<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1996
SECURITIES ACT FILE NO. 333-7823
INVESTMENT COMPANY ACT FILE NO. 811-6540
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 /X/ POST-EFFECTIVE AMENDMENT NO. / /
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MUNIYIELD INSURED FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS 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 INSURED 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:
<TABLE>
<S> <C>
FRANK P. BRUNO, ESQ. MARK B. GOLDFUS, 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
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of 1933.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MUNIYIELD INSURED FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14 PROXY STATEMENT AND
ITEM NO. PROSPECTUS CAPTION
- -------------------------------------------------- -------------------------------------
<S> <C>
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
Annual 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
Registrant.............................. The Reorganization -- Comparison of
the Funds
Item 13. Additional Information about the Company
Being Acquired.......................... The Reorganization -- Comparison of
the Funds
Item 14. Financial Statements.................... Financial Statements
</TABLE>
PART C
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> 3
MUNIYIELD INSURED FUND, INC.
MUNIYIELD INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
------------------------
NOTICE OF ANNUAL MEETINGS OF STOCKHOLDERS
------------------------
TO BE HELD ON SEPTEMBER 30, 1996
TO THE STOCKHOLDERS OF
MUNIYIELD INSURED FUND, INC.
MUNIYIELD INSURED FUND II, INC.:
NOTICE IS HEREBY GIVEN that annual meetings of stockholders (the
"Meetings") of MuniYield
Insured Fund, Inc. ("Insured I") and MuniYield Insured Fund II, Inc. ("Insured
II") will be held at the offices of Merrill Lynch Asset Management, L.P., 800
Scudders Mill Road, Plainsboro, New Jersey on Monday, September 30, 1996 at
10:45 A.M., New York time (for Insured I) and 11:00 A.M., New York time (for
Insured II) 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 Insured II by Insured I, and the assumption of all
of the liabilities of Insured II by Insured I, in exchange solely for an
equal aggregate value of newly-issued shares of Common Stock of Insured I
("Insured I Common Stock") and shares of two newly-created series of
Auction Market Preferred Stock ("AMPS") of Insured I to be designated
Series F and Series G ("Insured I Series F AMPS" and "Insured I Series G
AMPS", respectively) and the distribution of such Insured I Common Stock to
the holders of Common Stock of Insured II, such Insured I Series F AMPS to
the holders of Series A AMPS of Insured II and such Insured I Series G AMPS
to the holders of Series B AMPS of Insured II. A vote in favor of this
proposal also will constitute a vote in favor of the liquidation and
dissolution of Insured II and the termination of its registration under the
Investment Company Act of 1940;
(2) To elect a Board of Directors of Insured I and Insured II to serve
for the ensuing year;
(3) For the stockholders of Insured I only:
(a) in the event that proposal 1 is approved by the requisite
number of stockholders of each Fund and the Reorganization takes place
prior to October 31, 1996, to consider and act upon a proposal to ratify
the selection of Ernst & Young LLP to serve as independent auditors of
the combined fund for the fiscal year ending October 31, 1996; and
(b) in the event that proposal 1 is not approved by the requisite
number of stockholders of each Fund or the Reorganization does not take
place prior to October 31, 1996, to consider and act upon a proposal to
ratify the selection of Deloitte & Touche LLP to serve as independent
auditors of Insured I for its current fiscal year ending October 31,
1996;
<PAGE> 4
(4) For the stockholders of Insured II only: to consider and act upon
a proposal to ratify the selection of Ernst & Young LLP to serve as
independent auditors of Insured II for the current fiscal year ending
October 31, 1996; and
(5) To transact such other business as properly may come before the
Meetings or any adjournment thereof.
The Boards of Directors of Insured I and Insured II have fixed the close of
business on August 16, 1996 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 Insured I and Insured II entitled to
vote at the Meetings will be available and open to the examination of any
stockholder of Insured I or Insured II, respectively, for any purpose germane to
the Meetings during ordinary business hours from and after September 16, 1996,
at the offices of Insured I, 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 Insured I or Insured II, as applicable.
By Order of the Boards of Directors
MARK B. GOLDFUS
Secretary of each Fund
Plainsboro, New Jersey
Dated: August 21, 1996
<PAGE> 5
PROXY STATEMENT AND PROSPECTUS
MUNIYIELD INSURED FUND, INC.
MUNIYIELD INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
------------------------
ANNUAL MEETINGS OF STOCKHOLDERS
------------------------
SEPTEMBER 30, 1996
This Joint Proxy Statement and Prospectus (this "Proxy Statement and
Prospectus") is furnished in connection with the solicitation of proxies on
behalf of the Boards of Directors of MuniYield Insured Fund, Inc., a Maryland
corporation ("Insured I"), and MuniYield Insured Fund II, Inc., a Maryland
corporation ("Insured II"), for use at Annual Meetings of Stockholders (the
"Meetings") called to approve or disapprove the proposed reorganization whereby
(i) Insured I will acquire all of the assets, and will assume all of the
liabilities, of Insured II, in exchange solely for an equal aggregate value of
newly-issued shares of Common Stock, par value $.10 per share, of Insured I
("Insured I Common Stock") and shares of two newly-created series of Auction
Market Preferred Stock ("AMPS") of Insured I, 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 F and Series
G ("Insured I Series F AMPS" and "Insured I Series G AMPS", respectively) to be
issued by Insured I; and (ii) Insured II will be deregistered and dissolved
(collectively, the "Reorganization"). Insured I and Insured II 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 in connection with the election of a Board of
Directors of each Fund and the ratification of the selection of independent
auditors for each Fund.
(continued on next page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
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 Insured I
under the Securities Act of
1933, as amended (the "Securities Act"), in connection with the issuance of
Insured I Common Stock, Insured I Series F AMPS and Insured I Series G AMPS in
the Reorganization.
This Proxy Statement and Prospectus sets forth concisely the information
about Insured I and Insured II that stockholders of Insured I and Insured II
should know before considering the Reorganization and should be retained for
future reference. Insured I and Insured II 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 Insured I and
Insured II 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 AUGUST 21, 1996.
<PAGE> 6
The aggregate net asset value of the Insured I Common Stock to be issued to
Insured II and thereafter distributed to the holders of shares of Common Stock,
par value $.10 per share, of Insured II ("Insured II Common Stock") will equal
the aggregate net asset value of the shares of Insured II Common Stock on the
date of the Reorganization. Similarly, it is intended that the aggregate
liquidation preference and value of the Insured I Series F AMPS to be issued to
Insured II and thereafter distributed to the holders of shares of AMPS of
Insured II, 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), designated Series A AMPS ("Insured II Series A AMPS"), will equal the
aggregate liquidation preference and value of the Insured II Series A AMPS on
the date of the Reorganization, and that the aggregate liquidation preference
and value of the Insured I Series G AMPS to be issued to Insured II and
thereafter distributed to the holders of shares of AMPS of Insured II, 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), designated
Series B AMPS ("Insured II Series B AMPS" and, together with the Insured II
Series A AMPS, the "Insured II AMPS"), will equal the aggregate liquidation
preference and value of the Insured II Series B AMPS on the date of the
Reorganization. As soon as practicable after the receipt by Insured I of all of
Insured II's assets and the assumption by Insured I of all of Insured II's
liabilities, Insured II will distribute Insured I Common Stock, Insured I Series
F AMPS and Insured I Series G AMPS to Insured II's stockholders as described
under "The Reorganization". Thereafter, Insured II 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 Insured I and Insured II are non-diversified, leveraged, closed-end
management investment companies with virtually identical investment objectives.
Both Insured I and Insured II seek to provide stockholders with as high a level
of current income exempt from Federal income taxes as is consistent with their
respective investment policies and prudent investment management. Insured I and
Insured II 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 income taxes ("Municipal Bonds"). There can be no assurance that
after the Reorganization the surviving fund will achieve the investment
objective of either Insured I or Insured II.
Insured I Common Stock and Insured II Common Stock are listed on the New
York Stock Exchange (the "NYSE") under the symbols "MYI" and "MTI",
respectively. Subsequent to the Reorganization, shares of Insured I Common Stock
will continue to be listed on the NYSE under the symbol "MYI". 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> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION......................................................................... 5
THE REORGANIZATION................................................................... 6
SUMMARY......................................................................... 6
RISK FACTORS AND SPECIAL CONSIDERATIONS......................................... 14
Effects of Leverage........................................................ 15
Portfolio Management....................................................... 16
Ratings Considerations..................................................... 16
COMPARISON OF THE FUNDS......................................................... 17
Financial Highlights....................................................... 17
Investment Objective and Policies.......................................... 22
Portfolio Insurance........................................................ 24
Description of Municipal Bonds............................................. 25
Other Investment Policies.................................................. 26
Information Regarding Options and Futures Transactions..................... 27
Investment Restrictions.................................................... 31
Rating Agency Guidelines................................................... 32
Portfolio Composition...................................................... 33
Portfolio Transactions..................................................... 34
Portfolio Turnover......................................................... 35
Net Asset Value............................................................ 35
Capital Stock.............................................................. 36
Management of the Funds.................................................... 38
Voting Rights.............................................................. 40
Stockholder Inquiries...................................................... 41
Dividends and Distributions................................................ 41
Automatic Dividend Reinvestment Plan....................................... 42
Liquidation Rights of Holders of AMPS...................................... 44
Tax Rules Applicable to Insured I, Insured II and their Stockholders....... 45
AGREEMENT AND PLAN OF REORGANIZATION............................................ 48
General.................................................................... 48
Procedure.................................................................. 49
Terms of the Agreement and Plan of Reorganization.......................... 50
Potential Benefits to Insured I Common Stockholders and Insured II Common
Stockholders as a Result of the Reorganization............................. 52
Surrender and Exchange of Insured II Stock Certificates.................... 53
Tax Consequences of the Reorganization..................................... 54
Capitalization............................................................. 56
</TABLE>
3
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
DIRECTORS.....................56Committee and Board Meetings.................... 62
Compliance with Section 16(a) of the Securities Exchange Act of 1934............ 62
Interested Persons.............................................................. 62
Compensation of Directors....................................................... 62
Officers of the Funds........................................................... 64
SELECTION OF INDEPENDENT AUDITORS.................................................... 64
INFORMATION CONCERNING THE ANNUAL MEETINGS........................................... 65
Date, Time and Place of Meetings................................................ 65
Solicitation, Revocation and Use of Proxies..................................... 65
Record Date and Outstanding Shares.............................................. 66
Security Ownership of Certain Beneficial Owners and Management of Insured I and
Insured II.................................................................... 66
Voting Rights and Required Vote................................................. 66
ADDITIONAL INFORMATION............................................................... 68
CUSTODIAN............................................................................ 69
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR.............................. 69
LEGAL PROCEEDINGS.................................................................... 69
LEGAL OPINIONS....................................................................... 70
EXPERTS.............................................................................. 70
STOCKHOLDER PROPOSALS................................................................ 71
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 -- PORTFOLIO INSURANCE................................................... III-1
</TABLE>
4
<PAGE> 9
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of Insured I and
Insured II 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 September 30, 1996, at 10:45 A.M., New York time (for Insured I) and 11:00
A.M., New York time (for Insured II). The mailing address for both Insured I and
Insured II is P.O. Box 9011, Princeton, New Jersey 08543-9011. The approximate
mailing date of this Proxy Statement and Prospectus is August 26, 1996.
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 Insured I or Insured II, 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, proxies will be voted
"FOR" each of the following proposals: (1) to approve the Agreement and Plan of
Reorganization between Insured I and Insured II (the "Agreement and Plan of
Reorganization"); (2) to elect a Board of Directors of each Fund to serve for
the ensuing year; (3) for the stockholders of Insured I only: (a) in the event
that proposal 1 is approved by the requisite number of stockholders of each Fund
and the Reorganization takes place prior to October 31, 1996, to consider and
act upon a proposal to ratify the selection of Ernst & Young LLP to serve as
independent auditors of the combined fund for the fiscal year ending October 31,
1996; and (b) in the event that proposal 1 is not approved by the requisite
number of stockholders of each Fund or the Reorganization does not take place
prior to October 31, 1996, to consider and act upon a proposal to ratify the
selection of Deloitte & Touche LLP to serve as independent auditors of Insured I
for the current fiscal year ending October 31, 1996; and (4) for the
stockholders of Insured II only: to ratify the selection of Ernst & Young LLP as
the independent auditors of Insured II for the current fiscal year ending
October 31, 1996.
With respect to proposal 1, approval of the Agreement and Plan of
Reorganization will require the affirmative vote of stockholders representing a
majority of the outstanding shares of Insured I Common Stock and AMPS of Insured
I, designated Series A, Series B, Series C, Series D and Series E, 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 "Insured I AMPS"), voting together as a single class, and a majority of the
outstanding shares of Insured I AMPS, voting separately as a class, as well as
the affirmative vote of stockholders representing a majority of the outstanding
shares of Insured II Common Stock and Insured II AMPS, voting together as a
single class, and a majority of the outstanding shares of Insured II AMPS,
voting separately as a class.
With respect to proposal 2, holders of shares of Insured I AMPS are
entitled to elect two Directors of Insured I and holders of shares of Insured I
Common Stock and Insured I AMPS, voting together as a single class, are entitled
to elect the remaining Directors of Insured I; similarly, holders of shares of
Insured II AMPS are entitled to elect two Directors of Insured II and holders of
shares of Insured II Common Stock and Insured II AMPS, voting together as a
single class, are entitled to elect the remaining Directors of Insured II.
Assuming a quorum is present, (x) election of the two Directors of Insured I or
Insured II, as the case may be, to be elected by the holders of that Fund's
AMPS, voting separately as a class, will require the affirmative vote of a
majority of the votes cast by the holders of the Insured I AMPS or Insured II
AMPS, respectively, represented at the Meetings and entitled to vote; and (y)
election of the remaining Directors of Insured I or Insured II, as the case may
be, will require the affirmative vote of a majority of the votes cast by the
holders of
5
<PAGE> 10
shares of their respective Common Stock and AMPS, represented at the Meetings
and entitled to vote, voting together as a single class.
With respect to proposal 3(a), (i) approval of the ratification of the
selection of Ernst & Young LLP as the independent auditors of the combined fund
will require the affirmative vote of a majority of the votes cast by the holders
of shares of Insured I Common Stock and Insured I AMPS represented at the
Meetings and entitled to vote, voting together as a single class; and with
respect to proposal 3(b), approval of the ratification of the selection of
Deloitte & Touche LLP as the independent auditors of Insured I will require the
affirmative vote of a majority of the votes cast by the holders of shares of
Insured I Common Stock and Insured I AMPS represented at the Meetings and
entitled to vote, voting together as a single class.
With respect to proposal 4, approval of the ratification of the selection
of Ernst & Young LLP as the independent auditors of Insured II will require the
affirmative vote of a majority of the votes cast by the holders of shares of
Insured II Common Stock and Insured II AMPS represented at the Meetings and
entitled to vote, voting together as a single class.
The Boards of Directors of Insured I and Insured II have fixed the close of
business on August 16, 1996 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
45,187,339 shares of Insured I Common Stock, 12,800 shares of Insured I AMPS in
five series, 16,420,827 shares of Insured II Common Stock and 4,800 shares of
Insured II AMPS in two series. To the knowledge of the management of each of
Insured I and Insured II, no person owned beneficially more than 5% of the
respective outstanding shares of either class of capital stock of Insured I or
Insured II at the Record Date.
The Boards of Directors of Insured I and Insured II know of no business
other than that discussed in proposals 1, 2, 3 and 4 above which 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 Insured II by Insured I and the subsequent
distribution of Insured I Common Stock, Insured I Series F AMPS and Insured I
Series G AMPS to the holders of Insured II Common Stock, Insured II Series A
AMPS and Insured II Series B AMPS, respectively, and (ii) the subsequent
deregistration and dissolution of Insured II.
At a meeting of the Board of Directors of Insured I held on June 18, 1996,
and at a meeting of the Board of Directors of Insured II held on May 3, 1996,
the Boards of Directors of Insured I and Insured II
6
<PAGE> 11
unanimously approved a proposal that Insured I acquire all of the assets, and
assume all of the liabilities, of Insured II in exchange solely for Insured I
Common Stock, Insured I Series F AMPS and Insured I Series G AMPS to be issued
to Insured II and thereafter distributed to the stockholders of Insured II.
Subject to obtaining the necessary approvals from the Insured I and Insured II
stockholders, the Board of Directors of Insured II deemed advisable the
deregistration of Insured II under the Investment Company Act and its
dissolution under the laws of the State of Maryland.
Both Insured I and Insured II seek to provide stockholders with as high a
level of current income exempt from Federal income taxes as is consistent with
their respective investment policies and prudent investment management. Both
Insured I and Insured II seek to achieve their investment objectives by
investing primarily in a portfolio of Municipal Bonds. Under normal
circumstances, at least 80% of each Fund's total assets will be invested in
Municipal Bonds with remaining maturities of one year or more which are covered
by insurance guaranteeing the timely payment of principal at maturity and
interest.
Insured I and Insured II are both non-diversified, leveraged, closed-end
management investment companies registered under the Investment Company Act. If
the Insured I and Insured II stockholders approve the Reorganization, Insured I
Common Stock, Insured I Series F AMPS and Insured I Series G AMPS will be issued
to Insured II in exchange for the assets of Insured I and thereafter Insured II
will distribute these shares to its stockholders as provided in the Agreement
and Plan of Reorganization. After the Reorganization, Insured II will terminate
its registration under the Investment Company Act and its incorporation under
Maryland law.
Based upon their evaluation of all relevant information, the Directors of
Insured I and Insured II have determined that the Reorganization will
potentially benefit the holders of Common Stock of both Insured I and Insured
II. Specifically, after the Reorganization, Insured II stockholders will remain
invested in a closed-end fund that has an investment objective and policies
virtually identical to those of Insured II and which utilizes the same
management personnel. In addition, it is anticipated that both Insured I and
Insured II 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 Insured I AMPS or Insured II 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.
In deciding to recommend the Reorganization, the Boards of Directors of
Insured I and Insured II took into account the investment objective and policies
of both Insured I and Insured II, the expenses incurred both due to the
Reorganization and on an ongoing basis by the new and existing stockholders of
Insured I and the potential benefits, including economies of scale, to the
holders of Common Stock and AMPS of Insured I and Insured II as a result of the
Reorganization. The Boards of Directors of Insured I and Insured II, including
all of the Directors who are not "interested persons", as defined in the
Investment Company Act, of Insured I or Insured II, 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 Insured I and Insured II 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
7
<PAGE> 12
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 Insured I or Insured II 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 Insured I or Insured II, 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 Insured I and Insured II; (ii) by the Board of Directors
of Insured I if any condition to Insured I's obligations has not been fulfilled
or waived by such Board; or (iii) by the Board of Directors of Insured II if any
condition to Insured II's obligations has not been fulfilled or waived by such
Board.
PRO FORMA FEE TABLE FOR COMMON STOCKHOLDERS OF INSURED I, INSURED II
AND THE COMBINED FUND AS OF APRIL 30, 1996 (UNAUDITED)(A)
<TABLE>
<CAPTION>
ACTUAL
------------------------ PRO FORMA
INSURED I INSURED II 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 at April 30, 1996;
annualized)(d):
Investment Advisory Fees................................... 0.72% 0.73% 0.71%
Other Expenses
Transfer Agent Fees..................................... 0.02% 0.02% 0.02%
Custodian Fee........................................... 0.01% 0.01% 0.01%
Miscellaneous........................................... 0.18% 0.22% 0.16%
---- ---- ----
Total Other Expenses....................................... 0.21% 0.25% 0.19%
---- ---- ----
Total Annual Operating Expenses.............................. 0.93% 0.98% 0.90%
==== ==== ====
</TABLE>
- ---------------
(a) No information is presented with respect to AMPS because neither a Fund's
expenses nor 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 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
shareholder report dated as of April 30, 1996. The pro forma annual
operating expenses for the combined fund are projections for a 12-month
period.
8
<PAGE> 13
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 0.93% for Insured I
shares, 0.98% for Insured II shares and 0.90% for shares of the
combined fund and (2) a 5% annual return throughout the period:
Insured I.......................................................... $64 $83 $104 $163
Insured II......................................................... $64 $85 $106 $169
Combined Fund*..................................................... $64 $82 $102 $160
</TABLE>
- ---------------
* Assumes that the Reorganization had taken place on April 30, 1996
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that an Insured I or Insured II 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 "Comparison of the Funds" and "The Reorganization--Potential
Benefits to Insured I Common Stockholders and Insured II Common Stockholders as
a Result of the Reorganization".
BUSINESS OF INSURED I...... Insured I was incorporated under the laws of the
State of Maryland on January 13, 1992 and commenced
operations on March 27, 1992. Like Insured II,
Insured I is a non-diversified, leveraged,
closed-end management investment company whose
investment objective is to provide stockholders
with as high a level of current income exempt from
Federal income taxes as is consistent with its
investment policies and prudent investment
management. Furthermore, like Insured II, Insured I
seeks to achieve its investment objective by
investing primarily in a portfolio of Municipal
Bonds. See "Comparison of the Funds -- Investment
Objectives and Policies".
Like Insured II, Insured I has outstanding both
Common Stock and AMPS. As of July 31, 1996, Insured
I had net assets of $1,008,134,450.
BUSINESS OF INSURED II..... Insured II was incorporated under the laws of the
State of Maryland on September 2, 1992 and
commenced operations on October 30, 1992. Like
Insured I, Insured II is a non-diversified,
leveraged, closed-end management investment company
whose investment objective is to
9
<PAGE> 14
provide stockholders with as high a level of
current income exempt from Federal income taxes as
is consistent with its investment policies and
prudent investment management. Furthermore, like
Insured I, Insured II seeks to achieve its
investment objective by investing primarily in a
portfolio of Municipal Bonds.
Like Insured I, Insured II has outstanding both
Common Stock and AMPS. As of July 31, 1996, Insured
II had net assets of $368,681,067.
COMPARISON OF THE FUNDS.... Investment Objectives and Policies. Insured I and
Insured II have virtually identical investment
objectives and policies. Both Funds seek to pay
interest exempt from Federal income taxes and seek
to maintain as much of their respective portfolios
invested in Municipal Bonds as possible. As of July
31, 1996, 99% of Insured I's net assets and 98% of
Insured II's net assets were invested in Municipal
Bonds. The same investment restrictions apply to
both Insured I and Insured II. See "Comparison of
the Funds -- Investment Objective and Policies".
Capital Stock. Insured I and Insured II each has
outstanding both Common Stock and several series of
AMPS. Like Insured II Common Stock, Insured I
Common Stock is traded on the NYSE. As of July 31,
1996, the net asset value per share of the Insured
I Common Stock was $15.23 and the market price per
share was $13.75, and as of the same date, the net
asset value per share of the Insured II Common
Stock was $15.14 and the market price per share was
$13.375. Insured I AMPS and Insured II AMPS have
liquidation preferences of $25,000 per share and
are sold principally at auctions. See "Comparison
of the Funds -- Capital Stock".
Auctions generally have been held and will be held
every 28 days in the case of the Insured I Series A
AMPS, Series B AMPS, Series C AMPS and Series D
AMPS and every seven days in the case of the
Insured I Series E AMPS unless Insured I elects,
subject to certain limitations, to have a special
dividend period. As of the auction held on August
7, 1996, the dividend rate on the Insured I Series
A AMPS was 3.47%; as of the auction held on August
7, 1996, the dividend rate on the Insured I Series
B AMPS was 3.45%; as of the auction held on August
7, 1996, the dividend rate on the Insured I Series
C AMPS was 3.45%; and as of the auction held on
August 7, 1996, the dividend rate on the Insured I
Series E AMPS was 3.40%. In connection with the
auction held on July 31, 1996, Insured I elected a
special dividend period on the Insured I Series D
AMPS which ends on February 12, 1997, and the
dividend rate during such special dividend period
is 3.74%.
Similarly, auctions generally have been held and
will be held every 28 days in the case of the
Insured II Series A AMPS and every seven
10
<PAGE> 15
days in the case of the Insured II Series B AMPS
unless Insured II elects, subject to certain
limitations, to have a special dividend period. In
connection with the auction held on June 10, 1996,
Insured II elected a special dividend period on the
Insured II Series A AMPS which ends on February 3,
1997 and the dividend rate during such special
dividend period is 3.68%. The Insured I Series F
AMPS to be issued in the Reorganization for the
Insured II Series A AMPS will have an initial
dividend period ending on February 3, 1997 and an
initial dividend rate of 3.68%. As of the auction
held on August 5, 1996, the dividend rate on the
Insured II Series B AMPS was 3.178%.
Advisory Fees. The investment adviser for both
Insured I and Insured II is Fund Asset Management,
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 investment adviser for more than 130 registered
investment companies. FAM also offers portfolio
management and portfolio analysis services to
individuals and institutions.
FAM is responsible for the management of each
Fund's investment portfolio and for providing
administrative services to each Fund. The same
personnel manage the portfolios of both Insured I
and Insured II. William Bock serves as the
portfolio manager for both Funds.
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. Subsequent to the
Reorganization, FAM will continue to receive
compensation at the rate of 0.50% of the average
weekly net assets of the surviving Fund. See
"Comparison of the Funds -- Management of the
Funds".
Other Significant Fees. Boston EquiServe is the
transfer agent, dividend disbursing agent and
registrar for both Insured I and Insured II in
connection with their respective Common Stock.
State Street Bank and Trust Company is the
custodian for the assets of Insured I and Insured
II. IBJ Schroder Bank and Trust Company is the
transfer agent, registrar and auction agent for
both Insured I and Insured II in connection with
their respective AMPS. The principal business
addresses are as follows: Boston EquiServe, 150
Royall Street, Canton, Massachusetts 02021; State
Street Bank and Trust Company, One Heritage Drive,
P2N, North Quincy, Massachusetts 02171; IBJ
Schroder Bank and Trust Company, One State Street,
New York, New York 10004. See "Comparison of the
Funds -- Management of the Funds".
Overall Expense Ratio. As of April 30, 1996, the
overall annualized operating expense ratio for
Insured I was 0.64%, based on average net
11
<PAGE> 16
assets of approximately $1.0 billion including
AMPS, and 0.93%, based on average net assets of
approximately $706.5 million excluding AMPS, and
the overall annualized expense ratio for Insured II
was 0.67%, based on average net assets of
approximately $374.9 million including AMPS, and
0.98%, based on average net assets of approximately
$254.9 million excluding AMPS. If the
Reorganization had taken place on April 30, 1996,
the overall operating expense ratio for the
combined fund on a pro forma basis would have been
0.62%, based on average net assets of approximately
$1.4 billion including AMPS, and 0.90%, based on
average net assets of approximately $961.5 million
excluding AMPS.
Purchases and Sales of Common Stock and
AMPS. Purchase and sale procedures for both Insured
I Common Stock and Insured II 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. Alternatively, investors may purchase or
sell shares of Common Stock of such Funds through
privately negotiated transactions with existing
stockholders.
Purchase and sale procedures for Insured I AMPS and
Insured II AMPS also are identical. Such AMPS
generally are purchased and sold at separate
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 customers 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 dividend
period), each holder may submit orders to buy, sell
or hold AMPS to its broker-dealer. Outside of these
auctions, shares of Insured I AMPS or Insured II
AMPS may be purchased 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
broker-dealers for the AMPS of either Fund.
Ratings of AMPS. The Insured I AMPS and the Insured
II AMPS have each been assigned a rating of AAA
from Standard & Poor's Ratings Group ("S&P") and
"aaa" from Moody's Investors Service, Inc.
("Moody's"). See "Comparison of the Funds -- Rating
Agency Guidelines".
Portfolio Insurance. The policies are the same for
each Fund with respect to obtaining insurance for
portfolio securities. Under normal
12
<PAGE> 17
circumstances, at least 80% of each Fund's assets
will be invested in Municipal Bonds either (i)
insured under an insurance policy purchased by the
Fund or (ii) insured under an insurance policy
obtained by the issuer thereof or any other party.
See "Comparison of the Funds -- Investment
Objective and Policies -- Portfolio Insurance".
Portfolio Transactions. The portfolio transactions
in which Insured I and Insured II may engage 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 identical
for Insured I and Insured II, both with respect to
the Common Stock and the AMPS of each Fund. See
"Comparison of the Funds -- Dividends and
Distributions".
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 each day
during which the NYSE is open for trading. 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. See "Comparison of the Funds -- Net
Asset Value".
Voting Rights. The corresponding voting rights of
the holders of shares of Insured I Common Stock and
Insured II Common Stock are identical. Similarly,
the corresponding voting rights of the holders of
shares of Insured I AMPS and Insured II AMPS are
identical. See "Comparison of the Funds -- Capital
Stock".
Stockholder Services. An automatic dividend
reinvestment plan is available both to the holders
of shares of Insured I Common Stock and the holders
of shares of Insured II Common Stock. The plans are
identical for the two Funds. See "Comparison of the
Funds -- Automatic Dividend Reinvestment Plan".
Other stockholder services, including the provision
of annual and semi-annual reports, are the same for
the two Funds.
13
<PAGE> 18
OUTSTANDING SECURITIES OF INSURED I AND INSURED II
AS OF JULY 31, 1996 (UNAUDITED)
<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>
INSURED I
Common Stock............................ 199,987,200 - 0 - 45,187,339
AMPS
Series A AMPS........................ 2,200 - 0 - 2,200
Series B AMPS........................ 2,200 - 0 - 2,200
Series C AMPS........................ 2,200 - 0 - 2,200
Series D AMPS........................ 2,200 - 0 - 2,200
Series E AMPS........................ 4,000 - 0 - 4,000
INSURED II
Common Stock............................ 199,995,200 - 0 - 16,420,827
AMPS
Series A AMPS........................ 2,400 - 0 - 2,400
Series B AMPS........................ 2,400 - 0 - 2,400
</TABLE>
TAX CONSIDERATIONS......... Insured I and Insured II have jointly requested a
private letter ruling from the IRS with respect to
the Reorganization to the effect that, among other
things, neither Insured I nor Insured II will
recognize gain or loss on the transaction and
Insured II stockholders will not recognize gain or
loss on the exchange of their Insured II shares for
shares of Insured I Common Stock (except to the
extent that an Insured II Common Stockholder
receives cash representing an interest in less than
a full share of Insured I Common Stock in the
Reorganization), Insured I Series F AMPS or Insured
I Series G AMPS. The consummation of the
Reorganization is subject to the receipt of such
ruling. The Reorganization will not affect the
status of Insured I as a regulated investment
company (a "RIC") under the Internal Revenue Code
of 1986, as amended (the "Code"). Insured II will
liquidate pursuant to the Reorganization. See "The
Reorganization -- Tax Consequences of the
Reorganization".
RISK FACTORS AND SPECIAL CONSIDERATIONS
Since both Insured I and Insured II invest primarily in a portfolio of
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.
14
<PAGE> 19
EFFECTS OF LEVERAGE
Utilization of leverage, through the issuance of AMPS, involves certain
risks to holders of Insured I Common Stock and Insured II 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, since 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 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, since 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 "The 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 rating 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.
15
<PAGE> 20
PORTFOLIO MANAGEMENT
The portfolio management strategies of Insured I and Insured II are 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
Insured I and Insured II 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 Insured I
Common Stock nor the Insured II Common Stock has been rated by a nationally
recognized statistical rating organization.
The Board of Directors of each of Insured I and Insured II, as the case may
be, without stockholder approval, may amend, alter or repeal certain definitions
or restrictions which 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.
16
<PAGE> 21
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
Insured I
The financial information in the table below, except for the six-month
period ended April 30, 1996 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
FOR THE PERIOD
SIX MONTHS MARCH 27,
ENDED FOR THE YEAR ENDED OCTOBER 31, 1992+ TO
APRIL 30, -------------------------------------------- OCTOBER 31,
1996 1995 1994 1993 1992
--------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 15.46 $ 13.85 $ 16.76 $ 14.27 $ 14.18
------- -------- -------- -------- --------
Investment income -- net................. .59 1.20 1.20 1.21 .66
Realized and unrealized gain (loss) on
investments -- net..................... (.33) 1.66 (2.66) 2.59 .16
------- -------- -------- -------- --------
Total from investment operations......... .26 2.86 (1.46) 3.80 .82
------- -------- -------- -------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income -- net............... (.46) (.92) (.98) (1.00) (.48)
Realized gain on investments -- net.... (.09) (.00)# (.26) (.10) --
In excess of realized gain on
investments -- net................... -- (.04) -- -- --
------- -------- -------- -------- --------
Total dividends and distributions to
Common Stock shareholders.............. (.55) (.96) (1.24) (1.10) (.48)
------- -------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock........................... -- -- -- -- (.01)
------- -------- -------- -------- --------
Effect of Preferred Stock activity:++
Dividends and distributions to
Preferred Stock shareholders:
Investment income -- net............. (.11) (.28) (.17) (.19) (.10)
Realized gain on
investments -- net................. (.03) (.00)# (.04) (.02) --
In excess of realized gain on
investments -- net................. -- (.01) -- -- --
Capital charge resulting from issuance
of Preferred Stock................... -- -- -- -- (.14)
------- -------- -------- -------- --------
Total effect of Preferred Stock
activity............................... (.14) (.29) (.21) (.21) (.24)
------- -------- -------- -------- --------
Net asset value, end of period........... $ 15.03 $ 15.46 $ 13.85 $ 16.76 $ 14.27
======= ======== ======== ======== ========
Market price per share, end of period.... $ 13.75 $ 13.625 $ 11.625 $ 15.875 $ 14.875
======= ======== ======== ======== ========
</TABLE>
17
<PAGE> 22
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD
SIX MONTHS MARCH 27,
ENDED FOR THE YEAR ENDED OCTOBER 31, 1992+ TO
APRIL 30, -------------------------------------------- OCTOBER 31,
1996 1995 1994 1993 1992
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
RETURN:**Based on market price per
share.................................. 4.88%## 26.09% (20.23)% 14.51% 2.46%##
========== =========== =========== =========== ===========
Based on net asset value per share....... 1.03%## 20.09% (9.98)% 26.01% 3.97%##
========== =========== =========== =========== ===========
RATIOS TO AVERAGE NET ASSETS:***
Expenses, net of reimbursement........... .64%* .65% .66% .65% .47%*++++
========== =========== =========== =========== ===========
Expenses................................. .64%* .65% .66% .65% .66%*
========== =========== =========== =========== ===========
Investment income -- net................. 5.20%* 5.55% 5.35% 5.35% 5.69%*
========== =========== =========== =========== ===========
SUPPLEMENTAL DATA:
Net assets, net of Preferred Stock, end
of period (in thousands)............... $679,008 $698,512 $625,630 $757,138 $638,150
========== =========== =========== =========== ===========
Preferred Stock outstanding, end of
period (in thousands).................. $320,000 $320,000 $320,000 $320,000 $320,000
========== =========== =========== =========== ===========
Portfolio turnover....................... 46.42% 59.71% 45.71% 39.93% 21.89%
========== =========== =========== =========== ===========
DIVIDENDS PER SHARE ON PREFERRED STOCK
OUTSTANDING:+++
Series A -- Investment income -- net..... $ 360 $ 1,043 $ 1,184 $ 1,150 $ 688
========== =========== =========== =========== ===========
Series B -- Investment income -- net..... $ 363 $ 1,043 $ 1,090 $ 1,253 $ 656
========== =========== =========== =========== ===========
Series C -- Investment income -- net..... $ 368 $ 1,042 $ 1,278 $ 1,175 $ 659
========== =========== =========== =========== ===========
Series D -- Investment income -- net..... $ 362 $ 950 $ 1,144 $ 1,426 $ 767
========== =========== =========== =========== ===========
Series E -- Investment income -- net..... $ 408 $ 933 $ 1,282 $ 1,492 $ 766
========== =========== =========== =========== ===========
LEVERAGE:
Asset coverage per $1,000.............. $ 3,122 $ 3,183 $ 2,955 $ 3,366 $ 2,994
========== =========== =========== =========== ===========
</TABLE>
- ---------------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or less than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Does not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on May 22, 1992.
+++ Dividends per share have been adjusted to reflect a two-for-one stock split
that occurred on December 1, 1994.
# Amount is less than $.01 per share.
## Aggregate total investment return.
++++ For the period March 27, 1992 (commencement of operations) to October 31,
1992, FAM earned fees of $2,644,017, of which $963,565 was voluntarily
waived.
18
<PAGE> 23
Insured II
The financial information in the table below, except for the six-month
period ended April 30, 1996 and the leverage information which are unaudited and
have 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
PERIOD
FOR THE OCTOBER 30,
SIX MONTHS FOR THE YEAR ENDED OCTOBER 31, 1992+ TO
ENDED APRIL 30, ------------------------------------------- OCTOBER 31,
1996 1995 1994 1993 1992
--------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.......................... $ 15.27 $ 13.45 $ 16.63 $ 14.15 $14.18
------- ------- ------- ------- ------
Investment income -- net.......... .58 1.19 1.18 1.15 --
Realized and unrealized gain
(loss) on investments -- net.... (.30) 1.88 (2.92) 2.53 --
------- ------- ------- ------- ------
Total from investment
operations...................... .28 3.07 (1.74) 3.68 --
------- ------- ------- ------- ------
Less dividends and distributions
to Common Stock shareholders:
Investment income -- net...... (.44) (.90) (.96) (.88) --
Realized loss on
investments -- net.......... (.03) (.04) (.25) -- --
In excess of realized gain on
investments -- net.......... -- (.03) -- -- --
------- ------- ------- ------- ------
Total dividends and distributions
to Common Stock shareholders.... (.47) (.97) (1.21) (.88) --
------- ------- ------- ------- ------
Capital charge resulting from
issuance of Common Stock........ -- -- -- -- (.03)
------- ------- ------- ------- ------
Effect of Preferred Stock
activity++:
Dividends and distributions to
Preferred Stock shareholders:
Investment income -- net...... (.12) (.27) (.18) (.18) --
Realized gain on
investments -- net.......... (.01) (.01) (.05) -- --
In excess of realized gain on
investments -- net.......... -- (.00) -- -- --
Capital charge resulting from
issuance of Preferred Stock... -- -- -- (.14) --
------- ------- ------- ------- ------
Total effect of Preferred Stock
activity........................ (.13) (.28) (.23) (.32) --
------- ------- ------- ------- ------
Net asset value, end of period.... $ 14.95 $ 15.27 $ 13.45 $ 16.63 $14.15
======= ======= ======= ======= ======
Market price per share, end of
period.......................... $13.375 $13.125 $11.375 $15.875 $15.00
======= ======= ======= ======= ======
</TABLE>
19
<PAGE> 24
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE OCTOBER 30,
SIX MONTHS FOR THE YEAR ENDED OCTOBER 31, 1992+ TO
ENDED APRIL 30, ------------------------------------------- OCTOBER 31,
1996 1995 1994 1993 1992
--------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
RETURN:**Based on market price per
share........................... 5.41%## 24.33% (21.92%) 11.95% .00%##
============== =========== =========== =========== ===========
Based on net asset value per
share........................... 1.27%## 22.33% (11.87%) 24.32% (0.21%)##
============== =========== =========== =========== ===========
RATIOS TO AVERAGE NET ASSETS:***
Expenses, net of reimbursement.... .67%* .69% .69% .54%### --
============== =========== =========== =========== ===========
Expenses.......................... .67%* .69% .69% .65% --
============== =========== =========== =========== ===========
Investment income -- net.......... 5.15%* 5.47% 5.24% 5.25% --
============== =========== =========== =========== ===========
SUPPLEMENTAL DATA:
Net assets, net of Preferred
Stock, end of period (in
thousands)...................... $ 245,559 $ 250,690 $ 220,828 $ 272,639 $230,667
============== =========== =========== =========== ===========
Preferred Stock outstanding, end
of period (in thousands)........ $ 120,000 $ 120,000 $ 120,000 $ 120,000 --
============== =========== =========== =========== ===========
Portfolio turnover................ 39.74% 64.18% 47.85% 38.69% --
============== =========== =========== =========== ===========
DIVIDENDS PER SHARE ON PREFERRED
STOCK OUTSTANDING+++:
Series A -- Investment
income -- net................... $ 406 $ 953 $ 590 $ 592 --
============== =========== =========== =========== ===========
Series B -- Investment
income -- net................... $ 440 $ 902 $ 640 $ 640 --
============== =========== =========== =========== ===========
LEVERAGE:
Asset coverage per $1,000......... $ 3,046 $ 3,089 $ 2,840 $ 3,272 --
============== =========== =========== =========== ===========
</TABLE>
- ---------------
<TABLE>
<S> <C>
* 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.
*** Does not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on November 30, 1992.
+++ Dividends per share have been adjusted to reflect a two-for-one stock split that occurred on December 1,
1994.
# Amount is less than $.01 per share.
## Aggregate total investment return.
### For the year ended October 31, 1993, FAM earned fees of $1,809,565, of which $316,159 was voluntarily waived.
In addition, FAM reimbursed the Fund $76,732 for additional expenses.
</TABLE>
20
<PAGE> 25
PER SHARE DATA FOR COMMON STOCK*
TRADED ON THE NEW YORK STOCK EXCHANGE
Insured I
<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................... $15.375 $ 14.50 $15.01 $14.27 4.24 % (2.55)%
April 30, 1993..................... 15.75 15.00 16.18 14.99 1.08 (3.66)
July 31, 1993...................... 16.00 15.125 16.20 15.60 (0.19) (4.93)
October 31, 1993................... 16.625 15.625 17.08 16.00 (0.48) (7.00)
January 31, 1994................... 16.50 15.00 16.78 16.19 0.12 (8.21)
April 30, 1994..................... 16.25 13.25 16.55 14.26 (1.75) (11.21)
July 31, 1994...................... 14.00 13.00 15.36 14.38 (4.51) (11.91)
October 31, 1994................... 13.75 11.50 15.00 13.85 (8.19) (17.56)
January 31, 1995................... 13.125 10.75 14.30 12.82 (5.03) (17.56)
April 30, 1995..................... 13.375 12.875 15.07 14.32 (6.79) (13.39)
July 31, 1995...................... 13.75 12.75 15.62 14.71 (9.88) (15.14)
October 31, 1995................... 13.75 13.25 15.54 14.69 (9.01) (13.26)
January 31, 1996................... 14.625 13.375 16.06 15.52 (8.31) (14.92)
April 30, 1996..................... 14.75 13.625 16.23 14.88 (5.91) (10.14)
July 31, 1996...................... 13.75 13.375 15.23 14.80 (8.64) (11.54)
</TABLE>
Insured II
<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................... $15.125 $14.125 $14.78 $14.15 4.75 % (4.04)%
April 30, 1993..................... 15.875 14.625 16.00 14.78 0.71 (4.46)
July 31, 1993...................... 15.75 15.00 16.01 15.39 0.96 (4.21)
October 31, 1993................... 16.50 15.25 16.95 15.80 (0.60) (6.16)
January 31, 1994................... 16.75 15.375 16.61 16.03 0.25 (8.61)
April 30, 1994..................... 16.125 12.75 16.38 13.87 (1.56) (11.20)
July 31, 1994...................... 13.75 13.00 15.14 14.07 (3.44) (11.66)
October 31, 1994................... 13.375 11.375 14.74 13.45 (5.56) (17.22)
January 31, 1995................... 12.625 10.50 14.03 12.41 (4.84) (17.97)
April 30, 1995..................... 13.25 12.875 14.82 14.05 (8.36) (13.12)
July 31, 1995...................... 13.375 12.50 15.41 14.45 (10.96) (16.34)
October 31, 1995................... 13.375 12.625 15.35 14.48 (10.96) (15.77)
January 31, 1996................... 14.375 13.125 15.91 15.34 (8.61) (15.13)
April 30, 1996..................... 14.50 13.250 16.17 14.82 (8.46) (12.92)
July 31, 1996...................... 13.50 13.125 15.14 14.71 (9.82) (12.79)
</TABLE>
- ---------------
* Calculations are based upon shares of Common Stock outstanding at the end of
each quarter.
** As reported in the consolidated transaction reporting system.
21
<PAGE> 26
As indicated in the tables above, since November 1, 1993 the Insured I
Common Stock and the Insured II Common Stock generally have traded at market
prices that represent a discount to net asset value. Since November 1, 1993,
share prices for Insured I Common Stock have fluctuated between a maximum
premium of 0.12% and a maximum discount of (17.56%) and share prices for Insured
II Common Stock have fluctuated between a maximum premium of 0.25% and a maximum
discount of (17.97%). 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 policies of Insured I and
Insured II 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 income taxes as is consistent
with the Fund's investment policies and prudent investment management.
The investment objective and policies of Insured I and Insured II are
identical. Each Fund seeks to achieve its investment objective by investing
primarily in a portfolio of 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 80% of each Fund's total assets will be invested in
Municipal Bonds with remaining maturities of one year or more which are covered
by insurance guaranteeing the timely payment of principal at maturity and
interest. At times, each Fund may seek to hedge its portfolio through the use of
futures and options transactions to reduce volatility in the net asset value of
its shares of Common Stock.
Ordinarily, neither Fund intends to realize significant investment income
not exempt from Federal income taxes. Each Fund seeks to invest substantially
all 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 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. Neither Fund will invest more than 25% of its total
assets (taken at market value) in Municipal Bonds whose issuers are located in
the same state.
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-1 through Prime-3 for Moody's and F-1+ 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. In assessing the quality of Municipal Bonds with respect to the
foregoing requirements, FAM takes into account the portfolio insurance as well
as the nature of any letters of credit or similar credit enhancement to which
particular Municipal Bonds are entitled and the
22
<PAGE> 27
creditworthiness of the insurance company or other financial institution which
provided such credit enhancement. See Exhibit II -- "Ratings of Municipal Bonds
and Commercial Paper" and Exhibit III -- "Portfolio Insurance".
In the case of Insured II only, if Municipal Bonds are covered by insurance
policies issued by insurers whose claims-paying ability is rated AAA by S&P or
Aaa by Moody's, FAM may consider such Municipal Bonds to be equivalent to AAA or
Aaa rated securities, as the case may be, even though such Municipal Bonds would
generally be assigned a lower rating if the rating were based primarily upon the
credit characteristics of the issuers without regard to the insurance feature.
The insured Municipal Bonds must also comply with the standards applied by the
insurance carriers in determining eligibility for portfolio insurance.
Insured I and Insured II 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) which 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%) of 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. Insured I and Insured II 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.
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 close-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 "The
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 are
23
<PAGE> 28
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 are invested in the
securities (other than U.S. Government securities) of a single issuer. A fund
which 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 Insured I or Insured II 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.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of each Fund's assets will be
invested in Municipal Bonds either (i) insured under an insurance policy
purchased by the Fund or (ii) insured under an insurance policy obtained by the
issuer thereof or any other party. The insurance policies in either instance
will be issued by insurance carriers that have total admitted assets (unaudited)
of at least $50,000,000 and insurance claims-paying ability ratings of AAA from
S&P and Aaa from Moody's. See Exhibit III to this Proxy Statement and Prospectus
for a brief description of S&P's and Moody's insurance claims-paying ability
ratings. Currently, a majority of the insured Municipal Bonds in each Fund's
portfolio are insured by the following insurance companies which satisfy the
foregoing requirements: AMBAC Indemnity Corporation, Financial Security
Assurance/Capital Guaranty Insurance Company, Financial Guaranty Insurance
Company and Municipal Bond Investors Assurance Corporation. Each Fund also may
purchase Municipal Bonds covered by insurance issued by any other insurance
company which satisfies the foregoing requirements. A majority of insured
Municipal Bonds held by each Fund will be insured under policies obtained by
parties other than the Fund.
Each Fund may purchase, but has no obligation to purchase, separate mutual
fund insurance policies (the "Policies") from insurance companies meeting the
requirements set forth above which guarantee payment of principal and interest
on specified eligible Municipal Bonds purchased by the Fund. A Municipal Bond
will be eligible for coverage if it meets certain requirements of the insurance
company set forth in a Policy. In the event interest or principal on an insured
Municipal Bond is not paid when due, the insurer will be obligated under its
Policy to make such payment not later than 30 days after it has been notified
by, and provided with documentation from, the Fund that such nonpayment has
occurred.
The Policies will be effective only as to insured Municipal Bonds
beneficially owned by a Fund. In the event of a sale of any Municipal Bonds held
by a Fund, the issuer of the relevant Policy will be liable only for those
payments of interest and principal which are then due and owing. The Policies
will not guarantee the market value of the insured Municipal Bonds or the value
of the shares of the Fund.
The insurer will not have the right to withdraw coverage on securities
insured by its Policies and held by a Fund so long as such securities remain in
the Fund's portfolio. In addition, the insurer may not cancel its Policies for
any reason except failure to pay premiums when due. The Board of Directors of
each Fund reserves the right to terminate any of the Policies if it determines
that the benefits to the Fund of having its portfolio insured under such Policy
are not justified by the expense involved.
The premiums for the Policies are paid by a Fund and the yield on the
Fund's portfolio is reduced thereby. FAM estimates that the cost of the annual
premiums for the Policies of each Fund currently range from approximately .10 of
1% to .25 of 1% of the principal amount of the Municipal Bonds covered by such
24
<PAGE> 29
Policies. The estimate is based on the expected composition of each Fund's
portfolio of Municipal Bonds. Additional information regarding the Policies is
set forth in Exhibit III to this Proxy Statement and Prospectus. In instances in
which the Fund purchases Municipal Bonds insured under policies obtained by
parties other than the Fund, the Fund does not pay the premiums for such
policies; rather, the cost of such policies may be reflected in the purchase
price of the Municipal Bonds.
It is the intention of FAM to retain any insured securities which are in
default or in significant risk of default and to place a value on the insurance
which ordinarily will be the difference between the market value of the
defaulted security and the market value of similar securities which are not in
default. In certain circumstances, however, FAM may determine that an
alternative value for the insurance, such as the difference between the market
value of the defaulted security and its par value, is more appropriate. FAM will
be unable to manage the portfolio of a Fund to the extent it holds defaulted
securities, which may limit its ability in certain circumstances to purchase
other Municipal Bonds. See "Net Asset Value" below for a more complete
description of each Fund's method of valuing defaulted securities and securities
which have a significant risk of default.
There can be no assurance that insurance of the kind described above will
continue to be available to each Fund. In the event the Board of Directors of a
Fund determines that such insurance is unavailable or that the cost of such
insurance outweighs the benefits to the Fund, the Fund may discontinue its
policy of maintaining insurance for all or any of the Municipal Bonds held in
the Fund's portfolio. Although FAM periodically reviews the financial condition
of each insurer, there can be no assurance that the insurers will be able to
honor their obligations under all circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Municipal Bonds will not receive
timely scheduled payments of principal or interest). However, the insured
Municipal Bonds are subject to market risk (i.e., fluctuations in market value
as a result of changes in prevailing interest rates.
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
25
<PAGE> 30
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.
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 which 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 which 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 which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Funds.
OTHER INVESTMENT POLICIES
Both Insured I and Insured II 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 Insured II, which borrowings shall
be repaid within 60 days and not be extended or renewed).
When-Issued Securities and Delayed Delivery Transactions. Insured I and
Insured II 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. Insured I and Insured II 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
26
<PAGE> 31
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 which 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 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 which 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 which allows FAM to vary the degree of investment
leverage relatively efficiently under different market conditions.
Call Rights. Insured I and Insured II 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 only will 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
27
<PAGE> 32
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 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 which 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.
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<PAGE> 33
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 which 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
which 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 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 which will 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
29
<PAGE> 34
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
short-term, high-grade, fixed-income 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 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.
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.
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 which 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.
30
<PAGE> 35
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 which 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
Insured I and Insured II 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).
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<PAGE> 36
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 Moody's and AAA from S&P. Moody's and S&P,
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 which 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".
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<PAGE> 37
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 Municipal Bonds owned by Insured I as
of July 31, 1996, 85.0% are rated in the highest grade by Moody's or S&P, 90.4%
are rated in the highest two grades, 94.1% are rated in the highest three
grades, 99.1% are rated in the highest four grades, and 0.9% are unrated. The
comparable percentages for Insured II are 87.8% in the highest grade, 95.2% in
the highest two grades, 97.9% in the highest three grades, 99.5% in the highest
four grades and 0.5% unrated.
There are small differences in concentration among the states of issuers of
the Municipal Bonds held in the portfolios of the Funds. For Insured I, as of
July 31, 1996, the highest concentration of Municipal Bonds was in the states of
California, Illinois and Texas, accounting for 16.7%, 8.8%, and 8.5% of the
Fund's portfolio, respectively, whereas for Insured II, the highest
concentration was in the states of Illinois, Texas and California, accounting
for 13.7%, 12.5% and 11.4% of the Fund's portfolio, respectively.
Insured I
As of July 31, 1996, approximately 91% of the market value of Insured I's
portfolio was invested in long-term municipal obligations and approximately 8%
of the market value of Insured I's portfolio was invested in short-term
municipal obligations. The following table sets forth certain information with
respect to the composition of Insured I's long-term municipal obligation
investment portfolio as of July 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S ISSUES (IN THOUSANDS) PERCENT
- ----- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 103 781,403 85.0%
AA Aa 10 49,734 5.4
A A 7 34,196 3.7
BBB Baa 7 45,318 5.0
NR NR 2 8,244 0.9
--- -------------- -------
129 918,895 100.0%
======== =========== =====
</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".
Insured II
As of July 31, 1996, approximately 90% of the market value of Insured II's
portfolio was invested in long-term municipal obligations and approximately 8%
of the market value of Insured II's portfolio was invested in
33
<PAGE> 38
short-term municipal obligations. The following table sets forth certain
information with respect to the composition of Insured II's long-term municipal
obligation investment portfolio as of July 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S ISSUES (IN THOUSANDS) PERCENT
- ----- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 65 $291,650 87.8%
AA Aa 8 24,438 7.4
A A 3 9,135 2.7
BBB Baa 2 5,476 1.6
NR NR 1 1,588 0.5
--
-------------- -------
79 $332,287 100.0%
======== =========== =====
</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".
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are the same for both
Insured I and Insured II. 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, Insured I and Insured II 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 which provide supplemental investment
research to FAM, including Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), may receive orders for transactions by a Fund. 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. Since 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
34
<PAGE> 39
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.
Insured I and Insured II also may make loans to tax-exempt borrowers in
individually negotiated transactions with the borrower. 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 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 Insured I AMPS and the Insured II
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 Insured I nor Insured II 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. Although each Fund
anticipates that its annual portfolio turnover rate should not exceed 100%, the
turnover rate may vary greatly from year to year or during periods within a
year. (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 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,
1995 and 1994 was 59.71% and 45.71%, respectively, for Insured I and 64.18% and
47.85%, respectively, for Insured II.
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 each day during which the NYSE is open for trading. 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 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
35
<PAGE> 40
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. 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
Insured I and Insured II each has outstanding both Common Stock and AMPS.
Insured I Common Stock and Insured II Common Stock both are traded on the NYSE.
The shares of Insured I Common Stock commenced trading on the NYSE on March 27,
1992. As of July 31, 1996, the net asset value per share of the Insured I Common
Stock was $15.23 and the market price per share was $13.75. The shares of
Insured II Common Stock commenced trading on the NYSE on October 30, 1992. As of
July 31, 1996, the net asset value per share of the Insured II Common Stock was
$15.14 and the market price per share was $13.375.
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, Insured I reclassified 12,800 shares of
unissued capital stock as AMPS, and Insured II reclassified 4,800 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.
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.
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Preferred Stock
Insured I AMPS are structured identically to Insured II 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. Insured I AMPS and Insured II 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 Insured I Series A AMPS, Series B AMPS, Series C AMPS and Series D
AMPS and every seven days in the case of the Insured I Series E AMPS unless
Insured I elects, subject to certain limitations, to have a special dividend
period. As of the auction held on August 7, 1996, the dividend rate on the
Insured I Series A AMPS was 3.47%; as of the auction held on August 7, 1996, the
dividend rate on the Insured I Series B AMPS was 3.45%; as of the auction held
on August 7, 1996, the dividend rate on the Insured I Series C AMPS was 3.45%;
and as of the auction held on August 7, 1996, the dividend rate on the Insured I
Series E AMPS was 3.40%. In connection with the auction held on July 31, 1996,
Insured I elected a special dividend period on the Insured I Series D AMPS which
ends on February 12, 1997 and the dividend rate during such special dividend
period is 3.74%.
Similarly, auctions generally have been held and will be held every 28 days
in the case of the Insured II Series A AMPS and every seven days in the case of
the Insured II Series B AMPS unless Insured II elects, subject to certain
limitations, to have a special dividend period. In connection with the auction
held on June 10, 1996, Insured II elected a special dividend period on the
Insured II Series A AMPS which ends February 3, 1997 and the dividend rate
during such special dividend period is 3.68%. The Insured I Series F AMPS to be
issued in the Reorganization for the Insured II Series A AMPS will have an
initial dividend period ending February 3, 1997 and an initial dividend rate of
3.68%. As of the auction held on August 5, 1996, the dividend rate on the
Insured II Series B AMPS was 3.178%.
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
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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 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
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 Insured I and
Insured II 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
Insured I and Insured II and perform the various duties imposed on the directors
of investment companies by the Investment Company
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Act and under applicable Maryland law. Insured I and Insured II have the same
officers. For further information regarding the Directors and officers of each
Fund, see "Election of Directors".
Management and Advisory Arrangements. FAM serves as the investment adviser
for both Insured I and Insured II 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 130
registered investment companies. FAM also offers portfolio management and
portfolio analysis services to individuals and institutions. As of July 31,
1996, FAM and MLAM had a total of approximately $207.3 billion in investment
company and other portfolio assets under management (approximately $30.4 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.
FAM provides the portfolio management for Insured I and Insured II. 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, 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 Insured I and FAM will continue from year to year if approved
annually (a) by the Board of Directors of Insured I or by a majority of the
outstanding shares of Insured I Common Stock and Insured I AMPS, voting together
as a
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single class, and (b) by a majority of the Directors of Insured I 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 Insured I.
Similarly, unless earlier terminated as described below, the investment
advisory agreement between Insured II and FAM will continue from year to year if
approved annually (a) by the Board of Directors of Insured II or by a majority
of the outstanding shares of Insured II Common Stock and Insured II AMPS, voting
together as a single class, and (b) by a majority of the Directors of Insured II
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 Insured II.
VOTING RIGHTS
Voting rights are identical for the holders of shares of Insured I Common
Stock and the holders of shares of Insured II 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.
Stockholders of each Fund are entitled to one vote for each share held. 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.
Voting rights of the holders of Insured I AMPS are identical to voting
rights of the holders of Insured II 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
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<PAGE> 45
class, will be entitled to elect the smallest number of additional Directors
that, together with the two Directors which 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 Insured I and Insured II 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
Insured I's current policy with respect to dividends and distributions
relating to shares of Insured I Common Stock is identical to Insured II's policy
with respect to shares of Insured II 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
"Agreement and Plan of Reorganization -- Tax Consequences of the
Reorganization".
Similarly, Insured I's current policy with respect to dividends and
distributions relating to shares of Insured I AMPS is identical to Insured II's
current policy with respect to shares of Insured II AMPS. The holders of 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 Insured I
AMPS and the Insured II 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
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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 which may be in arrears.
Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on Municipal Bonds, are exempt from Federal 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 Insured I or Insured II, 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 Boston
EquiServe, 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 Boston
EquiServe, 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 Boston EquiServe, 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 which 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.
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There are no brokerage charges with respect to shares issued directly by
Insured I or Insured II 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".
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 Insured I or Insured II,
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.
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TAX RULES APPLICABLE TO INSURED I, INSURED II AND THEIR STOCKHOLDERS
The tax consequences associated with investment in shares of Insured I
Common Stock are identical to the tax consequences associated with investment in
shares of Insured II Common Stock. Similarly, the tax consequences associated
with investment in shares of Insured I AMPS are identical to the tax
consequences associated with investment in shares of Insured II AMPS. Insured I
and Insured II 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. Insured I 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.
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 which 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.
Each Fund informs its stockholders annually as to the portion of the Fund's
distributions which constitutes exempt-interest dividends. Interest on
indebtedness incurred or continued to purchase or carry a Fund's shares is not
deductible for Federal income tax purposes.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the Insured I AMPS and the
Insured II 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
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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.
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. 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 is treated as long-term capital loss to the
extent of capital gain dividends received by the stockholder. In addition, such
loss is disallowed to the extent of any exempt-interest 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 which 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 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.
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<PAGE> 51
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.
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.
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" are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
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 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 which 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.
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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), Insured I will acquire all of the assets, and will assume all of the
liabilities, of Insured II, in exchange solely for an equal aggregate value of
Insured I Common Stock, Insured I Series F AMPS and Insured I Series G AMPS to
be issued by Insured I. Upon receipt by Insured II of such shares, Insured II
will distribute the shares of Insured I Common Stock to the holders of Insured
II Common Stock, the shares of Insured I Series F AMPS to the holders of Insured
II Series A AMPS and the shares of Insured I Series G AMPS to the holders of
Insured II Series B AMPS in exchange for their shares in Insured II. Separate
Articles Supplementary to the Articles of Incorporation of Insured I
establishing the powers, rights and preferences of the Insured I Series F AMPS
and the Insured I Series G 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"), Insured II will file Articles
of Dissolution with the Maryland Department to effect the formal dissolution.
Insured II will distribute the shares of Insured I Common Stock, Insured I
Series F AMPS and Insured I Series G AMPS received by it pro rata to its holders
of record of Insured II Common Stock, Insured II Series A AMPS and Insured II
Series B AMPS, respectively, in exchange for such stockholders' shares in
Insured II. Such distribution would be accomplished by opening new accounts on
the books of Insured I in the names of the common and preferred stockholders of
Insured II and transferring to those stockholder accounts the Insured I Common
Stock, Insured I Series F AMPS and Insured I Series G AMPS previously credited
on those books to the account of Insured II. Each newly-opened account on the
books of Insured I for the previous holders of Insured II Common Stock would
represent the respective pro rata number of shares of Insured I Common Stock
(rounded down, in the case of fractional shares, to the next largest number of
whole shares) due such holder of Insured II Common Stock. No fractional shares
of Insured I Common Stock will be issued. In lieu thereof, Insured I's transfer
agent, Boston EquiServe, will aggregate all fractional shares of Insured I
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 Insured II
Common Stock certificates. Similarly, each newly-opened account on the books of
Insured I for the previous holders of Insured II Series A AMPS would represent
the respective pro
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rata number of shares of Insured I Series F AMPS due such holder of Insured II
Series A AMPS, and each newly-opened account on the books of Insured I for the
previous holders of Insured II Series B AMPS would represent the respective pro
rata number of shares of Insured I Series G AMPS due such holder of Insured II
Series B AMPS. See "Surrender and Exchange of Insured II Stock Certificates"
below for a description of the procedures to be followed by Insured II
stockholders to obtain their Insured I Common Stock (and cash in lieu of
fractional shares, if any), Insured I Series F AMPS or Insured I Series G AMPS,
as the case may be.
Accordingly, as a result of the Reorganization, every holder of Insured II
Common Stock would own shares of Insured I 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 Insured II Common Stock immediately prior to the
Exchange Date. Since the Insured I Common Stock would be issued at net asset
value in exchange for the net assets of Insured II having a value equal to the
aggregate net asset value of those shares of Insured I Common Stock, the net
asset value per share of Insured I Common Stock should remain virtually
unchanged by the Reorganization. Similarly, since the Insured I Series F AMPS
would be issued at a liquidation preference and value per share equal to the
liquidation preference and value per share of the Insured II Series A AMPS, and
the Insured I Series G AMPS would be issued at a liquidation preference and
value per share equal to the liquidation preference and value per share of the
Insured II Series B AMPS, the respective liquidation preference and value per
share of the Insured I Series F AMPS and the Insured I Series G AMPS will remain
unchanged by the Reorganization. Thus, the Reorganization will result in no
dilution of net asset value of the Insured I Common Stock, other than to reflect
the costs of the Reorganization, and will result in no dilution of liquidation
preference and value of the Insured I Series F AMPS or Insured I Series G 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 Insured I and Insured II held on
June 18, 1996 and May 3, 1996, respectively, the Boards of Directors of Insured
I and Insured II, respectively, including all of the Directors who are not
"interested persons", as defined in the Investment Company Act, of Insured I and
Insured II 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 18, 1996, the Board of Directors of Insured I approved the
filing of separate Articles Supplementary to Insured I's Articles of
Incorporation establishing the powers, rights and preferences of the Insured I
Series F AMPS and the Insured I Series G AMPS in order that they may be given to
holders of Insured II Series A AMPS and Insured II Series B AMPS as part of the
Reorganization.
As a result of such Board approvals, Insured I and Insured II jointly filed
a proxy statement with the Commission soliciting a vote of the stockholders of
Insured I and Insured II to approve the Reorganization. The costs of such
solicitation are to be paid by Insured I after the Reorganization so as to be
borne equally and exclusively on a per share basis by the holders of Insured I
Common Stock and Insured II Common Stock. It is anticipated that annual meetings
of stockholders of Insured I and Insured II will be held on September 30, 1996.
If the stockholders of both Insured I and Insured II 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
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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 INSURED I AND INSURED II RECOMMEND THAT THE
STOCKHOLDERS OF THE RESPECTIVE FUNDS APPROVE THE AGREEMENT AND PLAN OF
REORGANIZATION.
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 Insured I and
Insured II will be valued on the business day prior to the Exchange Date (the
"Valuation Date"). The valuation procedures are the same for both Funds: net
asset value per share of the Insured I Common Stock and the Insured II 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 Insured I Common
Stock or the Insured II 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 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. 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 Boards of Directors of Insured I and Insured II have
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.
Distribution of Insured I Common Stock, Insured I Series F AMPS and Insured
I Series G AMPS. On the Exchange Date, Insured I will issue to Insured II a
number of shares of Insured I Common Stock the aggregate net asset value of
which will equal the aggregate net asset value of shares of Insured II Common
Stock on the Valuation Date. Each holder of Insured II Common Stock will receive
the number of shares of Insured I Common Stock corresponding to his or her
proportionate interest in the aggregate net asset value of the Insured II Common
Stock.
On the Exchange Date, Insured I also will issue to Insured II a number of
shares of Insured I Series F AMPS the aggregate liquidation preference of which
will equal the aggregate liquidation preference of Insured II Series A AMPS on
the Valuation Date, as well as a number of shares of Insured I Series G AMPS the
aggregate liquidation preference of which will equal the aggregate liquidation
preference of Insured II Series B AMPS on the Valuation Date. Each holder of
Insured II Series A AMPS or Insured II Series B AMPS, as
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the case may be, will receive the number of shares of Insured I Series F AMPS or
Insured I Series G AMPS corresponding to his or her proportionate interest in
the aggregate liquidation preference and value of the Insured II Series A AMPS
or the Insured II Series B AMPS. No sales charge or fee of any kind will be
charged to Insured II stockholders in connection with their receipt of Insured I
Common Stock, Insured I Series F AMPS and Insured I Series G AMPS in the
Reorganization. It is anticipated that the Insured I Series F AMPS will follow a
similar auction schedule and procedures as those presently followed by the
Insured II Series A AMPS, and that the Insured I Series G AMPS will follow a
similar auction schedule and procedures as those presently followed by the
Insured II Series B AMPS. As a result of the Reorganization, the last dividend
period for the Insured II Series A AMPS and Insured II Series B 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. Insured I 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 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 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 Insured I Common Stock and Insured II Common Stock. Neither Insured I
nor Insured II shall pay any expenses of its respective stockholders arising out
of or in connection with the Reorganization.
Required Approvals. Under Insured I's Articles of Incorporation (as amended
to date and including Articles Supplementary establishing the powers, rights and
preferences of the Insured I 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 Insured I Common Stock and Insured I AMPS, voting together
as a single class, and of the Insured I AMPS, voting separately as a class.
Similarly, under Insured II's Articles of Incorporation (as amended to date and
including Articles Supplementary establishing the powers, rights and preferences
of the Insured II 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 Insured II Common Stock and Insured II AMPS, voting together as a
single class, and of the Insured II AMPS, voting separately as a class.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of Insured II to Insured I and the distribution of shares of Insured
I Common Stock, Insured I Series F AMPS and Insured I Series G AMPS to Insured I
stockholders, Insured II 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 Insured I and
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Insured II 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 Insured I and Insured II, 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 Insured
I and Insured II 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 Insured I and Insured II; (ii) by
the Board of Directors of Insured I if any condition to Insured I'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 Insured
II if any condition to Insured II's 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 INSURED I COMMON STOCKHOLDERS AND INSURED II 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 Insured II,
following the Reorganization Insured II stockholders will remain invested in a
closed-end fund that has investment objectives and policies similar to that of
Insured II. 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 of Municipal Bonds
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 objectives and investment policies, their common management
and their similar portfolios of Municipal Bonds. 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).
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, 1996, the total
annualized operating expense ratio for Insured I was 0.64%, based on average net
assets of approximately $1.0 billion including AMPS, and 0.93%, based on average
net assets of approximately $706.5 million excluding AMPS, and the total
annualized operating expense ratio for Insured II was 0.67%, based on average
net assets of approximately $374.9 million including AMPS, and
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0.98%, based on average net assets of approximately $254.9 million excluding
AMPS. If the Reorganization had taken place on April 30, 1996, the overall
operating expense ratio for the combined fund on a pro forma basis would have
been 0.62%, based on average net assets of approximately $1.4 billion including
AMPS, and 0.90%, based on average net assets of approximately $961.5 million
excluding AMPS.
Management projections estimate that Insured I will have net assets in
excess of $1.3 billion upon completion of the Reorganization. A larger asset
base should provide benefits in portfolio management. After the Reorganization,
Insured I 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.
Based on the foregoing, the Boards concluded that the Reorganization
presents no significant risks or costs (including legal, accounting and
administrative costs) that would outweigh the benefits discussed above.
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 12 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 Insured I AMPS or Insured II 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 INSURED II STOCK CERTIFICATES
After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing shares of Insured II Common Stock, Insured II
Series A AMPS or Insured II Series B 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 Insured I
Common Stock, Insured I Series F AMPS or Insured I Series G AMPS distributable
with respect to such holder's shares of Insured II Common Stock, Insured II
Series A AMPS or Insured II Series B AMPS, together with cash in lieu of any
fractional shares. Promptly after the Exchange Date, the transfer agent for the
Insured I Common Stock, the Insured I Series F AMPS or the Insured I Series G
AMPS, as the case may be, will mail to each holder of certificates formerly
representing shares of Insured II Common Stock, Insured II Series A AMPS or
Insured II Series B AMPS, as the case may be, a letter of transmittal for use in
surrendering his or her certificates for certificates representing shares of
Insured I Common Stock, Insured I Series F AMPS or Insured I Series G 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, INSURED II COMMON AND PREFERRED STOCKHOLDERS
WILL BE FURNISHED WITH INSTRUCTIONS FOR EXCHANGING THEIR INSURED II STOCK
CERTIFICATES FOR INSURED I 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 Insured II Common Stock, Insured II Series A AMPS or Insured II Series B
AMPS, as the case may be, will be deemed for all purposes to evidence ownership
of the number of full shares of Insured I Common Stock, Insured I Series F AMPS
or Insured I Series G AMPS distributable with respect to such shares of Insured
II in the Reorganization, provided, that until such Insured II stock
certificates have been so surrendered, no dividends payable to the holders of
record of Insured I Common Stock, Insured I Series F AMPS or Insured I Series G
AMPS, as the case may be, as of any date subsequent to the Exchange Date will be
paid to the holders of such outstanding Insured II stock certificates. Dividends
payable to holders of record of shares of Insured I Common Stock, Insured I
Series F AMPS or Insured I Series G AMPS, as the case may be, as of any date
after the Exchange Date and prior to the exchange of certificates by any Insured
II stockholder will be paid to such stockholder, without interest, at the time
such stockholder surrenders his or her Insured II stock certificates for
exchange.
From and after the Exchange Date, there will be no transfers on the stock
transfer books of Insured II. If, after the Exchange Date, certificates
representing shares of Insured II Common Stock, Insured II Series A AMPS or
Insured II Series B AMPS are presented to Insured I, they will be cancelled and
exchanged for certificates representing Insured I Common Stock, Insured I Series
F AMPS or Insured I Series G AMPS, as the case may be, and cash in lieu of
fractional shares, if any, distributable with respect to such Insured II Common
Stock, Insured II Series A AMPS or Insured II Series B 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. Insured I and Insured II each has elected and
qualified for the special tax treatment afforded RICs under the Code, and
Insured I intends to continue to so qualify after the Reorganization. Insured I
and Insured II 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 Insured I and Insured II 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 Insured II as a result of the Reorganization or on the distribution of
Insured I Common Stock, Insured I Series F AMPS and Insured I Series G AMPS to
Insured II stockholders under Section 361(c)(1) of the Code; (iii) under Section
1032 of the Code, no gain or loss will be recognized to Insured I 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 Insured II on the receipt
of Insured I Common Stock, Insured I Series F AMPS and Insured I Series G AMPS
in exchange for their corresponding Insured II Common Stock, Insured II Series A
AMPS and Insured II Series B AMPS (except to the extent that Insured II Common
Stockholders receive cash representing an interest in fractional shares of
Insured I in the Reorganization); (v) in accordance with Section 362(b) of the
Code, the tax basis of the Insured II assets in the hands of Insured I will be
the same as the tax basis of such assets in the hands of Insured II 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
Insured I Common Stock, Insured I Series F AMPS and Insured I Series G AMPS
received by the stockholders of Insured II in the Reorganization will be equal,
in the aggregate, to the tax basis of the Insured II Common Stock, Insured II
Series A AMPS and Insured II Series B AMPS surrendered in exchange; (vii) in
accordance with Section 1223 of the Code, a stockholder's holding period for the
Insured I
54
<PAGE> 59
Common Stock, Insured I Series F AMPS and Insured I Series G AMPS will be
determined by including the period for which such stockholder held the Insured
II Common Stock, Insured II Series A AMPS or Insured II Series B AMPS exchanged
therefor, provided, that such Insured II shares were held as a capital asset;
(viii) in accordance with Section 1223 of the Code, Insured I's holding period
with respect to the Insured II assets transferred will include the period for
which such assets were held by Insured II; (ix) the payment of cash to Insured
II stockholders in lieu of fractional shares of Insured I will be treated as
though the fractional shares were distributed as part of the Reorganization and
then redeemed, with the result that such Insured II stockholders will have
short- or long-term capital gain or loss to the extent that the cash
distribution differs from the basis allocable to the Insured I fractional
shares; and (x) the taxable year of Insured II will end on the effective date of
the Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, Insured I will succeed to and take into account certain tax
attributes of Insured II, such as earnings and profits, capital loss carryovers
and method of accounting.
As noted in the discussion under "Comparison of the Funds--Tax Rules
Applicable to Insured I, Insured II 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 Insured I Series F AMPS and Insured I Series G AMPS pursuant to the
Reorganization in addition to the already existing Insured I Series A AMPS,
Series B AMPS, Series C AMPS, Series D AMPS and Series E 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, Insured I 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, Insured I would be subject to
the alternative minimum tax.
Under Section 381(a) of the Code, Insured I will succeed to and take into
account certain tax attributes of Insured II, including, but not limited to,
earnings and profits, any net operating loss carryovers, any capital loss
carryovers and method of accounting. The Code, however, contains special
limitations with regard to the use of net operating losses, capital losses and
other similar items in the context of certain reorganizations, including
tax-free reorganizations pursuant to Section 368(a)(1)(C) of the Code, which
could reduce the benefit of these attributes to Insured I.
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 Insured I and Insured II
have elected and qualified for taxation as RICs under Sections 851-855 of the
Code, and after the Reorganization Insured I intends to continue to so qualify.
55
<PAGE> 60
CAPITALIZATION
The following table sets forth as of April 30, 1996 (i) the capitalization
of Insured I, (ii) the capitalization of Insured II and (iii) the pro forma
capitalization of Insured I as adjusted to give effect to the Reorganization.
PRO FORMA CAPITALIZATION OF INSURED I, INSURED II AND THE COMBINED FUND
AS OF APRIL 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA COMBINED FUND
INSURED I INSURED II ADJUSTMENT AS ADJUSTED(A)
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net Assets:........................... $999,007,576 $365,558,557 ($15,066,958) $1,349,499,175
Net Assets Attributable to Common
Stock............................ $679,007,576 $245,558,557 (15,066,958) $909,499,175
Net Assets Attributable to AMPS..... $320,000,000 $120,000,000 -- $440,000,000
Shares Outstanding:
Common Stock........................ 45,187,339 16,420,827 -- 61,475,341(b)
AMPS
Series A......................... 2,200 2,400 -- 2,200
Series B......................... 2,200 2,400 -- 2,200
Series C......................... 2,200 -- -- 2,200
Series D......................... 2,200 -- -- 2,200
Series E......................... 4,000 -- -- 4,000
Series F......................... -- -- -- 2,400(b)
Series G......................... -- -- -- 2,400(b)
Net Asset Value Per Share:
Common Stock........................ $15.03 $14.95 -- $14.79(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, 1996 and are for informational purposes only.
Assumes distributions of undistributed net investment income and accrual of
estimated Reorganization expenses of $217,000. No assurance can be given as
to how many shares of Insured I Common Stock that Insured II stockholders
will receive on the Exchange Date, and the foregoing should not be relied
upon to reflect the number of shares of Insured I Common Stock that actually
will be received on or after such date.
(b) Assumes the issuance of 16,288,002 shares of Insured I Common Stock and two
newly-created series of AMPS each consisting of 2,400 shares in exchange for
the net assets of Insured II. The number of shares of Common Stock issued
was based on the net asset value of each Fund, net of distributions on April
30, 1996.
(c) Net Asset Value Per Share of Common Stock after Reorganization-related
expenses and distribution of undistributed net investment income.
ELECTION OF DIRECTORS
At the Meetings, the Boards of Directors for Insured I and Insured II 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 Insured
I and Insured II approve the Reorganization, then the Board of Directors of
Insured I elected at the Meeting will serve as the Board of combined fund, until
its next Annual Meeting of Stockholders. If the
56
<PAGE> 61
stockholders of either Insured I or Insured II vote against the Reorganization,
then the Board of Directors of each Fund elected at the Meetings will continue
to serve until the next Annual Meeting of Stockholders of each 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 Insured I stockholders:
(1) All proxies of the holders of shares of Insured I 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 Insured I AMPS; and
(2) All proxies of the holders of shares of Insured I Common Stock and
Insured I 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
Insured I Common Stock and Insured I AMPS.
With respect to the proxies of Insured II stockholders:
(1) All proxies of the holders of shares of Insured II 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 Insured II AMPS; and
(2) All proxies of the holders of shares of Insured II Common Stock
and Insured II 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 shares of Insured II Common Stock and Insured II AMPS.
The Boards of Directors of Insured I and Insured II know 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 Boards of Directors may recommend.
Certain information concerning the nominees for the Board of Directors of
Insured I, including their designated classes, is set forth below.
TO BE ELECTED BY HOLDERS OF INSURED I AMPS,
VOTING SEPARATELY AS A CLASS
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
RECORD DATE
PRINCIPAL OCCUPATIONS DURING --------------
THE PAST FIVE YEARS AND DIRECTOR COMMON
NAME AND ADDRESS OF NOMINEE AGE PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
- ---------------------------------- --- ------------------------------ -------- ------ ----
<S> <C> <C> <C> <C> <C>
Walter Mintz(1)(2)................ 67 Special Limited Partner of 1992 0 0
1114 Avenue of the Americas Cumberland Partners
New York, New York 10036 (investment partnership)
since 1982.
Melvin R. Seiden(1)(2)............ 65 President of Silbanc 1992 0 0
780 Third Avenue Properties, Ltd. (real estate,
Suite 2502 investments and consulting)
New York, New York 10017 since 1987.
</TABLE>
(See footnotes on page 59)
57
<PAGE> 62
TO BE ELECTED BY HOLDERS OF INSURED I AMPS AND INSURED I COMMON STOCK,
VOTING TOGETHER AS A SINGLE CLASS
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
RECORD DATE
PRINCIPAL OCCUPATIONS DURING --------------
THE PAST FIVE YEARS AND DIRECTOR COMMON
NAME AND ADDRESS OF NOMINEE AGE PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
- ---------------------------------- --- ------------------------------ -------- ------ ----
<S> <C> <C> <C> <C> <C>
Joe Grills(1)(2).................. 61 Member of the Committee of 1994 0 0
183 Soundview Lane Investment of Employee
New Canaan, Benefit Assets of the
Connecticut 06840 Financial Executives
Institute ("CIEBA") since
1986; member of CIEBA's
Executive Committee since
1988 and its Chairman from
1991 to 1992; Assistant
Treasurer of International
Business Machines
Incorporated ("IBM") and
Chief Investment Officer of
IBM Retirement Funds from
1986 until 1993; Member of
the Investment Advisory
Committee of the State of
New York Common Retirement
Fund; Director, Duke
Management Company and
LaSalle Street Fund.
Robert S. Salomon, Jr.(1)(2)(3)... 59 Principal of STI Management 1996 0 0
106 Dolphin Cove Quay (investment adviser) since
Stamford, Connecticut 06902 1995; Chairman and CEO of
Salomon Brothers Asset
Management Inc from 1992 to
1995; Chairman of Salomon
Brothers equity mutual funds
from 1992 to 1995; Director
of Stock Research and U.S.
Equity Strategist at Salomon
Brothers Inc from 1975 to
1991; Director, Common Fund
and the Norwalk Community
Technical College
Foundation.
</TABLE>
(See footnotes on following page)
58
<PAGE> 63
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
RECORD DATE
PRINCIPAL OCCUPATIONS DURING --------------
THE PAST FIVE YEARS AND DIRECTOR COMMON
NAME AND ADDRESS OF NOMINEE AGE PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
- ---------------------------------- --- ------------------------------ -------- ------ ----
<S> <C> <C> <C> <C> <C>
Stephen B. Swensrud(1)(2)......... 63 Principal of Fernwood 1992 0 0
24 Federal Street Associates (financial
Suite 400 consultants) since 1975.
Boston, Massachusetts 02110
Arthur Zeikel(1)(4)............... 64 President of FAM (which term 1992 0 0
800 Scudders Mill Road as used herein includes its
Plainsboro, New Jersey 08536 corporate predecessors)
since 1977; President of
MLAM (which term as used
herein includes its
corporate predecessors)
since 1977; President and
Director of Princeton
Services, Inc. ("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 adviser. See "Compensation of Directors" below.
(2) Member of the Audit Committee of the Board of Directors.
(3) On January 17, 1996, Robert S. Salomon, Jr. was elected a Director of the
Fund to fill the vacancy created by the retirement of Harry Woolf, who
retired as a Director, effective December 31, 1995, pursuant to the Fund's
retirement policy.
(4) Interested person, as defined in the Investment Company Act, of the Funds.
59
<PAGE> 64
Certain information concerning the nominees for the Board of Directors of
Insured II, including their designated classes, is set forth below.
TO BE ELECTED BY HOLDERS OF INSURED II AMPS,
VOTING SEPARATELY AS A CLASS
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
RECORD DATE
PRINCIPAL OCCUPATIONS DURING --------------
THE PAST FIVE YEARS AND DIRECTOR COMMON
NAME AND ADDRESS OF NOMINEE AGE PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
- ---------------------------------- --- ------------------------------ -------- ------ ----
<S> <C> <C> <C> <C> <C>
Donald Cecil (1)(2)............... 69 Special Limited Partner of 1992 0 0
Cumberland Associates Cumberland Partners (an
1114 Avenue of the Americas investment partnership)
New York, New York 10036 since 1982; Member of
Institute of Chartered
Financial Analysts; Member
and Chairman of Westchester
County (N.Y.) Board of
Transportation.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
M. Colyer Crum(1)(2).............. 64 James R. Williston Professor 1992 0 0
Soldiers Field Road of Investment Management,
Boston, Massachusetts 02163 Harvard Business School,
from 1971 to 1996; Director
of Cambridge Bancorp, Copley
Properties, Inc. and Sun
Life Assurance Company of
Canada.
</TABLE>
(See footnotes on following page)
60
<PAGE> 65
TO BE ELECTED BY HOLDERS OF INSURED II AMPS AND INSURED II COMMON STOCK,
VOTING TOGETHER AS A SINGLE CLASS
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
RECORD DATE
PRINCIPAL OCCUPATIONS DURING --------------
THE PAST FIVE YEARS AND DIRECTOR COMMON
NAME AND ADDRESS OF NOMINEE AGE PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
- ---------------------------------- --- ------------------------------ -------- ------ ----
<S> <C> <C> <C> <C> <C>
Edward H. Meyer(1)(2)............. 69 President of Grey Advertising 1992 0 0
Grey Advertising Inc. Inc. since 1968, Chief
777 Third Avenue Executive Officer since 1970
New York, New York 10017 and Chairman of the Board of
Directors since 1972;
Director of The May
Department Stores Company,
Bowne & Co., Inc. (financial
printers), Ethan Allen
Interiors, Inc. and Harman
International Industries,
Inc.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Jack B. Sunderland(1)(2).......... 67 President and Director of 1992 0 0
P.O. Box 7 American Independent Oil
West Cornwall, Company, Inc. (an energy
Connecticut 06796 company) since 1987; Member
of Council on Foreign
Relations since 1971.
J. Thomas Touchton(1)(2).......... 57 Managing Partner of The Witt- 1992 0 0
Suite 3405 Touchton Company and its
One Tampa City Center predecessor, The Witt Co. (a
201 North Franklin Street private investment
Tampa, Florida 33602 partnership) since 1972;
Trustee Emeritus of
Washington and Lee
University; Director of TECO
Energy Inc. (an electric
utility holding company).
Arthur Zeikel(1)(3)............... 64 President of FAM since 1977; 1992 0 0
800 Scudders Mill Road President of MLAM since
Plainsboro, New Jersey 08536 1977; President and Director
of Princeton Services since
1993; Executive Vice
President of ML & Co. since
1990; Director of 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 adviser. 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 Funds.
61
<PAGE> 66
COMMITTEE AND BOARD MEETINGS
The Board of Directors of each Fund 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 each Fund'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.
Neither Board of Directors has a nominating committee. During the fiscal year
ended October 31, 1995, the Boards of Directors and the Audit Committees of
Insured I and Insured II each held four quarterly meetings. All of the Directors
of each Fund then in office attended at least 75% 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 each Fund'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 the Fund
with copies of all Forms 3, 4 and 5 that they file.
Based solely on each Fund'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 Forms 5 with respect to the most recent fiscal
year, each Fund 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 Insured I and Insured II, pays all
compensation of all officers of each Fund and all Directors of each Fund who are
affiliated with ML & Co. or its subsidiaries. Insured I pays each Director who
is not affiliated with FAM a fee of $4,000 per year plus $1,000 per regular
meeting attended, together with such Director's actual out-of-pocket expenses
relating to attendance at meetings. The Fund also pays each member of its Audit
Committee, which consists of all of the non-affiliated Directors, a fee of
$4,000 per year plus $750 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, 1995 aggregated $77,751 for
Insured I.
62
<PAGE> 67
Insured II pays each Director who is not affiliated with FAM 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. The
Fund 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, 1995
aggregated $22,606 for Insured II.
The following table sets forth, for the fiscal year ended October 31, 1995,
compensation paid by Insured I to the non-affiliated Directors, and for the
calendar year ended December 31, 1995, 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.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
PENSION OR FROM THE FUND AND
RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR FROM THE FUND FUND EXPENSES DIRECTORS
- -------------------------------------------- -------------- -------------------- -----------------------
<S> <C> <C> <C>
Joe Grills(1)............................... $ 15,500 None $ 153,883
Walter Mintz(1)............................. $ 15,500 None $ 153,883
Robert S. Salomon, Jr.(1)(2)................ None None None
Melvin R. Seiden(1)......................... $ 15,500 None $ 153,883
Stephen B. Swensrud(1)...................... $ 15,500 None $ 161,883
Harry Woolf(1)(2)........................... $ 15,500 None $ 153,883
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Grills (18 registered investment companies consisting of 38 portfolios); Mr.
Mintz (18 registered investment companies consisting of 38 portfolios); Mr.
Seiden (18 registered investment companies consisting of 38 portfolios); Mr.
Salomon (18 registered investment companies consisting of 38 portfolios);
Mr. Swensrud (20 registered investment companies consisting of 49
portfolios); and Mr. Woolf prior to his retirement (18 registered investment
companies consisting of 38 portfolios).
(2) Mr. Salomon was elected a Director of Insured I on January 17, 1996 to fill
the vacancy created by the retirement of Mr. Woolf who retired as a
Director, effective December 31, 1995, pursuant to the Fund's retirement
policy.
The following table sets forth, for the fiscal year ended October 31, 1995,
compensation paid by Insured II to the non-affiliated Directors and, for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
FAM/MLAM Advised Funds to the non-affiliated Directors.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
PENSION OR FROM THE FUND AND
RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR FROM THE FUND FUND EXPENSES DIRECTORS
- -------------------------------------------- -------------- -------------------- -----------------------
<S> <C> <C> <C>
Donald Cecil(1)............................. $4,500 None $ 271,850
M. Colyer Crum(1)........................... $4,500 None $ 126,600
Edward H. Meyer(1).......................... $4,500 None $ 239,225
Jack B. Sunderland(1)....................... $4,500 None $ 134,600
J. Thomas Touchton(1)....................... $4,500 None $ 134,600
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (36 registered investment companies consisting of 36 portfolios); Mr.
Crum (18 registered investment companies consisting of 18 portfolios); Mr.
Meyer (36 registered investment companies consisting of 36 portfolios); Mr.
Sunderland (19 registered investment companies consisting of 28 portfolios);
and Mr. Touchton (19 registered investment companies consisting of 28
portfolios).
63
<PAGE> 68
OFFICERS OF THE FUNDS
The Boards of Directors of Insured I and Insured II have elected the
following officers of each of the Funds. 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 64 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 55 1992
Executive Vice President of FAM and of MLAM since 1983; Vice
Executive Vice President and Director of Princeton Services President
since 1993; President of MLFD since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since
1988.
Vincent R. Giordano............................................. Senior 51 1992
Senior Vice President of FAM and of MLAM since 1984; Senior Vice
Vice President of Princeton Services since 1993. President
Kenneth A. Jacob................................................ Vice 45 1992
Vice President of FAM and of MLAM since 1984; employed by MLAM President
since 1978.
Donald C. Burke................................................. Vice 36 1993
Vice President and Director of Taxation of MLAM since 1990; President
Employee at Deloitte & Touche LLP from 1982 to 1990.
William R. Bock................................................. Portfolio 59 1992
Vice President of MLAM since 1989. Manager
Gerald M. Richard............................................... Treasurer 47 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.
Mark B. Goldfus................................................. Secretary 49 1992
Vice President of FAM and of MLAM since 1985.
</TABLE>
SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of Insured I, including a majority of the Directors
who are not "interested persons", as defined in the Investment Company Act, of
the Fund, has selected the firm of Deloitte & Touche LLP as independent
auditors, to audit the financial statements of Insured I for the current fiscal
year ending October 31, 1996. However, in the event that the Reorganization is
approved by the requisite number of stockholders of each Fund and the
Reorganization takes place prior to October 31, 1996, the Board of
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<PAGE> 69
Directors of Insured I, including a majority of the Directors who are not
"interested persons" of the Fund, have selected the firm of Ernst & Young LLP as
independent auditors, to audit the financial statements of the combined fund for
the fiscal year ending October 31, 1996.
The Board of Directors of Insured II, including a majority of the Directors
who are not "interested persons" of the Fund, has selected the firm of Ernst &
Young LLP as independent auditors, to audit the financial statements of the Fund
for the current fiscal year ending October 31, 1996.
The Funds know of no direct or indirect financial interest of such firms in
the Funds. Such appointment is subject to ratification or rejection by the
stockholders of the Funds. If the stockholders of both Insured I and Insured II
approve the Reorganization, then the independent auditors selected at the
Meetings for Insured I will serve as the independent auditors of the combined
fund until its next Annual Meeting of Stockholders. If the stockholders of
either Insured I or Insured II vote against the Reorganization, then the
independent auditors of each Fund selected at the Meetings will continue to
serve until the next Annual Meeting of Stockholders of each Fund. Unless a
contrary specification is made, the accompanying proxy will be voted in favor of
ratification of the selection of such auditors.
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 Insured I. The Board of Directors of Insured I
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 Insured
I.
Ernst & Young LLP also acts as independent auditors for several other
investment companies for which FAM or MLAM acts as investment adviser. The fees
received by Ernst & Young LLP from these other entities are substantially
greater, in the aggregate, than the total fees received by it from Insured II.
The Board of Directors of each of Insured I and Insured II considered the fact
that Ernst & Young LLP has been retained as the independent auditors of the
other entities described above in its evaluation of the independence of Ernst &
Young LLP with respect to Insured I or Insured II, as applicable.
Representatives of Deloitte & Touche LLP or Ernst & Young LLP, as
applicable, are expected to be present at the Meetings and will have the
opportunity to make a statement if they so desire and to respond to questions
from stockholders.
INFORMATION CONCERNING THE ANNUAL MEETINGS
DATE, TIME AND PLACE OF MEETINGS
The Meetings will be held on September 30, 1996 at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey at 10:45 A.M., New York time (for
Insured I) and 11:00 A.M., New York time (for Insured II).
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 Insured I or
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<PAGE> 70
Insured II, 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" (i) the approval of the Agreement and Plan of Reorganization, (ii)
the election of Directors and (iii) the ratification of the selection of
Deloitte & Touche LLP or Ernst & Young LLP, as applicable, as independent
accountants.
It is not anticipated that any matters other than (i) the adoption of the
Agreement and Plan of Reorganization, (ii) the election of Directors and (iii)
the ratification of the selection of Deloitte & Touche LLP or Ernst & Young LLP,
as applicable, 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 Insured I Common Stock, Insured I AMPS,
Insured II Common Stock and Insured II 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 45,187,339 shares of
Insured I Common Stock, 12,800 shares of Insured I AMPS, 16,420,827 shares of
Insured II Common Stock and 4,800 shares of Insured II AMPS issued and
outstanding and entitled to vote.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF INSURED I AND
INSURED II
To the knowledge of Insured I and Insured II, at the date hereof, no person
or entity owns beneficially 5% or more of the shares of any of the Insured I
Common Stock, the Insured I AMPS, the Insured II Common Stock or the Insured II
AMPS.
On the Record Date, the Directors and officers of Insured I as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of Insured
I Common Stock and Insured I AMPS.
On the Record Date, the Directors and officers of Insured II as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of Insured
II Common Stock and Insured II 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 Insured
I Common Stock, Insured I AMPS, Insured II Common Stock and Insured II 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 Insured I Common Stock and Insured I AMPS, voting together
as a single class, and of the Insured I AMPS, voting separately as a class, as
well as the affirmative vote of stockholders representing a majority of the
outstanding shares of Insured II Common Stock and Insured II AMPS, voting
together as a single class, and of the Insured II AMPS, voting separately as a
class.
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<PAGE> 71
Under Maryland law, stockholders of a registered investment company whose
shares are traded publicly on a national securities exchange, such as Insured
II, are not entitled to demand the fair value of their shares upon a transfer of
assets; therefore, the Insured II Common Stockholders will be bound by the terms
of the Reorganization, if approved at the Meetings. However, any Common
Stockholder of Insured II may sell his or her shares of Common Stock at any time
on the NYSE. Conversely, since the Insured II AMPS are not traded publicly on a
national securities exchange, shareholders of Insured II AMPS will be entitled
to appraisal rights upon the consummation of the Reorganization. As stockholders
of the corporation acquiring the assets of Insured II, neither holders of
Insured I Common Stock nor holders of Insured I AMPS are entitled to appraisal
rights under Maryland law.
Under Maryland law, a holder of Insured II AMPS desiring to receive payment
of the fair value of his or her stock (an "objecting stockholder") (i) must file
with Insured II 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 Insured I 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 (Insured I 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 of 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 Insured I. 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 Insured I
AMPS are entitled to elect two Directors of Insured I and holders of shares of
Insured I Common Stock and Insured I AMPS, voting together as a single class,
are entitled to elect the remaining Directors of Insured I; similarly, holders
of shares of Insured II AMPS are entitled to elect two Directors of Insured II
and holders of shares of Insured II Common Stock and Insured II AMPS, voting
together as a single class, are entitled to elect the remaining Directors of
Insured II. Assuming a quorum is present, (x) election of the two Directors of
Insured I or Insured II, as the case may be, to be elected by the holders of
shares of Insured I AMPS or Insured II AMPS, respectively, voting separately as
a class, will require the affirmative vote of a majority of the votes cast by
the
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<PAGE> 72
holders of that Fund's AMPS, represented at the Meetings and entitled to vote;
and (y) election of the remaining Directors of Insured I or Insured II, as the
case may be, will require the affirmative vote of a majority of the votes cast
by the holders of their respective Common Stock and AMPS, represented at the
Meetings 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 Insured I (or, in the event that the Reorganization
is approved by the requisite number of stockholders of each Fund and the
Reorganization takes place prior to October 31, 1996, approval of Ernst & Young
LLP as the independent auditors of the combined fund) will require the
affirmative vote of a majority of the votes cast by the holders of Insured I
Common Stock and Insured I AMPS represented at the Meetings and entitled to
vote, voting together as a single class; similarly, approval of the ratification
of the selection of Ernst & Young LLP as the independent auditors of Insured II
will require the affirmative vote of a majority of the votes cast by the holders
of Insured II Common Stock and Insured II AMPS represented at the Meetings and
entitled to vote, voting together as a single class.
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 Insured I, the surviving fund after the Reorganization, so as to be
borne equally and exclusively on a per share basis by the holders of Insured I
Common Stock and Insured II Common Stock.
Insured I and Insured II likewise will reimburse banks, brokers and others
for their reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of Insured I and Insured II and certain persons that
Insured I or Insured II may employ for their reasonable expenses in assisting in
the solicitation of proxies from such beneficial owners of shares of capital
stock of Insured I or Insured II.
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 Insured I. 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 each Fund to serve for the ensuing year (proposal 2)
and the ratification of the selection of Deloitte & Touche LLP or Ernst & Young
LLP, as applicable, as independent auditors for each Fund for the current fiscal
year (proposals 3 and 4) if no instructions have been received prior to the date
specified in the broker-dealer firm's request for voting instructions.
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). 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 shareholders of each Fund exists. Proxies which
are returned to a Fund but which are marked "abstain" or
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<PAGE> 73
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 2, 3 and 4 (in the case of Insured I) 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, 3 and 4 (in the case of Insured I); 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
Insured I has filed with the Commission under the Securities Act and the
Investment Company Act, to which reference is hereby made.
Insured I and Insured II 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 Insured I and Insured II 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 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.
CUSTODIAN
State Street Bank and Trust Company acts as the custodian for cash and
securities of Insured I and Insured II. The principal business address of State
Street Bank and Trust Company in such capacity is One Heritage Drive, P2N, North
Quincy, Massachusetts 02171.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
Boston EquiServe serves as the transfer agent, dividend disbursing agent
and registrar with respect to the Insured I Common Stock and the Insured II
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 Boston EquiServe in such capacity is 150 Royall Street,
Canton, Massachusetts 02021.
IBJ Schroder Bank and Trust Company serves as the transfer agent, registrar
and auction agent to Insured I and Insured II, 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
On June 21, 1996, a purported class action titled Jack Green, et al. v.
Fund Asset Management, L.P., et al. was filed in the United States District
Court for the District of Massachusetts. Among the named defendants in the
action are seven of the leveraged closed-end municipal bond funds for which FAM
serves as the investment adviser (including Insured I and Insured II). In
addition to the named defendants, plaintiffs also
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<PAGE> 74
purport to bring claims against a defendant class consisting of all other
publicly traded, closed-end investment companies for which FAM serves as
investment adviser and which, among other things, have issued AMPS. The named
plaintiffs, who claim to be investors in the seven named funds, purport to bring
the action on behalf of a class consisting of all holders of the common stock of
the subject funds.
Plaintiffs allege that FAM and other affiliated defendants received
excessive compensation for managing the subject funds. Plaintiffs claim, among
other things, that the registration statements, annual reports and other
documents filed by the funds with the Commission were misleading because such
documents allegedly failed to disclose that proceeds arising from the issuance
of AMPS would be included in a fund's net assets for the purposes of calculating
the investment advisory fee payable to FAM. In addition, plaintiffs allege that
a conflict of interest existed because it would always be in the defendants'
interest to keep the funds fully leveraged to maximize the advisory fees and
collateral compensation notwithstanding adverse market conditions. Plaintiffs
also allege an additional conflict of interest arising from the receipt by such
affiliates of underwriting discounts, or other revenues in connection with the
sale of the AMPS by the funds. The complaint asserts claims under Sections 8(e),
34(b), 36(a) and 36(b) of the Investment Company Act and the common law.
Plaintiffs seek unspecified monetary damages as well as injunctive relief.
The defendants believe that the plaintiffs' allegations are entirely
without merit and intend to defend the action vigorously. FAM has agreed to
indemnify the named defendant funds for any liabilities or expenses that they
may occur in connection with this litigation.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for Insured I and Insured II by Brown & Wood LLP, New York, New York. Brown
& Wood LLP will rely as to matters of Maryland law on the opinion of Wilmer,
Cutler & Pickering, Baltimore, Maryland.
EXPERTS
The financial statements as of October 31, 1995 of Insured I included in
this Proxy Statement and Prospectus have been so included in reliance on the
reports 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 financial statements as of October 31, 1995 of Insured II included in
this Proxy Statement and Prospectus have been so included in reliance on the
reports of Ernst & Young LLP, independent auditors, given on their authority as
experts in auditing and accounting. The principal business address of Ernst &
Young LLP is 202 Carnegie Center, Princeton, New Jersey 08543.
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STOCKHOLDER PROPOSALS
If a stockholder of either Fund intends to present a proposal at the 1997
Annual Meeting of Stockholders of either Fund, both of which are anticipated to
be held in September, 1997, 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 the Fund by April 23, 1997.
By Order of the Boards of Directors
MARK B. GOLDFUS
Secretary of each of the Funds
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<PAGE> 76
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements for Insured I for the Fiscal Year Ended October 31,
1995................................................................................ F- 2
Unaudited Financial Statements for Insured I for the Six-Month Period Ended April 30,
1996................................................................................ F-17
Audited Financial Statements for Insured II for the Fiscal Year Ended October 31,
1995................................................................................ F-29
Unaudited Financial Statements for Insured II for the Six-Month Period Ended April 30,
1996................................................................................ F-42
Unaudited Financial Statements for the Combined Fund on a Pro Forma Basis as of April
30, 1996............................................................................ F-53
</TABLE>
F-1
<PAGE> 77
AUDITED FINANCIAL STATEMENTS FOR INSURED I
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995
F-2
<PAGE> 78
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
MuniYield Insured Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniYield Insured Fund, Inc. as of
October 31, 1995, 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 three-year
period then ended and the period March 27, 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, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniYield Insured
Fund, Inc. as of October 31, 1995, 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 8, 1995
F-3
<PAGE> 79
MuniYield Insured Fund, Inc. October 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--0.4% AAA Aaa $ 3,500 Huntsville, Alabama, Health Care Authority, Facilities
Revenue Bonds, Series B, 6.625% due 6/01/2023 (d) $ 3,749
Alaska--0.5% AAA Aaa 5,000 Alaska State Housing Finance Corporation, Series A,
5.875% due 12/01/2024 (d) 4,894
Arizona--0.6% Arizona Educational Loan Marketing Corporation,
Educational Loan Revenue Bonds, VRDN, AMT, Series A (a):
AAA VMIG1++ 600 4.05% due 3/01/2015 (d) 600
NR* MIG1++ 200 4.05% due 12/01/2020 200
A1+ VMIG1++ 1,900 Maricopa County, Arizona, IDA, Hospital Facility Revenue
Bonds (Samaritan Health Service Hospital), VRDN,
Series B-2, 4% due 12/01/2008 (a)(d) 1,900
NR* NR* 3,500 Mohave County, Arizona, IDA, IDR (North Star Steel Co.
Project), AMT, 6.70% due 3/01/2020 3,744
Arkansas NR* P1 600 Crosset, Arkansas, PCR (Georgia Pacific Corp. Project),
- --0.2% VRDN, 3.90% due 10/01/2007 (a) 600
AAA Aaa 1,500 North Little Rock, Arkansas, Electric Revenue Refunding
Bonds, Series A, 6.50% due 7/01/2010 (d) 1,695
California AAA Aaa 7,500 Anaheim, California, Public Financing Authority
- --14.0% Revenue Bonds (Electric Utility--San Juan 4), 2nd
Series, 5.75% due 10/01/2022 (c) 7,369
California HFA, Revenue Bonds, AMT:
AA- Aa 3,950 RIB, 8.777% due 8/01/2023 (i) 4,118
AAA Aaa 1,595 Series E, 7% due 8/01/2026 (d) 1,675
AAA Aaa 7,000 California State GO, 5.90% due 4/01/2023 (c) 7,010
California State Public Works Board Lease Revenue Bonds:
A- A 8,500 (Department of Corrections--Monterey County), Series A,
7% due 11/01/2019 9,246
AAA Aaa 3,000 (Various University of California Projects), Series A,
6.40% due 12/01/2016 (b) 3,171
A- A 2,750 (Various University of California Projects), Series A,
6.375% due 10/01/2019 2,803
A- A1 4,000 (Various University of California Projects), Series B,
6.625% due 12/01/2019 4,223
California State, RAW, Series C:
SP-1 MIG1++ 4,615 5.75% due 4/25/1996 4,658
AAA Aaa 5,000 5.75% due 4/25/1996 (c) 5,041
AAA Aaa 2,000 Cerritos, California, Public Financing Authority Revenue
Bonds (Los Coyotes Redevelopment Project Loan),
Series A, 5.75% due 11/01/2022 (b) 1,978
AAA Aaa 5,000 Contra Costa, California, Water District, Water Revenue
Bonds, Series D, 6.375% due 10/01/2022 (b) 5,244
Los Angeles, California, Harbor Department Revenue
Bonds, AMT, Series B (b):
AAA Aaa 3,000 6.625% due 8/01/2019 3,197
AAA Aaa 8,725 6.625% due 8/01/2025 9,268
AAA Aaa 5,000 Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Bonds, Senior Series B,
Proposition C, 5.25% due 7/01/2023 (b) 4,675
AAA Aaa 5,000 Los Angeles County, California, Transportation Commission,
Sales Tax Revenue Refunding Bonds, Series B, 6.50%
due 7/01/2015 (c) 5,290
AAA Aaa 8,210 M-S-R Public Power Agency, California, Revenue Bonds
(San Juan Project), Series E, 6.75% due 7/01/2011 (d) 8,971
AAA Aaa 2,190 Northern California Transmission Revenue Bonds
(California--Oregon Transmission Project), Series A,
6.50% due 5/01/2016 (d) 2,336
</TABLE>
F-4
<PAGE> 80
MuniYield Insured Fund, Inc. October 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
California AAA Aaa $ 3,000 Orange County, California, Financing Authority, Tax
(concluded) Allocation Revenue Refunding Bonds, Series A, 6.25%
due 9/01/2014 (d) $ 3,109
AAA Aaa 3,000 Redwood City, California, Public Financing Authority,
Local Agency Revenue Refunding Bonds, Series A, 6.50%
due 7/15/2011 (b) 3,229
AAA Aaa 5,000 Sacramento, California, City Financing Authority, Lease
Revenue Refunding Bonds, Series A, 5.40% due
11/01/2020 (b) 4,840
AAA Aaa 6,000 San Francisco, California, City and County Airports,
Revenue Bonds (Commerce International Airport), AMT,
Second Series, Issue 6, 6.60% due 5/01/2024 (b) 6,422
San Francisco, California, City and County Sewer
Revenue Bonds (c):
AAA Aaa 3,000 Refunding, 5.375% due 10/01/2022 2,866
AAA Aaa 10,000 Series A, 5.95% due 10/01/2025 10,104
AAA Aaa 5,375 San Mateo County, California, Joint Powers Financing
Authority, Lease Revenue Bonds (San Mateo County
Health Care Center), Series A, 5.75% due 7/15/2022 (e) 5,288
AAA Aaa 3,000 Santa Rosa, California, Wastewater Revenue Refunding
Bonds, Series A, 5.25% due 9/01/2016 (c) 2,886
AAA Aaa 5,000 University of California Revenue Bonds (Multiple
Purpose Projects), Series D, 6.375% due 9/01/2024 (d) 5,238
West Covina, California, COP, GO (Queen of the Valley
Hospital):
A A 5,410 6.50% due 8/15/2014 5,536
A A 2,500 6.50% due 8/15/2019 2,540
Colorado AA Aa 9,000 Colorado Springs, Colorado, Utilities Revenue Bonds,
- --1.2% Series A, 6.10% due 11/15/2024 9,231
AAA Aaa 2,500 Douglas County, Colorado, School District No. 1
(Douglas and Elbert Counties Improvement Project),
Series A, 6.50% due 12/15/2016 (d) 2,719
Connecticut A1 VMIG1++ 1,500 Connecticut State Economic Recovery Notes, VRDN,
- --1.8% Series B, 3.90% due 6/01/1996 (a) 1,500
AA- A1 5,000 Connecticut State Health and Educational Facilities
Authority Revenue Bonds (Nursing Home
Program--AHF/Hartford), 7.125% due 11/01/2024 5,628
AAA Aaa 3,500 Connecticut State HFA, Revenue Bonds (Mortgage
Finance Program), Series B, 6.75% due 11/15/2023 (d) 3,664
AAA Aaa 6,500 Connecticut State Special Tax Obligation Revenue Bonds
(Transportation Infrastructure), Series A, 5.60% due
6/01/2015 (c) 6,484
AAA Aaa 1,500 South Central Connecticut, Regional Water Authority,
Water System Revenue Bonds, 11th Series, 5.75% due
8/01/2012 (c) 1,534
Delaware--1.3% AAA Aaa 8,490 Delaware State EDA, PCR, Refunding (Delmarva Power
Project), Series B, 7.15% due 7/01/2018 (c) 9,491
AAA Aaa 3,525 Delaware Transportation Authority, System Revenue
Bonds, 7% due 7/01/2013 (c) 3,963
District of AAA Aaa 20,100 Metropolitan Washington, D.C., Airport Authority,
Columbia--2.1% General Airport Revenue Bonds, AMT, Series A, 6.625%
due 10/01/2019 (d) 21,240
</TABLE>
F-5
<PAGE> 81
MuniYield Insured Fund, Inc. October 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Florida--3.5% AA Aa $ 4,000 Florida State Board of Education, Capital Outlay,
Series C, 5.85% due 6/01/2018 $ 4,019
AAA Aaa 11,000 Florida State Department of Transportation (Right of
Way), 5.875% due 7/01/2024 (d) 11,107
A1+ VMIG1++ 1,000 Hillsborough County, Florida, IDA, PCR, Refunding
(Tampa Electric Company--Gannon), VRDN, 3.85% due
5/15/2018 (a) 1,000
A1+ VMIG1++ 200 Manatee County, Florida, PCR, Refunding (Florida Power
and Light Co. Project), VRDN, 4% due 9/01/2024 (a) 200
AAA Aaa 9,940 Orange County, Florida, Tourist Development Tax Revenue
Bonds, Series B, 6.50% due 10/01/2019 (b) 10,683
AA- Aa 3,000 Orlando, Florida, Utilities Commission, Water and Electric
Revenue Refunding Bonds, Sub-Series A, 5.25% due 10/01/2023 2,808
A1 VMIG1++ 2,600 Pinellas County, Florida, Health Facilities Authority,
Revenue Refunding Bonds (Pooled Hospital Loan
Program), DATES, 4% due 12/01/2015 (a) 2,600
A1+ VMIG1++ 3,200 Saint Lucie County, Florida, PCR, Refunding (Florida
Power and Light Co. Project), VRDN, 3.85% due
3/01/2027 (a) 3,200
Georgia--4.5% AAA Aaa 3,000 Chatam County, Georgia, School District Revenue Bonds,
GO, UT, 6.75% due 8/01/2018 (d) 3,313
AAA Aaa 10,000 Georgia Municipal Electric Authority, Power Revenue
Bonds, Series EE, 6.40% due 1/01/2023 (b) 10,478
AAA Aaa 1,200 Medical Center Hospital Authority, Georgia, Anticipation
Certificates (Columbus Regional Healthcare System),
5.50% due 8/01/2015 (d) 1,156
Metropolitan Atlanta Rapid Transportation Authority,
Georgia, Sales Tax Revenue Bonds:
AAA Aaa 6,500 Second Indenture, Series A, 6.90% due 7/01/2020 (d) 7,225
AAA Aaa 8,955 Series O, 6.55% due 7/01/2020 (c) 9,575
AAA Aaa 12,800 Municipal Electric Authority, Georgia, Special Obligation
Bonds (Fifth Crossover Series--Project One), 6.40% due
1/01/2013 (b)(g) 13,919
Hawaii--1.8% AAA Aaa 17,145 Hawaii State Airport Systems Revenue Bonds, AMT, Second
Series, 6.75% due 7/01/2021 (d) 18,129
Illinois AAA Aaa 9,160 Chicago, Illinois, Midway Airport Revenue Bonds, AMT,
- --6.0% Series A, 6.25% due 1/01/2024 (d) 9,345
AAA Aaa 12,000 Chicago, Illinois, Public Building Commission, Building
Revenue Bonds, Series A, 6.50% due 1/01/2018 (d)(g) 12,760
AAA Aaa 15,000 Cook County, Illinois, GO, UT, Series A, 6.60% due
11/15/2022 (d) 15,976
Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 6,000 Refunding (Carle Foundation), Series A, 6.75% due
1/01/2010 (c) 6,408
A+ A 1,500 Refunding (Lutheran General Health), Series C, 7%
due 4/01/2014 1,696
AAA Aaa 8,545 (Rockford Memorial Hospital), Series B, 6.75% due
8/15/2018 (b) 9,064
AAA Aaa 5,860 Illinois Municipal Electric Agency, Power Supply System
Revenue Bonds, Series A, 5.75% due 2/01/2021 (b) 5,783
Indiana--0.7% AAA Aaa 5,000 Indianapolis, Indiana, Gas Utility Revenue Bonds,
Series A, 6.20% due 6/01/2023 (c) 5,130
AAA Aaa 2,000 Monroe County, Indiana, Hospital Authority Revenue Bonds
(Bloomington Hospital Project), 6.70% due 5/01/2012 (d) 2,153
</TABLE>
F-6
<PAGE> 82
MuniYield Insured Fund, Inc. October 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Kansas--2.2% AAA Aaa $ 20,250 Burlington, Kansas, PCR, Refunding (Kansas Gas and
Electric Company Project), 7% due 6/01/2031 (d) $ 22,498
Kentucky--0.9% AAA Aaa 9,030 Owensboro, Kentucky, Water Revenue Improvement and
Refunding Bonds, 6.25% due 9/15/2017 (c) 9,376
Maryland NR* Aa 2,000 Maryland State Community Development Administration,
- --0.2% Department of Housing and Community Development,
S/F Program, AMT, Second Series, 6.55% due 4/01/2026 2,034
Massachusetts Massachusetts Bay Transportation Authority, General
- --4.4% Transportation Systems Revenue Bonds, Series B (b):
A+ Aaa 7,000 5.375% due 3/01/2020 6,755
AAA Aaa 7,500 5.375% due 3/01/2025 7,195
Massachusetts State Health and Educational
Facilities Authority Revenue Bonds (c):
AAA Aaa 6,400 (Bay State Medical Center), Series D, 5.50% due
7/01/2016 6,177
AAA Aaa 7,130 (New England Medical Center Hospitals), Series F,
6.625% due 7/01/2025 7,641
AAA Aaa 7,000 Massachusetts State HFA, Housing Revenue Refunding
Bonds, Series A, 6.10% due 12/01/2016 (d) 7,035
AAA Aaa 5,000 Massachusetts State Industrial Finance Agency Revenue
Bonds (Brandeis University), Series C, 6.80% due
10/01/2019 (d) 5,498
AAA Aaa 5,000 Massachusetts State Water Resource Authority, General
Revenue Bonds, Series A, 5.90% due 8/01/2016 (d) 5,039
Michigan A1+ VMIG1++ 200 Grand Rapids, Michigan, Water Supply Systems, Revenue
- --3.4% Refunding Bonds, VRDN, 3.90% due 1/01/2020 (a)(c) 200
AAA Aaa 21,750 Michigan State Strategic Fund, Limited Obligation
Revenue Refunding Bonds (Detroit Edison Company
Pollution Project), 6.875% due 12/01/2021 (c) 23,803
Monroe County, Michigan, PCR (Detroit Edison Co.
Project), AMT:
AAA Aaa 5,000 Series CC, 6.55% due 6/01/2024 5,231
AAA Aaa 5,000 Series I-B, 6.55% due 9/01/2024 5,266
Minnesota Minnesota State HFA, S/F Mortgage Revenue Bonds, AMT:
- --0.7% AA+ Aa 3,800 Series H, 6.50% due 1/01/2026 3,852
AA Aa 3,000 Series L, 6.70% due 7/01/2020 3,089
Missouri AAA Aaa 4,000 Kansas City, Missouri, Airport General Revenue
- --0.4% Improvement Bonds, Series B, 6.875% due 9/01/2014 (h) 4,393
Nebraska AAA Aaa 5,000 Nebraska Public Power District Revenue Bonds, Series A,
- --0.5% 5.25% due 1/01/2022 (d) 4,761
Nevada--6.6% AAA Aaa 5,000 Clark County, Nevada, Passenger Facility Revenue Bonds
(Las Vegas McCarran International Airport), Series A,
6% due 7/01/2022 (b) 5,033
Humboldt County, Nevada, PCR, Refunding (Sierra Pacific
Power Company Project) (b):
AAA Aaa 9,250 6.55% due 10/01/2013 9,856
AAA Aaa 4,500 Series A, 6.30% due 7/01/2022 4,698
Las Vegas, Nevada, GO, Refunding (c):
AAA Aaa 4,180 6.60% due 10/01/2010 4,537
AAA Aaa 4,470 6.60% due 10/01/2011 4,831
AAA Aaa 4,770 6.60% due 10/01/2012 5,134
AAA Aaa 15,255 Nevada State GO, Nos. 49 and 50, 5.50% due 11/01/2025 (c) 14,683
</TABLE>
F-7
<PAGE> 83
MuniYield Insured Fund, Inc. October 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Nevada AAA Aaa $ 2,400 Reno, Nevada, Hospital Revenue Bonds (Saint Mary's
(concluded) Regional Medical Center), Series A, 6.70% due
7/01/2021 (d) $ 2,570
AAA Aaa 15,000 Washoe County, Nevada, Gas Facilities Revenue Bonds
(Sierra Pacific Power Company), AMT, 6.65% due 12/01/2017 (b) 16,008
New Hampshire AAA Aaa 7,660 New Hampshire Higher Educational and Health Facilities
- --0.8% Authority Revenue Bonds (Elliot Hospital of Manchester),
6.25% due 10/01/2021 (b) 7,881
New New Jersey State Housing and Mortgage Finance Agency,
Jersey--2.4% Revenue Bonds (Home Buyer), AMT (d):
AAA Aaa 4,695 Series K, 6.375% due 10/01/2026 4,780
AAA Aaa 5,000 Series M, 6.95% due 10/01/2022 5,286
AAA Aaa 5,000 New Jersey State Transportation Trust Fund Authority,
Refunding Bonds (Transportation System), Series A,
5.25% due 6/15/2014 (d) 4,838
Port Authority of New York and New Jersey, Consolidated
Revenue Bonds, AMT (c):
AAA Aaa 5,000 96th Series, 6.60% due 10/01/2023 5,309
AAA Aaa 3,875 Refunding, 97th Series, UT, 6.65% due 1/15/2023 4,133
New AAA Aaa 10,275 Farmington, New Mexico, PCR, Refunding (Southern
Mexico--1.5% California Edison Company), Series A, 5.875% due
6/01/2023 (d) 10,315
AAA Aaa 1,480 New Mexico Educational Assistance Foundation, Student
Loan Revenue Bonds, AMT, Series A, 6.85% due
4/01/2005 (b) 1,593
AAA Aaa 3,000 Santa Fe, New Mexico, Revenue Bonds, Series A, 6.30%
due 6/01/2024 (b) 3,129
New York--9.2% BBB Baa1 10,980 Metropolitan Transportation Authority, New York, Service
Contract Revenue Refunding Bonds (Transit Facilities),
Series 5, 7% due 7/01/2012 11,827
New York City, New York, GO:
A1+ VMIG1++ 7,300 Series B, Sub-Series B-4, VRDN, UT, 4% due
8/15/2023 (a)(d) 7,300
BBB+ Baa1 2,210 Series C, Sub-Series C-1, UT, 7.50% due 8/01/2019 2,421
BBB+ Baa1 2,000 Series D, 6% due 2/15/2015 1,971
BBB+ Baa1 5,000 Series D, 6% due 2/15/2016 4,913
BBB+ Baa1 1,000 Series D, UT, 7.50% due 2/01/2016 1,086
BBB+ Baa1 12,000 Series D, UT, 7.50% due 2/01/2019 13,089
New York City, New York, Municipal Water Finance
Authority, Water and Sewer System Revenue Bonds:
AAA Aaa 7,000 Series B, 5.375% due 6/15/2019 (b) 6,741
AAA VMIG1++ 12,400 VRDN, Series A, 4% due 6/15/2025 (a)(c) 12,400
AAA VMIG1++ 5,300 VRDN, Series G, 3.90% due 6/15/2024 (a)(c) 5,300
SP-1+ MIG1++ 5,900 New York City, New York, TAN, UT, Series A, 4.50%
due 2/15/1996 5,912
A1+ VMIG1++ 200 New York State Dormitory Authority Revenue Bonds (Cornell
University), VRDN, Series B, 3.90% due 7/01/2025 (a) 200
BBB+ Baa1 7,595 New York State Dormitory Authority, Revenue Refunding
Bonds (State University Educational Facilities),
Series B, 7% due 5/15/2016 8,115
AAA MIG1++ 4,600 New York State Thruway Authority, General Revenue
Bonds, VRDN, Series B, 3.90% due 1/01/2024 (a)(c) 4,600
BBB Baa1 7,000 New York State Urban Development Corporation Revenue
Bonds (State Facilities), 7.50% due 4/01/2020 7,804
</TABLE>
F-8
<PAGE> 84
MuniYield Insured Fund, Inc. October 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
North NR* VMIG1++ $ 1,800 Person County, North Carolina, Industrial Facilities
Carolina--0.2% and Pollution Control Financing Authority, Solid Waste
Disposal Revenue Bonds (Carolina Power and Light
Company), AMT, DATES, 4% due 11/01/2016 (a) $ 1,800
North AAA Aaa 2,500 Grand Forks, North Dakota, Health Care Facilities
Dakota--0.3% Revenue Bonds (United Hospital Obligated Group),
6.25% due 12/01/2024 (d) 2,576
Ohio--1.8% AAA Aaa 14,735 Cuyahoga County, Ohio, Hospital Improvement and Revenue
Refunding Bonds (University Hospital Health Systems),
Series A, 6.875% due 1/15/2019 (f) 16,014
AAA Aaa 2,500 Ohio State Higher Educational Facilities Commission,
Mortgage Revenue Bonds (University of Dayton Project),
6.60% due 12/01/2017 (c) 2,711
Pennsylvania AAA Aaa 16,000 Montgomery County, Pennsylvania, IDA, PCR, Refunding
- --3.5% (Philadelphia Electric Company), Series B, 6.70% due
12/01/2021 (d) 17,288
AAA Aaa 6,250 Philadelphia, Pennsylvania, Water and Wastewater
Revenue Bonds, 5.60% due 8/01/2018 (d) 6,178
AAA Aaa 12,000 Pittsburgh, Pennsylvania, Water and Sewer Authority
Revenue Bonds, Series B, 5.75% due 9/01/2025 (e) 11,864
South Carolina AAA Aaa 10,250 South Carolina State Port Authority Revenue Bonds, AMT,
- --4.0% 6.75% due 7/01/2021 (b) 10,954
AAA Aaa 9,900 South Carolina State Public Service Authority Revenue
Bonds (Santee Cooper), Series D, 6.50% due 7/01/2014 (b) 10,595
South Carolina State Public Service Authority, Revenue
Refunding Bonds:
AAA Aaa 2,500 Series A, 5.50% due 7/01/2021(d) 2,420
AAA Aaa 4,850 Series B, 5.875% due 1/01/2023(c) 4,864
AAA Aaa 7,000 Spartanburg County, South Carolina, Hospital Facilities
Revenue Refunding Bonds (Spartanburg General Hospital
System), Series A, 6.625% due 4/15/2022 (e) 7,533
NR* NR* 4,200 Spartanburg County, South Carolina, Solid Waste
Disposal Facilities Revenue Bonds (BMW Project), AMT,
7.55% due 11/01/2024 4,586
Tennessee--1.4% AAA Aaa 3,820 Johnson City, Tennessee, Health and Educational
Facilities Board, Hospital Revenue Refunding and
Improvement Bonds (Johnson City Medical Center),
6.75% due 7/01/2016 (d) 4,131
Metropolitan Government Nashville and Davidson County,
Tennessee, Water and Sewer Revenue Bonds (b):
AAA Aaa 3,000 RIB, 8.054% due 1/01/2022 (i) 3,086
AAA Aaa 3,000 SAVRS, 4.04% due 1/01/2022 (a) 3,000
A+ A1 3,900 Tennessee, Housing Development Agency, Mortgage
Finance, AMT, Series A, 6.90% due 7/01/2025 4,052
Texas--7.0% AAA Aaa 2,800 Austin, Texas, Utility System Revenue Refunding Bonds,
5.50% due 5/15/2020 (d) 2,723
AAA Aaa 3,200 Bexar, Texas, Metropolitan Water District, Waterworks
System Revenue Refunding Bonds, 6.35% due
5/01/2025 (d) 3,374
AAA Aaa 3,800 Brazos River Authority, Texas, PCR (Texas Utilities
Electric Company Project), AMT, Series A, 6.75% due
4/01/2022 (b) 4,064
AAA Aaa 12,140 Brazos River Authority, Texas, Revenue Refunding Bonds
(Houston Light and Power), Series A, 6.70% due 3/01/2017 (b) 13,259
</TABLE>
F-9
<PAGE> 85
MuniYield Insured Fund, Inc. October 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Texas AAA Aaa $ 6,885 Houston, Texas, Airport System Revenue Bonds (Sub-Lien),
(concluded) AMT, Series A, 6.75% due 7/01/2021 (c) $ 7,358
AAA Aaa 4,750 Houston, Texas, Hotel Occupany Tax Revenue Refunding
Bonds (Senior-Lien), 5.50% due 7/01/2015 (e) 4,627
AAA Aaa 7,500 Houston, Texas, Water and Sewer System Revenue Refunding
Bonds (Junior Lien), Series A, 6.20% due 12/01/2020 (d) 7,767
AAA Aaa 11,795 Matagorda County, Texas, Navigational District No. 1,
Revenue Refunding Bonds (Houston Light and Power),
Series A, 6.70% due 3/01/2027 (b) 12,769
San Antonio, Texas, Electric and Gas Revenue Bonds,
Series 95 (d):
AAA Aaa 5,500 5.375% due 2/01/2016 5,318
AAA Aaa 7,000 5.375% due 2/01/2017 6,763
AAA Aaa 3,000 5.375% due 2/01/2018 2,896
Utah--1.9% AA- Aa 10,250 Intermountain Power Agency, Utah, Power Supply Revenue
Refunding Bonds, Series A, 5.50% due 7/01/2020 9,732
AAA Aaa 10,000 Salt Lake City, Utah, Airport Revenue Bonds, AMT,
Series A, 6.125% due 12/01/2022 (c) 10,131
Virginia--1.2% AAA Aaa 5,540 Loudon County, Virginia, COP, 6.90% due 3/01/2019 (e) 6,111
AAA Aaa 6,500 Virginia State Housing Development Authority,
Commonwealth Mortgage, AMT, Series A, Sub-Series A-4,
6.45% due 7/01/2028 (d) 6,631
Washington AAA Aaa 1,200 Douglas County, Washington, Public Utility District No. 001,
- --7.3% Electric District System Revenue Bonds, 6% due 1/01/2015 (d) 1,215
AAA Aaa 9,495 Port Seattle, Washington, Revenue Bonds (Sub-Lien),
Series C, 6.625% due 8/01/2017 (d) 10,243
Seattle, Washington, Metropolitan Seattle Municipality
Sewer Revenue Bonds:
AAA Aaa 5,000 Refunding, Series X, 5.50% due 1/01/2016 (c) 4,892
AAA Aaa 10,560 Series U, 6.60% due 1/01/2032 (c) 11,163
AAA Aaa 1,750 Series W, 6.25% due 1/01/2022 (d) 1,803
Seattle, Washington, Municipal Light and Power Revenue
Bonds, Series A (d):
AAA Aaa 3,000 5.625% due 9/01/2017 2,971
AAA Aaa 3,000 5.625% due 9/01/2018 2,968
AAA Aaa 5,000 Snohomish County, Washington, Public Utility District
No. 001, Electric Revenue Bonds (Generation System), AMT,
Series B, 5.80% due 1/01/2024 (d) 4,891
AAA Aaa 3,500 Tacoma, Washington, Refuse Utility Revenue Bonds,
7% due 12/01/2019 (b) 3,909
AAA Aaa 2,000 University of Washington Alumni Association, Lease
Revenue Bonds (University of Washington Medical Center--
Roosevelt II), 6.25% due 8/15/2012 (h) 2,114
AA Aa 8,500 Washington State, GO, UT, Series 93A, 5.75% due 10/01/2017 8,416
A+ A1 8,300 Washington State Health Care Facilities Authority Revenue
Bonds (Children's Hospital and Medical Center), 6% due
10/01/2022 8,158
AAA Aaa 11,175 Washington State Public Power Supply Systems, Revenue
Refunding Bonds (Nuclear Project No. 1), Series A, 6.25%
due 7/01/2017 (d) 11,482
</TABLE>
F-10
<PAGE> 86
MuniYield Insured Fund, Inc. October 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
West Virginia-- AAA Aaa $ 4,425 Harrison County, West Virginia, Commonwealth Solid Waste
0.8% Disposal Revenue Bonds (Monongahela Power), AMT, Series C,
6.75% due 8/01/2024 (b) $ 4,798
AAA Aaa 2,800 West Virginia School Building Authority, Revenue and
Capital Improvement Bonds, Series B, 6.75% due 7/01/2017 (d) 3,039
Wisconsin AAA Aaa 6,000 Wisconsin State Health and Educational Facilities
- --1.3% Authority Revenue Bonds (Aurora Health Care Obligated
Group), 5.25% due 8/15/2023 (d) 5,477
Wisconsin State Health and Educational Facilities
Authority, Revenue Refunding Bonds (Wheaton-Franciscan
Services) (d):
AAA Aaa 3,955 6.50% due 8/15/2011 4,154
AAA Aaa 2,000 6% due 8/15/2015 2,012
AA Aa 2,000 Wisconsin State Housing and EDA, Home Ownership Revenue
Bonds, AMT, Series B, 6.75% due 9/01/2025 2,054
Puerto AAA Aaa 500 Puerto Rico Housing and Banking Agency, S/F
Rico--0.0% Mortgage Revenue Bonds (Affordable Housing Mortgage--
Portfolio I), AMT, 6.25% due 4/01/2029 504
Total Investments (Cost--$984,814)--102.5% 1,044,468
Liabilities in Excess of Other Assets--(2.5%) (25,956)
----------
Net Assets--100.0% $1,018,512
==========
<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, 1995.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)FSA Insured.
(f)BIG Insured.
(g)Escrowed to maturity.
(h)CGIC Insured.
(i)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, 1995.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE> 87
MuniYield Insured Fund, Inc. October 31, 1995
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of October 31, 1995
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$984,813,712) (Note 1a) $1,044,468,282
Cash 36,144
Receivables:
Interest $ 17,279,916
Securities sold 11,085,578 28,365,494
--------------
Deferred organization expenses (Note 1e) 8,873
Prepaid expenses and other assets 47,140
--------------
Total assets 1,072,925,933
--------------
Liabilities: Payables:
Securities purchased 52,379,427
Dividends to shareholders (Note 1f) 1,511,720
Investment adviser (Note 2) 444,673 54,335,820
--------------
Accrued expenses and other liabilities 78,057
--------------
Total liabilities 54,413,877
--------------
Net Assets: Net assets $1,018,512,056
==============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (12,800 shares of AMPS*
issued and outstanding at $25,000 per share liquidation
preference) $ 320,000,000
Common Stock, par value $.10 per share (45,187,339 shares
issued and outstanding) $ 4,518,734
Paid-in capital in excess of par 630,233,103
Undistributed investment income--net 7,213,796
Accumulated realized capital losses on investments--net (1,207,134)
Accumulated distributions in excess of realized
capital gains--net (1,901,013)
Unrealized appreciation on investments--net 59,654,570
--------------
Total--Equivalent to $15.46 net asset value per Common Stock
(market price--$13.625) 698,512,056
--------------
Total capital $1,018,512,056
==============
<FN>
*Auction Market Preferred Stock.
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE> 88
MuniYield Insured Fund, Inc. October 31, 1995
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1995
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 60,869,852
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 4,914,408
Commission fees (Note 4) 834,817
Transfer agent fees 149,777
Accounting services (Note 2) 109,921
Professional fees 86,275
Directors' fees and expenses 77,751
Printing and shareholder reports 75,317
Custodian fees 55,719
Listing fees 39,708
Pricing fees 20,941
Amortization of organization expenses (Note 1e) 6,313
Other 56,703
--------------
Total expenses 6,427,650
--------------
Investment income--net 54,442,202
--------------
Realized & Realized loss on investments--net (1,207,134)
Unrealized Gain Change in unrealized appreciation/depreciation on
(Loss) on investments--net 76,204,182
Investments--Net --------------
(Notes 1b, Net Increase in Net Assets Resulting from Operations $ 129,439,250
1d & 3): ==============
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <C> <C> <C>
Operations: Investment income--net $ 54,442,202 $ 54,559,554
Realized gain (loss) on investments--net (1,207,134) 184,275
Change in unrealized appreciation/depreciation on
investments--net 76,204,182 (120,465,020)
-------------- --------------
Net increase (decrease) in net assets resulting from
operations 129,439,250 (65,721,191)
-------------- --------------
Dividends & Investment income--net:
Distributions to Common Stock (41,768,871) (44,380,022)
Shareholders Preferred Stock (12,703,005) (7,730,046)
(Note 1f): Realized gain on investments--net:
Common Stock (158,132) (11,709,621)
Preferred Stock (26,101) (1,956,511)
In excess of realized gain on investments--net:
Common Stock (1,631,693) --
Preferred Stock (269,320) --
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (56,557,122) (65,776,200)
-------------- --------------
Capital Stock Offering costs resulting from the issuance of Common Stock -- (18,766)
Transactions Offering costs resulting from the issuance of
(Notes 1e & 4): Preferred Stock -- 8,000
-------------- --------------
Net decrease in net assets derived from capital stock
transactions -- (10,766)
============== ==============
Net Assets: Total increase (decrease) in net assets 72,882,128 (131,508,157)
Beginning of year 945,629,928 1,077,138,085
-------------- --------------
End of year* $1,018,512,056 $ 945,629,928
============== ==============
<FN>
*Undistributed investment income--net $ 7,213,796 $ 7,243,470
============== ==============
</TABLE>
See Notes to Financial Statements.
F-13
<PAGE> 89
MuniYield Insured Fund, Inc. October 31, 1995
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights
For the
Period
The following per share data and ratios have been derived March 27,
from information provided in the financial statements. 1992++ to
For the Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.85 $ 16.76 $ 14.27 $ 14.18
Operating -------- -------- -------- --------
Performance: Investment income--net 1.20 1.20 1.21 .66
Realized and unrealized gain (loss) on
investments--net 1.66 (2.66) 2.59 .16
-------- -------- -------- --------
Total from investment operations 2.86 (1.46) 3.80 .82
-------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.92) (.98) (1.00) (.48)
Realized gain on investments--net --+++ (.26) (.10) --
In excess of realized gains on investments--net (.04) -- -- --
-------- -------- -------- --------
Total dividends and distributions to Common Stock
shareholders (.96) (1.24) (1.10) (.48)
-------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock -- -- -- (.01)
-------- -------- -------- --------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.28) (.17) (.19) (.10)
Realized gain on investments--net --+++ (.04) (.02) --
In excess of realized gains on investments--net (.01) -- -- --
Capital charge resulting from issuance of
Preferred Stock -- -- -- (.14)
-------- -------- -------- --------
Total effect of Preferred Stock activity (.29) (.21) (.21) (.24)
-------- -------- -------- --------
Net asset value, end of period $ 15.46 $ 13.85 $ 16.76 $ 14.27
======== ======== ======== ========
Market price per share, end of period $ 13.625 $ 11.625 $ 15.875 $ 14.875
======== ======== ======== ========
Total Investment Based on market price per share 26.09% (20.23%) 14.51% 2.46%+++++
Return:** ======== ======== ======== ========
Based on net asset value per share 20.09% (9.98%) 26.01% 3.97%+++++
======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .65% .66% .65% .47%*
Net Assets:*** ======== ======== ======== ========
Expenses .65% .66% .65% .66%*
======== ======== ======== ========
Investment income--net 5.55% 5.35% 5.35% 5.69%*
======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end of
Data: period (in thousands) $698,512 $625,630 $757,138 $638,150
======== ======== ======== ========
Preferred Stock outstanding, end of period
(in thousands) $320,000 $320,000 $320,000 $320,000
======== ======== ======== ========
Portfolio turnover 59.71% 45.71% 39.93% 21.89%
======== ======== ======== ========
Dividends Per Series A--Investment income--net $ 1,043 $ 1,184 $ 1,150 $ 688
Share on Series B--Investment income--net 1,043 1,090 1,253 656
Preferred Stock Series C--Investment income--net 1,042 1,278 1,175 659
Outstanding:++++++ Series D--Investment income--net 950 1,144 1,426 767
Series E--Investment income--net 933 1,282 1,492 766
<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 May 22, 1992.
++++++Dividends per share have been adjusted to reflect a two-for-
one stock split.
+++Amount less than $.01 per share.
+++++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 90
MuniYield Insured Fund, Inc. October 31, 1995
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Insured 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 MYI. 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 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 and offering expenses--Deferred
organization expenses are amortized on a straight-line basis over a
five-year period. Direct expenses relating to the public offering of
the Common and Preferred Stock were charged to capital at time of
issuance.
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the
F-15
<PAGE> 91
MuniYield Insured Fund, Inc. October 31, 1995
NOTES TO FINANCIAL STATEMENTS (concluded)
ex-dividend dates. Distributions in excess of realized capital gains
are due primarily to differing tax treatments for futures transactions
and post-October losses.
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, 1995 were $555,583,347 and
$569,854,939, respectively.
Net realized and unrealized gains (losses) as of October 31, 1995
were as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
(Losses) (Losses)
<S> <C> <C>
Long-term investments $ 8,738,527 $59,639,327
Short-term investments (40,911) 15,243
Financial futures contracts (9,904,750) --
----------- -----------
Total $(1,207,134) $59,654,570
=========== ===========
</TABLE>
As of October 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $59,654,570, of which $59,814,243
related to appreciated securities and $159,673 related to
depreciated securities. The aggregate cost of investments at October
31, 1995 for Federal income tax purposes was $984,813,712.
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 holders of Common Stock.
Common Stock
For the year ended October 31, 1995, shares issued and outstanding
remained constant at 45,187,339. At October 31, 1995, total paid-in
capital amounted to $634,751,837.
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, 1995 were as
follows: Series A, 3.77%; Series B, 3.77%; Series C, 3.77%; Series
D, 3.667%; and Series E, 3.77%.
A two-for-one stock split occurred on December 1, 1994. As a result,
as of October 31, 1995, there were 12,800 AMPS shares authorized,
issued and outstanding with a liquidation preference of $25,000 per
share, plus accumulated and unpaid dividends of $197,820.
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, 1995, MLPF&S, an affiliate of FAM, earned $450,570 as
commissions.
5. Subsequent Event:
On November 13, 1995, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $0.077732 per share, payable on November 29, 1995, to
shareholders of record as of November 24, 1995.
F-16
<PAGE> 92
UNAUDITED FINANCIAL STATEMENTS FOR INSURED I
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1996
F-17
<PAGE> 93
MuniYield Insured Fund, Inc. April 30,1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--0.4% AAA Aaa $ 3,500 Huntsville, Alabama, Health Care Authority, Health Care
Facilities Revenue Bonds, Series B, 6.625% due 6/01/2023 (d) $ 3,658
Alaska--1.8% AAA Aaa 18,960 Alaska State Housing Finance Corporation, Refunding, Series A,
5.875% due 12/01/2024 (d)(j)(k) 18,261
Arizona--0.4% NR* VMIG1++ 200 Arizona Educational Loan Marketing Corporation, Educational
Loan Revenue Bonds, VRDN, AMT, Series A, 4.35% due 12/01/2020 (a) 200
NR* NR* 3,500 Mohave County, Arizona, IDA, IDR (North Star Steel Company
Project), AMT, 6.70% due 3/01/2020 3,687
AA P1 100 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont
Mining Corporation), VRDN, 4.05% due 12/01/2009 (a) 100
Arkansas--0.1% NR* P1 600 Crosset, Arkansas, PCR (Georgia--Pacific Corporation Project),
VRDN, 4.20% due 10/01/2007 (a) 600
California California HFA, Revenue Bonds, AMT:
- --16.0% AA- Aa 3,850 RIB, 9.237% due 8/01/2023 (i) 3,889
AAA Aaa 1,595 Series E, 7% due 8/01/2026 (d) 1,656
AAA Aaa 6,500 California State Department of Water Resources, Water Systems
Revenue Bonds (Central Valley Project), Series O, 4.75%
due 12/01/2029 (d) 5,276
California State Public Works Board, Lease Revenue Bonds:
A- A 8,500 (Department of Corrections--Monterey County Soledad II),
Series A, 7% due 11/01/2019 9,252
A- A 2,750 (Various California State University Projects), 6.375%
due 10/01/2019 2,835
AAA Aaa 3,000 (Various University of California Projects), Series A,
6.40% due 12/01/2016 (b) 3,120
A- A1 4,000 (Various University of California Projects), Series B,
6.625% due 12/01/2019 4,194
AAA Aaa 7,000 California State, Various Purpose, 5.90% due 4/01/2023 (c) 6,888
AAA Aaa 5,000 Contra Costa, California, Water District, Water Revenue Bonds,
Series D, 6.375% due 10/01/2022 (b) 5,179
AAA Aaa 3,000 East Bay, California, Municipal Utility District, Wastewater
Treatment Systems, Revenue Refunding Bonds, Sub-Series,
5% due 6/01/2026 (c) 2,599
AAA Aaa 11,500 Los Angeles, California, Convention and Exhibition Center
Authority, Lease Revenue Refunding Bonds, Series A, 5.375%
due 8/15/2018 (d) 10,556
Los Angeles, California, Harbor Department Revenue
Bonds, AMT, Series B (b):
AAA Aaa 3,000 6.625% due 8/01/2019 3,124
AAA Aaa 8,725 6.625% due 8/01/2025 8,989
AAA Aaa 11,585 Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Bonds, Second Senior Series B,
Proposition C, 5.25% due 7/01/2023 (b) 10,341
AAA Aaa 5,000 Los Angeles County, California, Transportation Commission,
Sales Tax Revenue Refunding Bonds, Series B, 6.50% due
7/01/2015 (c) 5,277
AAA Aaa 8,210 M-S-R Public Power Agency, California, Revenue Bonds
(San Juan Project), Series E, 6.75% due 7/01/2011 (d) 8,782
AAA Aaa 2,190 Northern California Transmission Revenue Bonds
(California--Oregon Transmission Project), Series A,
6.50% due 5/01/2016 (d) 2,319
AAA Aaa 3,000 Orange County, California, Financing Authority, Tax
Allocation Revenue Refunding Bonds, Series A, 6.25%
due 9/01/2014 (d) 3,074
AAA Aaa 3,000 Redwood City, California, Public Financing Authority,
Local Agency Revenue Refunding Bonds, Series A, 6.50%
due 7/15/2011 (b) 3,202
</TABLE>
F-18
<PAGE> 94
MuniYield Insured Fund, Inc. April 30,1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
California AAA Aaa $ 5,000 Sacramento, California, City Financing Authority, Lease
(concluded) Revenue Refunding Bonds, Series A, 5.40% due 11/01/2020 (b) $ 4,684
AAA Aaa 2,250 Sacramento, California, Municipal Utility District, Electric
Revenue Bonds, Series J, 5.50% due 8/15/2021 (b) 2,127
AAA Aaa 6,000 San Francisco, California, Bay Area Rapid Transit District,
Sales Tax Revenue Bonds, 5.50% due 7/01/2020 (c) 5,678
San Francisco, California, City and County Airports Commission
Revenue Bonds (International Airport), Second Series:
AAA Aaa 6,000 AMT, Issue 6, 6.60% due 5/01/2024 (b) 6,190
AAA Aaa 13,500 Issue 9B, 5.25% due 5/01/2020 (c) 12,349
AAA Aaa 10,000 San Francisco, California, City and County Sewer Revenue
Bonds, Series A, 5.95% due 10/01/2025 (c) 9,863
AAA Aaa 5,375 San Mateo County, California, Joint Powers Financing
Authority, Lease Revenue Bonds (San Mateo County Health
Care Center), Series A, 5.75% due 7/15/2022 (e) 5,184
AAA Aaa 3,000 Santa Rosa, California, Wastewater Revenue Refunding Bonds,
Series A, 5.25% due 9/01/2016 (c) 2,818
AAA Aaa 4,900 Southern California Public Power Authority, Transmission
Project Revenue Refunding Bonds, Sub-Series A, 5% due
7/01/2022 (d) 4,216
AAA Aaa 2,500 Stanislaus County, California, COP, Refunding (Capital
Improvement Program), Series A, 5.25% due 5/01/2018 (d) 2,293
AAA Aaa 5,000 University of California Revenue Bonds (Multiple Purpose
Projects), Series D, 6.375% due 9/01/2024 (d) 5,171
Colorado--1.9% AA Aa 9,000 Colorado Springs, Colorado, Utilities Revenue Bonds,
Series A, 6.10% due 11/15/2024 9,051
AAA Aaa 7,000 Denver, Colorado, City and County Airport Revenue Bonds,
Series A, 5.50% due 11/15/2025 (d) 6,555
AAA Aaa 2,500 Douglas County, Colorado, School District No. Re-1 (Douglas
and Elbert Counties Improvement Project), Series A, 6.50%
due 12/15/2016(d) 2,641
Connecticut AAA Aaa 3,500 Connecticut State HFA (Housing Mortgage Finance Program),
- --1.2% Series B, 6.75% due 11/15/2023 (d) 3,626
AA- A1 5,000 Connecticut State Health and Educational Facilities
Authority Revenue Bonds (Nursing Home Program--AHF/Hartford),
7.125% due 11/01/2024 5,566
AA- Aa 2,000 Connecticut State, Series A, 5.50% due 5/15/2014 1,946
Delaware--1.3% AAA Aaa 8,490 Delaware State EDA, PCR, Refunding (Delmarva Power
Project), Series B, 7.15% due 7/01/2018 (c) 9,382
AAA Aaa 3,525 Delaware Transportation Authority, Transportation System
Revenue Bonds, Senior Series, 7% due 7/01/2013 (c) 3,882
District of AAA Aaa 20,100 Metropolitan Washington, D.C., Virginia Airports Authority,
Columbia--2.1% General Airport Revenue Bonds, AMT, Series A, 6.625%
due 10/01/2019 (d) 20,812
Florida--3.7% AAA Aaa 4,000 Dade County, Florida, Aviation Revenue Bonds, Series B,
5.60% due 10/01/2026 (d) 3,826
AA- VMIG1++ 3,300 Dade County, Florida, IDA, Exempt Facilities Revenue
Refunding Bonds (Florida Power & Light Co.), VRDN, 4.10%
due 6/01/2021 (a) 3,300
A1+ VMIG1++ 6,500 Dade County, Florida, IDA, IDR (Dolphins Stadium Project),
VRDN, Series D, 4.05% due 1/01/2016 (a) 6,500
AAA Aaa 6,250 Dade County, Florida, Refunding (Seaport), UT, 5.125%
due 10/01/2026 (d) 5,585
AAA Aaa 9,940 Orange County, Florida, Tourist Development, Tax Revenue
Bonds, Series B, 6.50% due 10/01/2019 (b) 10,472
A-1 VMIG1++ 6,800 Pinellas County, Florida, Health Facilities Authority,
Revenue Refunding Bonds (Pooled Hospital Loan Program),
DATES, 4.05% due 12/01/2015 (a) 6,800
</TABLE>
F-19
<PAGE> 95
MuniYield Insured Fund, Inc. April 30,1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Georgia--2.8% AAA Aaa $ 10,000 Georgia Municipal Electric Authority, Power Revenue
Bonds, Series EE, 6.40% due 1/01/2023 (b) $ 10,311
AAA Aaa 1,200 Medical Center Hospital Authority, Georgia, Anticipation
Certificates (Columbus Regional Healthcare System),
5.50% due 8/01/2015 (d) 1,135
Metropolitan Atlanta Rapid Transportation Authority,
Georgia, Sales Tax Revenue Bonds:
AAA Aaa 6,500 Second Indenture, Series A, 6.90% due 7/01/2020 (d) 7,076
AAA Aaa 8,955 Series O, 6.55% due 7/01/2020 (c) 9,566
Hawaii--1.8% AAA Aaa 17,145 Hawaii State Airports Systems Revenue Bonds, AMT, Second
Series, 6.75% due 7/01/2021 (d) 17,934
Illinois--6.5% AAA Aaa 7,000 Chicago, Illinois (Central Public Library), Series B, 6.85%
due 7/01/2002 (b)(h) 7,845
AAA Aaa 9,160 Chicago, Illinois, Midway Airport Revenue Bonds, AMT, Series A,
6.25% due 1/01/2024 (d) 9,179
AAA Aaa 5,000 Chicago, Illinois (Project Series), UT, 5.50% due 1/01/2024 (c) 4,613
AAA Aaa 12,000 Chicago, Illinois, Public Building Commission, Building
Revenue Bonds, Series A, 6.50% due 1/01/2018 (d)(g) 12,498
AAA Aaa 15,000 Cook County, Illinois, GO, UT, Series A, 6.60% due
11/15/2022 (d) 15,655
Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 6,000 Refunding (Carle Foundation), Series A, 6.75% due
1/01/2010 (c) 6,309
AAA Aaa 8,545 (Rockford Memorial Hospital), Series B, 6.75% due
8/15/2018 (b) 8,933
Indiana--0.7% AAA Aaa 5,000 Indianapolis, Indiana, Gas Utility Revenue Bonds, Series A,
6.20% due 6/01/2023 (c) 5,085
AAA Aaa 2,000 Monroe County, Indiana, Hospital Authority Revenue Bonds
(Bloomington Hospital Project), 6.70% due 5/01/2012 (d) 2,107
A-1 Aaa 300 Rockport, Indiana, PCR, Refunding, (AEP Generating Co.
Project), VRDN, Series A, 4.10% due 7/01/2025 (a)(b) 300
Kansas--2.2% AAA Aaa 20,250 Burlington, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (d) 22,162
Maryland--0.2% NR* Aa 1,995 Maryland State Community Development Administration,
Department of Housing and Community Development, S/F
Program, AMT, Second Series, 6.55% due 4/01/2026 2,020
Massachusetts Massachusetts Bay Transportation Authority, General
- --5.1% Transportation Systems, Series B (b):
AAA Aaa 7,000 5.375% due 3/01/2020 6,482
AAA Aaa 7,500 5.375% due 3/01/2025 6,899
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds (c):
AAA Aaa 6,400 (Bay State Medical Center), Series D, 5.50% due 7/01/2016 6,000
AAA Aaa 7,130 (New England Medical Center Hospitals), Series F, 6.625%
due 7/01/2025 7,456
AAA Aaa 5,000 Massachusetts State Industrial Finance Agency Revenue Bonds
(Brandeis University), Series C, 6.80% due 10/01/2019 (d) 5,335
Massachusetts State Water Resource Authority (d):
AAA Aaa 5,000 (General), Series A, 5.90% due 8/01/2016 4,878
AAA Aaa 6,000 Series B, 4.75% due 12/01/2021 4,977
AAA Aaa 12,000 Series B, 5% due 12/01/2025 10,407
Michigan--3.3% A1+ VMIG1++ 200 Grand Rapids, Michigan, Water Supply System, Revenue
Refunding Bonds, VRDN, 4.10% due 1/01/2020 (a)(c) 200
AAA Aaa 21,750 Michigan State Strategic Fund, Limited Obligation Revenue
Refunding Bonds (Detroit Edison Company Pollution Project),
6.875% due 12/01/2021 (c) 23,426
Monroe County, Michigan, PCR (Detroit Edison Co. Project), AMT (d):
AAA Aaa 5,000 Series CC, 6.55% due 6/01/2024 5,158
AAA Aaa 5,000 Series I-B, 6.55% due 9/01/2024 5,161
</TABLE>
F-20
<PAGE> 96
MuniYield Insured Fund, Inc. April 30,1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Minnesota--0.7% Minnesota State HFA, S/F Mortgage Revenue Bonds, AMT:
AA+ Aa $ 3,800 Series H, 6.50% due 1/01/2026 $ 3,847
AA+ Aa 3,000 Series L, 6.70% due 7/01/2020 3,051
Missouri--0.4% AAA Aaa 4,000 Kansas City, Missouri, Airport General Revenue Improvement
Bonds, Series B, 6.875% due 9/01/2014 (e) 4,300
Nevada--5.7% AAA Aaa 9,250 Humboldt County, Nevada, PCR, Refunding (Sierra Pacific
Power Company Project), 6.55% due 10/01/2013 (b) 9,888
Las Vegas, Nevada, GO, Refunding (c):
AAA Aaa 4,180 6.60% due 10/01/2010 4,492
AAA Aaa 4,470 6.60% due 10/01/2011 4,785
AAA Aaa 4,770 6.60% due 10/01/2012 5,103
AAA Aaa 15,255 Nevada State GO, Nos. 49 and 50, 5.50% due 11/01/2025 (c) 14,378
AAA Aaa 2,400 Reno, Nevada, Hospital Revenue Bonds (Saint Mary's Regional
Medical Center), Series A, 6.70% due 7/01/2021 (d) 2,532
AAA Aaa 15,000 Washoe County, Nevada, Gas Facilities Revenue Bonds
(Sierra Pacific Power Co.), AMT, 6.65% due 12/01/2017 (b) 15,581
New Hampshire-- AAA Aaa 7,660 New Hampshire Higher Educational and Health Facilities
0.8% Authority Revenue Bonds (Elliot Hospital of Manchester),
6.25% due 10/01/2021 (b) 7,837
New Jersey AAA Aaa 4,695 New Jersey State Housing and Mortgage Finance Agency Revenue
- --1.7% Bonds (Home Buyer), AMT, Series K, 6.375% due 10/01/2026 (d) 4,716
AAA Aaa 12,000 New Jersey State Transportation Trust Fund Authority Refunding
Bonds (Transportation System), Series A, 5.50% due 6/15/2013 (d) 11,713
New Mexico A1+ P1 800 Farmington, New Mexico, PCR (Arizona Public Service Co.),
- --1.1% VRDN, AMT, Series C, 4.25% due 9/01/2024 (a) 800
AAA Aaa 10,275 Farmington, New Mexico, PCR, Refunding (Southern California
Edison Company), Series A, 5.875% due 6/01/2023 (d) 10,063
New York--5.6% BBB Baa1 10,980 Metropolitan Transportation Authority, New York, Service
Contract Refunding Bonds (Transit Facilities), Series 5, 7%
due 7/01/2012 11,604
New York City, New York, GO, UT:
BBB+ Baa1 2,210 Series C, Sub-Series C-1, 7.50% due 8/01/2019 2,421
BBB+ Baa1 1,000 Series D, 7.50% due 2/01/2016 1,090
BBB+ Baa1 12,000 Series D, 7.50% due 2/01/2019 13,083
AAA Aaa 7,000 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, Series B,
5.375% due 6/15/2019 (b) 6,464
BBB+ Baa1 7,595 New York State Dormitory Authority, Revenue Refunding
Bonds (State University Educational Facilities), Series B, 7%
due 5/15/2016 8,054
A A 5,000 New York State Local Government Assistance Corporation,
Refunding, Series B, 5.50% due 4/01/2021 4,624
New York State Urban Development Corporation, Revenue
Refunding Bonds (Correctional Facilities):
BBB Baa1 6,000 5.50% due 1/01/2015 5,440
BBB Baa1 4,000 Series A, 5.50% due 1/01/2016 3,617
North NR* VMIG1++ 5,000 Person County, North Carolina, Industrial Facilities and
Carolina--0.5% Pollution Control Financing Authority, Solid Waste Disposal
Revenue Bonds (Carolina Power and Light Company), DATES, AMT,
4.30% due 11/01/2016 (a) 5,000
North AAA Aaa 2,500 Grand Forks, North Dakota, Health Care Facilities Revenue
Dakota--0.3% Bonds (United Hospital Obligated Group), 6.25% due
12/01/2024 (d) 2,550
Ohio--3.0% AAA Aaa 3,950 Clermont County, Ohio, Sewer Systems Revenue Bonds, 7.10%
due 12/01/2001 (b)(h) 4,470
AAA Aaa 14,735 Cuyahoga County, Ohio, Hospital Revenue and Improvement
Refunding Bonds (University Hospitals Health Systems), Series A,
6.875% due 1/15/1999 (f)(h) 15,925
</TABLE>
F-21
<PAGE> 97
MuniYield Insured Fund, Inc. April 30,1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Ohio NR* VMIG1++ $ 6,700 Cuyahoga County, Ohio, Hospital Revenue Improvement Bonds
(concluded) (University Hospital of Cleveland), VRDN, 4.25% due 1/01/2016 (a) $ 6,700
AAA Aaa 2,500 Ohio State Higher Educational Facilities Commission,
Mortgage Revenue Bonds (University of Dayton Project), 6.60%
due 12/01/2017 (c) 2,676
Oklahoma--0.5% AAA Aaa 4,655 Sapulpa, Oklahoma, Municipal Authority, Utility Revenue
Refunding Bonds, 5.75% due 4/01/2023 (c) 4,506
Oregon--0.0% A1+ VMIG1++ 200 Port Saint Helen's, Oregon, PCR (Portland General Electric
Company Project), VRDN, Series B, 4.10% due 6/01/2010 (a) 200
Pennsylvania AAA Aaa 16,000 Montgomery County, Pennsylvania, IDA, PCR, Refunding
- --1.7% (Philadelphia Electric Company), Series B, 6.70%
due 12/01/2021 (d) 17,044
South South Carolina State Public Service Authority Revenue
Carolina--2.8% Bonds:
AAA Aaa 4,850 Refunding, Series B, 5.875% due 1/01/2023 (c) 4,744
AAA Aaa 9,900 (Santee Cooper), Series D, 6.50% due 7/01/2014 (b) 10,550
AAA Aaa 7,000 Spartanburg County, South Carolina, Hospital Facilities
Revenue Refunding Bonds (Spartanburg General Hospital
System), Series A, 6.625% due 4/15/2022 (e) 7,309
NR* NR* 4,200 Spartanburg County, South Carolina, Solid Waste Disposal
Facilities Revenue Bonds (BMW Project), AMT, 7.55% due
11/01/2024 4,522
Tennessee--1.1% AAA Aaa 3,820 Johnson City, Tennessee, Health and Educational Facilities
Board, Hospital Revenue Refunding and Improvement Bonds
(Johnson City Medical Center), 6.75% due 7/01/2016 (d) 4,070
AAA Aaa 3,000 Metropolitan Government, Nashville and Davidson County, Tennessee,
Water and Sewer Revenue Bonds, RIB, 8.371% due 1/01/2022 (b)(i) 2,970
A+ A1 3,900 Tennessee HDA, Mortgage Finance, AMT, Series A, 6.90%
due 7/01/2025 4,006
Texas--9.2% BBB Baa2 3,700 Alliance Airport Authority, Inc., Texas, Special Facilities
Revenue Bonds (Federal Express Corporation Project), AMT,
6.375% due 4/01/2021 3,636
AAA Aaa 2,800 Austin, Texas, Utility System Revenue Refunding Bonds, 5.50%
due 5/15/2020 (d) 2,640
AAA Aaa 3,200 Bexar, Texas, Metropolitan Water District, Waterworks System
Revenue Refunding Bonds, 6.35% due 5/01/2025 (d) 3,302
Brazos River Authority, Texas, PCR (Texas Utilities Electric
Company Project), AMT (b):
A1 VMIG1++ 13,800 Refunding, VRDN, Series 96A, 4.25% due 3/01/2026 (a) 13,800
AAA Aaa 3,800 Series A, 6.75% due 4/01/2022 3,990
A1+ VMIG1++ 100 Harris County, Texas, Health Facilities Development
Corporation, Special Facilities Revenue Bonds (Texas
Medical Center Project), VRDN, 4.20% due 2/15/2022 (a)(d) 100
AAA Aaa 6,885 Houston, Texas, Airport System Revenue Bonds
(Sub-Lien), AMT, Series A, 6.75% due 7/01/2021 (c) 7,182
AAA Aaa 4,750 Houston, Texas, Hotel Occupancy Tax, Revenue Refunding Bonds
(Senior-Lien), 5.50% due 7/01/2015 (e) 4,512
AAA Aaa 11,795 Matagorda County, Texas, Navigation District No. 1, Revenue
Refunding Bonds (Houston Light and Power), Series A, 6.70%
due 3/01/2027 (b) 12,634
NR* VMIG1++ 1,400 Port of Port Arthur, Texas, Navigation District, PCR, Refunding
(Texaco Inc. Project), VRDN, 4.15% due 10/01/2024 (a) 1,400
AAA Aaa 10,000 San Antonio, Texas, Electric and Gas Revenue Bonds, Series 95,
5.375% due 2/01/2018 (d) 9,326
AAA Aaa 11,000 San Antonio, Texas, Hotel Occupancy Revenue Bonds (Henry B.
Gonzalez Convention Center Project), 5.70% due 8/15/2026 (c) 10,541
AAA Aaa 20,180 Texas State Turnpike Authority, Dallas North Thruway Revenue
Bonds (President George Bush Turnpike), 5.25% due 1/01/2023 (c) 18,326
</TABLE>
F-22
<PAGE> 98
MuniYield Insured Fund, Inc. April 30,1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Utah--2.3% A1+ VMIG1++ $ 2,140 Emery County, Utah, PCR, Refunding (Pacificorp Projects),
VRDN, 4.10% due 11/01/2024 (a)(b) $ 2,140
AA- Aa 5,250 Intermountain Power Agency, Utah, Power Supply Revenue
Refunding Bonds, Series D, 5% due 7/01/2023 4,493
AAA Aaa 10,000 Salt Lake City, Utah, Airport Revenue Bonds, AMT,
Series A, 6.125% due 12/01/2022 (c) 9,980
AAA Aaa 7,000 Timpanagos Special Service District, Utah, Sewer Revenue
Bonds, Series A, 6.10% due 6/01/2019 (b) 6,957
Virginia--1.8% AAA Aaa 5,540 Loudon County, Virginia, COP, 6.90% due 3/01/2019 (e) 5,953
AAA Aaa 5,890 Upper Occoquan Sewer Authority, Virginia, Regional Sewer
Revenue Bonds, Series A, 5% due 7/01/2025 (d) 5,148
AAA Aaa 6,500 Virginia State HDA, Commonwealth Mortgage, AMT, Series A,
Sub-Series A-4, 6.45% due 7/01/2028 (d) 6,590
Washington AAA Aaa 1,200 Douglas County, Washington, Public Utility District No. 001,
- --5.4% Revenue Bonds (Electric Distribution System), 6% due
1/01/2015 (d) 1,206
AAA Aaa 9,495 Port Seattle, Washington, Revenue Bonds (Sub-Lien), Series C,
6.625% due 8/01/2017 (d) 10,059
Seattle, Washington, Metropolitan Seattle Municipality
Sewer Revenue Bonds:
AAA Aaa 10,560 Series U, 6.60% due 1/01/2032 (c) 11,158
AAA Aaa 1,750 Series W, 6.25% due 1/01/2022 (d) 1,791
AAA Aaa 5,000 Snohomish County, Washington, Public Utility District No. 001,
Electric Revenue Bonds (Generation System), AMT, Series B,
5.80% due 1/01/2024 (d) 4,724
AAA Aaa 3,500 Tacoma, Washington, Refuse Utility Revenue Bonds, 7% due
12/01/2019 (b) 3,854
AAA Aaa 2,000 University of Washington Alumni Association, Lease Revenue
Bonds (University of Washington Medical Center--Roosevelt II),
6.25% due 8/15/2012 (e) 2,064
A+ A1 8,300 Washington State Health Care Facilities Authority Revenue
Bonds (Children's Hospital and Medical Center), 6% due
10/01/2022 7,809
AAA Aaa 11,175 Washington State Public Power Supply Systems, Revenue Refunding
Bonds (Nuclear Project No. 1), Series A, 6.25% due 7/01/2017 (d) 11,367
West AAA Aaa 4,425 Harrison County, West Virginia, County Commission Solid Waste
Virginia--0.8% Disposal Revenue Bonds (Monongahela Power), AMT, Series C,
6.75% due 8/01/2024 (b) 4,697
AAA Aaa 2,800 West Virginia School Building Authority, Revenue and Capital
Improvement Bonds, Series B, 6.75% due 7/01/2017 (d) 2,981
Wisconsin--0.8% AA Aa 2,000 Wisconsin, Housing and EDA, Home Ownership Revenue Bonds,
AMT, Series B, 6.75% due 9/01/2025 2,040
Wisconsin State Health and Educational Facilities Authority,
Revenue Refunding Bonds (Wheaton--Franciscan Services) (d):
AAA Aaa 3,955 6.50% due 8/15/2011 4,113
AAA Aaa 2,000 6% due 8/15/2015 1,964
Total Investments (Cost--$941,940)--97.7% 975,884
Other Assets Less Liabilities--2.3% 23,124
--------
Net Assets--100.0% $999,008
========
<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, 1996.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)FSA Insured.
(f)BIG Insured.
(g)Escrowed to maturity.
(h)Prerefunded.
(i)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, 1996.
(j)FNMA Collateralized.
(k)GNMA Collateralized.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE> 99
MuniYield Insured Fund, Inc. April 30,1996
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of April 30, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$941,940,039) (Note 1a) $ 975,884,449
Cash 66,458
Receivables:
Interest $ 17,962,980
Securities sold 6,616,570 24,579,550
--------------
Deferred organization expenses (Note 1e) 8,873
Prepaid expenses and other assets 58,767
--------------
Total assets 1,000,598,097
--------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) 1,036,870
Investment adviser (Note 2) 438,695 1,475,565
--------------
Accrued expenses and other liabilities 114,956
--------------
Total liabilities 1,590,521
--------------
Net Assets: Net assets $ 999,007,576
==============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (12,800 shares
of AMPS* issued and outstanding at $25,000 per share
liquidation preference) $ 320,000,000
Common Stock, par value $.10 per share (45,187,339 shares
issued and outstanding) $ 4,518,734
Paid-in capital in excess of par 630,233,103
Undistributed investment income--net 8,124,513
Undistributed realized capital gains on investments--net 2,186,816
Unrealized appreciation on investments--net 33,944,410
--------------
Total--Equivalent to $15.03 net asset value per Common Stock
(market price--$13.75) 679,007,576
--------------
Total capital $ 999,007,576
==============
<FN>
*Auction Market Preferred Stock.
</TABLE>
See Notes to Financial Statements.
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Insured Fund II, 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.
<TABLE>
<S> <C>
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
CP Commercial Paper
GO General Obligations
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
RAW Revenue Anticipation Warrants
RIB Residual Interest Bonds
S/F Single-Family
SAVRS Select Auction Variable Rate Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Insured Fund II, 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.
<TABLE>
<S> <C>
ACES SM Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
</TABLE>
F-24
<PAGE> 100
MuniYield Insured Fund, Inc. April 30,1996
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Six Months Ended April 30, 1996
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 29,890,556
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 2,550,693
Commission fees (Note 4) 396,667
Transfer agent fees 63,880
Professional fees 48,237
Accounting services (Note 2) 45,036
Directors' fees and expenses 39,361
Printing and shareholder reports 33,904
Custodian fees 28,739
Listing fees 22,773
Pricing fees 12,296
Amortization of organization expenses (Note 1e) 3,128
Other 33,541
--------------
Total expenses 3,278,255
--------------
Investment income--net 26,612,301
--------------
Realized & Realized gain on investments--net 10,345,853
Unrealized Gain Change in unrealized appreciation on investments--net (25,710,160)
(Loss) on --------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 11,247,994
(Notes 1b, ==============
1d & 3):
</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: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 26,612,301 $ 54,442,202
Realized gain (loss) on investments--net 10,345,853 (1,207,134)
Change in unrealized appreciation/depreciation on
investments--net (25,710,160) 76,204,182
-------------- --------------
Net increase in net assets resulting from operations 11,247,994 129,439,250
-------------- --------------
Dividends & Investment income--net:
Distributions to Common Stock (20,873,432) (41,768,871)
Shareholders Preferred Stock (4,828,152) (12,703,005)
(Note 1f): Realized gain on investments--net:
Common Stock (3,872,510) (158,132)
Preferred Stock (1,178,380) (26,101)
In excess of realized gain on investments--net:
Common Stock -- (1,631,693)
Preferred Stock -- (269,320)
-------------- --------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (30,752,474) (56,557,122)
-------------- --------------
Net Assets: Total increase (decrease) in net assets (19,504,480) 72,882,128
Beginning of period 1,018,512,056 945,629,928
-------------- --------------
End of period* $ 999,007,576 $1,018,512,056
============== ==============
<FN>
*Undistributed investment income--net $ 8,124,513 $ 7,213,796
============== ==============
</TABLE>
See Notes to Financial Statements.
F-25
<PAGE> 101
MuniYield Insured Fund, Inc. April 30,1996
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights
For the For the Period
The following per share data and ratios have been derived Six Months March 27,
from information provided in the financial statements. Ended 1992++ to
April 30, For the Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.46 $ 13.85 $ 16.76 $ 14.27 $ 14.18
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .59 1.20 1.20 1.21 .66
Realized and unrealized gain (loss) on
investments--net (.33) 1.66 (2.66) 2.59 .16
-------- -------- -------- -------- --------
Total from investment operations .26 2.86 (1.46) 3.80 .82
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.46) (.92) (.98) (1.00) (.48)
Realized gain on investments--net (.09) (.00)+++ (.26) (.10) --
In excess of realized gains on
investments--net -- (.04) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions to
Common Stock shareholders (.55) (.96) (1.24) (1.10) (.48)
-------- -------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock -- -- -- -- (.01)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.11) (.28) (.17) (.19) (.10)
Realized gain on investments--net (.03) (.00)+++ (.04) (.02) --
In excess of realized gains on
investments--net -- (.01) -- -- --
Capital charge resulting from issuance
of Preferred Stock -- -- -- -- (.14)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.14) (.29) (.21) (.21) (.24)
-------- -------- -------- -------- --------
Net asset value, end of period $ 15.03 $ 15.46 $ 13.85 $ 16.76 $ 14.27
======== ======== ======== ======== ========
Market price per share, end of period $ 13.75 $ 13.625 $ 11.625 $ 15.875 $ 14.875
======== ======== ======== ======== ========
Total Investment Based on market price per share 4.88%+++++ 26.09% (20.23%) 14.51% 2.46%+++++
Return:** ======== ======== ======== ======== ========
Based on net asset value per share 1.03%+++++ 20.09% (9.98%) 26.01% 3.97%+++++
======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .64%* .65% .66% .65% .47%*
Net Assets:*** ======== ======== ======== ======== ========
Expenses .64%* .65% .66% .65% .66%*
======== ======== ======== ======== ========
Investment income--net 5.20%* 5.55% 5.35% 5.35% 5.69%*
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock,
Data: end of period (in thousands) $679,008 $698,512 $625,630 $757,138 $638,150
======== ======== ======== ======== ========
Preferred Stock outstanding, end of
period (in thousands) $320,000 $320,000 $320,000 $320,000 $320,000
======== ======== ======== ======== ========
Portfolio turnover 46.42% 59.71% 45.71% 39.93% 21.89%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,122 $ 3,183 2,955 $ 3,366 $ 2,994
======== ======== ======== ======== ========
Dividends Per Series A--Investment income--net $ 360 $ 1,043 $ 1,184 $ 1,150 $ 688
Share on ======== ======== ======== ======== ========
Preferred Stock Series B--Investment income--net $ 363 $ 1,043 $ 1,090 $ 1,253 $ 656
Outstanding:++++++ ======== ======== ======== ======== ========
Series C--Investment income--net $ 368 $ 1,042 $ 1,278 $ 1,175 $ 659
======== ======== ======== ======== ========
Series D--Investment income--net $ 362 $ 950 $ 1,144 $ 1,426 $ 767
======== ======== ======== ======== ========
Series E--Investment income--net $ 408 $ 933 $ 1,282 $ 1,492 $ 766
======== ======== ======== ======== ========
<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 May 22, 1992.
++++++Dividends per share have been adjusted to reflect a two-for-
one stock split that occurred on December 1, 1994.
+++Amount less than $.01 per share.
+++++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE> 102
MuniYield Insured Fund, Inc. April 30,1996
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Insured 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 MYI.
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 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).
F-27
<PAGE> 103
MuniYield Insured Fund, Inc. April 30,1996
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) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates. Distributions in excess of
realized capital gains are due primarily to differing tax treatments
for future transactions and post-October losses.
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 six months ended April 30, 1996 were $454,588,870 and
$491,596,635, respectively.
Net realized and unrealized gains as of April 30, 1996 were as
follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
<S> <C> <C>
Long-term investments $ 5,146,283 $33,944,410
Short-term investments 3,007 --
Financial futures contracts 5,196,563 --
----------- -----------
Total $10,345,853 $33,944,410
=========== ===========
</TABLE>
As of April 30, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $33,944,410, of which $37,489,277 related to
appreciated securities and $3,544,867 related to depreciated
securities. The aggregate cost of April 30, 1996 for Federal income
tax purposes was $941,940,039.
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, 1996, shares issued and
outstanding remained constant at 45,187,339. At April 30, 1996,
total paid-in capital amounted to $634,751,837.
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, 1996 were as
follows: Series A, 3.65%; Series B, 3.62%; Series C, 3.63%; Series
D, 3.47%; and Series E, 3.85%.
As of April 30, 1996, there were 12,800 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, 1996, MLPF&S, an affiliate of FAM, earned $228,545 as
commissions.
5. Subsequent Event:
On May 10, 1996, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$0.073902 per share, payable on May 30, 1996, to shareholders of
record as of May 21, 1996.
F-28
<PAGE> 104
AUDITED FINANCIAL STATEMENTS FOR INSURED II
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995
F-29
<PAGE> 105
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
MuniYield Insured Fund II, Inc.
We have audited the accompanying statement of assets, liabilities and capital of
MuniYield Insured Fund II, Inc., including the schedule of investments, as of
October 31, 1995, 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 periods 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, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
MuniYield Insured Fund II, Inc. at October 31, 1995, 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 periods, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Princeton, New Jersey
December 1, 1995
F-30
<PAGE> 106
MuniYield Insured Fund II, Inc. October 31,1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--0.7% AAA Aaa $ 2,500 Huntsville, Alabama, Health Care Authority, Health Care
Facilities Revenue Bonds, Series B, 6.625% due 6/01/2023 (d) $ 2,678
Alaska--1.3% AAA Aaa 4,875 Alaska State Housing Finance Corporation, Series A, 5.875%
due 12/01/2024 (d) 4,772
Arizona--1.0% A1+ P1 2,100 Maricopa County, Arizona, PCR, Refunding (Arizona Public
Service Co.), VRDN, Series C, 4% due 5/01/2029 (a) 2,100
NR* NR* 1,500 Mohave County, Arizona, IDA, IDR (North Star Steel Co.
Project), AMT, 6.70% due 3/01/2020 1,604
California AAA Aaa 3,000 Anaheim, California, Public Financing Authority Revenue
- --14.8% Bonds (Electric Utility-San Juan 4), 2nd Series, 5.75% due
10/01/2022 (c) 2,947
AAA Aaa 1,500 California HFA, Home Mortgage Revenue Bonds, Series F, 6%
due 8/01/2017 (d) 1,493
AAA Aaa 5,000 California State Public Works Board, Lease Revenue Bonds
(Various Universities of California Projects), Series A,
6.40% due 12/01/2016 (b) 5,285
California State, RAW, Series C:
SP-1 MIG1++ 500 5.75% due 4/25/1996 505
AAA Aaa 3,550 5.75% due 4/25/1996 (c) 3,579
AAA Aaa 3,000 California State Various Purpose Bonds, 5.90% due
4/01/2023 (c) 3,004
AAA Aaa 1,575 Cerritos, California, Public Financing Authority Revenue
Bonds (Los Coyotes Redevelopment Project Loan), Series A,
5.75% due 11/01/2022 (b) 1,558
AAA Aaa 2,390 Fresno, California, Health Facilities, Revenue Refunding
Bonds (Holy Cross Health), Series A, 5.625% due
12/01/2018 (d) 2,325
AAA Aaa 3,330 Los Angeles, California, Harbor Department Revenue Bonds,
AMT, Series B, 6.625% due 8/01/2019 (b) 3,549
AAA Aaa 5,000 Los Angeles County, California, COP (Correctional Facilities
Project), 6.50% due 9/01/2013 (d) 5,255
AAA Aaa 5,000 Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Refunding Bonds, Proposition A,
Series A, 5.625% due 7/01/2018 (d) 4,927
AAA Aaa 3,000 Sacramento, California, Municipal Utility District, Electric
Revenue Bonds, Series I, 6% due 1/01/2024 (d) 3,029
</TABLE>
F-31
<PAGE> 107
MuniYield Insured Fund II, Inc. October 31,1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
California AAA Aaa $ 2,500 San Francisco, California, City and County Airport
(concluded) Commission, Revenue Bonds (International Airport), UT,
Second Series, Issue 8-B, 6.10% due 5/01/2025 (c) $ 2,545
AAA Aaa 5,000 San Francisco, California, City and County, COP (San Francisco
Courthouse Project), 5.875% due 4/01/2021 (e) 5,002
AAA Aaa 2,000 San Francisco, California, City and County Sewer Revenue
Refunding Bonds, 5.375% due 10/01/2022 (c) 1,911
AAA Aaa 2,000 Santa Clara County, California, Financing Authority, Lease
Revenue Bonds (VMC Facility Replacement Project), Series A,
6.75% due 11/15/2020 (b) 2,180
AAA Aaa 3,295 Santa Rosa, California, Wastewater Revenue Refunding Bonds,
Series B, 6.125% due 9/01/2017 (c) 3,393
AAA Aaa 2,500 Southern California Public Power Authority, Power Project
Revenue Bonds (San Juan Unit 3), Series A, 5% due 1/01/2020 (d) 2,257
Colorado--2.9% A-1 Aa3 200 Colorado HFA, M/F Revenue Bonds (Central Park Coven &
Greenwood), VRDN, 4% due 5/01/1997 (a) 200
AA Aa 7,500 Colorado Springs, Colorado, Utilities Revenue Bonds, Series A,
6.10% due 11/15/2024 7,692
AAA Aaa 2,500 Garfield Pitkin and Eagle Counties, Colorado, School
District No. 1, UT, 6.60% due 12/15/2014 (d) 2,720
Connecticut A-1 VMIG1++ 300 Connecticut State Economic Recovery Notes, VRDN, Series B,
- --3.4% 3.90% due 6/01/1996 (a) 300
AA- A1 1,035 Connecticut State Health and Educational Facilities Authority
Revenue Bonds (Nursing Home Program-AHF/Windsor Project),
7.125% due 11/01/2024 1,165
AAA Aaa 8,000 Connecticut State HFA, Revenue Bonds (Housing Mortgage
Finance Program), Series B, 6.75% due 11/15/2023 (d) 8,374
A1+ VMIG1++ 100 Connecticut State Special Assessment Unemployment
Compensation, Advanced Fund Revenue Bonds (Connecticut
Unemployment), VRDN, Series B, 3.95% due 11/01/2001(a) 100
AAA Aaa 2,760 Connecticut State Special Tax Obligation Revenue Bonds
(Transportation Infrastructure), Series A, 5.60% due
6/01/2015 (c) 2,753
District of A1+ VMIG1++ 200 District of Columbia, General Fund Recovery Bonds, VRDN, UT,
Columbia--0.1% Series B, 4.30% due 6/01/2003 (a) 200
Florida--1.6% AAA Aaa 6,000 Florida State Department of Transportation (Right of Way),
5.875% due 7/01/2024 (d) 6,059
Georgia--3.9% AAA Aaa 4,700 Albany, Georgia, Sewer System Revenue Bonds, 6.70% due
7/01/2022 (d) 5,112
AAA Aaa 2,000 Chatam County, Georgia, School District Revenue Bonds,
UT, 6.75% due 8/01/2018 (d) 2,209
AAA Aaa 2,590 Marietta, Georgia, Development Authority, Revenue Refunding
Bonds (First Mortgage-Life College), Series A, 6.25% due
9/01/2025 (e) 2,675
A+ A3 2,000 Monroe County, Georgia, Development Authority, PCR,
Refunding (Oglethorpe Power Scherer), Series A, 6.80%
due 1/01/2012 2,242
AAA Aaa 2,000 Municipal Electric Authority, Georgia, Project One,
Sub-Series A, 6.50% due 1/01/2026 (b) 2,127
Hawaii--1.7% AAA Aaa 6,000 Hawaii State Airport System Revenue Bonds, AMT, Second
Series, 7% due 7/01/2018 (d) 6,499
</TABLE>
F-32
<PAGE> 108
MuniYield Insured Fund II, Inc. October 31,1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Illinois--10.5% AAA Aaa $ 3,870 Chicago, Illinois, O'Hare International Airport, Special
Facilities Revenue Bonds (International Terminal), AMT, 6.75%
due 1/01/2018 (d) $ 4,080
Chicago, Illinois, Wastewater Transmission Revenue Bonds:
AAA Aaa 10,375 6.35% due 1/01/2022 (c) 10,768
AAA Aaa 6,000 6.375% due 1/01/2024 (d) 6,270
Illinois Health Facilities Authority Revenue Bonds:
A1+ VMIG1++ 200 (Northwest Community Hospital), VRDN, 4% due 7/01/2025 (a) 200
AAA Aaa 3,000 (Servantcor Project), Series A, 6.375% due 8/15/2021 (e) 3,105
AAA Aaa 9,200 Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue Bonds (McCormick Expansion
Project), Series A, 6.50% due 6/15/2027 (b) 9,760
AAA Aaa 4,000 Regional Transportation Authority, Illinois, Series A, 7.20%
due 11/01/2020 (b) 4,800
Indiana--1.6% AAA Aaa 2,400 Indiana State Vocational Technical College, Building Facilities
Refunding Bonds (Student Fee), Series D, 6.50% due 7/01/2014 (b) 2,565
A+ NR* 3,000 Indianapolis, Indiana, Local Public Improvement Bond Bank,
Refunding Bonds, Series D, 6.75% due 2/01/2020 3,202
Iowa--1.2% AAA Aaa 4,110 Iowa Financing Authority, S/F Mortgage Revenue Refunding Bonds,
Series F, 6.35% due 7/01/2009 (b) 4,423
Kansas--1.3% AAA Aaa 5,000 Kansas State Turnpike Authority, Revenue Refunding Bonds,
5.25% due 9/01/2017 (b) 4,830
Maryland--0.6% NR* Aa 2,085 Maryland State Community Development Administration, M/F
Housing Revenue Bonds (Department of Housing and Community
Development), Series C, 6.65% due 5/15/2025 2,163
Massachusetts A+ Aaa 3,000 Massachusetts Bay Transportation Authority, Massachusetts
- --5.0% General Transportation, Series B, 5.375% due 3/01/2020 (b) 2,895
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
AAA Aaa 5,000 (Massachusetts General Hospital), Series F, 6.25% due
7/01/2020 (b) 5,135
AAA Aaa 10,000 (Northeastern University), Series E, 6.55% due 10/01/2022 (d) 10,717
Michigan--2.2% AAA Aaa 2,750 Caledonia, Michigan, Community Schools, Revenue
Refunding Bonds, UT, 6.625% due 5/01/2014 (b) 2,961
BBB Baa1 1,750 Michigan State, Hospital Financing Authority, Revenue
Refunding Bonds (Pontiac Osteopathic), Series A, 6% due
2/01/2024 1,555
AAA Aaa 3,500 Monroe County, Michigan, PCR (Detroit Edison Company),
AMT, Series I-B, 6.55% due 9/01/2024 (d) 3,686
Minnesota--1.3% A- A 4,500 Minneapolis and St. Paul, Minnesota, Housing and Redevelopment
Authority, Health Care System Revenue Bonds (Group Health Plan
Incorporated Project), 6.90% due 12/01/2022 4,793
Mississippi AAA Aaa 3,930 Mississippi Hospital Equipment and Facilities Authority,
- --1.2% Revenue Refunding Bonds (Baptist Medical Center), 6.50%
due 5/01/2011 (d) 4,298
Missouri--0.9% AAA Aaa 3,000 Kansas City, Missouri, Airport General Revenue Improvement
Bonds, Series B, 6.875% due 9/01/2014 (e) 3,295
Nevada--2.9% AAA Aaa 5,000 Washoe County, Nevada, Gas Facility Revenue Bonds (Sierra
Pacific Power), AMT, 6.55% due 9/01/2020 (d) 5,298
AAA Aaa 5,000 Washoe County, Nevada, Water Facility Revenue Bonds
(Sierra Pacific Power), AMT, 6.65% due 6/01/2017 (d) 5,368
</TABLE>
F-33
<PAGE> 109
MuniYield Insured Fund II, Inc. October 31,1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New Jersey AAA Aaa $ 4,500 New Jersey State Housing and Mortgage Finance Agency
- --2.0% Revenue Bonds (Home Buyer), AMT, Series K, 6.375% due
10/01/2026 (d) $ 4,581
AAA Aaa 3,000 New Jersey State Transportation Trust Fund Authority,
Refunding Bonds (Transportation System), Series A, 5.25%
due 6/15/2014 (d) 2,903
New Mexico AAA Aaa 5,750 Gallup, New Mexico, PCR, Refunding (Plains Electric
- --2.2% Generation), 6.65% due 8/15/2017 (d) 6,203
AAA Aaa 2,250 Las Cruces, New Mexico, Revenue Bonds, AMT, 5.50%
due 12/01/2015 (d) 2,150
New York--3.0% BBB+ Baa1 3,000 New York City, New York, GO, Series D, 6% due 2/15/2015 2,956
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds:
AAA Aaa 2,000 Series B, 5.375% due 6/15/2019 (b) 1,926
AAA VMIG1++ 500 VRDN, Series G, 3.90% due 6/15/2024 (a)(c) 500
SP1+ MIG1++ 1,000 New York City, New York, RAN, CP, Series A, 4.50% due
4/11/1996 1,003
A1+ NR* 200 New York State Energy Research and Development Authority,
PCR (Niagara Power Corporation Project), VRDN, AMT,
Series B, 3.95% due 7/01/2027 (a) 200
BBB Baa1 4,145 New York State Urban Development Corporation Revenue Bonds
(State Facilities), 7.50% due 4/01/2020 4,621
Ohio--0.8% AAA Aaa 2,500 North Canton, Ohio, City School District Improvement Bonds,
UT, 6.70% due 12/01/2019 (b) 2,800
Oregon--0.5% AA- Aa 2,000 Oregon State Veterans Welfare, Series 75, 5.875% due
10/01/2018 1,997
Pennsylvania NR* Aa2 4,000 Pennsylvania, HFA, RIB, AMT, 8.111% due 4/01/2025 3,955
- --3.2% AAA Aaa 2,670 Philadelphia, Pennsylvania, Water and Wastewater Revenue
Bonds, 5.60% due 8/01/2018 (d) 2,639
AAA Aaa 5,425 Pittsburgh, Pennsylvania, Water and Sewer Authority,
Water and Sewer Systems Revenue Bonds, Series B, 5.75%
due 9/01/2025 (f) 5,364
South AAA Aaa 10,000 Piedmont, South Carolina, Municipal Power Agency, Electric
Carolina--3.4% Revenue Refunding Bonds, 6.30% due 1/01/2022 (d) 10,336
AAA Aaa 2,000 South Carolina State Public Service Authority Revenue Bonds
(Santee Cooper), Series D, 6.50% due 7/01/2014 (b) 2,141
Tennessee--1.4% Metropolitan Government, Nashville and Davidson County,
Tennessee, Water and Sewer Revenue Bonds (b):
AAA Aaa 2,000 RIB, 8.054% due 1/01/2022 (g) 2,058
AAA Aaa 2,000 SAVRS, 4.04% due 1/01/2022 (a) 2,000
A+ A1 1,000 Tennessee, HDA, Mortgage Finance, AMT, Series A, 6.90% due
7/01/2025 1,039
Texas--13.5% AAA Aaa 2,000 Austin, Texas, Airport System Revenue Bonds (Prior Lien),
AMT, Series A, 6.125% due 11/15/2025 (d) 2,023
AAA Aaa 11,500 Brazos River Authority, Texas, PCR, Refunding (Collateral--
Texas Utilities Electric Company Project), AMT, 6.50% due
12/01/2027 (b) 12,212
Brazos River Authority, Texas, PCR (Texas Utilities Electric
Co.), VRDN, AMT (a):
A1+ VMIG1++ 2,400 Refunding, Series C, 4.05% due 6/01/2030 2,400
NR* Ba2 2,200 Series A, 4.05% due 4/01/2030 2,200
AAA Aaa 7,000 Brazos River Authority, Texas, Revenue Refunding Bonds
(Houston Light & Power), Series A, 6.70% due 3/01/2017 (b) 7,645
AAA Aaa 4,500 Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds (Hermann Hospital
Project), 6.375% due 10/01/2024 (d) 4,695
</TABLE>
F-34
<PAGE> 110
MuniYield Insured Fund II, Inc. October 31,1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Texas Houston, Texas, Water and Sewer System Revenue Bonds,
(concluded) Junior Lien, Series A (d):
AAA Aaa $ 5,565 6.375% due 12/01/2022 $ 5,820
AAA Aaa 3,200 Refunding, 6.20% due 12/01/2020 3,314
AAA Aaa 1,500 Sabine River Authority, Texas, PCR, Refunding (Texas
Utilities Electric Company Project), 6.55% due 10/01/2022 (c) 1,597
San Antonio, Texas, Electric and Gas Revenue Bonds,
Series 95 (d):
AAA Aaa 3,000 5.375% due 2/01/2017 2,898
AAA Aaa 1,500 5.375% due 2/01/2018 1,448
NR* VMIG1++ 3,900 Southwest Texas, Higher Education Authority Incorporated,
Revenue Refunding Bonds (Southern Methodist University),
VRDN, 3.90% due 7/01/2015 (a) 3,900
Virginia--1.7% Virginia State, HDA, Commonwealth Mortgage:
AAA Aaa 2,500 AMT, Series A, Sub-Series A-4, 6.45% due 7/01/2028 (d) 2,550
AA+ Aa1 3,500 Series J, Sub-Series J-2, 6.75% due 7/01/2017 3,647
Washington--8.6% Seattle, Washington, Municipal Light and Power Revenue
Bonds, Series A (d):
AAA Aaa 1,185 5.625% due 9/01/2017 1,173
AAA Aaa 1,480 5.625% due 9/01/2018 1,464
Seattle, Washington, Municipality Metropolitan, Sewer
Revenue Bonds:
AAA Aaa 1,500 Refunding, Series X, 5.50% due 1/01/2016 (c) 1,468
AAA Aaa 1,465 Series W, 6.25% due 1/01/2021 (d) 1,507
AAA Aaa 11,000 Spokane County, Washington, Lease Revenue Refunding
Bonds (Multi-Purpose Arena Project), AMT, Series A, 6.60%
due 1/01/2014 (b) 11,631
AAA Aaa 2,500 Tacoma, Washington, Refuse Utility Revenue Bonds,
7% due 12/01/2019 (b) 2,792
AAA Aaa 2,500 Washington State, Health Care Facilities Authority Revenue
Bonds (Virginia Mason Obligation Group, Seattle), 6.30%
due 2/15/2017 (d) 2,563
Washington State Public Power Supply Systems, Revenue
Refunding Bonds (d):
AAA Aaa 4,000 (Nuclear Project No. 1), Series A, 6.25% due 7/01/2017 4,110
AAA Aaa 1,500 (Nuclear Project No. 3), Series C, 7.50% due 7/01/2008 1,792
AA Aa 3,600 Washington State, UT, Series 93-A, 5.75% due 10/01/2017 3,564
Wisconsin AAA Aaa 4,500 Wisconsin State Health and Educational Facilities Authority
- --1.1% Revenue Bonds (Waukesha Memorial Hospital), Series A, 5.25%
due 8/15/2019 (b) 4,139
Total Investments (Cost--$356,835)--101.5% 376,416
Liabilities in Excess of Other Assets--(1.5%) (5,726)
--------
Net Assets--100.0% $370,690
========
<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, 1995.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)CGIC Insured.
(f)FSA Insured.
(g)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, 1995.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Ernst & Young LLP.
</TABLE>
See Notes to Financial Statements.
F-35
<PAGE> 111
MuniYield Insured Fund II, Inc. October 31,1995
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of October 31, 1995
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$356,835,346)
(Note 1a) $ 376,415,510
Cash 31,687
Receivables:
Securities sold $ 6,785,789
Interest 6,356,052 13,141,841
-------------
Deferred organization expenses (Note 1e) 14,956
Prepaid expenses and other assets 20,204
-------------
Total assets 389,624,198
-------------
Liabilities: Payables:
Securities purchased 18,392,702
Dividends to shareholders (Note 1f) 330,156
Investment adviser (Note 2) 161,755 18,884,613
-------------
Accrued expenses and other liabilities 49,833
-------------
Total liabilities 18,934,446
-------------
Net Assets: Net assets $ 370,689,752
=============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 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 (16,420,827 shares
issued and outstanding) $ 1,642,083
Paid-in capital in excess of par 228,565,325
Undistributed investment income--net 2,403,790
Accumulated realized capital losses on investments--net (822,378)
Accumulated distributions in excess of realized capital
gains--net (679,232)
Unrealized appreciation on investments--net 19,580,164
-------------
Total--Equivalent to $15.27 net asset value per share of
Common Stock (market price--$13.125) 250,689,752
-------------
Total capital $ 370,689,752
=============
<FN>
*Auction Market Preferred Stock.
</TABLE>
See Notes to Financial Statements.
F-36
<PAGE> 112
MuniYield Insured Fund II, Inc. October 31,1995
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
October 31, 1995
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 21,936,133
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 1,783,002
Commission fees (Note 4) 338,387
Professional fees 78,292
Transfer agent fees 69,994
Accounting services (Note 2) 54,216
Printing and shareholder reports 26,741
Listing fees 24,991
Directors' fees and expenses 22,606
Custodian fees 20,468
Pricing fees 12,644
Amortization of organization expenses (Note 1e) 7,478
Other 16,093
-------------
Total expenses 2,454,912
-------------
Investment income--net 19,481,221
-------------
Realized & Realized loss on investments--net (816,424)
Unrealized Gain Change in unrealized appreciation/depreciation on
(Loss) on investments--net 31,718,726
Investments--Net -------------
(Notes 1b, Net Increase in Net Assets Resulting from Operations $ 50,383,523
1d & 3): =============
</TABLE>
See Notes to Financial Statements.
F-37
<PAGE> 113
MuniYield Insured Fund II, Inc. October 31,1995
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <C> <C> <C>
Operations: Investment income--net $ 19,481,221 $ 19,372,697
Realized gain (loss) on investments--net (816,424) 686,231
Change in unrealized appreciation/depreciation on
investments--net 31,718,726 (48,661,875)
------------- -------------
Net increase (decrease) in net assets resulting from operations 50,383,523 (28,602,947)
------------- -------------
Dividends & Investment income--net:
Distributions to Common Stock (14,703,701) (15,824,435)
Shareholders Preferred Stock (4,452,300) (2,951,808)
(Note 1f): Realized gain on investments--net:
Common Stock (581,683) (4,174,364)
Preferred Stock (104,543) (777,156)
In excess of realized gain on investments--net:
Common Stock (575,755) --
Preferred Stock (103,477) --
------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (20,521,459) (23,727,763)
------------- -------------
Capital Stock Value of shares issued to Common Stock Shareholders in
Transactions reinvestment of dividends and distributions -- 491,846
(Notes 1e & 4): Offering costs resulting from the issuance of Preferred Stock -- 27,598
------------- -------------
Net increase in net assets derived from capital stock
transactions -- 519,444
------------- -------------
Net Assets: Total increase (decrease) in net assets 29,862,064 (51,811,266)
Beginning of year 340,827,688 392,638,954
------------- -------------
End of year* $ 370,689,752 $ 340,827,688
============= =============
<FN>
*Undistributed investment income--net (Note 1g) $ 2,403,790 $ 2,072,616
============= =============
</TABLE>
See Notes to Financial Statements.
F-38
<PAGE> 114
MuniYield Insured Fund II, Inc. October 31,1995
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights
For the
Period
The following per share data and ratios have been derived Oct. 30,
from information provided in the financial statements. For the Year Ended 1992++ to
October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.45 $ 16.63 $ 14.15 $ 14.18
Operating -------- -------- -------- --------
Performance: Investment income--net 1.19 1.18 1.15 --
Realized and unrealized gain (loss) on investments
--net 1.88 (2.92) 2.53 --
-------- -------- -------- --------
Total from investment operations 3.07 (1.74) 3.68 --
-------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.90) (.96) (.88) --
Realized gain on investments--net (.04) (.25) -- --
In excess of realized gain on investments--net (.03) -- -- --
-------- -------- -------- --------
Total dividends and distributions to Common Stock
shareholders (.97) (1.21) (.88) --
-------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock -- -- -- (.03)
-------- -------- -------- --------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.27) (.18) (.18) --
Realized gain on investments--net (.01) (.05) -- --
In excess of realized gain on investments--net --+++ -- -- --
Capital charge resulting from issuance of
Preferred Stock -- -- (.14) --
-------- -------- -------- --------
Total effect of Preferred Stock activity (.28) (.23) (.32) --
-------- -------- -------- --------
Net asset value, end of period $ 15.27 $ 13.45 $ 16.63 $ 14.15
======== ======== ======== ========
Market price per share, end of period $ 13.125 $ 11.375 $ 15.875 $ 15.00
======== ======== ======== ========
Total Investment Based on market price per share 24.33% (21.92%) 11.95% .00%+++++
Return:* ======== ======== ======== ========
Based on net asset value per share 22.33% (11.87%) 24.32% (.21%)+++++
======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .69% .69% .54% --
Net Assets:** ======== ======== ======== ========
Expenses .69% .69% .65% --
======== ======== ======== ========
Investment income--net 5.47% 5.24% 5.25% --
======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end of period
Data: (in thousands) $250,690 $220,828 $272,639 $230,667
======== ======== ======== ========
Preferred Stock outstanding, end of period
(in thousands) $120,000 $120,000 $120,000 --
======== ======== ======== ========
Portfolio turnover 64.18% 47.85% 38.69% --
======== ======== ======== ========
Dividends Per Series A--Investment income--net $ 953 $ 590 $ 592 --
Share on Series B--Investment income--net 902 640 640 --
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.
++Commencement of Operations.
++++The Fund's Preferred Stock was issued on November 30, 1992.
++++++Dividends per share have been adjusted to reflect a two-for-
one stock split.
+++Amount less than $.01 per share.
+++++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
F-39
<PAGE> 115
MuniYield Insured Fund II, Inc. October 31,1995
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Insured Fund II, 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 MTI. 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.
Direct expenses relating to the public offering of the Common and
Preferred Stock were charged to capital at the time of issuance.
F-40
<PAGE> 116
MuniYield Insured Fund II, Inc. October 31,1995
NOTES TO FINANCIAL STATEMENTS (concluded)
(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. Distributions in excess of
realized capital gains are due primarily to differing tax treatments
for futures transactions and post-October losses.
(g) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $5,954 have been reclassified from accumulated net realized
capital losses to undistributed net investment income. These
reclassifications have no effect on net assets or net asset value
per share.
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, 1995 were $226,613,801 and
$214,964,056, respectively.
Net realized and unrealized gains (losses) as of October 31, 1995
were as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
(Losses) (Losses)
<S> <C> <C>
Long-term investments $ 2,656,679 $19,582,086
Short-term investments (4,684) (1,922)
Financial futures contracts (3,468,419) --
----------- -----------
Total $ (816,424) $19,580,164
=========== ===========
</TABLE>
As of October 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $19,580,164, of which $19,753,121
related to appreciated securities and $172,957 related to
depreciated securities. The aggregate cost of investments at October
31, 1995 for Federal income tax purposes was $356,835,346.
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 holders of Common Stock.
Common Stock
For the year ended October 31, 1995, shares issued and outstanding
remained constant at 16,420,827. At October 31, 1995, total paid-in
capital amounted to $230,207,408.
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, 1995 were 3.75%
for Series A and 3.75% for Series B.
A two-for-one stock split occurred on December 1, 1994. As a result,
as of October 31, 1995, there were 4,800 AMPS shares authorized,
issued and outstanding with a liquidation preference of $25,000 per
share, plus accumulated and unpaid dividends of $147,634.
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, 1995, MLPF&S, an affiliate of FAM, earned $174,972 as
commissions.
5. Subsequent Event:
On November 13, 1995, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $0.075475 per share, payable on November 29, 1995 to shareholders
of record as of November 24, 1995.
F-41
<PAGE> 117
UNAUDITED FINANCIAL STATEMENTS FOR INSURED II
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1996
F-42
<PAGE> 118
MuniYield Insured Fund II, Inc. April 30, 1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--0.7% AAA Aaa $ 2,500 Huntsville, Alabama, Health Care Authority, Health Care
Facilities Revenue Bonds, Series B, 6.625% due 6/01/2023 (d) $ 2,613
Alaska--2.1% AAA Aaa 8,025 Alaska State Housing Finance Corporation, Refunding,
Series A, 5.875% due 12/01/2024 (d)(h)(i) 7,729
Arizona--0.4% NR* NR* 1,500 Mohave County, Arizona, IDA, IDR (North Star Steel Company
Project), AMT, 6.70% due 3/01/2020 1,580
California AAA Aaa 1,500 California HFA, Home Mortgage Revenue Bonds, Series F,
- --12.2% 6% due 8/01/2017 (d) 1,498
AAA Aaa 2,500 California State Department of Water Resources, Water Systems
Revenue Bonds (Central Valley Project), Series O, 4.75% due
12/01/2029 (d) 2,029
AAA Aaa 5,000 California State Public Works Board, Lease Revenue Bonds
(Various University of California Projects), Series A,
6.40% due 12/01/2016 (b) 5,200
AAA Aaa 3,000 California State, Various Purpose, 5.90% due 4/01/2023 (c) 2,952
AAA Aaa 4,275 Los Angeles, California, Convention and Exhibition Center
Authority, Lease Revenue Refunding Bonds, Series A,
5.375% due 8/15/2018 (d) 3,924
AAA Aaa 3,330 Los Angeles, California, Harbor Department Revenue Bonds,
AMT, Series B, 6.625% due 8/01/2019 (b) 3,468
AAA Aaa 5,000 Los Angeles County, California, COP (Correctional
Facilities Project), 6.50% due 9/01/2013 (d) 5,237
AAA Aaa 3,000 Sacramento, California, Municipal Utility District,
Electric Revenue Bonds, Series I, 6% due 1/01/2024 (d) 3,000
AAA Aaa 3,000 San Francisco, California, Bay Area Rapid Transit
District, Sales Tax Revenue Bonds, 5.50% due 7/01/2020 (c) 2,839
AAA Aaa 2,500 San Francisco, California, City and County Airports
Commission, Revenue Bonds (International Airport), UT,
Second Series, Issue 8-B, 6.10% due 5/01/2025 (c) 2,517
AAA Aaa 5,000 San Francisco, California, City and County, COP (San
Francisco Courthouse Project), 5.875% due 4/01/2021 (f) 4,919
AAA Aaa 2,000 Santa Clara County, California, Financing Authority,
Lease Revenue Bonds (VMC Facility Replacement Project),
Series A, 6.75% due 11/15/2020 (b) 2,166
AAA Aaa 3,295 Santa Rosa, California, Wastewater Revenue Refunding
Bonds, Series B, 6.125% due 9/01/2017 (c) 3,321
AAA Aaa 1,850 Southern California Public Power Authority,
Transmission Project Revenue Refunding Bonds,
Sub-Series A, 5% due 7/01/2022 (d) 1,592
</TABLE>
F-43
<PAGE> 119
MuniYield Insured Fund II, Inc. April 30, 1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Colorado--2.4% AA Aa $ 5,500 Colorado Springs, Colorado, Utilities Revenue Bonds,
Series A, 6.10% due 11/15/2024 $ 5,531
AAA Aaa 3,500 Denver, Colorado, City and County Airport Revenue Bonds,
Series A, 5.50% due 11/15/2025 (d) 3,277
Connecticut AA- A1 1,035 Connecticut State Health and Educational Facilities
- --2.6% Authority Revenue Bonds (Nursing Home Program--
AHF/Windsor Project), 7.125% due 11/01/2024 1,152
AAA Aaa 8,000 Connecticut State, HFA (Housing Mortgage Finance Program),
Series B, 6.75% due 11/15/2023 (d) 8,288
Florida--1.2% A1+ VMIG1++ 4,000 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa
Electric Company--Gannon), VRDN, 4% due 5/15/2018 (a) 4,000
A2 VMIG1++ 400 Volusia County, Florida, Health Facilities Authority
Revenue Bonds (Pooled Hospital Loan Program), ACES,
4.15% due 11/01/2015 (a)(c) 400
Georgia--2.6% AAA Aaa 4,700 Albany, Georgia, Sewer System Revenue Bonds, 6.70% due
7/01/2022 (d) 5,056
A+ A3 2,000 Monroe County, Georgia, Development Authority, PCR,
Refunding (Oglethorpe Power Scherer), Series A, 6.80%
due 1/01/2012 2,150
AAA Aaa 2,000 Municipal Electric Authority of Georgia, Project One,
Sub-Series A, 6.50% due 1/01/2026 (b) 2,093
Hawaii--1.8% AAA Aaa 6,000 Hawaii State Airports System Revenue Bonds, AMT, Second
Series, 7% due 7/01/2018 (d) 6,482
Illinois--12.0% AAA Aaa 3,000 Chicago, Illinois (Central Public Library), Series B,
6.85% due 7/01/2002 (b)(e) 3,362
AAA Aaa 3,870 Chicago, Illinois, O'Hare International Airport, Special
Facilities Revenue Bonds (International Terminal), AMT,
6.75% due 1/01/2018 (d) 4,027
Chicago, Illinois, Wastewater Transmission Revenue Bonds:
AAA Aaa 10,375 6.35% due 1/01/2003 (c)(e) 11,384
AAA Aaa 6,000 6.375% due 1/01/2024 (d) 6,165
Illinois Health Facilities Authority Revenue Bonds:
A1+ VMIG1++ 200 (Northwest Community Hospital), VRDN, 4.45% due
7/01/2025 (a) 200
AAA Aaa 3,000 (Servantcor Project), Series A, 6.375% due 8/15/2021 (f) 3,055
AAA Aaa 9,200 Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue Bonds (McCormick Place Expansion
Project), Series A, 6.50% due 6/15/2027 (b) 9,552
AAA Aaa 4,000 Regional Transportation Authority, Illinois, Series A, 7.20%
due 11/01/2020 (b) 4,658
A1+ VMIG1++ 1,500 Southwestern Illinois Development Authority, Solid Waste
Disposal Revenue Bonds (Shell Oil Co.--Wood River Project),
VRDN, AMT, 4.25% due 4/01/2022 (a) 1,500
Indiana--1.6% AAA Aaa 2,400 Indiana State Vocational Technical College, Building Facilities
Fee, Refunding (Student Fee), Series D, 6.50% due 7/01/2014 (b) 2,511
A+ NR* 3,000 Indianapolis, Indiana, Local Public Improvement Bond Bank,
Refunding, Series O, 6.75% due 2/01/2020 3,180
Iowa--1.2% AAA Aaa 4,020 Iowa Financing Authority, S/F Mortgage Refunding Bonds
Series F, 6.35% due 7/01/2009 (b) 4,201
Kansas--1.3% AAA Aaa 5,000 Kansas State Turnpike Authority, Revenue Refunding Bonds,
5.25% due 9/01/2017 (b) 4,625
</TABLE>
F-44
<PAGE> 120
MuniYield Insured Fund II, Inc. April 30, 1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Maryland--0.6% NR* Aa $ 2,085 Maryland State Community Development Administration, M/F
Housing Revenue Bonds (Department of Housing and Community
Development), Series C, 6.65% due 5/15/2025 $ 2,142
Massachusetts AAA Aaa 3,000 Massachusetts Bay Transportation Authority, Massachusetts
- --6.5% General Transportation, Series B, 5.375% due 3/01/2020 (b) 2,778
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
AAA Aaa 5,000 (Massachusettes General Hospital), Series F, 6.25% due
7/01/2020 (b) 5,073
AAA Aaa 10,000 (Northeastern University), Series E, 6.55% due 10/01/2022 (d) 10,575
Massachusetts State Water Resource Authority, Series B (d):
AAA Aaa 3,000 4.75% due 12/01/2021 2,489
AAA Aaa 3,000 5% due 12/01/2025 2,602
Michigan--2.2% AAA Aaa 2,750 Caledonia, Michigan, Community Schools, Refunding, UT, 6.625%
due 5/01/2014 (b) 2,955
BBB Baa1 1,750 Michigan State, Hospital Finance Authority, Revenue Refunding
Bonds (Pontiac Osteopathic), Series A, 6% due 2/01/2024 1,550
AAA Aaa 3,500 Monroe County, Michigan, PCR (Detroit Edison Company Project),
AMT, Series I-B, 6.55% due 9/01/2024 (d) 3,613
Minnesota--1.3% A- A 4,500 Minneapolis and St. Paul, Minnesota, Housing and
Redevelopment Authority, Health Care System Revenue Bonds
(Group Health Plan Incorporated Project), 6.90% due 10/15/2022 4,779
Mississippi NR* Aa2 2,700 Jackson County, Mississippi, Industrial Sewer Facilities
- --3.5% Revenue Bonds (Chevron USA, Inc. Project), VRDN, 4.25%
due 12/15/2024 (a) 2,700
NR* P1 6,300 Jackson County, Mississippi, Port Facility Revenue Refunding
Bonds (Chevron USA, Inc. Project), VRDN, 4% due 6/01/2023 (a) 6,300
AAA Aaa 3,930 Mississippi Hospital Equipment and Facilities Authority,
Revenue Refunding Bonds (Mississippi Baptist Medical Center),
6.50% due 5/01/2011 (d) 4,158
Missouri--0.9% AAA Aaa 3,000 Kansas City, Missouri, Airport Revenue General Improvement
Bonds, Series B, 6.875% due 9/01/2014 (f) 3,225
Nevada--2.8% AAA Aaa 5,000 Washoe County, Nevada, Gas Facilities Revenue Bonds
(Sierra Pacific Power), AMT, 6.55% due 9/01/2020 (d) 5,135
AAA Aaa 5,000 Washoe County, Nevada, Water Facility Revenue Bonds
(Sierra Pacific Power), AMT, 6.65% due 6/01/2017 (d) 5,196
New Jersey AAA Aaa 4,500 New Jersey State Housing and Mortgage Finance Agency Revenue
- --1.7% Bonds (Home Buyer), AMT, Series K, 6.375% due 10/01/2026 (d) 4,521
AAA Aaa 2,000 New Jersey State Transportation Trust Fund Authority, Refunding
(Transportation System), Series A, 5.50% due 6/15/2013 (d) 1,952
New Mexico AAA Aaa 5,750 Gallup, New Mexico, PCR, Refunding (Plains Electric Generation),
- --1.8% 6.65% due 8/15/2017 (d) 6,118
A1+ P1 500 Hurley, New Mexico, PCR (Kennecott Santa Fe), VRDN, 4.10%
due 12/01/2015 (a) 500
New York--2.0% AAA Aaa 2,000 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, Series B, 5.375%
due 6/15/2019 (b) 1,847
A A 2,000 New York State Local Government Assistance Corporation,
Refunding, Series B, 5.50% due 4/01/2021 1,850
BBB Baa1 4,000 New York State Urban Development Corporation, Revenue
Refunding Bonds (Correctional Facilities), 5.50% due 1/01/2015 3,627
</TABLE>
F-45
<PAGE> 121
MuniYield Insured Fund II, Inc. April 30, 1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
North Carolina A1+ NR* $ 200 Raleigh--Durham, North Carolina, Airport Authority, Special
- --0.1% Facility Revenue Refunding Bonds (American Airlines), VRDN,
Series B, 4.10% due 11/01/2015 (a) $ 200
Ohio--1.2% AAA Aaa 1,450 Clermont County, Ohio, Sewer Systems Revenue Bonds,
7.10% due 12/01/2001 (b)(e) 1,641
AAA Aaa 2,500 North Canton, Ohio, City School District Improvement Bonds,
UT, 6.70% due 12/01/2019 (b) 2,715
Oklahoma--0.5% AAA Aaa 2,000 Sapulpa, Oklahoma, Municipal Authority, Utility Revenue
Refunding Bonds, 5.75% due 4/01/2023 (c) 1,936
Pennsylvania AA Aa 4,000 Pennsylvania, HFA, RIB, AMT, 8.414% due 4/01/2025 (g) 3,745
- --1.0%
South Carolina AAA Aaa 10,000 Piedmont Municipal Power Agency, South Carolina, Electric
- --4.1% Revenue Refunding Bonds, 6.30% due 1/01/2022 (d) 10,274
AAA Aaa 2,715 Richland--Lexington, South Carolina, Airport District Revenue
Bonds (Columbia Metropolitan Airport), AMT, Series A, 5.70%
due 1/01/2026 (b) 2,567
AAA Aaa 2,000 South Carolina State Public Service Authority Revenue Bonds
(Santee Cooper), Series D, 6.50% due 7/01/2014 (b) 2,131
Tennessee--0.8% AAA Aaa 2,000 Metropolitan Government, Nashville and Davidson County,
Tennessee, Water and Sewer Revenue Bonds, RIB, 8.371%
due 1/01/2022 (b)(g) 1,980
A+ A1 1,000 Tennessee, Housing Development Agency, Mortgage Finance,
AMT, Series A, 6.90% due 7/01/2025 1,027
Texas--14.0% BBB Baa2 1,550 Alliance Airport Authority, Inc., Texas, Special Facilities
Revenue Bonds (Federal Express Corporation Project), AMT,
6.375% due 4/01/2021 1,523
AAA Aaa 11,500 Brazos River Authority, Texas, PCR, Refunding (Texas Utilities
Electric Company Project), AMT, 6.50% due 12/01/2027 (b) 11,803
AAA Aaa 7,000 Brazos River Authority, Texas, Revenue Refunding Bonds
(Houston Light & Power), Series A, 6.70% due 3/01/2017 (b) 7,505
AAA Aaa 4,500 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Hermann Hospital Project), 6.375%
due 10/01/2024 (d) 4,647
A1+ Aaa 1,100 Harris County, Texas, Industrial Development Corporation,
PCR (Exxon Project), DATES, 1984--Series A, 4.15% due 3/01/2024 (a) 1,100
AAA Aaa 5,565 Houston, Texas, Water and Sewer System Revenue Bonds,
Junior Lien, Series A, 6.375% due 12/01/2022 (d) 5,752
AAA Aaa 1,500 Sabine River Authority, Texas, PCR, Refunding (Texas Utilities
Electric Company Project), 6.55% due 10/01/2022 (c) 1,592
AAA Aaa 1,500 San Antonio, Texas, Electric and Gas Revenue Bonds,
Series 95, 5.375% due 2/01/2018 (d) 1,399
AAA Aaa 4,000 San Antonio, Texas, Hotel Occupancy Revenue Bonds (Henry B.
Gonzalez Convention Center Project), 5.70% due 8/15/2026 (c) 3,833
AAA Aaa 13,000 Texas State Turnpike Authority, Dallas North Thruway Revenue
Bonds (President George Bush Turnpike), 5.25% due 1/01/2023 (c) 11,806
</TABLE>
F-46
<PAGE> 122
MuniYield Insured Fund II, Inc. April 30, 1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Utah--1.6% A1+ VMIG1++ $ 900 Emery County, Utah, PCR, Refunding (Pacificorp Projects),
VRDN, 4.10% due 11/01/2024 (a)(b) $ 900
AA- Aa 2,425 Intermountain Power Agency, Utah, Power Supply Revenue
Refunding Bonds, Series D, 5% due 7/01/2023 2,076
AAA Aaa 3,000 Timpanogos Special Service District, Utah, Sewer Revenue
Bonds, Series A, 6.10% due 6/01/2019 (b) 2,981
Virginia--1.7% Virginia State HDA, Commonwealth Mortgage:
AAA Aaa 2,500 AMT, Series A, Sub-Series A-4, 6.45% due 7/01/2028 (d) 2,534
AA+ Aa1 3,500 Series J, Sub-Series J-2, 6.75% due 7/01/2017 3,599
Washington AAA Aaa 1,465 Seattle, Washington, Municipality, Metropolitan Seattle, Sewer
- --5.2% Revenue Bonds, Series W, 6.25% due 1/01/2021 (d) 1,499
AAA Aaa 7,875 Spokane, Washington, Lease Revenue Refunding Bonds (Multi-
Purpose Arena Project), AMT, Series A, 6.60% due 1/01/2014 (b) 8,103
AAA Aaa 2,500 Tacoma, Washington, Refuse Utility Revenue Bonds, 7%
due 12/01/2019 (b) 2,753
AAA Aaa 2,500 Washington State, Health Care Facilities Authority Revenue
Bonds (Virginia Mason Obligation Group, Seattle), 6.30%
due 2/15/2017 (d) 2,544
AAA Aaa 4,000 Washington State Public Power Supply Systems, Revenue
Refunding Bonds (Nuclear Project No. 1), Series A, 6.25% due
7/01/2017 (d) 4,069
Wisconsin--2.0% Wisconsin State Health and Educational Facilities Authority
Revenue Bonds:
AAA Aaa 3,500 (Aurora Medical Group Inc. Project), 5.60% due 11/15/2016 (f) 3,308
AAA Aaa 4,500 Refunding (Waukesha Memorial Hospital), Series A, 5.25% due
8/15/2019 (b) 4,048
Total Investments (Cost--$345,880)--97.6% 356,708
Other Assets Less Liabilities--2.4% 8,851
--------
Net Assets--100.0% $365,559
========
<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, 1996.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)Prerefunded.
(f)FSA Insured.
(g)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, 1996.
(h)FNMA Collateralized.
(i)GNMA Collateralized.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
</TABLE>
See Notes to Financial Statements.
F-47
<PAGE> 123
MuniYield Insured Fund II, Inc. April 30, 1996
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of April 30, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$345,880,407) (Note 1a) $356,707,883
Cash 35,089
Receivables:
Interest $ 6,465,987
Securities sold 2,833,518 9,299,505
------------
Deferred organization expenses (Note 1e) 14,956
Prepaid expenses and other assets 21,049
------------
Total assets 366,078,482
------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) 313,913
Investment adviser (Note 2) 160,519 474,432
------------
Accrued expenses and other liabilities 45,493
------------
Total liabilities 519,925
------------
Net Assets: Net assets $365,558,557
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 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 (16,420,827
shares issued and outstanding) $ 1,642,083
Paid-in capital in excess of par 228,565,325
Undistributed investment income--net 2,732,385
Undistributed realized capital gains on investments--net 1,791,288
Unrealized appreciation on investments--net 10,827,476
------------
Total--Equivalent to $14.95 net asset value per share of
Common Stock (market price--$13.375) 245,558,557
------------
Total capital $365,558,557
============
</TABLE>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
F-48
<PAGE> 124
MuniYield Insured Fund II, Inc. April 30, 1996
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Six Months Ended April 30, 1996
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 10,884,460
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 931,800
Commission fees (Note 4) 142,379
Professional fees 40,583
Accounting services (Note 2) 31,862
Transfer agent fees 31,121
Printing and shareholder reports 17,347
Listing fees 12,069
Directors' fees and expenses 11,264
Custodian fees 10,942
Pricing fees 6,211
Amortization of organization expenses (Note 1e) 3,701
Other 14,354
------------
Total expenses 1,253,633
------------
Investment income--net 9,630,827
------------
Realized & Realized gain on investments 3,900,331
Unrealized Gain Change in unrealized appreciation on investments--net (8,752,688)
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 4,778,470
- --Net (Notes 1b, ============
1d & 3):
</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: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 9,630,827 $ 19,481,221
Realized gain (loss) on investments--net 3,900,331 (816,424)
Change in unrealized appreciation/depreciation on investments--net (8,752,688) 31,718,726
------------ ------------
Net increase in net assets resulting from operations 4,778,470 50,383,523
------------ ------------
Dividends & Investment income--net:
Distributions to Common Stock (7,271,208) (14,703,701)
Shareholders Preferred Stock (2,031,024) (4,452,300)
(Note 1f): Realized gain on investments--net:
Common Stock (468,617) (581,683)
Preferred Stock (138,816) (104,543)
In excess of realized gain on investments--net:
Common Stock -- (575,755)
Preferred Stock -- (103,477)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (9,909,665) (20,521,459)
------------ ------------
Net Assets: Total increase (decrease) in net assets (5,131,195) 29,862,064
Beginning of period 370,689,752 340,827,688
------------ ------------
End of period* $365,558,557 $370,689,752
============ ============
<FN>
*Undistributed investment income--net $ 2,732,385 $ 2,403,790
============ ============
</TABLE>
See Notes to Financial Statements.
F-49
<PAGE> 125
MuniYield Insured Fund II, Inc. April 30, 1996
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For the For the Period
The following per share data and ratios have been derived Six Months Oct. 30,
from information provided in the financial statements. Ended 1992++ to
April 30, For the Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.27 $ 13.45 $ 16.63 $ 14.15 $ 14.18
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .58 1.19 1.18 1.15 --
Realized and unrealized gain (loss) on
investments--net (.30) 1.88 (2.92) 2.53 --
-------- -------- -------- -------- --------
Total from investment operations .28 3.07 (1.74) 3.68 --
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.44) (.90) (.96) (.88) --
Realized gain on investments--net (.03) (.04) (.25) -- --
In excess of realized gain on
investments--net -- -- (.03) -- --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders (.47) (.97) (1.21) (.88) --
-------- -------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock -- -- -- -- (.03)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.12) (.27) (.18) (.18) --
Realized gain on investments--net (.01) (.01) (.05) -- --
In excess of realized gain on invest-
ments--net -- (.00)+++ -- -- --
Capital charge resulting from issuance of
Preferred Stock -- -- -- (.14) --
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.13) (.28) (.23) (.32) --
-------- -------- -------- -------- --------
Net asset value, end of period $ 14.95 $ 15.27 $ 13.45 $ 16.63 $ 14.15
======== ======== ======== ======== ========
Market price per share, end of period $ 13.375 $ 13.125 $ 11.375 $ 15.875 $ 15.00
======== ======== ======== ======== ========
Total Based on market price per share 5.41%+++++ 24.33% (21.92%) 11.95% .00%+++++
Investment ======== ======== ======== ======== ========
Return:** Based on net asset value per share 1.27%+++++ 22.33% (11.87%) 24.32% (.21%)+++++
======== ======== ======== ======== ========
Ratios to Expenses, net of reimbursement .67%* .69% .69% .54% --
Average ======== ======== ======== ======== ========
Net Assets:*** Expenses .67%* .69% .69% .65% --
======== ======== ======== ======== ========
Investment income--net 5.15%* 5.47% 5.24% 5.25% --
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end of
Data: period (in thousands) $245,559 $250,690 $220,828 $272,639 $230,667
======== ======== ======== ======== ========
Preferred Stock outstanding, end of period
(in thousands) $120,000 $120,000 $120,000 $120,000 --
======== ======== ======== ======== ========
Portfolio turnover 39.74% 64.18% 47.85% 38.69% --
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,046 $ 3,089 $ 2,840 $ 3,272 --
======== ======== ======== ======== ========
Dividends Series A--Investment income--net $ 406 $ 953 $ 590 $ 592 --
Per Share ======== ======== ======== ======== ========
On Preferred Series B--Investment income--net $ 440 $ 902 $ 640 $ 640 --
Stock ======== ======== ======== ======== ========
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.
++Commencement of Operations.
++++The Fund's Preferred Stock was issued on November 30, 1992.
++++++Dividends per share have been adjusted to reflect a two-for-
one stock split that occurred on December 1, 1994.
+++Amount less than $.01 per share.
+++++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
F-50
<PAGE> 126
MuniYield Insured Fund II, Inc. April 30, 1996
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Insured Fund II, 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 MTI.
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 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.
F-51
<PAGE> 127
MuniYield Insured Fund II, Inc. April 30, 1996
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. Distributions in excess of
realized capital gains are due primarily to differing tax treatments
for futures transactions and post-October losses.
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 six months ended April 30, 1996 were $142,111,759 and
$155,364,418, respectively.
Net realized and unrealized gains (losses) as of April 30, 1996 were
as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains (Losses) Gains
<S> <C> <C>
Long-term investments $1,880,281 $10,827,476
Short-term investments (556) --
Financial futures contracts 2,020,606 --
---------- -----------
Total $3,900,331 $10,827,476
========== ===========
</TABLE>
As of April 30, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $10,827,476, of which $12,437,976 related to
appreciated securities and $1,610,500 related to depreciated
securities. The aggregate cost of investments at April 30, 1996 for
Federal income tax purposes was $345,880,407.
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 holders of Common Stock.
Common Stock
For the six months ended April 30, 1996, shares issued and
outstanding remained constant at 16,420,827. At April 30, 1996,
total paid-in capital amounted to $230,207,408.
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, 1996 were 3.65%
for Series A and 3.75% for Series B.
As of April 30, 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 six months ended
April 30, 1996, MLPF&S, an affiliate of FAM, earned $82,924 as
commissions.
5. Subsequent Event:
On May 10, 1996, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$0.069054 per share, payable on May 30, 1996 to shareholders of
record as of May 21, 1996.
F-52
<PAGE> 128
UNAUDITED FINANCIAL STATEMENTS FOR THE COMBINED FUND
ON A PRO FORMA BASIS AS OF APRIL 30, 1996
F-53
<PAGE> 129
The following unaudited pro forma Combined Schedule of Investments as of
April 30, 1996, represents a combining of the portfolios of each of the Funds as
of that date. No adjustments were required to arrive at the Pro Forma for
Combined Fund values. For additional information about the holdings of each Fund
see the Schedule of Investments for each of the Funds as of April 30, 1996
contained in this Joint Proxy Statement and Prospectus as follows: Insured I
(pages F-18 to F-23) and Insured II (pages F-43 to F-47).
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD
INSURED INSURED II PRO FORMA FOR
COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Alabama -- $ 6,000 Huntsville, Alabama, Health Care
0.5% Authority, Health Care Facilities
Revenue Bonds, Series B, 6.625% due
6/01/2023(d).......................... $ 3,658 $ 2,613 $ 6,271
Alaska -- 26,985 Alaska State Housing Finance
1.9% Corporation, Refunding, Series A,
5.875% due 12/01/2024(d)(k)(l)........ 18,261 7,729 25,990
Arizona -- 200 Arizona Educational Loan Marketing
0.4% Corporation, Educational Loan Revenue
Bonds, VRDN, AMT, Series A, 4.35% due
12/01/2020(a)......................... 200 -- 200
5,000 Mohave County, Arizona, IDA, IDR (North
Star Steel Co. Project), AMT, 6.70%
due 3/01/2020......................... 3,687 1,580 5,267
100 Pinal County, Arizona, IDA, PCR (Magma
Copper/Newmont Mining Corporation),
VRDN, 4.05% due 12/01/2009(a)......... 100 -- 100
Arkansas -- 600 Crosset, Arkansas, PCR (Georgia-Pacific
0.0% Corp. Project), VRDN, 4.20% due
10/01/2007(a)......................... 600 -- 600
California -- 1,500 California HFA, Home Mortgage Revenue
15.1% Bonds, Series F, 6% due
8/01/2017(d).......................... -- 1,498 1,498
1,595 California HFA, Revenue Bonds, AMT,
Series E, 7% due 8/01/2026(d)......... 1,656 -- 1,656
3,850 California HFA, Revenue Bonds, RIB, AMT,
9.237% due 8/01/2023(i)............... 3,889 -- 3,889
9,000 California State Department of Water
Resources, Water Systems Revenue Bonds
(Central Valley Project), Series O,
4.75% due 12/01/2029(d)............... 5,276 2,029 7,305
</TABLE>
F-54
<PAGE> 130
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD
INSURED INSURED II PRO FORMA FOR
COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
$ 10,000 California State, Various Purpose Bonds,
5.90% due 4/01/2023(c)................ $ 6,888 $ 2,952 $ 9,840
California State Public Works Board,
Lease Revenue Bonds:
8,500 (Department of Corrections - Monterey
County Soledad II), Series A, 7% due
11/01/2019............................ 9,252 -- 9,252
2,750 (Various University of California
Projects), 6.375% due 10/01/2019...... 2,835 -- 2,835
8,000 (Various University of California
Projects), Series A, 6.40% due
12/01/2016(b)......................... 3,120 5,200 8,320
4,000 (Various University of California
Projects), Series B, 6.625% due
12/01/2019............................ 4,194 -- 4,194
5,000 Contra Costa, California, Water
District, Water Revenue Bonds, Series
D, 6.375% due 10/01/2022(b)........... 5,179 -- 5,179
3,000 East Bay, California, Municipal Utility
District, Wastewater Treatment
Systems, Revenue Refunding Bonds,
Sub-Series, 5% due 6/01/2026(c)....... 2,599 -- 2,599
15,775 Los Angeles, California, Convention and
Exhibition Center Authority, Lease
Revenue Refunding Bonds, Series A,
5.375% due 8/15/2018(d)............... 10,556 3,924 14,480
Los Angeles, California, Harbor
Department Revenue Bonds, AMT, Series
B(b):
6,330 6.625% due 8/01/2019.................. 3,124 3,468 6,592
8,725 6.625% due 8/01/2025.................. 8,989 -- 8,989
5,000 Los Angeles County, California, COP
(Correctional Facilities Project),
6.50% due 9/01/2013(d)................ -- 5,237 5,237
11,585 Los Angeles County, California,
Metropolitan Transportation Authority,
Sales Tax Revenue Bonds, Second Senior
Series B, Proposition C, 5.25% due
7/01/2023(b).......................... 10,341 -- 10,341
</TABLE>
F-55
<PAGE> 131
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD
INSURED INSURED II PRO FORMA FOR
COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
$ 5,000 Los Angeles County, California,
Transportation Commission, Sales Tax
Revenue Refunding Bonds, Series B,
6.50% due 7/01/2015(c)................ $ 5,277 $ -- $ 5,277
8,210 M-S-R Public Power Agency, California,
Revenue Bonds (San Juan Project),
Series E, 6.75% due 7/01/2011(d)...... 8,782 -- 8,782
2,190 Northern California Transmission Revenue
Bonds (California-Oregon Transmission
Project), Series A, 6.50% due
5/01/2016(d).......................... 2,319 -- 2,319
3,000 Orange County, California, Financing
Authority, Tax Allocation Revenue
Refunding Bonds, Series A, 6.25% due
9/01/2014(d).......................... 3,074 -- 3,074
3,000 Redwood City, California, Public
Financing Authority, Local Agency
Revenue Refunding Bonds, Series A,
6.50% due 7/15/2011(b)................ 3,202 -- 3,202
5,000 Sacramento, California, City Financing
Authority, Lease Revenue Refunding
Bonds, Series A, 5.40% due
11/01/2020(b)......................... 4,684 -- 4,684
Sacramento, California, Municipal
Utility District, Electric Revenue
Bonds:
3,000 Series I, 6% due 1/01/2024(d)......... -- 3,000 3,000
2,250 Series J, 5.50% due 8/15/2021(b)...... 2,127 -- 2,127
9,000 San Francisco, California, Bay Area
Rapid Transit District, Sales Tax
Revenue Bonds, 5.50% due
7/01/2020(c).......................... 5,678 2,839 8,517
San Francisco, California, City and
County Airports Commission Revenue Bonds
(International Airport), Second Series:
6,000 AMT, Issue 6, 6.60% due
5/01/2024(b).......................... 6,190 -- 6,190
2,500 UT, Issue 8-B, 6.10% due
5/01/2025(c).......................... -- 2,517 2,517
13,500 Issue 9-B, 5.25% due 5/01/2020(c)..... 12,349 -- 12,349
</TABLE>
F-56
<PAGE> 132
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD
INSURED INSURED II PRO FORMA FOR
COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
$ 5,000 San Francisco, California, City and
County, COP (San Francisco Courthouse
Project), 5.875% due 4/01/2021(e)..... $ -- $ 4,919 $ 4,919
10,000 San Francisco, California, City and
County Sewer Revenue Bonds, Series A,
5.95% due 10/01/2025(c)............... 9,863 -- 9,863
5,375 San Mateo County, California, Joint
Powers Financing Authority, Lease
Revenue Bonds (San Mateo County Health
Care Center), Series A, 5.75% due
7/15/2022(e).......................... 5,184 -- 5,184
2,000 Santa Clara County, California,
Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement
Project), Series A, 6.75% due
11/15/2020(b)......................... -- 2,166 2,166
Santa Rosa, California, Wastewater
Revenue Refunding Bonds(c):
3,000 Series A, 5.25% due 9/01/2016......... 2,818 -- 2,818
3,295 Series B, 6.125% due 9/01/2017........ -- 3,321 3,321
6,750 Southern California Public Power
Authority, Transmission Project
Revenue Refunding Bonds, Sub-Series A,
5% due 7/01/2022(d)................... 4,216 1,592 5,808
2,500 Stanislaus County, California, COP,
Refunding (Capital Improvement
Program), Series A, 5.25% due
5/01/2018(d).......................... 2,293 -- 2,293
5,000 University of California Revenue Bonds
(Multiple Purpose Projects), Series D,
6.375% due 9/01/2024(d)............... 5,171 -- 5,171
Colorado -- 14,500 Colorado Springs, Colorado, Utilities
2.0% Revenue Bonds, Series A, 6.10% due
11/15/2024............................ 9,051 5,531 14,582
10,500 Denver, Colorado, City and County
Airport Revenue Bonds, Series A, 5.50%
due 11/15/2025(d)..................... 6,555 3,277 9,832
</TABLE>
F-57
<PAGE> 133
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD
INSURED INSURED II PRO FORMA FOR
COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
$ 2,500 Douglas County, Colorado, School
District No. Re-1 (Douglas and Elbert
Counties Improvement Project), Series
A, 6.50% due 12/15/2016(d)............ $ 2,641 $ -- $ 2,641
Connecticut -- 11,500 Connecticut State HFA (Housing Mortgage
1.5% Finance Program), Series B, 6.75% due
11/15/2023(d)......................... 3,626 8,288 11,914
5,000 Connecticut State Health and Educational
Facilities Authority Revenue Bonds
(Nursing Home Program --
AHF/Hartford), 7.125% due
11/01/2024............................ 5,566 -- 5,566
1,035 Connecticut State Health and Educational
Facilities Authority Revenue Bonds
(Nursing Home Program -- AHF/Windsor),
7.125% due 11/01/2024................. -- 1,152 1,152
2,000 Connecticut State, Series A, 5.50% due
5/15/2014............................. 1,946 -- 1,946
Delaware -- 8,490 Delaware State EDA, PCR, Refunding
1.0% (Delmarva Power Project), Series B,
7.15% due 7/01/2018(c)................ 9,382 -- 9,382
3,525 Delaware Transportation Authority,
Transportation System Revenue Bonds,
Senior Series, 7% due 7/01/2013(c).... 3,882 -- 3,882
District of 20,100 Metropolitan Washington, D.C., Virginia
Columbia -- 1.5% Airports Authority, General Airport
Revenue Bonds, AMT, Series A, 6.625%
due 10/01/2019(d)..................... 20,812 -- 20,812
Florida -- 4,000 Dade County, Florida, Aviation Revenue
3.0% Bonds, Series B, 5.60% due
10/01/2026(d)......................... 3,826 -- 3,826
3,300 Dade County, Florida, IDA, Exempt
Facilities Revenue Refunding Bonds
(Florida Power & Light Co.), VRDN,
4.10% due 6/01/2021(a)................ 3,300 -- 3,300
</TABLE>
F-58
<PAGE> 134
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD PRO FORMA FOR
INSURED INSURED II COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6,500 Dade County, Florida, IDA, IDR (Dolphins
Stadium Project), VRDN, Series D,
4.05% due 1/01/2016(a)................ $ 6,500 $ -- $ 6,500
6,250 Dade County, Florida, Refunding
(Seaport), UT, 5.125% due
10/01/2026(d)......................... 5,585 -- 5,585
4,000 Hillsborough County, Florida, IDA, PCR,
Refunding (Tampa Electric Company-
Gannon), VRDN, 4% due 5/15/2018(a).... -- 4,000 4,000
9,940 Orange County, Florida, Tourist
Development Tax Revenue Bonds, Series
B, 6.50% due 10/01/2019(b)............ 10,472 -- 10,472
6,800 Pinellas County, Florida, Health
Facilities Authority, Revenue
Refunding Bonds (Pooled Hospital Loan
Program), DATES, 4.05% due
12/01/2015(a)......................... 6,800 -- 6,800
400 Volusia County, Florida, Health
Facilities Authority Revenue Bonds
(Pooled Hospital Loan Program), ACES,
4.15% due 11/01/2015(a)(c)............ -- 400 400
Georgia -- 4,700 Albany, Georgia, Sewer System Revenue
2.7% Bonds, 6.70% due 7/01/2022(d)......... -- 5,056 5,056
10,000 Georgia Municipal Electric Authority,
Power Revenue Bonds, Series EE, 6.40%
due 1/01/2023(b)...................... 10,311 -- 10,311
1,200 Medical Center Hospital Authority,
Georgia, Anticipation Certificates
(Columbus Regional Healthcare System),
5.50% due 8/01/2015(d)................ 1,135 -- 1,135
Metropolitan Atlanta Rapid
Transportation Authority, Georgia, Sales
Tax Revenue Bonds:
6,500 Second Indenture, Series A, 6.90% due
7/01/2020(d).......................... 7,076 -- 7,076
8,955 Series O, 6.55% due 7/01/2020(c)...... 9,566 -- 9,566
</TABLE>
F-59
<PAGE> 135
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD PRO FORMA FOR
INSURED INSURED II COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2,000 Monroe County, Georgia, Development
Authority, PCR, Refunding (Oglethorpe
Power Scherer), Series A, 6.80% due
1/01/2012............................. $ -- $ 2,150 $ 2,150
2,000 Municipal Electric Authority of Georgia,
Project One, Sub-Series A, 6.50% due
1/01/2026(b).......................... -- 2,093 2,093
Hawaii -- Hawaii State Airport Systems Revenue
1.8% Bonds, AMT, Second Series(d):
6,000 7% due 7/01/2018...................... -- 6,482 6,482
17,145 6.75% due 7/01/2021................... 17,934 -- 17,934
Illinois -- 10,000 Chicago, Illinois (Central Public
8.0% Library), Series B, 6.85% due
7/01/2002(b)(h)....................... 7,845 3,362 11,207
9,160 Chicago, Illinois, Midway Airport
Revenue Bonds, AMT, Series A, 6.25%
due 1/01/2024(d)...................... 9,179 -- 9,179
3,870 Chicago, Illinois, O'Hare International
Airport, Special Facilities Revenue
Bonds (International Terminal), AMT,
6.75% due 1/01/2018(d)................ -- 4,027 4,027
5,000 Chicago, Illinois (Project Series), UT,
5.50% due 1/01/2024(c)................ 4,613 -- 4,613
12,000 Chicago, Illinois, Public Building
Commission, Building Revenue Bonds,
Series A, 6.50% due 1/01/2018(d)(g)... 12,498 -- 12,498
Chicago, Illinois, Wastewater
Transmission Revenue Bonds:
10,375 6.35% due 1/01/2003(c)(h)............. -- 11,384 11,384
6,000 6.375% due 1/01/2024(d)............... -- 6,165 6,165
15,000 Cook County, Illinois, GO, UT, Series A,
6.60% due 11/15/2022(d)............... 15,655 -- 15,655
Illinois Health Facilities Authority
Revenue Bonds:
200 (Northwest Community Hospital), VRDN,
4.45% due 7/01/2025(a)................ -- 200 200
</TABLE>
F-60
<PAGE> 136
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD
INSURED INSURED II PRO FORMA FOR
COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
$ 6,000 Refunding (Carle Foundation), Series
A, 6.75% due 1/01/2010(c)............. $ 6,309 $ -- $ 6,309
8,545 (Rockford Memorial Hospital), Series
B, 6.75% due 8/15/2018(b)............. 8,933 -- 8,933
3,000 (Servantcor Project), Series A, 6.375%
due 8/15/2021(e)...................... -- 3,055 3,055
9,200 Metropolitan Pier and Exposition
Authority, Illinois, Dedicated State
Tax Revenue Bonds (McCormick Place
Expansion Project), Series A, 6.50%
due 6/15/2027(b)...................... -- 9,552 9,552
4,000 Regional Transportation Authority,
Illinois, Series A, 7.20% due
11/01/2020(b)......................... -- 4,658 4,658
1,500 Southwestern Illinois Development
Authority, Solid Waste Disposal
Revenue Bonds (Shell Oil Co. - Wood
River Project), VRDN, AMT, 4.25% due
4/01/2022(a).......................... -- 1,500 1,500
Indiana -- 2,400 Indiana State Vocational Technical
1.0% College, Building Facilities Fee,
Refunding (Student Fee), Series D,
6.50% due 7/01/2014(b)................ -- 2,511 2,511
5,000 Indianapolis, Indiana, Gas Utility
Revenue Bonds, Series A, 6.20% due
6/01/2023(c).......................... 5,085 -- 5,085
3,000 Indianapolis, Indiana, Local Public
Improvement Bond Bank, Refunding,
Series O, 6.75% due 2/01/2020......... -- 3,180 3,180
2,000 Monroe County, Indiana, Hospital
Authority Revenue Bonds (Bloomington
Hospital Project), 6.70% due
5/01/2012(d).......................... 2,107 -- 2,107
300 Rockport, Indiana, PCR, Refunding (AEP
Generating Co. Project), VRDN, Series
A, 4.10% due 7/01/2025(a)(b).......... 300 -- 300
Iowa -- 0.3% 4,020 Iowa Financing Authority, S/F Mortgage
Refunding Bonds, Series F, 6.35% due
7/01/2009(b).......................... -- 4,201 4,201
</TABLE>
F-61
<PAGE> 137
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD PRO FORMA FOR
INSURED INSURED II COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kansas -- 2.0% $ 20,250 Burlington, Kansas, PCR, Refunding
(Kansas Gas and Electric Company
Project), 7% due 6/01/2031(d)......... $ 22,162 $ -- $ 22,162
5,000 Kansas State Turnpike Authority, Revenue
Refunding Bonds, 5.25% due
9/01/2017(b).......................... -- 4,625 4,625
Maryland -- 1,995 Maryland State Community Development
0.3% Administration, Department of Housing
and Community Development, S/F
Program, AMT, Second Series, 6.55% due
4/01/2026............................. 2,020 -- 2,020
2,085 Maryland State Community Development
Administration, M/F Housing Revenue
Bonds (Department of Housing and
Community Development), Series C,
6.65% due 5/15/2025................... -- 2,142 2,142
Massachusetts -- Massachusetts Bay Transportation
5.6% Authority, General Transportation
Systems, Series B(b):
10,000 5.375% due 3/01/2020.................. 6,482 2,778 9,260
7,500 5.375% due 3/01/2025.................. 6,899 -- 6,899
Massachusetts State Health and
Educational Facilities Authority Revenue
Bonds:
6,400 (Bay State Medical Center), Series D,
5.50% due 7/01/2016(c)................ 6,000 -- 6,000
5,000 (Massachusetts General Hospital),
Series F, 6.25% due 7/01/2020(b)...... -- 5,073 5,073
7,130 (New England Medical Center
Hospitals), Series F, 6.625% due
7/01/2025(c).......................... 7,456 -- 7,456
10,000 (Northeastern University), Series E,
6.55% due 10/01/2022(d)............... -- 10,575 10,575
5,000 Massachusetts State Industrial Finance
Agency Revenue Bonds (Brandeis
University), Series C, 6.80% due
10/01/2019(d)......................... 5,335 -- 5,335
</TABLE>
F-62
<PAGE> 138
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD
INSURED INSURED II PRO FORMA FOR
COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Massachusetts State Water Resource
Authority(d):
$ 5,000 (General), Series A, 5.90% due
8/01/2016............................. $ 4,878 $ -- $ 4,878
9,000 Series B, 4.75% due 12/01/2021........ 4,977 2,489 7,466
15,000 Series B, 5% due 12/01/2025........... 10,407 2,602 13,009
Michigan -- 2,750 Caledonia, Michigan, Community Schools,
3.1% Refunding, UT, 6.625% due
5/01/2014(b).......................... -- 2,955 2,955
200 Grand Rapids, Michigan, Water Supply
System Revenue Refunding Bonds, VRDN,
4.10% due 1/01/2020(a)(c)............. 200 -- 200
1,750 Michigan State, Hospital Financing
Authority, Revenue Refunding Bonds
(Pontiac Osteopathic), Series A, 6%
due 2/01/2024......................... -- 1,550 1,550
21,750 Michigan State Strategic Fund, Limited
Obligation Revenue Refunding Bonds
(Detroit Edison Company Pollution
Project), 6.875% due 12/01/2021(c).... 23,426 -- 23,426
Monroe County, Michigan, PCR (Detroit
Edison Co. Project), AMT (d):
5,000 Series CC, 6.55% due 6/01/2024........ 5,158 -- 5,158
8,500 Series I-B, 6.55% due 9/01/2024....... 5,161 3,613 8,774
Minnesota -- 4,500 Minneapolis and St. Paul, Minnesota,
0.8% Housing and Redevelopment Authority,
Health Care System Revenue Bonds
(Group Health Plan Incorporated
Project), 6.90% due 10/15/2022........ -- 4,779 4,779
Minnesota State HFA, S/F Mortgage
Revenue Bonds, AMT:
3,800 Series H, 6.50% due 1/01/2026......... 3,847 -- 3,847
3,000 Series L, 6.70% due 7/01/2020......... 3,051 -- 3,051
</TABLE>
F-63
<PAGE> 139
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD PRO FORMA FOR
INSURED INSURED II COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mississippi -- $ 2,700 Jackson County, Mississippi, Industrial
1.0% Sewer Facilities Revenue Bonds
(Chevron USA, Inc. Project), VRDN,
4.25% due 12/15/2024(a)............... $ -- $ 2,700 $ 2,700
6,300 Jackson County, Mississippi, Port
Facility Revenue Refunding Bonds
(Chevron USA, Inc. Project), VRDN, 4%
due 6/01/2023(a)...................... -- 6,300 6,300
3,930 Mississippi Hospital Equipment and
Facilities Authority, Revenue
Refunding Bonds (Mississippi Baptist
Medical Center), 6.50% due
5/01/2011(d).......................... -- 4,158 4,158
Missouri -- 7,000 Kansas City, Missouri, Airport General
0.5% Revenue Improvement Bonds, Series B,
6.875% due 9/01/2014(e)............... 4,300 3,225 7,525
Nevada -- 9,250 Humboldt County, Nevada, PCR, Refunding
4.9% (Sierra Pacific Power Company
Project), 6.55% due 10/01/2013(b)..... 9,888 -- 9,888
Las Vegas, Nevada, GO, Refunding (c):
4,180 6.60% due 10/01/2010.................. 4,492 -- 4,492
4,470 6.60% due 10/01/2011.................. 4,785 -- 4,785
4,770 6.60% due 10/01/2012.................. 5,103 -- 5,103
15,255 Nevada State GO, Nos. 49 and 50, 5.50%
due 11/01/2025(c)..................... 14,378 -- 14,378
2,400 Reno, Nevada, Hospital Revenue Bonds
(Saint Mary's Regional Medical
Center), Series A, 6.70% due
7/01/2021(d).......................... 2,532 -- 2,532
Washoe County, Nevada, Gas Facilities
Revenue Bonds (Sierra Pacific Power
Co.), AMT:
15,000 6.65% due 12/01/2017(b)............... 15,581 -- 15,581
5,000 6.55% due 9/01/2020(d)................ -- 5,135 5,135
5,000 Washoe County, Nevada, Water Facility
Revenue Bonds (Sierra Pacific Power
Co.), AMT, 6.65% due 6/01/2017(d)..... -- 5,196 5,196
</TABLE>
F-64
<PAGE> 140
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD PRO FORMA FOR
INSURED INSURED II COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
New Hampshire -- $ 7,660 New Hampshire Higher Educational and
0.6% Health Facilities Authority Revenue
Bonds (Elliot Hospital of Manchester),
6.25% due 10/01/2021(b)............... $ 7,837 $ -- $ 7,837
New Jersey -- 9,195 New Jersey State Housing and Mortgage
1.7% Finance Agency Revenue Bonds (Home
Buyer), AMT, Series K, 6.375% due
10/01/2026(d)......................... 4,716 4,521 9,237
14,000 New Jersey State Transportation Trust
Fund Authority Refunding Bonds
(Transportation System), Series A,
5.50% due 6/15/2013(d)................ 11,713 1,952 13,665
New Mexico -- 800 Farmington, New Mexico, PCR (Arizona
1.3% Public Service Co.), VRDN, AMT, Series
C, 4.25% due 9/01/2024(a)............. 800 -- 800
10,275 Farmington, New Mexico, PCR, Refunding
(Southern California Edison Company),
Series A, 5.875% due 6/01/2023(d)..... 10,063 -- 10,063
5,750 Gallup, New Mexico, PCR, Refunding
(Plains Electric Generation), 6.65%
due 8/15/2017(d)...................... -- 6,118 6,118
500 Hurley, New Mexico, PCR (Kennecott Santa
Fe), VRDN, 4.10% due 12/01/2015(a).... -- 500 500
New York -- 10,980 Metropolitan Transportation Authority,
4.7% New York, Service Contract Refunding
Bonds (Transit Facilities), Series 5,
7% due 7/01/2012...................... 11,604 -- 11,604
New York City, New York, GO, UT:
2,210 Series C, Sub-Series C-1, 7.50% due
8/01/2019............................. 2,421 -- 2,421
1,000 Series D, 7.50% due 2/01/2016......... 1,090 -- 1,090
12,000 Series D, 7.50% due 2/01/2019......... 13,083 -- 13,083
9,000 New York City, New York, Municipal Water
Finance Authority, Water and Sewer
System Revenue Bonds, Series B, 5.375%
due 6/15/2019(b)...................... 6,464 1,847 8,311
</TABLE>
F-65
<PAGE> 141
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD
INSURED INSURED II PRO FORMA FOR
COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
$ 7,595 New York State Dormitory Authority
Revenue Refunding Bonds (State
University Educational Facilities),
Series B, 7% due 5/15/2016............ $ 8,054 $ -- $ 8,054
7,000 New York State Local Government
Assistance Corporation, Refunding,
Series B, 5.50% due 4/01/2021......... 4,624 1,850 6,474
New York State Urban Development
Corporation, Revenue Refunding Bonds
(Correctional Facilities):
10,000 5.50% due 1/01/2015................... 5,440 3,627 9,067
4,000 Series A, 5.50% due 1/01/2016......... 3,617 -- 3,617
North Carolina -- 5,000 Person County, North Carolina,
0.4% Industrial Facilities and Pollution
Control Financing Authority, Solid
Waste Disposal Revenue Bonds (Carolina
Power and Light Company), DATES, AMT,
4.30% due 11/01/2016(a)............... 5,000 -- 5,000
200 Raleigh-Durham, North Carolina, Airport
Authority, Special Facility Revenue
Refunding Bonds (American Airlines),
VRDN, Series B, 4.10% due
11/01/2015(a)......................... -- 200 200
North Dakota -- 2,500 Grand Forks, North Dakota, Health Care
0.2% Facilities Revenue Bonds (United
Hospital Obligated Group), 6.25% due
12/01/2024(d)......................... 2,550 -- 2,550
Ohio -- 5,400 Clermont County, Ohio, Sewer Systems
2.5% Revenue Bonds, 7.10% due
12/01/2001(b)(h)...................... 4,470 1,641 6,111
14,735 Cuyahoga County, Ohio, Hospital
Improvement and Revenue Refunding
Bonds (University Hospital Health
Systems), Series A, 6.875% due
1/15/1999(f)(h)....................... 15,925 -- 15,925
</TABLE>
F-66
<PAGE> 142
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD PRO FORMA FOR
INSURED INSURED II COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6,700 Cuyahoga County, Ohio, Hospital Revenue
Improvement Bonds (Cleveland
University Hospital), VRDN, 4.25% due
1/01/2016(a).......................... $ 6,700 $ -- $ 6,700
2,500 North Canton, Ohio, City School District
Improvement Bonds, UT, 6.70% due
12/01/2019(b)......................... -- 2,715 2,715
2,500 Ohio State Higher Educational Facilities
Commission, Mortgage Revenue Bonds
(University of Dayton Project), 6.60%
due 12/01/2017(c)..................... 2,676 -- 2,676
Oklahoma -- 6,655 Sapulpa, Oklahoma, Municipal Authority,
0.5% Utility Revenue Refunding Bonds, 5.75%
due 4/01/2023(c)...................... 4,506 1,936 6,442
Oregon -- 200 Port Saint Helen's, Oregon, PCR
0.0% (Portland General Electric Company
Project), VRDN, Series B, 4.10% due
6/01/2010(a).......................... 200 -- 200
Pennsylvania -- 16,000 Montgomery County, Pennsylvania, IDA,
1.5% PCR, Refunding (Philadelphia Electric
Company), Series B, 6.70% due
12/01/2021(d)......................... 17,044 -- 17,044
4,000 Pennsylvania, HFA, RIB, AMT, 8.414% due
4/01/2025(i).......................... -- 3,745 3,745
South Carolina -- 10,000 Piedmont Municipal Power Agency, South
3.1% Carolina, Electric Revenue Refunding
Bonds, 6.30% due 1/01/2022(d)......... -- 10,274 10,274
2,715 Richland-Lexington, South Carolina,
Airport District Revenue Bonds
(Columbia Metropolitan Airport), AMT,
Series A, 5.70% due 1/01/2026(b)...... -- 2,567 2,567
11,900 South Carolina State Public Service
Authority Revenue Bonds (Santee
Cooper), Series D, 6.50% due
7/01/2014(b).......................... 10,550 2,131 12,681
4,850 South Carolina State Public Service
Authority Revenue Refunding Bonds,
Series B, 5.875% due 1/01/2023(c)..... 4,744 -- 4,744
</TABLE>
F-67
<PAGE> 143
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD PRO FORMA FOR
INSURED INSURED II COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 7,000 Spartanburg County, South Carolina,
Hospital Facilities Revenue Refunding
Bonds (Spartanburg General Hospital
System), Series A, 6.625% due
4/15/2022(e).......................... $ 7,309 $ -- $ 7,309
4,200 Spartanburg County, South Carolina,
Solid Waste Disposal Facilities
Revenue Bonds (BMW Project), AMT,
7.55% due 11/01/2024.................. 4,522 -- 4,522
Tennessee -- 3,820 Johnson City, Tennessee, Health and
1.0% Educational Facilities Board, Hospital
Revenue Refunding and Improvement
Bonds (Johnson City Medical Center),
6.75% due 7/01/2016(d)................ 4,070 -- 4,070
5,000 Metropolitan Government, Nashville and
Davidson County, Tennessee, Water and
Sewer Revenue Bonds, RIB, 8.371% due
1/01/2022(b)(i)....................... 2,970 1,980 4,950
4,900 Tennessee, Housing Development Agency,
Mortgage Finance, AMT, Series A, 6.90%
due 7/01/2025......................... 4,006 1,027 5,033
Texas -- 5,250 Alliance Airport Authority, Inc., Texas,
10.4% Special Facilities Revenue Bonds
(Federal Express Corporation Project),
AMT, 6.375% due 4/01/2021............. 3,636 1,523 5,159
2,800 Austin, Texas, Utility System Revenue
Refunding Bonds, 5.50% due
5/15/2020(d).......................... 2,640 -- 2,640
3,200 Bexar, Texas, Metropolitan Water
District, Waterworks System Revenue
Refunding Bonds, 6.35% due
5/01/2025(d).......................... 3,302 -- 3,302
Brazos River Authority, Texas, PCR
(Texas Utilities Electric Company
Project), AMT(b):
11,500 Refunding, 6.50% due 12/01/2027....... -- 11,803 11,803
13,800 Refunding, VRDN, Series 96A, 4.25% due
3/01/2026(a).......................... 13,800 -- 13,800
</TABLE>
F-68
<PAGE> 144
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD
INSURED INSURED II PRO FORMA FOR
COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
$ 3,800 Series A, 6.75% due 4/01/2022......... $ 3,990 $ -- $ 3,990
7,000 Brazos River Authority, Texas, Revenue
Refunding Bonds (Houston Light &
Power), Series A, 6.70% due
3/01/2017(b).......................... -- 7,505 7,505
4,500 Harris County, Texas, Health Facilities
Development Corporation, Hospital
Revenue Bonds (Hermann Hospital
Project), 6.375% due 10/01/2024(d).... -- 4,647 4,647
100 Harris County, Texas, Health Facilities
Development Corporation, Special
Facilities Revenue Bonds (Texas
Medical Center Project), VRDN, 4.20%
due 2/15/2022(a)(d)................... 100 -- 100
1,100 Harris County, Texas, Industrial
Development Corporation, PCR (Exxon
Project), DATES, 1984-Series A, 4.15%
due 3/01/2024(a)...................... -- 1,100 1,100
6,885 Houston, Texas, Airport System Revenue
Bonds (Sub-Lien), AMT, Series A, 6.75%
due 7/01/2021(c)...................... 7,182 -- 7,182
4,750 Houston, Texas, Hotel Occupancy Tax
Revenue Refunding Bonds (Senior-Lien),
5.50% due 7/01/2015(e)................ 4,512 -- 4,512
5,565 Houston, Texas, Water and Sewer System
Revenue Bonds, Junior Lien, Series A,
6.375% due 12/01/2022(d).............. -- 5,752 5,752
11,795 Matagorda County, Texas, Navigation
District No. 1, Revenue Refunding
Bonds (Houston Light and Power),
Series A, 6.70% due 3/01/2027(b)...... 12,634 -- 12,634
1,400 Port of Port Arthur, Texas, Navigation
District, PCR, Refunding (Texaco Inc.
Project), VRDN, 4.15% due
10/01/2024(a)......................... 1,400 -- 1,400
</TABLE>
F-69
<PAGE> 145
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD PRO FORMA FOR
INSURED INSURED II COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1,500 Sabine River Authority, Texas, PCR,
Refunding (Texas Utilities Electric
Company Project), 6.55% due
10/01/2022(c)......................... $ -- $ 1,592 $ 1,592
11,500 San Antonio, Texas, Electric and Gas
Revenue Bonds, Series 95, 5.375% due
2/01/2018(d).......................... 9,326 1,399 10,725
15,000 San Antonio, Texas, Hotel Occupancy
Revenue Bonds (Henry B. Gonzalez
Convention Center Project), 5.70% due
8/15/2026(c).......................... 10,541 3,833 14,374
33,180 Texas State Turnpike Authority, Dallas
North Thruway Revenue Bonds (President
George Bush Turnpike), 5.25% due
1/01/2023(c).......................... 18,326 11,806 30,132
Utah -- 3,040 Emery County, Utah, PCR, Refunding
2.2% (Pacificorp Projects), VRDN, 4.10% due
11/01/2024(a)(b)...................... 2,140 900 3,040
7,675 Intermountain Power Agency, Utah, Power
Supply Revenue Refunding Bonds, Series
D, 5% due 7/01/2023................... 4,493 2,076 6,569
10,000 Salt Lake City, Utah, Airport Revenue
Bonds, AMT, Series A, 6.125% due
12/01/2022(c)......................... 9,980 -- 9,980
10,000 Timpanagos Special Service District,
Utah, Sewer Revenue Bonds, Series A,
6.10% due 6/01/2019(b)................ 6,957 2,981 9,938
Virginia -- 5,540 Loudon County, Virginia, COP, 6.90% due
1.7% 3/01/2019(e).......................... 5,953 -- 5,953
5,890 Upper Occoquan Sewer Authority,
Virginia, Regional Sewer Revenue
Bonds, Series A, 5% due
7/01/2025(d).......................... 5,148 -- 5,148
</TABLE>
F-70
<PAGE> 146
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD
INSURED INSURED II PRO FORMA FOR
COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Virginia State HDA, Commonwealth
Mortgage, AMT:
$ 9,000 Series A, Sub-Series A-4, 6.45% due
7/01/2028(d).......................... $ 6,590 $ 2,534 $ 9,124
3,500 Series J, Sub-Series J-2, 6.75% due
7/01/2017............................. -- 3,599 3,599
Washington -- 1,200 Douglas County, Washington, Public
5.3% Utility District No. 001, Revenue
Bonds (Electric Distribution System),
6% due 1/01/2015(d)................... 1,206 -- 1,206
9,495 Port Seattle, Washington, Revenue Bonds
(Sub-Lien), Series C, 6.625% due
8/01/2017(d).......................... 10,059 -- 10,059
Seattle, Washington, Metropolitan
Seattle Municipality Sewer Revenue
Bonds:
10,560 Series U, 6.60% due 1/01/2032(c)...... 11,158 -- 11,158
1,465 Series W, 6.25% due 1/01/2021(d)...... -- 1,499 1,499
1,750 Series W, 6.25% due 1/01/2022(d)...... 1,791 -- 1,791
5,000 Snohomish County, Washington, Public
Utility District No. 001, Electric
Revenue Bonds (Generation System),
AMT, Series B, 5.80% due
1/01/2024(d).......................... 4,724 -- 4,724
7,875 Spokane, Washington, Lease Revenue
Refunding Bonds (Multi-Purpose Arena
Project), AMT, Series A, 6.60% due
1/01/2014(b).......................... -- 8,103 8,103
6,000 Tacoma, Washington, Refuse Utility
Revenue Bonds, 7% due 12/01/2019(b)... 3,854 2,753 6,607
2,000 University of Washington Alumni
Association, Lease Revenue Bonds
(University of Washington Medical
Center -- Roosevelt II), 6.25% due
8/15/2012(e).......................... 2,064 -- 2,064
</TABLE>
F-71
<PAGE> 147
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MUNIYIELD MUNIYIELD PRO FORMA FOR
INSURED INSURED II COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
STATE AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington State Health Care Facilities
Authority Revenue Bonds:
$ 8,300 (Children's Hospital and Medical
Center), 6% due 10/01/2022............ $ 7,809 $ -- $ 7,809
2,500 (Virginia Mason Obligation Group,
Seattle), 6.30% due 2/15/2017(d)...... -- 2,544 2,544
15,175 Washington State Public Power Supply
Systems, Revenue Refunding Bonds
(Nuclear Project No. 1), Series A,
6.25% due 7/01/2017(d)................ 11,367 4,069 15,436
West Virginia -- 4,425 Harrison County, West Virginia, County
0.6% Commission Solid Waste Disposal
Revenue Bonds (Monongahela Power),
AMT, Series C, 6.75% due
8/01/2024(b).......................... 4,697 -- 4,697
2,800 West Virginia School Building Authority,
Revenue and Capital Improvement Bonds,
Series B, 6.75% due 7/01/2017(d)...... 2,981 -- 2,981
Wisconsin -- 2,000 Wisconsin, Housing and EDA, Home
1.1% Ownership Revenue Bonds, AMT, Series
B, 6.75% due 9/01/2025................ 2,040 -- 2,040
Wisconsin State Health and Educational
Facilities Authority, Revenue Bonds:
3,500 (Aurora Medical Group Inc. Project),
5.60% due 11/15/2016(e)............... -- 3,308 3,308
3,955 Refunding (Wheaton-Franciscan Services),
6.50% due 8/15/2011(d)................ 4,113 -- 4,113
2,000 Refunding (Wheaton-Franciscan Services),
6% due 8/15/2015(d)................... 1,964 -- 1,964
4,500 Refunding (Waukesha Memorial Hospital),
Series A, 5.25% due 8/15/2019(b)...... -- 4,048 4,048
--------- ---------- ------------
Total Investments (Cost -- $1,287,820) -- 97.7%........................ $ 975,884 $ 356,708 $ 1,332,592
========= ========= ===========
</TABLE>
F-72
<PAGE> 148
COMBINED SCHEDULE OF INVESTMENTS OF MUNIYIELD INSURED FUND, INC.
AND MUNIYIELD INSURED FUND II, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
- ---------------
(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,
1996.
(b) AMBAC Insured.
(c) FGIC Insured.
(d) MBIA Insured.
(e) FSA Insured.
(f) BIG Insured.
(g) Escrowed to maturity.
(h) Prerefunded.
(i) 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, 1996.
(k) FNMA Insured.
(l) GNMA Insured.
(*) Not Rated.
+ Highest Short-term rating by Moody's Investors Service, Inc.
F-73
<PAGE> 149
Portfolio Abbreviations:
To simplify the listings of the Combined Schedule of MuniYield Insured
Fund, Inc. and MuniYield Insured Fund II, Inc.'s portfolio holdings in the
Schedule of Investments, we have abbreviated the names of many of the securities
according to the list below.
ACES Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-74
<PAGE> 150
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 Funds at April 30, 1996 and such
information has been adjusted to give effect to the Reorganization as if the
Reorganization had occurred at April 30, 1996. 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,
1996. 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, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
MUNIYIELD MUNIYIELD FOR
INSURED INSURED II ADJUSTMENTS COMBINED FUND
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value.................................... $ 975,884,449 $356,707,883 $ 0 $ ,332,592,332
Cash..................................................... 66,458 35,089 0 101,547
Receivables:
Interest............................................... 17,962,980 6,465,987 0 24,428,967
Securities sold........................................ 6,616,570 2,833,518 0 9,450,088
Deferred organization expenses........................... 8,873 14,956 (14,956) 8,873
Prepaid expenses and other assets........................ 58,767 21,049 79,816
------------- ------------ ------------ --------------
Total assets.................................... 1,000,598,097 366,078,482 (14,956) 1,366,661,623
------------- ------------ ------------ --------------
LIABILITIES:
Payables:
Dividends to shareholders.............................. 1,036,870 313,913 14,835,002(1) 16,185,785
Investment adviser..................................... 438,695 160,519 599,214
Accrued expenses and other liabilities................... 114,956 45,493 217,000(2) 377,449
------------- ------------ ------------ --------------
Total liabilities............................... 1,590,521 519,925 15,052,002 17,162,448
------------- ------------ ------------ --------------
Net Assets............................................... $ 999,007,576 $365,558,557 ($15,066,958) $1,349,499,175
============= ============ ============ ==============
CAPITAL:
Capital Stock (200,000,000 shares of each fund
authorized; 200,000,000 shares as adjusted); Preferred
Stock, par value $.05 per share (12,800 shares of
MuniYield Insured AMPS*, and 4,800 shares of MuniYield
Insured II AMPS* issued and outstanding at $25,000
liquidation preference; 17,600 shares for the combined
Fund as adjusted)...................................... $ 320,000,000 $120,000,000 $ 0 $ 440,000,000
Common Stock, par value, $.10 per share (45,187,339
shares of MuniYield Insured Common Stock, and
16,420,827 shares of MuniYield Insured II Common Stock
issued and outstanding; 61,475,341 shares for the
combined Fund as adjusted)............................. 4,518,734 1,642,083 (13,283) 6,147,534
Paid-in-capital in excess of par......................... 630,233,103 228,565,325 (218,673) 858,579,755
Undistributed investment income -- net................... 8,124,513 2,732,385 (10,856,898) 0
Accumulated realized capital gains on
investments -- net..................................... 2,186,816 1,791,288 (3,978,104) 0
Unrealized appreciation on investments -- net............ 33,944,410 10,827,476 0 44,771,886
------------- ------------ ------------ --------------
Total Capital -- Equivalent to $15.03 net asset value per
share of MuniYield Insured Common Stock, $14.95 net
asset value per share of MuniYield Insured II Common
Stock and $14.79 net asset value per share of the
combined Fund.......................................... $ 999,007,576 $365,558,557 $(15,066,958) $1,349,499,175
============= ============ ============ ==============
</TABLE>
- ---------------
* Auction Market Preferred Stock (AMPS)
(1) Assumes the distribution of undistributed investment income.
(2) Reflects the charge for estimated Reorganization expenses of $217,000.
F-75
<PAGE> 151
The following unaudited pro forma combined statement of operations for the
Combined Fund has been derived from the statements of operations of the Funds
for the six months ended April 30, 1996, and such information has been adjusted
to give effect to the Reorganization as if the Reorganization had occurred on
November 1, 1995. 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, 1995 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, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
MUNIYIELD MUNIYIELD FOR
INSURED INSURED II ADJUSTMENTS COMBINED FUND
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and amortization of premium and
discount earned.......................... $29,890,556 $10,884,460 $ 0 $40,775,016
EXPENSES:
Investment advisory fees.................... 2,550,693 931,800 3,482,493
Commission fees............................. 396,667 142,379 539,046
Transfer agent fees......................... 63,880 31,121 95,001
Professional fees........................... 48,237 40,583 88,820
Accounting services......................... 45,036 31,862 76,898
Directors' fees and expenses................ 39,361 11,264 50,625
Printing and shareholder reports............ 33,904 17,347 51,251
Custodian fees.............................. 28,739 10,942 39,681
Listing fees................................ 22,773 12,069 34,842
Pricing fees................................ 12,296 6,211 18,507
Amortization of organization expenses....... 3,128 3,701 6,829
Other....................................... 33,541 14,354 217,000(1) 264,895
----------- ----------- --------- -----------
Total expenses.............................. 3,278,255 1,253,633 217,000 4,748,888
----------- ----------- --------- -----------
Investment income -- net.................... 26,612,301 9,630,827 (217,000) 36,026,128
----------- ----------- --------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- NET
Realized gain on investments -- net......... 10,345,853 3,900,331 14,246,184
Change in unrealized appreciation on
investments -- net....................... (25,710,160) (8,752,688) (34,462,848)
----------- ----------- --------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................... $11,247,994 $ 4,778,470 $(217,000) $15,809,464
=========== =========== ========= ===========
</TABLE>
- ---------------
(1) Reflects the charge for estimated Reorganization expenses of $217,000.
F-76
<PAGE> 152
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the 21st day of August, 1996, by and between MuniYield Insured Fund, Inc., a
Maryland corporation ("Insured I"), and MuniYield Insured Fund II, Inc., a
Maryland corporation ("Insured II").
PLAN OF REORGANIZATION
The reorganization will comprise (a) the acquisition by Insured I of all of
the assets, and the assumption by Insured I of all of the liabilities, of
Insured II in exchange solely for an equal aggregate value of newly-issued
shares of (i) common stock, par value $.10 per share, of Insured I ("Insured I
Common Stock"), (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 F,
of Insured I ("Insured I Series F AMPS"), and (iii) 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 G, of Insured I ("Insured I Series G AMPS"), and (b) the
subsequent distribution to Insured II stockholders of (x) all of the Insured I
Common Stock received by Insured II in exchange for their shares of common
stock, par value $.10 per share, of Insured II ("Insured II Common Stock"), (y)
all of the Insured I Series F AMPS received by Insured II 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) designated Series A, of Insured II
("Insured II Series A AMPS"), and (z) all of the Insured I Series G AMPS
received by Insured II 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)
designated Series B, of Insured II ("Insured II Series B AMPS" and, together
with the Insured II Series A AMPS, the "Insured II AMPS"), all upon and subject
to the terms hereinafter set forth (collectively, the "Reorganization").
In the course of the Reorganization, Insured I Common Stock, Insured I
Series F AMPS and Insured I Series G AMPS will be distributed to Insured II
stockholders as follows: (i) each holder of Insured II Common Stock will be
entitled to receive a number of shares of Insured I Common Stock equal to the
aggregate net asset value of the Insured II Common Stock owned by such
stockholder on the Exchange Date (as defined in Section 7(a) of this Agreement);
(ii) each holder of Insured II Series A AMPS will be entitled to receive a
number of shares of Insured I Series F AMPS equal to the aggregate liquidation
preference (and aggregate value) of the Insured II Series A AMPS owned by such
stockholder on the Exchange Date; and (iii) each holder of Insured II Series B
AMPS will be entitled to receive a number of shares of Insured I Series G AMPS
equal to the aggregate liquidation preference (and aggregate value) of the
Insured II Series B AMPS owned by such stockholder on the Exchange Date. In
consideration therefor, on the Exchange Date Insured I shall acquire all of the
assets of Insured II and shall assume all of Insured II'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.
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Prior to the Exchange Date, Insured II 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 November 1, 1995 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
November 1, 1995 to and including the Exchange Date. In this regard, the last
dividend period for the Insured II Series A AMPS and the Insured II Series B
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 Insured I's Articles of Incorporation
establishing the powers, rights and preferences of the Insured I Series F AMPS
and the Insured I Series G 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 Insured II pursuant to
the Reorganization, Insured II 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").
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, Insured I and Insured II hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF INSURED I.
Insured I represents and warrants to, and agrees with, Insured II that:
(a) Insured I 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. Insured
I 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) Insured I is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No.
811-6540), and such registration has not been revoked or rescinded and is
in full force and effect. Insured I 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) Insured I 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) Insured II has been furnished with Insured I's Annual Report to
Stockholders for the year ended October 31, 1995, and the audited financial
statements appearing therein, having been examined
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by Deloitte & Touche LLP, independent public accountants, fairly present
the financial position of Insured I as of the respective dates indicated,
in conformity with generally accepted accounting principles applied on a
consistent basis.
(e) Insured II has been furnished with Insured I's Semi-Annual Report
to Stockholders for the six months ended April 30, 1996, and the unaudited
financial statements appearing therein fairly present the financial
position of Insured I 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
Insured I and an unaudited schedule of investments of Insured I, each as of
the Valuation Time (as defined in Section 3(d) of this Agreement), will be
furnished to Insured II at or prior to the Exchange Date for the purpose of
determining the number of shares of Insured I Common Stock, Insured I
Series F AMPS and Insured I Series G AMPS to be issued pursuant to Section
4 of this Agreement; each will fairly present the financial position of
Insured I 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 Insured I, threatened against Insured I
which assert liability on the part of Insured I or which materially affect
its financial condition or its ability to consummate the Reorganization.
Insured I 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) Insured I 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 Insured I and Insured II 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) There are no material contracts outstanding to which Insured I 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
Insured II prior to the Valuation Time.
(j) Insured I has no known liabilities of a material amount,
contingent or otherwise, other than those shown on Insured I'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,
1996 and those incurred in connection with the Reorganization. As of the
Valuation Time, Insured I will advise Insured II 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 Insured I 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.
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(l) The registration statement filed by Insured I on Form N-14
relating to the Insured I Common Stock, the Insured I Series F AMPS and the
Insured I Series G AMPS to be issued pursuant to this Agreement, which
includes the joint proxy statement of Insured I and Insured II and the
prospectus of Insured I 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 Insured I (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 Insured I for use in the N-14 Registration Statement as
provided in Section 6(e) of this Agreement.
(m) Insured I is authorized to issue 200,000,000 shares of capital
stock, of which 2,200 shares have been designated as Series A AMPS, 2,200
shares have been designated as Series B AMPS, 2,200 shares have been
designated as Series C AMPS, 2,200 shares have been designated as Series D
AMPS, 4,000 shares have been designated as Series E AMPS (collectively, the
"Insured I AMPS"), and 199,987,200 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 Insured I Common Stock, Insured I Series F AMPS and Insured I
Series G AMPS to be issued to Insured II 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
Insured I will have any preemptive right of subscription or purchase in
respect thereof.
(o) At or prior to the Exchange Date, the Insured I Common Stock,
Insured I Series F AMPS and Insured I Series G AMPS to be transferred to
Insured II 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
Insured II 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, Insured I will have obtained any
and all regulatory, Director and stockholder approvals necessary to issue
the Insured I Common Stock, Insured I Series F AMPS and Insured I Series G
AMPS to Insured II.
2. REPRESENTATIONS AND WARRANTIES OF INSURED II.
Insured II represents and warrants to, and agrees with, Insured I
that:
(a) Insured II 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
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Agreement. Insured II 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) Insured II is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No.
811-7158), and such registration has not been revoked or rescinded and is
in full force and effect. Insured II 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 Insured II shown on the schedule of its investments as
of the Valuation Time furnished to Insured I; and (ii) all other assets
owned by Insured II or liabilities incurred as of the Valuation Time.
(d) Insured II 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) Insured I has been furnished with Insured II's Annual Report to
Stockholders for the year ended October 31, 1995, and the audited financial
statements appearing therein, having been examined by Ernst & Young LLP,
independent public accountants, fairly present the financial position of
Insured II as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(f) Insured I has been furnished with Insured II's Semi-Annual Report
to Stockholders for the six months ended April 30, 1996, and the unaudited
financial statements appearing therein fairly present the financial
position of Insured II 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
Insured II and an unaudited schedule of investments of Insured II, each as
of the Valuation Time, will be furnished to Insured I at or prior to the
Exchange Date for the purpose of determining the number of shares of
Insured I Common Stock, Insured I Series F AMPS and Insured I Series G AMPS
to be issued to Insured II pursuant to Section 4 of this Agreement; and
each will fairly present the financial position of Insured II 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 Insured II, threatened against Insured II
which assert liability on the part of Insured II or which materially affect
its financial condition or its ability to consummate the Reorganization.
Insured II 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 Insured II is
a party that have not been disclosed in the N-14 Registration Statement or
will not otherwise be disclosed to Insured I prior to the Valuation Time.
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(j) Insured II 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 Insured I and Insured II 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) Insured II 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 course of its business as an investment company since April 30,
1996, and those incurred in connection with the Reorganization. As of the
Valuation Time, Insured II will advise Insured I 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) Insured II 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 Insured II have adequately been
provided for on its books, and no tax deficiency or liability of Insured II
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, Insured II 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, Insured II will have good
and marketable title to all of the Investments, and Insured I 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 Insured II 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 Insured II (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
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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 Insured II for use in the N-14 Registration
Statement as provided in Section 6(e) of this Agreement.
(p) Insured II is authorized to issue 200,000,000 shares of capital
stock, of which 2,400 shares have been designated as Series A AMPS and
2,400 shares have been designated as Series B 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.
(q) All of the issued and outstanding shares of Insured II Common
Stock, Insured II Series A AMPS and Insured II Series B AMPS were offered
for sale and sold in conformity with all applicable Federal and state
securities laws.
(r) The books and records of Insured II made available to Insured I
and/or its counsel are substantially true and correct and contain no
material misstatements or omissions with respect to the operations of
Insured II.
(s) Insured II will not sell or otherwise dispose of any of the shares
of Insured I Common Stock, Insured I Series F AMPS or Insured I Series G
AMPS to be received in the Reorganization, except in distribution to the
stockholders of Insured II as provided in Section 4 of this Agreement.
3. THE REORGANIZATION.
(a) Subject to receiving the requisite approvals of the stockholders of
each of Insured I and Insured II and to the other terms and conditions contained
herein, Insured II agrees to convey, transfer and deliver to Insured I for the
benefit of Insured I, and Insured I agrees to acquire from Insured II for the
benefit of Insured I, on the Exchange Date all of the Investments (including
interest accrued as of the Valuation Time on debt instruments) of Insured II,
and assume all of the liabilities of Insured II, in exchange solely for that
number of shares of Insured I Common Stock, Insured I Series F AMPS and Insured
I Series G AMPS provided in Section 4 of this Agreement. Pursuant to this
Agreement, as soon as practicable after the Exchange Date Insured II will
distribute all shares of Insured I Common Stock, Insured I Series F AMPS and
Insured I Series G AMPS received by it to its stockholders in exchange for their
corresponding shares of Insured II Common Stock, Insured II Series A AMPS and
Insured II Series B AMPS. Such distribution shall be accomplished by the opening
of stockholder accounts on the stock ledger records of Insured I in the amounts
due the stockholders of Insured II based on their respective holdings in Insured
II as of the Valuation Time.
(b) Prior to the Exchange Date, Insured II 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 November 1, 1995 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
November 1, 1995 to and including the Exchange Date. In this regard, the last
dividend period for the Insured II Series A AMPS and the Insured II Series B
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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(c) Insured II will pay, or cause to be paid, to Insured I any interest it
receives on or after the Exchange Date with respect to the Investments
transferred to Insured I hereunder.
(d) The Valuation Time shall be 4:15 P.M., New York time, on October 25,
1996, or such earlier or later day and time as mutually may be agreed upon in
writing (the "Valuation Time").
(e) Insured I will acquire all of the assets of, and assume all of the
known liabilities of, Insured II, except that recourse for such liabilities will
be limited to Insured I. The known liabilities of Insured II as of the Valuation
Time shall be confirmed in writing to Insured I by Insured II pursuant to
Section 2(k) of this Agreement.
(f) Insured I will file separate Articles Supplementary to its Articles of
Incorporation establishing the powers, rights and preferences of the Insured I
Series F AMPS and the Insured I Series G AMPS with the Maryland Department prior
to the closing of the Reorganization.
(g) Insured I and Insured II 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 Insured II to Insured
I.
(h) Insured II 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 Insured II pursuant
to the Reorganization, Insured II shall terminate its registration under the
1940 Act.
4. ISSUANCE AND VALUATION OF INSURED I COMMON STOCK, INSURED I SERIES F AMPS
AND INSURED I SERIES G AMPS IN THE REORGANIZATION.
Full shares of Insured I Common Stock, Insured I Series F AMPS and Insured
I Series G 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 Insured II acquired in the Reorganization determined as
hereinafter provided, reduced by the amount of liabilities of Insured II assumed
by Insured I, shall be issued by Insured I in exchange for such assets of
Insured II, plus cash in lieu of fractional shares. The net asset value of
Insured I and Insured II shall be determined as of the Valuation Time in
accordance with the procedures described in (i) the prospectus of Insured I,
dated March 20, 1992, relating to the Insured I Common Stock and (ii) the
prospectus of Insured I, dated May 18, 1992, relating to the Insured I AMPS, and
no formula will be used to adjust the net asset value so determined of either
Insured I or Insured II 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 Insured II to be transferred to
Insured I shall be determined by Insured I pursuant to the procedures utilized
by Insured I in valuing its own assets and determining its own liabilities for
purposes of the Reorganization. Such valuation and determination shall be made
by Insured I in cooperation with Insured II and shall be confirmed in writing by
Insured I to Insured II. The net asset value per share of the Insured I Common
Stock and the liquidation preference per share of the Insured I Series F AMPS
and Insured I Series G AMPS shall be determined in accordance with such
procedures and Insured I shall certify the computations involved. Insured I
shall issue to Insured II separate certificates or share deposit receipts for
the Insured I Common Stock, the Insured I Series F AMPS and the Insured I Series
G AMPS, each registered in the name of Insured II. Insured II then shall
distribute the Insured I Common Stock, the
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Insured I Series F AMPS and the Insured I Series G AMPS to its corresponding
stockholders of Insured II Common Stock, Insured II Series A AMPS and Insured II
Series B AMPS by redelivering the certificates or share deposit receipts
evidencing ownership of (i) the Insured I Common Stock to State Street Bank and
Trust Company, as the transfer agent and registrar for the Insured I Common
Stock and (ii) the Insured I Series F AMPS and the Insured I Series G AMPS to
IBJ Schroder Bank and Trust Company, as the transfer agent and registrar for the
Insured I Series F AMPS and the Insured I Series G AMPS. With respect to any
Insured II stockholder holding certificates evidencing ownership of either the
Insured II Common Stock, the Insured II Series A AMPS or the Insured II Series B
AMPS as of the Exchange Date, and subject to Insured I being informed thereof in
writing by Insured II, Insured I will not permit such stockholder to receive new
certificates evidencing ownership of the Insured I Common Stock, Insured I
Series F AMPS or Insured I Series G AMPS, exchange Insured I Common Stock,
Insured I Series F AMPS or Insured I Series G 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 Insured I Common Stock, Insured I Series F AMPS or Insured I Series
G AMPS, in any case, until notified by Insured II or its agent that such
stockholder has surrendered his or her outstanding certificates evidencing
ownership of the Insured II Common Stock, the Insured II Series A AMPS or the
Insured II Series B AMPS or, in the event of lost certificates, posted adequate
bond. Insured II, at its own expense, will request its stockholders to surrender
their outstanding certificates evidencing ownership of the Insured II Common
Stock, the Insured II Series A AMPS or the Insured II Series B AMPS, as the case
may be, or post adequate bond therefor.
Dividends payable to holders of record of shares of Insured I Common Stock,
Insured I Series F AMPS and Insured I Series G 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 Insured II 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 Insured II for exchange.
No fractional shares of Insured I Common Stock will be issued to holders of
Insured II Common Stock. In lieu thereof, Insured I's transfer agent, State
Street Bank and Trust Company, will aggregate all fractional shares of Insured I
Common Stock and sell the resulting full shares on the New York Stock Exchange
at the current market price for shares of Insured I 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
Insured II Common Stock certificates.
5. PAYMENT OF EXPENSES.
(a) Insured I 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
a private letter ruling request to the IRS, expenses incurred in connection with
the deregistration and dissolution of Insured II 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 Insured
I nor Insured II shall pay any expenses of its respective stockholders arising
out of or in connection with the Reorganization.
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(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 INSURED I AND INSURED II.
(a) Insured I and Insured II each agrees to call an annual 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.
(b) Insured I and Insured II each covenants to operate its respective
business as presently conducted between the date hereof and the Exchange Date.
(c) Insured II 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 Insured I Common Stock, Insured I Series F AMPS or Insured
I Series G AMPS other than to the stockholders of Insured II and without first
paying or adequately providing for the payment of all of Insured II's
liabilities not assumed by Insured I, if any, and on and after the Exchange Date
it shall not conduct any business except in connection with its liquidation and
dissolution.
(d) Insured II 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 Insured II has ceased to be a
registered investment company.
(e) Insured I 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. Insured I and Insured II 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) Insured I agrees to advise Insured II promptly in writing if at any
time prior to the Exchange Date the assets of Insured II include any assets
which Insured I is not permitted, or reasonably believes to be unsuitable for
it, to acquire, including without limitation any security which, prior to its
acquisition by Insured II, Insured I has informed Insured II is unsuitable for
Insured I to acquire. Moreover, Insured I has no plan or intention to sell or
otherwise dispose of the assets of Insured II to be acquired in the
Reorganization, except for dispositions made in the ordinary course of business.
(g) Insured I and Insured II 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. Insured I 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 Insured II 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
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or in conducting an audit or other proceeding. After the Exchange Date, Insured
II shall prepare, or cause its agents to prepare, any Federal, state or local
tax returns, including any Forms 1099, required to be filed by Insured II with
respect to Insured II's 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 Insured II (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 Insured I.
(h) Insured I and Insured II each agrees to mail to each of its respective
stockholders of record entitled to vote at the annual meeting of stockholders 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.
(i) Following the consummation of the Reorganization, Insured I 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 Insured II to be transferred, together with
any other Investments, and the Insured I Common Stock, Insured I Series F AMPS
and Insured I Series G 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 day following the Valuation Time, or at such other place,
time and date agreed to by Insured I and Insured II, 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, Insured II shall cause such Investments to be transferred
to Insured I's account with State Street Bank and Trust Company at the earliest
practicable date thereafter.
(b) Insured II will deliver to Insured I on the Exchange Date confirmations
or other adequate evidence as to the tax basis of each of the Investments
delivered to Insured I hereunder, certified by Ernst & Young LLP.
(c) Insured I shall have made prior arrangements for the delivery on the
Exchange Date of the Investments to State Street Bank and Trust Company as the
custodian for Insured I.
(d) As soon as practicable after the close of business on the Exchange
Date, Insured II shall deliver to Insured I a list of the names and addresses of
all of the stockholders of record of Insured II on the Exchange Date and the
number of shares of Insured II Common Stock, Insured II Series A AMPS and/or
Insured II Series B AMPS owned by each such stockholder, certified to the best
of their knowledge and belief by the transfer agent for the Insured II Common
Stock, the Insured II Series A AMPS or the Insured II Series B AMPS, as
applicable, or by its President.
8. INSURED I CONDITIONS.
The obligations of Insured I 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 Boards of Directors of Insured I and
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Insured II and by the affirmative vote of (i) the holders of (a) a majority
of the Insured II Common Stock and Insured II AMPS, voting together as a
single class, and (b) a majority of the Insured II 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 Insured II Common
Stock and the Insured II AMPS, voting together as a single class, and (y) a
majority of the Insured II AMPS, voting separately as a class, in each case
issued and outstanding and entitled to vote thereon; and further that (iii)
Insured I shall have delivered to Insured II a copy of the resolution
approving this Agreement adopted by Insured I's Board of Directors, and a
certificate setting forth the vote of Insured I's stockholders obtained,
each certified by the Secretary of Insured I; and (iv) Insured II shall
have delivered to Insured I a copy of the resolution approving this
Agreement adopted by Insured II's Board of Directors, and a certificate
setting forth the vote of Insured II's stockholders obtained, each
certified by the Secretary of Insured II.
(b) That Insured II shall have furnished to Insured I a statement of
Insured II's 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 Insured II's 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 Insured II since October 31, 1995, other than
changes in the Investments since that date or changes in the market value
of the Investments.
(c) That Insured II shall have furnished to Insured I a certificate
signed by Insured II's 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 Insured II 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 Insured II 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 Insured II shall have delivered to Insured I 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 Insured II for the period ended October 31, 1995 (which returns
originally were prepared and filed by Insured II), and that based on such
limited review, nothing came to their attention which caused them to
believe that such returns did not properly reflect, in all material
respects, the Federal, state and local income taxes of Insured II for the
period covered thereby; and that for the period from November 1, 1995 to
and including the Exchange Date and for any taxable year of Insured II
ending upon the liquidation of Insured II, 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, 1995 to and including the Exchange
Date and for the final taxable year of Insured II ending upon liquidation
or that Insured II had not qualified as a regulated investment company for
Federal income tax purposes for the period from November 1, 1995 through
liquidation of Insured II.
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(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(f) That Insured I shall have received an opinion of Brown & Wood LLP,
as counsel to both Insured I and Insured II, in form and substance
satisfactory to Insured I and dated the Exchange Date, to the effect that
(i) each of Insured I and Insured II is a corporation duly organized,
validly existing and in good standing in conformity with the laws of the
State of Maryland; (ii) the Insured I Common Stock, Insured I Series F AMPS
and Insured I Series G 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 Insured I, and no stockholder of
Insured I has any preemptive right to subscription or purchase in respect
thereof (pursuant to the Articles of Incorporation, as amended, or the
by-laws of Insured I or, to the best of such counsel's knowledge,
otherwise); (iii) this Agreement has been duly authorized, executed and
delivered by each of Insured I and Insured II, 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) Insured II 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, Insured II 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 Insured I and Insured II 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 reserved
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 do
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 Insured I or Insured II is a party or by
which either Insured I or Insured II is bound, except insofar as the
parties have agreed to amend such provision as a condition precedent to the
Reorganization; (x) neither Insured I nor Insured II, 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 Insured
I, Insured II, or their respective stockholders; (xi) to the best of such
counsel's knowledge, no material suit, action or legal or administrative
proceeding is pending or threatened against Insured I or Insured II, the
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unfavorable outcome of which would materially adversely affect Insured I or
Insured II; and (xii) all corporate actions required to be taken by Insured
I and Insured II to authorize this Agreement and to effect the
Reorganization have been duly authorized by all necessary corporate actions
on the part of Insured I and Insured II. Such opinion also shall state that
(x) 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 (y) such counsel do not express any opinion or belief as to
the financial statements, other financial data, statistical data or
information relating to Insured I or Insured II 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 Insured I and Insured II with regard to matters of fact and
certain certificates and written statements of governmental officials with
respect to the good standing of Insured I and Insured II and on the opinion
of Wilmer, Cutler & Pickering as to matters of Maryland law.
(g) That Insured I 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 Insured II to Insured I in exchange
solely for Insured I Common Stock, Insured I Series F AMPS and Insured I
Series G AMPS as provided in this Agreement will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
Insured I and Insured II 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 Insured
II as a result of the Reorganization or on the distribution of Insured I
Common Stock, Insured I Series F AMPS and Insured I Series G AMPS to
Insured II stockholders under Section 361(c)(1) of the Code; (iii) under
Section 1032 of the Code, no gain or loss will be recognized to Insured I
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 Insured II on the receipt of Insured I Common Stock,
Insured I Series F AMPS and Insured I Series G AMPS in exchange for their
corresponding Insured II Common Stock, Insured II Series A AMPS and Insured
II Series B AMPS (except to the extent that Insured II stockholders receive
cash representing an interest in fractional shares of Insured I in the
Reorganization); (v) in accordance with Section 362(b) of the Code, the tax
basis of the Insured II assets in the hands of Insured I will be the same
as the tax basis of such assets in the hands of Insured II 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 Insured I Common Stock, Insured I Series F AMPS and Insured I
Series G AMPS received by the stockholders of Insured II in the
Reorganization will be equal, in the aggregate, to the tax basis of the
Insured II Common Stock, Insured II Series A AMPS and Insured II Series B
AMPS surrendered in exchange; (vii) in accordance with Section 1223 of the
Code, a stockholder's holding period for the Insured I Common Stock,
Insured I Series F AMPS and Insured I Series G AMPS will be determined by
including the period for which such stockholder held the Insured II Common
Stock, Insured II
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Series A AMPS and Insured II Series B AMPS exchanged therefor, provided,
that such Insured II shares were held as a capital asset; (viii) in
accordance with Section 1223 of the Code, Insured I's holding period with
respect to the Insured II assets transferred will include the period for
which such assets were held by Insured II; (ix) the payment of cash to
Insured II stockholders in lieu of fractional shares of Insured I will be
treated as though the fractional shares were distributed as part of the
Reorganization and then redeemed by Insured I, with the result that each
Insured II 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 Insured I fractional shares; and (x) the taxable
year of Insured II will end on the effective date of the Reorganization and
pursuant to Section 381(a) of the Code and regulations thereunder, Insured
I will succeed to and take into account certain tax attributes of Insured
II, such as earnings and profits, capital loss carryovers and method of
accounting.
(h) That Insured I 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 Insured I, to the effect that (i) they are
independent public accountants with respect to Insured II 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 Insured II 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 Insured
I and Insured II 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 Insured II included in the N-14 Registration
Statement, and inquiries of certain officials of Insured II 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 Insured I and Insured II
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the information relating to Insured
II appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) concerning
Insured II (with the exception of performance comparisons, if any), has
been obtained from the accounting records of Insured II or from schedules
prepared by officials of Insured II 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 Insured I shall not
include any assets or liabilities which Insured I, 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 Insured II, contemplated by
the Commission.
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(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 Insured II or would
prohibit the Reorganization.
(l) That Insured I shall have received from the Commission such orders
or interpretations as Brown & Wood LLP, as counsel to Insured I, 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 Insured II and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to Insured I.
(n) That prior to the Exchange Date, Insured II 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 November 1, 1995 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 November 1, 1995 to and including the Exchange
Date. In this regard, the last dividend period for the Insured II Series A
AMPS and the Insured II Series B 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.
9. INSURED II CONDITIONS.
The obligations of Insured II 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 Insured I shall have furnished to Insured II a statement of
Insured I'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 Insured II's behalf
by its President (or any Vice President) and its Treasurer, and a
certificate signed by Insured I'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 there has been no material
adverse change in the financial position of Insured I since October 31,
1995, other than changes in its portfolio securities since that date or
changes in the market value of its portfolio securities.
(c) That Insured I shall have furnished to Insured II a certificate
signed by Insured I'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 Insured I
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 Insured I 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.
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(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That Insured II shall have received an opinion of Brown & Wood
LLP, as counsel to both Insured I and Insured II, in form and substance
satisfactory to Insured II and dated the Exchange Date, with respect to the
matters specified in Section 8(f) of this Agreement and such other matters
as Insured II reasonably may deem necessary or desirable.
(f) That Insured II shall have received a private letter ruling from
the IRS with respect to the matters specified in Section 8(h) of this
Agreement.
(g) That all proceedings taken by Insured I and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to Insured II.
(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 Insured I, contemplated by the
Commission.
(i) That Insured II 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 Insured II, to the effect that (i) they
are independent public accountants with respect to Insured I 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 Insured I 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 Insured
I and Insured II 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 Insured I included in the N-14 Registration
Statement, and inquiries of certain officials of Insured I 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 Insured I and Insured II
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the information relating to Insured
I appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) concerning
Insured I (with the exception of performance comparisons, if any), if any,
has been obtained from the accounting records of Insured I or from
schedules prepared by officials of Insured I having responsibility for
financial and reporting matters and such information is in agreement with
such records, schedules or computations made therefrom.
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(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 Insured I or would
prohibit the Reorganization.
(k) That Insured II shall have received from the Commission such
orders or interpretations as Brown & Wood LLP, as counsel to Insured II,
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 Insured
I and Insured II) prior to the Exchange Date, or the Exchange Date may be
postponed, (i) by mutual consent of the Boards of Directors of Insured I and
Insured II; (ii) by the Board of Directors of Insured I if any condition of
Insured I'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 Insured
II if any condition of Insured II's 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, 1997, this Agreement automatically shall terminate on
that date, unless a later date is mutually agreed to by the Boards of Directors
of Insured I and Insured II.
(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 Insured I or Insured II
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 Insured I or
Insured II, 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 Insured I and
Insured II 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 Insured I and Insured II 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 Insured I nor Insured II 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 Insured I or Insured II 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, 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.
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(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 Insured
I and Insured II 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 Insured I and Insured II, unless such terms and conditions shall result in a
change in the method of computing the number of shares of Insured I Common
Stock, Insured I Series F AMPS and Insured I Series G AMPS to be issued to
Insured II in which event, unless such terms and conditions shall have been
included in the proxy solicitation materials furnished to the stockholders of
Insured I and Insured II prior to the meetings at which the Reorganization shall
have been approved, this Agreement shall not be consummated and shall terminate
unless Insured I and Insured II 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), Insured I 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 INSURED I 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 Insured I's
transfer agent with respect to such shares. Insured II will provide Insured I on
the Exchange Date with the name of any Insured II stockholder who is to the
knowledge of Insured II 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 Insured I or
Insured II, 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.
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<PAGE> 171
(e) Copies of the Articles of Incorporation, as amended, of Insured I and
Insured II 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.
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 INSURED FUND, INC.
By: /s/ ARTHUR ZEIKEL
------------------------------------
Arthur Zeikel
President
Attest:
/s/ MARK B. GOLDFUS
- --------------------------------------
Mark B. Goldfus
Secretary
MUNIYIELD INSURED FUND II, INC.
By: /s/ ARTHUR ZEIKEL
------------------------------------
Arthur Zeikel
President
Attest:
/s/ MARK B. GOLDFUS
- --------------------------------------
Mark B. Goldfus
Secretary
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<PAGE> 172
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 some time 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 a 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
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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 Aa1,
A1, Baa1, Ba1 and B1.
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 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:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally 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 earnings 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.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of 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.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity 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 in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS
A Standard & Poor'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.
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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 Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor'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 reasons.
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;
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 Standard &
Poor'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 they are 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.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
B -- Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
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likely impair capacity or willingness to pay interest and repay principal.
The "B" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BB" or "BB-" rating.
CCC -- Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "B" or "B-" rating.
CC -- The rating "CC" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
C -- The rating "C" is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy petition has
been filed but debt service payments are continued.
C1 -- The rating "C1" is reserved for income bonds on which no
interest is being paid.
D -- Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor'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 STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. The three designations in the
"A" category are as follows:
A-1 -- 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 "+" 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-1".
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.
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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 Standard &
Poor's believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information.
A Standard & Poor'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.
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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.
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-1+".
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:
<TABLE>
<S> <C>
Improving [UP ARROW]
Stable [LEFT AND RIGHT ARROW]
Declining [DOWN ARROW]
Uncertain [UP AND DOWN ARROW]
</TABLE>
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.
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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.
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 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 same 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.
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DESCRIPTION OF FITCH'S INVESTMENT GRADE 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:
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
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-1+" and "F-1" ratings.
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-4 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.
</TABLE>
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EXHIBIT III
PORTFOLIO INSURANCE
Set forth below is further information with respect to the Mutual Fund
Insurance Policies (the "Policies") which each Fund may obtain from several
insurance companies with respect to insured Municipal Bonds held by the Fund.
Each Fund has no obligation to obtain any such Policies and the terms of any
Policies actually obtained may vary significantly from the terms described
below.
In determining eligibility for insurance, insurance companies will apply
their own standards which correspond generally to the standards they normally
use in establishing the insurability of new issues of Municipal Bonds and which
are not necessarily the criteria which would be used in regard to the purchase
of such bonds by the Funds. The Policies do not insure (i) municipal securities
ineligible for insurance and (ii) municipal securities no longer owned by a
Fund.
The Policies do not guarantee the market value of the insured Municipal
Bonds or the value of the shares of the Funds. In addition, if the provider of
an original issuance insurance policy is unable to meet its obligations under
such policy or if the rating assigned to the insurance claims-paying ability of
any such insurer deteriorates, the insurance company will not have any
obligation to insure any issue held by a Fund which is adversely affected by
either of the above described events. In addition to the payment of premiums,
the Policies may require that a Fund notify the insurance company as to all
Municipal Bonds in the Fund's portfolio and permit the insurance company to
audit their records. The insurance premiums will be payable monthly by each Fund
in accordance with a premium schedule to be furnished by the insurance company
at the time the Policies are issued. Premiums are based upon the amounts covered
and the composition of the portfolio.
The insurance companies will have insurance claims-paying ability ratings
of AAA from Standard & Poor's Ratings Group ("S&P"), Aaa from Moody's Investors
Service, Inc. ("Moody's") or AAA from Fitch Investors Service, Inc. ("Fitch").
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is adjudged by S&P to be extremely strong
and highly likely to remain so over a long period of time. A Moody's insurance
claims-paying ability rating is an opinion of the ability of an insurance
company to repay punctually senior policyholder obligations and claims. An
insurer with an insurance claims-paying ability rating of Aaa is adjudged by
Moody's to be of the best quality. In the opinion of Moody's, the policy
obligations of an insurance company with an insurance claims-paying ability
rating of Aaa carry the smallest degree of credit risk and, while the financial
strength of these companies is likely to change, such changes as can be
visualized are most unlikely to impair the company's fundamentally strong
position. A Fitch insurance claims-paying ability rating provides an assessment
of an insurance company's financial strength and, therefore, its ability to pay
policy and contract claims under the terms indicated. An insurer with an
insurance claims-paying ability rating of AAA has the highest rating assigned by
Fitch. The ability to pay claims is adjudged by Fitch to be extremely strong for
insurance companies with this highest rating. In the opinion of Fitch,
foreseeable business and economic risk factors should not have any material
adverse impact on the ability of these insurers to pay claims. In Fitch's
opinion, profitability, overall balance sheet strength,
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capitalization and liquidity are all at very secure levels and are unlikely to
be affected by potential adverse underwriting, investment or cyclical events.
An insurance claims-paying ability rating by S&P, Moody's or Fitch does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e. debt
contracts.)
The assignment of ratings by S&P, Moody's or Fitch to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
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COMMON STOCK
MUNIYIELD INSURED FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Mark B.
Goldfus 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 Insured Fund, Inc. (the
"Fund") held of record by the undersigned on August 16, 1996 at the Annual
Meeting of Stockholders of the Fund to be held on September 30, 1996, 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, 3 AND 4.
(Continued and to be signed on the reverse side)
<PAGE> 183
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Insured Fund II, Inc. ("Insured
II")
FOR / / AGAINST / / ABSTAIN / /
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
<TABLE>
<S> <C>
FOR all nominees listed WITHHOLD AUTHORITY
below (except as marked to the contrary below) / / to vote for all nominees listed below / /
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list below.)
Joe Grills, Robert S. Salomon, Jr., Stephen B. Swensrud, Arthur Zeikel
3. In the event that proposal 1 has been approved by the requisite number of
stockholders of the Fund and Insured II and the Reorganization has taken
place prior to October 31, 1996, to consider and act upon a proposal to
ratify the selection of Ernst & Young LLP as the independent auditors of the
combined fund to serve for the fiscal year ending October 31, 1996.
FOR / / AGAINST / / ABSTAIN / /
4. In the event that proposal 1 has not been approved by the requisite number of
stockholders of the Fund and Insured II or the Reorganization has not taken
place prior to October 31, 1996, 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, 1996.
FOR / / AGAINST / / ABSTAIN / /
5. 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: , 1996
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> 184
AUCTION MARKET
PREFERRED STOCK
MUNIYIELD INSURED 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 Mark B.
Goldfus 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 Insured
Fund, Inc. (the "Fund") held of record by the undersigned on August 16, 1996 at
the Annual Meeting of Stockholders of the Fund to be held on September 30, 1996,
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, 3 AND 4.
(Continued and to be signed on the reverse side)
<PAGE> 185
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Insured Fund II, Inc. ("Insured
II")
FOR / / AGAINST / / ABSTAIN / /
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
<TABLE>
<S> <C>
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) / / to vote for all nominees listed below / /
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Joe Grills, Walter Mintz, Robert S. Salomon, Jr., Melvin R. Seiden, Stephen
B. Swensrud, Arthur Zeikel
3. In the event that proposal 1 has been approved by the requisite number of
stockholders of the Fund and Insured II and the Reorganization has taken
place prior to October 31, 1996, to consider and act upon a proposal to
ratify the selection of Ernst & Young LLP as the independent auditors of the
combined fund to serve for the fiscal year ending October 31, 1996.
FOR / / AGAINST / / ABSTAIN / /
4. In the event that proposal 1 has not been approved by the requisite number of
stockholders of the Fund and Insured II or the Reorganization has not taken
place prior to October 31, 1996, 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, 1996.
FOR / / AGAINST / / ABSTAIN / /
5. 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: , 1996
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> 186
COMMON STOCK
MUNIYIELD INSURED FUND II, 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 Mark B.
Goldfus 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 Insured Fund II, Inc.
(the "Fund") held of record by the undersigned on August 16, 1996 at the Annual
Meeting of Stockholders of the Fund to be held on September 30, 1996, 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> 187
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Insured Fund, Inc.
FOR / / AGAINST / / ABSTAIN / /
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
<TABLE>
<S> <C>
FOR all nominees listed WITHHOLD AUTHORITY
below (except as marked to the contrary below) / / to vote for all nominees listed below / /
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Edward H. Meyer, Jack B. Sunderland, J. Thomas Touchton, Arthur Zeikel
3. To consider and act upon a proposal to ratify the selection of Ernst & Young
LLP as the independent auditors of the Fund to serve for the current fiscal
year ending October 31, 1996.
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 _________________ , 1996
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> 188
AUCTION MARKET
PREFERRED STOCK
MUNIYIELD INSURED FUND II, 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 Mark B.
Goldfus 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 Insured
Fund II, Inc. (the "Fund") held of record by the undersigned on August 16, 1996
at the Annual Meeting of Stockholders of the Fund to be held on September 30,
1996, 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> 189
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Insured Fund, 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
(except as marked to the contrary below) / / to vote
for all nominees listed below) / /
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Donald Cecil, M. Colyer Crum, Edward H. Meyer, Jack B. Sunderland, J. Thomas
Touchton, Arthur Zeikel
3. To consider and act upon a proposal to ratify the selection of Ernst & Young
LLP as the independent auditors of the Fund to serve for the current fiscal
year ending October 31, 1996.
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
- -------------------------------------------------------------------------------,
1996
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> 190
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>
<S> <C>
(1)(a) -- Articles of Incorporation of the Registrant(a)
(1)(b) -- Amendment to Articles of Incorporation of the Registrant(a)
(1)(c) -- Form of Articles Supplementary creating the Series A, Series B, Series C,
Series D and Series E Auction Market Preferred Shares of the Registrant(b)
(1)(d) -- Form of Articles Supplementary creating the Series F and Series G Auction
Market Preferred Shares of the Registrant
(2) -- By-Laws of the Registrant(c)
(3) -- Not applicable
(4) -- Form of Agreement and Plan of Reorganization between the Registrant and
MuniYield Insured Fund II, Inc.(d)
(5)(a) -- Form of Certificate for Common Stock(c)
(5)(b) -- Form of Certificate for AMPS(b)
</TABLE>
C-1
<PAGE> 191
<TABLE>
<S> <C>
(5)(c) -- Portions of the Articles of Incorporation and the By-Laws of the Registrant
defining the rights of holders of shares of the Registrant(e)
(6) -- Form of Investment Advisory Agreement between the Registrant and the
Investment Adviser(c)
(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(c)
(7)(b) -- Form of Purchase Agreement between the Registrant, the Investment Adviser
and Merrill Lynch relating to the Registrant's AMPS(b)
(7)(c) -- Merrill Lynch Standard Dealer Agreement(a)
(8) -- Not applicable
(9) -- Custodian Contract between the Registrant and State Street Bank and Trust
Company(c)
(10) -- Not applicable
(11) -- Opinion and Consent of Brown & Wood LLP, counsel for the Registrant
(12) -- Private Letter Ruling from the Internal Revenue Service(f)
(13)(a) -- Registrar, Transfer Agency and Service Agreement between the Registrant and
The Bank of New York(c)
(13)(b) -- Form of Auction Agent Agreement(b)
(13)(c) -- Form of Broker-Dealer Agreement(b)
(13)(d) -- Form of Letter of Representations(b)
(14)(a) -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant
(14)(b) -- Consent of Ernst & Young LLP, independent auditors for MuniYield Insured
Fund II, Inc.
(15) -- Not applicable
(16) -- Power of Attorney(g)
(17) -- None
</TABLE>
- ---------------
(a) Incorporated by reference to the Registrant's Registration Statement on
Form N-2 relating to the Common Stock, File Nos. 33-45058 and 811-06540
(the "Common Stock Registration Statement").
(b) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2 relating to the Auction
Market Preferred Stock, File Nos. 33-46025 and 811-06540.
(c) Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registrant's Common Stock Registration Statement.
(d) Included in Exhibit I to the Proxy Statement and Prospectus contained in
this Registration Statement.
(e) Reference is made to Article V, Article VI (Sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article IX, Article X, Article XI, Article XII
and Article XIII of the Registrant's Articles of Incorporation, as amended,
filed as Exhibits 1(a) and 1(b) 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 amended, as Exhibit 2 to Pre-Effective Amendment No. 2 to
the Common Stock Registration Statement.
(f) To be filed by post-effective amendment.
(g) Included on the signature page of the Registrant's Registration Statement
on Form N-14 filed on July 9, 1996 and incorporated by reference herein.
C-2
<PAGE> 192
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-3
<PAGE> 193
SIGNATURES
As required by the Securities Act of 1933, this Pre-Effective Amendment to
the Registration Statement has been signed on behalf of the Registrant, in the
Township of Plainsboro and State of New Jersey, on the 20th day of August, 1996.
MUNIYIELD INSURED FUND, INC.
(Registrant)
/s/ GERALD M. RICHARD
--------------------------------------
(Gerald M. Richard, Treasurer)
As required by the Securities Act of 1933, this Pre-Effective Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ----------------------------------------------- ------------------------------
<S> <C> <C>
ARTHUR ZEIKEL* President (Principal Executive
- ----------------------------------------------- Officer) and Director
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal Financial August 20, 1996
- ----------------------------------------------- and Accounting Officer)
(Gerald M. Richard)
JOE GRILLS* Director
- -----------------------------------------------
(Joe Grills)
WALTER MINTZ* Director
- -----------------------------------------------
(Walter Mintz)
ROBERT S. SALOMON, JR.* Director
- -----------------------------------------------
(Robert S. Salomon, Jr.)
MELVIN R. SEIDEN* Director
- -----------------------------------------------
(Melvin R. Seiden)
STEPHEN B. SWENSRUD* Director
- -----------------------------------------------
(Stephen B. Swensrud)
*By: /s/ GERALD M. RICHARD August 20, 1996
- -----------------------------------------------
(Gerald M. Richard, Attorney-in-Fact)
</TABLE>
C-4
<PAGE> 194
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION
-------- -----------------------------------------------------------------------
<C> <S> <C>
1(d) Form of Articles Supplementary creating the Series F and Series G
Auction Market Preferred Shares of the Registrant
(11) Opinion and Consent of Brown & Wood LLP, counsel for the Registrant
(14)(a) Consent of Deloitte & Touche LLP, independent auditors for the
Registrant
(14)(b) Consent of Ernst & Young LLP, independent auditors for MuniYield
Insured Fund II, Inc.
</TABLE>
C-5
<PAGE> 1
DRAFT
8/15/96
MUNIYIELD INSURED FUND, INC.
Articles Supplementary creating two series of
Auction Market Preferred Stock(R)
MUNIYIELD INSURED 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 4,800 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 respectively: Auction Market Preferred Stock, Series F; and Auction
Market Preferred Stock, Series G.
SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the
shares of each such series of preferred stock are as follows:
__________________________
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE> 2
DESIGNATION
Series F: A series of 2,400 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 F." Each share of
Auction Market Preferred Stock, Series F (sometimes referred to herein as
"Series F 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 F shall constitute a
separate series of preferred stock of the Corporation, and each share of
Auction Market Preferred Stock, Series F shall be identical.
Series G: A series of 2,400 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 G." Each share of
Auction Market
2
<PAGE> 3
Preferred Stock, Series G (sometimes referred to herein as "Series G 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 G shall constitute a separate series of
preferred stock of the Corporation, and each share of Auction Market Preferred
Stock, Series G 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 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
3
<PAGE> 4
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 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
4
<PAGE> 5
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.
"AMPS" means, as the case may be, the Auction Market Preferred Stock,
Series F; or Auction Market Preferred Stock, Series G.
"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
of each series and Other AMPS
5
<PAGE> 6
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 for each series of AMPS 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); (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
6
<PAGE> 7
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 payables for 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). For Moody's, the
Corporation shall include as a liability an amount calculated semi-annually
equal to 150% of the estimated cost of obtaining other insurance guaranteeing
the timely payment of interest on a Moody's Eligible Asset and principal thereof
to maturity with respect to Moody's Eligible Assets that (i) are covered by a
Policy which provides the Corporation with the option to obtain such other
insurance and (ii) are discounted by a Moody's Discount Factor determined by
reference to the insurance claims-paying ability rating of the issuer of such
Policy.
"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Corporation to satisfy the AMPS Basic Maintenance
7
<PAGE> 8
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 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 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 paragraph 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 Appli-
8
<PAGE> 9
cable Rate and to act as transfer agent, registrar, dividend disbursing agent
and redemption agent for the AMPS and Other AMPS.
"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.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including these Articles Supplementary), of the
9
<PAGE> 10
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 Insured 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 Municipal Bonds rated at least A, P-1,
VMIG-1 or MIG-1 by Moody's or A, 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 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.
10
<PAGE> 11
"Dividend Period" means the Initial Dividend Period, any 7-Day 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 each
series of AMPS or Other AMPS, as the case may be.
"Initial Dividend Period," with respect to each series of 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.
"Initial Dividend Rate," with respect to each series of AMPS, means the
rate per annum applicable to the Initial Dividend
11
<PAGE> 12
Period for such series of 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 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
12
<PAGE> 13
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 who 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 Dividends that would be due if
the Corporation were to make Retro active Taxable Allocations, with respect to
any fiscal year, estimated based upon dividends paid and the amount of undis-
13
<PAGE> 14
tributed 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 Municipal Bond which constitutes a Moody's Eligible Asset, the
percentage determined by reference to (a)(i) the rating by Moody's or S&P on
such Bond or (ii) in the event the Moody's Eligible Asset is insured under a
Policy and the terms of the Policy permit the Corporation, at its option, to
obtain other insurance guaranteeing the timely payment of interest on such
Moody's Eligible Asset and principal thereof to maturity, the Moody's insurance
claims-paying ability rating of the issuer of the Policy or (iii) in the event
the Moody's Eligible Asset is insured under an insurance policy which guarantees
the timely payment of interest on such Moody's Eligible Asset and principal
thereof to maturity, the Moody's insurance claims-paying ability rating of the
issuer of the insurance policy (provided that for purposes of clauses (ii) and
(iii) if the insurance claims-paying ability of an issuer of a Policy or
insurance policy is not rated by Moody's but is rated by S&P, such issuer shall
be deemed to have a Moody's insurance claims-paying ability rating which is two
full categories lower than the S&P insurance claims-paying ability rating) and
(b) the
14
<PAGE> 15
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** VM1G-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.
** Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
*** 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.
; provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-paying
ability rating in accordance with clause (a)(ii) or (a)(iii), such Moody's
Discount Factor shall be increased by an amount equal to 50% of the difference
between (a) the percentage set forth in the foregoing table under the
applicable rating category and (b) the percentage set forth in the foregoing
table under the rating category which is one category lower than the applicable
rating category.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term Municipal Bonds so long as such 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
15
<PAGE> 16
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 Municipal Bonds Sold. "Receivables for 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
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 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).
"Moody's Eligible Asset" means cash, Receivables for Municipal Bonds Sold
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 Municipal Bond, such Municipal
Bond (excluding any short-term Municipal Bond) will be deemed to have a Moody's
rating which is one full rating
16
<PAGE> 17
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 Municipal Bonds of at
least $10,000,000. In addition, Municipal Bonds in the Corporation's portfolio
must be within the following diversification requirements in order to be
included within Moody's Eligible Assets:
<TABLE>
<CAPTION>
Maximum State
Minimum Maximum or Territory
Issue Size Underlying Concentration
Rating ($Millions) Obligor (%)(1) (%)(1)(3)
- -------- ----------- -------------- -------------
<S> <C> <C> <C>
Aaa 10 100 100
Aa 10 20 60
A 10 10 40
Baa 10 6 20
Other(2) 10 4 12
</TABLE>
- ----------------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) 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.
For purposes of the maximum underlying obligor requirement described above, any
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.
When the Corporation sells a 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 Municipal
17
<PAGE> 18
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.
"Moody's Hedging Transaction" 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:
18
<PAGE> 19
<TABLE>
<CAPTION>
% Change in Moody's Volatility
Marginal Tax Rate Factor
----------------- ------------------
<S> <C>
=<.5% 292%
>5% but =<.10% 313%
>10% but =<.15% 338%
>15% but =<.20% 364%
>20% but =<.25% 396%
>25% but =<.30% 432%
>30% but =<.35% 472%
>35% but =<.40% 520%
</TABLE>
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. 33-_______) 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 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).
19
<PAGE> 20
"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 each series of 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 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
20
<PAGE> 21
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 there 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 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 (and 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
21
<PAGE> 22
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 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
22
<PAGE> 23
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.
"Policy" means an insurance policy purchased by the Corporation which
guarantees the payment of principal and interest on specified Municipal Bonds
during the period in which such Municipal Bonds are owned by the Corporation;
provided, however, that, as long as the AMPS are rated by Moody's and S&P, the
Corporation will not obtain any policy unless Moody's and S&P advise the
Corporation in writing that the purchase of such
Policy will not adversely affect their then-current rating on the AMPS.
23
<PAGE> 24
"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-fifth 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 October 25, 1996.
"Receivables for Municipal Bonds Sold" for Moody's has the meaning set
forth under the definition of Moody's Discount
24
<PAGE> 25
Factor, and for S&P has the meaning set forth under the definition of S&P
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 each series of 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 Group or its successors.
25
<PAGE> 26
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a)(i) the rating by S&P or Moody's on
such Bond or (ii) in the event the Municipal Bond is insured under a Policy and
the terms of the Policy permit the Corporation, at its option, to obtain other
permanent insurance guaranteeing the timely payment of interest on such
Municipal Bond and principal thereof to maturity, the S&P insurance
claims-paying ability rating of the issuer of the Policy or (iii) in the event
the Municipal Bond is insured under an insurance policy which guarantees the
timely payment of interest on such Municipal Bond and principal thereof to
maturity, the S&P insurance claims-paying ability rating of the issuer of the
insurance policy and (b) the S&P Exposure Period, in accordance with the tables
set forth below:
<TABLE>
<CAPTION>
Rating Category
-------------------------------
S&P Exposure Period AAA* AA* A* BBB*
------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
40 Business Days 190% 195% 210% 250%
22 Business Days 170 175 190 230
10 Business Days 155 160 175 215
7 Business Days 150 155 170 210
3 Business Days 130 135 150 190
</TABLE>
______________
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Bonds will be 115%, so long as such 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
26
<PAGE> 27
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 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 Municipal Bonds rated by Moody's
but not rated by S&P may comprise no more than 50% of short-term 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 Municipal Bonds Sold. "Receivables for
Municipal Bonds Sold," for purposes of calculating S&P's Eligible Assets as of
any Valuation Date, means the book value of receivables for Municipal Bonds sold
as of or prior to such Valuation Date if such receivables are due within five
Business Days of such Valuation Date. 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 Municipal
Bonds.
"S&P Eligible Asset" means cash, Receivables for Municipal Bonds Sold or a
Municipal Bond that (i) is issued by any of the 50 states, the territories and
their subdivisions, counties, cities, towns, villages, and school districts,
agencies, such as authorities and special districts created by the states, and
certain federally sponsored agencies such as local housing
27
<PAGE> 28
authorities (payments made on these bonds are exempt from regular federal
income taxes and are generally exempt from state and local taxes in the state
of issuance), (ii) is interest bearing and pays interest at least
semi-annually; (iii) is payable with respect to principal and interest in
United States Dollars; (iv) 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 that such Moody's-rated Municipal Bonds will be included in
S&P Eligible Assets only to the extent the Market Value of such 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 Municipal Bond, such Municipal Bond will
be deemed to have an S&P rating which is one full rating category lower than
its Moody's rating); (v) is not subject to a covered call or covered put option
written by the Corporation; (vi) is not part of a private placement of
Municipal Bonds; and (vii) is part of an issue of 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:
28
<PAGE> 29
(1) 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 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 Municipal Bonds exceeds 5% of the aggregate Market Value of the S&P
Eligible Assets and;
(2) Municipal Bonds issued by issuers in any one state or territory
will be considered S&P Eligible Assets only to the extent the Market
Value of such Municipal Bonds does not exceed 20% of the aggregate Market
Value of S&P Eligible Assets.
"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.
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"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.
"7-Day Dividend Period" means, with respect to Series G AMPS, a Dividend
Period consisting of seven days.
"Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days (other than 28 in the case of Series F AMPS and
other than seven in the case of Series G AMPS), evenly divisible by seven and
not fewer than seven or more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than 28 in the case of Series F AMPS and other
than seven in the case of Series G AMPS), 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
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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 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
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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 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 or any successor
index (the "Kenny 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
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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 Day, divided by (B) 1.00 minus the
Marginal Tax Rate (expressed as a decimal).
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"28-Day Dividend Period" means, with respect to Series F AMPS, 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
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<PAGE> 34
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
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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 Accountants, 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 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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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 each series of AMPS. Following the
Initial Dividend Payment Date for each series of AMPS, dividends on such series
of AMPS will be payable, at the option of the Corporation, either (i) with
respect to any 7-Day Dividend Period, 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
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on the day next succeeding the last day thereof (each such date 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, 7-Day
Dividend Periods, 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
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time, on the Business Day preceding the Dividend Payment Date. 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 each series of AMPS (the
"Initial Dividend Period"), the Applicable Rate shall be the Initial Dividend
Rate. Commencing on the Initial Dividend Payment Date for each series of 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 in the case of Series F AMPS and a
7-Day Dividend Period in the case of Series G AMPS, provided that if the
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preceding Dividend Period for Series F AMPS is a Special Dividend Period of less
than 28 days, the Dividend Period commencing during a Non-Payment Period will be
the same 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 Dividend Rate for the Dividend Period commencing during the
Non-Payment Period resulting from such
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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 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 and on each Dividend Payment
Date of each 7-Day Dividend Period, each 28-Day Dividend Period and 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,
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multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent.
(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 a series of AMPS be a number of days (other than 28 in the
case of Series F AMPS and other than seven in the case of Series G AMPS), evenly
divisible by seven, and not fewer than seven or 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
of greater than 28 days (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 a series of 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
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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
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 series of AMPS, the Corporation may not give
a Notice of Special Dividend Period in respect of such Request for Special
Dividend Period. In the
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event the Response indicates that it is advisable that the Corporation give a
Notice of Special Dividend Period for the series of AMPS, the Corporation may by
no later than the second Business Day prior to such Auction Date give a notice
(a "Notice of 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
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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 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. 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 for that series will be a 28-Day Dividend Period in
the case of Series F AMPS and a 7-Day Dividend Period in the case of Series G
AMPS, provided that if the then current Dividend Period for Series F AMPS is a
Special Dividend Period of less than 28 days, the next succeeding Dividend
Period for such series of 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,
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such next succeeding Dividend Period will be a 28-Day Dividend Period (in the
case of Series F AMPS) or a 7-Day Dividend Period (in the case of Series G
AMPS) and the Corporation may not again give a Notice of Special Dividend
Period for the AMPS (and any such attempted notice shall be null and void)
until Sufficient Clearing Bids have been made in an Auction with respect to a
28-Day Dividend Period (in the case of Series F AMPS) or a 7-Day Dividend
Period (in the case of Series G AMPS).
(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
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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 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
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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 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.
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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 income tax consequences) from the 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 marginal regular Federal 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 marginal regular
Federal corporate income tax rate applicable to ordinary income or capital
gains depending on the taxable character of the distribution (disregarding in
both (x) and (y) the effect of any state or local taxes and the phase out of,
or provision limiting,
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personal exemptions, itemized deductions, or the benefit of lower tax
brackets).
(f) Except as provided below, whenever the Corporation intends to include
any net capital gains or other income subject 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 a series 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 date of distribution, and after
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such payment the holders of AMPS 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 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,
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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) the Initial Dividend Period with respect to a series
of shares or (B) a Non-Call Period to which such share is subject. In
addition, holders of AMPS 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
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AMPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
respectively 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
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
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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 of all
series, Other AMPS and other Preferred Stock subject to 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
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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 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)
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the aggregate number of shares of AMPS of such series to be redeemed, (iv) the
place or places where shares of AMPS of such series 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 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
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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 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
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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 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
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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, 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
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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 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 differently than those of a
Holder of shares of any other series of AMPS without the affirmative vote of
the holders of at least a majority of the shares of 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.
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(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 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.
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(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 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
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paragraph 5(b) above shall cease, subject to the provisions of the last
sentence of paragraph 5(b)(ii).
(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
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
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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.
(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 Amounts or on which the Corporation fails to
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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 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
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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 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 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 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
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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 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
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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 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
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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 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
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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:
(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 $100,000 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;
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(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
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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 or (B) outstanding futures
contracts based on Treasury Bonds exceeding in number 10% of 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;
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(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
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(v) when the Corporation writes a futures contract or option thereon,
it will either maintain an amount of cash, cash equivalents or short-term,
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 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,
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<PAGE> 72
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 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 the Market Value of all 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);
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<PAGE> 73
(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 40% of the aggregate 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 80% of the aggregate Market Value of all 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;
-------
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<PAGE> 74
(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;
(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
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<PAGE> 75
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; (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
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<PAGE> 76
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 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
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<PAGE> 77
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 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
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<PAGE> 78
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 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.
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(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.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below. (v)
"Bidder" 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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<PAGE> 80
<TABLE>
<CAPTION>
Applicable Applicable
Percentage of Percentage of
Credit Ratings Reference Reference
- -------------------------------------- Rate - Rate -
Moody's S&P No Notification Notification
- ----------------- -------------- ---------------- -------------
<S> <C> <C> <C>
"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%
</TABLE>
The Corporation shall take all reasonable action necessary to enable S&P
and Moody's to provide a rating for each series of 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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<PAGE> 81
(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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<PAGE> 82
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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<PAGE> 83
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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<PAGE> 84
Holders also applies to the underlying beneficial ownership interests
represented thereby.
(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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<PAGE> 85
(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 Order 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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<PAGE> 86
(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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<PAGE> 87
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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<PAGE> 88
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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<PAGE> 89
(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 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 Rate and
Applicable Rate.
(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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<PAGE> 90
(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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<PAGE> 91
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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<PAGE> 92
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 Exiting 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 of a series 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 of a series
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 INSURED 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 under the penalties of perjury 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 ___________, 1996.
MUNIYIELD INSURED FUND, INC.
By _____________________________
Name:
Title:
Attest:
___________________________
Mark Goldfus
Secretary
<PAGE> 1
Exhibit (11)
BROWN & WOOD LLP
One World Trade Center
New York, N.Y. 10048-0557
Telephone: 212-839-5300
Facsimile: 212-839-5599
August 20, 1996
MuniYield Insured Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
We have acted as counsel for MuniYield Insured Fund, Inc. ("Insured I") in
connection with its proposed acquisition of all of the assets and assumption of
all of the liabilities of MuniYield Insured Fund II, Inc. ("Insured II"), in
exchange for newly-issued shares of common stock and auction market preferred
stock of Insured I (collectively, the "Reorganization"). This opinion is
furnished in connection with Insured I's Registration Statement on Form N-14
under the Securities Act of 1933, as amended (File No. 333-7823; the
"Registration Statement"), relating to shares of common stock and auction
market preferred stock of Insured I, each par value $0.10 per share
(collectively, the "Shares"), to be issued in the Reorganization.
As counsel for Insured I, we are familiar with the proceedings taken by it
and to be taken by it in connection with the authorization, issuance and sale
of the Shares. In addition, we have examined and are familiar with the
Articles of Incorporation of Insured I, as amended and supplemented, the
By-Laws of Insured I, as amended, and such other documents as we have deemed
relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that subsequent to the
approval of the Agreement and Plan of Reorganization between Insured I and
Insured II set forth in the joint proxy statement and prospectus constituting a
part of the Registration Statement (the "Joint Proxy Statement and
Prospectus"), the Shares, upon issuance in the manner referred to in the
Registration Statement, for consideration not less than the par value thereof,
will be legally issued, fully paid and non-assessable shares of common stock or
auction market preferred stock, as the case may be, of Insured I.
<PAGE> 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Joint Proxy Statement
and Prospectus constituting parts thereof.
Very truly yours,
/s/ BROWN & WOOD LLP
2
<PAGE> 1
EXHIBIT 14(a)
INDEPENDENT AUDITORS' CONSENT
MuniYield Insured Fund, Inc.
We consent to the use in this Registration Statement on Form N-14 of our report
dated December 8, 1995 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 20, 1996
<PAGE> 1
Exhibit 14(b)
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 MuniYield
Insured Fund II, Inc. dated December 1, 1995, in the Registration Statement
(Form N-14 No. 333-7823) and related joint Proxy Statement and Prospectus of
MuniYield Insured Fund, Inc. dated August 21, 1996.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Princeton, New Jersey
August 15, 1996
