N-CSR 1 ml7084.txt MUNIYIELD MICHIGAN INSURED II UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-6501 Name of Fund: MuniYield Michigan Insured Fund II, Inc. Fund Address: P.O. Box 9011 Princeton, NJ 08543-9011 Name and address of agent for service: Terry K. Glenn, President, MuniYield Michigan Insured Fund II, Inc., 800 Scudders Mill Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011, Princeton, NJ, 08543-9011 Registrant's telephone number, including area code: (609) 282-2800 Date of fiscal year end: 10/31/03 Date of reporting period: 11/01/02 - 10/31/03 Item 1 - Attach shareholder report (BULL LOGO) Merrill Lynch Investment Managers www.mlim.ml.com MuniYield Michigan Insured Fund II, Inc. Annual Report October 31, 2003 MuniYield Michigan Insured Fund II, Inc. seeks to provide shareholders with as high a level of current income exempt from Federal income tax and Michigan income taxes as is consistent with its investment policies and prudent investment management by investing primarily in a portfolio of long-term municipal obligations the interest on which, in the opinion of bond counsel to the issuer, is exempt from Federal income tax and Michigan income taxes. This report, including the financial information herein, is transmitted to shareholders of MuniYield Michigan Insured Fund II, Inc. for their information. It is not a prospectus. Past performance results shown in this report should not be considered a representation of future performance. The Fund has leveraged its Common Stock and intends to remain leveraged by issuing Preferred Stock to provide the Common Stock shareholders with a potentially higher rate of return. Leverage creates risks for Common Stock shareholders, including the likelihood of greater volatility of net asset value and market price of shares of the Common Stock, and the risk that fluctuations in the short-term dividend rates of the Preferred Stock may affect the yield to Common Stock shareholders. Statements and other information herein are as dated and are subject to change. MuniYield Michigan Insured Fund II, Inc. Box 9011 Princeton, NJ 08543-9011 MuniYield Michigan Insured Fund II, Inc. The Benefits and Risks of Leveraging MuniYield Michigan Insured Fund II, Inc. utilizes leveraging to seek to enhance the yield and net asset value of its Common Stock. However, these objectives cannot be achieved in all interest rate environments. To leverage, the Fund issues Preferred Stock, which pays dividends at prevailing short-term interest rates, and invests the proceeds in long-term municipal bonds. The interest earned on these investments, net of dividends to Preferred Stock, is paid to Common Stock shareholders in the form of dividends, and the value of these portfolio holdings is reflected in the per share net asset value of the Fund's Common Stock. However, in order to benefit Common Stock shareholders, the yield curve must be positively sloped; that is, short-term interest rates must be lower than long- term interest rates. At the same time, a period of generally declining interest rates will benefit Common Stock shareholders. If either of these conditions change, then the risks of leveraging will begin to outweigh the benefits. To illustrate these concepts, assume a fund's Common Stock capitalization of $100 million and the issuance of Preferred Stock for an additional $50 million, creating a total value of $150 million available for investment in long-term municipal bonds. If prevailing short-term interest rates are approximately 3% and long-term interest rates are approximately 6%, the yield curve has a strongly positive slope. The fund pays dividends on the $50 million of Preferred Stock based on the lower short-term interest rates. At the same time, the fund's total portfolio of $150 million earns the income based on long-term interest rates. Of course, increases in short-term interest rates would reduce (and even eliminate) the dividends on the Common Stock. In this case, the dividends paid to Preferred Stock shareholders are significantly lower than the income earned on the fund's long-term investments, and therefore the Common Stock shareholders are the beneficiaries of the incremental yield. However, if short-term interest rates rise, narrowing the differential between short-term and long-term interest rates, the incremental yield pickup on the Common Stock will be reduced or eliminated completely. At the same time, the market value of the fund's Common Stock (that is, its price as listed on the New York Stock Exchange) may, as a result, decline. Furthermore, if long-term interest rates rise, the Common Stock's net asset value will reflect the full decline in the price of the portfolio's investments, since the value of the fund's Preferred Stock does not fluctuate. In addition to the decline in net asset value, the market value of the fund's Common Stock may also decline. As a part of its investment strategy, the Fund may invest in certain securities whose potential income return is inversely related to changes in a floating interest rate ("inverse floaters"). In general, income on inverse floaters will decrease when short-term interest rates increase and increase when short-term interest rates decrease. Investments in inverse floaters may be characterized as derivative securities and may subject the Fund to the risks of reduced or eliminated interest payments and losses of invested principal. In addition, inverse floaters have the effect of providing investment leverage and, as a result, the market value of such securities will generally be more volatile than that of fixed- rate, tax-exempt securities. To the extent the Fund invests in inverse floaters, the market value of the Fund's portfolio and the net asset value of the Fund's shares may also be more volatile than if the Fund did not invest in such securities. As of October 31, 2003, the percentage of the Fund's total net assets invested in inverse floaters was 12.46%. Swap Agreements The Fund may also invest in swap agreements, which are over-the- counter contracts in which one party agrees to make periodic payments based on the change in market value of a specified bond, basket of bonds, or index in return for periodic payments based on a fixed or variable interest rate or the change in market value of a different bond, basket of bonds or index. Swap agreements may be used to obtain exposure to a bond or market without owning or taking physical custody of securities. MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 A Letter From the President Dear Shareholder As 2003 draws to a close, it seems appropriate to reflect on what has been a meaningful year in many respects. We saw the beginning and the end of all-out war in Iraq, equity market uncertainty turned to strength and sub par gross domestic product growth of 1.4% in the first quarter of 2003 grew to an extraordinary 8.2% in the third quarter. Amid the good news, fixed income investments, which had become the asset class of choice during the preceding three-year equity market decline, faced new challenges. During 2003, municipal bond yields rose and fell in reaction to geopolitical events, equity market performance, economic activity and employment figures. By the end of October, long-term municipal revenue bond yields were slightly higher than they were one year earlier, at 5.24% as measured by the Bond Buyer Revenue Bond Index. With many state deficits at record levels, municipalities issued nearly $400 billion in new long-term tax-exempt bonds during the 12-month period ended October 31, 2003. The availability of bonds, together with attractive yield ratios relative to U.S. Treasury issues, made municipal bonds a popular fixed income investment alternative. Throughout the year, our portfolio managers continued to work diligently to deliver on our commitment to provide superior performance within reasonable expectations for risk and return. This included striving to outperform our peers and the market indexes. With that said, remember that the advice and guidance of a skilled financial advisor often can mean the difference between successful and unsuccessful investing. A financial professional can help you choose those investments that will best serve you as you plan for your financial future. Finally, I am proud to premiere a new look to our shareholder communications. Our portfolio manager commentaries have been trimmed and organized in such a way that you can get the information you need at a glance, in plain language. Today's markets are confusing enough. We want to help you put it all in perspective. The report's new size also allows us certain mailing efficiencies. Any cost savings in production or postage are passed on to the Fund and, ultimately, to Fund shareholders. We thank you for trusting Merrill Lynch Investment Managers with your investment assets, and we look forward to serving you in the months and years ahead. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 A Discussion With Your Fund's Portfolio Manager The Fund was able to successfully weather bouts of excessive interest rate volatility during the fiscal year while preserving net asset value. Describe the market environment relative to municipal bonds during the fiscal year. At the end of October, long-term tax-exempt bond yields were 90% - 95% of comparable U.S. Treasury securities, substantially exceeding their historical average of 85% - 88%. Considering their tax-free status, this made long-term municipal bonds an attractive investment alternative during the past 12 months. Long-term U.S. Treasury bond yields declined throughout most of the first seven months of the fiscal year, while bond prices--which move in the opposite direction of yields--rose in response to weak equity markets, concerns about a growing conflict in Iraq and continued sub par U.S. economic growth. The Federal Reserve Board continued to lower short-term interest rates to stimulate business and consumer economic activity. Bond yields reversed course in July and August, rising sharply as economic conditions began to improve and as most analysts agreed the Federal Reserve Board had finished lowering interest rates. In mid-August, U.S. Treasury bond yields reached 5.45%, their highest level during the period, before again moving lower and ending the 12-month period at 5.13%, 15 basis points (.15%) higher than a year earlier. Long-term tax-exempt bond yields also rose from year-ago levels, although to a lesser extent than U.S. Treasury bonds, as municipal bond prices typically are less sensitive to short-term economic and geopolitical pressures. By the end of October, long-term municipal revenue bond yields stood at 5.24%, a small increase compared to the previous year. Yields for long-term Aaa-rated tax-exempt bonds (the highest rated) declined 10 basis points during the past year. The decline largely reflected investors' growing demand for high-quality bonds, which provided valuable stability in an uncertain market. How did conditions in the state of Michigan affect the Fund? Michigan maintains the highest possible credit ratings of Aaa and AAA from Moody's and Standard & Poor's, although with a negative outlook, and is rated AA+ by Fitch. The state ranks 28th in debt per capita and 29th in debt as a percent of personal income nationally. While debt has increased recently, we find these ratios modest for a populous state, pointing to Michigan's flexibility in responding to economic downturns relative to other states. For the state's fiscal year 2003, which ended on September 30, 2003, the budget was revised downward on several occasions. Accordingly, the state is expected to draw down virtually all of its $145 million Budget Stabilization Fund (BSF) to balance fiscal year 2003 operations. The BSF was $1 billion in fiscal year 2001. In May 2003, for the first time in six years, Michigan issued cash flow notes in the amount of $1.2 billion. The governor and legislature agreed on a fiscal year 2004 budget in mid-July. The budget closed a $1.7 billion gap largely through broad- based spending cuts, one-time federal aid of $658 million and smaller revenue enhancements. No broad-based tax increases were approved. These sources also allowed the state to budget $75 million to replenish the BSF, $75 million for a new school reserve fund and $60 million in the Medicaid trust fund. Balanced financial operations in fiscal year 2004 depend largely on an improved economy. In managing the Fund, our strategy has been to purchase insured state general obligation bonds and their equivalents rather than unenhanced general obligation bonds, as there is no meaningful increase in yield offered by the uninsured issues. As the state's economy continues to struggle, we believe credit deterioration will lead to better relative performance of the insured bonds. How did the Fund perform during the fiscal year in light of the existing market conditions? For the year ended October 31, 2003, the Common Stock of MuniYield Michigan Insured Fund II, Inc. had a net annualized yield of 5.88%, based on a year-end per share net asset value of $15.21 and $.894 per share income dividends. Over the same period, the total investment return on the Fund's Common Stock was +8.82%, based on a change in per share net asset value from $14.91 to $15.21, and assuming reinvestment of $.894 per share ordinary income dividends. MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 For the six-month period ended October 31, 2003, the total investment return on the Fund's Common Stock was +1.85%, based on a change in per share net asset value from $15.42 to $15.21, and assuming reinvestment of $.447 per share ordinary income dividends. For the six-month period ended October 31, 2003, the Fund's Auction Market Preferred Stock had an average yield of .84% for Series A and .85% for Series B. For a description of the Fund's total investment return based on a change in the per share market value of the Fund's Common Stock (as measured by the trading price of the Fund's shares on the New York Stock Exchange), and assuming reinvestment of dividends, please refer to the Financial Highlights section of the Financial Statements included in this report. As a closed-end fund, the Fund's shares may trade in the secondary market at a premium or discount to the Fund's net asset value. As a result, total investment returns based on changes in the market value of the Fund's Common Stock can vary significantly from total investment return based on changes in the Fund's net asset value. We established a neutral posture with respect to interest rates in 2002 and early 2003, and maintained that stance through the middle of the year. We believe this positioning helped insulate the Fund from much of the interest rate volatility experienced during the past six months. Our strategy of enhancing yield by increasing the Fund's exposure to lower-rated investment-grade issues also was beneficial to total return performance, as these issues helped to increase the Fund's investment income stream. In addition, these lower-rated issues exhibited less price volatility than many general market issues in recent months, which also served to enhance performance. What changes were made to the portfolio during the period? In May and June, as market yields declined in response to weak economic growth and the possibility of additional short-term interest rate changes by the Federal Reserve Board, we adopted a slightly more defensive strategy, further reducing the portfolio's interest rate sensitivity by lowering the Fund's average portfolio maturity. This defensive positioning resulted in relative outperformance as interest rates rose dramatically in July and August. We also continued to add higher-yielding instruments to the portfolio whenever they were attractively priced, although the supply of these issues was severely restricted throughout most of the period. In terms of leverage, the Fund's borrowing costs remained in the low 1% range during the period. These attractive funding levels, in combination with a steep tax-exempt yield curve, generated a significant income benefit to the Fund's Common Stock shareholders. Further declines in the Fund's borrowing costs would require significant easing of monetary policy by the Federal Reserve Board. While such action is not expected, neither is an increase in short- term interest rates. We expect short-term borrowing costs to remain near current attractive levels for the coming months. However, should the spread between short-term and long-term interest rates narrow, the benefits of leverage will decline, and as a result, reduce the yield on the Fund's Common Stock. (For a more complete explanation of the benefits and risks of leveraging, see page 2 of this report to shareholders.) How would you characterize the portfolio's position at the close of the period? We ended the period with a modestly defensive posture with respect to future interest rate movements. We continue to favor more defensive, higher-coupon issues over the more interest-rate- sensitive securities. Overall, the Fund is structured to perform better in stable-to-rising interest rate environments. If yields decline to the lows seen in June 2003, we would expect to adopt a much stronger defensive strategy. Fred K. Stuebe Vice President and Portfolio Manager November 10, 2003 MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Schedule of Investments (In Thousands)
S&P Moody's Face Ratings++ Ratings++ Amount Municipal Bonds Value Michigan--132.7% Anchor Bay, Michigan, School District, GO (School Building and Site) (c)(f): AAA Aaa $ 4,250 Series I, 6% due 5/01/2009 $ 4,972 AAA Aaa 1,375 Series II, 5.70% due 5/01/2010 1,594 AAA Aaa 3,165 Series II, 5.75% due 5/01/2010 3,678 AAA Aaa 2,150 Bullock Creek, Michigan, School District, GO, 5.50% due 5/01/2026 (e) 2,279 AAA Aaa 2,175 Carman-Ainsworth, Michigan, Community School, GO, 5.50% due 5/01/2018 (c) 2,375 AAA Aaa 1,000 Central Montcalm, Michigan, Public Schools, GO, 5.75% due 5/01/2024 (e) 1,086 AAA Aaa 3,850 Charlotte, Michigan, Public School District, GO, 5.375% due 5/01/2029 (c) 4,017 AAA Aaa 1,500 Comstock Park, Michigan, Public Schools, GO, 5.75% due 5/01/2029 (c) 1,627 BBB Baa2 2,420 Delta County, Michigan, Economic Development Corporation, Environmental Improvement Revenue Refunding Bonds (Mead Westvaco--Escanaba), Series A, 6.25% due 4/15/2027 2,508 Detroit, Michigan, City School District, GO (School Building and Site Improvement) (c): AAA Aaa 1,480 Series A, 5.375% due 5/01/2024 1,561 AAA Aaa 2,000 Series B, 5% due 5/01/2019 2,089 AAA Aaa 2,530 Detroit, Michigan, Convention Facility Revenue Refunding Bonds (Cobo Hall), 5% due 9/30/2011 (e) 2,783 AAA Aaa 1,000 Detroit, Michigan, Sewer Disposal Revenue Bonds, Series A, 5.75% due 1/01/2010 (c)(f) 1,165 AAA Aaa 1,000 Detroit, Michigan, Sewer Disposal Revenue Refunding Bonds, Senior Lien, Series A, 5% due 7/01/2024 (d) 1,014 Detroit, Michigan, Water Supply System Revenue Bonds: AAA NR* 1,000 DRIVERS, Series 200, 10.14% due 7/01/2011 (c)(f)(g) 1,346 AAA Aaa 7,600 Senior Lien, Series A, 5.75% due 1/01/2010 (c)(f) 8,846 AAA Aaa 1,300 Series B, 5.25% due 7/01/2032 (e) 1,344 BBB Baa2 2,500 Dickinson County, Michigan, Economic Development Corporation, Environmental Improvement Revenue Refunding Bonds (International Paper Company Project), Series A, 5.75% due 6/01/2016 2,644 BBB Baa2 1,500 Dickinson County, Michigan, Economic Development Corporation, PCR, Refunding (Champion International Corporation Project), 5.85% due 10/01/2018 1,531 Dickinson County, Michigan, Healthcare System, Hospital Revenue Refunding Bonds: NR* Baa3 570 5.80% due 11/01/2024 549 A NR* 1,600 5.80% due 11/01/2024 1,651 East Grand Rapids, Michigan, Public School District, GO (d)(f): AAA Aaa 1,610 5.75% due 5/01/2009 1,863 AAA Aaa 6,300 6% due 5/01/2009 7,370 NR* Baa3 385 Flint, Michigan, Hospital Building Authority, Revenue Refunding Bonds (Hurley Medical Center), Series A, 5.375% due 7/01/2020 336 Grand Blanc, Michigan, Community Schools, GO (c): AAA Aaa 1,000 5.625% due 5/01/2017 1,118 AAA Aaa 1,000 5.625% due 5/01/2018 1,114 AAA Aaa 1,100 5.625% due 5/01/2019 1,221
Portfolio Abbreviations To simplify the listings of MuniYield Michigan Insured Fund II, Inc.'s portfolio holdings in the Schedule of Investments, we have abbreviated the names of many of the securities according to the list at right. AMT Alternative Minimum Tax (subject to) COP Certificates of Participation DRIVERS Derivative Inverse Tax-Exempt Receipts GO General Obligation Bonds HDA Housing Development Authority PCR Pollution Control Revenue Bonds RIB Residual Interest Bonds S/F Single-Family MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Schedule of Investments (continued) (In Thousands)
S&P Moody's Face Ratings++ Ratings++ Amount Municipal Bonds Value Michigan (continued) AAA Aaa $ 1,600 Grand Ledge, Michigan, Public Schools District, GO, Refunding, 5.375% due 5/01/2024 (e) $ 1,676 Grand Rapids, Michigan, Building Authority Revenue Bonds, Series A (a): AAA Aaa 1,340 5.50% due 10/01/2018 1,468 AAA Aaa 320 5.50% due 10/01/2019 349 AAA Aaa 1,500 Grand Rapids, Michigan, Sanitation Sewer System, Revenue Refunding and Improvement Bonds, Series A, 5.50% due 1/01/2022 (c) 1,661 AAA Aaa 7,425 Hartland, Michigan, Consolidated School District, GO, 6% due 5/01/2010 (c)(f) 8,748 AAA Aaa 1,275 Haslett, Michigan, Public School District, Building and Site, GO, 5.625% due 5/01/2018 (e) 1,421 AAA Aaa 2,000 Howell, Michigan, Public Schools, GO, 5.875% due 5/01/2009 (e)(f) 2,327 AAA Aaa 3,975 Jackson, Michigan, Public Schools, GO, 5.375% due 5/01/2022 (c) 4,208 AAA Aaa 3,750 Kalamazoo, Michigan, Hospital Finance Authority, Hospital Facility Revenue Refunding and Improvement Bonds (Bronson Methodist Hospital), 5.875% due 5/15/2026 (e) 4,068 NR* Aaa 7,550 Kalamazoo, Michigan, Hospital Finance Authority, Hospital Facility Revenue Refunding Bonds (Bronson Methodist Hospital), 5.50% due 5/15/2028 (e) 7,926 AAA NR* 3,000 Kent, Michigan, Hospital Finance Authority Revenue Bonds (Spectrum Health), Series A, 5.50% due 1/15/2031 (e) 3,154 NR* Aaa 1,440 Ludington, Michigan, Area School District, GO, 5.25% due 5/01/2023 (e) 1,502 BBB- NR* 2,000 Macomb County, Michigan, Hospital Finance Authority, Hospital Revenue Bonds (Mount Clemens General Hospital), Series B, 5.875% due 11/15/2034 1,895 BBB NR* 1,000 Michigan Higher Education Facilities Authority, Limited Obligation Revenue Refunding Bonds (Hope College), Series A, 5.90% due 4/01/2032 1,020 Michigan Higher Education Facilities Authority, Revenue Refunding Bonds (College for Creative Studies): NR* Baa2 550 5.85% due 12/01/2022 554 NR* Baa2 1,000 5.90% due 12/01/2027 1,005 AAA NR* 3,000 Michigan Higher Education Student Loan Authority, Student Loan Revenue Bonds, AMT, Series XVII-B, 5.40% due 6/01/2018 (a) 3,097 AAA Aa1 2,500 Michigan Municipal Bond Authority, Revenue Refunding Bonds (Local Government--Qualified School), Series A, 6.50% due 5/01/2016 2,590 Michigan State Building Authority Revenue Bonds: AAA Aaa 1,185 (Facilities Program), Series II, 4.67%** due 10/15/2009 (a)(b) 984 AAA Aaa 1,675 (Facilities Program), Series II, 4.77%** due 10/15/2010 (a)(b) 1,317 AA+ Aaa 2,675 GO, RIB, Series 481, 9.66% due 4/15/2009 (e)(g) 3,452 NR* Aaa 3,500 Michigan State Building Authority, Revenue Refunding Bonds, RIB, Series 517X, 9.66% due 10/15/2010 (d)(g) 4,515 Michigan State, COP: AAA Aaa 3,870 5.50% due 6/01/2027 (a) 4,086 AAA NR* 5,380 RIB, Series 530, 10.12% due 9/01/2011 (e)(g) 7,098
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Schedule of Investments (continued) (In Thousands)
S&P Moody's Face Ratings++ Ratings++ Amount Municipal Bonds Value Michigan (continued) AAA Aaa $ 1,500 Michigan State Comprehensive Transportation Revenue Refunding Bonds, Series A, 5.50% due 11/01/2018 (d) $ 1,655 AAA Aaa 1,155 Michigan State, HDA, Rental Housing Revenue Bonds, AMT, Series A, 5.30% due 10/01/2037 (e) 1,159 AAA Aaa 1,000 Michigan State, HDA, Revenue Refunding Bonds, AMT, Series B, 5.50% due 6/01/2030 (e) 1,023 AAA NR* 925 Michigan State, HDA, S/F Housing Revenue Bonds, AMT, Series B, 5.20% due 12/01/2018 (a) 949 AAA Aaa 1,000 Michigan State Hospital Finance Authority, Hospital Revenue Bonds (Mid-Michigan Obligation Group), Series A, 5.50% due 4/15/2018 (a) 1,078 Michigan State Hospital Finance Authority, Hospital Revenue Refunding Bonds: A+ A2 1,300 (Crittenton Hospital), Series A, 5.625% due 3/01/2027 1,321 A A1 1,250 (Sparrow Obligation Group), 5.625% due 11/15/2031 1,260 AAA Aaa 2,000 Michigan State Hospital Finance Authority, Revenue Bonds (Mercy Health Services), Series R, 5.375% due 8/15/2026 (a)(b) 2,093 Michigan State Hospital Finance Authority, Revenue Refunding Bonds: AAA Aaa 7,000 (Ascension Health Credit), Series A, 6.125% due 11/15/2009 (e)(f) 8,383 AAA Aa2 2,500 (Ascension Health Credit), Series A, 6.125% due 11/15/2009 (f) 2,994 AAA Aaa 1,000 (Ascension Health Credit), Series A, 6.125% due 11/15/2009 (e)(f) 1,198 AAA Aaa 3,760 (Ascension Health Credit), Series A, 6.25% due 11/15/2009 (e)(f) 4,529 B Ba1 1,200 (Detroit Medical Center Obligation Group), Series A, 6.25% due 8/15/2013 920 AAA Aaa 3,215 (Mercy Health Services), Series X, 6% due 8/15/2014 (e) 3,653 AAA Aaa 1,000 (Mercy Mount Clemens), Series A, 6% due 5/15/2014 (e) 1,134 AAA Aaa 2,000 (Mercy Mount Clemens), Series A, 5.75% due 5/15/2029 (e) 2,157 AAA Aaa 1,250 (Mid-Michigan Obligation Group), Series A, 5.375% due 6/01/2027 (d) 1,297 AAA Aaa 5,500 (Trinity Health), Series A, 6% due 12/01/2027 (a) 5,996 AA- Aa3 875 (Trinity Health Credit), Series C, 5.375% due 12/01/2030 887 BBB Baa3 1,000 Michigan State Strategic Fund, Limited Obligation Revenue Bonds (WMX Technologies Inc. Project), AMT, 6% due 12/01/2013 1,021 Michigan State Strategic Fund, Limited Obligation Revenue Refunding Bonds: AAA Aaa 8,000 (Detroit Edison Company), AMT, Series A, 5.55% due 9/01/2029 (e) 8,286 AAA Aaa 2,000 (Detroit Edison Company Fund--Pollution), Series AA, 6.95% due 5/01/2011 (c) 2,461 A- A3 1,375 (Dow Chemical Company Project), AMT, 5.50% due 12/01/2028 1,433 BBB Baa1 2,200 (Ford Motor Co. Project), Series A, 7.10% due 2/01/2006 2,366 NR* Aaa 5,000 RIB, Series 382, 11.41% due 9/01/2025 (e)(g) 5,980 BBB Baa1 2,500 Michigan State Strategic Fund, PCR, Refunding (General Motors Corp.), 6.20% due 9/01/2020 2,568 AAA Aaa 1,500 Milan, Michigan, Area Schools, GO, Series A, 5.75% due 5/01/2010 (c)(f) 1,743 AAA Aaa 6,500 Monroe County, Michigan, Economic Development Corp., Limited Obligation Revenue Refunding Bonds (Detroit Edison Co. Project), Series AA, 6.95% due 9/01/2022 (c) 8,337 AAA Aaa 2,500 Oxford, Michigan, Area Community School District, GO, 5.40% due 5/01/2025 (c) 2,621
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Schedule of Investments (continued) (In Thousands)
S&P Moody's Face Ratings++ Ratings++ Amount Municipal Bonds Value Michigan (concluded) AAA Aaa $ 1,000 Plainwell, Michigan, Community Schools, School District, GO (School Building and Site), 5.50% due 5/01/2018 (d) $ 1,097 A NR* 1,000 Pontiac, Michigan, Tax Increment Finance Authority, Revenue Refunding Bonds (Tax Increment--Development Area Number 3), 5.375% due 6/01/2017 1,039 AAA Aaa 1,900 Rochester, Michigan, Community School District, GO, Series II, 5.50% due 5/01/2018 (e) 2,092 AAA Aaa 1,500 Romulus, Michigan, Community Schools, GO, 5.75% due 5/01/2009 (c)(f) 1,736 NR* Aaa 6,500 Saint Clair County, Michigan, Economic Revenue Refunding Bonds (Detroit Edison Company), RIB, Series 282, 11.42% due 8/01/2024 (a)(g) 8,486 AAA Aaa 2,650 South Lyon, Michigan, Community Schools, GO, Series A, 5.75% due 5/01/2023 (e) 2,906 AAA Aaa 6,500 Wayne Charter County, Michigan, Airport Revenue Bonds (Detroit Metropolitan Wayne County), AMT, Series A, 5.375% due 12/01/2015 (e) 6,938 AAA Aaa 2,230 Wayne County, Michigan, COP, 5.625% due 5/01/2011 (e) 2,492 AAA NR* 1,000 West Ottawa, Michigan, Public School District, School Buildings, GO, Refunding, 5% due 5/01/2022 (d) 1,024 AAA Aaa 1,000 Western Michigan University, Revenue Refunding Bonds, 5% due 7/15/2021 (a) 1,026 Guam--0.8% AAA Aaa 1,440 A.B. Won Guam International Airport Authority, General Revenue Refunding Bonds, Series A, 5.25% due 10/01/2019 (e) 1,545 Puerto Rico--8.6% BBB Baa2 2,700 Children's Trust Fund, Puerto Rico, Tobacco Settlement Revenue Bonds, 5.625% due 5/15/2043 2,376 Puerto Rico Commonwealth, Public Improvement, GO, Refunding (d): AAA Aaa 1,000 5% due 7/01/2024 1,022 AAA Aaa 2,000 Series C, 5% due 7/01/2021 2,208 Puerto Rico Electric Power Authority, Power Revenue Bonds: AAA Aaa 3,500 Series LL, 5.50% due 7/01/2017 (e) 4,013 AAA Aaa 2,270 Trust Receipts, Class R, Series 16 HH, 10.094% due 7/01/2013 (d)(g) 3,041 BBB+ Baa3 2,900 Puerto Rico Public Finance Corporation, Commonwealth Appropriation Revenue Bonds, Series E, 5.75% due 8/01/2030 3,090 Total Municipal Bonds (Cost--$236,562)--142.1% 260,435
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Schedule of Investments (concluded) (In Thousands)
Shares Held Short-Term Securities Value 8,509 CMA Michigan Municipal Money Fund (h) $ 8,509 Total Short-Term Securities (Cost--$8,509)--4.7% 8,509 Total Investments (Cost--$245,071)--146.8% 268,944 Unrealized Depreciation on Forward Interest Rate Swaps--Net***--(0.1%) (104) Other Assets Less Liabilities--1.9% 3,406 Preferred Stock, at Redemption Value--(48.6%) (89,009) --------- Net Assets Applicable to Common Stock--100.0% $ 183,237 ========= (a)AMBAC Insured. (b)Escrowed to maturity. (c)FGIC Insured. (d)FSA Insured. (e)MBIA Insured. (f)Prerefunded. (g)The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at October 31, 2003. (h)Investments in companies considered to be an affiliate of the Fund (such companies are defined as "Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940) are as follows: (in Thousands) Net Dividend Affiliate Activity Income CMA Michigan Municipal Money Fund 8,509 $30 *Not Rated. **Represents a zero coupon bond; the interest rate shown reflects the effective yield at the time of purchase by the Fund. ***Forward interest rate swaps entered into as of October 31, 2003 were as follows: (in Thousands) Unrealized Notional Appreciation/ Amount (Depreciation) Receive a variable rate equal to 7-Day Bond Market Association Municipal Swap Index Rate and pay a fixed rate equal to 3.741% Broker, J.P. Morgan Chase Bank Expires December 2013 $6,750 $ (14) Receive a variable rate equal to 3-Month LIBOR at quarterly reset date and pay a fixed rate equal to 5.025% Broker, Morgan Stanley Capital Services, Inc. Expires January 2014 $7,000 (133) Receive a variable rate equal to 7-Day Bond Market Association Municipal Swap Index Rate and pay a fixed rate equal to 3.832% Broker, J.P. Morgan Chase Bank Expires February 2014 $7,000 (35) Receive a variable rate equal to 7-Day Bond Market Association Municipal Swap Index Rate and pay a fixed rate equal to 4.14% Broker, Morgan Stanley Capital Services, Inc. Expires December 2023 $7,000 130 Receive a variable rate equal to 7-Day Bond Market Association Municipal Swap Index Rate and pay a fixed rate equal to 4.3295% Broker, J.P. Morgan Chase Bank Expires January 2024 $7,000 (52) ------ Total $(104) ====== ++Ratings of issues shown are unaudited. See Notes to Financial Statements.
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Statement of Net Assets
As of October 31, 2003 Assets Investments, at value (identified cost--$245,071,490) $ 268,943,842 Cash 9,032 Receivables: Interest $ 5,186,499 Dividends from affiliates 93 5,186,592 --------------- Prepaid expenses 6,287 --------------- Total assets 274,145,753 --------------- Liabilities Unrealized depreciation on forward interest rate swaps--net 103,882 Payables: Securities purchased 1,502,323 Dividends to Common Stock shareholders 133,483 Investment adviser 126,194 Other affiliates 1,932 1,763,932 --------------- Accrued expenses 31,525 --------------- Total liabilities 1,899,339 --------------- Preferred Stock Preferred Stock, par value $.05 per share on Series A Shares and $.10 per share on Series B Shares (2,200 Series A Shares and 1,360 Series B Shares of AMPS* issued and outstanding at $25,000 per share liquidation preference) 89,009,394 --------------- Net Assets Applicable to Common Stock Net assets applicable to Common Stock $ 183,237,020 =============== Analysis of Net Assets Applicable to Common Stock Common Stock, par value $.10 per share (12,046,592 shares issued and outstanding) $ 1,204,659 Paid-in capital in excess of par 164,038,928 Undistributed investment income--net $ 2,413,016 Accumulated realized capital losses on investments--net (8,188,053) Unrealized appreciation on investments--net 23,768,470 --------------- Total accumulated earnings--net 17,993,433 --------------- Total--Equivalent to $15.21 net asset value per share of Common Stock (market price--$13.75) $ 183,237,020 =============== *Auction Market Preferred Stock. See Notes to Financial Statements.
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Statement of Operations
For the Year Ended October 31, 2003 Investment Income Interest $ 14,189,332 Dividends from affiliates 30,186 --------------- Total income 14,219,518 --------------- Expenses Investment advisory fees $ 1,367,223 Commission fees 225,833 Accounting services 103,932 Professional fees 41,647 Transfer agent fees 40,404 Printing and shareholder reports 33,442 Directors' fees and expenses 19,399 Custodian fees 18,131 Other expenses 30,672 --------------- Total expenses before reimbursement 1,880,683 Reimbursement of expenses (30,649) --------------- Total expenses after reimbursement 1,850,034 --------------- Investment income--net 12,369,484 --------------- Realized & Unrealized Gain on Investments--Net Realized gain on investments--net 431,296 Change in unrealized appreciation on investments--net 2,466,510 --------------- Total realized and unrealized gain on investments--net 2,897,806 --------------- Dividends to Preferred Stock Shareholders Investment income--net (867,422) --------------- Net Increase in Net Assets Resulting from Operations $ 14,399,868 =============== See Notes to Financial Statements.
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Statements of Changes in Net Assets
For the Year Ended October 31, Increase (Decrease) in Net Assets: 2003 2002 Operations Investment income--net $ 12,369,484 $ 9,812,846 Realized gain (loss) on investments--net 431,296 (929,471) Change in unrealized appreciation/depreciation on investments--net 2,466,510 1,530,416 Dividends to Preferred Stock shareholders (867,422) (939,553) --------------- --------------- Net increase in net assets resulting from operations 14,399,868 9,474,238 --------------- --------------- Dividends to Common Stock Shareholders Investment income--net (10,769,653) (8,229,879) --------------- --------------- Net decrease in net assets resulting from dividends to Common Stock shareholders (10,769,653) (8,229,879) --------------- --------------- Common Stock Transactions Proceeds from issuance of Common Stock resulting from reorganization -- 59,863,668 --------------- --------------- Net Assets Applicable to Common Stock Total increase in net assets 3,630,215 61,108,027 Beginning of year 179,606,805 118,498,778 --------------- --------------- End of year* $ 183,237,020 $ 179,606,805 =============== =============== *Undistributed investment income--net $ 2,413,016 $ 1,726,522 =============== =============== See Notes to Financial Statements.
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Financial Highlights
The following per share data and ratios have been derived from information provided in the financial statements. For the Year Ended October 31, Increase (Decrease) in Net Asset Value: 2003 2002 2001+++ 2000+++ 1999+++ Per Share Operating Performance Net asset value, beginning of year $ 14.91 $ 14.97 $ 13.83 $ 13.34 $ 15.85 ---------- ---------- ---------- ---------- ---------- Investment income--net 1.02++ 1.00 1.00 1.04 1.02 Realized and unrealized gain (loss) on investments--net .24 (.07) 1.15 .51 (1.96) Dividends and distributions to Preferred Stock shareholders: Investment income--net (.07) (.10) (.22) (.29) (.18) Realized gain on investments--net -- -- -- -- (.01) In excess of realized gain on investments--net -- -- -- -- (.06) ---------- ---------- ---------- ---------- ---------- Total from investment operations 1.19 .83 1.93 1.26 (1.19) ---------- ---------- ---------- ---------- ---------- Less dividends and distributions to Common Stock shareholders: Investment income--net (.89) (.89) (.79) (.77) (.88) Realized gain on investments--net -- -- -- -- (.05) In excess of realized gain on investments--net -- -- -- -- (.39) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions to Common Stock shareholders (.89) (.89) (.79) (.77) (1.32) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 15.21 $ 14.91 $ 14.97 $ 13.83 $ 13.34 ========== ========== ========== ========== ========== Market price per share, end of year $ 13.75 $ 13.45 $ 13.85 $ 11.75 $ 12.25 ========== ========== ========== ========== ========== Total Investment Return* Based on market price per share 9.06% 3.70% 25.13% 2.47% (16.42%) ========== ========== ========== ========== ========== Based on net asset value per share 8.82% 6.36% 14.91% 10.76% (8.12%) ========== ========== ========== ========== ========== Ratios Based on Average Net Assets of Common Stock Total expenses, net of reimbursement** 1.01% 1.12% 1.15% 1.15% 1.12% ========== ========== ========== ========== ========== Total expenses** 1.02% 1.12% 1.15% 1.15% 1.12% ========== ========== ========== ========== ========== Total investment income--net** 6.73% 6.91% 6.96% 7.62% 6.96% ========== ========== ========== ========== ========== Amount of dividends to Preferred Stock shareholders .47% .66% 1.53% 2.12% 1.20% ========== ========== ========== ========== ========== Investment income--net, to Common Stock shareholders 6.26% 6.25% 5.43% 5.50% 5.76% ========== ========== ========== ========== ========== Ratios Based on Average Net Assets of Common & Preferred Stock** Total expenses, net of reimbursement .68% .75% .77% .75% .76% ========== ========== ========== ========== ========== Total expenses .69% .75% .77% .75% .76% ========== ========== ========== ========== ========== Total investment income--net 4.53% 4.65% 4.70% 5.02% 4.73% ========== ========== ========== ========== ========== Ratios Based on Average Net Assets of Preferred Stock Dividends to Preferred Stock shareholders .97% 1.36% 3.19% 4.09% 2.55% ========== ========== ========== ========== ==========
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Financial Highlights (concluded)
The following per share data and ratios have been derived from information provided in the financial statements. For the Year Ended October 31, Increase (Decrease) in Net Asset Value: 2003 2002 2001+++ 2000+++ 1999+++ Supplemental Data Net assets applicable to Common Stock, end of year(in thousands) $ 183,237 $ 179,607 $ 118,508 $ 109,398 $ 105,574 ========== ========== ========== ========== ========== Preferred Stock outstanding, end of year (in thousands) $ 89,000 $ 89,000 $ 55,000 $ 55,000 $ 55,000 ========== ========== ========== ========== ========== Portfolio turnover 30.84% 41.77% 72.58% 75.11% 63.64% ========== ========== ========== ========== ========== Leverage Asset coverage per $1,000 $ 3,059 $ 3,018 $ 3,155 $ 2,989 $ 2,920 ========== ========== ========== ========== ========== Dividends Per Share on Preferred Stock Outstanding++++ Series A--Investment income--net $ 243 $ 343 $ 798 $ 1,026 $ 637 ========== ========== ========== ========== ========== Series B--Investment income--net $ 245 $ 136 -- -- -- ========== ========== ========== ========== ========== *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. ++Based on average shares outstanding. ++++The Fund's Preferred Stock was issued on April 10, 1992 (Series A) and May 31, 2002 (Series B). +++Certain prior year amounts have been reclassified to conform to current year presentation. See Notes to Financial Statements.
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Notes to Financial Statements 1. Significant Accounting Policies: MuniYield Michigan Insured Fund II, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a non- diversified, closed-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. The Fund determines and makes available for publication the net asset value of its Common Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange under the symbol MYM. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Municipal bonds are traded primarily in the over-the-counter markets and are valued at the last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained by the Fund's pricing service from one or more dealers that make markets in such securities. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their closing price as of the close of such exchanges. Options written or purchased are valued at the last sale price in the case of exchange-traded options. In the case of options traded in the over-counter-market, valuation is the last asked price (options written) or the last bid price (options purchased). Swap agreements are valued by quoted fair values received daily by the Fund from the counterparty. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund, including valuations furnished by a pricing service retained by the Fund, which may utilize a matrix system for valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Fund under general supervision of the Board of Directors. (b) Derivative financial instruments--The Fund may engage in various portfolio investment strategies both to increase the return of the Fund and to hedge, or protect, its exposure to interest rate movements and movements in the securities markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The Fund may purchase or sell financial futures contracts and options on such futures contracts. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. * Options--The Fund is authorized to write covered call options and purchase put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. * Forward interest rate swaps--The Fund may enter into forward interest rate swaps. In a forward interest rate swap, the Fund and the counterparty agree to make periodic net payments on a specified notional contract amount, commencing on a specified future effective date, unless terminated earlier. When the agreement is closed, the Fund records a realized gain or loss in an amount equal to the value of the agreement. MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Notes to Financial Statements (continued) (c) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Interest income is recognized on the accrual basis. The Fund amortizes all premiums and discounts on debt securities. (e) Dividends and distributions--Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. (f) Reclassification--Accounting principles generally accepted in the United States of America require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, the current year's permanent book/tax difference of $45,915 has been reclassified between undistributed net investment income and paid-in capital in excess of par. This reclassification has no effect on net assets or net asset value per share. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. FAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at an annual rate of .50% of the Fund's average weekly net assets, including proceeds from the issuance of Preferred Stock. For the year ended October 31, 2003, FAM reimbursed the Fund in the amount of $30,649. For the year ended October 31, 2003, the Fund reimbursed FAM $5,908 for certain accounting services. Certain officers and/or directors of the Fund are officers and/or directors of FAM, PSI, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended October 31, 2003 were $80,781,348, and $83,291,197, respectively. Net realized gains (losses) for year ended October 31, 2003 and net unrealized gains (losses) as of October 31, 2003 were as follows: Realized Unrealized Gains (Losses) Gains (Losses) Long-term investments $ 1,563,964 $ 23,872,352 Financial futures contracts (1,740,684) -- Forward interest rate swaps 608,016 (103,882) -------------- -------------- Total $ 431,296 $ 23,768,470 ============== ============== As of October 31, 2003, net unrealized appreciation for Federal income tax purposes aggregated $24,002,949, of which $24,800,750 related to appreciated securities and $797,801 related to depreciated securities. The aggregate cost of investments at October 31, 2003 for Federal income tax purposes was $244,940,893. 4. Stock Transactions: The Fund is authorized to issue 200,000,000 shares of stock, including Preferred Stock, par value $.10 per share, all of which were initially classified as Common Stock. The Board of Directors is authorized, however, to reclassify any unissued shares of stock without approval of the holders of Common Stock. Common Stock Shares issued and outstanding during the year ended October 31, 2003 remained constant and during the year ended October 31, 2002 increased by 4,130,421 as a result of reorganization. MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Notes to Financial Statements (concluded) Preferred Stock Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the Fund, with a par value of $.05 per share for Series A and $.10 per share for Series B, and a liquidation preference of $25,000 per share plus accrued and unpaid dividends, that entitle their holders to receive cash dividends at an annual rate that may vary for the successive dividend periods. The yields in effect at October 31, 2003 were .89% for Series A and .90% for Series B. Shares issued and outstanding during the year ended October 31, 2003 remained constant and for the year ended October 31, 2002 increased by 1,360 as a result of reorganization. The Fund pays commissions to certain broker-dealers at the end of each auction at an annual rate ranging from .25% to .375%, calculated on the proceeds of each auction. For the year ended October 31, 2003, Merrill Lynch, Pierce Fenner & Smith Incorporated, an affiliate of FAM, earned $121,792 as commissions. 5. Distributions to Shareholders: The Fund paid a tax-exempt income dividend to holders of Common Stock in the amount of $.074500 per share on November 26, 2003 to shareholders of record on November 14, 2003. The tax character of distributions paid during the fiscal years ended October 31, 2003 and October 31, 2002 was as follows: 10/31/2003 10/31/2002 Distributions paid from: Tax-exempt income $ 11,637,075 $ 9,169,432 -------------- -------------- Total distributions $ 11,637,075 $ 9,169,432 ============== ============== As of October 31, 2003, the components of accumulated earnings on a tax basis were as follows: Undistributed tax-exempt income--net $ 2,282,239 Undistributed long-term capital gains--net -- -------------- Total undistributed earnings--net 2,282,239 Capital loss carryforward (5,390,016)* Unrealized gains--net 21,101,210** -------------- Total accumulated earnings--net $ 17,993,433 ============== *On October 31, 2003, the Fund had a net capital loss carryforward of $5,390,016, of which $4,339,763 expires in 2008 and $1,050,253 expires in 2010. This amount will be available to offset like amounts of any future taxable gains. **The difference between book-basis and tax-basis net unrealize gains is attributable primarily to the tax deferral of losses on wash sales, the tax deferral of losses on straddles and the difference between book and tax amortization methods for premiums and discounts on fixed income securities. MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Independent Auditors' Report To the Shareholders and Board of Directors of MuniYield Michigan Insured Fund II, Inc.: We have audited the accompanying statement of net assets, including the schedule of investments, of MuniYield Michigan Insured Fund II, Inc. as of October 31, 2003, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2003, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MuniYield Michigan Insured Fund II, Inc. as of October 31, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Princeton, New Jersey December 17, 2003 MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Automatic Dividend Reinvestment Plan The following description of the Fund's Automatic Dividend Reinvestment Plan (the "Plan") is sent to you annually as required by Federal securities laws. Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects, all dividend and capital gains distributions will be automatically reinvested by The Bank of New York (the "Plan Agent"), as agent for shareholders in administering the Plan, in additional shares of Common Stock of the Fund. Holders of Common Stock who elect not to participate in the Plan will receive all distributions in cash paid by check mailed directly to the shareholder of record (or, if the shares are held in street or other nominee name then to such nominee) by The Bank of New York, as dividend paying agent. Such participants may elect not to participate in the Plan and to receive all distributions of dividends and capital gains in cash by sending written instructions to The Bank of New York, as dividend paying agent, at the address set forth below. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by written notice if received by the Plan Agent not less than ten days prior to any dividend record date; otherwise such termination will be effective with respect to any subsequently declared dividend or distribution. Whenever the Fund declares an income dividend or capital gains distribution (collectively referred to as "dividends") payable either in shares or in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in shares of Common Stock. The shares will be 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 Common Stock from the Fund ("newly issued shares") or (ii) by purchase of outstanding shares of Common Stock on the open market ("open-market purchases") on the New York Stock Exchange or elsewhere. If on the payment date for the dividend, the net asset value per share of the Common Stock is equal to or less than the market price per share of the Common Stock plus estimated brokerage commissions (such conditions being referred to herein as "market premium"), the Plan Agent will invest the dividend amount in newly issued shares on behalf of the participant. The number of newly issued shares of Common Stock to be credited to the participant's account will be determined by dividing the dollar amount of the dividend by the net asset value per share on the date the shares are issued, provided that the maximum discount from the then current market price per share on the date of issuance may not exceed 5%. If on the dividend payment date the net asset value per share is greater than the market value (such condition being referred to herein as "market discount"), the Plan Agent will invest 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 will have 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. It is contemplated that the Fund will pay monthly income dividends. Therefore, the period during which open- market purchases can be made will exist only from the payment date on the dividend through the date before the next "ex-dividend" date, which typically will be approximately ten days. If, before the Plan Agent has completed its open-market purchases, the market price of a share of 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 acquisitions of fewer shares than if the dividend had been paid in newly issued shares on the dividend payment date. Because of the foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend amount in open-market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Agent will cease making open-market purchases and will invest the uninvested portion of the dividend amount in newly issued shares at the close of business on the last purchase date determined by dividing the uninvested portion of the dividend by the net asset value per share. MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Automatic Dividend Reinvestment Plan (concluded) The Plan Agent maintains all shareholders' accounts in the Plan and furnishes written confirmation of all transactions in the account, including information needed by shareholders for tax records. Shares in the account of each Plan participant will be held by the Plan Agent in non-certificated form in the name of the participant, and each shareholder's proxy will include those shares purchased or received pursuant to the Plan. The Plan Agent will forward all proxy solicitation materials to participants and vote proxies for shares held pursuant to the Plan in accordance with the instructions of the participants. In the case of shareholders such as banks, brokers or nominees which hold shares of others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of shares certified from time to time by the record shareholders as representing the total amount registered in the record shareholder's name and held for the account of beneficial owners who are to participate in the Plan. There will be no brokerage charges with respect to shares issued directly by the Fund as a result of dividends or capital gains distributions payable either in shares or in cash. However, each participant will pay 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 will not relieve participants of any Federal, state or local income tax that may be payable (or required to be withheld) on such dividends. Shareholders participating in the Plan may receive benefits not available to shareholders not participating in the Plan. If the market price plus commissions of the Fund's shares is above the net asset value, participants in the Plan will receive shares of the Fund at less than they could otherwise purchase them and will have shares with a cash value greater than the value of any cash distribution they would have received on their shares. If the market price plus commissions is below the net asset value, participants will receive distributions in shares with a net asset value greater than the value of any cash distribution they would have received on their shares. However, there may be insufficient shares available in the market to make distributions in shares at prices below the net asset value. Also, since the Fund does not redeem shares, the price on resale may be more or less than the net asset value. The value of shares acquired pursuant to the Plan will generally be excluded from gross income to the extent that the cash amount reinvested would be excluded from gross income. If, when the 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 the shareholders, including shareholders who do not participate in the Plan. Thus, shareholders who do not participate in the Plan might be required to report as ordinary income a portion of their distributions equal to their allocable share of the discount. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. All correspondence concerning the Plan should be directed to the Plan Agent at The Bank of New York, Church Street Station, P.O. Box 11258, New York , NY 10286-1258, Telephone: 800-432-8224. MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Officers and Directors (unaudited)
Number of Portfolios in Other Public Position(s) Length Fund Complex Directorships Held Of Time Overseen by Held by Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director Interested Director Terry K. Glenn* President 1999 to President and Chairman of Merrill Lynch 124 Funds None P.O. Box 9011 and present Investment Managers, L.P. ("MLIM")/Fund 163 Portfolios Princeton, Director and Asset Management, L.P. ("FAM")--Advised NJ 08543-9011 1993 to Funds since 1999; Chairman (Americas Age: 63 present Region) of MLIM from 2000 to 2002; Executive Vice President of MLIM and FAM (which terms as used herein include their corporate predecessors) from 1983 to 2002; President of FAM Distributors, Inc. ("FAMD") from 1986 to 2002 and Director thereof from 1991 to 2002; Executive Vice President and Director of Princeton Services, Inc. ("Princeton Services") from 1993 to 2002; President of Princeton Administrators, L.P. from 1989 to 2002; 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 MLIM or FAM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of the Fund based on his former positions with MLIM, FAM, FAMD, Princeton Services and Princeton Administrators, L.P. The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board of Directors. Independent Directors* James H. Bodurtha Director 1995 to Director, The China Business Group, Inc. 40 Funds None P.O. Box 9095 present since 1996 and Executive Vice President 59 Portfolios Princeton, thereof from 1996 to 2003; Chairman of NJ 08543-9095 the Board, Berkshire Holding Corporation Age: 59 since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993. Joe Grills Director 2002 to Member of the Committee of Investment of 40 Funds Kimco Realty P.O. Box 9095 present Employee Benefit Assets of the Association 59 Portfolios Corporation Princeton, of Financial Professionals ("CIEBA") since NJ 08543-9095 1986 and its Chairman from 1991 to 1992; Age: 68 Member of the Investment Advisory Committees of the State of New York Common Retirement Fund 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 from 1995 to 2001; Director, Kimco Realty Corporation since 1997; Member of the Investment Advisory Committee of the Virginia Retirement System since 1998 and Vice Chairman thereof since 2002; Director, Montpelier Foundation since 1998 and Vice Chairman thereof 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.
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Officers and Directors (unaudited)(continued)
Number of Portfolios in Other Public Position(s) Length Fund Complex Directorships Held Of Time Overseen by Held by Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director Independent Directors (concluded)* Herbert I. London Director 1992 to John M. Olin Professor of Humanities, New 40 Funds None P.O. Box 9095 present York University since 1993 and Professor 59 Portfolios Princeton, thereof since 1980; President of Hudson NJ 08543-9095 Institute since 1997 and Trustee thereof Age: 64 since 1980. Andre F. Perold Director 1992 to George Gund Professor of Finance and 40 Funds None P.O. Box 9095 present Banking, Harvard Business School since 59 Portfolios Princeton, 2000 and a member of the faculty since NJ 08543-9095 1979; Director and Chairman of the Board, Age: 51 UNX, Inc. since 2003; Director, Sanlam Limited and Sanlam Life since 2001; Director, Genbel Securities and Gensec Bank since 1999; Director, Stockback.com from 2002 to 2002; Director, Bulldogresearch.com from 2000 to 2001; Director, Sanlam Investment Management from 1999 to 2001; Director, Quantec Limited from 1991 to 1999. Roberta Cooper Ramo Director 1999 to Shareholder, Modrall, Sperling, Roehl, 40 Funds None P.O. Box 9095 present Harris & Sisk, P.A. since 1993; Director 59 Portfolios Princeton, of Cooper's, Inc. since 1999 and Chairman NJ 08543-9095 of the Board since 2000; Director of ECMC, Age: 61 Inc. since 2001. Robert S. Salomon, Jr. Director 2002 to Principal of STI Management since 1994, 40 Funds None P.O. Box 9095 present Trustee of Commonfund from 1980 to 2001; 59 Portfolios Princeton, Director of Rye Country Day School since NJ 08543-9095 2001. Age: 66 Stephen B. Swensrud Director 2002 to Chairman, Fernwood Advisors (investment 41 Funds None P.O. Box 9095 present adviser) since 1996; Principal of Fernwood 60 Portfolios Princeton, Associates (financial consultant) since NJ 08543-9095 1975; Chairman of RPP Corporation since Age: 70 1978; Director, International Mobile Communications, Inc. since 1998. * The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Officers and Directors (unaudited)(concluded)
Position(s) Length Held Of Time Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Fund Officers Donald C. Burke Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since P.O. Box 9011 President present 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Princeton, and and Vice President of FAMD since 1999; Director of MLIM Taxation since 1990. NJ 08543-9011 Treasurer 1999 to Age: 43 present Kenneth A. Jacob Senior 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund P.O. Box 9011 Vice present Management) of MLIM from 1997 to 2000. Princeton, President NJ 08543-9011 Age: 52 John M. Loffredo Senior 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund P.O. Box 9011 Vice present Management) of MLIM from 1998 to 2000. Princeton, President NJ 08543-9011 Age: 39 Fred K. Steube Vice 1995 to Director (Municipal Tax-Exempt Fund Management) of MLIM since 2000; Vice P.O. Box 9011 President present President of MLIM from 1994 to 2000. Princeton, NJ 08543-9011 Age: 53 Brian D. Stewart Secretary 2003 to Vice President (Legal Advisory) of MLIM since 2002; Attorney with Reed Smith P.O. Box 9011 present from 2001 to 2002; Attorney with Saul Ewing from 1999 to 2001. Princeton, NJ 08543-9011 Age: 34 * Officers of the Fund serve at the pleasure of the Board of Directors.
Custodian The Bank of New York 100 Church Street New York, NY 10286 Transfer Agents Common Stock: The Bank of New York 101 Barclay Street New York, NY 10286 Preferred Stock: The Bank of New York 100 Church Street New York, NY 10286 NYSE Symbol MYM MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Important Tax Information (unaudited) All of the net investment income distributions paid by MuniYield Michigan Insured Fund II, Inc. during its taxable year ended October 31, 2003 qualify as tax-exempt interest dividends for Federal income tax purposes. Please retain this information for your records. Dividend Policy The Fund's dividend policy is to distribute all or a portion of its net investment income to its shareholders on a monthly basis. In order to provide shareholders with a more stable level of dividend distributions, the Fund may at times pay out less than the entire amount of net investment income earned in any particular month and may at times in any month pay out such accumulated but undistributed income in addition to net investment income earned in that month. As a result, the dividends paid by the Fund for any particular month may be more or less than the amount of net investment income earned by the Fund during such month. The Fund's current accumulated but undistributed net investment income, if any, is disclosed in the Statement of Net Assets, which comprises part of the Financial Information included in this report. MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Quality Profile (unaudited) The quality ratings of securities in the Fund as of October 31, 2003 were as follows: Percent of S&P Rating/Moody's Rating Total Investments AAA/Aaa 85.0% AA/Aa 0.3 A/A 2.5 BBB/Baa 8.7 BB/Ba 0.3 NR (Not Rated) 3.2 MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Electronic Delivery The Fund is now offering electronic delivery of communications to its shareholders. In order to receive this service, you must register your account and provide us with e-mail information. To sign up for this service, simply access this website http://www.icsdelivery.com/live and follow the instructions. When you visit this site, you will obtain a personal identification number (PIN). You will need this PIN should you wish to update your e-mail address, choose to discontinue this service and/or make any other changes to the service. This service is not available for certain retirement accounts at this time. MUNIYIELD MICHIGAN INSURED FUND II, INC., OCTOBER 31, 2003 Item 2 - Did registrant adopt a code of ethics, as of the end of the period covered by this report, that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party? If not, why not? Briefly describe any amendments or waivers that occurred during the period. State here if code of ethics/amendments/waivers are on website and give website address-. State here if fund will send code of ethics to shareholders without charge upon request-- The registrant has adopted a code of ethics, as of the end of the period covered by this report, that applies to the registrant's principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. A copy of the code of ethics is available without charge upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863). Item 3 - Did the registrant's board of directors determine that the registrant either: (i) has at least one audit committee financial expert serving on its audit committee; or (ii) does not have an audit committee financial expert serving on its audit committee? If yes, disclose name of financial expert and whether he/she is "independent," (fund may, but is not required, to disclose name/ independence of more than one financial expert) If no, explain why not. - The registrant's board of directors has determined that (i) the registrant has the following audit committee financial experts serving on its audit committee and (ii) each audit committee financial expert is independent: (1) Joe Grills, (2) Andre Perold, (3) Robert S. Salomon, Jr., and (4) Stephen B. Swensrud. Item 4 - Disclose annually only (not answered until December 15, 2003) (a) Audit Fees - Disclose aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. N/A. (b) Audit-Related Fees - Disclose aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (c) Tax Fees - Disclose aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (d) All Other Fees - Disclose aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. N/A. (e)(2) Disclose the percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. N/A. (f) If greater than 50%, disclose the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. N/A. (g) Disclose the aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant. N/A. (h) Disclose whether the registrant's audit committee has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any subadviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. N/A. Item 5 - If the registrant is a listed issuer as defined in Rule 10A-3 under the Exchange Act, state whether or not the registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. If the registrant has such a committee, however designated, identify each committee member. If the entire board of directors is acting as the registrant's audit committee in Section 3(a)(58)(B) of the Exchange Act, so state. If applicable, provide the disclosure required by Rule 10A-3(d) under the Exchange Act regarding an exemption from the listing standards for audit committees. N/A (Listed issuers must be in compliance with the new listing rules by the earlier of their first annual shareholders meeting after January 2004, or October 31, 2004 (annual requirement)) Item 6 - Reserved Item 7 - For closed-end funds that contain voting securities in their portfolio, describe the policies and procedures that it uses to determine how to vote proxies relating to those portfolio securities. Proxy Voting Policies and Procedures Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch Investment Managers, L.P. and/or Fund Asset Management, L.P. (the "Investment Adviser") authority to vote all proxies relating to the Fund's portfolio securities. The Investment Adviser has adopted policies and procedures ("Proxy Voting Procedures") with respect to the voting of proxies related to the portfolio securities held in the account of one or more of its clients, including a Fund. Pursuant to these Proxy Voting Procedures, the Investment Adviser's primary objective when voting proxies is to make proxy voting decisions solely in the best interests of each Fund and its shareholders, and to act in a manner that the Investment Adviser believes is most likely to enhance the economic value of the securities held by the Fund. The Proxy Voting Procedures are designed to ensure that that the Investment Adviser considers the interests of its clients, including the Funds, and not the interests of the Investment Adviser, when voting proxies and that real (or perceived) material conflicts that may arise between the Investment Adviser's interest and those of the Investment Adviser's clients are properly addressed and resolved. In order to implement the Proxy Voting Procedures, the Investment Adviser has formed a Proxy Voting Committee (the "Committee"). The Committee is comprised of the Investment Adviser's Chief Investment Officer (the "CIO"), one or more other senior investment professionals appointed by the CIO, portfolio managers and investment analysts appointed by the CIO and any other personnel the CIO deems appropriate. The Committee will also include two non- voting representatives from the Investment Adviser's Legal department appointed by the Investment Adviser's General Counsel. The Committee's membership shall be limited to full-time employees of the Investment Adviser. No person with any investment banking, trading, retail brokerage or research responsibilities for the Investment Adviser's affiliates may serve as a member of the Committee or participate in its decision making (except to the extent such person is asked by the Committee to present information to the Committee, on the same basis as other interested knowledgeable parties not affiliated with the Investment Adviser might be asked to do so). The Committee determines how to vote the proxies of all clients, including a Fund, that have delegated proxy voting authority to the Investment Adviser and seeks to ensure that all votes are consistent with the best interests of those clients and are free from unwarranted and inappropriate influences. The Committee establishes general proxy voting policies for the Investment Adviser and is responsible for determining how those policies are applied to specific proxy votes, in light of each issuer's unique structure, management, strategic options and, in certain circumstances, probable economic and other anticipated consequences of alternate actions. In so doing, the Committee may determine to vote a particular proxy in a manner contrary to its generally stated policies. In addition, the Committee will be responsible for ensuring that all reporting and recordkeeping requirements related to proxy voting are fulfilled. The Committee may determine that the subject matter of a recurring proxy issue is not suitable for general voting policies and requires a case-by-case determination. In such cases, the Committee may elect not to adopt a specific voting policy applicable to that issue. The Investment Adviser believes that certain proxy voting issues require investment analysis - such as approval of mergers and other significant corporate transactions - akin to investment decisions, and are, therefore, not suitable for general guidelines. The Committee may elect to adopt a common position for the Investment Adviser on certain proxy votes that are akin to investment decisions, or determine to permit the portfolio manager to make individual decisions on how best to maximize economic value for a Fund (similar to normal buy/sell investment decisions made by such portfolio managers). While it is expected that the Investment Adviser will generally seek to vote proxies over which the Investment Adviser exercises voting authority in a uniform manner for all the Investment Adviser's clients, the Committee, in conjunction with a Fund's portfolio manager, may determine that the Fund's specific circumstances require that its proxies be voted differently. To assist the Investment Adviser in voting proxies, the Committee has retained Institutional Shareholder Services ("ISS"). ISS is an independent adviser that specializes in providing a variety of fiduciary-level proxy-related services to institutional investment managers, plan sponsors, custodians, consultants, and other institutional investors. The services provided to the Investment Adviser by ISS include in-depth research, voting recommendations (although the Investment Adviser is not obligated to follow such recommendations), vote execution, and recordkeeping. ISS will also assist the Fund in fulfilling its reporting and recordkeeping obligations under the Investment Company Act. The Investment Adviser's Proxy Voting Procedures also address special circumstances that can arise in connection with proxy voting. For instance, under the Proxy Voting Procedures, the Investment Adviser generally will not seek to vote proxies related to portfolio securities that are on loan, although it may do so under certain circumstances. In addition, the Investment Adviser will vote proxies related to securities of foreign issuers only on a best efforts basis and may elect not to vote at all in certain countries where the Committee determines that the costs associated with voting generally outweigh the benefits. The Committee may at any time override these general policies if it determines that such action is in the best interests of a Fund. From time to time, the Investment Adviser may be required to vote proxies in respect of an issuer where an affiliate of the Investment Adviser (each, an "Affiliate"), or a money management or other client of the Investment Adviser (each, a "Client") is involved. The Proxy Voting Procedures and the Investment Adviser's adherence to those procedures are designed to address such conflicts of interest. The Committee intends to strictly adhere to the Proxy Voting Procedures in all proxy matters, including matters involving Affiliates and Clients. If, however, an issue representing a non- routine matter that is material to an Affiliate or a widely known Client is involved such that the Committee does not reasonably believe it is able to follow its guidelines (or if the particular proxy matter is not addressed by the guidelines) and vote impartially, the Committee may, in its discretion for the purposes of ensuring that an independent determination is reached, retain an independent fiduciary to advise the Committee on how to vote or to cast votes on behalf of the Investment Adviser's clients. In the event that the Committee determines not to retain an independent fiduciary, or it does not follow the advice of such an independent fiduciary, the powers of the Committee shall pass to a subcommittee, appointed by the CIO (with advice from the Secretary of the Committee), consisting solely of Committee members selected by the CIO. The CIO shall appoint to the subcommittee, where appropriate, only persons whose job responsibilities do not include contact with the Client and whose job evaluations would not be affected by the Investment Adviser's relationship with the Client (or failure to retain such relationship). The subcommittee shall determine whether and how to vote all proxies on behalf of the Investment Adviser's clients or, if the proxy matter is, in their judgment, akin to an investment decision, to defer to the applicable portfolio managers, provided that, if the subcommittee determines to alter the Investment Adviser's normal voting guidelines or, on matters where the Investment Adviser's policy is case-by-case, does not follow the voting recommendation of any proxy voting service or other independent fiduciary that may be retained to provide research or advice to the Investment Adviser on that matter, no proxies relating to the Client may be voted unless the Secretary, or in the Secretary's absence, the Assistant Secretary of the Committee concurs that the subcommittee's determination is consistent with the Investment Adviser's fiduciary duties In addition to the general principles outlined above, the Investment Adviser has adopted voting guidelines with respect to certain recurring proxy issues that are not expected to involve unusual circumstances. These policies are guidelines only, and the Investment Adviser may elect to vote differently from the recommendation set forth in a voting guideline if the Committee determines that it is in a Fund's best interest to do so. In addition, the guidelines may be reviewed at any time upon the request of a Committee member and may be amended or deleted upon the vote of a majority of Committee members present at a Committee meeting at which there is a quorum. The Investment Adviser has adopted specific voting guidelines with respect to the following proxy issues: * Proposals related to the composition of the Board of Directors of issuers other than investment companies. As a general matter, the Committee believes that a company's Board of Directors (rather than shareholders) is most likely to have access to important, nonpublic information regarding a company's business and prospects, and is therefore best-positioned to set corporate policy and oversee management. The Committee, therefore, believes that the foundation of good corporate governance is the election of qualified, independent corporate directors who are likely to diligently represent the interests of shareholders and oversee management of the corporation in a manner that will seek to maximize shareholder value over time. In individual cases, the Committee may look at a nominee's history of representing shareholder interests as a director of other companies or other factors, to the extent the Committee deems relevant. * Proposals related to the selection of an issuer's independent auditors. As a general matter, the Committee believes that corporate auditors have a responsibility to represent the interests of shareholders and provide an independent view on the propriety of financial reporting decisions of corporate management. While the Committee will generally defer to a corporation's choice of auditor, in individual cases, the Committee may look at an auditors' history of representing shareholder interests as auditor of other companies, to the extent the Committee deems relevant. * Proposals related to management compensation and employee benefits. As a general matter, the Committee favors disclosure of an issuer's compensation and benefit policies and opposes excessive compensation, but believes that compensation matters are normally best determined by an issuer's board of directors, rather than shareholders. Proposals to "micro-manage" an issuer's compensation practices or to set arbitrary restrictions on compensation or benefits will, therefore, generally not be supported. * Proposals related to requests, principally from management, for approval of amendments that would alter an issuer's capital structure. As a general matter, the Committee will support requests that enhance the rights of common shareholders and oppose requests that appear to be unreasonably dilutive. * Proposals related to requests for approval of amendments to an issuer's charter or by-laws. As a general matter, the Committee opposes poison pill provisions. * Routine proposals related to requests regarding the formalities of corporate meetings. * Proposals related to proxy issues associated solely with holdings of investment company shares. As with other types of companies, the Committee believes that a fund's Board of Directors (rather than its shareholders) is best-positioned to set fund policy and oversee management. However, the Committee opposes granting Boards of Directors authority over certain matters, such as changes to a fund's investment objective, that the Investment Company Act envisions will be approved directly by shareholders. * Proposals related to limiting corporate conduct in some manner that relates to the shareholder's environmental or social concerns. The Committee generally believes that annual shareholder meetings are inappropriate forums for discussion of larger social issues, and opposes shareholder resolutions "micromanaging" corporate conduct or requesting release of information that would not help a shareholder evaluate an investment in the corporation as an economic matter. While the Committee is generally supportive of proposals to require corporate disclosure of matters that seem relevant and material to the economic interests of shareholders, the Committee is generally not supportive of proposals to require disclosure of corporate matters for other purposes. Item 8--Reserved Item 9(a) - The registrant's certifying officers have reasonably designed such disclosure controls and procedures to ensure material information relating to the registrant is made known to us by others particularly during the period in which this report is being prepared. The registrant's certifying officers have determined that the registrant's disclosure controls and procedures are effective based on our evaluation of these controls and procedures as of a date within 90 days prior to the filing date of this report. Item 9(b)--There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 10 - Exhibits 10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or amendments/waivers is on website or offered to shareholders upon request without charge. N/A. 10(b) - Attach certifications pursuant to Section 302 of the Sarbanes-Oxley Act. Attached hereto. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MuniYield Michigan Insured Fund II, Inc. By: _/s/ Terry K. Glenn_______ Terry K. Glenn, President of MuniYield Michigan Insured Fund II, Inc. Date: December 22, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: _/s/ Terry K. Glenn________ Terry K. Glenn, President of MuniYield Michigan Insured Fund II, Inc. Date: December 22, 2003 By: _/s/ Donald C. Burke________ Donald C. Burke, Chief Financial Officer of MuniYield Michigan Insured Fund II, Inc. Date: December 22, 2003 Attached hereto as a furnished exhibit are the certifications pursuant to Section 906 of the Sarbanes-Oxley Act.