<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1996
SECURITIES ACT FILE NO. 333-7813
INVESTMENT COMPANY ACT FILE NO. 811-6502
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 CALIFORNIA INSURED FUND II, 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:
NUMBER, STREET, CITY, STATE, ZIP CODE)
------------------------
ARTHUR ZEIKEL
MUNIYIELD CALIFORNIA INSURED FUND II, 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, NY 10048-0557 PLAINSBORO, NJ 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 CALIFORNIA INSURED FUND II, 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 CALIFORNIA INSURED FUND II, INC.
MUNIVEST CALIFORNIA INSURED FUND, 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 CALIFORNIA INSURED FUND II, INC.
MUNIVEST CALIFORNIA INSURED FUND, INC.:
NOTICE IS HEREBY GIVEN that annual meetings of stockholders (the
"Meetings") of MuniYield California Insured Fund II, Inc. ("MuniYield California
Insured II") and MuniVest California Insured Fund, Inc. ("MuniVest California
Insured") 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
11:30 A.M., New York time (for MuniYield California Insured II) and 11:15 A.M.,
New York time (for MuniVest California Insured) 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 MuniVest California Insured by MuniYield California
Insured II, and the assumption of all of the liabilities of MuniVest
California Insured by MuniYield California Insured II, in exchange solely
for an equal aggregate value of shares of Common Stock of MuniYield
California Insured II ("MuniYield California Insured II Common Stock") and
shares of a newly-created series of Auction Market Preferred Stock ("AMPS")
of MuniYield California Insured II to be designated Series C ("MuniYield
California Insured II Series C AMPS") and the distribution of such
MuniYield California Insured II Common Stock to the holders of Common Stock
of MuniVest California Insured and such MuniYield California Insured II
Series C AMPS to the holders of AMPS of MuniVest California Insured. A vote
in favor of this proposal also will constitute a vote in favor of the
liquidation and dissolution of MuniVest California Insured and the
termination of its registration under the Investment Company Act of 1940;
(2) To elect a Board of Directors of MuniYield California Insured II
and MuniVest California Insured to serve for the ensuing year;
(3) To consider and act upon a proposal to ratify the selection of
Deloitte & Touche LLP to serve as independent auditors of MuniYield
California Insured II and MuniVest California Insured, for the respective
Fund's current fiscal year ending October 31, 1996; and
(4) To transact such other business as properly may come before the
Meetings or any adjournment thereof.
The Boards of Directors of MuniYield California Insured II and MuniVest
California Insured 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.
<PAGE> 4
A complete list of the stockholders of MuniYield California Insured II and
MuniVest California Insured, as the case may be, entitled to vote at the
Meetings will be available and open to the examination of any stockholder of
MuniYield California Insured II or MuniVest California Insured, respectively,
for any purpose germane to the Meetings during ordinary business hours from and
after September 16, 1996, at the offices of MuniYield California Insured II, 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 and return it promptly in the envelope provided for
that purpose. The enclosed proxy is being solicited on behalf of the Board of
Directors of MuniYield California Insured II or MuniVest California Insured, 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 CALIFORNIA INSURED FUND II, INC.
MUNIVEST CALIFORNIA INSURED FUND, 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 California Insured Fund II, Inc.,
a Maryland corporation ("MuniYield California Insured II"), and MuniVest
California Insured Fund, Inc., a Maryland corporation ("MuniVest California
Insured"), for use at Annual Meetings of Stockholders (the "Meetings") called to
approve or disapprove the proposed reorganization whereby (i) MuniYield
California Insured II will acquire all of the assets, and will assume all of the
liabilities, of MuniVest California Insured, in exchange solely for an equal
aggregate value of newly-issued shares of Common Stock, par value $.10 per
share, of MuniYield California Insured II ("MuniYield California Insured II
Common Stock") and shares of a newly-created series of Auction Market Preferred
Stock ("AMPS") of MuniYield California 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) to be designated Series C
("MuniYield California Insured II Series C AMPS") to be issued by MuniYield
California Insured II; and (ii) MuniVest California Insured will be deregistered
and dissolved (collectively, the "Reorganization"). MuniYield California Insured
II and MuniVest California Insured 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 sets forth concisely the
information about MuniYield California Insured II and MuniVest California
Insured that stockholders of MuniYield California Insured II and MuniVest
California Insured should know before considering the Reorganization and should
be retained for future reference. MuniYield California Insured II and MuniVest
California Insured 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.
MuniYield California Insured II Common Stock and MuniVest California
Insured Common Stock are listed on the New York Stock Exchange (the "NYSE")
under the symbols "MCA" and "MVC", respectively. Subsequent to the
Reorganization, shares of MuniYield California Insured II Common Stock will
continue to be listed on the NYSE under the symbol "MCA". 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.
The address of the principal executive offices of both MuniYield California
Insured II and MuniVest California Insured 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
This Proxy Statement and Prospectus serves as a prospectus of MuniYield
California Insured II under the Securities Act of 1933, as amended (the
"Securities Act"), in connection with the issuance of MuniYield California
Insured II Common Stock and MuniYield California Insured II Series C AMPS in the
Reorganization.
The aggregate net asset value of the MuniYield California Insured II Common
Stock to be issued to MuniVest California Insured and thereafter distributed to
the holders of shares of Common Stock, par value $.10 per share, of MuniVest
California Insured ("MuniVest California Insured Common Stock") will equal the
aggregate net asset value of the shares of MuniVest California Insured Common
Stock on the date of the Reorganization. Similarly, it is intended that the
aggregate liquidation preference and value of the MuniYield California Insured
II Series C AMPS to be issued to MuniVest California Insured and thereafter
distributed to the holders of shares of AMPS of MuniVest California Insured,
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)
("MuniVest California Insured AMPS"), will equal the aggregate liquidation
preference and value of the MuniVest California Insured AMPS on the date of the
Reorganization. As soon as practicable after the receipt by MuniYield California
Insured II of all of MuniVest California Insured's assets and the assumption by
MuniYield California Insured II of all of MuniVest California Insured's
liabilities, MuniVest California Insured will distribute MuniYield California
Insured II Common Stock and MuniYield California Insured II Series C AMPS to
MuniVest California Insured's stockholders as described under "The
Reorganization". Thereafter, MuniVest California Insured will terminate its
registration under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and will liquidate and dissolve in accordance with
the laws of the State of Maryland.
Both MuniYield California Insured II and MuniVest California Insured are
non-diversified, leveraged, closed-end management investment companies with
virtually identical investment objectives. Both MuniYield California Insured II
and MuniVest California Insured seek to provide stockholders with as high a
level of current income exempt from Federal and California income taxes as is
consistent with their respective investment policies and prudent investment
management. MuniYield California Insured II and MuniVest California Insured seek
to achieve their respective investment objectives by investing primarily in a
portfolio of long-term, investment grade municipal obligations the interest on
which, in the opinion of bond counsel to the issuer, is exempt from Federal and
California income taxes ("California Municipal Bonds"). There can be no
assurance that after the Reorganization the surviving fund will achieve the
investment objective of either MuniYield California Insured II or MuniVest
California Insured.
2
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION......................................................................... 5
</TABLE>
<TABLE>
<S> <C>
THE REORGANIZATION................................................................... 6
SUMMARY......................................................................... 6
RISK FACTORS AND SPECIAL CONSIDERATIONS......................................... 16
Special Considerations Relating to California Municipal Bonds.............. 17
Effects of Leverage........................................................ 17
Portfolio Management....................................................... 18
Ratings Considerations..................................................... 18
COMPARISON OF THE FUNDS......................................................... 19
Financial Highlights....................................................... 19
Investment Objective and Policies.......................................... 23
Portfolio Insurance........................................................ 25
Description of California Municipal Bonds.................................. 26
Other Investment Policies.................................................. 27
Information Regarding Options and Futures Transactions..................... 28
Investment Restrictions.................................................... 32
Rating Agency Guidelines................................................... 33
Portfolio Composition...................................................... 34
Portfolio Transactions..................................................... 35
Portfolio Turnover......................................................... 36
Net Asset Value............................................................ 37
Capital Stock.............................................................. 37
Management of the Funds.................................................... 40
Voting Rights.............................................................. 41
Stockholder Inquiries...................................................... 42
Dividends and Distributions................................................ 42
Automatic Dividend Reinvestment Plan....................................... 44
Liquidation Rights of Holders of AMPS...................................... 45
Tax Rules Applicable to MuniYield California Insured II, MuniVest
California Insured and their Stockholders.................................. 46
AGREEMENT AND PLAN OF REORGANIZATION............................................ 49
General.................................................................... 49
Procedure.................................................................. 51
Terms of the Agreement and Plan of Reorganization.......................... 51
Potential Benefits to MuniYield California Insured II Common Stockholders
and MuniVest California Insured Common Stockholders as a Result of the
Reorganization............................................................. 54
Surrender and Exchange of MuniVest California Insured Stock Certificates... 55
Tax Consequences of the Reorganization..................................... 56
Capitalization............................................................. 58
</TABLE>
3
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ELECTION OF DIRECTORS................................................................ 59
Committee and Board Meetings.................................................... 65
Compliance with Section 16(a) of the Securities Exchange Act of 1934............ 65
Interested Persons.............................................................. 66
Compensation of Directors....................................................... 66
Officers of the Funds........................................................... 67
SELECTION OF INDEPENDENT AUDITORS.................................................... 68
INFORMATION CONCERNING THE ANNUAL MEETINGS........................................... 69
Date, Time and Place of Meetings................................................ 69
Solicitation, Revocation and Use of Proxies..................................... 69
Record Date and Outstanding Shares.............................................. 69
Security Ownership of Certain Beneficial Owners and Management of MuniYield
California Insured II and MuniVest California Insured.......................... 69
Voting Rights and Required Vote................................................. 70
ADDITIONAL INFORMATION............................................................... 71
CUSTODIAN............................................................................ 73
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR.............................. 73
LEGAL PROCEEDINGS.................................................................... 73
LEGAL OPINIONS....................................................................... 73
EXPERTS.............................................................................. 73
STOCKHOLDER PROPOSALS................................................................ 74
INDEX TO FINANCIAL STATEMENTS........................................................ F-1
EXHIBIT I -- AGREEMENT AND PLAN OF REORGANIZATION.................................... I-1
EXHIBIT II -- ECONOMIC CONDITIONS IN CALIFORNIA...................................... II-1
EXHIBIT III -- RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER....................... III-1
EXHIBIT IV -- PORTFOLIO INSURANCE.................................................... IV-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 MuniYield
California Insured II and MuniVest California Insured 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 11:30 A.M.,
New York time (for MuniYield California Insured II) and 11:15 A.M., New York
time (for MuniVest California Insured). The mailing address for both MuniYield
California Insured II and MuniVest California Insured 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 MuniYield California Insured II or MuniVest California Insured,
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
MuniYield California Insured II and MuniVest California Insured (the "Agreement
and Plan of Reorganization"); (2) to elect a Board of Directors of each Fund to
serve for the ensuing year; and (3) to ratify the selection of Deloitte & Touche
LLP as the independent auditors of MuniYield California Insured II and MuniVest
California Insured, for the respective Fund's current fiscal year ending October
31, 1996.
With respect to proposal 1, approval of the Agreement and Plan of
Reorganization by MuniYield California Insured II will require the affirmative
vote of stockholders representing a majority of the outstanding shares of
MuniYield California Insured II Common Stock and of the AMPS of MuniYield
California Insured II, designated Series A and Series B, each with a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) (collectively, the
"MuniYield California Insured II AMPS"), voting together as a single class, and
a majority of the outstanding shares of MuniYield California Insured II AMPS,
voting separately as a class; and approval by MuniVest California Insured will
require the affirmative vote of stockholders representing a majority of the
outstanding shares of MuniVest California Insured Common Stock and MuniVest
California Insured AMPS, voting together as a single class, and a majority of
the outstanding shares of MuniVest California Insured AMPS, voting separately as
a class.
With respect to proposal 2, holders of shares of MuniYield California
Insured II AMPS are entitled to elect two Directors of MuniYield California
Insured II and holders of shares of MuniYield California Insured II Common Stock
and MuniYield California Insured II AMPS voting together as a single class are
entitled to elect the remaining Directors of MuniYield California Insured II;
similarly, holders of shares of MuniVest California Insured AMPS are entitled to
elect two Directors of MuniVest California Insured and holders of shares of
MuniVest California Insured Common Stock and MuniVest California Insured AMPS
voting together as a single class are entitled to elect the remaining Directors
of MuniVest California Insured. Assuming a quorum is present, (x) election of
the two Directors of MuniYield California Insured II or MuniVest California
Insured, as the case may be, to be elected by the holders of shares 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 MuniYield California Insured
II AMPS or MuniVest California Insured AMPS, respectively, represented at
5
<PAGE> 10
the Meetings and entitled to vote; and (y) election of the remaining Directors
of MuniYield California Insured II or MuniVest California Insured, as the case
may be, will require the affirmative vote of a majority of the votes cast by the
holders of 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, approval of the ratification of the selection
of Deloitte & Touche LLP as the independent auditors of MuniYield California
Insured II will require the affirmative vote of a majority of the votes cast by
the holders of shares of MuniYield California Insured II Common Stock and
MuniYield California Insured II AMPS represented at the Meetings and entitled to
vote, voting together as a single class; similarly, approval of the ratification
of the selection of Deloitte & Touche LLP as the independent auditors of
MuniVest California Insured will require the affirmative vote of a majority of
the votes cast by the holders of shares of MuniVest California Insured Common
Stock and MuniVest California Insured AMPS represented at the Meetings and
entitled to vote, voting together as a single class.
The Boards of Directors of MuniYield California Insured II and MuniVest
California Insured 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 12,678,633 shares of MuniYield California
Insured II Common Stock, 3,600 shares of MuniYield California Insured II AMPS in
two series, 5,961,365 shares of MuniVest California Insured Common Stock and
1,600 shares of MuniVest California Insured AMPS. To the knowledge of the
management of each of MuniYield California Insured II and MuniVest California
Insured, no person owned beneficially more than 5% of the respective outstanding
shares of either class of capital stock of MuniYield California Insured II or
MuniVest California Insured at the Record Date.
The Boards of Directors of MuniYield California Insured II and MuniVest
California Insured know of no business other than that discussed in proposals 1,
2 and 3 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 MuniVest California Insured by MuniYield California
Insured II and the subsequent distribution of MuniYield California Insured II
Common Stock and MuniYield California Insured II Series C AMPS to the holders of
MuniVest California Insured Common Stock and MuniVest California Insured AMPS,
respectively, and (ii) the subsequent deregistration and dissolution of MuniVest
California Insured.
6
<PAGE> 11
At a meeting of the Board of Directors of MuniYield California Insured II
held on June 21, 1996 and at a meeting of the Board of Directors of MuniVest
California Insured held on May 3, 1996, the Boards of Directors of MuniYield
California Insured II and MuniVest California Insured each unanimously approved
a proposal that MuniYield California Insured II acquire all of the assets, and
assume all of the liabilities, of MuniVest California Insured in exchange solely
for MuniYield California Insured II Common Stock and MuniYield California
Insured II Series C AMPS to be issued to MuniVest California Insured and
thereafter distributed to the stockholders of MuniVest California Insured.
Subject to obtaining the necessary approvals from the MuniYield California
Insured II and MuniVest California Insured stockholders, the Board of Directors
of MuniVest California Insured deemed advisable the deregistration of MuniVest
California Insured under the Investment Company Act and its dissolution under
the laws of the State of Maryland.
Both MuniYield California Insured II and MuniVest California Insured seek
to provide stockholders with as high a level of current income exempt from
Federal and California income taxes as is consistent with their respective
investment policies and prudent investment management. Both MuniYield California
Insured II and MuniVest California Insured seek to achieve their investment
objectives by investing primarily in a portfolio of California Municipal Bonds.
Under normal circumstances, at least 80% of each Fund's total assets will be
invested in California 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.
MuniYield California Insured II and MuniVest California Insured are both
non-diversified, leveraged, closed-end management investment companies
registered under the Investment Company Act. If the MuniYield California Insured
II and MuniVest California Insured stockholders approve the Reorganization,
MuniYield California Insured II Common Stock and MuniYield California Insured II
Series C AMPS will be issued to MuniVest California Insured in exchange for the
assets of MuniVest California Insured. After the Reorganization, MuniVest
California Insured will distribute the MuniYield California Insured II Common
Stock and the MuniYield California Insured II Series C AMPS to its stockholders
and thereafter 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
MuniYield California Insured II and MuniVest California Insured have determined
that the Reorganization will potentially benefit the holders of Common Stock of
both MuniYield California Insured II and MuniVest California Insured.
Specifically, after the Reorganization, MuniVest California Insured stockholders
will remain invested in a closed-end fund that has an investment objective and
policies virtually identical to those of MuniVest California Insured and which
utilizes the same management personnel. In addition, it is anticipated that both
MuniYield California Insured II and MuniVest California Insured common
stockholders will be subject to a reduced overall operating expense ratio based
on the combined assets of the surviving fund after the Reorganization. It is not
anticipated that the Reorganization will directly benefit the holders of shares
of MuniYield California Insured II AMPS or MuniVest California Insured 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
MuniYield California Insured II and MuniVest California Insured took into
account the investment objective and policies of both MuniYield California
Insured II and MuniVest California Insured, the expenses incurred by both due to
the Reorganization and on an ongoing basis by the new and existing stockholders
of MuniYield California Insured II and the potential benefits, including
economies of scale, to MuniYield California Insured II and
7
<PAGE> 12
MuniVest California Insured common and preferred stockholders as a result of the
Reorganization. The Boards of Directors of MuniYield California Insured II and
MuniVest California Insured, including all of the Directors who are not
"interested persons", as defined in the Investment Company Act, of MuniYield
California Insured II or MuniVest California Insured, have determined that the
Reorganization is in the best interests of each of the Funds and of the common
and preferred stockholders of MuniYield California Insured II and MuniVest
California Insured 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 ("IRS") concerning the tax consequences
of the Reorganization as set forth in the Agreement and Plan of Reorganization.
Under the Agreement and Plan of Reorganization, however, the Board of Directors
of either MuniYield California Insured II or MuniVest California Insured may
cause the Reorganization to be postponed or abandoned should either Board
determine that it is in the best interests of the stockholders of either
MuniYield California Insured II or MuniVest California Insured, respectively,
to do so. The Agreement and Plan of Reorganization may be terminated, and the
Reorganization abandoned, whether before or after approval by the Funds'
stockholders, at any time prior to the Exchange Date (as defined below) (i) by
mutual consent of the Boards of Directors of MuniYield California Insured II and
MuniVest California Insured; (ii) by the Board of Directors of MuniYield
California Insured II if any condition to MuniYield California Insured II's
obligations has not been fulfilled or waived by such Board; or (iii) by the
Board of Directors of MuniVest California Insured if any condition to MuniVest
California Insured's obligations has not been fulfilled or waived by such Board.
8
<PAGE> 13
PRO FORMA FEE TABLE FOR COMMON STOCKHOLDERS OF MUNIYIELD CALIFORNIA
INSURED II, MUNIVEST CALIFORNIA INSURED AND
THE COMBINED FUND AS OF APRIL 30, 1996 (UNAUDITED)(A)
<TABLE>
<CAPTION>
ACTUAL
----------------------
MUNIYIELD
CALIFORNIA MUNIVEST
INSURED CALIFORNIA PRO FORMA FOR
II INSURED COMBINED FUND
--------- --------- -------------
<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.......................... 0.73% 0.74% 0.71%
Other Expenses
Transfer Agent Fees.......................... 0.03% 0.06% 0.03%
Custodian Fee................................ 0.01% 0.01% 0.01%
Miscellaneous................................ 0.25% 0.40% 0.23%
--------- --------- -------------
Total Other Expenses.............................. 0.29% 0.47% 0.27%
--------- --------- -------------
Total Annual Operating Expenses........................ 1.02% 1.21% 0.98%
======== ======== ===============
</TABLE>
- ---------------
(a) No information is presented with respect to AMPS because neither a Fund's
operating 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 annualized 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.
9
<PAGE> 14
EXAMPLE:
CUMULATIVE EXPENSES PAID ON SHARES OF COMMON STOCK
FOR THE PERIODS INDICATED:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 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 1.02% for
MuniYield California Insured II shares, 1.21% for MuniVest
California Insured shares and 0.98% for shares of the
combined fund and (2) a 5% annual return throughout the
period:
MuniYield California Insured II......................... $ 65 $86 $ 108 $173
MuniVest California Insured............................. $ 67 $91 $ 118 $194
Combined Fund*.......................................... $ 64 $85 $ 106 $169
</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 a MuniYield California Insured II or MuniVest
California Insured 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 MuniYield
California Insured II Common Stockholders and MuniVest California Insured Common
Stockholders as a Result of the Reorganization".
BUSINESS OF MUNIYIELD
CALIFORNIA
INSURED II.................. MuniYield California Insured II was
incorporated under the laws of the State of
Maryland on June 3, 1992 and commenced
operations on October 30, 1992. Like MuniVest
California Insured, MuniYield California
Insured II 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 and California
income taxes as is consistent with its
investment policies and prudent investment
management. Furthermore, like MuniVest
California Insured, MuniYield California
Insured II seeks to achieve its investment
objective by investing primarily in a
portfolio of California Municipal Bonds. See
"Comparison of the Funds -- Investment
Objectives and Policies".
10
<PAGE> 15
Like MuniVest California Insured, MuniYield
California Insured II has outstanding both
Common Stock and AMPS. As of July 31, 1996,
MuniYield California Insured II had net
assets of $277,031,427.
BUSINESS OF MUNIVEST
CALIFORNIA
INSURED..................... MuniVest California Insured was incorporated
under the laws of the State of Maryland on
February 19, 1993 and commenced operations on
April 30, 1993. Like MuniYield California
Insured II, MuniVest California Insured 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 and California
income taxes as is consistent with its
investment policies and prudent investment
management. Furthermore, like MuniYield
California Insured II, MuniVest California
Insured seeks to achieve its investment
objective by investing primarily in a
portfolio of California Municipal Bonds.
Like MuniYield California Insured II, MuniVest
California Insured has outstanding both
Common Stock and AMPS. As of July 31, 1996,
MuniVest California Insured had net assets of
$118,957,110.
COMPARISON OF THE FUNDS....... Investment Objectives and Policies. MuniYield
California Insured II and MuniVest California
Insured have virtually identical investment
objectives and policies. Both Funds seek to
pay interest exempt from Federal and
California income taxes and seek to maintain
as much of their respective portfolios
invested in California Municipal Bonds as
possible. As of July 31, 1996, 99% of
MuniYield California Insured II's net assets
and 99% of MuniVest California Insured's net
assets were invested in California Municipal
Bonds. The same investment restrictions apply
to both MuniYield California Insured II and
MuniVest California Insured. See "Comparison
of the Funds -- Investment Objective and
Policies".
Capital Stock. MuniYield California Insured II
and MuniVest California Insured each has
outstanding both Common Stock and AMPS. Both
MuniYield California Insured II Common Stock
and MuniVest California Insured Common Stock
are traded on the NYSE. As of July 31, 1996,
the net asset value per share of the
MuniYield California Insured II Common Stock
was $14.75 and the market price per share was
$13.50 and as of the same date, the net asset
value per share of the MuniVest California
Insured Common Stock was $13.24 and the
market
11
<PAGE> 16
price per share was $12.375. MuniYield
California Insured II AMPS and MuniVest
California Insured 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 MuniYield
California Insured II Series A AMPS and every
seven days in the case of MuniYield
California Insured II Series B AMPS unless
MuniYield California Insured II elects,
subject to certain limitations, to have a
special dividend period. As of the auction
held on July 19, 1996, the dividend rate on
the MuniYield California Insured II Series A
AMPS was 3.39%; as of the auction held on
August 2, 1996, the dividend rate on the
MuniYield California Insured II Series B AMPS
was 3.50%.
Similarly, auctions generally have been held
and will be held every seven days in the case
of MuniVest California Insured AMPS unless
MuniVest California Insured elects, subject
to certain limitations, to have a special
dividend period. As of the auction held on
August 6, 1996, the dividend rate on the
MuniVest California Insured AMPS was 2.80%.
Advisory Fees. The investment adviser for both
MuniYield California Insured II and MuniVest
California Insured 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
MuniYield California Insured II and MuniVest
California Insured. Roberto Roffo 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
12
<PAGE> 17
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 MuniYield California
Insured II Common Stock and The Bank of New
York is the transfer agent, dividend
disbursing agent and registrar for MuniVest
California Insured Common Stock. State Street
Bank and Trust Company is the custodian for
the assets of MuniYield California Insured II
and The Bank of New York is the custodian for
the assets of MuniVest California Insured.
IBJ Schroder Bank and Trust Company is the
transfer agent, registrar and auction agent
for both MuniYield California Insured II and
MuniVest California Insured 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; The Bank of New
York, 90 Washington Street, New York, New
York 10286 (for custodial services) and 101
Barclay Street, New York, New York 10286 (for
transfer agency services) and 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 MuniYield California Insured II was
0.69%, based on average net assets of
approximately $282.6 million including AMPS,
and 1.02%, based on average net assets of
approximately $192.6 million excluding AMPS,
and the overall annualized operating expense
ratio for MuniVest California Insured was
0.81%, based on average net assets of
approximately $121.2 million including AMPS,
and 1.21%, based on average net assets of
approximately $81.2 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 0.67%, based on average
net assets of approximately $403.8 million
including AMPS, and 0.98%, based on average
net assets of approximately $273.8 million
excluding AMPS.
Purchases and Sales of Common Stock and
AMPS. Purchase and sale procedures for both
MuniYield California Insured II Common Stock
and MuniVest California Insured Common
13
<PAGE> 18
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 MuniYield
California Insured II AMPS and MuniVest
California Insured 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
MuniYield California Insured II AMPS or
MuniVest California Insured 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 MuniYield California
Insured II AMPS and the MuniVest California
Insured 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 circumstances, 65% of each Fund's
total assets will be invested in California
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, and at
least 80% of each Fund's total assets will be
invested in California Municipal Bonds and
Municipal Bonds with remaining maturities of
one year or more which are insured under
either (i) an insurance policy purchased by
the Fund or
14
<PAGE> 19
(ii) an insurance policy obtained by the
issuer thereof or any other party. See
"Comparison of the Funds -- Investment
Objectives and Policies -- Portfolio
Insurance".
Portfolio Transactions. The portfolio
transactions in which MuniYield California
Insured II and MuniVest California Insured
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 MuniYield California Insured II
and MuniVest California Insured, 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 MuniYield
California Insured II Common Stock and
MuniVest California Insured Common Stock are
identical. Similarly, the corresponding
voting rights of the holders of shares of
MuniYield California Insured II AMPS and
MuniVest California Insured 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 MuniYield California
Insured II Common Stock and the holders of
shares of MuniVest California Insured 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.
15
<PAGE> 20
OUTSTANDING SECURITIES OF MUNIYIELD CALIFORNIA INSURED II
AND MUNIVEST CALIFORNIA INSURED AS OF JULY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT
AMOUNT FUND FOR ITS SHOWN IN PREVIOUS
TITLE OF CLASS AUTHORIZED OWN ACCOUNT COLUMN
- ------------------------------------------------ ----------- ------------------ -------------------
<S> <C> <C> <C>
MuniYield California Insured II
Common Stock............................... 199,996,400 -0 - 12,678,633
AMPS
Series A AMPS......................... 1,800 - 0 - 1,800
Series B AMPS......................... 1,800 -0 - 1,800
MuniVest California Insured
Common Stock............................... 199,998,400 -0 - 5,961,365
AMPS....................................... 1,600 -0 - 1,600
</TABLE>
TAX CONSIDERATIONS............ MuniYield California Insured II and MuniVest
California Insured have jointly requested a
private letter ruling from the IRS with
respect to the Reorganization to the effect
that, among other things, neither MuniYield
California Insured II nor MuniVest
California Insured will recognize gain or
loss on the transaction and MuniVest
California Insured stockholders will not
recognize gain or loss on the exchange of
their MuniVest California Insured shares
for shares of MuniYield California Insured
II Common Stock (except to the extent a
MuniVest California Insured common
stockholder receives cash representing an
interest in less than a full share of
MuniYield California Insured II Common Stock
in the Reorganization) or MuniYield
California Insured II Series C AMPS. The
consummation of the Reorganization is subject
to the receipt of such ruling. The
Reorganization will not affect the status of
MuniYield California Insured II as a
regulated investment company (a "RIC") under
the Internal Revenue Code of 1986, as amended
(the "Code"). MuniVest California Insured
will liquidate pursuant to the
Reorganization. See "The Reorganization --
Tax Consequences of the Reorganization".
RISK FACTORS AND SPECIAL CONSIDERATIONS
Since both MuniYield California Insured II and MuniVest California Insured
invest primarily in a portfolio of California 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.
16
<PAGE> 21
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL BONDS
MuniYield California Insured II and MuniVest California Insured ordinarily
invest substantially all of their total assets in California Municipal Bonds
and, therefore, they are more susceptible to factors adversely affecting issuers
of California Municipal Bonds than is a municipal bond investment company that
is not concentrated in issuers of California Municipal Bonds to this degree.
Economic activity in California, as in many other industrially developed states,
tends to be more cyclical than in some other states and in the nation as a
whole. FAM does not believe that the current economic conditions in California
will have a significant adverse effect on either Fund's ability to invest
prudently in California Municipal Bonds. See Exhibit II -- "Economic Conditions
in California".
EFFECTS OF LEVERAGE
Utilization of leverage, through the issuance of AMPS, involves certain
risks to holders of MuniYield California Insured II Common Stock and MuniVest
California Insured 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
17
<PAGE> 22
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.
PORTFOLIO MANAGEMENT
The portfolio management strategies of MuniYield California Insured II and
MuniVest California Insured 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
MuniYield California Insured II and MuniVest California Insured have
received ratings of their AMPS of AAA from S&P and "aaa" from Moody's. In order
to maintain these ratings, the Funds are required to maintain portfolio holdings
meeting specified guidelines of such rating agencies. These guidelines may
impose asset coverage requirements that are more stringent than those imposed by
the Investment Company Act.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings of the AMPS are not recommendations to purchase, hold or sell shares
of AMPS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor, nor do the rating agency guidelines
address the likelihood that a holder of shares of AMPS will be able to sell such
shares in an auction. The ratings are based on current information furnished to
Moody's and S&P by the Funds and FAM and information obtained from other
sources. The ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information. Neither the MuniYield
California Insured II Common Stock nor the MuniVest California Insured Common
Stock has been rated by a nationally recognized statistical rating organization.
The Board of Directors of each of MuniYield California Insured II or
MuniVest California Insured, as the case may be, without stockholder approval,
may amend, alter or repeal certain definitions or restrictions
18
<PAGE> 23
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.
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
MuniYield California Insured II
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 SIX FOR THE PERIOD
MONTHS ENDED FOR THE YEAR ENDED OCTOBER 31, OCTOBER 30, 1992+
APRIL 30, -------------------------------------------- TO 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......... $ 14.92 $ 13.39 $ 16.36 $ 14.15 $ 14.18
------------ ------------ ------------ ------------ --------
Investment income -- net..................... .56 1.13 1.17 1.12 --
Realized and unrealized gain (loss) on
investments -- net......................... (.47) 1.61 (2.90) 2.27 --
------------ ------------ ------------ ------------ --------
Total from investment operations............. .09 2.74 (1.73) 3.39 --
------------ ------------ ------------ ------------ --------
Less dividends and distributions to Common
Stock shareholders:
Investment income -- net................. (.44) (.87) (.92) (.84) --
Realized gain on investments -- net...... -- (.07) (.11) -- --
------------ ------------ ------------ ------------ --------
Total dividends and distributions to Common
Stock shareholders......................... (.44) (.94) (1.03) (.84) --
------------ ------------ ------------ ------------ --------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Capital charge resulting from issuance of
Common Stock............................... -- -- -- -- (.03)
------------ ------------ ------------ ------------ --------
Effect of Preferred Stock activity++:
Dividends and distributions to Preferred
Stock shareholders:
Investment income -- net............. (.13) (.26) (.19) (.20) --
Realized gain on
investments -- net................. -- (.01) (.02) -- --
Capital charge resulting from issuance of
Preferred Stock........................ -- -- -- (.14) --
------------ ------------ ------------ ------------ --------
Total effect of Preferred Stock activity..... (.13) (.27) (.21) (.34) --
------------ ------------ ------------ ------------ --------
Net asset value, end of period............... $ 14.44 $ 14.92 $ 13.39 $ 16.36 $ 14.15
=========== ======== ======== ======== ==============
Market price per share, end of period........ $ 13.875 $ 13.125 $ 11.875 $ 15.375 $ 15.00
=========== ======== ======== ======== ==============
TOTAL INVESTMENT RETURN:**
Based on market price per share.............. 9.08%# 19.00% (16.78%) 8.24% .00%#
=========== ======== ======== ======== ==============
Based on net asset value per share........... (.14%)# 19.97% (11.82%) 22.09% (.21%)#
=========== ======== ======== ======== ==============
RATIOS TO AVERAGE NET ASSETS:***
Expenses, net of reimbursement............... .69%* .71% .70% .56%## -- %
=========== ======== ======== ======== ==============
</TABLE>
19
<PAGE> 24
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED FOR THE YEAR ENDED OCTOBER 31, OCTOBER 30, 1992+
APRIL 30, -------------------------------------------- TO OCTOBER 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
Expenses..................................... .69%* .71% .70% .68% -- %
=========== ======== ======== ======== ==============
Investment income -- net..................... 4.97%* 5.42% 5.28% 5.17% -- %
=========== ======== ======== ======== ==============
SUPPLEMENTAL DATA:
Net assets, net of Preferred Stock, end of
period (in thousands)...................... $183,044 $ 189,124 $ 169,757 $ 207,404 $ 178,555
=========== ======== ======== ======== ==============
Preferred Stock outstanding, end of period
(in thousands)............................. $ 90,000 $ 90,000 $ 90,000 $ 90,000 --
=========== ======== ======== ======== ==============
Portfolio turnover........................... 57.30% 114.78% 41.67% 15.85% .00%
=========== ======== ======== ======== ==============
LEVERAGE:
Asset coverage per $1,000.................... $ 3,034 $ 3,101 $ 2,886 $ 3,304 --
=========== ======== ======== ======== ==============
DIVIDENDS PER SHARE ON PREFERRED STOCK
OUTSTANDING+++:
Series A -- Investment income -- net......... $ 469 $ 948 $ 636 $ 743 --
=========== ======== ======== ======== ==============
Series B -- Investment income -- net......... $ 441 $ 904 $ 687 $ 685 --
=========== ======== ======== ======== ==============
</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.
*** 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.
# Aggregate total investment return.
## For the year ended October 31, 1993, FAM earned fees of $1,379,081, of which
$297,429 was voluntarily waived. In addition, FAM reimbursed the Fund $40,885
for additional expenses.
MuniVest California Insured
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 SIX FOR THE YEAR ENDED OCTOBER FOR THE PERIOD
MONTHS ENDED 31, APRIL 30, 1993+
APRIL 30, ---------------------------- TO OCTOBER 31,
1996 1995 1994 1993
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $ 13.39 $ 11.80 $ 15.01 $ 14.18
------------ ------------ ------------ ---------------
Investment income -- net....................................... .50 1.03 1.01 .48
Realized and unrealized gain (loss) on investments -- net...... (.45) 1.58 (3.13) .91
------------ ------------ ------------ ---------------
Total from investment operations............................... .05 2.61 (2.12) 1.39
------------ ------------ ------------ ---------------
Less dividends and distributions to Common Stock shareholders:
Investment income -- net................................... (.39) (.77) (.82) (.34)
Realized gain on investments -- net........................ -- -- (.07) --
------------ ------------ ------------ ---------------
Total dividends and distributions to Common Stock
shareholders................................................. (.39) (.77) (.89) (.34)
------------ ------------ ------------ ---------------
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) (.25) (.20) (.06)
</TABLE>
20
<PAGE> 25
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED OCTOBER FOR THE PERIOD
MONTHS ENDED 31, APRIL 30, 1993+
APRIL 30, ---------------------------- TO OCTOBER 31,
1996 1995 1994 1993
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Realized gain on
investments -- net................. -- -- (.01) --
Capital charge resulting from issuance of Preferred
Stock.................................................... -- -- .01 (.13)
------------ ------------ ------------ ---------------
Total effect of Preferred Stock activity....................... (.12) (.25) (.20) (.19)
------------ ------------ ------------ ---------------
Net asset value, end of period................................. $ 12.93 $ 13.39 $ 11.80 $ 15.01
=========== ======= ======== ============
Market price per share, end of period.......................... $ 12.50 $ 11.875 $ 10.50 $ 14.75
=========== ======= ======== ============
TOTAL INVESTMENT RETURN:**
Based on market price per share................................ 8.59%# 20.89% (23.56%) .64%#
=========== ======= ======== ============
Based on net asset value per share............................. (.38%)# 21.30% (15.58%) 8.34%#
=========== ======= ======== ============
RATIOS TO AVERAGE NET ASSETS:***
Expenses, net of reimbursement................................. .81%* .81% .76%## .41%*##
------------ ------------ ------------ ---------------
Expenses....................................................... .81%* .81% .81% .83%*
=========== ======= ======== ============
Investment income -- net....................................... 4.96%* 5.33% 5.06% 4.82%*
=========== ======= ======== ============
SUPPLEMENTAL DATA:
Net assets, net of Preferred Stock, end of period (in
thousands)................................................... $ 77,069 $ 79,821 $ 70,351 $ 89,497
=========== ======= ======== ============
Preferred Stock outstanding, end of period (in thousands)...... $ 40,000 $ 40,000 $ 40,000 $ 40,000
=========== ======= ======== ============
Portfolio turnover............................................. 40.93% 90.41% 81.53% 38.34%
=========== ======= ======== ============
LEVERAGE:
Asset coverage per $1,000...................................... $ 2,927 $ 2,996 $ 2,759 $ 3,237
=========== ======= ======== ============
DIVIDENDS PER SHARE ON PREFERRED STOCK OUTSTANDING+++:
Investment income -- net....................................... $ 433 $ 933 $ 760 $ 239
=========== ======= ======== ============
</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.
*** Do not reflect the effect of dividends to holders of Preferred Stock.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on June 1, 1993.
+++ Dividends per share have been adjusted to reflect a two-for-one stock split
that occurred on December 1, 1994.
# Aggregate total investment return.
## For the period April 30, 1993 (commencement of operations) to October 31,
1993, FAM earned fees of $302,300, of which $197,543 was voluntarily waived.
In addition, FAM reimbursed the Fund $50,975 for additional expenses. For the
year ended October 31, 1994, FAM earned fees of $598,833, of which $70,995
was voluntarily waived.
21
<PAGE> 26
PER SHARE DATA FOR COMMON STOCK*
TRADED ON THE NEW YORK STOCK EXCHANGE
MuniYield California 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 $14.50 $14.77 $14.15 5.55% -1.83%
April 30, 1993.......................... 15.75 14.625 15.94 14.76 2.58 -3.66
July 31, 1993........................... 15.375 14.75 15.80 15.26 -0.72 -5.32
October 31, 1993........................ 16.00 15.00 16.67 15.62 -2.13 -8.09
January 31, 1994........................ 15.375 14.375 16.38 15.78 -4.75 -10.22
April 30, 1994.......................... 15.125 12.875 16.33 13.64 -3.46 -11.49
July 31, 1994........................... 13.625 13.00 14.89 13.95 -3.78 -9.34
October 31, 1994........................ 13.50 11.75 14.61 13.37 -6.40 -13.70
January 31, 1995........................ 12.375 10.625 13.81 12.22 -0.44 -15.94
April 30, 1995.......................... 13.375 12.75 14.45 13.79 -5.29 -11.40
July 31, 1995........................... 13.50 12.625 15.16 14.01 -6.45 -13.09
October 31, 1995........................ 13.25 12.625 14.95 13.96 -7.54 -13.68
January 31, 1996........................ 14.125 13.00 15.73 14.99 -8.91 -15.50
April 30, 1996.......................... 14.875 13.625 15.98 14.28 -1.98 -11.67
July 31, 1996........................... 14.00 13.50 14.75 14.26 -3.51 -8.29
</TABLE>
MuniVest California Insured
<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>
July 31, 1993........................... $15.125 $12.375 $14.56 $14.12 6.97% -1.13%
October 31, 1993........................ 15.25 14.50 15.35 14.30 2.75 -4.72
January 31, 1994........................ 15.00 13.25 15.00 14.28 1.76 -10.95
April 30, 1994.......................... 14.25 11.50 14.25 11.50 0.98 -10.58
July 31, 1994........................... 12.625 11.50 12.625 11.50 -1.98 -11.20
October 31, 1994........................ 11.875 10.375 11.875 10.375 -8.51 -16.33
January 31, 1995........................ 11.00 9.375 11.00 9.375 -2.88 -15.62
April 30, 1995.......................... 11.625 11.125 11.625 11.125 -7.66 -13.22
July 31, 1995........................... 12.125 11.125 12.125 11.125 -7.52 -15.14
October 31, 1995........................ 12.00 11.50 12.00 11.50 -7.15 -12.51
January 31, 1996........................ 13.375 12.00 14.09 13.46 -4.33 -11.92
April 30, 1996.......................... 12.75 11.75 14.29 12.75 -2.72 -11.65
July 31, 1996........................... 12.50 12.125 13.24 12.77 -3.77 -6.87
</TABLE>
- ---------------
* Calculations are based upon shares of Common Stock outstanding at the end of
each period.
** As reported in the consolidated transaction reporting system.
22
<PAGE> 27
As indicated in the tables above, since November 1, 1993 the MuniYield
California Insured II Common Stock and the MuniVest California Insured Common
Stock generally have traded at prices that represent a discount to net asset
value. Since November 1, 1993, share prices for MuniYield California Insured II
Common Stock have traded at a maximum discount of (15.94%) and share prices for
MuniVest California Insured Common Stock have fluctuated between a maximum
premium of 1.76% and a maximum discount of (16.33%). 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 MuniYield California
Insured II and MuniVest California Insured are virtually identical, with the
minor differences between the two Funds set forth below. Each Fund seeks as a
fundamental investment objective as high a level of current income exempt from
Federal and California income taxes as is consistent with the Fund's investment
policies and prudent investment management.
The investment objective and policies of MuniYield California Insured II
and MuniVest California Insured 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 65% of each Fund's total assets
will be invested in California 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, and at least 80% of each Fund's total assets
will be invested in California Municipal Bonds and 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 and California income taxes. Each Fund seeks to invest
substantially all of its total assets in California Municipal Bonds except at
times when, in the judgment of FAM, California 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.
The investment grade California Municipal Bonds in which each Fund invests
are those California 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-l+ through F-4 for Fitch. Obligations ranked in the fourth highest rating
category assigned long-term debt or in an equivalent short-term rating category
(BBB, SP-3 and A-3 for S&P; Baa, MIG-4 and Prime-3 for Moody's; and BBB, F-3 and
F-4 for
23
<PAGE> 28
Fitch), while considered "investment grade," may have certain speculative
characteristics. In assessing the quality of California 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 California Municipal Bonds are entitled and the
creditworthiness of the insurance company or other financial institution which
provided such credit enhancement. See Exhibit III -- "Ratings of Municipal Bonds
and Commercial Paper" and Exhibit IV -- "Portfolio Insurance".
In the case of California Municipal Bonds 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 California Municipal Bonds to be equivalent to
AAA or Aaa rated securities, as the case may be, even though such California
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 California Municipal Bonds must also comply
with the standards applied by the insurance carriers in determining eligibility
for portfolio insurance.
MuniYield California Insured II and MuniVest California Insured 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. MuniYield
California Insured II and MuniVest California Insured have been advised by their
counsel that the Fund 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 closed-end investment company, such as each Fund,
which invests primarily in fixed-income securities, changes as the general
levels of interest rates fluctuate. When interest rates decline, the value of a
fixed income portfolio can be expected to rise. Conversely, when interest rates
rise, the value of a fixed-income portfolio can be expected to decline. Prices
of longer-term securities generally fluctuate more in response to interest rate
changes than do short-term or medium-term securities. These changes in net asset
value are likely to be greater in the case of a fund having a leveraged capital
structure, such as the Funds.
On a temporary basis, each Fund may invest in short-term tax-exempt
securities, short-term U.S. Government securities, repurchase agreements or
cash. Such securities or cash will not exceed 20% of each Fund's total assets
except during interim periods pending investment of the net proceeds from public
offerings of the Fund's securities and temporary defensive periods when, in the
opinion of FAM, prevailing market or economic conditions warrant.
24
<PAGE> 29
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 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
MuniYield California Insured II or MuniVest California Insured 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 $75,000,000 and insurance claims-paying ability ratings of AAA from
S&P and Aaa from Moody's. See Exhibit II 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 California Municipal Bonds purchased by the Fund. A
California 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 California 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 California Municipal
Bonds beneficially owned by a Fund. In the event of a sale of any California
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 California
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
25
<PAGE> 30
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 .20 of
1% to .25 of 1% of the principal amount of the California Municipal Bonds
covered by such Policies. The estimate is based on the expected composition of
each Fund's portfolio of California Municipal Bonds. Additional information
regarding the Policies is set forth in Exhibit IV to this Proxy Statement and
Prospectus. In instances in which the Fund purchases California 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 California 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 California 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 California 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 California Municipal Bonds will not
receive timely scheduled payments of principal or interest). However, the
insured California Municipal Bonds are subject to market risk (i.e.,
fluctuations in market value as a result of changes in prevailing interest
rates).
DESCRIPTION OF CALIFORNIA MUNICIPAL BONDS
California 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 California Municipal Bonds if the interest paid
thereon is exempt from Federal and California income tax, even though such bonds
may be "private activity bonds" as discussed below.
The two principal classifications of California Municipal Bonds are
"general obligation" bonds and "revenue" or "special obligation" bonds. General
obligation bonds are secured by the issuer's pledge of faith,
26
<PAGE> 31
credit and taxing power for the payment of principal and interest. Revenue or
special obligation bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
from a special excise tax or other specific revenue source such as from the user
of the facility being financed. Industrial development bonds are in most cases
revenue bonds and generally do not constitute the pledge of the credit or taxing
power of the issuer of such bonds. The payment of the principal and interest on
such industrial development bonds depends solely on the ability of the user of
the facility financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. California 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 California 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 California 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 MuniYield California Insured II and MuniVest California Insured 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 MuniVest California Insured, which
borrowings shall be repaid within 60 days and not be extended or renewed).
When-Issued Securities and Delayed Delivery Transactions. MuniYield
California Insured II and MuniVest California Insured 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
27
<PAGE> 32
Fund enters into the commitment, and the value of the obligation thereafter will
be reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery day may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or liquid Municipal Bonds having a market value at all
times at least equal to the amount of the commitment.
Indexed and Inverse Floating Obligations. MuniYield California Insured II
and MuniVest California Insured may invest in Municipal Bonds the return on
which is based on a particular index of value or interest rates. For example,
each Fund may invest in Municipal Bonds that pay interest based on an index of
Municipal Bond interest rates or based on the value of gold or some other
product. The principal amount payable upon maturity of certain Municipal Bonds
also may be based on the value of an index. To the extent a Fund invests in
these types of Municipal Bonds, the Fund's return on such Municipal Bonds will
be subject to risk with respect to the value of the particular index. Also, a
Fund may invest in so-called "inverse floating rate bonds" or "residual interest
bonds" on which the interest rates typically vary inversely with a short-term
floating rate (which may be reset periodically by a dutch auction, by a
remarketing agent, or by reference to a short-term tax-exempt interest rate
index). Each Fund may purchase original issue inverse floating rate bonds in
both the primary and secondary markets and also may purchase in the secondary
market synthetically-created inverse floating rate bonds evidenced by custodial
or trust receipts. Generally, interest rates on inverse floating rate bonds will
decrease when short-term rates increase, and will increase when short-term rates
decrease. Such securities have the effect of providing a degree of investment
leverage, since they may increase or decrease in value in response to changes,
as an illustration, in market interest rates at a rate 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. MuniYield California Insured II and MuniVest California
Insured 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
28
<PAGE> 33
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
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 California 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 California 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
29
<PAGE> 34
value of portfolio securities because such depreciation may be offset, in whole
or in part, by an increase in the value of the position in the financial futures
contracts or options. A purchase of financial futures contracts or options
thereon may provide a hedge against an increase in the cost of securities
intended to be purchased, because such appreciation may be offset, in whole or
in part, by an increase in the value of the position in the financial futures
contracts or options.
The purchase or sale of a financial futures contract or option thereon
differs from the purchase or sale of a security in that no price or premium is
paid or received. Instead, an amount of cash or securities acceptable to the
broker equal to approximately 5% of the contract amount must be deposited with
the broker. This amount is known as initial margin. Subsequent payments to and
from the broker, called variation margin, are made on a daily basis as the price
of the financial futures contract or option thereon fluctuates making the long
and short positions in the financial futures contract or option thereon more or
less valuable.
Each Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of
40 large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging California 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 California 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
30
<PAGE> 35
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 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
31
<PAGE> 36
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.
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
MuniYield California Insured II and MuniVest California Insured 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 Funds 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 Funds
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 Funds are authorized to borrow money in excess
32
<PAGE> 37
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 Funds 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 Funds 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).
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
33
<PAGE> 38
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".
For so long as any shares of 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.
PORTFOLIO COMPOSITION
Although the investment portfolios of both Funds must satisfy the same
standards of credit quality, the actual securities owned by each Fund are
different, as a result of which there are certain differences in the composition
of the two investment portfolios. Of the California Municipal Bonds owned by
MuniYield California Insured II as of July 31, 1996, 90.2% are rated in the
highest grade by Moody's or S&P, 96.9% are rated in the highest two grades,
99.4% are rated in the highest three grades, 100% are rated in the highest four
grades, and none are unrated. The comparable percentages for MuniVest California
Insured are 85.8% in the highest grade, 93.2% in the highest two grades, 100% in
the highest three grades, 100% in the highest four grades and none unrated.
There are small differences in concentration among the categories of
issuers of the California Municipal Bonds held in the portfolios of the Funds.
For MuniYield California Insured II, as of July 31, 1996, the highest
concentration of Municipal Bonds was in the other revenue bonds category, the
water & sewer utilities industry and the transportation industry, accounting for
22%, 12%, and 11% of the Fund's portfolio, respectively, whereas for MuniVest
California Insured, the highest concentration was in the other revenue bonds
category, lease obligations and the industrial revenue pollution control
industry, accounting for 21%, 14% and 13% of the Fund's portfolio, respectively.
MuniYield California Insured II
As of July 31, 1996, approximately 92% of the market value of MuniYield
California Insured II's portfolio was invested in long-term municipal
obligations and approximately 11% of the market value of MuniYield California
Insured II's portfolio was invested in short-term municipal obligations. The
following
34
<PAGE> 39
table sets forth certain information with respect to the composition of
MuniYield California Insured II's long-term municipal obligation investment
portfolio as of July 31, 1996.
<TABLE>
<CAPTION>
VALUE
S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT
- ---- -------- ---------------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 60 $229,575 90.2%
AA Aa 5 17,095 6.7
A A 3 6,374 2.5
BBB Baa 1 1,361 0.6
--
-------------- -------
69 $254,405 100.0%
============ =========== =====
</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
III -- "Ratings of Municipal Bonds and Commercial Paper".
MuniVest California Insured
As of July 31, 1996, approximately 92.7% of the market value of MuniVest
California Insured's portfolio was invested in long-term municipal obligations
and approximately 11.7% of the market value of MuniVest California Insured's
portfolio was invested in short-term municipal obligations. The following table
sets forth certain information with respect to the composition of MuniVest
California Insured's long-term municipal obligation investment portfolio as of
July 31, 1996.
<TABLE>
<CAPTION>
VALUE
S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT
- ---- -------- ---------------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 37 $ 94,591 85.8%
AA Aa 4 8,185 7.4
A A 3 7,490 6.8
--
-------------- -------
44 $110,266 100.0%
============ =========== =====
</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
III -- "Ratings of Municipal Bonds and Commercial Paper".
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are the same for both
MuniYield California Insured II and MuniVest California Insured. 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
35
<PAGE> 40
generally seeks reasonably competitive commission rates, MuniYield California
Insured II and MuniVest California Insured 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
with Merrill Lynch in high quality, short-term, tax-exempt securities. An
affiliated person of a Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis.
MuniYield California Insured II and MuniVest California Insured 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 that 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 MuniYield California Insured II
AMPS and the MuniVest California Insured AMPS by the Auction Agent for the
Funds. The auctions require the participation of one or more broker-dealers,
each of whom enters into an agreement with the Auction Agent. After each
auction, the Auction Agent pays a service charge, from funds provided by the
issuing Fund, to each broker-dealer at the annual rate of 1/4 of 1%, calculated
on the basis of the purchase price of shares of the relevant AMPS placed by such
broker-dealer at such auction.
PORTFOLIO TURNOVER
Generally, neither MuniYield California Insured II nor MuniVest California
Insured 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
36
<PAGE> 41
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 114.78% and 41.67% respectively, for MuniYield California Insured II and
90.41% and 81.53% for MuniVest California Insured.
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 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
MuniYield California Insured II and MuniVest California Insured each has
outstanding both Common Stock and AMPS. MuniYield California Insured II Common
Stock and MuniVest California Insured Common Stock both are traded on the NYSE.
The shares of MuniYield California 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 MuniYield California Insured II Common Stock was $14.75 and the market
price per share was $13.50. The shares of MuniVest California Insured Common
Stock commenced trading on the NYSE on April 30, 1993. As of July 31, 1996, the
net asset value per share of the MuniVest California Insured Common Stock was
$13.24 and the market price per share was $12.375.
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
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powers, restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption. In connection with each Fund's offering of shares of
AMPS, MuniYield California Insured II reclassified 3,600 shares of unissued
capital stock as AMPS, and MuniVest California Insured reclassified 1,600 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.
Preferred Stock
MuniYield California Insured II AMPS are structured identically to MuniVest
California Insured AMPS. The AMPS of each Fund are shares of preferred stock of
the Fund that entitle their holders to receive dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor, at
a rate per annum that may vary for the successive dividend periods. MuniYield
California Insured II AMPS and MuniVest California Insured 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 MuniYield California Insured II Series A AMPS and every seven days in
the case of MuniYield California Insured II Series B AMPS unless MuniYield
California Insured II elects, subject to certain limitations, to have a special
dividend period. As of the auction held on July 19, 1996, the dividend rate on
the MuniYield California Insured II Series A AMPS was 3.39%; as of the auction
held on August 2, 1996, the dividend rate on the MuniYield California Insured II
Series B AMPS was 3.50%.
Similarly, auctions generally have been held and will be held every seven
days in the case of MuniVest California Insured AMPS unless MuniVest California
Insured elects, subject to certain limitations, to have a special dividend
period. As of the auction held on August 6, 1996, the dividend rate on the
MuniVest California Insured AMPS was 2.80%.
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.
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Certain Provisions of the Charter
Each Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the Fund
or to change the composition of its Board of Directors and could have the effect
of depriving stockholders of an opportunity to sell their shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund. A Director may be removed from office with or
without cause by a vote of the holders of at least 66 2/3% of the votes entitled
to be voted on the matter. A Director elected by the holders of Common Stock,
AMPS and any other preferred stock may be removed only by action of such
holders, and a Director elected by the holders of AMPS and any other preferred
stock may be removed only by action of the holders of AMPS and any other
preferred stock. In addition, the Charter of each Fund requires the affirmative
vote of the holders of at least 66 2/3% of all of the Fund's shares of capital
stock, then entitled to be voted, voting as a single class, to approve, adopt or
authorize the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with any other corporation or entity,
(ii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment activities), or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the entire Board of Directors, in which case the
affirmative vote of a majority of all of the votes entitled to be cast by
stockholders of the Fund, voting as a single class, is required. Such approval,
adoption or authorization of the 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.
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The Board of Directors of each Fund has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the Investment Company Act, are in the best interests of
stockholders generally. Reference should be made to the Charter of each Fund on
file with the Commission for the full text of these provisions.
MANAGEMENT OF THE FUNDS
Directors and Officers. The Boards of Directors of each of MuniYield
California Insured II and MuniVest California Insured currently consist of six
persons, five of whom are not "interested persons" as defined in the Investment
Company Act, of either Fund. The Directors of each Fund are responsible for the
overall supervision of the operations of MuniYield California Insured II and
MuniVest California Insured, as the case may be, and perform the various duties
imposed on the directors of investment companies by the Investment Company Act
and under applicable Maryland law. MuniYield California Insured II and MuniVest
California Insured 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 MuniYield California Insured II and MuniVest California Insured
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 MuniYield California Insured II
and MuniVest California Insured. 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
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<PAGE> 45
investment and economic research, trading and investment management of the Fund,
as well as the compensation of all Directors of the Fund who are affiliated
persons of FAM or any of its affiliates. Each Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, listing fees,
stock certificates and stockholder reports, charges of the custodian and the
transfer agent, dividend disbursing agent and registrar, fees and expenses with
respect to the issuance of AMPS, Commission fees, fees and expenses of
unaffiliated Directors, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. FAM provides accounting
services to each Fund, and each Fund reimburses FAM for its respective costs in
connection with such services.
Unless earlier terminated as described below, the investment advisory
agreement between MuniYield California Insured II and FAM will continue from
year to year if approved annually (a) by the Board of Directors of MuniYield
California Insured II or by a majority of the outstanding shares of MuniYield
California Insured II Common Stock and MuniYield California Insured II AMPS,
voting together as a single class, and (b) by a majority of the Directors of
MuniYield California Insured II who are not parties to such contract or
"interested persons", as defined in the Investment Company Act, of any such
party. The contract is not assignable and it may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by the vote
of the stockholders of MuniYield California Insured II.
Similarly, unless earlier terminated as described below, the investment
advisory agreement between MuniVest California Insured and FAM will continue
from year to year if approved annually (a) by the Board of Directors of MuniVest
California Insured or by a majority of the outstanding shares of MuniVest
California Insured Common Stock and MuniVest California Insured AMPS, voting
together as a single class, and (b) by a majority of the Directors of MuniVest
California Insured 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 MuniVest California Insured.
VOTING RIGHTS
Voting rights are identical for the holders of shares of MuniYield
California Insured II Common Stock and the holders of shares of MuniVest
California Insured 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 MuniYield California Insured II AMPS are
identical to voting rights of the holders of MuniVest California Insured 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.
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In connection with the election of a Fund's Directors, holders of shares of
a Fund's AMPS and any other preferred stock, voting separately as a class, shall
be entitled at all times to elect two of the Fund's Directors, and the remaining
Directors will be elected by holders of shares of the Fund's Common Stock and
shares of the Fund's AMPS and any other preferred stock, voting together as a
single class. In addition, if at any time dividends on outstanding shares of a
Fund's AMPS shall be unpaid in an amount equal to at least two full years'
dividends thereon or if at any time holders of any shares of a Fund's preferred
stock are entitled, together with the holders of shares of the Fund's AMPS, to
elect a majority of the Directors of the Fund under the Investment Company Act,
then the number of Directors constituting the Board of Directors automatically
shall be increased by the smallest number that, when added to the two Directors
elected exclusively by the holders of shares of AMPS and any other preferred
stock as described above, would constitute a majority of the Board of Directors
as so increased by such smallest number, and at a special meeting of
stockholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Directors are to be elected, the holders of shares
of the Fund's AMPS and any other preferred stock, voting separately as a class,
will be entitled to elect the smallest number of additional Directors that,
together with the two Directors 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 MuniYield California Insured II and
MuniVest California Insured may be addressed to either Fund by telephone at
(609) 282-2800 or at the address set forth on the cover page of this Proxy
Statement and Prospectus.
DIVIDENDS AND DISTRIBUTIONS
MuniYield California Insured II's current policy with respect to dividends
and distributions relating to shares of MuniYield California Insured II Common
Stock is identical to MuniVest California Insured's policy with respect to
shares of MuniVest California Insured Common Stock. Each Fund intends to
distribute substantially 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
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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, MuniYield California Insured II's current policy with respect to
dividends and distributions relating to shares of MuniYield California Insured
II AMPS is identical to MuniVest California Insured's current policy with
respect to shares of MuniVest California Insured 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 MuniYield California
Insured II AMPS and the MuniVest California Insured AMPS are paid through The
Depository Trust Company ("DTC") (or a successor securities depository) on each
dividend payment date. DTC's normal procedures now provide for it to distribute
dividends in same-day funds to agent members, who in turn are expected to
distribute such dividends to the person for whom they are acting as agent in
accordance with the instructions of such person. Prior to each dividend payment
date, the relevant Fund is required to deposit with the Auction Agent sufficient
funds for the payment of such declared dividends. Neither Fund intends to
establish any reserves for the payment of dividends, and no interest will be
payable in respect of any dividend payment or payment on the shares of a Fund's
AMPS which may be in arrears.
Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on California Municipal Bonds, are exempt from Federal and California
income taxes, subject to the possible application of the alternative minimum
tax. However, each Fund is required to allocate net capital gains and other
income subject to regular Federal and California income taxes, if any,
proportionately between shares of its Common Stock and shares of its AMPS in
accordance with the current position of the IRS described herein. Each Fund
notifies the Auction Agent of the amount of any net capital gains or other
taxable income to be included in any dividend on shares of AMPS prior to the
auction establishing the applicable rate for such dividend. The Auction Agent in
turn notifies each broker-dealer whenever it receives any such notice from a
Fund, and each broker-dealer then notifies its customers who are holders of the
Fund's AMPS. Each Fund also may include such income in a dividend on shares of
its AMPS without giving advance notice thereof if it increases the dividend by
an additional amount to offset the tax effect thereof. The amount of taxable
income allocable to shares of a Fund's AMPS will depend upon the amount of such
income realized by the Fund and other factors, but generally is not expected to
be significant.
For information concerning the manner in which dividends and distributions
to holders of each Fund's Common Stock may be reinvested automatically in shares
of the Fund's Common Stock, see "Automatic Dividend Reinvestment Plan" below.
Dividends and distributions may be taxable to stockholders under certain
circumstances as discussed below, whether they are reinvested in shares of a
Fund or received in cash.
If MuniYield California Insured II or MuniVest California Insured, as the
case may be, retroactively allocates any net capital gains or other income
subject to regular Federal and California 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.
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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
in the case of MuniYield California Insured II or by The Bank of New York in the
case of MuniVest California Insured, 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 in the case of MuniYield
California Insured II or by The Bank of New York in the case of MuniVest
California Insured, 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 or The
Bank of New York, as dividend paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date; otherwise, such
termination will be effective with respect to any subsequently declared dividend
or capital gains distribution.
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
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<PAGE> 49
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.
There are no brokerage charges with respect to shares issued directly by
MuniYield California Insured II or MuniVest California Insured 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 MuniYield California
Insured II or MuniVest California Insured, 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 to
AMPS in right of payment upon liquidation, $25,000 per share together with the
amount of any dividends accumulated but unpaid (whether or not earned or
declared) thereon to the
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date of distribution, and after such payment the holders of AMPS will be
entitled to no other payments except for any additional dividends. If such
assets of the Fund shall be insufficient to make the full liquidation payment on
the AMPS and liquidation payments on any other outstanding class or series of
preferred stock of the Fund ranking on a parity with the AMPS as to payment upon
liquidation, then such assets will be distributed among the holders of shares of
AMPS and the holders of shares of such other class or series ratably in
proportion to the respective preferential amounts to which they are entitled.
After payment of the full amount of liquidation distribution to which they are
entitled, the holders of shares of a Fund's AMPS will not be entitled to any
further participation in any distribution of assets by the Fund except for any
additional dividends. A consolidation, merger or share exchange of a Fund with
or into any other entity or entities or a sale, whether for cash, shares of
stock, securities or properties, of all or substantially all or any part of the
assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
TAX RULES APPLICABLE TO MUNIYIELD CALIFORNIA INSURED II, MUNIVEST CALIFORNIA
INSURED AND THEIR STOCKHOLDERS
The tax consequences associated with investment in shares of MuniYield
California Insured II Common Stock are identical to the tax consequences
associated with investment in shares of MuniVest California Insured Common
Stock. Similarly, the tax consequences associated with investment in shares of
MuniYield California Insured II AMPS are identical to the tax consequences
associated with investment in shares of MuniVest California Insured AMPS.
MuniYield California Insured II and MuniVest California Insured 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. Similar rules apply to the Fund if its income is subject to California
tax. In prior years and in the taxable year of the Reorganization, each Fund has
distributed substantially all of its income. MuniYield California Insured II
intends to continue to distribute substantially all of its income in 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
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purposes. Exempt-interest dividends are included, however, in determining the
portion, if any, of a person's social security benefits and railroad retirement
benefits subject to Federal income taxes. Interest on indebtedness incurred or
continued to purchase or carry a Fund's shares is not deductible for Federal
income tax purposes to the extent attributable to exempt-interest dividends. A
tax adviser should be consulted with respect to whether exempt-interest
dividends retain the exclusion under Code Section 103(a) if a stockholder would
be treated as a "substantial user" or "related person" under Code Section 147(a)
with respect to property financed with the proceeds from an issue of "industrial
development bonds" or "private activity bonds," if any, held by a Fund.
The portion of exempt-interest dividends paid from interest received by
each Fund from California Municipal Bonds also is exempt from California
personal and corporate income tax. However, exempt-interest dividends paid to a
corporate shareholder subject to the California state franchise tax will not be
exempt from taxation. Stockholders subject to income taxation by states other
than California may realize a lower after-tax rate of return than California
residents since the dividends distributed by a Fund generally are not exempt, to
any significant degree, from income taxation by such other states. Each Fund
informs its stockholders annually as to the portion of the Fund's distributions
which constitutes exempt-interest dividends and the portion which is exempt from
California personal and corporate income taxes.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the MuniYield California
Insured II AMPS and the MuniVest California Insured AMPS are substantially
similar, but not identical, to the AMPS discussed in the revenue ruling, and in
the opinion of Brown & Wood LLP, counsel to both Funds, the shares of each
Fund's AMPS constitute stock and distributions with respect to shares of such
AMPS (other than distributions in redemption of shares of AMPS subject to
Section 302(b) of the Code) constitute dividends to the extent of current and
accumulated earnings and profits as calculated for Federal income tax purposes.
Nevertheless, the IRS could take a contrary position, asserting, for example,
that the shares of AMPS constitute debt. If this position were upheld, the
discussion of the treatment of distributions below would not apply to holders of
shares of AMPS. Instead, distributions by each Fund to holders of shares of its
AMPS would constitute interest, whether or not they exceed the earnings and
profits of the Fund, would be included in full in the income of the recipient
and taxed as ordinary income. Counsel believes that such a position, if asserted
by the IRS, would be unlikely to prevail.
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 and California income tax
purposes. Distributions, if any, from an excess of net long-term capital gains
over net short-term capital losses from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the stockholder has owned Fund shares, and for California income
tax purposes, will be treated as capital gains which are taxed at ordinary
income rates. Distributions by the Fund, whether from exempt-interest income,
ordinary income or capital gains, will not be eligible for the dividends
received deduction allowed to 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
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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.
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
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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.
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.
Provided the Fund does not have a tax nexus to California, such as through
the location of the Fund's activities or those of its advisors within the state,
under present California law, the Fund is not subject to California taxation. In
the event of a tax nexus to California, the Fund would be subject to California
taxation.
AGREEMENT AND PLAN OF REORGANIZATION
GENERAL
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
I), MuniYield California Insured II will acquire all of the assets, and will
assume all of the liabilities, of MuniVest California Insured, in exchange
solely for an equal aggregate value of MuniYield California Insured II Common
Stock and MuniYield California Insured II Series C AMPS to be issued by
MuniYield California Insured II. Upon receipt by MuniVest California Insured of
such shares, MuniVest California Insured will distribute the shares of MuniYield
California Insured II Common Stock to the holders of MuniVest California Insured
Common
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Stock and will distribute the shares of MuniYield California Insured II Series C
AMPS to the holders of MuniVest California Insured AMPS, in each case in
exchange for their shares in MuniVest California Insured. Separate Articles
Supplementary to the Articles of Incorporation of MuniYield California Insured
II establishing the powers, rights and preferences of the MuniYield California
Insured II Series C AMPS will have been filed with the State Department of
Assessments and Taxation of Maryland (the "Maryland Department") prior to the
closing of the Reorganization. As soon as practicable after the date that the
Reorganization takes place (the "Exchange Date"), MuniVest California Insured
will file Articles of Dissolution with the Maryland Department to effect the
formal dissolution.
MuniVest California Insured will distribute the shares of MuniYield
California Insured II Common Stock and MuniYield California Insured II Series C
AMPS received by it pro rata to its holders of record of MuniVest California
Insured Common Stock and MuniVest California Insured AMPS, respectively, in
exchange for such stockholder's shares in MuniVest California Insured. Such
distribution would be accomplished by opening new accounts on the books of
MuniYield California Insured II in the names of the common and preferred
stockholders of MuniVest California Insured and transferring to those
stockholder accounts the MuniYield California Insured II Common Stock and the
MuniYield California Insured II Series C AMPS previously credited on those books
to the account of MuniVest California Insured. Each newly-opened account on the
books of MuniYield California Insured II for the previous holders of MuniVest
California Insured Common Stock would represent the respective pro rata number
of shares of MuniYield California Insured II Common Stock (rounded down, in the
case of fractional shares, to the next largest number of whole shares) due such
holder of MuniVest California Insured Common Stock. No fractional shares of
MuniYield California Insured II Common Stock or MuniYield California Insured II
Series C AMPS will be issued. In lieu thereof, MuniYield California Insured II's
transfer agent, State Street Bank and Trust Company, will aggregate all
fractional shares of MuniYield California Insured II 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 MuniVest California Insured Common
Stock certificates. Similarly, each newly-opened account on the books of
MuniYield California Insured II for the previous holders of MuniVest California
Insured AMPS would represent the respective pro rata number of shares of
MuniYield California Insured II Series C AMPS due such holder of MuniVest
California Insured AMPS. See "Surrender and Exchange of MuniVest California
Insured Stock Certificates" below for a description of the procedures to be
followed by MuniVest California Insured stockholders to obtain their MuniYield
California Insured II Common Stock (and cash in lieu of fractional shares, if
any), and/or MuniYield California Insured II Series C AMPS.
Accordingly, as a result of the Reorganization, every holder of MuniVest
California Insured Common Stock would own shares of MuniYield California Insured
II 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 MuniVest
California Insured Common Stock immediately prior to the Exchange Date. Since
the MuniYield California Insured II Common Stock would be issued at net asset
value in exchange for the net assets of MuniVest California Insured having a
value equal to the aggregate net asset value of those shares of MuniYield
California Insured II Common Stock, the net asset value per share of MuniYield
California Insured II Common Stock should remain virtually unchanged by the
Reorganization. Similarly, since the MuniYield California Insured II Series C
AMPS would be issued at a liquidation preference and value per share equal to
the liquidation preference and value of the MuniVest California Insured AMPS,
the respective liquidation preference per share of the MuniYield California
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Insured II Series C AMPS will remain unchanged by the Reorganization. Thus, the
Reorganization will result in no dilution of net asset value of the MuniYield
California Insured II Common Stock, other than to reflect the costs of the
Reorganization, and will result in no dilution of liquidation preference of the
MuniYield California Insured II Series C AMPS. However, as a result of the
Reorganization, a stockholder of either Fund likely will hold a reduced
percentage of ownership in the larger combined entity than he or she did in
either of the constituent Funds.
PROCEDURE
At meetings of the Boards of Directors of MuniYield California Insured II
and MuniVest California Insured held on June 21, 1996 and May 3, 1996,
respectively, the Boards of Directors of MuniYield California Insured II and
MuniVest California Insured, respectively, including all of the Directors who
are not "interested persons", as defined in the Investment Company Act, of
MuniYield California Insured II and MuniVest California Insured 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 21, 1996, the Board of Directors of MuniYield California
Insured II approved the filing of Articles Supplementary to MuniYield California
Insured II's Articles of Incorporation establishing the powers, rights and
preferences of the MuniYield California Insured II Series C AMPS in order that
they may be distributed to holders of MuniVest California Insured AMPS as part
of the Reorganization.
As a result of such Board approvals, MuniYield California Insured II and
MuniVest California Insured jointly filed a proxy statement with the Commission
soliciting a vote of the stockholders of MuniYield California Insured II and
MuniVest California Insured to approve the Reorganization. The costs of such
solicitation are to be paid by MuniYield California Insured II after the
Reorganization so as to be borne equally and exclusively on a per share basis by
the holders of MuniYield California Insured II Common Stock and MuniVest
California Insured Common Stock. It is anticipated that annual meetings of
stockholders of MuniYield California Insured II and MuniVest California Insured
will be held on September 30, 1996. If the stockholders of both MuniYield
California Insured II and MuniVest California Insured approve the
Reorganization, the Reorganization will take place as soon as practicable after
such approval, provided that the Funds have obtained prior to that time a
favorable private letter ruling from the IRS concerning the tax consequences of
the Reorganization as set forth in the Agreement and Plan of Reorganization.
THE BOARDS OF DIRECTORS OF MUNIYIELD CALIFORNIA INSURED II AND MUNIVEST
CALIFORNIA INSURED 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 MuniYield
California Insured II and MuniVest California Insured 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
MuniYield California Insured II Common Stock and the MuniVest California Insured
Common Stock will be
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determined as of 15 minutes after the close of business on the NYSE (generally,
4:00 P.M., New York time) on the Valuation Date. For the purpose of determining
the net asset value of a share of the MuniYield California Insured II Common
Stock or the MuniVest California Insured Common Stock, the value of the
securities held by the issuing Fund plus any cash or other assets (including
interest accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of AMPS
of the issuing Fund is divided by the total number of shares of Common Stock of
the issuing Fund outstanding at such time. Daily expenses, including the fees
payable to FAM, will accrue on the Valuation Date.
The California Municipal Bonds in which each Fund invests are traded
primarily in the over-the-counter markets. In determining net asset value on the
Valuation Date, each Fund will utilize the valuations of portfolio securities
furnished by a pricing service approved by the Boards of Directors of the Funds.
The pricing service typically values portfolio securities at the bid price or
the yield equivalent when quotations are readily available. California Municipal
Bonds 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 MuniYield
California Insured II and MuniVest California Insured 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 MuniYield California Insured II Common Stock and MuniYield
California Insured II Series C AMPS. On the Exchange Date, MuniYield California
Insured II will issue to MuniVest California Insured a number of shares of
MuniYield California Insured II Common Stock the aggregate net asset value of
which will equal the aggregate net asset value of shares of MuniVest California
Insured Common Stock on the Valuation Date. Each holder of MuniVest California
Insured Common Stock will receive the number of shares of MuniYield California
Insured II Common Stock corresponding to his or her proportionate interest in
the aggregate net asset value of the MuniVest California Insured Common Stock.
On the Exchange Date, MuniYield California Insured II also will issue to
MuniVest California Insured a number of shares of MuniYield California Insured
II Series C AMPS the aggregate liquidation preference and value of which will
equal the aggregate liquidation preference and value of MuniVest California
Insured AMPS on the Valuation Date. Each holder of MuniVest California Insured
AMPS will receive the number of shares of MuniYield California Insured II Series
C AMPS corresponding to his or her proportionate interest in the aggregate
liquidation preference and value of the MuniVest California Insured AMPS. No
sales charge or fee of any kind will be charged to MuniVest California Insured
stockholders in connection with their receipt of MuniYield California Insured II
Common Stock or MuniYield California Insured II Series C AMPS in the
Reorganization. It is anticipated that the MuniYield California Insured II
Series C AMPS will follow a similar auction schedule and procedures as those
presently followed by the MuniVest California Insured AMPS. As a result of the
Reorganization, the last dividend period for the MuniVest California Insured
AMPS prior to the Exchange Date may be shorter than the dividend period for such
AMPS determined as set forth in the Articles Supplementary.
Expenses. MuniYield California Insured II 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
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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 thereof, 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 MuniYield California Insured
II Common Stock and MuniVest California Insured Common Stock. Neither MuniYield
California Insured II nor MuniVest California Insured shall pay any expenses of
its respective stockholders arising out of or in connection with the
Reorganization.
Required Approvals. Under MuniYield California Insured II's Articles of
Incorporation (as amended to date and including Articles Supplementary
establishing the powers, rights and preferences of the MuniYield California
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
MuniYield California Insured II Common Stock and MuniYield California Insured II
AMPS, voting together as a single class, and of the MuniYield California Insured
II AMPS, voting separately as a class. Similarly, under MuniVest California
Insured's Articles of Incorporation (as amended to date and including Articles
Supplementary establishing the powers, rights and preferences of the MuniVest
California Insured 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 MuniVest California Insured Common Stock and MuniVest California
Insured AMPS, voting together as a single class, and of the MuniVest California
Insured AMPS, voting separately as a class.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of MuniVest California Insured to MuniYield California Insured II
and the distribution of shares of MuniYield California Insured II Common Stock
and MuniYield California Insured II Series C AMPS to MuniVest California Insured
stockholders, MuniVest California Insured will terminate its registration under
the Investment Company Act and its incorporation under Maryland law and will
withdraw its authority to do business in any state where it is required to do
so.
Amendments and Conditions. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the terms
therein. The obligations of MuniYield California Insured II and MuniVest
California Insured pursuant to the Agreement and Plan of Reorganization are
subject to various conditions, including a registration statement on Form N-14
being declared effective by the Commission, approval of the Reorganization by
the stockholders of MuniYield California Insured II and MuniVest California
Insured, a favorable IRS ruling being received as to tax matters, an opinion of
counsel being received as to securities matters and the continuing accuracy of
various representations and warranties of MuniYield California Insured II and
MuniVest California Insured 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. The Agreement and Plan of Reorganization may be
terminated, and the Reorganization abandoned, should either Board determine that
it
53
<PAGE> 58
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 each of MuniYield California Insured II and MuniVest
California Insured) prior to the Exchange Date, or the Exchange Date may be
postponed: (i) by mutual consent of the Boards of Directors of MuniYield
California Insured II and MuniVest California Insured; (ii) by the Board of
Directors of MuniYield California Insured II if any condition of MuniYield
California 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; or (iii)
by the Board of Directors of MuniVest California Insured if any condition of
MuniVest California Insured's obligations set forth in Section 8 of the
Agreement and Plan of Reorganization has not been fulfilled or waived by such
Board.
POTENTIAL BENEFITS TO MUNIYIELD CALIFORNIA INSURED II COMMON STOCKHOLDERS AND
MUNIVEST CALIFORNIA INSURED 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 MuniVest California
Insured, following the Reorganization MuniVest California Insured stockholders
will remain invested in a closed-end fund that has investment objectives and
policies similar to that of MuniVest California Insured. 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 California 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 California 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, registration 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 MuniYield California
Insured II was 0.69%, based on average net assets of approximately $282.6
million including AMPS, and 1.02%, based on average net assets of approximately
$192.6 million excluding AMPS, and the total annualized operating expense ratio
for MuniVest California Insured was 0.81%, based on average net assets of
approximately $121.2 million including AMPS, and 1.21%, based on average net
assets of approximately $81.2 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 0.67%, based on average net
assets of approximately $403.8 million including AMPS, and 0.98%, based on
average net assets of approximately $273.8 million excluding AMPS.
54
<PAGE> 59
Management projections estimate that MuniYield California Insured II will
have net assets in excess of $387.9 million upon completion of the
Reorganization. A larger asset base should provide benefits in portfolio
management. After the Reorganization, MuniYield California Insured II 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 expects that such costs would be
recovered within 24 months after the Exchange Date due to a decrease in the
operating expense ratio.
It is not anticipated that the Reorganization directly would benefit the
holders of shares of MuniYield California Insured II AMPS or MuniVest California
Insured 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 MUNIVEST CALIFORNIA INSURED STOCK CERTIFICATES
After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing shares of MuniVest California Insured Common
Stock or MuniVest California Insured AMPS, as the case may be, will be entitled
to receive, upon surrender of his or her certificate or certificates, a
certificate or certificates representing the number of shares of MuniYield
California Insured II Common Stock and MuniYield California Insured II Series C
AMPS distributable with respect to such holder's shares of MuniVest California
Insured Common Stock or MuniVest California Insured AMPS, together with cash in
lieu of any fractional shares. Promptly after the Exchange Date, the transfer
agent for the MuniYield California Insured II Common Stock or, the MuniYield
California Insured II Series C AMPS, as the case may be, will mail to each
holder of certificates formerly representing shares of MuniVest California
Insured Common Stock or MuniVest California Insured AMPS, as the case may be, a
letter of transmittal for use in surrendering his or her certificates for
certificates representing shares of MuniYield California Insured II Common Stock
and MuniYield California Insured II Series C AMPS, as the case may be, and cash
in lieu of any fractional shares.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. UPON
CONSUMMATION OF THE REORGANIZATION, MUNIVEST CALIFORNIA INSURED COMMON AND
PREFERRED STOCKHOLDERS WILL BE FURNISHED WITH INSTRUCTIONS FOR EXCHANGING THEIR
MUNIVEST CALIFORNIA INSURED STOCK CERTIFICATES FOR MUNIYIELD CALIFORNIA INSURED
II STOCK CERTIFICATES AND, IF APPLICABLE, CASH IN LIEU OF FRACTIONAL SHARES.
From and after the Exchange Date, certificates formerly representing shares
of MuniVest California Insured Common Stock or MuniVest California Insured AMPS,
as the case may be, will be deemed for all purposes to evidence ownership of the
number of full shares of MuniYield California Insured II Common Stock or
MuniYield California Insured II Series C AMPS distributable with respect to such
shares of
55
<PAGE> 60
Common Stock or AMPS of MuniVest California Insured in the Reorganization,
provided that, until such MuniVest California Insured stock certificates have
been surrendered, no dividends payable to the holders of record of MuniYield
California Insured II Common Stock or MuniYield California Insured II Series C
AMPS, as the case may be, as of any date subsequent to the Exchange Date will be
paid to the holders of such outstanding MuniVest California Insured stock
certificates. Dividends payable to holders of record of shares of MuniYield
California Insured II Common Stock or MuniYield California Insured II Series C
AMPS, as the case may be, as of any date after the Exchange Date and prior to
the exchange of certificates by any MuniVest California Insured stockholder will
be paid to such stockholder, without interest, at the time such stockholder
surrenders his or her MuniVest California Insured stock certificates for
exchange.
From and after the Exchange Date, there will be no transfers on the stock
transfer books of MuniVest California Insured. If, after the Exchange Date,
certificates representing shares of MuniVest California Insured Common Stock or
MuniVest California Insured AMPS are presented to MuniYield California Insured
II, they will be cancelled and exchanged for certificates representing MuniYield
California Insured II Common Stock or MuniYield California Insured II Series C
AMPS, as the case may be, and cash in lieu of fractional shares, if any,
distributable with respect to such MuniVest California Insured Common Stock or
MuniVest California Insured AMPS in the Reorganization.
TAX CONSEQUENCES OF THE REORGANIZATION
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. MuniYield California Insured II and MuniVest
California Insured each has elected and qualified for the special tax treatment
afforded RICs under the Code, and MuniYield California Insured II intends to
continue to so qualify after the Reorganization. MuniYield California Insured II
and MuniVest California Insured have jointly requested a private letter ruling
from the IRS that for Federal income tax purposes: (i) the Reorganization, as
described, will constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and MuniYield California Insured II and MuniVest
California Insured 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 by MuniVest California Insured as a
result of the Reorganization or on the distribution of MuniYield California
Insured II Common Stock and MuniYield California Insured II Series C AMPS to
MuniVest California Insured stockholders under Section 361(c)(1) of the Code;
(iii) under Section 1032 of the Code, no gain or loss will be recognized by
MuniYield California Insured II as a result of the Reorganization; (iv) in
accordance with Section 354(a)(1) of the Code, no gain or loss will be
recognized by the stockholders of MuniVest California Insured on the receipt of
MuniYield California Insured II Common Stock and MuniYield California Insured II
Series C AMPS in exchange for their corresponding MuniVest California Insured
Common Stock and MuniVest California Insured AMPS (except to the extent that
MuniVest California Insured common stockholders receive cash representing an
interest in fractional shares of MuniYield California Insured II in the
Reorganization); (v) in accordance with Section 362(b) of the Code, the tax
basis of the MuniVest California Insured assets in the hands of MuniYield
California Insured II will be the same as the tax basis of such assets in the
hands of MuniVest California Insured immediately prior to the consummation of
the Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the MuniYield California Insured II
Common Stock and MuniYield California Insured II Series C AMPS received by the
stockholders of MuniVest California Insured in the Reorganization will be equal,
in the aggregate, to the tax basis of the MuniVest
56
<PAGE> 61
California Insured Common Stock and the MuniVest California Insured AMPS
surrendered in the exchange; (vii) in accordance with Section 1223 of the Code,
a stockholder's holding period for the MuniYield California Insured II Common
Stock and MuniYield California Insured II Series C AMPS will be determined by
including the period for which such stockholder held the MuniVest California
Insured Common Stock or MuniVest California Insured AMPS exchanged therefor,
provided, that such MuniVest California Insured shares were held as a capital
asset; (viii) in accordance with Section 1223 of the Code, MuniYield California
Insured II's holding period with respect to the MuniVest California Insured
assets transferred will include the period for which such assets were held by
MuniVest California Insured; (ix) the payment of cash to MuniVest California
Insured stockholders in lieu of fractional shares of MuniYield California
Insured II will be treated as though the fractional shares were distributed as
part of the Reorganization and then redeemed, with the result that such MuniVest
California Insured 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 MuniYield California Insured II fractional shares; and (x) the taxable
year of MuniVest California Insured will end on the effective date of the
Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, MuniYield California Insured II will succeed to and take into
account certain tax attributes of MuniVest California Insured, 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 MuniYield California Insured II, MuniVest California Insured and
Their Stockholders", a Fund must distribute annually at least 90% of its net
taxable and tax-exempt income. A distribution only will be counted for this
purpose if it qualifies for the dividends paid deduction under the Code. In the
opinion of Brown & Wood LLP, the issuance of MuniYield California Insured II
Series C AMPS pursuant to the Reorganization in addition to the already existing
MuniYield California Insured II Series A AMPS and Series B AMPS will not cause
distributions on any series of AMPS to be treated as preferential dividends
ineligible for the dividends paid deduction. It is possible that the IRS may
assert that, because there are three series of AMPS, distributions on such
shares are preferential under the Code and therefore not eligible for the
dividends paid deduction. If the IRS successfully disallowed the dividends paid
deduction for dividends on the AMPS, MuniYield California Insured II could lose
the special tax treatment afforded RICs. In this case, dividends on the shares
of AMPS would not be exempt from Federal income tax. Additionally, MuniYield
California Insured II would be subject to the alternative minimum tax.
Under Section 381(a) of the Code, MuniYield California Insured II will
succeed to and take into account certain tax attributes of MuniVest California
Insured, 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
MuniYield California Insured II.
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.
57
<PAGE> 62
Status as a Regulated Investment Company. Both MuniYield California
Insured II and MuniVest California Insured have elected and qualified for
taxation as RICs under Sections 851-855 of the Code, and after the
Reorganization MuniYield California Insured II intends to continue to so
qualify.
CAPITALIZATION
The following table sets forth as of April 30, 1996 (i) the capitalization
of MuniYield California Insured II, (ii) the capitalization of MuniVest
California Insured and (iii) the pro forma capitalization of MuniYield
California Insured II as adjusted to give effect to the Reorganization.
PRO FORMA CAPITALIZATION OF MUNIYIELD CALIFORNIA INSURED II, MUNIVEST CALIFORNIA
INSURED AND THE COMBINED FUND AS OF APRIL 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
MUNIYIELD MUNIVEST COMBINED
CALIFORNIA CALIFORNIA PRO FORMA FUND AS
INSURED II INSURED ADJUSTMENT ADJUSTED(A)
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Assets:...................... $273,044,369 $117,069,481 $(2,258,888)(a) $387,854,962
Net Assets Attributable to
Common Stock.............. $183,044,369 $77,069,481 $(2,258,888) $257,854,962
Net Assets Attributable to
AMPS...................... $90,000,000 $40,000,000 -- $130,000,000
Shares Outstanding:
Common Stock................ 12,678,633 5,961,365 -- 18,036,505(b)
AMPS
Series A............... 1,800 1,600 -- 1,800
Series B............... 1,800 -- -- 1,800
Series C............... -- -- -- 1,600(b)
Net Asset Value Per Share:
Common Stock........... $14.44 $12.93 -- $14.30(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 distribution of undistributed net investment income and accrual of
estimated Reorganization expenses of $207,000. No assurance can be given as
to how many shares of MuniYield California Insured II Common Stock that
MuniVest California Insured stockholders will receive on the Exchange Date,
and the foregoing should not be relied upon to reflect the number of shares
of MuniYield California Insured II Common Stock that actually will be
received on or after such date.
(b) Assumes the issuance of 5,357,872 shares of MuniYield California Insured II
Common Stock and a newly-created series of AMPS consisting of 1,600 shares
in exchange for the net assets of MuniVest California Insured. The estimated
number of shares issued was based on the net asset value of each Fund, net
of distributions, on April 30, 1996 of net investment income of $1,631,798
for MuniYield California Insured II and $406,542 for MuniVest California
Insured.
(c) Net Asset Value Per Share of Common Stock after Reorganization-related
expenses and distribution of undistributed net investment income.
58
<PAGE> 63
ELECTION OF DIRECTORS
At the Meetings, the Boards of Directors for MuniYield California Insured
II and MuniVest California Insured will be elected to serve until the next
Annual Meeting of Stockholders and until their successors are elected and
qualified. If the stockholders of both MuniYield California Insured II and
MuniVest California Insured approve the Reorganization, then the Board of
Directors of MuniYield California Insured II elected at the Meetings will serve
as the Board of the combined fund, until its next Annual Meeting of Stockholders
and until their successors are elected and qualified. If the stockholders of
either MuniYield California Insured II or MuniVest California Insured 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 that Fund and until their successors are elected and qualified.
It is intended that all properly executed proxies will be voted (unless such
authority has been withheld in the proxy) as follows:
With respect to the proxies of MuniYield California Insured II
stockholders:
(1) All proxies of the holders of shares of MuniYield California
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 MuniYield California Insured II AMPS; and
(2) All proxies of the holders of shares of MuniYield California
Insured II Common Stock and MuniYield California 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 MuniYield
California Insured II Common Stock and MuniYield California Insured II
AMPS.
With respect to the proxies of MuniVest California Insured stockholders:
(1) All proxies of the holders of shares of MuniVest California
Insured 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 MuniVest California Insured AMPS; and
(2) All proxies of the holders of shares of MuniVest California
Insured Common Stock and MuniVest California Insured 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 MuniVest California
Insured Common Stock and MuniVest California Insured AMPS.
The Boards of Directors of MuniYield California Insured II and MuniVest
California Insured 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.
59
<PAGE> 64
Certain information concerning the nominees for the Board of Directors of
MuniYield California Insured II, including their designated classes, is set
forth below.
TO BE ELECTED BY HOLDERS OF MUNIYIELD CALIFORNIA INSURED II AMPS,
VOTING SEPARATELY AS A CLASS
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
PRINCIPAL OCCUPATIONS RECORD DATE
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>
Joseph L. May (2).................. 67 Attorney in private 1993 0 0
424 Church Street, Suite 2000 practice since 1984;
Nashville, Tennessee 37219 President, May and Athens
Hosiery Mills Division,
Wayne-Gossard Corporation
from 1954 to 1983; Vice
President, Wayne-Gossard
Corporation from 1972 to
1983; Chairman, The May
Corporation (personal
holding company) from
1972 to 1983; Director,
Signal Apparel Co. from
1972 to 1989.
Andre F. Perold (2)................ 44 Professor, Harvard Business 1993 0 0
Morgan Hall, Soldiers Field School since 1989 and
Boston, Massachusetts 02163 Associate Professor from
1983 to 1989; Trustee,
The Common Fund, since
1989; Director, Quantec
Limited since 1991 and
Teknekron Software
Systems since 1994.
</TABLE>
(See footnotes on page 62)
60
<PAGE> 65
TO BE ELECTED BY HOLDERS OF MUNIYIELD CALIFORNIA INSURED II AMPS AND
MUNIYIELD CALIFORNIA INSURED II COMMON STOCK,
VOTING TOGETHER AS A SINGLE CLASS
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
PRINCIPAL OCCUPATIONS RECORD DATE
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>
James H. Bodurtha (2).............. 52 Chairman and Chief 1995 0 0
124 Long Pond Road Executive Officer, China
Plymouth, Massachusetts 02360 Enterprise Management
Corporation since 1993;
Chairman, Berkshire
Corporation since 1980;
Partner, Squire, Sanders
& Dempsey from 1980 to
1993.
Herbert I. London (2).............. 57 Dean, Gallatin Division of 1993 0 0
113-115 University Place New York University from
New York, New York 10003 1978 to 1993; John M.
Olin Professor of
Humanities, since 1993
and Professor since 1980,
New York University;
Distinguished Fellow,
Herman Kahn Chair, Hudson
Institute from 1984 to
1985; Trustee, Hudson
Institute since 1980;
Overseer, Center for
Naval Analyses from 1983
to 1993; Director, Damon
Corporation since 1991.
</TABLE>
(See footnotes on following page)
61
<PAGE> 66
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
PRINCIPAL OCCUPATIONS RECORD DATE
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>
Robert R. Martin (2)............... 69 Director, WTC Industries, 1993 0 0
513 Grand Hill, Inc. from 1994 to 1996;
St. Paul, Minnesota 55102 Chairman and Chief
Executive Officer,
Kinnard Investments, Inc.
from 1990 to 1993;
Executive Vice President,
Dain Bosworth from 1974
to 1989; Director,
Carnegie Capital
Management from 1977 to
1985 and Chairman thereof
in 1979; Director,
Securities Industry
Association from 1981 to
1982 and Public
Securities Association
from 1979 to 1980;
Trustee, Northland
College since 1992.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Arthur Zeikel (3).................. 64 President of FAM (which 1993 0 0
800 Scudders Mill Road term as used herein
Plainsboro, New Jersey 08536 includes its 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) Interested person, as defined in the Investment Company Act, of the Fund.
62
<PAGE> 67
Certain information concerning the nominees for the Board of Directors of
MuniVest California Insured, including their designated classes, is set forth
below.
TO BE ELECTED BY HOLDERS OF MUNIVEST CALIFORNIA INSURED AMPS,
VOTING SEPARATELY AS A CLASS
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
PRINCIPAL OCCUPATIONS RECORD DATE
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 (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 (2)................. 64 James R. Williston 1992 0 0
Soldiers Field Road Professor of Investment
Boston, Massachusetts 02163 Management, 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 page 65)
63
<PAGE> 68
TO BE ELECTED BY HOLDERS OF MUNIVEST CALIFORNIA INSURED AMPS AND
MUNIVEST CALIFORNIA INSURED COMMON STOCK,
VOTING TOGETHER AS A SINGLE CLASS
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
PRINCIPAL OCCUPATIONS RECORD DATE
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 (2)................ 69 President of Grey 1992 0 0
Grey Advertising Inc. Advertising Inc. since
777 Third Avenue 1968, Chief Executive
New York, New York 10017 Officer since 1970 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 (2)............. 67 President and Director of 1992 0 0
P.O. Box 7 American Independent Oil
West Cornwall, Connecticut 06796 Company, Inc. (an energy
company) since 1987;
Member of Council on
Foreign Relations since
1971.
J. Thomas Touchton (2)............. 57 Managing Partner of The 1992 0 0
Suite 3405 Witt-Touchton Company and
One Tampa City Center its predecessor The Witt
Tampa, Florida 33602 Co. (a private investment
partnership) since 1972;
Trustee Emeritus of
Washington and Lee
University; Director of
TECO Energy, Inc. (an
electric utility holding
company).
(See footnotes on following page)
</TABLE>
64
<PAGE> 69
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON THE
PRINCIPAL OCCUPATIONS RECORD DATE
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>
Arthur Zeikel (3).................. 64 President of FAM since 1992 0 0
800 Scudders Mill Road 1977; President of MLAM
Plainsboro, New Jersey 08536 since 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 Fund.
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
MuniYield California Insured II and MuniVest California Insured 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),
65
<PAGE> 70
have complied with all filing requirements applicable to them with respect to
transactions during the Fund's most recent fiscal year, except that James H.
Bodurtha inadvertently filed late a Form 3 to report his election as a Director
of MuniYield California Insured II.
INTERESTED PERSONS
Each Fund considers Mr. Zeikel to be an "interested person" of the Fund
within the meaning of Section 2(a)(19) of the Investment Company Act as a result
of the positions he holds with FAM and its affiliates. Mr. Zeikel is the
President of each Fund, the President of FAM and the President of MLAM.
COMPENSATION OF DIRECTORS
FAM, the investment adviser for MuniYield California Insured II and
MuniVest California Insured, pays all compensation of all officers of each Fund
and all Directors of each Fund who are affiliated with ML & Co. or its
subsidiaries. MuniYield California 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 compensates members of its Audit
Committee, which consists of all of the non-interested Directors. These fees and
expenses for the fiscal year ended October 31, 1995 aggregated $23,667 for
MuniYield California Insured II.
MuniVest California Insured 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 compensates members of its Audit Committee, which
consists of all of the non-interested Directors. These fees and expenses for the
fiscal year ended October 31, 1995 aggregated $22,690 for MuniVest California
Insured.
The following table sets forth compensation paid by MuniYield California
Insured II to the non-interested Directors for the fiscal year ended October 31,
1995, 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-interested Directors.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM THE FUND
PENSION OR AND
COMPENSATION RETIREMENT BENEFITS FAM/MLAM ADVISED
FROM THE ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR FUND FUND EXPENSES DIRECTORS
- ---------------------------------------------- ------------ ------------------- ----------------
<S> <C> <C> <C>
James H. Bodurtha(1).......................... $5,000 None $157,500*
Herbert I. London(1).......................... $4,500 None $157,500
Robert R. Martin(1)........................... $4,500 None $157,500
Joseph L. May(1).............................. $4,500 None $157,500
Andre F. Perold(1)............................ $4,500 None $157,500
</TABLE>
- ---------------
* $157,500 represents the amount Mr. Bodurtha would have received if he had
been a Director for the entire calendar year ended December 31, 1995 and had
attended all Board and Audit Committee meetings held. Mr. Bodurtha was
elected to the Fund's Board of Directors effective June 23, 1995.
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46 portfolios);
Mr. Martin (22 registered investment companies consisting of 46 portfolios);
Mr. May (22 registered investment companies consisting of 46 portfolios);
and Mr. Perold (22 registered investment companies consisting of 46
portfolios).
66
<PAGE> 71
The following table sets forth compensation paid by MuniVest California
Insured to the non-interested Directors for the fiscal year ended October 31,
1995, and for the calendar year ended December 31, 1995, the aggregate
compensation paid by FAM/MLAM Advised Funds, to the non-interested Directors.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
PENSION OR FROM THE FUND AND
COMPENSATION RETIREMENT BENEFITS FAM/MLAM ADVISED
FROM THE ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR 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 (20 registered investment companies consisting of 29 portfolios);
and Mr. Touchton (20 registered investment companies consisting of 29
portfolios).
OFFICERS OF THE FUNDS
The Boards of Directors of MuniYield California Insured II and MuniVest
California Insured 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 and MLAM since 1977; President and
Director of Princeton Services since 1993;
Executive Vice President of ML & Co. since 1990;
Director of MLFD since 1977.
Terry K. Glenn.......................................... Executive Vice President 55 1992
Executive Vice President of FAM and of MLAM since
1983; Executive Vice President and Director of
Princeton Services since 1993; President of MLFD
since 1986 and Director thereof since 1991;
President of Princeton Administrators, L.P., since
1988.
Vincent R. Giordano..................................... Senior Vice President 51 1992
Senior Vice President of FAM and of MLAM since
1984; Senior Vice President of Princeton Services
since 1993.
Kenneth A. Jacob........................................ Vice President 45 1992
Vice President of FAM and of MLAM since 1984;
employed by MLAM since 1978.
</TABLE>
67
<PAGE> 72
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
- -------------------------------------------------------- ------------------------- --- -------
<S> <C> <C> <C>
Donald C. Burke......................................... Vice President 36 1993
Vice President and Director of Taxation of MLAM
since 1990; Employee at Deloitte & Touche LLP
from 1982 to 1990.
Roberto Roffo........................................... Portfolio Manager 30 1992
Vice President of MLAM since 1996 and a Portfolio
Manager thereof since 1992; prior thereto,
employee of State Street Bank and Trust Company
from 1989 to 1992.
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 Boards of Directors of MuniYield California Insured II and MuniVest
California Insured, including a majority of the Directors who are not
"interested persons", as defined in the Investment Company Act, of the Fund,
have selected the firm of Deloitte & Touche LLP as independent auditors, to
audit the financial statements of the Funds for the current fiscal year ending
October 31, 1996.
The Funds know of no direct or indirect financial interest of such firm in
the Funds. Such appointment is subject to ratification or rejection by the
stockholders of the Funds. If the stockholders of both MuniYield California
Insured II and MuniVest California Insured approve the Reorganization, then the
independent auditors selected at the Meetings for MuniYield California Insured
II will serve as the independent auditors of the combined Fund. If the
stockholders of either MuniYield California Insured II or MuniVest California
Insured 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 the Funds. The Boards of Directors of MuniYield
California Insured II and MuniVest California Insured considered the fact that
Deloitte & Touche LLP has been retained as the independent auditors of ML & Co.
and the other entities described above in its evaluation of the independence of
Deloitte & Touche LLP with respect to MuniYield California Insured II and
MuniVest California Insured.
68
<PAGE> 73
Representatives of Deloitte & Touche LLP 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 11:30 A.M., New York time (for
MuniYield California Insured II) and 11:15 A.M., New York time (for MuniVest
California Insured).
SOLICITATION, REVOCATION AND USE OF PROXIES
A stockholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy or by submitting
a notice of revocation to the Secretary of MuniYield California Insured II or
MuniVest California Insured, 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 returned to the
respective Fund, 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 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 will be brought
before the Meetings. If, however, any other business properly is brought before
the Meetings, proxies will be voted in accordance with the judgment of the
persons designated on such proxies.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of MuniYield California Insured II Common
Stock, MuniYield California Insured II AMPS, MuniVest California Insured Common
Stock and MuniVest California Insured 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 12,678,633 shares of
MuniYield California Insured II Common Stock, 3,600 shares of MuniYield
California Insured II AMPS, 5,961,365 shares of MuniVest California Insured
Common Stock and 1,800 shares of MuniVest California Insured AMPS issued and
outstanding and entitled to vote.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF MUNIYIELD CALIFORNIA INSURED II AND MUNIVEST CALIFORNIA INSURED
To the knowledge of MuniYield California Insured II and MuniVest California
Insured, at the date hereof, no person or entity owns beneficially 5% or more of
the shares of any of the MuniYield California Insured II Common Stock, the
MuniYield California Insured II AMPS, the MuniVest California Insured Common
Stock or the MuniVest California Insured AMPS.
69
<PAGE> 74
On the Record Date, the Directors and officers of MuniYield California
Insured II as a group (10 persons) owned an aggregate of less than 1% of the
outstanding shares of MuniYield California Insured II Common Stock and MuniYield
California Insured II AMPS.
On the Record Date, the Directors and officers of MuniVest California
Insured as a group (10 persons) owned an aggregate of less than 1% of the
outstanding shares of MuniVest California Insured Common Stock and MuniVest
California Insured AMPS.
On the Record Date, Mr. Zeikel, a Director and officer of each of the Funds
and the other Directors and officers of each Fund owned an aggregate of less
than 1% of the outstanding shares of Common Stock of ML & Co.
VOTING RIGHTS AND REQUIRED VOTE
For purposes of this Proxy Statement and Prospectus, each share of
MuniYield California Insured II Common Stock, MuniYield California Insured II
AMPS, MuniVest California Insured Common Stock and MuniVest California Insured
AMPS is entitled to one vote. Approval of the Agreement and Plan of
Reorganization requires the affirmative vote of stockholders representing a
majority of the outstanding shares of MuniYield California Insured II Common
Stock and MuniYield California Insured II AMPS, voting together as a single
class, and of the MuniYield California Insured II AMPS, voting separately as a
class, as well as the affirmative vote of stockholders representing a majority
of the outstanding shares of MuniVest California Insured Common Stock and
MuniVest California Insured AMPS, voting together as a single class, and of the
MuniVest California Insured AMPS, voting separately as a class.
Under Maryland law, stockholders of a registered investment company whose
shares are traded publicly on a national securities exchange, such as MuniVest
California Insured, are not entitled to demand the fair value of their shares
upon a transfer of assets; therefore, the MuniVest California Insured common
stockholders will be bound by the terms of the Reorganization. However, any
common stockholder of MuniVest California Insured may sell his or her shares of
Common Stock at any time on the NYSE. Conversely, since the MuniVest California
Insured AMPS are not traded publicly on a national securities exchange,
stockholders of MuniVest California Insured AMPS will be entitled to appraisal
rights upon the consummation of the Reorganization. As stockholders of the
corporation acquiring the assets of MuniVest California Insured, neither holders
of MuniYield California Insured II Common Stock nor holders of MuniYield
California Insured II AMPS are entitled to appraisal rights under Maryland law.
Under Maryland law, a holder of MuniVest California Insured AMPS desiring
to receive payment of the fair value of his or her stock (an "objecting
stockholder") (i) must file with MuniVest California Insured a written objection
to the Reorganization at or before the Meeting, (ii) must not vote in favor of
the Reorganization and (iii) must make written demand on MuniYield California
Insured II for payment of his or her stock, stating the number and class of
shares for which he or she demands payment, within 20 days after the Maryland
Department of Assessments and Taxation accepts for filing the Articles of
Transfer with respect to the Reorganization (MuniYield California Insured II 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
70
<PAGE> 75
after the close of business on the date on which fair value is to be determined,
which, for these purposes, will be the date of the Meeting. A demand for payment
of fair market value may not be withdrawn, except upon the consent of MuniYield
California Insured II. Within 50 days after the Articles of Transfer have been
accepted for filing, an objecting stockholder who has not received payment for
his or her shares may petition a court located in Baltimore, Maryland for an
appraisal to determine the fair market value of his or her stock.
For purposes of each Meeting, a quorum consists of a majority of the shares
entitled to vote at the Meeting, present in person or by proxy. If, by the time
scheduled for each Meeting, a quorum of the applicable Fund's stockholders is
not present or if a quorum is present but sufficient votes in favor of the
Agreement and Plan of Reorganization are not received from the stockholders of
the applicable Fund, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies from
stockholders. Any such adjournment will require the affirmative vote of a
majority of the shares of the applicable Fund present in person or by proxy and
entitled to vote at the session of the meeting to be adjourned. The persons
named as proxies will vote in favor of any such adjournment if they determine
that adjournment and additional solicitation are reasonable and in the interests
of the applicable Fund's stockholders.
With respect to the election of Directors, holders of shares of MuniYield
California Insured II AMPS are entitled to elect two Directors of MuniYield
California Insured II and holders of shares of MuniYield California Insured II
Common Stock and MuniYield California Insured II AMPS, voting together as a
single class, are entitled to elect the remaining Directors of MuniYield
California Insured II; similarly, holders of shares of MuniVest California
Insured AMPS are entitled to elect two Directors of MuniVest California Insured
and holders of shares of MuniVest California Insured Common Stock and MuniVest
California Insured AMPS, voting together as a single class, are entitled to
elect the remaining Directors of MuniVest California Insured. Assuming a quorum
is present, (x) election of the two Directors of MuniYield California II or
MuniVest California Insured, as the case may be, to be elected by the holders of
shares of MuniYield California Insured II AMPS or MuniVest California Insured
AMPS, respectively, voting separately as a class, will require the affirmative
vote of a majority of the votes cast by holders of that Fund's AMPS, represented
at the Meetings and entitled to vote; and (y) election of the remaining
Directors of MuniYield California Insured II or MuniVest California Insured, as
the case may be, will require the affirmative vote of a majority of the votes
cast by 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 MuniYield California Insured II and MuniVest
California Insured will require the affirmative vote of a majority of the votes
cast by holders of each Fund's Common Stock and 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 MuniYield California Insured II, the surviving fund after the
Reorganization, so as to be borne equally and exclusively on a per share basis
by the holders of MuniYield California Insured II Common Stock and MuniVest
California Insured Common Stock.
71
<PAGE> 76
MuniYield California Insured II and MuniVest California Insured likewise
will reimburse banks, brokers and others for their reasonable expenses in
forwarding proxy solicitation materials to the beneficial owners of shares of
MuniYield California Insured II and MuniVest California Insured and certain
persons that MuniYield California Insured II or MuniVest California Insured may
employ for their reasonable expenses in assisting in the solicitation of proxies
from such beneficial owners of shares of capital stock of MuniYield California
Insured II or MuniVest California Insured.
In order to obtain the necessary quorum at the Meetings (i.e., a majority
of the shares of each class of each Fund's securities entitled to vote at the
Meetings, present in person or by proxy), supplementary solicitation may be made
by mail, telephone, telegraph or personal interview by officers of the Fund. The
Funds also may hire proxy solicitors at the expense of MuniYield California
Insured II. 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 as independent
auditors for each Fund for the current fiscal year (proposal 3) 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 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 and 3 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 and 3;
however, abstentions and broker non-votes will have the same effect as a vote
against proposal 1.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statement and the exhibits relating thereto which
MuniYield California Insured II has filed with the Commission under the
Securities Act and the Investment Company Act, to which reference is hereby
made.
MuniYield California Insured II and MuniVest California Insured both are
subject to the informational requirements of the Securities Exchange Act, and in
accordance therewith file reports and other information with the Commission.
Reports, proxy statements, registration statements and other information filed
by MuniYield California Insured II and MuniVest California Insured 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.
72
<PAGE> 77
CUSTODIAN
State Street Bank and Trust Company acts as the custodian for cash and
securities of MuniYield California 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. The Bank of New York acts as the custodian
for cash and securities of MuniVest California Insured. The principal business
address of The Bank of New York in such capacity is 90 Washington Street, 12th
floor, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
Boston EquiServe serves as the transfer agent, dividend disbursing agent
and registrar with respect to the MuniYield California Insured II Common Stock
pursuant to a registrar, transfer agency and service agreement with the Fund.
The principal business address of Boston EquiServe in such capacity is 150
Royall Street, Canton, Massachusetts 02021. The Bank of New York serves as the
transfer agent, dividend disbursing agent and registrar with respect to the
MuniVest California Insured Common Stock pursuant to a registrar, transfer
agency and service agreement with the Fund. The principal business address of
The Bank of New York in such capacity is 12 West Street, New York, New York
10286.
IBJ Schroder Bank and Trust Company serves as the transfer agent, registrar
and auction agent to MuniYield California Insured II and MuniVest California
Insured, in connection with their respective AMPS, at the same rate for each
Fund, pursuant to separate registrar, transfer agency and service agreements
with each of the Funds. The principal business address of IBJ Schroder Bank and
Trust Company is One State Street, New York, New York 10004.
LEGAL PROCEEDINGS
There are no material legal proceedings to which MuniYield California
Insured II or MuniVest California Insured is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for MuniYield California Insured II and MuniVest California Insured 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 MuniYield California
Insured II and MuniVest California Insured 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.
73
<PAGE> 78
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 June, 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 February 15, 1997.
By Order of the Boards of Directors
MARK B. GOLDFUS
Secretary of each of the Funds
74
<PAGE> 79
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Audited Financial Statements for MuniYield California Insured II for the Fiscal
Year Ended October 31, 1995..................................................... F- 2
Unaudited Financial Statements for MuniYield California Insured II for the
Six-Month Period Ended April 30, 1996........................................... F-13
Audited Financial Statements for MuniVest California Insured for the Fiscal Year
Ended October 31, 1995.......................................................... F-24
Unaudited Financial Statements for MuniVest California Insured for the Six-Month
Period Ended April 30, 1996..................................................... F-34
Unaudited Financial Statements for the Combined Fund on a Pro Forma Basis as of
April 30, 1996.................................................................. F-43
</TABLE>
F-1
<PAGE> 80
AUDITED FINANCIAL STATEMENTS FOR MUNIYIELD CALIFORNIA INSURED II
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995
F-2
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
MuniYield California Insured Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments of MuniYield California Insured Fund II,
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 for the period October 30, 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. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniYield California
Insured Fund II, 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 1, 1995
F-3
<PAGE> 82
MUNIYIELD CALIFORNIA INSURED FUND II, INC. OCTOBER 31, 1995
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
(in Thousands)
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
California--97.2%
<S> <S> <C> <S> <C>
AAA Aaa $ 2,000 Berkeley, California, Unified School District, UT, Series C, 6.50% due
8/01/2019 (b) $ 2,134
- -----------------------------------------------------------------------------------------------------------------------------
California Health Facilities Financing Authority Revenue Bonds:
AAA Aaa 1,000 (Adventist Health System-West), Series B, 6.25% due 3/01/2021 (d) 1,027
AAA Aaa 1,000 (Kaiser Permanente), Series A, 7% due 10/01/2018 (b) 1,105
AAA VMIG1++ 1,200 (Pooled Loan Program), VRDN, Series 85-B, 3.70% due 10/01/2010 (a)(c) 1,200
AAA Aaa 15,750 (San Diego Children's Hospital), 6.50% due 7/01/2020 (d) 16,430
- -----------------------------------------------------------------------------------------------------------------------------
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 3,900 AMT, Series F-1, 7% due 8/01/2026 4,088
AA- Aa 2,435 Refunding, AMT, Series H, 7.50% due 8/01/2025 2,609
AA- Aa 5,750 Series B, 6.90% due 8/01/2016 5,905
- -----------------------------------------------------------------------------------------------------------------------------
AA- Aa 2,000 California HFA, Revenue Bonds, RIB, AMT, 8.777% due 8/01/2023 (h) 2,085
- -----------------------------------------------------------------------------------------------------------------------------
A1 P1 100 California Pollution Control Financing Authority, PCR (Southern California
Edison), VRDN, Series C, 3.75% due 2/28/2008 (a) 100
- -----------------------------------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, Resource Recovery Revenue Bonds,
VRDN, AMT (a):
NR* P1 500 (Delano Project), 4% due 8/01/2019 500
NR* P1 100 Refunding (Ultra Power Malaga Project), Series B, 4.05% due 4/01/2017 100
- -----------------------------------------------------------------------------------------------------------------------------
NR* Aaa 1,000 California Rural Home Mortgage Finance Authority, S/F Mortgage Revenue Bonds
(Mortgage-Backed Securities Program), AMT, Series A-1, 6.90% due 12/01/2024 (j) 1,055
- -----------------------------------------------------------------------------------------------------------------------------
AA Aaa 1,500 California State Department of Water Resources, Water System Revenue Bonds
(Central Valley Project), Series I, 6.95% due 6/01/2000 (i) 1,681
- -----------------------------------------------------------------------------------------------------------------------------
California State, GO, UT:
AAA Aaa 2,000 7% due 11/01/2014 (c) 2,255
AAA Aaa 5,750 Refunding, 5.125% due 10/01/2017 (d)(f) 5,319
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield California 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 at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-4
<PAGE> 83
MUNIYIELD CALIFORNIA INSURED FUND II, INC. OCTOBER 31, 1995
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
(in Thousands)
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
California (continued)
<S> <S> <C> <S> <C>
California State Public Works Board, Lease Revenue Bonds:
AAA Aaa $ 3,000 (Department of Corrections-California State Prison-Susanville), Series D, 5.25%
due 6/01/2015 (f) $ 2,842
AAA Aaa 3,000 Refunding (Department of Corrections-State Prisons), Series A, 5% due
12/01/2019 (b) 2,734
A- A1 1,000 Refunding (Various Universities of California Projects), Series A, 5.50% due
6/01/2021 926
AAA Aaa 900 (Secretary of State), Series A, 6.40% due 12/01/2007 (b) 1,002
A- A 2,000 (Various Community College Projects), 7% due 3/01/2014 2,177
AAA Aaa 3,200 (Various University of California Projects), Series A, 6.40% due 12/01/2016 (b) 3,382
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 California Statewide Community Development Authority Revenue Bonds, COP
(Good Samaritan Health System), 6.50% due 5/01/2024 (e) 1,113
- -----------------------------------------------------------------------------------------------------------------------------
Central Coast Water Authority, California, Water Project, Regional Facilities Revenue
Bonds (b):
AAA Aaa 2,385 6.50% due 10/01/2014 2,541
AAA Aaa 7,500 6.60% due 10/01/2022 8,037
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Compton, California, Community Redevelopment Agency, Tax Allocation Refunding Bonds
(Compton Redevelopment Project), Series A, 6.50% due 8/01/2013 (f) 6,476
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Cucamonga County, California, Water District COP, Refinancing Facilities, 6.50% due
9/01/2022 (c) 2,120
- -----------------------------------------------------------------------------------------------------------------------------
Culver City, California, Redevelopment Finance Authority, Tax Allocation Revenue
Refunding Bonds (b):
AAA Aaa 5,425 5.50% due 11/01/2014 5,387
AAA Aaa 1,785 5% due 11/01/2023 1,607
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 El Cajon, California, Redevelopment Agency, Tax Allocation Bonds (El Cajon
Redevelopment Project), 6.60% due 10/01/2022 (b) 6,410
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,125 Elk Grove, California, Unified School District, Special Tax Community Facilities
District No. 1, 7% due 12/01/2003 (b)(i) 3,681
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,500 Fresno, California, Sewer Revenue Bonds, Series A-1, 5.25% due 9/01/2019(b) 1,426
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,500 Los Angeles, California, Community Redevelopment Agency, Tax Allocation Refunding
Bonds (Bunker), Series C, 6% due 12/01/2001 (d)(i) 1,651
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Los Angeles, California, Convention and Exhibition Center Authority, Lease Revenue
Refunding Bonds, Series A, 5.125% due 8/15/2021 (d) 5,521
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Los Angeles, California, Department of Water and Power, Electric Plant Revenue
Refunding Bonds, 5.375% due 9/01/2023 (c) 2,852
- -----------------------------------------------------------------------------------------------------------------------------
AA Aa 2,000 Los Angeles, California, Harbor Department Revenue Bonds, AMT, Series B, 6.625%
due 8/01/2025 2,101
- -----------------------------------------------------------------------------------------------------------------------------
A- A 1,000 Los Angeles, California, State Building Authority, Lease Revenue Refunding Bonds
(California State Department of General Services), Series A, 5.625% due 5/01/2011 985
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,250 Los Angeles, California, Wastewater System Revenue Refunding Bonds, Series D,
5.20% due 11/01/2021 (c) 1,163
- -----------------------------------------------------------------------------------------------------------------------------
Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax
Revenue Bonds:
AAA Aaa 6,250 (Proposition C), Second Series A, 5% due 7/01/2025 (b) 5,619
AAA Aaa 5,325 Refunding (Proposition A), Series A, 5% due 7/01/2021 (c) 4,812
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,285 Los Angeles County, California, Transportation Commission, Sales Tax Revenue
Bonds, Series A, 6.75% due 7/01/2001 (c)(i) 7,123
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE> 84
MUNIYIELD CALIFORNIA INSURED FUND II, INC. OCTOBER 31, 1995
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
(in Thousands)
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
California (continued)
<S> <S> <C> <S> <C>
AAA Aaa $ 1,000 M-S-R Public Power Agency, California, Revenue Bonds (San Juan Project), Series E,
6.50% due 7/01/2017 (d) $ 1,057
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,250 Marysville, California, Hospital Revenue Bonds (Fremont-Rideout Health Group),
Series A, 6.30% due 1/01/2022 (b) 4,378
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,850 Mountain View, California, Capital Improvements Financing Authority Revenue
Bonds (City Hall Community Theatre), 6.50% due 8/01/2016 (d) 4,063
- -----------------------------------------------------------------------------------------------------------------------------
Northern California Power Agency, Multiple Capital Facilities Revenue Bonds (d):
AAA Aaa 2,500 RIB, 8.891% due 9/02/2025 (h) 2,775
AAA Aaa 2,000 Series A, 6.50% due 8/01/2012 2,151
- -----------------------------------------------------------------------------------------------------------------------------
Northern California Transmission Revenue Bonds (California-Oregon Transmission
Project), Series A (d):
AAA Aaa 2,000 6.50% due 5/01/2016 2,133
AAA Aaa 6,400 Refunding, 5.25% due 5/01/2020 6,038
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 7,000 Orange County, California, Local Transportation Authority, Sales Tax Revenue
Bonds, 6.20% due 2/14/2011 (b) 7,397
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,360 Orchard, California, School District, GO, Series A, 6.50% due 8/01/2019 (c) 2,528
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Port Oakland, California, Port Revenue Bonds, AMT, Series E, 6.50% due
11/01/2016 (d) 2,098
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 14,000 Poway, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Paraguay Redevelopment Project), 5.50% due 12/15/2023 (c) 13,476
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Sacramento, California, Area Flood Control Agency, Capital Assessment
District No. 2, 5.375% due 10/01/2025 (c) 1,902
- -----------------------------------------------------------------------------------------------------------------------------
A+ Aa 2,600 Sacramento, California, City Financing Authority, Lease Revenue Refunding
Bonds, Series B, 5.40% due 11/01/2020 2,441
- -----------------------------------------------------------------------------------------------------------------------------
Sacramento, California, Municipal Utility District, Electric Revenue Bonds (d):
AAA Aaa 7,475 Refunding, Series D, 5.25% due 11/15/2020 7,010
AAA Aaa 1,270 Refunding, Series G, 6.50% due 9/01/2013 1,404
AAA Aaa 7,000 Series B, 6.375% due 8/15/2022 7,347
San Francisco, California, City and County Airport Commission, International
Airport Revenue Bonds, Second Series:
AAA Aaa 1,500 AMT, Issue 5, 6.50% due 5/01/2019 (c) 1,593
AAA Aaa 3,000 AMT, Issue 6, 6.50% due 5/01/2018 (b) 3,188
AAA Aaa 1,000 Refunding, Issue 2, 6.75% due 5/01/2013 (d) 1,096
AAA Aaa 10,000 Refunding, Issue 2, 6.75% due 5/01/2020 (d) 10,938
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,550 San Francisco, California, City and County Redevelopment Agency, Lease
Revenue Bonds (George R. Moscone Convention Center), 6.75% due 7/01/2024 (f) 1,680
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,470 San Francisco, California, City and County Sewer Revenue Refunding Bonds,
5.375% due 10/01/2022 (c) 2,360
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,845 San Jose, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Merged Area Redevelopment Project), 5% due 8/01/2020 (d) 4,386
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,150 San Mateo County, California, COP (Capital Projects Program), 6.50% due
7/01/2001 (d)(i) 1,289
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE> 85
MUNIYIELD CALIFORNIA INSURED FUND II, INC. OCTOBER 31, 1995
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
California (concluded)
<S> <S> <C> <S> <C>
AAA Aaa $ 3,430 Santa Ana, California, Financing Authority, Lease Revenue Bonds (Police
Administration and Holding Facility), Series A, 6.25% due 7/01/2024 (d) $ 3,730
- -----------------------------------------------------------------------------------------------------------------------------
Santa Clara County, California, Financing Authority, Lease Revenue Bonds (VMC
Facility Replacement Project), Series A (b):
AAA Aaa 2,500 7.75% due 11/15/2011 3,076
AAA Aaa 10,770 6.875% due 11/15/2014 11,913
AAA Aaa 1,700 6.75% due 11/15/2020 1,853
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Santa Rosa, California, Wastewater Revenue Bonds (Subregional Wastewater Project),
Series A, 6.50% due 9/01/2022 (c) 3,189
- -----------------------------------------------------------------------------------------------------------------------------
AAA NR* 3,335 Southern California, HFA, S/F Mortgage Revenue Bonds Program, AMT, Series B,
6.90% due 10/01/2024 (g) 3,466
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,375 Southern California Public Power Authority, Transmission Project Revenue Refunding
Bonds, Sub-Series A, 5% due 7/01/2022 (d) 1,233
- -----------------------------------------------------------------------------------------------------------------------------
BBB+ NR* 1,280 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste Facility
Revenue Refunding Bonds (Ogden Martin System Inc. Project), 7.625% due 1/01/2010 1,371
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Suisun City, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Suisun City Redevelopment Project), 5.50% due 10/01/2023 (d) 1,939
- -----------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 University of California, Housing Systems Revenue Refunding Bonds, Series A, 5% due
11/01/2014 (d) 2,304
- -----------------------------------------------------------------------------------------------------------------------------
University of California, Revenue Refunding Bonds (Multiple Purpose Projects):
AAA Aaa 3,000 Series A, 6.875% due 9/01/2002 (d)(i) 3,463
AAA Aaa 2,000 Series C, 5.25% due 9/01/2016 (b) 1,896
AAA Aaa 6,500 Series C, 5% due 9/01/2023 (b) 5,852
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$257,075)--97.2% 271,294
OTHER ASSETS LESS LIABILITIES--2.8% 7,830
--------
NET ASSETS--100.0% $279,124
========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1995.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)CAPMAC Insured.
(f)CGIC Insured.
(g)GNMA/FNMA Collateralized.
(h)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at October 31, 1995.
(i)Prerefunded.
(j)GNMA Collateralized.
*Not Rated.
+Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
F-7
<PAGE> 86
MUNIYIELD CALIFORNIA 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--$257,074,845) (Note 1a) $271,294,382
Cash 3,063,315
Interest receivable 5,157,121
Deferred organization expenses (Note 1e) 15,227
Prepaid expenses and other assets 9,951
------------
Total assets 279,539,996
------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES: Payables:
Dividends to shareholders (Note 1f) $ 232,224
Investment adviser (Note 2) 121,463 353,687
------------
Accrued expenses and other liabilities 62,782
------------
Total liabilities 416,469
------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Net assets $279,123,527
============
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (3,600 shares of
AMPS* issued and outstanding at $25,000 per share liquidation
preference) $ 90,000,000
Common Stock, par value $.10 per share (12,678,633 shares
issued and outstanding) $ 1,267,863
Paid-in capital in excess of par 176,474,591
Undistributed investment income--net 1,838,287
Accumulated realized capital losses on investments--net (Note 5) (4,676,751)
Unrealized appreciation on investments--net 14,219,537
------------
Total--Equivalent to $14.92 net asset value per share of
Common Stock (market price--$13.125) 189,123,527
------------
Total capital $279,123,527
============
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
F-8
<PAGE> 87
MUNIYIELD CALIFORNIA INSURED FUND II, INC. OCTOBER 31, 1995
FINANCIAL INFORMATION (continued)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME Interest and amortization of premium and discount earned $ 16,419,079
(Note 1d):
EXPENSES: Investment advisory fees (Note 2) $ 1,340,990
Commission fees (Note 4) 226,674
Professional fees 79,533
Accounting services (Note 2) 63,054
Transfer agent fees 58,799
Printing and shareholder reports 30,261
Listing fees 24,295
Directors' fees and expenses 23,667
Custodian fees 12,653
Pricing fees 10,785
Amortization of organization expenses (Note 1e) 7,593
Other 19,400
------------
Total expenses 1,897,704
------------
Investment income--net 14,521,375
------------
- ------------------------------------------------------------------------------------------------------------------------
REALIZED & Realized loss on investments--net (4,676,753)
UNREALIZED GAIN Change in unrealized appreciation/depreciation on investments--net 25,009,415
(LOSS) ON ------------
INVESTMENTS-- Net Increase in Net Assets Resulting from Operations $ 34,854,037
NET (NOTES 1B, ============
1D & 3):
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCT. 31,
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS: Investment income--net $ 14,521,375 $ 14,861,089
Realized gain (loss) on investments--net (4,676,753) 1,066,977
Change in unrealized appreciation/depreciation on investments--net 25,009,415 (37,816,850)
------------ ------------
Net increase (decrease) in net assets resulting from operations 34,854,037 (21,888,784)
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & Investment income--net:
DISTRIBUTIONS TO Common Stock (11,088,099) (11,722,512)
SHAREHOLDERS Preferred Stock (3,332,916) (2,381,373)
(NOTE 1F): Realized gain on investments--net:
Common Stock (895,821) (1,352,849)
Preferred Stock (170,928) (300,357)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (15,487,764) (15,757,091)
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL STOCK Offering and underwriting costs from issuance of Preferred Stock -- (1,000)
TRANSACTIONS ------------ ------------
(NOTES 1E & 4): Net decrease in net assets derived from capital stock transactions -- (1,000)
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Total increase (decrease) in net assets 19,366,273 (37,646,875)
Beginning of year 259,757,254 297,404,129
------------ ------------
End of year* $279,123,527 $259,757,254
============ ============
- ------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1g) $ 1,838,287 $ 1,737,697
============ ============
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
F-9
<PAGE> 88
MUNIYIELD CALIFORNIA INSURED FUND II, INC. OCTOBER 31, 1995
FINANCIAL INFORMATION (concluded)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE
PERIOD
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE YEAR ENDED OCT. 30,
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. OCTOBER 31, 1992++ TO
------------------------------ 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 $ 13.39 $ 16.36 $ 14.15 $ 14.18
OPERATING -------- -------- -------- --------
PERFORMANCE: Investment income--net 1.13 1.17 1.12 --
Realized and unrealized gain (loss) on investments--net 1.61 (2.90) 2.27 --
-------- -------- -------- --------
Total from investment operations 2.74 (1.73) 3.39 --
-------- -------- -------- --------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net (.87) (.92) (.84) --
Realized gain on investments--net (.07) (.11) -- --
-------- -------- -------- --------
Total dividends and distributions to
Common Stock shareholders (.94) (1.03) (.84) --
-------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock -- -- -- (.03)
-------- -------- -------- --------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred Stock
shareholders:
Investment income--net (.26) (.19) (.20) --
Realized gain on investments--net (.01) (.02) -- --
Capital charge resulting from issuance of
Preferred Stock -- -- (.14) --
-------- -------- -------- --------
Total effect of Preferred Stock activity (.27) (.21) (.34) --
-------- -------- -------- --------
Net asset value, end of period $ 14.92 $ 13.39 $ 16.36 $ 14.15
======== ======== ======== ========
Market price per share, end of period $ 13.125 $ 11.875 $ 15.375 $ 15.00
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT Based on market price per share 19.00% (16.78%) 8.24% .00%+++
RETURN:* ======== ======== ======== ========
Based on net asset value per share 19.97% (11.82%) 22.09% (.21%)+++
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE Expenses, net of reimbursement .71% .70% .56% --%
NET ASSETS:** ======== ======== ======== ========
Expenses .71% .70% .68% --%
======== ======== ======== ========
Investment income--net 5.42% 5.28% 5.17% --%
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL Net assets, net of Preferred Stock, end of period
DATA: (in thousands) $189,124 $169,757 $207,404 $178,555
======== ======== ======== ========
Preferred Stock outstanding, end of period
(in thousands) $ 90,000 $ 90,000 $ 90,000 --
======== ======== ======== ========
Portfolio turnover 114.78% 41.67% 15.85% .00%
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER Series A--Investment income--net $ 948 $ 636 $ 743 --
SHARE ON Series B--Investment income--net 904 687 685 --
PREFERRED STOCK
OUTSTANDING:++++++
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*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.
+++Aggregate total investment return.
See Notes to Financial Statements.
F-10
<PAGE> 89
MUNIYIELD CALIFORNIA INSURED FUND II, INC. OCTOBER 31, 1995
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
MuniYield California 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 MCA. 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.
o 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.
o 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 the time
of issuance.
F-11
<PAGE> 90
MUNIYIELD CALIFORNIA 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.
(g) Reclassification--Generally accepted accounting principles
require that certain differences between accumulated net realized
capital losses for financial reporting and tax purposes, if
permanent, be reclassified to undistributed net investment income.
Accordingly, current year's permanent book/tax differences of $230
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 $295,216,613 and
$299,397,095, respectively.
Net realized and unrealized gains (losses) as of October 31, 1995
were as follows:
- ------------------------------------------------------------
REALIZED UNREALIZED
GAINS (LOSSES) GAINS
- ------------------------------------------------------------
Long-term investments $(1,395,321) $ 14,219,537
Short-term investments 26,475 --
Financial futures contracts (3,307,907) --
----------- ------------
Total $(4,676,753) $ 14,219,537
=========== ============
- ------------------------------------------------------------
As of October 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $14,183,125, of which $14,205,636
related to appreciated securities and $22,511 related to depreciated
securities. The aggregate cost of investments at October 31, 1995
for Federal income tax purposes was $257,111,257.
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 12,678,633. At October 31, 1995, total paid-in
capital amounted to $177,742,454.
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, 3.65% and Series B, 3.40%.
A two-for-one stock split occurred on December 1, 1994. As a result,
as of October 31, 1995, there were 3,600 AMPS shares authorized,
issued and outstanding with a liquidation preference of $25,000 per
share, plus accumulated and unpaid dividends of $181,192.
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 $183,927 as
commissions.
5. CAPITAL LOSS CARRYFORWARD:
At October 31, 1995, the Fund had a net capital loss carryforward of
approximately $2,501,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
6. SUBSEQUENT EVENT:
On November 13, 1995, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $0.071678 per share, payable on November 29, 1995 to shareholders
of record as of November 24, 1995.
F-12
<PAGE> 91
UNAUDITED FINANCIAL STATEMENTS FOR MUNIYIELD CALIFORNIA INSURED II
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1996
F-13
<PAGE> 92
MUNIYIELD CALIFORNIA INSURED FUND II, INC. APRIL 30, 1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
California--99.2%
<S> <C> <C> <C> <C>
AAA Aaa $ 2,000 Berkeley, California, Unified School District, UT, Series C, 6.50% due
8/01/2019 (b) $ 2,101
- -------------------------------------------------------------------------------------------------------------------------
California Health Facilities Financing Authority Revenue Bonds:
AAA Aaa 1,000 (Adventist Health System--West), Series B, 6.25% due 3/01/2021 (d) 1,019
AAA Aaa 1,000 (Kaiser Permanente), Series A, 7% due 10/01/2018 (b) 1,076
AA Aa3 2,855 (Kaiser Permanente), Series A, 6.50% due 12/01/2020 2,928
AAA Aaa 15,750 (San Diego Children's Hospital), 6.50% due 7/01/2000 (d)(i) 17,215
- -------------------------------------------------------------------------------------------------------------------------
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 3,900 AMT, Series F-1, 7% due 8/01/2026 4,033
AA- Aa 2,425 Refunding, AMT, Series H, 7.50% due 8/01/2025 2,556
AA- Aa 5,750 Series B, 6.90% due 8/01/2016 5,862
- -------------------------------------------------------------------------------------------------------------------------
AA- Aa 2,000 California HFA, Revenue Bonds, RIB, AMT, 9.237% due 8/01/2023 (k) 2,020
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 California Maritime Infrastructure Authority, Airport Revenue Bonds
(San Diego Unified Port District), AMT, 5% due 11/01/2020 (b) 3,444
- -------------------------------------------------------------------------------------------------------------------------
A1 P1 300 California Pollution Control Financing Authority, PCR (Southern California
Edison), VRDN, Series C, 3.75% due 2/28/2008 (a) 300
- -------------------------------------------------------------------------------------------------------------------------
NR* Aa3 600 California Pollution Control Financing Authority, Resource Recovery Revenue
Bonds (Honey Lake Power Project), VRDN, AMT, 4.10% due 9/01/2018 (a) 600
- -------------------------------------------------------------------------------------------------------------------------
NR* Aaa 1,000 California Rural Home Mortgage Finance Authority, S/F Mortgage Revenue Bonds
(Mortgage-Backed Securities Program), AMT, Series A-1, 6.90% due 12/01/2024
(g)(j) 1,049
- -------------------------------------------------------------------------------------------------------------------------
AA Aa 5,360 California State Department of Water Resources, Water System Revenue Bonds
(Central Valley Project) Series O, 5% due 12/01/2022 4,633
- -------------------------------------------------------------------------------------------------------------------------
California State, GO, UT (c):
AAA Aaa 1,935 7% due 11/01/2004 (i) 2,243
AAA Aaa 65 7% due 11/01/2014 72
- -------------------------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Bonds:
AAA Aaa 3,000 (Department of Corrections--California State Prison--Susanville), Series D,
5.25% due 6/01/2015 (f)(h) 2,782
AAA Aaa 3,000 Refunding (Department of Corrections--State Prisons), Series A, 5% due
12/01/2019 (b) 2,669
AAA Aaa 900 (Secretary of State), Series A, 6.40% due 12/01/2007 (b) 992
A - A 2,000 (Various Community College Projects), Series B, 7% due 3/01/2014 2,168
AAA Aaa 3,200 (Various University of California Projects), Series A, 6.40% due 12/01/2016 (b) 3,328
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield California 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.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Finance Agency
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-14
<PAGE> 93
MUNIYIELD CALIFORNIA INSURED FUND II, INC. APRIL 30, 1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
California (continued)
<S> <C> <C> <C> <C>
AAA Aaa $ 5,415 California State University, Housing System Revenue Refunding Bonds, 5.90%
due 11/01/2021 (c) $ 5,352
- -------------------------------------------------------------------------------------------------------------------------
California Statewide Community Development Authority Revenue Bonds, COP:
AAA Aaa 1,000 (Good Samaritan Health System), 6.50% due 5/01/2004 (e)(i) 1,120
A1+ VMIG1++ 1,300 Refunding (Saint Joseph Health System), VRDN, 3.75% due 7/01/2008 (a) 1,300
- -------------------------------------------------------------------------------------------------------------------------
Central Coast Water Authority, California, Revenue Bonds (State Water
Project Regional Facilities) (b):
AAA Aaa 2,385 6.50% due 10/01/2014 2,511
AAA Aaa 7,500 6.60% due 10/01/2022 7,967
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Compton, California, Community Redevelopment Agency, Tax Allocation
Refunding Bonds (Compton Redevelopment Project), Series A, 6.50% due
8/01/2013(h) 6,368
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Cucamonga County, California, Water District Facilities Refinancing Bonds,
COP, 6.50% due 9/01/2022(c) 2,082
- -------------------------------------------------------------------------------------------------------------------------
Culver City, California, Redevelopment Finance Authority, Tax Allocation
Revenue Refunding Bonds (b):
AAA Aaa 5,425 5.50% due 11/01/2014 5,278
AAA Aaa 1,785 5% due 11/01/2023 1,527
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,750 East Bay, California, Municipal Utilities District, Water System Subordinate
Revenue Refunding Bonds, 5% due 6/01/2021 (d) 1,514
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 El Cajon, California, Redevelopment Agency, Tax Allocation Bonds (El Cajon
Redevelopment Project), 6.60% due 10/01/2022 (b) 6,406
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,125 Elk Grove, California, Unified School District, Special Tax Community
Facilities District No. 1, 7% due 12/01/2003 (b)(i) 3,608
- -------------------------------------------------------------------------------------------------------------------------
Fresno, California, Sewer Revenue Bonds:
AAA Aaa 2,000 Series A, 4.75% due 9/01/2026 (d) 1,641
AAA Aaa 1,500 Series A-1, 5.25% due 9/01/2019 (b) 1,388
- -------------------------------------------------------------------------------------------------------------------------
Los Angeles, California, Department of Water and Power, Electric Plant
Revenue Refunding Bonds:
AAA Aaa 4,990 4.75% due 8/15/2015 (c) 4,237
AA- Aa 1,000 6.375% due 2/01/2020 1,036
- -------------------------------------------------------------------------------------------------------------------------
AA Aa 2,000 Los Angeles, California, Harbor Department Revenue Bonds, AMT, Series B,
6.625% due 8/01/2025 2,083
- -------------------------------------------------------------------------------------------------------------------------
A- A 1,000 Los Angeles, California, State Building Authority, Lease Revenue Refunding
Bonds(California State Department of General Services), Series A, 5.625%
due 5/01/2011 984
- -------------------------------------------------------------------------------------------------------------------------
A1+ VMIG1++ 12,400 Los Angeles County, California, Metropolitan Transportation Authority, Sales
Tax Revenue Refunding Bonds, Proposition C, VRDN, Second Senior Series A,
3.85% due 7/01/2020 (a)(d) 12,400
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Los Angeles County, California, Public Works Financing Authority, Lease
Revenue Bonds(Multiple Capital Facilities Project-IV), 4.75% due 12/01/2013 (d) 8,643
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Los Angeles County, California, Transportation Commission, Sales Tax Revenue
Bonds, Series A, 6.75% due 7/01/2001 (c)(i) 4,459
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 M-S-R Public Power Agency, California, Revenue Bonds (San Juan Project),
Series E, 6.50% due 7/01/2017 (d) 1,043
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,250 Marysville, California, Hospital Revenue Bonds (Fremont-Rideout Health Group),
Series A, 6.30% due 1/01/2022 (b) 4,364
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE> 94
MUNIYIELD CALIFORNIA INSURED FUND II, INC. APRIL 30, 1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
California (continued)
<S> <C> <C> <C> <C>
AAA Aaa $ 1,750 Metropolitan Water District, Southern California Waterworks Revenue
Refunding Bonds, Series B, 4.75% due 7/01/2021 (d) $ 1,458
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,850 Mountain View, California, Capital Improvements Financing Authority Revenue
Bonds (City Hall Community Theatre), 6.50% due 8/01/2016 (d) 4,035
- -------------------------------------------------------------------------------------------------------------------------
Northern California Power Agency, Multiple Capital Facilities Revenue Bonds
(d):
AAA Aaa 2,500 RIB, 9.121% due 9/02/2025 (k) 2,703
AAA Aaa 2,000 Series A, 6.50% due 8/01/2012 2,128
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Northern California Transmission Revenue Bonds (California-Oregon Transmission
Project), Series A, 6.50% due 5/01/2016 (d) 2,117
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 7,000 Orange County, California, Local Transportation Authority, Sales Tax Revenue
Bonds, 6.20% due 2/14/2011 (b) 7,197
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,360 Orchard, California, School District, GO, Series A, 6.50% due 8/01/2019 (c) 2,487
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Pioneers Memorial Hospital District, California, Refunding, GO, 6.50% due
10/01/2024 (b) 2,627
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Port Oakland, California, Port Revenue Bonds, AMT, Series E, 6.50% due
11/01/2016 (d) 2,054
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,400 Riverside County, California, Transportation Commission, Sales Tax Revenue
Bonds, Series A, 6.50% due 6/01/2001 (b)(i) 2,643
- -------------------------------------------------------------------------------------------------------------------------
Sacramento, California, City Financing Authority, Lease Revenue Refunding
Bonds:
AAA Aaa 7,000 Series A, 5.40% due 11/01/2020 (b) 6,558
A+ Aa 2,600 Series B, 5.40% due 11/01/2020 2,401
- -------------------------------------------------------------------------------------------------------------------------
Sacramento, California, Municipal Utility District, Electric Revenue Bonds (d):
AAA Aaa 1,270 Refunding, Series G, 6.50% due 9/01/2013 1,388
AAA Aaa 7,000 Series B, 6.375% due 8/15/2022 7,247
- -------------------------------------------------------------------------------------------------------------------------
San Francisco, California, City and County Airport Commission, International
Airport Revenue Bonds, Second Series:
AAA Aaa 1,500 AMT, Issue 5, 6.50% due 5/01/2019 (c) 1,538
AAA Aaa 3,000 AMT, Issue 6, 6.50% due 5/01/2018 (b) 3,075
AAA Aaa 4,385 Refunding, Issue 1, 6.30% due 5/01/2011 (b) 4,569
AAA Aaa 4,000 Refunding, Issue 1, 6.50% due 5/01/2013 (b) 4,248
AAA Aaa 1,000 Refunding, Issue 2, 6.75% due 5/01/2013 (d) 1,081
AAA Aaa 10,000 Refunding, Issue 2, 6.75% due 5/01/2020 (d) 10,788
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,550 San Francisco, California, City and County Redevelopment Agency, Lease
Revenue Bonds(George R. Moscone Convention Center), 6.75% due 7/01/2024 (h) 1,677
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 San Jose, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Merged Area Redevelopment Project), 4.75% due 8/01/2024 (d) 1,659
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,430 Santa Ana, California, Financing Authority, Lease Revenue Bonds (Police
Administration and Holding Facility), Series A, 6.25% due 7/01/2024 (d) 3,603
- -------------------------------------------------------------------------------------------------------------------------
Santa Clara County, California, Financing Authority, Lease Revenue Bonds
(VMC Facility Replacement Project), Series A (b):
AAA Aaa 2,500 7.75% due 11/15/2011 3,068
AAA Aaa 10,770 6.875% due 11/15/2014 11,811
AAA Aaa 1,700 6.75% due 11/15/2020 1,841
- -------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Santa Rosa, California, Wastewater Revenue Bonds (Subregional Wastewater
Project), Series A, 6.50% due 9/01/2002 (c)(i) 3,330
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE> 95
MUNIYIELD CALIFORNIA INSURED FUND II, INC. APRIL 30, 1996
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (concluded)
<S> <C> <C> <C> <C>
AAA NR* $ 3,335 Southern California, HFA, S/F Mortgage Revenue Bonds Program, AMT, Series B,
6.90% due 10/01/2024 (g) $ 3,406
- -------------------------------------------------------------------------------------------------------------------------
Southern California Public Power Authority, Power Project Revenue Refunding
Bonds, Series A (b):
AAA Aaa 1,000 (Mead Adelanto Project), 4.875% due 7/01/2020 845
AAA Aaa 5,455 (Mead Phoenix Project), 5% due 7/01/2017 4,794
- -------------------------------------------------------------------------------------------------------------------------
A1+ VMIG1++ 10,800 Southern California Public Power Authority, Revenue Refunding Bonds (Southern
Transmission Project), VRDN, 3.80% due 7/01/2019 (a)(b) 10,800
- -------------------------------------------------------------------------------------------------------------------------
BBB+ NR* 1,265 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste Facility
Revenue Refunding Bonds (Ogden Martin System Inc. Project), 7.625% due 1/01/2010 1,361
Puerto Rico--2.0%
A1+ P1 4,900 Puerto Rico Commonwealth (Government Development Bank), CP, 4.10% due 5/03/1996 4,900
- -------------------------------------------------------------------------------------------------------------------------
A1+ VMIG1++ 600 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway Revenue
Bonds, VRDN, Series X, 3.75% due 7/01/1999 (a) 600
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$269,151)--101.2% 276,438
LIABILITIES IN EXCESS OF OTHER ASSETS--(1.2%) (3,394)
--------
NET ASSETS--100.0% $273,044
========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at April 30, 1996.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)CAPMAC Insured.
(f)CGIC Insured.
(g)GNMA/FNMA Collateralized.
(h)FSA Insured.
(i)Prerefunded.
(j)FHLMC Insured.
(k)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.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
F-17
<PAGE> 96
MUNIYIELD CALIFORNIA INSURED FUND II, INC. APRIL 30, 1996
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL AS OF APRIL 30, 1996
<S> <C> <C> <C>
ASSETS: Investments, at value (identified cost--$269,150,581) (Note 1a) $276,437,893
Cash 8,239
Interest receivable 5,040,369
Deferred organization expenses (Note 1e) 15,227
Prepaid expenses and other assets 10,301
------------
Total assets 281,512,029
------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES: Payables:
Securities purchased $ 8,015,282
Dividends to shareholders (Note 1f) 254,185
Investment adviser (Note 2) 119,975 8,389,442
------------
Accrued expenses and other liabilities 78,218
------------
Total liabilities 8,467,660
------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Net assets $273,044,369
============
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (3,600 shares
of AMPS* issued and outstanding at $25,000 per share
liquidation preference) $90,000,000
Common Stock, par value $.10 per share (12,678,633 shares
issued and outstanding) $ 1,267,863
Paid-in capital in excess of par 176,474,591
Undistributed investment income--net 1,631,798
Accumulated realized capital losses on investments--net (Note 5) (3,617,195)
Unrealized appreciation on investments--net 7,287,312
------------
Total--Equivalent to $14.44 net asset value per Common Stock
(market price--$13.875) 183,044,369
------------
Total capital $273,044,369
============
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
F-18
<PAGE> 97
MUNIYIELD CALIFORNIA INSURED FUND II, INC. APRIL 30, 1996
FINANCIAL INFORMATION (continued)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
APRIL 30, 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME Interest and amortization of premium and discount earned $ 7,984,785
(NOTE 1D):
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES: Investment advisory fees (Note 2) $ 701,986
Commission fees (Note 4) 113,663
Professional fees 39,776
Transfer agent fees 27,840
Accounting services (Note 2) 24,440
Printing and shareholder reports 14,997
Listing fees 12,104
Directors' fees and expenses 11,584
Custodian fees 9,030
Pricing fees 5,372
Amortization of organization expenses (Note 1e) 3,793
Other 10,988
------------
Total expenses 975,573
------------
Investment income--net 7,009,212
------------
- ------------------------------------------------------------------------------------------------------------------------
REALIZED & Realized gain on investments--net 1,059,556
UNREALIZED Change in unrealized appreciation on investments--net (6,932,225)
GAIN (LOSS) ON ------------
INVESTMENTS--NET Net Increase in Net Assets Resulting from Operations $ 1,136,543
(NOTES 1B, 1D & 3): ============
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-19
<PAGE> 98
MUNIYIELD CALIFORNIA INSURED FUND II, INC. APRIL 30, 1996
FINANCIAL INFORMATION (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE
ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: APRIL 30, 1996 OCT. 31, 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS: Investment income--net $ 7,009,212 $ 14,521,375
Realized gain (loss) on investments--net 1,059,556 (4,676,753)
Change in unrealized appreciation/depreciation on investments--net (6,932,225) 25,009,415
------------ ------------
Net increase in net assets resulting from operations 1,136,543 34,854,037
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & Investment income--net:
DISTRIBUTIONS TO Common Stock (5,576,963) (11,088,099)
SHAREHOLDERS Preferred Stock (1,638,738) (3,332,916)
(NOTE 1F): Realized gain on investments--net:
Common Stock -- (895,821)
Preferred Stock -- (170,928)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (7,215,701) (15,487,764)
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Total increase (decrease) in net assets (6,079,158) 19,366,273
Beginning of period 279,123,527 259,757,254
------------ ------------
End of period* $273,044,369 $279,123,527
============ ============
- ------------------------------------------------------------------------------------------------------------------------
Undistributed investment income--net $ 1,631,798 $ 1,838,287
============ ============
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE> 99
MUNIYIELD CALIFORNIA INSURED FUND II, INC. APRIL 30, 1996
FINANCIAL INFORMATION (concluded)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX PERIOD
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED MONTHS FOR THE YEAR ENDED OCT. 30,
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ENDED October 31, 1992++ TO
April 30, ---------------------------- 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 $ 14.92 $ 13.39 $ 16.36 $ 14.15 $ 14.18
OPERATING -------- -------- -------- -------- --------
PERFORMANCE: Investment income--net .56 1.13 1.17 1.12 --
Realized and unrealized gain (loss) on
investments--net (.47) 1.61 (2.90) 2.27 --
-------- -------- -------- -------- --------
Total from investment operations .09 2.74 (1.73) 3.39 --
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.44) (.87) (.92) (.84) --
Realized gain on investments--net -- (.07) (.11) -- --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders (.44) (.94) (1.03) (.84) --
-------- -------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock -- -- -- -- (.03)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.13) (.26) (.19) (.20) --
Realized gain on investments--net -- (.01) (.02) -- --
Capital charge resulting from issuance of
Preferred Stock -- -- -- (.14) --
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.13) (.27) (.21) (.34) --
-------- -------- -------- -------- --------
Net asset value, end of period $ 14.44 $ 14.92 $ 13.39 $ 16.36 $ 14.15
======== ======== ======== ======== ========
Market price per share, end of period $ 13.875 $ 13.125 $ 11.875 $ 15.375 $ 15.00
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT Based on market price per share 9.08%+++ 19.00% (16.78%) 8.24% .00%+++
RETURN:** ======== ======== ======== ======== ========
Based on net asset value per share (.14%)+++ 19.97% (11.82%) 22.09% (.21%)+++
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE Expenses, net of reimbursement .69%* .71% .70% .56% --
NET ASSETS:*** ======== ======== ======== ======== ========
Expenses .69%* .71% .70% .68% --
======== ======== ======== ======== ========
Investment income--net 4.97%* 5.42% 5.28% 5.17% --
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL Net assets, net of Preferred Stock, end of
DATA: period (in thousands) $183,044 $189,124 $169,757 $207,404 $178,555
======== ======== ======== ======== ========
Preferred Stock outstanding, end of period
(in thousands) $ 90,000 $ 90,000 $ 90,000 $ 90,000 --
======== ======== ======== ======== ========
Portfolio turnover 57.30% 114.78% 41.67% 15.85% 0.00%
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
LEVERAGE: Asset coverage per $1,000 $ 3,034 $ 3,101 $ 2,886 $ 3,304 --
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE Series A--Investment income--net $ 469 $ 948 $ 636 $ 743 --
ON PREFERRED STOCK ======== ======== ======== ======== ========
OUTSTANDING:++++++ Series B--Investment income--net $ 441 $ 904 $ 687 $ 685 --
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Commencement of Operations.
++++The Fund's Preferred Stock was issued on November 30, 1992.
++++++Dividends per share have been adjusted to reflect a two-for-
one stock split that occurred on December 1, 1994.
+++Aggregate total investment return.
See Notes to Financial Statements.
F-21
<PAGE> 100
MUNIYIELD CALIFORNIA INSURED FUND II, INC. APRIL 30, 1996
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
MuniYield California 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 MCA. 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.
o 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.
o 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-22
<PAGE> 101
MUNIYIELD CALIFORNIA 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.
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 $154,639,787 and
$172,104,096, 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 $ 618,042 $ 7,287,312
Short-term investments (721) --
Financial futures contracts 442,235 --
------------ ------------
Total $ 1,059,556 $ 7,287,312
============ ============
- ------------------------------------------------------------
</TABLE>
As of April 30, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $7,287,312, of which $9,817,847 related to
appreciated securities and $2,530,535 related to depreciated
securities. The aggregate cost of investments at April 30, 1996 for
Federal income tax purposes was $269,150,581.
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 12,678,633. At April 30, 1996,
total paid-in capital amounted to $177,742,454.
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, 3.50% and Series B, 3.375%.
As of April 30, 1996, there were 3,600 AMPS shares authorized,
issued and outstanding with a liquidation preference of $25,000 per
share, plus accumulated and unpaid dividends of $16,951.
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 $86,207 as
commissions.
5. CAPITAL LOSS CARRYFORWARD:
At October 31, 1995, the Fund had a net capital loss carryforward of
approximately $2,501,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
6. SUBSEQUENT EVENT:
On May 10, 1996, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$0.071145 per share, payable on May 30, 1996 to shareholders of
record as of May 21, 1996.
F-23
<PAGE> 102
AUDITED FINANCIAL STATEMENTS FOR MUNIVEST CALIFORNIA INSURED
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995
F-24
<PAGE> 103
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MuniVest California Insured Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniVest California 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 two-year
period then ended and the period April 30, 1993 (commencement of operations) to
October 31, 1993. 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. 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 MuniVest California
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 1, 1995
F-25
<PAGE> 104
MUNIVEST CALIFORNIA INSURED FUND, INC., OCTOBER 31, 1995
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
California--98.5% AAA Aaa $ 2,485 California Health Facilities Financing Authority, Insured Revenue
Bonds (Children's Hospital of San Diego), 7% due 7/01/2013 (d) $ 2,751
--------------------------------------------------------------------------------------------------------------
AA- Aa 2,500 California HFA, Home Mortgage Revenue Bonds, AMT, Series F-1,
7% due 8/01/2026 2,621
--------------------------------------------------------------------------------------------------------------
AA- Aa 2,000 California HFA, Revenue Bonds, RIB, AMT, 8.777% due 8/01/2023 (e) 2,085
--------------------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, PCR (Southern
California Edison), VRDN (a):
A1 VMIG1++ 200 Series A, 3.75% due 2/28/2008 200
A1 P1 2,000 Series D, 3.75% due 2/28/2008 2,000
--------------------------------------------------------------------------------------------------------------
NR* P1 400 California Pollution Control Financing Authority, Resource Recovery
Revenue Refunding Bonds (Ultra Power Rocklin Project), VRDN, AMT,
Series A, 4.05% due 6/01/2017 (a) 400
--------------------------------------------------------------------------------------------------------------
A1+ VMIG1++ 200 California Pollution Control Financing Authority, Solid Waste
Disposal Revenue Bonds (Shell Oil Co.--Martinez Project), VRDN,
AMT, Series A, 3.90% due 10/01/2024 (a) 200
--------------------------------------------------------------------------------------------------------------
California Rural Home Mortgage Finance Authority, S/F Mortgage
Revenue Bonds (Mortgage-Backed Securities Program), AMT (f):
NR* Aaa 670 Series A-2, 7.95% due 12/01/2024 771
AAA NR* 1,500 Series B, 7.75% due 9/01/2026 1,687
--------------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Bonds, Series A:
A- A 3,500 (Department of Corrections--Monterey County), 7% due 11/01/2019 3,807
A- A 1,000 (Various Community College Projects), 5.625% due 12/01/2018 945
AAA Aaa 1,500 (Various University of California Projects), 6.40% due
12/01/2016 (b) 1,586
--------------------------------------------------------------------------------------------------------------
AA Aa 2,000 California Statewide Community Development Authority Revenue Bonds,
COP (Saint Joseph Health System Group), 6.625% due 7/01/2021 2,136
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Central Coast Water Authority, California, Revenue Bonds
(Water Project Regional Facilities), 6.60% due 10/01/2022 (b) 2,143
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,990 Compton, California, Community Redevelopment Agency, Tax Allocation
Refunding Bonds (Compton Redevelopment Project), Series A, 6.50%
due 8/01/2013 (h) 2,148
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Cucamonga County, California, Water District Facilities Refinancing
Bonds, COP, 6.50% due 9/01/2022 (c) 2,120
--------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Culver City, California, Redevelopment Finance Authority, Tax
Allocation Revenue Refunding Bonds, 5.50% due 11/01/2014 (b) 4,965
--------------------------------------------------------------------------------------------------------------
Fresno, California, Sewer Revenue Bonds, Series A-1 (b):
AAA Aaa 500 6.25% due 9/01/2014 542
AAA Aaa 1,000 5.25% due 9/01/2019 950
--------------------------------------------------------------------------------------------------------------
Los Angeles, California, Community Redevelopment Agency, Tax
Allocation Refunding Bonds (Bunker Hill), Series H (g):
AAA Aaa 1,500 6.50% due 12/01/2015 1,590
AAA Aaa 3,500 6.50% due 12/01/2016 3,699
--------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Los Angeles, California, Convention and Exhibition Center Authority,
Lease Revenue Refunding Bonds, Series A, 5.375% due 8/15/2018 (d) 2,869
--------------------------------------------------------------------------------------------------------------
Los Angeles, California, Department of Water and Power, Electric
Plant Revenue Refunding Bonds:
AAA Aaa 3,500 5.375% due 9/01/2023 (c) 3,328
AAA Aaa 5,000 5.375% due 9/01/2023 (d) 4,761
--------------------------------------------------------------------------------------------------------------
</TABLE>
F-26
<PAGE> 105
<TABLE>
<S> <C> <C> <C> <C> <C>
AA Aa 3,000 Los Angeles, California, Harbor Department Revenue Bonds, AMT,
Series B, 6.625% due 8/01/2025 3,151
--------------------------------------------------------------------------------------------------------------
AAA Aaa 7,335 Los Angeles County, California, COP (Correctional Facilities
Project), 6.50% due 9/01/2013 (d) 7,709
--------------------------------------------------------------------------------------------------------------
M-S-R Public Power Agency, California, Revenue Bonds (San Juan
Project) (d):
AAA Aaa 1,500 Refunding, 6.75% due 7/01/2020 1,722
AAA Aaa 2,000 Series E, 6.75% due 7/01/2011 2,185
--------------------------------------------------------------------------------------------------------------
AAA Aaa 3,500 Northern California Power Agency, Public Power Revenue Refunding
Bonds (Hydroelectric Project Number 1), Series A, 5.50%
due 7/01/2024 (d) 3,411
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Oakland, California, Redevelopment Agency, Refunding Bonds, INFLOS,
7.865% due 9/01/2019 (d) (e) 1,003
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,750 Oceanside, California, COP (Watereuse Association, California,
Financing Project), Series A, 6.50% due 10/01/2017 (b) 2,924
--------------------------------------------------------------------------------------------------------------
A+ A1 3,000 Pasadena, California, COP, Refunding (Old Pasadena Package Facility
Project), 6.25% due 1/01/2018 3,121
--------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Pioneers Memorial Hospital District, California, Refunding, GO, UT,
6.50% due 10/01/2024 (b) 3,188
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Poway, California, Redevelopment Agency, Tax Allocation Refunding
Bonds (Paraguay Redevelopment Project), 5.50% due 12/15/2023 (c) 1,925
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,500 Rancho, California, Water District Financing Authority, Revenue
Refunding Bonds, 5% due 8/15/2014 (b) 1,390
--------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Rancho Cucamonga, California, Redevelopment Agency, Tax Allocation
Bonds (Rancho Redevelopment Project), 6.75% due 9/01/2020 (d) 3,223
--------------------------------------------------------------------------------------------------------------
A+ Aa 1,500 Sacramento, California, City Financing Authority, Lease Revenue
Refunding Bonds, Series B, 5.40% due 11/01/2020 1,408
--------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Sacramento, California, Municipal Utilities District, Electric
Revenue Bonds, Series B, 6.375% due 8/15/2022 (d) 4,198
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Sacramento County, California, COP, GO, 6.50% due 6/01/2015 (d) 1,050
--------------------------------------------------------------------------------------------------------------
San Francisco, California, City and County Airports Commission,
International Airport Revenue Bonds, Second Series:
AAA Aaa 2,000 AMT, Issue 5, 6.50% due 5/01/2019 (c) 2,124
AAA Aaa 2,000 AMT, Issue 6, 6.60% due 5/01/2020 (b) 2,147
AAA Aaa 2,000 Refunding, Issue 2, 6.75% due 5/01/2013 (d) 2,192
--------------------------------------------------------------------------------------------------------------
San Francisco, California, City and County Redevelopment Agency,
Lease Revenue Bonds (George R. Moscone Convention Center) (h):
AAA Aaa 2,800 6.75% due 7/01/2015 3,053
AAA Aaa 1,500 6.75% due 7/01/2024 1,626
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 San Jose, California, Redevelopment Agency, Tax Allocation Refunding
Bonds (Merged Area Redevelopment Project), 5.25% due 8/01/2016 (d) 950
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,450 San Mateo County, California, Joint Powers Financing Authority, Lease
Revenue Refunding Bonds (Capital Projects Program), 5.125% due
7/01/2018 (d) 2,292
--------------------------------------------------------------------------------------------------------------
</TABLE>
Portfolio
Abbreviations
To simplify the listings of MuniVest California Insured Fund,
Inc.'s portfolio holdings in the Schedule of Investments,
we have abbreviated the names of many of the securities
according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
INFLOS Inverse Floating Rate Municipal Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-27
<PAGE> 106
MUNIVEST CALIFORNIA 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>
California AAA Aaa $ 3,500 Stockton, California, Revenue Bonds (Wastewater Treatment Plant
(concluded) Expansion), COP, Series A, 6.70% due 9/01/2014 (c) $ 3,813
--------------------------------------------------------------------------------------------------------------
University of California, Revenue Refunding Bonds (Multiple
Purpose Projects), Series C (b):
AAA Aaa 1,250 5% due 9/01/2013 1,163
AAA Aaa 4,000 5% due 9/01/2023 3,601
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,500 Vacaville, California, Public Financing Authority, Tax Allocation
Revenue Refunding Bonds (Vacaville Redevelopment Projects), 6.35%
due 9/01/2022 (d) 1,564
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,500 Walnut, California, Public Financing Authority, Tax Allocation
Revenue Refunding Bonds (Walnut Improvement Project), 6.50%
due 9/01/2022 (d) 1,596
TOTAL INVESTMENTS (COST--$112,527)--98.5% 118,033
OTHER ASSETS LESS LIABILITIES--1.5% 1,788
--------
NET ASSETS--100.0% $119,821
========
</TABLE>
(a)The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at
October 31, 1995.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)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.
(f)GNMA Collateralized.
(g)FSA Insured.
(h)CGIC Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of October 31, 1995
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$112,527,018) (Note 1a) $118,032,748
Cash 28,784
Interest receivable 1,949,006
Deferred organization expenses (Note 1e) 13,548
Prepaid expenses 6,906
------------
Total assets 120,030,992
------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) $ 124,298
Investment adviser (Note 2) 48,908 173,206
------------
Accrued expenses and other liabilities 37,219
------------
</TABLE>
F-28
<PAGE> 107
<TABLE>
<S> <C> <C> <C>
Total liabilities 210,425
Net Assets: Net assets $119,820,567
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (1,600 shares of AMPS* issued and
outstanding at $25,000 per share liquidation preference) $ 40,000,000
Common Stock, par value $.10 per share (5,961,365 shares issued and outstanding) $ 596,136
Paid-in capital in excess of par 82,965,863
Undistributed investment income--net 452,016
Accumulated realized capital losses on investments--net (Note 5) (9,699,178)
Unrealized appreciation on investments--net 5,505,730
------------
Total--Equivalent to $13.39 net asset value per share of Common Stock
(market price--$11.875) 79,820,567
------------
Total capital $119,820,567
============
</TABLE>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended October 31, 1995
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $ 7,045,659
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 574,411
Commission fees (Note 4) 101,464
Professional fees 76,102
Printing and shareholder reports 41,820
Transfer agent fees 26,248
Listing fees 25,465
Accounting services (Note 2) 23,992
Directors' fees and expenses 22,690
Custodian fees 10,570
Pricing fees 6,304
Amortization of organization expenses (Note 1e) 5,434
Other 11,550
-----------
Total expenses 926,050
-----------
Investment income--net 6,119,609
-----------
Realized & Realized loss on investments--net (3,594,227)
Unrealized Change in unrealized appreciation/depreciation on investments--net 13,039,828
Gain(Loss) -----------
on Invest- Net Increase in Net Assets Resulting from Operations $15,565,210
ments--Net ===========
(Notes 1b, 1d
& 3):
</TABLE>
See Notes to Financial Statements.
F-29
<PAGE> 108
MUNIVEST CALIFORNIA INSURED FUND, INC., OCTOBER 31, 1995
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED OCTOBER 31,
-------------------------------
Increase (Decrease) in Net Assets: 1995 1994
<S> <C> <C> <C>
Operations: Investment income--net $ 6,119,609 $ 6,068,712
Realized loss on investments--net (3,594,227) (6,104,947)
Change in unrealized appreciation/depreciation on investments--net 13,039,828 (12,568,883)
------------ ------------
Net increase (decrease) in net assets resulting from operations 15,565,210 (12,605,118)
------------ ------------
Dividends & Investment income--net:
Distributions Common Stock (4,602,835) (4,886,495)
to Share- Preferred Stock (1,492,944) (1,215,832)
holders Realized gain on investments--net:
(Note 1f): Common Stock -- (410,130)
Preferred Stock -- (62,896)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (6,095,779) (6,575,353)
------------ ------------
Capital Stock Offering and underwriting costs resulting from the issuance of Preferred Stock -- 34,413
Transactions ------------ ------------
(Notes 1e Net increase in net assets derived from capital stock transactions -- 34,413
& 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets 9,469,431 (19,146,058)
Beginning of year 110,351,136 129,497,194
------------ ------------
End of year* $119,820,567 $110,351,136
============ ============
*Undistributed investment income--net $ 452,016 $ 428,186
============ ============
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE FOR THE PERIOD
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. YEAR ENDED APRIL 30, 1993++
OCTOBER 31, TO OCTOBER 31,
--------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1993
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.80 $ 15.01 $ 14.18
Operating ---------- ---------- ----------
Performance: Investment income--net 1.03 1.01 .48
Realized and unrealized gain (loss) on investments--net 1.58 (3.13) .91
---------- ---------- ----------
</TABLE>
F-30
<PAGE> 109
<TABLE>
<S> <C> <C> <C> <C>
Total from investment operations 2.61 (2.12) 1.39
---------- ---------- ----------
Less dividends and distributions to Common Stock shareholders:
Investment income--net (.77) (.82) (.34)
Realized gain on investments--net -- (.07) --
---------- ---------- ----------
Total dividends and distributions to Common Stock shareholders (.77) (.89) (.34)
---------- ---------- ----------
Capital charge resulting from issuance of Common Stock -- -- (.03)
---------- ---------- ----------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred Stock shareholders:
Investment income--net (.25) (.20) (.06)
Realized gain on investments--net -- (.01) --
Capital charge resulting from issuance of Preferred Stock -- .01 (.13)
---------- ---------- ----------
Total effect of Preferred Stock activity (.25) (.20) (.19)
---------- ---------- ----------
Net asset value, end of period $ 13.39 $ 11.80 $ 15.01
========== ========== ==========
Market price per share, end of period $ 11.875 $ 10.50 $ 14.75
========== ========== ==========
Total Based on market price per share 20.89% (23.56%) .64%+++
Investment ========== ========== ==========
Return:** Based on net asset value per share 21.30% (15.58%) 8.34%+++
========== ========== ==========
Ratios to Expenses, net of reimbursement .81% .76% .41%*
Average Net ========== ========== ==========
Assets:*** Expenses .81% .81% .83%*
========== ========== ==========
Investment income--net 5.33% 5.06% 4.82%*
========== ========== ==========
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 79,821 $ 70,351 $ 89,497
Data: ========== ========== ==========
Preferred Stock outstanding, end of period (in thousands) $ 40,000 $ 40,000 $ 40,000
========== ========== ==========
Portfolio turnover 90.41% 81.53% 38.34%
========== ========== ==========
Dividends Investment income--net $ 933 $ 760 $ 239
Per Share
on Preferred
Stock
Outstanding:++++++
</TABLE>
*Annualized.
**Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of
sales loads.
***Do not reflect the effect of dividends to Preferred Stock shareholders.
++Commencement of Operations.
++++The Fund's Preferred Stock was issued on June 1, 1993.
++++++Dividends per share have been adjusted to reflect a two-for-one
stock split.
+++Aggregate total investment return.
See Notes to Financial Statements.
F-31
<PAGE> 110
MUNIVEST CALIFORNIA INSURED FUND, INC., OCTOBER 31, 1995
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
MuniVest California 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 MVC. 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.
o 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.
o 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 trans-
actions 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 and offering expenses--Deferred organiza-
tion expenses are amortized on a straight-line basis over a five-year
period beginning with the commencement of operations of the Fund.
Direct expenses relating to the public offering of the Fund's Common
and Preferred Stock were charged to capital at the time of issuance of
the shares.
F-32
<PAGE> 111
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH
AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). The general partner of FAM
is Princeton Services, Inc. ("PSI"), an indirect wholly-owned sub-
sidiary 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 $99,785,185 and
$102,282,899, respectively.
Net realized and unrealized gains (losses) as of October 31, 1995 were
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
REALIZED UNREALIZED
LOSSES GAINS
- ---------------------------------------------------------------------
<S> <C> <C>
Long-term investments $(2,173,988) $5,505,730
Financial futures contracts (1,420,239) --
----------- ----------
Total $(3,594,227) $5,505,730
=========== ==========
- ---------------------------------------------------------------------
</TABLE>
As of October 31, 1995, net unrealized appreciation for Federal income
tax purposes aggregated $5,505,730, of which $5,548,018 related to
appreciated securities and $42,288 related to depreciated securities.
The aggregate cost of investments at October 31, 1995 for Federal
income tax purposes was $112,527,018.
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 5,961,365. At October 31, 1995, total paid-in
capital amounted to $83,561,999.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund that entitle their holders to receive cash dividends
at an annual rate that may vary for the successive dividend periods.
The yield in effect at October 31, 1995 was 3.375%.
A two-for-one stock split occurred on December 1, 1994. As a result,
as of October 31, 1995 there were 1,600 AMPS authorized, issued and
outstanding with a liquidation preference of $25,000 per share.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the year ended
October 31, 1995, MLPF&S, an affiliate of FAM, earned $88,206 as
commissions.
5. CAPITAL LOSS CARRYFORWARD:
At October 31, 1995, the Fund had a capital loss carryforward of
approximately $8,322,000, of which $6,105,000 expires in 2002 and
$2,217,000 expires in 2003. This amount will be available to offset
like amounts of any future taxable gains.
6. 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 $.069464 per share, payable on November 29, 1995 to
shareholders of record as of November 24, 1995.
F-33
<PAGE> 112
UNAUDITED FINANCIAL STATEMENTS FOR MUNIVEST CALIFORNIA INSURED
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1996
F-34
<PAGE> 113
MUNIVEST CALIFORNIA INSURED FUND, INC., APRIL 30, 1996
(in Thousands)
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
California--100.6% AAA Aaa $ 2,485 California Health Facilities Financing Authority, Insured
Revenue Bonds (Children's Hospital of San Diego), 7% due
7/01/2000(d)(h) $ 2,763
- -----------------------------------------------------------------------------------------------------------------------------------
AA- Aa 2,500 California HFA, Home Mortgage Revenue Bonds, AMT, Series F-1,
7% due 8/01/2026 2,586
- -----------------------------------------------------------------------------------------------------------------------------------
AA- Aa 2,000 California HFA, Revenue Bonds, RIB, AMT, 9.237% due 8/01/2023(e) 2,020
- -----------------------------------------------------------------------------------------------------------------------------------
A1+ VMIG1++ 5,200 California Pollution Control Financing Authority, Solid Waste
Disposal Revenue Bonds (Shell Oil Co.--Martinez Project),
VRDN, AMT, Series A, 3.80% due 10/01/2024(a) 5,200
- -----------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 670 California Rural Home Mortgage Finance Authority, S/F Mortgage
Revenue Bonds (Mortgage-Backed Securities Program), AMT,
Series A-2, 7.95% due 12/01/2024(f)(i) 749
- -----------------------------------------------------------------------------------------------------------------------------------
AA Aa 1,000 California State Department of Water Resources, Water System
Revenue Bonds (Central Valley Project), Series O, 5% due
12/01/2022 864
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 California State, GO, 4.75% due 9/01/2018(g) 832
- -----------------------------------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Bonds,
Series A:
A- A 3,500 (Department of Corrections--Monterey County), 7% due 11/01/2019 3,810
AAA Aaa 2,500 (Various University of California Projects), 6.40% due
12/01/2016(b) 2,600
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 California State University, Housing System Revenue Refunding
Bonds, 5.90% due 11/01/2021(c) 1,977
- -----------------------------------------------------------------------------------------------------------------------------------
AA Aa 2,000 California Statewide Community Development Authority Revenue Bonds,
COP (Saint Joseph Health System Group), 6.625% due 7/01/2021 2,080
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Central Coast Water Authority, California, Revenue Bonds
(Water Project Regional Facilities), 6.60% due 10/01/2022(b) 2,124
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,990 Compton, California, Community Redevelopment Agency, Tax
Allocation Refunding Bonds (Compton Redevelopment Project),
Series A, 6.50% due 8/01/2013(g) 2,112
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Cucamonga County, California, Water District Facilities
Refinancing Bonds, COP, 6.50% due 9/01/2022(c) 2,082
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Culver City, California, Redevelopment Finance Authority,
Tax Allocation Revenue Refunding Bonds, 5.50% due 11/01/2014(b) 4,864
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,050 Elk Grove, California, Unified School District, Special Tax
Refunding Bonds (Community Facilities District No. 1), 5.60%++
due 12/01/2017(b) 554
- -----------------------------------------------------------------------------------------------------------------------------------
Fresno, California, Sewer Revenue Bonds:
AAA Aaa 1,000 (Fowler Avenue Project), Series A, 6.25% due 8/01/2011 (b) 1,038
AAA Aaa 3,000 Series A, 4.75% due 9/01/2026(d) 2,461
AAA Aaa 600 Series A-1, 6.25% due 9/01/2014(b) 535
AAA Aaa 1,000 Series A-1, 5.25% due 9/01/2019(b) 925
- -----------------------------------------------------------------------------------------------------------------------------------
AA Aa 1,035 Long Beach, California, Water Revenue Refunding Bonds,
6.25% due 5/01/2024 1,057
- -----------------------------------------------------------------------------------------------------------------------------------
Los Angeles, California, Community Redevelopment Agency,
Tax Allocation Refunding Bonds (Bunker Hill), Series H(g):
AAA Aaa 1,500 6.50% due 12/01/2015 1,576
AAA Aaa 3,500 6.50% due 12/01/2016 3,678
- -----------------------------------------------------------------------------------------------------------------------------------
AA Aa 3,000 Los Angeles, California, Harbor Department Revenue Bonds, AMT,
Series B, 6.625% due 8/01/2025 3,124
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,900 Los Angeles, California, Wastewater System Revenue Refunding
Bonds, Series D, 4.70% due 11/01/2017(c) 2,417
</TABLE>
F-35
<PAGE> 114
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 7,335 Los Angeles County, California, COP (Correctional Facilities
Project), 6.50% due 9/01/2013 (d) 7,682
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,250 Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Bonds (Proposition C), Senior
Series B, 4.75% due 7/01/2018 (b) 1,876
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Los Angeles County, California, Transportation Commission, Sales
Tax Revenue Bonds, Series A, 6.75% due 7/01/2001 (c) (h) 1,115
- -----------------------------------------------------------------------------------------------------------------------------------
M--S--R Public Power Agency, California, Revenue Bonds (San Juan
Project) (d):
AAA Aaa 1,500 Refunding, 6.75% due 7/01/2020 1,665
AAA Aaa 2,000 Series E, 6.75% due 7/01/2011 2,139
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Metropolitan Water District, Southern California Waterworks,
Revenue Refunding Bonds, Series B, 4.75% due 7/01/2021 (d) 833
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Oakland, California, Redevelopment Agency Refunding Bonds,
INFLOS, 8.321% due 9/01/2019 (d) (e) 955
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,750 Oceanside, California, COP (Watereuse Association, California,
Financing Project), Series A, 6.50% due 10/01/2017 (b) 2,877
- -----------------------------------------------------------------------------------------------------------------------------------
A+ A1 2,000 Pasadena, California, COP, Refunding (Old Pasadena Package
Facility Project), 6.25% due 1/01/2018 2,050
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Pioneers Memorial Hospital District, California, Refunding,
GO, UT, 6.50% due 10/01/2024 (b) 5,255
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Port Oakland, California, Port Revenue Bonds, AMT, Series E,
6.50% due 11/01/2016 (d) 2,054
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Rancho Cucamonga, California, Redevelopment Agency, Tax Allocation
Bonds (Rancho Redevelopment Project), 6.75% due 9/01/2020 (d) 3,187
- -----------------------------------------------------------------------------------------------------------------------------------
A+ Aa 1,500 Sacramento, California, City Financing Authority, Lease Revenue
Refunding Bonds, Series B, 5.40% due 11/01/2020 1,385
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Sacramento, California, Municipal Utilities District, Electric
Revenue Bonds, Series B, 6.375% due 8/15/2022 (d) 4,141
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Sacramento County, California, COP, GO, 6.50% due 6/01/2015 (d) 1,038
- -----------------------------------------------------------------------------------------------------------------------------------
San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, Second Series:
AAA Aaa 2,000 AMT, Issue 5, 6.50% due 5/01/2019 (c) 2,050
AAA Aaa 2,000 AMT, Issue 6, 6.60% due 5/01/2020 (b) 2,065
AAA Aaa 2,000 Refunding, Issue 2, 6.75% due 5/01/2013 (d) 2,163
- -----------------------------------------------------------------------------------------------------------------------------------
San Francisco, California, City and County Redevelopment Agency,
Lease Revenue Bonds (George R. Moscone Convention Center) (g):
AAA Aaa 2,800 6.75% due 7/01/2015 3,035
AAA Aaa 1,500 6.75% due 7/01/2024 1,623
- -----------------------------------------------------------------------------------------------------------------------------------
AAA VMIG1+ 3,800 San Jose-Santa Clara, California, Water Financing Authority,
Sewer Revenue Bonds, VRDN, Series B, 3.85% due 11/15/2020 (a) (c) 3,800
- -----------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,450 San Mateo County, California, Joint Powers Financing Authority,
Lease Revenue Refunding Bonds (Capital Projects Program),
5.125% due 7/01/2018 (d) 2,225
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Portfolio
Abbreviations
To simplify the listings of MuniVest California Insured Fund,
Inc.'s portfolio holdings in the Schedule of Investments,
we have abbreviated the names of many of the securities
according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
INFLOS Inverse Floating Rate Municipal Bonds
RIB Residual Interest Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-36
<PAGE> 115
MUNIVEST CALIFORNIA 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>
California AAA Aaa $ 1,000 Southern California Public Power Authority, Power Project
(concluded) Revenue Refunding Bonds (Mead Adelanto Project), Series A,
4.875% due 7/01/2020 (b) $ 845
--------------------------------------------------------------------------------------------------------------
AAA Aaa 3,500 Stockton, California, Revenue Bonds (Wastewater Treatment
Plant Expansion), COP, Series A, 6.70% due 9/01/2014 (c) 3,765
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,500 Vacaville, California, Public Financing Authority,
Tax Allocation Revenue Refunding Bonds (Vacaville
Redevelopment Projects), 6.35% due 9/01/2022 (d) 1,539
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,500 Walnut, California, Public Financing Authority, Tax Allocation
Revenue Refunding Bonds (Walnut Improvement Project),
6.50% due 9/01/2022 (d) 1,568
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Walnut Creek, California, COP, Refunding (John Muir Medical
Center), 5% due 2/15/2016 (d) 880
Puerto Rico-- A1+ VMIG1++ 1,500 Puerto Rico Commonwealth, Highway and Transportation Authority,
1.3% Highway Revenue Bonds, VRDN, Series X, 3.75% due 7/01/1999 (a) 1,500
TOTAL INVESTMENTS (COST--$117,312)--101.9% 119,338
LIABILITIES IN EXCESS OF OTHER ASSETS--(1.9%) (2,269)
--------
NET ASSETS--100.0% $117,069
========
</TABLE>
(a)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is
the rate in effect aT April 30, 1996.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)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.
(f)GNMA Collateralized.
(g)FSA Insured.
(h)Prerefunded.
(i)FHLMC Insured.
*Not Rated.
+Highest short-term rating by Moody's Investors Service,
Inc.
++Represents a zero coupon bond; the interest rate shown
is the effective yield at the time of purchase by the Fund.
See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of April 30, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$117,311,603) (Note 1a) ................... $119,338,022
Cash .............................................................................. 62,535
Interest receivable ............................................................... 1,964,779
Deferred organization expenses (Note 1e) .......................................... 13,548
Prepaid expenses and other assets ................................................. 7,439
------------
Total assets ...................................................................... 121,386,323
------------
Liabilities: Payables:
Securities purchased ............................................................. $ 4,0097,715
Dividends to shareholders (Note 1f) .............................................. 123,658
</TABLE>
F-37
<PAGE> 116
<TABLE>
<S> <C> <C> <C>
Investment adviser (Note 2) 48,211 4,269,584
------------
Accrued expenses and other liabilities 47,258
------------
Total liabilities 4,316,842
------------
Net Assets: Net assets $117,069,481
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (1,600 shares of AMPS* issued
and outstanding at $25,000 per share liquidation preference) $ 40,000,000
Common Stock, par value $.10 per share (5,961,365 shares issued and outstanding) $ 596,136
Paid-in capital in excess of par 82,965,863
Undistributed investment income--net 406,542
Accumulated realized capital losses on investments--net (Note 5) (8,925,479)
Unrealized appreciation on investments--net 2,026,419
------------
Total--Equivalent to $12.93 net asset value per share of Common Stock
(market price--$12.50) 77,069,481
------------
Total capital $117,069,481
============
</TABLE>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED APRIL 30, 1996
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $ 3,484,789
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 301,093
Commission fees (Note 4) 50,051
Professional fees 35,378
Transfer agent fees 22,170
Accounting services (Note 2) 21,869
Printing and shareholder reports 20,592
Directors' fees and expenses 11,216
Listing fees 8,098
Custodian fees 5,092
Pricing fees 2,799
Amortization of organization expenses (Note 1e) 2,687
Other 7,929
------------
Total expenses 488,974
------------
Investment income--net 2,995,815
------------
Realized & Realized gain on investments--net 773,699
Unrealized Change in unrealized appreciation on investments--net (3,479,311)
Gain (Loss) ------------
on Invest- Net Increase in Net Assets Resulting from Operations $ 290,203
ments--Net ============
(Notes
1b, 1d & 3):
</TABLE>
See Notes to Financial Statements.
F-38
<PAGE> 117
MUNIVEST CALIFORNIA INSURED FUND, INC., APRIL 30, 1996
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS YEAR ENDED
APRIL 30, OCTOBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 2,995,815 $ 6,119,609
Realized gain (loss) on investments--net 773,699 (3,594,227)
Change in unrealized appreciation/depreciation on investments--net (3,479,311) 13,039,828
------------ ------------
Net increase in net assets resulting from operations 290,203 15,565,210
------------ ------------
Dividends to Investment income--net:
Shareholders Common Stock (2,347,961) (4,602,835)
(Note 1f): Preferred Stock (693,328) (1,492,944)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (3,041,289) (6,095,779)
------------ ------------
Net Assets: Total increase (decrease) in net assets (2,751,086) 9,469,431
Beginning of period 119,820,567 110,351,136
------------ ------------
End of period* $117,069,481 $119,820,567
============ ============
*Undistributed investment income--net $ 406,542 $ 452,016
============ ============
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE SIX FOR THE FOR THE PERIOD
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, 1993++
APRIL 30, ----------------------- TO OCTOBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.39 $ 11.80 $ 15.01 $ 14.18
Operating --------- ---------- --------- ---------
Performance: Investment income--net .50 1.03 1.01 .48
Realized and unrealized gain (loss) on investments--net (.45) 1.58 (3.13) .91
--------- ---------- --------- ---------
Total from investment operations .05 2.61 (2.12) 1.39
--------- ---------- --------- ---------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net (.39) (.77) (.82) (.34)
Realized gain on investments--net -- -- (.07) --
--------- ---------- --------- ---------
</TABLE>
F-39
<PAGE> 118
<TABLE>
<S> <C> <C> <C> <C> <C>
Total dividends and distributions to Common Stock
shareholders (.39) (.77) (.89) (.34)
--------- ---------- --------- ---------
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) (.25) (.20) (.06)
Realized gain on investments--net -- -- (.01) --
Capital charge resulting from issuance of Preferred Stock -- -- .01 (.13)
--------- ---------- --------- ---------
Total effect of Preferred Stock activity (.12) (.25) (.20) (.19)
--------- ---------- --------- ---------
Net asset value, end of period $ 12.93 $ 13.39 $ 11.80 $ 15.01
========= ========== ========= =========
Market price per share, end of period $ 12.50 $ 11.875 $ 10.50 $ 14.75
========= ========== ========= =========
Total Based on market price per share 8.59%++++ 20.89% (23.56%) .64%+
Investment ========= ========== ========= =========
Return:** Based on net asset value per share (.38%)++++ 21.30% (15.58%) 8.34%+
========= ========== ========= =========
Ratios to Expenses, net of reimbursement .81%* .81% .76% .41%*
Average Net ========= ========== ========= =========
Assets:*** Expenses .81%* .81% .81% .83%*
========= ========== ========= =========
Investment income--net 4.96%* 5.33% 5.06% 4.82%*
========= ========== ========= =========
Supplemental Net assets, net of Preferred Stock, end of period
Data: (in thousands) $ 77,069 $ 79,821 $ 70,351 $ 89,497
========= ========== ========= =========
Preferred Stock outstanding, end of period (in thousands) $ 40,000 $ 40,000 $ 40,000 $ 40,000
========= ========== ========= =========
Portfolio turnover 40.93% 90.41% 81.53% 38.34%
========= ========== ========= =========
Leverage: Asset coverage per $1,000 $ 2,927 $ 2,996 $ 2,759 $ 3,237
========= ========== ========= =========
Dividends Investment income--net $ 433 $ 933 $ 760 $ 239
Per Share on ========= ========== ========= =========
Preferred
Stock
Outstanding:+++
</TABLE>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may
result in substantially different returns. Total investment
returns exclude the effects of sales loads.
***Does not reflect the effect of dividends to Preferred Stock
shareholders.
+Commencement of Operations.
++The Fund's Preferred Stock was issued on June 1, 1993.
+++Dividends per share have been adjusted to reflect a two-for-one
stock split, that occurred on December 1, 1994.
++++Aggregate total investment return.
See Notes to Financial Statements.
F-40
<PAGE> 119
MUNIVEST CALIFORNIA INSURED FUND, INC., APRIL 30, 1996
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
MuniVest California 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 recur-
ring nature. The Fund determines and makes available for publica-
tion 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 MVC. 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.
o 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.
o 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 trans-
actions 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 beginning
with the commencement of operations of the Fund.
F-41
<PAGE> 120
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH
AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). The general partner of FAM
is Princeton Services, Inc. ("PSI"), an indirect wholly-owned sub-
sidiary 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 $47,480,994 and
$50,979,792, respectively.
Net realized and unrealized gains (losses) as of April 30, 1996 were
as follows:
REALIZED UNREALIZED
GAINS (LOSSES) GAINS
Long-term investments $600,348 $2,026,419
Short-term investments (384) --
Financial futures contracts 173,735 --
-------- ----------
Total $773,699 $2,026,419
======== ==========
As of April 30, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $2,026,419, of which $3,254,408 related to
appreciated securities and $1,227,989 related to depreciated secu-
rities. The aggregate cost of investments at April 30, 1996 for Federal
income tax purposes was $117,311,603.
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 5,961,365. At April 30, 1996, total paid-in
capital amounted to $83,561,999.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund that entitle their holders to receive cash dividends
at an annual rate that may vary for the successive dividend periods.
The yield in effect at April 30, 1996 was 3.79%.
As of April 30, 1996 there were 1,600 AMPS 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 $38,828 as
commissions.
5. CAPITAL LOSS CARRYFORWARD:
At October 31, 1995, the Fund had a net capital loss carryforward of
approximately $8,322,000, of which $6,105,000 expires in 2002 and
$2,217,000 expires in 2003. This amount will be available to offset
like amounts of any future taxable gains.
6. 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 $0.061836 per share, payable on May 30, 1996 to share-
holders of record as of May 21, 1996.
F-42
<PAGE> 121
UNAUDITED FINANCIAL STATEMENTS FOR THE COMBINED FUND
ON A PRO FORMA BASIS AS OF APRIL 30, 1996
F-43
<PAGE> 122
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: MuniYield
California Insured II (pages F-14 to F-17) and MuniVest California Insured
(pages F-35 to F-37).
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
AND MUNIVEST CALIFORNIA INSURED FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNIYIELD
CALIFORNIA MUNIVEST PRO FORMA
INSURED CALIFORNIA FOR
California -- 99.7% II INSURED COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
$ 2,000 Berkeley, California, Unified School District, UT,
Series C, 6.50% due 8/01/2019(b).................... $ 2,101 $ -- $ 2,101
2,485 California Health Facilities Financing Authority,
Insured Revenue Bonds (Children's Hospital of San
Diego), 7% due 7/01/2000(d)(i)...................... -- 2,763 2,763
California Health Facilities Financing Authority
Revenue Bonds:
1,000 (Adventist Health System-West), Series B, 6.25% due
3/01/2021(d)..................................... 1,019 -- 1,019
1,000 (Kaiser Permanente), Series A, 7% due
10/01/2018(b).................................... 1,076 -- 1,076
2,855 (Kaiser Permanente), Series A, 6.50% due
12/01/2020....................................... 2,928 -- 2,928
15,750 (San Diego Children's Hospital), 6.50% due
7/01/2000(d)(i).................................. 17,215 -- 17,215
California HFA, Home Mortgage Revenue Bonds:
6,400 AMT, Series F-1, 7% due 8/01/2026................... 4,033 2,586 6,619
2,425 Refunding, AMT, Series H, 7.50% due 8/01/2025....... 2,556 -- 2,556
5,750 Series B, 6.90% due 8/01/2016....................... 5,862 -- 5,862
4,000 California HFA, Revenue Bonds, RIB, AMT, 9.237% due
8/01/2023(j)........................................ 2,020 2,020 4,040
4,000 California Maritime Infrastructure Authority, Airport
Revenue Bonds (San Diego Unified Port District),
AMT, 5% due 11/01/2020(b)........................... 3,444 -- 3,444
</TABLE>
F-44
<PAGE> 123
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
AND MUNIVEST CALIFORNIA INSURED FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNIYIELD
CALIFORNIA MUNIVEST PRO FORMA
INSURED CALIFORNIA FOR
California -- 99.7% II INSURED COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
$ 300 California Pollution Control Financing Authority, PCR
(Southern California Edison), VRDN, Series C, 3.75%
due 2/28/2008(a).................................... $ 300 $ -- $ 300
600 California Pollution Control Financing Authority,
Resource Recovery Revenue Bonds (Honey Lake Power
Project), VRDN, AMT, 4.10% due 9/01/2018(a)......... 600 -- 600
5,200 California Pollution Control Financing Authority,
Solid Waste Disposal Revenue Bonds (Shell Oil
Co. -- Martinez Project), VRDN, AMT, Series A, 3.80%
due 10/01/2024(a)................................... -- 5,200 5,200
California Rural Home Mortgage Finance Authority, S/F
Mortgage Revenue Bonds (Mortgage-Backed Securities
Program), AMT (g):
1,000 Series A-1, 6.90% due 12/01/2024...................... 1,049 -- 1,049
670 Series A-2, 7.95% due 12/01/2024...................... -- 749 749
6,360 California State Department of Water Resources, Water
System Revenue Bonds (Central Valley Project),
Series O, 5% due 12/01/2022......................... 4,633 864 5,497
California State, GO (c):
1,935 UT, 7% due 11/01/2004 (i)............................. 2,243 -- 2,243
65 UT, 7% due 11/01/2014................................. 72 -- 72
1,000 4.75% due 9/01/2018 (h)............................... -- 832 832
California State Public Works Board, Lease Revenue
Bonds:
3,000 (Department of Corrections -- California State
Prison -- Susanville), Series D, 5.25% due
6/01/2015 (f).................................... 2,782 -- 2,782
3,500 (Department of Corrections -- Monterey County),
Series A, 7% due 11/01/2019...................... -- 3,810 3,810
3,000 Refunding (Department of Corrections -- State
Prisons), Series A, 5% due 12/01/2019 (b)........ 2,669 -- 2,669
900 (Secretary of State), Series A, 6.40% due 12/01/2007
(b).............................................. 992 -- 992
2,000 (Various Community College Projects), Series B, 7%
due 3/01/2014.................................... 2,168 -- 2,168
</TABLE>
F-45
<PAGE> 124
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
AND MUNIVEST CALIFORNIA INSURED FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNIYIELD
CALIFORNIA MUNIVEST PRO FORMA
INSURED CALIFORNIA FOR
California -- 99.7% II INSURED COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
$ 5,700 (Various University of California Projects), Series
A, 6.40% due 12/01/2016 (b)...................... $ 3,328 $ 2,600 $ 5,928
7,415 California State University, Housing System Revenue
Refunding Bonds, 5.90% due 11/01/2021 (c)........... 5,352 1,977 7,329
California Statewide Community Development Authority
Revenue Bonds, COP:
1,000 (Good Samaritan Health System), 6.50% due
5/01/2004 (e)(i)................................. 1,120 -- 1,120
1,300 Refunding (Saint Joseph Health System), VRDN, 3.75%
due 7/01/2008 (a)................................ 1,300 -- 1,300
2,000 (Saint Joseph Health System Group), 6.625% due
7/01/2021........................................ -- 2,080 2,080
Central Coast Water Authority, California, Revenue
Bonds (State Water Project Regional Facilities) (b):
2,385 6.50% due 10/01/2014................................ 2,511 -- 2,511
7,500 6.60% due 10/01/2022................................ 7,967 -- 7,967
2,000 6.60% due 10/01/2022 (b)............................ -- 2,124 2,124
7,990 Compton, California, Community Redevelopment Agency,
Tax Allocation Refunding Bonds (Compton
Redevelopment Project), Series A, 6.50% due
8/01/2013 (h)....................................... 6,368 2,112 8,480
4,000 Cucamonga County, California, Water District
Facilities Refinancing Bonds, COP, 6.50% due
9/01/2022 (c)....................................... 2,082 2,082 4,164
Culver City, California, Redevelopment Finance
Authority, Tax Allocation Revenue Refunding Bonds
(b):
10,425 5.50% due 11/01/2014................................ 5,278 4,864 10,142
1,785 5% due 11/01/2023................................... 1,527 -- 1,527
1,750 East Bay, California, Municipal Utilities District,
Water System Subordinate Revenue Refunding Bonds, 5%
due 6/01/2021 (d)................................... 1,514 -- 1,514
6,000 El Cajon, California, Redevelopment Agency, Tax
Allocation Bonds (El Cajon Redevelopment Project),
6.60% due 10/01/2022 (b)............................ 6,406 -- 6,406
</TABLE>
F-46
<PAGE> 125
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
AND MUNIVEST CALIFORNIA INSURED FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNIYIELD
CALIFORNIA MUNIVEST PRO FORMA
INSURED CALIFORNIA FOR
California -- 99.7% II INSURED COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
Elk Grove, California, Unified School District,
Special Tax Revenue Bonds (Community Facilities
District No. 1):
$ 3,125 7% due 12/01/2003 (b)(i)............................ $ 3,608 $ -- $ 3,608
2,050 Refunding, 5.60%++ due 12/01/2017................... -- 554 554
Fresno, California, Sewer Revenue Bonds:
1,000 (Fowler Avenue Project), Series A, 6.25% due
8/01/2011 (b).................................... -- 1,038 1,038
5,000 Series A, 4.75% due 9/01/2026 (b)(d)................ 1,641 2,461 4,102
500 Series A-1, 6.25% due 9/01/2014 (b)................. -- 535 535
2,500 Series A-1, 5.25% due 9/01/2019 (a)................. 1,388 925 2,313
1,035 Long Beach, California, Water Revenue Refunding Bonds,
6.25% due 5/01/2024................................. -- 1,057 1,057
Los Angeles, California, Community Redevelopment
Agency, Tax Allocation Refunding Bonds (Bunker
Hill), Series H (g):
1,500 6.50% due 12/01/2015................................ -- 1,576 1,576
3,500 6.50% due 12/01/2016................................ -- 3,678 3,678
Los Angeles, California, Department of Water and
Power, Electric Plant Revenue Refunding Bonds:
4,990 4.75% due 8/15/2015 (c)............................. 4,237 -- 4,237
1,000 6.375% due 2/01/2020................................ 1,036 -- 1,036
5,000 Los Angeles, California, Harbor Department Revenue
Bonds, AMT, Series B, 6.625% due 8/01/2025.......... 2,083 3,124 5,207
1,000 Los Angeles, California, State Building Authority,
Lease Revenue Refunding Bonds (California State
Department of General Services), Series A, 5.625%
due 5/01/2011....................................... 984 -- 984
2,900 Los Angeles, California, Wastewater System Revenue
Refunding Bonds, Series D, 4.70% due 11/01/2017
(c)................................................. -- 2,417 2,417
7,335 Los Angeles County, California, COP (Correctional
Facilities Project), 6.50% due 9/01/2013 (d)........ -- 7,682 7,682
</TABLE>
F-47
<PAGE> 126
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
AND MUNIVEST CALIFORNIA INSURED FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNIYIELD
CALIFORNIA MUNIVEST PRO FORMA
INSURED CALIFORNIA FOR
California -- 99.7% II INSURED COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
Los Angeles County, California, Metropolitan
Transportation Authority, Sales Tax Revenue
Refunding Bonds, Proposition C:
$ 2,250 Senior Series B, 4.75% due 7/01/2018(b)............. $ -- $ 1,876 $ 1,876
12,400 VRDN, Second Senior Series A, 3.85% due
7/01/2020(a)(d).................................. 12,400 -- 12,400
10,000 Los Angeles County, California, Public Works Financing
Authority, Lease Revenue Bonds (Multiple Capital
Facilities Project--IV), 4.75% due 12/01/2013(d).... 8,643 -- 8,643
5,000 Los Angeles County, California, Transportation
Commission, Sales Tax Revenue Bonds, Series A, 6.75%
due 7/01/2001(c)(i)................................. 4,459 1,115 5,574
M-S-R Public Power Agency, California, Revenue Bonds
(San Juan Project)(d):
1,500 Refunding, 6.75% due 7/01/2020...................... -- 1,665 1,665
2,000 Series E, 6.75% due 7/01/2011....................... -- 2,139 2,139
1,000 Series E, 6.50% due 7/01/2017....................... 1,043 -- 1,043
4,250 Marysville, California, Hospital Revenue Bonds
(Fremont-Rideout Health Group), Series A, 6.30% due
1/01/2022(b)........................................ 4,364 -- 4,364
2,750 Metropolitan Water District, Southern California
Waterworks Revenue Refunding Bonds, Series B, 4.75%
due 7/01/2021(d).................................... 1,458 833 2,291
3,850 Mountain View, California, Capital Improvements
Financing Authority Revenue Bonds (City Hall
Community Theatre), 6.50% due 8/01/2016(d).......... 4,035 -- 4,035
Northern California Power Agency, Multiple Capital
Facilities Revenue Bonds(d):
2,500 RIB, 9.121% due 9/02/2025(j)........................ 2,703 -- 2,703
2,000 Series A, 6.50% due 8/01/2012....................... 2,128 -- 2,128
2,000 Northern California Transmission Revenue Bonds
(California-Oregon Transmission Project), Series A,
6.50% due 5/01/2016(d).............................. 2,117 -- 2,117
</TABLE>
F-48
<PAGE> 127
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
AND MUNIVEST CALIFORNIA INSURED FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNIYIELD
CALIFORNIA MUNIVEST PRO FORMA
INSURED CALIFORNIA FOR
California -- 99.7% II INSURED COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
$ 1,000 Oakland, California, Redevelopment Agency Refunding
Bonds, INFLOS, 8.321% due 9/01/2019 (d)(e)(j)....... $ -- $ 955 $ 955
2,750 Oceanside, California, COP (Watereuse Association,
California, Financing Project), Series A, 6.50% due
10/01/2017 (b)...................................... -- 2,877 2,877
7,000 Orange County, California, Local Transportation
Authority, Sales Tax Revenue Bonds, 6.20% due
2/14/2011 (b)....................................... 7,197 -- 7,197
2,360 Orchard, California, School District, GO, Series A,
6.50% due 8/01/2019(c).............................. 2,487 -- 2,487
2,000 Pasadena, California, COP, Refunding (Old Pasadena
Package Facility Project), 6.25% due 1/01/2018...... -- 2,050 2,050
7,500 Pioneers Memorial Hospital District, California,
Refunding, GO, UT, 6.50% due 10/01/2024 (b)......... 2,627 5,255 7,882
4,000 Port Oakland, California, Port Revenue Bonds, AMT,
Series E, 6.50% due 11/01/2016 (d).................. 2,054 2,054 4,108
3,000 Rancho Cucamonga, California, Redevelopment Agency,
Tax Allocation Bonds (Rancho Redevelopment Project),
6.75% due 9/01/2020 (d)............................. -- 3,187 3,187
2,400 Riverside County, California, Transportation
Commission, Sales Tax Revenue Bonds, Series A, 6.50%
due 6/01/2001 (b)(i)................................ 2,643 -- 2,643
Sacramento, California, City Financing Authority,
Lease Revenue Refunding Bonds:
7,000 Series A, 5.40% due 11/01/2020 (b).................. 6,558 -- 6,558
4,100 Series B, 5.40% due 11/01/2020...................... 2,401 1,385 3,786
Sacramento, California, Municipal Utility District,
Electric Revenue Bonds (d):
1,270 Refunding, Series G, 6.50% due 9/01/2013.............. 1,388 -- 1,388
11,000 Series B, 6.375% due 8/15/2022........................ 7,247 4,141 11,388
1,000 Sacramento County, California, COP, GO, 6.50% due
6/01/2015(d)........................................ -- 1,038 1,038
</TABLE>
F-49
<PAGE> 128
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
AND MUNIVEST CALIFORNIA INSURED FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNIYIELD
CALIFORNIA MUNIVEST PRO FORMA
INSURED CALIFORNIA FOR
California -- 99.7% II INSURED COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
SecondSeries:$3,500 AMT, Issue 5, 6.50% due 5/01/2019 (c)............ $ 1,538 $ 2,050 $ 3,588
3,000 AMT, Issue 6, 6.50% due 5/01/2018 (b)................. 3,075 -- 3,075
2,000 AMT, Issue 6, 6.60% due 5/01/2020 (b)................. -- 2,065 2,065
4,385 Refunding, Issue 1, 6.30% due 5/01/2011 (b)........... 4,569 -- 4,569
4,000 Refunding, Issue 1, 6.50% due 5/01/2013 (b)........... 4,248 -- 4,248
3,000 Refunding, Issue 2, 6.75% due 5/01/2013 (d)........... 1,081 2,163 3,244
10,000 Refunding, Issue 2, 6.75% due 5/01/2020 (d)........... 10,788 -- 10,788
San Francisco, California, City and County
Redevelopment Agency, Lease Revenue Bonds (George R.
Moscone Convention Center) (h):
2,800 6.75% due 7/01/2015................................... -- 3,035 3,035
3,050 6.75% due 7/01/2024................................... 1,677 1,623 3,300
2,000 San Jose, California, Redevelopment Agency, Tax
Allocation Refunding Bonds (Merged Area
Redevelopment Project), 4.75% due 8/01/2024 (d)..... 1,659 -- 1,659
3,800 San Jose-Santa Clara, California, Water Financing
Authority, Sewer Revenue Bonds, VRDN, Series B,
3.85% due 11/15/2020 (a)(c)......................... -- 3,800 3,800
2,450 San Mateo County, California, Joint Powers Financing
Authority, Lease Revenue Refunding Bonds (Capital
Projects Program), 5.125% due 7/01/2018(d).......... -- 2,225 2,225
3,430 Santa Ana, California, Financing Authority, Lease
Revenue Bonds (Police Administration and Holding
Facility), Series A, 6.25% due 7/01/2024(d)......... 3,603 -- 3,603
Santa Clara County, California, Financing Authority,
Lease Revenue Bonds (VMC Facility Replacement
Project), Series A(b):
2,500 7.75% due 11/15/2011................................ 3,068 -- 3,068
10,770 6.875% due 11/15/2014............................... 11,811 -- 11,811
</TABLE>
F-50
<PAGE> 129
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
AND MUNIVEST CALIFORNIA INSURED FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNIYIELD
CALIFORNIA MUNIVEST PRO FORMA
INSURED CALIFORNIA FOR
California -- 99.7% II INSURED COMBINED FUND
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------
$ 1,700 6.75% due 11/15/2020................................ $ 1,841 $ -- $ 1,841
3,000 Santa Rosa, California, Wastewater Revenue Bonds
(Subregional Wastewater Project), Series A, 6.50%
due 9/01/2002(c)(i)................................. 3,330 -- 3,330
3,335 Southern California, HFA, S/F Mortgage Revenue Bonds
Program, AMT, Series B, 6.90% due 10/01/2024(g)..... 3,406 -- 3,406
Southern California Public Power Authority, Power
Project Revenue Refunding Bonds, Series A(b):
2,000 (Mead Adelanto Project), 4.875% due 7/01/2020....... 845 845 1,690
5,455 (Mead Phoenix Project), 5% due 7/01/2017............ 4,794 -- 4,794
10,800 Southern California Public Power Authority, Revenue
Refunding Bonds (Southern Transmission Project),
VRDN, 3.80% due 7/01/2019(a)(b)..................... 10,800 -- 10,800
1,265 Stanislaus, California, Waste-to-Energy Financing
Agency, Solid Waste Facility Revenue Refunding Bonds
(Ogden Martin System Inc. Project), 7.625% due
1/01/2010........................................... 1,361 -- 1,361
3,500 Stockton, California, Revenue Bonds, COP (Wastewater
Treatment Plant Expansion), Series A, 6.70% due
9/01/2014(c)........................................ -- 3,765 3,765
1,500 Vacaville, California, Public Financing Authority, Tax
Allocation Revenue Refunding Bonds (Vacaville
Redevelopment Projects), 6.35% due 9/01/2022(d)..... -- 1,539 1,539
1,500 Walnut, California, Public Financing Authority, Tax
Allocation Revenue Refunding Bonds (Walnut
Improvement Project), 6.50% due 9/01/2022(d)........ -- 1,568 1,568
1,000 Walnut Creek, California, COP, Refunding (John Muir
Medical Center), 5% due 2/15/2016(d)................ -- 880 880
</TABLE>
F-51
<PAGE> 130
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
AND MUNIVEST CALIFORNIA INSURED FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONCLUDED)
APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Puerto Rico -- 1.8% MUNIYIELD MUNIVEST PRO FORMA
CALIFORNIA CALIFORNIA FOR
INSURED INSURED COMBINED FUND
II
- --------------------------------------------------------------------------------------------------------------
TOTAL FACE ISSUE
AMOUNT VALUE VALUE VALUE*
- --------------------------------------------------------------------------------------------------------------
$ 4,900 Puerto Rico Commonwealth, CP (Government Development
Bank), 4.10% due 5/03/1996.......................... $ 4,900 $ -- $ 4,900
2,100 Puerto Rico Commonwealth, Highway and Transportation
Authority, Highway Revenue Bonds, VRDN, Series X,
3.75% due 7/01/1999 (a)............................. 600 1,500 2,100
- --------------------------------------------------------------------------------------------------------------
Total Investments (Cost - $386,463) -- 101.5%......... $ 276,438 $ 119,338 $ 395,776
======== ======== ===========
</TABLE>
- ---------------
* Not Rated
(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) CAPMAC Insured.
(f) Capital Guaranty.
(g) GNMA/FNMA Collateralized.
(h) FSA Insured.
(i) Prerefunded.
(j) 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.
+ Highest short-term rating by Moody's Investors Service, Inc.
++ Represents a zero coupon or step bond; the interest rate shown is the
effective yield at the time of purchase by the fund.
To simplify the listings of MuniYield California Insured Fund II, Inc. and
MuniVest California Insured Fund, Inc.'s portfolio holdings in the Schedule of
Investments, we have abbreviated the names of many of the securities according
to the list below.
AMT Alternative Minimum Tax (subject to)
COP Certificate of Participation
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Finance Agency
INFLOS Inverse Floating Rate Municipal Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-52
<PAGE> 131
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 rules
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>
MUNIYIELD MUNIVEST PRO FORMA
CALIFORNIA CALIFORNIA FOR
INSURED II INSURED ADJUSTMENTS COMBINED FUND
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value.......................................... $276,437,893 $119,338,022 $ 0 $395,775,915
Cash........................................................... 8,239 62,535 0 70,774
Receivables:
Interest..................................................... 5,040,369 1,964,779 0 7,005,148
Deferred organization expenses................................. 15,227 13,548 (13,548 ) 15,227
Prepaid expenses and other assets.............................. 10,301 7,439 0 17,740
------------ ------------ ----------- ------------
Total assets........................................... 281,512,029 121,386,323 (13,548 ) 402,884,804
------------ ------------ ----------- ------------
LIABILITIES:
Payables:
Securities purchased......................................... 8,015,282 4,097,715 2,038,340 (1) 12,112,997
Dividends to shareholders.................................... 254,185 123,658 0 2,416,183
Investment adviser........................................... 119,975 48,211 0 168,186
Accrued expenses and other liabilities......................... 78,218 47,258 207,000 (2) 332,476
------------ ------------ ----------- ------------
Total liabilities...................................... 8,467,660 4,316,842 2,245,340 15,029,842
------------ ------------ ----------- ------------
Net Assets..................................................... $273,044,369 $117,069,481 $(2,258,888) $387,854,962
============ ============ =========== ============
CAPITAL:
Capital Stock (200,000,000 shares of each fund authorized;
200,000,000 shares as adjusted); Preferred Stock, par value
$.05 per share (3,600 shares of MuniYield California Insured
II AMPS* and 1,600 Shares of MuniVest California Insured
AMPS* issued and outstanding at $25,000 per share liquidation
preference; 5,200 shares for the combined fund as
adjusted).................................................... $ 90,000,000 $ 40,000,000 $ 0 $130,000,000
Common Stock, par value $.10 per share (12,678,633 shares of
MuniYield California Insured II Common Stock, and 5,961,365
shares of MuniVest California Insured Common Stock issued and
outstanding; 18,036,505 shares for the combined fund as
adjusted).................................................... 1,267,863 596,136 (60,348 ) 1,803,651
Paid-in-capital in excess of par............................... 176,474,591 82,965,863 (160,200 ) 259,280,254
Undistributed investment income -- net......................... 1,631,798 406,542 (2,038,340 ) 0
Accumulated realized capital losses on investments -- net...... (3,617,195) (8,925,479) 0 (12,542,674 )
Unrealized appreciation on investments -- net.................. 7,287,312 2,026,419 0 9,313,731
------------ ------------ ----------- ------------
Total Capital -- Equivalent to $14.44 net asset value per share
of MuniYield California Insured II Common Stock, $12.93 net
asset value per share of MuniVest California Insured Common
Stock and $14.30 net asset value per share for the combined
fund as adjusted............................................. $273,044,369 $117,069,481 $(2,258,888) $387,854,962
============ ============ =========== ============
</TABLE>
- ---------------
* Auction Market Preferred Stock (AMPS).
(1) Assumes the distribution of undistributed investment income.
(2) Reflects the charge for estimated Reorganization expenses of $207,000.
F-53
<PAGE> 132
The following unaudited pro forma combined statement of operations for the
Funds 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>
MUNIYIELD MUNIVEST PRO FORMA
CALIFORNIA CALIFORNIA FOR
INSURED II INSURED ADJUSTMENTS COMBINED FUND
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and amortization of premium and
discount earned....................... $ 7,984,785 $ 3,484,789 $ 0 $ 11,469,574
EXPENSES:
Investment advisory fees................. 701,986 301,093 1,003,079
Commission fees.......................... 113,663 50,051 163,714
Transfer agent fees...................... 27,840 22,170 50,010
Professional fees........................ 39,776 35,378 75,154
Accounting services...................... 24,440 21,869 46,309
Directors' fees and expenses............. 11,584 11,216 22,800
Printing and shareholder reports......... 14,997 20,592 35,589
Custodian fees........................... 9,030 5,092 14,122
Listing fees............................. 12,104 8,098 20,202
Pricing fees............................. 5,372 2,799 8,171
Amortization of organization expenses.... 3,793 2,687 6,480
Other.................................... 10,988 7,929 207,000(1) 225,917
----------- ----------- --------- ------------
Total expenses........................... 975,573 488,974 207,000 1,671,547
----------- ----------- --------- ------------
Investment income -- net................. 7,009,212 2,995,815 (207,000) 9,798,027
----------- ----------- --------- ------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS -- NET:
Realized gain on investments -- net...... 1,059,556 773,699 1,833,255
Change in unrealized appreciation on
investments -- net.................... (6,932,225) (3,479,311) (10,411,536)
----------- ----------- --------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................ $ 1,136,543 $ 290,203 $(207,000) $ 1,219,746
=========== =========== ========= ============
</TABLE>
- ---------------
(1) Reflects the charge for estimated reorganization expenses of $207,000.
F-54
<PAGE> 133
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
the 21st day of August, 1996, by and between MuniVest California Insured Fund,
Inc., a Maryland corporation ("MuniVest California Insured"), and MuniYield
California Insured Fund II, Inc., a Maryland corporation ("MuniYield California
Insured II").
PLAN OF REORGANIZATION
The reorganization will comprise (a) the acquisition by MuniYield
California Insured II of all of the assets, and the assumption by MuniYield
California Insured II of all of the liabilities, of MuniVest California Insured
in exchange solely for an equal aggregate value of newly-issued shares of (i)
common stock, par value $.10 per share, of MuniYield California Insured II
("MuniYield California Insured II Common Stock") and (ii) auction market
preferred stock, with a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared) to be designated Series C, of MuniYield California Insured II
("MuniYield California Insured II Series C AMPS"), and (b) the subsequent
distribution to MuniVest California Insured stockholders of (x) all of the
MuniYield California Insured II Common Stock received by MuniVest California
Insured in exchange for their shares of common stock, par value $.10 per share,
of MuniVest California Insured ("MuniVest California Insured Common Stock") and
(y) all of the MuniYield California Insured II Series C AMPS received by
MuniVest California Insured in exchange for their shares of auction market
preferred stock, with a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared), of MuniVest California Insured ("MuniVest California Insured
AMPS"), all upon and subject to the terms hereinafter set forth (collectively,
the "Reorganization").
In the course of the Reorganization, MuniYield California Insured II Common
Stock and MuniYield California Insured II Series C AMPS will be distributed to
MuniVest California Insured stockholders as follows: (i) each holder of MuniVest
California Insured Common Stock will be entitled to receive a number of shares
of MuniYield California Insured II Common Stock equal to the aggregate net asset
value of the MuniVest California Insured Common Stock owned by such stockholder
on the Exchange Date (as defined in Section 7(a) of this Agreement); and (ii)
each holder of MuniVest California Insured AMPS will be entitled to receive a
number of shares of MuniYield California Insured II Series C AMPS equal to the
aggregate liquidation preference (and aggregate value) of the MuniVest
California Insured AMPS owned by such stockholder on the Exchange Date. In
consideration therefor, on the Exchange Date MuniYield California Insured II
shall acquire all of the assets of MuniVest California Insured and shall assume
all of MuniVest California Insured's obligations and liabilities then existing,
whether absolute, accrued, contingent or otherwise. It is intended that the
Reorganization described in this Plan shall be a reorganization within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
(the "Code"), and any successor provision.
Prior to the Exchange Date, MuniVest California Insured 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
I-1
<PAGE> 134
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 MuniVest California Insured AMPS prior to the Exchange Date may
be shorter than the dividend period for such AMPS determined as set forth in the
applicable Articles Supplementary.
Separate Articles Supplementary to MuniYield California Insured II's
Articles of Incorporation establishing the powers, rights and preferences of the
MuniYield California Insured II Series C AMPS will have been filed with the
State Department of Assessments and Taxation of Maryland (the "Maryland
Department") prior to the Exchange Date (as defined in Section 7(a) of this
Agreement).
As promptly as practicable after the liquidation of MuniVest California
Insured pursuant to the Reorganization, MuniVest California Insured shall be
dissolved in accordance with the laws of the State of Maryland, will terminate
its registration under the Investment Company Act of 1940, as amended (the "1940
Act") and will terminate its listing on the New York Stock Exchange.
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, MuniVest California Insured and MuniYield California
Insured II hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF MUNIVEST CALIFORNIA INSURED.
MuniVest California Insured represents and warrants to, and agrees with,
MuniYield California Insured II that:
(a) MuniVest California Insured 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. MuniVest California Insured 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) MuniVest California Insured is duly registered under the 1940 Act
as a non-diversified, closed-end management investment company (File No.
811-7576), and such registration has not been revoked or rescinded and is
in full force and effect. MuniVest California Insured 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 through its final
taxable year ending upon liquidation.
(c) As used in this Agreement, the term "Investments" shall mean (i)
the investments of MuniVest California Insured shown on the schedule of its
investments as of the Valuation Time (as defined in Section 3(d) of this
Agreement) furnished to MuniYield California Insured II; and (ii) all other
assets owned by MuniVest California Insured or liabilities incurred as of
the Valuation Time.
(d) MuniVest California Insured 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,
I-2
<PAGE> 135
insolvency, moratorium, fraudulent conveyance and similar laws relating to
or affecting creditors' rights generally and court decisions with respect
thereto.
(e) MuniYield California Insured II has been furnished with MuniVest
California Insured's Annual Report to Stockholders for the year ended
October 31, 1995, and the audited financial statements appearing therein,
having been examined by Deloitte & Touche LLP, independent public
accountants, fairly present the financial position of MuniVest California
Insured as of the respective dates indicated, in conformity with generally
accepted accounting principles applied on a consistent basis.
(f) MuniYield California Insured II has been furnished with MuniVest
California Insured'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 MuniVest California
Insured 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
MuniVest California Insured and an unaudited schedule of investments of
MuniVest California Insured, each as of the Valuation Time, will be
furnished to MuniYield California Insured II at or prior to the Exchange
Date for the purpose of determining the number of shares of MuniYield
California Insured II Common Stock and MuniYield California Insured II
Series C AMPS to be issued to MuniVest California Insured pursuant to
Section 4 of this Agreement; and each will fairly present the financial
position of MuniVest California Insured 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 MuniVest California Insured, threatened
against MuniVest California Insured which assert liability on the part of
MuniVest California Insured or which materially affect its financial
condition or its ability to consummate the Reorganization. MuniVest
California Insured 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 MuniVest
California Insured is a party that have not been disclosed in the N-14
Registration Statement (as defined in subsection (o) below) or will not
otherwise be disclosed to MuniYield California Insured II prior to the
Valuation Time.
(j) MuniVest California Insured 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 MuniVest California
Insured and MuniYield California 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) MuniVest California Insured 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, MuniVest California
I-3
<PAGE> 136
Insured will advise MuniYield California 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.
(l) MuniVest California Insured 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 MuniVest California
Insured have adequately been provided for on its books, and no tax
deficiency or liability of MuniVest California Insured 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, MuniVest
California Insured 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,
MuniVest California Insured will have good and marketable title to all of
the Investments, and MuniYield California Insured II 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 MuniVest
California Insured 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 (which term as used herein shall include the laws
of the District of Columbia and Puerto Rico).
(o) The registration statement filed by MuniYield California Insured
II on Form N-14 relating to the MuniYield California Insured II Common
Stock and the MuniYield California Insured II Series C AMPS to be issued
pursuant to this Agreement, which includes the joint proxy statement of
MuniVest California Insured and MuniYield California Insured II and the
prospectus of MuniYield California Insured II 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 on the Exchange Date, insofar as
it relates to MuniVest California Insured (i) complied or will comply in
all material respects with the provisions of the 1933 Act, the 1934 Act and
the 1940 Act and the rules and regulations thereunder, and (ii) did not or
will not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading; and the joint proxy statement and
prospectus included therein did not or will not contain any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
representations and warranties in this subsection shall apply only to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by MuniVest
California Insured for use in the N-14 Registration Statement as provided
in Section 6(e) of this Agreement.
I-4
<PAGE> 137
(p) MuniVest California Insured is authorized to issue 200,000,000
shares of capital stock, of which 1,600 shares have been designated as
AMPS, and 199,998,400 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 MuniVest California
Insured Common Stock and MuniVest California Insured AMPS were offered for
sale and sold in conformity with all applicable Federal and state
securities laws.
(r) The books and records of MuniVest California Insured made
available to MuniYield California Insured II and/or its counsel are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of MuniVest California Insured.
(s) MuniVest California Insured will not sell or otherwise dispose of
any of the shares of MuniYield California Insured II Common Stock or
MuniYield California Insured II Series C AMPS to be received in the
Reorganization, except in distribution to the stockholders of MuniVest
California Insured as provided in Section 4 of this Agreement.
2. REPRESENTATIONS AND WARRANTIES OF MUNIYIELD CALIFORNIA INSURED II.
MuniYield California Insured II represents and warrants to, and agrees
with, MuniVest California Insured that:
(a) MuniYield California 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 Agreement. MuniYield California 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) MuniYield California Insured II is duly registered under the 1940
Act as a non-diversified, closed-end management investment company (File
No. 811-6692), and such registration has not been revoked or rescinded and
is in full force and effect. MuniYield California 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 both until consummation of the Reorganization and
thereafter.
(c) MuniYield California 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.
(d) MuniVest California Insured has been furnished with MuniYield
California 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 Deloitte & Touche LLP, independent public
accountants, fairly present the financial position of MuniYield California
Insured II as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
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(e) MuniVest California Insured has been furnished with MuniYield
California 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 MuniYield
California Insured II as of the respective dates indicated, in conformity
with generally accepted accounting principles applied on a consistent
basis.
(f) An unaudited statement of assets, liabilities and capital of
MuniYield California Insured II and an unaudited schedule of investments of
MuniYield California Insured II, each as of the Valuation Time (as defined
in Section 3(c) of this Agreement), will be furnished to MuniVest
California Insured at or prior to the Exchange Date for the purpose of
determining the number of shares of MuniYield California Insured II Common
Stock and MuniYield California Insured II Series C AMPS to be issued
pursuant to Section 4 of this Agreement; each will fairly present the
financial position of MuniYield California Insured II as of the Valuation
Time in conformity with generally accepted accounting principles applied on
a consistent basis.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of MuniYield California Insured II, threatened
against MuniYield California Insured II which assert liability on the part
of MuniYield California Insured II or which materially affect its financial
condition or its ability to consummate the Reorganization. MuniYield
California 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.
(h) MuniYield California 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
MuniVest California Insured and MuniYield California 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 MuniYield
California Insured II is a party that have not been disclosed in the N-14
Registration Statement or will not otherwise be disclosed to MuniVest
California Insured prior to the Valuation Time.
(j) MuniYield California Insured II has no known liabilities of a
material amount, contingent or otherwise, other than those shown on
MuniYield California Insured II's statement 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, MuniYield
California Insured II will advise MuniVest California Insured in writing of
all known liabilities, contingent or otherwise, whether or not incurred in
the ordinary course of business, existing or accrued as of such time.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MuniYield
California Insured II of the Reorganization, except such as may be required
under the 1933 Act, the 1934 Act, the 1940 Act or state securities laws.
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(l) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meetings referred to in Section 6(a) of this
Agreement and at the Exchange Date, insofar as it relates to MuniYield
California 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 subsection only shall apply to statements in or omissions from the
N-14 Registration Statement made in reliance upon and in conformity with
information furnished by MuniYield California Insured II for use in the
N-14 Registration Statement as provided in Section 6(e) of this Agreement.
(m) MuniYield California Insured II is authorized to issue 200,000,000
shares of capital stock, of which 1,800 shares have been designated as
Series A AMPS and 1,800 shares have been designated as Series B AMPS
(collectively, the "MuniYield California Insured II AMPS"), and 199,996,400
shares have been designated as common stock, par value $.10 per share, each
outstanding share of which is fully paid, nonassessable and has full voting
rights.
(n) The MuniYield California Insured II Common Stock and MuniYield
California Insured II Series C AMPS to be issued to MuniVest California
Insured pursuant to this Agreement will have been duly authorized and, when
issued and delivered pursuant to this Agreement, will be legally and
validly issued and will be fully paid and nonassessable and will have full
voting rights, and no stockholder of MuniYield California Insured II will
have any preemptive right of subscription or purchase in respect thereof.
(o) At or prior to the Exchange Date, the MuniYield California Insured
II Common Stock and MuniYield California Insured II Series C AMPS to be
transferred to MuniVest California Insured 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 MuniVest California Insured presently
are qualified, and there are a sufficient number of such shares registered
under the 1933 Act and with each pertinent state securities commission to
permit the transfers contemplated by this Agreement to be consummated.
(p) At or prior to the Exchange Date, MuniYield California Insured II
will have obtained any and all regulatory, Director and stockholder
approvals necessary to issue the MuniYield California Insured II Common
Stock and MuniYield California Insured II Series C AMPS to MuniVest
California Insured.
3. THE REORGANIZATION.
(a) Subject to receiving the requisite approvals of the stockholders
of each of MuniVest California Insured and MuniYield California Insured II
and to the other terms and conditions contained herein, MuniVest California
Insured agrees to convey, transfer and deliver to MuniYield California
Insured II for the benefit of MuniYield California Insured II, and
MuniYield California Insured II agrees to acquire from MuniVest California
Insured for the benefit of MuniYield California Insured II, on the Exchange
Date all of the Investments (including interest accrued as of the Valuation
Time on debt instruments) of MuniVest California Insured, and assume all of
the liabilities of MuniVest California Insured, in
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exchange solely for that number of shares of MuniYield California Insured
II Common Stock and MuniYield California Insured II Series C AMPS provided
in Section 4 of this Agreement. Pursuant to this Agreement, as soon as
practicable after the Exchange Date MuniVest California Insured will
distribute all shares of MuniYield California Insured II Common Stock and
MuniYield California Insured II Series C AMPS received by it to its
stockholders in exchange for their corresponding shares of MuniVest
California Insured Common Stock and MuniVest California Insured AMPS. Such
distribution shall be accomplished by the opening of stockholder accounts
on the stock ledger records of MuniYield California Insured II in the
amounts due the stockholders of MuniVest California Insured based on their
respective holdings in MuniVest California Insured as of the Valuation
Time.
(b) Prior to the Exchange Date, MuniVest California Insured 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 MuniVest California
Insured AMPS prior to the Exchange Date may be shorter than the dividend
period for such AMPS determined as set forth in the applicable Articles
Supplementary.
(c) MuniVest California Insured will pay, or cause to be paid, to
MuniYield California Insured II any interest it receives on or after the
Exchange Date with respect to the Investments transferred to MuniYield
California Insured II 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) MuniYield California Insured II will acquire all of the assets of,
and assume all of the known liabilities of, MuniVest California Insured,
except that recourse for such liabilities will be limited to MuniYield
California Insured II. The known liabilities of MuniVest California Insured
as of the Valuation Time shall be confirmed in writing to MuniYield
California Insured II by MuniVest California Insured pursuant to Section
1(k) of this Agreement.
(f) MuniYield California Insured II will file separate Articles
Supplementary to its Articles of Incorporation establishing the powers,
rights and preferences of the MuniYield California Insured II Series C AMPS
with the Maryland Department prior to the Exchange Date (as defined in
Section 7(a) of this Agreement).
(g) MuniVest California Insured and MuniYield California 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 MuniVest California Insured to MuniYield
California Insured II.
(h) MuniVest California Insured 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 MuniVest
California Insured pursuant to the Reorganization, MuniVest California
Insured shall terminate its registration under the 1940 Act.
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4. ISSUANCE AND VALUATION OF MUNIYIELD CALIFORNIA INSURED II COMMON STOCK AND
MUNIYIELD CALIFORNIA INSURED II SERIES C AMPS IN THE REORGANIZATION.
Full shares of MuniYield California Insured II Common Stock and MuniYield
California Insured II Series C AMPS of an aggregate net asset value or
liquidation preference, as the case may be, equal (to the nearest one ten
thousandth of one cent) to the value of the assets of MuniVest California
Insured acquired in the Reorganization determined as hereinafter provided,
reduced by the amount of liabilities of MuniVest California Insured assumed by
MuniYield California Insured II, shall be issued by MuniYield California Insured
II in exchange for such assets of MuniVest California Insured, plus cash in lieu
of fractional shares. The net asset value of MuniVest California Insured and
MuniYield California Insured II shall be determined as of the Valuation Time in
accordance with the procedures described in (i) the prospectus of MuniYield
California Insured II, dated October 23, 1992, relating to the MuniYield
California Insured II Common Stock and (ii) the prospectus of MuniYield
California Insured II, dated November 23, 1992, relating to the MuniYield
California Insured II AMPS, and no formula will be used to adjust the net asset
value so determined of either MuniVest California Insured or MuniYield
California 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 MuniVest California Insured to
be transferred to MuniYield California Insured II shall be determined by
MuniYield California Insured II pursuant to the procedures utilized by MuniYield
California Insured II in valuing its own assets and determining its own
liabilities for purposes of the Reorganization. Such valuation and determination
shall be made by MuniYield California Insured II in cooperation with MuniVest
California Insured and shall be confirmed in writing by MuniYield California
Insured II to MuniVest California Insured. The net asset value per share of the
MuniYield California Insured II Common Stock and the liquidation preference per
share of the MuniYield California Insured II Series C AMPS shall be determined
in accordance with such procedures and MuniYield California Insured II shall
certify the computations involved. MuniYield California Insured II shall issue
to MuniVest California Insured separate certificates or share deposit receipts
for the MuniYield California Insured II Common Stock and the MuniYield
California Insured II Series C AMPS, each registered in the name of MuniVest
California Insured. MuniVest California Insured then shall distribute the
MuniYield California Insured II Common Stock and the MuniYield California
Insured II Series C AMPS to its corresponding stockholders of MuniVest
California Insured Common Stock and MuniVest California Insured AMPS by
redelivering the certificates or share deposit receipts evidencing ownership of
(i) the MuniYield California Insured II Common Stock to State Street Bank and
Trust Company, as the transfer agent and registrar for the MuniYield California
Insured II Common Stock and (ii) the MuniYield California Insured II Series C
AMPS to IBJ Schroder Bank and Trust Company, as the transfer agent and registrar
for the MuniYield California Insured II Series C AMPS. With respect to any
MuniVest California Insured stockholder holding certificates evidencing
ownership of either the MuniVest California Insured Common Stock or the MuniVest
California Insured AMPS as of the Exchange Date, and subject to MuniYield
California Insured II being informed thereof in writing by MuniVest California
Insured, MuniYield California Insured II will not permit such stockholder to
receive new certificates evidencing ownership of the MuniYield California
Insured II Common Stock or MuniYield California Insured II Series C AMPS,
exchange MuniYield California Insured II Common Stock or MuniYield California
Insured II Series C AMPS credited to such stockholder's account for shares of
other investment companies managed by Merrill Lynch Asset Management, L.P. or
any of its affiliates, or pledge or redeem such MuniYield California Insured II
Common Stock or MuniYield California Insured II Series C AMPS, in any case,
until notified by MuniVest California Insured or its agent
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that such stockholder has surrendered his or her outstanding certificates
evidencing ownership of the MuniVest California Insured Common Stock or the
MuniVest California Insured AMPS or, in the event of lost certificates, posted
adequate bond. MuniVest California Insured, at its own expense, will request its
stockholders to surrender their outstanding certificates evidencing ownership of
the MuniVest California Insured Common Stock or the MuniVest California Insured
AMPS, as the case may be, or post adequate bond therefor.
Dividends payable to holders of record of shares of MuniYield California
Insured II Common Stock and MuniYield California Insured II Series C AMPS, as
the case may be, as of any date after the Exchange Date and prior to the
exchange of certificates by any stockholder of MuniVest California Insured 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 MuniVest California Insured for exchange.
No fractional shares of MuniYield California Insured II Common Stock will
be issued to holders of MuniVest California Insured Common Stock. In lieu
thereof, MuniYield California Insured II's transfer agent, State Street Bank and
Trust Company, will aggregate all fractional shares of MuniYield California
Insured II Common Stock and sell the resulting full shares on the New York Stock
Exchange at the current market price for shares of MuniYield California Insured
II 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 MuniVest California Insured Common Stock
certificates.
5. PAYMENT OF EXPENSES.
(a) MuniYield California Insured II 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 MuniVest California Insured 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 MuniVest California Insured nor MuniYield
California Insured II shall pay any expenses of its respective stockholders
arising out of or in connection with the Reorganization.
(b) If for any reason the Reorganization is not consummated, no party
shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages.
6. COVENANTS OF MUNIVEST CALIFORNIA INSURED AND MUNIYIELD CALIFORNIA INSURED II.
(a) MuniVest California Insured and MuniYield California 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) MuniVest California Insured and MuniYield California Insured II
each covenants to operate its respective business as presently conducted
between the date hereof and the Exchange Date.
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(c) MuniVest California Insured agrees that following the consummation
of the Reorganization, it will liquidate and dissolve in accordance with
the laws of the State of Maryland and any other applicable law, it will not
make any distributions of any MuniYield California Insured II Common Stock
or MuniYield California Insured II Series C AMPS other than to the
stockholders of MuniVest California Insured and without first paying or
adequately providing for the payment of all of MuniVest California
Insured's liabilities not assumed by MuniYield California Insured II, if
any, and on and after the Exchange Date it shall not conduct any business
except in connection with its liquidation and dissolution.
(d) MuniVest California Insured 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
MuniVest California Insured has ceased to be a registered investment
company.
(e) MuniYield California Insured II 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. MuniVest California
Insured and MuniYield California 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) MuniYield California Insured II agrees to advise MuniVest
California Insured promptly in writing if at any time prior to the Exchange
Date the assets of MuniVest California Insured include any assets which
MuniYield California Insured II is not permitted, or reasonably believes to
be unsuitable for it, to acquire, including without limitation any security
which, prior to its acquisition by MuniVest California Insured, MuniYield
California Insured II has informed MuniVest California Insured is
unsuitable for MuniYield California Insured II to acquire. Moreover,
MuniYield California Insured II has no plan or intention to sell or
otherwise dispose of the assets of MuniVest California Insured to be
acquired in the Reorganization, except for dispositions made in the
ordinary course of business.
(g) MuniVest California Insured and MuniYield California 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. MuniYield California Insured II 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 MuniVest California Insured for its taxable period first ending after
the Exchange Date and for all prior taxable periods. Any information
obtained under this subsection shall be kept confidential except as
otherwise may be necessary in connection with the filing of returns or
claims for refund or in conducting an audit or other proceeding. After the
Exchange Date, MuniVest California Insured shall prepare, or cause its
agents to prepare, any Federal, state or local tax returns, including any
Forms 1099, required to be filed by MuniVest California Insured with
respect to MuniVest California Insured'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
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expenses incurred by MuniVest California Insured (other than for payment of
taxes) in connection with the preparation and filing of said tax returns
and Forms 1099 after the Exchange Date shall be borne by MuniYield
California Insured II.
(h) MuniVest California Insured and MuniYield California 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, MuniYield
California Insured II 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 MuniVest California Insured to be
transferred, together with any other Investments, and the MuniYield
California Insured II Common Stock and MuniYield California Insured II
Series C AMPS to be issued, shall be made at the offices of Brown & Wood
LLP, One World Trade Center, New York, New York 10048, at 10:00 A.M. on the
next full business day following the Valuation Time, or at such other
place, time and date agreed to by MuniVest California Insured and MuniYield
California 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, MuniVest California Insured shall cause such Investments to be
transferred to MuniYield California Insured II's account with State Street
Bank and Trust Company at the earliest practicable date thereafter.
(b) MuniVest California Insured will deliver to MuniYield California
Insured II on the Exchange Date confirmations or other adequate evidence as
to the tax basis of each of the Investments delivered to MuniYield
California Insured II hereunder, certified by Deloitte & Touche LLP.
(c) MuniYield California Insured II 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 MuniYield California Insured
II.
(d) As soon as practicable after the close of business on the Exchange
Date, MuniVest California Insured shall deliver to MuniYield California
Insured II a list of the names and addresses of all of the stockholders of
record of MuniVest California Insured on the Exchange Date and the number
of shares of MuniVest California Insured Common Stock and/or MuniVest
California Insured AMPS owned by each such stockholder, certified to the
best of their knowledge and belief by the transfer agent for the MuniVest
California Insured Common Stock or the MuniVest California Insured AMPS, as
applicable, or by its President.
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8. MUNIVEST CALIFORNIA INSURED CONDITIONS.
The obligations of MuniVest California Insured 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 MuniVest California
Insured and MuniYield California Insured II and by the affirmative vote of
(i) the holders of (a) a majority of the MuniVest California Insured Common
Stock and MuniVest California Insured AMPS, voting together as a single
class, and (b) a majority of the MuniVest California Insured 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 MuniYield
California Insured II Common Stock and the MuniYield California Insured II
AMPS, voting together as a single class, and (y) a majority of the
MuniYield California Insured II AMPS, voting separately as a class, in each
case issued and outstanding and entitled to vote thereon; and further that
(iii) MuniYield California Insured II shall have delivered to MuniVest
California Insured a copy of the resolution approving this Agreement
adopted by MuniYield California Insured II's Board of Directors, and a
certificate setting forth the vote of MuniYield California Insured II's
stockholders obtained, each certified by the Secretary of MuniYield
California Insured II; and (iv) MuniVest California Insured shall have
delivered to MuniYield California Insured II a copy of the resolution
approving this Agreement adopted by MuniVest California Insured's Board of
Directors, and a certificate setting forth the vote of MuniVest California
Insured's stockholders obtained, each certified by the Secretary of
MuniVest California Insured.
(b) That MuniYield California Insured II shall have furnished to
MuniVest California Insured a statement of MuniYield California Insured
II'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 MuniVest California Insured's
behalf by its President (or any Vice President) and its Treasurer, and a
certificate signed by MuniYield California Insured II'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 MuniYield
California Insured II 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 MuniYield California Insured II shall have furnished to
MuniVest California Insured a certificate signed by MuniYield California
Insured II's President (or any Vice President) and its Treasurer, dated as
of the Exchange Date, certifying that as of the Valuation Time and as of
the Exchange Date all representations and warranties of MuniYield
California 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 that MuniYield California 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 date.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That MuniVest California Insured shall have received an opinion of
Brown & Wood LLP, as counsel to both MuniVest California Insured and
MuniYield California Insured II, in form and substance satisfactory to
MuniVest California Insured and dated the Exchange Date, to the effect that
(i) each of MuniVest California Insured and MuniYield California Insured II
is a corporation duly organized,
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validly existing and in good standing in conformity with the laws of the
State of Maryland; (ii) the MuniYield California Insured II Common Stock
and MuniYield California Insured II Series C AMPS to be issued pursuant to
this Agreement are duly authorized and, upon delivery, will be validly
issued and outstanding and fully paid and nonassessable by MuniYield
California Insured II, and no stockholder of MuniYield California Insured
II has any preemptive right to subscription or purchase in respect thereof
(pursuant to the Articles of Incorporation, as amended, or the by-laws of
MuniYield California Insured II or, to the best of such counsel's
knowledge, otherwise); (iii) this Agreement has been duly authorized,
executed and delivered by each of MuniVest California Insured and MuniYield
California 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) MuniVest California Insured 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, MuniVest California Insured will have duly transferred such
assets and liabilities in accordance with this Agreement; (v) no consent,
approval, authorization or order of any United States federal or Maryland
state court or governmental authority is required for the consummation by
MuniVest California Insured and MuniYield California 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 required
under state securities or blue sky laws; (vi) the N-14 Registration
Statement has become effective under the 1933 Act, no stop order suspending
the effectiveness of the N-14 Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act, and the N-14 Registration Statement, and
each amendment or supplement thereto, as of their respective effective
dates, appear on their face to be appropriately responsive in all material
respects to the requirements of the 1933 Act, the 1934 Act and the 1940 Act
and the published rules and regulations of the Commission thereunder; (vii)
the descriptions in the N-14 Registration Statement of statutes, legal and
governmental proceedings and contracts and other documents are accurate and
fairly present the information required to be shown; (viii) such counsel 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 MuniVest California Insured or MuniYield
California Insured II is a party or by which either MuniVest California
Insured or MuniYield California Insured II is bound, except insofar as the
parties have agreed to amend such provision as a condition precedent to the
Reorganization; (x) neither MuniVest California Insured nor MuniYield
California 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 MuniVest California Insured, MuniYield
California 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 MuniVest
California Insured or MuniYield California Insured II, the unfavorable
outcome of which would materially and adversely affect MuniVest California
Insured or MuniYield California Insured II; and (xii) all corporate actions
required to be taken by MuniVest California Insured
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and MuniYield California Insured II to authorize this Agreement and to
effect the Reorganization have been duly authorized by all necessary
corporate actions on the part of MuniVest California Insured and MuniYield
California 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 MuniVest California Insured or MuniYield California
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 MuniVest California
Insured and MuniYield California Insured II with regard to matters of fact
and certain certificates and written statements of governmental officials
with respect to the good standing of MuniVest California Insured and
MuniYield California Insured II and on the opinion of Wilmer, Cutler &
Pickering as to matters of Maryland law.
(f) That MuniVest California Insured 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 MuniVest California
Insured to MuniYield California Insured II in exchange solely for MuniYield
California Insured II Common Stock and MuniYield California Insured II
Series C AMPS as provided in this Agreement will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
MuniVest California Insured and MuniYield California 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 MuniVest California Insured as a result
of the Reorganization or on the distribution of MuniYield California
Insured II Common Stock and MuniYield California Insured II Series C AMPS
to MuniVest California Insured stockholders under Section 361(c)(1) of the
Code; (iii) under Section 1032 of the Code, no gain or loss will be
recognized to MuniYield California Insured II 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 MuniVest California
Insured on the receipt of MuniYield California Insured II Common Stock and
MuniYield California Insured II Series C AMPS in exchange for their
corresponding MuniVest California Insured Common Stock and MuniVest
California Insured AMPS (except to the extent that MuniVest California
Insured stockholders receive cash representing an interest in fractional
shares of MuniYield California Insured II in the Reorganization); (v) in
accordance with Section 362(b) of the Code, the tax basis of the MuniVest
California Insured assets in the hands of MuniYield California Insured II
will be the same as the tax basis of such assets in the hands of MuniVest
California Insured immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code,
immediately after the Reorganization, the tax basis of the MuniYield
California Insured II Common Stock and MuniYield California Insured II
Series C AMPS received by the stockholders of MuniVest California Insured
in the Reorganization will be equal, in the aggregate, to the tax basis of
the MuniVest California Insured
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Common Stock and MuniVest California Insured AMPS surrendered in exchange;
(vii) in accordance with Section 1223 of the Code, a stockholder's holding
period for the MuniYield California Insured II Common Stock and MuniYield
California Insured II Series C AMPS will be determined by including the
period for which such stockholder held the MuniVest California Insured
Common Stock and MuniVest California Insured AMPS exchanged therefor,
provided, that such MuniVest California Insured shares were held as a
capital asset; (viii) in accordance with Section 1223 of the Code,
MuniYield California Insured II's holding period with respect to the
MuniVest California Insured assets transferred will include the period for
which such assets were held by MuniVest California Insured; (ix) the
payment of cash to MuniVest California Insured stockholders in lieu of
fractional shares of MuniYield California Insured II will be treated as
though the fractional shares were distributed as part of the Reorganization
and then redeemed by MuniYield California Insured II, with the result that
each MuniVest California Insured stockholder will have short- or long-term
capital gain or loss to the extent that the cash distribution differs from
such stockholder's basis allocable to the MuniYield California Insured II
fractional shares; and (x) the taxable year of MuniVest California Insured
will end on the effective date of the Reorganization and pursuant to
Section 381(a) of the Code and regulations thereunder, MuniYield California
Insured II will succeed to and take into account certain tax attributes of
MuniVest California Insured, such as earnings and profits, capital loss
carryovers and method of accounting.
(g) That all proceedings taken by MuniYield California Insured II and
its counsel in connection with the Reorganization and all documents
incidental thereto shall be satisfactory in form and substance to MuniVest
California Insured.
(h) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of MuniYield California Insured
II, contemplated by the Commission.
(i) That MuniVest California Insured 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 MuniVest
California Insured, to the effect that (i) they are independent public
accountants with respect to MuniYield California 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 MuniYield California 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 MuniVest California Insured and MuniYield California 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 MuniYield California Insured II included in the N-14
Registration Statement, and inquiries of certain officials of MuniYield
California 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
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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 MuniVest California Insured and MuniYield
California Insured II and described in such letter (but not an examination
in accordance with generally accepted auditing standards), the information
relating to MuniYield California Insured II appearing in the N-14
Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) concerning MuniYield California
Insured II (with the exception of performance comparisons, if any), if any,
has been obtained from the accounting records of MuniYield California
Insured II or from schedules prepared by officials of MuniYield California
Insured II having responsibility for financial and reporting matters and
such information is in agreement with such records, schedules or
computations made therefrom.
(j) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of MuniYield California
Insured II or would prohibit the Reorganization.
(k) That MuniVest California Insured shall have received from the
Commission such orders or interpretations as Brown & Wood LLP, as counsel
to MuniVest California Insured, 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.
9. MUNIYIELD CALIFORNIA INSURED II CONDITIONS.
The obligations of MuniYield California 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 MuniVest California Insured shall have furnished to MuniYield
California Insured II a statement of MuniVest California Insured'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 MuniVest California Insured'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 MuniVest California Insured since October 31,
1995, other than changes in the Investments since that date or changes in
the market value of the Investments.
(c) That MuniVest California Insured shall have furnished to MuniYield
California Insured II a certificate signed by MuniVest California Insured'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
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representations and warranties of MuniVest California Insured 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 MuniVest California Insured
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 MuniVest California Insured shall have delivered to MuniYield
California Insured II a letter from Deloitte & Touche LLP, dated the
Exchange Date, stating that such firm has performed a limited review of the
Federal, state and local income tax returns of MuniVest California Insured
for the period ended October 31, 1995 (which returns originally were
prepared and filed by MuniVest California Insured), 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 MuniVest California
Insured 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 MuniVest California Insured ending upon the liquidation of MuniVest
California Insured, 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 MuniVest California Insured ending upon liquidation or that MuniVest
California Insured had not qualified as a regulated investment company for
Federal income tax purposes for the period from November 1, 1995 through
liquidation of MuniVest California Insured.
(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(f) That MuniYield California Insured II shall have received an
opinion of Brown & Wood LLP, as counsel to both MuniVest California Insured
and MuniYield California Insured II, in form and substance satisfactory to
MuniYield California Insured II and dated the Exchange Date, with respect
to the matters specified in Section 8(e) of this Agreement and such other
matters as MuniYield California Insured II reasonably may deem necessary or
desirable.
(g) That MuniYield California Insured II shall have received a private
letter ruling from the IRS with respect to the matters specified in Section
8(f) of this Agreement.
(h) That MuniYield California 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 MuniYield
California Insured II, to the effect that (i) they are independent public
accountants with respect to MuniVest California Insured 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 MuniVest California Insured 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 MuniVest California Insured and MuniYield California Insured II
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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 MuniVest California Insured included in the N-14
Registration Statement, and inquiries of certain officials of MuniVest
California Insured 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 MuniVest California Insured and
MuniYield California Insured II and described in such letter (but not an
examination in accordance with generally accepted auditing standards), the
information relating to MuniVest California Insured appearing in the N-14
Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records
of MuniVest California Insured or from schedules prepared by officials of
MuniVest California Insured having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(i) That the Investments to be transferred to MuniYield California
Insured II shall not include any assets or liabilities which MuniYield
California Insured II, 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 MuniVest California Insured,
contemplated by the Commission.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of MuniVest California
Insured or would prohibit the Reorganization.
(l) That MuniYield California Insured II shall have received from the
Commission such orders or interpretations as Brown & Wood LLP, as counsel
to MuniYield California 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.
(m) That all proceedings taken by MuniVest California Insured and its
counsel in connection with the Reorganization and all documents incidental
thereto shall be satisfactory in form and substance to MuniYield California
Insured II.
(n) That prior to the Exchange Date, MuniVest California Insured 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
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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 MuniVest California
Insured 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.
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 MuniVest California Insured and MuniYield California Insured II)
prior to the Exchange Date, or the Exchange Date may be postponed, (i) by
mutual consent of the Boards of Directors of MuniVest California Insured
and MuniYield California Insured II; (ii) by the Board of Directors of
MuniVest California Insured if any condition of MuniVest California
Insured'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
MuniYield California Insured II if any condition of MuniYield California
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 MuniVest California Insured and MuniYield California 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 MuniVest
California Insured or MuniYield California 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 MuniVest California Insured or MuniYield California 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 MuniVest California Insured and MuniYield California 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
MuniVest California Insured and MuniYield California 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 MuniVest California
Insured nor MuniYield California 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 MuniVest California Insured or MuniYield California 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
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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.
(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 MuniVest California Insured and MuniYield California 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 MuniVest California Insured and MuniYield California Insured II, unless
such terms and conditions shall result in a change in the method of
computing the number of shares of MuniYield California Insured II Common
Stock and MuniYield California Insured II Series C AMPS to be issued to
MuniVest California Insured in which event, unless such terms and
conditions shall have been included in the proxy solicitation materials
furnished to the stockholders of MuniVest California Insured and MuniYield
California Insured II prior to the meetings at which the Reorganization
shall have been approved, this Agreement shall not be consummated and shall
terminate unless MuniVest California Insured and MuniYield California
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), MuniYield California Insured II
will cause to be affixed upon the certificate(s) issued to such person (if
any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT TO MUNIYIELD CALIFORNIA INSURED FUND II, INC. (OR ITS
STATUTORY SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE
SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to MuniYield
California Insured II's transfer agent with respect to such shares.
MuniVest California Insured will provide MuniYield California Insured II on
the Exchange Date with the name of any MuniVest California Insured
stockholder who is to the knowledge of MuniVest California Insured an
affiliate of such fund 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 MuniVest California Insured or MuniYield California Insured II, in
either case at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attn:
Arthur Zeikel, President.
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(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization,
constitutes the only understanding with respect to the Reorganization, may
not be changed except by a letter of agreement signed by each party and
shall be governed by and construed in accordance with the laws of the State
of New York applicable to agreements made and to be performed in said
state.
(e) Copies of the Articles of Incorporation, as amended, of MuniVest
California Insured and MuniYield California 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.
MUNIVEST CALIFORNIA INSURED FUND, INC.
By: /s/ ARTHUR ZEIKEL
-----------------------------------------
Arthur Zeikel
President
Attest:
/s/ MARK B. GOLDFUS
- ---------------------------------------------
Mark B. Goldfus
Secretary
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
By: /s/ ARTHUR ZEIKEL
-----------------------------------------
Arthur Zeikel
President
Attest:
/s/ MARK G. GOLDFUS
- ---------------------------------------------
Mark B. Goldfus
Secretary
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EXHIBIT II
ECONOMIC CONDITIONS IN CALIFORNIA
The following information is a brief summary of factors affecting the
economy of the State of California and does not purport to be a complete
description of such factors. Other factors will affect issuers. The summary is
based primarily upon one or more publicly available offering statements relating
to debt offerings of State issuers; however, it has not been updated nor will it
be updated during the year. The Funds have not independently verified the
information.
ECONOMIC CONDITIONS
The economy of the State of California (sometimes referred to herein as the
"State") is the largest among the 50 states and one of the largest in the world.
This diversified economy has major components in agriculture, manufacturing,
high technology, trade, entertainment, tourism, construction and services. Total
State gross domestic product of about $835 billion in 1994 was larger than all
but six nations in the world.
California's July 1, 1994 population of over 32 million represented over 12
percent of the total United States population. The official 1990 Census
population was 29,760,021 as of April 1, 1990, which represented an increase of
over 6 million persons, or 26 percent, during the decade of the 1980s. As of the
April 1, 1990 Census, the median age of California's population was 31.5 years,
younger than the 1990 U.S. median of 32.9 years.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 Census, 96 percent resided in the 23 Metropolitan Statistical
Areas in the State. Overall, California's population per square mile was 191 in
1990. As of July 1, 1994, 69 percent of the population of the State was located
in the two consolidated Metropolitan Statistical Areas in California. The
5-county Los Angeles area accounted for 48 percent, with 15.6 million residents.
The 10-county San Francisco Bay Area represented 21 percent, with a population
of 6.7 million.
After suffering through a severe recession, California's economy has been
on a steady recovery since the start of 1994. Employment grew by over 500,000 in
1994 and 1995, and the pre-recession level of total employment is expected to be
matched in 1996. The strongest growth has been in export-related industries,
business services, electronics, entertainment and tourism, all of which have
offset the recession-related losses which were heaviest in aerospace and
defense-related industries (which accounted for two-thirds of the job losses),
finance and insurance. Residential housing construction, with new permits for
under 100,000 annual new units issued in 1994 and 1995, is weaker than in
previous recoveries, but has been growing slowly since 1993.
The State. In the years following enactment of the Federal Tax Reform Act
of 1986, and conforming changes to the State's tax laws, taxpayer behavior
became much more difficult to predict, and the State experienced a series of
fiscal years in which revenue came in significantly higher or lower than
original estimates. The 1989-90 Fiscal Year ended with revenues below estimates,
so that the State's budget reserve (the Special Fund for Economic Uncertainties
or "SFEU") was fully depleted by June 30, 1990. This date essentially coincided
with the start of the current recession, which severely affected State General
Fund revenues and increased expenditures above initial budget appropriations due
to greater health and welfare costs. The State's budget problems in recent years
have also been caused by a structural imbalance which has
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been identified by the current and previous Administrations. The largest General
Fund Program -- K-14 education, health, welfare and corrections -- was
increasing faster than the revenue base, driven by the State's rapid population
growth. These pressures will continue as population trends maintain strong
demand for health and welfare services, as the school-age population continues
to grow and as the State's corrections program responds to a "Three Strikes" law
enacted in 1994, which requires mandatory life prison terms for certain
third-time felony offenders.
Prior Years. As a result of these factors and others, from the late 1980s
until 1992-93, the State had a period of budget imbalance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the SFEU approaching $2.8 billion
at its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and for each
fiscal year thereafter, each budget required multi-billion dollar actions to
bring projected revenues and expenditures into balance and to close large
"budget gaps" which were identified. Despite budget actions by the Legislature,
the effects of the recession led to large, unanticipated deficits in the budget
reserve, the SFEU, as compared to projected positive balances. By the 1993-94
Fiscal Year, the accumulated deficit was so large that it was impractical to
budget to retire it in one year, so a two-year program was implemented, using
the issuance of revenue anticipation warrants to carry a portion of the deficit
over the end of the fiscal year. When the economy failed to recover sufficiently
in 1993-94, a second two-year plan was implemented in 1994-95.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. The State's cash condition became so serious in late Spring of 1992
that the State Controller was required to issue revenue anticipation warrants
maturing in the following fiscal year in order to pay the State's continuing
obligations. The State was forced to rely increasingly on external debt markets
to meet its cash needs, as a succession of notes and warrants were issued in the
period from June 1992 to July 1994, often needed to pay previously maturing
notes or warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of the fiscal year.
The 1994-95 Fiscal Year represented the fourth consecutive year that the
Governor and the Legislature were faced with a very difficult budget environment
to produce a balanced budget. Many program cuts and budgetary adjustments had
already been made in the last three years. The Governor's budget proposal, as
updated in May and June, 1994, recognized that the accumulated deficit could not
be repaid in one year and proposed a two-year solution.
Pursuant to the Budget Adjustment Law (the "Law"), the State Controller was
required to make a report by November 15, 1994 on whether the projected cash
resources for the General Fund as of June 30, 1995 would decrease more than $430
million from the amount projected by the State in its Official Statement in July
1994 for the sale of $4,000,000,000 of revenue anticipation warrants. On
November 15, 1994, the State Controller issued the report on the State's cash
position required by the Law. The report indicated that the cash position of the
General Fund on June 30, 1995 would be $581 million better than was estimated in
the July 1994 cash flow projections and therefore, no budget adjustment
procedures would be invoked for the 1994-95 Fiscal Year.
On October 15, 1995, when the State Controller, in conjunction with the
Legislative Analyst's Office, reviewed the estimated cash condition of the
General Fund for the 1995-96 Fiscal Year, the State Controller
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estimated that the General Fund would not have negative internal cash resources
on June 30, 1996 (i.e., external borrowing would be needed to pay all
obligations due). If a cash shortfall had been identified by the State
Controller, the State Legislature would have been required to enact legislation
providing for sufficient General Fund expenditure reductions, revenue increases,
or both.
1995-96 Budget Act. On January 10, 1995, the Governor presented his
1995-96 Fiscal Year budget proposal (the "Proposed Budget"). Two of the
principal features of the Proposed Budget were a phased 15% cut in personal
income and corporate taxes and a further expansion of the "realignment" process
to transfer more responsibility and funding sources for certain health and
welfare programs to local governments. Neither of these proposals was approved
by the Legislature. As a result of the improving economy, with resulting
improved revenue and caseload estimates, the State entered the 1995-96 budget
negotiations with the smallest nominal "budget gap" to be closed in many years.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995. The
Budget Act projects General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year. Expenditures are budgeted at $43.4
billion, a 4 percent increase. The Department of Finance projects that, after
repaying the last of the carryover budget deficit, there will be a positive
balance of $28 million in the budget reserve, the SFEU, at June 30, 1996. The
Budget Act also projects Special Fund revenues of $12.7 billion and appropriates
Special Fund expenditures of $13.4 billion.
1996-97 Budget Act. The 1996-97 Governor's Budget, released January 10,
1996, projected General Fund revenues and transfers of $45.6 billion, a 1.3%
increase over 1995-96. Although an expected strong economy would generate larger
revenue growth, the Governor proposed two major initiatives, a 15% personal and
corporate income tax cut and a revision of the trial court funding program,
which would have the effect of reducing General Fund revenues. The Governor's
Budget proposed General Fund expenditures of $45.2 billion. The Governor's
Budget also proposed Special Fund revenues equal to expenditures, at a level of
$13.3 billion.
The May Revision of the Governor's Budget, released on May 21, 1996 ("May
Revision"), updated revenue estimates for the 1996-97 Fiscal Year, reflecting
stronger economic activity in the State and thus greater revenue growth. The
revised estimate was for $47.1 billion of revenues, still assuming the
Governor's tax cut would be enacted, and $46.5 billion of expenditures.
The 1996-97 Budget Act was signed by the Governor on July 15, 1996, along
with various implementing bills. The Budget Act appropriates a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The Department of
Finance projects that, on June 30, 1997, the State's available internal
borrowable (cash) resources will be $2.9 billion, after payment of all
obligations due by that date, so that no cross-fiscal year borrowing will be
needed.
The Legislature rejected the Governor's proposed 15% cut in personal income
taxes (to be phased over three years), but did approve a 5% cut in bank and
corporation taxes, to be effective for income years starting on January 1, 1997.
As a result, revenues for the Fiscal Year will be an estimated $550 million
higher than projected in the May Revision, and are now estimated to total
$47.643 billion, a 3.3 percent increase over the final estimated 1995-96
revenues. Special Fund revenues are estimated to be $13.3 billion. The Budget
Act contains General Fund appropriations totaling $47,251 billion, a 4.0 percent
increase over the final estimated 1995-96 expenditures. Special Fund
expenditures are budgeted at $12.6 billion.
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The following are principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (General Fund) and $1.65 billion total above
revised 1995-96 levels. Also, for the second year in a row, the full cost of
living allowance (3.2 percent) was funded. The Proposition 98 increases have
brought K-12 expenditures to almost $4,800 per pupil (also called per ADA, or
Average Daily Attendance), an almost 15 percent increase over the level
prevailing during the recession years. Community colleges will receive an
increase in funding of $157 million for 1996-97 out of this $1.6 billion total.
Because of the higher than projected revenues in 1995-96, an additional $1.1
billion ($190 per K-12 ADA and $145 million for community colleges) was
appropriated and retroactively applied towards the 1995-96 Proposition 98
guarantee, bringing K-12 expenditures in that year to over $4,600 per ADA.
2. Proposed cuts in health and welfare totaled $660 million. All of these
cuts require federal law changes (including welfare reform), federal waivers, or
federal budget appropriations in order to be achieved. The Budget Act assumes
approval/action by October, 1996, with the savings to be achieved beginning in
November, 1996. The Budget Act was based on continuation of previously approved
assistance levels for Aid to Families with Dependent Children and other health
and welfare programs, which had been reduced in prior years, including
suspension of State authorized cost of living increases. Part of the federal
actions referred to above is approval to maintain reduced assistance levels in
1996-97.
3. A 4.9 percent increase in funding for the University of California and
the California State University system.
4. The Budget Act assumed the federal government will provide approximately
$700 million in new aid for incarceration and health care costs of illegal
immigrants. These funds reduce appropriations in these categories that would
otherwise have to be paid from the General Fund. The Department of Finance
expects $540 million of this amount to be received during the 1996-97 fiscal
year.
5. General Fund support for the Department of Corrections was increased by
about 7 percent over the prior year, reflecting estimates of increased prison
population.
6. With respect to aid to local governments, the principal new programs
included in the Budget Act are $100 million in grants to cities and counties for
law enforcement purposes, and budgeted $50 million for competitive grants to
local governments for programs to combat juvenile crime.
LOCAL GOVERNMENTS
The primary units of local government in California are the counties,
ranging in population from 1,300 (Alpine) to over 9,000,000 (Los Angeles).
Counties are responsible for the provision of many basic services, including
indigent healthcare, welfare, courts, jails and public safety in unincorporated
areas. There are also about 480 incorporated cities and thousands of other
special districts formed for education, utility and other services. The fiscal
condition of local governments has been constrained since the enactment of
"Proposition 13" in 1978, which reduced and limited the future growth of
property taxes and limited the ability of local governments to impose other
taxes. Counties, in particular, have had fewer options to raise revenues than
other local government entities, and have been required to maintain many
services.
In the aftermath of Proposition 13, the State provided aid from the General
Fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools
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and community colleges. Under the pressure of the recent recession, the
Legislature has eliminated remnants of this post-Proposition 13 aid to entities
other than K-14 education districts, although it has also provided additional
funding sources (such as sales taxes) and reduced mandates for local services.
Many counties continue to be under severe fiscal stress. While such stress has
in recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
ORANGE COUNTY BANKRUPTCY
In December 1994, Orange County, California ("Orange County"), together
with its pooled investment funds (the "Pools") filed for protection under
Chapter 9 of the Federal Bankruptcy Code, after reports that the Pools had
suffered significant market losses in their investments, causing a liquidity
crisis for the Pools and Orange County. More than 200 other public entities,
most, but not all, of which are located in Orange County, were also depositors
in the Pools. Orange County has reported the Pools' loss at about $1.69 billion,
or about 23 percent of their initial deposits of approximately $7.5 billion.
Many of the entities which deposited moneys in the Pools, including Orange
County, faced interim and/or extended cash flow difficulties because of the
bankruptcy filing and may be required to reduce programs or capital projects.
Orange County has embarked on a fiscal recovery plan based on sharp reductions
in services and personnel and rescheduling of outstanding short-term debt using
certain new revenues transferred to Orange County from other local governments
pursuant to special legislation enacted in October 1995. The termination of the
bankruptcy was approved in June 1996.
CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT INITIATIVES, PENDING LITIGATION
Constitutional and Statutory Limitations. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. Article XIIIA provides
that the maximum ad valorem tax on real property cannot exceed 1 percent of the
"full cash value" of the property and effectively prohibits the levying of any
other ad valorem tax on real property for general purposes. However, on May 3,
1986, Proposition 46, an amendment to Article XIIIA, was approved by the voters
of the State of California, creating a new exemption under Article XIIIA
permitting an increase in ad valorem taxes on real property in excess of 1
percent for bonded indebtedness approved by two-thirds of the voters voting on
the proposed indebtedness. "Full cash value" is defined as "the County
Assessor's valuation of real property as shown on the 1975-76 tax bill under
"full cash value" or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment". The "full cash value" is subject to annual adjustment to
reflect increases (not to exceed 2 percent) or decreases in the consumer price
index or comparable local data, or to reflect reductions in property value
caused by damage, destruction or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has financial
responsibility for providing. To the extent that the revenues of the State
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) required that any tax for general
governmental purposes imposed by a local governmental entity be
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approved by a majority of the electorate of the governmental entity, (ii)
required that any special tax (defined as taxes levied for other than general
government purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricted the use
of revenues from a special tax to the purposes or for the service for which the
special tax is imposed, (iv) prohibited the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibited the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) required that any tax imposed
by a local government on or after August 1, 1985 be ratified by a majority vote
of the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) required that, in the event a local
government fails to comply with the provisions of this measure, a reduction in
the amount of property tax revenues allocated to such local government occurs in
an amount equal to the revenues received by such entity attributable to the tax
levied in violation of the initiative, and (vii) permitted those provisions to
be amended exclusively by the voters of the State of California.
On September 28, 1995 the California Supreme Court upheld the
constitutionality of the provision requiring a two-thirds vote in order for a
local government to impose a "special tax". Although the Supreme Court has yet
to rule on the provision requiring a majority vote for a "general tax", it
appears that the Supreme Court is favorably disposed to uphold that portion of
Proposition 62 as well. In that event, a number of taxes currently being
collected (especially by counties and general law cities) would be invalidated.
Prior collection of such taxes may also be subject to claims for refund unless
the Supreme Court chooses to apply its ruling prospectively. The California
Supreme Court has yet to consider the validity of Proposition 62 with regard to
charter cities.
Recent Initiatives. At the November 9, 1988 general election, California
voters approved an initiative known as Proposition 98. This initiative amends
Article XIIIB to require that (i) the California Legislature establish a prudent
state reserve fund in an amount it shall deem reasonable and necessary and (ii)
revenues in excess of amounts permitted to be spent and which would otherwise be
returned pursuant to Article XIIIB by revision of tax rates or fee schedules be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
Proposition 98 also amends Article XVI to require that the State of California
provide a minimum level of funding for public schools and community colleges.
Commencing with the 1988-89 Fiscal Year, money to be applied by the State for
the support of school districts and community college districts shall not be
less than the greater of: (i) the amount which, as a percentage of the State
General Fund revenues which may be appropriated pursuant to Article XIIIB,
equals the percentage of such State General Fund revenues appropriated for
school districts and community college districts, respectively, in Fiscal Year
1986-87 or (ii) the amount required to ensure that the total allocations to
school districts and community college districts from the State General Fund
proceeds of taxes appropriated pursuant to Article XIIIB and allocated local
proceeds of taxes shall not be less than the total amount from these sources in
the prior year, adjusted for increases in enrollment and adjusted for changes in
the costs of living pursuant to the provisions of Article XIIIB. The initiative
permits the enactment of legislation, by a two-thirds vote, to suspend the
minimum funding requirements for one year. As a result of Proposition 98, funds
that the State might otherwise make available to its political subdivisions may
be allocated instead to satisfy such minimum funding level.
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During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlement. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. As part of the
negotiations leading to the 1995-96 Budget Act, an oral agreement was reached to
settle this case. The parties reached a conditional final settlement of the case
in April 1996. The settlement requires adoption of legislation satisfactory to
the parties to implement its terms and final approval by the court.
The settlement provides, among other things, that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The State
share of the repayment will be reflected as expenditures above the current
Proposition 98 base calculation. The schools' share of the repayment will count
as appropriations that count toward satisfying the Proposition 98 guarantee, or
from "below" the current base. Repayments are spread over the eight-year period
of 1994-95 through 2001-02 to mitigate any adverse fiscal impact. Once the
Director of Finance certifies that a settlement has occurred, approximately $377
million in appropriations from the 1995-96 Fiscal Year to schools will be
disbursed in August 1996.
On November 8, 1994, the voters approved Proposition 187, an initiative
statute ("Proposition 187"). Proposition 187 specifically prohibits funding by
the State of social services, health care services and public school education
for the benefit of any person not verified as either a United States citizen or
a person legally admitted to the United States. Among the provisions in
Proposition 187 pertaining to public school education, the measure requires,
commencing January 1, 1995, that every school district in the State verify the
legal status of every child enrolling in the district for the first time. By
January 1, 1996, each school district must also verify the legal status of
children already enrolled in the district and of all parents or guardians of all
students. If the district "reasonably suspects" that a student, parent or
guardian is not legally in the United States, that district must report the
student to the United States Immigration and Naturalization Service and certain
other parties. The measure also prohibits a school district from providing
education to a student it does not verify as either a United States citizen or a
person legally admitted to the United States. The State Legislative Analyst
estimates that verification costs could be in the tens of millions of dollars on
a statewide level (including verification costs incurred by other local
governments), with first-year costs potentially in excess of $100 million.
The reporting requirements may violate the Family Educational Rights and
Privacy Act ("FERPA"), which generally prohibits schools that receive Federal
funds from disclosing information in student records without parental consent.
Compliance with FERPA is a condition of receiving Federal education funds, which
total $2.3 billion annually to California school districts. The Secretary of the
United States Department of Education has indicated that the reporting
requirement in Proposition 187 could jeopardize the ability of school districts
to receive these funds.
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Opponents of Proposition 187 have filed at least eight lawsuits challenging
the constitutionality and validity of the measure. On November 2, 1995, a United
States District Court judge struck down the central provisions of Proposition
187 by ruling that parts of Proposition 187 conflict with Federal power over
immigration. The ruling concluded that states may not enact their own schemes to
"regulate immigration or devise immigration regulations which run parallel or
purport to supplement Federal immigration law". As a consequence of the ruling,
students may not be denied public education and may not be asked about their
immigration status when enrolling in public schools. Further, the ruling struck
down the requirements of Proposition 187 that teachers and district employees
report information on the immigrant status of students, parents, and guardians.
An appeal has been filed.
Article XIIIA, Article XIIIB and a number of other Propositions were
adopted pursuant to California's constitutional initiative process. From time to
time, other initiative measures could be adopted by California voters. The
adoption of any such initiatives may cause California issuers to receive reduced
revenues, or to increase expenditures, or both.
Pending Litigation. The State is a party to numerous legal proceedings,
many of which normally occur in governmental operations. Some of the more
significant lawsuits pending against the State are described herein.
The State is a defendant in 12 lawsuits involving the exclusion of small
business stock gains from preference tax and in some cases, also from taxation.
The lead cases are Mervin Morris v. Franchise Tax Board and James Lennane v.
Franchise Tax Board. The majority of the remaining cases had been deferred
pending the outcome of the Morris and Lennane cases. The Supreme Court has ruled
against the State in Lennane but has not yet ruled in Morris. The State has lost
at least $80 million as a result of the Lennane decision.
In Parr v. State of California, a complaint was filed in Federal court
claiming that payment of wages in registered warrants violated the Fair Labor
Standards Act ("FLSA"). The Federal court held that the issuance of registered
warrants does violate the FLSA but subsequently withdrew its order. The parties
have agreed to a settlement which has been approved by the trial court. If the
State had lost, the maximum amount of damages could have been approximately $500
million.
The State is involved in a lawsuit seeking reimbursement for alleged
state-mandated costs. In Thomas Hayes v. Commission on State Mandates, the State
Director of Finance is appealing a 1984 decision by the State Board of Control.
The Board of Control decided in favor of local school districts' claims for
reimbursement for special education programs for handicapped students; however,
funds have not been appropriated. The amount of potential liability to the
State, if all potentially eligible school districts pursue timely claims, has
been estimated by the Department of Finance at over $1 billion.
In another case, the State is a defendant in Long Beach Unified School
Districts v. State of California. In this case, the school district seeks
reimbursement for voluntary desegregation costs incurred in the implementation
of California Department of Education guidelines. The years of reimbursement are
from Fiscal Year 1977-78 and each fiscal year thereafter to the present. The
district prevailed in a superior court, and the case has been decided by a State
appellate court against the State. A petition for review was denied and the
superior court judgment has become final, but the court retains jurisdiction to
oversee payment. The State anticipates that the unfavorable outcome will affect
pending claims by other school districts, and the total loss could be in excess
of $300 million.
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A Federal Court of Appeals in the case of Deanna Beno et al. v. Donna
Shalala, et al., reversing a trial court ruling in favor of the State, recently
determined that the Secretary of the United States Department of Health and
Human Services violated the Federal Administrative Procedure Act when she
approved California's Assistance Payment Demonstration Project, which in part,
granted California a waiver from complying with requirements for state
participation in the Federal program for medical assistance ("Medicaid"). The
waiver has allowed California to reduce payments under the Aid to Families with
Dependent Children program ("AFDC"), below 1988 payment levels without violating
Medicaid requirements relating to maintenance of AFDC payment levels. California
had relied, in part, on the waiver to reduce state AFDC payments in 1992, 1993
and 1994. The Court of Appeals remanded the case to the trial court with
instructions to remand the Demonstration Project to the Secretary for additional
consideration of objections raised by the plaintiffs. The effect of the court's
decision on California is uncertain at this time.
One of the features of the 1994-95 Budget Act is a 2.3 percent reduction in
AFDC payments. In Welch v. Anderson, on August 19, 1994, the San Francisco
Superior Court issued a preliminary injunction against the California Director
of Social Services to prevent the 2.3 percent AFDC cuts from becoming effective
September 1, 1994. While September cuts were already in process and could not be
halted, the court ordered the cuts to be restored. The preliminary injunction
has been upheld and the case on the merits remains pending.
The State is involved in two lawsuits related to contamination at the
Stringfellow toxic waste site. In one suit, the State is one of approximately
130 defendants in Penny Newman v. J.B. Stringfellow, et al., in which 3,800
plaintiffs are claiming damages of $850 million arising from contamination at
the Stringfellow toxic waste site. The State is a defendant because it chose the
site and approved the deposit of toxic wastes. Seventeen of the 3,800 plaintiffs
have litigated their claims; in half of these cases plaintiffs' verdicts in the
total amount of $159,000 were received and in the remaining cases verdicts were
entered for the State. The other cases have been settled for $13.5 million. In
the separate suit described in United States, People of the State of California
v. J.B. Stringfellow Jr., et al., the State has been found liable by the
District Court on the counterclaim. The amount of liability is still being
litigated although allocation of liability has been determined by the trial
court, including an allocation of liability to the State.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court finding of liability in inverse
condemnation and awarded damages of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 300 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion.
The State is involved in a case concerning the default by Triad Healthcare
on a $167 million loan guaranteed by the Cal-Mortgage Loan Insurance Division of
the Office of Statewide Health Planning and Development ("Cal-Mortgage"). Monies
for the loan were raised through the sale of Certificates of Participation and
Cal-Mortgage insured the debt service payments. Since July 1993, Triad has
failed to make its monthly debt service payments; therefore, the reserve account
of the bonds has been used to make the payments. Once the reserve account is
exhausted, additional debt service payments would be made from the Health
Facility Construction Loan Insurance Fund as they become due. However, if there
is any shortfall in this fund, the State's General Fund would be used to make up
the difference.
In Jernigan & Burleson v. State, filed in Federal district court, the
prison inmate plaintiffs claim they are entitled to minimum wages while working
for the Prison Industry Authority. The inmates claim that the State
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has violated the FLSA. Plaintiffs are seeking back pay for the period from
August 1990 onward, and liquidated damages for a total of approximately $350
million. In June 1995, the district court ruled that the inmates are not
employees under the FLSA. The decision has been appealed to the Ninth Circuit
Court of Appeals which affirmed the district court decision.
Additional lawsuits challenge the transfer of moneys from special fund
accounts within the State Treasury to the State's General Fund pursuant to the
Budget Acts of 1991, 1992, 1993 and 1994. Plaintiffs in the two cases titled
Abramovitz, et al., v. Wilson, et al., filed in State and Federal courts seek to
have the transfers reversed and the moneys allegedly totalling approximately
$400 million returned to the special funds. Plaintiffs in the case of Kurt
Hathaway, et al. v. Wilson, filed in State court seek to reverse transfers of
money from special fund accounts to the State's General Fund authorized in the
1994 and 1995 Budget Acts, allegedly totalling approximately $370 million. The
State disputes both liability and the amount claimed. In the case of
Professional Engineers in California Government v. Wilson, several State
employees' unions have challenged transfers made from special funds to the
General Fund pursuant to the Budget Acts of 1993, 1994 and 1995 and seek
reimbursement of over $400 million to these special funds.
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
("PERS") beginning in Fiscal Year 1992-1993. On January 11, 1995, the Sacramento
County Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation were found to be unconstitutional and to transfer to PERS the
1993-94 and 1994-95 contributions that are unpaid to date. The State defendants
have appealed.
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EXHIBIT III
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 the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Con. (...) -- Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
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<PAGE> 166
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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<PAGE> 168
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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<PAGE> 169
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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<PAGE> 170
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> <C>
Improving UP ARROW
Stable BI-DIRECTIONAL ARROW--LEFT/RIGHT
Declining DOWN ARROW
Uncertain BI-DIRECTIONAL ARROW--UP/DOWN
</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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<PAGE> 172
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> <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 IV
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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<PAGE> 174
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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<PAGE> 175
COMMON STOCK
MUNIYIELD CALIFORNIA INSURED FUND II, 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 California 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> 176
<TABLE>
<S> <C>
1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between the Fund and MuniVest
California 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 (except as WITHHOLD AUTHORITY to vote for
marked to the contrary below) / / 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.)
James H. Bodurtha, Herbert I. London, Robert R. Martin, Arthur Zeikel
3. To consider and act upon a proposal to ratify the selection of Deloitte & Touche LLP as the independent auditors of the Fund
to serve for the current fiscal year ending October 31, 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.
</TABLE>
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> 177
AUCTION MARKET PREFERRED STOCK
MUNIYIELD CALIFORNIA INSURED FUND II, 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 Auction Market Preferred Stock of MuniYield
California 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> 178
<TABLE>
<S> <C>
1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between the Fund and MuniVest
California 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 (except as WITHHOLD AUTHORITY to vote for
marked to the contrary below) / / 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.)
James H. Bodurtha, Herbert I. London, Robert R. Martin, Joseph L. May, Andre F. Perold, Arthur Zeikel
3. To consider and act upon a proposal to ratify the selection of Deloitte & Touche LLP as the independent auditors of
the Fund to serve for the current fiscal year ending October 31, 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.
</TABLE>
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> 179
COMMON STOCK
MUNIVEST CALIFORNIA 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 MuniVest California 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 hereof.
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> 180
<TABLE>
<S> <C>
1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between the Fund and MuniYield
California Insured Fund II, 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 (except as WITHHOLD AUTHORITY to vote for
marked to the contrary below) / / 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.)
Edward H. Meyer, Jack B. Sunderland, J. Thomas Touchton, Arthur Zeikel
3. To consider and act upon a proposal to ratify the selection of Deloitte & Touche LLP as the independent auditors of
the Fund to serve for the current fiscal year ending October 31, 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.
</TABLE>
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> 181
AUCTION MARKET PREFERRED STOCK
MUNIVEST CALIFORNIA 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 Auction Market Preferred Stock of MuniVest
California 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 AND 3.
(Continued and to be signed on the reverse side)
<PAGE> 182
<TABLE>
<S> <C>
1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between the Fund and MuniYield
California Insured Fund II, 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 (except as WITHHOLD AUTHORITY to vote for
marked to the contrary below) / / 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 Deloitte & Touche 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.
</TABLE>
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> 183
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.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S> <C>
(1)(a) -- Articles of Incorporation of the Registrant(a)
(b) -- Form of Articles Supplementary creating the AMPS(b)
(c) -- Form of Articles Supplementary creating the Series C AMPS
(2) -- By-Laws of the Registrant(a)
(3) -- Not applicable
(4) -- Form of Agreement and Plan of Reorganization between the Registrant and MuniVest
California Insured Fund, Inc.(d)
(5)(a) -- Form of specimen certificate for Common Stock(e)
(b) -- Form of Certificate for AMPS(b)
(c) -- Portions of the Articles of Incorporation and the By-Laws of the Registrant
defining the rights of holders of shares of the Registrant(f)
(6) -- Form of Investment Advisory Agreement between the Registrant and the Investment
Adviser(a)
(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(a)
(b) -- Form of Purchase Agreement between the Registrant, the Investment Adviser and
Merrill Lynch relating to the Registrant's AMPS(b)
(c) -- Merrill Lynch Standard Dealer Agreement(a)
(8) -- Not applicable
(9) -- Custody Agreement between the Registrant and State Street Bank and Trust
Company(e)
(10) -- Not applicable
(11) -- Opinion and Consent of Brown & Wood LLP, counsel for the Registrant
(12) -- Private Letter Ruling from the Internal Revenue Service(c)
</TABLE>
C-1
<PAGE> 184
<TABLE>
<C> <S> <C>
(13)(a) -- Transfer Agency and Service Agreement between the Registrant and State Street
Bank and Trust Company(e)
(b) -- Form of Auction Agent Agreement(b)
(c) -- Form of Broker-Dealer Agreement(b)
(d) -- Form of Letter of Representations(b)
(14)(a) -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant
(b) -- Consent of Deloitte & Touche LLP, independent auditors for MuniVest California
Insured Fund, Inc.
(15) -- Not applicable
(16) -- Power of Attorney(g)
</TABLE>
- ---------------
(a) Incorporated by reference to the Registrant's registration statement on Form
N-2 relating to the Registrant's Common Stock (File Nos. 33-48416 and
811-6692), filed with the Securities and Exchange Commission (the
"Commission") on June 5, 1992 (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 Registrant's
Series A and Series B Auction Market Preferred Shares (File Nos. 33-53602
and 811-6692), filed with the Commission on November 9, 1992.
(c) To be filed by post-effective amendment.
(d) Included as Exhibit I to the Proxy Statement and Prospectus included in this
Registration Statement.
(e) Incorporated by reference to Pre-Effective Amendment No. 2 to the Common
Stock Registration Statement filed with the Commission on October 23, 1992.
(f) 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, filed as
Exhibit 1(a) to the Common Stock Registration Statement; and to Article II,
Article III (sections 1, 3, 5 and 17), Article VI, Article VII, Article XII,
Article XIII and Article XIV of the Registrant's By-Laws, filed as Exhibit 2
to the Common Stock Registration Statement.
(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.
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; and (2) for the purpose of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
C-2
<PAGE> 185
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 CALIFORNIA INSURED FUND II, INC.
(Registrant)
By: /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 DATE
- ------------------------------------------ ------------------------------ ----------------
<C> <S> <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)
JAMES H. BODURTHA* Director
- ------------------------------------------
(JAMES H. BODURTHA)
HERBERT I. LONDON* Director
- ------------------------------------------
(HERBERT I. LONDON)
ROBERT R. MARTIN* Director
- ------------------------------------------
(ROBERT R. MARTIN)
JOSEPH L. MAY* Director
- ------------------------------------------
(JOSEPH L. MAY)
ANDRE F. PEROLD* Director
- ------------------------------------------
(ANDRE F. PEROLD)
*By: /s/ GERALD M. RICHARD August 20, 1996
- ------------------------------------------
(GERALD M. RICHARD, ATTORNEY-IN-FACT)
</TABLE>
<PAGE> 186
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<S> <C>
(1)(c) Form of Articles Supplementary creating the Series C AMPS.
(11) Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.
(14)(a) Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
(b) Consent of Deloitte & Touche LLP, independent auditors for MuniVest California
Insured Fund, Inc.
</TABLE>
<PAGE> 1
Exhibit 1(c)
MUNIYIELD CALIFORNIA INSURED FUND II, INC.
Articles Supplementary creating a series of
Auction Market Preferred Stock(R)
MUNIYIELD CALIFORNIA INSURED FUND II, 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 1,600 authorized and unissued shares of common stock of the
Corporation as preferred stock of the Corporation and has authorized the
issuance of a series of preferred stock, par value $.10 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) thereon, to be designated Auction
Market Preferred Stock, Series C.
SECOND: The preferences, voting powers, restrictions, limi- tations as
to dividends, qualifications, and terms and conditions of redemption, of the
shares of such series of preferred stock are as follows:
- ---------
[Registration mark] Registered trademark of Merrill Lynch & Co., Inc.
<PAGE> 2
DESIGNATION
A series of 1,600 shares of preferred stock, par value $.10 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared) thereon, is hereby
designated "Auction Market Preferred Stock, Series C". Each share of Auction
Market Preferred Stock, Series C (sometimes referred to herein as "AMPS") shall
be issued on a date to be determined by the Board of Directors of the
Corporation or pursuant to their delegated authority; have an Initial Dividend
Rate and an Initial Dividend Payment Date as shall be determined in advance of
the issuance thereof by the Board of Directors of the Corporation or pursuant to
their delegated authority; and have such other preferences, voting powers,
limitations as to dividends, qualifications and terms and conditions of
redemption as are set forth in these Articles Supplementary. The Auction Market
Preferred Stock, Series C shall constitute a separate series of preferred stock
of the Corporation, and each share of Auction Market Preferred Stock, Series C
shall be identical.
1. Definitions. (a) Unless the context or use indicates another
or different meaning or intent, in these Articles Supplementary the following
terms have the following meanings, whether used in the singular or plural:
"'AA' Composite Commercial Paper Rate," on any date of
determination, means (i) the Interest Equivalent of the rate on commercial paper
placed on behalf of issuers whose corporate
2
<PAGE> 3
bonds are rated "AA" by S&P or "Aa" by Moody's or the equivalent of such rating
by another nationally recognized rating agency, as such rate is made available
on a discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day immediately preceding such date, or (ii) in the event that the
Federal Reserve Bank of New York does not make available such a rate, then the
arithmetic average of the Interest Equivalent of the rate on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise by
Merrill Lynch, Pierce, Fenner & Smith Incorporated or its successors that are
Commercial Paper Dealers, to the Auction Agent for the close of business on the
Business Day immediately preceding such date. If one of the Commercial Paper
Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Corporation to provide such rate or rates not being supplied by
the Commercial Paper Dealer. If the number of Dividend Period days shall be (i)
7 or more but fewer than 49 days, such rate shall be the Interest Equivalent of
the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate shall
be the arithmetic average of the Interest Equivalent on the 60-day and 90-day
rates on such
3
<PAGE> 4
commercial paper; (iv) 85 or more days but fewer than 99 days, such rate shall
be the Interest Equivalent of the 90-day rate on such commercial paper; (v) 99
or more days but fewer than 120 days, such rate shall be the arithmetic average
of the Interest Equivalent of the 90-day and 120-day rates on such commercial
paper; (vi) 120 or more days but fewer than 141 days, such rate shall be the
Interest Equivalent of the 120-day rate on such commercial paper; (vii) 141 or
more days but fewer than 162 days, such rate shall be the arithmetic average of
the Interest Equivalent of the 120-day and 180-day rates on such commercial
paper; and (viii) 162 or more days but fewer than 183 days, such rate shall be
the Interest Equivalent of the 180-day rate on such commercial paper.
"Accountant's Confirmation" has the meaning set forth in
paragraph 7(c) of these Articles Supplementary.
"Additional Dividend" has the meaning set forth in paragraph
2(e) of these Articles Supplementary.
"Adviser" means the Corporation's investment adviser which initially
shall be Fund Asset Management, L.P.
"Affiliate" shall mean 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.
4
<PAGE> 5
"AMPS" means the Auction Market Preferred Stock, Series C.
"AMPS Basic Maintenance Amount," as of any Valuation Date,
means the dollar amount equal to (i) the sum of (A) the product of the number of
shares of AMPS and Other AMPS Outstanding on such Valuation Date multiplied by
the sum of (a) $25,000 and (b) any applicable redemption premium attributable to
the designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have accumulated for
each share of AMPS and Other AMPS Outstanding, in each case, to (but not
including) the end of the current Dividend Period that follows such Valuation
Date in the event the then current Dividend Period will end within 49 calendar
days of such Valuation Date or through the 49th day after such Valuation Date in
the event the then current Dividend Period will not end within 49 calendar days
of such Valuation Date; (C) in the event the then current Dividend Period will
end within 49 calendar days of such Valuation Date, the aggregate amount of cash
dividends that would accumulate at the Maximum Applicable Rate applicable to a
Dividend Period of 28 or fewer days on any shares of AMPS and Other AMPS
Outstanding from the end of such Dividend Period through the 49th day after such
Valuation Date, multiplied by the larger of the Moody's Volatility Factor and
the S&P Volatility Factor, determined from time to time by Moody's and S&P,
respectively (except that if such Valuation Date occurs during a Non-Payment
Period, the cash dividend for purposes of calculation would accumulate at the
then current Non-Payment Period Rate);
5
<PAGE> 6
(D) the amount of anticipated expenses of the Corporation for the 90 days
subsequent to such Valuation Date (including any premiums payable with respect
to a Policy); (E) the amount of the Corporation's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current liabilities as
of such Valuation Date to the extent not reflected in any of (i)(A) through
(i)(E) (including, without limitation, and immediately upon determination, any
amounts due and payable by the Corporation pursuant to repurchase agreements and
any payables for California Municipal Bonds or Municipal Bonds purchased as of
such Valuation Date) less (ii) either (A) the Discounted Value of any of the
Corporation's assets, or (B) the face value of any of the Corporation's assets
if such assets mature prior to or on the date of redemption of AMPS or payment
of a liability and are either securities issued or guaranteed by the United
States Government or Deposit Securities, in both cases irrevocably deposited by
the Corporation for the payment of the amount needed to redeem shares of AMPS
subject to redemption or any of (i)(B) through (i)(F). 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
6
<PAGE> 7
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 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 California
Municipal Bonds: revenue anticipation notes, tax anticipation
notes, tax and revenue anticipation notes, grant anticipation
notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in
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
7
<PAGE> 8
financial institution appointed by a resolution of the Board of Directors of the
Corporation or a duly authorized committee thereof enters into an agreement with
the Corporation to follow the Auction Procedures for the purpose of determining
the Applicable Rate and to act as transfer agent, registrar, dividend disbursing
agent and redemption agent for the AMPS and Other AMPS.
"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" shall mean 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" shall mean 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,
8
<PAGE> 9
Sunday or other day on which banks in The City of New York are authorized or
obligated by law to close.
"California Municipal Bonds" means municipal obligations issued by or
on behalf of the State of California, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal and California
income taxes.
"Charter" means the Articles of Incorporation, as amended and
supplemented (including these Articles Supplementary), of the Corporation on
file in the State Department of Assessments and Taxation of Maryland.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the
Corporation may from time to time appoint, or, in lieu of any thereof, their
respective affiliates or successors.
"Common Stock" means the common stock, par value $.10 per share, of the
Corporation.
"Corporation" means MuniYield California Insured Fund II, 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.
9
<PAGE> 10
"Deposit Securities" means cash and California Municipal Bonds 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.
"Dividend Period" means the Initial Dividend Period, any 7- 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.
10
<PAGE> 11
"Initial Dividend Payment Date" means the Initial Dividend Payment Date
as determined by the Board of Directors of the Corporation with respect to the
AMPS or Other AMPS, as the case may be.
"Initial Dividend Period," with respect to the 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 the AMPS, means the rate per
annum applicable to the Initial Dividend Period for the AMPS and, with respect
to Other AMPS, has the equivalent meaning.
"Initial Margin" means the amount of cash or securities deposited with
a broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.
"Long Term Dividend Period" means a Special Dividend Period consisting
of a specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of AMPS plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption and excluding Additional Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal
individual income tax rate applicable to ordinary income
11
<PAGE> 12
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 available shall be valued at
fair value as determined by the Pricing Service using methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
type of issue, coupon, maturity and rating; indications as to value from
dealers; and general market conditions. The Pricing Service may employ
electronic data processing techniques and/or a matrix system to determine
valuations. In the event the Pricing Service is unable to value a security, the
security shall be valued at the lower of two dealer bids obtained by the
Corporation from dealers who are members of the National Association of
Securities Dealers, Inc. and make a market in the security, at least one of
which shall be in writing. Futures contracts and options are valued at closing
prices for such instruments established by the exchange or board of trade on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Directors.
12
<PAGE> 13
"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 Retroactive Taxable Allocations, with respect to
any fiscal year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by the
Corporation, as of the end of the calendar month immediately preceding such
Valuation Date and assuming such Additional Dividends are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any California Municipal Bond or Municipal Bond which
constitutes a Moody's Eligible Asset, the percentage determined by reference to
(a)(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
13
<PAGE> 14
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 Moody's Exposure
Period, in accordance with the table set forth below:
<TABLE>
<CAPTION>
Rating Category
-----------------------------------
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1*** SP-1+***
----------------------- ---- --- ---- ---- ------- ---------- --------
<C> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less............ 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven weeks... 154 164 173 205 235 137 149
9 weeks or less but
greater than eight weeks... 158 169 179 209 242 138 150
</TABLE>
* Moody's rating.
** California Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
*** California Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or
P-1 or, if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do
not mature or have a demand feature at par exercisable within the
Moody's Exposure Period and which do not have a long-term rating. For
the purposes of the definition of Moody's Eligible Assets, these
securities will have an assumed rating of "A" by Moody's.
; 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
14
<PAGE> 15
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 California Municipal Bonds and short-term Municipal Bonds,
so long as such California Municipal Bonds and Municipal Bonds are rated at
least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and the Moody's Discount Factor
for such Bonds will be 125% if such Bonds are not rated by Moody's but are rated
A-1+ or SP-1+ or AA by S&P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and (ii) no Moody's Discount
Factor will be applied to cash or to Receivables for California Municipal Bonds
or Municipal Bonds Sold. "Receivables for California Municipal Bonds or
Municipal Bonds Sold," for purposes of calculating Moody's Eligible Assets as of
any Valuation Date, means no more than the aggregate of the following: (i) the
book value of receivables for California Municipal Bonds or Municipal Bonds sold
as of or prior to such Valuation Date if such receivables are due within five
Business Days of such Valuation Date, and if the trades which generated such
receivables are (x) settled through clearing house firms with respect to which
the Corporation has received prior written authorization from Moody's or (y)
with counterparties having a Moody's long-term debt rating of at least Baa3; and
(ii) the Moody's Discounted Value of California Municipal Bonds or Municipal
Bonds sold as of or prior
15
<PAGE> 16
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 California
Municipal Bonds or Municipal Bonds Sold, a California Municipal Bond or a
Municipal Bond that (i) pays interest in cash, (ii) is publicly rated Baa or
higher by Moody's or, if not rated by Moody's but rated by S&P, is rated at
least BBB by S&P (provided that, for purposes of determining the Moody's
Discount Factor applicable to any such S&P-rated California Municipal Bond or
S&P-rated Municipal Bond, such California Municipal Bond or Municipal Bond
(excluding any short-term California Municipal Bond or Municipal Bond) will be
deemed to have a Moody's rating which is one full rating category lower than its
S&P rating), (iii) does not have its Moody's rating suspended by Moody's; and
(iv) is part of an issue of California Municipal Bonds or Municipal Bonds of at
least $10,000,000. In addition, California Municipal Bonds and Municipal Bonds
in the Corporation's portfolio must be within the following diversification
requirements in order to be included within Moody's Eligible Assets:
16
<PAGE> 17
<TABLE>
<CAPTION>
Minimum Maximum Maximum Maximum Maximum
Issue Size Underlying Issue Type County State or Territory
Rating ($ Millions) Obligor (%)(1) Concentration(%)(1)(3) Concentration(%)(1)(4) Concentration (1)(5)
------ ------------ -------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
Aaa................ 10 100 100 100 100
Aa................. 10 20 60 60 60
A.................. 10 10 40 40 40
Baa................ 10 6 20 20 20
Other(2)........... 10 4 12 12 12
</TABLE>
- --------------
(1) The referenced percentages represent maximum cumulative totals for
the related rating category and each lower rating category.
(2) California Municipal Bonds and Municipal Bonds not rated by Moody's
but rated BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to California Municipal Bonds. Territorial bonds
(other than those issued by Puerto Rico and counted collectively) are
each limited to 10% of Moody's Eligible Assets. For diversification
purposes, Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described above, any
such Bond backed by the guaranty, letter of credit or insurance issued by a
third party will be deemed to be issued by such third party if the issuance of
such third party credit is the sole determinant of the rating on such Bond. For
purposes of the issue type concentration requirement described above, California
Municipal Bonds and Municipal Bonds will be classified within one of the
following categories: health care issues (teaching and non-teaching hospitals,
public and private), housing issues (single- and multi-family), educational
facilities issues (public and private schools), student loan issues, resource
recovery issues, transportation issues (mass transit, airport and highway
bonds), industrial revenue/pollution control bond issues, utility issues
(including water, sewer and electricity), general obligation issues, lease
obligations/certificates of participation, escrowed bonds and other issues
("Other Issues") not falling within one of the aforementioned categories
(includes special obligations to crossover, excise and sales tax revenue,
recreation revenue,
17
<PAGE> 18
special assessment and telephone revenue bonds). In no event shall (a) more than
10% of Moody's Eligible Assets consist of student loan issues, (b) more than 10%
of Moody's Eligible Assets consist of resource recovery issues or (c) more than
10% of Moody's Eligible Assets consist of Other Issues.
When the Corporation sells a California Municipal Bond or Municipal
Bond and agrees to repurchase it at a future date, the Discounted Value of such
Bond will constitute a Moody's Eligible Asset and the amount the Corporation is
required to pay upon repurchase of such Bond will count as a liability for
purposes of calculating the AMPS Basic Maintenance Amount. When the Corporation
purchases a California Municipal Bond or Municipal Bond and agrees to sell it at
a future date to another party, cash receivable by the Corporation thereby will
constitute a Moody's Eligible Asset if the long-term debt of such other party is
rated at least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such Bond will constitute a Moody's Eligible
Asset.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset if it is (i) held in a margin account, (ii) subject to
any material lien, mortgage, pledge, security interest or security agreement of
any kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Corporation for the payment of
dividends or redemption.
18
<PAGE> 19
"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 Transactions" has the meaning set forth in paragraph
8(b) of these Articles Supplementary.
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
<TABLE>
<CAPTION>
% Change in
Marginal Tax Moody's Volatility
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.
19
<PAGE> 20
"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).
"1940 Act Cure Date," with respect to the failure by the Corporation to
maintain the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of these
Articles Supplementary) as of the last Business Day of each month, means the
last Business Day of the following month.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Non-Payment Period" means, with respect to the AMPS, any period
commencing on and including the day on which the Corporation shall fail to (i)
declare, prior to the close of business on the second Business Day preceding any
Dividend Payment Date, for payment on or (to the extent permitted by paragraph
2(c)(i) of these Articles Supplementary) within three Business Days after such
Dividend Payment Date to the Holders as
20
<PAGE> 21
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 unpaid cash dividends and unpaid redemption prices
shall have been so deposited or shall have otherwise been made available to
Holders in same-day funds; provided that, a Non-Payment Period shall not end
unless the Corporation shall have given at least five days' but no more than 30
days' written notice of such deposit or availability to the Auction Agent, all
Existing Holders (at their addresses appearing in the Stock Books) and the
Securities Depository. Notwithstanding the foregoing, the failure by the
Corporation to deposit funds as provided for by clauses (ii)(A) or (ii)(B) above
within three Business Days after any Dividend Payment Date or redemption date,
as the case may be, in each case to the extent contemplated by paragraph 2(c)(i)
of these Articles Supplementary, shall not constitute a "Non-Payment Period."
21
<PAGE> 22
"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 (or any Substitute Rating Agency in lieu of
Moody's or S&P in the event either of such parties shall not rate the AMPS)
advise the Corporation in writing that such adjustment, modification, alteration
or change will not adversely affect their then-current ratings on the AMPS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of these Articles Supplementary.
"Notice of Redemption" means any notice with respect to the redemption
of shares of AMPS pursuant to paragraph 4 of these Articles Supplementary.
"Notice of Revocation" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
"Notice of Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
"Optional Redemption Price" shall mean $25,000 per share plus an amount
equal to accumulated but unpaid dividends (whether
22
<PAGE> 23
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 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.
23
<PAGE> 24
"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 California
Municipal Bonds or Municipal Bonds during the period in which such California
Municipal Bonds or 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.
"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" shall mean 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.
24
<PAGE> 25
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Pricing Service" shall mean 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 last Business Day of the last
month of each fiscal quarter of the Corporation in each fiscal year of the
Corporation, commencing October 31, 1996.
"Receivables for California Municipal Bonds Sold" has the meaning set
forth under the definition of S&P Discount Factor.
"Receivables for California Municipal Bonds or Municipal Bonds Sold"
has the meaning set forth under the definition of Moody's Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a
Short Term Dividend Period having 28 or fewer days, the higher of the applicable
"AA" Composite Commercial Paper Rate and the Taxable Equivalent of the
Short-Term Municipal Bond Rate, (ii) with respect to any Short Term Dividend
Period having more than 28 but fewer than 183 days, the applicable "AA"
Composite Commercial Paper Rate, (iii) with respect to any Short Term Dividend
Period having 183 or more but fewer than 364 days, the applicable U.S. Treasury
Bill Rate and (iv) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Note Rate.
25
<PAGE> 26
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
"Response" has the meaning set forth in paragraph 2(c)(iii) of these
Articles Supplementary.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of these Articles Supplementary.
"Right," with respect to the AMPS, has the meaning set forth in
paragraph 2(e) of these Articles Supplementary and, with respect to Other AMPS,
has the equivalent meaning.
"S&P" means Standard & Poor's Ratings Group or its successors.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any California Municipal Bond which constitutes an S&P Eligible Asset,
the percentage determined by reference to (a)(i) the rating by S&P or Moody's on
such Bond or (ii) in the event the California 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 California 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 California Municipal Bond is insured under an insurance policy
which guarantees the timely payment of interest on such California Municipal
Bond and principal thereof to maturity, the S&P insurance claims-paying ability
rating of the issuer of the
26
<PAGE> 27
insurance policy and (b) the S&P Exposure Period, in accordance with the tables
set forth below:
For California Municipal Bonds:
<TABLE>
<CAPTION>
Rating Category
-------------------------------------------------
S&P Exposure Period AAA* AA* A* BBB*
<S> <C> <C> <C> <C>
40 Business Days..................................... 200% 205% 220% 260%
22 Business Days..................................... 180 185 200 240
10 Business Days..................................... 165 170 185 225
7 Business Days..................................... 160 165 180 220
3 Business Days..................................... 140 145 160 200
</TABLE>
- ---------------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term California Municipal Bonds will be 115%, so long as such California
Municipal Bonds are rated A-1+ or SP-1+ by S&P and mature or have a demand
feature exercisable in 30 days or less, or 125% if such California Municipal
Bonds are not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's;
provided, however, such short-term California Municipal Bonds rated by Moody's
but not rated by S&P having a demand feature exercisable in 30 days or less must
be backed by a letter of credit, liquidity facility or guarantee from a bank or
other financial institution having a short-term rating of at least A-1+ from
S&P; and further provided that such short-term California Municipal Bonds rated
by Moody's but not rated by S&P may comprise no more than 50% of short-term
California Municipal Bonds that qualify as S&P Eligible Assets and (ii) no S&P
Discount Factor will be applied to cash or to Receivables for California
Municipal Bonds Sold. "Receivables for California Municipal Bonds Sold," for
27
<PAGE> 28
purposes of calculating S&P Eligible Assets as of any Valuation Date, means the
book value of receivables for California Municipal Bonds sold as of or prior to
such Valuation Date if such receivables are due within five Business Days of
such Valuation Date. The Corporation may adopt S&P Discount Factors for
Municipal Bonds other than California Municipal Bonds provided that S&P advises
the Corporation in writing that such action will not adversely affect its then
current rating on the AMPS. For purposes of the foregoing, Anticipation Notes
rated SP-1+ or, if not rated by S&P, rated VMIG-1 by Moody's, which do not
mature or have a demand feature exercisable in 30 days and which do not have a
long-term rating, shall be considered to be short-term California Municipal
Bonds.
"S&P Eligible Asset" means cash, Receivables for California Municipal
Bonds Sold or a California Municipal Bond that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in United States Dollars; (iii) is publicly rated BBB or higher by S&P
or, except in the case of Anticipation Notes that are grant anticipation notes
or bond anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's, is rated at least A
by Moody's (provided that such Moody's-rated California Municipal Bonds will be
included in S&P Eligible Assets only to the extent the Market Value of such
California Municipal Bonds does not exceed 50% of the aggregate Market Value of
the S&P Eligible Assets; and
28
<PAGE> 29
further provided that, for purposes of determining the S&P Discount Factor
applicable to any such Moody's-rated California Municipal Bond, such California
Municipal Bond will be deemed to have an S&P rating which is one full rating
category lower than its Moody's rating); (iv) is not subject to a covered call
or covered put option written by the Corporation; (v) is not part of a private
placement of California Municipal Bonds; and (vi) is part of an issue of
California Municipal Bonds with an original issue size of at least $20 million
or, if of an issue with an original issue size below $20 million (but in no
event below $10 million), is issued by an issuer with a total of at least $50
million of securities outstanding. Notwithstanding the foregoing:
(1) California Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only
to the extent the Market Value of such California Municipal Bonds does
not exceed 10% of the aggregate Market Value of the S&P Eligible
Assets, provided that 2% is added to the applicable S&P Discount Factor
for every 1% by which the Market Value of such California Municipal
Bonds exceeds 5% of the aggregate Market Value of the S&P Eligible
Assets; and
(2) California Municipal Bonds of any one issue type category
(as described below) will be considered S&P Eligible Assets only to the
extent the Market Value of such Bonds does not exceed 20% of the
aggregate Market Value of
29
<PAGE> 30
S&P Eligible Assets, except that California Municipal Bonds falling
within the utility issue type category will be broken down into three
sub-categories (as described below) and such California Municipal Bonds
will be considered S&P Eligible Assets to the extent the Market Value
of such Bonds in each such sub-category does not exceed 20% of the
aggregate Market Value of S&P Eligible Assets. For purposes of the
issue type category requirement described above, California Municipal
Bonds will be classified within one of the following categories: health
care issues, housing issues, educational facilities issues, student
loan issues, transportation issues, industrial development bond issues,
utility issues, general obligation issues, lease obligations, escrowed
bonds and other issues not falling within one of the aforementioned
categories. For purposes of the issue type category requirement
described above, California Municipal Bonds in the utility issue type
category will be classified within one of the three following
sub-categories: (i) electric, gas and combination issues (if the
combination issue includes an electric issue), (ii) water and sewer
utilities and combination issues (if the combination issue does not
include an electric issue), and (iii) irrigation, resource recovery,
solid waste and other utilities, provided that California Municipal
Bonds included in this sub-category (iii) must be rated by S&P in order
to be included in S&P Eligible Assets.
30
<PAGE> 31
The Corporation may include Municipal Bonds other than California
Municipal Bonds as S&P Eligible Assets pursuant to guidelines and restrictions
to be established by S&P provided that S&P advises the Corporation in writing
that such action will not adversely affect its then current rating on the AMPS.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance Cure
Date, that the Corporation has under these Articles Supplementary to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the AMPS Basic Maintenance Amount (as described in
paragraph 7(a) of these Articles Supplementary).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a)
of these Articles Supplementary.
"S&P Volatility Factor" means 277% or such other potential dividend
rate increase factor as S&P advises the Corporation in writing is applicable.
"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 a Dividend Period consisting of seven
days.
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"Short Term Dividend Period" means a Special Dividend Period consisting
of a specified number of days (other than seven), evenly divisible by seven and
not fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period either, or any combination of, (i) a period (a "Non-Call
Period") determined by the Board of Directors of the Corporation, after
consultation with the Auction Agent and the Broker-Dealers, during which the
shares of AMPS subject to such Dividend Period shall not be subject to
redemption at the option of the Corporation and (ii) a period (a "Premium Call
Period"), consisting of a number of whole years as 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.
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"Stock Books" means the books maintained by the Auction Agent setting
forth at all times a current list, as determined by the Auction Agent, of
Existing Holders of the AMPS.
"Stock Register" means the register of Holders maintained on behalf of
the Corporation by the Auction Agent in its capacity as transfer agent and
registrar for the AMPS.
"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Corporation may from time to time appoint or, in
lieu of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and successors,
after consultation with the Corporation, to act as the substitute rating agency
or substitute rating agencies, as the case may be, to determine the credit
ratings of the shares of AMPS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenney
Index") or any successor
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index, made available for the Business Day immediately preceding such date but
in any event not later than 8:30 A.M., New York City time, on such date by Kenny
Information Systems Inc. or any successor thereto, based upon 30-day yield
evaluations at par of bonds the interest on which is excludable for regular
Federal income tax purposes under the Code of "high grade" component issuers
selected by Kenny Information Systems Inc. or any such successor from time to
time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57(a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
provided, however, that if the Kenny Index is not made so available by 8:30
A.M., New York City time, on such date by Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate shall
mean the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the most recent Kenny Index so made available for any preceding
Business Day, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal). The Corporation may not utilize a successor index to the Kenny Index
unless Moody's and S&P provide the Corporation with written confirmation that
the use of such successor index will not adversely affect the then-current
respective Moody's and S&P ratings of the AMPS.
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"Treasury Bonds" shall have the meaning set forth in paragraph 8(a) of
these Articles Supplementary.
"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
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.
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<PAGE> 36
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 to the Initial Margin payment) from
time to time as the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Market Value, Maximum Potential Additional Dividend Liability, Moody's
Discount Factor, Moody's Eligible Asset, Moody's Exposure Period, Moody's
Hedging Transactions, Moody's Volatility Factor, S&P Discount
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<PAGE> 37
Factor, S&P Eligible Asset, S&P Exposure Period, S&P Hedging Transactions, S&P
Volatility Factor, Valuation Date and Variation Margin have been determined by
the Board of Directors of the Corporation in order to obtain a "aaa" rating from
Moody's and a AAA rating from S&P on the AMPS on their Date of Original Issue;
and the Board of Directors of the Corporation shall have the authority, without
shareholder approval, to amend, alter or repeal from time to time the foregoing
definitions and the restrictions and guidelines set forth thereunder if Moody's
and S&P or any Substitute Rating Agency advises the Corporation in writing that
such amendment, alteration or repeal will not adversely affect their
then-current ratings on the AMPS.
2. Dividends. (a) The Holders shall be entitled to receive, when, as
and if declared by the Board of Directors of the Corporation, out of funds
legally available therefor, cumulative dividends each consisting of (i) cash at
the Applicable Rate, (ii) a Right to receive cash as set forth in paragraph 2(e)
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
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<PAGE> 38
exempt-interest dividends. For the purposes of this section, the term "net
tax-exempt income" shall exclude capital gains of the Corporation.
(b) (i) Cash dividends on shares of AMPS shall accumulate from the
Date of Original Issue and shall be payable, when, as and if declared by the
Board of Directors, out of funds legally available therefor, commencing on the
Initial Dividend Payment Date with respect to the AMPS. Following the Initial
Dividend Payment Date for the AMPS, dividends on the AMPS will be payable, at
the option of the Corporation, either (i) with respect to any 7-Day Dividend
Period and any Short Term Dividend Period of 35 or fewer days, on the day next
succeeding the last day thereof, or (ii) with respect to any Short Term Dividend
Period of more than 35 days and with respect to any Long Term Dividend Period,
monthly on the first Business Day of each calendar month during such Short Term
Dividend Period or Long Term Dividend Period and on the day next succeeding the
last day thereof (each such date 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
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<PAGE> 39
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 the Holders of
shares of AMPS set forth in the Charter. The Initial Dividend Period, 7-Day
Dividend Periods and Special Dividend Periods are hereinafter sometimes referred
to as Dividend Periods. Each dividend payment date determined as provided above
is hereinafter referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in
the Stock Register as of 12:00 noon, New York City time, on the Business Day
preceding the Dividend Payment Date. 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
(the "Initial Dividend Period"), the Applicable Rate shall be the
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<PAGE> 40
Initial Dividend Rate. Commencing on the Initial Dividend Payment Date, 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 7-Day 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
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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 failure shall be the
NonPayment 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 AMPS payable (if declared) on
the Initial Dividend Payment Date and on each Dividend Payment Date of each
7-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 such share
was outstanding and the denominator of which
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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 on any Dividend Payment
Date shall be computed by multiplying the Applicable Rate for such Dividend
Period by a fraction, the numerator of which will be such number of days in such
part of such Dividend Period that such share was outstanding and for which
dividends are payable on such Dividend Payment Date and the denominator of which
will be 360, multiplying the amount so obtained by $25,000, and rounding the
amount so obtained to the nearest cent.
(iii) With respect to each Dividend Period that is a Special Dividend Period,
the Corporation may, at its sole option and to the extent permitted by law, by
telephonic and written notice (a "Request for Special Dividend Period") to the
Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for the AMPS be the number of days (other than seven) evenly
divisible by seven, and not fewer than seven nor more than 364 in the case of a
Short Term Dividend Period or one whole year or more but not greater than five
years in the case of a Long Term Dividend Period, specified in such notice,
provided that the Corporation may not give a Request for Special Dividend Period
(and any such request shall be null and void) unless, for any Auction occurring
after the initial Auction, Sufficient Clearing Bids were made in the last
occurring Auction and unless full cumulative dividends, any amounts due with
respect to
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redemptions, and any Additional Dividends payable prior to such date have been
paid in full. Such Request for Special Dividend Period, in the case of a Short
Term Dividend Period, shall be given on or prior to the second Business Day but
not more than seven Business Days prior to an Auction Date for AMPS and, in the
case of a Long Term Dividend Period, shall be given on or prior to the second
Business Day but not more than 28 days prior to an Auction Date for the AMPS.
Upon receiving such Request for Special Dividend Period, the Broker-Dealer(s)
shall jointly determine whether, given the factors set forth below, it is
advisable that the Corporation issue a Notice of Special Dividend Period for the
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
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become beneficial holders. If the Broker-Dealer(s) shall not give the
Corporation and the Auction Agent a Response by such second Business Day or if
the Response states that given the factors set forth above it is not advisable
that the Corporation give a Notice of Special Dividend Period for the AMPS, the
Corporation may not give a Notice of Special Dividend Period in respect of such
Request for Special Dividend Period. In the event the Response indicates that it
is advisable that the Corporation give a Notice of Special Dividend Period for
the AMPS, the Corporation may by no later than the second Business Day prior to
such Auction Date give a notice (a "Notice of 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
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maintain S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value at least equal to the AMPS Basic Maintenance Amount, in each
case on each of the two Valuation Dates immediately preceding the Business Day
prior to the relevant Auction Date on an actual basis and on a pro forma basis
giving effect to the proposed Special Dividend Period (using as a pro forma
dividend rate with respect to such Special Dividend Period the dividend rate
which the Broker-Dealers shall advise the Corporation is an approximately equal
rate for securities similar to the AMPS with an equal dividend period), provided
that, in calculating the aggregate Discounted Value of Moody's Eligible Assets
for this purpose, the Moody's Exposure Period shall be deemed to be one week
longer, (y) sufficient funds for the payment of dividends payable on the
immediately succeeding Dividend Payment Date have not been irrevocably deposited
with the Auction Agent by the close of business on the third Business Day
preceding the related Auction Date or (z) the Broker-Dealer(s) jointly advise
the Corporation that after consideration of the factors listed above they have
concluded that it is advisable to give a Notice of Revocation. The Corporation
also shall provide a copy of such Notice of Revocation to Moody's and S&P. If
the Corporation is prohibited from giving a Notice of Special Dividend Period as
a result of any of the factors enumerated in clause (x), (y) or (z) above or if
the Corporation gives a Notice of Revocation with respect to a Notice of Special
Dividend Period for the AMPS, the next
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succeeding Dividend Period will be a 7-Day Dividend Period. In addition, in the
event Sufficient Clearing Bids are not made in the applicable Auction or such
Auction is not held for any reason, such next succeeding Dividend Period will be
a 7-Day Dividend Period and the Corporation may not again give a Notice of
Special Dividend Period for the AMPS (and any such attempted notice shall be
null and void) until Sufficient Clearing Bids have been made in an Auction with
respect to a 7-Day Dividend Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends and
applicable late charges, as herein provided, on the shares of AMPS (except for
Additional Dividends as provided in paragraph 2(e) hereof and additional
payments as provided in paragraph 2(f) hereof). Except for the late charge
payable pursuant to paragraph 2(c)(i) hereof, no interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment on the
shares of AMPS that may be in arrears.
(ii) For so long as any share of AMPS is Outstanding, the Corporation shall
not declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or options, warrants
or rights to subscribe for or purchase, Common Stock or other stock, if any,
ranking junior to the shares of AMPS as to dividends or upon liquidation) in
respect of the Common Stock or any other stock of the Corporation ranking junior
to or on a parity with the shares
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of AMPS as to dividends or upon liquidation, or call for redemption, redeem,
purchase or otherwise acquire for consideration any shares of the Common Stock
or any other such junior stock (except by conversion into or exchange for stock
of the Corporation ranking junior to the shares of AMPS as to dividends and upon
liquidation) or any other such Parity Stock (except by conversion into or
exchange for stock of the 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
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amounts as set forth in paragraph 2(f) below. Each Right shall thereafter be
independent of the share or shares of AMPS on which the dividend was paid. The
Corporation shall cause to be maintained a record of each Right received by the
respective Holders. A Right may not be transferred other than by operation of
law. If the Corporation retroactively allocates any net capital gains or other
income subject to regular Federal income 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
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Dividend with respect to all Retroactive Taxable Allocations made to such
holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate amount
of Retroactive Taxable Allocations made to such holder with respect to the
fiscal year in question, would cause such holder's dividends in dollars (after
Federal and California income tax consequences) from the 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 had been excludable
from the gross income of such holder. Such Additional Dividend shall be
calculated (i) without consideration being given to the time value of money;
(ii) assuming that no holder of shares of AMPS is subject to the Federal
alternative minimum tax with respect to dividends received from the Corporation;
and (iii) assuming that each Retroactive Taxable Allocation would be taxable in
the hands of each holder of shares of AMPS at the greater of: (x) the maximum
combined marginal regular Federal and California individual income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (including any surtax); or (y) the maximum
combined marginal regular Federal and California corporate income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (taking into account in
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both (x) and (y) the Federal income tax deductibility of state taxes paid or
incurred but not any phase out of, or provision limiting, personal exemptions,
itemized deductions, or the benefit of lower tax brackets and assuming the
taxability of Federally tax-exempt dividends for corporations for California
state income tax purposes).
(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 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
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Common Stock or any other capital stock ranking junior in right of payment upon
liquidation to the AMPS, the sum of $25,000 per share plus accumulated but
unpaid dividends (whether or not earned or declared) thereon to the date of
distribution, and after such payment the Holders will be entitled to no other
payments other than Additional Dividends as provided in paragraph 2(e) hereof.
If upon any liquidation, dissolution or winding up of the Corporation, the
amounts payable with respect to the AMPS 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:
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(i) To the extent permitted under the 1940 Act and Maryland
law, upon giving a Notice of Redemption, the Corporation at its option
may redeem shares of AMPS, in whole or in part, out of funds legally
available therefor, at the Optional Redemption Price per share, on any
Dividend Payment Date; provided that no share of AMPS may be redeemed
at the option of the Corporation during (A) 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 AMPS Basic
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Maintenance Cure Date or the 1940 Act Cure Date (herein collectively
referred to as a "Cure Date"), as the case may be. In addition, holders
of AMPS so redeemed shall be entitled to receive Additional Dividends
to the extent provided herein. The number of shares of AMPS to be
redeemed shall be equal to the lesser of (i) the minimum 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
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determining the number of shares of AMPS required to be redeemed in
accordance with the foregoing, the Corporation shall allocate the
number required to be redeemed which would result in the Corporation
having S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount or satisfaction of the 1940 Act AMPS Asset Coverage,
as the case may be, pro rata among shares of AMPS, Other AMPS and other
Preferred Stock subject to 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
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the Corporation otherwise is unable to effect such redemption on or
prior to 35 days after such Cure Date, the Corporation shall redeem
those shares of AMPS which it is unable to redeem on the earliest
practicable date on which it is able to effect such redemption out of
funds legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares
of AMPS may be redeemed pursuant to paragraph 4(a)(i) of these Articles
Supplementary (i) unless all dividends 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
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published in the eastern and national editions of The Wall Street Journal. The
Notice of Redemption shall set forth (i) the redemption date, (ii) the amount of
the redemption price, (iii) the aggregate number of shares of AMPS to be
redeemed, (iv) the place or places where shares of AMPS are to be surrendered
for payment of the redemption price, (v) a statement that dividends on the
shares to be redeemed shall cease to accumulate on such redemption date (except
that holders may be entitled to Additional Dividends) and (vi) the provision of
these 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
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rights of the Holders of such shares as shareholders of the Corporation by
reason of the ownership of such shares will cease and terminate (except their
right to receive the redemption price in respect thereof and any Additional
Dividends, but without interest), and such shares shall no longer be deemed
outstanding. The Corporation shall be entitled to receive, from time to time,
from the Auction Agent the interest, if any, on such Deposit Securities
deposited with it and the Holders of any shares so redeemed shall have no claim
to any of such interest. In case 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
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entitled, as a class, to the exclusion of the holders of all other securities
and classes of capital stock of the Corporation, to elect two directors of the
Corporation. Subject to paragraph 5(b) hereof, the holders of outstanding shares
of capital stock of the Corporation, including the holders of outstanding shares
of Preferred Stock, including AMPS, voting as a single class, shall elect the
balance of the directors.
(b) Right to Elect Majority of Board of Directors. During any period in
which any one or more of the conditions described 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'
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dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for the
payment of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred
Stock are entitled to elect a majority of the directors of the
Corporation under the 1940 Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always, 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,
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consolidation or otherwise, so as to adversely affect any of the contract rights
expressly set forth in the Charter of holders of shares of AMPS or any other
Preferred Stock. To the extent permitted under the 1940 Act, in the event shares
of more than one series of AMPS 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
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Stock, including AMPS, voting together as a single class necessary to authorize
the action in question.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right of
the holders of shares of Preferred Stock to elect additional directors
as described in paragraph 5(b) above, the Corporation shall call a
special meeting of such holders and instruct the Auction Agent to mail
a notice of such special meeting to such holders, such meeting to be
held not less than 10 nor more than 20 days after the date of mailing
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
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announcement at the meeting, to a date not more than 120 days after the
original record date.
(ii) For purposes of determining any rights of the Holders to
vote on any matter or the number of shares required to constitute a
quorum, whether such right is created by these Articles Supplementary,
by the other provisions of the Charter, by statute or otherwise, a
share of AMPS which is not Outstanding shall not be counted.
(iii) The terms of office of all persons who are directors of
the Corporation at the time of a special 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
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other holders to elect additional directors pursuant to paragraph 5(b)
above shall cease, subject to the provisions of the last sentence of
paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of
shares of AMPS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of AMPS shall have no
preemptive rights or rights to cumulative voting. In the event that the
Corporation fails to pay any dividends on the shares of AMPS, the exclusive
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)
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S&P Eligible Assets having an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount and (ii) Moody's Eligible Assets having
an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount. Upon any failure to maintain the required Discounted Value,
the Corporation will use its best efforts to alter the composition of its
portfolio to reattain a Discounted Value at least equal to the AMPS Basic
Maintenance Amount on or prior to the AMPS Basic Maintenance Cure Date.
(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
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Basic Maintenance Amount or on which the Corporation fails to maintain Moody's
Eligible Assets or S&P Eligible Assets, as the case may be, with an aggregate
Discounted Value which exceeds the AMPS Basic Maintenance Amount by 5% or more.
The Corporation will also deliver an AMPS Basic Maintenance Report to the
Auction Agent, Moody's and S&P as of each Quarterly Valuation Date on or before
the third Business Day after such date. Additionally, on or before 5:00 p.m.,
New York City time, on the third Business Day after the first day of a Special
Dividend Period, the 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
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Accountant, that was delivered by the Corporation during the quarter ending on
such Quarterly Valuation Date), (ii) that, in such Report (and in such randomly
selected Report), the Corporation correctly determined the assets of the
Corporation which constitute S&P Eligible Assets or Moody's Eligible Assets, as
the case may be, at such Quarterly Valuation Date in accordance with these
Articles Supplementary, (iii) that, in such Report (and in such randomly
selected Report), the Corporation determined whether the Corporation had, at
such Quarterly 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 New York Municipal Bonds or Municipal Bonds, the issuer name,
issue size and coupon rate listed in such Report, that the Independent
Accountant has requested that S&P verify such information and the Independent
Accountant shall provide a listing in its letter of any differences, (v) with
respect to the Moody's ratings on New York Municipal Bonds or Municipal Bonds,
the issuer name, issue size and coupon rate listed in such Report, that such
information has been verified by Moody's (in the event such information is not
verified by Moody's, the Independent Accountant will inquire of Moody's what
such information is, and provide a listing in its letter of any
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differences), (vi) with respect to the bid or mean price (or such alternative
permissible factor used in calculating the Market Value) provided by the
custodian of the Corporation's assets to the Corporation for purposes of valuing
securities in the Corporation's portfolio, the Independent Accountant has traced
the price used in such Report to the bid or mean price listed in such Report as
provided to the Corporation and verified that such information agrees (in the
event such information does not agree, the Independent Accountant will provide a
listing in its letter 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.
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(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets or Moody's
Eligible Assets, as the case may be, of the Corporation was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Corporation, and the Corporation shall accordingly amend and deliver the AMPS
Basic 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
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City time, on the first Business Day after shares of Common Stock are
repurchased by the Corporation, the Corporation will complete and deliver to S&P
and Moody's an AMPS Basic Maintenance Report as of the close of business on such
date that Common Stock is repurchased.
(g) For so long as shares of AMPS are rated by Moody's, in managing the
Corporation's portfolio, the Adviser will not alter the composition of the
Corporation's portfolio if, in the reasonable belief of the Adviser, the effect
of any such alteration would be to cause the Corporation to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the 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
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options (except covered put options) or call options (except covered call
options) on portfolio securities unless it receives written confirmation from
S&P that engaging in such transactions will not impair the ratings then assigned
to the shares of AMPS by S&P, except that the Corporation may purchase or sell
futures contracts based on the Bond Buyer Municipal Bond Index (the "Municipal
Index") or United States Treasury Bonds or Notes ("Treasury Bonds") and write,
purchase or sell put and call options on such contracts (collectively, "S&P
Hedging Transactions"), subject to the following limitations:
(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 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;
(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
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unless the Corporation holds the securities deliverable under such
terms; and
(v) when the Corporation writes a futures contract or option
thereon, it will either maintain an amount of cash, cash equivalents or
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.
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(b) For so long as any shares of AMPS are rated by Moody's, the
Corporation will not buy or sell futures contracts, write, purchase or sell call
options on futures contracts or purchase put options on futures contracts or
write call options (except covered call options) on portfolio securities unless
it receives written confirmation from Moody's that engaging in such transactions
would not impair the ratings then assigned to the shares of AMPS by Moody's,
except that the Corporation may purchase or sell exchange-traded futures
contracts based on the Municipal Index or Treasury Bonds and purchase, write or
sell exchange-traded put options on such futures contracts and purchase, write
or sell exchange-traded call options on such futures contracts (collectively,
"Moody's Hedging Transactions"), subject to the following limitations:
(i) the Corporation will not engage in any Moody's Hedging
Transaction based on the Municipal Index (other than Closing
Transactions) which would cause the Corporation at the time of such
transaction to own or have sold (A) outstanding futures contracts based
on the Municipal Index exceeding in number 10% of the average number of
daily traded futures contracts based on the Municipal Index in the 30
days preceding the time of effecting such transaction as reported by
The Wall Street Journal or (B) outstanding futures contracts based on
the Municipal Index having a Market Value exceeding 50% of the Market
Value of all Municipal Bonds constituting Moody's Eligible Assets owned
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<PAGE> 74
by the Corporation (other than Moody's Eligible Assets already subject
to a Moody's Hedging Transaction);
(ii) the Corporation will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
which would cause the Corporation at the time of such transaction to
own or have sold (A) outstanding futures contracts based on Treasury
Bonds having an aggregate Market Value exceeding 20% of the aggregate
Market Value of Moody's Eligible Assets owned by the Corporation and
rated Aa by Moody's (or, if not rated by Moody's but rated by S&P,
rated AAA by S&P) or (B) outstanding futures contracts based on
Treasury Bonds having an aggregate Market Value exceeding 40% of the
aggregate Market Value of all 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> 75
(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> 76
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> 77
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> 78
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
idetermining whether the Corporation hasMoody'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> 79
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" shall mean the shares of AMPS being auctioned
pursuant to this paragraph 10.
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(ii) "Auction Date" shall mean the first Business Day
preceding the first day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in
paragraph 10(d)(i) below.
(iv) "Bid" shall have the meaning specified in paragraph
10(b)(i) below.
(v) "Bidder" shall have the meaning specified in paragraph
10(b)(i) below.
(vi) "Hold Order" shall have 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> 81
<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 the AMPS. If either S&P or Moody's shall
not make such a rating available, or neither S&P nor Moody's shall make such a
rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates and successors, after consultation with the Corporation, shall select
a nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating Agency
or Substitute Rating Agencies, as the case may be.
(viii) "Order" shall have the meaning specified in paragraph
10(b)(i) below.
(ix) "Sell Order" shall have the meaning specified in
paragraph 10(b)(i) below.
(x) "Submission Deadline" shall mean 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
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<PAGE> 82
obtained by it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in
paragraph 10(d)(i) below.
(xii) "Submitted Hold Order" shall have the meaning specified
in paragraph 10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in
paragraph 10(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning specified
in paragraph 10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning
specified in paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" shall have 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
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<PAGE> 83
in its own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders
to the Auction Agent as a Beneficial Owner or 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
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<PAGE> 84
the purpose of conducting a competitive Auction, shall contact
Potential Beneficial Owners, including Persons that 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
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<PAGE> 85
customers or itself, all discussion herein relating to the consequences of an
Auction for Existing Holders and Potential Holders also applies to the
underlying beneficial ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of Outstanding shares of AMPS specified in such
Bid if the Applicable Rate determined on such Auction Date shall be
less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of
AMPS to be determined as set forth in paragraph 10(e)(i)(D) if the
Applicable Rate determined on such Auction Date shall be equal to the
rate per annum specified therein; or
(3) a lesser number of Outstanding shares of AMPS to be
determined as set forth in paragraph 10(e)(ii)(C) if such specified
rate per annum shall be higher than the Maximum Applicable Rate and
Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of Outstanding shares of AMPS
specified in such Sell Order; or
(2) such number or a lesser number of Outstanding
shares of AMPS to be determined as set forth in
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<PAGE> 86
paragraph 10(e)(ii)(C) if Sufficient Clearing Bids do not
exist.
(C) A Bid by a Potential Holder shall constitute an
irrevocable offer to purchase:
(1) the number of Outstanding shares of AMPS
specified in such Bid if the Applicable Rate determined on
such Auction Date shall be higher than the rate per annum
specified in such Bid; or
(2) such number or a lesser number of Outstanding
shares of AMPS to be determined as set forth in paragraph
10(e)(i)(E) if the Applicable Rate determined on such Auction
Date shall be equal to the rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Corporation) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
specifying with respect to each Order:
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<PAGE> 87
(A) the name of the Bidder placing such Order (which shall be
the Broker-Dealer unless otherwise permitted by the Corporation);
(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
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<PAGE> 88
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 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
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<PAGE> 89
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 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
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<PAGE> 90
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.
(v) If more than one Bid is submitted on behalf of any
Potential Holder, each Bid submitted shall be a separate Bid with the
rate per annum and number of shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, prior to the Submission Deadline on any Auction Date
shall be irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid
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
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<PAGE> 91
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:
(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
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<PAGE> 92
(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 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
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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 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;
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(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 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
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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 which shall be the sum of the
numbers 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
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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 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
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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 shares of AMPS subject to all such Submitted Bids
and Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph 10(e)(i)
or paragraph 10(e)(ii), any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of a share of AMPS on any Auction Date, the Auction Agent shall, in
such manner as in its sole discretion it shall determine, round up or down the
number of shares of AMPS to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date so that each Outstanding share of AMPS
purchased or sold by each Existing Holder or Potential Holder on such Auction
Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in paragraph 10(e)(i),
any Potential Holder would be entitled or required to purchase less than a whole
share of AMPS on any Auction Date, the Auction Agent shall, in such manner as in
its sole discretion it shall determine, allocate shares of AMPS for purchase
among Potential Holders so that only whole shares of AMPS are purchased on such
Auction Date by any Potential Holder, even if such allocation results in one or
more of such Potential Holders not purchasing any shares of AMPS on such Auction
Date.
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(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 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)
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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 beneficial ownership. Neither the Corporation nor any
Affiliate shall submit an Order in any Auction. Any Beneficial Owner that is an
Affiliate shall not sell, transfer or otherwise dispose of shares of AMPS to any
Person other than the Corporation. All of the Outstanding shares of AMPS shall
be represented by a single certificate registered in the name of the nominee of
the Securities Depository unless otherwise required by law or unless there is no
Securities Depository. If there is no Securities Depository, at the
Corporation's option and upon its receipt of such documents as it deems
appropriate, any shares of AMPS may be registered in the Stock Register in the
name of the Beneficial Owner thereof and such Beneficial Owner thereupon will be
entitled to receive certificates therefor and required to deliver certificates
therefor upon transfer or exchange thereof.
11. Securities Depository; Stock Certificates. (a) If there is a
Securities Depository, one certificate for all of the shares of AMPS of each
series shall be issued to the Securities Depository and registered in the name
of the Securities Depository or its nominee. Additional certificates may be
issued as necessary to represent shares of AMPS. All such certificates shall
bear a legend to the effect that such certificates are issued subject to the
provisions restricting the transfer of shares of AMPS
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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 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 NEW YORK INSURED FUND II, 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 NEW YORK INSURED
FUND II, INC.
By _______________________
Name:
Title:
Attest:
_______________________
Mark B. 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 II, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
We have acted as counsel for MuniYield California Insured Fund II, Inc.
("MuniYield California Insured II") in connection with its proposed acquisition
of all of the assets and assumption of all of the liabilities of MuniVest
California Insured Fund, Inc. ("MuniVest California Insured"), in exchange for
newly-issued shares of common stock and auction market preferred stock of
MuniYield California Insured II (collectively, the "Reorganization"). This
opinion is furnished in connection with MuniYield California Insured II's
Registration Statement on Form N-14 under the Securities Act of 1933, as amended
(File No. 333- 7813; the "Registration Statement"), relating to shares of common
stock and auction market preferred stock of MuniYield California Insured II,
each par value $0.10 per share (collectively, the "Shares"), to be issued in the
Reorganization.
As counsel for MuniYield California Insured II, 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 MuniYield California
Insured II, as amended and supplemented, the By-Laws of MuniYield California
Insured II, 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 MuniYield
California Insured II and MuniVest California Insured 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 MuniYield California Insured II.
<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 California Insured Fund II, Inc.:
We consent to the use in this Registration Statement on Form N-14 of our report
dated December 1, 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)
INDEPENDENT AUDITORS' CONSENT
MuniVest California Insured Fund, Inc.:
We consent to the use in this Registration Statement on Form N-14 of our report
dated December 1, 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
