MUNIHOLDINGS
INSURED
FUND II, INC.
FUND LOGO
Annual Report
September 30, 2000
MuniHoldings Insured Fund II, Inc. seeks to provide shareholders
with current income exempt from Federal income tax by investing
primarily in a portfolio of long-term, investment-grade municipal
obligations the interest on which, in the opinion of bond counsel to
the issuer, is exempt from Federal income taxes.
This report, including the financial information herein, is
transmitted to shareholders of MuniHoldings Insured Fund II, Inc.
for their information. It is not a prospectus. Past performance
results shown in this report should not be considered a
representation of future performance. The Fund has 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
Insured Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MUNIHOLDINGS INSURED FUND II, INC.
The Benefits and
Risks of
Leveraging
MuniHoldings Insured Fund II, Inc. utilizes leveraging to seek to
enhance the yield and net asset value of its Common Stock. However,
these objectives cannot be achieved in all interest rate
environments. To leverage, the Fund issues Preferred Stock, which
pays dividends at prevailing short-term interest rates, and invests
the proceeds in long-term municipal bonds. The interest earned on
these investments 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 net
asset value of the Fund's shares may also be more volatile than if
the Fund did not invest in these securities.
MuniHoldings Insured Fund II, Inc., September 30, 2000
DEAR SHAREHOLDER
For the year ended September 30, 2000, MuniHoldings Insured Fund II,
Inc. earned $0.737 per share income dividends. This represents a net
annualized yield of 5.79%, based on a month-end per share net asset
value of $12.72. During the same period, the Fund's total investment
return was +7.08%, based on an unchanged share net asset value of
$12.72, and assuming reinvestment of $0.747 per share income
dividends.
During the six-month period ended September 30, 2000, the Fund's
total investment return was +4.84%, based on a change in per share
net asset value from $12.54 to $12.72, and assuming reinvestment of
$0.357 per share income dividends.
For the six-month period ended September 30, 2000, the Fund's
Auction Market Preferred Stock had an average yield of 4.21% for
Series A, 4.24% for Series B and 3.85% for Series C.
The Municipal Market Environment
During the six-month period ended September 30, 2000, long-term US
Treasury bond yields drifted slightly higher. A number of economic
indicators, particularly employment, new home sales and consumer
spending, have suggested that US economic growth, while still
robust, has moderated from 1999's levels. Consensus estimates for
the third-quarter US gross domestic product are centered around 3%,
well below the 4.8% growth rate of the first-quarter 2000 and second-
quarter 2000 gross domestic product of 5.62%. This decline in
economic growth suggested to some analysts that the Federal Reserve
Board is approaching the end of its current tightening cycle. Given
the ongoing US Treasury debt reduction program and forecasts of
sizeable Federal budgeting surpluses going forward, investor
emphasis has remained largely focused on the future shortage of
longer-dated maturity US Treasury bonds. By late August, US Treasury
bond yields declined more than 15 basis points (0.15%) to 5.66%,
their lowest level in more than a year.
However, for the remainder of the period, bond yields were unable to
maintain their earlier gains. Rising prices were the major factor
behind the decline in bond prices, as many investors feared that
higher oil prices would result in increased inflationary pressures.
Additionally, US corporations have been issuing large amounts of
taxable debt in order to take advantage of the current low interest
rate environment. During the last three months, US corporations
issued more than $100 billion in investment-grade securities,
offering yields in the 7.25%--9.00% range, and many investors found
these taxable issues an attractive and more plentiful alternative to
US Treasury bonds. As the demand for US Treasury issues weakened in
recent weeks, US bond yields rose. By the end of September, US
Treasury bonds rose to 5.88%, an increase of 5 basis points over the
last six months.
The six-month period ended September 2000 was one of the few periods
in recent years in which the tax-exempt bond market outperformed its
taxable counterpart. This has largely been a reflection of the
continuing reduction in new municipal bond issuance and a moderate
increase in investor demand. Thus, for this year, only $141 billion
in new long-term tax-exempt bonds was issued, a decline of almost
20% compared to the same period in 1999. Recent issuance has been
even more restricted. In September 2000, just over $14 billion in
municipal bonds was underwritten, a decline of more than 25% from
September 1999 levels.
Recently, investor demand has been stronger particularly among
individual retail investors. Investors received more than $45
billion in coupon payments, bond maturities and the proceeds from
early redemptions during June and July. Traditional institutional
investors, such as mutual funds, have not played a major role during
recent months, as fund flows, although slowing, remained negative.
However, non-traditional buyers, hedge funds and arbitrageurs, have
noticeably increased their activity as may be expected when tax-
exempt bond yield ratios exceed 100% of their taxable counterparts
as they have in recent weeks. Property/casualty insurers, after
being unprofitable for a number of years, have also begun to return
to the tax-exempt bond market. During the period, long-term
municipal revenue bond yields, as measured by the Bond Buyer Revenue
Bond Index, declined more than 15 basis points to end the period at
5.85%.
However, tax-exempt bond yields have generally declined throughout
most of this year. Much of the resulting price appreciation has been
triggered by the significant improvement in the long-term US
Treasury market. While the technical position of the municipal bond
market has been very positive this year, it was also positive for
most of 1999 when tax-exempt bond yields rose dramatically. From
that perspective, it may be too early to become overly positive
about the extent to which the municipal bond market can continue to
improve. The US Treasury bond market demonstrated on a number of
occasions this year that its positive technical backdrop can quickly
be subordinated by resurgent domestic economic growth.
Portfolio Strategy
During the six months ended September 30, 2000, we maintained a
fully invested position for the Fund to seek to enhance the amount
of tax-exempt income for our Common Stock shareholders. We focused
on purchases for the Fund in 15-year--20-year bonds with premium
coupons. This strategy enabled the Fund to maintain a very
competitive yield with a more neutral interest rate position.
Historically, the 15-year sector of the municipal curve has provided
above-average risk adjusted returns in the municipal market. This
strategy proved correct since the Fund has performed well in the
improving bond market for the year to date.
The 125 basis point increase in short-term interest rates engineered
by the Federal Reserve Board over the past year has resulted in an
increase in the Fund's borrowing cost into the 4%--4.125% range.
Despite this increase, the tax-exempt yield curve has remained
steeply positive, generating a material income benefit to the Fund's
Common Stock shareholder from the leveraging of the Preferred Stock.
However, should the spread between long-term and short-term interest
rates narrow, the benefits of leverage will decline and as a result,
reduce the yield on the Fund's Common Stock. (For an explanation of
the benefits and risks of leveraging, see page 1 of this report to
shareholders.)
Going forward, it is our opinion that interest rates will trend
sideways until there is a further slowdown in the economy. The
current increase in energy prices may cause an increase in
inflationary expectations, but we believe that this inflation scare
would present an opportunity to extend duration. We believe the
increase in interest rates would be temporary, allowing a
significant decrease in yields when the economy slows enough for the
Federal Reserve Board to change from a tightening bias to a neutral
stance. Currently, the Fund is structured with a high current
income, low volatility position. We plan to maintain this strategy
until there is a clear sign the economy has slowed to a sustainable
pace, and the Federal Reserve Board has contained inflation.
In Conclusion
We appreciate your investment in MuniHoldings Insured Fund II, Inc.,
and we look forward to assisting you with your financial needs in
the months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Robert A. DiMella)
Robert A. DiMella
Vice President and Portfolio Manager
November 6, 2000
MuniHoldings Insured Fund II, Inc., September 30, 2000
PROXY RESULTS
During the six-month period ended September 30, 2000, MuniHoldings
Insured Fund II, Inc.'s Common Stock shareholders voted on the
following proposal. The proposal was approved at a shareholders'
meeting on July 25, 2000. The description of the proposal and number
of shares voted are as follows:
<TABLE>
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
To approve the Agreement and Plan of Reorganization among the Fund,
MuniHoldings Insured Fund III, Inc. & MuniHoldings Insured Fund IV, Inc. 5,609,821 101,628 236,608
<CAPTION>
During the six-month period ended September 30, 2000, MuniHoldings
Insured Fund II, Inc.'s Preferred Stock (Series A&B) shareholders
voted on the following proposal. The proposal was approved at a
shareholders' meeting on July 25, 2000. The description of the
proposal and number of shares voted are as follows:
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C> <C>
To approve the Agreement and Plan of Reorganization among
the Fund, MuniHoldings Insured Fund III, Inc. & MuniHoldings
Insured Fund IV, Inc. as follows: Series A 2,036 0 64
Series B 1,786 3 311
<CAPTION>
Proxy results listed below are from the funds, substantially all of
the assets and liabilities of which were acquired by MuniHoldings
Insured Fund II, Inc. on August 14, 2000, in accordance with the
Agreement and Plan of Reorganization.
During the six-month period ended September 30, 2000, MuniHoldings
Insured Fund III, Inc.'s Common Stock shareholders voted on the
following proposal. The proposal was approved at a shareholders'
meeting on July 25, 2000. The description of the proposal and number
of shares voted are as follows:
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
To approve the Agreement and Plan of Reorganization among the Fund,
MuniHoldings Insured Fund II, Inc. & MuniHoldings Insured Fund IV, Inc. 3,421,358 94,063 87,939
<CAPTION>
During the six-month period ended September 30, 2000, MuniHoldings
Insured Fund III, Inc.'s Preferred Stock shareholders voted on the
following proposal. The proposal was approved at a shareholders'
meeting on July 25, 2000. The description of the proposal and number
of shares voted are as follows:
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
To approve the Agreement and Plan of Reorganization among the Fund,
MuniHoldings Insured Fund II, Inc. & MuniHoldings Insured Fund IV, Inc. 2,362 0 352
<CAPTION>
During the six-month period ended September 30, 2000, MuniHoldings
Insured Fund IV, Inc.'s Common Stock shareholders voted on the
following proposal. The proposal was approved at a shareholders'
meeting on July 25, 2000. The description of the proposal and number
of shares voted are as follows:
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
To approve the Agreement and Plan of Reorganization among the Fund,
MuniHoldings Insured Fund II, Inc. & MuniHoldings Insured Fund III, Inc. 1,749,387 28,604 65,970
<CAPTION>
During the six-month period ended September 30, 2000, MuniHoldings
Insured Fund IV, Inc.'s Preferred Stock shareholders voted on the
following proposal. The proposal was approved at a shareholders'
meeting on July 25, 2000. The description of the proposal and number
of shares voted are as follows:
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
To approve the Agreement and Plan of Reorganization among the Fund,
MuniHoldings Insured Fund II, Inc. & MuniHoldings Insured Fund III, Inc. 1,266 0 0
</TABLE>
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon, Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Donald C. Burke, Vice President and Treasurer
Bradley J. Lucido, Secretary
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Transfer Agents
Common Stock:
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MUE
MuniHoldings Insured Fund II, Inc., September 30, 2000
Portfolio Abbreviations
To simplify the listings of MuniHoldings 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
DATES Daily Adjustable Tax-Exempt Securities
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
<S> <S> <S> <C> <S> <C>
Alaska--1.4% AAA Aaa $ 2,995 Alaska, Energy Authority, Power Revenue Refunding Bonds
(Bradley Lake), 4th Series, 6% due 7/01/2020 (c) $ 3,166
AAA Aaa 2,000 Anchorage, Alaska, Water Revenue Refunding Bonds, 6% due
9/01/2024 (a) 2,065
AAA Aaa 1,700 Matanuska-Susitna Boro, Alaska, GO, Series A, 6% due
3/01/2020 (d) 1,761
Arizona--0.5% BBB+ Baa1 2,170 Arizona Health Facilities Authority Revenue Bonds (Catholic
Healthcare West), Series A, 6.625% due 7/01/2020 2,179
A1 P1 400 Coconino County, Arizona, Pollution Control Corporation Revenue
Bonds (Arizona Public Service Co.--Navajo Project), VRDN, AMT,
Series A, 5.65% due 10/01/2029 (g) 400
California BBB NR* 2,500 Contra Costa County, California, Public Financing Authority,
--4.8% Tax Allocation Revenue
Refunding Bonds (Pleasant Hill Bart Etc. Redevelopment), 5.25%
due 8/01/2028 2,282
Foothill De-Anza, California, Community College District, GO (d):
AAA Aaa 4,755 5.98%** due 8/01/2016 2,013
AAA Aaa 1,745 6.03%** due 8/01/2017 691
AAA Aaa 5,635 6.08%** due 8/01/2018 2,086
NR* Aa3 2,000 Los Angeles, California, Department of Water and Power, Electric
Plant Revenue Refunding Bonds, RIB, Series 370, 6.70% due
2/15/2024 (e) 2,122
NR* Aaa 1,500 Port Oakland, California, Trust Receipts, Revenue Bonds, AMT,
Class R, Series K, 6.247% due 11/01/2021 (b)(e) 1,573
AA Aa3 7,000 Sacramento County, California, Sanitation District, Financing
Authority, Revenue Refunding Bonds, RIB, Series 366, 6.60% due
12/01/2027 (e) 7,374
AAA NR* 4,000 San Bernardino County, California, COP, Refunding (Medical
Center Financing Project), 5.50% due 8/01/2019 (d) 4,025
AAA Aaa 1,250 San Francisco, California, City and County Airport Commission,
International Airport, Special Facilities Lease Revenue Bonds
(SFO Fuel Company LLC), AMT, Series A, 6.10% due 1/01/2020 (c) 1,314
Colorado--3.2% Aurora, Colorado, COP (a):
AAA Aaa 3,055 5.75% due 12/01/2019 3,099
AAA Aaa 3,230 5.75% due 12/01/2020 3,269
AAA Aaa 1,000 5.50% due 12/01/2030 967
Colorado HFA, Revenue Refunding Bonds (S/F Program), AMT,
Senior Series A-2:
NR* Aa2 1,000 6.60% due 5/01/2028 1,045
NR* Aa2 3,000 7.50% due 4/01/2031 3,442
NR* Aaa 2,000 Colorado Health Facilities Authority, Hospital Revenue Refunding
Bonds (Poudre Valley Health Care), Series A, 5.75% due
12/01/2023 (c) 2,001
A1+ VMIG1++ 1,700 Moffat County, Colorado, PCR, Refunding (Pacificorp
Projects), VRDN, 5.40% due 5/01/2013 (a)(g) 1,700
Connecticut AA Aa3 5,000 Connecticut State, GO, RIB, Series 373, 5.99% due 6/15/2013 (e) 5,495
--4.2% NR* Baa3 8,000 Mashantucket Western Pequot Tribe, Connecticut, Special Revenue
Refunding Bonds, Sub-Series A, 5.50% due 9/01/2028 7,090
New Haven, Connecticut, GO, Series B (c):
AAA Aaa 3,360 5.75% due 11/01/2017 3,461
AAA Aaa 1,915 5.75% due 11/01/2018 1,965
AAA Aaa 2,575 5.75% due 11/01/2019 2,632
Delaware--0.7% AAA Aaa 3,400 Delaware State Housing Authority, S/F Mortgage Revenue
Refunding Bonds, AMT, Senior Series A-1, 5.55% due 7/01/2019 (a) 3,296
District of District of Columbia, GO, Refunding:
Columbia--4.2% AAA Aaa 8,000 Series A, 5.25% due 6/01/2027 (d) 7,373
AAA Aaa 3,900 Series B, 5.25% due 6/01/2026 (c) 3,600
AAA Aaa 5,115 District of Columbia, Water and Sewer Authority, Public Utility
Revenue Refunding Bonds,
5.50% due 10/01/2023 (c) 5,023
AAA Aaa 5,000 Washington, D.C., Convention Center Authority, Dedicated Tax
Revenue Bonds, Senior Lien, 5% due 10/01/2021 (a) 4,529
Florida--5.5% NR* Aaa 10,000 Escambia County, Florida, Health Facilities Authority, Health
Facility Revenue Bonds (Florida Health Care Facility Loan), 5.95%
due 7/01/2020 (a) 10,279
AAA Aaa 2,500 Florida State Division of Bond Finance Department, General
Services Revenue Refunding Bonds (Department of Environmental
Protection), Series B, 5.75% due 7/01/2007 (a) 2,650
NR* VMIG1++ 800 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa
Electric Company Project), VRDN, 5.35% due 9/01/2025 (g) 800
AAA Aaa 10,575 Orange County, Florida, Tourist Development Tax Revenue Bonds,
5.50% due 10/01/2012 (a) 10,908
AAA Aaa 2,000 Tampa Bay, Florida, Water Utility System Revenue Bonds, 6% due
10/01/2024 (b) 2,087
Georgia--1.1% AAA Aaa 5,905 Metropolitan Atlanta, Georgia, Rapid Transit Authority, Sales
Tax Revenue Bonds, Second Indenture, Series B, 5.10% due
7/01/2020 (d) 5,499
Hawaii--2.1% AAA Aaa 10,000 Hawaii State, GO, Series CT, 5.875% due 9/01/2018 (c) 10,279
Idaho--0.6% NR* Aaa 3,000 Idaho Housing and Finance Association, S/F Mortgage Revenue
Bonds, AMT, Series E, 6% due 1/01/2032 3,010
Illinois--9.0% AAA Aaa 4,000 Chicago, Illinois, GO, Refunding, Series A-2, 6.25% due
1/01/2014 (a) 4,382
Chicago, Illinois, GO, Series A (b):
AAA Aaa 8,800 6% due 1/01/2021 9,124
AAA Aaa 9,330 6% due 1/01/2022 9,658
AAA Aaa 2,500 6.75% due 1/01/2035 2,775
AAA Aaa 2,185 Chicago, Illinois, Neighborhoods Alive 21, GO, Series PG-A, 6%
due 1/01/2017 (b) 2,276
AAA Aaa 3,400 Chicago, Illinois, Skyway Toll Bridge Revenue Refunding Bonds,
5.50% due 1/01/2023 (d) 3,298
AAA Aaa 1,725 Chicago, Illinois, Water Revenue Refunding Bonds, 5.50% due
11/01/2022 (b) 1,676
A1 VMIG1++ 1,530 Illinois Health Facilities Authority, Revenue Refunding Bonds
(University of Chicago Hospitals), VRDN, 5.50% due
8/01/2026 (d)(g) 1,530
</TABLE>
MuniHoldings Insured Fund II, Inc., September 30, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
<S> <S> <S> <C> <S> <C>
Illinois NR* Aaa $ 1,600 Kane Cook and Du Page Counties, Illinois, School District
(concluded) Number 46, Elgin, GO, 6.50% due 1/01/2016 (c) $ 1,741
Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue Refunding Bonds (McCormick
Place Expansion Project):
AAA Aaa 2,000 5.50% due 12/15/2024 (b) 1,940
AAA Aaa 4,000 Series A, 5.25% due 6/15/2027 (a) 3,697
NR* Aaa 2,000 Northern Illinois University Revenue Refunding Bonds
(Auxiliary Facilities System), 6% due 4/01/2029 (a) 2,051
Indiana--1.9% AAA NR* 9,280 Shelbyville, Indiana, Elementary School Building Corporation
Revenue Bonds, First Mortgage, 5.75% due 1/15/2022 (c) 9,358
Kansas--0.7% AA Aa3 3,510 Kansas State Development Finance Authority, Health Facilities
Revenue Bonds (Sisters of Charity Leavenworth), Series J, 6.125%
due 12/01/2020 3,591
Kentucky--0.9% AAA Aaa 4,250 Kentucky State Property and Buildings Commission, Revenue
Refunding Bonds (Project Number 64), 5.75% due 5/01/2011 (d) 4,477
Louisiana--0.5% AAA Aaa 2,000 Louisiana Local Government, Environmental Facilities, Community
Development Authority Revenue Bonds (Capital Projects and
Equipment Acquisition), Series A, 6.30% due 7/01/2030 (a) 2,165
Maryland--0.6% A1+ VMIG1++ 3,000 Maryland State Energy Financing Administration, Solid Waste
Disposal Revenue Bonds (Cimenteries Project), VRDN, AMT, 5.70%
due 5/01/2035 (g) 3,000
Massachusetts-- AAA Aaa 6,000 Massachusetts State HFA, S/F Housing Revenue Refunding Bonds,
1.9% AMT, Series 77, 6.375% due 6/01/2029 (c) 6,161
Massachusetts State Water Resources Authority, Revenue Refunding
Bonds, Series A (b):
AAA Aaa 1,270 6% due 8/01/2016 1,342
AAA Aaa 1,500 6% due 8/01/2017 1,579
Michigan--2.6% NR* P1 3,700 Delta County, Michigan, Economic Development Corporation,
Environmental Improvement Revenue Refunding Bonds (Mead-Escanaba
Paper), DATES, Series F, 5.50% due 12/01/2013 (g) 3,700
AAA Aaa 2,000 Detroit, Michigan, Water Supply System Revenue Bonds, Senior
Lien, Series A, 5.875% due 7/01/2029 (b) 2,030
Michigan State Hospital Finance Authority, Revenue Refunding Bonds,
Series A:
AA Aa2 2,000 (Ascension Health Credit), 6.125% due 11/15/2026 2,008
AAA Aaa 1,000 (Mercy Mount Clemens), 6% due 5/15/2014 (d) 1,050
AAA Aaa 1,000 Michigan State Strategic Fund, Limited Obligation Revenue
Refunding Bonds (Detroit Edison Company), AMT, Series A, 5.55%
due 9/01/2029 (d) 958
NR* Aaa 1,500 Saint Clair County, Michigan, Ecomomic Revenue Refunding Bonds
(Detroit Edison Company), RIB, Series 282, 6.90% due
8/01/2024 (a)(e) 1,724
AAA Aaa 1,625 Wayne Charter County, Michigan, Airport Revenue Bonds
(Detroit Metropolitan-Wayne County Airport), AMT, Series A, 5%
due 12/01/2028 (d) 1,411
Minnesota AAA Aaa 4,250 Minneapolis, Minnesota, Special School District Number 001, COP,
--4.2% Series A, 5.90% due 2/01/2017 (d) 4,335
A A2 3,000 Minnesota Agriculture and Economic Development Board Revenue
Bonds (Fairview Health Care System), Series A, 6.375% due
11/15/2022 3,055
Prior Lake, Minnesota, Independent School District Number 719,
GO (c):
NR* Aaa 2,555 5.50% due 2/01/2016 2,568
NR* Aaa 1,830 5.50% due 2/01/2017 1,833
NR* Aaa 3,570 5.50% due 2/01/2018 3,562
NR* Aaa 2,840 5.50% due 2/01/2019 2,824
NR* Aaa 2,185 Sauk Rapids, Minnesota, Independent School District Number 47,
GO, Series A, 5.625% due 2/01/2018 (d) 2,199
Mississippi BBB- Ba1 3,550 Mississippi Business Finance Corporation, Mississippi, PCR,
--0.9% Refunding (System Energy Resources Inc. Project), 5.90% due
5/01/2022 3,304
AAA Aaa 1,000 Walnut Grove, Mississippi, Correctional Authority, COP, 6% due
11/01/2019 (a) 1,033
Nevada--2.7% AAA Aaa 3,000 Clark County, Nevada, Airport Revenue Bonds, Sub-Lien, Series A,
6% due 7/01/2029 (d) 3,098
AAA Aaa 7,000 Las Vegas, Nevada, New Convention and Visitors Authority Revenue
Bonds, 5.75% due 7/01/2016 (a) 7,135
AAA Aaa 3,000 Washoe County, Nevada, School District, GO, 5.875% due
6/01/2020 (c) 3,052
New Jersey AAA Aaa 5,000 New Jersey EDA, Revenue Bonds (Transportation Project), Sub-lease,
--1.1% Series A, 5.375% due 5/01/2006 (c) 5,189
New Mexico AAA Aaa 5,000 Farmington, New Mexico, PCR, Refunding (Public Service Company
--1.0% of San Juan), Series C, 5.70% due 12/01/2016 (a) 5,071
New York A1+ VMIG1++ 4,500 Long Island Power Authority, New York, Electric System Revenue
--14.1% Bonds, VRDN, Sub-Series 5, 5.35% due 5/01/2033 (g) 4,500
Metropolitan Transportation Authority, New York, Commuter
Facilities Revenue Bonds, Series A:
AAA Aaa 2,000 6% due 7/01/2016 (b) 2,087
AAA Aaa 3,430 5% due 7/01/2023 (c) 3,101
AAA Aaa 2,000 Metropolitan Transportation Authority, New York, Commuter
Facilities Revenue Refunding Bonds, Series B, 5% due 7/01/2017 (a) 1,885
AAA Aaa 10,000 Metropolitan Transportation Authority, New York, Dedicated Tax
Fund Revenue Bonds, Series A, 5% due 4/01/2029 (c) 8,891
AAA Aaa 14,000 Nassau Health Care Corporation, New York, Health System
Revenue Bonds, 5.75% due 8/01/2022 (c) 14,100
NR* Aa3 1,125 New York City, New York, City Transitional Finance Authority
Revenue Bonds, RIB, Series 283, 6.67% due 11/15/2015 (e) 1,289
AAA NR* 5,000 New York City, New York, GO, Refunding, Series G, 5.75% due
2/01/2017 (c) 5,089
AAA Aaa 3,115 New York State Dormitory Authority Revenue Bonds (Mental Health
Services Facilities Improvement), Series B, 5.375% due
2/15/2026 (c) 2,972
New York State Dormitory Authority, Revenue Refunding Bonds:
AAA Aaa 2,000 (City University), Third Generation Resources, Series 2, 5%
due 7/01/2023 (a) 1,806
AAA Aaa 5,000 (State University Educational Facilities), 5.75% due
5/15/2024 (b) 5,029
AAA Aaa 2,500 New York State Urban Development Corporation Revenue Bonds
(Correctional Facilities Service Contract), Series C, 6% due
1/01/2029 (a) 2,577
AAA NR* 8,000 New York State Urban Development Corporation, Revenue Refunding
Bonds (Correctional Facilities Service Contract), 5.75% due
1/01/2013 (c) 8,205
AAA Aaa 7,250 Port Authority of New York and New Jersey, Consolidated Revenue
Refunding Bonds, AMT, 119th Series, 5.50% due 9/15/2016 (b) 7,235
</TABLE>
MuniHoldings Insured Fund II, Inc., September 30, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
<S> <S> <S> <C> <S> <C>
Ohio--3.0% NR* Aaa $ 1,745 Aurora, Ohio, City School District, COP, 6.10% due
12/01/2019 (d) $ 1,829
A1+ VMIG1++ 1,800 Cuyahoga County, Ohio, Hospital Revenue Bonds (The
Cleveland Clinic), VRDN, Series D, 5.50% due 1/01/2026 (g) 1,800
AAA Aaa 1,000 Kent State University, Ohio, University Revenue Bonds, 6%
due 5/01/2024 (a) 1,040
NR* Aaa 2,435 Ohio HFA, Residential Mortgage Revenue Refunding Bonds,
Series F, 5.625% due 9/01/2016 (h) 2,448
BBB+ Baa1 5,000 Ohio State Solid Waste Disposal Revenue Bonds (USG Corporation
Project), AMT, 5.65% due 3/01/2033 4,459
AA A1 3,000 Ohio State Turnpike Commission, Turnpike Revenue Bonds,
Series A, 5.55% due 2/15/2013 3,046
Oregon--1.1% AAA Aaa 5,000 Linn County, Oregon, Community School District Number 9,
Lebanon, GO, Refunding, 6.125% due 6/15/2025 (d) 5,251
Pennsylvania AAA Aaa 5,900 Allegheny County, Pennsylvania, Hospital Development Authority
--2.2% Revenue Bonds (University of Pittsburgh Medical Center),
5.375% due 12/01/2025 (d) 5,525
NR* Aaa 5,600 Lycoming County, Pennsylvania, College Authority Revenue Bonds
(Pennsylvania College of Technology), 5.25% due 7/01/2018 (d) 5,387
Rhode Providence, Rhode Island, Public Building Authority, General
Island--1.5% Revenue Bonds (School and Public Facilities Projects),
Series A (a):
AAA Aaa 2,535 5.25% due 12/15/2017 2,457
AAA Aaa 1,000 5.25% due 12/15/2019 956
NR* Aaa 4,055 Providence, Rhode Island, Redevelopment Agency Revenue Refunding
Bonds (Public Safety and Municipal Buildings), Series A, 5.75%
due 4/01/2019 (a) 4,100
South NR* Aaa 4,500 South Carolina Housing Finance and Development Authority,
Carolina Mortgage Revenue Refunding Bonds, AMT, Series A-2, 6.35% due
--1.0% 7/01/2019 (c) 4,667
Tennessee AAA Aaa 3,500 Metropolitan Government of Nashville and Davidson County,
--1.3% Tennessee, Health and Education Facilities Board, Revenue
Refunding Bonds (Ascension Health Credit), Series A, 5.875% due
11/15/2028 (a) 3,515
AA Aa2 1,080 Tennessee HDA, Revenue Bonds (Homeownership Program), AMT,
Series 2C, 6% due 7/01/2011 1,126
AAA Aaa 1,515 Tennessee HDA, Revenue Refunding Bonds (Homeownership Program),
AMT, Series 1, 6.05% due 7/01/2014 (d) 1,560
Texas--7.8% AAA Aaa 4,205 Coastal Water Authority, Texas, Contract Revenue Refunding Bonds
(City of Houston Projects), 5% due 12/15/2025 (c) 3,767
Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Refunding Bonds (Methodist Hospital), VRDN (g):
A1+ NR* 8,100 5.50% due 12/01/2025 8,100
A1+ NR* 1,500 5.50% due 12/01/2026 1,500
AAA Aa3 6,000 Harris County, Texas, Health Facilities Development Corporation,
Revenue Refunding Bonds (School Health Care System), Series B,
5.75% due 7/01/2027 (f) 6,036
Houston, Texas, Water and Sewer System Revenue Bonds, Junior
Lien, Series C (b):
AAA Aaa 2,835 5.25% due 12/01/2022 2,669
AAA Aaa 5,000 5.375% due 12/01/2027 4,734
AAA Aaa 4,000 Matagorda County, Texas, Navigation District Number 1, Revenue
Refunding Bonds (Reliant Energy Inc.), Series A, 5.25% due
6/01/2026 (a) 3,708
AAA Aaa 1,850 Midland, Texas, Certificates of Obligation, GO, 6.10% due
3/01/2027 (b) 1,915
AAA Aaa 1,890 Round Rock, Texas, Certificates of Obligation, GO, 6.25% due
8/15/2016 (c) 2,019
AAA Aaa 2,700 Texas Technology University Revenue Refunding and Improvement
Bonds, Financing System, 6th Series, 5% due 2/15/2029 (a) 2,397
AAA Aaa 1,000 Travis County, Texas, Health Facilities Development Corporation,
Revenue Refunding Bonds (Ascension Health Credit), Series A,
5.875% due 11/15/2024 (a) 1,003
Utah--1.0% AAA Aaa 5,000 Weber County, Utah, Municipal Building Authority, Lease Revenue
Refunding Bonds, 5.75% due 12/15/2019 (d) 5,029
Washington AAA Aaa 3,485 Grant County, Washington, Public Utility District Number 2
--7.0% Revenue Bonds (Priest Rapids Hydro Electric), AMT, Second Series,
Series B, 5.90% due 1/01/2021 (d) 3,508
AAA Aaa 15,000 King County, Washington, GO, Refunding, Series B, 5.25% due
1/01/2034 (d) 13,871
AAA Aaa 1,505 King County, Washington, Sewer Revenue Bonds, Second Series,
6% due 1/01/2020 (b) 1,560
NR* Aaa 3,445 Lewis County, Washington, GO, Refunding, 5.75% due 12/01/2024 (a) 3,462
AAA Aaa 1,000 Seattle, Washington, GO, Series A, 5.75% due 1/15/2017 (d) 1,012
AAA Aaa 2,500 Seattle, Washington, Municipal Light and Power Revenue Bonds,
6% due 10/01/2024 (d) 2,582
AAA Aaa 3,500 Seattle, Washington, Water System Revenue Bonds, Series B, 6%
due 7/01/2029 (b) 3,612
AAA Aaa 5,000 Washington State Health Care Facilities Authority, Revenue
Refunding Bonds (Providence Services), 5.375% due 12/01/2019 (d) 4,783
Wisconsin--1.0% Milwaukee County, Wisconsin, Airport Revenue Bonds, AMT,
Series A (b):
NR* Aaa 2,175 6% due 12/01/2016 2,233
NR* Aaa 2,675 6% due 12/01/2017 2,734
Wyoming--0.4% NR* P1 1,700 Uinta County, Wyoming, PCR, Refunding (Chevron USA Inc.
Project), VRDN, 5.35% due 8/15/2020 (g) 1,700
Puerto NR* Aaa 5,000 Puerto Rico Commonwealth, GO, RIB, Series 365, 6.90% due
Rico--1.1% 7/01/2029 (d)(e) 5,307
Total Investments (Cost--$472,453)--98.8% 482,683
Other Assets Less Liabilities--1.2% 6,039
---------
Net Assets--100.0% $ 488,722
=========
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
(f)Escrowed to maturity.
(g)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at September 30, 2000.
(h)GNMA Collateralized.
*Not Rated.
**Represents a zero coupon; the interest rate shown reflects the
effective yield at the time of purchase by the Fund.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Ernst & Young LLP.
rate in effect at September 30, 2000.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Insured Fund II, Inc., September 30, 2000
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of September 30, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$472,453,350) $482,682,776
Cash 11,498
Interest receivable 7,180,200
Prepaid expenses 23,172
------------
Total assets 489,897,646
------------
Liabilities: Payables:
Dividends to shareholders $ 413,959
Reorganization costs 347,348
Investment adviser 146,703 908,010
------------
Accrued expenses and other liabilities 267,750
------------
Total liabilities 1,175,760
------------
Net Assets: Net assets $488,721,886
============
Capital: Capital Stock (200,000,000 shares authorized):
Preferred Stock, par value $.10 per share (8,180 shares of
AMPS* issued and outstanding at $25,000 per share liquidation
preference) $204,500,000
Common Stock, par value $.10 per share (22,352,426 shares
issued and outstanding) $ 2,235,243
Paid-in capital in excess of par 313,662,726
Undistributed investment income--net 1,562,507
Accumulated realized capital losses on investments--net (43,468,016)
Unrealized appreciation on investments--net 10,229,426
------------
Total--Equivalent to $12.72 net asset value per share of Common
Stock (market price--$10.75) 284,221,886
------------
Total capital $488,721,886
============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended September 30, 2000
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 15,763,704
Income:
Expenses: Investment advisory fees $ 1,507,748
Reorganization expenses 490,662
Commission fees 304,308
Professional fees 121,114
Transfer agent fees 55,626
Accounting services 50,332
Printing and shareholder reports 25,641
Directors' fees and expenses 25,541
Listing fees 16,170
Custodian fees 12,482
Pricing fees 7,581
Other 36,507
------------
Total expenses before reimbursement 2,653,712
Reimbursement of expenses (396,046)
------------
Total expenses after reimbursement 2,257,666
------------
Investment income--net 13,506,038
------------
Realized & Realized loss on investments--net (15,561,114)
Unrealized Change in unrealized appreciation/depreciation on investments--net 14,249,237
Gain (Loss) on ------------
Investments--Net: Net Increase in Net Assets Resulting from Operations $ 12,194,161
============
See Notes to Financial Statements.
</TABLE>
MuniHoldings Insured Fund II, Inc., September 30, 2000
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
For the Feb. 26,
Year Ended 1999++ to
Increase (Decrease) in Net Assets: Sept. 30, 2000 Sept. 30, 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 13,506,038 $ 7,439,255
Realized loss on investments--net (15,561,114) (13,067,399)
Change in unrealized appreciation/depreciation on
investments--net 14,249,237 (11,671,656)
------------ ------------
Net increase (decrease) in net assets resulting from
operations 12,194,161 (17,299,800)
------------ ------------
Dividends to Investment income--net:
Shareholders: Common Stock (8,636,948) (4,682,689)
Preferred Stock (4,715,131) (1,838,680)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (13,352,079) (6,521,369)
------------ ------------
Capital Stock Proceeds from issuance of Common Stock -- 164,850,000
Transactions: Proceeds from issuance of Preferred Stock -- 105,000,000
Proceeds from issuance of Common Stock resulting from
reorganization 145,198,000 --
Proceeds from issuance of Preferred Stock resulting from
reorganization 99,500,000 --
Offering costs resulting from the issuance of Common Stock 5,483 (228,434)
Offering and underwriting costs resulting from the
issuance of Preferred Stock 21,855 (970,940)
Value of shares issued to Common Stock shareholders in
reinvestment of dividends 225,004 --
------------ ------------
Net increase in net assets derived from capital stock
transactions 244,950,342 268,650,626
------------ ------------
Net Assets: Total increase in net assets 243,792,424 244,829,457
Beginning of period 244,929,462 100,005
------------ ------------
End of period* $488,721,886 $244,929,462
============ ============
<FN>
*Undistributed investment income--net $ 1,562,507 $ 917,886
============ ============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. For the Feb. 26,
Year Ended 1999++ to
Increase (Decrease) in Net Asset Value: Sept. 30, 2000 Sept. 30, 1999
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 12.72 $ 15.00
Operating ------------ ------------
Performance: Investment income--net 1.09 .68
Realized and unrealized gain (loss) on investments--net .04 (2.24)
------------ ------------
Total from investment operations 1.13 (1.56)
------------ ------------
Less dividends to Common Stock shareholders from investment
income--net (.75) (.43)
------------ ------------
Capital charge resulting from issuance of Common Stock --+++++ (.03)
------------ ------------
Effect of Preferred Stock activity:++++
Dividends to Preferred Stock shareholders:
Investment income--net (.38) (.17)
Capital charge resulting from issuance of Preferred Stock --+++++ (.09)
------------ ------------
Total effect of Preferred Stock activity (.38) (.26)
------------ ------------
Net asset value, end of period $ 12.72 $ 12.72
============ ============
Market price per share, end of period $ 10.75 $ 12.00
============ ============
Total Investment Based on market price per share (4.07%) (17.36%)+++
Return:** ============ ============
Based on net asset value per share 7.08% (12.40%)+++
============ ============
Ratios Based on Total expenses, net of reimbursement and excluding
Average Net reorganization expenses*** 1.13% .62%*
Assets of ============ ============
Common Stock: Total expenses, excluding reorganization expenses*** 1.39% 1.22%*
============ ============
Total expenses*** 1.70% 1.22%*
============ ============
Total investment income--net*** 8.67% 8.27%*
============ ============
Amount of dividends to Preferred Stock shareholders 3.03% 2.04%*
============ ============
Investment income--net, to Common Stock shareholders 5.64% 6.23%*
============ ============
Ratios Based on Total expenses, net of reimbursement and excluding
Total Average Net reorganization expenses .64% .38%*
Assets:++++++*** ============ ============
Total expenses, excluding reorganization expenses .79% .75%*
============ ============
Total expenses .97% .75%*
============ ============
Total investment income--net 4.93% 5.07%*
============ ============
Ratios Based on Dividends to Preferred Stock shareholders 3.98% 3.24%*
Average Net ============ ============
Assets of
Preferred Stock:
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 284,222 $ 139,929
Data: ============ ============
Preferred Stock outstanding, end of period (in thousands) $ 204,500 $ 105,000
============ ============
Portfolio turnover 139.29% 159.29%
============ ============
Leverage: Asset coverage per $1,000 $ 2,390 $ 2,333
============ ============
Dividends Series A--Investment income--net $ 1,002 $ 443
Per Share on ============ ============
Preferred Stock Series B--Investment income--net $ 1,009 $ 432
Outstanding: ============ ============
Series C--Investment income--net $ 124 --
============ ============
*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.
++++The Fund's Preferred Stock was issued on March 18, 1999 (Series
A and B) and August 14, 2000 (Series C).
++++++Includes Common and Preferred Stock average net assets.
+++Aggregate total investment return.
+++++Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Insured Fund II, Inc., September 30, 2000
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings 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 conformity with accounting principles generally accepted
in the United States of America, which may require the use of
management accruals and estimates. The Fund determines and makes
available for publication the net asset value of its Common Stock on
a weekly basis. The Fund's Common Stock is listed on the New York
Stock Exchange under the symbol MUE. 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 increase or decrease the level of risk to
which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Losses may arise due to
changes in the value of the contract or if the counterparty does not
perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
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.
* 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) Offering expenses - 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, the current year's permanent book/tax differences of
$490,662 have been reclassified between paid-in capital in excess of
par and undistributed net investment income and $3,238 has been
reclassified between accumulated net realized capital losses and
paid-in capital in excess of par. 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 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 year ended September 30, 2000,
FAM earned fees of $1,507,748, of which $396,046 was waived.
During the period February 26, 1999 to September 30, 1999, Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate
of FAM, received underwriting fees of $787,500 in connection with
the issuance of the Fund's Preferred Stock.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended September 30, 2000 were $372,635,230 and
$396,318,878, respectively.
Net realized losses for the year ended September 30, 2000 and net
unrealized gains as of September 30, 2000 were as follows:
Realized Unrealized
Losses Gains
Long-term investments $(15,550,273) $ 10,229,426
Financial futures contracts (10,841) --
------------ ------------
Total $(15,561,114) $ 10,229,426
============ ============
As of September 30, 2000, net unrealized appreciation for Federal
income tax purposes aggregated $10,229,426, of which $12,116,088
related to appreciated securities and $1,886,662 related to
depreciated securities. The aggregate cost of investments at
September 30, 2000 for Federal income tax purposes was $472,453,350.
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 September 30,
2000 increased by 11,336,707 as a result of the reorganization and
by 19,052 as a result of dividend reinvestment and during the period
February 26, 1999 to September 30, 1999 increased by 10,990,000 from
shares sold.
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
September 30, 2000 were as follows: Series A, 4.109%, Series B,
4.00% and Series C, 4.35%.
Shares issued and outstanding during the year ended September 30,
2000 increased by 3,980 as a result of the reorganization and during
the period February 26, 1999 to September 30, 1999 increased by
4,200 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 .25% to .375%,
calculated on the proceeds of each auction. For the year ended
September 30, 2000, MLPF&S earned $208,015 as commissions.
5. Capital Loss Carryforward:
At September 30, 2000, the Fund had a capital loss carryforward of
approximately $38,381,000, of which $3,736,000 expires in 2006;
$23,125,000 expires in 2007 and $11,520,000 expires in 2008. This
amount will be available to offset like amounts of any future
taxable gains.
6. Subsequent Event:
On October 6, 2000, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.059311 per share, payable on October 30, 2000 to shareholders
of record as of October 17, 2000.
MuniHoldings Insured Fund II, Inc., September 30, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
7. Reorganization Plan:
On August 14, 2000, the Fund acquired all of the net assets of
MuniHoldings Insured Fund III, Inc. and MuniHoldings Insured Fund
IV, Inc. pursuant to a plan of reorganization. The acquisition was
accomplished by a tax-free exchange of the following capital shares:
Common Stock AMPS Shares
Shares Exchanged Exchanged
MuniHoldings Insured Fund III, Inc. 6,806,667 2,714
MuniHoldings Insured Fund IV, Inc. 3,441,482 1,266
In exchange for these shares, the Fund issued 11,336,707 Common
Stock shares and 3,980 AMPS shares. As of that date, net assets of
the acquired funds, including unrealized appreciation and
accumulated net realized capital losses, were as follows:
Accumulated
Net Unrealized Net Realized
Assets Appreciation Capital Losses
MuniHoldings Insured
Fund III, Inc. $159,360,101 $4,310,561 $14,034,484
MuniHoldings Insured
Fund IV, Inc. $ 85,337,899 $3,341,284 $ 801,781
The aggregate net assets of the Fund immediately after the
acquisition amounted to $490,784,678.
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
MuniHoldings Insured Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital of MuniHoldings Insured Fund II, Inc., including
the schedule of investments, as of September 30, 2000, and the
related statement of operations for the year then ended, and the
statements of changes in net assets and financial highlights for the
year then ended and for the period from February 26, 1999
(commencement of operations) to September 30, 1999. These financial
statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our
audit.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements and financial highlights. Our procedures
included confirmation of securities owned as of September 30, 2000,
by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of MuniHoldings Insured Fund II, Inc. at
September 30, 2000, the results of its operations for the year then
ended, and the changes in its net assets and the financial
highlights for each of the indicated periods in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
MetroPark, New Jersey
October 27, 2000
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniHoldings
Insured Fund II, Inc. during its taxable year ended September 30,
2000 qualify as tax-exempt interest dividends for Federal income tax
purposes. Additionally, there were no capital gains distributions
made by the Fund during the year.
Please retain this information for your records.
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.
QUALITY PROFILE (unaudited)
The quality ratings of securities in the Fund as of September 30,
2000 were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 82.1%
AA/Aa 6.2
A/A 0.6
BBB/Baa 4.0
Other++ 5.9
++Temporary investments in short-term municipal securities.
