisfied or the Corporation shall fail to maintain S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value at least equal to the AMPS Basic Maintenance Amount, in each case on each
of the two Valuation Dates immediately preceding the Business Day prior to the
relevant Auction Date on an actual basis and on a pro forma basis giving effect
to the proposed Special Dividend Period (using as a pro forma dividend rate with
respect to such Special Dividend Period the dividend rate which the Broker-
Dealers shall advise the Corporation is an approximately equal rate for
securities similar to the AMPS with an equal dividend period), provided that, in
calculating the aggregate Discounted Value of
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<PAGE>
Moody's Eligible Assets for this purpose, the Moody's Exposure Period shall be
deemed to be one week longer, (y) sufficient funds for the payment of dividends
payable on the immediately succeeding Dividend Payment Date have not been
irrevocably deposited with the Auction Agent by the close of business on the
third Business Day preceding the related Auction Date or (z) the Broker-
Dealer(s) jointly advise the Corporation that after consideration of the factors
listed above they have concluded that it is advisable to give a Notice of
Revocation. The Corporation also shall provide a copy of such Notice of
Revocation to Moody's and S&P. If the Corporation is prohibited from giving a
Notice of Special Dividend Period as a result of any of the factors enumerated
in clause (x), (y) or (z) above or if the Corporation gives a Notice of
Revocation with respect to a Notice of Special Dividend Period for any series of
AMPS, the next succeeding Dividend Period will be a 28-Day Dividend Period,
provided that if the then current Dividend Period for the AMPS is a Special
Dividend Period of less than 28 days, the next succeeding Dividend Period for
the AMPS will be the same length as such current Dividend Period. In addition,
in the event Sufficient Clearing Bids are not made in the applicable Auction or
such Auction is not held for any reason, such next succeeding Dividend Period
will be a 28-Day Dividend Period and the Corporation may not again give a Notice
of Special Dividend Period for the AMPS (and any such attempted notice shall be
null
44
<PAGE>
and void) until Sufficient Clearing Bids have been made in an Auction with
respect to a 28-Day Dividend Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends and
applicable late charges, as herein provided, on the shares of AMPS (except for
Additional Dividends as provided in paragraph 2(e) hereof and additional
payments as provided in paragraph 2(f) hereof). Except for the late charge
payable pursuant to paragraph 2(c)(i) hereof, no interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment on the
shares of AMPS that may be in arrears.
(ii) For so long as any share of AMPS is Outstanding, the Corporation shall
not declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or options, warrants
or rights to subscribe for or purchase, Common Stock or other stock, if any,
ranking junior to the shares of AMPS as to dividends or upon liquidation) in
respect of the Common Stock or any other stock of the Corporation ranking junior
to or on a parity with the shares of AMPS as to dividends or upon liquidation,
or call for redemption, redeem, purchase or otherwise acquire for consideration
any shares of the Common Stock or any other such junior stock (except by
conversion into or exchange for stock of the Corporation ranking junior to the
shares of AMPS as to dividends and upon liquidation) or any other such Parity
Stock (except by conversion into or exchange for stock of the
45
<PAGE>
Corporation ranking junior to or on a parity with the shares of AMPS as to
dividends and upon liquidation), unless (A) immediately after such transaction,
the Corporation shall have S&P Eligible Assets and Moody's Eligible Assets each
with an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount and the Corporation shall maintain the 1940 Act AMPS Asset
Coverage, (B) full cumulative dividends on shares of AMPS and shares of Other
AMPS due on or prior to the date of the transaction have been declared and paid
or shall have been declared and sufficient funds for the payment thereof
deposited with the Auction Agent, (C) any Additional Dividend required to be
paid under paragraph 2(e) below on or before the date of such declaration or
payment has been paid and (D) the Corporation has redeemed the full number of
shares of AMPS required to be redeemed by any provision for mandatory redemption
contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii) an
uncertificated right (a "Right") to receive an Additional Dividend (as defined
below), and (iii) any additional amounts as set forth in paragraph 2(f) below.
Each Right shall thereafter be independent of the share or shares of AMPS on
which the dividend was paid. The Corporation shall cause to be maintained a
record of each Right received by the respective Holders. A Right may not be
transferred other than by operation of law. If the Corporation retroactively
allocates any net capital gains or other income subject to regular Federal
income
46
<PAGE>
taxes to shares of AMPS without having given advance notice thereof to the
Auction Agent as described in paragraph 2(f) hereof solely by reason of the fact
that such allocation is made as a result of the redemption of all or a portion
of the outstanding shares of AMPS or the liquidation of the Corporation (the
amount of such allocation referred to herein as a "Retroactive Taxable
Allocation"), the Corporation will, within 90 days (and generally within 60
days) after the end of the Corporation's fiscal year for which a Retroactive
Taxable Allocation is made, provide notice thereof to the Auction Agent and to
each holder of a Right applicable to such shares of AMPS (initially Cede & Co.
as nominee of The Depository Trust Company) during such fiscal year at such
holder's address as the same appears or last appeared on the Stock Books of the
Corporation. The Corporation will, within 30 days after such notice is given to
the Auction Agent, pay to the Auction Agent (who will then distribute to such
holders of Rights), out of funds legally available therefor, an amount equal to
the aggregate Additional Dividend with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate amount
of Retroactive Taxable Allocations made to such holder with respect to the
fiscal year in question, would cause such holder's dividends in dollars (after
Federal and California income tax consequences) from the
47
<PAGE>
aggregate of both the Retroactive Taxable Allocations and the Additional
Dividend to be equal to the dollar amount of the dividends which would have been
received by such holder if the amount of the aggregate Retroactive Taxable
Allocations would have been excludable from the gross income of such holder.
Such Additional Dividend shall be calculated (i) without consideration being
given to the time value of money; (ii) assuming that no holder of shares of AMPS
is subject to the Federal alternative minimum tax with respect to dividends
received from the Corporation; and (iii) assuming that each Retroactive Taxable
Allocation would be taxable in the hands of each holder of shares of AMPS at the
greater of: (x) the maximum combined marginal regular Federal and California
individual income tax rate applicable to ordinary income or capital gains
depending on the taxable character of the distribution (including any surtax);
or (y) the maximum combined marginal regular Federal and California corporate
income tax rate applicable to ordinary income or capital gains depending on the
taxable character of the distribution (taking into account in both (x) and (y)
the Federal income tax deductibility of state taxes paid or incurred but not any
phase out of, or provision limiting, personal exemptions, itemized deductions,
or the benefit of lower tax brackets and assuming the taxability of Federally
tax-exempt dividends for corporations for California income tax purposes).
(f) Except as provided below, whenever the Corporation intends to include
any net capital gains or other income subject
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<PAGE>
to regular Federal income taxes in any dividend on shares of AMPS, the
Corporation will notify the Auction Agent of the amount to be so included at
least five Business Days prior to the Auction Date on which the Applicable Rate
for such dividend is to be established. The Corporation may also include such
income in a dividend on shares of AMPS without giving advance notice thereof if
it increases the dividend by an additional amount calculated as if such income
was a Retroactive Taxable Allocation and the additional amount was an Additional
Dividend, provided that the Corporation will notify the Auction Agent of the
additional amounts to be included in such dividend at least five Business Days
prior to the applicable Dividend Payment Date.
(g) No fractional shares of AMPS shall be issued.
3. Liquidation Rights. Upon any liquidation, dissolution or winding up
------------------
of the Corporation, whether voluntary or involuntary, the Holders shall be
entitled to receive, out of the assets of the Corporation available for
distribution to shareholders, before any distribution or payment is made upon
any Common Stock or any other capital stock ranking junior in right of payment
upon liquidation to the AMPS, the sum of $25,000 per share plus accumulated but
unpaid dividends (whether or not earned or declared) thereon to the date of
distribution, and after such payment the Holders will be entitled to no other
payments other than Additional Dividends as provided in paragraph 2(e) hereof.
If upon any liquidation, dissolution or winding up of the Corporation, the
amounts payable with respect to the AMPS
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<PAGE>
and any other Outstanding class or series of Preferred Stock of the Corporation
ranking on a parity with the AMPS as to payment upon liquidation are not paid in
full, the Holders and the holders of such other class or series will share
ratably in any such distribution of assets in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the Holders
will not be entitled to any further participation in any distribution of assets
by the Corporation except for any Additional Dividends. A consolidation, merger
or statutory share exchange of the Corporation with or into any other
corporation or entity or a sale, whether for cash, shares of stock, securities
or properties, of all or substantially all or any part of the assets of the
Corporation shall not be deemed or construed to be a liquidation, dissolution or
winding up of the Corporation.
4. Redemption. (a) Shares of AMPS shall be redeemable by the
----------
Corporation as provided below:
(i) To the extent permitted under the 1940 Act and Maryland law, upon
giving a Notice of Redemption, the Corporation at its option may redeem
shares of AMPS, in whole or in part, out of funds legally available
therefor, at the Optional Redemption Price per share, on any Dividend
Payment Date; provided that no share of AMPS may be redeemed at the option
of the Corporation during a Non-Call Period to which such share is subject.
In addition, holders of AMPS
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<PAGE>
which are redeemed shall be entitled to receive Additional Dividends to the
extent provided herein. The Corporation may not give a Notice of
Redemption relating to an optional redemption as described in this
paragraph 4(a)(i) unless, at the time of giving such Notice of Redemption,
the Corporation has available Deposit Securities with maturity or tender
dates not later than the day preceding the applicable redemption date and
having a value not less than the amount due to Holders by reason of the
redemption of their shares of AMPS on such redemption date.
(ii) The Corporation shall redeem, out of funds legally available
therefor, at the Mandatory Redemption Price per share, shares of AMPS to
the extent permitted under the 1940 Act and Maryland law, on a date fixed
by the Board of Directors, if the Corporation fails to maintain S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount
as provided in paragraph 7(a) or to satisfy the 1940 Act AMPS Asset
Coverage as provided in paragraph 6 and such failure is not cured on or
before the AMPS Basic Maintenance Cure Date or the 1940 Act Cure Date
(herein collectively referred to as a "Cure Date"), as the case may be. In
addition, holders of AMPS so redeemed shall be entitled to receive
Additional Dividends to the extent provided herein. The number of shares
of AMPS to be redeemed shall be equal to the lesser of (i) the minimum
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<PAGE>
number of shares of AMPS the redemption of which, if deemed to have
occurred immediately prior to the opening of business on the Cure Date,
together with all shares of other Preferred Stock subject to redemption or
retirement, would result in the Corporation having S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount or satisfaction of the 1940
Act AMPS Asset Coverage, as the case may be, on such Cure Date (provided
that, if there is no such minimum number of shares of AMPS and shares of
other Preferred Stock the redemption of which would have such result, all
shares of AMPS and shares of other Preferred Stock then Outstanding shall
be redeemed), and (ii) the maximum number of shares of AMPS, together with
all shares of other Preferred Stock subject to redemption or retirement,
that can be redeemed out of funds expected to be legally available therefor
on such redemption date. In determining the number of shares of AMPS
required to be redeemed in accordance with the foregoing, the Corporation
shall allocate the number required to be redeemed which would result in the
Corporation having S&P Eligible Assets and Moody's Eligible Assets each
with an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as
the case may be, pro rata among shares of AMPS, Other AMPS and other
Preferred Stock subject to
52
<PAGE>
redemption pursuant to provisions similar to those contained in this
paragraph 4(a)(ii); provided that, shares of AMPS which may not be redeemed
at the option of the Corporation due to the designation of a Non-Call
Period applicable to such shares (A) will be subject to mandatory
redemption only to the extent that other shares are not available to
satisfy the number of shares required to be redeemed and (B) will be
selected for redemption in an ascending order of outstanding number of days
in the Non-Call Period (with shares with the lowest number of days to be
redeemed first) and by lot in the event of shares having an equal number of
days in such Non-Call Period. The Corporation shall effect such redemption
on a Business Day which is not later than 35 days after such Cure Date,
except that if the Corporation does not have funds legally available for
the redemption of all of the required number of shares of AMPS and shares
of other Preferred Stock which are subject to mandatory redemption or the
Corporation otherwise is unable to effect such redemption on or prior to 35
days after such Cure Date, the Corporation shall redeem those shares of
AMPS which it is unable to redeem on the earliest practicable date on which
it is able to effect such redemption out of funds legally available
therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares of
AMPS may be redeemed pursuant to paragraph 4(a)(i) of these Articles
Supplementary (i) unless all dividends
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<PAGE>
in arrears on all remaining outstanding shares of Parity Stock shall have been
or are being contemporaneously paid or declared and set apart for payment and
(ii) if redemption thereof would result in the Corporation's failure to maintain
Moody's Eligible Assets or S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount. In the event
that less than all the outstanding shares of a series of AMPS are to be redeemed
and there is more than one Holder, the shares of that series of AMPS to be
redeemed shall be selected by lot or such other method as the Corporation shall
deem fair and equitable.
(c) Whenever shares of AMPS are to be redeemed, the Corporation, not less
than 20 nor more than 30 days prior to the date fixed for redemption, shall
mail a notice ("Notice of Redemption") by first-class mail, postage prepaid, to
each Holder of shares of AMPS to be redeemed and to the Auction Agent. The
Corporation shall cause the Notice of Redemption to also be published in the
eastern and national editions of The Wall Street Journal. The Notice of
-----------------------
Redemption shall set forth (i) the redemption date, (ii) the amount of the
redemption price, (iii) the aggregate number of shares of AMPS to be redeemed,
(iv) the place or places where shares of AMPS are to be surrendered for payment
of the redemption price, (v) a statement that dividends on the shares to be
redeemed shall cease to accumulate on such redemption date (except that holders
may be entitled to Additional Dividends) and (vi) the provision of these
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<PAGE>
Articles Supplementary pursuant to which such shares are being redeemed. No
defect in the Notice of Redemption or in the mailing or publication thereof
shall affect the validity of the redemption proceedings, except as required by
applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Corporation shall have deposited in trust with
the Auction Agent, or segregated in an account at the Corporation's custodian
bank for the benefit of the Auction Agent, Deposit Securities (with a right of
substitution) having an aggregate Discounted Value (utilizing in the case of S&P
an S&P Exposure Period of 22 Business Days) equal to the redemption payment for
the shares of AMPS as to which such Notice of Redemption has been given with
irrevocable instructions and authority to pay the redemption price to the
Holders of such shares, then upon the date of such deposit or, if no such
deposit is made, then upon such date fixed for redemption (unless the
Corporation shall default in making the redemption payment), all rights of the
Holders of such shares as shareholders of the Corporation by reason of the
ownership of such shares will cease and terminate (except their right to receive
the redemption price in respect thereof and any Additional Dividends, but
without interest), and such shares shall no longer be deemed outstanding. The
Corporation shall be entitled to receive, from time to time, from the Auction
Agent the interest, if any, on such Deposit Securities deposited with it and the
Holders of any shares so redeemed shall have no claim to any of such interest.
In case
55
<PAGE>
the Holder of any shares so called for redemption shall not claim the redemption
payment for his shares within one year after the date of redemption, the Auction
Agent shall, upon demand, pay over to the Corporation such amount remaining on
deposit and the Auction Agent shall thereupon be relieved of all responsibility
to the Holder of such shares called for redemption and such Holder thereafter
shall look only to the Corporation for the redemption payment.
5. Voting Rights. (a) General. Except as otherwise provided in the
------------- -------
Charter or By-Laws, each Holder of shares of AMPS shall be entitled to one vote
for each share held on each matter submitted to a vote of shareholders of the
Corporation, and the holders of outstanding shares of Preferred Stock, including
AMPS, and of shares of Common Stock shall vote together as a single class;
provided that, at any meeting of the shareholders of the Corporation held for
the election of directors, the holders of outstanding shares of Preferred Stock,
including AMPS, shall be entitled, as a class, to the exclusion of the holders
of all other securities and classes of capital stock of the Corporation, to
elect two directors of the Corporation. Subject to paragraph 5(b) hereof, the
holders of outstanding shares of capital stock of the Corporation, including the
holders of outstanding shares of Preferred Stock, including AMPS, voting as a
single class, shall elect the balance of the directors.
(b) Right to Elect Majority of Board of Directors. During any period in
---------------------------------------------
which any one or more of the conditions described
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<PAGE>
below shall exist (such period being referred to herein as a "Voting Period"),
the number of directors constituting the Board of Directors shall be
automatically increased by the smallest number that, when added to the two
directors elected exclusively by the holders of shares of Preferred Stock, would
constitute a majority of the Board of Directors as so increased by such smallest
number; and the holders of shares of Preferred Stock shall be entitled, voting
separately as one class (to the exclusion of the holders of all other securities
and classes of capital stock of the Corporation), to elect such smallest number
of additional directors, together with the two directors that such holders are
in any event entitled to elect. A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of AMPS equal to at least
two full years' dividends shall be due and unpaid and sufficient cash or
specified securities shall not have been deposited with the Auction Agent
for the payment of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred Stock are
entitled to elect a majority of the directors of the Corporation under the
1940 Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always,
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<PAGE>
however, to the reverting of such voting rights in the Holders upon the further
occurrence of any of the events described in this paragraph 5(b).
(c) Right to Vote with Respect to Certain Other Matters. So long as any
---------------------------------------------------
shares of AMPS are outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of Preferred Stock
Outstanding at the time, voting separately as one class: (i) authorize, create
or issue (other than with respect to the issuance of AMPS authorized hereby), or
increase the authorized or issued aggregate stated capital amount of (other than
with respect to the issuance of AMPS authorized hereby), any class or series of
stock ranking prior to or on a parity with any series of Preferred Stock with
respect to payment of dividends or the distribution of assets on liquidation, or
increase the authorized aggregate stated capital amount of AMPS or any other
Preferred Stock, or (ii) amend, alter or repeal the provisions of the Charter,
whether by merger, consolidation or otherwise, so as to adversely affect any of
the contract rights expressly set forth in the Charter of holders of shares of
AMPS or any other Preferred Stock. To the extent permitted under the 1940 Act,
in the event shares of more than one series of AMPS or Other AMPS are
outstanding, the Corporation shall not approve any of the actions set forth in
clause (i) or (ii) which adversely affects the contract rights expressly set
forth in the Charter of a Holder of shares of a series of AMPS or Other AMPS
differently than those of a Holder of shares of any
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<PAGE>
other series of AMPS or Other AMPS without the affirmative vote of the holders
of at least a majority of the shares of AMPS or Other AMPS of each series
adversely affected and outstanding at such time (each such adversely affected
series voting separately as a class). The Corporation shall notify Moody's and
S&P ten Business Days prior to any such vote described in clause (i) or (ii).
Unless a higher percentage is provided for under the Charter, the affirmative
vote of the holders of a majority of the outstanding shares of Preferred Stock,
including AMPS, voting together as a single class, will be required to approve
any plan of reorganization (including bankruptcy proceedings) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act. The class vote of holders of shares of Preferred
Stock, including AMPS, described above will in each case be in addition to a
separate vote of the requisite percentage of shares of Common Stock and shares
of Preferred Stock, including AMPS, voting together as a single class necessary
to authorize the action in question.
(d) Voting Procedures.
-----------------
(i) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Stock to elect additional directors as
described in paragraph 5(b) above, the Corporation shall call a special
meeting of such holders and instruct the Auction Agent to mail a notice of
such special meeting to such holders, such meeting to be held not less than
10 nor more than 20 days after the date of mailing
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<PAGE>
of such notice. If the Corporation fails to send such notice to the
Auction Agent or if the Corporation does not call such a special meeting,
it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding
the day on which such notice is mailed. At any such special meeting and at
each meeting held during a Voting Period, such Holders, voting together as
a class (to the exclusion of the holders of all other securities and
classes of capital stock of the Corporation), shall be entitled to elect
the number of directors prescribed in paragraph 5(b) above. At any such
meeting or adjournment thereof in the absence of a quorum, a majority of
such holders present in person or by proxy shall have the power to adjourn
the meeting without notice, other than by an announcement at the meeting,
to a date not more than 120 days after the original record date.
(ii) For purposes of determining any rights of the Holders to vote on
any matter or the number of shares required to constitute a quorum, whether
such right is created by these Articles Supplementary, by the other
provisions of the Charter, by statute or otherwise, a share of AMPS which
is not Outstanding shall not be counted.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special
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meeting of Holders and holders of other Preferred Stock to elect directors
shall continue, notwithstanding the election at such meeting by the Holders
and such other holders of the number of directors that they are entitled to
elect, and the persons so elected by the Holders and such other holders,
together with the two incumbent directors elected by the Holders and such
other holders of Preferred Stock and the remaining incumbent directors
elected by the holders of the Common Stock and Preferred Stock, shall
constitute the duly elected directors of the Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional directors elected by the Holders and holders of
other Preferred Stock pursuant to paragraph 5(b) above shall terminate, the
remaining directors shall constitute the directors of the Corporation and
the voting rights of the Holders and such other holders to elect additional
directors pursuant to paragraph 5(b) above shall cease, subject to the
provisions of the last sentence of paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of
----------------
shares of AMPS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of AMPS shall have no
preemptive rights or rights to cumulative voting. In the event that the
Corporation fails to pay any dividends on the shares of AMPS, the exclusive
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<PAGE>
remedy of the Holders shall be the right to vote for directors pursuant to the
provisions of this paragraph 5.
(f) Notification to S&P and Moody's. In the event a vote of Holders of
-------------------------------
AMPS is required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Corporation shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify S&P and Moody's that such vote is to be
taken and the nature of the action with respect to which such vote is to be
taken and, not later than ten Business Days after the date on which such vote is
taken, notify S&P and Moody's of the result of such vote.
6. 1940 Act AMPS Asset Coverage. The Corporation shall maintain, as of
----------------------------
the last Business Day of each month in which any share of AMPS is outstanding,
the 1940 Act AMPS Asset Coverage.
7. AMPS Basic Maintenance Amount. (a) The Corporation shall maintain,
-----------------------------
on each Valuation Date, and shall verify to its satisfaction that it is
maintaining on such Valuation Date, (i) S&P Eligible Assets having an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount and
(ii) Moody's Eligible Assets having an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount. Upon any failure to maintain
the required Discounted Value, the Corporation will use its best efforts to
alter the composition of its portfolio to reattain a Discounted Value at least
equal to the AMPS Basic Maintenance Amount on or prior to the AMPS Basic
Maintenance Cure Date.
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(b) On or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the Corporation fails to satisfy the AMPS Basic
Maintenance Amount, the Corporation shall complete and deliver to the Auction
Agent, and Moody's and S&P, as the case may be, a complete AMPS Basic
Maintenance Report as of the date of such failure, which will be deemed to have
been delivered to the Auction Agent if the Auction Agent receives a copy or
telecopy, telex or other electronic transcription thereof and on the same day
the Corporation mails to the Auction Agent for delivery on the next Business Day
the complete AMPS Basic Maintenance Report. The Corporation will deliver an
AMPS Basic Maintenance Report to the Auction Agent and Moody's and S&P, as the
case may be, on or before 5:00 p.m., New York City time, on the third Business
Day after a Valuation Date on which the Corporation cures its failure to
maintain Moody's Eligible Assets or S&P Eligible Assets, as the case may be,
with an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount or on which the Corporation fails to maintain Moody's
Eligible Assets or S&P Eligible Assets, as the case may be, with an aggregate
Discounted Value which exceeds the AMPS Basic Maintenance Amount by 5% or more.
The Corporation will also deliver an AMPS Basic Maintenance Report to the
Auction Agent, Moody's and S&P as of each Quarterly Valuation Date on or before
the third Business Day after such date. Additionally, on or before 5:00 p.m.,
New York City time, on the third Business Day after the first day of a Special
Dividend Period, the
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Corporation will deliver an AMPS Basic Maintenance Report to S&P and the Auction
Agent. The Corporation shall also provide Moody's and S&P with an AMPS Basic
Maintenance Report when specifically requested by either Moody's or S&P. A
failure by the Corporation to deliver an AMPS Basic Maintenance Report under
this paragraph 7(b) shall be deemed to be delivery of an AMPS Basic Maintenance
Report indicating the Discounted Value for S&P Eligible Assets and Moody's
Eligible Assets of the Corporation is less than the AMPS Basic Maintenance
Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of an AMPS Basic
Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent, S&P and Moody's (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other AMPS Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Corporation during the quarter ending on such Quarterly Valuation Date),
(ii) that, in such Report (and in such randomly selected Report), the
Corporation correctly determined the assets of the Corporation which constitute
S&P Eligible Assets or Moody's Eligible Assets, as the case may be, at such
Quarterly Valuation Date in accordance with these Articles Supplementary, (iii)
that, in such Report (and in such randomly selected Report), the Corporation
determined whether the Corporation had, at such Quarterly
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Valuation Date (and at the Valuation Date addressed in such randomly selected
Report) in accordance with these Articles Supplementary, S&P Eligible Assets of
an aggregate Discounted Value at least equal to the AMPS Basic Maintenance
Amount and Moody's Eligible Assets of an aggregate Discounted Value at least
equal to the AMPS Basic Maintenance Amount, (iv) with respect to the S&P ratings
on California Municipal Bonds or Municipal Bonds, the issuer name, issue size
and coupon rate listed in such Report, that the Independent Accountant has
requested that S&P verify such information and the Independent Accountant shall
provide a listing in its letter of any differences, (v) with respect to the
Moody's ratings on California Municipal Bonds or Municipal Bonds, the issuer
name, issue size and coupon rate listed in such Report, that such information
has been verified by Moody's (in the event such information is not verified by
Moody's, the Independent Accountant will inquire of Moody's what such
information is, and provide a listing in its letter of any differences), (vi)
with respect to the bid or mean price (or such alternative permissible factor
used in calculating the Market Value) provided by the custodian of the
Corporation's assets to the Corporation for purposes of valuing securities in
the Corporation's portfolio, the Independent Accountant has traced the price
used in such Report to the bid or mean price listed in such Report as provided
to the Corporation and verified that such information agrees (in the event such
information does not agree, the Independent Accountant will provide a listing in
its letter
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of such differences) and (vii) with respect to such confirmation to Moody's,
that the Corporation has satisfied the requirements of paragraph 8(b) of these
Articles Supplementary (such confirmation is herein called the "Accountant's
Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction
Agent, S&P and Moody's of an AMPS Basic Maintenance Report in accordance with
paragraph 7(b) above relating to any Valuation Date on which the Corporation
failed to maintain S&P Eligible Assets with an aggregate Discounted Value and
Moody's Eligible Assets with an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount, and relating to the AMPS Basic
Maintenance Cure Date with respect to such failure, the Independent Accountant
will provide to the Auction Agent, S&P and Moody's an Accountant's Confirmation
as to such AMPS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph (c)
or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets or Moody's
Eligible Assets, as the case may be, of the Corporation was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Corporation, and the Corporation shall accordingly amend and deliver the AMPS
Basic
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Maintenance Report to the Auction Agent, S&P and Moody's promptly following
receipt by the Corporation of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of the shares of AMPS, the Corporation will
complete and deliver to S&P and Moody's an AMPS Basic Maintenance Report as of
the close of business on such Date of Original Issue. Within five Business Days
of such Date of Original Issue, the Independent Accountant will confirm in
writing to S&P and Moody's (i) the mathematical accuracy of the calculations
reflected in such Report and (ii) that the aggregate Discounted Value of S&P
Eligible Assets and the aggregate Discounted Value of Moody's Eligible Assets
reflected thereon equals or exceeds the AMPS Basic Maintenance Amount reflected
thereon. Also, on or before 5:00 p.m., New York City time, on the first
Business Day after shares of Common Stock are repurchased by the Corporation,
the Corporation will complete and deliver to S&P and Moody's an AMPS Basic
Maintenance Report as of the close of business on such date that Common Stock is
repurchased.
(g) For so long as shares of AMPS are rated by Moody's, in managing the
Corporation's portfolio, the Adviser will not alter the composition of the
Corporation's portfolio if, in the reasonable belief of the Adviser, the effect
of any such alteration would be to cause the Corporation to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the
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immediately preceding Valuation Date, less than the AMPS Basic Maintenance
Amount as of such Valuation Date; provided, however, that in the event that, as
of the immediately preceding Valuation Date, the aggregate Discounted Value of
Moody's Eligible Assets exceeded the AMPS Basic Maintenance Amount by five
percent or less, the Adviser will not alter the composition of the Corporation's
portfolio in a manner reasonably expected to reduce the aggregate Discounted
Value of Moody's Eligible Assets unless the Corporation shall have confirmed
that, after giving effect to such alteration, the aggregate Discounted Value of
Moody's Eligible Assets would exceed the AMPS Basic Maintenance Amount.
8. Certain Other Restrictions.
--------------------------
(a) For so long as any shares of AMPS are rated by S&P, the Corporation
will not purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not impair
the ratings then assigned to the shares of AMPS by S&P, except that the
Corporation may purchase or sell futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds or
Notes ("Treasury Bonds") and write, purchase or sell put and call options on
such contracts (collectively, "S&P Hedging Transactions"), subject to the
following limitations:
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(i) the Corporation will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate a
futures contract or option held by the Corporation by the Corporation's
taking an opposite position thereto ("Closing Transactions")), which would
cause the Corporation at the time of such transaction to own or have sold
the least of (A) more than 1,000 outstanding futures contracts based on the
Municipal Index, (B) outstanding futures contracts based on the Municipal
Index exceeding in number 25% of the quotient of the Market Value of the
Corporation's total assets divided by $1,000 or (C) outstanding futures
contracts based on the Municipal Index exceeding in number 10% of the
average number of daily traded futures contracts based on the Municipal
Index in the 30 days preceding the time of effecting such transaction as
reported by The Wall Street Journal;
-----------------------
(ii) the Corporation will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause
the Corporation at the time of such transaction to own or have sold the
lesser of (A) outstanding futures contracts based on Treasury Bonds and on
the Municipal Index exceeding in number 25% of the quotient of the Market
Value of the Corporation's total assets divided by $100,000 ($200,000 in
the case of the two-year United States Treasury Note) or (B) outstanding
futures contracts based on Treasury Bonds exceeding in number 10% of
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the average number of daily traded futures contracts based on Treasury
Bonds in the 30 days preceding the time of effecting such transaction as
reported by The Wall Street Journal;
-----------------------
(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract which the Corporation owns or has sold
or any outstanding option thereon owned by the Corporation in the event (A)
the Corporation does not have S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount
on two consecutive Valuation Dates and (B) the Corporation is required to
pay Variation Margin on the second such Valuation Date;
(iv) the Corporation will engage in a Closing Transaction to close
out any outstanding futures contract or option thereon in the month prior
to the delivery month under the terms of such futures contract or option
thereon unless the Corporation holds the securities deliverable under such
terms; and
(v) when the Corporation writes a futures contract or option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P), fixed-income securities in a
segregated account with the Corporation's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in
the account of or on behalf of the Corporation's broker
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with respect to such futures contract or option equals the Market Value of
the futures contract or option, or, in the event the Corporation writes a
futures contract or option thereon which requires delivery of an underlying
security, it shall hold such underlying security in its portfolio.
For purposes of determining whether the Corporation has S&P Eligible Assets
with a Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate Discounted
Value of S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Corporation plus
(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on Treasury Bonds which contracts are owned
by the Corporation.
(b) For so long as any shares of AMPS are rated by Moody's, the Corporation
will not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the ratings then assigned to the shares of AMPS by Moody's, except that
the Corporation may purchase or sell exchange-traded futures contracts based on
the
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Municipal Index or Treasury Bonds and purchase, write or sell exchange-traded
put options on such futures contracts and purchase, write or sell exchange-
traded call options on such futures contracts (collectively, "Moody's Hedging
Transactions"), subject to the following limitations:
(i) the Corporation will not engage in any Moody's Hedging
Transaction based on the Municipal Index (other than Closing Transactions)
which would cause the Corporation at the time of such transaction to own or
have sold (A) outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal or (B)
-----------------------
outstanding futures contracts based on the Municipal Index having a Market
Value exceeding 50% of the Market Value of all California Municipal Bonds
and Municipal Bonds constituting Moody's Eligible Assets owned by the
Corporation (other than Moody's Eligible Assets already subject to a
Moody's Hedging Transaction);
(ii) the Corporation will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions) which
would cause the Corporation at the time of such transaction to own or have
sold (A) outstanding futures contracts based on Treasury Bonds having an
aggregate Market Value exceeding 20% of the aggregate
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Market Value of Moody's Eligible Assets owned by the Corporation and rated
Aa by Moody's (or, if not rated by Moody's but rated by S&P, rated AAA by
S&P) or (B) outstanding futures contracts based on Treasury Bonds having an
aggregate Market Value exceeding 40% of the aggregate Market Value of all
California Municipal Bonds and Municipal Bonds constituting Moody's
Eligible Assets owned by the Corporation (other than Moody's Eligible
Assets already subject to a Moody's Hedging Transaction) and rated Baa or A
by Moody's (or, if not rated by Moody's but rated by S&P, rated A or AA by
S&P) (for purposes of the foregoing clauses (i) and (ii), the Corporation
shall be deemed to own the number of futures contracts that underlie any
outstanding options written by the Corporation);
(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
--------
Street Journal is less than 5,000;
--------------
(iv) the Corporation will engage in a Closing Transaction to close
out any outstanding futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in a
Closing Transaction to close out any outstanding option on a futures
contract by no later than the first Business Day of the month in which such
option expires;
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(v) the Corporation will engage in Moody's Hedging Transactions
only with respect to futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Corporation will not engage in options and futures
transactions for leveraging or speculative purposes and will not write any
call options or sell any futures contracts for the purpose of hedging the
anticipated purchase of an asset prior to completion of such purchase; and
(vii) the Corporation will not enter into an option or futures
transaction unless, after giving effect thereto, the Corporation would
continue to have Moody's Eligible Assets with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets which the
Corporation is obligated to deliver or receive pursuant to an outstanding
futures contract or option shall be as follows: (i) assets subject to call
options written by the Corporation which are either exchange-traded and "readily
reversible" or which expire within 49 days after the date as of which such
valuation is made shall be valued at the lesser of (a) Discounted Value and (b)
the exercise price of the call option written by the Corporation;
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(ii) assets subject to call options written by the Corporation not meeting the
requirements of clause (i) of this sentence shall have no value; (iii) assets
subject to put options written by the Corporation shall be valued at the lesser
of (A) the exercise price and (B) the Discounted Value of the subject security;
(iv) futures contracts shall be valued at the lesser of (A) settlement price and
(B) the Discounted Value of the subject security, provided that, if a contract
matures within 49 days after the date as of which such valuation is made, where
the Corporation is the seller the contract may be valued at the settlement price
and where the Corporation is the buyer the contract may be valued at the
Discounted Value of the subject securities; and (v) where delivery may be made
to the Corporation with any security of a class of securities, the Corporation
shall assume that it will take delivery of the security with the lowest
Discounted Value.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the aggregate
Discounted Value of the Moody's Eligible Assets held by the Corporation: (i)
10% of the exercise price of a written call option; (ii) the exercise price of
any written put option; (iii) where the Corporation is the seller under a
futures contract, 10% of the settlement price of the futures contract; (iv)
where the Corporation is the purchaser under a futures
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contract, the settlement price of assets purchased under such futures contract;
(v) the settlement price of the underlying futures contract if the Corporation
writes put options on a futures contract; and (vi) 105% of the Market Value of
the underlying futures contracts if the Corporation writes call options on a
futures contract and does not own the underlying contract.
(c) For so long as any shares of AMPS are rated by Moody's, the Corporation
will not enter into any contract to purchase securities for a fixed price at a
future date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions that are permitted under paragraph 8(b)
of these Articles Supplementary), except that the Corporation may enter into
such contracts to purchase newly-issued securities on the date such securities
are issued ("Forward Commitments"), subject to the following limitations:
(i) the Corporation will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income securities
rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the
Forward Commitment with a Market Value that equals or exceeds the amount of
the Corporation's obligations under any Forward Commitments to which it is
from time to time a party or long-term fixed income securities with a
Discounted Value that equals or exceeds the amount of the Corporation's
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obligations under any Forward Commitment to which it is from time to time a
party; and
(ii) the Corporation will not enter into a Forward Commitment unless,
after giving effect thereto, the Corporation would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than
the AMPS Basic Maintenance Amount.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which the
Corporation is a party and of all securities deliverable to the Corporation
pursuant to such Forward Commitments shall be zero.
(d) For so long as shares of AMPS are rated by S&P or Moody's, the
Corporation will not, unless it has received written confirmation from S&P
and/or Moody's, as the case may be, that such action would not impair the
ratings then assigned to shares of AMPS by S&P and/or Moody's, as the case may
be, (i) borrow money except for the purpose of clearing transactions in
portfolio securities (which borrowings shall under any circumstances be limited
to the lesser of $10 million and an amount equal to 5% of the Market Value of
the Corporation's assets at the time of such borrowings and which borrowings
shall be repaid within 60 days and not be extended or renewed and shall not
cause the aggregate Discounted Value of Moody's Eligible Assets and S&P Eligible
Assets to be less than the AMPS Basic
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Maintenance Amount), (ii) engage in short sales of securities, (iii) lend any
securities, (iv) issue any class or series of stock ranking prior to or on a
parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
Corporation, (v) reissue any AMPS previously purchased or redeemed by the
Corporation, (vi) merge or consolidate into or with any other corporation or
entity, (vii) change the Pricing Service or (viii) engage in reverse repurchase
agreements.
9. Notice. All notices or communications, unless otherwise specified in
------
the By-Laws of the Corporation or these Articles Supplementary, shall be
sufficiently given if in writing and delivered in person or mailed by first-
class mail, postage prepaid. Notice shall be deemed given on the earlier of the
date received or the date seven days after which such notice is mailed.
10. Auction Procedures. (a) Certain definitions. As used in this
------------------ -------------------
paragraph 10, the following terms shall have the following meanings, unless the
context otherwise requires:
(i) "AMPS" means the shares of AMPS being auctioned pursuant to this
paragraph 10.
(ii) "Auction Date" means the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available AMPS" has the meaning specified in paragraph 10(d)(i)
below.
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(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i) below.
(vi) "Hold Order" has the meaning specified in paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage
will be determined based on (i) the lower of the credit rating or ratings
assigned on such date to such shares by Moody's and S&P (or if Moody's or
S&P or both shall not make such rating available, the equivalent of either
or both of such ratings by a Substitute Rating Agency or two Substitute
Rating Agencies or, in the event that only one such rating shall be
available, such rating) and (ii) whether the Corporation has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of AMPS as follows:
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Applicable Applicable
Percentage of Percentage of
Reference Reference
Credit Ratings Rate - Rate -
- ---------------------------------
Moody's S&P No Notification Notification
- ------------------ ------------- ---------------- --------------
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
The Corporation shall take all reasonable action necessary to enable
S&P and Moody's to provide a rating for the AMPS. If either S&P or Moody's
shall not make such a rating available, or neither S&P nor Moody's shall make
such a rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or
its affiliates and successors, after consultation with the Corporation, shall
select a nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating Agency
or Substitute Rating Agencies, as the case may be.
(viii) "Order" has the meaning specified in paragraph 10(b)(i) below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i)
below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by
the Auction Agent from time to time as the time by which each Broker-Dealer
must submit to the Auction Agent in writing all Orders obtained by it for
the Auction to be conducted on such Auction Date.
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(xi) "Submitted Bid" has the meaning specified in paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph 10(d)(i)
below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in paragraph
10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph
10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
------------------------------------------------------------------
Holders and Potential Holders.
- -----------------------------
(i) Unless otherwise permitted by the Corporation, Beneficial Owners
and Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners and
as Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold shares of AMPS in
its own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders
to the Auction Agent as a Beneficial Owner or
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a Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its customers.
On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information
as to:
(1) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to continue
to hold without regard to the Applicable Rate for the next succeeding
Dividend Period;
(2) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to continue
to hold, provided that the Applicable Rate for the next succeeding
Dividend Period shall not be less than the rate per annum specified by
such Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next succeeding Dividend
Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners
that shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that
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are not Beneficial Owners, on such list to determine the number of
Outstanding shares, if any, of AMPS which each such Potential Beneficial
Owner offers to purchase, provided that the Applicable Rate for the next
succeeding Dividend Period shall not be less than the rate per annum
specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a Broker-
Dealer acting for its own account to the Auction Agent, of information referred
to in clause (A) or (B) of this paragraph 10(b)(i) is hereinafter referred to as
an "Order" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order, including a Broker-Dealer acting in such capacity for its own account,
is hereinafter referred to as a "Bidder"; an Order containing the information
referred to in clause (A)(1) of this paragraph 10(b)(i) is hereinafter referred
to as a "Hold Order"; an Order containing the information referred to in clause
(A)(2) or (B) of this paragraph 10(b)(i) is hereinafter referred to as a "Bid";
and an Order containing the information referred to in clause (A)(3) of this
paragraph 10(b)(i) is hereinafter referred to as a "Sell Order". Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be its customers or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders and Potential
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Holders also applies to the underlying beneficial ownership interests
represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of Outstanding shares of AMPS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be less than the
rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of AMPS to
be determined as set forth in paragraph 10(e)(i)(D) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein; or
(3) a lesser number of Outstanding shares of AMPS to be determined as
set forth in paragraph 10(e)(ii)(C) if such specified rate per annum shall
be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do
not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of AMPS specified in such
Sell Order; or
(2) such number or a lesser number of Outstanding shares of AMPS
to be determined as set forth in paragraph 10(e)(ii)(C) if Sufficient
Clearing Bids do not exist.
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(C) A Bid by a Potential Holder shall constitute an irrevocable offer
to purchase:
(1) the number of Outstanding shares of AMPS specified in such
Bid if the Applicable Rate determined on such Auction Date shall be
higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of AMPS
to be determined as set forth in paragraph 10(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to the
rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
-------------------------------------------------------
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Corporation) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Corporation);
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(B) the aggregate number of Outstanding shares of AMPS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of AMPS subject to
any Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of AMPS subject to
any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and
(3) the number of Outstanding shares, if any, of AMPS subject to
any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding shares of AMPS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Dividend Period which is not a Special Dividend Period)
and a Sell Order (in the case of an Auction relating to a Special Dividend
Period) to have been submitted on behalf of such
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Existing Holder covering the number of Outstanding shares of AMPS held by such
Existing Holder and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of Outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Order shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of Outstanding shares of
AMPS held by such Existing Holder; provided that if more than one Hold
Order is submitted on behalf of such Existing Holder and the number of
shares of AMPS subject to such Hold Orders exceeds the number of
Outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each of such Hold Orders shall be reduced pro
rata so that such Hold Orders, in the aggregate, will cover exactly the
number of Outstanding shares of AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of Outstanding shares of AMPS
held by such Existing Holder over the number of shares
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of AMPS subject to any Hold Order referred to in paragraph 10(c)(iv)(A)
above (and if more than one Bid submitted on behalf of such Existing Holder
specifies the same rate per annum and together they cover more than the
remaining number of shares that can be the subject of valid Bids after
application of paragraph 10(c)(iv)(A) above and of the foregoing portion of
this paragraph 10(c)(iv)(B) to any Bid or Bids specifying a lower rate or
rates per annum, the number of shares subject to each of such Bids shall be
reduced pro rata so that such Bids, in the aggregate, cover exactly such
remaining number of shares); and the number of shares, if any, subject to
Bids not valid under this paragraph 10(c)(iv)(B) shall be treated as the
subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding shares of AMPS held by such Existing
Holder over the number of shares of AMPS subject to Hold Orders referred to
in paragraph 10(c)(iv)(A) and Bids referred to in paragraph 10(c)(iv)(B);
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of AMPS subject to such Sell
Orders is greater than such excess, the number of shares of AMPS subject to
each of such Sell Orders shall be reduced pro rata so that such Sell
Orders, in the aggregate, cover exactly the number of shares of AMPS equal
to such excess.
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(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number of
shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date shall be irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid
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Rate and Applicable Rate.
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(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of AMPS over
the number of Outstanding shares of AMPS that are the subject of Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
AMPS");
(B) from the Submitted Orders whether the number of Outstanding shares
of AMPS that are the subject of Submitted Bids by Potential Holders
specifying one or more rates per annum equal to or lower than the Maximum
Applicable Rate exceeds or is equal to the sum of:
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(1) the number of Outstanding shares of AMPS that are the subject
of Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding shares of AMPS that are subject to
Submitted Sell Orders (if such excess or such equality exists (other
than because the number of Outstanding shares of AMPS in clause (1)
above and this clause (2) are each zero because all of the Outstanding
shares of AMPS are the subject of Submitted Hold Orders), such
Submitted Bids by Potential Holders being hereinafter referred to
collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other Submitted Bids from Existing Holders
specifying lower rates per annum were rejected, thus entitling such
Existing Holders to continue to hold the shares of AMPS that are the
subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the
Potential
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Holders to purchase the shares of AMPS that are the subject of such
Submitted Bids,
would result in the number of shares subject to all Submitted Bids specifying
the Winning Bid Rate or a lower rate per annum being at least equal to the
Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations pursuant
to paragraph 10(d)(i), the Auction Agent shall advise the Corporation of the
Maximum Applicable Rate and, based on such determinations, the Applicable Rate
for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the Outstanding shares of AMPS are the subject of Submitted Hold
Orders), that the Applicable Rate for the next succeeding Dividend Period
shall be equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding shares of AMPS are the subject of
Submitted Hold Orders, that the Dividend Period next succeeding the Auction
shall automatically be the same length as the immediately preceding
Dividend Period and the Applicable Rate for the next succeeding Dividend
Period shall be equal to 59% of the Reference Rate (or 90% of such rate if
the Corporation has provided notification to the Auction Agent prior to the
Auction establishing the
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Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of AMPS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
--------------------------------------------------------------------
and Allocation of Shares. Based on the determinations made pursuant to
- ------------------------
paragraph 10(d)(i), the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected and the Auction Agent shall take such other action as set
forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any rate
per annum that is higher than the Winning Bid Rate shall be accepted, thus
requiring each such Existing Holder to sell the Outstanding shares of AMPS
that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such
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Existing Holder to continue to hold the Outstanding shares of AMPS that are
the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding shares of AMPS that are the subject of such Submitted Bid,
unless the number of Outstanding shares of AMPS subject to all such
Submitted Bids shall be greater than the number of Outstanding shares of
AMPS ("Remaining Shares") equal to the excess of the Available AMPS over
the number of Outstanding shares of AMPS subject to Submitted Bids
described in paragraph 10(e)(i)(B) and paragraph 10(e)(i)(C), in which
event the Submitted Bids of each such Existing Holder shall be accepted,
and each such Existing Holder shall be required to sell Outstanding shares
of AMPS, but only in an amount equal to the difference between (1) the
number of Outstanding shares of AMPS then held by such Existing Holder
subject to such Submitted Bid and (2) the number of shares of AMPS obtained
by multiplying (x) the number of Remaining Shares by (y) a fraction the
numerator of which shall be the number of Outstanding shares of AMPS held
by such Existing Holder subject to such Submitted Bid and the denominator
of
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which shall be the sum of the number of Outstanding shares of AMPS subject
to such Submitted Bids made by all such Existing Holders that specified a
rate per annum equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted but
only in an amount equal to the number of Outstanding shares of AMPS
obtained by multiplying (x) the difference between the Available AMPS and
the number of Outstanding shares of AMPS subject to Submitted Bids
described in paragraph 10(e)(i)(B), paragraph 10(e)(i)(C) and paragraph
10(e)(i)(D) by (y) a fraction the numerator of which shall be the number of
Outstanding shares of AMPS subject to such Submitted Bid and the
denominator of which shall be the sum of the number of Outstanding shares
of AMPS subject to such Submitted Bids made by all such Potential Holders
that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all
of the Outstanding shares of AMPS are subject to Submitted Hold Orders), subject
to the provisions of paragraph 10(e)(iii), Submitted Orders shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than
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the Maximum Applicable Rate shall be rejected, thus entitling such Existing
Holder to continue to hold the Outstanding shares of AMPS that are the
subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate shall
be accepted, thus requiring such Potential Holder to purchase the
Outstanding shares of AMPS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate
per annum that is higher than the Maximum Applicable Rate shall be accepted
and the Submitted Sell Orders of each Existing Holder shall be accepted, in
both cases only in an amount equal to the difference between (1) the number
of Outstanding shares of AMPS then held by such Existing Holder subject to
such Submitted Bid or Submitted Sell Order and (2) the number of shares of
AMPS obtained by multiplying (x) the difference between the Available AMPS
and the aggregate number of Outstanding shares of AMPS subject to Submitted
Bids described in paragraph 10(e)(ii)(A) and paragraph 10(e)(ii)(B) by (y)
a fraction the numerator of which shall be the number of Outstanding shares
of AMPS held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the number of
Outstanding
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shares of AMPS subject to all such Submitted Bids and Submitted Sell
Orders.
(iii) If, as a result of the procedures described in paragraph 10(e)(i) or
paragraph 10(e)(ii), any Existing Holder would be entitled or required to sell,
or any Potential Holder would be entitled or required to purchase, a fraction of
a share of AMPS on any Auction Date, the Auction Agent shall, in such manner as
in its sole discretion it shall determine, round up or down the number of shares
of AMPS to be purchased or sold by any Existing Holder or Potential Holder on
such Auction Date so that each Outstanding share of AMPS purchased or sold by
each Existing Holder or Potential Holder on such Auction Date shall be a whole
share of AMPS.
(iv) If, as a result of the procedures described in paragraph 10(e)(i), any
Potential Holder would be entitled or required to purchase less than a whole
share of AMPS on any Auction Date, the Auction Agent shall, in such manner as in
its sole discretion it shall determine, allocate shares of AMPS for purchase
among Potential Holders so that only whole shares of AMPS are purchased on such
Auction Date by any Potential Holder, even if such allocation results in one or
more of such Potential Holders not purchasing any shares of AMPS on such Auction
Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of
Outstanding shares of
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AMPS to be purchased and the aggregate number of the Outstanding shares of AMPS
to be sold by such Potential Holders and Existing Holders and, to the extent
that such aggregate number of Outstanding shares to be purchased and such
aggregate number of Outstanding shares to be sold differ, the Auction Agent
shall determine to which other Broker-Dealer or Broker-Dealers acting for one or
more purchasers such Broker-Dealer shall deliver, or from which other Broker-
Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall
receive, as the case may be, Outstanding shares of AMPS.
(f) Miscellaneous. The Corporation may interpret the provisions of this
-------------
paragraph 10 to resolve any inconsistency or ambiguity, remedy any formal defect
or make any other change or modification that does not substantially adversely
affect the rights of Beneficial Owners of AMPS. A Beneficial Owner or an
Existing Holder (A) may sell, transfer or otherwise dispose of shares of AMPS
only pursuant to a Bid or Sell Order in accordance with the procedures described
in this paragraph 10 or to or through a Broker-Dealer, provided that in the case
of all transfers other than pursuant to Auctions such Beneficial Owner or
Existing Holder, its Broker-Dealer, if applicable, or its Agent Member advises
the Auction Agent of such transfer and (B) except as otherwise required by law,
shall have the ownership of the shares of AMPS held by it maintained in book
entry form by the Securities Depository in the account of its Agent Member,
which in turn will maintain records of such Beneficial Owner's
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beneficial ownership. Neither the Corporation nor any Affiliate shall submit an
Order in any Auction. Any Beneficial Owner that is an Affiliate shall not sell,
transfer or otherwise dispose of shares of AMPS to any Person other than the
Corporation. All of the Outstanding shares of AMPS shall be represented by a
single certificate registered in the name of the nominee of the Securities
Depository unless otherwise required by law or unless there is no Securities
Depository. If there is no Securities Depository, at the Corporation's option
and upon its receipt of such documents as it deems appropriate, any shares of
AMPS may be registered in the Stock Register in the name of the Beneficial Owner
thereof and such Beneficial Owner thereupon will be entitled to receive
certificates therefor and required to deliver certificates therefor upon
transfer or exchange thereof.
11. Securities Depository; Stock Certificates. (a) If there is a
-----------------------------------------
Securities Depository, one certificate for all of the shares of AMPS of each
series shall be issued to the Securities Depository and registered in the name
of the Securities Depository or its nominee. Additional certificates may be
issued as necessary to represent shares of AMPS. All such certificates shall
bear a legend to the effect that such certificates are issued subject to the
provisions restricting the transfer of shares of AMPS contained in these
Articles Supplementary. Unless the Corporation shall have elected, during a
Non-Payment Period, to waive this requirement, the Corporation will also issue
stop-transfer instructions to the Auction Agent for the shares of
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AMPS. Except as provided in paragraph (b) below, the Securities Depository or
its nominee will be the Holder, and no Beneficial Owner shall receive
certificates representing its ownership interest in such shares.
(b) If the Applicable Rate applicable to all shares of AMPS shall be the
Non-Payment Period Rate or there is no Securities Depository, the Corporation
may at its option issue one or more new certificates with respect to such shares
(without the legend referred to in paragraph 11(a)) registered in the names of
the Beneficial Owners or their nominees and rescind the stop-transfer
instructions referred to in paragraph 11(a) with respect to such shares.
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IN WITNESS WHEREOF, MUNIYIELD CALIFORNIA FUND, INC. has caused these
presents to be signed in its name and on its behalf by a duly authorized
officer, and attested by its Secretary, and the said officers of the Corporation
further acknowledge said instrument to be the corporate act of the Corporation,
and state that to the best of their knowledge, information and belief the
matters and facts herein set forth with respect to approval are true in all
material respects, all on , 1997.
MUNIYIELD CALIFORNIA FUND, INC.
By ___________________________
Name:
Title:
Attest:
___________________________
Secretary
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INDEPENDENT AUDITORS' CONSENT
MuniYield California Fund, Inc.:
We consent to the use in this Registration Statement on Form N-14 of our report
dated December 3, 1996 appearing in the Proxy Statement and Prospectus, which is
a part of such Registration Statement, and to the reference to us under the
captions "The Reorganization - Comparison of the Funds - Financial Highlights"
and "Experts" also appearing in such Proxy Statement and Prospectus.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Princeton, New Jersey
August 4, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "The
Reorganization-Comparison of the Funds-Financial Highlights," "Selection of
Independent Auditors" and "Experts" and to the use of our report on Taurus
MuniCalifornia Holdings, Inc. dated November 25, 1996, in this Registration
Statement on Form N-14 under the Securities Act of 1933 (File No. 333-00000) and
related Joint Proxy Statement and Prospectus of MuniYield California Fund, Inc.
dated August 5, 1997.
/s/ Ernst & Young LLP
Princeton, New Jersey
July 31, 1997
