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 811-8215
Name of Fund: MuniHoldings 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 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: 07/31/03
Date of reporting period: 08/01/02 - 1/31/03
Item 1 - Attach shareholder report
(BULL LOGO)
Merrill Lynch Investment Managers
Semi-Annual Report
January 31, 2003
MuniHoldings
Fund II, Inc.
www.mlim.ml.com
MuniHoldings Fund II, Inc. seeks to provide shareholders with
current income exempt from Federal income taxes. The Fund seeks to
achieve its objective 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.
MuniHoldings Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MUNIHOLDINGS FUND II, INC.
The Benefits
And Risks of
Leveraging
MuniHoldings Fund II, Inc. utilizes leveraging to seek to enhance
the yield and net asset value of its Common Stock. However, these
objectives cannot be achieved in all interest rate environments. To
leverage, the Fund issues Preferred Stock, which pays dividends at
prevailing short-term interest rates, and invests the proceeds in
long-term municipal bonds. The interest earned on these investments
is paid to Common Stock shareholders in the form of dividends, and
the value of these portfolio holdings is reflected in the per share
net asset value of the Fund's Common Stock. However, in order to
benefit Common Stock shareholders, the yield curve must be
positively sloped; that is, short-term interest rates must be lower
than long-term interest rates. At the same time, a period of
generally declining interest rates will benefit Common Stock
shareholders. If either of these conditions change, then the risks
of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock
capitalization of $100 million and the issuance of Preferred Stock
for an additional $50 million, creating a total value of $150
million available for investment in long-term municipal bonds. If
prevailing short-term interest rates are approximately 3% and long-
term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million
of Preferred Stock based on the lower short-term interest rates. At
the same time, the fund's total portfolio of $150 million earns the
income based on long-term interest rates. Of course, increases in
short-term interest rates would reduce (and even eliminate) the
dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term
investments, and therefore the Common Stock shareholders are the
beneficiaries of the incremental yield. However, if short-term
interest rates rise, narrowing the differential between short-term
and long-term interest rates, the incremental yield pickup on the
Common Stock will be reduced or eliminated completely. At the same
time, the market value of the fund's Common Stock (that is, its
price as listed on the New York Stock Exchange) may, as a result,
decline.Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price
of the portfolio's investments, since the value of the fund's
Preferred Stock does not fluctuate. In addition to the decline in
net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain
securities whose potential income return is inversely related to
changes in a floating interest rate ("inverse floaters"). In
general, income on inverse floaters will decrease when short-term
interest rates increase and increase when short-term interest rates
decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of
reduced or eliminated interest payments and losses of invested
principal. In addition, inverse floaters have the effect of
providing investment leverage and, as a result, the market value of
such securities will generally be more volatile than that of fixed
rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the
net asset value of the Fund's shares may also be more volatile than
if the Fund did not invest in these securities.
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.
MuniHoldings Fund II, Inc., January 31, 2003
DEAR SHAREHOLDER
For the six months ended January 31, 2003, the Common Stock of
MuniHoldings Fund II, Inc. had a net annualized yield of 6.85%,
based on a period-end per share net asset value of $13.46 and $.465
per share income dividends. Over the same period, the total
investment return on the Fund's Common Stock was +3.24%, based on a
change in per share net asset value from $13.51 to $13.46, and
assuming reinvestment of $.454 per share ordinary income dividends.
For the six-month period ended January 31, 2003, the Fund's Auction
Market Preferred Stock had an average yield of 1.29% for Series A
and 1.34% for Series B.
The Municipal Market Environment
During the six-month period ended January 31, 2003, long-term fixed
income interest rates continued to move lower. As they had in 2002,
declining U.S. equity markets and escalating worldwide political
tensions easily overshadowed the incipient U.S. economic recovery,
allowing bond yields to fall to recent historical lows. Economic
releases, such as national employment and purchasing manager
surveys, were generally weak early in the period. Additionally, at
its August 2002 meeting, the Federal Reserve Board indicated that
concerns about future economic weakness outweighed those of rising
inflation. This signaled that the Federal Reserve Board was more
likely to continue to lower short-term interest rates to boost
economic activity rather than to raise them to reduce inflationary
pressures. These factors combined to generate a very favorable fixed
income environment during August and September 2002. The dramatic
decline in equity values in late August and September triggered a
significant fixed income rally as investors sought the safe-haven
status of U.S. Treasury issues. By the end of September, U.S.
Treasury bond yields had fallen to 4.65%.
Bolstered by an unexpected decline in the national unemployment rate
to 5.6% in early October, U.S. equity markets staged a strong rally
throughout much of the month. The Standard & Poor's 500 (S&P 500)
Index rose over 8% for October, triggered by stronger-than-expected
earnings reports from a large number of companies, such as General
Electric Company, International Business Machines Corporation and
Microsoft Corporation. As they have throughout most of the period,
bond prices traded in an inverse relationship to equity prices.
Consequently, as stocks rallied, bond yields rose in October,
despite generally weak economic releases. During October, the U.S.
housing sector remained quite robust, but retail sales and
industrial production slowed. Fixed income bond yields remained
under pressure in November as U.S. equity markets continued to
strengthen. During November, the S&P 500 Index rose an additional
5.5%. Equity prices were supported by further signs of U.S. economic
recovery, especially improving labor market activity. By the end of
November, third quarter gross domestic product growth was 4%.
Financial conditions were also strengthened by a larger-than-
expected reduction in short-term interest rates by the Federal
Reserve Board in early November. The Federal Funds target rate was
lowered 50 basis points (.50%) to 1.25%, its lowest level since the
1960s. Recent action by the Federal Reserve Board was largely viewed
as being taken to bolster the sputtering U.S. economic recovery.
Rebounding U.S. equity markets and the prospects for a more
substantial U.S. economic recovery pushed long-term U.S. Treasury
yield levels to 5.10% by late November.
In December 2002 and January 2003, softer equity prices and renewed
investor concerns about potential military action against Iraq and
nuclear tensions in North Korea again pushed bond prices higher. The
S&P 500 Index declined more than 5% in December on disappointing
earnings reports and anticipated weak holiday retail sales. During
January, the S&P 500 Index declined an additional 2.5% as businesses
tried to scale back analysts' expectations of future earnings. In
early 2003, investors again sought the safety of U.S. Treasury
securities. U.S. Treasury bond yields declined more than 25 basis
points in December and January to end the period at approximately
4.85%. Over the last six months, U.S. Treasury bond yields fell more
than 45 basis points.
For the six-month period ended January 31, 2003, tax-exempt bond
prices also generally rose. In recent months, municipal bond yields
have declined in response to the positive fixed income environment
engendered by falling equity valuations. Price advances in tax-
exempt issues have not been able to keep pace with U.S. Treasury
bond price improvement as municipal bonds cannot offer foreign
investors the safe-haven status U.S. Treasury obligations enjoy in
periods of economic and political instability. Additionally, tax-
exempt bond issuance increased dramatically in the last half of
2002, removing some of the positive technical support the municipal
bond market enjoyed earlier in 2002. At the end of January 2003,
long-term municipal bond yields, as measured by the Bond Buyer
Revenue Bond Index, stood at 5.34%, a decline of approximately 15
basis points during the last six months.
Investor demand for tax-exempt products remained positive throughout
the period. In addition to the approximately $75 billion investors
received from June to August 2002 from bond maturities, coupon
income and proceeds from early redemptions, investors also received
approximately $30 billion from these sources in January 2003. The
Investment Company Institute reported that in 2002 municipal bond
funds net cash flows were very positive at more than $16 billion, an
increase of over 40% compared to 2001. However, these positive
demand factors have not been able to offset the increase in tax-
exempt new-issue supply that has resulted in the underperformance
seen in recent months. This price underperformance served to make
municipal bonds a particularly attractive purchase relative to their
taxable counterparts. Throughout most of the yield curve, municipal
bonds have been available for purchase at yields near or exceeding
those of comparable U.S. Treasury issues. Compared to their recent
historical averages of 82% - 88% of U.S. Treasury yields, municipal
bond yield ratios in their current 95% - 105% range are likely to
prove attractive to long-term investors.
Continued uncertainty regarding the pace of the current U.S.
economic recovery as well as the resolution of the U.N./Iraq
confrontation are likely to keep interest rates near their present
levels for the immediate future. Equity market declines over the
past three years have helped push interest rates lower than economic
fundamentals alone would support. When U.S. business conditions
improve and equity markets stabilize, any associated interest rate
increases should not be extreme. Inflationary pressures are
negligible and any move by the Federal Reserve Board to raise
short-term interest rates is unlikely before late 2003. As equity
valuations are likely to only gradually improve, the U.S. economic
recovery is also likely to be a moderate process. This suggests that
the pace of any interest rate increases will also be gradual. As the
municipal bond market's strong technical position can be expected to
remain supportive in the coming months, future tax-exempt interest
rate increases should be more restrained than their taxable
counterparts.
Portfolio Strategy
During the six-month period ended January 31, 2003, our investment
strategy continued to focus on seeking to enhance tax-exempt income,
through the use of leverage, to the Fund's Common Stock
shareholders. Over the past six months, we kept the Fund in a
defensive structure with a fully invested position. Since the Fund
currently has a low exposure to performance bonds, the Fund fared
well, as interest rates have been very volatile. We maintained the
Fund at a fully invested stance because of the extremely low
interest rates available on cash reserves. A low cash balance helped
the Fund generate a tax-free yield significantly above the industry
average. The Fund's trading activity focused on corporate-backed
issues and supply/demand imbalances in the California market. Our
recent purchases of airline-backed bonds and TXU Electric Company
secured bonds performed very well during the period. We took
advantage of significant weakness in the sector and purchased bonds
with various security features backed by American Airlines and
Continental Airlines. These issues rallied going into the fourth
quarter of 2002 as new crossover buyers entered the tax-exempt
market. We took advantage of the higher prices, and we reduced the
Fund's exposure to American Airlines-backed bonds in January 2003,
with the anticipation of a weak earning season for the industry and
American Airlines in particular. Under unwarranted pressure on their
parent company, spreads for TXU Electric-backed bonds widened
significantly in October of 2002. We purchased approximately 2% of
the company's assets at attractive levels before investor demand
drove up the prices of bonds following Moody's reaffirmation of TXU
Electric's Baa2 rating. In addition, we made attractive purchases in
the new-issue market. The large $11.8 billion California Department
of Water issue provided us with an opportunity to purchase
attractively priced non-amortized paper. Because of the size of the
issue, the California water transaction came at a significant
concession to the market to stimulate demand. Thus, we were able to
purchase attractively priced bonds set to mature in 2021 and 2022.
The long-term outlook for the tax-exempt high-yield market appears
positive. With credit spreads still well-above historical averages
and new demand for spread product coming from several new closed-end
funds, it is likely that the municipal high-yield market should
continue to perform well. In addition, the Federal Reserve Board
seems committed to add liquidity to reinvigorate the economy. The
Fund's current portfolio structure of a high current yield and a
defensive duration should enable the Fund to perform well in most
interest rate environments. We will attempt to seek to reduce the
Fund's exposure to spread product if there is a significant
improvement in credit spreads or if there is a risk of another
slowdown of the economy.
MuniHoldings Fund II, Inc., January 31, 2003
During the period, the Fund's borrowing costs remained in the
1% - 1.5% range. These attractive funding levels, in combination
with a steep tax-exempt yield curve, generated a material income
benefit to the Fund's Common Stock shareholders. Further declines in
the Fund's borrowing costs would require significant easing of
monetary policy by the Federal Reserve Board. While such action is
not expected, an increase in short-term interest rates by the
Federal Reserve Board is even less anticipated. We expect the Fund's
short-term borrowing costs to remain near current levels well into
2003. However, should the spread between short-term and long-term
interest rates narrow, the benefits of the leverage will decline
and, as a result, reduce the yield on the Fund's Common Stock. (See
page 1 of this report to shareholders for a complete explanation of
the benefits and risks of leverage.)
In Conclusion
We appreciate your interest in MuniHoldings Fund II, and we look
forward to assisting you with your financial needs in the months and
years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Kenneth A. Jacob)
Kenneth A. Jacob
Senior Vice President
(John M. Loffredo)
John M. Loffredo
Senior Vice President
(Robert A. DiMella)
Robert A. DiMella
Vice President and
Portfolio Manager
March 5, 2003
MuniHoldings Fund II, Inc., January 31, 2003
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
Alabama--2.9% AAA Aaa $ 4,000 Jefferson County, Alabama, Sewer Revenue Bonds, Series D, 5.70%
due 2/01/2018 (b) $ 4,381
Arizona--5.0% BBB Baa2 1,000 Arizona Health Facilities Authority Revenue Bonds (Catholic
Healthcare West), Series A, 6.625% due 7/01/2020 1,038
NR* Caa2 2,800 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding
Bonds (America West Airlines Inc. Project), AMT, 6.30%
due 4/01/2023 1,007
Phoenix, Arizona, IDA, M/F Housing Revenue Bonds (Bay Club
Apartments Project)(g):
AAA NR* 915 5.90% due 11/20/2031 1,005
AAA NR* 1,265 5.95% due 11/20/2036 1,390
Pima County, Arizona, IDA, M/F Housing Revenue Bonds (Columbus
Village), Series A (g):
AAA NR* 585 6% due 10/20/2031 651
AAA NR* 770 6.05% due 10/20/2041 856
NR* NR* 1,420 Show Low, Arizona, Improvement District No. 5, Special Assessment
Bonds, 6.375% due 1/01/2015 1,490
Arkansas--1.1% AAA Aaa 1,645 Fort Smith, Arkansas, Water and Sewer Revenue Bonds, Series C, 5%
due 10/01/2022 (c) 1,671
California-- AAA Aaa 2,000 Benicia, California, Unified School District, GO, Refunding,
16.8% Series A, 5.615%** due 8/01/2020 (b) 812
A A1 3,000 California State, GO, Refunding, 5.25% due 2/01/2030 2,957
A A2 4,000 Chula Vista, California, IDR, Refunding (San Diego Gas & Electric
Co.), AMT, Series A, 6.75% due 3/01/2023 (i) 4,053
A A1 2,350 Golden State Tobacco Securitization Corporation, California,
Tobacco Settlement Revenue Bonds, Series 2003-A-1, 6.625%
due 6/01/2040 2,248
Sacramento County, California, Sanitation District Financing
Authority, Revenue Refunding Bonds (e):
AA Aa3 3,000 RIB, Series 366, 10.391% due 12/01/2027 3,563
AA Aa3 2,500 Trust Receipts, Class R, Series A, 10.549% due 12/01/2019 3,079
San Marino, California, Unified School District, GO, Series A (d):
AAA Aaa 1,820 5.50%** due 7/01/2017 898
AAA Aaa 1,945 5.55%** due 7/01/2018 903
AAA Aaa 2,070 5.60%** due 7/01/2019 901
AAA Aaa 5,000 Tracy, California, Area Public Facilities Financing Agency, Special
Tax Refunding Bonds (Community Facilities District Number 87-1),
Series H, 5.875% due 10/01/2019 (d) 5,619
Colorado--2.1% NR* NR* 1,890 Elk Valley, Colorado, Public Improvement Revenue Bonds (Public
Improvement Fee), Series A, 7.10% due 9/01/2014 1,919
BB+ Ba1 1,110 Northwest Parkway, Colorado, Public Highway Authority Revenue
Bonds, First Tier, Sub-Series D, 7.125% due 6/15/2041 1,156
Connecticut-- AAA Aaa 2,470 Connecticut State, HFA, Revenue Bonds (Housing Mortgage Finance
1.8% Program), Series C-1, 6% due 11/15/2028 2,620
Florida--6.4% NR* NR* 525 Bonnet Creek Resort, Florida, Community Development District,
Special Assessment Revenue Bonds, 7.50% due 5/01/2034 533
AA- A3 5,000 Broward County, Florida, Resource Recovery Revenue Refunding
Bonds (Wheelabrator South Broward), Series A, 5.375% due 12/01/2009 5,417
A- A2 3,490 Orange County, Florida, Health Facilities Authority, Hospital
Revenue Bonds (Orlando Regional Healthcare), 6% due 12/01/2028 3,613
Georgia--0.9% NR* NR* 1,250 Atlanta, Georgia, Tax Allocation Revenue Bonds (Atlantic Station
Project), 7.90% due 12/01/2024 1,289
Idaho--1.1% BB+ Ba3 2,000 Power County, Idaho, Industrial Development Corporation, Solid
Waste Disposal Revenue Bonds (FMC Corporation Project), AMT,
6.45% due 8/01/2032 1,600
Portfolio
Abbreviations
To simplify the listings of MuniHoldings Fund II, Inc.'s portfolio
holdings in the Schedule of Investments, we have abbreviated the
names of many of the securities according to the list below and at
right.
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
VRDN Variable Rate Demand Notes
MuniHoldings Fund II, Inc., January 31, 2003
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
Illinois--3.6% NR* NR* $ 1,000 Chicago, Illinois, Special Assessment Bonds (Lake Shore East),
6.75% due 12/01/2032 $ 995
BBB NR* 2,315 Illinois, Development Finance Authority Revenue Bonds
(Community Rehabilitation Providers Facilities), Series A,
6.625% due 7/01/2032 2,342
AA Aa2 2,000 Illinois HDA, Homeowner Mortgage Revenue Bonds, AMT,
Sub-Series C-2, 5.25% due 8/01/2022 2,021
Indiana--1.8% NR* NR* 2,595 Indiana State Educational Facilities Authority, Revenue Refunding
Bonds (Saint Joseph's College Project), 7% due 10/01/2029 2,729
Kentucky--0.6% NR* NR* 1,165 Kenton County, Kentucky, Airport Board, Special Facilities
Revenue Bonds (Mesaba Aviation Inc. Project), AMT, Series A,
6.625% due 7/01/2019 958
Louisiana--0.7% NR* NR* 1,000 Hodge, Louisiana, Utility Revenue Bonds (Stone Container
Corporation), AMT, 9% due 3/01/2010 1,022
Maine--2.4% AA+ Aa1 3,500 Maine State Housing Authority, Mortgage Purchase Revenue Refunding
Bonds, Series B, 5.30% due 11/15/2023 3,593
Maryland--0.7% NR* NR* 1,050 Maryland State Energy Financing Administration, Limited Obligation
Revenue Bonds (Cogeneration-AES Warrior Run), AMT, 7.40% due 9/01/2019 1,071
Massachusetts-- Massachusetts State Development Finance Agency Revenue Bonds
2.0% (Neville Communities Home), Series A (g):
AAA NR* 600 5.75% due 6/20/2022 646
AAA NR* 1,500 6% due 6/20/2044 1,623
BB+ NR* 1,000 Massachusetts State Development Finance Agency, Revenue Refunding
Bonds (Eastern Nazarine College), 5.625% due 4/01/2029 749
Michigan--7.6% BBB Baa2 2,630 Delta County, Michigan, Economic Development Corporation,
Environmental Improvement Revenue Refunding Bonds (Mead Westvaco-
Escanaba), Series A, 6.25% due 4/15/2027 2,614
BBB- Baa3 2,000 Michigan State Hospital Finance Authority, Revenue Refunding
Bonds (Detroit Medical Center Obligation Group), Series A, 6.50%
due 8/15/2018 2,004
AAA Aaa 5,000 Michigan State Strategic Fund, Limited Obligation Revenue
Refunding Bonds (Detroit Edison Company Project), AMT, Series C,
5.65% due 9/01/2029 (l) 5,157
NR* VMIG1++ 600 Michigan State Strategic Fund, PCR, Refunding (Consumers Power
Project), VRDN, 1.20% due 4/15/2018 (a)(f) 600
A1+ VMIG1++ 900 Michigan State University Revenue Bonds, VRDN, Series A, 1.10%
due 8/15/2032 (f) 900
Minnesota--5.0% A- NR* 1,680 Minneapolis, Minnesota, Community Development Agency, Supported
Development Revenue Refunding Bonds (Common Bond), Series G-3,
5.35% due 12/01/2021 1,726
Rockford, Minnesota, Independent School District Number 883, GO (c):
AAA Aaa 2,870 5.60% due 2/01/2019 3,094
AAA Aaa 2,390 5.60% due 2/01/2020 2,591
Mississippi--4.4% Mississippi Business Finance Corporation, Mississippi, PCR,
Refunding (System Energy Resources Inc. Project):
BBB- Ba1 5,000 5.875% due 4/01/2022 4,606
BBB- Ba1 2,050 5.90% due 5/01/2022 1,894
Missouri--2.2% Fenton, Missouri, Tax Increment Revenue Refunding and Improvement
Bonds (Gravois Bluffs):
NR* NR* 1,225 6.75% due 10/01/2015 1,259
NR* NR* 1,000 7% due 10/01/2021 1,049
BBB+ Baa1 1,000 Missouri State Development Finance Board, Infrastructure Facilities
Revenue Bonds (Branson), Series A, 5.50% due 12/01/2032 997
New Jersey--7.0% New Jersey EDA, Retirement Community Revenue Bonds, Series A:
NR* NR* 1,000 (Cedar Crest Village Inc. Facility), 7.25% due 11/15/2031 988
NR* NR* 2,000 (Seabrook Village Inc.), 8.125% due 11/15/2023 2,096
New Jersey EDA, Special Facility Revenue Bonds (Continental
Airlines Inc. Project), AMT:
B+ B3 2,000 6.625% due 9/15/2012 1,540
B+ B3 2,250 6.25% due 9/15/2029 1,583
NR* Baa1 2,375 New Jersey Health Care Facilities Financing Authority Revenue
Bonds (South Jersey Hospital), 6% due 7/01/2026 2,428
A A1 2,000 Tobacco Settlement Financing Corporation of New Jersey,
Asset-Backed Revenue Refunding Bonds, 5.75% due 6/01/2032 1,785
New Mexico-- BBB- Baa3 4,675 Farmington, New Mexico, PCR, Refunding (Public Service Company-San
3.0% Juan Project), Series A, 5.80% due 4/01/2022 4,551
New York--13.0% AAA Aaa 2,500 Metropolitan Transportation Authority, New York, Dedicated Tax Fund
Revenue Bonds, Series A, 5.25% due 11/15/2022 (b) 2,603
New York City, New York, City IDA, Civic Facility Revenue Bonds:
NR* NR* 415 Series C, 6.80% due 6/01/2028 420
NR* NR* 1,925 (Special Needs Facilities Pooled Program), Series C-1, 5.50%
due 7/01/2007 1,912
BBB- Ba2 825 New York City, New York, City IDA, Special Facility Revenue Bonds
(British Airways PLC Project), AMT, 7.625% due 12/01/2032 718
NR* Aaa 7,860 New York City, New York, City Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, RITR, Series 11, 10.37%
due 6/15/2026 (c)(e) 9,922
AAA Aaa 3,500 New York State Dormitory Authority, Mental Health Services
Facilities Improvement Revenue Bonds, Series B, 5.75% due
2/15/2020 (d) 3,785
NR* NR* 55 Suffolk County, New York, IDA, Civic Facility Revenue Bonds (Special
Needs Facilities Pooled Program), Series D-1, 5.50% due 7/01/2007 55
North Carolina-- BBB Baa3 2,000 North Carolina Eastern Municipal Power Agency, Power System Revenue
2.9% Bonds, Series D, 6.75% due 1/01/2026 2,152
NR* NR* 2,000 North Carolina Medical Care Commission, Health Care Facilities,
First Mortgage Revenue Refunding Bonds (Presbyterian Homes Project),
7% due 10/01/2031 2,162
Ohio--6.9% AAA Aaa 10,000 Ohio State Air Quality Development Authority, Revenue Refunding
Bonds (Dayton Power & Light Company), Series B, 6.40% due
8/15/2027 (d) 10,237
Oklahoma--0.7% Tulsa, Oklahoma, Municipal Airport Trust, Revenue Refunding Bonds
(AMR Corporation), AMT, Series A:
BB- B2 430 5.80% due 6/01/2035 306
BB- B2 1,075 5.375% due 12/01/2035 677
Pennsylvania-- Pennsylvania Economic Development Financing Authority, Exempt
5.7% Facilities Revenue Bonds (National Gypsum Company), AMT:
NR* NR* 4,750 Series A, 6.25% due 11/01/2027 4,194
NR* NR* 2,000 Series B, 6.125% due 11/01/2027 1,737
NR* NR* 540 Philadelphia, Pennsylvania, Authority for IDR, Commercial
Development, AMT, 7.75% due 12/01/2017 554
A- NR* 2,000 Sayre, Pennsylvania, Health Care Facilities Authority Revenue Bonds
(Guthrie Health), Series A, 5.875% due 12/01/2031 2,040
MuniHoldings Fund II, Inc., January 31, 2003
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
Rhode Island-- NR* NR* $ 2,022 Cranston, Rhode Island, GO, BAN, Refunding, 8.25% due 2/12/2003 $ 2,028
4.1% AAA Aaa 1,000 Providence, Rhode Island, Public Building Authority, General
Revenue Bonds, Series A, 5.60% due 12/15/2013 (c) 1,126
Rhode Island State Health and Educational Building Corporation,
Hospital Financing Revenue Bonds (Lifespan Obligation Group):
BBB Baa2 1,000 6.375% due 8/15/2021 1,022
BBB Baa2 1,900 6.50% due 8/15/2032 1,936
South Carolina-- BBB+ Baa2 2,080 Medical University, South Carolina, Hospital Authority, Hospital
2.9% Facilities Revenue Refunding Bonds, Series A, 6.375% due 8/15/2027 2,128
BBB NR* 2,000 South Carolina Jobs, EDA, Economic Development Revenue Bonds
(Westminster Presbyterian Center), 7.75% due 11/15/2030 2,213
South Dakota-- A A1 1,680 Educational Enhancement Funding Corporation, South Dakota,
1.1% Series B, 6.50% due 6/01/2032 1,610
Tennessee--3.9% NR* NR* 2,200 Hardeman County, Tennessee, Correctional Facilities Corporation
Revenue Bonds, Series B, 7.375% due 8/01/2017 2,148
BBB+ Baa1 3,450 Shelby County, Tennessee, Health, Educational and Housing Facility
Board, Hospital Revenue Refunding Bonds (Methodist Healthcare),
6.50% due 9/01/2026 3,638
Texas--13.4% BBB- Baa3 2,665 Austin, Texas, Convention Center Revenue Bonds (Convention
Enterprises Inc.), First Tier, Series A, 6.70% due 1/01/2028 2,773
Brazos River Authority, Texas, PCR, Refunding, Series B:
BBB Baa2 1,000 (TXU Electric Company Project), 4.75% due 5/01/2029 971
BBB Baa2 3,205 (Utilities Electric Company), AMT, 5.05% due 6/01/2030 3,111
A A3 2,875 Brazos River, Texas, Harbor Navigation District, Brazoria
County Environmental Revenue Refunding Bonds (Dow Chemical
Company Project), AMT, Series A-7, 6.625% due 5/15/2033 2,987
BB- B2 195 Dallas-Fort Worth, Texas, International Airport Facility Improvement
Corporation Revenue Bonds (American Airlines Inc.), 6% due 11/01/2014 54
NR* Ba2 1,100 Gulf Coast, Texas, IDA, Solid Waste Disposal Revenue Bonds (Citgo
Petroleum Corporation Project), AMT, 7.50% due 5/01/2025 1,073
BBB Baa2 3,185 Gulf Coast, Texas, Waste Disposal Authority, Revenue Refunding
Bonds (International Paper Company), AMT, Series A, 6.10% due
8/01/2024 3,155
A1+ VMIG1++ 100 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Texas Children's Hospital), VRDN,
Series B-1, 1.25% due 10/01/2029 (f) 100
A- Baa1 2,000 Lower Colorado River Authority, Texas, PCR (Samsung Austin
Semiconductor), AMT, 6.95% due 4/01/2030 2,131
BBB Baa2 2,495 Red River Authority, Texas, PCR, Refunding (Celanese Project),
Series A, 6.45% due 11/01/2030 2,533
BBB Baa2 1,050 Sabine River Authority, Texas, PCR, Refunding (TXU Electric
Company Project), Series C, 4% due 5/01/2028 1,036
Vermont--0.7% BBB+ NR* 1,000 Vermont Educational and Health Buildings, Financing Agency
Revenue Bonds (Developmental and Mental Health), Series A,
6.50% due 6/15/2032 1,004
Virginia--16.9% Chesterfield County, Virginia, IDA, PCR (Virginia Electric
and Power Company):
BBB+ A3 425 Series A, 5.875% due 6/01/2017 440
BBB+ A3 575 Series B, 5.875% due 6/01/2017 595
AAA Aaa 10,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue
Refunding Bonds, AMT, Series A, 6.10% due 2/01/2011 (a) 11,447
BBB- Baa3 1,100 Mecklenburg County, Virginia, IDA, Exempt Facility Revenue
Refunding Bonds (UAE LP Project), 6.50% due 10/15/2017 1,098
Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2030 242
BB NR* 18,400 Senior-Series B, 5.90%** due 8/15/2030 1,690
BB NR* 30,000 Senior-Series B, 5.95%** due 8/15/2033 2,125
AAA Aaa 3,000 Virginia State, HDA, Commonwealth Mortgage Revenue Bonds, Series J,
Sub-Series J-1, 5.20% due 7/01/2019 (d) 3,085
AA+ Aa1 1,095 Virginia State, HDA, Rental Housing Revenue Bonds, AMT, Series B,
5.625% due 8/01/2011 1,168
AA+ Aa1 3,200 Virginia State, HDA, Revenue Bonds, AMT, Series D, 6% due 4/01/2024 3,349
Washington--0.7% NR* NR* 1,075 Seattle, Washington, Housing Authority, Housing Revenue Bonds
(Replacement Housing Project), 6.125% due 12/01/2032 1,072
Wisconsin--0.9% BBB+ NR* 1,360 Wisconsin State Health and Educational Facilities Authority Revenue
Bonds (Synergyhealth Inc.), 6% due 11/15/2032 1,329
Virgin Islands-- BBB- Baa3 3,600 Virgin Islands Government Refinery Facilities Revenue Bonds
2.4% (Hovensa Coker Project), AMT, 6.50% due 7/01/2021 3,614
Total Municipal Bonds (Cost--$230,174)--155.3% 231,385
Shares
Held Common Stock
107 Horizon Natural Resources Company (h)(k) 0
12 Merrill Lynch Institutional Tax-Exempt Fund (j) 12
Total Common Stock (Cost--$1,195)--0.0% 12
Total Investments (Cost--$231,369)--155.3% 231,397
Other Assets Less Liabilities--3.1% 4,633
Preferred Stock, at Redemption Value--(58.4%) (87,027)
--------
Net Assets Applicable to Common Stock--100.0% $149,003
========
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at January 31, 2003.
(f)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at January 31, 2003.
(g)GNMA Collateralized.
(h)Represents entitlement received from a bankruptcy exchange for
Peninsula Ports, 6.90% due 5/22/2022.
(i)Floating rate note.
(j)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) are as
follows:
(in Thousands)
Net Share Net Dividend
Affiliate Activity Cost Income
Merrill Lynch Institutional
Tax-Exempt Fund 12 $12 $23
(k)Non-income producing security.
(l)XL Capital Insured.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
MuniHoldings Fund II, Inc., January 31, 2003
STATEMENT OF NET ASSETS
As of January 31, 2003
Assets: Investments, at value (identified cost--$231,369,435) $231,396,763
Cash 13,628
Receivables:
Interest $ 4,204,057
Securities sold 1,769,086
Dividends 23,125 5,996,268
------------
Prepaid expenses and other assets 183,052
------------
Total assets 237,589,711
------------
Liabilities: Payables:
Securities purchased 1,330,796
Investment adviser 124,413
Dividends to Common Stock shareholders 104,893
------------
Total liabilities 1,560,102
------------
Preferred Stock: Preferred Stock, at redemption value, par value $.10 per share
(1,740 Series A shares and 1,740 Series B shares of AMPS* issued
and outstanding at $25,000 per share liquidation preference) 87,026,831
============
Net Assets Net assets applicable to Common Stock $149,002,778
Applicable to ============
Common Stock:
Analysis of Common Stock, par value $.10 per share (11,073,334 shares issued
Net Assets and outstanding) $ 1,107,333
Applicable to Paid-in capital in excess of par 163,858,315
Common Stock: Undistributed investment income--net $ 3,408,594
Accumulated realized capital losses on investments--net (19,398,792)
Unrealized appreciation on investments--net 27,328
------------
Total accumulated losses--net (15,962,870)
------------
Total--Equivalent to $13.46 net asset value per share of Common Stock
(market price--$12.48) $149,002,778
============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
For the Six Months Ended January 31, 2003
Investment Interest $ 7,352,556
Income: Dividends 23,125
------------
Total income 7,375,681
------------
Expenses: Investment advisory fees $ 662,851
Commission fees 112,807
Accounting services 47,625
Professional fees 39,042
Transfer agent fees 24,418
Directors' fees and expenses 18,967
Listing fees 16,096
Printing and shareholder reports 14,881
Custodian fees 7,903
Pricing fees 7,826
Other 14,534
------------
Total expenses before reimbursement 966,950
Reimbursement of expenses (3,586)
------------
Total expenses after reimbursement 963,364
------------
Investment income--net 6,412,317
------------
Realized & Realized gain on investments--net 2,725,165
Unrealized Change in unrealized appreciation on investments--net (4,157,584)
Gain (Loss)on ------------
Investments--Net: Total realized and unrealized loss on investments--net (1,432,419)
------------
Dividends to Investment income--net (582,900)
Preferred Stock ------------
Shareholders: Net Increase in Net Assets Resulting from Operations $ 4,396,998
============
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Six For the
Months Ended Year Ended
January 31, July 31,
Increase (Decrease) in Net Assets: 2003 2002
Operations: Investment income--net $ 6,412,317 $ 12,156,016
Realized gain (loss) on investments--net 2,725,165 (1,561,536)
Change in unrealized appreciation on investments--net (4,157,584) 1,167,576
Dividends to Preferred Stock shareholders (582,900) (1,396,089)
------------ ------------
Net increase in net assets resulting from operations 4,396,998 10,365,967
------------ ------------
Dividends to Investment income--net (5,027,293) (9,350,545)
Common Stock ------------ ------------
Shareholders: Net decrease in net assets resulting from dividends to Common
Stock shareholders (5,027,293) (9,350,545)
------------ ------------
Net Assets Total increase (decrease) in net assets applicable to Common Stock (630,295) 1,015,422
Applicable to Beginning of period 149,633,073 148,617,651
Common Stock: ------------ ------------
End of period* $149,002,778 $149,633,073
============ ============
*Undistributed investment income--net $ 3,408,594 $ 2,606,470
============ ============
See Notes to Financial Statements.
MuniHoldings Fund II, Inc., January 31, 2003
FINANCIAL HIGHLIGHTS
The following per share data and ratios
have been derived from information For the Six
provided in the financial statements. Months Ended
January 31, For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999
Per Share Net asset value, beginning of period $ 13.51 $ 13.42 $ 12.45 $ 14.16 $ 15.01
Operating ---------- ---------- ---------- ---------- ----------
Performance:+++++ Investment income--net .58++++ 1.10 1.06 1.08 1.11
Realized and unrealized gain (loss)
on investments--net (.13) (.04) .95 (1.67) (.88)
Dividends and distributions to
Preferred Stock shareholders:
Investment income--net (.05) (.13) (.28) (.29) (.25)
In excess of realized gain on
investments--net -- -- -- --++ --
---------- ---------- ---------- ---------- ----------
Total from investment operations .40 .93 1.73 (.88) (.02)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.45) (.84) (.76) (.82) (.83)
In excess of realized gain on
investments--net -- -- -- (.01) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions to
Common Stock shareholders (.45) (.84) (.76) (.83) (.83)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 13.46 $ 13.51 $ 13.42 $ 12.45 $ 14.16
========== ========== ========== ========== ==========
Market price per share, end of period $ 12.48 $ 12.96 $ 12.35 $ 11.4375 $ 12.9375
========== ========== ========== ========== ==========
Total Investment Based on market price per share (.22%)+++ 12.12% 15.06% (4.93%) (3.79%)
Return:** ========== ========== ========== ========== ==========
Based on net asset value per share 3.24%+++ 7.56% 14.86% (5.44%) (.03%)
========== ========== ========== ========== ==========
Ratios Based on Total expenses, net of reimbursement*** 1.26%* 1.29% 1.28% 1.32% 1.11%
Average Net Assets ========== ========== ========== ========== ==========
Of Common Stock: Total expenses*** 1.27%* 1.29% 1.28% 1.32% 1.14%
========== ========== ========== ========== ==========
Total investment income--net*** 8.41%* 8.27% 8.29% 8.71% 7.35%
========== ========== ========== ========== ==========
Amount of dividends to Preferred
Stock shareholders .76%* .95% 2.20% 2.34% 1.66%
========== ========== ========== ========== ==========
Investment income--net, to Common
Stock shareholders 7.65%* 7.32% 6.09% 6.36% 5.68%
========== ========== ========== ========== ==========
Ratios Based on Total expenses, net of reimbursement .80%* .81% .79% .81% .73%
Average Net ========== ========== ========== ========== ==========
Assets of Total expenses .80%* .81% .79% .81% .75%
Common & ========== ========== ========== ========== ==========
Preferred Total investment income--net 5.32%* 5.19% 5.14% 5.34% 4.83%
Stock:*** ========== ========== ========== ========== ==========
Ratios Based on Dividends to Preferred Stock
Average Net shareholders 1.31%* 1.60% 3.59% 3.72% 3.20%
Assets Of ========== ========== ========== ========== ==========
Preferred Stock:
Supplemental Net assets applicable to Common
Data: Stock, end of period (in thousands) $ 149,003 $ 149,633 $ 148,618 $ 137,819 $ 156,745
========== ========== ========== ========== ==========
Preferred Stock outstanding, end of
period (in thousands) $ 87,000 $ 87,000 $ 87,000 $ 87,000 $ 87,000
========== ========== ========== ========== ==========
Portfolio turnover 26.35% 46.31% 57.57% 129.35% 71.07%
========== ========== ========== ========== ==========
Leverage: Asset coverage per $1,000 $ 2,713 $ 2,720 $ 2,708 $ 2,584 $ 2,802
========== ========== ========== ========== ==========
Dividends Per Series A--Investment income--net $ 165 $ 409 $ 908 $ 967 $ 807
Share On ========== ========== ========== ========== ==========
Preferred Stock Series B--Investment income--net $ 170 $ 394 $ 890 $ 893 $ 789
Outstanding: ========== ========== ========== ========== ==========
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales charges. If applicable, the Fund's Investment
Adviser waived a portion of its management fees. Without such
waiver, the Fund's performance would have been lower.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Amount is less than $.01 per share.
++++Based on average shares outstanding.
+++Aggregate total investment return.
+++++Certain prior year amounts have been reclassified to conform to
current year presentation.
See Notes to Financial Statements.
MuniHoldings Fund II, Inc., January 31, 2003
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings Fund II, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund's financial statements are
prepared in conformity with accounting principles generally accepted
in the United States of America, which may require the use of
management accruals and estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal,
recurring nature. The Fund determines and makes available for
publication the net asset value of its Common Stock on a weekly
basis. The Fund's Common Stock is listed on the New York Stock
Exchange under the symbol MUH. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). Securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Losses may arise due to
changes in the value of the contract or if the counterparty does not
perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase call and put options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward interest rate swaps--The Fund is authorized to enter into
forward interest rate swaps for the purpose of hedging the interest
rate risk on portfolio securities. In a forward interest rate swap,
the Fund and the counterparty agree to pay or receive interest on a
specified notional contract amount, commencing on a specified future
effective date, unless terminated earlier. The value of the
agreement is determined by quoted fair values received daily by the
Fund from the counterparty. 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.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of .55% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Stock. For the six months ended January 31,
2003, FAM reimbursed the Fund in the amount of $3,586.
For the six months ended January 31, 2003, the Fund reimbursed FAM
$2,579 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 six months ended January 31, 2003 were $62,758,051 and
$60,748,102, respectively.
Net realized gains for the six months ended January 31, 2003 and net
unrealized gains as of January 31, 2003 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $ 2,725,165 $ 27,328
------------- -------------
Total $ 2,725,165 $ 27,328
============= =============
As of January 31, 2003, net unrealized appreciation for Federal
income tax purposes aggregated $171,714, of which $10,305,315
related to appreciated securities and $10,133,601 related to
depreciated securities. The aggregate cost of investments at January
31, 2003 for Federal income tax purposes was $231,225,049.
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.
Common Stock
Shares issued and outstanding during the six months ended January
31, 2003 and the year ended July 31, 2002 remained constant.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund, with a par value of $.10 per share and a
liquidation preference of $25,000 per share, 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 January 31, 2003 were as follows: Series A,
..80% and Series B, 1.55%.
Shares issued and outstanding during the six months ended January
31, 2003 and the year ended July 31, 2002 remained constant.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from .25% to .375%,
calculated on the proceeds of each auction. For the six months ended
January 31, 2003, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, an affiliate of FAM, earned $49,676 as commissions.
5. Capital Loss Carryforward:
On July 31, 2002, the Fund had a net capital loss carryforward of
$20,023,975, of which $7,226,789 expires in 2008, $12,107,981
expires in 2009 and $689,205 expires in 2010. This amount will be
available to offset like amounts of any future taxable gains.
6. Subsequent Event:
On February 6, 2003, a tax-exempt income dividend of $.084000 was
declared. The dividend was paid on February 27, 2003 to shareholders
of record on February 14, 2003.
MuniHoldings Fund II, Inc., January 31, 2003
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute all or a portion of its
net investment income to its shareholders on a monthly basis. In
order to provide shareholders with a more consistent yield to the
current trading price of shares of Common Stock of the Fund, the
Fund may at times pay out less than the entire amount of net
investment income earned in any particular month and may at times in
any particular month pay out such accumulated but undistributed
income in addition to net investment income earned in that month. As
a result, the dividends paid by the Fund for any particular month
may be more or less than the amount of net investment income earned
by the Fund during such month. The Fund's current accumulated but
undistributed net investment income, if any, is disclosed in the
Statement of Net Assets, which comprises part of the financial
information included in this report.
QUALITY PROFILE
The quality ratings of securities in the Fund as of January 31, 2003
were as follows:
Percent of
Total
S&P Rating/Moody's Rating Investments
AAA/Aaa 33.3%
AA/Aa 9.6
A/A 11.3
BBB/Baa 24.6
BB/Ba 4.2
B/B 1.3
CCC/Caa 0.4
NR (Not Rated) 14.6
Other* 0.7
*Temporary investments in short-term municipal securities.
MuniHoldings Fund II, Inc., January 31, 2003
PROXY RESULTS
During the six-month period ended January 31, 2003, MuniHoldings
Fund II, Inc.'s Common Stock shareholders voted on the following
proposal. The proposal was approved at a shareholders' meeting on
January 28, 2003. A description of the proposal and number of shares
voted are as follows:
Shares Voted Shares Withheld
For From Voting
1.To elect the Fund's Directors: Terry K. Glenn 10,330,443 253,938
Ronald W. Forbes 10,352,079 232,302
Cynthia A. Montgomery 10,336,828 247,553
Kevin A. Ryan 10,329,775 254,606
Roscoe S. Suddarth 10,331,030 253,351
Edward D. Zinbarg 10,335,928 248,453
During the six-month period ended January 31, 2003, MuniHoldings
Fund II, Inc.'s Preferred Stock shareholders (Series A & B) voted on
the following proposal. The proposal was approved at a shareholders'
meeting on January 28, 2003. A description of the proposal and
number of shares voted are as follows:
Shares Voted Shares Withheld
For From Voting
1. To elect the Fund's Board of Directors: Terry K. Glenn,
Ronald W. Forbes, Cynthia A. Montgomery, Charles C. Reilly,
Kevin A. Ryan, Roscoe S. Suddarth, Richard R. West and
Edward D. Zinbarg 3,411 5
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Kenneth A. Jacob, Senior Vice President
John M. Loffredo, Senior Vice President
Robert A. DiMella, Vice President
Donald C. Burke, Vice President and Treasurer
Brian D. Stewart, Secretary
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MUH
Item 2 - Did registrant adopt 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, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by
the registrant or a third party? If not, why not? Briefly describe
any amendments or waivers that occurred during the period. State
here if code of ethics/amendments/waivers are on website and give
website address-. State here if fund will send code of ethics to
shareholders without charge upon request--N/A (not answered until
July 15, 2003 and only annually for funds)
Item 3 - Did the registrant's board of directors determine that the
registrant either: (i) has at least one audit committee financial
expert serving on its audit committee; or (ii) does not have an
audit committee financial expert serving on its audit committee? If
yes, disclose name of financial expert and whether he/she is
"independent," (fund may, but is not required, to disclose
name/independence of more than one financial expert) If no, explain
why not. -N/A (not answered until July 15, 2003 and only annually
for funds)
Item 4 - Disclose annually only (not answered until December 15,
2003)
(a) Audit Fees - Disclose aggregate fees billed for each of the last
two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant
in connection with statutory and regulatory filings or engagements
for those fiscal years. N/A.
(b) Audit-Related Fees - Disclose aggregate fees billed in each of
the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance
of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item. Registrants shall
describe the nature of the services comprising the fees disclosed
under this category. N/A.
(c) Tax Fees - Disclose aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning.
Registrants shall describe the nature of the services comprising the
fees disclosed under this category. N/A.
(d) All Other Fees - Disclose aggregate fees billed in each of the
last two fiscal years for products and services provided by the
principal accountant, other than the services reported in paragraphs
(a) through (c) of this Item. Registrants shall describe the nature
of the services comprising the fees disclosed under this category.
N/A.
(e)(1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of Regulation
S-X. N/A.
(e)(2) Disclose the percentage of services described in each of
paragraphs (b) through (d) of this Item that were approved by the
audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X. N/A.
(f) If greater than 50%, disclose the percentage of hours expended
on the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal
accountant's full-time, permanent employees. N/A.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the adviser
that provides ongoing services to the registrant for each of the
last two fiscal years of the registrant. N/A.
(h) Disclose whether the registrant's audit committee has considered
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another 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. N/A.
Items 5-6 - Reserved
Item 7 - For closed-end funds that contain voting securities in
their portfolio, describe the policies and procedures that it uses
to determine how to vote proxies relating to those portfolio
securities. N/A.
Item 8--Reserved
Item 9(a) - Disclose the conclusions of the registrant's principal
executive officer or officers and principal financial officer or
officers, or persons performing similar functions, about the
effectiveness of the registrant's disclosure controls and procedures
(as defined in Rule 30a-2(c) under the Act (17 CFR 270.30a-2(c)))
based on their evaluation of these controls and procedures as of a
date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph. N/A.
Item 9(b)--There were no significant changes in the registrant's
internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Item 10 - Exhibits
10(a) - Attach code of ethics or amendments/waivers, unless code of
ethics or amendments/waivers is on website or offered to
shareholders upon request without charge. N/A.
10(b) - Attach certifications (4 in total pursuant to Sections 302
and 906 for CEO/CFO). 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 Fund II, Inc.
By: _/s/ Terry K. Glenn_______
Terry K. Glenn,
President of
MuniHoldings Fund II, Inc.
Date: March 17, 2003
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 Fund II, Inc.
Date: March 17, 2003
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
MuniHoldings Fund II, Inc.
Date: March 17, 2003