MUNIHOLDINGS
MICHIGAN INSURED
FUND II, INC.
FUND LOGO
Annual Report
July 31, 2000
MuniHoldings Michigan Insured Fund II, Inc. seeks to provide
shareholders with current income exempt from Federal and Michigan
income taxes by investing primarily in a portfolio of long-term,
investment-grade municipal obligations the interest on which, in the
opinion of the bond counsel to the issuer, is exempt from Federal
and Michigan income taxes.
This report, including the financial information herein, is
transmitted to shareholders of MuniHoldings Michigan 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 Michigan
Insured Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
The Benefits and
Risks of
Leveraging
MuniHoldings Michigan 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 issue 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 American 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 Michigan Insured Fund II, Inc., July 31, 2000
DEAR SHAREHOLDER
Since inception (September 17, 1999), the Common Stock of
MuniHoldings Michigan Insured Fund II, Inc. earned $.771 per share
income dividends, which included earned and unpaid dividends of
$.073. This represents a net annualized yield of 5.89%, based on a
month-end per share net asset value of $15.04. Over the same period,
the total investment return on the Fund's Common Stock was +5.82%,
based on a change in per share net asset value from $15.00 to
$15.04, and assuming reinvestment of $.699 per share income
dividends.
For the six-month period ended July 31, 2000, the Fund's Auction
Market Preferred Stock had an average yield of 4.20%.
The Municipal Market Environment
During the six months ended July 31, 2000, US domestic economic
growth remained robust. After growing at a 4.2% annual rate in 1999,
US domestic economic growth expanded at a 4.8% rate during the first
quarter of 2000 and at a 5.2% rate during the second quarter.
However, despite these significant growth rates, few price measure
indicators have shown any meaningful signs of future price pressures
at the consumer level, despite the lowest unemployment rates since
1970. With few signs of any economic slowdown, the Federal Reserve
Board continued to raise short-term interest rates in February,
March and May 2000. The Federal Reserve Board cited both the
continued growth of US employment and the continued strength of US
equity markets as reasons for attempting to moderate US economic
growth before inflationary price pressures can occur.
However, since then fixed-income markets have largely ignored strong
economic fundamentals and concentrated upon very positive technical
supply factors. Declining bond issuance--both current, and more
importantly, expected future issuance--helped push bond yields lower
into mid-April 2000. In late January and early February 2000, the US
Treasury announced its intention to reduce the amounts to be
auctioned in the quarterly Treasury note and bond auctions.
Furthermore, budgetary surpluses allowed the US Treasury to
repurchase outstanding, higher-couponed Treasury issues, primarily
in the 15-year and longer maturity sector. Both these actions
resulted in significant reduction in the outstanding supply of
longer-dated maturity US Treasury debt. Domestic and international
investors quickly began to accumulate what was expected to become a
scarce commodity and bond prices quickly rose.
By mid-April 2000, US Treasury bond yields had declined more than 80
basis points (0.80%) to 5.67%. During the remainder of the period,
US Treasury bond prices were volatile as strong economic reports and
investors' concerns of additional moves by the Federal Reserve Board
occasionally overshadowed the positive technical position of the
long-term US Treasury bond market.
Recently, a number of economic indicators have begun to suggest that
the actions taken by the Federal Reserve Board in 1999 and early
2000 have started to affect US economic growth. Both new home sales
and consumer spending have slowed, suggesting that economic growth
may subside into a 4%--4.5% range by late 2000. In our opinion, this
range of growth was targeted by the Federal Reserve Board as being
sustainable, given current productivity measures, without
endangering the present benign inflationary environment.
By June, investor focus returned to the dwindling supply of long-
term US Treasury securities and bond prices generally rose for the
remainder of the period. The decline in long-term US Treasury bond
yields resulted in an inverted yield curve as short-term and
intermediate-term interest rates did not fall proportionately to
long-term interest rates as the Federal Reserve Board was expected
to continue to raise short-term interest rates. The current
inversion has had as much to do with debt reduction and US Treasury
buybacks as with investor expectations of slower economic growth.
During the last six months, US Treasury bond yields have declined
more than 70 basis points to end the period at 5.78%, their lowest
monthly closing level since May 1999.
Tax-exempt bond yields also have declined in recent months. The
decline has largely been in response to the rally in US Treasury
securities, as well as a continued positive technical supply
environment. States such as California and Maryland have announced
that their large current and anticipated future budget surpluses
will permit the cancellation or postponement of expected bond
issuance. Additionally, some issuers have also initiated tenders to
repurchase existing debt, reducing the supply of tax-exempt bonds in
the secondary market as well. Given the decline in available long-
term US Treasury securities, some investors who need longer maturity
investment vehicles have begun to consider long-term municipal bonds
as potential substitutes. This has further strengthened the overall
positive technical position of the tax-exempt market. During the
last six months, long-term municipal revenue bond yields have
declined nearly 50 basis points to 5.85%, their lowest level since
late August 1999, as measured by the Bond Buyer Revenue Bond Index.
The recent relative underperformance of the municipal bond market
has been especially disappointing given the strong technical
position the tax-exempt bond market has enjoyed. The issuance of
long-term tax-exempt securities has dramatically declined. During
the last year, almost $200 billion in new long-term municipal
securities was issued, a decline of almost 20% compared to the same
period a year earlier. For the six months ended July 31, 2000,
approximately $100 billion in new tax-exempt bonds was underwritten,
a decline of 17% compared to the same period in 1999.
Although investors received more than $45 billion in coupon
payments, bond maturities and the proceeds from early bond
redemptions during June and July, overall investor demand has
diminished. Long-term municipal bond mutual funds have seen
consistent outflows in recent months as the yields of individual
securities have risen faster than those larger, more diverse mutual
funds. Thus far this year, tax-exempt mutual funds have had net
redemptions of more than $12 billion.
However, the rate at which these redemptions have been occurring has
slowed in recent months. Recent US equity market volatility,
especially in the NASDAQ, has reduced some investor interest in the
stock market. This investor interest, especially earlier this year,
had been siphoning away demand for municipal bonds by retail
investors. Also, the demand from property and casualty companies is
expected to increase in the coming months. These firms are becoming
more profitable after experiencing losses in the past few years
resulting from a series of weather-related natural disasters. Yet as
positive as the tax-exempt bond market's technical environment has
been for much of this year, investor response to the reduction in
both current and future supply of US Treasury bonds has been
overwhelmingly positive and municipal bond yields have
underperformed their taxable counterparts.
Significantly lower municipal bond yields are still likely to
require weaker US employment growth and consumer spending. The
actions taken in recent months by the Federal Reserve Board should
eventually slow US economic growth. Recent declines in US new home
sales are perhaps the first sign that consumer spending is being
slowed by higher interest rates. Until further signs develop, it is
likely that the municipal bond market's current favorable technical
position will dampen significant tax-exempt interest rate volatility
and provide a stable environment for eventual improvement in
municipal bond prices.
Portfolio Matters
Our portfolio strategy in late 1999 and early 2000 was to remain
fully invested and protect the Fund's assets by restructuring the
portfolio. This en-tailed replacing the more interest rate-sensitive
issues with more defensive, higher couponed issues maturing in 15
years - 20 years. These issues can capture 90%--95% of the yield
available in the entire yield curve and exhibit considerably less
price volatility. However, ongoing declines in new bond issuance
hampered quick implementation of this strategy. During the last
year, less than $6 billion in long-term Michigan securities was
issued, a decline of 12% compared to the same period a year earlier.
During the six months ended July 31, 2000, more than $2 billion in
Michigan long-term tax-exempt bonds was underwritten, representing a
decline of more than 20% compared to the same period in 1999. By
late January/early February 2000, we were able to accumulate
sufficient defensively structured bonds to alter the Fund's
composition. This allowed the Fund to both maintain its attractive
dividend and perform competitively during the period.
Looking forward, we intend to maintain the Fund's fully invested
position, continuing our efforts to seek to enhance shareholder
income. Given the magnitude of the Federal Reserve Board's actions
to date, we do not expect significantly higher bond yields in the
near future. Yet, given the dramatic decline in bond yields in
recent months, it is likely that bond prices will remain near their
present levels awaiting further evidence of US economic slowdown
before resuming their appreciation. Depending upon the nature and
time frame of such evidence, we are prepared to adjust the Fund's
present neutral position in an effort to enhance the Fund's dividend
stream.
The Fund's borrowing costs for much of the year have been in the
3.75%--4% range. The US Treasury bond yield curve recently inverted
with the ten-year US Treasury bond yield higher than that of the 30-
year Treasury bond. The tax-exempt bond market remained steeply
positive, generating significant benefits to the Fund's Common Stock
shareholder from the leveraging of the Preferred Stock. However,
should short-term tax-exempt interest rates rise, the benefits of
leverage will diminish and the yield paid to Common Stock
shareholders will decline. (For a complete explanation of the
benefits and risks of leveraging, see page 1 of this report of
shareholders.)
In Conclusion
We appreciate your ongoing interest in MuniHoldings Michigan 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
(Fred K. Stuebe)
Fred K. Stuebe
Vice President and
Portfolio Manager
September 1, 2000
MuniHoldings Michigan Insured Fund II, Inc., July 31, 2000
Portfolio Abbreviations
To simplify the listings of MuniHoldings Michigan Insured Fund II,
Inc.'s portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HDA Housing 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>
Michigan--98.8% Anchor Bay, Michigan, School District, GO (School Building and
Site) (b):
AAA Aaa $ 2,000 Series I, 6% due 5/01/2019 $ 2,064
AAA Aaa 2,250 Series I, 6% due 5/01/2029 2,305
AAA Aaa 2,625 Series II, 5.70% due 5/01/2025 2,622
AAA Aaa 1,000 Central Montcalm, Michigan, Public Schools, GO, 5.75% due
5/01/2024 (d) 1,004
AAA Aaa 3,850 Charlotte, Michigan, Public School District, GO, 5.375% due
5/01/2029 (b) 3,653
AAA Aaa 1,500 Comstock Park, Michigan, Public Schools, GO, 5.75% due
5/01/2029 (b) 1,502
AAA Aaa 1,000 Detroit, Michigan, Sewage Disposal Revenue Bonds, Series A,
5% due 7/01/2027 (d) 897
AAA Aaa 6,000 Detroit, Michigan, Water Supply System Revenue Bonds, Senior
Lien, Series A, 5.75% due 7/01/2026 (b) 6,025
AAA Aaa 6,300 East Grand Rapids, Michigan, Public School District, GO, 6%
due 5/01/2025 (g) 6,472
AAA Aaa 1,600 Grand Ledge, Michigan, Public Schools District, GO, Refunding,
5.375% due 5/01/2024 (d) 1,523
AAA Aaa 2,925 Hartland, Michigan, Consolidated School District, GO, 6% due
5/01/2013 (b) 3,102
AAA Aaa 2,000 Howell, Michigan, Public Schools, GO, 5.875% due 5/01/2022 (d) 2,029
AAA Aaa 3,975 Jackson, Michigan, Public Schools, GO, 5.375% due 5/01/2022 (b) 3,824
AAA Aaa 3,750 Kalamazoo, Michigan, Hospital Finance Authority, Hospital
Facility Revenue Refunding and Improvement Bonds (Bronson
Methodist Hospital), 5.875% due 5/15/2026 (d) 3,751
AAA NR* 3,000 Michigan Higher Education Student Loan Authority, Student
Loan Revenue Bonds, AMT, Series XVII-B, 5.40% due 6/01/2018 (a) 2,840
AAA Aaa 1,950 Michigan State, HDA, Rental Housing Revenue Bonds, Series B,
5.10% due 10/01/2019 (d) 1,793
AAA Aaa 3,075 Michigan State, HDA, Revenue Refunding Bonds, AMT, Series A,
6.05% due 12/01/2027 (a)(c) 3,050
AAA NR* 1,920 Michigan State, HDA, S/F Housing Revenue Bonds, AMT, Series B,
5.20% due 12/01/2018 (a) 1,768
Michigan State Hospital Finance Authority, Revenue
Refunding Bonds (d):
AAA Aaa 2,000 (Ascension Health Credit), Series A, 6.125% due 11/15/2023 2,040
AAA Aaa 1,000 (Ascension Health Credit), Series A, 6.125% due 11/15/2026 1,018
AAA Aaa 1,000 (Mercy Health Services), Series S, 5.50% due 8/15/2020 969
AAA Aaa 2,215 (Mercy Health Services), Series X, 6% due 8/15/2014 2,315
AAA Aaa 2,000 (Mercy-Mount Clemens), Series A, 5.75% due 5/15/2029 1,975
AAA Aaa 3,500 Michigan State Strategic Fund, Limited Obligation Revenue
Refunding Bonds (Detroit Edison Company), AMT, Series A,
5.55% due 9/01/2029 (d) 3,345
NR* VMIG1++ 1,500 Michigan State Strategic Fund, PCR, Refunding (Consumers Power
Project), VRDN, 4.30% due 4/15/2018 (a)(f) 1,500
AAA Aaa 1,500 Milan, Michigan, Area Schools, GO, Series A, 5.75% due
5/01/2024 (b) 1,511
AAA NR* 1,000 Northern Michigan University Revenue Refunding Bonds, 5.125%
due 12/01/2020 (d) 939
AAA Aaa 1,500 Romulus, Michigan, Community Schools, GO, 5.75% due
5/01/2025 (b) 1,505
A1+ VMIG1++ 200 Royal Oak, Michigan, Hospital Finance Authority, Hospital
Revenue Bonds (William Beaumont Hospital), VRDN, Series L,
4.35% due 1/01/2027 (f) 200
NR* Aaa 5,500 Saint Clair County, Michigan, Ecomomic Revenue Refunding Bonds
(Detroit Edison Company), RIB, Series 282, 8.19% due
8/01/2024 (a)(e) 6,264
AAA NR* 2,650 South Lyon, Michigan, Community Schools, GO, Series A,
5.75% due 5/01/2023 (d) 2,669
AAA Aaa 5,000 Wayne Charter County, Michigan, Airport Revenue Bonds
(Detroit Metropolitan Wayne County), AMT, Series A, 5.375%
due 12/01/2015 (d) 4,880
AAA Aaa 3,525 Wayne State University, Michigan, University Revenue
Refunding Bonds, 5.125% due 11/15/2029 (b) 3,233
AAA Aaa 2,000 Ypsilanti, Michigan, School District, GO, Refunding, 5.375%
due 5/01/2026 (b) 1,907
AAA Aaa 1,000 Zeeland, Michigan, Public Schools, GO, 5.25% due 5/01/2022 (b) 947
Total Investments (Cost--$85,332)--98.8% 87,441
Other Assets Less Liabilities--1.2% 1,036
---------
Net Assets--100.0% $ 88,477
=========
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FHA 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
rate in effect at July 31, 2000.
(f)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 2000.
(g)FSA Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Ernst & Young llp.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Michigan Insured Fund II, Inc., July 31, 2000
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of July 31, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$85,331,815) $ 87,440,678
Cash 7,304
Interest receivable 1,368,879
Prepaid expenses 2,634
------------
Total assets 88,819,495
------------
Liabilities: Payables:
Offering costs $ 142,628
Dividends to shareholders 114,806
Investment adviser 14,475 271,909
------------
Accrued expenses 70,701
------------
Total liabilities 342,610
------------
Net Assets: Net assets $ 88,476,885
============
Capital: Capital Stock (200,000,000 shares authorized):
Preferred Stock, par value $.10 per share (1,360 shares
of AMPS* issued and outstanding at $25,000 per share
liquidation preference) $ 34,000,000
Common Stock, par value $.10 per share (3,621,776 shares
issued and outstanding) $ 362,178
Paid-in capital in excess of par 53,431,840
Undistributed investment income--net 259,949
Accumulated realized capital losses on investments--net (1,685,945)
Unrealized appreciation on investments--net 2,108,863
------------
Total--Equivalent to $15.04 net asset value per share of
Common Stock (market price--$13.625) 54,476,885
------------
Total capital $ 88,476,885
============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period September 17, 1999++ to July 31, 2000
<S> <S> <C> <C>
Investment Income: Interest and amortization of premium and discount earned $ 4,242,351
Expenses: Investment advisory fees $ 393,129
Commission fees 68,027
Accounting services 59,260
Professional fees 34,932
Directors' fees and expenses 28,703
Transfer agent fees 21,440
Printing and shareholder reports 8,240
Custodian fees 6,327
Pricing fees 4,620
Other 3,868
------------
Total expenses before reimbursement 628,546
Reimbursement of expenses (304,612)
------------
Total expenses after reimbursement 323,934
------------
Investment income--net 3,918,417
------------
Realized & Realized loss on investments--net (1,685,945)
Unrealized Unrealized appreciation on investments--net 2,108,863
Gain (Loss) on ------------
Investments--Net: Net Increase in Net Assets Resulting from Operations $ 4,341,335
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Michigan Insured Fund II, Inc., July 31, 2000
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
September 17, 1999++
Increase (Decrease) in Net Assets: to July 31, 2000
<S> <S> <C>
Operations: Investment income--net $ 3,918,417
Realized loss on investments--net (1,685,945)
Unrealized appreciation on investments--net 2,108,863
------------
Net increase in net assets resulting from operations 4,341,335
------------
Dividends to Investment income--net:
Shareholders: Common Stock (2,530,263)
Preferred Stock (1,128,205)
------------
Net decrease in net assets resulting from dividends to shareholders (3,658,468)
------------
Capital Stock Proceeds from issuance of Common Stock 54,226,635
Transactions: Proceeds from issuance of Preferred Stock 34,000,000
Offering costs resulting from the issuance of Common Stock (137,170)
Offering and underwriting costs resulting from the issuance of Preferred Stock (395,452)
------------
Net increase in net assets derived from capital stock transactions 87,694,013
------------
Net Assets: Total increase in net assets 88,376,880
Beginning of period 100,005
------------
End of period* $ 88,476,885
============
*Undistributed investment income--net $ 259,949
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
September 17, 1999++
Increase (Decrease) in Net Asset Value: to July 31, 2000
<S> <S> <C>
Per Share Net asset value, beginning of period $ 15.00
Operating ------------
Performance: Investment income--net 1.08
Realized and unrealized gain on investments--net .13
------------
Total from investment operations 1.21
------------
Less dividends to Common Stock shareholders from investment income--net (.70)
------------
Capital charge resulting from issuance of Common Stock (.04)
------------
Effect of Preferred Stock activity:++++
Dividends to Preferred Stock shareholders:
Investment income--net (.31)
Capital charge resulting from issuance of Preferred Stock (.12)
------------
Total effect of Preferred Stock activity (.43)
------------
Net asset value, end of period $ 15.04
============
Market price per share, end of period $ 13.625
============
Total Investment Based on market price per share (4.13%)+++
Return:** ============
Based on net asset value per share 5.82%+++
============
Ratios Based on Total expenses, net of reimbursement*** .73%*
Average Net ============
Assets of Total expenses*** 1.42%*
Common Stock: ============
Total investment income--net*** 8.85%*
============
Amount of dividends to Preferred Stock shareholders 2.55%*
============
Investment income--net, to Common Stock shareholders 6.30%*
============
Ratios Based on Total expenses, net of reimbursement .45%*
Total Average ============
Net Total expenses .88%*
Assets:++++++*** ============
Total investment income--net 5.47%*
============
Ratios Based on Dividends to Preferred Stock shareholders 4.12%*
Average Net ============
Assets of
Preferred Stock:
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 54,477
Data: ============
Preferred Stock outstanding, end of period (in thousands) $ 34,000
============
Portfolio turnover 67.64%
============
Leverage: Asset coverage per $1,000 $ 2,602
============
Dividends Investment income--net $ 830
Per Share on ============
Preferred Stock
Outstanding:
*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 October 12, 1999.
++++++Includes Common and Preferred Stock average net assets.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Michigan Insured Fund II, Inc., July 31, 2000
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings Michigan 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 accounting
principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. Prior to
commencement of operations on September 17, 1999, the Fund had no
operations other than those relating to organizational matters and
the sale of 6,667 shares of Common Stock on August 30, 1999 to Fund
Asset Management, L.P. ("FAM") for $100,005. The Fund determines and
makes available for publication the net asset value of its Common
Stock on a weekly basis. The Fund's Common Stock is listed on the
American Stock Exchange under the symbol MDH. 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 investment 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 call and 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.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
The general partner of FAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of .55% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Stock. For the period September 17, 1999 to
July 31, 2000, FAM earned fees of $393,129, of which $269,917 was
voluntarily waived. In addition, FAM also reimbursed the Fund
$34,695 in additional expenses.
During the period September 17, 1999 to July 31, 2000, Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate
of FAM, received underwriting fees of $255,000 in connection with
the issuance of the Fund's Preferred Stock.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period September 17, 1999 to July 31, 2000 were $137,961,869
and $52,734,685, respectively.
Net realized losses for the period September 17, 1999 to July 31,
2000 and net unrealized gains as of July 31, 2000 were as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (1,608,870) $ 2,108,863
Financial futures contracts (77,075) --
------------ -----------
Total $ (1,685,945) $ 2,108,863
============ ===========
As of July 31, 2000, net unrealized appreciation for Federal income
tax purposes aggregated $2,108,863, of which $2,126,078 related to
appreciated securities and $17,215 related to depreciated
securities. The aggregate cost of investments at July 31, 2000 for
Federal income tax purposes was $85,331,815.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of holders of Common Stock.
Common Stock
Shares issued and outstanding during the period September 17, 1999
to July 31, 2000 increased by 3,615,109 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 yield in effect at July 31,
2000 was 4.15%.
In connection with the offering of AMPS, the Board of Directors
reclassified 1,360 shares of unissued capital stock as AMPS. Shares
issued and outstanding during the period September 17, 1999 to July
31, 2000 increased by 1,360 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 period September
17, 1999 to July 31, 2000, MLPF&S, an affiliate of FAM, earned
$58,943 as commissions.
5. Capital Loss Carryforward:
At July 31, 2000, the Fund had a net capital loss carryforward of
approximately $37,000, all of which expires in 2008. This amount
will be available to offset like amounts of any future taxable
gains.
6. Subsequent Event:
On August 8, 2000, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.072841 per share, payable on August 30, 2000 to shareholders of
record as of August 18, 2000.
MuniHoldings Michigan Insured Fund II, Inc., July 31, 2000
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
MuniHoldings Michigan Insured Fund II, Inc.
We have audited the accompanying statement of assets, liabilities
and capital of MuniHoldings Michigan Insured Fund II, Inc.,
including the schedule of investments, as of July 31, 2000, and the
related statements of operations and changes in net assets, and
financial highlights for the period from September 17, 1999
(commencement of operations) to July 31, 2000. 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 audit in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit 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 July 31, 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 audit provides 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 Michigan Insured Fund II, Inc. at
July 31, 2000 and the results of its operations, the changes in its
net assets, and the financial highlights for the period from
September 17, 1999 to July 31, 2000, in conformity with accounting
principles generally accepted in the United States.
(Ernst & Young LLP)
MetroPark, New Jersey
August 28, 2000
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by the Fund
during its taxable period ended July 31, 2000 qualify as tax-exempt
interest dividends for Federal income tax purposes. Additionally,
there were no capital gains distributions paid by the Fund during
the period.
Please retain this information for your records.
QUALITY PROFILE (unaudited)
The quality ratings of securities in the Fund as of July 31, 2000
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 96.9%
Other++ 1.9
++Temporary investments in short-term municipal securities.
MANAGED DIVIDEND POLICY (unaudited)
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.
MuniHoldings Michigan Insured Fund II, Inc., July 31, 2000
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
M. Colyer Crum, Director
Laurie Simon Hodrick, Director
Jack B. Sunderland, Director
Stephen Swensrud, Director
J. Thomas Touchton, Director
Fred G. Weiss, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Fred K. Stuebe, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, 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
AMEX Symbol
MDH
