MUNIHOLDINGS
CALIFORNIA
INSURED
FUND II, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
December 31, 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, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses of invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities.
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1998
DEAR SHAREHOLDER
For the six-month period ended December 31, 1998, the Common Stock of
MuniHoldings California Insured Fund II, Inc. earned $0.414 per share income
dividends, which included earned and unpaid dividends of $0.070. This represents
a net annualized yield of 5.33%, based on a month-end per share net asset value
of $15.42. Over the same period, the total investment return on the Fund's
Common Stock was +6.06%, based on a change in per share net asset value from
$14.96 to $15.42, and assuming reinvestment of $0.416 per share ordinary income
dividends and $0.022 per share capital gains distributions.
For the six-month period ended December 31, 1998, the Fund's Auction Market
Preferred Stock had an average yield of 3.43% for Series A and 3.31% for Series
B.
The Municipal Market Environment
During the six months ended December 31, 1998, long-term bond yields generally
declined. Modest domestic economic growth coupled with a continued lack of
inflationary pressures has allowed bond yields to continue the decline seen for
most of 1998. The US Treasury market has also continued to benefit from its
"safe-haven" status. The earlier turmoil in foreign markets, especially in
Russia and Brazil, remains unresolved. The declines in foreign economies also
have led to reduced demand for US exports. This reduction has forced some US
manufacturers to scale back production and initiate significant contractions in
employment. Concerns that the declines in the US manufacturing sector seen thus
far would intensify and spread to the service sector of the US economy led the
Federal Reserve Board to lower short-term interest rates in September, October
and November. These actions were taken in large part to ensure that US economic
growth would remain at least at its current level of growth. During the six
months ended December 31, 1998, US Treasury bond yields declined over 50 basis
points (0.50%) to end the year at 5.09%. Long-term uninsured municipal revenue
bond yields, as measured by the Bond Buyer Revenue Bond Index, fell 10 basis
points to end the six-month period at 5.26%.
One of the two principal themes characterizing the municipal bond market for
much of the past year has been the significant increase in new municipal bond
issuance. Over $285 billion in new long-term tax-exempt bonds were underwritten
in 1998, an increase of almost 30% relative to 1997 levels. As tax-exempt bond
yields declined in recent years, increasingly lower municipal bond yields were
required to refinance existing debt. Consequently, the rate of increase in
municipal bond issuance has begun to slow in recent quarters. During the last
six months of 1998, nearly $135 billion in new tax-exempt bonds were issued, an
increase of nearly 10% as compared to the same period a year earlier. During the
three months ended December 31, 1998, $68 billion in new municipal bonds were
underwritten, an increase of just over 5% as compared to the quarter ended
December 31, 1997. Unless municipal bond yields decline dramatically in 1999,
new bond issuance in 1999 seems unlikely to match 1998 levels.
The second and perhaps more striking theme during the past year has been the
dramatic underperformance of the municipal bond market. At the end of 1998,
long-term tax-exempt bond yields were at attractive yield ratios relative to US
Treasury securities of comparable maturities (103%), matching their least
expensive level of the year. Municipal bond yield ratios have averaged
approximately 95% for the last six months and 92% for all of 1998. During 1997,
tax-exempt bond yield ratios averaged 84%. It is likely that the combination of
the increase in new-issue volume and the safe haven status of US Treasury
securities has driven municipal bond yield ratios to their present attractive
levels. Should new-issue volume decline or foreign financial markets regain
stability in 1999, tax-exempt bond yield ratios could be expected to quickly
return to their more historic levels (85%-88%).
Looking ahead, the expected combination of moderate economic growth in the
United States and continued negligible inflation suggest a relatively stable
interest rate environment into early 1999. However, it is likely that foreign
financial markets will again be a critical factor in determining US bond yields.
At this time, it appears that there is little immediate risk of any significant
increase in long-term bond yields.
Portfolio Strategy
The Fund's investment strategy remained virtually unchanged during the six-month
period ended December 31, 1998. We believed that the slow growth, low inflation
economic environment would continue to supply a positive backdrop for debt
securities, and the relatively tight technical supply/ demand outlook for
municipal bonds would cushion any temporary downward movements in tax-exempt
bond prices. Although the domestic economy performed better than we anticipated,
inflation continued to decline year-over-year, and interest rates declined. The
Fund's constructive posture enabled it to perform well in this declining
interest rate environment. We expect to maintain an aggressive investment
strategy in response to the positive fundamental and technical conditions that
exist for fixed-income markets.
Because of the historically tight credit quality spreads, we continued to favor
overweighting the position of the Fund's assets in AAA-insured securities. At
December 31, 1998, 96% of the Fund's assets were rated AAA by Standard & Poor's
Corp., up from 89% as of June 30, 1998.
In Conclusion
We appreciate your ongoing interest 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/ Walter C. O'Connor
Walter C. O'Connor
Vice President and Portfolio Manager
February 10, 1999
2 & 3
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1998
PROXY RESULTS
During the six-month period ended December 31, 1998, MuniHoldings California
Insured Fund II, Inc. Common Stock shareholders voted on the following
proposals. The proposals were approved at a shareholders' meeting on December
16, 1998. The description of each proposal and number of shares voted are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To elect the Fund's Directors: Herbert I. London 9,692,206 87,126
Robert R. Martin 9,693,900 85,432
Andre F. Perold 9,693,398 85,934
Arthur Zeikel 9,688,794 90,538
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2. To ratify the selection of Deloitte & Touche llp as the Fund's independent
auditors for the current fiscal year. 9,547,269 32,924 199,139
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
During the six-month period ended December 31, 1998, MuniHoldings California
Insured Fund II, Inc. Preferred Stock shareholders voted on the following
proposals. The proposals were approved at a shareholders' meeting on December
16, 1998. The description of each proposal and number of shares voted are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha, Herbert I. London,
Robert R. Martin, Joseph L. May and Andre F. Perold as follows:
Series A 1,920 0
Series B 1,920 0
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2. To ratify the selection of Deloitte & Touche llp as the Fund's independent
auditors for the current fiscal year as follows:
Series A 1,920 0 0
Series B 1,920 0 0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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--97.6% NR* Aaa $ 6,550 Antioch, California, Public Financing Authority,
Reassessment Revenue Refunding Bonds, Series A, 5%
due 9/02/2013 (a) $ 6,677
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,430 California Educational Facilities Authority, Revenue
Refunding Bonds (Mills College), 5.125% due 9/01/2022 (g) 1,438
-----------------------------------------------------------------------------------------------------------
California HFA, Home Mortgage Revenue Bonds, AMT:
AAA Aaa 3,000 Series B, 5.25% due 2/01/2028 (a)(d) 3,011
AAA Aaa 7,500 Series J, 5.55% due 8/01/2028 (g) 7,641
AAA Aaa 2,500 Series N, 5.25% due 8/01/2029 (f) 2,502
-----------------------------------------------------------------------------------------------------------
California Health Facilities Finance Authority Revenue Bonds:
NR* Aaa 2,500 RITR, Series 26, 6.695% due 6/01/2022 (b)(f) 2,742
A A2 5,465 Refunding (Catholic Healthcare West), Series A, 5%
due 7/01/2028 5,253
AAA Aaa 6,370 Refunding (Little Co. of Mary Health Service), 4.50%
due 10/01/2028 (a) 5,861
-----------------------------------------------------------------------------------------------------------
AAA Aaa 4,180 California State, Department of Water Resources, Water
Systems Revenue Refunding Bonds (Central Valley Project),
Series Q, 5.375% due 12/01/2027 (g) 4,328
-----------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 125 California State Economic Development Financing Authority
Revenue Bonds (California Independent Systems Operator Corp.
Project), VRDN, Series A, 5% due 4/01/2008 (h) 125
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,950 California State Public Work Board, Lease Revenue Bonds,
Department of Corrections, Series A, 5.25% due 1/01/2021 (a) 3,000
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 California State University and Colleges, Revenue Refunding
Bonds (Hayward Foundation Inc.-- Auxiliary Organization),
5.25% due 8/01/2025 (g) 1,024
-----------------------------------------------------------------------------------------------------------
AAA Aaa 10,130 California State, Veterans Bonds, Refunding, GO, AMT,
Series BH, 5.50% due 12/01/2024 (f) 10,405
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,890 California Statewide Communities Development Authority,
COP (Huntington East Valley Hospital), 5.40% due 12/01/2027 (a) 3,011
-----------------------------------------------------------------------------------------------------------
</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.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
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., December 31, 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 $ 5,000 Central Coast, California, Water Authority, Revenue
(concluded) Refunding Bonds (State Water Project (concluded)
Regional Facilities), Series A, 5% due 10/01/2022 (a) $ 4,965
-----------------------------------------------------------------------------------------------------------
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 (e)(g) 7,657
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,505 Folsom Cordova, California, Unified School District, Refunding,
COP (1998 Financing Project), 5.25% due 3/01/2024 (f) 2,562
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Fremont, California, Unified School District, Alameda County,
Refunding, GO, 5.25% due 9/01/2019 (g) 3,081
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,360 Hayward, California, COP (Civic Center Project), 5.25% due
8/01/2026 (g) 1,390
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,850 Irvine, California, Unified School District, Special Tax,
Community Facilities District Number 86-1, 5.375%
due 11/01/2020 (a) 4,016
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,600 La Quinta, California, Redevelopment Agency, Tax Allocation
Refunding Bonds (Redevelopment Project Area Number 1), 5.20%
due 9/01/2028 (a) 2,642
-----------------------------------------------------------------------------------------------------------
AAA Aaa 15,875 Los Angeles, California, Convention and Exhibition Center
Authority, Lease Revenue Bonds, RITR, Series 21, 6.47%
due 8/15/2018 (b) 16,788
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,750 Los Angeles, California, Wastewater System Revenue Bonds,
Series A, 5% due 6/01/2023 (c) 3,724
-----------------------------------------------------------------------------------------------------------
Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Bonds:
AAA Aaa 5,000 RITR, Series 30, 6.22% due 7/01/2023 (a)(b) 5,159
AAA Aaa 6,250 Refunding, Proposition A, First Tier, Senior Series A,
5.25% due 7/01/2027 (g) 6,386
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Metropolitan Water District, Southern California, Waterworks
Revenue Insured Bonds, Series C, 5% due 7/01/2027 (g) 4,962
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,080 Monrovia, California, Unified School District, GO, UT,
Series A, 5.375% due 8/01/2022 (g) 1,122
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Oakland, California, State Building Authority, Lease
Revenue Bonds (Elihu M. Harris), Series A, 5% due 4/01/2023 (a) 5,958
-----------------------------------------------------------------------------------------------------------
AAA Aaa 13,095 Oakland, California, Unified School District, Alameda
County, Refunding, GO, UT, Series C, 5.50% due 8/01/2019 (c) 13,680
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Olivenhain, California, Municipal Water District, COP,
Revenue Refunding Bonds (Water Capital Projects), 5.125%
due 6/01/2028 (c) 5,009
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,500 Sacramento, California, Cogeneration Authority, Cogeneration
Project Revenue Refunding Bonds, 5.20% due 7/01/2021 (g) 6,582
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Sacramento, California, Municipal Utility District, Electric
Revenue Refunding Bonds, Series L, 5.125% due 7/01/2022 (g) 6,031
-----------------------------------------------------------------------------------------------------------
AAA Aaa 18,805 San Diego, California, Public Facilities Financing Authority,
Sewer Revenue Bonds, Series A, 5.25% due 5/15/2027 (c) 19,242
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,540 San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, Special Facilities Lease
(SFO Fuel Co. LLC), AMT, Series A, 5.25% due 1/01/2022 (a) 5,595
-----------------------------------------------------------------------------------------------------------
AAA Aaa 9,390 San Jose, California, Improvement Bond Act of 1915, Special
Assessment Refunding Bonds, Reassessment District 98-216SJ-24P,
5.25% due 9/02/2015 (a) 9,675
-----------------------------------------------------------------------------------------------------------
AAA Aaa 7,250 San Jose, California, Redevelopment Agency, Tax Allocation
(Merged Area Redevelopment Project), 5% due 8/01/2026 (a) 7,196
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 San Jose-Santa Clara, California, Water Financing Authority,
Sewer Revenue Bonds, Series A, 5.375% due 11/15/2020 (c) 5,180
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Santa Ana, California, Financing Authority, Revenue Refunding
Bonds (South Harbor Boulevard), Series A, 5% due 9/01/2019 (g) 4,961
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,750 Santa Clara County, California, Financing Authority, Lease
Revenue Refunding Bonds, Series A, 5% due 11/15/2022 (a) 6,703
-----------------------------------------------------------------------------------------------------------
AAA Aaa 9,000 Santa Fe Springs, California, Community Development, Community
Tax Allocation Refunding Bonds (Consolidated Redevelopment
Project), Series A, 5% due 9/01/2022 (g) 8,938
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Stockton, California, Revenue Refunding Bonds, COP (Wastewater
System Project), Series A, 5.20% due 9/01/2029 (g) 5,101
-----------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 University of California, Revenue Refunding Bonds (Multiple
Purpose Projects), Series E, 5.125% due 9/01/2020 (g) 10,052
=================================================================================================================================
Puerto Rico--1.1% A Baa1 2,500 Puerto Rico Commonwealth, Public Improvement, 5.375%
due 7/01/2025 2,563
=================================================================================================================================
Total Investments (Cost--$239,219)--98.7% 243,938
Other Assets Less Liabilities--1.3% 3,306
--------
Net Assets--100.0% $247,244
========
=================================================================================================================================
</TABLE>
(a) AMBAC Insured.
(b) 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 December 31, 1998.
(c) FGIC Insured.
(d) FHA Insured.
(e) FNMA/GNMA Collateralized.
(f) FSA Insured.
(g) MBIA Insured.
(h) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at December
31, 1998.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
6 & 7
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1998
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of December 31, 1998
=================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $239,218,947) (Note 1a) ................. $243,937,649
Cash .............................................................................. 27,467
Interest receivable ............................................................... 3,975,968
Deferred organization expenses (Note 1e) .......................................... 15,147
Prepaid expenses and other assets ................................................. 3,726
-------------
Total assets ...................................................................... 247,959,957
-------------
=================================================================================================================================
Liabilities: Payables:
Dividends and distributions to shareholders (Note 1f) ........................... $ 396,979
Investment adviser (Note 2) ..................................................... 117,204
Distributor (Note 2) ............................................................ 65,500 579,683
------------
Accrued expenses and other liabilities ............................................ 135,980
-------------
Total liabilities ................................................................. 715,663
-------------
=================================================================================================================================
Net Assets: Net assets ........................................................................ $ 247,244,294
=============
=================================================================================================================================
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 .................................................. 144,963,982
Undistributed investment income -- net ............................................ 815,466
Accumulated realized capital losses on investments -- net (Note 5) ................ (234,551)
Unrealized appreciation on investments -- net ..................................... 4,718,702
------------
Total -- Equivalent to $15.42 net asset value per share of Common Stock
(market price--$15.3125) ........................................................ 151,244,294
-------------
Total capital ..................................................................... $247,244,294
============
=================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended December 31, 1998
=================================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ................ $ 6,514,477
Income (Note 1d):
=================================================================================================================================
Expenses: Investment advisory fees (Note 2) ....................................... $ 694,979
Commission fees (Note 4) ................................................ 116,012
Professional fees ....................................................... 32,715
Accounting services (Note 2) ............................................ 28,866
Transfer agent fees ..................................................... 21,157
Printing and shareholder reports ........................................ 12,314
Custodian fees .......................................................... 11,315
Directors' fees and expenses ............................................ 9,923
Listing fees ............................................................ 6,788
Pricing fees ............................................................ 4,979
Amortization of organization expenses (Note 1e) ......................... 1,638
Other ................................................................... 7,469
----------
Total expenses before reimbursement ..................................... 948,155
Reimbursement of expenses (Note 2) ...................................... (152,848)
----------
Total expenses .......................................................... 795,307
------------
Investment income--net .................................................. 5,719,170
------------
=================================================================================================================================
Realized & Realized gain on investments ............................................ 1,271,567
Unrealized Gain on Change in unrealized appreciation on investments--net ................... 3,484,988
Investments -- Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations .................... $ 10,475,725
============
=================================================================================================================================
</TABLE>
See Notes to Financial Statements.
8 & 9
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1998
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the Period
Six Months Feb. 27,
Ended 1998+ to
Increase (Decrease) in Net Assets: Dec. 31, 1998 June 30, 1998
==================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ........................................................... $ 5,719,170 $ 3,709,606
Realized gain (loss) on investments--net ......................................... 1,271,567 (1,110,322)
Change in unrealized appreciation on investments--net ............................ 3,484,988 1,233,714
----------- -----------
Net increase in net assets resulting from operations ............................. 10,475,725 3,832,998
----------- -----------
==================================================================================================================================
Dividends & Investment income--net:
Distributions to Common Stock ................................................................... (4,012,738) (2,063,732)
Shareholders Preferred Stock ................................................................ (1,539,497) (997,343)
(Note 1f): Realized gain on investments--net:
Common Stock ................................................................... (276,968) --
Preferred Stock ................................................................ (118,829) --
----------- -----------
Net decrease in net assets resulting from dividends and distributions
to shareholders ................................................................ (5,948,032) (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
(Notes 1e & 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 ..................................................... 4,527,693 242,616,596
Beginning of period .............................................................. 242,716,601 100,005
----------- -----------
End of period* ................................................................... $247,244,294 $242,716,601
=========== ===========
==================================================================================================================================
* Undistributed investment income--net ............................................. $ 815,466 $ 648,531
=========== ===========
==================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the For the Period
from information provided in the financial statements. Six Months Feb. 27,
Ended 1998+ to
Increase (Decrease) in Net Asset Value: Dec. 31, 1998 June 30, 1998
=================================================================================================================================
<S> <C> <C> <C>
Per Share Net asset value, beginning of period .......................................... $ 14.96 $ 15.00
Operating -------- --------
Performance: Investment income--net ........................................................ .58 .38
Realized and unrealized gain on investments--net .............................. .49 .01
-------- --------
Total from investment operations .............................................. 1.07 .39
-------- --------
Less dividends and distributions to Common Stock shareholders:
Investment income--net ...................................................... (.41) (.21)
Realized gain on investments--net ........................................... (.03) --
-------- --------
Total dividends and distributions to Common Stock Shareholders ................ (.44) (.21)
-------- --------
Capital charge resulting from issuance of Common Stock ........................ -- (.03)
-------- --------
Effect of Preferred Stock activity:+++
Dividends and distributions to Preferred Stock shareholders:
Investment income--net .................................................... (.16) (.10)
Realized gain on investments--net ......................................... (.01) --
Capital charge resulting from issuance of Preferred Stock ................... -- (.09)
-------- --------
Total effect of Preferred Stock activity ...................................... (.17) (.19)
-------- --------
Net asset value, end of period ................................................ $ 15.42 $ 14.96
======== ========
Market price per share, end of period ......................................... $15.3125 $ 15.00
======== ========
=================================================================================================================================
Total Investment Based on market price per share ............................................... 5.04%++ 1.42%++
Return:** ======== ========
Based on net asset value per share ............................................ 6.06%++ 1.15%++
======== ========
=================================================================================================================================
Ratios to Average Expenses, net of reimbursement ................................................ .63%* .24%*
Net Assets:*** ======== ========
Expenses ...................................................................... .75%* .75%*
======== ========
Investment income--net ........................................................ 4.53%* 5.05%*
======== ========
=================================================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) .............. $151,244 $146,717
======== ========
Preferred Stock outstanding, end of period (in thousands) ..................... $ 96,000 $ 96,000
======== ========
Portfolio turnover ............................................................ 41.55% 64.17%
======== ========
=================================================================================================================================
Leverage: Asset coverage per $1,000 ..................................................... $ 2,575 $ 2,528
======== ========
=================================================================================================================================
Dividends Per Series A--Investment income--net .............................................. $ 408 $ 262
Share on Preferred ======== ========
Stock Outstanding: Series B--Investment income--net .............................................. $ 394 $ 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.
10 & 11
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1998
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. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal recurring nature. 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 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-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at 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).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses--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 charge 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 six months ended December
31, 1998, FAM earned fees of $694,979, of which $152,848 was voluntarily waived.
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 six
months ended December 31, 1998 were $118,935,260 and $100,240,221, respectively.
Net realized gains (losses) for the six months ended December 31, 1998 and net
unrealized gains as of December 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments ................. $ 1,287,967 $ 4,718,702
Financial futures contracts ........... (16,400) --
----------- -----------
Total ................................. $ 1,271,567 $ 4,718,702
=========== ===========
- --------------------------------------------------------------------------------
As of December 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $4,718,702, of which $4,858,550 related to appreciated
securities and $139,848 related to depreciated securities. The aggregate cost of
investments at December 31, 1998 for Federal income tax purposes was
$239,218,947.
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 six months ended December 31, 1998
remained constant and 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 initial offering.
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
12 & 13
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
effect at December 31, 1998 were: Series A, 4.24% and Series B, 4.25%.
Shares issued and outstanding during the six months ended December 31, 1998
remained constant and 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 six months ended December 31, 1998, MLPF&S earned $62,132
as commissions.
5. 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.
6. Subsequent Event:
On January 7, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.069961 per share,
payable on January 28, 1999 to shareholders of record as of January 22, 1999.
QUALITY PROFILE
The quality ratings of securities in the Fund as of December 31, 1998 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa ................................................ 96.5%
A/A .................................................... 2.1
Other+ ................................................. 0.1
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
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--12/98
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