MUNIHOLDINGS
CALIFORNIA
INSURED
FUND II, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
June 30, 1999
<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., June 30, 1999
DEAR SHAREHOLDER
For the year ended June 30, 1999, the Common Stock of MuniHoldings California
Insured Fund II, Inc. earned $0.809 per share income dividends, which included
earned and unpaid dividends of $0.069. This represents a net annualized yield of
5.63%, based on a month-end per share net asset value of $14.38. Over the same
period, the total investment return on the Fund's Common Stock was +1.66%, based
on a change in per share net asset value from $14.96 to $14.38, and assuming
reinvestment of $0.811 per share ordinary income dividends and $0.022 per share
capital gains distributions.
For the six-month period ended June 30, 1999, the total investment return on the
Fund's Common Stock was -4.14%, based on a change in per share net asset value
from $15.42 to $14.38, and assuming reinvestment of $0.396 per share income
dividends.
For the six-month period ended June 30, 1999, the Fund's Preferred Stock had an
average yield of 3.01% for Series A and 2.80% for Series B.
The Municipal Market Environment
Long-term bond yields moved higher during the first six months of 1999. US
Treasury bond yields rose throughout the period as the US economy continued to
exhibit considerable strength. An above-trend inflationary report in May coupled
with the May announcement by the Federal Reserve Board that it was considering
increasing short-term interest rates in order to slow domestic economic growth
also contributed to pushing US Treasury bond yields to an 18-month high of over
6.10%. The Federal Reserve Board's return to a neutral policy after the expected
increase in short-term interest rates of 25 basis points (0.25%) in late June
allowed long-term US Treasury bond yields to decline and close the six-month
period ended June 30, 1999 at 5.96%. During the same period, the yield on
long-term US Treasury securities rose almost 90 basis points.
For much of early 1999, long-term tax-exempt bond yields remained essentially
unchanged. However, in May and June municipal bond yields eventually followed
taxable bond yields higher. As measured by the Bond Buyer Revenue Bond Index,
long-term tax-exempt revenue bond yields rose more than 35 basis points to end
the six-month period at 5.61%, their highest level in 20 months.
The strong technical position that the tax-exempt bond market has enjoyed in
recent quarters has continued. Municipal investors are expected to have received
as much as $40 billion in June and early July from coupon income, bond
maturities and the proceeds from early bond redemptions. The receipt of these
assets has coincided with a significant decline in new bond issuance. Over the
last six months, over $115 billion in new long-term tax-exempt bonds were
issued, a decline of 22% as compared to the first six months of 1998. During the
quarter ended June 30, 1999, less than $60 billion in securities were issued by
US municipalities, a decline of nearly 25% versus the June 30, 1998 quarter.
New-issue volume of $22 billion for the month of June 1999 was 28% lower than
June 1998's issuance and the lowest June production since 1996. The combination
of reduced issuance and seasonally high reinvestment has produced a very
positive supply/demand function for the municipal bond market.
Prior to May 1999, this positive technical position had enabled the tax-exempt
bond market to outperform its taxable counterpart. This resulted in a decline of
the yield ratio between taxable and tax-exempt bonds. At the end of 1998,
long-term uninsured revenue bond yields were in excess of 100% of US Treasury
bond yields, far greater than their recent historic range of 85%-88%. However,
by early May, tax-exempt revenue bond yield ratios had declined to nearly 90%.
Given the rapid rise in municipal bond yields in recent weeks, this ratio has
risen again to nearly 95%. The recent period of volatility has created
additional opportunities for long-term investors to purchase tax-exempt bonds at
historically attractive yields relative to US Treasury securities.
While the Federal Reserve Board announced that it has no immediate bias toward
raising short-term interest rates, it is clear that additional US economic
growth will result in further action by the Federal Reserve Board.
Portfolio Strategy
At the beginning of 1999, our investment strategy was constructive as we looked
for a continuation of the decline in long-term interest rates. We believed the
slow growth, low inflation economic environment would continue to provide a
positive backdrop for debt securities. In addition, we expected that the tight
technical supply/demand environment for municipal bonds would cushion any
temporary downward movements in tax-exempt bond prices. Although the domestic
economy performed better than we had anticipated, inflation continued to decline
year-over-year. Interest rates declined for the first half of the year, enabling
the Fund to perform well. During the six months ended June 30, 1999, we shifted
to a slightly more neutral posture to seek to maintain an attractive tax-exempt
yield while protecting the Fund's net asset value. Although municipal bonds have
outperformed their taxable counterparts, total return for the Fund's Common
Stock was negatively impacted by the increase in interest rates that occurred
during the months of May and June.
Looking forward, we expect to maintain a neutral posture for the balance of
1999, focusing on seeking to enhance the yield to the Fund's Common Stock
shareholders. We believe the backup in long-term interest rates has created an
attractive buying opportunity. (For a complete explanation of the benefits and
risks of leveraging, see page 1 of this report to shareholders.)
Because of the historically tight credit quality spreads, we continue to favor
overweighting the Fund's position in AAA-insured securities. At June 30, 1999,
94.9% of the Fund's assets were rated AAA by Standard & Poor's, an increase from
89% from a year ago.
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/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Robert A. DiMella
Robert A. DiMella
Vice President and Portfolio Manager
/s/ Walter C. O'Connor
Walter C. O'Connor
Vice President and Portfolio Manager
August 11, 1999
================================================================================
We are pleased to announce that Robert A. DiMella has been named Vice President
and Co-Portfolio Manager of MuniHoldings California Insured Fund II, Inc. Mr.
DiMella has been employed by Merrill Lynch Asset Management, L.P. (MLAM) since
1997 as Vice President. Prior thereto, Mr. DiMella was Assistant Vice President
of MLAM from 1995 to 1997 and Assistant Portfolio Manager of MLAM from 1993 to
1997.
================================================================================
2 & 3
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
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--96.6% AAA Aaa $ 1,000 Anaheim, California, Public Financing Authority, Lease Revenue Bonds
(Public Improvements Project), Series C, 5.38%** due 9/01/2024 (f) $ 246
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,195 Benicia, California, Unified School District, GO, Refunding, Series A,
5.216%** due 8/01/2019 (c) 1,064
---------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Cabrillo, California, Unified School District, GO, Series A, 5.216%** due
8/01/2019 (a) 1,332
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,430 California Educational Facilities Authority, Revenue Refunding Bonds
(Mills College), 5.125% due 9/01/2022 (g) 1,378
---------------------------------------------------------------------------------------------------------------
California HFA, Home Mortgage Revenue Bonds, AMT:
AAA Aaa 3,000 Series B, 5.25% due 2/01/2028 (a)(d) 2,851
AAA Aaa 7,500 Series J, 5.55% due 8/01/2028 (g) 7,446
AAA Aaa 2,500 Series N, 5.25% due 8/01/2029 (f) 2,373
---------------------------------------------------------------------------------------------------------------
NR* NR* 2,500 California Health Facilities Financing Authority Revenue Bonds, RITR,
Series 26, 7.175% due 6/01/2022 (b)(f) 2,524
---------------------------------------------------------------------------------------------------------------
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) 4,190
---------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 100 California State Economic Development Financing Authority Revenue Bonds
(California Independent Systems Project), VRDN, Series A, 3.80% due
4/01/2008 (h) 100
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,950 California State Public Work Board, Lease Revenue Bonds, Department of
Corrections, Series A, 5.25% due 1/01/2021 (a) 2,902
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 California State University and Colleges, Revenue Refunding Bonds (Hayward
Foundation Inc. Auxiliary Organization), 5.25% due 8/01/2025 (g) 980
---------------------------------------------------------------------------------------------------------------
AAA Aaa 10,130 California State Veterans Bonds, GO, Refunding, AMT, Series BH, 5.50% due
12/01/2024 (f)(i) 10,261
---------------------------------------------------------------------------------------------------------------
California Statewide Communities Development Authority, COP:
NR* VMIG1+ 600 (Continuing Care/University Project), VRDN, 3.85% due 11/15/2028 (h) 600
AAA Aaa 2,890 (Huntington East Valley Hospital), 5.40% due 12/01/2027 (a) 2,886
---------------------------------------------------------------------------------------------------------------
Aaa NR* 2,035 California Statewide Communities Development Authority, COP, Refunding
(San Diego State University Foundation), 5.30% due 3/01/2017 (a) 2,032
---------------------------------------------------------------------------------------------------------------
BBB NR* 3,500 Contra Costa County, California, Public Financing Authority, Tax
Allocation Revenue Refunding Bonds (Pleasant Hill Bart Etc.
Redevelopment), 5.25% due 8/01/2028 3,254
---------------------------------------------------------------------------------------------------------------
AAA Aaa 7,500 Delta County, California, Home Mortgage Finance Authority, S/F Mortgage
Revenue Bonds, AMT, Series A, 5.35% due 6/01/2024 (e)(g) 7,298
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,505 Folsom Cordova, California, Unified School District, Refunding, COP (1998
Financing Project), 5.25% due 3/01/2024 (f) 2,467
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Fremont, California, Unified School District, Alameda County, GO,
Refunding, 5.25% due 9/01/2019 (g) 2,974
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,360 Hayward, California, COP (Civic Center Project), 5.25% due 8/01/2026 (g) 1,327
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,850 Irvine, California, Unified School District, Special Tax, Community
Facilities District Number 86-1, 5.375% due 11/01/2020 (a) 3,871
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 La Quinta, California, Redevelopment Agency, Tax Allocation Refunding
Bonds (Redevelopment Project Area Number 1), 5.20% due 9/01/2028 (a) 2,430
---------------------------------------------------------------------------------------------------------------
NR* Aaa 15,875 Los Angeles, California, Convention and Exhibition Center Authority,
Lease Revenue Bonds, RITR, Series 21, 6.87% due 8/15/2018 (b)(g) 15,898
---------------------------------------------------------------------------------------------------------------
AAA Aaa 15,750 Los Angeles, California, Unified School District, GO, Series A, 5% due
7/01/2021 (c) 15,003
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Los Angeles County, California, Metropolitan Transportation Authority, Sales
Tax Revenue Bonds, RITR, Series 30, 6.62% due 7/01/2023 (a)(b) 4,826
---------------------------------------------------------------------------------------------------------------
AAA Aaa 6,250 Los Angeles County, California, Metropolitan Transportation Authority,
Sales Tax Revenue Refunding Bonds, Proposition A, First Tier, Senior
Series A, 5.25% due 7/01/2027 (g) 6,124
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,080 Monrovia, California, Unified School District, GO, Series A, 5.375% due
8/01/2022 (g) 1,085
---------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Northern California Power Agency, Public Power Revenue Refunding Bonds
(Hydroelectric Project Number One), Series A, 5.125% due 7/01/2023 (g) 5,780
---------------------------------------------------------------------------------------------------------------
AAA Aaa 13,095 Oakland, California, Alameda County, Unified School District, Refunding,
GO, Series C, 5.50% due 8/01/2019 (c) 13,209
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Olivenhain Municipal Water District, California, Water Revenue Refunding
Bonds, COP, Capital Projects, 5.125% due 6/01/2028 (c) 4,775
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Rancho Cucamonga, California, Redevelopment Agency, Tax Allocation Bonds
(Rancho Redevelopment Project), 5.25% due 9/01/2026 (g) 4,900
---------------------------------------------------------------------------------------------------------------
AAA NR* 6,500 Sacramento, California, Cogeneration Authority, Cogeneration Project,
Revenue Refunding Bonds, 5.20% due 7/01/2021 (g) 6,326
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Sacramento, California, Municipal Utility District, Electric Revenue
Bonds, Series K, 5.25% due 7/01/2024 (a) 4,932
---------------------------------------------------------------------------------------------------------------
AAA Aaa 8,000 Sacramento County, California, COP, Refunding (Public Facilities
Project), 4.75% due 10/01/2027 (a) 7,155
---------------------------------------------------------------------------------------------------------------
AAA Aaa 18,805 San Diego, California, Public Facilities Financing Authority, Sewer
Revenue Bonds, Series A, 5.25% due 5/15/2027 (c) 18,426
---------------------------------------------------------------------------------------------------------------
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) 5,383
---------------------------------------------------------------------------------------------------------------
AAA Aaa 9,200 San Jose, California, Improvement Bond Act of 1915, Special Assessment
Refunding Bonds, Reassessment District 98-216SJ-24P, 5.25% due
9/02/2015 (a) 9,140
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 San Jose-Santa Clara, California, Water Financing Authority, Sewer
Revenue Bonds, Series A, 5.375% due 11/15/2020 (c) 4,990
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Santa Ana, California, Financing Authority, Revenue Refunding Bonds
(South Harbor Boulevard), Series A, 5% due 9/01/2019 (g) 4,768
---------------------------------------------------------------------------------------------------------------
AAA Aaa 6,750 Santa Clara County, California, Financing Authority, Lease Revenue
Refunding Bonds, Series A, 5% due 11/15/2022 (a) 6,385
---------------------------------------------------------------------------------------------------------------
</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 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
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
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, Community Tax
(concluded) Allocation Refunding Bonds (Consolidated Redevelopment Project),
Series A, 5% due 9/01/2022 (g) $ 8,515
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Stockton, California, Revenue Refunding Bonds, COP (Wastewater System
Project), Series A, 5.20% due 9/01/2029 (g) 4,830
---------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 University of California, Revenue Refunding Bonds (Multiple Purpose
Projects), Series E, 5.125% due 9/01/2020 (g) 9,704
===================================================================================================================================
Puerto Rico--1.6% A Baa1 4,150 Puerto Rico Commonwealth, GO, Public Improvement, 5% due 7/01/2027 3,855
===================================================================================================================================
Total Investments (Cost--$237,476)--98.2% 232,795
Variation Margin on Financial Futures Contracts***--(0.1%) (276)
Other Assets Less Liabilities--1.9% 4,554
--------
Net Assets--100.0% $237,073
========
===================================================================================================================================
</TABLE>
(a) AMBAC Insured.
(b) The interest rate is subject to change periodically and is inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at June 30, 1999.
(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 June 30, 1999.
(i) All or a portion of security held as collateral in connection with
open financial futures contracts.
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown
reflects the effective yield at the time of purchase by the Fund.
*** Financial futures contracts sold as of June 30, 1999 were as
follows:
--------------------------------------------------------------------
(in Thousands)
--------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
--------------------------------------------------------------------
315 US Treasury Bonds September 1999 $36,510
--------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price--$35,954) $36,510
=======
--------------------------------------------------------------------
+ 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, 1999 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa ............................................................ 94.9%
A/A ................................................................ 1.6
BBB/Baa ............................................................ 1.4
Other+ ............................................................. 0.3
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of June 30, 1999
===================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$237,476,223) (Note 1a) ...................... $232,794,724
Cash ................................................................................. 914,385
Interest receivable .................................................................. 4,053,477
Deferred organization expenses (Note 1e) ............................................. 11,898
Prepaid expenses and other assets .................................................... 12,589
------------
Total assets ......................................................................... 237,787,073
------------
===================================================================================================================================
Liabilities: Payables:
Variation margin (Note 1b) ......................................................... $ 275,625
Dividends to shareholders (Note 1f) ................................................ 198,301
Investment adviser (Note 2) ........................................................ 99,484
Offering costs (Note 1e) ........................................................... 60,000 633,410
-----------
Accrued expenses and other liabilities ............................................... 80,741
------------
Total liabilities .................................................................... 714,151
------------
===================================================================================================================================
Net Assets: Net assets ........................................................................... $237,072,922
============
===================================================================================================================================
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 ................................................. 1,004,497
Accumulated realized capital losses on investments--net .............................. (638,660)
Unrealized depreciation on investments--net .......................................... (5,237,593)
-----------
Total--Equivalent to $14.38 net asset value per share of Common Stock (market
price--$13.00) ....................................................................... 141,072,922
------------
Total capital ........................................................................ $237,072,922
============
===================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
6 & 7
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended June 30, 1999
===================================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned .......................... $ 12,785,332
Income (Note 1d):
===================================================================================================================================
Expenses: Investment advisory fees (Note 2) ................................................. $ 1,354,514
Commission fees (Note 4) .......................................................... 230,228
Accounting services (Note 2) ...................................................... 68,778
Professional fees ................................................................. 57,994
Transfer agent fees ............................................................... 36,140
Printing and shareholder reports .................................................. 25,105
Directors' fees and expenses ...................................................... 21,945
Custodian fees .................................................................... 20,436
Listing fees ...................................................................... 13,457
Pricing fees ...................................................................... 7,704
Amortization of organization expenses (Note 1e) ................................... 3,248
Other ............................................................................. 4,938
------------
Total expenses before reimbursement ............................................... 1,844,487
Reimbursement of expenses (Note 2) ................................................ (206,643)
------------
Total expenses .................................................................... 1,637,844
------------
Investment income--net ............................................................ 11,147,488
------------
===================================================================================================================================
Realized & Realized gain on investments ...................................................... 867,427
Unrealized Gain Change in unrealized appreciation/depreciation on investments--net ................ (6,471,307)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations .............................. $ 5,543,608
(Notes 1b, 1d & 3): ============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the Period
Year Ended Feb. 27, 1998+
June 30, to June 30,
Increase (Decrease) in Net Assets: 1999 1998
===================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ............................................................ $ 11,147,488 $ 3,709,606
Realized gain (loss) on investments--net .......................................... 867,427 (1,110,322)
Change in unrealized appreciation/depreciation on investments--net ................ (6,471,307) 1,233,714
------------ ------------
Net increase in net assets resulting from operations .............................. 5,543,608 3,832,998
------------ ------------
===================================================================================================================================
Dividends & Investment income--net:
Distributions to Common Stock .................................................................... (7,892,730) (2,063,732)
Shareholders Preferred Stock ................................................................. (2,898,760) (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 ...................................................................... (11,187,287) (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 (decrease) in net assets ........................................... (5,643,679) 242,616,596
Beginning of period ............................................................... 242,716,601 100,005
------------ ------------
End of period* .................................................................... $237,072,922 $242,716,601
============ ============
===================================================================================================================================
* Undistributed investment income--net (Note 1g) .................................... $ 1,004,497 $ 648,531
============ ============
===================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
8 & 9
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
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. Year Ended Feb. 27, 1998+
June 30, to June 30,
Increase (Decrease) in Net Asset Value: 1999 1998
============================================================================================================================
<S> <C> <C> <C>
Per Share Net asset value, beginning of period .................................. $ 14.96 $ 15.00
Operating ----------- -----------
Performance: Investment income--net ................................................ 1.13 .38
Realized and unrealized gain (loss) on investments--net ............... (.57) .01
----------- -----------
Total from investment operations ...................................... .56 .39
----------- -----------
Less dividends and distributions to Common Stock shareholders:
Investment income--net .............................................. (.80) (.21)
Realized gain on investments--net ................................... (.03) --
----------- -----------
Total dividends and distributions to Common Stock shareholders ........ (.83) (.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 ............................................ (.30) (.10)
Realized gain on investments--net ................................. (.01) --
Capital charge resulting from issuance of Preferred Stock ........... -- (.09)
----------- -----------
Total effect of Preferred Stock activity .............................. (.31) (.19)
----------- -----------
Net asset value, end of period ........................................ $ 14.38 $ 14.96
=========== ===========
Market price per share, end of period ................................. $ 13.00 $ 15.00
=========== ===========
============================================================================================================================
Total Investment Based on market price per share ....................................... (8.34%) 1.42%++++
Return:** =========== ===========
Based on net asset value per share .................................... 1.66% 1.15%++++
=========== ===========
============================================================================================================================
Ratios Based on Total expenses, net of reimbursement*** ............................... 1.09% .38%*
Average Net Assets =========== ===========
Of Common Stock: Total expenses*** ..................................................... 1.23% 1.19%*
=========== ===========
Total investment income--net*** ....................................... 7.42% 8.00%*
=========== ===========
Amount of dividends to Preferred Stock shareholders ................... 1.93% 2.15%*
=========== ===========
Investment income--net, to Common Stock shareholders .................. 5.49% 5.85%*
=========== ===========
============================================================================================================================
Ratios Based on Total expenses, net of reimbursement .................................. .67% .24%*
Average =========== ===========
Net Assets:++*** Total expenses ........................................................ .75% .75%*
=========== ===========
Total investment income--net .......................................... 4.53% 5.05%*
=========== ===========
============================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ............................. 3.02% 3.65%*
Average Net Assets =========== ===========
Of Preferred Stock:
============================================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) ...... $ 141,073 $ 146,717
=========== ===========
Preferred Stock outstanding, end of period (in thousands) ............. $ 96,000 $ 96,000
=========== ===========
Portfolio turnover .................................................... 82.36% 64.17%
=========== ===========
============================================================================================================================
Leverage: Asset coverage per $1,000 ............................................. $ 2,470 $ 2,528
=========== ===========
============================================================================================================================
Dividends Per Series A--Investment income--net ...................................... $ 775 $ 262
=========== ===========
Share on Preferred
Stock Outstanding: Series B--Investment income--net ...................................... $ 735 $ 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.
++ Includes Common and Preferred Stock average net assets.
+++ 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. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles, which may require the use of
management accruals and estimates. The Fund determines and makes available for
publication the net asset value of its Common Stock on a weekly basis. The
Fund's Common Stock is listed on the New York Stock Exchange under the symbol
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
10 & 11
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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 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 July 1, 1999. 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.
(g) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $32 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with 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 year ended June 30, 1999,
FAM earned fees of $1,354,514, of which $206,643 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
year ended June 30, 1999 were $214,492,917 and $197,101,574, respectively.
Net realized gains for the year ended June 30, 1999 and net unrealized losses as
of June 30, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Losses
- --------------------------------------------------------------------------------
Long-term investments .............................. $ 285,377 $(4,681,499)
Financial futures contracts ........................ 582,050 (556,094)
---------- -----------
Total .............................................. $ 867,427 $(5,237,593)
========== ===========
- --------------------------------------------------------------------------------
As of June 30, 1999, net unrealized depreciation for Federal income tax purposes
aggregated $4,691,979, of which $135,955 related to appreciated securities and
$4,827,934 related to depreciated securities. The aggregate cost of investments
at June 30, 1999 for Federal income tax purposes was $237,486,703.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of holders of
Common Stock.
Common Stock
Shares issued and outstanding during the year ended June 30, 1999 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 at June
30, 1999 were Series A, 3.95% and Series B, 2.40%.
Shares issued and outstanding during the year ended June 30, 1999 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 year ended June 30, 1999, MLPF&S earned $166,836 as
commissions.
5. Subsequent Event:
On July 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.069000 per share,
payable on July 29, 1999 to shareholders of record as of July 23, 1999.
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, 1999, the related statements of operations for the year
then ended, changes in net assets and the financial highlights for the year then
ended and 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
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1999 by correspondence with the custodian and broker. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniHoldings
California Insured Fund II, Inc. as of June 30, 1999, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 13, 1999
12 & 13
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniHoldings California
Insured Fund II, Inc. during its taxable year ended June 30, 1999 qualify as
tax-exempt interest dividends for Federal income tax purposes.
Additionally, the following table summarizes the taxable distributions paid by
the Fund during the year:
- --------------------------------------------------------------------------------
Payable Ordinary Long-Term
Date Income Capital Gains*
- --------------------------------------------------------------------------------
Common Stock Shareholders 12/30/98 $.006547 $.021695
- --------------------------------------------------------------------------------
Preferred Stock Shareholders: Series A 11/17/98 $ 6.08 $ 18.65
11/24/98 $ 1.19 $ 5.44
------------------------------------------------
Series B 11/16/98 $ 6.08 $ 18.65
11/23/98 $ 1.00 $ 4.80
- --------------------------------------------------------------------------------
* The entire distribution is subject to the 20% tax rate.
Please retain this information for your records.
YEAR 2000 ISSUES (unaudited)
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the securities in which
the Fund invests and this could hurt the Fund's investment returns.
MANAGED DIVIDEND POLICY (unaudited)
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
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Hebert I. London, Director
Robert R. Martin, Director
Joseph L. May, Director
Andre F. Perold, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary
- --------------------------------------------------------------------------------
After more than 20 years of service, Arthur Zeikel recently retired as Chairman
of Merrill Lynch Asset Management, L.P. (MLAM). Mr. Zeikel served as President
of MLAM from 1977 to 1997 and as Chairman since December 1997. Mr. Zeikel is one
of the country's most respected leaders in asset management and presided over
the growth of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500 billion. Mr.
Zeikel will remain on MuniHoldings California Insured Fund II, Inc.'s Board of
Directors. We are pleased to announce that Terry K. Glenn has been elected
President and Director of the Fund. Mr. Glenn has held the position of Executive
Vice President of MLAM since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Directors in wishing
him well in his retirement from Merrill Lynch and are pleased that he will
continue as a member of the Fund's Board of Directors.
- --------------------------------------------------------------------------------
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 Whitehall Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MUC
- --------------------------------------------------------------------------------
Gerald M. Richard, Treasurer and Philip M. Mandel, Secretary of MuniHoldings
California Insured Fund II, Inc. have recently retired. Their colleagues at
Merrill Lynch Asset Management, L.P. join the Fund's Board of Directors in
wishing Mr. Richard and Mr. Mandel well in their retirements.
- --------------------------------------------------------------------------------
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--6/99
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