MUNIHOLDINGS
CALIFORNIA
INSURED
FUND II, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
June 30, 1998
<PAGE>
MuniHoldings California Insured Fund II, Inc.
The Benefits and Risks of Leveraging
MuniHoldings California Insured Fund II, Inc. has the ability to leverage to
seek to enhance the yield and net asset value of its Common Stock. However,
these objectives cannot be achieved in all interest rate environments. To
leverage, the Fund issues Preferred Stock, which pays dividends at prevailing
short-term interest rates, and invests the proceeds in long-term municipal
bonds. The interest earned on these investments is paid to Common Stock
shareholders in the form of dividends, and the value of these portfolio holdings
is reflected in the per share net asset value of the Fund's Common Stock.
However, in order to benefit Common Stock shareholders, the yield curve must be
positively sloped; that is, short-term interest rates must be lower than
long-term interest rates. At the same time, a period of generally declining
interest rates will benefit Common Stock shareholders. If either of these
conditions change, then the risks of leveraging will begin to outweigh the
benefits.
To illustrate these concepts, assume a fund's Common Stock capitalization of
$100 million and the issuance of Preferred Stock for an additional $50 million,
creating a total value of $150 million available for investment in long-term
municipal bonds. If prevailing short-term interest rates are approximately 3%
and long-term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million of Preferred
Stock based on the lower short-term interest rates. At the same time, the fund's
total portfolio of $150 million earns the income based on long-term interest
rates. Of course, increases in short-term interest rates would reduce (and even
eliminate) the dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term investments,
and therefore the Common Stock shareholders are the beneficiaries of the
incremental yield. However, if short-term interest rates rise, narrowing the
differential between short-term and long-term interest rates, the incremental
yield pickup on the Common Stock will be reduced or eliminated completely. At
the same time, the market value of the fund's Common Stock (that is, its price
as listed on the New York Stock Exchange) may, as a result, decline.
Furthermore, if long-term interest rates rise, the Common Stock's net asset
value will reflect the full decline in the price of the portfolio's investments,
since the value of the fund's Preferred Stock does not fluctuate. In addition to
the decline in net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, interest rates 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.
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1998
DEAR SHAREHOLDER
We are pleased to provide you with this first annual report for MuniHoldings
California Insured Fund II, Inc. In this and future reports to shareholders, we
will highlight the Fund's performance, describe the recent investment
environment and outline investment activities. The Fund seeks to provide
shareholders with current income exempt from Federal and California income taxes
by investing in a portfolio of long-term, investment-grade municipal
obligations.
Since inception (February 27, 1998) through June 30, 1998, the Common Stock of
MuniHoldings California Insured Fund II, Inc. earned $0.276 per share income
dividends, which included earned and unpaid dividends of $0.065. This represents
a net annualized yield of 5.42%, based on a month-end per share net asset value
of $14.96. Over the same period, the total investment return on the Fund's
Common Stock was +1.15%, based on a change in per share net asset value from
$15.00 to $14.96, and assuming reinvestment of $0.211 per share income
dividends.
For the period February 27, 1998 through June 30, 1998, the Fund's Preferred
Stock had an average yield of 3.68% for Series A and 3.61% for Series B.
The Municipal Market Environment
Since inception (February 27, 1998) through June 30, 1998, long-term tax-exempt
revenue bond yields were little changed. Throughout the period, the near absence
of inflationary pressures continued to support low interest rates. However,
consistently strong domestic economic growth has caused some investors to fear
that the Federal Reserve Board will be forced eventually to raise short-term
interest rates. Such action would be taken to ensure that the US economy's
present rate of growth would decelerate before any inflationary pressures could
develop. These concerns pushed bond yields modestly higher by late April.
However, the weakening financial conditions in many Asian countries subsequently
calmed investor fears of Federal Reserve Board intervention, and fixed-income
prices again moved higher. Long-term uninsured municipal bond yields, as
measured by the Bond Buyer Revenue Bond Index, fell approximately 5 basis points
(0.05%) to end the June quarter at 5.34%. As in late 1997 and early 1998, US
Treasury bond yields benefited from a "flight to quality" as foreign investors
were drawn to the relative safe haven of US Government securities. Long-term US
Treasury bond yields declined approximately 30 basis points to end the June
quarter at 5.62%.
Thus far in 1998, the municipal bond market has experienced unexpectedly strong
supply pressures. These supply pressures have prevented tax-exempt bond yields
from declining as much as US Treasury bond yields. During the first six months
of 1998, more than $145 billion in new tax-exempt bonds were underwritten, an
increase of over 50% compared to the same period a year ago. During the quarter
ended June 30, 1998, municipalities issued over $75 billion in new securities,
an increase of more than 35% compared to the same three-month period in 1997.
Additionally, corporate issuers have also viewed current interest rate levels as
an opportunity to issue significant amounts of taxable securities. Thus far in
1998, over $500 billion in investment-grade corporate bonds have been
underwritten, an increase of more than 70% compared to the same period a year
ago. This sizeable corporate bond issuance has tended to both support generally
higher fixed-income yields and reduce the demand for tax-exempt bonds.
However, the recent pace of new municipal bond issuance is unlikely to be
maintained. Continued increases in bond issuance will require lower and lower
tax-exempt bond yields to generate the economic savings necessary for additional
municipal bond refinancings. Preliminary estimates for 1998 total municipal bond
issuance are presently in the $200 billion-$225 billion range. These estimates
suggest that recent supply pressures are likely to abate later in the year.
Earlier this year, municipal bond investors received approximately $30 billion
in coupon payments, bond maturities and proceeds from early redemptions. The
demand generated by these assets has helped to offset the increase in supply
seen thus far in 1998. Historically, the month of July tends to be a period of
strong investor demand as seasonal factors generate strong income flows.
It is also possible that at least some of the recent economic strength seen in
the United States will be reversed in the coming months. A particularly mild
winter has been partially responsible for a strong housing sector, as well as
other construction industries. This past winter's economic strength may have
borrowed from future quarters' growth. This recent strong trend may not be
sustained and may lead to weaker construction growth later this year.
Additionally, strong economic growth in 1997 and the increased use of electronic
tax filings have resulted in larger and earlier Federal and state income tax
refunds to many individuals. These refunds appear to have supported strong
consumer spending in recent months, but may be borrowing against weaker spending
later this year.
The continued impact of the Asian financial crisis on the US domestic economy's
future growth remains unclear. Current Asian economic conditions continue to
reflect ongoing weakness. Recent trade data indicated that reduced US exports to
these countries may have lowered US economic growth by as much as 2% in the
first quarter of 1998. Since further trade deterioration is possible in the
coming months, we do not believe that the Federal Reserve Board will be willing
to raise interest rates, barring a dramatic and unexpected resurgence of
domestic inflation.
These factors suggest that over the near term, interest rates in general are
unlikely to rise by any appreciable amount. Recent supply pressures have caused
municipal bond yield ratios to rise relative to US Treasury bond yields. At June
30, 1998, long-term tax-exempt bond yields were at attractive yield ratios
relative to US Treasury securities of comparable maturities (over 90%), well in
excess of their expected range of 85%-88%. Tax-exempt bond yield ratios rarely
exceeded 90% in the 1980s and 1990s. Previous instances have usually been
associated with potential changes in the Federal tax code that would have
adversely affected the tax-favored status of municipal bonds. The present
situation has developed largely because of a temporary supply imbalance. These
imbalances should soon be corrected as tax-exempt bond issuance slows from its
current rapid pace later this year. Any further pressure on the municipal market
may well represent a very attractive investment opportunity.
Portfolio Strategy
During the four months since the Fund's inception, our strategy was to maintain
a fully invested position. This aggressive stance enabled the Fund to perform
extremely well in the declining interest rate environment witnessed recently in
the tax-exempt bond markets. Although it is probable that the market will
experience some volatility in the future and setbacks are likely to occur, we
believe that these instances will be short-lived. In our opinion, a slow growth,
low inflation economic environment is likely to continue to supply a positive
backdrop for debt securities, and the relatively tight technical supply/demand
outlook for municipal bonds should cushion any temporary downward movements in
tax-exempt bond prices. While the Fund is already aggressively structured, our
strategy going forward will be concentrated more on improving the call feature
of the underlying securities in the portfolio, as well as adjusting the sector
diversity of the Fund's holdings.
Because of historically tight credit quality spreads, we favored overweighting
the position of the Fund's assets in AAA-insured securities. At June 30, 1998,
89% of the Fund's assets were rated AAA by Standard & Poor's Corp.
In Conclusion
We appreciate your investment in MuniHoldings California Insured Fund II, Inc.,
and we look forward to assisting you with your financial needs in the months and
years ahead.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Robert A. DiMella
Robert A. DiMella
Vice President
/s/ Walter C. O'Connor
Walter C. O'Connor
Vice President and Portfolio Manager
July 30, 1998
2 & 3
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1998
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
California -- 97.0% AAA Aaa $ 1,430 California Educational Facilities Authority,
Revenue Refunding Bonds (Mills College),
5.125% due 9/01/2022 (c) $ 1,413
-----------------------------------------------------------------------------------------------------------
California HFA, Home Mortgage Revenue Bonds, AMT:
AAA Aaa 3,000 Series B, 5.25% due 2/01/2028 (b) 2,948
AAA Aaa 7,500 Series J-1, 5.55% due 8/01/2028 (c) 7,539
-----------------------------------------------------------------------------------------------------------
California Health Facilities Financing Authority
Revenue Bonds, VRDN (a):
A1+ VMIG1+ 6,450 (Adventist Hospital), Series A, 3.75% due 9/01/2028 (c) 6,450
A1+ Aaa 1,000 Refunding (Sutter/CHS), Series C, 3.25% due 7/01/2022 1,000
-----------------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, PCR,
Refunding (Pacific Gas and Electric Co.), VRDN (a):
A1+ NR* 500 AMT, Series C, 3.85% due 11/01/2026 500
A1+ NR* 1,100 Series F, 3.50% due 11/01/2026 1,100
-----------------------------------------------------------------------------------------------------------
AAA Aaa 4,180 California State Department of Water Resources, Central
Valley Project, Revenue Refunding Bonds (Water Systems),
Series Q, 5.375% due 12/01/2027 (c) 4,259
-----------------------------------------------------------------------------------------------------------
California State Economic Development Financing Authority
Revenue Bonds (California Independent Systems Project), VRDN (a):
A1+ VMIG1+ 4,200 Series A, 3.75% due 4/01/2008 4,200
A1+ VMIG1+ 2,100 Series C, 3.40% due 4/01/2008 2,100
-----------------------------------------------------------------------------------------------------------
California State, GO:
AAA Aaa 5,000 Refunding, UT, 5% due 2/01/2023 (d) 4,882
AAA Aaa 10,130 (Veterans), AMT, Series BH, 5.50% due 12/01/2024 (f) 10,269
A+ A1 1,640 (Veterans), Series BM, 5.45% due 12/01/2025 1,656
-----------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Bonds (b):
AAA Aaa 1,950 (Department of Corrections -- Corcoran II), Series A, 5.25%
due 1/01/2021 1,952
AAA Aaa 1,000 Refunding (California State University Project), Series A,
5.375% due 10/01/2017 1,024
AAA Aaa 4,175 (Various California University Projects), Series C, 5.125%
due 9/01/2022 4,126
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 California State University, Revenue Refunding Bonds (Hayward
Foundation Inc. -- Auxiliary Organization), 5.25% due 8/01/2025 (c) 1,002
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,890 California Statewide Community Development Authority, COP, 5.40%
due 12/01/2027 (b) 2,952
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,240 Contra Costa County, California, Water District Revenue Refunding
Bonds, Series F, 6% due 10/01/2013 (d) 3,494
-----------------------------------------------------------------------------------------------------------
AAA Aaa 7,500 Delta County, California, Home Mortgage Finance Authority, S/F
Mortgage Revenue Refunding Bonds, AMT, Series A, 5.35% due
6/01/2024 (c)(e) 7,489
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,725 East Bay, California, Municipal Utility District, Wastewater
System Revenue Bonds, 4.75% due 6/01/2028 (c) 6,307
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,685 East Bay, California, Municipal Utility District, Water System
Revenue Refunding Bonds, 5% due 6/01/2026 (d) 3,588
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Fremont, California, Unified School District, Refunding (Alameda
County), 5.25% due 9/01/2019 (c) 3,010
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,360 Hayward, California, COP (Civic Center Project), 5.25% due
8/01/2026 (c) 1,362
-----------------------------------------------------------------------------------------------------------
AAA Aaa 15,875 Los Angeles, California, Convention and Exhibition Center Authority,
Lease Revenue Bonds, RITR, Series 21, 6.72% due 8/15/2018 (g) 16,292
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,750 Los Angeles, California, Wastewater System Revenue Bonds, Series A,
5% due 6/01/2023 (d) 3,661
-----------------------------------------------------------------------------------------------------------
Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Bonds:
AAA Aaa 5,000 RITR, Series 30, 6.47% due 7/01/2023 (b)(g) 5,019
AAA Aaa 6,250 Refunding, Property A, First-Tier, Senior Series A, 5.25% due
7/01/2027 (c) 6,264
AAA Aaa 5,000 Refunding, Property C, Second Senior Series A, 5% due 7/01/2023 (b) 4,881
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,050 Metropolitan Water District, Southern California Waterworks Revenue
Bonds, Series C, 5% due 7/01/2027 (c) 5,896
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,215 Modesto, California, Revenue Refunding Bonds, COP (Water Utility
System Refining Project), 5.125% due 10/01/2022 (d) 6,142
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,080 Monrovia, California, Unified School District, UT, Series A, 5.375%
due 8/01/2022 (c) 1,102
-----------------------------------------------------------------------------------------------------------
AAA Aaa 13,095 Oakland, California, Unified School District, Refunding (Alameda
County), UT, Series C, 5.50% due 8/01/2019 (d) 13,508
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Olivenhain, California, Municipal Water District, COP, Revenue
Refunding Bonds (Water Capital Projects), 5.125% due 6/01/2028 (d) 4,906
-----------------------------------------------------------------------------------------------------------
A1+ NR* 400 Riverside County, California, COP (Riverside County Public
Facilities), ACES, Series A, 3.25% due 12/01/2015 (a) 400
-----------------------------------------------------------------------------------------------------------
A1+ Aaa 500 Roseville, California, Finance Authority, Hospital Lease Revenue
Bonds (Roseville Hospital), VRDN, Series A, 3.05% due 10/01/2014 (a) 500
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Sacramento, California, Municipal Utility District, Electric Revenue
Refunding Bonds, Series L, 5.125% due 7/01/2022 (c) 5,931
-----------------------------------------------------------------------------------------------------------
San Diego, California, Public Facilities Financing Authority, Sewer
Revenue Bonds (d):
AAA Aaa 12,525 Series A, 5.25% due 5/15/2027 12,555
AAA Aaa 2,950 Series B, 5.25% due 5/15/2027 2,957
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,540 San Francisco, California, City and County Airports Commission,
International Airport Revenue Bonds, AMT, Series A, 5.25% due
1/01/2022 (b) 5,549
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 San Francisco, California, City and County Sewer Revenue Refunding
Bonds, 6% due 10/01/2011 (b) 2,157
-----------------------------------------------------------------------------------------------------------
San Francisco, California, State Building Authority, Lease Revenue
Bonds (San Francisco Civic Center Complex), Series A (b):
AAA Aaa 1,000 5.25% due 12/01/2016 1,016
AAA Aaa 1,000 5.25% due 12/01/2021 1,004
-----------------------------------------------------------------------------------------------------------
AAA Aaa 7,250 San Jose, California, Redevelopment Agency, Tax Allocation Bonds
(Merged Area Redevelopment Project), 5% due 8/01/2026 (b) 7,068
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 San Jose-Santa Clara, California, Water Financing Authority, Sewer
Revenue Bonds, Series A, 5.375% due 11/15/2020 (d) 5,090
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,750 Santa Clara County, California, Financing Authority, Lease Revenue
Refunding Bonds, Series A, 5% due 11/15/2022 (b) 6,592
-----------------------------------------------------------------------------------------------------------
</TABLE>
Portfolio
Abbreviations
To simplify the listings of MuniHoldings California Insured Fund II, Inc.'s
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list below and at right.
ACES(SM) Adjustable Convertible Extendible Securities
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1998
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
California AAA Aaa $ 9,000 Santa Fe Springs, California, Community Development Commission,
(concluded) Tax Allocation Refunding Bonds (Consolidated Redevelopment
Project), Series A, 5% due 9/01/2022 (c) $ 8,790
-----------------------------------------------------------------------------------------------------------
AAA VMIG1+ 1,200 Southern California Public Power Authority, Power Project Revenue
Refunding Bonds (Sub-Palo Verde Project), VRDN, Series C, 3.10%
due 7/01/2017 (a)(b) 1,200
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Southern California Rapid Transportation District, California,
Revenue Bonds (Special Assessment District), Series A-1, 6%
due 9/01/2008 (b) 3,255
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Stockton, California, Revenue Bonds, COP (Wastewater Systems
Project), Series A, 5.20% due 9/01/2029 (c) 4,977
-----------------------------------------------------------------------------------------------------------
AAA Aaa 14,200 University of California, Revenue Refunding Bonds (Multiple Purpose
Projects), Series E, 5.125% due 9/01/2020 (c) 14,078
====================================================================================================================================
Puerto Rico -- 1.0% A Baa1 2,500 Puerto Rico Commonwealth, Public Improvement Refunding Bonds, 5.375%
due 7/01/2025 (h) 2,540
====================================================================================================================================
Total Investments (Cost -- $236,596) -- 98.0% 237,952
Variation Margin on Financial Futures Contracts** -- 0.0% (122)
Other Assets Less Liabilities -- 2.0% 4,887
--------
Net Assets -- 100.0% $242,717
========
====================================================================================================================================
</TABLE>
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at June 30,
1998.
(b) AMBAC Insured.
(c) MBIA Insured.
(d) FGIC Insured.
(e) FNMA/GNMA Collateralized.
(f) FSA Insured.
(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 June 30, 1998.
(h) All or a portion of security held as collateral in connection with open
financial futures contracts.
* Not Rated.
** Financial futures contracts sold as of June 30, 1998 were as follows:
- ----------------------------------------------------------------------------
(in Thousands)
- ----------------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
- ----------------------------------------------------------------------------
300 US Treasury Bonds September 1998 $37,078
- ----------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price -- $36,956) $37,078
=======
- ----------------------------------------------------------------------------
+ Highest short-term ratings by Moody's Investors Service, Inc. Ratings of
issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
Quality Profile
The quality ratings of securities in the Fund as of June 30, 1998 were as
follows:
- ------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- ------------------------------------------------------------
AAA/Aaa .......................................... 89.1%
A/A .............................................. 1.7
Other+ ........................................... 7.2
- ------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of June 30, 1998
================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $236,596,466) (Note 1a) .................. $237,952,055
Cash ............................................................................... 156,823
Receivables:
Securities sold .................................................................. $ 8,456,459
Interest ......................................................................... 3,055,640 11,512,099
------------
Deferred organization expenses (Note 1e) ........................................... 15,147
Prepaid expenses and other assets .................................................. 3,726
------------
Total assets ....................................................................... 249,639,850
------------
================================================================================================================================
Liabilities: Payables:
Securities purchased ............................................................. 6,392,101
Distributor (Note 2) ............................................................. 142,451
Variation margin (Note 1b) ....................................................... 121,875
Investment adviser (Note 2) ...................................................... 57,124 6,713,551
------------
Accrued expenses and other liabilities ............................................. 209,698
------------
Total liabilities .................................................................. 6,923,249
------------
================================================================================================================================
Net Assets: Net assets ......................................................................... $242,716,601
============
================================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (3,840 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) .............. $ 96,000,000
Common Stock, par value $.10 per share (9,806,948 shares issued and outstanding) . $ 980,695
Paid-in capital in excess of par ................................................... 144,963,983
Undistributed investment income -- net ............................................. 648,531
Accumulated realized capital losses on investments -- net .......................... (1,110,322)
Unrealized appreciation on investments -- net ...................................... 1,233,714
------------
Total -- Equivalent to $14.96 net asset value per Common Stock (market price --
$15.00) ............................................................................ 146,716,601
------------
Total capital ...................................................................... $242,716,601
============
================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
6 & 7
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1998
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period February 27, 1998+ to June 30, 1998
===========================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned . $ 3,887,734
Income (Note 1d):
===========================================================================================================
Expenses: Investment advisory fees (Note 2) ........................ $ 404,290
Commission fees (Note 4) ................................. 60,442
Professional fees ........................................ 22,500
Accounting services (Note 2) ............................. 15,815
Directors' fees and expenses ............................. 11,459
Transfer agent fees ...................................... 9,335
Listing fees ............................................. 8,085
Custodian fees ........................................... 3,874
Pricing fees ............................................. 2,081
Amortization of organization expenses (Note 1e) .......... 1,103
Other .................................................... 14,089
---------
Total expenses before reimbursement ...................... 553,073
Reimbursement of expenses (Note 2) ....................... (374,945)
---------
Total expenses ........................................... 178,128
-----------
Investment income -- net ................................. 3,709,606
-----------
===========================================================================================================
Realized & Unrealized Realized loss on investments ............................. (1,110,322)
Gain (Loss) on Unrealized appreciation on investments -- net ............ 1,233,714
Investments -- Net -----------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations ..... $ 3,832,998
===========
===========================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
Feb. 27, 1998+ to
Increase (Decrease) in Net Assets: June 30, 1998
==================================================================================================================
<S> <C> <C>
Operations: Investment income -- net ......................................................... $ 3,709,606
Realized loss on investments -- net .............................................. (1,110,322)
Unrealized appreciation on investments -- net .................................... 1,233,714
------------
Net increase in net assets resulting from operations ............................. 3,832,998
------------
==================================================================================================================
Dividends to Investment income -- net:
Shareholders Common Stock ................................................................... (2,063,732)
(Note 1f): Preferred Stock ................................................................ (997,343)
------------
Net decrease in net assets resulting from dividends to shareholders .............. (3,061,075)
------------
==================================================================================================================
Capital Stock Proceeds from issuance of Preferred Stock ........................................ 96,000,000
Transactions Net proceeds from issuance of Common Stock ....................................... 146,750,010
(Note 4): Offering and underwriting costs resulting from the issuance of Preferred Stock ... (882,865)
Offering costs resulting from the issuance of Common Stock ....................... (275,830)
Value of shares issued to Common Stock shareholders in reinvestment of dividends . 253,358
------------
Net increase in net assets derived from capital stock transactions ............... 241,844,673
------------
==================================================================================================================
Net Assets: Total increase in net assets ..................................................... 242,616,596
Beginning of period .............................................................. 100,005
------------
End of period* ................................................................... $242,716,601
============
==================================================================================================================
*Undistributed investment income -- net ........................................... $ 648,531
============
==================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
8 & 9
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1998
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Feb. 27, 1998+ to
Increase (Decrease) in Net Asset Value: June 30, 1998
==============================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period ..................................... $ 15.00
Operating ---------
Performance: Investment income -- net ................................................. .38
Realized and unrealized gain on investments -- net ....................... .01
---------
Total from investment operations ......................................... .39
---------
Less dividends to Common Stock shareholders:
Investment income -- net ............................................... (.21)
---------
Total dividends to Common Stock Shareholders ............................. (.21)
---------
Capital charge resulting from issuance of Common Stock ................... (.03)
---------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net ............................................. (.10)
Capital charge resulting from issuance of Preferred Stock .............. (.09)
---------
Total effect of Preferred Stock activity ................................. (.19)
---------
Net asset value, end of period ........................................... $ 14.96
=========
Market price per share, end of period .................................... $ 15.00
=========
==============================================================================================================
Total Investment Based on market price per share .......................................... 1.42%+++
Return:** =========
Based on net asset value per share ....................................... 1.15%+++
=========
==============================================================================================================
Ratios to Average Expenses, net of reimbursement ........................................... .24%*
Net Assets:*** =========
Expenses ................................................................. .75%*
=========
Investment income -- net ................................................. 5.05%*
=========
==============================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) ......... $ 146,717
=========
Preferred Stock outstanding, end of period (in thousands) ................ $ 96,000
=========
Portfolio turnover ....................................................... 64.17%
=========
==============================================================================================================
Leverage: Asset coverage per $1,000 ................................................ $ 2,528
=========
==============================================================================================================
Dividends Per Series A -- Investment income -- net ..................................... $ 262
Share on Preferred =========
Stock Outstanding: Series B -- Investment income -- net ..................................... $ 257
=========
==============================================================================================================
</TABLE>
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on March 19, 1998.
+++ Aggregate total investment return.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings California Insured Fund II, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. Prior to commencement of operations on February 27, 1998,
the Fund had no operations other than those relating to organizational matters
and the sale of 6,667 shares of Common Stock on February 18, 1998 to Fund Asset
Management, L.P. ("FAM") for $100,005. 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
MUC. The following is a summary of significant accounting policies followed by
the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options, which are traded on exchanges, are valued at
their last sale price as of the close of such exchanges or, lacking any sales,
at the last available bid price. Securities with remaining maturities of sixty
days or less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund, including valuations furnished by a pricing
service retained by the Fund, which may utilize a matrix system for valuations.
The procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
o Financial futures contracts -- The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o Options -- The Fund is authorized to write covered call options and purchase
put options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked to market to reflect the current
market value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
10 & 11
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization and offering expenses -- Deferred organization
expenses are amortized on a straight-line basis over a period not exceeding five
years. In accordance with Statement of Position 98-5, any unamortized
organization expenses will be expensed on the first day of the next fiscal year
beginning after December 15, 1998. This change will not have any material impact
on the operations of the Fund. Direct expenses relating to the public offering
of the Fund's Common and Preferred Stock were charged to capital at the time of
issuance of the shares.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of 0.55% of the Fund's average weekly net assets, including
proceeds from the issuance of Preferred Stock. For the period February 27, 1998
to June 30, 1998, FAM earned fees of $404,290, of which $326,217 was voluntarily
waived. FAM also reimbursed the Fund additional expenses of $48,728.
During the period February 27, 1998 to June 30, 1998, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), an affiliate of FAM, received underwriting fees
of $720,000 in connection with the issuance of the Fund's Preferred Stock.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period February 27, 1998 to June 30, 1998 were $343,764,994 and $123,809,898,
respectively.
Net realized losses for the period February 27, 1998 to June 30, 1998 and net
unrealized gains (losses) as of June 30, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Losses Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments ............................ $ (805,122) $ 1,355,589
Financial futures contracts ...................... (305,200) (121,875)
----------- -----------
Total ............................................ $(1,110,322) $ 1,233,714
=========== ===========
- --------------------------------------------------------------------------------
As of June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $1,326,832, of which $1,476,389 related to appreciated securities and
$149,557 related to depreciated securities. The aggregate cost of investments at
June 30, 1998 for Federal income tax purposes was $236,625,223.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of holders of
Common Stock.
Common Stock
Shares issued and outstanding during the period February 27, 1998 to June 30,
1998 increased by 16,947 as a result of dividend reinvestment and by 9,783,334
as a result of the initial offering. Prior to February 27, 1998 (commencement of
operations), the Fund issued 6,667 shares to FAM for $100,005.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund, with a par value of $.10 per share and a liquidation preference of $25,000
per share 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 June
30, 1998 were for Series A, 3.85% and Series B, 3.08%.
In connection with the offering of AMPS, the Board of Directors reclassified
3,840 shares of unissued capital stock as AMPS. Shares issued and outstanding
during the period February 27, 1998 to June 30, 1998 increased by 3,840 as a
result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from 0.25% to 0.375%, calculated on the proceeds of
each auction. For the period February 27, 1998 to June 30, 1998, MLPF&S earned
$46,689 as commissions.
5. Subsequent Event:
On July 9, 1998, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.064787 per share,
payable on July 30, 1998 to shareholders of record as of July 23, 1998.
6. Capital Loss Carryforward:
At June 30, 1998, the Fund had a net capital loss carryforward of approximately
$1,173,000, all of which expires in 2006. This amount will be available to
offset like amounts of any future taxable gains.
12 & 13
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
MuniHoldings California Insured Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniHoldings California Insured Fund
II, Inc. as of June 30, 1998, the related statements of operations and changes
in net assets, and the financial highlights for the period February 27, 1998
(commencement of operations) to June 30, 1998. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at June 30, 1998 by
correspondence with the custodian and brokers. 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniHoldings
California Insured Fund II, Inc. as of June 30, 1998, the results of its
operations, the changes in its net assets, and the financial highlights for the
period February 27, 1998 through June 30, 1998 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 6, 1998
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniHoldings California
Insured Fund II, Inc. during its taxable period ended June 30, 1998 qualify as
tax-exempt interest dividends for Federal income tax purposes.
Additionally, there were no capital gains distributed by the Fund during the
period.
Please retain this information for your records.
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute substantially all of its net
investment income to its shareholders on a monthly basis. However, in order to
provide shareholders with a more consistent yield to the current trading price
of shares of Common Stock of the Fund, the Fund may at times pay out less than
the entire amount of net investment income earned in any particular month and
may at times in any particular 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 Assets, Liabilities and Capital, which comprises
part of the financial information included in this report.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
James H. Bodurtha, Director
Hebert I. London, Director
Robert R. Martin, Director
Joseph L. May, Director
Andre F. Perold, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Gerald M. Richard, Treasurer
Philip M. Mandel, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
IBJ Schroder Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MUC
14 & 15
<PAGE>
This report, including the financial information herein, is transmitted to the
shareholders of MuniHoldings California Insured Fund II, Inc. for their
information. It is not a prospectus, circular or representation intended for use
in the purchase of shares of the Fund or any securities mentioned in the report.
Past performance results shown in this report should not be considered a
representation of future performance. The Fund has the ability to leverage its
Common Stock by issuing Preferred Stock to provide the Common Stock shareholders
with a potentially higher rate of return. Leverage creates risks for Common
Stock shareholders, including the likelihood of greater volatility of net asset
value and market price of shares of the Common Stock, and the risk that
fluctuations in the short-term dividend rates of the Preferred Stock may affect
the yield to Common Stock shareholders. Statements and other information herein
are as dated and are subject to change.
MuniHoldings California
Insured Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011 HOLDCA II -- 6/98
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