MUNIHOLDINGS
MICHIGAN INSURED
FUND II, INC.
FUND LOGO
Semi-Annual Report
January 31, 2000
Officers and Directors
Terry K. Glenn, President and Director
M. Colyer Crum, Director
Laurie Simon Hodrick, Director
Jack B. Sunderland, 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
This report, including the financial information herein, is
transmitted to the shareholders of MuniHoldings Michigan Insured
Fund II, Inc. for their information. It is not a prospectus,
circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in the report. Past
performance results shown in this report should not be considered a
representation of future performance. The Fund has the ability to
leverage its Common Stock by issuing Preferred Stock to provide the
Common Stock shareholders with a potentially higher rate of return.
Leverage creates risks for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price
of shares of the Common Stock, and the risk that fluctuations in the
short-term dividend rates of the Preferred Stock may affect the
yield to Common Stock shareholders. Statements and other information
herein are as dated and are subject to change.
MuniHoldings 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., January 31, 2000
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report for
MuniHoldings Michigan Insured Fund II, Inc. In this and future
shareholder reports, we will highlight the Fund's performance and
describe recent investment activities. The Fund 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.
Since inception (September 17, 1999), the Common Stock of
MuniHoldings Michigan Insured Fund II, Inc. earned $0.331 per share
income dividends, which included earned and unpaid dividends of
$0.074. This represents a net annualized yield of 6.44%, based on a
month-end per share net asset value of $13.72. Over the same period,
the total investment return on the Fund's Common Stock was -6.72%,
based on a change in per share net asset value from $15.00 to
$13.72, and assuming reinvestment of $0.257 per share income
dividends.
For the period September 17, 1999 through January 31, 2000, the
Fund's Auction Market Preferred Stock had an average yield of 3.98%.
The Municipal Market Environment
During the six months ended January 31, 2000, continued strong
domestic growth, gradual improvement in foreign economies and
investor concerns regarding future inflationary pressures pushed
long-term fixed-income bond yields higher. The Federal Reserve Board
continued to raise short-term interest rates in August and November
1999 as well as just after the period's close, seeking to moderate
US economic growth and maintain the existing benign inflationary
environment. US economic growth, in part intensified by Year 2000
preparations, grew 5.8% during the last fiscal quarter of 1999 and
had an annual rate of 4.1% for 1999. A number of inflationary
indicators have also begun to signal some increase in price
pressures.
However, most investors believe that the Federal Reserve Board will
be extremely vigilant in preventing such pressures from any material
escalation. US Treasury bond yields responded by rising
approximately 60 basis points (0.60%) by mid-January 2000. A strong
rally, largely based upon an expected significant reduction in the
future supply of US Treasury 30-year maturity bonds, pushed yields
lower to 6.50% at January 31, 2000. Over the last six months, yields
on 30-year US Treasury bonds rose approximately 40 basis points.
The tax-exempt bond market was also under pressure throughout the
entire period. Despite receiving more than $30 billion in coupon
payments, bond maturities and proceeds from early redemptions in
December and January, overall investor demand has diminished. It is
likely that the returns generated by the US equity market have
continued to attract investor attention and have left little demand
for competing investment alternatives. At January 31, 2000, the long-
term tax-exempt revenue bond yield, as measured by the Bond Buyer
Revenue Index, was 6.34%, an increase of nearly 70 basis points over
the last six months.
Issuance by municipalities has significantly declined in recent
months. Over the last six months, less than $100 billion in long-
term tax-exempt bonds were issued, representing a decline of over
20% compared to the same period a year ago. During the last three
months, less than $45 billion in long-term bonds were issued by
various municipalities. This most recent quarterly issuance is 30%
below the level of the January 31, 1999 quarter. Additionally,
during January 2000, less than $8 billion in municipal debt was
underwritten, down more than 50% from January 1999 levels. This
represents the lowest monthly issuance in over five years. Toward
the end of 1999, consensus estimates for 2000 annual issuance were
in the $210 billion--$215 billion range. January's underwritings,
as well as those expected to be issued in the near future, have led
some analysts to revise their forecasts to the $190 billion range.
We believe an overall reduction in bond supply in the coming year
should help support the municipal bond market's overall technical
position. While tax-exempt bond yields, which are at their highest
level in over three years, have attracted significant retail
investor interest, institutional demand declined sharply. Long-term
municipal bond mutual funds have seen consistent outflows in recent
months as the yields of individual securities rose faster than those
of larger, more diverse mutual funds. During the six months ended
January 31, 2000, tax-exempt mutual funds have had net redemptions
of approximately $9 billion. Also, the demand from property and
casualty insurance companies has weakened as a result of the losses
and anticipated losses incurred from the series of damaging storms
across much of the eastern United States. Additionally, many
institutional investors who have in recent years been attracted to
the municipal bond market by historically attractive tax-exempt bond
yield ratios of over 90%, found other asset classes even more
attractive. Even with a reduced supply position, tax-exempt issuers
have been forced to repeatedly raise municipal bond yields in an
attempt to attract adequate demand. We believe a reduced bond supply
going forward is likely to promote a more closely balanced
supply/demand structure and foster a more stable tax-exempt interest
rate environment.
Looking ahead, it appears to us that long-term tax-exempt bond
yields will remain under pressure, trading in a broad range centered
around current levels. Investors are also likely to remain concerned
regarding future action by the Federal Reserve Board in early 2000.
Any improvement in bond prices may be contingent upon weakening in
both US employment growth and consumer spending. The 100 basis point
rise in US Treasury bond yields seen thus far could negatively
affect US economic growth. The US housing market is likely to be
among the first sectors to be affected, as some declines have
already been evidenced because of higher mortgage rates. We believe
it is also unrealistic to expect double-digit returns in US equity
markets to continue indefinitely. Much of the US consumer's wealth
is tied to recent stock market appreciation. Any slowing in these
incredible growth rates may reduce consumer spending. We believe
that these factors suggest that the worst of the recent increase in
bond yields has passed and stable, if not slightly improving, bond
prices may be expected.
Portfolio Strategy
Since the Fund's inception in September 1999, our primary investment
objective has been to provide shareholders with current income
exempt from both Federal and Michigan state income tax. Following
the initial offering of the Fund's Common Stock, we immediately
purchased insured Michigan municipal securities in an effort to
quickly generate an attractive dividend stream. However, the
relative scarcity of Michigan bond issuance in recent months has
hindered us from purchasing optimally structured issues, such as
higher-couponed, less interest rate-sensitive securities. Similarly,
the proceeds from the subsequent issuance of Preferred Stock were
invested in the highest-yielding insured securities available.
Looking ahead, we expect to maintain the Fund's current fully
invested position in order to seek to enhance shareholder income.
Given the recent increases in short-term interest rates by the
Federal Reserve Board as well as those expected in the near future,
we anticipate that economic growth in 2000 will be somewhat slower
than that seen in 1999. Tax-exempt bond yields are likely to remain
in their present range until the impact of the recent moves taken by
the Federal Reserve Board can be more fully established. As Michigan
issuance continues in the coming months, we intend to purchase
higher-couponed issues whenever they become available at attractive
price levels. These issues should provide the Fund with a high level
of coupon income.
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
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Fred K. Stuebe)
Fred K. Stuebe
Vice President and Portfolio Manager
March 8, 2000
MuniHoldings Michigan Insured Fund II, Inc., January 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)
COP Certificates of Participation
GO General Obligation Bonds
HDA Housing Development Authority
RIB Residual Interest Bonds
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 AAA Aaa $2,000 Anchor Bay, Michigan, School District, GO (School Building and
- --99.9% Site), Series I, 6% due 5/01/2019 (b)(h) $ 1,993
AAA Aaa 1,000 Central Montcalm, Michigan, Public Schools, GO, 5.75% due
5/01/2024 (d) 946
AAA Aaa 3,850 Charlotte, Michigan, Public School District, GO, 5.375% due
5/01/2029 (b) 3,381
AAA Aaa 1,500 Chippewa Valley, Michigan, Schools, GO, Refunding, 5% due
5/01/2027 (a) 1,239
AAA Aaa 2,500 Coopersville Area, Michigan, Public Schools, GO, 5% due
5/01/2024 (d) 2,088
NR* P1 800 Delta County, Michigan, Economic Development Corporation,
Environmental Improvement Revenue Refunding Bonds (Mead-
Escanaba Paper), VRDN, Series D, 3.60% due 12/01/2023 (f) 800
AAA Aaa 1,000 Detroit, Michigan, Sewage Disposal Revenue Bonds, Series A,
5% due 7/01/2027 (d) 825
AAA Aaa 3,000 Ecorse, Michigan, Public School District, GO, 5.50% due
5/01/2027 (b) 2,710
AAA Aaa 2,460 Fenton, Michigan, Area Public Schools, GO, 5% due 5/01/2021 (b) 2,078
AAA Aaa 1,600 Grand Ledge, Michigan, Public Schools District, GO,
Refunding, 5.375% due 5/01/2024 (d) 1,424
A1+ VMIG1++ 750 Grand Rapids, Michigan, Water Supply Revenue Refunding Bonds,
VRDN, 3.10% due 1/01/2020 (b)(f) 750
AAA Aaa 2,105 Grand Traverse County, Michigan, Hospital Revenue Refunding
Bonds (Munson Healthcare), Series A, 5.25% due 7/01/2013 (a) 1,952
AAA Aaa 1,770 Holly, Michigan, Area School District, GO, Refunding, 5% due
5/01/2022 (b) 1,489
AAA Aaa 1,250 Howell, Michigan, Public Schools, GO, 5.875% due 5/01/2022 (d) 1,207
AAA Aaa 3,975 Jackson, Michigan, Public Schools, GO, 5.375% due 5/01/2022 (b) 3,564
AAA Aaa 2,500 Kalamazoo, Michigan, Hospital Finance Authority, Hospital
Facility Revenue Refunding and Improvement Bonds (Bronson
Methodist Hospital), 5.875% due 5/15/2026 (d) 2,346
AAA NR* 5,360 Michigan Higher Education Student Loan Authority Revenue Bonds,
Student Loan, AMT, Series XVII-B, 5.40% due 6/01/2018 (a) 4,791
AAA NR* 1,920 Michigan State, HDA, Housing Revenue Bonds, AMT, Series B,
5.20% due 12/01/2018 (a) 1,666
AAA Aaa 1,950 Michigan State, HDA, Rental Housing Revenue Bonds, Series B,
5.10% due 10/01/2019 (d) 1,690
AAA Aaa 3,075 Michigan State, HDA, Revenue Refunding Bonds, AMT, Series A,
6.05% due 12/01/2027 (a)(g) 2,978
Michigan State Hospital Finance Authority, Revenue Refunding
Bonds (d):
AAA Aaa 2,000 (Ascension Health Credit), Series A, 6.125% due 11/15/2023 1,967
AAA Aaa 1,000 (Mercy Health Services), Series S, 5.50% due 8/15/2020 905
AAA Aaa 2,215 (Mercy Health Services), Series X, 6% due 8/15/2014 2,225
AAA Aaa 2,715 Michigan State House Representatives, COP, 5.50% due
8/15/2015 (a) 2,600
AAA Aaa 5,000 Michigan State Strategic Fund, Limited Obligation Revenue
Refunding Bonds (Detroit Edison Company), AMT, Series A,
5.55% due 9/01/2029 (d) 4,385
AAA Aaa 2,190 Montabella Community School District, Michigan, GO, 5.25%
due 5/01/2020 (b) 1,942
AAA Aaa 2,000 Muskegon Heights, Michigan, Public Schools, GO, 5% due
5/01/2024 (d) 1,670
AAA NR* 1,000 Northern Michigan University Revenue Refunding Bonds,
5.125% due 12/01/2020 (d) 867
AAA Aaa 1,500 Novi, Michigan, Building Authority Revenue Bonds, 5.60%
due 10/01/2019 (c) 1,405
AAA Aaa 1,500 Romulus, Michigan, Community Schools, GO, 5.75% due
5/01/2025 (b) 1,416
AAA Aaa 3,500 Saint Clair County, Michigan, Economic Revenue Refunding
Bonds (Detroit Edison Co. Project), Series AA, 6.40% due
8/01/2024 (a) 3,569
AAA Aaa 1,000 Sault Sainte Marie, Michigan, Area Public Schools, GO,
5.375% due 5/01/2019 (b) 913
A1+ VMIG1++ 300 University of Michigan, University Revenue Bonds (Medical
Service Plan), VRDN, Series A, 3.60% due 12/01/2027 (f) 300
A1+ VMIG1++ 500 University of Michigan, University Revenue Refunding Bonds
(Medical Service Plan), VRDN, Series A-1, 3.60% due 12/01/2021 (f) 500
Wayne Charter County, Michigan, Airport Revenue Bonds, AMT (d):
AAA Aaa 5,000 (Detroit Metropolitan Wayne County), Series A, 5.375% due
12/01/2015 4,611
NR* Aaa 4,750 RIB, Series 68, 7.095% due 12/01/2017 (e) 3,914
AAA Aaa 5,650 Wayne State University, Michigan, University Revenue Refunding
Bonds, 5.125% due 11/15/2029 (b) 4,736
AAA Aaa 2,000 Ypsilanti, Michigan, School District, GO, Refunding, 5.375%
due 5/01/2026 (b) 1,769
Zeeland, Michigan, Public Schools, GO (b):
AAA Aaa 2,500 5.25% due 5/01/2019 2,238
AAA Aaa 2,000 5.25% due 5/01/2022 1,757
Total Investments (Cost--$87,868)--99.9% 83,606
Variation Margin on Financial Futures Contracts**--0.1% 58
Other Assets Less Liabilities--0.0% 25
---------
Net Assets--100.0% $ 83,689
=========
(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
rate in effect at January 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 January 31, 2000.
(g)FHA Insured.
(h)All or a portion of security held as collateral in connection
with open financial futures contracts.
*Not Rated.
**Financial futures contracts sold as of January 31, 2000 were as
follows:
(in Thousands)
Number of Expiration
Contracts Issue Date Value
80 US Treasury Bonds March 2000 $ 7,378
Total Financial Futures Contracts Sold
(Total Contract Price--$7,208) $ 7,378
===========
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Michigan Insured Fund II, Inc., January 31, 2000
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of January 31, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$87,867,545) $ 83,605,575
Cash 27,802
Receivables:
Interest $ 1,414,838
Variation margin 57,500
Investment adviser 22,258 1,494,596
------------ ------------
Total assets 85,127,973
------------
Liabilities: Payables:
Securities purchased 1,019,466
Offering costs 255,622
Dividends to shareholders 130,442 1,405,530
------------
Accrued expenses 33,875
------------
Total liabilities 1,439,405
------------
Net Assets: Net assets $ 83,688,568
============
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 289,107
Undistributed realized capital gains on investments--net 37,413
Unrealized depreciation on investments--net (4,431,970)
------------
Total--Equivalent to $13.72 net asset value per share of Common
Stock (market price--$12.6875) 49,688,568
------------
Total capital $ 83,688,568
============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period September 17, 1999++ to January 31, 2000
<S> <S> <C> <C>
Investment Income: Interest and amortization of premium and discount earned $ 1,715,189
Expenses: Investment advisory fees $ 157,926
Commission fees 26,751
Accounting services 17,533
Professional fees 15,130
Directors' fees and expenses 10,758
Transfer agent fees 9,862
Listing fees 3,002
Custodian fees 2,917
Printing and shareholder reports 2,382
Pricing fees 1,926
Other 1,765
------------
Total expenses before reimbursement 249,952
Reimbursement of expenses (170,673)
------------
Total expenses after reimbursement 79,279
------------
Investment income--net 1,635,910
------------
Realized & Realized gain on investments--net 37,413
Unrealized Unrealized depreciation on investments--net (4,431,970)
Gain (Loss) on ------------
Investments--Net: Net Decrease in Net Assets Resulting from Operations $ (2,758,647)
============
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
September 17, 1999++
Increase (Decrease) in Net Assets: to January 31, 2000
<S> <S> <C>
Operations: Investment income--net $ 1,635,910
Realized gain on investments--net 37,413
Unrealized depreciation on investments--net (4,431,970)
------------
Net decrease in net assets resulting from operations (2,758,647)
------------
Dividends to Investment income--net:
Shareholders: Common Stock (931,293)
Preferred Stock (415,510)
------------
Net decrease in net assets resulting from dividends to shareholders (1,346,803)
------------
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 83,588,563
Beginning of period 100,005
------------
End of period* $ 83,688,568
============
*Undistributed investment income--net $ 289,107
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Michigan Insured Fund II, Inc., January 31, 2000
<TABLE>
FINANCIAL HIGHLIGHTS
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 January 31, 2000
<S> <S> <C>
Per Share Net asset value, beginning of period $ 15.00
Operating ------------
Performance: Investment income--net .46
Realized and unrealized loss on investments--net (1.20)
------------
Total from investment operations (.74)
------------
Less dividends to Common Stock shareholders from investment income--net (.26)
------------
Capital charge resulting from issuance of Common Stock (.04)
------------
Effect of Preferred Stock activity:++++
Dividends to Preferred Stock shareholders:
Investment income--net (.12)
Capital charge resulting from issuance of Preferred Stock (.12)
------------
Total effect of Preferred Stock activity (.24)
------------
Net asset value, end of period $ 13.72
============
Market price per share, end of period $ 12.6875
============
Total Investment Based on market price per share (13.74%)+++
Return:** ============
Based on net asset value per share (6.72%)+++
Ratios Based on Total expenses, net of reimbursement*** .43%*
Average Net ============
Assets of Total expenses*** 1.37%*
Common Stock: ============
Total investment income--net*** 8.95%*
============
Amount of dividends to Preferred Stock shareholders 2.27%*
============
Investment income--net, to Common Stock shareholders 6.68%*
============
Ratios Based on Total expenses, net of reimbursement .28%*
Total Average ============
Net Total expenses .87%*
Assets:++++++*** ============
Total investment income--net 5.70%*
============
Ratios Based on Dividends to Preferred Stock shareholders 3.98%*
Average Net ============
Assets of
Preferred Stock:
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 49,689
Data: ============
Preferred Stock outstanding, end of period (in thousands) $ 34,000
============
Portfolio turnover 14.97%
============
Leverage: Asset coverage per $1,000 $ 2,461
============
Dividends Investment income--net $ 306
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>
NOTES TO FINANCIAL STATEMENTS
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 generally
accepted accounting principles, which may require the use of
management accruals and estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal
recurring nature. 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 strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* 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).
MuniHoldings Michigan Insured Fund II, Inc., January 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
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
January 31, 2000, FAM earned fees of $157,926, of which $135,978 was
voluntarily waived. In addition, FAM also reimbursed the Fund
$34,695 in additional expenses.
During the period September 17, 1999 to January 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 January 31, 2000 were
$96,797,854 and $10,960,195, respectively.
Net realized gains (losses) for the period September 17, 1999 to
January 31, 2000 and net unrealized losses as of January 31, 2000
were as follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $ (328,632) $(4,261,970)
Financial futures contracts 366,045 (170,000)
------------ -----------
Total $ 37,413 $(4,431,970)
============ ===========
As of January 31, 2000, net unrealized depreciation for Federal
income tax purposes aggregated $4,261,970, of which $8,831 related
to appreciated securities and $4,270,801 related to depreciated
securities. The aggregate cost of investments at January 31, 2000
for Federal income tax purposes was $87,867,545.
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 January 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 January
31, 2000 was 3.70%.
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
January 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 January 31, 2000, MLPF&S, an affiliate of FAM, earned
$23,739 as commissions.
5. Subsequent Event:
On February 7, 2000, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.074300 per share, payable on February 28, 2000 to shareholders
of record as of February 17, 2000.
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute all or a portion of its
net investment income to its shareholders on a monthly basis. In
order to provide shareholders with a more consistent yield to the
current trading price of shares of Common Stock of the Fund, the
Fund may at times pay out less than the entire amount of net
investment income earned in any particular month and may at times in
any particular month pay out such accumulated but undistributed
income in addition to net investment income earned in that month. As
a result, the dividends paid by the Fund for any particular month
may be more or less than the amount of net investment income earned
by the Fund during such month. The Fund's current accumulated but
undistributed net investment income, if any, is disclosed in the
Statement of Assets, Liabilities and Capital, which comprises part
of the financial information included in this report.
QUALITY PROFILE
The quality ratings of securities in the Fund as of January 31, 2000
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 97.1%
Other++ 2.8
++Temporary investments in short-term municipal securities.
