-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QLpc1zAajETh2huypkVbmE/w9CUTKq9EuzGbZ8l6taDivhukSKHfQv9Ew0lLAVHZ +C/Q0GJFpIPILftYlJwMqw== 0000928816-97-000396.txt : 19971212 0000928816-97-000396.hdr.sgml : 19971212 ACCESSION NUMBER: 0000928816-97-000396 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19971211 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUNIYIELD CALIFORNIA INSURED FUND II INC CENTRAL INDEX KEY: 0000888410 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-06692 FILM NUMBER: 97736379 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092822800 N-30D 1 MUNIYIELD CALIFORNIA INSURED FUND II, INC. MUNIYIELD CALIFORNIA INSURED FUND II, INC. [FUND LOGO] STRATEGIC Performance Annual Report October 31, 1997 Officers and Directors Arthur Zeikel, President and Director James H. Bodurtha, Director Herbert I. London, Director Robert R. Martin, Director Joseph L. May, Director Andre F. Perold, Director Terry K. Glenn, Executive Vice President Vincent R. Giordano, Senior Vice President Donald C. Burke, Vice President Kenneth A. Jacob, Vice President Roberto Roffo, Vice President Gerald M. Richard, Treasurer Philip M. Mandel, Secretary Custodian State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 Transfer Agents Common Stock: State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 Preferred Stock: IBJ Schroder Bank & Trust Company One State Street New York, NY 10004 NYSE Symbol MCA This report, including the financial information herein, is transmitted to the shareholders of MuniYield California Insured Fund II, Inc. for their information. It is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in the report. Past performance results shown in this report should not be considered a representation of future performance. The Fund has leveraged its Common Stock 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 California Insured Fund II, Inc. Box 9011 Princeton, NJ 08543-9011 #16388 -- 10/97 [RECYCLE LOGO] Printed on post-consumer recycled paper MuniYield California Insured Fund II, Inc. TO OUR SHAREHOLDERS For the year ended October 31, 1997, the Common Stock of MuniYield California Insured Fund II, Inc. earned $0.881 per share income dividends, which included earned and unpaid dividends of $0.074. This represents a net annualized yield of 5.61%, based on a month-end per share net asset value of $15.70. Over the same period, the total investment return on the Fund's Common Stock was +10.82%, based on a change in per share net asset value from $15.04 to $15.70, and assuming reinvestment of $0.881 per share income dividends. For the six-month period ended October 31, 1997, the total investment return on the Fund's Common Stock was +9.64%, based on a change in per share net asset value from $14.74 to $15.70, and assuming reinvestment of $0.437 per share income dividends. For the six-month period ended October 31, 1997, the Fund's Auction Market Preferred Stock had an average yield of 3.00% for Series A, 3.43% for Series B and 2.92% for Series C. The Municipal Market Environment Long-term interest rates generally declined during the six-month period ended October 31, 1997. The general financial environment has remained one of solid economic growth tempered by few or no inflationary pressures. While economic growth has been conducive to declining bond yields, it has remained strong enough to suggest that the Federal Reserve Board (FRB) might find it necessary to raise short-term interest rates. This would be intended to slow economic growth and ensure that any incipient inflationary pressures would be curtailed. There were investor concerns that the FRB would be forced to raise interest rates prior to year-end, thus preventing an even more dramatic decline in interest rates. Long-term tax-exempt revenue bonds, as measured by the Bond Buyer Revenue Bond Index, declined over 50 basis points (0.50%) to end the six-month period ended October 31, 1997 at 5.60%. Similarly, long-term US Treasury bond yields generally moved lower during most of the six-month period ended October 31, 1997. However, the turmoil in the world's equity markets during the last week in October has resulted in a significant rally in the Treasury bond market. The US Treasury bond market was the beneficiary of a flight to quality mainly by foreign investors whose own domestic markets have continued to be very volatile. Prior to the initial decline in Asian equity markets, long-term US Treasury bond yields were essentially unchanged. By the end of October, US Treasury bond yields declined 80 basis points to 6.15%, their lowest level of 1997. The tax-exempt bond market's continued underperformance as compared to its taxable counterpart has been largely in response to its ongoing weakening technical position. As municipal bond yields have declined, municipalities have hurriedly rushed to refinance outstanding higher- couponed debt with new issues financed at present low rates. During the last six months, over $118 billion in new long-term tax-exempt issues were underwritten, an increase of over 25% versus the comparable period a year ago. As interest rates have continued to decline, these refinancings have intensified municipal bond issuance. During the past three months, approximately $60 billion in new long- term municipal securities were underwritten, an increase of over 34% as compared to the October 31, 1996 quarter. The recent trend toward larger and larger bond issues has also continued. However, issues of such magnitude usually must be attractively priced to ensure adequate investor interest. Obviously, the yields of other municipal bond issues are impacted by the yield premiums such large issuers have been required to pay. Much of the municipal bond market's recent underperformance can be traced to market pressures that these large bond issuances have exerted. In our opinion, the recent correction in world equity markets has enhanced the near-term prospects for continued low, if not declining, interest rates in the United States. It is likely that the recent correction will result in slower US domestic growth in the coming months. This decline is likely to be generated in part by reduced US export growth. Additionally, some decline in consumer spending also can be expected in response to reduced consumer confidence. Perhaps more importantly, it is likely that barring a dramatic and unexpected resurgence in domestic growth, the FRB may be unwilling to raise interest rates until the full impact of the equity market's corrections can be established. All of these factors suggest that for at least the near term, interest rates, including tax-exempt bond yields, are unlikely to rise by any appreciable amount. It is probable that municipal bond yields will remain under some pressure as a result of continued strong new-issue supply. However, the recent pace of municipal bond issuance is likely to be unsustainable. Continued increases in bond issuance will require lower tax-exempt bond yields to generate the economic savings necessary for additional municipal bond refinancing. With tax-exempt bond yields at already attractive yield ratios relative to US Treasury bonds (approximately 90% at the end of October), any further pressure on the municipal market may represent an attractive investment opportunity. Portfolio Strategy During the 12 months ended October 31, 1997, we managed the Fund with the intention of seeking to sustain a generous level of tax-exempt income in addition to providing an attractive total return. We began the 12-month period optimistic that interest rates would decline in response to the historically attractive 6.75% yield on the US Treasury bond and the correspondingly high yields on municipal bonds. This optimism on interest rates proved correct as interest rates declined about 60 basis points from October 1996 to October 1997. While the overall trend in interest rates was down for the year, market volatility created a narrow trading range in which the Fund was invested. Between October 1996 and December 1996, interest rates declined about 35 basis points in response to the belief that inflation was not a threat. At that time the Fund's aggressive posture, which we adopted when interest rates were higher, was scaled back to a more defensive posture because of our belief that interest rates had declined too rapidly relative to the prevailing economic conditions. This strategy proved correct as interest rates increased about 80 basis points from December 1996 to April 1997 on investors' belief that the economy was expanding at an excessive pace that would cause inflation and ultimately lead to an FRB tightening. At this point, with interest rates at 7.15% for long-term US Treasury bonds, we once again adopted a more aggressive posture because of the excessive backup in municipal yields and our belief that the FRB would not tighten monetary policy since inflation did not appear to be a threat. This strategy benefited Fund performance as interest rates ultimately declined about 100 basis points from April 1997 to the end of October 1997. This interest rate decline was the result of various circumstances, such as low inflation and the volatility created by the Asian stock market and currency crisis. As a result of our strategy, the Fund had a total return above the industry average of similar California-insured municipal bond funds. Given our opinion that interest rates are not in danger of rising substantially -- and that they probably will trade in a narrow range -- we expect to concentrate on seeking to enhance tax-exempt income for our shareholders while trying to limit any volatility in net asset value. In Conclusion We appreciate your ongoing interest in MuniYield California Insured Fund II, Inc., and we look forward to serving your investment needs in the months and years to come. Sincerely, /S/ARTHUR ZEIKEL Arthur Zeikel President /S/VINCENT R. GIORDANO Vincent R. Giordano Senior Vice President /S/ROBERTO ROFFO Roberto Roffo Vice President and Portfolio Manager December 2, 1997
PROXY RESULTS During the six-month period ended October 31, 1997, MuniYield California Insured Fund II, Inc. Common Stock shareholders voted on the following proposals. The proposals were approved at a shareholders' meeting on September 18, 1997. The description of each proposal and number of shares voted are as follows: Shares Shares Withheld Voted For From Voting 1. To elect the Fund's Board of Directors: James H. Bodurtha 17,450,157 316,246 Herbert I. London 17,436,240 330,163 Robert R. Martin 17,450,091 316,312 Arthur Zeikel 17,447,531 318,872 Shares Shares Voted Shares Voted Voted For Against Abstain 2. To ratify the selection of Deloitte & Touche LLP as the Fund's independent auditors for the current fiscal year. 17,362,619 42,928 360,857
During the six-month period ended October 31, 1997, MuniYield California Insured Fund II, Inc. Preferred Stock shareholders (Series A, B and C) voted on the following proposals. The proposals were approved at a shareholders' meeting on September 17, 1997. The description of each proposal and number of shares voted are as follows: Shares Shares Withheld Voted For From Voting 1. To elect the Fund's Board of Directors: James H. Bodurtha, Herbert I. London, Robert R. Martin, Joseph L. May, Andre F. Perold and Arthur Zeikel as follows: Series A 1,798 0 Series B 1,800 0 Series C 1,496 18 Shares Shares Voted Shares Voted Voted For Against Abstain 2. To ratify the selection of Deloitte & Touche LLP as the Fund's independent auditors for the current fiscal year as follows: Series A 1,798 0 0 Series B 1,800 0 0 Series C 1,496 0 18
IMPORTANT TAX INFORMATION All of the net investment income distributions paid by MuniYield California Insured Fund II, Inc. during its taxable year ended October 31, 1997 qualify as tax-exempt interest dividends for Federal income tax purposes. Additionally, the following table summarizes the per share capital gain distributions paid by the Fund during the year: Payable Short-Term Date Capital Gains Common Stock Shareholders 12/30/96 $0.002824 Preferred Stock Shareholders: Series A 12/09/96 $2.86 Series B 11/25/96 $2.78 Please retain this information for your records.
THE BENEFITS AND RISKS OF LEVERAGING MuniYield California 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.
MuniYield California Insured Fund II, Inc. October 31, 1997 SCHEDULE OF INVESTMENTS (in Thousands) S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) California -- 98.3% AAA Aaa $1,985 Arcadia, California, Unified School District, UT, Series B, 6.50% due 7/01/2015 (c) $2,227 AAA Aaa 2,000 Berkeley, California, Unified School District, UT, Series C, 6.50% due 8/01/2019 (b) 2,235 AAA Aaa 1,450 Big Bear Lake, California, Water Revenue Refunding Bonds, 6% due 4/01/2015 (d) 1,596 California HFA, Home Mortgage Revenue Bonds, AMT: AA - Aa 2,265 Refunding, Series H, 7.50% due 8/01/2025 2,471 AAA Aaa 1,500 Series E, 6.15% due 8/01/2025 (d) 1,556 AA - Aa 6,330 Series F-1, 7% due 8/01/2026 6,822 AAA Aaa 5,500 Series I, 5.75% due 2/01/2029 (d) 5,556 AA - Aa 3,950 California HFA, Revenue Bonds, RIB, AMT, 8.945% due 8/01/2023 (e) 4,409 California Health Facilities Financing Authority Revenue Bonds: A1+ VMIG1+ 2,400 (Catholic Healthcare), VRDN, Series D, 3.40% due 7/01/2021 (a)(d) 2,400 AAA Aaa 2,485 (Children's Hospital - San Diego), 7% due 7/01/2000 (d)(i) 2,716 AAA Aaa 1,000 (Kaiser Permanente), Series A, 7% due 10/01/2018 (b) 1,068 AAA Aaa 5,000 Refunding (Catholic Healthcare West), Series A, 5.125% due 7/01/2024 (d) 4,834 AAA Aaa 1,000 (Sutter Health), Series A, 5.125% due 8/15/2017 (h) 988 California Pollution Control Financing Authority, PCR, Refunding (Pacific Gas and Electric Co.), VRDN (a): NR* NR* 1,400 AMT, Series C, 3.65% due 11/01/2026 1,400 A1+ NR* 200 Series A, 3.55% due 12/01/2018 200 A1+ NR* 300 Series C, 3.55% due 11/01/2026 300 A1 VMIG1+ 1,800 California Pollution Control Financing Authority, PCR (Southern California Edison Co.), VRDN, Series B, 3.40% due 2/28/2008 (a) 1,800 NR* P1 3,700 California Pollution Control Financing Authority, Resource Recovery Revenue Bonds (Delano Project), VRDN, AMT, Series 1991, 3.65% due 8/01/2019 (a) 3,700 A A2 4,440 California Pollution Control Financing Authority, Solid Waste Disposal Revenue Bonds, (Keller Canyon Landfill Company Project), AMT, 6.875% due 11/01/2027 4,928 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)(k) 1,085 AAA Aaa 1,935 California State, GO, UT, 7% due 11/01/2004 (c)(i) 2,277 A1+ NR* 2,000 California State, MSTR, VRDN, 3.65% due 8/01/2019 (a) 2,000 California State Public Works Board, Lease Revenue Bonds: A Aaa 2,000 (Department of Corrections - Monterey County, Soledad II), Series A, 7% due 11/01/2004 (i) 2,353 AAA Aaa 2,000 (Department of Corrections - State Prisons), AMT, 6% due 6/01/2007 (h) 2,189 AAA Aaa 5,525 Refunding (Department of Corrections - State Prisons), Series A, 5% due 12/01/2019 (b) 5,381 A Aaa 2,000 (Various Community College Projects), Series B, 7% due 3/01/2004 (i) 2,327 AAA Aaa 2,375 California State University, Housing System Revenue Refunding Bonds, 5.90% due 11/01/2021 (c) 2,496 California Statewide Community Development Authority Revenue Bonds, COP: AAA Aaa 1,000 (Good Samaritan Health System), 6.50% due 5/01/2004 (f)(i) 1,136 AA Aa 2,000 (Saint Joseph Health System Group), 6.625% due 7/01/2004 (i) 2,288 NR* Aa2 300 California Statewide Community Development Authority, Solid Waste Facilities Revenue Bonds (Chevron U.S.A. Inc. Project), VRDN, AMT, 3.60% due 12/15/2024 (a) 300 AAA Aaa 1,000 California Statewide Community Development Corporation, COP (Devereux Foundation Obligation Group), 5.25% due 11/01/2019 (d) 986 AAA Aaa 2,270 Center Unified School District, California, Refunding, UT, Series C, 5.55%** due 9/01/2015 (d) 882 Central Coast Water Authority, California, Revenue Bonds (State Water Project Regional Facilities) (b)(i): AAA Aaa 2,385 6.50% due 10/01/2002 2,671 AAA Aaa 9,500 6.60% due 10/01/2002 10,680 AAA Aaa 7,990 Compton, California, Community Redevelopment Agency, Tax Allocation Refunding Bonds (Compton Redevelopment Project), Series A, 6.50% due 8/01/2013 (h) 9,015 AAA Aaa 2,000 Contra Costa, California, Water District Revenue Bonds, Series G, 5.75% due 10/01/2014 (d) 2,092 AAA Aaa 4,000 Cucamonga County, California, Water District Facilities Refinancing Bonds, COP, 6.50% due 9/01/2022 (c) 4,344 AAA Aaa 1,375 East Bay, California, Municipal Utility District, Water System Subordinated Revenue Refunding Bonds, 5% due 6/01/2026 (c) 1,317 AAA Aaa 6,000 El Cajon, California, Redevelopment Agency, Tax Allocation Bonds (El Cajon Redevelopment Project), 6.60% due 10/01/2001 (b)(i) 6,647 AAA Aaa 3,125 Elk Grove, California, Unified School District, Special Tax Community Facilities District No. 1, 7% due 12/01/2003 (b)(i) 3,633 AAA Aaa 1,000 Fairfield - Suisun, California, Sewer District Revenue Refunding Bonds, Series A, 6.25% due 5/01/2016 (d) 1,074 AAA Aaa 2,500 Fresno, California, Sewer Revenue Bonds, Series A-1, 5.25% due 9/01/2019 (b) 2,516 AAA Aaa 1,500 Long Beach California, Water Revenue Refunding Bonds, Series A, 5% due 5/01/2024 (d) 1,438 AAA Aaa 3,750 Los Angeles, California, Community College District, COP, Refunding, Series A, 6% due 8/15/2020 (h) 3,926 Los Angeles, California, Community Redevelopment Agency, Tax Allocation Refunding Bonds (Bunker Hill), Series H (h): AAA Aaa 1,500 6.50% due 12/01/2015 1,672 AAA Aaa 3,500 6.50% due 12/01/2016 3,902 AAA Aaa 10,000 Los Angeles, California, Convention and Exhibition Center Authority, Lease Revenue Refunding Bonds, Series A, 5.125% due 8/15/2021 (d) 9,659 AAA Aaa 2,500 Los Angeles, California, Department Airports Revenue Bonds (Ontario International Airport), AMT, Series A, 6% due 5/15/2017 (c) 2,612 Los Angeles, California, Harbor Department Revenue Bonds, AMT (d): AAA Aaa 7,000 RITR, Series 7, 8.395% due 11/01/2026 (e) 8,531 AAA Aaa 5,000 Series B, 6.625% due 8/01/2025 5,441 Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax Revenue Bonds (Proposition C): A1+ VMIG1+ 2,800 Refunding, VRDN, Second Senior Series A, 3.35% due 7/01/2020 (a)(d) 2,800 AAA Aaa 10,150 Second Series A, 5% due 7/01/2025 (b) 9,611 AAA Aaa 3,000 Los Angeles County, California, Transportation Commission, Sales Tax Revenue Bonds, Series A, 6.75% due 7/01/2001 (c)(i) 3,323 M-S-R Public Power Agency, California, Revenue Bonds (San Juan Project) (d): AAA Aaa 1,500 Refunding, 6.75% due 7/01/2020 (l) 1,801 AAA Aaa 3,000 Refunding, Series H, 5.90% due 7/01/2020 3,012 AAA Aaa 2,000 Series E, 6.75% due 7/01/2011 2,191 AAA Aaa 1,000 Series E, 6.50% due 7/01/2017 1,087 AAA Aaa 4,250 Marysville, California, Hospital Revenue Bonds (Fremont - Rideout Health Group), Series A, 6.30% due 1/01/2022 (b) 4,570 AAA Aaa 1,740 Modesto, California, Health Facilities Revenue Bonds (Memorial Hospital Association), Series A, 6.875% due 6/01/2001 (d)(i) 1,931 AAA Aaa 3,850 Mountain View, California, Capital Improvements Financing Authority Revenue Bonds (City Hall Community Theatre), 6.50% due 8/01/2016 (d) 4,190 Mountain View - Los Altos, California, Unified High School District, UT: AA Aa3 3,000 Series B, 6.50% due 5/01/2017 3,370 AAA Aaa 1,015 Series C, 6.05%** due 5/01/2017 (d) 359 AAA Aaa 1,080 Series C, 6.05%** due 5/01/2018 (d) 361 AAA Aaa 1,045 Series C, 6.05%** due 5/01/2019 (d) 331 Northern California Power Agency, Multiple Capital Facilities Revenue Bonds (d): AAA Aaa 2,500 RIB, 9.045% due 9/02/2025 (e) 2,984 AAA Aaa 2,000 Series A, 6.50% due 8/01/2012 2,202 AAA Aaa 2,000 Northern California Transmission Revenue Bonds (California - Oregon Transmission Project), Series A, 6.50% due 5/01/2016 (d) 2,195 AAA Aaa 1,000 Oakland, California, Redevelopment Agency, Refunding, INFLOS, 8.116% due 9/01/2019 (d)(e) 1,089 AAA Aaa 2,750 Oceanside, California, COP (Watereuse Association Financing Program), Series A, 6.50% due 10/01/2017 (b) 3,016 AAA Aaa 2,360 Orchard, California, School District, GO, UT, Series A, 6.50% due 8/01/2019 (c) 2,650 A+ A1 2,000 Pasadena, California, COP, Refunding (Old Pasadena Package Facility Project), 6.25% due 1/01/2018 2,233 AAA Aaa 7,500 Pioneers Memorial Hospital District, California, Refunding, GO, UT, 6.50% due 10/01/2024 (b) 8,374 AAA Aaa 8,000 Port Oakland, California, Port Revenue Bonds, AMT, Series E, 6.50% due 11/01/2016 (d) 8,721 AAA Aaa 1,000 Rancho Cucamonga, California, Redevelopment Agency, Tax Allocation Bonds (Rancho Redevelopment Project), 5.25% due 9/01/2026 (d) 984 Riverside County, California, Asset Leasing Corporation, Leasehold Revenue Bonds (Riverside County Hospital Project), Series B (d): AAA Aaa 4,500 5.70% due 6/01/2016 4,731 AAA Aaa 3,000 5% due 6/01/2019 2,866 AAA Aaa 4,335 Riverside County, California, COP (Lease Refunding Project), Series 1997, 5.125% due 11/01/2021 (d) 4,215 BBB - Baa2 4,905 Riverside County, California, Public Financing Authority, Tax Allocation Revenue Bonds (Redevelopment Projects), Series A, 5.625% due 10/01/2033 4,907 AAA Aaa 2,400 Riverside County, California, Transportation Commission Sales Tax Revenue Bonds, Series A, 6.50% due 6/01/2001 (b)(i) 2,634 Sacramento, California, City Financing Authority, Lease Revenue Refunding Bonds: AAA Aaa 10,500 Series A, 5.40% due 11/01/2020 (b) 10,756 A+ A1 4,100 Series B, 5.40% due 11/01/2020 4,171 Sacramento, California, Municipal Utility District, Electric Revenue Bonds: AAA Aaa 11,000 Series B, 6.375% due 8/15/2002 (d)(i) 12,233 AAA Aaa 7,500 Series K, 5.25% due 7/01/2024 (b) 7,521 AAA Aaa 1,000 Sacramento County, California, COP, 6.50% due 6/01/2000 (d)(i) 1,080 San Diego, California, IDR, RITR (e): AAA Aaa 3,000 8.185% due 9/01/2018 3,405 AAA Aaa 2,900 8.185% due 9/01/2019 3,291 AAA Aaa 5,000 San Diego, California, IDR, Refunding (San Diego Gas & Electric Co.), Series C, 5.90% due 9/01/2018 (h) 5,216 San Diego, California, Public Facilities Financing Authority, Sewer Revenue Bonds (c): AAA Aaa 4,000 5% due 5/15/2020 3,843 AAA Aaa 12,500 5% due 5/15/2025 11,960 San Francisco, California, City and County Airport Commission, International Airport Revenue Bonds, Second Series: AAA Aaa 3,500 AMT, Issue 5, 6.50% due 5/01/2019 (c) 3,819 AAA Aaa 3,000 AMT, Issue 6, 6.50% due 5/01/2018 (b) 3,273 AAA Aaa 2,000 AMT, Issue 6, 6.60% due 5/01/2020 (b) 2,194 AAA Aaa 4,335 Refunding, Issue 1, 6.30% due 5/01/2011 (b) 4,723 AAA Aaa 4,000 Refunding, Issue 1, 6.50% due 5/01/2013 (b) 4,390 AAA Aaa 10,000 Refunding, Issue 2, 6.75% due 5/01/2020 (d) 11,190 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 3,175 AAA Aaa 3,050 6.75% due 7/01/2024 3,458 AAA Aaa 5,000 San Jose, California, Redevelopment Agency, Tax Allocation Bonds, AMT, Series E, 5.85% due 8/01/2027 (d) 5,167 AAA Aaa 4,720 San Mateo, California, Foster City School District, UT, 5% due 8/01/2027 (d) 4,516 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) 2,427 AAA Aaa 1,600 San Mateo County, California, Transportation District, Sales Tax Revenue Refunding Bonds, Series A, 5.25% due 6/01/2019 (d) 1,610 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) 3,945 Santa Clara County, California, Financing Authority, Lease Revenue Bonds (VMC Facility Replacement Project), Series A (b): AAA Aaa 1,700 6.75% due 11/15/2004 (i) 1,976 AAA Aaa 10,770 6.875% due 11/15/2004 (i) 12,598 AAA Aaa 2,500 7.75% due 11/15/2011 3,214 AAA Aaa 3,500 Santa Clara County, California, Financing Authority, Lease Revenue Refunding Bonds, Series A, 5% due 11/15/2022 (b) 3,360 AAA Aaa 3,000 Santa Rosa, California, Wastewater Revenue Bonds (Subregional Wastewater Project), Series A, 6.50% due 9/01/2002 (c)(i) 3,343 AAA NR* 3,265 Southern California, HFA, S/F Mortgage Revenue Bonds Program, AMT, Series B, 6.90% due 10/01/2024 (g) 3,446 BBB+ NR* 1,225 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste Facility Revenue Refunding Bonds (Ogden Martin System Inc. Project), 7.625% due 1/01/2010 1,313 AAA Aaa 3,500 Stockton, California, Revenue Bonds, COP (Wastewater Treatment Plant Expansion), Series A, 6.70% due 9/01/2014 (c) 3,932 AAA Aaa 2,000 University of California Revenue Bonds (Multiple Purpose Projects), Series D, 6.375% due 9/01/2024 (d) 2,181 AAA Aaa 1,500 Vacaville, California, Public Financing Authority, Tax Allocation Revenue Refunding Bonds (Vacaville Redevelopment Projects), 6.35% due 9/01/2022 (d) 1,603 AAA Aaa 1,500 Walnut, California, Public Financing Authority, Tax Allocation Revenue Refunding Bonds (Walnut Improvement Project), 6.50% due 9/01/2022 (d) 1,654 Puerto Rico -- 0.4% A1+ VMIG1+ 1,600 Puerto Rico Commonwealth, Government Development Bank, Refunding, VRDN, 3.35% due 12/01/2015 (a) 1,600 --------- Total Investments (Cost -- $382,053) -- 98.7% 408,397 Other Assets Less Liabilities -- 1.3% 5,264 --------- Net Assets -- 100.0% $413,661 ========= (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, 1997. (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, 1997. (f) CAPMAC Insured. (g) GNMA/FNMA Collateralized. (h) FSA Insured. (i) Prerefunded. (j) GNMA Collateralized. (k) FHLMC Collateralized. (l) Escrowed to maturity. * Not Rated. ** Represents a zero coupon bond; the interest rate shown is the effective yield at the time of purchase by the Fund. + Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. 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 GO General Obligation Bonds HFA Housing Finance Agency IDR Industrial Development Revenue Bonds INFLOS Inverse Floating Rate Municipal Bonds MSTR Municipal Trust Receipts PCR Pollution Control Revenue Bonds RIB Residual Interest Bonds RITR Residual Interest Trust Receipts S/F Single-Family UT Unlimited Tax VRDN Variable Rate Demand Notes See Notes to Financial Statements.
FINANCIAL INFORMATION Statement of Assets, Liabilities and Capital as of October 31, 1997 Assets: Investments, at value (identified cost -- $382,052,775) (Note 1a) $408,397,247 Cash 88,239 Receivables: Interest $7,324,389 Securities sold 973,561 8,297,950 ------------- Prepaid expenses and other assets 11,362 ------------- Total assets 416,794,798 ------------- Liabilities: Payables: Securities purchased 2,512,327 Dividends to shareholders (Note 1f) 294,960 Investment adviser (Note 2) 185,742 2,993,029 ------------- Accrued expenses and other liabilities 140,958 ------------- Total liabilities 3,133,987 ------------- Net Assets: Net assets $413,660,811 ============= Capital: Capital Stock (200,000,000 shares authorized) (Note 4): Preferred Stock, par value $.05 per share (5,200 shares of AMPS* issued and outstanding at $25,000 per share liquidation preference) $130,000,000 Common Stock, par value $.10 per share (18,067,037 shares issued and outstanding) $1,806,704 Paid-in capital in excess of par 259,273,946 Undistributed investment income -- net 2,122,111 Accumulated realized capital losses on investments -- net (Note 5) (5,886,422) Unrealized appreciation on investments -- net 26,344,472 ------------- Total -- Equivalent to $15.70 net asset value per share of Common Stock (market price -- $15.0625) 283,660,811 ------------- Total capital $413,660,811 ============= * Auction Market Preferred Stock. See Notes to Financial Statements.
Statement of Operations For the Year Ended October 31, 1997 Investment Income Interest and amortization of premium and discount earned $21,162,477 (Note 1d): Expenses: Investment advisory fees (Note 2) $1,886,424 Commission fees (Note 4) 305,582 Professional fees 91,650 Transfer agent fees 81,307 Accounting services (Note 2) 61,237 Directors' fees and expenses 21,145 Printing and shareholder reports 19,055 Custodian fees 16,531 Pricing fees 15,997 Listing fees 13,591 Amortization of organization expenses (Note 1e) 7,614 Other 20,944 ------------ Total expenses 2,541,077 ------------ Investment income -- net 18,621,400 ------------ Realized & Realized gain on investments 6,072,724 Unrealized Gain on Change in unrealized appreciation on investments -- net 7,145,659 Investments -- Net ------------ (Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $31,839,783 ============ See Notes to Financial Statements.
Statements of Changes in Net Assets For the Year Ended October 31, Increase (Decrease) in Net Assets: 1997 1996 Operations: Investment income -- net $18,621,400 $13,969,783 Realized gain on investments -- net 6,072,724 1,250,414 Change in unrealized appreciation on investments -- net 7,145,659 446,717 ------------- ------------- Net increase in net assets resulting from operations 31,839,783 15,666,914 ------------- ------------- Dividends & Investment income -- net: Distributions to Common Stock (14,322,833) (11,051,597) Shareholders Preferred Stock (3,853,552) (3,085,704) (Note 1f): Realized gain on investments -- net: Common Stock (35,804) -- Preferred Stock (10,152) -- ------------- ------------- Net decrease in net assets resulting from dividends and distributions to shareholders (18,222,341) (14,137,301) ------------- ------------- Capital Stock Proceeds from issuance of Preferred Stock resulting from reorganization 40,000,000 -- Transactions Proceeds from issuance of Common Stock resulting from reorganization 79,644,600 -- (Notes 1e & 4): Offering costs from issuance of Common Stock resulting from reorganization (254,371) -- ------------- ------------- Net increase in net assets derived from capital stock transactions 119,390,229 -- ------------- ------------- Net Assets: Total increase in net assets 133,007,671 1,529,613 Beginning of year 280,653,140 279,123,527 ------------- ------------- End of year* $413,660,811 $280,653,140 ============= ============= * Undistributed investment income -- net (Note 1g) $2,122,111 $1,670,769 ============= ============= See Notes to Financial Statements.
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, 1997 1996 1995 1994 1993 Increase (Decrease) in Net Asset Value: Per Share Net asset value, beginning of year $15.04 $14.92 $13.39 $16.36 $14.15 Operating --------- --------- --------- --------- --------- Performance: Investment income -- net 1.10 1.10 1.13 1.17 1.12 Realized and unrealized gain (loss) on investments -- net .68 .13 1.61 (2.90) 2.27 --------- --------- --------- --------- --------- Total from investment operations 1.78 1.23 2.74 (1.73) 3.39 --------- --------- --------- --------- --------- Less dividends and distributions to Common Stock shareholders: Investment income -- net (.88) (.87) (.87) (.92) (.84) Realized gain on investments -- net --+ -- (.07) (.11) -- --------- --------- --------- --------- --------- Total dividends and distributions to Common Stock shareholders (.88) (.87) (.94) (1.03) (.84) --------- --------- --------- --------- --------- Capital charge resulting from issuance of Common Stock (.01) -- -- -- -- --------- --------- --------- --------- --------- Effect of Preferred Stock activity:++ Dividends and distributions to Preferred Stock shareholders: Investment income -- net (.23) (.24) (.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 (.23) (.24) (.27) (.21) (.34) --------- --------- --------- --------- --------- Net asset value, end of year $15.70 $15.04 $14.92 $13.39 $16.36 ========= ========= ========= ========= ========= Market price per share, end of year $15.0625 $14.125 $13.125 $11.875 $15.375 ========= ========= ========= ========= ========= Total Investment Based on market price per share 13.20% 14.52% 19.00% (16.79%) 8.24% Return:* ========= ========= ========= ========= ========= Based on net asset value per share 10.82% 7.26% 19.97% (11.82%) 22.09% ========= ========= ========= ========= ========= Ratios to Average Expenses, net of reimbursement .68% .69% .71% .70% .56% Net Assets:** ========= ========= ========= ========= ========= Expenses .68% .69% .71% .70% .68% ========= ========= ========= ========= ========= Investment income -- net 4.97% 4.99% 5.42% 5.28% 5.17% ========= ========= ========= ========= ========= Supplemental Net assets, net of Preferred Stock, Data: end of year (in thousands) $283,661 $190,653 $189,124 $169,757 $207,404 ========= ========= ========= ========= ========= Preferred Stock outstanding, end of year (in thousands) $130,000 $90,000 $90,000 $90,000 $90,000 ========= ========= ========= ========= ========= Portfolio turnover 85.35% 119.52% 114.78% 41.67% 15.85% ========= ========= ========= ========= ========= Leverage: Asset coverage per $1,000 $3,182 $3,118 $3,101 $2,886 $3,304 ========= ========= ========= ========= ========= Dividends Per Share Series A -- Investment income -- net $809 $870 $948 $636 $743 On Preferred Stock ========= ========= ========= ========= ========= Outstanding:+++ Series B -- Investment income -- net $821 $844 $904 $687 $685 ========= ========= ========= ========= ========= Series C -- Investment income -- net $574 -- -- -- -- ========= ========= ========= ========= ========= * 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. + Amount is less than $.01 per share. ++ The Fund's Preferred Stock was issued on November 30, 1992 (Series A and B) and January 27, 1997 (Series C). +++ Dividends per share have been adjusted to reflect a two-for-one stock split that occurred on December 1, 1994. See Notes to Financial Statements.
MuniYield California Insured Fund II, Inc. October 31, 1997 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. [bullet] 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. [bullet] 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 costs -- Deferred organization expenses are amortized on a straight-line basis over a five-year period. Direct expenses relating to the issuance of Common Stock resulting from the reorganization were charged to capital. (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 components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, current year's permanent book/tax differences of $30,568 have been reclassified between accumulated net realized capital losses and paid-in capital in excess of par and $6,327 have been reclassified between undistributed net investment income and accumulated net realized capital losses. 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, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended October 31, 1997 were $299,956,332 and $320,053,765, respectively. Net realized and unrealized gains (losses) as of October 31, 1997 were as follows: Realized Unrealized Gains (Losses) Gains Long-term investments $6,817,559 $26,344,472 Short-term investments (1,172) -- Financial futures contracts (743,663) -- ----------- ----------- Total $6,072,724 $26,344,472 =========== =========== As of October 31, 1997, net unrealized appreciation for Federal income tax purposes aggregated $26,344,472, of which $26,396,758 related to appreciated securities and $52,286 related to depreciated securities. The aggregate cost of investments at October 31, 1997 for Federal income tax purposes was $382,052,775. 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 Shares issued and outstanding during the year ended October 31, 1997 increased by 5,388,404 pursuant to a plan of reorganization and during the year ended October 31, 1996 remained constant. 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, 1997 were as follows: Series A, 3.24%; Series B, 3.26%; and Series C, 3.50%. In addition, 1,600 Series C AMPS shares were issued pursuant to a plan of reorganization. As a result, as of October 31, 1997, there were 5,200 shares authorized, issued and outstanding, with a liquidation preference of $25,000 per share. The Fund pays commissions to certain broker-dealers at the end of each auction at an annual rate ranging from 0.25% to 0.375%, calculated on the proceeds of each auction. For the year ended October 31, 1997, Merrill Lynch, Pierce, Fenner & Smith Inc., an affiliate of FAM, earned $184,482 as commissions. 5. Capital Loss Carryforward: At October 31, 1997, the Fund had a net capital loss carryforward of approximately $1,680,000, all of which expires in 2002. This amount will be available to offset like amounts of any future taxable gains. 6. Acquisition of MuniVest California Insured Fund, Inc.: On January 27, 1997, MuniYield California Insured Fund II, Inc. acquired all the net assets of MuniVest California Insured Fund, Inc. pursuant to a plan of reorganization. The acquisition was accomplished by a tax-free exchange of 5,388,404 Common Stock shares and 1,600 AMPS shares of MuniYield California Insured Fund II, Inc. for 5,961,365 Common Stock shares and 1,600 AMPS shares outstanding of MuniVest California Insured Fund, Inc. MuniVest California Insured Fund, Inc.'s net assets on that date of $119,644,600, including $4,532,559 of unrealized appreciation and $8,480,527 of accumulated net realized capital losses, were combined with those of MuniYield California Insured Fund II, Inc. The aggregate net assets of MuniYield California Insured Fund II, Inc. immediately after the acquisition amounted to $397,041,763. 7. Subsequent Event: On November 6, 1997, the Fund's Board of Directors declared an ordinary income dividend to Common Stock shareholders in the amount of $.073943 per share, payable on November 26, 1997 to shareholders of record as of November 17, 1997. 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, 1997, 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 five-year period then ended. 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, 1997 by correspondence with the custodian and broker. 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, 1997, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey December 3, 1997 -----END PRIVACY-ENHANCED MESSAGE-----