(BULL LOGO)
Merrill Lynch Investment Managers
Annual Report
October 31, 2002
MuniYield
Michigan Insured
Fund II, Inc.
www.mlim.ml.com
MuniYield Michigan Insured Fund II, Inc. seeks to provide
shareholders with as high a level of current income exempt from
Federal and Michigan income taxes as is consistent with its
investment policies and prudent investment management by investing
primarily in a portfolio of long-term municipal obligations the
interest on which, in the opinion of bond counsel to the issuer, is
exempt from Federal and Michigan income taxes.
This report, including the financial information herein, is
transmitted to shareholders of MuniYield Michigan Insured Fund II,
Inc. for their information. It is not a prospectus. Past performance
results shown in this report should not be considered a
representation of future performance. The Fund has leveraged its
Common Stock and intends to remain leveraged by issuing Preferred
Stock to provide the Common Stock shareholders with a potentially
higher rate of return. Leverage creates risks for Common Stock
shareholders, including the likelihood of greater volatility of net
asset value and market price of shares of the Common Stock, and the
risk that fluctuations in the short-term dividend rates of the
Preferred Stock may affect the yield to Common Stock shareholders.
Statements and other information herein are as dated and are subject
to change.
MuniYield Michigan Insured Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MUNIYIELD MICHIGAN INSURED FUND II, INC.
The Benefits
And Risks of
Leveraging
MuniYield Michigan Insured Fund II, Inc. utilizes leveraging to seek
to enhance the yield and net asset value of its Common Stock.
However, these objectives cannot be achieved in all interest rate
environments. To leverage, the Fund issues Preferred Stock, which
pays dividends at prevailing short-term interest rates, and invests
the proceeds in long-term municipal bonds. The interest earned on
these investments is paid to Common Stock shareholders in the form
of dividends, and the value of these portfolio holdings is reflected
in the per share net asset value of the Fund's Common Stock.
However, in order to benefit Common Stock shareholders, the yield
curve must be positively sloped; that is, short-term interest rates
must be lower than long-term interest rates. At the same time, a
period of generally declining interest rates will benefit Common
Stock shareholders. If either of these conditions change, then the
risks of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock
capitalization of $100 million and the issuance of Preferred
Stock for an additional $50 million, creating a total value of
$150 million available for investment in long-term municipal bonds.
If prevailing short-term interest rates are approximately 3% and
long-term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million
of Preferred Stock based on the lower short-term interest rates. At
the same time, the fund's total portfolio of $150 million earns the
income based on long-term interest rates. Of course, increases in
short-term interest rates would reduce (and even eliminate) the
dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term
investments, and therefore the Common Stock shareholders are the
beneficiaries of the incremental yield. However, if short-term
interest rates rise, narrowing the differential between short-term
and long-term interest rates, the incremental yield pickup on the
Common Stock will be reduced or eliminated completely. At the same
time, the market value of the fund's Common Stock (that is, its
price as listed on the New York Stock Exchange) may, as a result,
decline. Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price
of the portfolio's investments, since the value of the fund's
Preferred Stock does not fluctuate. In addition to the decline in
net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain
securities whose potential income return is inversely related to
changes in a floating interest rate ("inverse floaters"). In
general, income on inverse floaters will decrease when short-term
interest rates increase and increase when short-term interest rates
decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of
reduced or eliminated interest payments and losses of invested
principal. In addition, inverse floaters have the effect of
providing investment leverage and, as a result, the market value of
such securities will generally be more volatile than that of fixed-
rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the
net asset value of the Fund's shares may also be more volatile than
if the Fund did not invest in these securities.
Swap
Agreements
The Fund may also invest in swap agreements, which are over-the-
counter contracts in which one party agrees to make periodic
payments based on the change in market value of a specified bond,
basket of bonds or index in return for periodic payments based on a
fixed or variable interest rate or the change in market value of a
different bond, basket of bonds or index. Swap agreements may be
used to obtain exposure to a bond or market without owning or taking
physical custody of securities.
MuniYield Michigan Insured Fund II, Inc., October 31, 2002
DEAR SHAREHOLDER
On June 3, 2002, the Fund acquired all of the net assets of
MuniHoldings Michigan Insured Fund II, Inc. pursuant to a plan
of reorganization. At that time, the Fund also changed its name
from MuniYield Michigan Fund, Inc. to MuniYield Michigan Insured
Fund II, Inc.
For the year ended October 31, 2002, the Common Stock of MuniYield
Michigan Insured Fund II, Inc. earned $.890 per share income
dividends, which included earned and unpaid dividends of $.075. This
represents a net annualized yield of 5.95%, based on a year-end per
share net asset value of $14.91. During the same period, the total
investment return on the Fund's Common Stock was +6.36%, based on a
change in per share net asset value from $14.97 to $14.91, and
assuming reinvestment of $.887 per share income dividends.
For the six-month period ended October 31, 2002, the total
investment return on the Fund's Common Stock was +5.66%, based on a
change in per share net asset value from $14.58 to $14.91, and
assuming reinvestment of $.449 per share income dividends.
For the six-month period ended October 31, 2002, the Fund's Auction
Market Preferred Stock had an average yield of 1.26% for Series A
and 1.08% for Series B.
The Municipal Market Environment
During the six-month period ended October 31, 2002, the direction of
long-term fixed income interest rates was driven as much by volatile
U.S. equity markets and continued worldwide political tensions as by
economic fundamentals. After rising steadily early in 2002, bond
yields reversed course to move sharply lower throughout most of the
period. Positive economic fundamentals repeatedly were overwhelmed
by falling equity valuations and declines in investor confidence.
U.S. gross domestic product (GDP) activity for the first quarter of
2002 measured at 5%, considerably above the level of economic growth
seen at the end of 2001. During May and June, a number of economic
indicators, such as housing activity, consumer spending and weekly
unemployment claims, all pointed to at least a modest economic
recovery by the end of 2002. However, steady dramatic declines in
U.S. equity markets led the majority of investors to conclude that
the Federal Reserve Board was unlikely to increase short-term
interest rates for the remainder of the year. U.S. Treasury issue
prices were also boosted by erupting Middle East and India/Pakistan
conflicts that led many international investors to seek the safe-
haven status of U.S. Treasury securities. By the end of June 2002,
long-term U.S. Treasury bond yields had declined to 5.50%, a
decline of almost 35 basis points (.35%) from their recent highs in
mid-March.
In late July, second quarter U.S. GDP growth was initially estimated
at 1.1%. While subject to revision, this estimate suggested that
continued declines in U.S. equity prices were negatively affecting
not only consumer but business confidence as well and undermining
much of the economic growth witnessed earlier this year. Some
analysts extrapolated that recent weakness would continue, if not
accelerate. This brought about forecasts that the Federal Reserve
Board would soon be obliged to lower short-term interest rates both
to offset equity market declines and boost consumer and business
spending. The possibility of lower short-term interest rates helped
push longer-term bond yields lower still during July and August. The
dramatic decline in U.S. equity prices in late August and September
triggered a significant fixed income rally as investors again sought
the safe-haven status of U.S. Treasury securities. By the end of
September, U.S. Treasury bond yields fell to 4.66%.
Bolstered by an unexpected decline in the national unemployment rate
to 5.6% in early October, U.S. equity markets staged a strong rally
throughout much of the month. The Standard & Poor's 500 Index rose
more than 8% for the month, triggered by stronger-than-expected
earnings reports from a large number of companies, such as General
Electric Company, International Business Machines Corporation and
Microsoft Corporation. Bond prices continued to trade in an inverse
relationship to equity prices. Consequently, as stocks rallied, bond
yields rose in October, despite generally weak economic releases.
During October, the U.S. housing sector remained quite robust, but
retail sales and industrial production slowed. By October 31, 2002,
long-term U.S. Treasury bond yields rose to almost 5%, a monthly
increase of more than 30 basis points. During the past six months,
the yield on 30-year U.S. Treasury bonds declined over 60 basis
points.
For the six-month period ended October 31, 2002, municipal bond
prices also generally increased. Similar to their taxable
counterparts, municipal bond yields rose in early 2002, largely on
the expectation of short-term interest rate increases by the Federal
Reserve Board. By late March, long-term municipal revenue bond
yields, as measured by the Bond Buyer Revenue Bond Index, rose to
5.67%, their highest level in more than a year. During recent
months, tax-exempt bond yields have generally declined largely in
response to the positive fixed income environment engendered by
falling equity valuations. The municipal bond market's price
advances in tax-exempt issues, however, have not been able to keep
pace with U.S. Treasury issues as municipal bonds cannot offer
foreign investors the safe-haven status U.S. Treasury issues enjoy
in periods of economic and financial instability. The municipal bond
market's recent price advances have also been supported by the
continued improvement in the tax-exempt market's technical position.
Despite sizeable advances in the rate of new municipal bond
issuance, investor demand has increased, allowing tax-exempt bond
prices to rise. By the end of October 2002, long-term municipal
revenue bond yields stood at 5.20%, a decline of more than 30 basis
points during the past six months.
Investor demand has remained very positive throughout the period.
The Investment Company Institute reported that thus far in 2002,
municipal bond fund net cash flows remained very strong at over
$17.5 billion, up nearly 80% compared to the same period in 2001.
Additionally, investors received from June to August 2002
approximately $75 billion from bond maturities, proceeds from early
redemptions and coupon income. Given the current weakness in U.S.
equity markets, much of these monies were likely reinvested in
tax-exempt products. Perhaps more importantly, short-term municipal
rates have continued to move lower in response to Federal Reserve
Board actions. In reaction to Federal Reserve Board interest
rate reductions, short-term municipal rates have declined to the
1% - 1.50% range. As interest rates have declined, investors have
extended maturities to take advantage of the steep municipal bond
yield curve. The significant income sacrifice incurred by remaining
in cash reserves has resulted in ongoing strong demand for municipal
securities, especially in the 5-year - 15-year maturity range.
Recent performance by the tax-exempt market has been even more
impressive considering the increase in new bond issuance seen thus
far in 2002. Nationwide, municipalities have used present low
interest rate levels both to refinance older debt and fund new
capital projects. Over the past six months, more than $200 billion
in new long-term municipal bonds was issued, an increase of nearly
40% compared to the same period in 2001. Nearly $100 billion in long-
term tax-exempt securities was underwritten during the October
quarter of 2002, an increase of over 40% compared to the October
quarter of 2001 level.
In the coming months, interest rates are likely to remain volatile,
with an expected upward bias. However, until equity market
conditions stabilize, interest rates should remain near their
current historically low levels. While recent stock market declines
appear to have negatively affected economic growth in recent months,
business activity is likely to accelerate going forward. While
governmental stimulus in response to the September 11, 2001 attacks
has been significant, the recent 50 basis point decrease in interest
rates by the Federal Reserve Board should provide additional
incentive to the sluggish U.S. economy. The ongoing U.S. military
response to worldwide terrorism has reduced a once-sizeable Federal
surplus to a material deficit. Further military action in early 2003
would likely result in higher Federal spending, deficits and
increased Treasury financing. Increased Federal borrowings can be
expected to put upward pressure on interest rates going forward.
Equity market declines helped push interest rates to lower levels
than economic fundamentals alone would support. When U.S. equity
markets stabilize and economic activity resumes, associated interest
rate increases should not be extreme. Inflationary pressures have
remained subdued, meaning that significant interest rate increases
are unlikely. As equity valuations are likely to only gradually
recover, U.S. economic recovery is also likely to be a moderate
process. This suggests that the pace of any interest rate increases
will be gradual. As the municipal bond market's strong technical
position can be expected to remain supportive in the coming months,
future tax-exempt rate increases should be more restrained than
their taxable counterparts.
Specific to Michigan, the state maintains the highest possible
credit ratings (Aaa/AAA) from Moody's and Standard & Poor's,
respectively, and is rated AA+ by Fitch. Nationally, Michigan ranks
33rd in debt per capita and 35th in debt as a percentage of personal
income. These ratios are quite low for a populous state and indicate
flexibility in responding to economic downturns relative to other
states. Nevertheless, tax revenue collections are exhibiting a
downward trend, in line with the national economy. Accordingly, the
state has resorted to drawing down on its Budget Stabilization Fund
as well as revenue enhancements, such as the sale of state property,
and expenditure reductions, including delaying capital projects, in
order to balance its current budget. Additional uncertainty
surrounding the credit outlook for Michigan came from the
gubernatorial election that took place on November 5, 2002 in which
Jennifer Granholm was elected governor for the first time. Voters
approved only one of three important referendums--the $1 billion
in general obligation bonding authority for water and sewer projects
--while the referendums for the right to collective bargaining for
state employees and diversion of revenues from the Tobacco Master
Settlement Agreement to health care providers were defeated. Despite
these results, we expect that Michigan will remain among the highest-
rated states for credit because of its economic diversity, low debt
levels and strong reserves. Any ratings downgrade is likely to have
only a limited impact on the Fund's holdings as the Fund's insured
structure greatly insulates it from any downward price reaction to a
downgrade. It also should be noted that if a downgrade occurs, it is
likely to be to Aa+/AA+. Such a minor ratings adjustment, especially
given the current strong financial environment, is unlikely to
result in a significant price adjustment to state-supported issues.
MuniYield Michigan Insured Fund II, Inc., October 31, 2002
Portfolio Strategy
During the six months ended October 31, 2002, we maintained the
Fund's neutral market position adopted earlier this year. While
tax-exempt bond yields declined more than anticipated, the Fund's
leveraged structure and fully invested position allowed it to
completely participate in the significant market appreciation seen
in recent months. The combination of the U.S. equity markets
decline, corporate disclosure issues and the prospect of further
military action have driven bond prices higher than economic
fundamentals alone would have supported in the past. As current
tax-exempt rates are at historically low levels, we will carefully
continue to monitor business conditions. Should signs of a renewed,
sustainable economic recovery appear, we will adopt a more defensive
portfolio strategy in an effort to preserve recent gains in the
Fund's net asset value. As we focused on further enchancing the
Fund's current high level of coupon income, we purchased lower-rated
investment-grade issues whenever they were attractively priced.
Recently, many corporate-backed municipal bond issues have come
under considerable pressure, creating a historically attractive
investment opportunity. The addition of these higher-yielding issues
should help the Fund continue to provide its current dividend going
forward. However, we were able to maintain the Fund's historically
high credit quality profile. At October 31, 2002, 83.9% of the
Fund's holdings were insured and rated AAA by at least one of the
major rating agencies.
Throughout the period, the Fund's borrowing costs remained in the
1% - 1.25% range. These attractive funding levels, in combination
with a steep tax-exempt yield curve, generated a material income
benefit to the Fund's Common Stock shareholders. Further declines in
the Fund's borrowing costs would require significant easing of
monetary policy by the Federal Reserve Board. We expect the Fund's
short-term borrowing costs to stay near current levels for the
remainder of this year and into 2003. However, should the spread
between short-term and long-term interest rates narrow, the benefits
of leverage will decline and, as a result, reduce the yield paid on
the Fund's Common Stock. (For a more complete explanation of the
risks and benefits of leveraging, see page 1 of this report to
shareholders.)
In Conclusion
We appreciate your ongoing interest in MuniYield Michigan Insured
Fund II, Inc., and we look forward to assisting you with your
financial needs in the months and years to come.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Kenneth A. Jacob)
Kenneth A. Jacob
Senior Vice President
(John M. Loffredo)
John M. Loffredo
Senior Vice President
(Fred K. Stuebe)
Fred K. Stuebe
Vice President and Portfolio Manager
November 21, 2002
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face
STATE Ratings+++ Ratings+++ Amount Issue Value
Michigan-- AAA Aaa $1,000 Anchor Bay, Michigan, School District, GO, Refunding (School
140.6% Building and Site), Series III, 5.50% due 5/01/2015 (c) $ 1,110
Anchor Bay, Michigan, School District, GO (School Building
and Site)(d)(f):
AAA Aaa 2,000 Series I, 6% due 5/01/2009 2,325
AAA Aaa 2,250 Series I, 6% due 5/01/2009 2,616
AAA Aaa 1,375 Series II, 5.70% due 5/01/2010 1,578
AAA Aaa 3,165 Series II, 5.75% due 5/01/2010 3,643
AAA Aaa 1,160 Berkley, Michigan, City School District, GO, 5.625% due 5/01/2015 (c) 1,288
AAA Aaa 2,150 Bullock Creek, Michigan, School District, GO, 5.50% due 5/01/2026 2,238
Carman-Ainsworth, Michigan, Community School, GO (d):
AAA Aaa 2,175 5.50% due 5/01/2018 2,359
AAA Aaa 500 5.50% due 5/01/2020 534
AAA Aaa 1,000 Central Montcalm, Michigan, Public Schools, GO, 5.75% due
5/01/2024 (c) 1,077
AAA Aaa 3,850 Charlotte, Michigan, Public School District, GO, 5.375% due
5/01/2029 (d) 3,951
AAA Aaa 1,500 Comstock Park, Michigan, Public Schools, GO, 5.75% due 5/01/2029 (d) 1,617
AAA Aaa 2,500 Dearborn, Michigan, School District, GO, 5% due 5/01/2015 (e) 2,659
BBB Baa2 1,420 Delta County, Michigan, Economic Development Corporation,
Environmental Improvement Revenue Refunding Bonds (Mead
Westvaco--Escanaba), Series A, 6.25% due 4/15/2027 1,409
Detroit, Michigan, City School District, GO, Series A:
AAA Aaa 2,250 5.50% due 5/01/2013 (e) 2,539
AAA Aaa 1,480 (School Building and Site Improvement), 5.375% due 5/01/2024 (d) 1,540
Detroit, Michigan, Sewage Disposal Revenue Bonds, Series A:
AAA Aaa 1,000 5.75% due 1/01/2010 (d)(f) 1,154
AAA Aaa 1,000 5% due 7/01/2027 (c) 998
Detroit, Michigan, Water Supply System Revenue Bonds:
AAA NR* 1,000 DRIVERS, Series 200, 9.31% due 7/01/2028 (d)(g) 1,162
AAA Aaa 3,280 Second Lien, Series A, 5.40% due 7/01/2010 (c) 3,682
AAA Aaa 7,600 Senior Lien, Series A, 5.75% due 1/01/2010 (d)(f) 8,761
BBB Baa2 2,500 Dickinson County, Michigan, Economic Development Corporation,
Environmental Improvement Revenue Refunding Bonds (International
Paper Company Project), Series A, 5.75% due 6/01/2016 2,527
Portfolio
Abbreviations
To simplify the listings of MuniYield Michigan 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
DRIVERS Derivative Inverse Tax-Exempt Receipts
GO General Obligation Bonds
HDA Housing Development Authority
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
MuniYield Michigan Insured Fund II, Inc., October 31, 2002
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
STATE Ratings+++ Ratings+++ Amount Issue Value
Michigan BBB Baa2 $1,500 Dickinson County, Michigan, Economic Development Corporation,
(continued) PCR, Refunding (Champion International Corporation Project),
5.85% due 10/01/2018 $ 1,512
East Grand Rapids, Michigan, Public School District, GO (e)(f):
AAA Aaa 1,610 5.75% due 5/01/2009 1,848
AAA Aaa 6,300 6% due 5/01/2009 7,324
A1+ NR* 1,100 Eastern Michigan University Revenue Refunding Bonds, VRDN, 2%
due 6/01/2027 (a)(d) 1,100
Grand Blanc, Michigan, Community Schools, GO (d):
AAA Aaa 1,000 5.625% due 5/01/2017 1,099
AAA Aaa 1,000 5.625% due 5/01/2018 1,093
AAA Aaa 1,100 5.625% due 5/01/2019 1,195
AAA Aaa 1,600 Grand Ledge, Michigan, Public Schools District, GO, Refunding,
5.375% due 5/01/2024 (c) 1,633
Grand Rapids, Michigan, Building Authority Revenue Bonds,
Series A (b):
AAA Aaa 1,340 5.50% due 10/01/2018 1,457
AAA Aaa 320 5.50% due 10/01/2019 345
AAA Aaa 1,500 Grand Rapids, Michigan, Sanitation Sewer System, Revenue
Refunding and Improvement Bonds, Series A, 5.50% due 1/01/2022 (d) 1,635
Hartland, Michigan, Consolidated School District, GO (d)(f):
AAA Aaa 2,925 6% due 5/01/2010 3,416
AAA Aaa 1,075 6% due 5/01/2010 1,256
AAA Aaa 3,425 6% due 5/01/2010 (j) 4,000
AAA Aaa 1,275 Haslett, Michigan, Public School District, Building and Site,
GO, 5.625% due 5/01/2018 1,393
AAA Aaa 2,000 Howell, Michigan, Public Schools, GO, 5.875% due 5/01/2009 (c)(f) 2,310
AAA Aaa 3,975 Jackson, Michigan, Public Schools, GO, 5.375% due 5/01/2022 (d) 4,115
AAA Aaa 3,750 Kalamazoo, Michigan, Hospital Finance Authority, Hospital Facility
Revenue Refunding and Improvement Bonds (Bronson Methodist Hospital),
5.875% due 5/15/2026 (c) 3,995
NR* Aaa 7,550 Kalamazoo, Michigan, Hospital Finance Authority, Hospital
Facility Revenue Refunding Bonds (Bronson Methodist Hospital),
5.50% due 5/15/2028 (c) 7,786
AAA Aaa 4,600 Kent, Michigan, Hospital Finance Authority, Health Care Revenue
Bonds (Butterworth Health Systems), Series A, 5.625% due
1/15/2006 (c)(f) 5,148
AAA NR* 3,000 Kent, Michigan, Hospital Finance Authority Revenue Bonds
(Spectrum Health), Series A, 5.50% due 1/15/2031 (c) 3,114
BBB NR* 1,000 Michigan Higher Education Facilities Authority, Limited Obligation
Revenue Refunding Bonds (Hope College), Series A, 5.90% due 4/01/2032 1,016
Michigan Higher Education Facilities Authority, Revenue Refunding
Bonds (College for Creative Studies):
NR* Baa2 550 5.85% due 12/01/2022 545
NR* Baa2 1,000 5.90% due 12/01/2027 985
AAA NR* 3,000 Michigan Higher Education Student Loan Authority, Student Loan
Revenue Bonds, AMT, Series XVII-B, 5.40% due 6/01/2018 (b) 3,076
AAA Aa1 2,500 Michigan Municipal Bond Authority, Revenue Refunding Bonds
(Local Government--Qualified School), Series A, 6.50% due 5/01/2016 2,559
Michigan State Building Authority Revenue Bonds:
AAA Aaa 1,185 (Facilities Program), Series II, 4.67%** due 10/15/2009 (b) 913
AAA Aaa 1,675 (Facilities Program), Series II, 4.77%** due 10/15/2010 (b) 1,220
AA+ Aaa 2,675 GO, RIB, Series 481, 8.84% due 4/15/2009 (c)(g) 3,404
NR* Aa1 3,500 Michigan State Building Authority, Revenue Refunding Bonds,
RIB, Series 517X, 8.84% due 10/15/2010 (g) 4,449
Michigan State COP:
AAA Aaa 3,870 5.50% due 6/01/2027 (b) 4,015
AAA NR* 5,380 RIB, Series 530, 9.30% due 9/01/2011 (c)(g) 6,960
AAA Aaa 2,170 Michigan State, HDA, Rental Housing Revenue Bonds, AMT, Series A,
5.30% due 10/01/2037 (c) 2,171
Michigan State, HDA Revenue Refunding Bonds:
AAA Aaa 1,000 AMT, Series B, 5.50% due 6/01/2030 (c) 1,022
AA+ NR* 1,400 Series C, 6.50% due 6/01/2016 (h) 1,472
AAA NR* 1,570 Michigan State, HDA, S/F Housing Revenue Bonds, AMT, Series B,
5.20% due 12/01/2018 (b) 1,592
Michigan State Hospital Finance Authority, Hospital Revenue
Refunding Bonds:
A+ A2 1,300 (Crittenton Hospital), Series A, 5.625% due 3/01/2027 1,300
A A1 1,250 (Sparrow Obligation Group), 5.625% due 11/15/2031 1,253
AAA Aaa 2,000 Michigan State Hospital Finance Authority Revenue Bonds
(Mercy Health Services), Series R, 5.375% due 8/15/2026 (b)(i) 2,070
Michigan State Hospital Finance Authority, Revenue Refunding Bonds:
AAA Aaa 3,760 (Ascension Health Credit), Series A, 6.25% due 11/15/2014 (c) 4,254
AAA Aaa 7,000 (Ascension Health Credit), Series A, 6.125% due 11/15/2023 (c) 7,686
AA Aa2 2,500 (Ascension Health Credit), Series A, 6.125% due 11/15/2026 2,635
AAA Aaa 1,000 (Ascension Health Credit), Series A, 6.125% due 11/15/2026 (c) 1,097
BBB- Baa3 1,200 (Detroit Medical Center Obligaion Group), Series A, 6.25% due
8/15/2013 1,209
AAA Aaa 3,215 (Mercy Health Services), Series X, 6% due 8/15/2014 (c) 3,577
AAA Aaa 1,000 (Mercy Mount Clemens), Series A, 6% due 5/15/2014 (c) 1,109
AAA Aaa 2,000 (Mercy Mount Clemens), Series A, 5.75% due 5/15/2029 (c) 2,109
AAA Aaa 1,250 (Mid-Michigan Obligation Group), Series A, 5.375% due 6/01/2027 (e) 1,277
AAA Aaa 5,500 (Trinity Health), Series A, 6% due 12/01/2027 (b) 6,027
Michigan State Strategic Fund, Limited Obligation Revenue Bonds, AMT:
BBB Ba1 1,000 (WMX Technologies Inc. Project), 6% due 12/01/2013 1,007
BBB Ba1 2,500 (Waste Management Inc. Project), 6.625% due 12/01/2012 2,552
Michigan State Strategic Fund, Limited Obligation, Revenue
Refunding Bonds:
AAA Aaa 8,000 (Detroit Edison Company), AMT, Series A, 5.55% due 9/01/2029 (c) 8,293
AAA Aaa 2,000 (Detroit Edison Company Fund--Pollution), Series AA, 6.95%
due 5/01/2011 (d) 2,475
BBB Baa1 2,200 (Ford Motor Co. Project), Series A, 7.10% due 2/01/2006 2,301
NR* Aaa 5,000 RIB, Series 382, 10.59% due 9/01/2025 (c)(g) 6,204
Michigan State Strategic Fund, PCR, Refunding:
NR* VMIG1++ 3,300 (Consumers Power Project), VRDN, 2% due 4/15/2018 (a)(b) 3,300
BBB A3 2,500 (General Motors Corp.), 6.20% due 9/01/2020 2,556
AAA Aaa 1,500 Milan, Michigan, Area Schools, GO, Series A, 5.75% due
5/01/2010 (d)(f) 1,726
AAA Aaa 6,500 Monroe County, Michigan, Economic Development Corp., Limited
Obligation Revenue Refunding Bonds (Detroit Edison Co. Project),
Series AA, 6.95% due 9/01/2022 (d) 8,259
AAA Aaa 1,410 Morenci, Michigan, Area Schools, GO, 5.25% due 5/01/2021 (c) 1,463
AAA Aaa 2,500 Oxford, Michigan, Area Community School District, GO, 5.40%
due 5/01/2025 (d) 2,564
MuniYield Michigan Insured Fund II, Inc., October 31, 2002
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face
STATE Ratings+++ Ratings+++ Amount Issue Value
Michigan AAA Aaa $1,000 Plainwell, Michigan, Community Schools, School District, GO
(concluded) (School Building and Site), 5.50% due 5/01/2018 (e) $ 1,088
A NR* 1,000 Pontiac, Michigan, Tax Increment Finance Authority, Revenue
Refunding Bonds (Tax Increment--Development Area Number 3),
5.375% due 6/01/2017 1,021
AAA Aaa 1,900 Rochester, Michigan, Community School District, GO, Series II,
5.50% due 5/01/2018 (c) 2,054
AAA Aaa 2,900 Romulus, Michigan, Community Schools, GO, 5.75% due 5/01/2009 (d)(f) 3,329
NR* Aaa 6,500 Saint Clair County, Michigan, Economic Revenue Refunding
Bonds (Detroit Edison Company), RIB, Series 282, 10.87% due
8/01/2024 (b)(g) 8,665
AAA Aaa 2,650 South Lyon, Michigan, Community Schools, GO, Series A, 5.75%
due 5/01/2023 (c) 2,840
AAA Aaa 1,975 Southgate, Michigan, Community School District, GO, Refunding,
4% due 5/01/2011 (c) 2,025
AAA Aaa 1,000 Warren, Michigan, Consolidated School District, GO, 5.375%
due 5/01/2016 (e) 1,086
AAA Aaa 6,500 Wayne Charter County, Michigan, Airport Revenue Bonds (Detroit
Metropolitan Wayne County), AMT, Series A, 5.375% due 12/01/2015 (c) 6,800
AAA Aaa 2,230 Wayne County, Michigan, COP, 5.625% due 5/01/2011 (b) 2,474
Puerto A A1 2,700 Children's Trust Fund, Puerto Rico, Tobacco Settlement Revenue Bonds,
Rico--6.4% 5.625% due 5/15/2043 2,598
AAA Aaa 2,270 Puerto Rico Electric Power Authority, Power Revenue Bonds, Trust
Receipts, Class R, Series 16 HH, 9.308% due 7/01/2013 (e)(g) 3,007
A- Baa1 2,500 Puerto Rico Public Buildings Authority, Government Facilities
Revenue Refunding Bonds, Series C, 5.75% due 7/01/2022 2,746
BBB+ Baa3 2,900 Puerto Rico Public Finance Corporation, Commonwealth Appropriation
Revenue Bonds, Series E, 5.75% due 8/01/2030 3,125
Total Investments (Cost--$242,392)--147.0% 264,101
Variation Margin on Financial Futures Contracts***--0.0% (84)
Other Assets Less Liabilities--2.6% 4,590
Preferred Stock, at Redemption Value--(49.6%) (89,000)
--------
Net Assets Applicable to Common Stock--100.0% $179,607
========
(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, 2002.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)FGIC Insured.
(e)FSA Insured.
(f)Prerefunded.
(g)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at October 31, 2002.
(h)FHA Insured.
(i)Escrowed to maturity.
(j)All or a portion of security held as collateral in connection
with open financial futures contracts.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
***Financial futures contracts sold as of October 31, 2002 were as
follows:
(in Thousands)
Number of Expiration
Contracts Issue Date Value
185 U.S. Treasury Notes December 2002 $ 21,223
---------
Total Financial Futures Contracts Sold
(Total Contract Price--$20,816) $ 21,223
=========
++Highest short-term rating by Moody's Investors Service, Inc.
+++Ratings of issues shown are unaudited.
See Notes to Financial Statements.
STATEMENT OF NET ASSETS
As of October 31, 2002
Assets: Investments, at value (identified cost--$242,391,868) $264,100,938
Cash 33,262
Receivables:
Interest $ 5,008,870
Securities sold 2,428,920 7,437,790
------------
Prepaid expenses 16,071
------------
Total assets 271,588,061
------------
Liabilities: Payables:
Securities purchased 2,519,215
Dividends to Common Stock shareholders 158,620
Investment adviser 118,580
Variation margin 83,828 2,880,243
------------
Accrued expenses and other liabilities 101,013
------------
Total liabilities 2,981,256
------------
Preferred Stock: Preferred Stock, par value $.05 per share (2,200 Series A shares
and 1,360 Series B shares of AMPS* issued and outstanding at $25,000
per share liquidation preference) 89,000,000
------------
Net Assets Net assets applicable to Common Stock $179,606,805
Applicable To ============
Common Stock:
Analysis of Common Stock, par value $.10 per share (12,046,591 shares
Net Assets issued and outstanding) $ 1,204,659
Applicable to Paid-in capital in excess of par 163,993,013
Common Stock: Undistributed investment income--net $ 1,726,522
Accumulated realized capital losses on investments--net (8,619,350)
Unrealized appreciation on investments--net 21,301,961
------------
Total accumulated earnings--net 14,409,133
------------
Total--Equivalent to $14.91 net asset value per share of Common Stock
(market price--$13.45) $179,606,805
============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
MuniYield Michigan Insured Fund II, Inc., October 31, 2002
STATEMENT OF OPERATIONS
For the Year Ended October 31, 2002
Investment Interest $ 11,404,766
Income:
Expenses: Investment advisory fees $ 1,054,867
Commission fees 176,525
Accounting services 91,978
Professional fees 82,182
Transfer agent fees 66,742
Printing and shareholder reports 27,204
Listing fees 20,210
Directors' fees and expenses 16,999
Custodian fees 13,876
Pricing fees 13,605
Other 27,732
------------
Total expenses 1,591,920
------------
Investment income--net 9,812,846
------------
Realized & Realized loss on investments--net (929,471)
Unrealized Change in unrealized appreciation on investments--net 1,530,416
Gain (Loss) on ------------
Investments--Net: Total realized and unrealized gain on investments--net 600,945
------------
Dividends to Investment income--net (939,553)
Preferred Stock ------------
Shareholders: Net Increase in Net Assets Resulting from Operations $ 9,474,238
============
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 2002 2001++
Operations: Investment income--net $ 9,812,846 $ 7,974,332
Realized gain (loss) on investments--net (929,471) 1,668,490
Change in unrealized appreciation/depreciation on investments--net 1,530,416 7,409,558
Dividends to Preferred Stock shareholders (939,553) (1,754,676)
------------ ------------
Net increase in net assets resulting from operations 9,474,238 15,297,704
------------ ------------
Dividends to Investment income--net (8,229,879) (6,268,966)
Common Stock ------------ ------------
Shareholders: Net decrease in net assets resulting from dividends to
Common Stock shareholders (8,229,879) (6,268,966)
------------ ------------
Common Stock Proceeds from issuance of Common Stock resulting from reorganization 59,863,668 --
Transactions: Value of shares issued to Common Stock shareholders in reinvestment
of dividends -- 72,224
------------ ------------
Net increase in net assets derived from Common Stock transactions 59,863,668 72,224
------------ ------------
Net Assets Total increase in net assets applicable to Common Stock 61,108,027 9,100,962
Applicable To Beginning of year 118,498,778 109,397,816
Common Stock: ------------ ------------
End of year* $179,606,805 $118,498,778
============ ============
*Undistributed investment income--net $ 1,726,522 $ 1,029,641
============ ============
++Certain prior year amounts have been reclassified to conform to
current year presentation.
See Notes to Financial Statements.
MuniYield Michigan Insured Fund II, Inc., October 31, 2002
FINANCIAL HIGHLIGHTS
The following per share data and ratios
have been derived from information
provided in the financial statements.
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998
Per Share Net asset value, beginning of year $ 14.97 $ 13.83 $ 13.34 $ 15.85 $ 15.58
Operating --------- --------- --------- --------- ---------
Performance:+++ Investment income--net 1.00 1.00 1.04 1.02 1.12
Realized and unrealized gain (loss)
on investments--net (.07) 1.15 .51 (1.96) .38
Dividends and distributions to
Preferred Stock shareholders:
Investment income--net (.10) (.22) (.29) (.18) (.21)
Realized gain on investments--net -- -- -- (.01) (.05)
In excess of realized gain on
investments--net -- -- -- (.06) --
--------- --------- --------- --------- ---------
Total from investment operations .83 1.93 1.26 (1.19) 1.24
--------- --------- --------- --------- ---------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.89) (.79) (.77) (.88) (.89)
Realized gain on investments--net -- -- -- (.05) (.08)
In excess of realized gain on
investments--net -- -- -- (.39) --
--------- --------- --------- --------- ---------
Total dividends and distributions to
Common Stock shareholders (.89) (.79) (.77) (1.32) (.97)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 14.91 $ 14.97 $ 13.83 $ 13.34 $ 15.85
========= ========= ========= ========= =========
Market price per share, end of year $ 13.45 $ 13.85 $ 11.75 $ 12.25 $ 16.00
========= ========= ========= ========= =========
Total Based on market price per share 3.70% 25.13% 2.47% (16.42%) 12.56%
Investment ========= ========= ========= ========= =========
Return:* Based on net asset value per share 6.36% 14.91% 10.76% (8.12%) 8.25%
========= ========= ========= ========= =========
Ratios Based on Total expenses** 1.12% 1.15% 1.15% 1.12% 1.05%
Average Net ========= ========= ========= ========= =========
Assets of Total investment income--net** 6.91% 6.96% 7.62% 6.96% 7.20%
Common Stock: ========= ========= ========= ========= =========
Amount of dividends to Preferred
Stock shareholders .66% 1.53% 2.12% 1.20% 1.35%
========= ========= ========= ========= =========
Investment income--net, to Common
Stock shareholders 6.25% 5.43% 5.50% 5.76% 5.85%
========= ========= ========= ========= =========
Ratios Based on Total expenses .75% .77% .75% .76% .72%
Average Net Assets ========= ========= ========= ========= =========
of Common & Total investment income--net 4.65% 4.70% 5.02% 4.73% 4.96%
Preferred Stock:** ========= ========= ========= ========= =========
Ratios Based on Dividends to Preferred Stock shareholders 1.36% 3.19% 4.09% 2.55% 2.97%
Average Net ========= ========= ========= ========= =========
Assets of
Preferred Stock:
Supplemental Net assets applicable to Common Stock,
Data: end of year (in thousands) $ 179,607 $ 118,508 $ 109,398 $ 105,574 $ 123,119
========= ========= ========= ========= =========
Preferred Stock outstanding, end of
year (in thousands) $ 89,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000
========= ========= ========= ========= =========
Portfolio turnover 41.77% 72.58% 75.11% 63.64% 40.41%
========= ========= ========= ========= =========
Leverage: Asset coverage per $1,000 $ 3,018 $ 3,155 $ 2,989 $ 2,920 $ 3,239
========= ========= ========= ========= =========
Dividends Per Series A--Investment income--net $ 343 $ 798 $ 1,026 $ 637 $ 742
Share On ========= ========= ========= ========= =========
Preferred Stock Series B--Investment income--net $ 136 -- -- -- --
Outstanding:++ ========= ========= ========= ========= =========
*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 charges.
**Do not reflect the effect of dividends to Preferred Stock
shareholders.
++The Fund's Preferred Stock was issued on April 10, 1992 (Series A)
and May 31, 2002 (Series B).
+++Certain prior year amounts have been reclassified to conform to
current year presentation.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Michigan Insured Fund II, Inc. (the "Fund") (formerly
MuniYield Michigan Fund, Inc.) is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in
conformity with accounting principles generally accepted in the
United States of America, which may require the use of management
accruals and estimates. 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 MYM. 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 price as of the close of such
exchanges. Options written or purchased are valued at the last sale
price in the case of exchange-traded options. In the case of options
traded in the over-counter-market, valuation is the last asked price
(options written) or the last bid price (options purchased).
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 their 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 general supervision of the Board of
Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Losses may arise due to
changes in the value of the contract or if the counterparty does not
perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
MuniYield Michigan Insured Fund II, Inc., October 31, 2002
NOTES TO FINANCIAL STATEMENTS (concluded)
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). Realized gains and losses on security
transactions are determined on the identified cost basis. Interest
income is recognized on the accrual basis. As required, effective
November 1, 2001, the Fund has adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began
amortizing all premiums and discounts on debt securities. The
cumulative effect of this accounting change had no impact on total
net assets of the Fund, but resulted in a $38,617 increase in cost
of securities (which, in turn, results in a corresponding $38,617
decrease in net unrealized appreciation and a corresponding $38,617
increase in undistributed net investment income), based on
securities held by the Fund as of October 31, 2001.
The effect of this change for the year ended October 31, 2002 was to
increase net investment income by $71,508, decrease net unrealized
depreciation by $99,401 and increase net realized capital losses by
$10,724. The statement of changes in net assets and financial
highlights for prior periods have not been restated to reflect this
change in presentation.
(e) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
(f) Change in financial statement classification for Auction Market
Preferred Stock ("AMPS")--In accordance with the provisions of the
Financial Accounting Standards Board's Emerging Issues Task Force
D-98 ("EITF D-98"), "Classification and Measurement of Redeemable
Securities," effective for the current period, the Fund has
reclassified its AMPS outside of permanent equity in the Net Assets
section of the Statement of Net Assets. In addition, dividends to
Preferred Stock shareholders are now classified as a component of
the "Net Increase in Net Assets Resulting from Operations" on the
Statements of Operations and Changes in Net Assets and as a
component of the "Total from investment operations" in the Financial
Highlights. Prior year amounts presented have been reclassified to
conform to this period's presentation. The application of EITF D-98
related entirely to presentation and had no impact on net asset
value or the allocation of net investment income or net realized
capital gains or losses to Common Stock shareholders.
(g) Reclassification--Accounting principles generally accepted in
the United States of America require that certain components of net
assets be adjusted to reflect permanent differences between
financial and tax reporting. Accordingly, the current year's
permanent book/tax differences of $14,849 have been reclassified
between accumulated net realized capital losses and undistributed
net investment income and $12,338 has been reclassified between
accumulated net realized capital losses and paid-in capital in
excess of par. These reclassifications have no effect on net assets
or net asset values 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 .50% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Stock.
For the year ended October 31, 2002, the Fund reimbursed FAM, $8,828
for certain accounting services.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 2002 were $89,843,738 and
$84,484,779, respectively.
Net realized gains (losses) for the year ended October 31, 2002 and
net unrealized gains (losses) as of October 31, 2002 were as
follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 2,250,685 $ 21,709,070
Financial futures contracts (3,180,156) (407,109)
------------- -------------
Total $ (929,471) $ 21,301,961
============= =============
As of October 31, 2002, net unrealized appreciation for Federal
income tax purposes aggregated $21,808,291, of which $21,869,325
related to appreciated securities and $61,034 related to depreciated
securities. The aggregate cost of investments at October 31, 2002
for Federal income tax purposes was $242,292,647.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of 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 stock
without approval of the holders of Common Stock.
Common Stock
Shares issued and outstanding during the year ended October 31, 2002
increased by 4,130,421 as a result of reorganization and for the
year ended October 31, 2001 increased by 4,844 as a result of
dividend reinvestment.
Preferred Stock
AMPS are redeemable shares of Preferred Stock of the Fund, with a
par value of $.05 per share and a liquidation preference of $25,000
per share plus accrued and unpaid dividends, 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, 2002 were 1.60% for Series A and 1.65% for Series B.
Shares issued and outstanding during the year ended October 31, 2002
increased by 1,360 as a result of reorganization and for the year
ended October 31, 2001 remained constant.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from .25% to .375%,
calculated on the proceeds of each auction. For the year ended
October 31, 2002, Merrill Lynch, Pierce Fenner & Smith Incorporated,
an affiliate of FAM, earned $105,304 as commissions.
5. Distributions to Shareholders:
On November 7, 2002, a tax-exempt income dividend of $.074500 was
declared. The dividend was paid on November 27, 2002, to
shareholders of record on November 14, 2002.
The tax character of distributions paid during the fiscal years
ended October 31, 2002 and October 31, 2001 was as follows:
10/31/2002 10/31/2001
Distributions paid from:
Tax-exempt income $ 9,169,432 $ 8,023,642
------------- -------------
Total distributions $ 9,169,432 $ 8,023,642
============= =============
As of October 31, 2002, the components of accumulated earnings on a
tax basis were as follows:
Undistributed tax-exempt income--net $ 1,627,120
Undistributed long-term capital gains--net --
-------------
Total undistributed earnings--net 1,627,120
Capital loss carryforward (6,084,642)*
Unrealized gains--net 18,866,655**
-------------
Total accumulated earnings--net $ 14,409,133
=============
*On October 31, 2002, the Fund had a net capital loss carryforward
of $6,084,642, of which $5,034,389 expires in 2008 and $1,050,253
expires in 2010. This amount will be available to offset like
amounts of any future taxable gains.
**The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the tax deferral of losses on
wash sales, the tax deferral of losses on straddles, the realization
for tax purposes of unrealized gains (losses) on certain futures
contracts and the difference between book and tax amortization
methods for premiums and discounts on fixed income securities.
6. Acquisition of MuniHoldings Michigan Insured Fund II, Inc.:
On June 3, 2002, the Fund acquired all of the net assets of
MuniHoldings Michigan Insured Fund II, Inc. pursuant to a plan of
reorganization. The acquisition was accomplished by a tax-free
exchange of 3,621,776 common shares and 1,360 AMPS shares of
MuniHoldings Michigan Insured Fund II, Inc. for 4,130,421 common
shares and 1,360 AMPS shares of the Fund. MuniHoldings Michigan
Insured Fund II, Inc.'s net assets applicable to Common Stock on
that date of $59,863,668, including $7,285,540 of unrealized
appreciation and $1,159,792 of accumulated net realized capital
losses, were combined with those of the Fund. The aggregate net
assets applicable to Common Stock of the Fund immediately after the
acquisition amounted to $174,595,520. FAM paid all reorganization
costs of $129,870 on behalf of the Fund. In addition, 1,360 AMPS
shares of MuniHoldings Michigan Insured Fund II with a redemption
value of $34,000,000 were combined with the AMPS shares of the Fund.
MuniYield Michigan Insured Fund II, Inc., October 31, 2002
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
MuniYield Michigan Insured Fund II, Inc.:
We have audited the accompanying statement of net assets, including
the schedule of investments, of MuniYield Michigan Insured Fund II,
Inc. (formerly MuniYield Michigan Fund, Inc.) as of October 31,
2002, 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
presented. 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 auditing standards
generally accepted in the United States of America. 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, 2002 by
correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
present fairly, in all material respects, the financial position of
MuniYield Michigan Insured Fund II, Inc. as of October 31, 2002, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
Princeton, New Jersey
December 6, 2002
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniYield
Michigan Insured Fund II, Inc. during the taxable year ended October
31, 2002 qualify as tax-exempt interest dividends for Federal income
tax purposes.
Please retain this information for your records.
QUALITY PROFILE (unaudited)
The quality ratings of securities in the Fund as of October 31, 2002
were as follows:
Percent of
S&P Rating/Moody's Rating Total Investments
AAA/Aaa 83.9%
AA/Aa 3.2
A/A 4.3
BBB/Baa 6.9
Other++ 1.7
++Temporary investments in short-term municipal securities.
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute all or a portion of its
net investment income to its shareholders on a monthly basis. In
order to provide shareholders with a more consistent yield to the
current trading price of shares of Common Stock of the Fund, the
Fund may at times pay out less than the entire amount of net
investment income earned in any particular month and may at times in
any month pay out such accumulated but undistributed income in
addition to net investment income earned in that month. As a result,
the dividends paid by the Fund for any particular month may be more
or less than the amount of net investment income earned by the Fund
during such month. The Fund's current accumulated but undistributed
net investment income, if any, is disclosed in the Statement of Net
Assets, which comprises part of the Financial Information included
in this report.
MuniYield Michigan Insured Fund II, Inc., October 31, 2002
OFFICERS AND DIRECTORS
Number of Other
Portfolios in Director-
Position(s) Length Fund Complex ships
Held of Time Overseen by Held by
Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Terry K. Glenn* President 1999 to Chairman, Americas Region since 2001 and 117 Funds None
P.O. Box 9011 and present Executive Vice President since 1983 of 162 Portfolios
Princeton, Director and Fund Asset Management, L.P. ("FAM") and
NJ 08543-9011 1992 to Merrill Lynch Investment Managers, L.P.
Age: 62 present ("MLIM"); President of Merrill Lynch
Mutual Funds since 1999; President of
FAM Distributors, Inc. ("FAMD") since
1986 and Director thereof since 1991;
Executive Vice President and Director
of Princeton Services, Inc. ("Princeton
Services") since 1993; President of
Princeton Administrators, L.P. since
1988; Director of Financial Data Services,
Inc. since 1985.
*Mr. Glenn is a director, trustee or member of an advisory board of
certain other investment companies for which FAM or MLIM acts as
investment adviser. Mr. Glenn is an "interested person," as
described in the Investment Company Act, of the Fund based on his
positions as Chairman (Americas Region) and Executive Vice President
of FAM and MLIM; President of FAMD; Executive Vice President of
Princeton Services; and President of Princeton Administrators, L.P.
The Director's term is unlimited. Directors serve until their
resignation, removal or death, or until December 31 of the year in
which they turn 72. As Fund President, Mr. Glenn serves at the
pleasure of the Board of Directors.
Number of Other
Portfolios in Director-
Position(s) Length Fund Complex ships
Held of Time Overseen by Held by
Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Director Director
Independent Directors
James H. Bodurtha Director 1995 to Director and Executive Vice President, 42 Funds None
P.O. Box 9011 present The China Business Group, Inc. since 61 Portfolios
Princeton, 1996; Chairman of Berkshire Holding
NJ 08543-9011 Corporation since 1980.
Age: 58
Joe Grills Director 2002 to Member of Committee on Investment of 42 Funds Kimco
P.O. Box 9011 present Employee Benefit Assets of the Association 61 Portfolios Realty
Princeton, for Financial Professionals since 1986.
NJ 08543-9011
Age: 67
Herbert I. London Director 1992 to John M. Olin Professor of Humanities, 42 Funds None
P.O. Box 9011 present New York University since 1993. 61 Portfolios
Princeton,
NJ 08543-9011
Age: 63
Andre F. Perold Director 1992 to George Gund Professor of Finance and 42 Funds None
P.O. Box 9011 present Banking, Harvard Business School since 61 Portfolios
Princeton, 2000; Finance Area Chair since 1996.
NJ 08543-9011
Age: 50
Roberta Cooper Ramo Director 1999 to Shareholder, Modrall, Sperling, Roehl, 42 Funds Cooper's,
P.O. Box 9011 present Harris & Sisk, P.A. since 1993. 61 Portfolios Inc.;
Princeton, ECMC, Inc.
NJ 08543-9011
Age: 60
Robert S. Salomon, Jr. Director 2002 to Principal of STI Management since 1994; 42 Funds None
P.O. Box 9011 present Director of Rye Country Day School since 61 Portfolios
Princeton, 2001.
NJ 08543-9011
Age: 66
Melvin R. Seiden Director 2002 to Director, Silbanc Properties, Ltd. 42 Funds None
P.O. Box 9011 present (real estate, investment and consulting) 61 Portfolios
Princeton, since 1987.
NJ 08543-9011
Age: 72
Stephen B. Swensrud Director 2002 to Chairman, Fernwood Advisors since 1996. 42 Funds International
P.O. Box 9011 present 61 Portfolios Mobile
Princeton, Communi-
NJ 08543-9011 cations,
Age: 69 Inc.
*The Director's term is unlimited. Directors serve until their
resignation, removal or death, or until December 31 of the year in
which they turn 72.
Position(s) Length
Held of Time
Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years
Fund Officers
Donald C. Burke Vice 1993 to First Vice President of FAM and MLIM since 1997 and Treasurer thereof
P.O. Box 9011 President present since 1999; Senior Vice President and Treasurer of Princeton Services
Princeton, and and 1999 since 1999; Vice President of FAMD since 1999; Vice President of FAM
NJ 08543-9011 Treasurer to present and MLIM from 1990 to 1997; Director of Taxation of MLIM since 1990.
Age: 42
Kenneth A. Jacob Senior 2002 to Managing Director of FAM and MLIM since 1997.
P.O. Box 9011 Vice present
Princeton, President
NJ 08543-9011
Age: 51
John M. Loffredo Senior 2002 to Managing Director of FAM and MLIM since 2000 and First Vice President
P.O. Box 9011 Vice present from 1997 to 2000.
Princeton, President
NJ 08543-9011
Age: 38
Fred K. Stuebe Vice 1995 to Vice President of MLIM since 1989.
P.O. Box 9011 President present
Princeton,
NJ 08543-9011
Age: 49
Alice A. Pellegrino Secretary 1999 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM
P.O. Box 9011 present from 1999 to 2002; Attorney associated with MLIM since 1997; Associate
Princeton, with Kirkpatrick & Lockhart LLP from 1992 to 1997.
NJ 08543-9011
Age: 42
*Officers of the Fund serve at the pleasure of the Board of Directors.
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MYM