As filed with the Securities and Exchange Commission on January 17, 2002
Securities Act File No. 333-
Investment Company Act File No. 811-06501
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------
/_/ PRE-EFFECTIVE AMENDMENT NO.
/_/ POST-EFFECTIVE AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
---------
MUNIYIELD MICHIGAN FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------
(609) 282-2800
(AREA CODE AND TELEPHONE NUMBER)
---------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
NUMBER, STREET, CITY, STATE, ZIP CODE)
---------
TERRY K. GLENN
MUNIYIELD MICHIGAN FUND, INC.
800 SCUDDERS MILL ROAD,
PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------
Copies To:
FRANK P. BRUNO, ESQ. PHILIP L. KIRSTEIN, ESQ.
SIDLEY AUSTIN BROWN & WOOD LLP FUND ASSET MANAGEMENT, L.P.
875 THIRD AVENUE 800 SCUDDERS MILL ROAD
NEW YORK, NY 10022-6225 PLAINSBORO, NJ 08536
---------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable
after the Registration Statement becomes effective under the Securities Act of
1933.
---------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Amount of
Amount Being Offering Price Aggregate Registration
Title of Securities Being Registered Registered(1) Per Unit(1) Offering Price(1) Fee(3)
------------------------------------------------------------------------------------------------------------------------------
Common Stock ($.10 par value)..................... 4,971,232 $14.64 $72,778,836 $17,394
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Auction Market Preferred Stock, Series B.......... 1,360 $25,000(2) $34,000,000 $8,126
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(1) Estimated solely for the purpose of calculating the filing fee.
(2) Represents the liquidation preference of a share of auction market preferred stock.
(3) Paid by wire transfer to the designated lockbox of the Securities and Exchange Commission in Pittsburgh,
Pennsylvania.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
MUNIYIELD MICHIGAN FUND, INC.
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS OF
MUNIYIELD MICHIGAN FUND, INC.
---------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
---------
TO BE HELD ON APRIL 8, 2002
TO THE HOLDERS OF COMMON STOCK AND AUCTION MARKET PREFERRED STOCK OF
MUNIYIELD MICHIGAN FUND, INC. AND
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
MuniHoldings Michigan Insured Fund II, Inc. ("MuniHoldings Michigan"), a
Maryland corporation, and an annual meeting of stockholders of MuniYield
Michigan Fund, Inc. ("MuniYield Michigan"), a Maryland corporation, (each, a
"Meeting" and together, the "Meetings") will be held at the offices of Fund
Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey on
Monday, April 8, 2002 at 9:00 a.m. Eastern time (for MuniHoldings Michigan)
and 9:30 a.m. Eastern time (for MuniYield Michigan) for the following
purposes:
For the stockholders of both Funds:
(1) To approve or disapprove an Agreement and Plan of Reorganization
(the "Agreement and Plan") contemplating (i) the acquisition by MuniYield
Michigan of substantially all of the assets, and the assumption by
MuniYield Michigan of substantially all of the liabilities of
MuniHoldings Michigan, in exchange solely for (A) newly issued shares of
common stock of MuniYield Michigan (the "MuniYield Michigan Common
Stock"), and (B) shares of a newly created series of Auction Market
Preferred Stock ("AMPS") of MuniYield Michigan, to be designated Series B
(the "MuniYield Michigan Series B AMPS"); (ii) the subsequent
distribution by MuniHoldings Michigan, on a proportionate basis, of (A)
shares of MuniYield Michigan Common Stock to the holders of common stock
of MuniHoldings Michigan (the "MuniHoldings Michigan Common Stock") and
(B) shares of MuniYield Michigan Series B AMPS to the holders of AMPS,
designated Series A, of MuniHoldings Michigan (the "MuniHoldings Michigan
AMPS"); (iii) the amendment of the investment policies of MuniYield
Michigan, so that under normal conditions, at least 80% of its net assets
will be invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the timely
payment of principal at maturity and interest when due; and (iv) a change
in the name of MuniYield Michigan to MuniYield Michigan Insured Fund II,
Inc. A vote in favor of this proposal also will constitute a vote in
favor of the liquidation and dissolution of MuniHoldings Michigan under
the laws of the State of Maryland and the termination of the registration
of MuniHoldings Michigan under the Investment Company Act of 1940, as
amended;
For the stockholders of MuniYield Michigan only:
(2) To elect a Board of Directors of MuniYield Michigan to serve
until their successors have been duly elected and qualified or until
their earlier resignation or removal; and
For the stockholders of both Funds:
(3) To transact such other business as properly may come before a
Meeting or any adjournment thereof.
This Notice of the Meetings and the enclosed Joint Proxy Statement and
Prospectus are being sent to the holders of MuniYield Michigan Common Stock,
the holders of AMPS of MuniYield Michigan, designated Series A, the holders of
MuniHoldings Michigan Common Stock and the holders of MuniHoldings Michigan
AMPS.
The Boards of Directors of MuniYield Michigan and MuniHoldings Michigan
have fixed the close of business on February 11, 2002 as the record date for
the determination of the stockholders entitled to notice of, and to vote at,
the Meetings or any adjournment thereof.
A complete list of the stockholders of MuniYield Michigan and
MuniHoldings Michigan entitled to vote at the Meetings will be available and
open to the examination of any stockholder of MuniYield Michigan or
MuniHoldings Michigan, respectively, for any purpose germane to the Meetings
during ordinary business hours from and after March 25, 2002, at the offices
of MuniYield Michigan, 800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meetings. Stockholders who do not
expect to attend the Meetings in person are requested to complete, date and
sign the enclosed form of proxy applicable to their Fund and return it
promptly in the envelope provided for that purpose. If you have been provided
with the opportunity on your proxy card or voting instruction form to provide
instructions via telephone or the Internet, please take advantage of these
prompt and efficient voting options. The enclosed proxy is being solicited on
behalf of the Board of Directors of MuniYield Michigan or MuniHoldings
Michigan, as applicable.
If you have any questions regarding the enclosed proxy material, or need
assistance in voting your common stock or AMPS, please contact our proxy
solicitor, Georgeson Shareholder, at [1-800-___________].
By Order of the Boards of Directors
ALICE A. PELLEGRINO
Secretary
MuniYield Michigan Fund, Inc.
MuniHoldings Michigan Insured Fund II, Inc.
Plainsboro, New Jersey
Dated: February __, 2002
3
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY JOINT PROXY STATEMENT AND PROSPECTUS
DATED JANUARY 17, 2002
---------
JOINT PROXY STATEMENT AND PROSPECTUS
MUNIYIELD MICHIGAN FUND, INC.
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
---------
ANNUAL MEETING OF STOCKHOLDERS OF MUNIYIELD MICHIGAN FUND, INC.
---------
SPECIAL MEETING OF STOCKHOLDERS OF
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
---------
TO BE HELD ON APRIL 8, 2002
---------
This Joint Proxy Statement and Prospectus is furnished to you because you
are a stockholder of one or both of the funds listed above. An annual meeting
of stockholders of MuniYield Michigan Fund, Inc. ("MuniYield Michigan") and a
special meeting of stockholders of MuniHoldings Michigan Insured Fund II, Inc.
("MuniHoldings Michigan") will be held on Monday, April 8, 2002 (each, a
"Meeting" and together, the "Meetings") to consider the items listed below and
discussed in greater detail elsewhere in this Joint Proxy Statement and
Prospectus. The Board of Directors of each fund is requesting its stockholders
to submit a proxy to be used at the applicable Meeting to vote the shares held
by the stockholder submitting such proxy.
The proposals to be considered at the Meetings are:
For stockholders of MuniYield Michigan and MuniHoldings Michigan:
1. To approve or disapprove an Agreement and Plan of Reorganization
between the funds;
For stockholders of MuniYield Michigan only:
2. The election of the Board of Directors of MuniYield Michigan; and
For stockholders of both MuniYield Michigan and MuniHoldings Michigan:
3. To transact such other business as may properly come before any
Meeting or any adjournment thereof.
(continued on next page)
---------
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this Joint Proxy Statement and
Prospectus. Any representation to the contrary is a criminal offense.
---------
The date of this Joint Proxy Statement and Prospectus is February __, 2002.
Proposal 1 will involve a three-step transaction:
FIRST, MuniYield Michigan will acquire substantially all of the assets
and will assume substantially all of the liabilities, of MuniHoldings Michigan
solely in exchange for newly issued shares of common stock of MuniYield
Michigan ("MuniYield Michigan Common Stock") with a par value of $.10 per
share, and shares of a newly created series of Auction Market Preferred Stock
("AMPS") of MuniYield Michigan, to be designated Series B, with a par value of
$.10 per share and a liquidation preference of $25,000 per share (the
"MuniYield Michigan Series B AMPS").
SECOND, MuniHoldings Michigan will distribute the MuniYield Michigan
Common Stock (plus cash in lieu of fractional shares) and the MuniYield
Michigan Series B AMPS received from MuniYield Michigan to stockholders of
MuniHoldings Michigan.
THIRD, MuniYield Michigan will amend its investment policies to include
an investment policy that the Fund, under normal circumstances, will invest at
least 80% of its net assets in municipal obligations with remaining maturities
of one year or more that are covered by insurance guaranteeing the timely
payment of principal at maturity and interest when due, and the Fund will
change its name to "MuniYield Michigan Insured Fund II, Inc."
This three-step transaction will be referred to in this Joint Proxy
Statement and Prospectus as the "Reorganization." After the Reorganization is
completed, MuniHoldings Michigan will liquidate and dissolve under Maryland
law and terminate as an investment company under the Investment Company Act of
1940, as amended (the "Investment Company Act").
MuniYield Michigan and MuniHoldings Michigan are sometimes referred to
herein individually as a "Fund" and collectively as the "Funds," as the
context requires. The fund resulting from the Reorganization is sometimes
referred to herein as the "Combined Fund."
In the Reorganization, MuniYield Michigan will issue shares of its common
stock to MuniHoldings Michigan based on the net asset value of the assets
transferred to MuniYield Michigan by MuniHoldings Michigan. These shares will
then be distributed by MuniHoldings Michigan to its stockholders based on the
net asset value of the shares held by each stockholder just prior to the
Reorganization. A holder of common stock of MuniHoldings Michigan
("MuniHoldings Michigan Common Stock") with a par value of $.10 per share,
will receive MuniYield Michigan Common Stock (plus cash in lieu of fractional
shares). A holder of AMPS of MuniHoldings Michigan, designated Series A, with
a par value of $.10 per share and a liquidation preference of $25,000 per
share (the "MuniHoldings Michigan AMPS") will receive MuniYield Michigan
Series B AMPS. All references to MuniHoldings Michigan Common Stock will
include shares of common stock representing Dividend Reinvestment Plan shares
held in the book deposit accounts of holders of MuniHoldings Michigan Common
Stock.
This Joint Proxy Statement and Prospectus serves as a prospectus of
MuniYield Michigan in connection with the issuance of the MuniYield Michigan
Common Stock and the MuniYield Michigan Series B AMPS as part of the
Reorganization.
This Joint Proxy Statement and Prospectus sets forth the information
about MuniYield Michigan and MuniHoldings Michigan that stockholders of the
Funds should know before considering the Reorganization and should be retained
for future reference. Each Fund has authorized the solicitation of proxies in
connection with the Reorganization solely on the basis of this Joint Proxy
Statement and Prospectus and the accompanying documents.
The address of the principal executive offices of MuniYield Michigan and
MuniHoldings Michigan is 800 Scudders Mill Road, Plainsboro, New Jersey 08536,
and the telephone number is (609) 282-2800.
MuniYield Michigan Common Stock is listed on the New York Stock Exchange
(the "NYSE") under the symbol "MYM" and MuniHoldings Michigan Common Stock is
listed on the American Stock Exchange (the "AMEX") under the symbol "MDH."
Subsequent to the Reorganization, shares of MuniYield Michigan Common Stock
will continue to be listed on the NYSE under the symbol "MYM." Reports, proxy
materials and other information concerning MuniYield Michigan may be inspected
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
Reports, proxy materials and other information concerning MuniHoldings
Michigan may be inspected at the offices of the AMEX, 9801 Washingtonian
Boulevard, Gaithersburg, Maryland 20878.
TABLE OF CONTENTS
Page
INTRODUCTION......................................................................................................1
ITEM 1. THE REORGANIZATION.......................................................................................2
SUMMARY...........................................................................................................2
The Reorganization.......................................................................................2
What will be the Results of the Reorganization?..........................................................2
What are the Reasons for the Reorganization?.............................................................2
Pro Forma Fee Table:.....................................................................................4
RISK FACTORS AND SPECIAL CONSIDERATIONS..........................................................................10
Michigan Municipal Bonds................................................................................10
Interest Rate and Credit Risk...........................................................................10
Trading Discount........................................................................................10
Non-Diversification.....................................................................................10
Rating Categories.......................................................................................10
Private Activity Bonds..................................................................................10
Portfolio Insurance.....................................................................................10
Leverage................................................................................................11
Portfolio Management....................................................................................12
Inverse Floating Obligations............................................................................12
Options and Futures Transactions........................................................................12
Antitakeover Provisions.................................................................................12
Ratings Considerations..................................................................................12
COMPARISON OF THE FUNDS..........................................................................................14
Financial Highlights....................................................................................14
Investment Objective and Policies.......................................................................19
Portfolio Insurance.....................................................................................20
Information Regarding Options and Futures Transactions..................................................24
Investment Restrictions.................................................................................27
Rating Agency Guidelines................................................................................28
Portfolio Composition...................................................................................29
Performance.............................................................................................29
Portfolio Transactions..................................................................................30
Portfolio Turnover......................................................................................31
Net Asset Value.........................................................................................31
Capital Stock...........................................................................................32
Certain Provisions of the Charter.......................................................................33
Management of the Funds.................................................................................34
Code of Ethics..........................................................................................36
Voting Rights...........................................................................................36
Stockholder Inquiries...................................................................................37
Dividends and Distributions.............................................................................37
Automatic Dividend Reinvestment Plan....................................................................38
Mutual Fund Investment Option...........................................................................40
Liquidation Rights of Holders of AMPS...................................................................40
Tax Rules Applicable to the Funds and their Stockholders................................................40
AGREEMENT AND PLAN OF REORGANIZATION.............................................................................44
General.................................................................................................44
Procedure...............................................................................................45
Terms of the Agreement and Plan of Reorganization.......................................................45
Potential Benefits to Holders of Common Stock of the Funds as a Result of the Reorganization............47
Surrender and Exchange of Stock Certificates............................................................48
Tax Consequences of the Reorganization..................................................................49
Capitalization..........................................................................................50
i
ITEM 2. ELECTION OF DIRECTORS OF MUNIYIELD MICHIGAN..............................................................51
Committee and Board Meetings............................................................................52
Interested Persons......................................................................................53
Compensation of Directors...............................................................................53
Officers of MuniYield Michigan..........................................................................54
Share Ownership.........................................................................................54
INFORMATION CONCERNING THE MEETINGS..............................................................................55
Date, Time and Place of Meetings........................................................................55
Solicitation, Revocation and Use of Proxies.............................................................55
Record Date and Outstanding Shares......................................................................55
Security Ownership of Certain Beneficial Owners and Management..........................................55
Voting Rights and Required Vote.........................................................................55
Appraisal Rights........................................................................................56
ADDITIONAL INFORMATION...........................................................................................56
CUSTODIAN........................................................................................................58
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR..........................................................58
ACCOUNTING SERVICES PROVIDER.....................................................................................58
LEGAL PROCEEDINGS................................................................................................58
LEGAL OPINIONS...................................................................................................58
EXPERTS 58
STOCKHOLDER PROPOSALS............................................................................................59
INDEX TO FINANCIAL STATEMENTS.....................................................................................F-1
EXHIBIT I INFORMATION PERTAINING TO MUNIYIELD MICHIGAN....................................................I-1
EXHIBIT II AGREEMENT AND PLAN OF REORGANIZATION...........................................................II-1
EXHIBIT III ECONOMIC AND FINANCIAL CONDITIONS IN MICHIGAN.................................................III-1
EXHIBIT IV RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER................................................IV-1
EXHIBIT V PORTFOLIO INSURANCE.............................................................................V-1
EXHIBIT VI INFORMATION PERTAINING TO MUNIHOLDINGS MICHIGAN................................................VI-1
ii
INTRODUCTION
This Joint Proxy Statement and Prospectus is furnished in connection with
the solicitation of proxies on behalf of the Boards of Directors of MuniYield
Michigan and MuniHoldings Michigan for use at the Meetings to be held at the
offices of Fund Asset Management, L.P. ("FAM"), 800 Scudders Mill Road,
Plainsboro, New Jersey on Monday, April 8, 2002 at 9:00 a.m. Eastern time
(MuniHoldings Michigan) and 9:30 a.m. Eastern time (MuniYield Michigan). The
mailing address for each Fund is P.O. Box 9011, Princeton, New Jersey
08543-9011. The approximate mailing date of this Joint Proxy Statement and
Prospectus is February __, 2002.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation
to the Secretary of MuniYield Michigan or MuniHoldings Michigan, as
applicable, at the address indicated above or by voting in person at the
applicable Meeting. All properly executed proxies received prior to the
applicable Meeting will be voted at that Meeting in accordance with the
instructions marked thereon or otherwise as provided therein. Unless
instructions to the contrary are marked, (i) for the stockholders of both
Funds, all proxies will be voted "FOR" Item 1 to approve the Agreement and
Plan of Reorganization between MuniYield Michigan and MuniHoldings Michigan
(the "Agreement and Plan"); and (ii) for the stockholders MuniYield Michigan
only, all proxies submitted by MuniYield Michigan stockholders will be voted
"FOR" Item 2 to elect a Board of Directors for MuniYield Michigan to serve
until their successors have been duly elected and qualified or until their
earlier resignation or removal.
Assuming a quorum is present at the applicable Meeting, approval of the
Agreement and Plan will require the affirmative vote of (i) the holders of a
majority of the outstanding shares of MuniHoldings Michigan Common Stock and
MuniHoldings Michigan AMPS, voting together as a single class, (ii) a majority
of the outstanding shares of MuniHoldings Michigan AMPS, voting separately as
a class, (iii) a majority of the votes cast by the holders of shares of
MuniYield Michigan Common Stock and MuniYield Michigan AMPS, designated Series
A ("MuniYield Michigan Series A AMPS"), provided that the total number of
votes cast represents a majority of the shares of MuniYield Michigan Common
Stock and MuniYield Michigan Series A AMPS issued, outstanding and entitled to
vote thereon, and (iv) the holders of a majority of the outstanding shares of
MuniYield Michigan Series A AMPS, voting separately as a class.
Assuming the required quorum is present at the Meeting of MuniYield
Michigan, the election of the Board of Directors of the Fund will require the
affirmative vote of a plurality of the votes cast by the holders of MuniYield
Michigan Common Stock and the holders of MuniYield Michigan Series A AMPS,
represented at the Meeting and entitled to vote, voting together as a single
class. A "plurality of the votes cast" means the candidates must receive more
votes than any other candidates for the same position, but not necessarily a
majority of the votes cast.
The Board of Directors of each Fund has fixed the close of business on
February 11, 2002 as the record date (the "Record Date") for the determination
of stockholders entitled to notice of, and to vote at, the Meetings or any
adjournment thereof. Stockholders on the Record Date will be entitled to one
vote for each share held, with no shares having cumulative voting rights. As
of the Record Date, ________ shares of MuniYield Michigan Common Stock and
2,200 shares of MuniYield Michigan Series A AMPS were outstanding. As of the
Record Date, _____ shares of MuniHoldings Michigan Common Stock and 1,360
shares of MuniHoldings Michigan AMPS were outstanding. To the knowledge of the
management of each Fund, no person owned beneficially or of record 5% or more
of the respective outstanding shares of either class of capital stock of
either Fund as of the Record Date.
The Boards of Directors of the Funds know of no business other than that
discussed above which will be presented for consideration at the Meetings. If
any other matter is properly presented, it is the intention of the persons
named in the enclosed proxy to vote in accordance with their best judgment.
ITEM 1. THE REORGANIZATION
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement and Prospectus and is qualified in its entirety by
reference to the more complete information contained in this Joint Proxy
Statement and Prospectus and in the Agreement and Plan attached hereto as
Exhibit II.
The Reorganization
At meetings of the Board of Directors of each Fund, each Board approved
the Agreement and Plan with respect to its Fund by the affirmative vote of
more than two-thirds of the total number of Directors. The three-step
transaction described in the Agreement and Plan is the Reorganization.
What will be the Results of the Reorganization?
If the Agreement and Plan is approved and the Reorganization is
completed:
o MuniYield Michigan will acquire substantially all of the assets and
will assume substantially all of the liabilities of MuniHoldings
Michigan;
o Stockholders of MuniHoldings Michigan will become stockholders of
MuniYield Michigan;
o Stockholders of MuniHoldings Michigan Common Stock will receive full
shares of MuniYield Michigan Common Stock (plus cash in lieu of
fractional shares) equal to the aggregate net asset value of the
shares of MuniHoldings Michigan Common Stock currently owned by such
stockholders;
o Stockholders of MuniHoldings Michigan AMPS will receive shares of
MuniYield Michigan Series B AMPS equal to the liquidation preference
of the MuniHoldings Michigan AMPS currently owned by such
stockholders;
o MuniYield Michigan, under normal conditions, will invest at least
80% of its net assets in municipal obligations with remaining
maturities of one year or more that are covered by insurance
guaranteeing the timely payment of principal at maturity and
interest when due;
o MuniYield Michigan will change its name to MuniYield Michigan
Insured Fund II, Inc.; and
o MuniHoldings Michigan will dissolve and terminate its registration
as an investment company under the Investment Company Act.
The Reorganization will be structured as a tax-free transaction for
federal tax purposes. Neither Fund will recognize gain or loss in the
Reorganization and the stockholders of MuniHoldings Michigan will not
recognize gain or loss upon the exchange of their shares for MuniYield
Michigan Common Stock and MuniYield Michigan Series B AMPS, as applicable, in
the Reorganization (except to the extent that a holder of MuniHoldings
Michigan Common Stock receives cash representing an interest in fractional
shares of MuniYield Michigan Common Stock). Stockholders should consult their
tax advisers regarding the effect of the Reorganization in light of their
individual circumstances.
What are the Reasons for the Reorganization?
The Boards of Directors of MuniHoldings Michigan and MuniYield Michigan
have approved the Agreement and Plan and recommend that you vote to approve
the Agreement and Plan.
The Board of Directors of MuniHoldings Michigan determined that holders
of MuniHoldings Michigan Common Stock are likely to benefit from the
Reorganization. The Board of Directors of MuniYield Michigan
2
determined that the Reorganization will not adversely affect holders of
MuniYield Michigan Common Stock because FAM has agreed to bear the expenses of
the Reorganization attributable to MuniYield Michigan. Holders of MuniYield
Michigan Common Stock should also benefit from the Fund's new investment
policy providing that the Fund will invest at least 80% of its net assets in
municipal obligations and a drop in overall expenses and increase in assets.
In addition, each Board has determined, with respect to net asset value, that
the interests of existing stockholders will not be diluted as a result of the
Reorganization. The Boards of Directors believe that the Reorganization is in
the best interests of each Fund and its common stockholders.
In reaching its decision, the Boards considered a number of factors
including the following:
o After the Reorganization, MuniHoldings Michigan common stockholders
will remain invested in a leveraged, closed-end fund that seeks to
provide its stockholders with current income exempt from Federal and
Michigan income taxes;
o After the Reorganization, MuniYield Michigan common stockholders
will remain invested in a closed-end fund with an investment
objective and policies substantially similar to its current
investment objective and policies, except that MuniYield Michigan
will adopt a policy to invest at least 80% of its net assets in
insured municipal obligations;
o After the Reorganization, each Fund's common stockholders will be
invested in a fund with substantially greater net assets; and
o After the Reorganization, each Fund's common stockholders should
experience lower expenses per share, economies of scale and greater
flexibility in portfolio management.
It is not anticipated that the Reorganization will directly benefit the
holders of shares of any series of AMPS of either Fund. However, the
Reorganization will not adversely affect the holders of shares of any series
of AMPS of either Fund. The expenses of the Reorganization will not be borne
by the holders of shares of AMPS of either Fund.
See "Pro Forma Fee Table" below and "Agreement and Plan of Reorganization
-- Potential Benefits to Holders of Common Stock of the Funds as a Result of
the Reorganization."
The Reorganization requires the approval of the stockholders of both
Funds. The Reorganization will not take place if the stockholders of either
Fund do not approve the Agreement and Plan.
It is anticipated that the Reorganization will occur as soon as
practicable after all of the requisite approvals are obtained, provided that
the Funds have obtained prior to that time a favorable opinion of counsel
concerning the tax consequences of the Reorganization as set forth in the
Agreement and Plan. Under the Agreement and Plan, however, the Board of
Directors of either Fund may cause the Reorganization to be postponed or
abandoned in certain circumstances should a Board determine that it is in the
best interest of the stockholders of that Fund to do so. The Agreement and
Plan may be terminated, and the Reorganization abandoned, whether before or
after approval by the stockholders of the Funds at any time prior to the
Closing Date (as defined below), (i) by mutual consent of the Boards of
Directors of the Funds or (ii) by the Board of Directors of either Fund, if
any condition to that Fund's obligations has not been fulfilled or waived by
such Fund's Board of Directors.
3
Pro Forma Fee Table
Fee Table for MuniYield Michigan, MuniHoldings Michigan and the
Pro Forma Combined Fund as of October 31, 2001 (Unaudited)(a)
The following table illustrates, based on average net assets attributable
to common stock as of October 31, 2001, the expenses to be incurred by each
Fund individually and the estimated pro forma expenses to be incurred by the
Combined Fund after the Reorganization. Future expenses may be greater or less
than those indicated below.
Actual Pro Forma
--------------------------- ---------
MuniYield MuniHoldings Combined
Michigan Michigan Fund
-------- -------- ----
Common Stockholder Transaction Expenses
Maximum Sales Load (as a percentage of the offering price)
imposed on purchases of common stock........................ None(b) None(b) None(c)
Dividend Reinvestment and Cash Purchase Plan Fees.............. None None None
Annual Expenses (as a percentage of average net assets attributable
to common stock as of October 31, 2001)(d)
Investment Advisory Fees(e).................................... 0.74% 0.87% 0.76%
Interest Payments on Borrowed Funds............................ None None None
Other Expenses................................................. 0.41% 0.64% 0.34%
Total Annual Expenses(f)........................................... 1.15% 1.51% 1.10%
---------
(a) No information is presented with respect to AMPS because neither Fund's
operating expenses are, and the expenses of the Reorganization will not
be, borne by the holders of AMPS of either Fund. Generally, AMPS are sold
at a fixed liquidation preference of $25,000 per share and investment
return is set at an auction.
(b) Shares of common stock purchased in the secondary market may be subject
to brokerage commissions or other charges.
(c) No sales load will be charged in connection with the issuance of shares
as part of the Reorganization. Shares of common stock are not available
for purchase from the Funds but may be purchased through a broker-dealer
subject to individually negotiated commission rates.
(d) The pro forma annual operating expenses for the Combined Fund are
projections for a 12-month period.
(e) Based on average net assets as of October 31, 2001 of each Fund and the
Combined Fund (each excluding assets attributable to AMPS). If assets
attributable to AMPS are included, the Investment Advisory Fee for
MuniYield Michigan, MuniHoldings Michigan and the Combined Fund would be
0.50%, 0.55% and 0.50%, respectively.
(f) Based on average net assets as of October 31, 2001 (excluding assets
attributable to AMPS) of each Fund and the Combined Fund and excludes
FAM's waiver of a portion of its advisory fee and reimbursement of
certain other expenses with respect to MuniHoldings Michigan. Including
such fee waivers and/or expense reimbursements the Total Annual Expenses
for MuniHoldings Michigan would have been 1.12%. If assets attributable
to AMPS are included, the Total Annual Expenses for MuniYield Michigan,
MuniHoldings Michigan (excluding any advisory fee waivers and/or expense
reimbursements) and the Combined Fund would be 0.77%, 0.96% and 0.72%,
respectively. If assets attributable to AMPS and the above described
advisory fee waivers and expense reimbursements are included, the Total
Annual Expenses for MuniHoldings Michigan would have been 0.71%.
Example:
Cumulative Expenses Paid on Shares of Common Stock
for the Periods Indicated:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
An investor would pay the following expenses on a $1,000
investment assuming (1) the operating expense ratio for
each Fund (as a percentage of net assets attributable to
common stock) set forth above and (2) a 5% annual return
throughout the period:
MuniHoldings Michigan........................................ $15 $48 $82 $180
MuniYield Michigan........................................... $12 $37 $63 $140
Combined Fund*............................................... $11 $35 $61 $134
---------
* Assumes that the Reorganization had taken place on October 31, 2001.
4
The foregoing Fee Table and Example are intended to assist investors in
understanding the costs and expenses that a stockholder of each Fund will bear
directly or indirectly as compared to the costs and expenses that would be
borne by such investors taking into account the Reorganization. The Example
set forth above assumes that shares of common stock were purchased in the
initial offerings and that all dividends and distributions were reinvested and
uses a 5% annual rate of return as mandated by the regulations of the
Securities and Exchange Commission ("Commission"). The Example should not be
considered a representation of past or future expenses or annual rates of
return. Actual expenses or annual rates of return may be more or less than
those assumed for purposes of the Example. See "Comparison of the Funds" and
"The Reorganization -- Potential Benefits to Common Stockholders of the Funds
as a Result of the Reorganization."
MuniYield Michigan.................... MuniYield Michigan was incorporated
under the laws of the State of
Maryland on December 16, 1991 and
commenced operations on February 28,
1992.
MuniYield Michigan has outstanding
common stock and one series of AMPS,
designated Series A. As of October 31,
2001, MuniYield Michigan had net
assets (including assets attributable
to MuniYield Michigan AMPS) of $173.5
million.
MuniHoldings Michigan................. MuniHoldings Michigan was incorporated
under the laws of the State of
Maryland on July 8, 1999 and commenced
operations on September 17, 1999.
MuniHoldings Michigan has outstanding
common stock and one series of AMPS,
designated Series A. As of October 31,
2001, MuniHoldings Michigan had net
assets (including assets attributable
to MuniHoldings Michigan AMPS) of
$96.3 million.
Comparison of the Funds............... Investment Objectives. Each Fund is a
non-diversified, leveraged, closed-end
management investment company. The
investment objectives of the Funds are
identical. Each Fund seeks to provide
its stockholders with current income
exempt from Federal and Michigan
income taxes.
Investment Policies. Each Fund invests
primarily in a portfolio of long term,
investment grade municipal obligations
the interest on which, in the opinion
of bond counsel to the issuer, is
exempt from Federal and Michigan
income taxes ("Michigan Municipal
Bonds"). Each Fund intends to invest
in municipal obligations that are
rated investment grade or, if unrated,
are considered by the Funds'
investment adviser to be of comparable
quality. Each Fund, under normal
circumstances, will invest at least
80% of its net assets in Michigan
Municipal Bonds. To the extent the
Funds' investment adviser considers
that suitable Michigan Municipal Bonds
are not available for investment, each
Fund may purchase other long term
municipal obligations exempt from
Federal but not Michigan income taxes
("Municipal Bonds").
The policies of MuniYield Michigan
differ from the policies of
MuniHoldings Michigan in that
MuniYield Michigan currently is not
subject to the requirement that 80% of
its net assets be invested in
Municipal Bonds covered by insurance.
After the Reorganization, however, the
Combined Fund will be subject to this
requirement. See "Comparison of the
Funds - Investment Objectives and
Policies."
As of October 31, 2001, the weighted
average maturities of the portfolios
of MuniYield Michigan and MuniHoldings
Michigan were 15.42 years and
5
17.14 years, respectively. The average
maturity of each Fund's portfolio
securities, and, therefore, each
Fund's portfolio as a whole, will vary
based upon FAM's assessment of
economic and market conditions. See
"Comparison of the Funds -- Investment
Objective and Policies."
Capital Stock. Each Fund has
outstanding common stock and AMPS.
MuniYield Michigan Common Stock is
traded on the NYSE and MuniHoldings
Michigan is traded on the AMEX. As of
October 31, 2001, (i) the net asset
value per share of MuniYield Michigan
Common Stock was $14.97 and the market
price per share was $13.85 and (ii)
the net asset value per share of
MuniHoldings Michigan Common Stock was
$17.20 and the market price per share
was $16.25. The AMPS of each Fund have
a liquidation preference of $25,000
per share and are sold principally at
auction. See "Comparison of the Funds
-- Capital Stock."
MuniHoldings Michigan may issue AMPS
representing up to approximately 40%
of its total assets. MuniYield
Michigan may issue AMPS representing
up to approximately 35% of its total
assets. Following the Reorganization,
it is anticipated that the Combined
Fund will be permitted to issue AMPS
representing up to approximately 35%
of its total assets.
Auctions are generally held every
seven days for the AMPS of each Fund
unless the applicable Fund elects,
subject to certain limitations, to
have a special dividend period. See
"Comparison of the Funds -- Capital
Stock." The following table provides
information about the dividend rates
for each series of AMPS of each Fund
as of a recent auction date.
Auction Dividend
Auction Date Fund Series Schedule Rate
------------ ---- ------ -------- --------
January 8, 2002 MuniHoldings A 7 day 1.34%
Michigan
January 7, 2002 MuniYield A 7 day 1.38%
Michigan
Portfolio Management. The investment
adviser for each Fund is FAM. FAM is
responsible for the management of each
Fund's investment portfolio and for
providing administrative services to
each Fund. Fred K. Stuebe serves as
the portfolio manager for each Fund.
After the Reorganization, the Combined
Fund will be managed by Mr. Stuebe.
Advisory Fees. FAM is an affiliate of
Merrill Lynch Investment Managers,
L.P. ("MLIM"). Both FAM and MLIM are
owned and controlled by Merrill Lynch
& Co., Inc. ("ML&Co."). FAM was
organized as an investment adviser in
1977 and offers investment advisory
services to more than 50 registered
investment companies. FAM and its
affiliates, including MLIM, act as
investment adviser for over 100
registered investment companies and
also offer portfolio management and
portfolio analysis services to
individuals and institutional
accounts. See "Comparison of the
Funds--Management of the Funds."
MuniHoldings Michigan pays FAM a
monthly fee at the annual rate of
0.55% of its average weekly net
assets, including assets acquired from
the sale of AMPS. Since the
commencement of operations of
MuniHoldings Michigan, FAM has waived
a portion of its advisory fee and/or
reimbursed certain other expenses.
These fee waivers and expense
reimbursements are
6
voluntary and may be reduced or
discontinued by FAM at any time
without notice to holders of
MuniHoldings Michigan Common Stock.
MuniYield Michigan pays FAM a monthly
fee at the annual rate of 0.50% of its
average weekly net assets, including
assets acquired from the sale of AMPS.
Subsequent to the Reorganization, FAM
will continue to receive compensation
at the rate of 0.50% of the average
weekly net assets, including assets
acquired from the sale of AMPS, of the
Combined Fund. For MuniHoldings
Michigan, this represents a fee
reduction. See "Comparison of the
Funds -- Management of the Funds."
Other Significant Fees. The custodian,
transfer agent, dividend disbursing
agent and registrar is State Street
Bank and Trust Company ("State
Street") for shares of MuniHoldings
Michigan Common Stock and The Bank of
New York ("BONY") for shares of
MuniYield Michigan Common Stock. BONY
is the transfer agent, dividend
disbursing agent, registrar and
auction agent for the AMPS of each
Fund (in such capacity, the "Auction
Agent"). BONY and State Street each
receive fees for providing these
services.
Overall Annual Expense Ratio. The
table below sets forth (i) the total
annualized operating expense ratio for
MuniHoldings Michigan (excluding the
advisory fee waivers and/or expense
reimbursements), MuniYield Michigan
and the Combined Fund (excluding any
advisory fee waivers and/or expense
reimbursements) based on their
respective average net assets
(excluding assets attributable to
AMPS) as of October 31, 2001.
Average Net Assets
(Excluding Assets Total
Attributable to Annualized
AMPS) as of Operating
October 31, 2001 Expense Ratio
---------------- -------------
MuniHoldings Michigan........... $ 59,360,463 1.51%*
MuniYield Michigan.............. $114,580,103 1.15%
Combined Fund................... $173,940,566 1.10%
--------------
* Including the fee waivers and/or
expense reimbursements, the total
annualized operating expense ratio for
MuniHoldings Michigan would have been
1.12%.
The table below sets forth the total
annualized operating expense ratio for
MuniHoldings Michigan (excluding the
advisory fee waivers and/or expense
reimbursements), MuniYield Michigan
and the Combined Fund (excluding any
advisory fee waivers and/or expense
reimbursements) based on their
respective average net assets
(including assets attributable to
AMPS) as of October 31, 2001.
Average Net Assets
(Including Assets Total
Attributable to Annualized
AMPS) as of Operating
October 31, 2001 Expense Ratio
---------------- -------------
MuniHoldings Michigan........... $ 93,360,463 0.96%*
MuniYield Michigan.............. $169,580,103 0.77%
Combined Fund................... $262,940,566 0.72%
--------------
* Including the fee waivers and/or
expense reimbursements, the total
annualized operating expense ratio for
MuniHoldings Michigan would have been
0.71%.
7
Purchases and Sales of Common Stock
and AMPS. Purchase and sale procedures
for the common stock of each Fund are
substantially similar. Investors
typically purchase and sell shares of
common stock of each Fund through a
registered broker-dealer on the NYSE
(for MuniYield Michigan) or AMEX (for
MuniHoldings Michigan), thereby
incurring a brokerage commission set
by such broker-dealer. Alternatively,
investors may purchase or sell shares
of common stock of the Funds through
privately negotiated transactions with
existing stockholders.
Purchase and sale procedures for the
AMPS of each Fund are identical. Such
AMPS generally are purchased and sold
at separate auctions conducted on a
regular basis by the Auction Agent.
Unless otherwise permitted by the
Fund, existing and potential holders
of AMPS may only participate in
auctions through their broker-dealers.
Broker-dealers submit the orders of
their respective customers who are
existing and potential holders of AMPS
to the Auction Agent. On or prior to
each auction date for the AMPS (the
business day next preceding the first
day of each dividend period), each
holder may submit orders to buy, sell
or hold AMPS to its broker-dealer.
Outside of these auctions, shares of
AMPS may be purchased or sold through
broker-dealers for the AMPS in a
secondary trading market maintained by
the broker-dealers. However, no
assurance can be given that a
secondary market will develop, or, if
it does develop, that it will provide
holders with a liquid trading market
for the AMPS of either Fund.
Ratings of AMPS. The AMPS of each Fund
have been assigned a rating of AAA
from Standard & Poor's ("S&P") and Aaa
from Moody's Investors Service, Inc.
("Moody's"). See "Comparison of the
Funds-- Rating Agency Guidelines."
Portfolio Insurance. Under normal
circumstances, MuniHoldings Michigan
invests at least 80% of its net assets
in Municipal Bonds either (i) insured
under an insurance policy obtained by
the issuer thereof or any other party
or (ii) insured under an insurance
policy purchased by the Fund.
Currently, MuniYield Michigan does not
have a similar policy regarding
investments in insured Municipal
Bonds. In connection with the
Reorganization, however, the
investment policies of MuniYield
Michigan will be revised to provide
that, under normal circumstances, at
least 80% of the Combined Fund's net
assets will be invested in Municipal
Bonds either (i) insured under an
insurance policy obtained by the
issuer thereof or any other party or
(ii) insured under an insurance policy
purchased by the Fund. See "Comparison
of the Funds -- Investment Objectives
and Policies -- Portfolio Insurance."
Ratings of Municipal Obligations. Each
Fund will invest only in municipal
obligations that at the time of
purchase are considered investment
grade. See Exhibit IV-- "Ratings of
Municipal Bonds and Commercial Paper."
Portfolio Transactions. The portfolio
transactions in which the Funds may
engage and procedures for such
transactions are similar. See
"Comparison of the Funds-- Portfolio
Transactions."
Dividends and Distributions. The
methods of dividend payment and
distributions are substantially
similar for each Fund, both with
respect to the common stock and the
AMPS of each Fund. See "Comparison of
the Funds -- Dividends and
Distributions."
8
Net Asset Value. The net asset value
per share of common stock of each Fund
is determined as of the close of
business (generally, 4:00 p.m.,
Eastern time) on the last business day
of each week. Each Fund computes net
asset value per share in the same
manner. See "Comparison of the Funds
-- Net Asset Value."
Voting Rights. The corresponding
voting rights of the holders of shares
of each Fund's common stock are
substantially similar. The
corresponding voting rights of the
holders of shares of each Fund's AMPS
are also substantially similar except
that holders of MuniYield Michigan
Series A AMPS will be required to vote
in order for MuniYield Michigan to
issue any stock ranking on a parity
with such series of AMPS. See
"Comparison of the Funds -- Capital
Stock."
Stockholder Services. An automatic
dividend reinvestment plan is
available to holders of shares of each
Fund's common stock. These plans are
similar for both Funds. See
"Comparison of the Funds -- Automatic
Dividend Reinvestment Plan." Other
stockholder services, including the
provision of annual and semi-annual
reports, are the same for both Funds.
Outstanding Securities of MuniHoldings Michigan and
MuniYield Michigan as of October 31, 2001
Number of Shares
Number of Shares Held Outstanding Exclusive of
Number of Shares by Fund for Its Own Amount Shown in Previous
Title of Class Authorized Account Column
-------------- ---------------- ------------------- ------------------------
MuniHoldings Michigan
Common Stock................... 199,998,640 0 3,621,776
AMPS
Series A.................... 1,360 0 1,360
MuniYield Michigan
Common Stock................... 199,997,800 0 7,916,170
AMPS
Series A.................... 2,200 0 2,200
Tax Considerations.................... The Funds will receive an opinion of
counsel with respect to the
Reorganization to the effect that,
among other things, neither Fund will
recognize gain or loss on the
transaction, and no stockholder of
MuniHoldings Michigan will recognize
gain or loss upon the exchange of his
or her shares for shares of MuniYield
Michigan Common Stock or MuniYield
Michigan Series B AMPS, as applicable,
in the Reorganization (except to the
extent that exchanging common
stockholders receive cash representing
an interest in fractional shares of
MuniYield Michigan Common Stock in the
Reorganization). Consummation of the
Reorganization is subject to the
receipt of such opinion of counsel.
The Reorganization will not affect the
status of MuniYield Michigan as a
regulated investment company (a "RIC")
under the Internal Revenue Code of
1986, as amended (the "Code"). See
"Agreement and Plan of Reorganization
-- Tax Consequences of the
Reorganization." MuniHoldings Michigan
will liquidate and dissolve under the
laws of the State of Maryland as part
of the Reorganization.
9
RISK FACTORS AND SPECIAL CONSIDERATIONS
The investment objective and policies of each Fund are substantially
similar. Each Fund invests primarily in Michigan Municipal Bonds. For this
reason, the investment risks associated with an investment in MuniYield
Michigan are substantially similar to the investment risks associated with an
investment in MuniHoldings Michigan. These investment risks will also apply to
an investment in the Combined Fund after the Reorganization. It is expected
that the Reorganization itself will not adversely affect the rights of holders
of shares of common stock or of any series of AMPS of either Fund or create
additional risks.
Michigan Municipal Bonds
Each Fund intends to invest primarily in a portfolio of Michigan
Municipal Bonds. As a result, each Fund is more exposed to risks affecting
issuers of Michigan Municipal Bonds than is a municipal bond fund that invests
more widely. See "Comparison of the Funds -- Special Considerations Relating
to Michigan Municipal Bonds" and Exhibit III -- "Economic and Other Conditions
in Michigan."
Interest Rate and Credit Risk
Each Fund invests primarily in long term municipal bonds that are subject
to interest rate and credit risk. Interest rate risk is the risk that prices
of municipal bonds generally increase when interest rates decline and decrease
when interest rates increase. Prices of longer term securities generally
change more in response to interest rate changes than prices of shorter term
securities. Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. The degree of credit risk depends on both the
financial condition of the issuer and the terms of the obligation.
Trading Discount
Shares of closed-end funds such as the Funds frequently trade at a market
price that is lower than their net asset value. This is commonly referred to
as "trading at a discount." Shares may also trade at a price that is higher
than their net asset value (a "premium"). See "Comparison of the Funds --
Financial Highlights."
Non-Diversification
Each Fund is registered as a "non-diversified" investment company. This
means that each Fund may invest a greater percentage of its assets in a single
issuer than a diversified investment company. Since either Fund may invest a
relatively high percentage of its assets in a limited number of issuers, it
may be more exposed to the effects of any single economic, political or
regulatory occurrence than a fund that invests more widely. Even as a
non-diversified fund, each Fund must still meet the diversification
requirements of applicable Federal income tax law.
Rating Categories
The Funds intend to invest in municipal bonds that are rated investment
grade by S&P, Moody's or Fitch Inc. ("Fitch") or are considered by FAM to be
of comparable quality. Obligations rated in the lowest investment grade
category may be considered to have certain speculative characteristics.
Private Activity Bonds
Each Fund may invest all or a portion of its assets in certain tax-exempt
securities classified as "private activity bonds." These bonds may subject
certain investors in either Fund to a Federal alternative minimum tax.
Portfolio Insurance
MuniHoldings Michigan currently is subject to certain investment
restrictions imposed by guidelines of the insurance companies that issue
portfolio insurance. Following the Reorganization, MuniYield Michigan also
will be
10
subject to these guidelines. The Funds do not expect these guidelines
to prevent FAM from managing the Funds' portfolios in accordance with the
Funds' investment objective and policies.
Leverage
Use of leverage, through the issuance of AMPS, involves certain risks to
holders of common stock of each Fund. For example, each Fund's issuance of
AMPS may result in higher volatility of the net asset value of its common
stock and potentially more volatility in the market value of its common stock.
In addition, changes in the short term and medium term dividend rates on, and
the amount of taxable income allocable to, the AMPS will affect the yield to
holders of common stock. Under certain circumstances when either Fund is
required to allocate taxable income to holders of AMPS, it may be required to
make an additional distribution to such holders in an amount approximately
equal to the tax liability resulting from that allocation (an "Additional
Distribution"). Leverage will allow holders of each Fund's common stock to
realize a higher current rate of return than if the Fund were not leveraged as
long as the Fund, while accounting for its costs and operating expenses, is
able to realize a higher net return on its investment portfolio than the
then-current dividend rate (and any Additional Distribution) paid on the AMPS.
Similarly, since a pro rata portion of each Fund's net realized capital gains
is generally payable to holders of the Fund's common stock, the use of
leverage will increase the amount of such gains distributed to holders of the
Fund's common stock. However, short term, medium term and long term interest
rates change from time to time as do their relationships to each other (i.e.,
the slope of the yield curve) depending upon such factors as supply and demand
forces, monetary and tax policies and investor expectations. Changes in any or
all of such factors could cause the relationship between short term, medium
term and long term rates to change (i.e., to flatten or to invert the slope of
the yield curve) so that short term and medium term rates may substantially
increase relative to the long term obligations in which each Fund may be
invested. To the extent that the current dividend rate (and any Additional
Distribution) on the AMPS approaches the net return on a Fund's investment
portfolio, the benefit of leverage to holders of common stock will be
decreased. If the current dividend rate (and any Additional Distribution) on
the AMPS were to exceed the net return on a Fund's portfolio, holders of
common stock would receive a lower rate of return than if the Fund were not
leveraged. Similarly, since both the costs of issuing AMPS and any decline in
the value of a Fund's investments (including investments purchased with the
proceeds from any AMPS offering) will be borne entirely by holders of the
Fund's common stock, the effect of leverage in a declining market would result
in a greater decrease in net asset value to holders of common stock than if
the Fund were not leveraged. If a Fund is liquidated, holders of that Fund's
AMPS will be entitled to receive liquidating distributions before any
distribution is made to holders of common stock of that Fund.
In an extreme case, a decline in net asset value could affect each Fund's
ability to pay dividends on its common stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a RIC under the
Federal tax laws. See "Comparison of the Funds -- Tax Rules Applicable to the
Funds and their Stockholders." However, each Fund intends to take all measures
necessary to make common stock dividend payments. If either Fund's current
investment income is ever insufficient to meet dividend payments on either its
common stock or its AMPS, it may have to liquidate certain of its investments.
In addition, each Fund has the authority to redeem its AMPS for any reason and
may redeem all or part of its AMPS under the following circumstances:
o if the Fund anticipates that its leveraged capital structure will
result in a lower rate of return for any significant amount of time
to holders of the common stock than the Fund can obtain if the
common stock were not leveraged,
o if the asset coverage for the AMPS declines below 200%, either as a
result of a decline in the value of the Fund's portfolio investments
or as a result of the repurchase of common stock in tender offers,
or otherwise, or
o in order to maintain the asset coverage established by Moody's and
S&P in rating the AMPS.
Redemption of the AMPS or insufficient investment income to make dividend
payments may reduce the net asset value of a Fund's common stock and require
the Fund to liquidate a portion of its investments at a time when it may be
disadvantageous to do so. MuniHoldings Michigan may issue AMPS representing up
to approximately 40% of
11
its total assets. MuniYield Michigan may issue AMPS representing up to
approximately 35% of its total assets. Following the Reorganization, it is
anticipated that the Combined Fund will be permitted to issue AMPS
representing up to approximately 35% of its total assets.
Portfolio Management
The portfolio management strategies of the Funds are substantially
similar. In the event of an increase in short term or medium term rates or
other change in market conditions to the point where a Fund's leverage could
adversely affect holders of common stock as noted above, or in anticipation of
such changes, each Fund may attempt to shorten the average maturity of its
investment portfolio, which would tend to offset the negative impact of
leverage on holders of its common stock. Each Fund also may attempt to reduce
the degree to which it is leveraged by redeeming AMPS pursuant to the
provisions of the Fund's Articles Supplementary establishing the rights and
preferences of the AMPS or otherwise purchasing shares of AMPS. Purchases and
sales or redemptions of AMPS, whether on the open market or in negotiated
transactions, are subject to limitations under the Investment Company Act. If
market conditions subsequently change, each Fund may sell previously unissued
shares of AMPS or shares of AMPS that the Fund previously issued but later
repurchased or redeemed.
Inverse Floating Obligations
A Fund's investments in "inverse floating obligations" or "residual
interest bonds" provide investment leverage because their market value
increases or decreases in response to market changes at a greater rate than
fixed rate, long term tax-exempt securities. The market values of such
securities are more volatile than the market values of fixed rate, tax-exempt
securities.
Options and Futures Transactions
Each Fund may engage in certain options and futures transactions to
reduce its exposure to interest rate movements. If a Fund incorrectly
forecasts market values, interest rates or other factors, that Fund's
performance could suffer. Each Fund also may suffer a loss if the other party
to the transaction fails to meet its obligations. The Funds are not required
to use hedging and may choose not to do so. The Funds cannot guarantee that
any hedging strategies they use will work.
Antitakeover Provisions
The Articles of Incorporation of each Fund (in each case the "Charter")
and Maryland law include provisions that could limit the ability of other
entities or persons to acquire control of that Fund or to change the
composition of its Board of Directors. Such provisions could limit the ability
of stockholders to sell their shares at a premium over prevailing market
prices by discouraging a third party from seeking to obtain control of the
Fund.
Ratings Considerations
The Funds have received ratings of their AMPS of AAA from S&P and Aaa
from Moody's. In order to maintain these ratings, the Funds are required to
maintain portfolio holdings meeting specified guidelines of such rating
agencies. These guidelines may impose asset coverage requirements that are
more stringent than those imposed by the Investment Company Act.
As described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings of the AMPS are not recommendations to purchase, hold
or sell shares of AMPS, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor, nor do the rating agency
guidelines address the likelihood that a holder of shares of AMPS will be able
to sell such shares in an auction. The ratings are based on current
information furnished to Moody's and S&P by the Funds and FAM and information
obtained from other sources. The ratings may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such
information. The common stock of the Funds has not been rated by a nationally
recognized statistical rating organization ("NRSRO").
12
The Board of Directors of each Fund, without stockholder approval,
may amend, alter or repeal certain definitions or restrictions which have been
adopted by the Fund pursuant to the rating agency guidelines, in the event the
Fund receives confirmation from the rating agencies that any such amendment,
alteration or repeal would not impair the ratings then assigned to shares of
AMPS.
13
COMPARISON OF THE FUNDS
Financial Highlights
MuniYield Michigan
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of MuniYield
Michigan by ___________, independent auditors. The following per share data
and ratios have been derived from information provided in the financial
statements of MuniYield Michigan.
For the Year Ended October 31,
-----------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Increase (Decrease) in Net
Asset Value:
Per Share Operating
Performance:
Net asset value, beginning
of period................. $ 13.83 $ 13.34 $ 15.85 $ 15.58 $ 15.29 $ 15.23 $ 14.05
------- ------- ------- ------- ------- ------- -------
Investment income-- net..... 1.00 1.04 1.02 1.12 1.16 1.18 1.19
Realized and unrealized
gain (loss) on
investments-- net......... 1.15 .51 (1.96) .38 .28 .11 1.47
------- ------- ------- ------- ------- ------- -------
Total from investment
operations................ 2.15 1.55 (.94) 1.50 1.44 1.29 2.66
------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions to Common
Stock shareholders:
Investment income-- net... (.79) (.77) (.88) (.89) (.90) (.93) (.92)
Realized gain on
investments-- net......... -- -- (.05) (.08) -- -- (.27)
In excess of realized
gain on investments-- net. -- -- (.39) -- -- (.04) --
------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions to Common
Stock shareholders........ (.79) (.77) (1.32) (.97) (.90) (.97) (1.19)
------- ------- ------- ------- ------- ------- -------
Capital charge resulting
from issuance of Common
Stock..................... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Effect of Preferred Stock
activity:++
Dividends and
distributions to
Preferred Stock
shareholders:
Investment income-- net (.22) (.29) (.18) (.21) (.25) (.25) (.23)
For the
Period
February
28, 1992+ to
October 31,
------------------------ -----------
1994 1993 1992
---- ---- ----
Increase (Decrease) in Net
Asset Value:
Per Share Operating
Performance:
Net asset value, beginning
of period................. $ 16.59 $ 14.22 $ 14.18
------- ------- -------
Investment income-- net..... 1.20 1.21 .77
Realized and unrealized
gain (loss) on
investments-- net......... (2.44) 2.41 .14
------- ------- -------
Total from investment
operations................ (1.24) 3.62 .91
------- ------- -------
Less dividends and
distributions to Common
Stock shareholders:
Investment income-- net... (.96) (1.00) (.56)
Realized gain on
investments-- net......... (.10) (.05) --
In excess of realized
gain on investments-- net. -- -- --
------- ------- -------
Total dividends and
distributions to Common
Stock shareholders........ (1.06) (1.05) (.56)
------- ------- -------
Capital charge resulting
from issuance of Common
Stock..................... -- -- (.03)
------- ------- -------
Effect of Preferred Stock
activity:++
Dividends and
distributions to
Preferred Stock
shareholders:
Investment income-- net (.22) (.19) (.13)
(Continued on next page)
14
For the Year Ended October 31,
------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Realized gain on
investments-- net...... -- -- (.01) (.05) -- -- (.06)
In excess of realized
gain on investments--
net.................... -- -- (.06) -- -- (.01) --
------- ------- ------- ------- ------- ------- -------
Capital charge
resulting from
issuance of Preferred
Stock.................. -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total effect of Preferred
Stock activity............ (.22) (.29) (.25) (.26) (.25) (.26) (.29)
------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................... $ 14.97 $ 13.83 $ 13.34 $ 15.85 $ 15.58 $ 15.29 $ 15.23
======= ======= ======== ======== ======== ======== ========
Market price per share, end
of period................. $ 13.85 $ 11.75 $ 12.25 $ 16.00 $ 15.125 $ 14.50 $ 13.875
======= ======= ======== ======== ======== ======== ========
Total Investment Return:**
Based on market price per
share..................... 25.13% 2.47% (16.42%) 12.56% 10.92% 11.67% 19.93%
======= ======= ======== ======== ======== ======== ========
Based on net asset value
per share................. 14.91% 10.76% (8.12%) 8.25% 8.35% 7.28% 18.29%
======= ======= ======== ======== ======== ======== ========
Ratios Based on Average Net
Assets of Common Stock:
Total expenses***........... 1.15% 1.15% 1.12% 1.05% 1.08% 1.10% 1.13%
======= ======= ======== ======== ======== ======== ========
Total investment income--
net***.................... 6.96% 7.62% 6.96% 7.20% 7.46% 7.76% 8.21%
======= ======= ======== ======== ======== ======== ========
Amount of dividends to
Preferred Stock
shareholders.............. 1.53% 2.12% 1.20% 1.35% 1.63% 1.66% 1.58%
======= ======= ======== ======== ======== ======== ========
Investment income-- net, to
Common Stock shareholders. 5.43% 5.50% 5.76% 5.85% 5.83% 6.10% 6.63%
======= ======= ======== ======== ======== ======== ========
Ratios Based on Total
Average Net Assets:***###
Total expenses.............. .77% .75% .76% .72% .74% .75% .76%
======= ======= ======== ======== ======== ======== ========
Expenses, net of
reimbursement .77% .75% .76% .72% .74% .75% .76%
======= ======= ======== ======== ======== ======== ========
Total investment income--
net....................... 4.70% 5.02% 4.73% 4.96% 5.15% 5.26% 5.50%
======= ======= ======== ======== ======== ======== ========
Ratios Based on Average Net
Assets of Preferred Stock:
Dividends to Preferred
Stock shareholders........ 3.19% 4.09% 2.55% 2.97% 3.57% 3.52% 3.22%
======= ======= ======== ======== ======== ======== ========
Supplemental Data:
Net assets, net of
Preferred Stock, end of
period (in thousands)..... $118,508 $109,398 $105,574 $123,119 $120,392 $118,146 $117,600
======== ======== ======== ======== ======== ======== ========
Preferred Stock
outstanding, end of
period (in thousands)..... $ 55,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000
======== ======== ======== ======== ======== ======== ========
Portfolio turnover.......... 72.58% 75.11% 63.64% 40.41% 16.06% 19.73% 15.47%
======== ======== ======== ======== ======== ======== ========
For the
Period
February
28, 1992+ to
October 31,
------------------------ -----------
1994 1993 1992
---- ---- ----
Realized gain on
investments-- net...... (.02) (.01) --
In excess of realized
gain on investments--
net.................... -- -- --
------- ------- -------
Capital charge
resulting from
issuance of Preferred
Stock.................. -- -- (.15)
------- ------- -------
Total effect of Preferred
Stock activity............ (.24) (.20) (.28)
------- ------- -------
Net asset value, end of
period.................... $ 14.05 $ 16.59 $ 14.22
======== ======== ========
Market price per share, end
of period................. $ 12.625 $ 16.625 $ 14.875
======== ======== ========
Total Investment Return:**
Based on market price per
share..................... (18.40%) 19.54% 3.05%##
======== ======== ========
Based on net asset value
per share................. (9.00%) 24.78% 4.21%##
======== ======== ========
Ratios Based on Average Net
Assets of Common Stock:
Total expenses***........... # # #
======== ======== ========
Total investment income--
net***.................... # # #
======== ======== ========
Amount of dividends to
Preferred Stock
shareholders.............. # # #
======== ======== ========
Investment income-- net, to
Common Stock shareholders. # # #
======== ======== ========
Ratios Based on Total
Average Net Assets:***###
Total expenses.............. .76% .74% .72%*
======== ======== ========
Expenses, net of
reimbursement .76% .74% .54%*
======== ======== ========
Total investment income--
net....................... 5.25% 5.32% 5.66%*
======== ======== ========
Ratios Based on Average Net
Assets of Preferred Stock:
Dividends to Preferred
Stock shareholders........ # # #
======== ======== ========
Supplemental Data:
Net assets, net of
Preferred Stock, end of
period (in thousands)..... $108,467 $128,078 $106,938
======== ======== ========
Preferred Stock
outstanding, end of
period (in thousands)..... $ 55,000 $ 55,000 $ 55,000
======== ======== ========
Portfolio turnover.......... 18.88% 12.88% 22.49%
======== ======== ========
(Continued on next page)
15
For the Year Ended October 31,
-----------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Leverage:
Asset coverage per $1,000... $ 3,155 $ 2,989 $ 2,920 $ 3,239 $ 3,189 $ 3,148 $ 3,138
======== ======== ======== ======== ======== ======== ========
Dividends Per Share on
Preferred Stock
Outstanding:+++
Series A Investment
income-- net.............. $ 798 $ 1,026 $ 637 $ 742 $ 894 $ 880 $ 806
======== ======== ======== ======== ======== ======== ========
For the
Period
February
28, 1992+ to
October 31,
--------------------- -----------
1994 1993 1992
---- ---- ----
Leverage:
Asset coverage per $1,000... $ 2,972 $ 3,329 $ 2,944
======== ======== ========
Dividends Per Share on
Preferred Stock
Outstanding:+++
Series A Investment
income-- net.............. $ 1,529 $ 1,293 $ 888
======== ======== ========
---------
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result in
substantially different returns. Total investment returns exclude the
effects of sales charges.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of Operations. ++ MuniYield Michigan issued its Series A AMPS on
April 10, 1992.
+++ Dividends per share have been adjusted to reflect a two-for-one stock
split that occurred on December 1, 1994.
# Prior to the fiscal year ended October 31, 1995, MuniYield Michigan only
reported ratios with respect to Total Average Net Assets.
## Aggregate total investment return.
### Includes common stock and preferred stock average net assets.
16
MuniHoldings Michigan
The financial information in the table below has been audited in
conjunction with the annual audit of the financial statements of MuniHoldings
Michigan by ____________, independent auditors. The following per share data
and ratios have been derived from information provided in the financial
statements of MuniHoldings Michigan.
For the Period
For the Year September 17, 1999+
Ended July 31, to July 31,
-------------- -----------
2001 2000
-------------- -----------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period........... $ 15.04 $ 15.00
-------- ---------
Investment income-- net........................ 1.24 1.08
Realized and unrealized gain on investments-- net 1.73 .13
-------- ---------
Total from investment operations............... 2.97 1.21
-------- ---------
Less dividends to Common Stock shareholders from
investment income-- net: (.88) (.70)
Capital write-off (charge) resulting from
issuance of Common Stock..................... .02 (.04)
-------- ---------
Investment income-- net......................
Effect of Preferred Stock activity:
Dividends to Preferred Stock shareholders:
Investment income-- net................... (.34) (.31)
Capital write-off (charge) resulting from
issuance of Preferred Stock............... .01 (.12)
-------- ---------
Total effect of Preferred Stock activity....... (.33) (.43)
-------- ---------
Net asset value, end of period................. $ 16.82 $ 15.04
========= =========
Market price per share, end of period.......... $ 14.98 $ 13.625
========= =========
Total Investment Return:**
Based on market price per share................ 16.95% (4.13%)+++
========= =========
Based on net asset value per share............. 18.97% 5.82%+++
========= =========
Ratios Based on Average Net Assets of Common
Stock:
Total expenses, net of reimbursement*** .99% .73%*
========= =========
Total expenses***.............................. 1.54% 1.42%*
========= =========
Total investment income-- net***............... 7.80% 8.85%*
========= =========
Amount of dividends to Preferred Stock
shareholders................................. 2.16% 2.55%*
========= =========
Investment income-- net, to Common Stock
shareholders................................. 5.64% 6.30%*
========= =========
Ratios Based on Total Average Net Assets:++++***
Total expenses, net of reimbursement........... .62% .45%*
========= =========
Total expenses................................. .97% .88%*
========= =========
Total investment income-- net.................. 4.91% 5.47%*
========= =========
Ratios Based on Average Net Assets of Preferred
Stock:
Dividends to Preferred Stock shareholders...... 3.66% 4.12%*
========= =========
Supplemental Data:
Net assets, net of Preferred Stock, end of period
(in thousands)............................... $ 60,919 $ 54,477
========= =========
Preferred Stock outstanding, end of period (in
thousands)................................... $ 34,000 $ 34,000
========= =========
Portfolio turnover............................. 16.50% 67.64%
========= =========
Leverage:
Asset coverage per $1,000...................... $ 2,792 $ 2,602
========= =========
Dividends Per Share on Preferred Stock
Outstanding:++
Series A Investment income-- net............. $ 915 $ 830
========= =========
------------------
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales charges.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations ++ The Fund's Preferred Stock was issued on
October 1999.
+++ Aggregate total investment return.
++++ Includes Common and Preferred Stock average net assets.
17
Per share data for common stock* (unaudited)
MuniYield Michigan
(Traded on the NYSE)
Premium (Discount) to
Market Price** Net Asset Value Net Asset Value
-------------- --------------- ---------------
Quarter Ended* High Low High Low High Low
-------------- ---- --- ---- --- ---- ---
January 31, 2000....................... $12.50 $11.00 $13.69 $12.89 (6.88%) (20.93%)
April 30, 2000......................... $11.69 $10.94 $13.66 $12.92 (10.61%) (23.09%)
July 31, 2000.......................... $12.19 $10.69 $13.70 $12.82 (11.81%) (20.64%)
October 31, 2000....................... $12.135 $11.25 $13.95 $13.65 (13.76%) (21.33%)
January 31, 2001....................... $13.19 $11.50 $14.83 $13.74 (10.26%) (21.68%)
April 30, 2001......................... $13.40 $13.00 $14.69 $14.22 (6.99%) (12.41%)
July 31, 2001.......................... $13.63 $13.25 $14.67 $14.23 (5.08%) (9.05%)
October 31, 2001....................... $14.08 $13.10 $15.02 $14.67 (5.89%) (12.44%)
January 31, 2002....................... $_____ $_____ $_____ $_____ ( %) ( %)
MuniHoldings Michigan
(Traded on the AMEX)
Premium (Discount) to
Market Price** Net Asset Value Net Asset Value
-------------- --------------- ---------------
Quarter Ended* High Low High Low High Low
-------------- ---- --- ---- --- ---- ---
October 31, 1999+...................... 15.75 13.75 14.97 13.91 8.57% (1.75%)
January 31, 2000....................... 15.00 11.75 14.88 13.72 5.20% (18.28%)
April 30, 2000......................... 13.50 11.63 15.02 13.71 (10.07%) (25.59%)
July 31, 2000.......................... 14.25 11.56 15.04 13.68 (5.05%) (21.08%)
October 31, 2000....................... 14.13 12.25 15.44 15.02 (6.55%) (23.70%)
January 31, 2001....................... 15.13 12.50 16.68 10.38 (8.63%) (23.84%)
April 30, 2001......................... 15.00 14.25 16.62 16.01 (8.75%) (15.52%)
July 31, 2001.......................... 15.25 14.49 16.82 16.04 (5.57%) (14.08%)
October 31, 2001....................... 16.25 14.850 17.20 16.82 (4.69%) (11.76%)
January 31, 2002.......................
---------
* Calculations are based upon shares of common stock outstanding at the end of
each quarter.
** As reported in the consolidated transaction operating system.
+ From September 17, 1999 (commencement of operations)
18
For the periods shown, share prices for MuniYield Michigan's Common Stock
have traded at a discount ranging from ( %) to ( %). For the periods shown,
MuniHoldings Michigan's share prices for its common stock have fluctuated
between a maximum premium of approximately % and a maximum discount of
approximately ( %). Although there is no reason to believe that this pattern
should be affected by the Reorganization, it is not possible to predict
whether shares of the Combined Fund will trade at a premium or discount to net
asset value following the Reorganization, or what the extent of any such
premium or discount might be.
Investment Objective and Policies
The structure, organization and investment policies of the Funds are
substantially similar. Each Fund seeks current income exempt from Federal
income taxes and Michigan personal income taxes. The investment objective of
each Fund is a fundamental policy that may not be changed without a vote of a
majority of the Fund's outstanding voting securities.
Each Fund seeks to achieve its investment objective by investing
primarily in a portfolio of Michigan Municipal Bonds. Each Fund intends to
invest substantially all (at least 80%) of its net assets in Michigan
Municipal Bonds except at times when FAM considers that Michigan Municipal
Bonds of sufficient quantity and quality are unavailable at suitable prices,
or during interim periods pending investment of the net proceeds of public
offerings of its securities and during temporary defensive periods. At times,
each Fund may seek to hedge its portfolio through the use of futures and
options transactions to reduce volatility in the net asset value of its shares
of common stock. Currently, with respect to MuniHoldings Michigan, and after
the Reorganization, with respect to MuniYield Michigan, under normal
circumstances, at least 80% of each Fund's net assets will be invested in
Municipal Bonds that are covered by insurance guaranteeing the timely payment
of principal at maturity and interest when due. MuniYield Michigan is not
currently subject to this requirement regarding insurance coverage for its
portfolio securities but will adopt this requirement upon approval of the
Reorganization.
Ordinarily, neither Fund intends to realize significant investment income
subject to Federal income tax and Michigan income taxes. Each Fund may invest
all or a portion of its assets in certain tax-exempt securities classified as
"private activity bonds" (in general, bonds that benefit non-governmental
entities) that may subject certain investors in the Fund to a Federal
alternative minimum tax.
Each Fund also may invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Michigan Municipal Bonds and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act. Other Non-Municipal Tax-Exempt Securities could include trust
certificates or other instruments evidencing interests in one or more long
term Michigan Municipal Bonds or Municipal Bonds. Certain Non-Municipal
Tax-Exempt Securities may be characterized as derivative instruments. For
purposes of a Fund's investment objective and policies, Non-Municipal
Tax-Exempt Securities that pay interest that is exempt from Federal income
taxes and Michigan income taxes will be considered "Michigan Municipal Bonds"
and Non-Municipal Tax-Exempt Securities that pay interest that is exempt from
Federal income taxes will be considered "Municipal Bonds."
Each Fund will invest in investment grade Michigan Municipal Bonds
and Municipal Bonds that are rated at the date of purchase in the four highest
rating categories of S&P, Moody's or Fitch or, if unrated, are considered to
be of comparable quality by FAM. In the case of long term debt, the investment
grade rating categories are AAA through BBB for S&P and Fitch and Aaa through
Baa for Moody's. In the case of short term notes, the investment grade rating
categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moody's and
F-1+ through F-3 for Fitch. In the case of tax-exempt commercial paper, the
investment grade rating categories are A-1+ through A-3 for S&P, Prime-1
through Prime-3 for Moody's and F-1+ through F-3 for Fitch. Obligations ranked
in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P;
Baa, MIG-3 and Prime-3 for Moody's; and BBB and F-3 for Fitch), while
considered "investment grade," may have certain speculative characteristics.
There may be sub-categories or gradations indicating relative standing within
the rating categories set forth above. In assessing the quality of Michigan
Municipal Bonds and Municipal Bonds with respect to the foregoing
requirements, FAM takes into account the portfolio insurance as well as the
nature of any letters of credit or similar credit enhancement to which
particular Michigan Municipal Bonds and Municipal Bonds are entitled and the
creditworthiness of the insurance company or financial institution that
provided such insurance or credit enhancements. Consequently, if Michigan
Municipal Bonds or Municipal Bonds are covered by insurance policies issued by
insurers whose claims-paying ability is rated AAA by S&P or Fitch or Aaa by
Moody's, FAM may consider such municipal obligations to be equivalent to AAA-
or Aaa- rated securities, as the case may be, even though such Michigan
Municipal Bonds or
19
Municipal Bonds would generally be assigned a lower rating if the rating were
based primarily upon the credit characteristics of the issuers without regard
to the insurance feature. The insured Michigan Municipal Bonds and Municipal
Bonds must also comply with the standards applied by the insurance carriers in
determining eligibility for portfolio insurance. See Exhibit IV -- "Ratings of
Municipal Bonds and Commercial Paper" and Exhibit V -- "Portfolio Insurance."
Each Fund may invest in variable rate demand obligations ("VRDOs") and
VRDOs in the form of participation interests ("Participating VRDOs") in
variable rate tax-exempt obligations held by a financial institution,
typically a commercial bank. The VRDOs in which each Fund may invest are
tax-exempt obligations, in the opinion of counsel to the issuer, that contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand on the part of the holder thereof to receive payment of the
unpaid principal balance plus accrued interest on a short notice period not to
exceed seven days. Participating VRDOs provide each Fund with a specified
undivided interest (up to 100%) in the underlying obligation and the right to
demand payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution on a specified number of
days' notice, not to exceed seven days. There is, however, the possibility
that because of default or insolvency, the demand feature of VRDOs or
Participating VRDOs may not be honored. Each Fund has been advised by its
counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations for Federal income
tax purposes.
The net asset value of the shares of common stock of a closed-end
investment company such as MuniYield Michigan or MuniHoldings Michigan, which
invests primarily in fixed income securities, changes as the general levels of
interest rates fluctuate. When interest rates decline, the value of a fixed
income portfolio can be expected to rise. Conversely, when interest rates
rise, the value of a fixed income portfolio can be expected to decline. Prices
of longer term securities generally fluctuate more in response to interest
rate changes than do short term or medium term securities. These changes in
net asset value are likely to be greater in the case of a fund having a
leveraged capital structure, such as that used by the Funds. See "Risk Factors
and Special Considerations -- Leverage."
The average maturity of each Fund's portfolio securities varies based
upon FAM's assessment of economic and market conditions. Each Fund intends to
invest primarily in long term Michigan Municipal Bonds and Municipal Bonds
with a maturity of more than ten years. However, each Fund may also invest in
intermediate term Michigan Municipal Bonds and Municipal Bonds with a maturity
of between three years and ten years. Each Fund may also invest in short term
tax-exempt securities, short term U.S. Government securities, repurchase
agreements or cash. Investments in such short term securities or cash will not
exceed 20% of a Fund's total assets except during interim periods pending
investment of the net proceeds from public offerings of that Fund's securities
or in anticipation of the repurchase or redemption of that Fund's securities
and temporary periods when, in the opinion of FAM, prevailing market or
economic conditions warrant. The Funds do not ordinarily intend to realize
significant interest income that is subject to Federal and Michigan income
taxes.
Each Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act
in the proportion of its total assets that it may invest in securities of a
single issuer. However, each Fund's investments are limited so as to qualify
the Fund for the special tax treatment afforded RICs under the Federal tax
laws. To qualify, among other requirements, each Fund limits its investments
so that, at the close of each quarter of the taxable year, (i) not more than
25% of the market value of the Fund's total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer and it
will not own more than 10% of the outstanding voting securities of a single
issuer. A fund that elects to be classified as "diversified" under the
Investment Company Act must satisfy, among other requirements, the foregoing
5% and 10% requirements with respect to 75% of its total assets. To the extent
that either Fund assumes large positions in the securities of a small number
of issuers, its yield may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in
the market's assessment of the issuers.
Portfolio Insurance
Under normal circumstances, at least 80% of the net assets of
MuniHoldings Michigan will be invested in Michigan Municipal Bonds and
Municipal Bonds either (i) insured under an insurance policy obtained by the
issuer thereof or any other party, or (ii) insured under an insurance policy
purchased by MuniHoldings Michigan. MuniHoldings Michigan will seek to limit
its investments to municipal obligations insured under insurance policies
issued by insurance carriers that have total admitted assets (unaudited) of at
least $75,000,000 and capital and surplus (unaudited) of at least $50,000,000
and insurance claims-paying ability ratings of AAA from S&P or Fitch,
20
or Aaa from Moody's. There can be no assurance that insurance from insurance
carriers meeting these criteria will be available. See Exhibit V to this Joint
Proxy Statement and Prospectus for a brief description of insurance
claims-paying ability ratings of S&P, Moody's and Fitch. Currently, it is
anticipated that a majority of the insured Michigan Municipal Bonds and
Municipal Bonds in MuniHoldings Michigan's portfolio will be insured by the
following insurance companies which satisfy the foregoing criteria: Ambac
Assurance Corporation, Financial Guaranty Insurance Company, Financial
Security Assurance and MBIA Insurance Corporation. MuniHoldings Michigan also
may purchase Michigan Municipal Bonds and Municipal Bonds covered by insurance
issued by any other insurance company that satisfies the foregoing criteria. A
majority of insured Michigan Municipal Bonds and Municipal Bonds held by
MuniHoldings Michigan will be insured under policies obtained by parties other
than the Fund.
MuniYield Michigan is not currently subject to any requirement to invest
in Michigan Municipal Bonds or Municipal Bonds that are insured; however,
after the Reorganization, MuniYield Michigan will be subject to the same
requirement as MuniHoldings Michigan described above. After the
Reorganization, therefore, MuniYield Michigan shareholders will share in the
cost of maintaining such insurance. Currently % of the portfolio of MuniYield
Michigan is comprised of insured Michigan Municipal Bonds and Municipal Bonds.
MuniHoldings Michigan may purchase, but has no obligation to purchase,
separate insurance policies (the "Policies") from insurance companies meeting
the criteria set forth above that guarantee payment of principal and interest
when due on specified eligible Michigan Municipal Bonds and Municipal Bonds
that it purchases. A Michigan Municipal Bond or Municipal Bond will be
eligible for coverage if it meets certain requirements of the insurance
company set forth in a Policy. In the event interest or principal of an
insured Michigan Municipal Bond or Municipal Bond is not paid when due, the
insurer will be obligated under its Policy to make such payment not later than
30 days after it has been notified by, and provided with documentation from,
the Fund that such nonpayment has occurred.
The Policies will be effective only as to insured Michigan Municipal
Bonds and Municipal Bonds beneficially owned by MuniHoldings Michigan. In the
event of a sale of any Michigan Municipal Bonds and Municipal Bonds held by
MuniHoldings Michigan, the issuer of the relevant Policy will be liable only
for those payments of interest and principal that are then due and owing. The
Policies will not guarantee the market value of an insured Michigan Municipal
Bond or Municipal Bond or the value of the shares of MuniHoldings Michigan.
The insurer will not have the right to withdraw coverage on securities
insured by its Policies and held by MuniHoldings Michigan so long as such
securities remain in MuniHoldings Michigan's portfolio. In addition, the
insurer may not cancel its Policies for any reason except failure to pay
premiums when due. The Board of Directors of MuniHoldings Michigan reserves
the right to terminate any of the Policies if it determines that the benefits
to MuniHoldings Michigan of having its portfolio insured under such Policy are
not justified by the expense involved.
The premiums for the Policies are paid by MuniHoldings Michigan and the
yield on its portfolio is reduced thereby. FAM estimates that the cost of the
annual premiums for the Policies of MuniHoldings Michigan currently range from
approximately .05 of 1% to .40 of 1% of the principal amount of the Michigan
Municipal Bonds and Municipal Bonds covered by such Policies. The estimate is
based on the expected composition of MuniHoldings Michigan's portfolio of
Michigan Municipal Bonds and Municipal Bonds. Additional information regarding
the Policies is set forth in Exhibit V to this Proxy Statement and Prospectus.
In instances in which MuniHoldings Michigan purchases Michigan Municipal Bonds
and Municipal Bonds insured under policies obtained by parties other than
MuniHoldings Michigan, the Fund does not pay the premiums for such policies;
rather, the cost of such policies may be reflected in the purchase price of
the Michigan Municipal Bonds and Municipal Bonds.
It is the intention of FAM to retain any insured securities that are in
default or in significant risk of default and to place a value on the
insurance, which ordinarily will be the difference between the market value of
the defaulted security and the market value of similar securities that are not
in default. In certain circumstances, however, FAM may determine that an
alternate value for the insurance, such as the difference between the market
value of the defaulted security and its par value, is more appropriate. FAM's
ability to manage the portfolio of MuniHoldings Michigan may be limited to the
extent it holds defaulted securities for which market quotations are not
generally available, which may limit its ability in certain circumstances to
purchase other Michigan Municipal Bonds and Municipal Bonds. See "Net Asset
Value" below for a more complete description of each Fund's method of valuing
securities for which market quotations are not generally available.
No assurance can be given that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to MuniHoldings Michigan. In the event the Board of
21
Directors of MuniHoldings Michigan determines that such insurance is
unavailable or that the cost of such insurance outweighs the benefits to
MuniHoldings Michigan, the Fund may modify the criteria for insurance carriers
or the terms of the insurance, or may discontinue its policy of maintaining
insurance for all or any of the Michigan Municipal Bonds and Municipal Bonds
held in the Fund's portfolio. Although FAM periodically reviews the financial
condition of each insurer, there can be no assurance that the insurers will be
able to honor their obligations under all circumstances.
Portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Michigan Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured Michigan Municipal Bonds or Municipal Bonds
are subject to market risk (i.e., fluctuations in market value as a result of
changes in prevailing interest rates and other market conditions).
Description of Michigan Municipal Bonds and Municipal Bonds
Michigan Municipal Bonds and Municipal Bonds include debt obligations
issued to obtain funds for various public purposes, including construction of
a wide range of public facilities, refunding of outstanding obligations and
obtaining funds for general operating expenses and loans to other public
institutions and facilities. In addition, certain types of private activity
bonds ("PABs") are issued by or on behalf of public authorities to finance
various privately operated facilities, including, among other things,
airports, public ports, mass commuting facilities, multi-family housing
projects, as well as facilities for water supply, gas, electricity, sewage or
solid waste disposal. For purposes of this Joint Proxy Statement and
Prospectus, such obligations are Municipal Bonds if the interest paid thereon
is exempt from Federal income tax and are Michigan Municipal Bonds if the
interest thereon is exempt from Federal income tax and Michigan personal
income taxes, even though such bonds may be industrial development bonds or
PABs as discussed below. Also, for purposes of this Joint Proxy Statement and
Prospectus, Non-Municipal Tax-Exempt Securities as discussed above will be
considered Michigan Municipal Bonds or Municipal Bonds.
The two principal classifications of Michigan Municipal Bonds and
Municipal Bonds are "general obligation" bonds and "revenue" bonds, which
latter category includes PABs and, for bonds issued on or before August 15,
1986, industrial development bonds or "IDBs." General obligation bonds (other
than those of the State of Michigan which has limited taxing powers) are
typically secured by the issuer's pledge of faith, credit and taxing power for
the repayment of principal and the payment of interest. Revenue or special
obligation bonds are typically payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as from
the user of the facility being financed. PABs are in most cases revenue bonds
and do not generally constitute the pledge of the credit or taxing power of
the issuer of such bonds. The repayment of principal and the payment of
interest on such IDBs depends solely on the ability of the user of the
facility financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. Michigan Municipal Bonds and Municipal Bonds may also include "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
Each Fund may purchase Michigan Municipal Bonds and Municipal Bonds
classified as PABs. Interest received on certain PABs is treated as an item of
"tax preference" for purposes of the Federal alternative minimum tax and may
impact the overall tax liability of certain investors in the Fund. There is no
limitation on the percentage of each Fund's assets that may be invested in
Michigan Municipal Bonds and Municipal Bonds the interest on which is treated
as an item of "tax preference" for purposes of the Federal alternative minimum
tax. See "Comparison of the Funds -- Tax Rules Applicable to the Funds and
Their Stockholders."
Also included within the general category of Michigan Municipal Bonds
and/or Municipal Bonds are certificates of participation ("COPs") executed and
delivered for the benefit of government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. COPs
represent participations in a lease, an installment purchase contract or a
conditional sales contract (hereinafter collectively referred to as "lease
obligations") relating to such equipment, land or facilities. Although lease
obligations typically do not constitute general obligations of the issuer for
which the issuer's unlimited taxing power is pledged, a lease obligation
frequently is backed by the issuer's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses, which provide that the issuer
has no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the lease
property, disposition of the property in the event of foreclosure might prove
difficult.
22
Federal tax legislation has limited and may continue to limit the types
and volume of such bonds the interest on which is excludable from income for
Federal income tax purposes. Such legislation may affect the availability of
Michigan Municipal Bonds and Municipal Bonds for investment by each Fund.
Special Considerations Relating to Michigan Municipal Bonds
Each Fund ordinarily will invest at least 80% of its net assets in
Michigan Municipal Bonds and, therefore, is more exposed to factors adversely
affecting issuers of Michigan Municipal Bonds than is a municipal bond fund
that does not invest in issuers of Michigan Municipal Bonds to this degree.
FAM does not believe that current economic conditions in Michigan will have a
significant adverse effect on each Fund's ability to invest in high-quality
Michigan Municipal Bonds. Currently, Michigan's general obligation bonds are
rated AAA by S&P, Aaa by Moody's and AA+ by Fitch. See Exhibit III --
"Economic and Financial Conditions in Michigan" and Exhibit IV -- "Ratings of
Municipal Bonds and Commercial Paper."
Other Investment Policies
Each Fund has adopted certain other policies as set forth below:
Borrowings. Each Fund is authorized to borrow amounts of up to 5% of the
value of its total assets at the time of such borrowings; provided, however,
that each Fund is authorized to borrow moneys in excess of 5% of the value of
its total assets at the time of such borrowings to finance the repurchase of
its own common stock pursuant to tender offers or otherwise to redeem or
repurchase shares of preferred stock or for temporary, extraordinary or
emergency purposes. Borrowings by each Fund (commonly known, as with the
issuance of preferred stock, as "leveraging") create an opportunity for
greater total return since the Fund will not be required to sell portfolio
securities to repurchase or redeem shares but, at the same time, increase
exposure to capital risk. In addition, borrowed funds are subject to interest
costs that may offset or exceed the return earned on the borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. Each Fund may
purchase or sell Michigan Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase or sale terms.
These transactions arise when securities are purchased or sold by a Fund with
payment and delivery taking place in the future. The purchase will be recorded
on the date that the Fund enters into the commitment, and the value of the
obligation thereafter will be reflected in the calculation of the Fund's net
asset value. The value of the obligation on the delivery day may be more or
less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or liquid
securities having a market value at all times at least equal to the amount of
the commitment.
Indexed and Inverse Floating Obligations. Each Fund may invest in
Michigan Municipal Bonds and Municipal Bonds yielding a return based on a
particular index of value or interest rates. For example, each Fund may invest
in Michigan Municipal Bonds and Municipal Bonds that pay interest based on an
index of Municipal Bond interest rates. The principal amount payable upon
maturity of certain Michigan Municipal Bonds and Municipal Bonds also may be
based on the value of an index. To the extent a Fund invests in these types of
Municipal Bonds, the Fund's return on such Michigan Municipal Bonds and
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Also, a Fund may invest in so-called "inverse floating
obligations" or "residual interest bonds" on which the interest rates
typically vary inversely with a short term floating rate (which may be reset
periodically by a Dutch auction, a remarketing agent, or by reference to a
short term tax-exempt interest rate index). Each Fund may purchase
synthetically-created inverse floating obligations evidenced by custodial or
trust receipts. Generally, income on inverse floating obligations will
decrease when short term rates increase, and will increase when short term
rates decrease. Such securities have the effect of providing a degree of
investment leverage, since they may increase or decrease in value in response
to changes, as an illustration, in market interest rates at a rate that is a
multiple (typically two) of the rate at which fixed-rate, long term,
tax-exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities generally will be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit
the volatility of these securities, a Fund may purchase inverse floating
obligations with shorter term maturities or limitations on the extent to which
the interest rate may vary. FAM believes that indexed and inverse floating
obligations represent a flexible portfolio management instrument for the Funds
that allows FAM to vary the degree of investment leverage relatively
efficiently under different market conditions.
Call Rights. Each Fund may purchase a Michigan Municipal Bond or
Municipal Bond issuer's rights to call all or a portion of such Michigan
Municipal Bond or Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related
23
Michigan Municipal Bonds or Municipal Bonds, subject to certain conditions. A
Call Right that is not exercised prior to the maturity of the related Michigan
Municipal Bond or Municipal Bond will expire without value. The economic
effect of holding both the Call Right and the related Michigan Municipal Bond
or Municipal Bond is identical to holding a Michigan Municipal Bond or
Municipal Bond as a non-callable security.
Repurchase Agreements. The Funds may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed upon time and price, thereby determining the yield during
the term of the agreement. The Funds may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Funds may suffer
time delays and incur costs or possible losses in connection with the
disposition of the underlying securities.
In general, for Federal and Michigan income tax purposes, repurchase
agreements are treated as collateralized loans secured by the securities
"sold." Therefore, amounts earned under such agreements will not be considered
tax-exempt interest.
Information Regarding Options and Futures Transactions
Each Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts and options thereon. While each Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of its common stock, the net asset value of its common stock will fluctuate.
No assurance can be given that a Fund's hedging transactions will be
effective. In addition, because of the leveraged nature of the common stock,
hedging transactions will result in a larger impact on the net asset value of
the common stock than would be the case if the common stock were not
leveraged. Furthermore, a Fund may only engage in hedging activities from time
to time and may not necessarily be engaging in hedging activities when
movements in interest rates occur. Neither Fund has an obligation to enter
into hedging transactions and each may choose not to do so.
Gains from transactions in options and futures contracts distributed to
stockholders will be taxable as ordinary income or, in certain circumstances,
as long term capital gains to stockholders. See "Comparison of the Funds --
Tax Rules Applicable to the Funds and their Stockholders -- Tax Treatment of
Options and Futures Transactions." In order to obtain ratings of the AMPS from
one or more of the NRSROs, a Fund may be required to limit its use of hedging
techniques in accordance with the specified guidelines of the NRSROs. See
"Rating Agency Guidelines" below.
The following is a description of the options and futures transactions in
which each Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of a Fund are not fundamental policies and
may be modified by the Board of Directors of the Fund without the approval of
the Fund's stockholders.
Writing Covered Call Options. Each Fund is authorized to write (i.e.,
sell) covered call options with respect to Michigan Municipal Bonds and
Municipal Bonds it owns, thereby giving the holder of the option the right to
buy the underlying security covered by the option from the Fund at the stated
exercise price until the option expires. Each Fund writes only covered call
options, which means that so long as the Fund is obligated as the writer of a
call option, it will own the underlying securities subject to the option.
Neither Fund may write covered call options on underlying securities in an
amount exceeding 15% of the market value of its total assets.
Each Fund receives a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as a writer continues. Covered call options serve as a partial
hedge against a decline in the price of the underlying security. Each Fund may
engage in closing transactions in order to terminate outstanding options that
it has written.
Purchase of Options. Each Fund may purchase put options in connection
with its hedging activities. By buying a put, the Fund has a right to sell the
underlying security at the exercise price, thus limiting its risk of loss
through a decline in the market value of the security until the put expires.
The amount of any appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put option and any
24
related transaction costs. Prior to its expiration, a put option may be sold
in a closing sale transaction; profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. In certain circumstances, the Fund may purchase call options
on securities held in its portfolio on which it has written call options, or
on securities which it intends to purchase. A Fund will not purchase options
on securities if, as a result of such purchase, the aggregate cost of all
outstanding options on securities held by the Fund would exceed 5% of the
market value of the Fund's total assets.
Financial Futures Contracts and Options. Each Fund is authorized to
purchase and sell certain financial futures contracts and options thereon
solely for the purposes of hedging its investments in Michigan Municipal Bonds
and Municipal Bonds against declines in value and hedging against increases in
the cost of securities it intends to purchase. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract
to take delivery of the type of financial instrument covered by the contract
or, in the case of index-based financial futures contracts, to make and accept
a cash settlement, at a specific future time for a specified price. A sale of
financial futures contracts may provide a hedge against a decline in the value
of portfolio securities because such depreciation may be offset, in whole or
in part, by an increase in the value of the position in the financial futures
contracts. A purchase of financial futures contracts may provide a hedge
against an increase in the cost of securities intended to be purchased,
because such appreciation may be offset, in whole or in part, by an increase
in the value of the position in the financial futures contracts.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or
received. Instead, an amount of cash or securities acceptable to the broker
equal to approximately 5% of the contract amount must be deposited with the
broker. This amount is known as initial margin. Subsequent payments to and
from the broker, called variation margin, are made on a daily basis as the
price of the financial futures contract fluctuates making the long and short
positions in the financial futures contract more or less valuable.
Each Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price weighted measure of the market value
of 40 large tax-exempt issues, and purchase and sell put and call options on
such financial futures contracts for the purpose of hedging Michigan Municipal
Bonds and Municipal Bonds that the Fund holds or anticipates purchasing
against adverse changes in interest rates. Each Fund also may purchase and
sell financial futures contracts on U.S. Government securities and purchase
and sell put and call options on such financial futures contracts for such
hedging purposes. With respect to U.S. Government securities, currently there
are financial futures contracts based on long term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three month U.S. Treasury bills.
Subject to policies adopted by its Board of Directors, each Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available,
if FAM should determine that there is normally sufficient correlation between
the prices of such financial futures contracts and the Michigan Municipal
Bonds and Municipal Bonds in which the Fund invests to make such hedging
appropriate.
Over-the-Counter Options. Each Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC option transactions are two-party contracts with price and terms
negotiated by the buyer and seller.
Restrictions on OTC Options. Each Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Funds are considered to be illiquid. The illiquidity of such options or
assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that otherwise might be
realized.
Risk Factors in Financial Futures Contracts and Options Thereon. Use of
futures transactions involves the risk of imperfect correlation in movements
in the price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, a Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities
25
underlying financial futures contracts have different maturities, ratings,
geographic compositions or other characteristics different from those of the
security being hedged. In addition, the correlation may be affected by
additions to or deletions from the index that serves as a basis for a
financial futures contract. Finally, in the case of financial futures
contracts on U.S. Government securities and options on such financial futures
contracts, the anticipated correlation of price movements between the U.S.
Government securities underlying the futures or options and Michigan Municipal
Bonds and Municipal Bonds may be adversely affected by economic, political,
legislative or other developments which have a disparate impact on the
respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the
futures trading activities described herein will not result in a Fund being
deemed a "commodity pool," as defined under such regulations, provided that
the Fund adheres to certain restrictions. In particular, the Fund may purchase
and sell financial futures contracts and options thereon (i) for bona fide
hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes,
if, immediately thereafter the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums entered into for
non-hedging purposes do not exceed 5% of the market value of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any such transactions. Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When a Fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, it will maintain an amount of cash,
cash equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian, so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.
Although certain risks are involved in options and futures transactions,
FAM believes that, because each Fund will engage in options and futures
transactions only for hedging purposes, the options and futures portfolio
strategies of a Fund will not subject the Fund to the risks associated with
speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to Michigan
Municipal Bond or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
Each Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on a Fund's ability to hedge effectively its portfolio. There
is also the risk of loss by a Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.
The liquidity of a secondary market in a financial futures contract may
be adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past reached or exceeded the daily limit on a number of
consecutive trading days.
If it is not possible to close a financial futures position entered into
by a Fund, the Fund would continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so.
The successful use of these transactions also depends on the ability of
FAM to forecast correctly the direction and extent of interest rate movements
within a given time frame. To the extent these rates remain stable during the
period in which a financial futures contract is held by a Fund or move in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction that is not fully or partially offset by an increase in
the value of portfolio securities. As a result, the Fund's total return for
such period may be less than if it had not engaged in the hedging transaction.
Furthermore, the Fund will only engage in hedging transactions from time to
time and may not necessarily be engaging in hedging transactions when
movements in interest rates occur.
26
Investment Restrictions
The Funds have identical investment restrictions. The following are
fundamental investment restrictions of each Fund and may not be changed
without the approval of the holders of a majority of the outstanding shares of
common stock and the outstanding shares of AMPS and any other preferred stock,
voting together as a single class, and a majority of the outstanding shares of
AMPS and any other preferred stock, voting separately as a class. These
fundamental restrictions will also be the fundamental restrictions of the
Combined Fund. (For this purpose and under the Investment Company Act, for the
common stock and AMPS voting together as a single class, "majority" means the
lesser of (i) 67% of the shares of each class of capital stock represented at
a meeting at which more than 50% of the outstanding shares of each class of
capital stock are represented or (ii) more than 50% of the outstanding shares
of each class of capital stock.) For the AMPS voting separately as a single
class, "majority" means more than 50% of the outstanding AMPS. Neither Fund
may:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization,
or by purchase in the open market of securities of closed-end investment
companies and only if immediately thereafter not more than 10% of the
Fund's total assets would be invested in such securities.
3. Purchase or sell real estate, real estate limited partnerships,
commodities or commodity contracts; provided, that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies that invest in real estate or interests therein, and the Fund
may purchase and sell financial futures contracts and options thereon.
4. Issue senior securities other than preferred stock or borrow
amounts in excess of 5% of its total assets taken at market value;
provided, however, that the Fund is authorized to borrow moneys in excess
of 5% of the value of its total assets for the purpose of repurchasing
shares of common stock or redeeming shares of preferred stock.
5. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended
(the "Securities Act"), in selling portfolio securities.
6. Make loans to other persons, except that the Fund may purchase
Michigan Municipal Bonds, Municipal Bonds and other debt securities in
accordance with its investment objective, policies and limitations.
7. Purchase any securities on margin, except that each Fund may
obtain such short term credit as may be necessary for the clearance of
purchases and sales of portfolio securities (the deposit or payment by
each Fund of initial or variation margin in connection with financial
futures contracts and options thereon is not considered the purchase of a
security on margin).
8. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that each Fund
may write, purchase and sell options and futures on Michigan Municipal
Bonds, Municipal Bonds, U.S. Government obligations and related indices
or otherwise in connection with bona fide hedging activities.
9. Invest more than 25% of its total assets (taken at market value
at the time of each investment) in securities of issuers in a single
industry; provided, that for purposes of this restriction, states,
municipalities and their political subdivisions are not considered to be
part of any industry.
For purposes of restriction (9), the exception for states, municipalities
and their political subdivisions applies only to tax-exempt securities issued
by such entities.
An additional investment restriction adopted by each Fund, which may be
changed by the Board of Directors without stockholder approval, provides that
neither Fund may mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except as
may be necessary in connection with borrowings mentioned in investment
restriction (4) above or except as may be necessary in connection with
transactions in financial futures contracts and options thereon.
27
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
For so long as shares of its AMPS are rated by Moody's, neither Fund will
change its additional investment restrictions (as discussed above) unless it
receives written confirmation from Moody's that any such change would not
impair the rating then assigned to the shares of AMPS by Moody's.
FAM and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") are owned and controlled by ML & Co. Because of the affiliation of
Merrill Lynch with FAM, each Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the Investment Company Act and
the rules and regulations thereunder. Included among such restricted
transactions will be purchases from or sales to Merrill Lynch of securities in
transactions in which it acts as principal. The Funds recently received an
exemptive order under which they may purchase investment grade Michigan
Municipal Bonds and Municipal Bonds through group orders from an underwriting
syndicate of which Merrill Lynch is a member subject to conditions set forth
in such order (the "Group Order Exemptive Order"). A group order is an order
for securities held in an underwriting syndicate for the account of all
members of the syndicate, and in proportion to their respective participation
in the syndicate. No transactions were executed by MuniYield Michigan or
MuniHoldings Michigan pursuant to the Group Order Exemptive Order for the
fiscal year ended October 31, 2001, respectively, the first fiscal year of
each Fund in which the Group Order Exemptive Order was in effect. An exemptive
order has been obtained that permits the Funds to effect principal
transactions with Merrill Lynch in high quality, short term, tax-exempt
securities subject to conditions set forth in such order. The Funds may
consider in the future requesting an order permitting other principal
transactions with Merrill Lynch, but no assurance can be given that such
application will be made and, if made, that such order would be granted.
Rating Agency Guidelines.
Each Fund intends that, so long as shares of its AMPS are outstanding,
the composition of its portfolio will reflect guidelines established by
Moody's and S&P in connection with its receipt of a rating for such shares on
or prior to their date of original issue of at least Aaa from Moody's and AAA
from S&P. Moody's and S&P, which are nationally recognized statistical rating
organizations, issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines for rating AMPS have been
developed by Moody's and S&P in connection with issuances of asset-backed and
similar securities, including debt obligations and variable rate preferred
stock, generally on a case by case basis through discussions with the issuers
of these securities. The guidelines are designed to ensure that assets
underlying outstanding debt or preferred stock will be sufficiently varied and
of sufficient quality and amount to justify investment grade ratings. The
guidelines do not have the force of law but have been adopted by each Fund in
order to satisfy current requirements necessary for Moody's and S&P to issue
the above described ratings for shares of AMPS, which ratings generally are
relied upon by institutional investors in purchasing such securities. The
guidelines provide a set of tests for portfolio composition and asset coverage
that supplement (and in some cases are more restrictive than) the applicable
requirements under the Investment Company Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of the ratings altogether. In addition, any
rating agency providing a rating for the shares of AMPS, at any time, may
change or withdraw any such rating. As set forth in the Articles Supplementary
of each Fund, the Board of Directors, without stockholder approval, may modify
certain definitions or restrictions that have been adopted by the Fund
pursuant to the rating agency guidelines, provided the Board of Directors has
obtained written confirmation from Moody's and S&P that any such change would
not impair the ratings then assigned by Moody's and S&P to the AMPS. See "The
Reorganization -- Risk Factors and Special Considerations -- Ratings
Considerations."
For so long as any shares of a Fund's AMPS are rated by Moody's or S&P,
as the case may be, a Fund's use of options and financial futures contracts
and options thereon will be subject to certain limitations mandated by the
rating agencies.
28
Portfolio Composition
There are differences in concentration among the types of securities held
in the portfolio of each Fund. For MuniYield Michigan, as of October 31, 2001,
approximately 66.68%, 29.12% and 4.20% of the market value of its portfolio
was invested in revenue bonds, general obligation bonds, and cash equivalents,
respectively. For MuniHoldings Michigan, as of October 31, 2001, approximately
64.20%, 33.78% and 2.02% of the market value of its portfolio was invested in
revenue bonds, general obligation bonds, and cash equivalents, respectively.
Although the investment portfolios of both Funds must satisfy the same
standards of credit quality, the actual securities owned by each Fund are
different. As a result, there are certain differences in the composition of
the two investment portfolios. The tables below set forth ratings information
for the Michigan Municipal Bonds and Municipal Bonds held by each Fund, as of
a certain date.
MuniYield Michigan
As of January 31, 2002, approximately _____% of the market value of
MuniYield Michigan's portfolio was invested in long term municipal obligations
and approximately ____% of the market value of MuniYield Michigan's portfolio
was invested in short term municipal obligations. The following table sets
forth certain information with respect to the composition of MuniYield
Michigan's long term municipal obligation investment portfolio as of January
31, 2002.
Number Value
S&P* Moody's* of Issues (in thousands) Percent
---- -------- --------- -------------- -------
AAA Aaa $ %
A Aa
A A
BBB Baa
Total $ 100%
====
---------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations. S&P's rating categories may be modified further by
a plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A and Baa
ratings. See Exhibit IV -- "Ratings of Municipal Bonds and Commercial
Paper."
MuniHoldings Michigan
As of January 31, 2002, approximately ____% of the market value of
MuniHoldings Michigan's portfolio was invested in long term municipal
obligations and approximately ____% of the market value of MuniHoldings
Michigan's portfolio was invested in short term municipal obligations. The
following table sets forth certain information with respect to the composition
of MuniHoldings Michigan's long term municipal obligation investment portfolio
as of January 31, 2002.
Number Value
S&P* Moody's* of Issues (in thousands) Percent
---- -------- --------- -------------- -------
AAA Aaa $ %
AA Aa
A A
Total $ 100%
====
---------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations. S&P's rating categories may be modified further by
a plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A and Baa
ratings. See Exhibit IV -- "Ratings of Municipal Bonds and Commercial
Paper."
Performance
The table below details for each Fund the yield and tax equivalent yield
for the 31 days ended October 31, 2001 and the average annual total return for
the periods shown. The performance figures for MuniHoldings Michigan reflect
the effects of the voluntary fee waivers and expense reimbursements currently
in effect for that Fund and would be lower if such waivers and reimbursements
were not included.
29
Average Annual Total Return
Tax Equivalent -------------------------------------------------
Yield-31 days Yield-31 days One Year Five Years Since
ended ended ended ended Inception++ to
October 31, October 31, October 31, October 31, October 31,
2001 2001+ 2001 2001 2001
---- ----- ---- ---- ----
MuniHoldings
Michigan 5.76% 7.94% 19.61% N/A 13.49%
MuniYield
Michigan 5.61% 7.74% 14.91% 6.52% 7.75%
---------
+ Assumes a 27.5% Federal income tax rate.
++ MuniHoldings Michigan commenced operations on September 17, 1999 and MuniYield Michigan commenced
operations on February 28, 1992.
Portfolio Transactions
The procedures for engaging in portfolio transactions are the same for
each Fund. Subject to policies established by the Board of Directors of each
Fund, FAM is primarily responsible for the execution of each Fund's portfolio
transactions. In executing such transactions, FAM seeks to obtain the best
results for each Fund, taking into account such factors as price (including
the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved and
the firm's risk in positioning a block of securities. While FAM generally
seeks reasonably competitive commission rates, the Funds do not necessarily
pay the lowest commission or spread available.
Neither Fund has any obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provide supplemental
investment research to FAM, including Merrill Lynch, may receive orders for
transactions by a Fund. Information so received will be in addition to, and
not in lieu of, the services required to be performed by FAM under its
investment advisory agreements with the Funds, and the expenses of FAM will
not necessarily be reduced as a result of the receipt of such supplemental
information.
Each Fund invests in securities that are primarily traded in the
over-the-counter markets, and each Fund normally deals directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Under
the Investment Company Act, except as permitted by exemptive order, persons
affiliated with a Fund are prohibited from dealing with that Fund as
principals in the purchase and sale of securities. Since transactions in the
over-the-counter markets usually involve transactions with dealers acting as
principals for their own account, the Funds do not deal with affiliated
persons, including Merrill Lynch and its affiliates, in connection with such
transactions, except that, pursuant to an exemptive order obtained by FAM, a
Fund may engage in principal transactions with Merrill Lynch in high quality,
short term, tax-exempt securities. An affiliated person of a Fund may serve as
its broker in over-the-counter transactions conducted on an agency basis.
The Funds also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Funds may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
The Board of Directors of each Fund has considered the possibility of
recapturing for the benefit of the Funds brokerage commissions, dealer spreads
and other expenses of possible portfolio transactions, such as underwriting
commissions, by conducting portfolio transactions through affiliated entities,
including Merrill Lynch. For example, brokerage commissions received by
Merrill Lynch could be offset against the investment advisory fees paid by the
Fund to FAM. After considering all factors deemed relevant, the Directors of
each Fund made a determination not to seek such recapture. The Directors will
reconsider this matter from time to time.
Periodic auctions are conducted for the AMPS of each Fund by the Auction
Agent for the Funds. The auctions require the participation of one or more
broker-dealers, each of whom enters into an agreement with the Auction Agent.
After each auction, the Auction Agent pays a service charge, from funds
provided by the issuing
30
Fund, to each broker-dealer at the annual rate of .25%, calculated on the
basis of the purchase price of shares of the relevant AMPS placed by such
broker-dealer at such auction.
Portfolio Turnover
Generally, neither Fund purchases securities for short term trading
profits. However, either Fund may dispose of securities without regard to the
time that they have been held when such action, for defensive or other
reasons, appears advisable to FAM. (The portfolio turnover rate is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by a Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.) A high portfolio turnover rate
results in greater transaction costs, which are borne directly by the Fund,
and also has certain tax consequences for stockholders. The portfolio turnover
rate for each Fund for the fiscal periods indicated is set forth below:
Period September
Year Ended 17, 1999+ to July
July 31, 31,
------------------ -----------------
2001 2000
------------------ -----------------
MuniHoldings Michigan 16.50% 67.64%
Year Ended
October 31,
---------------------------------------
2001 2000
------------------ -----------------
MuniYield Michigan 72.58% 75.11%
---------
+ Commencement of operations
Net Asset Value
The net asset value per share of common stock of each Fund is determined
as of the close of business of the NYSE (generally, 4:00 p.m., Eastern time)
on the last business day in each week. For purposes of determining the net
asset value of a share of common stock of each Fund, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
AMPS is divided by the total number of shares of common stock outstanding at
such time. Expenses, including the fees payable to FAM, are accrued daily.
The Michigan Municipal Bonds and Municipal Bonds in which each Fund
invests are traded primarily in the over-the-counter markets. In determining
net asset value, each Fund uses the valuations of portfolio securities
furnished by a pricing service approved by its Board of Directors. The pricing
service typically values portfolio securities at the bid price or the yield
equivalent when quotations are readily available. Michigan Municipal Bonds and
Municipal Bonds for which quotations are not readily available are valued at
fair market value on a consistent basis as determined by the pricing service
using a matrix system to determine valuations. The procedures of the pricing
service and its valuations are reviewed by the officers of each Fund under the
general supervision of the Board of Directors of the Fund. The Board of
Directors of each Fund has determined in good faith that the use of a pricing
service is a fair method of determining the valuation of portfolio securities.
Positions in futures contracts are valued at closing prices for such contracts
established by the exchange on which they are traded, or if market quotations
are not readily available, are valued at fair value on a consistent basis
using methods determined in good faith by the Board of Directors of each Fund.
Each Fund determines and makes available for publication weekly the net
asset value of its common stock. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
31
Capital Stock
Each Fund has outstanding both common stock and AMPS. MuniYield Michigan
Common Stock is traded on the NYSE and MuniHoldings Michigan Common Stock is
traded on the AMEX. The shares of MuniYield Michigan Common Stock commenced
trading on the NYSE on February 28, 1992. As of October 31, 2001, the net
asset value per share of MuniYield Michigan Common Stock was $14.97 and the
market price per share was $13.85. The shares of MuniHoldings Michigan Common
Stock commenced trading on the AMEX on September 17, 1999. As of October 31,
2001, the net asset value per share of MuniHoldings Michigan Common Stock was
$17.20 and the market price per share was $16.25.
Each Fund is authorized to issue 200,000,000 shares of capital stock, all
of which shares initially were classified as common stock. The Board of
Directors of each Fund is authorized to classify or reclassify any unissued
shares of capital stock by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption. In connection with
MuniYield Michigan's offering of shares of AMPS, MuniYield Michigan
reclassified 2,200 shares of unissued capital stock as AMPS. In connection
with MuniHoldings Michigan's offering of shares of AMPS, MuniHoldings Michigan
reclassified 1,360 shares of its unissued capital stock as AMPS.
Common Stock
Holders of each Fund's common stock are entitled to share equally in
dividends declared by the Fund's Board of Directors payable to holders of the
common stock and in the net assets of the Fund available for distribution to
holders of the common stock after payment of the preferential amounts payable
to holders of any outstanding preferred stock. See "Voting Rights" and
"Liquidation Rights of Holders of AMPS" below. Holders of a Fund's common
stock do not have preemptive or conversion rights and shares of a Fund's
common stock are not redeemable. The outstanding shares of common stock of
each Fund are fully paid and nonassessable.
So long as any shares of a Fund's AMPS or any other preferred stock are
outstanding, holders of the Fund's common stock will not be entitled to
receive any dividends or other distributions from the Fund unless all
accumulated dividends on outstanding shares of the Fund's AMPS and any other
preferred stock have been paid, and unless asset coverage (as defined in the
Investment Company Act) with respect to such AMPS and any other preferred
stock would be at least 200% after giving effect to such distributions.
Preferred Stock
The AMPS of each Fund have a similar structure. The AMPS of each Fund are
shares of preferred stock of the Fund that entitle their holders to receive
dividends when, as and if declared by the Board of Directors, out of funds
legally available therefor, at a rate per annum that may vary for the
successive dividend periods. The AMPS of each Fund have a liquidation
preference of $25,000 per share; neither Fund's AMPS are traded on any stock
exchange or over-the-counter. Each Fund's AMPS can be purchased at an auction
or through broker-dealers who maintain a secondary market in the AMPS.
Auctions generally have been held and will be held every seven days for
the AMPS of each Fund, unless the applicable Fund elects, subject to certain
limitations, to declare a special dividend period. The following table
provides information about the dividend rates for each series of AMPS of each
Fund as of a recent auction.
Auction
Auction Date Fund Series Schedule Dividend Rate
------------ ---- ------ -------- -------------
January 8, 2002 MuniHoldings Michigan A 7 day 1.34%
January 7, 2002 MuniYield Michigan A 7 day 1.38%
Under the Investment Company Act, each Fund is permitted to have
outstanding more than one series of preferred stock as long as no single
series has priority over another series as to the distribution of assets of
the Fund or the payment of dividends. Holders of a Fund's preferred stock do
not have preemptive rights to purchase any shares of AMPS or any other
preferred stock that might be issued. The net asset value per share of a
Fund's AMPS equals its liquidation preference plus accumulated dividends per
share.
The redemption provisions pertaining to the AMPS of each Fund are
substantially similar. It is anticipated that shares of AMPS of each Fund will
generally be redeemable at the option of the Fund at a price equal to their
32
liquidation preference of $25,000 plus accumulated but unpaid dividends
(whether or not earned or declared) to the date of redemption plus, under
certain circumstances, a redemption premium. Shares of AMPS will also be
subject to mandatory redemption at a price equal to their liquidation
preference plus accumulated but unpaid dividends to the date of redemption
upon the occurrence of certain specified events, such as the failure of the
Fund to maintain the asset coverage for the AMPS specified by Moody's and S&P
in connection with their issuance of ratings on the AMPS.
Certain Provisions of the Charter
Each Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving holders of common stock of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. A Director may be removed
from office with or without cause by vote of the holders of at least 66 2/3%
of the votes entitled to be voted on the matter. A Director elected by all of
the holders of capital stock may be removed only by action of such holders,
and a Director elected by the holders of AMPS and any other preferred stock
may be removed only by action of the holders of AMPS and any other preferred
stock.
In addition, the Charter of each Fund requires the favorable vote of the
holders of at least 66 2/3% of all of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
o a merger or consolidation or statutory share exchange of the Fund
with any other corporation or entity,
o a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), or
o a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the by-laws, in which case the affirmative vote of a majority
of all of the votes entitled to be cast by stockholders of the Fund, voting as
a single class, is required. Such approval, adoption or authorization of the
foregoing also would require the favorable vote of at least a majority of the
Fund's shares of preferred stock then entitled to be voted thereon, including
the AMPS, voting as a separate class.
In addition, conversion of a Fund to an open-end investment company would
require an amendment to the Fund's Charter. The amendment would have to be
declared advisable by the Board of Directors prior to its submission to
stockholders. Such an amendment would require the affirmative vote of the
holders of at least 66 2/3% of the Fund's outstanding shares of capital stock
(including the AMPS and any other preferred stock) entitled to be voted on the
matter, voting as a single class (or a majority of such shares if the
amendment was previously approved, adopted or authorized by at least
two-thirds of the total number of Directors fixed in accordance with the
by-laws), and the affirmative vote of at least a majority of outstanding
shares of preferred stock of a Fund (including the AMPS), voting as a separate
class. Such a vote also would satisfy a separate requirement in the Investment
Company Act that the change be approved by the stockholders. Stockholders of
an open-end investment company may require the company to redeem their shares
of common stock at any time (except in certain circumstances as authorized by
or under the Investment Company Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption.
All redemptions will be made in cash. If the Fund is converted to an open-end
investment company, it could be required to liquidate portfolio securities to
meet requests for redemption and the Common Stock no longer would be listed on
a stock exchange. Conversion to an open-end investment company would also
require redemption of all outstanding shares of preferred stock (including the
AMPS) and would require changes in certain of the Fund's investment policies
and restrictions, such as those relating to the issuance of senior securities,
the borrowing of money and the purchase of illiquid securities.
The Board of Directors of each Fund has determined that the 66 2/3%
voting requirements described above, which are greater than the minimum
requirements under Maryland law or the Investment Company Act, are in the best
interests of stockholders generally. Reference should be made to the Charter
of each Fund on file with the Commission for the full text of these
provisions.
33
Management of the Funds
Directors and Officers. The Board of Directors of MuniHoldings Michigan
currently consists of six individuals, five of whom are not "interested
persons" of MuniHoldings Michigan as defined in the Investment Company Act.
The Board of Directors of MuniYield Michigan currently consists of five
individuals, four of whom are not "interested" persons. See "Item 2: Election
of Directors of MuniYield Michigan." Terry K. Glenn serves as President and
Director of each Fund. The Directors of each Fund are responsible for the
overall supervision of the operations of each Fund and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act and under applicable Maryland law. The Funds share some of the
same officers. For further information regarding the Directors and officers of
each Fund, see Exhibit I -- "Information Pertaining to MuniYield Michigan" and
Exhibit VI -- "Information Pertaining to MuniHoldings Michigan".
Management and Advisory Arrangements. FAM, which is owned and controlled
by ML & Co., serves as the investment adviser for each Fund pursuant to
separate investment advisory agreements that, except for (i) termination dates
and (ii) advisory fee rates, are substantially similar. FAM provides each Fund
with the same investment advisory and management services. FAM and its
affiliates, including MLIM, act as the investment adviser to more than 100
registered investment companies and offer services to individuals and
institutional accounts. As of November 2001, FAM and its affiliates had a
total of approximately $ billion in investment company and other portfolio
assets under management (approximately $ billion of which were invested in
municipal securities). FAM is a limited partnership, the partners of which are
ML & Co. and Princeton Services, Inc. FAM was organized as an investment
adviser in 1977 and offers investment advisory services to more than 50
registered investment companies. The principal business address of FAM is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
Each Fund's investment advisory agreement with FAM (each, an "Investment
Advisory Agreement") provides that, subject to the supervision of the Board of
Directors of the Fund, FAM is responsible for the actual management of the
Fund's portfolio. The responsibility for making decisions to buy, sell or hold
a particular security for each Fund rests with FAM, subject to review by the
Board of Directors of that Fund.
FAM provides the portfolio management for each Fund. Such portfolio
management considers analyses from various sources (including brokerage firms
with which each Fund does business), makes the necessary investment decisions,
and places orders for transactions accordingly. FAM also is responsible for
the performance of certain administrative and management services for each
Fund.
For the services provided by FAM under MuniYield Michigan's Investment
Advisory Agreement, MuniYield Michigan pays a monthly fee at an annual rate of
0.50% of its average weekly net assets (i.e., the average weekly value of the
total assets of the Fund, including assets acquired from the sale of preferred
stock, minus the sum of accrued liabilities of the Fund and accumulated
dividends on its shares of preferred stock). For the services provided by FAM
under MuniHoldings Michigan's Investment Advisory Agreement, MuniHoldings
Michigan pays a monthly fee at an annual rate of 0.55% of its average weekly
net assets (i.e., the average weekly value of the total assets of the Fund,
including assets acquired from the sale of preferred stock, minus the sum of
accrued liabilities of the Fund and accumulated dividends on its shares of
preferred stock). For purposes of this calculation, average weekly net assets
are determined at the end of each month on the basis of the average net assets
of each Fund for each week during the month. The assets for each weekly period
are determined by averaging the net assets at the last business day of a week
with the net assets at the last business day of the prior week. Since the
commencement of operations of MuniHoldings Michigan, FAM has waived a portion
of its advisory fee and/or reimbursed certain other expenses. These fee
waivers and expense reimbursements are voluntary and may be reduced or
discontinued by FAM at any time without notice to holders of MuniHoldings
Michigan Common Stock. After the Reorganization, the Combined Fund will pay
FAM a monthly fee at the annual rate of 0.50% of its average weekly net assets
as described above. For MuniHoldings Michigan stockholders, this represents a
fee reduction.
For the fiscal years ended October 31, 1999, 2000 and 2001, the fees paid
by MuniYield Michigan to FAM pursuant to its Investment Advisory Agreement
were $853,741, $806,270, and $848,748 respectively (such fees based on average
weekly net assets of approximately $171.6 million, $161.2 million and $169.6
million, respectively). For the period September 17, 1999 (commencement of
operations) to July 31, 2000 and the fiscal year ended July 31, 2001, the fees
paid by MuniHoldings Michigan to FAM pursuant to the Investment Advisory
Agreement were $393,129 and $504,003, respectively (such fees based on average
daily net assets of approximately $82.0 million and $91.6 million,
respectively). For the period September 17, 1999 (commencement of operations)
to July 31, 2000 and the fiscal year ended July 31, 2001, FAM voluntarily
waived $269,917 and $316,371, respectively, of the fees payable by
MuniHoldings Michigan pursuant to its Investment Advisory Agreement.
34
Each Fund's investment advisory agreement obligates FAM to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of the Fund connected with investment and
economic research, trading and investment management of the Fund, as well as
the compensation of all Directors of the Fund who are affiliated persons of
FAM or any of its affiliates. Each Fund pays all other expenses incurred in
the operation of the Fund, including, among other things, expenses for legal
and auditing services, listing fees, taxes, costs of printing proxies, stock
certificates and stockholder reports, charges of the custodian and the
transfer agent, dividend disbursing agent and registrar, fees and expenses
with respect to the issuance of AMPS, Commission fees, fees and expenses of
unaffiliated Directors, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. FAM provides certain
accounting services to each Fund, and each Fund reimburses FAM for its
respective costs in connection with such services.
Unless earlier terminated as described below, the investment advisory
agreement between each Fund and FAM will continue from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority
of the outstanding shares of the Fund's common stock and AMPS, voting together
as a single class, and (b) by a majority of the Directors of the Fund who are
not parties to such contract or "interested persons," as defined in the
Investment Company Act, of any such party. The contract is not assignable and
it may be terminated without penalty on 60 days' written notice at the option
of either party thereto or by the vote of the stockholders of the Fund.
At separate meetings of the Board of Directors of MuniYield Michigan and
MuniHoldings Michigan held on December 14, 2001 and November 7, 2001,
respectively, the Boards approved the continuation of each Fund's Investment
Advisory Agreement for an additional year. In connection with their
deliberations, the Boards reviewed information derived from a number of
sources and covering a range of issues. Each Board considered the services
provided to its Fund by FAM under the Investment Advisory Agreement, as well
as other services provided by FAM and its affiliates under other agreements,
and the personnel who provide these services. In addition to investment
advisory services, FAM and its affiliates provide administrative services,
shareholder services, oversight of fund accounting, marketing services,
assistance in meeting legal and regulatory requirements, and other services
necessary of the operation the Funds. The Boards also considered FAM's costs
of providing services, and the direct and indirect benefits to FAM from its
relationship with each Fund. The benefits considered by the Boards included
not only FAM's compensation for investment advisory services under the
Investment Advisory Agreement, but also compensation paid to the FAM or its
affiliates for other, non-advisory, services provided to the Funds. In
connection with its consideration of the Investment Advisory Agreement, the
Boards also compared each Fund's advisory fee rate, expense ratios and
historical performance to those of comparable funds. The Boards considered
whether there should be changes in the advisory fee rate or structure in order
to enable each Fund to participate in any economics of scale that FAM may
experience as a result of growth in a Fund's assets.
Securities held by a Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which FAM or
its affiliates act as an adviser. Because of different objectives or other
factors, a particular security may be bought for an advisory client when other
clients are selling the same security. If purchases or sales of securities by
FAM for a Fund or other funds for which it acts as investment adviser or for
advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. Transactions
effected by FAM (or its affiliates) on behalf of more than one of its clients
during the same period may increase the demand for securities being purchased
or the supply of securities being sold, causing an adverse effect on price.
Accounting Services. Each Fund entered into a separate agreement with
State Street, effective January 1, 2001, pursuant to which State Street
provides certain accounting services to each Fund. Each Fund pays a fee for
these services. Prior to January 1, 2001, FAM provided accounting services to
each Fund and was reimbursed by each Fund in connection with such services.
FAM continues to provide certain accounting services to each Fund and
MuniYield Michigan and MuniHoldings Michigan reimburse FAM for these services.
The table below shows the amounts paid by each Fund to State Street and
to FAM for the periods indicated.
35
MuniYield Michigan
Period Paid to State Street Paid to FAM
------ -------------------- -----------
Fiscal year ended October 31, 1999................................ N/A $ 60,234
Fiscal year ended October 31, 2000................................ N/A $ 42,062
Fiscal year ended October 31, 2001................................ $63,731* $ 8,427
MuniHoldings Michigan
Period Paid to State Street Paid to FAM
------ -------------------- -----------
For the period September 17, 1999** to July 31, 2000.............. N/A $ 59,260
Fiscal year ended July 31, 2001................................... $28,153* $ 25,250
---------
* Represents payments pursuant to the agreement with State Street commencing January 1, 2001.
** Commencement of operations.
Code of Ethics
The Board of Directors of each Fund has approved the same Code of Ethics
under Rule 17j-l of the Investment Company Act that covers the Funds and FAM.
The Code of Ethics establishes procedures for personal investing and restricts
certain transactions. Employees subject to the Code of Ethics may invest in
securities for their personal investment accounts, including securities that
may be purchased or held by each Fund.
Voting Rights
Voting rights are identical for the holders of shares of each Fund's
common stock. Holders of each Fund's common stock are entitled to one vote for
each share held by them and will vote with the holders of any outstanding
shares of the Fund's AMPS or other preferred stock on each matter submitted to
a vote of holders of common stock, except as set forth below.
Voting rights of the holders of each Fund's AMPS are identical, except as
indicated below. Except as otherwise indicated below, and except as otherwise
required by applicable law, holders of shares of a Fund's AMPS will be
entitled to one vote per share on each matter submitted to a vote of the
Fund's stockholders and will vote together with the holders of shares of the
Fund's common stock as a single class.
The shares of each Fund's common stock, AMPS and any other preferred
stock do not have cumulative voting rights, which means that the holders of
more than 50% of the shares of a Fund's common stock, AMPS and any other
preferred stock voting for the election of Directors can elect all of the
Directors standing for election by such holders, and, in such event, the
holders of the remaining shares of a Fund's common stock, AMPS and any other
preferred stock will not be able to elect any of such Directors.
In connection with the election of a Fund's Directors, holders of shares
of a Fund's AMPS, voting separately as a class, shall be entitled at all times
to elect two of the Fund's Directors, and the remaining Directors will be
elected by holders of shares of the Fund's common stock and shares of the
Fund's AMPS and any other preferred stock, voting together as a single class.
In addition, if at any time dividends on outstanding shares of a Fund's AMPS
shall be unpaid in an amount equal to at least two full years' dividends
thereon or if at any time holders of any shares of a Fund's preferred stock
are entitled, together with the holders of shares of the Fund's AMPS, to elect
a majority of the Directors of the Fund under the Investment Company Act, then
the number of Directors constituting the Board of Directors automatically
shall be increased by the smallest number that, when added to the two
Directors elected exclusively by the holders of shares of AMPS and any other
preferred stock as described above, would constitute a majority of the Board
of Directors as so increased by such smallest number, and at a special meeting
of stockholders which will be called and held as soon as practicable, and at
all subsequent meetings at which Directors are to be elected, the holders of
shares of the Fund's AMPS and any other preferred stock, voting separately as
a class, will be entitled to elect the smallest number of additional Directors
that, together with the two Directors which such holders in any event will be
entitled to elect, constitutes a majority of the total
36
number of Directors of the Fund as so increased. The terms of office of the
persons who are Directors at the time of that election will continue. If the
Fund thereafter shall pay, or declare and set apart for payment in full, all
dividends payable on all outstanding shares of AMPS and any other preferred
stock for all past dividend periods, the additional voting rights of the
holders of shares of AMPS and any other preferred stock as described above
shall cease, and the terms of office of all of the additional Directors
elected by the holders of shares of AMPS and any other preferred stock (but
not of the Directors with respect to whose election the holders of shares of
common stock were entitled to vote or the two Directors the holders of shares
of AMPS and any other preferred stock have the right to elect in any event)
will terminate automatically.
The affirmative vote of the holders of a majority of the outstanding
shares of a Fund's AMPS, voting as a separate class, will be required to (i)
authorize, create or issue, or increase the authorized or issued amount of,
any class or series of stock ranking prior to any series of preferred stock
with respect to payment of dividends or the distribution of assets on
liquidation, (ii) amend, alter or repeal the provisions of the Charter,
whether by merger, consolidation or otherwise, so as to adversely affect any
of the contract rights expressly set forth in the Charter of holders of
preferred stock, (iii) approve any plan of reorganization adversely affecting
such AMPS or (iv) take any action to change a Fund's investment policies
requiring a vote of stockholders under Section 13(a) of the Investment Company
Act. Additionally, holders of MuniYield Michigan Series A AMPS will be
required to vote in order for MuniYield Michigan to issue any stock ranking on
a parity with such series of AMPS.
Stockholder Inquiries
Stockholder inquiries with respect to either Fund may be addressed to
such Fund by telephone at (609) 282-2800 or at the address set forth on the
cover page of this Joint Proxy Statement and Prospectus.
Dividends and Distributions
The Funds' current policies with respect to dividends and distributions
relating to shares of their common stock are substantially similar. Each Fund
intends to distribute dividends equal to all or a portion of its net
investment income monthly to holders of a Fund's common stock. Monthly
distributions to holders of a Fund's common stock normally consist of all or a
portion of its net investment income remaining after the payment of dividends
(and any Additional Distribution) on the Fund's AMPS. A Fund may at times pay
out less than the entire amount of net investment income earned in any
particular period and may at times pay out such accumulated undistributed
income in addition to net investment income earned in other periods in order
to permit the Fund to maintain a more stable level of dividends to holders of
common stock. As a result, the dividend paid by a Fund to holders of its
common stock for any particular period may be more or less than the amount of
net investment income earned by the Fund during such period. For Federal tax
purposes, the Fund is required to distribute substantially all of its net
investment income for each year. All net realized long term or short term
capital gains, if any, are distributed pro rata at least annually to holders
of shares of a Fund's common stock and AMPS. While any shares of a Fund's AMPS
are outstanding, the Fund may not declare any cash dividend or other
distribution on the Fund's common stock, unless at the time of such
declaration (1) all accumulated dividends on the Fund's AMPS, including any
Additional Distribution, have been paid, and (2) the net asset value of the
Fund's portfolio (determined after deducting the amount of such dividend or
other distribution) is at least 200% of the liquidation value of the Fund's
outstanding shares of AMPS. If a Fund's ability to make distributions on its
common stock is limited, such limitation could under certain circumstances
impair the ability of the Fund to maintain its qualification under Federal
income tax law for taxation as a regulated investment company, which would
have adverse tax consequences for stockholders. See "Comparison of the Funds
-- Tax Rules Applicable to the Funds and their Stockholders."
Similarly, the Funds' current policies with respect to dividends and
distributions on shares of their AMPS are identical. The holders of shares of
a Fund's AMPS are entitled to receive, when, as and if declared by the Board
of Directors of the Fund, out of funds legally available therefor, cumulative
cash dividends on their shares. Dividends on a Fund's shares of AMPS so
declared and payable shall be paid (i) in preference to and in priority over
any dividends so declared and payable on the Fund's common stock, and (ii) to
the extent permitted under the Code and to the extent available, out of net
tax-exempt income earned on the Fund's investments. Dividends for each Fund's
AMPS are paid through The Depository Trust Company ("DTC") (or a successor
securities depository) on each dividend payment date. DTC's normal procedures
now provide for it to distribute dividends in same-day funds to agent members,
who in turn are expected to distribute such dividends to the person for whom
they are acting as agent in accordance with the instructions of such person.
Prior to each dividend payment date, the relevant Fund is required to deposit
with the Auction Agent sufficient funds for the payment of such declared
dividends. Neither
37
Fund intends to establish any reserves for the payment of dividends, and no
interest will be payable in respect of any dividend payment or payment on the
shares of a Fund's AMPS which may be in arrears.
Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on Michigan Municipal Bonds, are exempt from Federal and Michigan
income taxes, subject to the possible application of the Federal alternative
minimum tax. However, each Fund is required to allocate net capital gains and
other income subject to regular Federal and Michigan income taxes, if any,
proportionately between shares of its common stock and shares of its AMPS in
accordance with the current position of the IRS described herein. See "Tax
Rules Applicable to the Funds and their Stockholders" below. Each Fund
notifies the Auction Agent of the amount of any net capital gains or other
taxable income to be included in any dividend on shares of AMPS prior to the
auction establishing the applicable rate for such dividend. The Auction Agent
in turn notifies each broker-dealer whenever it receives any such notice from
a Fund, and each broker-dealer then notifies its customers who are holders of
the Fund's AMPS. Each Fund also may include such income in a dividend on
shares of its AMPS without giving advance notice thereof if it increases the
dividend by an additional amount to offset the tax effect thereof. The amount
of taxable income allocable to shares of a Fund's AMPS will depend upon the
amount of such income realized by the Fund and other factors, but generally is
not expected to be significant.
For information concerning the manner in which dividends and
distributions to holders of each Fund's common stock may be reinvested
automatically in shares of the Fund's common stock, see "Automatic Dividend
Reinvestment Plan" below. Dividends and distributions will be subject to the
tax treatment discussed below, whether they are reinvested in shares of a Fund
or received in cash.
If either Fund retroactively allocates any net capital gains or other
income subject to regular Federal and Michigan income taxes to shares of its
AMPS without having given advance notice thereof as described above, which
only may happen when such allocation is made as a result of the redemption of
all or a portion of the outstanding shares of its AMPS or the liquidation of
the Fund, such Fund will make certain payments to holders of shares of its
AMPS to which such allocation was made to offset substantially the tax effect
thereof. In no other instances will the Fund be required to make payments to
holders of shares of its AMPS to offset the tax effect of any reallocation of
net capital gains or other taxable income.
Automatic Dividend Reinvestment Plan
Pursuant to each Fund's Automatic Dividend Reinvestment Plan (each, a
"Plan"), unless a holder of a Fund's common stock elects otherwise, all
dividend and capital gains distributions are automatically reinvested by
either State Street, as agent for MuniHoldings Michigan stockholders, or BONY,
as agent for MuniYield Michigan stockholders, (as applicable, the "Plan
Agent"), in additional shares of a Fund's common stock. BONY will continue to
be the Plan Agent for the Combined Fund after the Reorganization. Holders of a
Fund's common stock who elect not to participate in the Plan receive all
distributions in cash paid by check mailed directly to the stockholder of
record (or, if the shares are held in street or other nominee name, then to
such nominee) by State Street or BONY, as dividend paying agent. Such
stockholders may elect not to participate in a Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to BONY, as dividend paying agent, at the address set forth
below. Participation in each Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if
received by the Plan Agent not less than ten days prior to any dividend record
date; otherwise, such termination or resumption will be effective with respect
to any subsequently declared dividend or capital gains distribution.
Whenever a Fund declares an ordinary income dividend or a capital gain
dividend (collectively referred to as "dividends") payable either in shares or
in cash, non-participants in a Plan receive cash, and participants in the Plan
receive the equivalent in shares of the Fund's common stock. The shares are
acquired by the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of additional
unissued but authorized shares of the Fund's common stock from the Fund
("newly issued shares") or (ii) by purchase of outstanding shares of the
Fund's common stock in the open market ("open-market purchases"), on the NYSE
or elsewhere. If on the payment date for the dividend the net asset value per
share of the Fund's common stock is equal to or less than the market price per
share of the Fund's common stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent
invests the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of the Fund's common stock to
be credited to the participant's account is determined by dividing the dollar
amount of the dividend by the net asset value per share on the date the shares
are issued, provided that the maximum discount from the then-current market
price per share on the date of issuance may not exceed 5%. If on the dividend
payment date, the net
38
asset value per share is greater than the market value (such condition being
referred to herein as "market discount"), the Plan Agent invests the dividend
amount in shares acquired on behalf of the participant in open-market
purchases.
In the event of a market discount on the dividend payment date, the Plan
Agent has until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. Each Fund intends to pay monthly
income dividends. Therefore, the period during which open-market purchases can
be made exists only from the payment date on the dividend through the date
before the next "ex-dividend" date, which typically is approximately ten days.
If, before the Plan Agent has completed its open-market purchases, the market
price of a share of a Fund's common stock exceeds the net asset value per
share, the average per share purchase price paid by the Plan Agent may exceed
the net asset value of the Fund's shares, resulting in the acquisition of
fewer shares than if the dividend had been paid in newly issued shares on the
dividend payment date. Because of the foregoing difficulty with respect to
open-market purchases, each Plan provides that if the Plan Agent is unable to
invest the full dividend amount in open-market purchases during the purchase
period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent ceases making open-market purchases and
invests the uninvested portion of the dividend amount in newly issued shares
at the close of business on the last purchase date.
The Plan Agent maintains all stockholders' accounts in a Plan and
furnishes written confirmation of all transactions in the account, including
information needed by stockholders for tax records. Shares in the account of
each Plan participant are held by the Plan Agent in non-certificated form in
the name of the participant, and each stockholder's proxy includes those
shares purchased or received pursuant to a Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to a Plan in accordance with the instructions of the
participants.
In the case of stockholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will
administer a Plan on the basis of the number of shares certified from time to
time by the record stockholders as representing the total amount registered in
the record stockholder's name and held for the account of beneficial owners
who are to participate in that Plan.
There are no brokerage charges with respect to shares issued directly by
either Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant pays a pro rata share
of brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions does not
relieve participants of any Federal, state or local income tax that may be
payable (or required to be withheld) on such dividends. See "Comparison of the
Funds -- Tax Rules Applicable to the Funds and their Stockholders."
Stockholders participating in a Plan may receive benefits not available
to stockholders not participating in a Plan. If the market price (plus
commissions) of a Fund's shares of common stock is higher than the net asset
value of such shares, participants in a Plan receive shares of the Fund's
common stock at less than they otherwise could purchase them and have shares
with a cash value greater than the value of any cash distribution they would
have received on their shares. If the market price plus commissions is lower
than the net asset value of such shares, participants receive distributions of
shares with a net asset value greater than the value of any cash distribution
they would have received on their shares. However, there may be insufficient
shares available in the market to make distributions of shares at prices below
the net asset value. Also, since the Funds normally do not redeem their
shares, the price on resale may be more or less than the net asset value. See
"Comparison of the Funds -- Tax Rules Applicable to the Funds and their
Stockholders" for a discussion of certain tax consequences of each fund's
Plan.
Each Fund reserves the right to amend or terminate its Plan. There is no
direct service charge to participants in a Plan; however, each Fund reserves
the right to amend its Plan to include a service charge payable by the
participants.
After the Reorganization, a holder of shares of MuniHoldings Michigan who
has elected to receive dividends in cash will continue to receive dividends in
cash; all other holders will have their dividends automatically reinvested in
shares of the Combined Fund. However, if a stockholder owns shares in
MuniHoldings Michigan and in MuniYield Michigan, after the Reorganization, the
stockholder's election with respect to the dividends of MuniYield Michigan
will control unless the stockholder specifically elects a different option at
that time. Following
39
the Reorganization, all correspondence should be directed to the Plan Agent of
MuniYield Michigan, The Bank of New York, at Five Penn Plaza, 13th Floor, New
York, New York 10001.
Mutual Fund Investment Option
A holder of common stock of either Fund, who purchased his or her shares
through Merrill Lynch in either Fund's initial public offering, has the right
to reinvest the net proceeds from a sale of such shares in Class A shares of
certain Merrill Lynch-sponsored open-end funds without the imposition of an
initial sales charge, if certain conditions are satisfied. A holder of
MuniHoldings Michigan Common Stock who qualifies for this option will have the
same option with respect to the shares of MuniYield Michigan Common Stock
received in the Reorganization.
Liquidation Rights of Holders of AMPS
Upon any liquidation, dissolution or winding up of either Fund, whether
voluntary or involuntary, the holders of shares of the Fund's AMPS will be
entitled to receive, out of the assets of the Fund available for distribution
to stockholders, before any distribution or payment is made upon any shares of
the Fund's common stock or any other capital stock of the Fund ranking junior
in right of payment upon liquidation to AMPS, $25,000 per share together with
the amount of any dividends accumulated but unpaid (whether or not earned or
declared) thereon to the date of distribution, and after such payment the
holders of AMPS will be entitled to no other payments except for any
additional dividends. If such assets of the Fund shall be insufficient to make
the full liquidation payment on the AMPS and liquidation payments on any other
outstanding class or series of preferred stock of the Fund ranking on a parity
with the AMPS as to payment upon liquidation, then such assets will be
distributed among the holders of shares of AMPS and the holders of shares of
such other class or series ratably in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of liquidation distribution to which they are entitled, the holders of
shares of a Fund's AMPS will not be entitled to any further participation in
any distribution of assets by the Fund except for any additional dividends. A
consolidation, merger or share exchange of a Fund with or into any other
entity or entities or a sale, whether for cash, shares of stock, securities or
properties, of all or substantially all or any part of the assets of the Fund
shall not be deemed or construed to be a liquidation, dissolution or winding
up of the Fund for this purpose.
Tax Rules Applicable to the Funds and their Stockholders
The tax consequences of investing in shares of common stock or AMPS of
each Fund are identical. The Funds have elected and qualified since inception
for the special tax treatment afforded RICs under the Code. MuniYield Michigan
intends to continue to so qualify after the Reorganization. As a result, in
any taxable year in which they distribute an amount equal to at least 90% of
taxable net income and 90% of tax-exempt net income (see below), the Funds
(but not their stockholders) are not subject to Federal income tax to the
extent that they distribute their net investment income and net realized
capital gains. In all taxable years through the taxable year of the
Reorganization, each Fund has distributed substantially all of its income.
MuniYield Michigan intends to continue to distribute substantially all of its
income following the Reorganization.
Each Fund is qualified to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section, if, at the close of each
quarter of its taxable year, at least 50% of the value of a Fund's total
assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund is qualified to
pay exempt-interest dividends to its stockholders. Exempt-interest dividends
are dividends or any part thereof paid by a Fund which are attributable to
interest on tax-exempt obligations and designated by a Fund as exempt-interest
dividends in a written notice mailed to stockholders within 60 days after the
close of its taxable year. To the extent that the dividends distributed to a
Fund's stockholders are derived from interest income exempt from Federal
income tax under Code Section 103(a) and are properly designated as
exempt-interest dividends, they are excludable from a stockholder's gross
income for Federal income tax purposes. Exempt-interest dividends are
included, however, in determining the portion, if any, of a person's social
security benefits and railroad retirement benefits subject to Federal income
taxes. A tax adviser should be consulted with respect to whether
exempt-interest dividends retain the exclusion under Code Section 103(a) if a
stockholder would be treated as a "substantial user" or "related person" under
Code Section 147(a) with respect to property financed with the proceeds from
an issue of "industrial development bonds" or "private activity bonds," if
any, held by a Fund.
So long as, at the close of each quarter of a Fund's taxable year, at
least 50% of the value of the Fund's total assets consists of Michigan
Municipal Bonds, the portion of exempt-interest dividends paid from interest
received from Michigan Municipal Bonds also will be exempt from Michigan
personal income tax. However,
40
exempt-interest dividends paid to a corporate shareholder subject to Michigan
state franchise tax will not be exempt from Michigan taxation. Shareholders
subject to income taxation by states other than Michigan will realize a lower
after-tax rate of return than Michigan shareholders since the dividends
distributed generally will not be exempt, to any significant degree, from
income taxation by such other states. Each Fund will inform shareholders
annually as to the portion of its distributions that constitutes
exempt-interest dividends and the portion that is exempt from Michigan income
taxes. Interest on indebtedness incurred or continued to purchase or carry a
Fund's shares is not deductible for Federal or Michigan income tax purposes to
the extent attributable to exempt-interest dividends.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the currently outstanding
AMPS of each Fund, as well as the Series B AMPS to be issued by MuniYield
Michigan, are substantially similar, but not identical, to the AMPS discussed
in the revenue ruling. In the opinion of Sidley Austin Brown & Wood LLP,
counsel to each Fund, the shares of each Fund's currently outstanding AMPS, as
well as the Series B AMPS to be issued by MuniYield Michigan, constitute
stock, and distributions with respect to shares of such AMPS (other than
distributions in redemption of shares of AMPS subject to Section 302(b) of the
Code) will constitute dividends to the extent of current and accumulated
earnings and profits as calculated for Federal income tax purposes.
Nevertheless, the IRS could take a contrary position, asserting, for example,
that the shares of AMPS constitute debt. If this position were upheld, the
discussion of the treatment of distributions below would not apply to holders
of shares of AMPS. Instead, distributions by each Fund to holders of shares of
its AMPS would constitute interest, whether or not they exceed the earnings
and profits of the Fund, would be included in full in the income of the
recipient and taxed as ordinary income. Counsel believes that such a position,
if asserted by the IRS, would be unlikely to prevail.
To the extent that a Fund's distributions are derived from interest on
its taxable investments or from an excess of net short term capital gains over
net long term capital losses ("ordinary income dividends"), such distributions
are considered taxable ordinary income for Federal and Michigan income tax
purposes. Distributions, if any, from an excess of net long term capital gains
over net short term capital losses derived from the sale of securities or from
certain transactions in futures or options ("capital gain dividends") are
taxable as long term capital gains for Federal income tax purposes, regardless
of the length of time the stockholder has owned Fund shares and for Michigan
income tax purposes, are treated as capital gains which are taxed at ordinary
income tax rates. Certain categories of capital gain are taxable at different
rates for Federal income tax purposes. Generally not later than 60 days after
the close of its taxable year, each Fund provides its stockholders with a
written notice designating the amounts of any exempt-interest dividends and
capital gain dividends, as well as any amount of capital gain dividends in the
different categories of capital gain referred to above. Distributions by a
Fund, whether from exempt-interest income, ordinary income or capital gains,
are not eligible for the dividends received deduction for corporations under
the Code.
A loss realized on a sale or exchange of shares of a Fund is disallowed
if other Fund shares are acquired (whether under a fund's Plan or otherwise)
within a 61-day period beginning 30 days before and ending 30 days after the
date that the shares are disposed of. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
All or a portion of a Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by stockholders. Any loss upon the sale or
exchange of Fund shares held for six months or less is treated as long term
capital loss to the extent of capital gain dividends received by the
stockholder. In addition, such loss is disallowed to the extent of any
exempt-interest dividends received by the stockholder. Distributions in excess
of a Fund's earnings and profits first will reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). If a Fund pays a dividend in January which was declared in the
previous October, November or December to stockholders of record on a
specified date in one of such months, then such dividend is treated for tax
purposes as paid by the Fund and received by its stockholders on December 31
of the year in which such dividend was declared.
The IRS has taken the position in a revenue ruling that if a RIC has two
or more classes of shares it may designate distributions made to each class in
any year as consisting of no more than such class' proportionate share of
particular types of income, including exempt-interest dividends and capital
gain dividends. A class's proportionate share of a particular type of income
is determined according to the percentage of total dividends paid by the RIC
during such year that was paid to such class. Consequently, when common stock
and one or more series of AMPS are outstanding, each Fund intends to designate
distributions made to the classes as consisting of particular types of income
in accordance with each class's proportionate share of such income. After the
Reorganization,
41
MuniYield Michigan will, likewise, so designate distributions with respect to
its common stock and its AMPS, Series A and Series B. Each Fund may notify the
Auction Agent of the amount of any net capital gains and other taxable income
to be included in any dividend on shares of its AMPS prior to the auction
establishing the applicable rate for such dividend. Except for the portion of
any dividend that a Fund informs the Auction Agent will be treated as capital
gains or other taxable income, the dividends paid on the shares of AMPS
constitute exempt-interest dividends. Alternatively, each Fund may include
such income in a dividend on shares of its AMPS without giving advance notice
thereof if it increases the dividend by an additional amount to offset the tax
effect thereof. The amount of net capital gains and ordinary income allocable
to shares of a Fund's AMPS (the "taxable distribution") depends upon the
amount of such gains and income realized by the Fund and the total dividends
paid by the Fund on shares of its common stock and shares of its AMPS during a
taxable year, but the taxable distribution generally is not significant.
In the opinion of Sidley Austin Brown & Wood LLP, counsel to each Fund,
under current law the manner in which each Fund allocates, and MuniYield
Michigan will allocate, items of tax-exempt income, net capital gains, and
other taxable income, if any, among shares of common stock and outstanding
AMPS (including, for MuniYield Michigan, its Series B AMPS) will be respected
for Federal income tax purposes. However, the tax treatment of additional
dividends may affect a Fund's calculation of each class' allocable share of
capital gains and other taxable income. In addition, there is currently no
direct guidance from the IRS or other sources specifically addressing whether
a Fund's method for allocating tax-exempt income, net capital gains and other
taxable income among shares of common stock and the outstanding series of AMPS
will be respected for Federal income tax purposes, and it is possible that the
IRS could disagree with counsel's opinion and attempt to reallocate a Fund's
net capital gains or other taxable income. In the event of a reallocation,
some of the dividends identified by a Fund as exempt-interest dividends to
holders of shares of its AMPS could be recharacterized as additional capital
gains or other taxable income. In the event of such recharacterization, a Fund
is not required to make payments to the affected stockholders to offset the
tax effect of such reallocation. In addition, a reallocation could cause a
Fund to be liable for income tax and excise tax on all reallocated taxable
income. Sidley Austin Brown & Wood LLP has advised each Fund that, in its
opinion, if the IRS were to challenge in court a Fund's allocations of income
and gain, the IRS would be unlikely to prevail. The opinion of Sidley Austin
Brown & Wood LLP, however, represents only its best legal judgment and is not
binding on the IRS or the courts.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent it does not distribute during each calendar year 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally does
not apply to the tax-exempt income of RICs, such as the Funds, that pay
exempt-interest dividends.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The alternative minimum tax
applies to interest received on "private activity bonds" issued after August
7, 1986. "Private activity bonds" are bonds which, although tax-exempt, are
used for purposes other than those generally performed by governmental units
and which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified
as an item of "tax preference" which could subject investors in such bonds,
including stockholders of the Funds, to an increased Federal alternative
minimum tax. Each Fund purchases such "private activity bonds" and reports to
stockholders within 60 days after calendar year-end the portion of its
dividends declared during the year which constitutes an item of tax preference
for alternative minimum tax purposes. The Code further provides that
corporations are subject to a Federal alternative minimum tax based, in part,
on certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings" which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by a Fund is included in adjusted current earnings, a corporate
stockholder may be required to pay a Federal alternative minimum tax on
exempt-interest dividends paid by such Fund.
The Funds may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special
tax rules under which a Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.
If at any time when shares of AMPS are outstanding a Fund does not meet
the asset coverage requirements of the Investment Company Act, the Fund will
be required to suspend distributions to holders of common stock until the
asset coverage is restored. See "Dividends and Distributions." This may
prevent such Fund from distributing at
42
least 90% of its net investment income and may, therefore, jeopardize the
Fund's qualification for taxation as a RIC. If a Fund were to fail to qualify
as a RIC, some or all of the distributions paid by the Fund would be fully
taxable to stockholders for Federal and Michigan income tax purposes. Upon any
failure to meet the asset coverage requirements of the Investment Company Act,
a Fund, in its sole discretion, may redeem shares of AMPS in order to maintain
or restore the requisite asset coverage and avoid the adverse consequences to
the Fund and its stockholders of failing to qualify as a RIC. No assurance can
be given, however, that any such action would achieve such objectives.
As noted above, a Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of preferred stock that each Fund has issued and that the
Combined Fund may issue may raise a question as to whether distributions on
such preferred stock are "preferential" under the Code and, therefore, not
eligible for the dividends paid deduction. Counsel has advised the Funds that
the outstanding preferred stock and the preferred stock to be issued by
MuniYield Michigan will not result in the payment of a preferential dividend.
If a Fund ultimately relies solely on a legal opinion when it issues such
preferred stock, no assurance can be given that the IRS would agree that
dividends on the preferred stock are not preferential. If the IRS successfully
disallowed the dividends paid deduction for dividends the Funds paid on the
preferred stock, the Funds could be disqualified as RICs. In this case,
dividends paid by the Funds on the common stock and the AMPS would not be
exempt from Federal income tax. Additionally, the Funds would be subject to a
Federal alternative minimum tax.
Under certain circumstances when a Fund is required to allocate taxable
income to the AMPS, it will pay Additional Distributions to holders of shares
of AMPS. The Federal income tax consequences of Additional Distributions under
existing law are uncertain. The Funds treat and MuniYield Michigan intends to
continue to treat a holder as receiving a dividend distribution in the amount
of any Additional Distribution only as and when such Additional Distribution
is paid. An Additional Distribution generally is designated by a Fund as an
exempt-interest dividend except as otherwise required by applicable law.
However, the IRS may assert that all or part of an Additional Distribution is
a taxable dividend either in the taxable year for which the allocation of
taxable income is made or in the taxable year in which the Additional
Distribution is paid.
The value of shares acquired pursuant to a Fund's Plan is generally
excluded from gross income to the extent that the cash amount reinvested would
be excluded from gross income. If, when a Fund's shares are trading at a
premium over net asset value, the Fund issues shares pursuant to the Plan that
have a greater fair market value than the amount of cash reinvested, it is
possible that all or a portion of such discount (which may not exceed 5% of
the fair market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution, it is also
possible that the taxable character of this discount would be allocable to all
of the stockholders, including stockholders who do not participate in the
Fund's Plan. Thus, stockholders who do not participate in a fund's Plan, as
well as Plan participants, might be required to report as ordinary income a
portion of their distributions equal to the allocable share of the discount.
Under certain provisions of the Code, some stockholders may be subject to
a withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
stockholders subject to backup withholding will be those for whom no taxpayer
identification number is on file with a Fund or who, to the Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that
such stockholder is not otherwise subject to backup withholding.
Ordinary income dividends paid to stockholders who are nonresident aliens
or foreign entities are subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident stockholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
The Code provides that every stockholder required to file a tax return
must include for information purposes on such return the amount of
exempt-interest dividends received from all sources (including the Funds)
during the taxable year.
Tax Treatment of Options and Futures Transactions. Each Fund may write,
purchase or sell municipal bond index financial futures contracts and interest
rate financial futures contracts on U.S. Government securities. Each Fund may
also purchase and write call and put options on such financial futures
contracts. In general, unless an election is available to a Fund or an
exception applies, such options and financial futures contracts that are
"Section
43
1256 contracts" will be "marked to market" for Federal income tax purposes at
the end of each taxable year, i.e., each such option or financial futures
contract will be treated as sold for its fair market value on the last day of
the taxable year, and any gain or loss attributable to Section 1256 contracts
will be 60% long term and 40% short term capital gain or loss. Application of
these rules to Section 1256 contracts held by a Fund may alter the timing and
character of distributions to stockholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by a Fund
solely to reduce the risk of changes in price or interest rates with respect
to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of a Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, a Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations and Michigan income tax laws
presently in effect. For the complete provisions, reference should be made to
the pertinent Code sections, the Treasury regulations promulgated thereunder
and the Michigan income and corporate franchise tax laws. The Code and the
Treasury regulations, as well as the Michigan income and corporation franchise
tax laws, are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Stockholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local tax consequences of an
investment in a Fund.
AGREEMENT AND PLAN OF REORGANIZATION
General
Under the Agreement and Plan (attached hereto as Exhibit II), MuniYield
Michigan will acquire substantially all of the assets, and will assume
substantially all of the liabilities, of MuniHoldings Michigan, in exchange
solely for shares of MuniYield Michigan Common Stock and MuniYield Michigan
Series B AMPS. The shares of MuniYield Michigan Common Stock issued to
MuniHoldings Michigan will have an aggregate net asset value equal to the
aggregate net asset value of the outstanding shares of MuniHoldings Michigan
Common Stock (except that cash will be paid in lieu of any fractional shares)
at the close of business on the business day immediately prior to the date on
which the Reorganization occurs. The shares of MuniYield Michigan Series B
AMPS issued to MuniHoldings Michigan will have a liquidation preference and
value equal to the liquidation preference and value of the MuniHoldings
Michigan AMPS. Upon receipt by MuniHoldings Michigan of such shares,
MuniHoldings Michigan will (i) distribute pro rata the shares of MuniYield
Michigan Common Stock to the holders of MuniHoldings Michigan Common Stock in
exchange for their shares of MuniHoldings Michigan Common Stock and (ii)
distribute pro rata the shares of MuniYield Michigan Series B AMPS to the
holders of MuniHoldings Michigan AMPS in exchange for their shares of
MuniHoldings Michigan AMPS. Prior to the transfer of substantially all of the
assets and substantially all of the liabilities of MuniHoldings Michigan to
MuniYield Michigan, MuniYield Michigan will (i) file Articles Supplementary
establishing the powers, rights and preferences of the MuniYield Michigan
Series B AMPS with the State Department of Assessments and Taxation of
Maryland (the "Maryland Department"); (ii) amend its investment policies so
that under normal circumstances, at least 80% of its net assets will be
invested in municipal obligations with remaining maturities of one year or
more that are covered by insurance guaranteeing the timely payment of
principal at maturity and interest when due; and (iii) change its name to
MuniYield Michigan Insured Fund II, Inc. As soon as practicable after the
effective date of the Reorganization (the "Closing Date"), MuniHoldings
Michigan will file Articles of Dissolution with the Maryland Department to
effect the formal dissolution of such Fund, and will dissolve.
As set forth above, MuniHoldings Michigan will distribute pro rata the
shares of (i) MuniYield Michigan Common Stock to the holders of record of
MuniHoldings Michigan Common Stock and (ii) MuniYield Michigan Series B AMPS
received by it to the holders of record of MuniHoldings Michigan AMPS in
exchange for such stockholders' shares in MuniHoldings Michigan.
Accordingly, as a result of the Reorganization, each holder of
MuniHoldings Michigan Common Stock will own shares of MuniYield Michigan
Common Stock that (except for cash payments received in lieu of fractional
shares) would have an aggregate net asset value immediately after the Closing
Date equal to the aggregate net asset value of that stockholder's MuniHoldings
Michigan Common Stock immediately prior to the Closing Date. Since the
MuniYield Michigan Common Stock would be issued at net asset value and the
shares of MuniHoldings
44
Michigan Common Stock would be valued at net asset value for the purposes of
the exchange, the holders of common stock of each Fund will not be diluted as
a result of the Reorganization. Similarly, since the MuniYield Michigan Series
B AMPS would be issued at a liquidation preference and value per share equal
to the liquidation preference and value per share of the AMPS of MuniHoldings
Michigan, holders of AMPS of each Fund will not be diluted as result of the
Reorganization. However, as a result of the Reorganization, a stockholder of
either Fund likely will hold a reduced percentage of ownership in the Combined
Fund after the Reorganization than he or she did in either of the constituent
Funds.
Procedure
At a meeting of the Board of Directors of each Fund, the Boards,
including the Directors who are not "interested persons," as defined in the
Investment Company Act, of the applicable Fund, approved the Agreement and
Plan by the affirmative vote of more than two-thirds of the total number of
Directors. The Board of MuniYield Michigan approved the submission of the
Agreement and Plan to the holders of MuniYield Michigan Common Stock and
MuniYield Michigan Series A AMPS for approval as described herein. The Board
of MuniHoldings Michigan approved the submission of the Agreement and Plan to
the holders of MuniHoldings Michigan Common Stock and MuniHoldings Michigan
AMPS for approval as described herein.
The Board of Directors of MuniYield Michigan also approved (i) the filing
of Articles Supplementary establishing the powers, rights and preferences of
the MuniYield Michigan Series B AMPS in order that such AMPS may be
distributed to holders of MuniHoldings Michigan AMPS as part of the
Reorganization; (ii) the issuance of additional shares of MuniYield Michigan
Common Stock and of shares of MuniYield Michigan Series B AMPS; (iii) the
amendment of its investment policies, so that under normal circumstances, at
least 80% of its net assets will be invested in Municipal Bonds; and (iv) the
change in the Fund's name to MuniYield Michigan Insured Fund II, Inc.
As a result of such Board approvals, the Funds have jointly filed this
Joint Proxy Statement and Prospectus with the Commission soliciting the vote
of the holders of MuniHoldings Michigan Common Stock and MuniHoldings Michigan
AMPS and MuniYield Michigan Common Stock and MuniYield Michigan Series A AMPS
to approve the Reorganization. If stockholders of MuniHoldings Michigan and
MuniYield Michigan approve the Reorganization, the Reorganization will take
place as soon as practicable after such approval, provided that the Funds have
obtained prior to that time an opinion of counsel concerning the tax
consequences of the Reorganization as set forth in the Agreement and Plan.
The Board of Directors of MuniYield Michigan recommends that the holders
of MuniYield Michigan Common Stock and MuniYield Michigan Series A AMPS
approve the Agreement and Plan. The Board of Directors of MuniHoldings
Michigan recommends that the holders of MuniHoldings Michigan Common Stock and
MuniHoldings Michigan AMPS approve the Agreement and Plan.
Terms of the Agreement and Plan of Reorganization
The following is a summary of the significant terms of the Agreement and
Plan. This summary is qualified in its entirety by reference to the Agreement
and Plan, attached hereto as Exhibit II.
Valuation of Assets and Liabilities. The respective assets of each Fund
will be valued the same way for both Funds: the net asset value per share of
the common stock of each Fund will be determined as of the close of business
on the NYSE (generally, 4:00 p.m., Eastern time) on the business day prior to
the Closing Date (the "Valuation Time"). For the purpose of determining the
net asset value of a share of common stock of each Fund, the value of the
securities held by the issuing Fund plus any cash or other assets (including
interest accrued but not yet received) minus all liabilities (including
accrued expenses) and the aggregate liquidation value of the outstanding
shares of AMPS of the issuing Fund is divided by the total number of shares of
common stock of the issuing Fund outstanding at such time. Daily expenses,
including the fees payable to FAM, will accrue at the Valuation Time.
The Michigan Municipal Bonds and Municipal Bonds in which each Fund
invests are traded primarily in the over-the-counter markets. In determining
net asset value at the Valuation Time, each Fund will use the valuations of
portfolio securities furnished by a pricing service approved by the Boards of
Directors of each Fund. The pricing service typically values portfolio
securities at the bid price or the yield equivalent when quotations are
readily available. Michigan Municipal Bonds and Municipal Bonds for which
quotations are not readily available will be valued at fair market value on a
consistent basis as determined by the pricing service using a matrix system to
determine valuations. The Boards of Directors of the Funds have determined in
good faith that the use of a pricing
45
service is a fair method of determining the valuation of portfolio securities.
Positions in financial futures contracts will be valued at the Valuation Time
at closing prices for such contracts established by the exchange on which they
are traded, or if market quotations are not readily available, will be valued
at fair value on a consistent basis using methods determined in good faith by
the Board of Directors.
Distribution of MuniYield Michigan Common Stock and MuniYield Michigan
Series B AMPS. On the Closing Date, MuniYield Michigan will issue to
MuniHoldings Michigan a number of shares of MuniYield Michigan Common Stock
the aggregate net asset value of which will equal the aggregate net asset
value of shares of common stock of MuniHoldings Michigan at the Valuation
Time. Each holder of MuniHoldings Michigan Common Stock will receive the
number of shares of MuniYield Michigan Common Stock corresponding to his or
her proportionate interest in the aggregate net asset value of the
MuniHoldings Michigan Common Stock. On the Closing Date, MuniYield Michigan
also will issue to MuniHoldings Michigan a number of shares of MuniYield
Michigan Series B AMPS, the liquidation preference and value of which will
equal the liquidation preference and value of MuniHoldings Michigan Series A
AMPS at the Valuation Time. Each holder of MuniHoldings Michigan AMPS will
receive the number of shares of MuniYield Michigan Series B AMPS corresponding
to his or her proportionate interest in the liquidation preference and value
of the MuniHoldings Michigan AMPS.
The distribution of shares described in the preceding paragraph will be
accomplished by opening new accounts on the books of MuniYield Michigan in the
names of the holders of MuniHoldings Michigan Common Stock and of MuniHoldings
Michigan AMPS and transferring to those stockholder accounts the MuniYield
Michigan Common Stock or MuniYield Michigan Series B AMPS representing such
stockholders' interests in MuniHoldings Michigan. Each newly-opened account on
the books of MuniYield Michigan for the previous holders of MuniHoldings
Michigan Common Stock would represent the respective pro rata number of shares
of MuniYield Michigan Common Stock (rounded down, in the case of fractional
shares, to the next largest number of whole shares) due such holder of common
stock. No fractional shares of MuniYield Michigan Common Stock will be issued.
In lieu thereof, MuniYield Michigan's transfer agent, BONY, will aggregate all
fractional shares of MuniYield Michigan Common Stock and sell the resulting
whole shares on the NYSE for the account of all holders of fractional
interests, and each such holder will be entitled to the pro rata share of the
proceeds from such sale upon surrender of the common stock certificates of
MuniHoldings Michigan. Similarly, each newly-opened account on the books of
MuniYield Michigan for the previous holders of AMPS of MuniHoldings Michigan
would represent the respective pro rata number of shares of MuniYield Michigan
Series B AMPS due such holder of AMPS. See "Surrender and Exchange of Stock
Certificates" below for a description of the procedures to be followed by the
stockholders of MuniHoldings Michigan to obtain their shares of MuniYield
Michigan Common Stock (and cash in lieu of fractional shares, if any). Because
AMPS are held in "street name" by The Depository Trust Company, all transfers
are accomplished by book entry.
No sales charge or fee of any kind will be charged to stockholders of
MuniHoldings Michigan in connection with their receipt of MuniYield Michigan
Common Stock or MuniYield Michigan Series B AMPS in the Reorganization. The
MuniHoldings Michigan AMPS are auctioned on Wednesday. The MuniYield Michigan
Series A AMPS are auctioned on Tuesday. After the Reorganization, the
MuniYield Michigan Series B AMPS will be auctioned on Wednesday. The auction
procedures for all of the AMPS are identical. As a result of the
Reorganization, the last dividend period for the MuniHoldings Michigan AMPS
prior to the Closing Date may be shorter than the dividend period for such
AMPS determined as set forth in the applicable Articles Supplementary.
Expenses. The expenses of the Reorganization that are directly
attributable to MuniHoldings Michigan will be deducted from the assets of
MuniHoldings Michigan as of the Valuation Time. These expenses are expected to
include the expenses incurred in preparing, printing and mailing the proxy
materials to be used in connection with the special meeting of the
stockholders of MuniHoldings Michigan to consider the Reorganization, the
expenses related to the solicitation of proxies to be voted at that meeting
and a portion of the expenses incurred in printing the N-14 Registration
Statement. The expenses of the Reorganization that are directly attributable
to MuniYield Michigan will be borne by FAM. The expenses attributable to
MuniYield Michigan include the expenses incurred in preparing, printing and
mailing the proxy materials to be utilized in connection with the annual
meeting of the stockholders of MuniYield Michigan to consider the
Reorganization, the expenses related to the solicitation of proxies to be
voted at that meeting and a portion of the expenses incurred in printing the
N-14 Registration Statement. Certain other expenses of the Reorganization,
including expenses in connection with obtaining an opinion of counsel as to
certain tax matters, the preparation of the Agreement and Plan, Commission
fees, stock exchange fees, rating agency fees, transfer agent fees, legal fees
and audit fees, will be borne equally by MuniHoldings Michigan and FAM, which
has agreed to bear the expenses of the Reorganization attributable to
MuniYield Michigan. The expenses of the Reorganization attributable to
MuniHoldings Michigan are currently
46
estimated to be $168,700. The expenses of the Reorganization attributable to
MuniYield Michigan are currently estimated to be $207,800.
Required Approvals. Under the Articles of Incorporation of each Fund (as
amended to date and including Articles Supplementary establishing the powers,
rights and preferences of the AMPS of each Fund), relevant Maryland law and
the rules of the NYSE and AMEX, stockholder approval of the Agreement and Plan
requires the affirmative vote of (i) the holders of a majority of the
outstanding shares of MuniHoldings Michigan Common Stock and MuniHoldings
Michigan AMPS, voting together as a single class, (ii) a majority of the
outstanding shares of MuniHoldings Michigan AMPS, voting separately as a
class, (iii) a majority of the votes cast by the holders of shares of
MuniYield Michigan Common Stock and MuniYield Michigan Series A AMPS, voting
together as a single class, provided that the total number of votes cast
represents a majority of the shares of MuniYield Michigan Common Stock and
MuniYield Michigan Series A AMPS issued, outstanding and entitled to vote
thereon, and (iv) the holders of a majority of the outstanding shares of
MuniYield Michigan Series A AMPS, voting separately as a class. Because of the
requirement that the Agreement and Plan be approved by the stockholders of
both Funds as set forth above, the Reorganization will not take place if the
applicable stockholders of either Fund do not approve the Agreement and Plan.
Deregistration and Dissolution. Following the transfer of substantially
all of the assets and substantially all of the liabilities of MuniHoldings
Michigan to MuniYield Michigan and the distribution of shares of MuniYield
Michigan Common Stock and MuniYield Michigan Series B AMPS to stockholders of
MuniHoldings Michigan, in accordance with the foregoing, MuniHoldings Michigan
will terminate its registration under the Investment Company Act and its
incorporation under Maryland law and will withdraw its authority to do
business in any state where it is required to do so.
Amendments and Conditions. The Agreement and Plan may be amended at any
time prior to the Closing Date with respect to any of the terms therein. The
obligations of each Fund pursuant to the Agreement and Plan are subject to
various conditions, including a registration statement on Form N-14 being
declared effective by the Commission, approval by the stockholders of each
Fund as described herein, an opinion of counsel being received with respect to
certain tax matters, an opinion of counsel as to securities matters being
received and the continuing accuracy of various representations and warranties
of the Funds being confirmed by the respective parties.
Postponement, Termination. Under the Agreement and Plan, the Board of
Directors of either Fund may cause the Reorganization to be postponed or
abandoned under certain circumstances should such Board determine that it is
in the best interests of the stockholders of its respective Fund to do so. The
Agreement and Plan may be terminated, and the Reorganization abandoned at any
time (whether before or after adoption thereof by the stockholders of either
Fund) prior to the Closing Date, or the Closing Date may be postponed: (i) by
mutual consent of the Boards of Directors of both Funds and (ii) by the Board
of Directors of either Fund if any condition to that Fund's obligations set
forth in the Agreement and Plan has not been fulfilled or waived by such
Board.
Potential Benefits to Holders of Common Stock of the Funds as a Result of the
Reorganization
In approving the Reorganization, the Board of Directors of MuniHoldings
Michigan identified certain potential benefits for MuniHoldings Michigan
common stockholders that are likely to result from the Reorganization,
including lower aggregate operating expenses and advisory fees per share for
holders of common stock of the Combined Fund, greater efficiency and
flexibility in portfolio management and a more liquid trading market for the
common stock of the Combined Fund. Following the Reorganization, MuniHoldings
Michigan stockholders will remain invested in a closed-end fund that has
investment objectives and policies substantially similar to those of
MuniHoldings Michigan.
Although the pro forma total operating expense ratio of the Combined Fund
is expected to be only slightly lower than MuniYield Michigan's current
operating expense ratio, MuniYield Michigan stockholders will not be adversely
affected by the Reorganization since FAM has agreed to bear all Reorganization
expenses attributable to MuniYield Michigan and the Fund may otherwise benefit
from an increase in the Combined Fund's level of net assets. MuniYield
Michigan common stockholders should also benefit from the change to the Fund's
investment policies providing that the Fund will invest at least 80% of its
net assets in insured Municipal Bonds.
The Board of Directors of each Fund also considered the possible risks
and costs of combining the Funds, and examined the relative credit strength,
maturity characteristics, mix of type and purpose, and yield of the Funds'
portfolios of Michigan Municipal Bonds and Municipal Bonds and the costs
involved in a transaction such as the Reorganization. The Boards noted the
many similarities between the Funds, including their substantially similar
47
investment objectives and investment policies, their use of substantially the
same management personnel and their similar portfolios of Michigan Municipal
Bonds and Municipal Bonds. The Boards also considered the relative tax
positions of each of the Fund's portfolios.
In the past, FAM has voluntarily waived a portion of its advisory fee
and/or reimbursed certain other expenses with respect to MuniHoldings
Michigan. FAM has not waived fees and/or reimbursed expenses with respect to
MuniYield Michigan. It is not anticipated that FAM will waive its advisory fee
and/or reimburse certain expenses with respect to MuniHoldings Michigan on an
ongoing basis and it is not anticipated that FAM will waive its advisory fee
and/or reimburse expenses with respect to the Combined Fund.
The Combined Fund that would result from the Reorganization would have a
larger asset base than either Fund has currently. Based on data presented by
FAM, the Board of each Fund believes that administrative expenses for a larger
Combined Fund are likely to be less than the aggregate expenses for each Fund,
resulting in a lower expense ratio for common stockholders of the Combined
Fund and higher earnings per common share. In particular, certain fixed costs,
such as costs of printing stockholder reports and proxy statements, legal
expenses, audit fees, mailing costs and other expenses will be spread across a
larger asset base, thereby lowering the expense ratio for the Combined Fund.
To illustrate the potential economies of scale, the table below sets forth the
total annualized operating expense ratio of each Fund and the Combined Fund
based on the average net assets of the Combined Fund, both excluding and
including assets attributable to AMPS, as of October 31, 2001.
Total Annualized
Operating Expense Average Net Assets, Total Annualized Average Net Assets,
Ratio, Excluding Excluding Assets Operating Expense Including Assets
AMPS Attributable to AMPS Ratio, Including AMPS Attributable to AMPS
MuniYield Michigan...... 1.15% $114,580,103 0.77% $169,580,103
MuniHoldings Michigan... 1.51%* $ 59,360,463 0.96%** $ 93,360,463
Combined Fund+.......... 1.10% $173,940,566 0.72% $262,940,566
---------
* Including the fee waivers and/or expense reimbursements, the total annualized operating expense ratio for
MuniHoldings Michigan would have been 1.12%.
** Including the fee waivers and/or expense reimbursements, the total annualized operating expense ratio for
MuniHoldings Michigan would have been 0.71%.
+ Assumes the Reorganization had taken place on October 31, 2001.
Management projections estimate that the Combined Fund will have net
assets of approximately $263 million, including assets attributable to AMPS,
upon completion of the Reorganization. A larger asset base should provide
benefits in portfolio management. After the Reorganization, the Combined Fund
may be able to purchase larger amounts of Michigan Municipal Bonds and
Municipal Bonds at more favorable prices than could either Fund separately
and, with this greater purchasing power, request improvements in the terms of
the Michigan Municipal Bonds and Municipal Bonds (e.g., added indenture
provisions covering call protection, sinking funds and audits for the benefit
of large holders) prior to purchase.
In approving the Reorganization, the Board of Directors of each Fund
determined that the Reorganization is in the best interests of the
stockholders of that Fund because the Reorganization presents no significant
risks or costs (including legal, accounting and administrative costs) that
would outweigh the potential benefits discussed above and because, with
respect to net asset value and liquidation preference, the interests of
existing stockholders of that Fund would not be diluted as a result of the
Reorganization.
It is not anticipated that the Reorganization directly would benefit the
holders of shares of AMPS of either Fund; however, the Reorganization will not
adversely affect the holders of shares of AMPS of either Fund and the expenses
of the Reorganization will not be borne by the holders of shares of AMPS of
either Fund.
Surrender and Exchange of Stock Certificates
After the Closing Date, each holder of an outstanding certificate or
certificates formerly representing shares of MuniHoldings Michigan Common
Stock will be entitled to receive, upon surrender of his or her certificate or
certificates, a certificate or certificates representing the number of shares
of MuniYield Michigan Common Stock distributable with respect to such holder's
shares of MuniHoldings Michigan Common Stock, together with cash in lieu of
any fractional shares of MuniYield Michigan Common Stock. Promptly after the
Closing Date, the transfer
48
agent for the MuniYield Michigan Common Stock will mail to each holder of
certificates formerly representing shares of MuniHoldings Michigan Common
Stock a letter of transmittal for use in effecting this exchange.
Shares of AMPS are held in "street name" by The Depository Trust Company,
and all transfers will be accomplished by book entry. Surrender of physical
certificates for AMPS is not required.
If prior to Reorganization you held: After the Reorganization, you will hold:
----------------------------------- ---------------------------------------
MuniYield Michigan Common Stock MuniYield Michigan* Common Stock
MuniYield Michigan Series A AMPS MuniYield Michigan* Series A AMPS
MuniHoldings Michigan Common Stock MuniYield Michigan* Common Stock
MuniHoldings Michigan AMPS MuniYield Michigan* Series B AMPS
---------
* After the Reorganization, MuniYield Michigan will change its name to
"MuniYield Michigan Insured Fund II, Inc."
Please do not send in any stock certificates at this time. Upon
consummation of the Reorganization, holders of MuniHoldings Michigan Common
Stock will be furnished with instructions for exchanging their stock
certificates for MuniYield Michigan stock certificates and, if applicable,
cash in lieu of fractional shares of MuniYield Michigan Common Stock.
From and after the Closing Date, certificates formerly representing
shares of MuniHoldings Michigan Common Stock will be deemed for all purposes
to evidence ownership of the number of full shares of MuniYield Michigan
Common Stock distributable with respect to the shares of MuniHoldings Michigan
Common Stock held before the Reorganization as described above and as shown in
the table above, provided that, until such stock certificates have been so
surrendered, no dividends payable to the holders of record of MuniHoldings
Michigan Common Stock as of any date subsequent to the Closing Date will be
paid to the holders of such outstanding stock certificates. Dividends payable
to holders of record of shares of MuniYield Michigan Common Stock, as of any
date after the Closing Date and prior to the exchange of certificates by any
holder of MuniHoldings Michigan Common Stock, will be paid to such
stockholder, without interest, at the time such stockholder surrenders his or
her stock certificates for exchange.
From and after the Closing Date, there will be no transfers on the stock
transfer books of MuniHoldings Michigan. If, after the Closing Date,
certificates representing shares of MuniHoldings Michigan Common Stock are
presented to MuniYield Michigan, they will be canceled and exchanged for
certificates representing MuniYield Michigan Common Stock and cash in lieu of
fractional shares of MuniYield Michigan Common Stock, if any, distributable
with respect to such MuniHoldings Michigan Common Stock in the Reorganization.
Tax Consequences of the Reorganization
Summary. As discussed below, the Reorganization is structured with the
intention that neither MuniHoldings Michigan, MuniYield Michigan, the
stockholders of MuniHoldings Michigan nor the stockholders of MuniYield
Michigan will recognize a gain or loss on the transaction.
General. The Reorganization has been structured with the intention that
it qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Each Fund has elected and qualified for the
special tax treatment afforded RICs under the Code, and MuniYield Michigan
intends to continue to so qualify after the Reorganization. The Funds shall
have received an opinion of Sidley Austin Brown & Wood llp to the effect that
for Federal income tax purposes: (i) the exchange of assets by MuniHoldings
Michigan for MuniYield Michigan stock, as described, will constitute a
reorganization, and MuniHoldings Michigan and MuniYield Michigan will each be
deemed a "party" to such reorganization; (ii) no gain or loss will be
recognized to MuniHoldings Michigan as a result of the Reorganization or on
the distribution of MuniYield Michigan Common Stock and MuniYield Michigan
Series B AMPS to the stockholders of MuniHoldings Michigan; (iii) no gain or
loss will be recognized to MuniYield Michigan as a result of the
Reorganization; (iv) no gain or loss will be recognized to the stockholders of
MuniHoldings Michigan on the receipt of MuniYield Michigan Common Stock and
MuniYield Michigan Series B AMPS in exchange for their corresponding shares of
MuniHoldings Michigan Common Stock or MuniHoldings Michigan AMPS (except to
the extent that holders of MuniHoldings Michigan Common Stock receive cash
representing an interest in fractional shares of MuniYield Michigan Common
Stock in the Reorganization); (v) the tax basis of the assets of MuniHoldings
Michigan in the hands of MuniYield Michigan will be the same as the tax basis
of such assets in the hands of MuniHoldings Michigan immediately prior to the
consummation of the Reorganization; (vi) immediately after the Reorganization,
the tax basis of the MuniYield Michigan Common Stock or MuniYield Michigan
Series B AMPS received by the stockholders of MuniHoldings
49
Michigan in the Reorganization will be equal to the tax basis of the
respective MuniHoldings Michigan Common Stock or MuniHoldings Michigan AMPS
surrendered in exchange; (vii) a stockholder's holding period for the
MuniYield Michigan Common Stock or MuniYield Michigan Series B AMPS will be
determined by including the period for which such stockholder held the
MuniHoldings Michigan Common Stock or MuniHoldings Michigan AMPS exchanged
therefor, provided, that such shares were held as a capital asset; (viii)
MuniYield Michigan's holding period with respect to the assets of MuniHoldings
Michigan transferred will include the period for which such assets were held
by MuniHoldings Michigan; (ix) the payment of cash to holders of MuniHoldings
Michigan Common Stock in lieu of fractional shares of MuniYield Michigan
Common Stock will be treated as though the fractional shares were distributed
as part of the Reorganization and then redeemed, with the result that such
stockholders will have short- or long term capital gain or loss to the extent
that the cash distribution differs from the stockholder's basis allocable to
the MuniYield Michigan fractional shares; and (x) the taxable year of
MuniHoldings Michigan will end on the effective date of the Reorganization,
and MuniYield Michigan will succeed to and take into account certain tax
attributes of MuniHoldings Michigan, such as earnings and profits, capital
loss carryovers and method of accounting.
As noted in the discussion under "Comparison of the Funds -- Tax Rules
Applicable to the Funds and Their Stockholders," a Fund must distribute
annually at least 90% of its net taxable and tax-exempt income. A distribution
will only be counted for this purpose if it qualifies for the dividends paid
deduction under the Code. In the opinion of Sidley Austin Brown & Wood LLP,
the issuance of MuniYield Michigan Series B AMPS pursuant to the
Reorganization in addition to the already existing MuniYield Michigan Series A
AMPS will not cause distributions on any series of MuniYield Michigan AMPS to
be treated as preferential dividends ineligible for the dividends paid
deduction. It is possible, however, that the IRS may assert that, because
there is more than one series of AMPS, distributions on such shares are
preferential under the Code and therefore not eligible for the dividends paid
deduction. If the IRS successfully disallowed the dividends paid deduction for
dividends on the AMPS, MuniYield Michigan could lose the special tax treatment
afforded RICs. In this case, dividends on the shares of MuniYield Michigan
Common Stock and MuniYield Michigan AMPS would not be exempt from Federal
income tax. Additionally, MuniYield Michigan would be subject to a Federal
alternative minimum tax and might be subject to the Michigan corporate
franchise tax.
Under Section 381(a) of the Code, MuniYield Michigan will succeed to and
take into account certain tax attributes of MuniHoldings Michigan, including,
but not limited to, earnings and profits, any net operating loss carryovers,
any capital loss carryovers and method of accounting. The Code, however,
contains special limitations with regard to the use of net operating losses,
capital losses and other similar items in the context of certain
reorganizations, including tax-free reorganizations pursuant to Section
368(a)(1)(C) of the Code, which could reduce the benefit of these attributes
to MuniYield Michigan.
Stockholders should consult their tax advisers regarding the effect of
the Reorganization in light of their individual circumstances. As the
foregoing relates only to Federal income tax consequences, stockholders also
should consult their tax advisers as to the foreign, state and local tax
consequences of the Reorganization.
Regulated Investment Company Status. The Funds have elected and qualified
since inception for taxation as RICs under Sections 851-855 of the Code, and
after the Reorganization MuniYield Michigan intends to continue to so qualify.
Capitalization
The following table sets forth as of October 31, 2001 (i) the
capitalization of MuniYield Michigan, (ii) the capitalization of MuniHoldings
Michigan and (iii) the capitalization of the Combined Fund, as adjusted to
give effect to the Reorganization.
50
Pro Forma Capitalization of MuniYield Michigan, MuniHoldings Michigan
and the Combined Fund as of October 31, 2001 (unaudited)
Combined
MuniYield MuniHoldings Pro Forma Fund as
Michigan Michigan Adjustment Adjusted (a)
-------- -------- ---------- ------------
Net Assets:
Net Assets Attributable to Common Stock........ $118,498,778 $ $ $
Net Assets Attributable to AMPS................ 55,000,000
Shares Outstanding:
Common Stock................................... 7,916,170 3,621,776 (b)
AMPS
Series A.................................... 2,200 1,360 2,200
Series B.................................... -- -- 1,360
Net Asset Value Per Share:
$
Common Stock................................... $14.97 $17.20 $ (c)
AMPS........................................... $25,000 $ $ $
---------
(a) The adjusted balances are presented as if the Reorganization had been
consummated on October 31, 2001 and are for informational purposes only.
Assumes distribution of undistributed net investment income and accrual
of estimated Reorganization expenses of $___________ of which $ is
attributable to MuniYield Michigan and $ is attributable to MuniHoldings
Michigan. FAM has agreed to bear the expenses of the Reorganization
attributable to MuniYield Michigan. No assurance can be given as to how
many shares of MuniYield Michigan Common Stock that stockholders of
MuniHoldings Michigan will receive on the Closing Date, and the foregoing
should not be relied upon to reflect the number of shares of MuniYield
Michigan Common Stock that actually will be received on or after such
date.
(b) Assumes the issuance of shares of MuniYield Michigan Common Stock and one
newly created series of AMPS consisting of 1,360 Series B shares, in
exchange for the net assets of MuniHoldings Michigan. The estimated
number of shares issued was based on the net asset value of each Fund,
net of distributions and estimated Reorganization expenses, on
___________.
(c) Net Asset Value Per Share of common stock net of Reorganization-related
expenses and distribution of undistributed net investment income of $ for
MuniYield Michigan and $ for MuniHoldings Michigan.
ITEM 2. ELECTION OF DIRECTORS OF MUNIYIELD MICHIGAN
At MuniYield Michigan's Meeting, Directors of MuniYield Michigan will be
elected to serve until their successors have been duly elected and qualified
or until their earlier resignation or removal. If the stockholders of either
Fund do not approve the Agreement and Plan as described herein, then the Board
of MuniYield Michigan elected at its Meeting will continue to serve as the
Board of MuniYield Michigan and the current Directors of MuniHoldings Michigan
will continue to serve as the Board of MuniHoldings Michigan. If the
stockholders of each Fund approve the Agreement and Plan as described herein,
and the Reorganization is consummated, the stockholders of MuniHoldings
Michigan will become stockholders of MuniYield Michigan. The Board of
MuniYield Michigan is responsible for the overall supervision of the
operations of the Fund and will be responsible for the overall supervision of
the Combined Fund if the Reorganization is consummated.
It is intended that all properly executed proxies will be voted (unless
such authority has been withheld in the proxy or revoked as described herein)
"FOR" the following Board nominees as follows:
(1) All proxies of the holders of MuniYield Michigan AMPS, voting
separately as a class, in favor of Herbert I. London and Andre F.
Perold as Directors to be elected by holders of AMPS; and
(2) All proxies of the holders of MuniYield Michigan Common Stock and
MuniYield Michigan AMPS, voting together as a single class, in favor
of James H. Bodurtha; Terry K. Glenn; Joe Grills; Roberta Cooper
Ramo; Robert S. Salomon, Jr.; Melvin R. Seiden; and Stephen B.
Swensrud as Directors to be elected by holders of MuniYield Michigan
Common Stock and AMPS.
Certain biographical and other information relating to the nominees is
set forth in Exhibit I to this Joint Proxy Statement and Prospectus. As of the
Record Date, the Directors owned no shares of MuniYield Michigan Common Stock
and no shares of MuniYield Michigan Series A AMPS. The Board of MuniYield
Michigan knows of no reason why any of these nominees listed in Exhibit I to
this Joint Proxy Statement and Prospectus will be
51
unable to serve, but in the event of any such unavailability, the proxies
received will be voted for such substitute nominee or nominees as the Board of
MuniYield Michigan may recommend.
Committee Report
The Board of MuniYield Michigan has a standing Audit and Nominating
Committee (the "Committee"), which consists of Directors who are not
"interested persons" of the Fund within the meaning of the Investment Company
Act and who are "independent" as defined in the NYSE listing standards.
Currently, Messrs. Bodurtha, London and Perold and Ms. Ramo are members of
the Committee. If all of the nominees are elected to the Board at the Meeting,
the Committee will consist of Messrs. Bodurtha, Grills, London, Perold,
Salomon, Seiden and Swensrud and Ms. Ramo. The principal responsibilities of
the Committee are to: (i) recommend to the Board the selection, retention or
termination of the Fund's independent auditors; (ii) review with the
independent auditors the scope, performance and anticipated cost of their
audit; (iii) discuss with the independent auditors certain matters relating to
the Fund's financial statements, including any adjustment to such financial
statements recommended by such independent auditors, or any other results of
any audit; (iv) ensure that the independent auditors submit on a periodic
basis a formal written statement as to their independence, discuss with the
independent auditors any relationships or services disclosed in the statement
that may impact the objectivity and independence of the Fund's independent
auditors and recommend that the Board take appropriate action in response to
this statement to satisfy itself of the independent auditors' independence;
and (v) consider the comments of the independent auditors and management's
responses thereto with respect to the quality and adequacy of the Fund's
accounting and financial reporting policies and practices and internal
controls. The Fund adopted an Audit Committee Charter (the "Charter") at a
meeting held on May 23, 2000. The Board revised and reapproved the Charter on
March 13, 2001. The Committee also has (a) received written disclosures and
the letter required by Independence Standards Board Standard No. 1 from
____________, MuniYield Michigan's independent auditors, and (b) discussed
certain matters required to be discussed by Statements on Auditing Standards
No. 61 with _________. The Committee has considered whether the provision of
non-audit services by ______________ is compatible with maintaining the
independence of those auditors.
At its meeting held on December 13, 2001, the Committee reviewed and
discussed the audit of the Fund's financial statements with Fund management
and ______________. Had any material concerns arisen during the course of the
audit and the preparation of the audited financial statements mailed to
stockholders and included in MuniYield Michigan's Annual Report, the Committee
would have been notified by Fund management or ______________. The Committee
received no such notifications. The Committee recommended to the Board that
the Fund's audited financial statements should be included in the Fund's
Annual Report to Stockholders for the fiscal year ended October 31, 2001.
In addition to the above, the Committee also reviews and nominates
candidates to serve as non-interested Directors. The Committee generally will
not consider nominees recommended by stockholders of the Fund. The
non-interested Directors have retained independent legal counsel to assist
them in connection with these duties.
Committee and Board Meetings
During MuniYield Michigan's most recently completed fiscal year, the Fund
held _____________ Board meetings and ____________ Committee meetings. Each of
the Directors then in office attended at least [75%] of the total number of
meetings of the Board held during the fiscal year and, if a member, attended
at least [75%] of the total number of meetings of the Committee held during
the period for which he or she served.
Independent Auditor's Fees
The following table sets forth the aggregate fees MuniYield Michigan paid
for the fiscal year ended October 31, 2001 for professional services rendered
for: (i) the audit of the Fund's annual financial statements and the review of
financial statements included in the Fund's reports to shareholders; (ii)
financial information systems design and implementation services provided to
the Fund, FAM and entities controlling, controlled by or under common control
with FAM that provide services to the Fund; and (iii) all other non-audit
services provided to the Fund, FAM, and entities controlling, controlled by or
under common control with FAM that provide services to the Fund. The Committee
determined that the provision of information technology services under clause
(ii) and the provision of non-audit services under clause (iii) are compatible
with maintaining the independence of the independent auditors.
52
----------------------------------------------------------------------------------------------------------------------
Audit Fees Charged
Fund Independent Auditor to the Fund Other Fees* Fiscal Year
--------------------------- ----------------------- ---------------------- -------------------- ----------------------
MuniYield Michigan
--------------------------- ----------------------- ---------------------- -------------------- ----------------------
---------
* Includes fees billed for non-audit services rendered to MuniYield Michigan,
FAM and any entity controlling, controlled by, or under common control with
FAM, during the year ended October 31, 2001.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the officers and directors of the Fund and persons
who own more than ten percent of a registered class of the Fund's equity
securities, to file reports of ownership and changes in ownership on Forms 3,
4 and 5 with the Commission and the NYSE. Officers, directors and greater than
ten percent stockholders are required by Commission regulations to furnish the
Fund with copies of all Forms 3, 4 and 5 they file.
Based solely on MuniYield Michigan's review of the copies of such forms,
and amendments thereto, furnished to it during or with respect to its most
recent fiscal year, and written representations from certain reporting persons
that they were not required to file Form 5 with respect to the most recent
fiscal year, the Fund believes that all of its officers, directors, greater
than ten percent beneficial owners and other persons subject to Section 16 of
the Exchange Act because of the requirements of Section 30 of the Investment
Company Act, (i.e., any advisory board member, investment adviser or
affiliated person of the Fund's investment adviser), have complied with all
filing requirements applicable to them with respect to transactions during the
Fund's most recent fiscal year.
Interested Persons
MuniYield Michigan considers Mr. Glenn to be an "interested person" of
the Fund within the meaning of Section 2(a)(19) of the Investment Company Act
because of the positions he holds with FAM and its affiliates. Mr. Glenn is
the President of MuniYield Michigan. See Exhibit I to this Joint Proxy
Statement and Prospectus.
Compensation of Directors
FAM pays all compensation to all officers of MuniYield Michigan and all
Directors of MuniYield Michigan who are affiliated with ML & Co. or its
subsidiaries. MuniYield Michigan pays fees to each Director who is not
affiliated with the FAM (each, a "non-affiliated Director") for service to
MuniYield Michigan. Each non-affiliated Director receives an aggregate annual
retainer of $100,000 for his or her services to multiple investment companies
advised by FAM or its affiliate, MLIM ("MLIM/FAM-advised funds"). The portion
of the annual retainer allocated to each MLIM/FAM-advised fund is determined
quarterly based on the relative net assets of each such fund. In addition,
each non-affiliated Director receives a fee per in-person Board meeting
attended and a fee per in-person Committee meeting attended. The annual per
meeting fees paid to each non-affiliated Director aggregate $60,000 for all
MLIM/FAM-advised funds for which that Director serves and are allocated
equally among those funds. MuniYield Michigan also reimburses the
non-affiliated Directors for actual out-of-pocket expenses relating to
attendance at meetings.
The following table shows the compensation earned by the non-affiliated
Directors of MuniYield Michigan from the Fund for the fiscal year ended
October 31, 2001, and the aggregate compensation paid to the Director nominees
from all MLIM/FAM-advised funds, for the calendar year ended December 31,
2001.
Pension or Estimated Aggregate
Retirement Compensation from
Position Benefits Annual Fund and Other
with Compensation Accrued as Part of Benefits upon MLIM/FAM-
Name Fund From Fund Fund Expense Retirement Advised Funds*
James H. Bodurtha.............. Director $2,981.59 None None $160,000
Joe Grills*................... Nominee N/A N/A N/A $220,000
Herbert I. London.............. Director $2,981.59 None None $160,000
Joseph L. May**................ Director $2,981.59 None None $160,000
Andre F. Perold................ Director $2,981.59 None None $160,000
Roberta Cooper Ramo............ Director $3,390.68 None None $160,000
53
Robert S. Salomon, Jr.*....... Nominee N/A N/A N/A $220,000
Melvin R. Seiden*............. Nominee N/A N/A N/A $220,000
Stephen B. Swensrud*.......... Nominee N/A N/A N/A $220,000
.........
*Not presently a Director of the Fund but nominated to be elected a Director
of the Fund at the Meeting.
**Joseph L. May retired from the Board on December 31, 2001.
After all of the Directors are elected to the Board of MuniYield
Michigan, the Fund will pay each non-affiliated Director an annual fee for
serving as a Director plus a fee for each Board meeting attended in person.
MuniYield Michigan will also compensate each member of the Committee with an
annual fee, plus a fee for each Committee meeting attended in person.
MuniYield Michigan will continue to reimburse the non-affiliated Directors for
actual out-of-pocket expenses relating to attendance at meetings. The
estimated aggregate compensation to be paid by MuniYield Michigan to the
non-affiliated Directors for a 12-month period under this compensation
schedule is $16,000, assuming that (a) all of the nominees are elected to the
Board of MuniYield Michigan, (b) MuniYield Michigan holds four Board meetings
and four Committee meetings, and (c) each Director attends each such meeting
in person.
Officers of MuniYield Michigan
Information regarding the officers of the Fund is set forth in Exhibit I
to this Joint Proxy Statement and Prospectus. Officers of the Fund are elected
and appointed by the Board and hold office until they resign, are removed or
are otherwise disqualified to serve.
Share Ownership
Set forth in Exhibit I to this Joint Proxy Statement and Prospectus is
the following information for each Director nominee: (i) the number of shares
of the Fund owned; (ii) the aggregate dollar range of equity in the Fund such
share ownership represents; and (iii) the aggregate dollar range of securities
in all registered funds overseen by the Director nominee in the Merrill Lynch
family of funds. Also set forth in Exhibit I is information for each nominee
and his or her immediate family members relating to securities owned
beneficially or of record in ML&Co. As of the Record Date, the Directors and
officers of MuniYield Michigan as a group owned an aggregate of less than 1%
of MuniYield Michigan Common Stock outstanding at such date. At such date, Mr.
Glenn, President and a Director of MuniYield Michigan, and the other officers
of MuniYield Michigan, owned an aggregate of less than 1% of the outstanding
shares of common stock of ML & Co.
The Board of MuniYield Michigan recommends that shareholders vote
"FOR" the election of the Director nominees.
54
INFORMATION CONCERNING THE MEETINGS
Date, Time and Place of Meetings
The Meetings will be held on April 8, 2002 at the offices of FAM, 800
Scudders Mill Road, Plainsboro, New Jersey at 9:00 a.m. Eastern time
(MuniHoldings Michigan) and 9:30 a.m. Eastern time (MuniYield Michigan).
Solicitation, Revocation and Use of Proxies
A stockholder executing and returning a proxy has the power to revoke it
at any time prior to its exercise by executing a superseding proxy, by giving
written notice of the revocation to the Secretary of the appropriate Fund or
by voting in person at the applicable Meeting. Although mere attendance at a
Meeting will not revoke a proxy, a stockholder present at a Meeting may
withdraw his or her proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the applicable Meeting in
accordance with the directions on the proxies; if no direction is indicated on
a properly executed proxy, such shares (i) for both Funds, will be voted "FOR"
Item 1, the approval of the Agreement and Plan, and (ii) for MuniYield
Michigan only, will be voted "FOR" Item 2, the election of the Directors of
MuniYield Michigan. It is not anticipated that any other matters will be
brought before the Meeting. If, however, any other business properly is
brought before any Meeting, proxies will be voted in accordance with the
judgment of the persons designated on such proxies.
Record Date and Outstanding Shares
Only holders of record of shares of MuniYield Michigan Common Stock and
MuniYield Michigan Series A AMPS at the close of business on the Record Date
are entitled to vote at the Meeting for MuniYield Michigan or any adjournment
thereof. Only holders of record of shares of MuniHoldings Michigan Common
Stock and MuniHoldings Michigan AMPS at the close of business on the Record
Date are entitled to vote at the Meeting for MuniHoldings Michigan or any
adjournment thereof. At the close of business on the Record Date, ______
shares of MuniYield Michigan Common Stock and 2,200 shares of MuniYield
Michigan Series A AMPS outstanding. At the close of business on the Record
Date, _______ shares of MuniHoldings Michigan Common Stock and 1,360 shares of
MuniHoldings Michigan AMPS were outstanding.
Security Ownership of Certain Beneficial Owners and Management
To the knowledge of the Funds, at the Record Date, no person or entity
owns beneficially or of record 5% or more of the shares of the common stock or
AMPS of either Fund.
As of the Record Date, the Directors and officers of MuniYield Michigan
as a group (10 persons) owned an aggregate of less than 1% of the outstanding
shares of MuniYield Michigan Common Stock and owned no MuniYield Michigan
AMPS.
As of the Record Date, the Directors and officers of MuniHoldings
Michigan as a group (11 persons) owned an aggregate of less than 1% of the
outstanding shares of MuniHoldings Michigan Common Stock and owned no
MuniHoldings Michigan AMPS.
On the Record Date, Mr. Glenn, a Director and an officer of each Fund,
and the other officers of each Fund, owned an aggregate of less than 1% of the
outstanding shares of common stock of ML & Co.
Voting Rights and Required Vote
For purposes of this Joint Proxy Statement and Prospectus, each share of
MuniYield Michigan Common Stock, each share of MuniYield Michigan Series A
AMPS, each share of MuniHoldings Michigan Common Stock and each share of
MuniHoldings Michigan AMPS is entitled to one vote.
Approval of the Agreement and Plan requires the affirmative vote of
stockholders representing (i) a majority of the outstanding shares of
MuniHoldings Michigan Common Stock and MuniHoldings Michigan AMPS, voting
together as a single class, (ii) a majority of the outstanding shares of
MuniHoldings Michigan AMPS, voting separately as a class, (iii) a majority of
the votes cast by the holders of shares of MuniYield Michigan Common Stock and
MuniYield Michigan Series A AMPS, voting together as a single class, provided
that the total number of
55
votes cast represents a majority of the shares of MuniYield Michigan Common
Stock and MuniYield Michigan Series A AMPS issued, outstanding and entitled to
vote thereon, and (iv) a majority of the outstanding shares of MuniYield
Michigan Series A AMPS, voting separately as a class.
Assuming the required quorum is present at the Meeting of MuniYield
Michigan stockholders, the election of the Board of Directors of MuniYield
Michigan will require the affirmative vote of a plurality of the votes cast by
the holders of MuniYield Michigan Common Stock and the holders of MuniYield
Michigan Series A AMPS, represented at the Meeting and entitled to vote,
voting together as a single class.
For purposes of each Meeting, a quorum consists of one-third of the
outstanding shares of common stock and AMPS entitled to vote at the Meeting,
present in person or by proxy. If, by the time scheduled for each Meeting, a
quorum of the applicable stockholders of a Fund is not present, or if a quorum
is present but sufficient votes to take action with respect to any Item are
not received from the stockholders of the applicable Fund, the persons named
as proxies may propose one or more adjournments of a Meeting with respect to
that Item to permit further solicitation of proxies from stockholders. Any
such adjournment will require the affirmative vote of a majority of the shares
of the applicable Fund present in person or by proxy and entitled to vote at
the session of the applicable Meeting to be adjourned. The persons named as
proxies will vote in favor of any such adjournment if they determine that
adjournment and additional solicitation are reasonable and in the interests of
the applicable Fund's stockholders.
Appraisal Rights
Under Maryland law, stockholders of a company whose shares are traded
publicly on a national securities exchange, such as the common stock of
MuniHoldings Michigan, are not entitled to demand the fair value of their
shares upon a transfer of assets; therefore, the holders of MuniHoldings
Michigan Common Stock will be bound by the terms of the Reorganization, if
approved at the Meetings. However, any holder of MuniHoldings Michigan Common
Stock may sell his or her shares of MuniHoldings Michigan Common Stock at any
time prior to the Reorganization on the AMEX. Conversely, since the AMPS are
not: (i) traded publicly on a national securities exchange, (ii) designated as
a national market system security on an interdealer quotation system by the
NASD, or (iii) designated for trading on the Nasdaq SmallCap Market, holders
of AMPS issued by MuniHoldings Michigan will be entitled to appraisal rights
under Maryland law, if such holders follow the procedures for demanding fair
value for stock set forth below. As stockholders of the corporation acquiring
the assets of MuniHoldings Michigan, neither holders of MuniYield Michigan
Common Stock nor holders of MuniYield Michigan AMPS are entitled to appraisal
rights under Maryland law.
Under Maryland law, a holder of AMPS of MuniHoldings Michigan desiring to
receive payment of the fair value of his or her stock (an "objecting
stockholder") (i) must file with MuniHoldings Michigan a written objection to
the Reorganization at or before the Meeting for MuniHoldings Michigan, (ii)
must not vote in favor of the Reorganization (although a vote against the
Reorganization is not required), and (iii) must make written demand on
MuniYield Michigan for payment of his or her stock, stating the number and
class of shares for which he or she demands payment, within 20 days after the
Maryland Department accepts for filing the Articles of Transfer with respect
to the Reorganization (MuniYield Michigan is required promptly to give written
notice to all objecting stockholders of the date that the Articles of Transfer
are accepted for record). A vote against the Reorganization will not be
sufficient to satisfy the requirement of a written demand described in (iii).
An objecting stockholder who fails to adhere to this procedure will be bound
by the terms of the Reorganization. An objecting stockholder ceases to have
any rights of a stockholder of MuniHoldings Michigan except the right to
receive fair value for his or her shares, and has no right to receive any
dividends or distributions payable to holders of MuniHoldings Michigan on a
record date after the close of business on the date on which fair value is to
be determined, which, for these purposes, will be the date of the Meeting for
MuniHoldings Michigan. A demand for payment of fair market value may not be
withdrawn, except upon the consent of MuniYield Michigan. Within 50 days after
the Articles of Transfer have been accepted for filing with the Maryland
Department, an objecting stockholder who has not received payment for his or
her shares may petition the Circuit Court for Baltimore City located in
Maryland for an appraisal to determine the fair market value of his or her
stock.
ADDITIONAL INFORMATION
The expenses of preparing, printing and mailing the proxy materials to be
used in connection with the Meeting for MuniYield Michigan, and the expenses
related to the solicitation of proxies to be voted at that
56
Meeting, will be paid by FAM which has agreed to bear the expenses of the
Reorganization attributable to MuniYield Michigan. The expenses of preparing,
printing and mailing the proxy materials to be used in connection with the
Meeting for MuniHoldings Michigan, and the expenses related to the
solicitation of proxies to be voted at that Meeting, will be paid by
MuniHoldings Michigan. See "Agreement and Plan of Reorganization -- Terms of
the Agreement and Plan of Reorganization -- Expenses."
The Funds will reimburse banks, brokers and others for their reasonable
expenses in forwarding proxy solicitation materials to the beneficial owners
of shares of each Fund and certain persons that the Funds may employ for their
reasonable expenses in assisting in the solicitation of proxies from such
beneficial owners of shares of capital stock of the Funds.
In order to obtain the necessary quorum at the Meetings, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview
by officers of the Funds. Each Fund has retained Georgeson Shareholder, 17
State Street, New York, New York 10004, to aid in the solicitation of proxies,
at a cost to be borne by each Fund of approximately $ per Fund, plus
out-of-pocket expenses.
Broker-dealer firms, including Merrill Lynch, holding Fund shares in
"street name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares on each
proposal before the Meetings. MuniYield Michigan understands that under the
rules of the NYSE, such broker-dealer firms may, without instructions from
their customers and clients, grant authority to the proxies designated to vote
on the election of Directors (Item 2) if no instructions have been received
prior to the date specific in the broker-dealer firm's request for voting
instructions. With respect to shares of MuniHoldings Michigan Common Stock and
MuniYield Michigan Common Stock, broker-dealer firms, including Merrill Lynch,
will not be permitted to grant voting authority without instructions with
respect to the approval of the Agreement and Plan. Shares of AMPS of either
Fund held in "street name," however, may be voted by broker-dealer firms
without instructions under certain conditions with respect to the approval of
the Reorganization and counted for purposes of establishing a quorum of that
Fund if no instructions are received one business day before the applicable
Meeting or, if adjourned, one business day before the day to which the Meeting
is adjourned. These conditions include, among others, that (i) with respect to
each Fund, at least 30% of that Fund's AMPS outstanding have voted on the
Reorganization, (ii) with respect to each Fund, less than 10% of that Fund's
AMPS outstanding have voted against the Reorganization and (iii) with respect
to each Fund, holders of that Fund's common stock have voted to approve the
Reorganization. In such instances, the broker-dealer firm will vote such
uninstructed shares of AMPS on the Reorganization in the same proportion as
the votes cast by all holders of that Fund's AMPS who voted on the
Reorganization. The Funds will include shares held of record by broker-dealers
as to which such authority has been granted in its tabulation of the total
number of shares present for purposes of determining whether the necessary
quorum of stockholders of each Fund exists. Proxies that are returned to a
Fund but that are marked "abstain" or on which a broker-dealer has declined to
vote on any proposal ("broker non-votes") will be counted as present for the
purposes of determining a quorum. Merrill Lynch has advised the Funds that if
it votes shares held in its name for which no instructions are received,
except as limited by agreement or applicable law, on the Reorganization (with
respect to AMPS only) and on the election of Directors it will do so in the
same proportion as the votes received from beneficial owners of those shares
for which instructions have been received, whether or not held in nominee
name. Abstentions and broker non-votes will have the same effect as a vote
against approval of the Agreement and Plan and the Reorganization and will
have no effect on the election of the Board of Directors of MuniYield
Michigan.
This Joint Proxy Statement and Prospectus does not contain all of the
information set forth in the registration statement and the exhibits relating
thereto that MuniYield Michigan has filed with the Commission under the
Securities Act of 1933, as amended, and the Investment Company Act, to which
reference is hereby made.
The Funds are subject to the informational requirements of the Exchange
Act and the Investment Company Act and in accordance therewith are required to
file reports, proxy statements and other information with the Commission. Any
such reports, proxy statements and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Pacific Regional Office, at 5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and Midwest
Regional Office, at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such materials can be obtained from
the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web
site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the Funds,
that file electronically with the Commission. Reports, proxy statements and
other information concerning MuniYield Michigan can also be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005. Reports, proxy
statements and other information concerning MuniHoldings Michigan can also be
inspected at the offices of the AMEX, 9801 Washingtonian Boulevard,
Gaithersburg, Maryland 20878.
57
CUSTODIAN
State Street acts as the custodian for the cash and securities of
MuniHoldings Michigan and BONY acts as custodian for the cash and securities
of MuniYield Michigan. The principal business address of State Street in such
capacity is One Heritage Drive, P2N, North Quincy, Massachusetts 02171. The
principal business address of BONY in such capacity is 90 Washington Street,
New York, New York 10286. It is anticipated that BONY will continue to act as
custodian for the Combined Fund.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
State Street serves as the transfer agent, dividend disbursing agent and
registrar with respect to the MuniHoldings Michigan Common Stock and BONY
serves as the transfer agent, dividend disbursing agent and registrar with
respect to the MuniYield Michigan Common Stock. The principal business address
of State Street in such capacity is 225 Franklin Street, Boston, Massachusetts
02110. The principal business address of BONY in such capacity is Five Penn
Plaza, 13th Floor, New York, New York 10001. It is anticipated that BONY will
continue to provide these services to the Combined Fund after the
Reorganization.
BONY serves as the transfer agent, dividend disbursing agent, registrar
and auction agent to MuniYield Michigan and MuniHoldings Michigan in
connection with their respective AMPS, pursuant to separate registrar,
transfer agency, dividend disbursing agency and service agreements with each
Fund. The principal business address of the Auction Agent in such capacity is
385 Rifle Camp Road, West Paterson, NJ 07424. It is anticipated that BONY will
continue to provide these services to the Combined Fund after the
Reorganization.
ACCOUNTING SERVICES PROVIDER
State Street provides certain accounting services for MuniYield Michigan
and MuniHoldings Michigan and will provide the same services to the Combined
Fund after the Reorganization. The principal business address of State Street
in such capacity is 500 College Road East, Princeton New Jersey 08540.
LEGAL PROCEEDINGS
There are no material legal proceedings to which either Fund is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be
passed upon for each Fund by Sidley Austin Brown & Wood LLP, New York, New
York.
EXPERTS
_______________________, independent auditors, have audited the financial
statements and financial highlights of MuniYield Michigan, as of October 31,
2001, and _______________________, independent auditors, have audited the
financial statements and financial highlights of MuniHoldings Michigan, as of
July 31, 2001, as set forth in their reports which appear in this Joint Proxy
Statement and Prospectus. The audited financial statements and financial
highlights of the Funds are included in reliance upon their reports, given on
their authority as experts in accounting and auditing.
_________________________________, will serve as the independent auditors
for the Combined Fund after the Reorganization. The principal business address
of ________________________________ is ________________________________.
58
STOCKHOLDER PROPOSALS
The 2002 Annual Meeting of MuniHoldings Michigan (if the Reorganization
is not approved) is expected to be held in December, 2002 and the 2003 Annual
Meeting of MuniYield Michigan is expected to be held in April, 2003. If a
stockholder intends to present a proposal at the Fund's next Annual Meeting,
and desires to have the proposal included in the Fund's proxy statement and
form of proxy for that meeting, the stockholder must deliver the proposal to
the offices of MuniHoldings Michigan by July 16, 2002, or to the offices of
MuniYield Michigan, by October __, 2003. The persons named as proxies in the
proxy materials for the 2002 Annual Meeting of stockholders of MuniHoldings
Michigan and the 2003 Annual Meeting of stockholding of MuniYield Michigan may
exercise discretionary authority with respect to any stockholder proposal
presented at such meeting if written notice of such proposal has not been
received by September 27, 2002 in the case of MuniHoldings Michigan and by
January __, 2003 in the case of MuniYield Michigan. Written proposals and
notices should be sent to the Secretary of the Funds (addressed to 800
Scuddens Mill Pond, Plainsboro, New Jersey 08536).
By Order of the Boards of Directors
ALICE A. PELLEGRINO
Secretary
MuniYield Michigan Fund, Inc.
MuniHoldings Michigan Insured Fund II, Inc.
Plainsboro, New Jersey
Dated: February __, 2002
59
INDEX TO FINANCIAL STATEMENTS
Page
Audited Financial Statements for MuniYield Michigan Fund, Inc. for the Year Ended
October 31, 2001.............................................................................................F-2
Audited Financial Statements for MuniHoldings Michigan Insured Fund II, Inc.
for the Year Ended July 31, 2001.............................................................................F-3
Pro Forma Unaudited Financial Statements for the Combined Fund as of October 31, 2001...........................F-4
F-1
Audited Financial Statements for
MuniYield Michigan Fund, Inc.
for the Year Ended October 31, 2001
[To Be Filed By Amendment]
F-2
Audited Financial Statements for
MuniHoldings Michigan Insured Fund II, Inc.
for the Year Ended July 31, 2001
[To Be Filed By Amendment]
F-3
Pro Forma Unaudited Financial Statements for
the Combined Fund
as of October 31, 2001
[To Be Filed By Amendment]
F-4
EXHIBIT I
INFORMATION PERTAINING TO MUNIYIELD MICHIGAN
General Information
Fiscal State of Meeting
Fund Year End Incorporation Time
---- -------- ------------- ----
MuniYield Michigan Fund, Inc............ 10/31 Maryland 9:00 a.m.
Shares of Capital Stock of the Fund
Outstanding as of the Record Date
---------------------------------
Common Stock AMPS
------------ ------------
[ ] 2,200
Information Pertaining to Director Nominees
As of the Record Date, none of the Director nominees held shares of
Common Stock or Series A AMPS of the Fund, except as set forth in the table
below:
Percent of Percent of
Director Nominee Common Stock Class (%)* Series A AMPS Class (%)*
---------------- ------------ ----------- ------------- -----------
Terry K. Glenn
James H. Bodurtha
Joe Grills
Herbert I. London
Andre F. Perold
Roberta Cooper Ramo
Robert S. Salomon, Jr.
Melvin R. Seiden
Stephen B. Swensrud
---------
*Less than .01% of the Class.
I-1
Information relating to the share ownership by each non-interested
Director nominees as of the Record Date is set forth in the chart below:
Aggregate Dollar Range of Equity
Securities in All Registered Funds
Overseen by Director Nominees in
Dollar Range of Equity Securities in Merrill Lynch
Director Nominee MuniYield Michigan Family of Funds
---------------- ------------------ ---------------
James H. Bodurtha
Joe Grills
Herbert I. London
Andre F. Perold
Roberta Cooper Ramo
Robert S. Salomon, Jr.
Melvin R. Seiden
Stephen B. Swensrud
The following table provides information, as of the Record Date, for each
non-interested Director nominee and his or her immediate family members
relating to securities owned beneficially or of record in ML & Co.
Name of Owner and
Relationship to Director Value of Securities Percent of
Director Nominee Nominee Title of Class Class (%)
---------------- ------- -------------- ---------
James H. Bodurtha None None 0 0
Joe Grills None None 0 0
Herbert I. London None None 0 0
Andre F. Perold None None 0 0
Roberta Cooper Ramo None None 0 0
Robert S. Salomon, Jr. None None 0 0
Melvin R. Seiden None None 0 0
Stephen B. Swensrud None None 0 0
I-2
Set forth below is certain biographical and other information relating to
the Director nominee who is an "interested person," as defined in the
Investment Company Act, of the Fund:
Name, Term of Number of
Address and Position(s) Office and MLIM/FAM-
Age of Held with Length of Principal Occupation Advised Funds Public
Director the Fund Time Served During Past Five Years Overseen Directorships
-------- -------- ----------- ---------------------- -------- -------------
Terry K. Glenn Director and Director since Chairman (Americas Region) since [ ] registered None
(61)* President 1999; President 2001, and Executive Vice President investment
P.O. Box 9011 since 1999** since 1983 of FAM and MLIM (the terms companies
Princeton, New FAM and MLIM, as used herein, include consisting of
Jersey their corporate predecessors); [ ] portfolios
08543-9011 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.
** Mr. Glenn served as Executive Vice President from 1992 until his election as President in 1999.
I-3
Set forth below is certain biographical and other information
relating to each non-interested Director nominee of the Fund:
--------------------------------------------------------------------------------------------------------------------------------
Term of Number of
Name, Address and Position(s) Office and MLIM/FAM-
Age of Held with Length of Advised Funds Public
Director the Fund Time Served Principal Occupation During Past Five Years Overseen Directorships
--------------------------------------------------------------------------------------------------------------------------------
James H. Bodurtha Director Directors Director and Executive Vice President, The 31 registered Chairman of
(57)* 36 since 1995 China Business Group, Inc. since 1996; investment Berkshire
Popponesset Road Chairman and Chief Executive Officer, China companies Corporation
Cotuit, Enterprise Management Corporation from 1993 consisting of
Massachusetts to 1996; Partner, Squire, Sanders & Dempsey 41 portfolios
02635 from 1980 to 1993.
--------------------------------------------------------------------------------------------------------------------------------
Joe Grills (66)* N/A N/A Member of the Committee of Investment of 20 registered Kimco Realty
P.O. Box 98 Employee Benefit Assets of the Association investment Corporation
Rapidan, Virginia of Financial Professionals ("CIEBA") since companies
22733 1986; Member of CIEBA's Executive Committee consisting of
since 1988 and its Chairman from 1991 to 49 portfolios
1992; Assistant Treasurer of International
Business Machines Corporation (`IBM") and
Chief Investment Officer of IBM Retirement
Funds from 1986 to 1993; Member of the
Investment Advisory Committee of the State
of New York Common Retirement Funds since
1989; Member of the Investment Advisory
Committee of the Howard Hughes Medical
Institute from 1997 to 2000; Director, Duke
Management Company since 1992 and Vice
Chairman thereof since 1998; Director,
LaSalle Street Fund since 1995; Member of
the Investment Advisory Committee of the
Virginia Retirement System since 1998;
Director, Montpelier Foundation since 1998
and its Vice Chairman since 2000; Member of
the Investment Committee of the Woodberry
Forest School since 2000; Member of the
Investment Committee of the National Trust
for Historic Preservation since 2000.
--------------------------------------------------------------------------------------------------------------------------------
Herbert I. London Director Director John M. Olin Professor of Humanities, New 31 registered None
(62)* since 1992 York University since 1993 and Professor investment
2 Washington thereof since 1980; President, Hudson companies
Square Village Institute since 1997 and Trustee thereof consisting of
New York, NY since 1980; Dean, Gallatin Divison of New 41 portfolios
10012 York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair,
Hudson Institute from 1984 to 1985;
Director, Damon Corp. from 1991 to 1995;
Overseer, Center for Naval
Analyses from 1983 to 1993;
Limited Partner, Hypertech LP
since 1996.
--------------------------------------------------------------------------------------------------------------------------------
I-4
--------------------------------------------------------------------------------------------------------------------------------
Term of Number of
Name, Address and Position(s) Office and MLIM/FAM-
Age of Held with Length of Advised Funds Public
Director the Fund Time Served Principal Occupation During Past Five Years Overseen Directorships
--------------------------------------------------------------------------------------------------------------------------------
Andre F. Perold Director Director Harvard Business School: George Gund 31 registered Commonfund;
(49)* since 1992 Professor of Finance and Banking since investment Stockback.com
Morgan Hall 2000; Sylvan C. Coleman Professor of companies
Soldiers Field Financial Management from 1993 to 2000; consisting of
Boston, Director, Sanlam Limited and Sanlam Life 41 portfolios
Massachusetts since 2001; Director, Genbel Securities
02163 Limited and Gense Bank since
1999; Director, Sanlam
Investment Management from
1999 to 2001; Director,
Bulldogresearch.com since
2000; Director, Quantec
Limited 1991 to 1999.
--------------------------------------------------------------------------------------------------------------------------------
Roberta Cooper Director Director Shareholder, Modrall, Sperling, Roehl, 31 registered Coopers, Inc.
Ramo (58)* since 1999 Harris & Sisk, P.A. since 1993; President, investment
P.O. Box 2168 American Bar Association from 1995 to 1996 companies
500 Fourth Street, and Member of the Board of Governors consisting of
N.W. thereof from 1994 to 1997; Partner, Pook, 41 portfolios
Albuquerque, New Kelly & Ramo, Attorneys at Law, P.C. from
Mexico 1997 to 1993; Director of ECMC Group
87107 (service provider to students, schools and
lenders) since 2001;
Director, United New Mexico
Bank (now Wells Fargo) from
1983 to 1988; Director, First
National Bank of New Mexico
(now First Security) from
1975 to 1976.
--------------------------------------------------------------------------------------------------------------------------------
Robert S. Salomon, N/A N/A Principal of STI Management (investment 16 registered Commonfund
Jr. (64) * adviser) since 1994; Chairman and CEO of investment
106 Dolphin Cove Salomon Brothers Asset Management Inc. from companies
Quay 1992 to 1995; Chairman of Salomon Brothers consisting of
Stamford, Equity Mutual Funds from 1992 to 1995; 36 portfolios
Connecticut regular columnist with Forbes Magazine
06902 since 1992; Director of Stock Research and
U.S. Equity Strategist at Salomon Brothers,
Inc. from 1975 to 1991.
--------------------------------------------------------------------------------------------------------------------------------
Melvin R. Seiden N/A N/A Director of Silbanc Properties, Ltd. (real 16 registered None
(71)* estate, investment and consulting) since investment
780 Third Avenue, 1987; Chairman and President of Seiden & companies
Suite 2502, de Cuevas, Inc. (private investment firm) consisting of
New York, New York from 1964 to 1987 36 portfolios
10017
--------------------------------------------------------------------------------------------------------------------------------
I-5
--------------------------------------------------------------------------------------------------------------------------------
Term of Number of
Name, Address and Position(s) Office and MLIM/FAM-
Age of Held with Length of Advised Funds Public
Director the Fund Time Served Principal Occupation During Past Five Years Overseen Directorships
--------------------------------------------------------------------------------------------------------------------------------
Stephen B. N/A N/A Chairman of Fernwood Advisors (investment 42 registered None
Swensrud (68) * adviser) since 1996; Principal of Fernwood investment
88 Broad Street, Associates (financial consultant) since companies
2nd Floor, 1975; Chairman of RPP Corporation consisting of 87
Boston, (manufacturing) since 1978; Director, portfolios
Massachusetts International Mobile Communications, Inc.
02110 (telecommunications) since 1998.
--------------------------------------------------------------------------------------------------------------------------------
---------
* Each Director nominee is a director, trustee or member of an advisory board of certain other investment companies
for which FAM or MLIM acts as investment adviser and is a member of the Committee of each Board on which he or she
currently serves as a Director and if elected will also be a member of the Committee of the Fund.
I-6
Certain biographical and other information relating to the officers
of the Fund is set forth below:
--------------------------------------------------------------------------------------------------------------------------------
Term of Number of
Name, Address and Position(s) Office** and MLIM/FAM-
Age of Held with Length of Principal Occupation Advised Funds Public
Director the Fund Time Served During Past Five Years Overseen Directorships
--------------------------------------------------------------------------------------------------------------------------------
Donald C. Burke Vice Vice First Vice President of FAM and MLIM since [o] registered None
(41) President President 1997 and the Treasurer thereof since 1999; investment
and since Senior Vice President and Treasurer of companies
Treasurer 1993 Princeton Services since 1999; Vice consisting of [o]
and 1993 President of FAMD since
Treasurer 1999; Vice portfolios
since President of FAM and MLIM
1999 from 1990 to 1997; Director
of Taxation of MLIM since
1990.
--------------------------------------------------------------------------------------------------------------------------------
Kenneth A. Jacob Senior Vice Senior Vice First Vice President of MLIM since 1997; [o] registered None
(50) President President Vice President of MLIM from 1984 to 1997; investment
since 2001, Vice President of FAM since 1984. companies
Vice consisting of [o]
President portfolios
since 1992
--------------------------------------------------------------------------------------------------------------------------------
John Loffredo (38) Senior Vice Senior Vice First Vice President of MLIM since 1997; [o] registered None
President President Vice President of MLIM from 1991 to 1997. investment
since 2001 companies
consisting of [o]
portfolios
--------------------------------------------------------------------------------------------------------------------------------
Alice A. Secretary Secretary Vice President of MLIM since 1999; [o] registered None
Pellegrino (41) since 1999 Associate with Kirkpatrick & Lockhart LLP investment
from 1992 to 1997. companies
consisting of [o]
portfolios
--------------------------------------------------------------------------------------------------------------------------------
Fred K. Steube (51) Vice Vice Vice President of MLIM since 1989. [o] registered None
President President investment
and and companies
Portfolio Portfolio consisting of [o]
Manager Manager portfolios
since 1995
--------------------------------------------------------------------------------------------------------------------------------
---------
* The address of each officer listed above is P.O. Box 9011, Princeton, New Jersey 08543-9011.
** Elected by and serves at the pleasure of the Board of Directors of the Fund.
I-7
EXHIBIT II
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as
of the day of February 2002, by and between MuniHoldings Michigan Insured Fund
II, Inc., a Maryland corporation ("MuniHoldings Michigan"), and MuniYield
Michigan Fund, Inc., a Maryland corporation ("MuniYield Michigan")
(MuniHoldings Michigan and MuniYield Michigan are sometimes referred to herein
together as the "Funds" and individually as a "Fund," as the context
requires).
PLAN OF REORGANIZATION
----------------------
The reorganization will constitute the following:
(1) the acquisition by MuniYield Michigan of substantially all of the
assets, and the assumption by MuniYield Michigan of substantially
all of the liabilities of MuniHoldings Michigan, in exchange solely
for an equal aggregate value of newly issued shares of (A) common
stock, with a par value of $0.10 per share of MuniYield Michigan
("MuniYield Michigan Common Stock"), and (B) auction market
preferred stock ("AMPS") of MuniYield Michigan, with a liquidation
preference of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared),
designated Series B ("MuniYield Michigan Series B AMPS"), and
(2) the subsequent distribution by MuniHoldings Michigan to MuniHoldings
Michigan stockholders of (A) all of the MuniYield Michigan Common
Stock received by MuniHoldings Michigan in exchange for such
stockholders' shares of common stock, with a par value of $0.10 per
share, of MuniHoldings Michigan, including shares of common stock of
MuniHoldings Michigan representing the Dividend Reinvestment Plan
("DRIP") shares held in the book deposit accounts of the holders of
common stock of MuniHoldings Michigan ("MuniHoldings Michigan Common
Stock") and (B) all of the MuniYield Michigan Series B AMPS received
by MuniHoldings Michigan in exchange for such stockholders' shares
of AMPS of MuniHoldings Michigan, with a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared), designated
Series A ("MuniHoldings Michigan Series A AMPS");
(3) Prior to the Closing Date (as defined below), MuniYield Michigan
will (A) amend its investment policies so that under normal
conditions, at least 80% of its net assets will be invested in
municipal obligations with remaining maturities of one year or more
that are covered by insurance guaranteeing the timely payment of
principal at maturity and interest when due; and (B) charge its name
to MuniYield Michigan Insured Fund II, Inc.
all upon and subject to the terms hereinafter set forth (collectively, the
"Reorganization").
In the course of the Reorganization, MuniYield Michigan Common Stock and
MuniYield Michigan Series B AMPS will be distributed to the stockholders of
MuniHoldings Michigan as follows:
(1) each holder of MuniHoldings Michigan Common Stock will be entitled
to receive a number of shares of MuniYield Michigan Common Stock
equal to the aggregate net asset value of the MuniHoldings Michigan
Common Stock owned by such stockholder on the Closing Date (as
defined in Section 7(a) of this Agreement); and
II-1
(2) each holder of MuniHoldings Michigan Series A AMPS will be entitled
to receive a number of shares of MuniYield Michigan Series B AMPS
equal to the aggregate liquidation preference (and aggregate value)
of the MuniHoldings Michigan Series A AMPS owned by such stockholder
on the Closing Date.
It is intended that the Reorganization described in this Agreement shall
be a reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any successor provision.
Prior to the Closing Date, MuniHoldings Michigan shall declare a dividend
or dividends which, together with all such previous dividends, shall have the
effect of distributing to its stockholders all of its net investment company
taxable income to and including the Closing Date, if any (computed without
regard to any deduction for dividends paid), and all of its net capital gain,
if any, realized to and including the Closing Date. In this regard and in
connection with the Reorganization, the last dividend period for MuniHoldings
Michigan Series A AMPS prior to the Closing Date may be shorter than the
dividend period for such AMPS determined as set forth in the Articles
Supplementary to the Articles of Incorporation of MuniHoldings Michigan
creating such AMPS.
Articles Supplementary to the Articles of Incorporation of MuniYield
Michigan, as amended and supplemented, establishing the powers, rights and
preferences of the MuniYield Michigan Series B AMPS will have been filed with
the State Department of Assessments and Taxation of Maryland (the "Maryland
Department") prior to the Closing Date.
As promptly as practicable after the consummation of the Reorganization,
MuniHoldings Michigan shall be dissolved in accordance with the laws of the
State of Maryland and will terminate its registration under the Investment
Company Act of 1940, as amended (the "1940 Act").
AGREEMENT
In order to consummate the Reorganization and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, each Fund hereby agrees as follows:
1. Representations and Warranties of MuniYield Michigan.
MuniYield Michigan represents and warrants to, and agrees with,
MuniHoldings Michigan that:
(a) MuniYield Michigan is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out this
Agreement. MuniYield Michigan has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted and to
carry out this Agreement.
(b) MuniYield Michigan is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No.
811-06501), and such registration has not been revoked or rescinded and is in
full force and effect. MuniYield Michigan has elected and qualified at all
times since its inception for the special tax treatment afforded regulated
investment companies ("RICs") under Sections 851-855 of the Code and intends
to continue to so qualify until consummation of the Reorganization and
thereafter.
(c) MuniHoldings Michigan has been furnished with MuniYield
Michigan's Annual Report to Stockholders for the fiscal year ended October 31,
2001, and the audited financial statements appearing therein, having been
examined by ___________________________, independent public accountants,
fairly present the financial position of MuniYield Michigan as of the
respective dates indicated, in conformity with generally accepted accounting
principles applied on a consistent basis.
(d) An unaudited statement of assets, liabilities and capital of
MuniYield Michigan and an unaudited schedule of investments of MuniYield
Michigan, each as of the Valuation Time (as defined in Section 3(d) of this
Agreement), will be furnished to MuniHoldings Michigan, at or prior to the
Closing Date for the purpose
II-2
of determining the number of shares of MuniYield Michigan Common Stock and
MuniYield Michigan Series B AMPS to be issued pursuant to Section 4 of this
Agreement; each will fairly present the financial position of MuniYield
Michigan as of the Valuation Time in conformity with generally accepted
accounting principles applied on a consistent basis.
(e) MuniYield Michigan has full power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(f) There are no material legal, administrative or other proceedings
pending or, to the knowledge of MuniYield Michigan, threatened against it
which assert liability on the part of MuniYield Michigan or which materially
affect its financial condition or its ability to consummate the
Reorganization. MuniYield Michigan is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation
or administrative ruling relating to any aspect of its business.
(g) MuniYield Michigan is not obligated under any provision of its
Articles of Incorporation, as amended and supplemented, or its by-laws, or a
party to any contract or other commitment or obligation, and is not subject to
any order or decree which would be violated by its execution of or performance
under this Agreement, except insofar as the Funds have mutually agreed to
amend such contract or other commitment or obligation to cure any potential
violation as a condition precedent to the Reorganization.
(h) There are no material contracts outstanding to which MuniYield
Michigan is a party that have not been disclosed in the N-14 Registration
Statement (as defined in subsection (l) below) or will not otherwise be
disclosed to MuniHoldings Michigan prior to the Valuation Time.
(i) MuniYield Michigan has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since October 31,
2001, and those incurred in connection with the Reorganization. As of the
Valuation Time, MuniYield Michigan will advise MuniHoldings Michigan in
writing of all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or accrued as of such
time.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MuniYield Michigan
of the Reorganization, except such as may be required under the Securities Act
of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and the 1940 Act or state securities laws (which
term as used herein shall include the laws of the District of Columbia and
Puerto Rico).
(k) The registration statement filed by MuniYield Michigan on Form
N-14 which includes the joint proxy statement of the Funds with respect to the
transactions contemplated herein and the prospectus of MuniYield Michigan
relating to the MuniYield Michigan Common Stock and the shares of
newly-created MuniYield Michigan Series B AMPS to be issued pursuant to this
Agreement (the "Joint Proxy Statement and Prospectus"), and any supplement or
amendment thereto or to the documents therein (as amended or supplemented, the
"N-14 Registration Statement"), on its effective date, at the time of the
stockholders' meetings referred to in Section 6(a) of this Agreement and at
the Closing Date, insofar as it relates to MuniYield Michigan (i) complied or
will comply in all material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations thereunder and (ii)
did not or will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading; and the Joint Proxy Statement and
Prospectus included therein did not or will not contain any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations and
warranties in this subsection only shall apply to statements in or omissions
from the N-14 Registration Statement made in reliance
II-3
upon and in conformity with information furnished by MuniYield Michigan for
use in the N-14 Registration Statement as provided in Section 6(e) of this
Agreement.
(l) MuniYield Michigan is authorized to issue 200,000,000 shares of
capital stock, of which 2,200 shares have been designated as Series A AMPS and
199,997,800 shares have been designated as common stock; each outstanding
share of which is fully paid and nonassessable and has full voting rights.
(m) The shares of MuniYield Michigan Common Stock and MuniYield
Michigan Series B AMPS to be issued to MuniHoldings Michigan pursuant to this
Agreement will have been duly authorized and, when issued and delivered
pursuant to this Agreement, will be legally and validly issued and will be
fully paid and nonassessable and will have full voting rights, and no
stockholder of MuniYield Michigan will have any preemptive right of
subscription or purchase in respect thereof.
(n) At or prior to the Closing Date, the MuniYield Michigan Common
Stock to be transferred to MuniHoldings Michigan for distribution to the
stockholders of MuniHoldings Michigan on the Closing Date will be duly
qualified for offering to the public in all states of the United States in
which the sale of shares of MuniHoldings Michigan presently is qualified, and
there will be a sufficient number of such shares registered under the 1933 Act
and, as may be necessary, with each pertinent state securities commission to
permit the transfers contemplated by this Agreement to be consummated.
(o) At or prior to the Closing Date, the shares of MuniYield
Michigan Series B AMPS to be transferred to MuniHoldings Michigan on the
Closing Date will be duly qualified for offering to the public in all states
of the United States in which the sale of MuniHoldings Michigan Series A AMPS
presently is qualified, and there are a sufficient number of shares of
MuniYield Michigan Series B AMPS registered under the 1933 Act and with each
pertinent state securities commission to permit the transfers contemplated by
this Agreement to be consummated.
(p) At or prior to the Closing Date, MuniYield Michigan will have
obtained any and all regulatory, Director and stockholder approvals necessary
to issue the MuniYield Michigan Common Stock and MuniYield Michigan Series B
AMPS to MuniHoldings Michigan.
2. Representations and Warranties of MuniHoldings Michigan.
MuniHoldings Michigan represents and warrants to, and agrees with,
MuniYield Michigan that:
(a) MuniHoldings Michigan is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out this
Agreement. MuniHoldings Michigan has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted and to
carry out this Agreement.
(b) MuniHoldings Michigan is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No.
811-09483), and such registration has not been revoked or rescinded and is in
full force and effect. MuniHoldings Michigan has elected and qualified at all
times since its inception for the special tax treatment afforded RICs under
Sections 851-855 of the Code and intends to continue to so qualify through its
taxable year ending upon liquidation.
(c) As used in this Agreement, the term "MuniHoldings Michigan
Investments" shall mean (i) the investments of MuniHoldings Michigan shown on
the schedule of its investments as of the Valuation Time furnished to
MuniYield Michigan; and (ii) all other assets owned by MuniHoldings Michigan
or liabilities incurred as of the Valuation Time.
(d) MuniHoldings Michigan has full power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors and this Agreement constitutes a valid and binding
contract enforceable in
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accordance with its terms, subject to the effects of bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto.
(e) MuniYield Michigan has been furnished with MuniHoldings
Michigan's Annual Report to Stockholders for the fiscal year ended July 31,
2001, and the audited financial statements appearing therein, having been
examined by ___________________________, independent public accountants,
fairly present the financial position of MuniHoldings Michigan as of the
respective dates indicated, in conformity with generally accepted accounting
principles applied on a consistent basis.
(f) An unaudited statement of assets, liabilities and capital of
MuniHoldings Michigan and an unaudited schedule of investments of MuniHoldings
Michigan, each as of the Valuation Time, will be furnished to MuniYield
Michigan at or prior to the Closing Date for the purpose of determining the
number of shares of MuniYield Michigan Common Stock and MuniYield Michigan
Series B AMPS to be issued to MuniHoldings Michigan pursuant to Section 4 of
this Agreement; each will fairly present the financial position of
MuniHoldings Michigan as of the Valuation Time in conformity with generally
accepted accounting principles applied on a consistent basis.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of MuniHoldings Michigan, threatened against it
which assert liability on the part of MuniHoldings Michigan or which
materially affect its financial condition or its ability to consummate the
Reorganization. MuniHoldings Michigan is not charged with or, to the best of
its knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation
or administrative ruling relating to any aspect of its business.
(h) There are no material contracts outstanding to which
MuniHoldings Michigan is a party that have not been disclosed in the N-14
Registration Statement or will not otherwise be disclosed to MuniYield
Michigan prior to the Valuation Time.
(i) MuniHoldings Michigan is not obligated under any provision of
its Articles of Incorporation, as amended and supplemented, or its by-laws, or
a party to any contract or other commitment or obligation, and is not subject
to any order or decree which would be violated by its execution of or
performance under this Agreement, except insofar as the Funds have mutually
agreed to amend such contract or other commitment or obligation to cure any
potential violation as a condition precedent to the Reorganization.
(j) MuniHoldings Michigan has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since July 31, 2001
and those incurred in connection with the Reorganization. As of the Valuation
Time, MuniHoldings Michigan will advise MuniYield Michigan in writing of all
known liabilities, contingent or otherwise, whether or not incurred in the
ordinary course of business, existing or accrued as of such time.
(k) MuniHoldings Michigan has filed, or has obtained extensions to
file, all Federal, state and local tax returns which are required to be filed
by it, and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Closing Date
occurs. All tax liabilities of MuniHoldings Michigan have been adequately
provided for on its books, and no tax deficiency or liability of MuniHoldings
Michigan has been asserted and no question with respect thereto has been
raised by the Internal Revenue Service or by any state or local tax authority
for taxes in excess of those already paid, up to and including the taxable
year in which the Closing Date occurs.
(l) At both the Valuation Time and the Closing Date, MuniHoldings
Michigan will have full right, power and authority to sell, assign, transfer
and deliver the MuniHoldings Michigan Investments. At the Closing Date,
subject only to the obligation to deliver the MuniHoldings Michigan
Investments as contemplated by this Agreement, MuniHoldings Michigan will have
good and marketable title to all of the MuniHoldings Michigan Investments, and
MuniYield Michigan will acquire all of the MuniHoldings Michigan Investments
free and clear of any encumbrances, liens or security interests and without
any restrictions upon the transfer thereof (except those
II-5
imposed by the Federal or state securities laws and those imperfections of
title or encumbrances as do not materially detract from the value or use of
the MuniHoldings Michigan Investments or materially affect title thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MuniHoldings
Michigan of the Reorganization, except such as may be required under the 1933
Act, the 1934 Act, the 1940 Act or state securities laws.
(n) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meetings referred to in Section 6(a) of this
Agreement and on the Closing Date, insofar as it relates to MuniHoldings
Michigan (i) complied or will comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder, and (ii) did not or will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading; and
the Joint Proxy Statement and Prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the representations and warranties in this subsection shall apply only to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by MuniHoldings
Michigan for use in the N-14 Registration Statement as provided in Section
6(e) of this Agreement.
(o) MuniHoldings Michigan is authorized to issue 200,000,000 shares
of capital stock, of which 1,360 shares have been designated as Series A AMPS
and 199,998,640 shares have been designated as common stock; each outstanding
share of which is fully paid and nonassessable and has full voting rights.
(p) All of the issued and outstanding shares of MuniHoldings
Michigan Common Stock and MuniHoldings Michigan Series A AMPS were offered for
sale and sold in conformity with all applicable Federal and state securities
laws.
(q) The books and records of MuniHoldings Michigan made available to
MuniYield Michigan and/or its counsel are substantially true and correct and
contain no material misstatements or omissions with respect to the operations
of MuniHoldings Michigan.
(r) MuniHoldings Michigan will not sell or otherwise dispose of any
of the shares of MuniYield Michigan Common Stock or MuniYield Michigan Series
B AMPS to be received in the Reorganization, except in distribution to the
stockholders of MuniHoldings Michigan, as provided in Section 4 of this
Agreement.
3. The Reorganization.
(a) Subject to receiving the requisite approval of the stockholders
of each Fund, and to the other terms and conditions contained herein, (i)
MuniHoldings Michigan agrees to convey, transfer and deliver to MuniYield
Michigan and MuniYield Michigan agrees to acquire from MuniHoldings Michigan
on the Closing Date, all of the MuniHoldings Michigan Investments (including
interest accrued as of the Valuation Time on debt instruments) and assume
substantially all of the liabilities of MuniHoldings Michigan in exchange
solely for that number of shares of MuniYield Michigan Common Stock and
MuniYield Michigan Series B AMPS provided in Section 4 of this Agreement, and
(ii) MuniYield Michigan agrees to change its investment policies to provide
that the Fund, under normal circumstances, will invest at least 80% of its
assets in municipal obligations with remaining maturities of one year or more
that are covered by insurance guaranteeing the timely payment of principal at
maturity and interest, as well as to change the Fund's name to "MuniYield
Michigan Insured Fund II, Inc."
Pursuant to this Agreement, as soon as practicable after the Closing
Date, MuniHoldings Michigan will distribute all shares of MuniYield Michigan
Common Stock and MuniYield Michigan Series B AMPS received by it to its
stockholders in exchange for their shares of MuniHoldings Michigan Common
Stock and MuniHoldings Michigan Series A AMPS. Such distributions shall be
accomplished by the opening of stockholder accounts on the stock ledger
records of MuniYield Michigan in the amounts due the stockholders of
MuniHoldings Michigan based on their respective holdings in MuniHoldings
Michigan as of the Valuation Time.
II-6
(b) Prior to the Closing Date, MuniHoldings Michigan shall declare a
dividend or dividends which, together with all such previous dividends, shall
have the effect of distributing to its stockholders all of its net investment
company taxable income to and including the Closing Date, if any (computed
without regard to any deduction for dividends paid), and all of its net
capital gain, if any, realized to and including the Closing Date. In this
regard and in connection with the Reorganization, the last dividend period for
the MuniHoldings Michigan Series A AMPS prior to the Closing Date may be
shorter than the dividend period for such AMPS determined as set forth in the
Articles Supplementary creating the MuniHoldings Michigan Series A AMPS.
(c) MuniHoldings Michigan will pay or cause to be paid to MuniYield
Michigan any interest MuniHoldings Michigan receives on or after the Closing
Date with respect to any of the MuniHoldings Michigan Investments transferred
to MuniYield Michigan hereunder.
(d) The Valuation Time shall be 4:00 p.m., Eastern time, on
____________, 2002, or such earlier or later day and time as may be mutually
agreed upon in writing (the "Valuation Time").
(e) Recourse for liabilities assumed from MuniHoldings Michigan by
MuniYield Michigan in the Reorganization will be limited to the net assets of
MuniHoldings Michigan. The known liabilities of MuniHoldings Michigan, as of
the Valuation Time, shall be confirmed in writing to MuniYield Michigan
pursuant to Section 2(k) of this Agreement.
(f) The Funds will jointly file Articles of Transfer with the
Maryland Department and any other such instrument as may be required by the
State of Maryland to effect the transfer of the MuniHoldings Michigan
Investments.
(g) MuniHoldings Michigan will be dissolved following the Closing
Date by filing Articles of Dissolution with the Maryland Department.
(h) MuniYield Michigan will file with the Maryland Department
Articles Supplementary to its Articles of Incorporation, as amended and
supplemented, establishing the powers, rights and preferences of the MuniYield
Michigan Series B AMPS prior to the closing of the Reorganization.
(i) As promptly as practicable after its liquidation pursuant to the
Reorganization, MuniHoldings Michigan shall terminate its registration under
the 1940 Act.
4. Issuance and Valuation of MuniYield Michigan Common Stock and
MuniYield Michigan Series B AMPS in the Reorganization.
Full shares of MuniYield Michigan Common Stock and MuniYield
Michigan Series B AMPS of an aggregate net asset value or liquidation
preference, as the case may be, equal (to the nearest one ten thousandth of
one cent) to the value of the assets of MuniHoldings Michigan acquired in the
Reorganization determined as hereinafter provided, reduced by the amount of
liabilities of MuniHoldings Michigan assumed by MuniYield Michigan in the
Reorganization, shall be issued by MuniYield Michigan to MuniHoldings Michigan
in exchange for such assets of MuniHoldings Michigan, plus cash in lieu of
fractional common shares. MuniYield Michigan will issue to MuniHoldings
Michigan (a) a number of shares of MuniYield Michigan Common Stock, the
aggregate net asset value of which will equal the aggregate net asset value of
the shares of MuniHoldings Michigan Common Stock, determined as set forth
below, and (b) a number of shares of MuniYield Michigan Series B AMPS, the
aggregate liquidation preference and value of which will equal the aggregate
liquidation preference and value of the MuniHoldings Michigan Series A AMPS,
determined as set forth below.
The net asset value of each Fund and the liquidation preference and
value of the AMPS of each Fund shall be determined as of the Valuation Time in
accordance with the procedures described in the N-14 Registration Statement to
be filed by MuniYield Michigan in connection with the Reorganization and no
formula will be used to adjust the net asset value so determined of any Fund
to take into account differences in realized and unrealized gains and losses.
Values in all cases shall be determined as of the Valuation Time. The value of
MuniHoldings Michigan Investments to be transferred to MuniYield Michigan
shall be determined by MuniYield Michigan pursuant to the
II-7
procedures utilized by MuniYield Michigan in valuing its own assets and
determining its own liabilities for purposes of the Reorganization. Such
valuation and determination shall be made by MuniYield Michigan in cooperation
with MuniHoldings Michigan and shall be confirmed in writing by MuniYield
Michigan to MuniHoldings Michigan. The net asset value per share of the
MuniYield Michigan Common Stock and the liquidation preference and value per
share of the MuniYield Michigan Series B AMPS shall be determined in
accordance with such procedures and MuniYield Michigan shall certify the
computations involved. For purposes of determining the net asset value of a
share of Common Stock of each Fund, the value of the securities held by the
Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding shares of AMPS of that Fund is divided by
the total number of shares of Common Stock of that Fund outstanding at such
time.
MuniYield Michigan shall issue to MuniHoldings Michigan separate
certificates or share deposit receipts for the MuniYield Michigan Common Stock
and the MuniYield Michigan Series B AMPS, each registered in the name of
MuniHoldings Michigan. MuniHoldings Michigan then shall distribute the
MuniYield Michigan Common Stock and the MuniYield Michigan Series B AMPS to
the holders of MuniHoldings Michigan Common Stock and MuniHoldings Michigan
Series A AMPS by redelivering the certificates or share deposit receipts
evidencing ownership of (i) the MuniYield Michigan Common Stock to The Bank of
New York, as the transfer agent and registrar for the MuniYield Michigan
Common Stock for distribution to the holders of MuniHoldings Michigan Common
Stock on the basis of such holder's proportionate interest in the aggregate
net asset value of the Common Stock of MuniHoldings Michigan, and (ii) the
MuniYield Michigan Series B AMPS to The Bank of New York as the transfer agent
and registrar for the MuniYield Michigan Series B AMPS for distribution to the
holders of MuniHoldings Michigan Series A AMPS on the basis of such holder's
proportionate interest in the aggregate liquidation preference and value of
the MuniHoldings Michigan Series A AMPS. With respect to any MuniHoldings
Michigan stockholder holding certificates evidencing ownership of either
MuniHoldings Michigan Common Stock or MuniHoldings Michigan Series A AMPS as
of the Closing Date, and subject to MuniYield Michigan being informed thereof
in writing by MuniHoldings Michigan, MuniYield Michigan will not permit such
stockholder to receive new certificates evidencing ownership of MuniYield
Michigan Common Stock or MuniYield Michigan Series B AMPS, exchange MuniYield
Michigan Common Stock or MuniYield Michigan Series B AMPS credited to such
stockholder's account for shares of other investment companies managed by FAM
or any of its affiliates, or pledge or redeem such MuniYield Michigan Common
Stock or MuniYield Michigan Series B AMPS, in any case, until notified by
MuniHoldings Michigan or its agent that such stockholder has surrendered his
or her outstanding certificates evidencing ownership of MuniHoldings Michigan
Common Stock or AMPS or, in the event of lost certificates, posted adequate
bond. MuniHoldings Michigan, at its own expense, will request its stockholders
to surrender their outstanding certificates evidencing ownership of
MuniHoldings Michigan Common Stock or AMPS or post adequate bond therefor.
Dividends payable to holders of record of shares of MuniYield Michigan
Common Stock and MuniYield Michigan Series B AMPS, as of any date after the
Closing Date and prior to the exchange of certificates by any stockholder of
MuniHoldings Michigan shall be payable to such stockholder without interest;
however, such dividends shall not be paid unless and until such stockholder
surrenders the stock certificates representing shares of Common Stock or AMPS
of MuniHoldings Michigan, as the case may be, for exchange.
No fractional shares of MuniYield Michigan Common Stock will be issued to
holders of MuniHoldings Michigan Common Stock. In lieu thereof, MuniYield
Michigan's transfer agent, The Bank of New York, will aggregate all fractional
shares of MuniYield Michigan Common Stock and sell the resulting full shares
on the New York Stock Exchange at the current market price for shares of
MuniYield Michigan Common Stock for the account of all holders of fractional
interests, and each such holder will receive such holder's pro rata share of
the proceeds of such sale upon surrender of such holder's certificates
representing MuniHoldings Michigan Common Stock.
5. Payment of Expenses.
(a) The expenses of the Reorganization that are directly
attributable to MuniHoldings Michigan will be deducted from the assets of
MuniHoldings Michigan as of the Valuation Time. These expenses are expected to
include the expenses incurred in preparing, printing and mailing the proxy
materials to be used in connection with the special meeting of the
stockholders of MuniHoldings Michigan to consider the Reorganization, the
expenses related to the solicitation of proxies to be voted at that meeting
and a portion of the expenses incurred
II-8
in printing the N-14 Registration Statement. The expenses of the
Reorganization that are directly attributable to MuniYield Michigan will be
borne by Fund Asset Management, L.P. ("FAM"). The expenses attributable to
MuniYield Michigan include the expenses incurred in preparing, printing and
mailing the proxy materials to be utilized in connection with the annual
meeting of the stockholders of MuniYield Michigan to consider the
Reorganization, the expenses related to the solicitation of proxies to be
voted at that meeting and a portion of the expenses incurred in printing the
N-14 Registration Statement. Certain other expenses of the Reorganization,
including expenses in connection with obtaining an opinion of counsel as to
certain tax matters, the preparation of this Agreement, Securities and
Exchange Commission (the "Commission") fees, stock exchange fees, rating
agency fees, transfer agent fees, legal fees and audit fees, will be borne
equally by MuniHoldings Michigan and FAM, which has agreed to bear the
expenses of the Reorganization attributable to MuniYield Michigan.
(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages.
6. Covenants of the Funds.
(a) Each Fund agrees to call a special meeting of its stockholders
to be held as soon as is practicable after the effective date of the N-14
Registration Statement for the purpose of considering the Reorganization as
described in this Agreement.
(b) Each Fund covenants to operate its business as presently
conducted between the date hereof and the Closing Date.
(c) MuniHoldings Michigan agrees that following the consummation of
the Reorganization, it will dissolve in accordance with the laws of the State
of Maryland and any other applicable law, it will not make any distributions
of any shares of MuniYield Michigan Common Stock and MuniYield Michigan Series
B AMPS other than to its stockholders and without first paying or adequately
providing for the payment of all of its respective liabilities not assumed by
MuniYield Michigan, if any, and on and after the Closing Date it shall not
conduct any business except in connection with its dissolution.
(d) MuniHoldings Michigan undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section 8(f) of the 1940
Act for an order declaring that MuniHoldings Michigan has ceased to be a
registered investment company.
(e) MuniYield Michigan will file the N-14 Registration Statement
with the Commission and will use its best efforts to provide that the N-14
Registration Statement becomes effective as promptly as practicable. Each Fund
agrees to cooperate fully with the other, and each will furnish to the other
the information relating to itself to be set forth in the N-14 Registration
Statement as required by the 1933 Act, the 1934 Act, the 1940 Act, and the
rules and regulations thereunder and the state securities laws.
(f) MuniYield Michigan has no plan or intention to sell or otherwise
dispose of MuniHoldings Michigan Investments, except for dispositions made in
the ordinary course of business.
(g) Each Fund agrees that by the Closing Date all of its Federal and
other tax returns and reports required to be filed on or before such date
shall have been filed and all taxes shown as due on said returns either have
been paid or adequate liability reserves have been provided for the payment of
such taxes. In connection with this covenant, the Funds agree to cooperate
with each other in filing any tax return, amended return or claim for refund,
determining a liability for taxes or a right to a refund of taxes or
participating in or conducting any audit or other proceeding in respect of
taxes. MuniYield Michigan agrees to retain for a period of ten (10) years
following the Closing Date all returns, schedules and work papers and all
material records or other documents relating to tax matters of MuniHoldings
Michigan for the Fund's taxable period first ending after the Closing Date and
for all prior taxable periods. Any information obtained under this subsection
shall be kept confidential except as otherwise may be necessary in connection
with the filing of returns or claims for refund or in conducting an audit or
other proceeding. After the Closing Date, MuniHoldings Michigan shall prepare,
or cause its agents to prepare, any Federal, state or local tax returns,
including any Forms 1099, required to be filed by the Fund with respect to its
final
II-9
taxable year ending with its complete liquidation and for any prior periods or
taxable years and further shall cause such tax returns and Forms 1099 to be
duly filed with the appropriate taxing authorities. Notwithstanding the
aforementioned provisions of this subsection, any expenses incurred by
MuniHoldings Michigan (other than for payment of taxes) in connection with the
preparation and filing of said tax returns and Forms 1099 after the Closing
Date shall be borne by MuniHoldings Michigan to the extent such expenses have
been accrued by such Fund in the ordinary course without regard to the
Reorganization; any excess expenses shall be borne by FAM at the time such tax
returns and Forms 1099 are prepared.
(h) Each Fund agrees to mail to its respective stockholders of
record entitled to vote at the special meeting of its stockholders at which
action is to be considered regarding this Agreement, in sufficient time to
comply with requirements as to notice thereof, a combined proxy statement and
prospectus which complies in all material respects with the applicable
provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act,
and the rules and regulations, respectively, thereunder.
(i) Following the consummation of the Reorganization, MuniYield
Michigan will stay in existence and continue its business as a
non-diversified, closed-end management investment company registered under the
1940 Act.
7. Closing Date.
(a) Delivery of the assets of MuniHoldings Michigan to be
transferred, together with any other MuniHoldings Michigan Investments, and
the shares of MuniYield Michigan Common Stock and MuniYield Michigan Series B
AMPS to be issued as provided in this Agreement, shall be made at the offices
of Sidley Austin Brown & Wood LLP, 875 Third Avenue, New York, New York 10022,
at 10:00 a.m. on the next full business day following the Valuation Time, or
at such other place, time and date agreed to by the Funds, the date and time
upon which such delivery is to take place being referred to herein as the
"Closing Date." To the extent that any MuniHoldings Michigan Investments, for
any reason, are not transferable on the Closing Date, MuniHoldings Michigan
shall cause such MuniHoldings Michigan Investments to be transferred to
MuniYield Michigan's account with The Bank of New York at the earliest
practicable date thereafter.
(b) MuniHoldings Michigan will deliver to MuniYield Michigan on the
Closing Date confirmations or other adequate evidence as to the tax basis of
its MuniHoldings Michigan Investments delivered to MuniYield Michigan
hereunder, certified by ___________________________.
(c) As soon as practicable after the close of business on the
Closing Date, MuniHoldings Michigan shall deliver to MuniYield Michigan a list
of the names and addresses of all of the stockholders of record of
MuniHoldings Michigan on the Closing Date and the number of shares of
MuniHoldings Michigan Common Stock and MuniHoldings Michigan Series A AMPS
owned by each such stockholder, certified to the best of its knowledge and
belief by the transfer agent for MuniHoldings Michigan or by its President.
8. Conditions of MuniHoldings Michigan.
The obligations of MuniHoldings Michigan hereunder shall be subject
to the following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of (i)
two-thirds of the members of the Board of Directors of MuniHoldings Michigan;
(ii) the holders of (a) a majority of the shares of MuniHoldings Michigan
Common Stock and MuniHoldings Michigan Series A AMPS, voting together as a
single class, and (b) a majority of the shares of MuniHoldings Michigan Series
A AMPS, voting separately as a class, in each case issued and outstanding and
entitled to vote thereon; (iii) a majority of the members of the Board of
Directors of MuniYield Michigan; (iv) a majority of the votes cast by the
holders of shares of MuniYield Michigan Common Stock and MuniYield Michigan
Series A, voting together as a single class, provided that the total number of
votes cast represents a majority of the shares of MuniYield Michigan Common
Stock and MuniYield Michigan Series A AMPS issued, outstanding and entitled to
vote thereon; and (v) the holders of a majority of the outstanding MuniYield
Michigan Series A AMPS, voting separately as a class; and further that each
Fund shall have delivered to the other Fund a copy of the
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resolution approving this Agreement adopted by such Fund's Board of Directors,
and a certificate setting forth the vote of such Fund's stockholders obtained
at the special meeting of its stockholders, each certified by the Secretary of
the appropriate Fund.
(b) That MuniHoldings Michigan shall have received from MuniYield
Michigan a statement of assets, liabilities and capital, with values
determined as provided in Section 4 of this Agreement, together with a
schedule of MuniYield Michigan's investments, all as of the Valuation Time,
certified on MuniYield Michigan's behalf by its President (or any Vice
President) and its Treasurer, and a certificate signed by MuniYield Michigan's
President (or any Vice President) and its Treasurer, dated as of the Closing
Date, certifying that as of the Valuation Time and as of the Closing Date
there has been no material adverse change in the financial position of
MuniYield Michigan since the date of MuniYield Michigan's most recent Annual
or Semi-Annual Report, as applicable, other than changes in its portfolio
securities since that date or changes in the market value of its portfolio
securities.
(c) That MuniYield Michigan shall have furnished to MuniHoldings
Michigan a certificate signed by MuniYield Michigan's President (or any Vice
President) and its Treasurer, dated as of the Closing Date, certifying that,
as of the Valuation Time and as of the Closing Date all representations and
warranties of MuniYield Michigan made in this Agreement are true and correct
in all material respects with the same effect as if made at and as of such
dates, and that MuniYield Michigan has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied at or
prior to each of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That MuniHoldings Michigan shall have received an opinion or
opinions of Sidley Austin Brown & Wood LLP, as counsel to the Funds, in form
and substance satisfactory to MuniHoldings Michigan and dated the Closing
Date, to the effect that (i) each Fund is a corporation duly organized,
validly existing and in good standing in conformity with the laws of the State
of Maryland; (ii) the shares of MuniYield Michigan Common Stock and MuniYield
Michigan Series B AMPS to be issued pursuant to this Agreement are duly
authorized and, upon delivery, will be validly issued and outstanding and
fully paid and nonassessable by MuniYield Michigan, and no stockholder of
MuniYield Michigan has any preemptive right to subscription or purchase in
respect thereof (pursuant to the Articles of Incorporation or the by-laws of
MuniYield Michigan or the state law of Maryland, or to the best of such
counsel's knowledge, otherwise); (iii) this Agreement has been duly
authorized, executed and delivered by each of the Funds, and represents a
valid and binding contract, enforceable in accordance with its terms, except
as enforceability may be limited by bankruptcy, insolvency, reorganization or
other similar laws pertaining to the enforcement of creditors' rights
generally and court decisions with respect thereto; provided, such counsel
shall express no opinion with respect to the application of equitable
principles in any proceeding, whether at law or in equity and, provided
further, that such counsel shall express no opinion with respect to the
indemnification and contribution provisions set forth in this Agreement; (iv)
the execution and delivery of this Agreement does not, and the consummation of
the Reorganization will not, violate any material provisions of Maryland law
or the Articles of Incorporation, as amended and supplemented, the by-laws, as
amended, or any agreement (known to such counsel) to which any Fund is a party
or by which any Fund is bound, except insofar as the parties have agreed to
amend such provision as a condition precedent to the Reorganization; (v)
MuniHoldings Michigan has the power to sell, assign, transfer and deliver the
assets transferred by it hereunder and, upon consummation of the
Reorganization in accordance with the terms of this Agreement, MuniHoldings
Michigan will have duly transferred such assets and liabilities in accordance
with this Agreement; (vi) to the best of such counsel's knowledge, no consent,
approval, authorization or order of any United States federal court, Maryland
state court or governmental authority is required for the consummation by the
Funds of the Reorganization, except such as have been obtained under the 1933
Act, the 1934 Act and the 1940 Act and the published rules and regulations of
the Commission thereunder and under Maryland law and such as may be required
under state securities laws; (vii) the N-14 Registration Statement has become
effective under the 1933 Act, no stop order suspending the effectiveness of
the N-14 Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the 1933
Act, and the N-14 Registration Statement, and each amendment or supplement
thereto, as of their respective effective dates, appear on their face to be
appropriately responsive in all material respects to the requirements of the
1933 Act, the 1934 Act and the 1940 Act and the published rules and
regulations of the Commission thereunder; (viii) the descriptions in the N-14
Registration Statement of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly present the information
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required to be shown; (ix) the information in the Joint Proxy Statement and
Prospectus under "Comparison of the Funds--Tax Rules Applicable to the Funds
and their Stockholders" and "Agreement and Plan of Reorganization--Tax
Consequences of the Reorganization," to the extent that it constitutes matters
of law, summaries of legal matters or legal conclusions other than information
related to Michigan law or legal conclusions involving matters of Michigan law
as to which we express no option, has been reviewed by such counsel and is
correct in all material respects as of the date of the Joint Proxy Statement
and Prospectus; (x) such counsel does not know of any statutes, legal or
governmental proceedings or contracts or other documents related to the
Reorganization of a character required to be described in the N-14
Registration Statement which are not described therein or, if required to be
filed, filed as required; (xi) no Fund, to the knowledge of such counsel, is
required to qualify to do business as a foreign corporation in any
jurisdiction except as may be required by state securities laws, and except
where each has so qualified or the failure so to qualify would not have a
material adverse effect on such Fund or its respective stockholders; (xii)
except as disclosed in the N-14 Registration Statement, such counsel does not
have actual knowledge of any material suit, action or legal or administrative
proceeding pending or threatened against any Fund, the unfavorable outcome of
which would materially and adversely affect such Fund; (xiii) all corporate
actions required to be taken by the Funds to authorize this Agreement and to
effect the Reorganization have been duly authorized by all necessary corporate
actions on the part of such Fund; and (xiv) such opinion is solely for the
benefit of the Funds and their Directors and officers. Such opinion also shall
state that (A) while such counsel cannot make any representation as to the
accuracy or completeness of statements of fact in the N-14 Registration
Statement or any amendment or supplement thereto, nothing has come to their
attention that would lead them to believe that, on the respective effective
dates of the N-14 Registration Statement and any amendment or supplement
thereto, (1) the N-14 Registration Statement or any amendment or supplement
thereto contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading; and (2) the prospectus included in the N-14
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
(B) such counsel does not express any opinion or belief as to the information
under "Comparison of the Funds--Special Considerations Relating to Michigan
Municipal Bonds" and "Exhibit III--Economic and Financial Conditions in
Michigan" included in the N-14 Registration Statement and (C) such counsel
does not express any opinion or belief as to the financial statements or other
financial or statistical data relating to any Fund contained or incorporated
by reference in the N-14 Registration Statement. In giving the opinion set
forth above, Sidley Austin Brown & Wood LLP may state that it is relying on
certificates of officers of a Fund with regard to matters of fact and certain
certificates and written statements of governmental officials with respect to
the good standing of a Fund.
(f) That MuniHoldings Michigan shall have received an opinion of
Sidley Austin Brown & Wood LLP, to the effect that for Federal income tax
purposes (i) the transfer by MuniHoldings Michigan of substantially all of its
assets to MuniYield Michigan in exchange solely for shares of MuniYield
Michigan Common Stock and MuniYield Michigan Series B AMPS as provided in this
Agreement will constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and each Fund will be deemed to be a "party" to a
reorganization within the meaning of Section 368(b); (ii) in accordance with
Section 361(a) of the Code, no gain or loss will be recognized to MuniHoldings
Michigan as a result of the asset transfer solely in exchange for shares of
MuniYield Michigan Common Stock and MuniYield Michigan Series B AMPS or on the
distribution of MuniYield Michigan Common Stock and MuniYield Michigan Series
B AMPS to stockholders of MuniHoldings Michigan under Section 361(c)(1); (iii)
under Section 1032 of the Code, no gain or loss will be recognized to
MuniYield Michigan on the receipt of assets of MuniHoldings Michigan in
exchange for its shares; (iv) in accordance with Section 354(a)(1) of the
Code, no gain or loss will be recognized to the stockholders of MuniHoldings
Michigan on the receipt of shares of MuniYield Michigan Common Stock and
MuniYield Michigan Series B AMPS in exchange for their respective shares of
MuniHoldings Michigan (except to the extent that MuniHoldings Michigan common
stockholders receive cash representing an interest in fractional shares of
MuniYield Michigan Common Stock in the Reorganization); (v) in accordance with
Section 362(b) of the Code, the tax basis of MuniHoldings Michigan's assets in
the hands of MuniYield Michigan will be the same as the tax basis of such
assets in the hands of MuniHoldings Michigan immediately prior to the
consummation of the Reorganization; (vi) in accordance with Section 358 of the
Code, immediately after the Reorganization, the tax basis of the shares of
MuniYield Michigan Common Stock and MuniYield Michigan Series B AMPS received
by the stockholders of MuniHoldings Michigan in the Reorganization will be
equal to the tax basis of the respective shares of MuniHoldings Michigan
surrendered in exchange; (vii) in accordance with Section 1223 of the Code, a
stockholder's holding period for the shares of MuniYield Michigan will be
determined by including the period for which such stockholder held
MuniHoldings
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Michigan shares exchanged therefor, provided, that such shares were held as a
capital asset; (viii) in accordance with Section 1223 of the Code, MuniYield
Michigan's holding period with respect to MuniHoldings Michigan's assets
transferred will include the period for which such assets were held by
MuniHoldings Michigan; (ix) the payment of cash to common stockholders of
MuniHoldings Michigan in lieu of fractional shares of MuniYield Michigan
Common Stock will be treated as though the fractional shares were distributed
as part of the Reorganization and then redeemed, with the result that each
common stockholder will have short- or long term capital gain or loss to the
extent that the cash distribution received differs from the stockholder's
basis allocable to the MuniYield Michigan fractional shares; and (x) the
taxable year of MuniHoldings Michigan will end on the effective date of the
Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, MuniYield Michigan will succeed to and take into account certain
tax attributes of MuniHoldings Michigan, such as earnings and profits, capital
loss carryovers and method of accounting.
(g) That all proceedings taken by MuniYield Michigan and its counsel
in connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to MuniHoldings Michigan and its
counsel.
(h) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall have
been instituted or, to the knowledge of MuniYield Michigan, be contemplated by
the Commission.
(i) That MuniHoldings Michigan shall have received from
______________________ a letter dated within three days prior to the effective
date of the N-14 Registration Statement and a similar letter dated within five
days prior to the Closing Date, in form and substance satisfactory to them, to
the effect that (i) they are independent public accountants with respect to
MuniYield Michigan within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder; (ii) in their opinion, the
financial statements and supplementary information of MuniYield Michigan
included or incorporated by reference in the N-14 Registration Statement and
reported on by them comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules and
regulations thereunder; (iii) on the basis of limited procedures agreed upon
by the Funds and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of any unaudited interim financial statements and unaudited supplementary
information of MuniYield Michigan included in the N-14 Registration Statement,
and inquiries of certain officials of MuniYield Michigan responsible for
financial and accounting matters, nothing came to their attention that caused
them to believe that (a) such unaudited financial statements and related
unaudited supplementary information do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder, (b) such unaudited financial
statements are not fairly presented in conformity with generally accepted
accounting principles, applied on a basis substantially consistent with that
of the audited financial statements, or (c) such unaudited supplementary
information is not fairly stated in all material respects in relation to the
unaudited financial statements taken as a whole; and (iv) on the basis of
limited procedures agreed upon by the Funds and described in such letter (but
not an examination in accordance with generally accepted auditing standards),
the information relating to MuniYield Michigan appearing in the N-14
Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records of
MuniYield Michigan or from schedules prepared by officials of MuniYield
Michigan having responsibility for financial and reporting matters and such
information is in agreement with such records, schedules or computations made
therefrom.
(j) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of MuniYield Michigan or would
prohibit the Reorganization.
(k) That MuniHoldings Michigan shall have received from the
Commission such orders or interpretations as Sidley Austin Brown & Wood LLP,
as counsel to MuniHoldings Michigan, deems reasonably necessary or desirable
under the 1933 Act and the 1940 Act in connection with the Reorganization,
provided, that
II-13
such counsel shall have requested such orders as promptly as practicable, and
all such orders shall be in full force and effect.
9. MuniYield Michigan Conditions.
The obligations of MuniYield Michigan hereunder shall be subject to
the following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the Board of Directors and the
stockholders of each Fund as set forth in Section 8(a); and that MuniHoldings
Michigan shall have delivered to MuniYield Michigan a copy of the resolution
approving this Agreement adopted by MuniHoldings Michigan's Board of
Directors, and a certificate setting forth the vote of the stockholders of
MuniHoldings Michigan obtained, each certified by its Secretary.
(b) That MuniHoldings Michigan shall have furnished to MuniYield
Michigan a statement of its assets, liabilities and capital, with values
determined as provided in Section 4 of this Agreement, together with a
schedule of investments with their respective dates of acquisition and tax
costs, all as of the Valuation Time, certified on MuniHoldings Michigan's
behalf by its President (or any Vice President) and its Treasurer, and a
certificate signed by MuniHoldings Michigan's President (or any Vice
President) and its Treasurer, dated as of the Closing Date, certifying that as
of the Valuation Time and as of the Closing Date there has been no material
adverse change in the financial position of MuniHoldings Michigan since the
date of MuniHoldings Michigan's most recent Annual Report or Semi-Annual
Report, as applicable, other than changes in MuniHoldings Michigan Investments
since that date or changes in the market value of MuniHoldings Michigan
Investments.
(c) That MuniHoldings Michigan shall have furnished to MuniYield
Michigan a certificate signed by MuniHoldings Michigan's President (or any
Vice President) and its Treasurer, dated the Closing Date, certifying that as
of the Valuation Time and as of the Closing Date all representations and
warranties of MuniHoldings Michigan made in this Agreement are true and
correct in all material respects with the same effect as if made at and as of
such dates and MuniHoldings Michigan has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or satisfied
at or prior to such dates.
(d) That MuniHoldings Michigan shall have delivered to MuniYield
Michigan a letter from ____________________ dated the Closing Date, stating
that such firm has performed a limited review of the Federal, state and local
income tax returns of MuniHoldings Michigan for the fiscal year ended July 31,
2001 (which returns originally were prepared and filed by MuniHoldings
Michigan), and that based on such limited review, nothing came to their
attention which caused them to believe that such returns did not properly
reflect, in all material respects, the Federal, state and local income taxes
of MuniHoldings Michigan for the period covered thereby; and that for the
period from August 1, 2001, to and including the Closing Date and for any
taxable year of MuniHoldings Michigan ending upon the liquidation of
MuniHoldings Michigan, such firm has performed a limited review to ascertain
the amount of applicable Federal, state and local taxes, and has determined
that either such amount has been paid or reserves have been established for
payment of such taxes, this review to be based on unaudited financial data;
and that based on such limited review, nothing has come to their attention
which caused them to believe that the taxes paid or reserves set aside for
payment of such taxes were not adequate in all material respects for the
satisfaction of Federal, state and local taxes for the period from February 1,
2002, to and including the Closing Date and for any taxable year of
MuniHoldings Michigan, ending upon the liquidation of such Fund or that such
Fund would not qualify as a regulated investment company for Federal income
tax purposes for the tax years in question.
(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(f) That MuniYield Michigan shall have received an opinion of Sidley
Austin Brown & Wood LLP, as counsel to the Funds, in form and substance
satisfactory to MuniYield Michigan and dated the Closing Date, with respect to
the matters specified in Section 8(e) of this Agreement and such other matters
as MuniYield Michigan reasonably may deem necessary or desirable.
II-14
(g) That MuniYield Michigan shall have received an opinion of Sidley
Austin Brown & Wood LLP with respect to the matters specified in Section 8(f)
of this Agreement.
(h) That MuniYield Michigan shall have received from
_________________ a letter regarding MuniHoldings Michigan dated within three
days prior to the effective date of the N-14 Registration Statement and a
similar letter dated within five days prior to the Closing Date, in form and
substance satisfactory to MuniYield Michigan, to the effect that (i) they are
independent public accountants with respect to such Fund within the meaning of
the 1933 Act and the applicable published rules and regulations thereunder;
(ii) in their opinion, the financial statements and supplementary information
of MuniHoldings Michigan included or incorporated by reference in the N-14
Registration Statement and reported on by them (if applicable) comply as to
form in all material respects with the applicable accounting requirements of
the 1933 Act and the published rules and regulations thereunder; (iii) on the
basis of limited procedures agreed upon by the Funds and described in such
letter (but not an examination in accordance with generally accepted auditing
standards) consisting of a reading of any unaudited interim financial
statements and unaudited supplementary information of MuniHoldings Michigan
included in the N-14 Registration Statement, and inquiries of certain
officials of MuniHoldings Michigan responsible for financial and accounting
matters, nothing came to their attention that caused them to believe that (a)
such unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules and
regulations thereunder, (b) such unaudited financial statements are not fairly
presented in conformity with generally accepted accounting principles, or (c)
such unaudited supplementary information is not fairly stated in all material
respects in relation to the unaudited financial statements taken as a whole;
and (iv) on the basis of limited procedures agreed upon by the Funds and
described in such letter (but not an examination in accordance with generally
accepted auditing standards), the information relating to MuniHoldings
Michigan appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) (with the
exception of performance comparisons, if any), if any, has been obtained from
the accounting records of MuniHoldings Michigan or from schedules prepared by
officials of MuniHoldings Michigan having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(i) That the MuniHoldings Michigan Investments to be transferred to
MuniYield Michigan shall not include any assets or liabilities which MuniYield
Michigan, by reason of charter limitations or otherwise, may not properly
acquire or assume.
(j) That the N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness shall have
been instituted or, to the knowledge of MuniHoldings Michigan, be contemplated
by the Commission.
(k) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of MuniHoldings Michigan or
would prohibit the Reorganization.
(l) That MuniYield Michigan shall have received from the Commission
such orders or interpretations as Sidley Austin Brown & Wood LLP, as counsel
to MuniYield Michigan, deems reasonably necessary or desirable under the 1933
Act and the 1940 Act in connection with the Reorganization, provided, that
such counsel shall have requested such orders as promptly as practicable, and
all such orders shall be in full force and effect.
(m) That all proceedings taken by MuniHoldings Michigan and its
counsel in connection with the Reorganization and all documents incidental
thereto shall be satisfactory in form and substance to MuniYield Michigan and
its counsel.
(n) That prior to the Closing Date, MuniHoldings Michigan shall have
declared a dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to its stockholders all of
its net investment company taxable income, tax-exempt net income and net
capital gain for the period to and
II-15
including the Closing Date, if any (computed without regard to any deduction
for dividends paid). In this regard, the last dividend period for the
MuniHoldings Michigan Series A AMPS may be shorter than the dividend period
for such AMPS determined as set forth in the applicable Articles
Supplementary.
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the Reorganization abandoned at
any time (whether before or after adoption thereof by the stockholders of the
Funds) prior to the Closing Date, or the Closing Date may be postponed, (i) by
mutual consent of the Boards of Directors of the Funds, (ii) by the Board of
Directors of MuniHoldings Michigan if any condition of MuniHoldings Michigan's
obligations set forth in Section 8 of this Agreement has not been fulfilled or
waived by such Board; or (iii) by the Board of Directors of MuniYield Michigan
if any condition of MuniYield Michigan's obligations set forth in Section 9 of
this Agreement has not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by December 31, 2002, this Agreement automatically shall terminate
on that date, unless a later date is mutually agreed to by the Boards of
Directors of the Funds.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either Fund or persons who are
their directors, trustees, officers, agents or stockholders in respect of this
Agreement.
(d) At any time prior to the Closing Date, any of the terms or
conditions of this Agreement may be waived by the Board of Directors of either
Fund (whichever is entitled to the benefit thereof), if, in the judgment of
such Board after consultation with its counsel, such action or waiver will not
have a material adverse effect on the benefits intended under this Agreement
to the stockholders of their respective Fund, on behalf of which such action
is taken. In addition, the Boards of Directors of the Funds have delegated to
FAM the ability to make non-material changes to the transaction if it deems it
to be in the best interests of the Funds to do so.
(e) The respective representations and warranties contained in
Sections 1 and 2 of this Agreement shall expire with, and be terminated by,
the consummation of the Reorganization, and no Fund nor any of its officers,
directors, trustees, agents or stockholders shall have any liability with
respect to such representations or warranties after the Closing Date. This
provision shall not protect any officer, director, trustee, agent or
stockholder of either Fund against any liability to the entity for which that
officer, director, trustee, agent or stockholder so acts or to its
stockholders, to which that officer, director, trustee, agent or stockholder
otherwise would be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Closing Date and shall impose any terms
or conditions which are determined by action of the Boards of Directors of the
Funds to be acceptable, such terms and conditions shall be binding as if a
part of this Agreement without further vote or approval of the stockholders of
the Funds unless such terms and conditions shall result in a change in the
method of computing the number of shares of MuniYield Michigan Common Stock
and MuniYield Michigan Series B AMPS to be issued to MuniHoldings Michigan, as
applicable, in which event, unless such terms and conditions shall have been
included in the proxy solicitation materials furnished to the stockholders of
MuniHoldings Michigan prior to the meeting at which the Reorganization shall
have been approved, this Agreement shall not be consummated and shall
terminate unless MuniHoldings Michigan promptly shall call a special meeting
of its stockholders at which such conditions so imposed shall be submitted for
approval.
11. Indemnification.
(a) MuniHoldings Michigan hereby agrees to indemnify and hold
MuniYield Michigan harmless from all loss, liability and expenses (including
reasonable counsel fees and expenses in connection with the contest of any
claim) which MuniYield Michigan may incur or sustain by reason of the fact
that (i) MuniYield Michigan shall be required to pay any corporate obligation
of MuniHoldings Michigan, whether consisting of tax deficiencies
II-16
or otherwise, based upon a claim or claims against MuniHoldings Michigan which
were omitted or not fairly reflected in the financial statements to be
delivered to MuniYield Michigan in connection with the Reorganization; (ii)
any representations or warranties made by MuniHoldings Michigan in this
Agreement should prove to be false or erroneous in any material respect; (iii)
any covenant of MuniHoldings Michigan has been breached in any material
respect; or (iv) any claim is made alleging that (a) the N-14 Registration
Statement included any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein attributable to such Fund not misleading or (b) the Joint
Proxy Statement and Prospectus delivered to the stockholders of the Funds and
forming a part of the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact necessary
to make the statements therein attributable to such Fund, in the light of the
circumstances under which they were made, not misleading, except with respect
to (iv)(a) and (b) herein insofar as such claim is based on written
information furnished to MuniHoldings Michigan by MuniYield Michigan.
(b) MuniYield Michigan hereby agrees to indemnify and hold
MuniHoldings Michigan harmless from all loss, liability and expenses
(including reasonable counsel fees and expenses in connection with the contest
of any claim) which MuniHoldings Michigan may incur or sustain by reason of
the fact that (i) any representations or warranties made by MuniYield Michigan
in this Agreement should prove false or erroneous in any material respect,
(ii) any covenant of MuniYield Michigan has been breached in any material
respect, or (iii) any claim is made alleging that (a) the N-14 Registration
Statement included any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein, not misleading or (b) the Joint Proxy Statement and
Prospectus delivered to stockholders of the Funds and forming a part of the
N-14 Registration Statement included any untrue statement of a material fact
or omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except with respect to (iii)(a) and (b) herein insofar as such
claim is based on written information furnished to MuniYield Michigan by
MuniHoldings Michigan.
(c) In the event that any claim is made against MuniYield Michigan
in respect of which indemnity may be sought by MuniYield Michigan from
MuniHoldings Michigan under Section 11(a) of this Agreement, or in the event
that any claim is made against MuniHoldings Michigan in respect of which
indemnity may be sought by MuniHoldings Michigan from MuniYield Michigan under
Section 11(b) of this Agreement, then the party seeking indemnification (the
"Indemnified Party"), with reasonable promptness and before payment of such
claim, shall give written notice of such claim to the other party (the
"Indemnifying Party"). If no objection as to the validity of the claim is made
in writing to the Indemnified Party by the Indemnifying Party within thirty
(30) days after the giving of notice hereunder, then the Indemnified Party may
pay such claim and shall be entitled to reimbursement therefor, pursuant to
this Agreement. If, prior to the termination of such thirty-day period,
objection in writing as to the validity of such claim is made to the
Indemnified Party, the Indemnified Party shall withhold payment thereof until
the validity of such claim is established (i) to the satisfaction of the
Indemnifying Party, or (ii) by a final determination of a court of competent
jurisdiction, whereupon the Indemnified Party may pay such claim and shall be
entitled to reimbursement thereof, pursuant to this Agreement, or (iii) with
respect to any tax claims, within seven (7) calendar days following the
earlier of (A) an agreement between MuniHoldings Michigan and MuniYield
Michigan seeking indemnification that an indemnity amount is payable, (B) an
assessment of a tax by a taxing authority, or (C) a "determination" as defined
in Section 1313(a) of the Code. For purposes of this Section 11, the term
"assessment" shall have the same meaning as used in Chapter 63 of the Code and
Treasury Regulations thereunder, or any comparable provision under the laws of
the appropriate taxing authority. In the event of any objection by the
Indemnifying Party, the Indemnifying Party promptly shall investigate the
claim, and if it is not satisfied with the validity thereof, the Indemnifying
Party shall conduct the defense against such claim. All costs and expenses
incurred by the Indemnifying Party in connection with such investigation and
defense of such claim shall be borne by it. These indemnification provisions
are in addition to, and not in limitation of, any other rights the parties may
have under applicable law.
12. Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with
the issuance of any shares to any person who at the time of the Reorganization
is, to its knowledge, an affiliate of a party to the Reorganization pursuant
to Rule 145(c), MuniYield Michigan will cause to be affixed upon the
certificate(s) issued to such person (if any) a legend as follows:
II-17
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED EXCEPT TO MUNIYIELD MICHIGAN INSURED FUND II, INC.
(OR ITS STATUTORY SUCCESSOR), OR ITS PRINCIPAL UNDERWRITER
UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH
REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to MuniYield
Michigan's transfer agent with respect to such shares. MuniHoldings Michigan
will provide MuniYield Michigan on the Closing Date with the name of any
stockholder of MuniHoldings Michigan who is to the knowledge of MuniHoldings
Michigan an affiliate of MuniHoldings Michigan on such date.
(b) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant to this Agreement
shall be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any
provision of this Agreement shall be in writing and shall be made by hand
delivery, prepaid certified mail or overnight service, addressed to either
Fund, at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attn: Terry K.
Glenn, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said state.
(e) Copies of the Articles of Incorporation, as amended, and
Articles Supplementary of each Fund are on file with the Maryland Department
and notice is hereby given that this instrument is executed on behalf of the
Directors of each Fund.
II-18
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
By: ______________________________________
Name:
Title:
Attest:
By: ____________________________
Name: Alice A. Pellegrino
Title: Secretary
MUNIYIELD MICHIGAN FUND, INC.
By: ______________________________________
Name:
Title:
Attest:
By: ____________________________
Name: Alice A. Pellegrino
Title: Secretary
II-19
EXHIBIT III
ECONOMIC AND OTHER CONDITIONS IN MICHIGAN
The following information is a brief summary of factors affecting the economy
of the State of Michigan (the "State") and does not purport to be a complete
description of such factors. Other factors will affect issuers. The summary is
based primarily upon one or more publicly available offering statements
relating to debt offerings of state issuers. The Funds have not independently
verified the information.
Economic activity in the State of Michigan has tended to be more cyclical than
in the nation as a whole. The State's efforts to diversify its economy have
proven successful, as reflected by the fact that the share of employment in
the State in the durable goods sector has fallen from 33.1% in 1960 to 16.2%
in 1999. While durable goods manufacturing still represents a sizable portion
of the State's economy, the service sector now represents 27.51% of the
State's economy. Any substantial national economic downturn may have an
adverse effect on the economy of the State and on the revenues of the State
and some of its local government units. Although historically, the average
monthly unemployment rate in the State has been higher than the average
figures for the United States, for five of the last six years, the
unemployment rate in the State has been at or below the national average.
During 2001, the average monthly unemployment rate in the State was 5.0%
compared to a national average of 4.8%.
The State's economy continues to be affected by changes in the auto industry
resulting from competitive pressures, overcapacity and labor disputes and
national and international events affecting national security. Such actions
are adversely affecting State revenues and the financial impact on the local
units of government in the areas in which plants are located could be more
severe. The State is currently experiencing a slowdown in its economy and is
experiencing reductions in general fund revenues from previous estimates.
The Michigan Constitution limits the amount of total revenues of the State
raised from taxes and certain other sources to a level for each fiscal year
equal to a percentage of the State's personal income for the prior calendar
year. In the event the State's total revenues exceed the limit by 1% or more,
the Constitution requires that the excess be refunded to taxpayers. To avoid
exceeding the revenue limit in the State's 1994-95 fiscal year, the State
refunded approximately $113 million through income tax credits for the 1995
calendar year. The State has determined that State revenues subject to the
limit in the 1998-99 fiscal year exceeded the constitutional limit by $159.7
million, which is less than 1% of the limit. Of this amount $100 million was
transferred to the State's Budget Stabilization Fund. The State Constitution
does not prohibit the increasing of taxes so long as expected revenues do not
exceed the revenue limit and authorizes exceeding the limit for emergencies.
The State Constitution further provides that the proportion of State spending
paid to all local units to total spending may not be reduced below the
proportion in effect for the 1978-79 fiscal year. The Constitution requires
that if spending does not meet the required level in a given year an
additional appropriation for local units is required for the following fiscal
year. The State Constitution also requires the State to finance any new or
expanded activity of local units mandated by State law. Any expenditures
required by this provision would be counted as State spending for local units
for purposes of determining compliance with the provisions stated above.
The State Constitution limits the purposes for which State general obligation
debt may be issued. Such debt is limited to short term debt for State
operating purposes, short- and long term debt for the purposes of making loans
to school districts and long term debt for voter approved purposes. In
addition to the foregoing, the State authorizes special purpose agencies and
authorities to issue revenue bonds payable from designated revenues and fees.
Revenue bonds are not obligations of the State and in the event of shortfalls
in self-supporting revenues, the State has no legal obligation to appropriate
money to these debt service payments. The State's Constitution also directs or
restricts the use of certain revenues.
The State finances its operations through the State's General Fund and Special
Revenue Funds. The General Fund receives revenues of the State that are not
specifically required to be included in the Special Revenue Fund. General Fund
revenues are obtained approximately 56% from the payment of State taxes and
44% from federal and non-tax revenue sources. The majority of the revenues
from State taxes are from the State's personal income tax, single business
tax, use tax, sales tax and various other taxes. Approximately two-thirds of
total General Fund expenditures are for State support of public education and
for social services programs. Other significant expenditures from the General
Fund provide funds for law enforcement, general State government, debt service
and
III-1
capital outlay. The State Constitution requires that any prior year's surplus
or deficit in any fund must be included in the next succeeding year's budget
for that fund.
The State of Michigan reports its financial results in accordance with
generally accepted accounting principles. The State ended the five fiscal
years 1992-96 with its General Fund in balance after substantial transfers
from the General Fund to the Budget Stabilization Fund. For the 1997 fiscal
year, the State closed its books with its general fund in balance. During the
1997-98 fiscal year, an error was identified pertaining to the Medicaid
program administered by the Department of Community Health ("DCH"). Over a
ten-year period DCH did not properly record all Medicaid expenditures and
revenues on a modified accrual basis as required by GAAP. For the fiscal year
ended September 30, 1997, the General Fund did not reflect Medicaid
expenditures of $178.7 million, and federal revenue of $24.6 million. As a
result, the total ending General Fund balance and unreserved fund balance for
the fiscal year ended September 30, 1997, were reduced by $154.1 million to
account for the correction of the prior period error. The General Fund was in
balance as of September 30, 1998, September 30, 1999 and September 30, 2000.
The balance in the Budget Stabilization Fund as of September 30, 2000 was
$1,264.4 million after net transfers into that fund of $41.9 million, which
included the excess of revenues of $100 million described above. In all but
two of the last seven fiscal years the State has borrowed between $500 million
and $900 million for cash flow purposes. It borrowed $900 million in each of
the 1996, 1997 and 1998 fiscal years. No cash flow borrowing was required in
the 1999, 2000 or 2001 fiscal years.
To address the reduction in state revenues, on November 6, 2001, the State
Legislature completed required approvals of an executive order of the Governor
which reduced 2001-02 appropriated State expenditures by approximately $540
million. Included in the executive order cuts are reductions in revenue
sharing for Michigan municipalities of approximately $37 million. The State
Legislature has also appropriated transfers from the Budget Stabilization Fund
to avoid a deficit as of September 30, 2001 in the General Fund, and to help
balance the 2001-02 General Fund budget. These transfers are expected to
reduce the balance in the Budget Stabilization Fund to approximately $520
million by the end of the 2001-02 State fiscal year.
In November, 1997, the State Legislature adopted legislation to provide for
the funding of claims of local school districts, some of whom had alleged in a
lawsuit, Durant v. State of Michigan, that the State had, over a period of
years, paid less in school aid than required by the State's Constitution.
Under this legislation, the State paid to school districts which were
plaintiffs in the suit approximately $212 million from the Budget
Stabilization Fund on April 15, 1998, and is required to pay to other school
districts an estimated amount of $932 million over time. These payments, which
commenced in fiscal year 1998-99, are being paid out of the Budget
Stabilization Fund or the General Fund, half in annual payments over ten years
and half in annual payments over fifteen years.
Amendments to the Michigan Constitution which placed limitations on increases
in State taxes and local ad valorem taxes (including taxes used to meet the
debt service commitments on obligations of taxing units) were approved by the
voters of the State of Michigan in November 1978 and became effective on
December 23, 1978. To the extent that obligations in the Fund are tax
supported and are for local units and have not been voted by the taxing unit's
electors, the ability of the local units to levy debt service taxes might be
affected.
State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units
unless the impact of the census is changed by State law. No assurance can be
given that any such State law will be enacted. In the 1991 fiscal year, the
State deferred certain scheduled payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
later dates, similar future deferrals could have an adverse impact on the cash
position of some local units. Additionally, while total State revenue sharing
payments have increased in each of the last six years, the State has reduced
revenue sharing payments to municipalities below the level otherwise provided
under formulas in each of those years.
On March 15, 1994, the electors of the State voted to amend the State's
Constitution to increase the State sales tax rate from 4% to 6% and to place
an annual cap on property assessment increases for all property taxes.
Companion legislation also cut the State's income tax rate from 4.6% to 4.4%,
reduced some property taxes and shifted the
III-2
balance of school funding sources among property taxes and State revenues,
some of which are being provided from new or increased State taxes. The
legislation also contains other provisions that may reduce or alter the
revenues of local units of government and tax increment bonds could be
particularly affected. In 1999, the Legislature voted to further reduce the
State personal income tax by 0.1% each year for five years beginning in 2000.
While the ultimate impact of the constitutional amendment and related
legislation cannot yet be accurately predicted, investors should be alert to
the potential effect of such measures upon the operations and revenues of
Michigan local units of government.
The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of
these proceedings could, if unfavorably resolved from the point of view of the
State, substantially affect State or local programs or finances. These
lawsuits involve programs generally in the areas of corrections, highway
maintenance, social services, tax collection, commerce and budgetary
reductions to school districts and government units and court funding.
Currently, the State's general obligation bonds are rated Aaa by Moody's, AAA
by Standard & Poor's and AA+ by Fitch. The State received upgrades in
September 2000 from Standard & Poor's, in October 2000 from Moody's and in
April 1998 from Fitch.
III-3
EXHIBIT IV
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER
Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal Bond
Ratings
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes can
be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some
time in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present, but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well
assured. Often the protection of interest and principal
payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of
danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment
standing.
Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
Short term Notes: The three ratings of Moody's for short term notes
are MIG 1/ VMIG 1, MIG 2/ VMIG 2, and MIG 3/ VMIG 3;
MIG 1/ VMIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2/ VMIG 2
denotes "high quality" with "ample margins of protection";
MIG 3/ VMIG 3 instruments are of "favorable quality ...
but ... lacking the undeniable strength of the preceding
grades."
IV-1
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of short term promissory obligations. Prime-1 repayment
capacity will often be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins, in earning coverage of fixed
financial charges and high internal cash generation; and with established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level
of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's, A Division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default-capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
IV-2
AAA Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity of the obligor to meet its
financial commitment on the obligation is extremely
strong.
AA Debt rated "AA" differs from the highest-rated issues
only in small degree. The obligor's capacity to meet its
financial commitment on the obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB B Debt rated "BB," "B," "CCC," "CC," and "C" are regarded as
CCC CC having significant speculative characteristics. "BB"
C indicates the least degree of speculation and "C" the
highest degree of speculation. While such debt will
likely have some quality and protective characteristics,
these may be outweighed by large uncertainties or major
risk exposures to adverse conditions.
D Debt rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not
made on the date due even if the applicable grace period
has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action if
payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into several categories, ranging from
"A-1" for the highest quality obligations to "D" for the lowest. These
categories are as follows:
A-1 This designation indicates that the degree of safety
regarding timely payment is strong. Those issues
determined to possess extremely strong safety
characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this
designation is satisfactory. However, the relative
degree of safety is not as high as for issues
designated "A-1."
A-3 Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable
to the adverse effects of changes in circumstances than
obligations carrying the higher designations.
B Issues rated "B" are regarded as having only speculative
capacity for timely payment.
C This rating is assigned to short term debt obligations
with a doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the date due, even if the
applicable grace period has not expired unless
Standard & Poor's believes that such payments
will be made during such grace period.
IV-3
C The "c" subscript is used to provide additional
information to investors that the bank may terminate
its obligation to purchase tendered bonds if the long
term credit rating of the issuer is below an
investment-grade level and/or the issuer's bonds are
deemed taxable.
P The letter "p" indicates that the rating is
provisional. A provisional rating assumes the
successful completion of the project financed by the
debt being rated and indicates that payment of the debt
service requirements is largely or entirely dependent
upon the successful, timely completion of the project.
This rating, however, while addressing credit quality
subsequent to completion of the project, makes no
comment on the likelihood of or the risk of default
upon failure of such completion. The investor should
exercise his own judgment with respect to such
likelihood and risk.
Continuance of the ratings is contingent upon Standard
& Poor's receipt of an executed copy of the escrow
agreement or closing documentation confirming
investments and cash flows.
R The "r" highlights derivative, hybrid, and certain
other obligations that Standard & Poor's believes may
experience high volatility or high variability in
expected returns as a result of noncredit risks.
Examples of such obligations are securities with
principal or interest return indexed to equities,
commodities, or currencies; certain swaps and options;
and interest-only and principal-only mortgage
securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit
no volatility or variability in total return.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to such notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most
likely receive a long term debt rating. The following criteria will be used in
making that assessment.
-- Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note.
Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with
some vulnerability to adverse financial and economic changes
over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Description of Fitch, Inc.'s ("Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
IV-4
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the
highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future
developments, short term debt of these issuers is
generally rated "F-1+."
A Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an
adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher
than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs,
however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional
A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
IV-5
Suspended
A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn
A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert
Ratings are placed on FitchAlert to notify investors of an occurrence
that is likely to result in a rating change and the likely direction of such
change. These are designated as "Positive," indicating a potential upgrade,
"Negative," for potential downgrade, or "Evolving," where ratings may be
raised or lowered. FitchAlert is relatively short term, and should be resolved
within three to 12 months.
Ratings Outlook
An outlook is used to describe the most likely direction of any rating
change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
Description Of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in
this class are currently meeting debt service
requirements, the probability of continued timely
payment of principal and interest reflects the
obligor's limited margin of safety and the need for
reasonable business and economic activity throughout
the life of the issue.
CCC Bonds have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
IV-6
DDD DD Bonds are in default on interest and/or principal
D payments. Such bonds are extremely speculative and
should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the
Obligor. "DDD" represents the highest potential for
recovery on these Bonds, and "D" represents the lowest
potential for recovery.
Plus(+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the
rating category. Plus and minus signs, however, are not
used in the "DDD," "DD," or "D" categories.
Description of Fitch's Short term Ratings
Fitch's short term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium term notes, and municipal and
investment notes.
The short term rating places greater emphasis than a long term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned
this rating are regarded as having the strongest degree
of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly
less in degree than issues rated "F-l+".
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues
assigned "F-1+" and "F-l" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance
for timely payment is adequate; however, near-term
adverse changes could cause these securities to be
rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to
near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol "LOC" indicates that the rating is based on
a letter of credit issued by a commercial bank.
IV-7
EXHIBIT V
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance
policies (the "Policies") that MuniYield Michigan Fund, Inc. and MuniHoldings
Michigan Insured Fund II, Inc. (each, a "Fund" and collectively, the "Funds")
may obtain from several insurance companies with respect to insured California
Municipal Bonds and Municipal Bonds held by the Fund. The Funds have no
obligation to obtain any such Policies, and the terms of any Policies actually
obtained may vary significantly from the terms discussed below.
In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards
such companies normally use in establishing the insurability of new issues of
California Municipal Bonds and Municipal Bonds and are not necessarily the
criteria that would be used in regard to the purchase of such bonds by a Fund.
The Policies do not insure (i) municipal securities ineligible for insurance
and (ii) municipal securities no longer owned by a Fund.
The Policies do not guarantee the market value of the insured California
Municipal Bonds and Municipal Bonds or the value of the shares of a Fund. In
addition, if the provider of an original issuance insurance policy is unable
to meet its obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the
insurance company will not have any obligation to insure any issue held by the
Fund that is adversely affected by either of the above described events. In
addition to the payment of premium, the policies may require that a Fund
notify the insurance company as to all California Municipal Bonds and
Municipal Bonds in a Fund's portfolio and permit the insurance company to
audit their records. The insurance premiums will be payable monthly by a Fund
in accordance with a premium schedule to be furnished by the insurance company
at the time the Policies are issued. Premiums are based upon the amounts
covered and the composition of the portfolio.
The Funds will seek to utilize insurance companies that have insurance
claims-paying ability ratings of AAA from Standard & Poor's ("S&P") or Fitch,
Inc. ("Fitch") or Aaa from Moody's Investors Service, Inc. ("Moody's"). No
assurance can be given, however, that insurance from insurance carriers
meeting these criteria will be at all times available.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Fitch
insurance claims-paying ability rating provides an assessment of an insurance
company's financial strength and, therefore, its ability to pay policy and
contract claims under the terms indicated. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by Fitch.
The ability to pay claims is adjudged by Fitch to be extremely strong for
insurance companies with this highest rating. In the opinion of Fitch,
foreseeable business and economic risk factors should not have any material
adverse impact on the ability of these insurers to pay claims. In Fitch's
opinion, profitability, overall balance sheet strength, capitalization and
liquidity are all at very secure levels and are unlikely to be affected by
potential adverse underwriting, investment or cyclical events. A Moody's
insurance claims-paying ability rating is an opinion of the ability of an
insurance company to repay punctually senior policyholder obligations and
claims. An insurer with an insurance claims-paying ability rating of Aaa is
considered by Moody's to be of the best quality. In the opinion of Moody's,
the policy obligations of an insurance company with an insurance claims-paying
ability rating of Aaa carry the smallest degree of credit risk and, while the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does
not constitute an opinion on any specific contract in that such an opinion can
only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet nonpolicy
obligations (i.e., debt contracts).
V-1
The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings.
The likelihood of a timely flow of funds from the insurer to the trustee for
the bondholders is a key element in the rating determination for such debt
issues.
V-2
EXHIBIT VI
INFORMATION PERTAINING TO MUNIHOLDINGS MICHIGAN
General Information
Fiscal State of Meeting
Fund Year End Incorporation Time
---- -------- ------------- ----
MuniHoldings Michigan Insured Fund II, Inc. 7/31 Maryland 9:30 a.m.
Shares of Capital Stock of the Fund
Outstanding as of the Record Date
-----------------------------------------------
Common Stock AMPS
------------ ------------
[ ] 1,360
Information Pertaining to Directors
Set forth in the table below is information regarding meetings of the
board of directors and the Audit and Nominating Committee (the "Committee")
held and the aggregate fees and expenses paid by MuniHoldings Michigan to
non-interested Directors during the most recently completed fiscal year.
Board of Directors Committee
------------------ ---------
Per Per Aggregate
# Meetings Annual Fee Meeting # Meetings Annual Meeting Fees and
Fund Held* ($) Fee ($) Held* Fee($)** Fee($) Expenses ($)
---- ----- --- ------- ----- -------- ------ ------------
MuniHoldings Michigan. 7 2,500 250 4 500 250 29,205
* Includes meetings held via teleconferencing equipment.
** The Co-Chairman of the Committee receives an additional annual fee of $500.
Set forth in the table below is information regarding compensation paid
by MuniHoldings Michigan to the non-interested Directors during the most
recently completed fiscal year.
M. Colyer Laurie Simon Stephen B J. Thomas Fred G.
Fund Crum Hodrick Swensrud Touchton Weiss
---- ---- ------- -------- -------- -----
MuniHoldings Michigan* $4,875 $4,875 $4,875 $4,875 $4,875
---------
* No pension or retirement benefits are accrued as part of the expenses of MuniHoldings Michigan.
VI-1
Set forth in the table below is information regarding the aggregate
compensation paid by all MLIM/FAM Advised Funds, including the Fund, to the
non-interested Directors for the year ended December 31, 2001.
Aggregate
Compensation from Fund and Other MLIM/FAM-
Director Advised Funds
-------- ------------------------------------------
M. Colyer Crum................. $
Laurie Simon Hodrick........... $
Stephen B. Swensrud............ $
J. Thomas Touchton............. $
Fred G. Weiss.................. $
As of the Record Date, none of the Directors held shares of the Fund's
Common Stock or Series A AMPS except as set forth in the table below:
Percent of Percent of
Director Common Stock Class (%)* Series A AMPS Class (%)*
--------- ------------ ----------- ------------- -----------
Terry K. Glenn
M. Colyer Crum
Laurie Simon Hodrick
Stephen B. Swensrud
J. Thomas Touchton
Fred G. Weiss
---------
* Less than .01% of the Class.
Information relating to the share ownership by the Directors as of the
Record Date is set forth in the chart below:
Aggregate Dollar Range of Equity
Dollar Range of Securities in All Registered Funds
Equity Securities in Overseen by Director in
Director MuniHoldings Michigan Merrill Lynch Family of Funds
-------- --------------------- -----------------------------
Terry K. Glenn
M. Colyer Crum
Laurie Simon Hodrick
Stephen B. Swensrud
J. Thomas Touchton
Fred G. Weiss
The following table provides information, as of the Record Date, for each
non-interested Director and his or her immediate family members relating to
securities owned beneficially or of record in ML & Co.
Name of Owner and
Relationship to Value of Percent of
Director Director Nominee Title of Class Securities Class (%)
-------- ---------------- -------------- ---------- ---------
M. Colyer Crum None None 0 0
Laurie Simon Hodrick None None 0 0
Stephen B. Swensrud None None 0 0
J. Thomas Touchton None None 0 0
Fred G. Weiss None None 0 0
VI-2
Set forth below is certain biographical and other information relating to
the Director who is an "interested person," as defined in the Investment
Company Act, of the Fund:
----------------------------------------------------------------------------------------------------------------------------------
Term of Office
and Number of MLIM/FAM-
Name, Address and Position(s) Held Length of Time Principal Occupation During Past Advised Funds Public
Age of Director with the Fund Served Five years Overseen Directorships
----------------------------------------------------------------------------------------------------------------------------------
Terry K. Glenn Director and Director since Chairman (Americas Region) since [ ] registered None
(61)* President 1999; President 2001, and Executive Vice investment companies
P.O. Box 9011 since 1999 President since 1983 of FAM and consisting of [ ]
Princeton, New MLIM (the terms FAM and MLIM, as portfolios
Jersey used herein, include their
08543-9011 corporate predecessors);
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 Chairmen (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.
VI-3
Set forth below is certain biographical and other information
relating to each non-interested Director of the Fund:
----------------------------------------------------------------------------------------------------------------------------------
Name, Address and Term of Office Number of MLIM/FAM-
Age of Position(s) Held and Length of Principal Occupation During Past Advised Funds Public
Director with the Fund Time Served Five years Overseen Directorships
----------------------------------------------------------------------------------------------------------------------------------
M. Colyer Crum Director Director since James R. Williston Professor of 26 registered None
(69)* 104 1999 Investment Management Emeritus, investment companies
Westcliff Road, Harvard Business School since consisting of
Weston, 1996; James R. Williston 51 portfolios
Massachusetts Professor of Investment
02493-1410 Management, Harvard Business
School, from 1971 to
1996; Director of
Cambridge Bancorp.
----------------------------------------------------------------------------------------------------------------------------------
Laurie Simon Director Director since Professor of Finance and 26 registered None
Hodrick (39)* 809 1999 Economics, Graduate School of investment companies
Uris Hall, Business, Columbia University consisting of
3022 Broadway since 1998; Associate Professor 51 portfolios
New York, New of Finance and Economics,
York 10027 Graduate School of Business,
Columbia University
from 1996 to 1998;
Associate Professor
of Finance, J.L.
Kellogg Graduate
School of
Management,
Northwestern
University, from
1992 to 1996.
----------------------------------------------------------------------------------------------------------------------------------
Stephen B. Director Director since Chairman of Fernwood Advisors 42 registered None
Swensrud (68)* 2000 (investment adviser) since 1996; investment companies
88 Broad Street, Principal of Fernwood Associates consisting of 87
2nd Floor, (financial consultant) since portfolios
Boston, 1975; Chairman of RPP Corporation
Massachusetts (manufacturing) since 1978;
02110 Director, International Mobile
Communications, Inc.
(telecommunications) since 1998.
----------------------------------------------------------------------------------------------------------------------------------
VI-4
----------------------------------------------------------------------------------------------------------------------------------
Name, Address and Term of Office Number of MLIM/FAM-
Age of Position(s) Held and Length of Principal Occupation During Past Advised Funds Public
Director with the Fund Time Served Five years Overseen Directorships
----------------------------------------------------------------------------------------------------------------------------------
J. Thomas Director Director since 26 registered TECO
Touchton (62)* 1999 Managing Partner of The investment companies Energy,
Suite 3405, One Witt-Touchton Company and its consisting of Inc.
Tampa City predecessor, The Witt Co. (a 51 portfolios
Center, 201 North private investment partnership)
Franklin Street, since 1972; Trustee Emeritus of
Tampa, Florida Washington and Lee University;
33602 Director of TECO Energy, Inc. (an
electric utility holding company).
----------------------------------------------------------------------------------------------------------------------------------
Fred G. Weiss Director Director since Managing Director of FGW 26 registered Watson
(60)* 16450 1999 Associates since 1997; Vice investment companies Pharmaceutical,
Maddalena Place, President, Planning, consisting of Inc.
Delray Beach, Investments and Development of 51portfolios
Florida 33446 Warner Lambert Co. from 1979 to
1997; Director of Watson
Pharmaceutical, Inc. (a
pharmaceutical company) since
2000; Director of the Michael
J. Fox Foundation for
Parkinson's Research.
----------------------------------------------------------------------------------------------------------------------------------
---------
* Each Director is a director, trustee or member of an advisory board of
certain other investment companies for which FAM or MLIM acts as
investment adviser and is a member of the Committee of each Board on
which he or she currently serves as a Director.
VI-5
Certain biographical and other information relating to the officers of
MuniHoldings Michigan is set forth below:
----------------------------------------------------------------------------------------------------------------------------------
Term of
Office**and Number of MLIM/FAM-
Name, Address* and Position(s) Held Length ofTime Principal Occupation During Past Advised Funds Public
Age of Officers with the Fund: Served for: Five years Overseen Directorships
----------------------------------------------------------------------------------------------------------------------------------
Donald C. Burke Vice President Vice President First Vice President of FAM and [o] registered None
(41) and Treasurer and Treasurer MLIM since 1997 and the Treasurer investment companies
since 1999 thereof since 1999; Senior Vice consisting of [o]
President and Treasurer of portfolios
Princeton Services since 1999;
Vice President of FAMD since
1999; Vice President of FAM and
MLIM from 1990 to 1997; Director
of Taxation of MLIM since 1990.
----------------------------------------------------------------------------------------------------------------------------------
Kenneth A. Jacob Senior Vice Vice President First Vice President of MLIM [o] registered None
(50) President from 1999 to since 1997; Vice President of investment companies
2002, Senior MLIM from 1984 to 1997; Vice consisting of [o]
Vice President President of FAM since 1984. portfolios
since 2002
----------------------------------------------------------------------------------------------------------------------------------
John Loffredo (38) Senior Vice Senior Vice First Vice President of MLIM [o] registered None
President President since since 1997; Vice President of investment companies
2002 MLIM from 1991 to 1997. consisting of [o]
portfolios
----------------------------------------------------------------------------------------------------------------------------------
Alice A. Secretary Secretary since Vice President of MLIM since [o] registered None
Pellegrino (41) 1999 1999; Associate with Kirkpatrick investment companies
& Lockhart LLP from 1992 to 1997. consisting of [o]
portfolios
----------------------------------------------------------------------------------------------------------------------------------
Fred K. Steube Vice President Vice President Vice President of MLIM since 1989. [o] registered None
(51) and Portfolio and Portfolio investment companies
Manager Manager since consisting of [o]
1999 portfolios
----------------------------------------------------------------------------------------------------------------------------------
---------
* The address of each officer listed above is P.O. Box 9011, Princeton, New Jersey 08543-9011.
** Elected by and serves at the pleasure of the Board of Directors of the Fund.
VI-6
[Proxy Card Front] AUCTION MARKET
PREFERRED STOCK
MUNIYIELD MICHIGAN FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her
substitute, as applicable, and hereby authorizes each of them to represent and
to vote, as designated on the reverse hereof, all of the shares of Auction
Market Preferred Stock of MuniYield Michigan Fund, Inc. (the "Fund") held of
record by the undersigned on February 11, 2002 at the Annual Meeting of
Stockholders of the Fund to be held on April 8, 2002, or any adjournment
thereof.
This proxy, when properly executed, will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" Items 1 and 2.
By signing and dating the reverse side of this card, you authorize the
proxies to vote the proposals as marked, or if not marked, to vote "FOR" the
proposals, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return the card
at once in the enclosed envelope.
You may also vote your shares by touch-tone phone by calling
1-800-690-6903 or through the Internet at www.proxyvote.com.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and
Plan of Reorganization between the Fund and MuniHoldings Michigan
Insured Fund II, Inc.
FOR /_/ AGAINST /_/ ABSTAIN /_/
2. Election of Directors
For Withhold For All To withhold authority to vote for
All All Except certain nominees only, mark "For All
Except" and write each such nominee's
/_/ /_/ /_/ number on the line below.
01) James K. Bodurtha
02) Terry K. Glenn
03) Joe Grills
04) Herbert I. London
05) Andre F. Perold
06) Roberta Cooper Ramo
07) Robert S. Salomon Jr.
08) Melvin R. Seiden
09) Stephen B. Swensrud
---------------------------------------
3. In the discretion of such proxies, upon such other business as
properly may come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the
proxies, pursuant to Rule 452 of the New York Stock Exchange, to
vote any uninstructed Auction Market Preferred Stock in the same
proportion as votes cast by holders of Auction Market Preferred
Stock who have responded to this proxy solicitation.
Please sign exactly as name
appears hereon. When shares are
held by joint tenants, both
should sign. When signing as
attorney or as executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation, please
sign in full corporate name by
president or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.
Dated: _________________________
X ______________________________
Signature
X ______________________________
Signature, if held jointly
Sign, Date, and Return the Proxy Card Promptly Using the Enclosed Envelope.
[Proxy Card Front] COMMON STOCK
MUNIYIELD MICHIGAN FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her
substitute, as applicable, and hereby authorizes each of them to represent and
to vote, as designated on the reverse hereof, all of the shares of common
stock of MuniYield Michigan Fund, Inc. (the "Fund") held of record by the
undersigned on February 11, 2002 at the Annual Meeting of Stockholders of the
Fund to be held on April 8, 2002, or any adjournment thereof.
This proxy, when properly executed, will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" Items 1 and 2.
By signing and dating the reverse side of this card, you authorize the
proxies to vote the proposals as marked, or if not marked, to vote "FOR" the
proposals, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return the card
at once in the enclosed envelope.
You may also vote your shares by touch-tone phone by calling
1-800-690-6903 or through the Internet at www.proxyvote.com.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and
Plan of Reorganization between the Fund and MuniHoldings Michigan
Insured Fund II, Inc.
FOR /_/ AGAINST /_/ ABSTAIN /_/
2. Election of Directors
For Withhold For All To withhold authority to vote for
All All Except certain nominees only, mark "For All
Except" and write each such nominee's
/_/ /_/ /_/ number on the line below.
01) James K. Bodurtha
02) Terry K. Glenn
03) Joe Grills
04) Roberta Cooper Ramo
05) Robert S. Salomon Jr.
06) Melvin R. Seiden
07) Stephen B. Swensrud
-------------------------------------
3. In the discretion of such proxies, upon such other business as
properly may come before the meeting or any adjournment thereof.
Please sign exactly as name
appears hereon. When shares are
held by joint tenants, both
should sign. When signing as
attorney or as executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation, please
sign in full corporate name by
president or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.
Dated: __________________________
X ______________________________
Signature
X ______________________________
Signature, if held jointly
Sign, Date, and Return the Proxy Card Promptly Using the Enclosed Envelope.
[Proxy Card Front] COMMON STOCK
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her
substitute, as applicable, and hereby authorizes each of them to represent and
to vote, as designated on the reverse hereof, all of the shares of common
stock of MuniHoldings Michigan Insured Fund II, Inc. (the "Fund") held of
record by the undersigned on February 11, 2002 at the Special Meeting of
Stockholders of the Fund to be held on April 8, 2002, or any adjournment
thereof.
This proxy, when properly executed, will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" Item 1.
By signing and dating the reverse side of this card, you authorize the
proxies to vote the proposal as marked, or if not marked, to vote "FOR" the
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return the card
at once in the enclosed envelope.
You may also vote your shares by touch-tone phone by calling
1-800-690-6903 or through the Internet at www.proxyvote.com.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and
Plan of Reorganization between the Fund and MuniYield Michigan Fund,
Inc.
FOR / / AGAINST / / ABSTAIN / /
2. In the discretion of such proxies, upon such other business as
properly may come before the meeting or any adjournment thereof.
Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both should sign. When signing
as attorney or as executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
Dated:
---------------------------------
X
--------------------------------------
Signature
X
--------------------------------------
Signature, if held jointly
Sign, Date, and Return the Proxy Card Promptly Using the Enclosed Envelope.
[Proxy Card Front] AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her
substitute, as applicable, and hereby authorizes each of them to represent and
to vote, as designated on the reverse hereof, all of the shares of Auction
Market Preferred Stock of MuniHoldings Michigan Insured Fund II, Inc. (the
"Fund") held of record by the undersigned on February 11, 2002 at the Special
Meeting of Stockholders of the Fund to be held on April 8, 2002, or any
adjournment thereof.
This proxy, when properly executed, will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" Item 1.
By signing and dating the reverse side of this card, you authorize the
proxies to vote the proposal as marked, or if not marked, to vote "FOR" the
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return the card
at once in the enclosed envelope.
You may also vote your shares by touch-tone phone by calling
1-800-690-6903 or through the Internet at www.proxyvote.com.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and
Plan of Reorganization between the Fund and MuniYield Michigan Fund,
Inc.
FOR / / AGAINST / / ABSTAIN / /
2. In the discretion of such proxies, upon such other business as
properly may come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the
proxies, pursuant to Rule 452 of the New York Stock Exchange, to
vote any uninstructed Auction Market Preferred Stock in the same
proportion as votes cast by holders of Auction Market Preferred
Stock who have responded to this proxy solicitation.
Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both should sign. When signing
as attorney or as executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
Dated:
---------------------------------
X
--------------------------------------
Signature
X
--------------------------------------
Signature, if held jointly
Sign, Date, and Return the Proxy Card Promptly Using the Enclosed Envelope.
PART C
OTHER INFORMATION
Item 15. Indemnification.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
1(a) hereto; Article VI of the Registrant's By-Laws, filed as Exhibit 2
hereto, and the Investment Advisory Agreement, a form of which is filed as
Exhibit 6 hereto, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be provided to directors,
officers and controlling persons of the Registrant, pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in
connection with any successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1933 Act and will be governed
by the final adjudication of such issue.
Reference is made to (i) Section 6 of the Purchase Agreement relating to
the Registrant's Common Stock, a form of which is filed as Exhibit 7(a)
hereto, and (ii) Section 7 of the Purchase Agreement relating to the
Registrant's AMPS, a form of which is filed as an Exhibit 7(b) hereto, for
provisions relating to the indemnification of the underwriter.
Item 16. Exhibits.
1 (a) -- Articles of Incorporation of the Registrant, dated December 17, 1991.
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated January 19, 1992.
(c) -- Articles Supplementary creating the Registrant's Series A AMPS.
(d) -- Articles of Amendment to the Articles Supplementary creating the Registrant's Series A AMPS.
(e) -- Articles of Amendment to the Articles Supplementary creating the Registrant's Series A AMPS.
(f) -- Form of Articles Supplementary creating the Registrant's Series B AMPS.
2 -- By-Laws of the Registrant.
3 -- Not Applicable.
4 -- Form of Agreement and Plan of Reorganization between the Registrant and MuniHoldings Michigan
Insured Fund II, Inc. (included in Exhibit II to the Joint Proxy Statement and Prospectus contained
in this Registration Statement)
5 (a) -- Copies of instruments defining the rights of stockholders, including the relevant portions of the
Articles of Incorporation and the By-Laws of the Registrant.(a)
(b) -- Form of specimen certificate for the common stock of the Registrant.(b)
(c) -- Form of specimen certificate for the AMPS of the Registrant.(b)
6 -- Form of Investment Advisory Agreement between Registrant and Fund Asset Management, L.P.(b)
7 (a) -- Form of Purchase Agreement for the common stock.(b)
(b) -- Form of Purchase Agreement for the AMPS.(b)
(c) -- Form of Merrill Lynch Standard Dealer Agreement.(b)
8 -- Not applicable.
9 -- Custody Agreement between the Registrant and The Bank of New York ("BONY").(b)
10 -- Not applicable.
11 -- Opinion of Sidley Austin Brown & Wood LLP, counsel for the Registrant.(b)
12 -- Tax Opinion of Sidley Austin Brown & Wood LLP, tax counsel for the Registrant.(b)
13 (a) -- Form of Registrar, Transfer Agency and Service Agreement between the Registrant and BONY.(b)
C-1
(b) -- Form of Auction Agent Agreement.(b)
(c) -- Form of Agreement of Resignation, Appointment and Acceptance among the Registrant, IBJ Whitehall
Banks Trust Company and BONY.(c)
(d) -- Form of Broker-Dealer Agreement.(b)
(e) -- Form of Letter of Representations.(b)
14 (a) -- Consent of , independent auditors for the Registrant. (b)
------------------------------------
(b) -- Consent of , independent auditors for MuniHoldings Michigan
------------------------------------
Insured Fund, II Inc. (b)
15 -- Not applicable.
16 -- Not applicable.
17 -- Not applicable.
------------------
(a) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6), Article VII, Article VIII, Article X, Article XI,
Article XII and Article XIII of the Registrant's Articles of Incorporation, filed as Exhibit 1(a) hereto, and to Article II,
Article III (sections 1, 2, 3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and Article XIV of the
Registrant's By-Laws filed as Exhibit 2 hereto.
(b) To be filed by amendment to this Registration Statement.
(c) Incorporated by reference to Exhibit 13(c) to the Registration Statement on Form N-14 of MuniYield Fund, Inc. (File No.
333-65242), filed on September 14, 2001.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
as amended, the reoffering prospectus will contain information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by other items of the
applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the offering of
securities at that time shall be deemed to be the initial bona fide offering
of them.
(3) The Registrant undertakes to file, by post-effective amendment, an
opinion of counsel as to certain tax matters within a reasonable time after
receipt of such opinion.
C-2
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 17th day of January, 2002.
MUNIYIELD MICHIGAN FUND, INC.
(Registrant)
By: /S/ TERRY K. GLENN
-------------------------------------------
(Terry K. Glenn, President and Director)
Each person whose signature appears below hereby authorizes Terry K.
Glenn, Donald C. Burke and Alice A. Pellegrino or any of them, as
attorney-in-fact, to sign on his or her behalf, individually and in each
capacity stated below, any amendments to this Registration Statement
(including post-effective amendments) and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission.
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title Date
---------- ----- ----
/S/ TERRY K. GLENN President (Principal Executive January 17, 2002
------------------ Officer) and Director
(Terry K. Glenn)
/S/ DONALD C. BURKE Vice President and Treasurer January 17, 2002
------------------- (Principal Financial and
(Donald C. Burke) Accounting Officer)
/S/ JAMES H. BODURTHA Director January 17, 2002
---------------------
(James H. Bodurtha)
/S/ HERBERT I. LONDON Director January 17, 2002
---------------------
(Herbert I. London)
/S/ ANDRE F. PEROLD Director January 17, 2002
-------------------
(Andre F. Perold)
/S/ ROBERTA C. RAMO Director January 17, 2002
-------------------
(Roberta C. Ramo)
C-3
EXHIBIT INDEX
Description
1 (a) -- Articles of Incorporation of the Registrant, dated December 17, 1991.
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated January 9, 1992.
(c) -- Articles Supplementary creating the Registrant's Series A AMPS.
(d) -- Articles of Amendment to the Articles Supplementary creating the Registrant's Series A AMPS.
(e) -- Articles of Amendment to the Articles Supplementary creating the Registrant's Series A AMPS.
(f) -- Form of Articles Supplementary creating the Registrant's Series B AMPS.
2 -- By-Laws of the Registrant.
6 -- Form of Investment Advisory Agreement between the Registrant and Fund Asset Management, L.P.