UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-9191
Name of Fund: MuniHoldings Insured Fund II, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President,
MuniHoldings Insured Fund II, Inc., 800 Scudders Mill Road,
Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011,
Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 09/30/04
Date of reporting period: 10/01/03 - 09/30/04
Item 1 - Report to Stockholders
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
MuniHoldings
Insured Fund II, Inc.
Annual Report
September 30, 2004
MuniHoldings Insured Fund II, Inc. seeks to provide shareholders
with current income exempt from federal income taxes 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 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 leveraged its Common Stock and intends to
remain leveraged 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.
A description of the policies and procedures that the Fund uses
to determine how to vote proxies relating to portfolio securities
is available (1) without charge, upon request, by calling toll-free
1-800-MER-FUND (1-800-637-3863); (2) at www.mutualfunds.ml.com;
and (3) on the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the
most recent 12-month period ended June 30 is available (1) at
www.mutualfunds.ml.com; and (2) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
MuniHoldings Insured Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
(GO PAPERLESS LOGO)
It's Fast, Convenient, & Timely!
To sign up today, go to www.icsdelivery.com/live.
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, net of dividends to Preferred Stock, 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 create 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. As of September 30,
2004, the percentage of the Fund's total net assets invested in
inverse floaters was 2.21%, before the deduction of Preferred Stock.
Swap Agreements
The Fund may also invest in swap agreements, which are over-the-
counter contracts in which one party agrees to make periodic
payments based on the change in market value of a specified bond,
basket of bonds, or index in return for periodic payments based on a
fixed or variable interest rate or the change in market value of a
different bond, basket of bonds or index. Swap agreements may be
used to obtain exposure to a bond or market without owning or taking
physical custody of securities. Swap agreements involve the risk
that the party with whom the Fund has entered into the swap will
default on its obligation to pay the Fund and the risk that the Fund
will not be able to meet its obligations to pay the other party to
the agreement.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
A Letter From the President
Dear Shareholder
As we ended the current reporting period, the financial markets were
facing a number of uncertainties. At the top of investors' minds
were questions about economic expansion, corporate earnings,
interest rates and inflation, politics, oil prices and terrorism.
After benefiting from aggressive monetary and fiscal policy
stimulus, some fear the U.S. economy has hit a "soft patch." In
fact, economic expansion has slowed somewhat in recent months, but
we believe it is easing into a pace of growth that is sustainable
and healthy. The favorable economic environment has served to
benefit American corporations, which have continued to post strong
earnings. Although the most impressive results were seen earlier in
the year, solid productivity, improved revenue growth and cost
discipline all point to a vital corporate sector.
In terms of inflation and interest rates, the Federal Reserve Board
(the Fed) has signaled its confidence in the economic recovery by
increasing the Federal Funds target rate three times in the past
several months, from 1% to 1.75%. Inflation, for its part, has
remained in check. Investors and economists are focused on how
quickly Fed policy will move from here, anxiously absorbing every
bit of economic data and Fed innuendo.
While any market jitters associated with the presidential election
should subside after November, the effect of oil prices is more
difficult to predict. At around $50 per barrel, the price of oil
is clearly a concern. However, on an inflation-adjusted basis and
considering modern usage levels, the situation is far from the
crisis proportions we saw in the 1980s. Finally, although terrorism
and geopolitical crises are realities we are forced to live with
today, history has shown us that the financial effects of any single
event tend to be short-lived.
Amid the uncertainty, the Lehman Brothers Municipal Bond Index
posted a 12-month return of +4.60% as of September 30, 2004. Yields,
although volatile, were not dramatically changed year over year. As
always, our investment professionals are closely monitoring the
markets, the economy and the overall environment in an effort to
make well-informed decisions for the portfolios they manage. For the
individual investor, the key during uncertain times is to remain
focused on the big picture. Investment success comes not from
reacting to short-term volatility, but from maintaining a long-term
perspective and adhering to the disciplines of asset allocation,
diversification and rebalancing. We encourage you to work with your
financial advisor to ensure these time-tested techniques are
incorporated into your investment plan.
We thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the
months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
A Discussion With Your Fund's Portfolio Manager
As interest rates remained erratic throughout the past year, we
found it prudent to focus on the longer end of the municipal yield
curve, where volatility was more subdued and yields more attractive.
Describe the recent market environment relative to municipal bonds.
Despite considerable monthly volatility, long-term U.S. Treasury
bond yields ended the 12-month period ended September 30, 2004
little changed from year-ago levels. Tax-exempt bonds were not as
volatile as their taxable counterparts and registered modest gains
for the year.
Early in the period, U.S. Treasury bond yields declined while their
prices, which move in the opposite direction, rose. Somewhat
surprisingly, this increase in bond prices came as the U.S. economy
continued to improve. However, solid job creation remained elusive,
producing a drag on consumer confidence. Against this backdrop,
investors became convinced that the Federal Reserve Board (the Fed)
would hold short-term interest rates near their historic lows. By
mid-March 2004, yields on 30-year U.S. Treasury bonds had declined
to 4.65%.
In early April, however, monthly employment reports began to reveal
unexpectedly large gains in job growth. Consumer confidence
increased, and investors started to anticipate that the Fed would
soon be forced to raise short-term interest rates to ward off
potential inflation. Yields rose in response, with long-term
Treasury bond yields surpassing 5.50% early in June 2004.
For the rest of the period, bond yields generally fell as payroll
growth began to wane and inflation appeared negligible. Although the
Fed embarked on a tightening cycle with a 25 basis point (.25%)
interest rate hike in June, it also telegraphed its intention to
continue raising rates at a measured pace, removing earlier concerns
about the potential for more dramatic increases. Despite additional
Fed interest rate hikes in August and September, the prospect for a
moderate tightening helped support higher bond prices, and lower
yields, for the remainder of the Fund's fiscal year.
At September 30, 2004, the 30-year Treasury bond yield stood at
4.89%, essentially unchanged from a year earlier. The yield on the
10-year U.S. Treasury note increased more than 15 basis points,
ending the period at 4.12%. Yields on long-term revenue bonds, as
measured by the Bond Buyer Revenue Bond Index, fell approximately 20
basis points during the past 12 months. According to Municipal
Market Data, yields on AAA-rated issues maturing in 30 years
declined 5 basis points to 4.68%, while yields on 10-year AAA-rated
issues remained essentially unchanged at 3.47%.
More than $360 billion in new long-term tax-exempt bonds was issued
in the past 12 months, a drop of approximately 8% compared to the
previous year. During the third quarter of 2004, approximately $78
billion in long-term tax-exempt bonds was issued, a decline of
nearly 12% compared to the same three months in 2003. The trend of
declining municipal bond issuance allowed tax-exempt bond prices to
register moderate gains and outperform the taxable market.
How did the Fund perform during the fiscal year in light of the
existing market conditions?
For the 12-month period ended September 30, 2004, the Common Stock
of MuniHoldings Insured Fund II, Inc. had net annualized yields of
6.05% and 6.58%, based on a year-end per share net asset value of
$14.41 and a per share market price of $13.25, respectively, and
$0.872 per share income dividends. Over the same period, the total
investment return on the Fund's Common Stock was +7.12%, based on a
change in per share net asset value from $14.37 to $14.41, and
assuming reinvestment of ordinary income dividends.
The Fund's return for the year, based on net asset value, exceeded
that of its comparable Lipper category of Insured Municipal Debt
Funds (Leveraged), which had an average return of +5.66% for the
12-month period. (Funds in this Lipper category invest primarily
in municipal debt issues insured as to timely payment. These funds
can be leveraged via use of debt, preferred equity and/or reverse
repurchase agreements.) The portfolio's slightly defensive
positioning in a very volatile interest rate environment benefited
performance during the period. Our strategy was to avoid those areas
of the yield curve that were demonstrating the most volatility,
particularly the 10-year and shorter parts of the curve, and to move
out on the curve to the 20-year range and longer. This not only
shielded the Fund from much of the market's volatility but also
helped to augment yield.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Also benefiting performance was our decision to make full use of the
Fund's uninsured basket. The Fund is permitted to invest up to 20%
of net assets in uninsured bonds. These types of credits typically
outperform when the economy begins to strengthen. The outperformance
comes from a general rise in credit strength and a reduction in the
risk premium commanded by such securities, causing the spread
required on these issues to narrow. In anticipation of an improving
economy, we increased our weighting in uninsured bonds to its full
20% allotment about 18 months ago. As economic conditions improved
throughout the past 12 months, this uninsured portion of the
portfolio performed well on a relative basis, contributing to the
Fund's overall performance for the period.
For the six-month period ended September 30, 2004, the total
investment return on the Fund's Common Stock was +2.21%, based on a
change in per share net asset value from $14.59 to $14.41, and
assuming reinvestment of ordinary income dividends.
For a description of the Fund's total investment return based on a
change in the per share market value of the Fund's Common Stock (as
measured by the trading price of the Fund's shares on the New York
Stock Exchange), and assuming reinvestment of dividends, please
refer to the Financial Highlights section of this report. As a
closed-end fund, the Fund's shares may trade in the secondary market
at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the
Fund's Common Stock can vary significantly from total investment
returns based on changes in the Fund's net asset value.
What changes were made to the portfolio during the year?
Throughout the period, we continued to focus on securities that we
felt represented the best relative value in the insured municipal
marketplace. In our view, tax-exempt California bonds provided one
such investment opportunity as budget problems depressed the state's
municipal bond prices. Although California's financial situation
improved toward the end of the period, we still believe that insured
California bonds are attractively priced on a relative basis and
that they may continue to perform well in the near future.
In addition, we began to shift our focus further out on the
municipal yield curve. As the curve steepened significantly between
15 years and 30 years - indicating a widening gap between short-term
and long-term municipal bond yields--we sought to take advantage by
investing in bonds with slightly longer maturities. In particular,
we emphasized bonds with maturities between 23 years and 26 years,
an area of the curve we thought offered particular value. At the
same time, we de-emphasized shorter bonds, which we believed would
encounter more challenging performance ahead.
For the six-month period ended September 30, 2004, the Fund's
Auction Market Preferred Stock (AMPS) had average yields of 1.08%
for Series A, 1.03% for Series B and 1.08% for Series C. These
attractive funding levels, even after the recent Fed interest rate
increases, continued to generate a significant income benefit to
the Fund's Common Stock shareholders. While additional interest
rate hikes are anticipated, future increases are not expected to
be sizeable or protracted. Most importantly, the spread between
short-term and long-term tax-exempt interest rates has remained
historically wide. Of course, should that spread narrow, the
benefits of leveraging will decline and, as a result, reduce the
yield on the Fund's Common Stock. At the end of the period, the
Fund's leverage amount, due to AMPS, was 38.90% of total net assets,
before the deduction of Preferred Stock. (For a more complete
explanation of the benefits and risks of leveraging, see page 2 of
this report to shareholders.)
How would you characterize the Fund's position at the close of the
period?
At period-end, the portfolio was fully invested and, in anticipation
of higher interest rates, defensively positioned. We continue to
emphasize a competitive yield and preservation of net asset value.
Although we have begun to restructure the portfolio with bonds
offering slightly longer maturities, those securities added in
recent months have tended to be premium-coupon bonds with defensive
characteristics. Such a defensive posture has enabled the Fund to
increase its yield-generation potential while helping to insulate it
from the volatility expected to accompany rising interest rates.
Robert A. DiMella
Vice President and Portfolio Manager
October 18, 2004
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Schedule of Investments (In Thousands)
S&P Moody's Face
State Ratings++ Ratings++ Amount Municipal Bonds Value
Alaska--2.4% AAA Aaa $ 2,995 Alaska Energy Authority, Power Revenue Refunding Bonds
(Bradley Lake), 4th Series, 6% due 7/01/2020 (c) $ 3,596
AAA Aaa 2,000 Anchorage, Alaska, Water Revenue Refunding Bonds, 6%
due 9/01/2024 (a) 2,270
AAA Aaa 1,700 Matanuska-Susitna Borough, Alaska, GO, Series A, 6%
due 3/01/2020 (d) 1,926
Arizona--2.1% Arizona State University, COP (Research Infrastructure
Projects) (a):
AAA Aaa 2,365 5.25% due 9/01/2020 2,595
AAA Aaa 2,000 5.25% due 9/01/2022 2,167
AAA Aaa 2,000 5.25% due 9/01/2023 2,154
Arkansas--1.1% NR* Aaa 3,205 University of Arkansas, University Revenue Bonds
(Fayetteville Campus), 5.50% due 12/01/2018 (b) 3,635
California--26.0% AAA Aaa 10,275 California Pollution Control Financing Authority, PCR,
Refunding (Pacific Gas & Electric), AMT, Series A, 5.35%
due 12/01/2016 (d) 11,123
California State, Department of Water Resources, Power
Supply Revenue Bonds, Series A:
AAA Aaa 6,865 5.375% due 5/01/2017 (j) 7,623
BBB+ A2 5,400 5.25% due 5/01/2020 5,773
NR* Aaa 4,675 California State, GO, Refunding, RIB, AMT, Series 777X,
8.74% due 12/01/2021 (d)(f) 4,904
California State, Various Purpose, GO:
A A3 2,280 5.25% due 11/01/2020 2,459
A A3 2,100 5.50% due 4/01/2028 2,239
AAA Aaa 2,800 Compton, California, Unified School District, GO (Election
of 2002), Series B, 5.50% due 6/01/2025 (d) 3,077
Golden State Tobacco Securitization Corporation of California,
Tobacco Settlement Revenue Bonds, Series B:
A- Baa1 3,000 5.50% due 6/01/2018 3,108
A- Baa1 2,000 5.75% due 6/01/2021 2,107
A- Baa1 5,980 5.75% due 6/01/2022 6,279
AAA Aaa 2,700 5.375% due 6/01/2028 (b) 2,821
A- Baa1 1,010 5.60% due 6/01/2028 1,042
NR* Aa3 515 Los Angeles, California, Department of Water and Power,
Electric Plant Revenue Refunding Bonds, RIB, Series 370,
10.03% due 2/15/2024 (f) 543
AAA Aaa 11,750 Los Angeles, California, Unified School District, GO,
Series A, 5% due 1/01/2028 (d) 12,059
AAA Aaa 4,240 Modesto, California, Schools Infrastructure Financing Agency,
Special Tax Bonds, 5.50% due 9/01/2036 (a) 4,587
AAA Aaa 5,000 Port Oakland, California, Revenue Refunding Bonds, AMT,
Series L, 5.375% due 11/01/2027 (b) 5,206
A-1+ Aaa 1,500 Port Oakland, California, Trust Receipts, Revenue Bonds,
AMT, Class R, Series K, 9.625% due 11/01/2021 (b)(f) 1,792
AA Aa3 2,250 Sacramento County, California, Sanitation District, Financing
Authority, Revenue Refunding Bonds, RIB, Series 366, 9.782%
due 12/01/2027 (f) 2,497
AAA Aaa 1,250 San Francisco, California, City and County Airports Commission,
International Airport, Special Facilities Lease Revenue Bonds
(SFO Fuel Company LLC), AMT, Series A, 6.10% due 1/01/2020 (c) 1,382
AAA Aaa 3,000 University of California Revenue Bonds (Multiple Purpose
Projects), Series Q, 5% due 9/01/2022 (c) 3,152
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 at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings++ Ratings++ Amount Municipal Bonds Value
Colorado--5.5% Aurora, Colorado, COP (a):
AAA Aaa $ 3,055 5.75% due 12/01/2019 $ 3,481
AAA Aaa 3,230 5.75% due 12/01/2020 3,641
NR* Aa2 460 Colorado HFA, Revenue Refunding Bonds (S/F Program), AMT,
Senior Series A-2, 7.50% due 4/01/2031 479
NR* Aaa 4,000 Colorado Health Facilities Authority, Hospital Revenue
Refunding Bonds (Poudre Valley Health Care), Series A,
5.75% due 12/01/2023 (c) 4,419
AAA Aaa 4,975 Larimer County, Colorado, Poudre School District Number R-1,
GO, 6% due 12/15/2010 (b)(e) 5,802
Connecticut--4.4% AAA Aaa 8,500 Connecticut State, HFA, Revenue Bonds (Housing Mortgage Program),
AMT, Series D, 5.15% due 11/15/2022 (d) 8,758
AA Baa3 5,000 Connecticut State Health and Educational Facilities Authority,
Revenue Refunding Bonds (University of Hartford), Series E,
5.50% due 7/01/2022 (g) 5,414
Florida--1.8% AAA Aaa 5,500 Dade County, Florida, Water and Sewer System Revenue Bonds,
5.25% due 10/01/2021 (b) 5,899
Idaho--0.4% NR* Aaa 1,260 Idaho Housing and Finance Association, S/F Mortgage Revenue
Bonds, AMT, Series E, 6% due 1/01/2032 1,269
Illinois--14.3% Chicago, Illinois, GO, Series A (b):
AAA Aaa 8,800 6% due 1/01/2021 10,078
AAA Aaa 9,330 6% due 1/01/2022 10,685
AAA Aaa 2,185 Chicago, Illinois, Neighborhoods Alive 21 Program, GO,
Series PG-A, 6% due 1/01/2017 (b) 2,514
Chicago, Illinois, O'Hare International Airport Revenue Bonds,
3rd Lien, AMT, Series B-2:
AAA Aaa 3,000 5.75% due 1/01/2023 (c) 3,281
AAA Aaa 7,300 6% due 1/01/2029 (j) 8,028
NR* Aaa 1,600 Kane Cook and Du Page Counties, Illinois, School District
Number 46, Elgin, GO, 6.50% due 1/01/2016 (c) 1,881
Lake Cook, Kane and McHenry Counties, Illinois, Community
Unit School District N220, GO (b):
AAA Aaa 8,035 6% due 12/01/2010 (e) 9,371
AAA Aaa 125 6% due 12/01/2020 143
Indiana--3.3% AAA Aaa 9,280 Shelbyville, Indiana, Elementary School Building Corporation
Revenue Bonds, First Mortgage, 5.75% due 1/15/2009 (c)(e) 10,532
Kansas--2.1% AA Aa2 3,510 Kansas State Development Finance Authority, Health Facilities
Revenue Bonds (Sisters of Charity Leavenworth), Series J,
6.125% due 12/01/2020 3,937
NR* Aaa 2,805 Sedgwick and Shawnee Counties, Kansas, S/F Mortgage Revenue
Bonds, AMT, Series A-2, 6.20% due 12/01/2033 (h)(i) 2,954
Louisiana--0.7% 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) 2,285
Maryland--1.7% AAA Aaa 5,000 Maryland State Economic Development Corporation, Lease Revenue
Bonds (Maryland Aviation Administration Facilities), AMT, 5.375%
due 6/01/2022 (c) 5,325
Massachusetts-- AAA Aaa 110 Massachusetts State, GO, Refunding, Series D, 5.375% due
6.4% 8/01/2012 (d)(e) 124
BBB NR* 1,105 Massachusetts State Industrial Finance Agency, Higher Education
Revenue Refunding Bonds (Hampshire College Project), 5.80% due
10/01/2007 (e) 1,229
Massachusetts State Special Obligation Dedicated Tax Revenue
Bonds (b):
AAA Aaa 2,655 5.25% due 1/01/2025 2,829
AAA Aaa 12,345 5.25% due 1/01/2026 13,087
Massachusetts State Water Resource Authority Revenue Refunding
Bonds, Series A (b):
AAA Aaa 1,270 6% due 8/01/2016 1,467
AAA Aaa 1,500 6% due 8/01/2017 1,733
Michigan--3.9% AAA Aaa 2,000 Detroit, Michigan, City School District, GO, Series A, 5.50%
due 5/01/2021 (c) 2,230
AAA Aaa 1,000 Michigan State Hospital Finance Authority, Revenue Refunding
Bonds (Mercy Mount Clemens), Series A, 6% due 5/15/2014 (d) 1,133
Michigan State Strategic Fund, Limited Obligation Revenue
Refunding Bonds (Detroit Edison Company Project), AMT (j):
AAA Aaa 2,000 Series A, 5.50% due 6/01/2030 2,097
AAA Aaa 5,000 Series C, 5.65% due 9/01/2029 5,253
NR* Aaa 1,500 Saint Clair County, Michigan, Economic Revenue Refunding
Bonds (The Detroit Edison Company), RIB, Series 282, 10.79%
due 8/01/2024 (a)(f) 1,927
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings++ Ratings++ Amount Municipal Bonds Value
Minnesota--4.5% Prior Lake, Minnesota, Independent School District
Number 719, GO (c):
NR* Aaa $ 2,555 5.50% due 2/01/2016 $ 2,833
NR* Aaa 1,830 5.50% due 2/01/2017 2,025
NR* Aaa 3,570 5.50% due 2/01/2018 3,951
NR* Aaa 2,840 5.50% due 2/01/2019 3,143
NR* Aaa 2,185 Sauk Rapids, Minnesota, Independent School District
Number 47, GO, Series A, 5.625% due 2/01/2018 (d) 2,463
Mississippi--1.5% BBB- Ba1 3,725 Mississippi Business Finance Corporation, Mississippi, PCR,
Refunding (System Energy Resources Inc. Project), 5.875% due
4/01/2022 3,736
AAA Aaa 1,000 Walnut Grove, Mississippi, Correctional Authority, COP, 6%
due 11/01/2009 (a)(e) 1,171
Nebraska--1.9% Omaha, Nebraska, Convention Hotel Corporation, Convention
Center Revenue Bonds, First Tier, Series A (a):
AAA Aaa 1,410 5.50% due 4/01/2020 1,578
AAA Aaa 3,985 5.50% due 4/01/2022 4,413
Nevada--6.4% AAA Aaa 1,750 Clark County, Nevada, IDR (Power Company Project), AMT,
Series A, 6.70% due 6/01/2022 (b) 1,818
AAA Aaa 7,000 Las Vegas, Nevada, New Convention and Visitors Authority
Revenue Bonds, 5.75% due 7/01/2016 (a) 7,904
AA Aaa 440 Nevada Housing Division, S/F Mortgage Revenue Bonds, AMT,
Series A-2, 6.30% due 4/01/2022 (d) 440
Truckee Meadows, Nevada, Water Authority, Water Revenue
Bonds, Series A (c):
AAA Aaa 5,000 5.50% due 7/01/2018 5,597
AAA Aaa 4,445 5.50% due 7/01/2019 4,975
New Jersey--3.6% AAA Aaa 11,000 New Jersey EDA, Motor Vehicle Surcharge Revenue Bonds,
Series A, 5.25% due 7/01/2033 (d) 11,609
New Mexico--1.7% AAA Aaa 5,000 Farmington, New Mexico, PCR, Refunding (Public Service
Company of San Juan), Series C, 5.70% due 12/01/2016 (a) 5,462
New York--15.6% AAA Aaa 14,000 Nassau Health Care Corporation, New York, Health System
Revenue Bonds, 5.75% due 8/01/2022 (c) 15,778
AAA Aaa 5,000 New York City, New York, GO, Refunding, Series G, 5.75% due
2/01/2017 (c) 5,314
AAA Aaa 4,345 New York State Dormitory Authority Revenue Bonds (School
Districts Financing Program), Series D, 5.25% due 10/01/2023 (d) 4,646
New York State Dormitory Authority, Revenue Refunding Bonds:
AAA Aaa 1,280 (School Districts Bond Financing Program), Series A, 5%
due 4/01/2016 (d) 1,408
AAA Aaa 5,000 (State University Educational Facilities), 5.75% due
5/15/2010 (b)(e) 5,786
Tobacco Settlement Financing Corporation of New York Revenue
Bonds:
AAA Aaa 5,000 Series A-1, 5.25% due 6/01/2022 (a) 5,359
AA- A3 7,850 Series C-1, 5.50% due 6/01/2017 8,566
AA- A3 3,000 Series C-1, 5.50% due 6/01/2021 3,267
North Carolina-- AAA Aaa 1,445 North Carolina HFA, Home Ownership Revenue Bonds, AMT,
0.5% Series 14-A, 5.35% due 1/01/2022 (a) 1,505
Ohio--1.8% NR* Aaa 1,745 Aurora, Ohio, City School District, COP, 6.10% due 12/01/2019 (d) 2,014
AAA Aaa 2,390 Columbus, Ohio, City School District, School Facilities
Construction and Improvement, GO, 5.25% due 12/01/2024 (c) 2,573
AAA Aaa 1,000 Kent State University, Ohio, University Revenue Bonds, 6%
due 5/01/2024 (a) 1,145
Oklahoma--1.1% AAA Aaa 3,385 Claremore, Oklahoma, Public Works Authority, Capital Improvement
Revenue Refunding Bonds, Series A, 5.25% due 6/01/2027 (c) 3,601
Pennsylvania-- Lycoming County, Pennsylvania, College Authority Revenue
6.6% Bonds (Pennsylvania College of Technology) (d):
NR* Aaa 2,255 5.25% due 7/01/2007 (e) 2,468
NR* Aaa 3,345 5.25% due 7/01/2018 3,607
NR* Aaa 6,435 Pennsylvania State Higher Educational Facilities Authority,
State System of Higher Education Revenue Bonds, Series O,
5.125% due 6/15/2024 (a) 6,716
A- NR* 2,430 Sayre, Pennsylvania, Health Care Facilities Authority Revenue
Bonds (Guthrie Health Issue), Series B, 5.85% due 12/01/2020 2,580
A- NR* 1,335 Sayre, Pennsylvania, Health Care Facilities Authority, Revenue
Refunding Bonds (Guthrie Healthcare System), Series A, 5.75%
due 12/01/2021 1,404
AAA Aaa 4,350 Washington County, Pennsylvania, Capital Funding Authority
Revenue Bonds (Capital Projects and Equipment Program), 6.15%
due 12/01/2029 (a) 4,568
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings++ Ratings++ Amount Municipal Bonds Value
Rhode Island-- NR* Aaa $ 5,555 Providence, Rhode Island, Redevelopment Agency Revenue
3.5% Refunding Bonds (Public Safety and Municipal Buildings),
Series A, 5.75% due 4/01/2019 (a) $ 6,283
NR* Aaa 4,685 Rhode Island State Health and Educational Building
Corporation Revenue Bonds (Rhode Island School of Design),
Series D, 5.50% due 8/15/2031 (j) 5,016
South Carolina-- NR* Aaa 2,810 South Carolina Housing Finance and Development Authority,
0.9% Mortgage Revenue Refunding Bonds, AMT, Series A-2, 6.35% due
7/01/2019 (c) 2,948
Tennessee--2.1% AAA Aaa 3,500 Metropolitan Government of Nashville and Davidson County,
Tennessee, Health and Education Facilities Board, Revenue
Refunding Bonds (Ascension Health Credit), Series A, 5.875%
due 11/15/2009 (a)(e) 4,034
AA Aa2 1,080 Tennessee HDA, Revenue Bonds (Homeownership Program), AMT,
Series 2C, 6% due 7/01/2011 1,138
AAA Aaa 1,515 Tennessee HDA, Revenue Refunding Bonds (Homeownership Program),
AMT, Series 1, 6.05% due 7/01/2014 (d) 1,577
Texas--14.9% NR* A3 5,000 Austin, Texas, Convention Center Revenue Bonds (Convention
Enterprises Inc.), Trust Certificates, Second Tier, Series B,
6% due 1/01/2023 (f) 5,083
AAA Aaa 15,000 Dallas-Fort Worth, Texas, International Airport Revenue Bonds,
AMT, Series A, 5.50% due 11/01/2033 (d) 15,698
Dallas-Fort Worth, Texas, International Airport Revenue
Refunding and Improvement Bonds, AMT, Series A (b):
AAA Aaa 1,835 5.875% due 11/01/2017 2,064
AAA Aaa 2,150 5.875% due 11/01/2018 2,418
AAA Aaa 2,390 5.875% due 11/01/2019 2,688
El Paso, Texas, Water and Sewer Revenue Refunding and
Improvement Bonds, Series A (c):
AAA Aaa 2,650 6% due 3/01/2015 3,072
AAA Aaa 3,875 6% due 3/01/2016 4,492
AAA Aaa 4,115 6% due 3/01/2017 4,770
AAA Aaa 4,954 Houston, Texas, Community College System, Participation
Interests, COP (Alief Center Project), 5.75% due 8/15/2022 (d) 5,506
AAA Aaa 1,850 Midland, Texas, Certificates of Obligation, GO, 6.10% due
3/01/2027 (b) 2,090
Utah--2.6% AAA Aaa 2,400 Salt Lake City, Utah, Municipal Building Authority, Lease
Revenue Refunding Bonds (Municipal Improvements and Refunding
Project), Series A, 5.40% due 10/15/2019 (a) 2,667
AAA Aaa 5,000 Weber County, Utah, Municipal Building Authority, Lease
Revenue Refunding Bonds, 5.75% due 12/15/2019 (d) 5,556
Virginia--1.9% AAA Aaa 5,925 Virginia State HDA, Commonwealth Mortgage Revenue Bonds,
Series J, Sub-Series J-1, 5.20% due 7/01/2019 (d) 6,027
Washington--6.8% AAA Aaa 6,885 Bellevue, Washington, GO, Refunding, 5.50% due 12/01/2039 (d) 7,374
AAA Aaa 3,840 Chelan County, Washington, Public Utility District Number 001,
Consolidated Revenue Bonds (Chelan Hydro System), AMT, Series A,
5.45% due 7/01/2037 (a) 3,969
NR* Aaa 3,445 Lewis County, Washington, GO, Refunding, 5.75% due 12/01/2024 (a) 3,849
AAA Aaa 2,500 Seattle, Washington, Municipal Light and Power Revenue Bonds,
6% due 10/01/2024 (d) 2,841
AAA Aaa 3,500 Seattle, Washington, Water System Revenue Bonds, Series B,
6% due 7/01/2029 (b) 3,905
West Virginia-- AAA Aaa 6,210 West Virginia State Housing Development Fund, Housing Finance
2.0% Revenue Refunding Bonds, Series D, 5.20% due 11/01/2021 (d) 6,505
Wisconsin--0.2% BBB+ NR* 750 Wisconsin State Health and Educational Facilities Authority
Revenue Bonds (Blood Center of Southeastern Wisconsin Project),
5.75% due 6/01/2034 761
Puerto Rico-- AAA Baa1 2,675 Puerto Rico Commonwealth, Public Improvement, GO, 5.125% due
0.9% 7/01/2030 (c) 2,769
Total Municipal Bonds (Cost--$472,048)--157.1% 505,924
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Schedule of Investments (concluded) (In Thousands)
Shares
Held Short-Term Investments Value
16,189 Merrill Lynch Institutional Tax-Exempt Fund (k) $ 16,189
Total Short-Term Investments (Cost--$16,189)--5.0% 16,189
Total Investments (Cost--$488,237**)--162.1% 522,113
Other Assets Less Liabilities--1.4% 4,473
Preferred Stock, at Redemption Value--(63.5%) (204,514)
----------
Net Assets Applicable to Common Stock--100.0% $ 322,072
==========
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) Prerefunded.
(f) 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 September 30, 2004.
(g) Radian Insured.
(h) FNMA Collateralized.
(i) GNMA Collateralized.
(j) XL Capital Insured.
(k) Investments in companies considered to be an affiliate of the Fund
(such companies are defined as "Affiliated Companies" in Section
2(a)(3) of the Investment Company Act of 1940) were as follows:
(in Thousands)
Net Dividend
Affiliate Activity Income
Merrill Lynch Institutional
Tax-Exempt Fund 14,800 $53
* Not Rated.
** The cost and unrealized appreciation/depreciation of investments as
of September 30, 2004, as computed for federal income tax purposes,
were as follows:
(in Thousands)
Aggregate cost $ 488,343
=============
Gross unrealized appreciation $ 34,244
Gross unrealized depreciation (474)
-------------
Net unrealized appreciation $ 33,770
=============
++ Ratings of issues shown are unaudited.
Forward interest rate swaps outstanding as of September 30, 2004
were as follows:
(in Thousands)
Notional Unrealized
Amount Depreciation
Receive a variable rate equal to
a 7-Day Bond Market Association
Municipal Swap Index Rate and
pay a fixed rate of 4.349%
Broker, J. P. Morgan Chase Bank
Expires October 2024 $ 50,000 $ (2,053)
Receive a variable rate equal to
a 7-Day Bond Market Association
Municipal Swap Index Rate and
pay a fixed rate of 3.68%
Broker, Morgan Stanley Capital
Services Inc.
Expires March 2015 $ 25,000 (133)
---------
Total $ (2,186)
=========
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Statement of Net Assets
As of September 30, 2004
Assets
Investments in unaffiliated securities, at value (identified cost--$472,047,255) $ 505,923,395
Investments in affiliated securities, at value (identified cost--$16,189,380) 16,189,380
Receivables:
Interest $ 7,703,011
Securities sold 335,000
Dividends from affiliates 602 8,038,613
---------------
Prepaid expenses 8,416
---------------
Total assets 530,159,804
---------------
Liabilities
Unrealized depreciation on forward interest rate swaps 2,186,125
Payables:
Securities purchased 1,133,006
Dividends to Common Stock shareholders 150,229
Investment adviser 28,336
Other affiliates 2,676 1,314,247
---------------
Accrued expenses and other liabilities 73,256
---------------
Total liabilities 3,573,628
---------------
Preferred Stock
Preferred Stock, at redemption value, par value $.10 per share (2,100 Series
A Shares, 2,100 Series B Shares and 3,980 Series C Shares of AMPS* authorized,
issued and outstanding at $25,000 per share liquidation preference) 204,514,091
---------------
Net Assets Applicable to Common Stock
Net assets applicable to Common Stock $ 322,072,085
===============
Analysis of Net Assets Applicable to Common Stock
Common Stock, par value $.10 per share (22,352,426 shares issued and
outstanding) $ 2,235,243
Paid-in capital in excess of par 313,735,958
Undistributed investment income--net $ 5,549,997
Accumulated realized capital losses--net (31,139,128)
Unrealized appreciation--net 31,690,015
---------------
Total accumulated earnings--net 6,100,884
---------------
Total--Equivalent to $14.41 net asset value per share of Common Stock
(market price--$13.25) $ 322,072,085
===============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Statement of Operations
For the Year Ended September 30, 2004
Investment Income
Interest $ 25,804,732
Dividends from affiliates 53,292
---------------
Total income 25,858,024
---------------
Expenses
Investment advisory fees $ 2,887,094
Commission fees 523,671
Accounting services 170,404
Transfer agent fees 71,152
Professional fees 57,964
Printing and shareholder reports 48,724
Custodian fees 29,334
Directors' fees and expenses 22,873
Listing fees 20,800
Pricing fees 18,770
Other 45,419
---------------
Total expenses before waiver and reimbursement 3,896,205
Waiver and reimbursement of expenses (290,208)
---------------
Total expenses after waiver and reimbursement 3,605,997
---------------
Investment income--net 22,252,027
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net 3,177,850
Forward interest rate swaps--net (3,230,902) (53,052)
---------------
Change in unrealized appreciation/depreciation on:
Investments--net (722,047)
Forward interest rate swaps--net 806,245 84,198
--------------- ---------------
Total realized and unrealized gain--net 31,146
---------------
Dividends to Preferred Stock Shareholders
Investment income--net (2,034,890)
---------------
Net Increase in Net Assets Resulting from Operations $ 20,248,283
===============
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Statements of Changes in Net Assets
For the Year Ended
September 30,
Increase (Decrease) in Net Assets: 2004 2003
Operations
Investment income--net $ 22,252,027 $ 22,801,670
Realized gain (loss)--net (53,052) 11,791,657
Change in unrealized appreciation/depreciation--net 84,198 (15,620,530)
Dividends to Preferred Stock shareholders (2,034,890) (2,201,859)
--------------- ---------------
Net increase in net assets resulting from operations 20,248,283 16,770,938
--------------- ---------------
Dividends to Common Stock Shareholders
Investment income--net (19,446,611) (19,178,382)
--------------- ---------------
Net decrease in net assets resulting from dividends to Common Stock
shareholders (19,446,611) (19,178,382)
--------------- ---------------
Net Assets Applicable to Common Stock
Total increase (decrease) in net assets applicable to Common Stock 801,672 (2,407,444)
Beginning of year 321,270,413 323,677,857
--------------- ---------------
End of year* $ 322,072,085 $ 321,270,413
=============== ===============
* Undistributed investment income--net $ 5,549,997 $ 4,779,746
=============== ===============
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001++++++ 2000++++++
Per Share Operating Performance
Net asset value, beginning of year $ 14.37 $ 14.48 $ 13.94 $ 12.72 $ 12.72
---------- ---------- ---------- ---------- ----------
Investment income--net 1.00+++++ 1.02++ 1.03 1.06 1.09
Realized and unrealized gain (loss)--net -- (.17) .47 1.21 .04
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.09) (.10) (.13) (.31) (.38)
Realized gain--net -- -- --++++ -- --
Capital write-off resulting from issuance of
Preferred Stock -- -- -- -- --++++
---------- ---------- ---------- ---------- ----------
Total from investment operations .91 .75 1.37 1.96 .75
---------- ---------- ---------- ---------- ----------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.87) (.86) (.83) (.74) (.75)
Realized gain--net -- -- --++++ -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions to Common
Stock shareholders (.87) (.86) (.83) (.74) (.75)
---------- ---------- ---------- ---------- ----------
Capital write-off resulting from issuance of
Common Stock -- -- -- -- --++++
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 14.41 $ 14.37 $ 14.48 $ 13.94 $ 12.72
========== ========== ========== ========== ==========
Market price per share, end of year $ 13.25 $ 13.13 $ 13.55 $ 13.04 $ 10.75
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 7.12% 5.95% 10.67% 16.43% 7.08%
========== ========== ========== ========== ==========
Based on market price per share 7.80% 3.45% 10.71% 28.87% 4.07%
========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Common Stock
Total expenses, net of waiver and reimbursement
and excluding reorganization expenses** 1.12% 1.14% 1.18% 1.09% 1.13%
========== ========== ========== ========== ==========
Total expenses, excluding reorganization
expenses** 1.21% 1.23% 1.27% 1.26% 1.39%
========== ========== ========== ========== ==========
Total expenses** 1.21% 1.23% 1.27% 1.26% 1.70%
========== ========== ========== ========== ==========
Total investment income--net** 6.93% 7.19% 7.44% 7.83% 8.67%
========== ========== ========== ========== ==========
Amount of dividends to Preferred Stock
shareholders .63% .69% .97% 2.28% 3.03%
========== ========== ========== ========== ==========
Investment income--net, to Common Stock
shareholders 6.30% 6.50% 6.47% 5.55% 5.64%
========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Common & Preferred Stock**
Total expenses, net of waiver and reimbursement
and excluding reorganization expenses .69% .69% .71% .65% .64%
========== ========== ========== ========== ==========
Total expenses, excluding reorganization
expenses .74% .75% .76% .75% .79%
========== ========== ========== ========== ==========
Total expenses .74% .75% .76% .75% .97%
========== ========== ========== ========== ==========
Total investment income--net 4.23% 4.37% 4.48% 4.67% 4.93%
========== ========== ========== ========== ==========
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Financial Highlights (concluded)
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001++++++ 2000++++++
Ratios Based on Average Net Assets of Preferred Stock
Dividends to Preferred Stock shareholders .99% 1.08% 1.46% 3.36% 3.98%
========== ========== ========== ========== ==========
Supplemental Data
Net assets applicable to Common Stock,
end of year (in thousands) $ 322,072 $ 321,270 $ 323,678 $ 311,505 $ 284,222
========== ========== ========== ========== ==========
Preferred Stock outstanding, end of year
(in thousands) $ 204,500 $ 204,500 $ 204,500 $ 204,500 $ 204,500
========== ========== ========== ========== ==========
Portfolio turnover 45.89% 52.00% 50.73% 61.09% 132.29%
========== ========== ========== ========== ==========
Leverage
Asset coverage per $1,000 $ 2,575 $ 2,571 $ 2,583 $ 2,523 $ 2,390
========== ========== ========== ========== ==========
Dividends Per Share on Preferred Stock Outstanding
Series A--Investment income--net $ 253 $ 268 $ 362 $ 820 $ 1,002
========== ========== ========== ========== ==========
Series B--Investment income--net $ 241 $ 267 $ 338 $ 830 $ 1,009
========== ========== ========== ========== ==========
Series C--Investment income--net $ 251 $ 271 $ 381 $ 850 $ 124
========== ========== ========== ========== ==========
* 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.
++ Based on average shares outstanding.
++++ Amount is less than $(.01) per share.
+++ Amount is less than $.01 per share.
++++++ Certain prior year amounts have been reclassified to conform to current year presentation.
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
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 amended, as a non-
diversified, closed-end management investment company. The Fund's
financial statements are prepared in conformity with U.S. generally
accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from
these estimates. The Fund determines and makes available for
publication the net asset value of its Common Stock on a daily
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 last available
bid price in the over-the-counter market or on the basis of values
as obtained by a pricing service. Pricing services use valuation
matrixes that incorporate both dealer-supplied valuations and
valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the
general direction of the Board of Directors. Such valuations and
procedures will be reviewed periodically by the Board of Directors
of the Fund. 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). Swap agreements are valued by quoted fair
values received daily by the Fund's pricing service. Short-term
investments with a remaining maturity of 60 days or less are valued
at amortized cost which approximates market value, under which
method the investment is valued at cost and any premium or discount
is amortized on a straight line basis to maturity. Investments in
open-end investment companies are valued at their net asset value
each business day. Securities and other 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.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies both to increase the return of the Fund and to
hedge, or protect, its exposure to interest rate movements and
movements in the securities 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.
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 may purchase and write 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 the 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.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Notes to Financial Statements (continued)
* Forward interest rate swaps--The Fund may enter into forward
interest rate swaps. In a forward interest rate swap, the Fund and
the counterparty agree to make periodic net payments on a specified
notional contract amount, commencing on a specified future effective
date, unless terminated earlier. When the agreement is closed, the
fund records a realized gain or loss in an amount equal to the value
of the agreement.
(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). Realized gains and losses on security
transactions are determined on the identified cost basis. Dividend
income is recorded on the ex-dividend dates. Interest income is
recognized on the accrual basis. The Fund amortizes all premiums and
discounts on debt securities.
(e) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
(f) Reclassifications--U.S. generally accepted accounting principles
require that certain components of net assets be adjusted to
reflect permanent differences between financial and tax reporting.
Accordingly, during the current year, $275 has been reclassified
between undistributed net investment income and accumulated net
realized capital losses as a result of permanent differences
attributable to the amortization methods on fixed income securities.
This reclassification has no effect on net assets or net asset
values 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, 2004,
FAM earned fees of $2,887,094, of which $278,207 was waived. For the
year ended September 30, 2004, FAM reimbursed the Fund in the amount
of $12,001.
In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), an affiliate of FAM, received $3,036 in commissions on
the execution of portfolio transactions for the Fund for the year
ended September 30, 2004.
For the year ended September 30, 2004, the Fund reimbursed FAM
$10,725 for certain accounting services.
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, 2004 were $234,484,481 and
$245,461,109, respectively.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of 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 stock
without approval of holders of Common Stock.
Preferred Stock
Auction Market Preferred Stock 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, plus accrued and unpaid dividends,
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, 2004 were as follows: Series A, 1.40%;
Series B, 1.35%; and Series C, 1.35%.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Notes to Financial Statements (concluded)
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from .25% to .375%,
calculated on the proceeds of each auction. For the year ended
September 30, 2004, MLPF&S earned $252,180 as commissions.
5. Distributions to Shareholders:
The Fund paid a tax-exempt income dividend to holders of Common
Stock in the amount of $.073000 per share on October 28, 2004 to
shareholders of record on October 15, 2004.
The tax character of distributions paid during the fiscal years
ended September 30, 2004 and September 30, 2003 was as follows:
9/30/2004 9/30/2003
Distributions paid from:
Tax-exempt income $ 21,481,501 $ 21,380,241
-------------- --------------
Total distributions $ 21,481,501 $ 21,380,241
============== ==============
As of September 30, 2004, the components of accumulated earnings on
a tax basis were as follows:
Undistributed tax-exempt income--net $ 5,549,998
Undistributed long-term capital gains--net --
--------------
Total undistributed earnings--net 5,549,998
Capital loss carryforward (25,279,349)*
Unrealized gains--net 25,830,235**
--------------
Total accumulated earnings--net $ 6,100,884
==============
* On September 30, 2004, the Fund had a net capital loss carry-
forward of $25,279,349, of which $13,453,559 expires in 2007,
$11,519,686 expires in 2008 and $306,104 expires in 2012. This
amount will be available to offset like amounts of any future
taxable gains.
** The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the tax deferral of losses on
wash sales and the tax deferral of losses on straddles.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors,
MuniHoldings Insured Fund II, Inc.
We have audited the accompanying statement of net assets of
MuniHoldings Insured Fund II, Inc., including the schedule of
investments, as of September 30, 2004, and the related statement of
operations for the year then ended, the statements of changes in net
assets for each of the two years in the period then ended and
financial highlights for each of the periods indicated therein.
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 audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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 September 30, 2004, by correspondence with the custodian and
others. 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, 2004, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the
periods indicated therein in conformity with U.S. generally accepted
accounting principles.
(Ernst & Young LLP)
Philadelphia, Pennsylvania
November 8, 2004
Important Tax Information (unaudited)
All of the net Investment income distributions paid by MuniHoldings
Insured Fund II, Inc. during the taxable year ended September 30,
2004 qualify as tax-exempt interest dividends for federal income tax
purposes.
Please retain this information for your records.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Automatic Dividend Reinvestment Plan (unaudited)
The following description of the Fund's Automatic Dividend
Reinvestment Plan (the "Plan") is sent to you annually as required
by federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock
otherwise elects, all dividend and capital gains distributions will
be automatically reinvested by EquiServe (the "Plan Agent"), as
agent for shareholders in administering the Plan, in additional
shares of Common Stock of the Fund. Holders of Common Stock who
elect not to participate in the Plan will receive all distributions
in cash paid by check mailed directly to the shareholder of record
(or, if the shares are held in street or other nominee name then
to such nominee) by EquiServe, as dividend paying agent. Such
participants may elect not to participate in the Plan and to receive
all distributions of dividends and capital gains in cash by sending
written instructions to EquiServe, as dividend paying agent, at the
address set forth below. Participation in the Plan is completely
voluntary and may be terminated or resumed at any time without
penalty by written notice if received by the Plan Agent not less
than ten days prior to any dividend record date; otherwise such
termination will be effective with respect to any subsequently
declared dividend or distribution.
Whenever the Fund declares an income dividend or capital gains
distribution (collectively referred to as "dividends") payable
either in shares or in cash, non-participants in the Plan will
receive cash and participants in the Plan will receive the
equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of
additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by purchase of outstanding
shares of Common Stock on the open market ("open-market purchases")
on the New York Stock Exchange or elsewhere. If on the payment
date for the dividend, the net asset value per share of the Common
Stock is equal to or less than the market price per share of the
Common Stock plus estimated brokerage commissions (such conditions
being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be
credited to the participant's account will be determined by dividing
the dollar amount of the dividend by the net asset value per share
on the date the shares are issued, provided that the maximum
discount from the then current market price per share on the date
of issuance may not exceed 5%. If on the dividend payment date the
net asset value per share is greater than the market value (such
condition being referred to herein as "market discount"), the Plan
Agent will invest the dividend amount in shares acquired on behalf
of the participant in open-market purchases.
In the event of a market discount on the dividend payment date, the
Plan Agent will have until the last business day before the next
date on which the shares trade on an "ex-dividend" basis or in no
event more than 30 days after the dividend payment date (the "last
purchase date") to invest the dividend amount in shares acquired in
open-market purchases. It is contemplated that the Fund will pay
monthly income dividends. Therefore, the period during which open-
market purchases can be made will exist only from the payment date
on the dividend through the date before the next "ex-dividend" date,
which typically will be approximately ten days. If, before the Plan
Agent has completed its open-market purchases, the market price of a
share of Common Stock exceeds the net asset value per share, the
average per share purchase price paid by the Plan Agent may exceed
the net asset value of the Fund's shares, resulting in the
acquisitions of fewer shares than if the dividend had been paid in
newly issued shares on the dividend payment date. Because of the
foregoing difficulty with respect to open-market purchases, the Plan
provides that if the Plan Agent is unable to invest the full
dividend amount in open-market purchases during the purchase period
or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market
purchases and will invest the uninvested portion of the dividend
amount in newly issued shares at the close of business on the last
purchase date determined by dividing the uninvested portion of the
dividend by the net asset value per share.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account,
including information needed by shareholders for tax records. Shares
in the account of each Plan participant will be held by the Plan
Agent in non-certificated form in the name of the participant, and
each shareholder's proxy will include those shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees
which hold shares of others who are the beneficial owners, the
Plan Agent will administer the Plan on the basis of the number of
shares certified from time to time by the record shareholders as
representing the total amount registered in the record shareholder's
name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued
directly by the Fund as a result of dividends or capital gains
distributions payable either in shares or in cash. However, each
participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open-market purchases in
connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not
relieve participants of any federal, state or local income tax that
may be payable (or required to be withheld) on such dividends.
Shareholders participating in the Plan may receive benefits not
available to shareholders not participating in the Plan. If the
market price plus commissions of the Fund's shares is above the
net asset value, participants in the Plan will receive shares of
the Fund at less than they could otherwise purchase them and will
have shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants
will receive distributions in shares with a net asset value greater
than the value of any cash distribution they would have received on
their shares. However, there may be insufficient shares available in
the market to make distributions in shares at prices below the net
asset value. Also, since the Fund does not redeem shares, the price
on resale may be more or less than the net asset value.
The value of shares acquired pursuant to the Plan will generally be
excluded from gross income to the extent that the cash amount
reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund
issues shares pursuant to the Plan that have a greater fair market
value than the amount of cash reinvested, it is possible that all or
a portion of such discount (which may not exceed 5% of the fair
market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution,
it is also possible that the taxable character of this discount
would be allocable to all the shareholders, including shareholders
who do not participate in the Plan. Thus, shareholders who do not
participate in the Plan might be required to report as ordinary
income a portion of their distributions equal to their allocable
share of the discount.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the
Plan. There is no direct service charge to participants in the Plan;
however, the Fund reserves the right to amend the Plan to include a
service charge payable by the participants.
All correspondence concerning the Plan should be directed to the
Plan Agent at EquiServe, P.O. Box 43010, Providence, RI 02940-3010,
Telephone: 800-426-5523.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
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 stable level of dividend
distributions, 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 Net Assets, 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, 2004 were as follows:
Percent of
S&P Rating/Moody's Rating Total Investments
AAA/Aaa 84.8%
AA/Aa 4.9
A/A 6.1
BBB/Baa 1.1
Other* 3.1
* Includes portfolio holdings in short-term investments.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Officers and Directors (unaudited)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Terry K. Glenn* President 1999 to President of the Merrill Lynch Investment 124 Funds None
P.O. Box 9011 and present Managers, L.P. ("MLIM")/Fund Asset 157 Portfolios
Princeton, Director Management, L.P. ("FAM")-advised funds
NJ 08543-9011 since 1999; Chairman (Americas Region)
Age: 64 of MLIM from 2000 to 2002; Executive Vice
President of MLIM and FAM (which terms
as used herein include their corporate
predecessors) from 1983 to 2002; President
of FAM Distributors, Inc. ("FAMD") from
1986 to 2002 and Director thereof from 1991
to 2002; Executive Vice President and
Director of Princeton Services, Inc.
("Princeton Services") from 1993 to 2002;
President of Princeton Administrators, L.P.
from 1989 to 2002; Director of Financial
Data Services, Inc. since 1985.
* Mr. Glenn is a director, trustee or member of an advisory board of
certain other investment companies for which MLIM or FAM acts as
investment adviser. Mr. Glenn is an "interested person," as
described in the Investment Company Act, of the Fund based on his
present and former positions with MLIM, FAM, FAMD, Princeton
Services and Princeton Administrators, L.P. The Director's term is
unlimited. Directors serve until their resignation, removal or
death, or until December 31 of the year in which they turn 72. As
Fund President, Mr. Glenn serves at the pleasure of the Board of
Directors.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Officers and Directors (unaudited)(continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors*
James H. Bodurtha Director 2002 to Director, The China Business Group, Inc. 38 Funds None
P.O. Box 9095 present since 1996 and Executive Vice President 55 Portfolios
Princeton, thereof from 1996 to 2003; Chairman of the
NJ 08543-9095 Board, Berkshire Holding Corporation since
Age: 60 1980; Partner, Squire, Sanders & Dempsey
from 1980 to 1993.
Joe Grills Director 1999 to Member of the Committee of Investment of 38 Funds Kimco Realty
P.O. Box 9095 present Employee Benefit Assets of the Association 55 Portfolios Corporation
Princeton, of Financial Professionals ("CIEBA") since
NJ 08543-9095 1986; Member of CIEBA's Executive Committee
Age: 69 since 1988 and its Chairman from 1991 to
1992; Assistant Treasurer of International
Business Machines Corporation ("IBM") and
Chief Investment Officer of IBM Retirement
Funds from 1986 to 1993; Member of the
Investment Advisory Committee of the State
of New York Common Retirement Fund since
1989; Member of the Investment Advisory
Committee of the Howard Hughes Medical
Institute from 1997 to 2000; Director,
Duke University Management Company from 1992
to 2004, Vice Chairman thereof from 1998 to
2004 and Director Emeritus thereof since
2004; Director, LaSalle Street Fund from
1995 to 2001; Director, Kimco Realty
Corporation since 1997; Member of the
Investment Advisory Committee of the
Virginia Retirement System since 1998 and
Vice Chairman thereof since 2002; Director,
Montpelier Foundation since 1998 and its
Vice Chairman since 2000; Member of the
Investment Committee of the Woodberry
Forest School since 2000; Member of the
Investment Committee of the National Trust
for Historic Preservation since 2000.
Herbert I. London Director 2002 to John M. Olin Professor of Humanities, New 38 Funds None
P.O. Box 9095 present York University since 1993 and Professor 55 Portfolios
Princeton, thereof since 1980; President, Hudson
NJ 08543-9095 Institute since 1997 and Trustee thereof
Age: 65 since 1980; Dean, Gallatin Division of
New York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair,
Hudson Institute from 1984 to 1985; Director,
Damon Corp. from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to 1993;
Director, Level Playing Field (education)
from 2000 to 2003.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Officers and Directors (unaudited)(continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors* (concluded)
Andre F. Perold Director 2002 to Harvard Business School, George Gund 38 Funds None
P.O. Box 9095 present Professor of Finance and Banking since 55 Portfolios
Princeton, 2000; Senior Associate Dean, Director of
NJ 08543-9095 Faculty Recruiting since 2001; Finance
Age: 52 Area Chair from 1996 to 2001; Sylvan C.
Coleman Professor of Financial Management
from 1993 to 2000; Director, Genbel
Securities Limited and Gensec Bank from
1999 to 2003; Director, Stockback, Inc.
from 2000 to 2002; Director, Sanlam Limited
from 2001 to 2003; Trustee, Commonfund from
1989 to 2001; Director, Sanlam Investment
Management from 1999 to 2001; Director,
Bulldogresearch.com from 2000 to 2001;
Director, Quantec Limited from 1991 to
1999; Director and Chairman of the Board
of UNX Inc. since 2003.
Roberta Cooper Ramo Director 2002 to Shareholder, Modrall, Sperling, Roehl, 38 Funds None
P.O. Box 9095 present Harris & Sisk, P.A. since 1993; President, 55 Portfolios
Princeton, American Bar Association from 1995 to
NJ 08543-9095 1996 and Member of the Board of Governors
Age: 62 thereof from 1994 to 1997; Shareholder,
Poole, Kelly & Ramo, Attorneys at Law, P.C.
from 1977 to 1993; Director, Coopers, Inc.
since 1999; Director, ECMC Group (service
provider to students, schools and lenders)
since 2001; Director, United New Mexico
Bank (now Wells Fargo) from 1983 to 1988;
Director, First National Bank of New Mexico
(now Wells Fargo) from 1975 to 1976.
Robert S. Salomon, Jr. Director 1999 to Principal of STI Management (investment 38 Funds None
P.O. Box 9095 present adviser) since 1994; Chairman and CEO of 55 Portfolios
Princeton, Salomon Brothers Asset Management from
NJ 08543-9095 1992 to 1995; Chairman of Salomon Brothers
Age: 67 equity mutual funds from 1992 to 1995;
regular columnist with Forbes Magazine from
1992 to 2002; Director of Stock Research and
U.S. Equity Strategist at Salomon Brothers
from 1975 to 1991; Trustee, Commonfund from
1980 to 2001.
Stephen B. Swensrud Director 1999 to Chairman of Fernwood Advisors, Inc. 39 Funds None
P.O. Box 9095 present (investment adviser) since 1996; Principal, 56 Portfolios
Princeton, Fernwood Associates (financial consultants)
NJ 08543-9095 since 1975; Chairman of R.P.P. Corporation
Age: 71 (manufacturing) since 1978; Director of
International Mobile Communications,
Incorporated (telecommunications) since 1998.
* The Director's term is unlimited. Directors serve until their
resignation, removal or death, or until December 31 of the year
in which they turn 72.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Officers and Directors (unaudited)(concluded)
Position(s) Length of
Held with Time
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 1999 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since
P.O. Box 9011 President present 1999; Senior Vice President and Treasurer of Princeton Services since 1999
Princeton, and and Director since 2004; Vice President of FAMD since 1999; Director of MLIM
NJ 08543-9011 Treasurer Taxation since 1990.
Age: 44
Kenneth A. Jacob Senior 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
P.O. Box 9011 Vice present Management) of MLIMfrom 1997 to 2000.
Princeton, President
NJ 08543-9011
Age: 53
John M. Loffredo Senior 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
P.O. Box 9011 Vice present Management) of MLIM from 1998 to 2000.
Princeton, President
NJ 08543-9011
Age: 40
Robert A. DiMella Vice 1998 to Director (Municipal Tax-Exempt Fund Management) of MLIM since 2002; Vice
P.O. Box 9011 President present President of MLIM from 1996 to 2002.
Princeton,
NJ 08543-9011
Age: 38
Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice
P.O. Box 9011 Compliance present President and Chief Compliance Officer of MLIM since 2004; Global Director
Princeton, Officer of Compliance at Morgan Stanley Investment Management from 2002 to 2004;
NJ 08543-9011 Managing Director and Global Director of Compliance at Citigroup Asset
Age: 53 Management from 2000 to 2002; Chief Compliance Officer at Soros Fund
Management in 2000; Chief Compliance Officer at Prudential Financial from
1995 to 2000.
Alice A. Pellegrino Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from
P.O. Box 9011 present 1999 to 2002; Attorney associated with MLIM since 1997.
Princeton,
NJ 08543-9011
Age: 44
* Officers of the Fund serve at the pleasure of the Board of Directors.
Custodian
State Street Bank and
Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agents
Common Stock:
EquiServe
P.O. Box 43010
Providence, RI 02940-3010
800-426-5523
Preferred Stock:
The Bank of New York
101 Barclay Street - 7 West
New York, NY 10286
NYSE Symbol
MUE
Andre F. Perold resigned as a Director of the Fund
effective October 1, 2004.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third
quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are
available on the SEC's Web site at http://www.sec.gov. The Fund's
Forms N-Q may also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
MUNIHOLDINGS INSURED FUND II, INC., SEPTEMBER 30, 2004
Item 2 - Code of Ethics - The registrant has adopted a code of
ethics, as of the end of the period covered by this report,
that applies to the registrant's principal executive officer,
principal financial officer and principal accounting officer,
or persons performing similar functions. A copy of the code
of ethics is available without charge upon request by calling
toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's
board of directors has determined that (i) the registrant has
the following audit committee financial experts serving on its
audit committee and (ii) each audit committee financial expert
is independent: (1) Joe Grills, (2) Andre F. Perold, (3) Robert S.
Salomon, Jr., and (4) Stephen B. Swensrud.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending September 30, 2004 - $31,500
Fiscal Year Ending September 30, 2003 - $30,550
(b) Audit-Related Fees -
Fiscal Year Ending September 30, 2004 - $3,000
Fiscal Year Ending September 30, 2003 - $3,000
The nature of the services include assurance and related services
reasonably related to the performance of the audit of financial
statements not included in Audit Fees.
(c) Tax Fees - Fiscal Year Ending September 30, 2004 - $5,200
Fiscal Year Ending September 30, 2003 - $5,000
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees -
Fiscal Year Ending September 30, 2004 - $0
Fiscal Year Ending September 30, 2003 - $0
(e)(1) The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services provided
to the registrant on an annual basis require specific pre-approval
by the Committee. The Committee also must approve other non-audit
services provided to the registrant and those non-audit services
provided to the registrant's affiliated service providers that
relate directly to the operations and the financial reporting of the
registrant. Certain of these non-audit services that the Committee
believes are a) consistent with the SEC's auditor independence rules
and b) routine and recurring services that will not impair the
independence of the independent accountants may be approved by the
Committee without consideration on a specific case-by-case basis
("general pre-approval"). However, such services will only be
deemed pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for all of
the registrants the Committee oversees. Any proposed services
exceeding the pre-approved cost levels will require specific pre-
approval by the Committee, as will any other services not subject to
general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person board
meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending September 30, 2004 - $8,200
Fiscal Year Ending September 30, 2003 - $8,000
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation
S-X is compatible with maintaining the principal accountant's
independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $945,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following
individuals are members of the registrant's separately-designated
standing audit committee established in accordance with Section
3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)):
James H. Bodurtha
Joe Grills
Herbert I. London
Andre F. Perold
Roberta Cooper Ramo
Robert S. Solomon, Jr.
Stephen B. Swensrud
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill
Lynch Investment Managers, L.P. and/or Fund Asset Management, L.P.
(the "Investment Adviser") authority to vote all proxies relating to
the Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to
the voting of proxies related to the portfolio securities held in
the account of one or more of its clients, including a Fund.
Pursuant to these Proxy Voting Procedures, the Investment Adviser's
primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its
shareholders, and to act in a manner that the Investment Adviser
believes is most likely to enhance the economic value of the
securities held by the Fund. The Proxy Voting Procedures are
designed to ensure that that the Investment Adviser considers the
interests of its clients, including the Funds, and not the interests
of the Investment Adviser, when voting proxies and that real (or
perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment
professionals appointed by the CIO, portfolio managers and
investment analysts appointed by the CIO and any other personnel the
CIO deems appropriate. The Committee will also include two non-
voting representatives from the Investment Adviser's Legal
department appointed by the Investment Adviser's General Counsel.
The Committee's membership shall be limited to full-time employees
of the Investment Adviser. No person with any investment banking,
trading, retail brokerage or research responsibilities for the
Investment Adviser's affiliates may serve as a member of the
Committee or participate in its decision making (except to the
extent such person is asked by the Committee to present information
to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser
might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy
voting authority to the Investment Adviser and seeks to ensure that
all votes are consistent with the best interests of those clients
and are free from unwarranted and inappropriate influences. The
Committee establishes general proxy voting policies for the
Investment Adviser and is responsible for determining how those
policies are applied to specific proxy votes, in light of each
issuer's unique structure, management, strategic options and, in
certain circumstances, probable economic and other anticipated
consequences of alternate actions. In so doing, the Committee may
determine to vote a particular proxy in a manner contrary to its
generally stated policies. In addition, the Committee will be
responsible for ensuring that all reporting and recordkeeping
requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires
a case-by-case determination. In such cases, the Committee may
elect not to adopt a specific voting policy applicable to that
issue. The Investment Adviser believes that certain proxy voting
issues require investment analysis - such as approval of mergers and
other significant corporate transactions - akin to investment
decisions, and are, therefore, not suitable for general guidelines.
The Committee may elect to adopt a common position for the
Investment Adviser on certain proxy votes that are akin to
investment decisions, or determine to permit the portfolio manager
to make individual decisions on how best to maximize economic value
for a Fund (similar to normal buy/sell investment decisions made by
such portfolio managers). While it is expected that the Investment
Adviser will generally seek to vote proxies over which the
Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in
conjunction with a Fund's portfolio manager, may determine that the
Fund's specific circumstances require that its proxies be voted
differently.
To assist the Investment Adviser in voting proxies, the Committee
has retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address
special circumstances that can arise in connection with proxy
voting. For instance, under the Proxy Voting Procedures, the
Investment Adviser generally will not seek to vote proxies related
to portfolio securities that are on loan, although it may do so
under certain circumstances. In addition, the Investment Adviser
will vote proxies related to securities of foreign issuers only on a
best efforts basis and may elect not to vote at all in certain
countries where the Committee determines that the costs associated
with voting generally outweigh the benefits. The Committee may at
any time override these general policies if it determines that such
action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote
proxies in respect of an issuer where an affiliate of the Investment
Adviser (each, an "Affiliate"), or a money management or other
client of the Investment Adviser (each, a "Client") is involved.
The Proxy Voting Procedures and the Investment Adviser's adherence
to those procedures are designed to address such conflicts of
interest. The Committee intends to strictly adhere to the Proxy
Voting Procedures in all proxy matters, including matters involving
Affiliates and Clients. If, however, an issue representing a non-
routine matter that is material to an Affiliate or a widely known
Client is involved such that the Committee does not reasonably
believe it is able to follow its guidelines (or if the particular
proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes
of ensuring that an independent determination is reached, retain an
independent fiduciary to advise the Committee on how to vote or to
cast votes on behalf of the Investment Adviser's clients.
In the event that the Committee determines not to retain an
independent fiduciary, or it does not follow the advice of such an
independent fiduciary, the powers of the Committee shall pass to a
subcommittee, appointed by the CIO (with advice from the Secretary
of the Committee), consisting solely of Committee members selected
by the CIO. The CIO shall appoint to the subcommittee, where
appropriate, only persons whose job responsibilities do not include
contact with the Client and whose job evaluations would not be
affected by the Investment Adviser's relationship with the Client
(or failure to retain such relationship). The subcommittee shall
determine whether and how to vote all proxies on behalf of the
Investment Adviser's clients or, if the proxy matter is, in their
judgment, akin to an investment decision, to defer to the applicable
portfolio managers, provided that, if the subcommittee determines to
alter the Investment Adviser's normal voting guidelines or, on
matters where the Investment Adviser's policy is case-by-case, does
not follow the voting recommendation of any proxy voting service or
other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies
relating to the Client may be voted unless the Secretary, or in the
Secretary's absence, the Assistant Secretary of the Committee
concurs that the subcommittee's determination is consistent with the
Investment Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain
recurring proxy issues that are not expected to involve unusual
circumstances. These policies are guidelines only, and the
Investment Adviser may elect to vote differently from the
recommendation set forth in a voting guideline if the Committee
determines that it is in a Fund's best interest to do so. In
addition, the guidelines may be reviewed at any time upon the
request of a Committee member and may be amended or deleted upon the
vote of a majority of Committee members present at a Committee
meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
* Proposals related to the composition of the Board of Directors of
issuers other than investment companies. As a general matter, the
Committee believes that a company's Board of Directors (rather than
shareholders) is most likely to have access to important, nonpublic
information regarding a company's business and prospects, and is
therefore best-positioned to set corporate policy and oversee
management. The Committee, therefore, believes that the foundation
of good corporate governance is the election of qualified,
independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of
the corporation in a manner that will seek to maximize shareholder
value over time. In individual cases, the Committee may look at a
nominee's history of representing shareholder interests as a
director of other companies or other factors, to the extent the
Committee deems relevant.
* Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the interests
of shareholders and provide an independent view on the propriety of
financial reporting decisions of corporate management. While the
Committee will generally defer to a corporation's choice of auditor,
in individual cases, the Committee may look at an auditors' history
of representing shareholder interests as auditor of other companies,
to the extent the Committee deems relevant.
* Proposals related to management compensation and employee
benefits. As a general matter, the Committee favors disclosure of
an issuer's compensation and benefit policies and opposes excessive
compensation, but believes that compensation matters are normally
best determined by an issuer's board of directors, rather than
shareholders. Proposals to "micro-manage" an issuer's compensation
practices or to set arbitrary restrictions on compensation or
benefits will, therefore, generally not be supported.
* Proposals related to requests, principally from management, for
approval of amendments that would alter an issuer's capital
structure. As a general matter, the Committee will support requests
that enhance the rights of common shareholders and oppose requests
that appear to be unreasonably dilutive.
* Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the Committee
opposes poison pill provisions.
* Routine proposals related to requests regarding the formalities of
corporate meetings.
* Proposals related to proxy issues associated solely with holdings
of investment company shares. As with other types of companies, the
Committee believes that a fund's Board of Directors (rather than its
shareholders) is best-positioned to set fund policy and oversee
management. However, the Committee opposes granting Boards of
Directors authority over certain matters, such as changes to a
fund's investment objective, that the Investment Company Act
envisions will be approved directly by shareholders.
* Proposals related to limiting corporate conduct in some manner
that relates to the shareholder's environmental or social concerns.
The Committee generally believes that annual shareholder meetings
are inappropriate forums for discussion of larger social issues, and
opposes shareholder resolutions "micromanaging" corporate conduct or
requesting release of information that would not help a shareholder
evaluate an investment in the corporation as an economic matter.
While the Committee is generally supportive of proposals to require
corporate disclosure of matters that seem relevant and material to
the economic interests of shareholders, the Committee is generally
not supportive of proposals to require disclosure of corporate
matters for other purposes.
Item 8 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 10 - Controls and Procedures
10(a) - The registrant's certifying officers have reasonably
designed such disclosure controls and procedures to ensure material
information relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
10(b) - There were no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the second fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - See Item 2
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MuniHoldings Insured Fund II, Inc.
By: _/s/ Terry K. Glenn_______
Terry K. Glenn,
President of
MuniHoldings Insured Fund II, Inc.
Date: November 19, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: _/s/ Terry K. Glenn________
Terry K. Glenn,
President of
MuniHoldings Insured Fund II, Inc.
Date: November 19, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
MuniHoldings Insured Fund II, Inc.
Date: November 19, 2004