MUNIHOLDINGS
CALIFORNIA
INSURED
FUND II, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
December 31, 1999
<PAGE>
MuniHoldings California Insured Fund II, Inc.
The Benefits and Risks of Leveraging
MuniHoldings California Insured Fund II, Inc. utilizes 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, 1999
DEAR SHAREHOLDER
For the six months ended December 31, 1999, the Common Stock of MuniHoldings
California Insured Fund II, Inc. earned $0.421 per share income dividends, which
included earned and unpaid dividends of $0.070. This represents a net annualized
yield of 6.69%, based on a month-end net asset value of $12.49 per share. Over
the same period, the Fund's total investment return was -10.23%, based on a
change in per share net asset value from $14.38 to $12.49, and assuming
reinvestment of $0.420 per share income dividends.
For the six-month period ended December 31, 1999, the Fund's Preferred Stock had
an average yield of 3.50% for Series A and 3.12% for Series B.
The Municipal Market Environment
The combination of steady strong domestic economic growth, improvement in
foreign economies (most notably in Japan) and increasing investor concerns
regarding potential increases in US inflation put upward pressure on bond yields
throughout the six-month period ended December 31, 1999. Continued strong US
employment growth and consumer spending were among the reasons the Federal
Reserve Board cited for raising short-term interest rates in late June, August
and November. US Treasury bond yields reacted by climbing above 6.375% by late
October and generally rising for the remainder of the year. During the period,
yields on 30-year US Treasury bonds increased over 50 basis points (0.50%).
Long-term tax-exempt bond yields also rose during the six months ended December
31, 1999. For much of the first half of 1999, the municipal bond market was able
to withstand much of the upward pressure on bond yields. However, investor
concerns of additional moves by the Federal Reserve Board to moderate US
economic growth and, more importantly, the loss of the strong technical support
that the tax-exempt market enjoyed in early 1999 helped push municipal bond
yields significantly higher for the remainder of the period. The yields on
long-term tax-exempt revenue bonds rose over 60 basis points to 6.23% by
December 31, 1999, as measured by the Bond Buyer Revenue Bond Index.
In recent months, the significant decline in new tax-exempt bond issuance has
remained a positive factor within the municipal bond market, as it had been for
much of the past year. Over the last year, more than $225 billion in long-term
municipal bonds was issued, a decline of nearly 20% compared to the same period
a year ago. During the past six months, over $100 billion in long-term
tax-exempt bonds was underwritten, representing a decline of nearly 18% compared
to the corresponding period in 1998. Over the past three months, approximately
$55 billion in securities was issued by municipalities nationally. This
quarterly issuance also represented a decline of over 20% when compared to the
same period in 1998. It is likely that many tax-exempt issuers accelerated their
financings in recent months or decided to postpone issuance into early 2000 to
avoid any potential Year 2000 (Y2K)-related disruptions at year-end.
Consequently, December 1999 volume of issuance of approximately $14 billion
declined more than 40% compared to 1998 levels. We expect decreased tax-exempt
bond issuance to continue. Early estimates suggest that annual tax-exempt
issuance in 2000 will be in the $210 billion-$215 billion range.
Although tax-exempt bond yields are at their highest level in over two years and
have attracted significant retail investor interest, institutional demand has
declined sharply. Long-term municipal mutual funds have seen consistent outflows
in recent months as the yields of individual securities have risen faster than
those of larger, more diverse mutual funds. In addition, the demand from
property/casualty insurance companies has weakened as a result of the losses,
and anticipated losses, incurred as a result of the series of damaging storms
across much of the eastern United States. Additionally, many institutional
investors who were attracted to the municipal bond market in recent years by
historically attractive tax-exempt bond yield ratios of over 90% have found
other asset classes even more attractive. Even with a reduced supply position,
tax-exempt issuers have been forced to repeatedly raise municipal bond yields in
the attempt to attract adequate demand.
The recent relative underperformance of the municipal bond market has resulted
in an opportunity for long-term investors to purchase tax-exempt issues whose
yields are nearly identical with taxable US Treasury securities. At December 31,
1999, long-term uninsured municipal revenue bond yields were more than 96% of
comparable US Treasury securities. In recent months, many taxable asset classes,
such as corporate bonds, mortgage-backed securities and US agency debt, have all
accelerated debt issuance. This acceleration was initiated largely to avoid
issuing securities at year-end and to minimize any associated Y2K problems that
could possibly develop. However, this increased issuance also resulted in higher
yield levels in the various asset classes, as lower bond prices became necessary
to attract sufficient investor demand. Going forward, it is believed that the
pace of non-US Government debt issuance is likely to slow significantly. As the
supply of this debt declines, we would expect many institutional investors to
return to the municipal bond market and the attractive yield ratios available.
Looking ahead, it appears to us that long-term tax-exempt bond yields will
remain under pressure, trading in a broad range centered near current levels.
Investors are likely to remain concerned about future action by the Federal
Reserve Board. Any improvement in bond prices will probably be contingent upon
weakening in both US employment growth and consumer spending. The over 100 basis
point rise in US Treasury bond yields seen thus far this year may negatively
impact US economic growth. The US housing market will be among the first sectors
likely to be affected, as some declines have already been evidenced in response
to higher mortgage rates. We believe that it is also unrealistic to expect
double-digit returns in US equity markets to continue indefinitely. Much of the
US consumer's wealth is tied to recent stock market appreciation. Any slowing in
these incredible growth rates is likely to reduce consumer spending. We believe
that these factors suggest that the worst of the recent increase in bond yields
has passed and stable, if not slightly improving, bond prices may be expected.
Portfolio Strategy
During the six months ended December 31, 1999, our investment strategy has
focused on seeking to enhance tax-exempt income. To achieve this goal, we kept
the Fund at an above-average duration as well as fully invested. During this
period, the price volatility in the fixed-income market, particularly the
municipal market, was above average. This was the result of strong domestic
growth, concerns about inflation, and the uncertainty of the Y2K situation.
During the six months ended December 31, 1999, the long-term bond yield rose
approximately 35 basis points, while long-term tax-exempt interest rates rose
about 60 basis points. While this was not good for the total return of the Fund,
it allowed us to purchase large coupon bonds, which have not been available in
the California tax-exempt market since early 1995. This allowed us to generate
for the Fund a higher level of tax-exempt income and limit the effects of any
future interest rate volatility.
In Conclusion
On September 23, 1999, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other conditions,
whereby the Fund would acquire substantially all of the assets and liabilities
of MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured
Fund III, Inc. and MuniHoldings California Insured Fund IV, Inc. in exchange for
newly issued shares of the Fund. These Funds are registered, non-diversified,
closed-end managed investment companies. All four entities have a similar
investment objective and are managed by Fund Asset Management, L.P.
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
February 7, 2000
2 & 3
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1999
PROXY RESULTS
During the six-month period ended December 31, 1999, MuniHoldings California
Insured Fund II, Inc.'s Common Stock shareholders voted on the following
proposals. With respect to Proposal 1, the meeting was adjourned until January
20, 2000. Proposals 2 and 3 were approved at a shareholders' meeting on December
15, 1999. The description of each proposal and number of shares voted are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To approve the Agreement and Plan of Reorganization among the Fund,
MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured
Fund III, Inc. and MuniHoldings California Insured Fund IV, Inc. Adjourned Adjourned Adjourned
- -----------------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- -----------------------------------------------------------------------------------------------------------------------------
2. To elect the Fund's Board of Directors: Terry K. Glenn 9,114,924 522,667
Herbert I. London 9,115,680 521,911
Robert R. Martin 9,116,295 521,296
Andre F. Perold 9,115,680 521,911
Arthur Zeikel 9,107,191 530,400
- -----------------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -----------------------------------------------------------------------------------------------------------------------------
3. To ratify the selection of Deloitte & Touche llp as the Fund's independent
auditors for the current fiscal year. 9,170,101 87,864 379,626
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the six-month period ended December 31, 1999, MuniHoldings California
Insured Fund II, Inc.'s Preferred Stock shareholders voted on the following
proposals. With respect to Proposal 1, the meeting was adjourned until January
20, 2000. Proposals 2 and 3 were approved at a shareholders' meeting on December
15, 1999. The description of each proposal and number of shares voted are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To approve the Agreement and Plan of Reorganization among the Fund,
MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured
Fund III, Inc. and MuniHoldings California Insured Fund IV, Inc. Adjourned Adjourned Adjourned
- -----------------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- -----------------------------------------------------------------------------------------------------------------------------
2. To elect the Fund's Board of Directors: James H.
Bodurtha, Terry K. Glenn, Herbert I. London, Robert R.
Martin, Joseph L. May, Andre F. Perold and
Arthur Zeikel as follows: Series A 1,703 7
Series B 1,836 8
- -----------------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -----------------------------------------------------------------------------------------------------------------------------
3. To ratify the selection of Deloitte & Touche llp as the
Fund's independent auditors for the current fiscal year
as follows: Series A 1,703 0 7
Series B 1,836 0 8
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
California--98.4% AAA Aaa $ 1,100 Alameda County, California, COP (Alameda County Medical Center Project),
5.30% due 6/01/2026 (g) $ 980
--------------------------------------------------------------------------------------------------------------
AAA Aaa 4,280 Alameda County, California, COP, Refunding (Capital Projects), 5% due
6/01/2022 (a) 3,713
--------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Bay Area Government Association, California, Revenue Refunding Bonds
(California Redevelopment Agency Pool), Series A, 6% due 12/15/2024 (f) 4,009
--------------------------------------------------------------------------------------------------------------
California HFA, Home Mortgage Revenue Bonds, AMT:
AAA Aaa 1,500 Series B, 5.25% due 2/01/2028 (a)(d) 1,303
AAA Aaa 7,000 Series J, 5.55% due 8/01/2028 (g) 6,403
--------------------------------------------------------------------------------------------------------------
NR* A2 5,000 California Health Facilities Finance Authority Revenue Bonds (Cedars-Sinai
Medical Center), Series A, 6.25% due 12/01/2034 4,894
--------------------------------------------------------------------------------------------------------------
California Health Facilities Finance Authority, Revenue Refunding Bonds,
VRDN (h):
A1+ VMIG1+ 5,000 (Adventist Hospital), Series A, 4.05% due 9/01/2028 (g) 5,000
A1+ VMIG1+ 1,600 (Sutter/Catholic Healthcare System), Series B, 4% due 7/01/2012 (a) 1,600
--------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 1,800 California Pollution Control Financing Authority, PCR, Refunding
(Pacific Gas and Electric), VRDN, Series E, 2.75% due 11/01/2026 (h) 1,800
--------------------------------------------------------------------------------------------------------------
AA- Aa3 2,010 California State, GO, 6.25% due 9/01/2012 2,188
--------------------------------------------------------------------------------------------------------------
California State Public Work Board, Lease Revenue Bonds (a):
AAA Aaa 2,950 (Department of Corrections), Series A, 5.25% due 1/01/2021 2,684
AAA Aaa 20,000 (Various University of California Projects), Series C,
5.125% due 9/01/2022 17,732
--------------------------------------------------------------------------------------------------------------
A+ A1 5,000 California State, Public Works Board, Lease Revenue Refunding Bonds
(Trustees California State University), Series A, 5% due 10/01/2017 4,428
--------------------------------------------------------------------------------------------------------------
AAA Aaa 6,035 California State Veterans Bonds, GO, Refunding, AMT, Series BH,
5.50% due 12/01/2024 (f) 5,502
--------------------------------------------------------------------------------------------------------------
California Statewide Communities Development Authority, COP:
BBB+ Baa1 3,500 (Catholic Healthcare West), 6.50% due 7/01/2020 3,368
NR* VMIG1+ 1,100 (Continuing Care/University Project), VRDN, 4.05% due 11/15/2028 (h) 1,100
AAA Aaa 2,890 (Huntington East Valley Hospital), 5.40% due 12/01/2027 (a) 2,608
--------------------------------------------------------------------------------------------------------------
</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
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1999
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
California NR* Aaa $ 2,035 California Statewide Communities Development Authority, COP, Refunding
(concluded) (San Diego State University Foundation), 5.30% due 3/01/2017 (a) $ 1,912
--------------------------------------------------------------------------------------------------------------
AAA Aaa 16,770 Capistrano, California, Unified Public Financing Authority, Special Tax
Revenue Refunding Bonds, First Lien, Series A, 5.70% due 9/01/2016 (a) 16,644
--------------------------------------------------------------------------------------------------------------
AAA Aaa 7,480 Central Coast Water Authority, California, Revenue Refunding Bonds (State
Water Project Regional Facilities), Series A, 5% due 10/01/2022 (a) 6,507
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,060 Chaffey Community College District, California, COP, Refunding, 5.20%
due 9/01/2023 (g) 1,833
--------------------------------------------------------------------------------------------------------------
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 2,940
--------------------------------------------------------------------------------------------------------------
AAA Aaa 5,305 Delta County, California, Home Mortgage Finance Authority, S/F Mortgage
Revenue Bonds, AMT, Series A, 5.35% due 6/01/2024 (e)(g) 4,681
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,505 Folsom Cordova, California, Unified School District, Refunding, COP (1998
Financing Project), 5.25% due 3/01/2024 (f) 2,249
--------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Fremont, California, Unified School District, Alameda County, GO,
Refunding, 5.25% due 9/01/2019 (g) 2,758
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,300 Irvine, California, Unified School District, Special Tax, Community
Facilities District Number 86-1, 5.375% due 11/01/2020 (a) 2,138
--------------------------------------------------------------------------------------------------------------
NR* Aaa 15,875 Los Angeles, California, Convention and Exhibition Center Authority, Lease
Revenue Refunding Bonds, RITR, Series 21, 4.67% due 8/15/2018 (b)(g) 14,004
--------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Los Angeles, California, Unified School District, GO, Series A, 5% due
7/01/2021 (c) 4,351
--------------------------------------------------------------------------------------------------------------
AAA Aaa 1,080 Monrovia, California, Unified School District, GO, Series A, 5.375% due
8/01/2022 (g) 997
--------------------------------------------------------------------------------------------------------------
Mountain View, Los Altos, California, Unified High School District, GO,
Series D (f):
AAA Aaa 1,200 5.95%** due 8/01/2021 321
AAA Aaa 1,170 5.95%** due 8/01/2022 294
AAA Aaa 1,140 5.97%** due 8/01/2023 269
AAA Aaa 1,110 5.97%** due 8/01/2024 246
--------------------------------------------------------------------------------------------------------------
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) 5,288
--------------------------------------------------------------------------------------------------------------
AAA Aaa 9,995 Oakland, California, Alameda County, Unified School District, GO,
Refunding, Series C, 5.50% due 8/01/2019 (c) 9,534
--------------------------------------------------------------------------------------------------------------
AAA NR* 6,500 Sacramento, California, Cogeneration Authority, Cogeneration Project,
Revenue Refunding Bonds, 5.20% due 7/01/2021 (g) 5,853
--------------------------------------------------------------------------------------------------------------
AAA Aaa 8,000 Sacramento County, California, COP, Refunding (Public Facilities Project),
4.75% due 10/01/2027 (a) 6,477
--------------------------------------------------------------------------------------------------------------
AAA Aaa 5,055 San Diego, California, Public Facilities Financing Authority, Sewer Revenue
Bonds, Series A, 5.25% due 5/15/2027 (c) 4,516
--------------------------------------------------------------------------------------------------------------
AAA Aaa 4,325 San Diego, California, Unified School District, GO, Series A, 6.12%** due
7/01/2017 (c) 1,524
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 San Francisco, California, Bay Area Rapid Transit District, Sales Tax
Revenue Refunding Bonds, 5% due 7/01/2028 (a) 2,131
--------------------------------------------------------------------------------------------------------------
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) 4,913
--------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 San Francisco, California, City and County Redevelopment Agency,
Hotel Tax Revenue Refunding Bonds, 5% due 7/01/2018 (f) 2,671
--------------------------------------------------------------------------------------------------------------
AAA Aaa 7,500 San Francisco, California, State Building Authority, Lease Revenue Bonds
(San Francisco Civic Center Complex), Series A, 5.25% due 12/01/2021 (a) 6,810
--------------------------------------------------------------------------------------------------------------
AAA Aaa 9,075 San Jose, California, Improvement Bond Act of 1915, Special Assessment
Refunding Bonds, Reassessment District 98-216SJ-24P, 5.25%
due 9/02/2015 (a) 8,529
--------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 San Jose-Santa Clara, California, Water Financing Authority, Sewer
Revenue Bonds, Series A, 5.375% due 11/15/2020 (c) 2,785
--------------------------------------------------------------------------------------------------------------
AAA NR* 5,000 Santa Clara, California, Unified School District, GO, 5% due 8/01/2022 (c) 4,347
--------------------------------------------------------------------------------------------------------------
AAA Aaa 10,410 University of California, COP, Series A, 5.25% due 11/01/2024 (a) 9,334
--------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 University of California, Revenue Refunding Bonds (Multiple Purpose
Projects), Series E, 5.125% due 9/01/2020 (g) 8,938
====================================================================================================================================
Total Investments (Cost--$228,246)--98.4% 215,106
Other Assets Less Liabilities--1.6% 3,391
--------
Net Assets--100.0% $218,497
========
====================================================================================================================================
</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, 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 December 31, 1999.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
+ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
QUALITY PROFILE
The quality ratings of securities in the Fund as of December 31, 1999 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa ................................................ 85.9%
AA/Aa .................................................. 1.0
A/A .................................................... 4.3
BBB/Baa ................................................ 2.9
Other+ ................................................. 4.3
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
6 & 7
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1999
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of December 31, 1999
===================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$228,246,197) ............................. $215,106,033
Cash .............................................................................. 16,085
Interest receivable ............................................................... 3,813,589
Prepaid expenses and other assets ................................................. 12,589
------------
Total assets ...................................................................... 218,948,296
------------
===================================================================================================================================
Liabilities: Payables:
Dividends to shareholders ....................................................... $ 252,390
Investment adviser .............................................................. 105,700
Offering costs .................................................................. 60,000 418,090
------------
Accrued expenses and other liabilities ............................................ 33,620
------------
Total liabilities ................................................................. 451,710
------------
===================================================================================================================================
Net Assets: Net assets ........................................................................ $218,496,586
============
===================================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized):
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 .............................................. 933,216
Accumulated realized capital losses on investments--net ........................... (11,241,144)
Unrealized depreciation on investments--net ....................................... (13,140,164)
------------
Total--Equivalent to $12.49 net asset value per share of Common Stock
(market price--$11.8125) ....................................................... 122,496,586
------------
Total capital ..................................................................... $218,496,586
============
===================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended December 31, 1999
===================================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned .......................... $ 6,519,840
Income:
===================================================================================================================================
Expenses: Investment advisory fees .......................................................... $ 638,730
Commission fees ................................................................... 122,395
Professional fees ................................................................. 43,773
Transfer agent fees ............................................................... 19,648
Accounting services ............................................................... 17,387
Printing and shareholder reports .................................................. 12,882
Organization expenses ............................................................. 11,898
Directors' fees and expenses ...................................................... 11,696
Custodian fees .................................................................... 9,286
Listing fees ...................................................................... 8,124
Pricing fees ...................................................................... 3,437
Other ............................................................................. 8,812
----------
Total expenses before reimbursement ............................................... 908,068
Reimbursement of expenses ......................................................... (58,822)
----------
Total expenses .................................................................... 849,246
------------
Investment income--net ............................................................ 5,670,594
------------
===================================================================================================================================
Realized & Realized loss on investments ...................................................... (10,602,484)
Unrealized Loss Change in unrealized depreciation on investments--net ............................. (7,902,571)
on Investments ------------
- --Net: Net Decrease in Net Assets Resulting from Operations .............................. $(12,834,461)
============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements.
8 & 9
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1999
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 1999 1999
================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net .............................................. $ 5,670,594 $ 11,147,488
Realized gain (loss) on investments--net ............................ (10,602,484) 867,427
Change in unrealized appreciation/depreciation on investments--net .. (7,902,571) (6,471,307)
------------- -------------
Net increase (decrease) in net assets resulting from operations ..... (12,834,461) 5,543,608
------------- -------------
================================================================================================================================
Dividends & Investment income--net:
Distributions to Common Stock ...................................................... (4,120,281) (7,892,730)
Shareholders: Preferred Stock ................................................... (1,621,594) (2,898,760)
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 ................................................... (5,741,875) (11,187,287)
------------- -------------
================================================================================================================================
Net Assets: Total decrease in net assets ........................................ (18,576,336) (5,643,679)
Beginning of period ................................................. 237,072,922 242,716,601
------------- -------------
End of period* ...................................................... $ 218,496,586 $ 237,072,922
============= =============
================================================================================================================================
* Undistributed investment income--net .............................. $ 933,216 $ 1,004,497
============= =============
================================================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Six For the For the Period
from information provided in the financial statements. Months Ended Year Ended Feb. 27, 1998+
December 31, June 30, to June 30,
Increase (Decrease) in Net Asset Value: 1999 1999 1998
=================================================================================================================================
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ........................... $ 14.38 $ 14.96 $ 15.00
Operating --------- -------- ---------
Performance: Investment income--net ......................................... .58 1.13 .38
Realized and unrealized gain (loss) on investments--net ........ (1.88) (.57) .01
--------- -------- ---------
Total from investment operations ............................... (1.30) .56 .39
--------- -------- ---------
Less dividends and distributions to Common Stock shareholders:
Investment income--net ....................................... (.42) (.80) (.21)
Realized gain on investments--net ............................ -- (.03) --
--------- -------- ---------
Total dividends and distributions to Common Stock shareholders . (.42) (.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 .................................. (.17) (.30) (.10)
Realized gain on investments--net ....................... -- (.01) --
Capital charge resulting from issuance of Preferred Stock . -- -- (.09)
--------- -------- ---------
Total effect of Preferred Stock activity .................... (.17) (.31) (.19)
--------- -------- ---------
Net asset value, end of period .............................. $ 12.49 $ 14.38 $ 14.96
========= ======== =========
Market price per share, end of period ....................... $ 11.8125 $ 13.00 $ 15.00
========= ======== =========
=================================================================================================================================
Total Investment Based on market price per share ................................ (6.09%)++++ (8.34%) 1.42%++++
Return:** ========= ======== =========
Based on net asset value per share ............................. (10.23%)++++ 1.66% 1.15%++++
========= ======== =========
=================================================================================================================================
Ratios Based on Total expenses, net of reimbursement*** ........................ 1.26%* 1.09% .38%*
Average Net Assets ========= ======== =========
Of Common Stock: Total expenses*** .............................................. 1.35%* 1.23% 1.19%*
========= ======== =========
Total investment income--net*** ................................ 8.44%* 7.42% 8.00%*
========= ======== =========
Amount of dividends to Preferred Stock shareholders ............ 2.41%* 1.93% 2.15%*
========= ======== =========
Investment income--net, to Common Stock shareholders ........... 6.03%* 5.49% 5.85%*
========= ======== =========
=================================================================================================================================
Ratios Based on Total expenses, net of reimbursement ........................... .73%* .67% .24%*
Total Average Net ========= ======== =========
Assets:++*** Total expenses ................................................. .78%* .75% .75%*
========= ======== =========
Total investment income--net ................................... 4.88%* 4.53% 5.05%*
========= ======== =========
=================================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ...................... 3.31%* 3.02% 3.65%*
Average Net ========= ======== =========
Assets Of
Preferred Stock:
=================================================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) $ 122,497 $141,073 $ 146,717
========= ======== =========
Preferred Stock outstanding, end of period (in thousands) ...... $ 96,000 $ 96,000 $ 96,000
========= ======== =========
Portfolio turnover ............................................. 68.88% 82.36% 64.17%
========= ======== =========
=================================================================================================================================
Leverage: Asset coverage per $1,000 ...................................... $ 2,276 $ 2,470 $ 2,528
========= ======== =========
=================================================================================================================================
Dividends Per Series A--Investment income--net ............................... $ 447 $ 775 $ 262
Share on Preferred ========= ======== =========
Stock Outstanding: Series B--Investment income--net ............................... $ 398 $ 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 charges.
*** 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.
10 & 11
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1999
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 valua tions. 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) Organization and offering expenses--In accordance with Statement of Position
98-5, unamortized organization expenses of $11,898 were expensed during the six
months ended December 31, 1999. This is considered to be a change in accounting
principle and had no 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.
(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 Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .55% of the Fund's average weekly net assets, including
proceeds from the issuance of Preferred Stock. For the six months ended December
31, 1999, FAM earned fees of $638,730, of which $58,822 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, 1999 were $151,306,767 and $158,595,339, respectively.
Net realized gains (losses) for the six months ended December 31, 1999 and net
unrealized losses as of December 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- --------------------------------------------------------------------------------
Long-term investments ................ $(10,832,552) $(13,140,164)
Financial futures contracts .......... 230,068 --
------------ ------------
Total ................................ $(10,602,484) $(13,140,164)
============ ============
- --------------------------------------------------------------------------------
As of December 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $13,140,164, of which $88,320 related to appreciated
securities and $13,228,484 related to depreciated securities. The aggregate cost
of investments at December 31, 1999 for Federal income tax purposes was
$228,246,197.
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, 1999 and
the year ended June 30, 1999 remained constant.
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
December 31, 1999 were Series A, 5.50% and Series B, 5.30%.
Shares issued and outstanding during the six months ended December 31, 1999 and
the year ended June 30, 1999 remained constant.
12 & 13
<PAGE>
MuniHoldings California Insured Fund II, Inc., December 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from .25% to .375%, calculated on the proceeds of each
auction. For the six months ended December 31, 1999, MLPF&S earned $60,386 as
commissions.
5. Reorganization Plan:
On September 23, 1999, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other conditions,
whereby the Fund would acquire substantially all of the assets and liabilities
of MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured
Fund III, Inc. and MuniHoldings California Insured Fund IV, Inc. in exchange for
newly issued shares of the Fund. These Funds are registered, non-diversified,
closed-end management investment companies. All four entities have a similar
investment objective and are managed by FAM.
6. Subsequent Event:
On January 6, 2000, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.070000 per share,
payable on January 28, 2000 to shareholders of record as of January 18, 2000.
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute all or a portion of its net
investment income to its shareholders on a monthly basis. In order to provide
shareholders with a more 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
Herbert I. London, Director
Joseph L. May, Director
Andre F. Perold, Director
Roberta Cooper Ramo, 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
- --------------------------------------------------------------------------------
Robert R. Martin, Director of MuniHoldings California Insured Fund II, Inc. has
recently retired. The Fund's Board of Directors wishes Mr. Martin well in his
retirement.
- --------------------------------------------------------------------------------
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:
The Bank of New York
100 Church Street
New York, NY 10286
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--12/99
[RECYCLE LOGO] Printed on post-consumer recycled paper
