UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
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: 07/31/04
Date of reporting period: 08/01/03 - 01/31/04
Item 1 - Report to Shareholders
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Merrill Lynch Investment Managers
www.mlim.ml.com
MuniHoldings Fund II, Inc.
Semi-Annual Report
January 31, 2004
MuniHoldings 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) on www.mutualfunds.ml.com; and
(3) on the Securities and Exchange Commission's website at
http://www.sec.gov.
MuniHoldings Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
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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,
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, 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. Invesments 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. As of January 31,
2004, the percentage of the Fund's net assets invested in inverse
floaters was 5.51%, 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.
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
A Letter From the President
Dear Shareholder
In my 35 years in the asset management business, 2003 was among the
more memorable. The year, which opened with geopolitical turmoil,
unrelenting economic uncertainty and a dismal continuation of a
three-year equity market slump, vigorously reversed course in the
months that followed.
As we entered 2004, the equity markets maintained their positive
momentum from year-end 2003. For the six-month and 12-month periods
ended January 31, 2004, the Standard & Poor's (S&P) 500 Index
returned +15.23% and +34.57%, respectively. In the fixed income
markets, investors willing to accept the greatest risk were rewarded
the most. This trend held true in the municipal bond market, where
high yield issues generally outperformed investment grade bonds. For
the six-month and 12-month periods ended January 31, 2004, the
Lehman Brothers Non-Investment Grade Index of municipal bonds posted
respective returns of +9.99% and +15.33%.
The major signposts indicate that we are seeing a shift from
economic growth fueled primarily by fiscal and monetary stimulus to
a broader-based, self-sustaining economic expansion. Gross domestic
product growth, which peaked at an annualized rate of 8.2% in the
third quarter of 2003, is estimated at a more sustainable 4% in the
fourth quarter. That level of growth is expected to repeat itself in
the first quarter of 2004. For its part, the Federal Reserve Board
has reiterated its willingness to keep short-term interest rates at
current low levels to ensure the economy's strength.
Accompanying the increase in economic activity was an improvement in
corporate earnings. By the end of January, 298 of the S&P 500
companies had reported their fourth-quarter results, and 67.4% of
those exceeded expectations. In the meantime, the American consumer,
who continued to spend despite the faltering economy, may get
further incentive from another round of Federal tax refunds in 2004.
At Merrill Lynch Investment Managers, we believe events and efforts
of 2003 leave us with a much stronger economy and the recent
optimism suggests it is time for investors to consider what can go
right in 2004. We encourage you to revisit your portfolio and your
asset allocation strategy to ensure you are well positioned to take
advantage of the opportunities that lie ahead.
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 FUND II, INC., JANUARY 31, 2004
A Discussion With Your Fund's Portfolio Manager
We continued to focus on increasing the Fund's yield and, to that
end, performance benefited most from an overweight position in the
high yield portion of the municipal bond market.
Discuss the recent market environment relative to municipal bonds.
Over the past six months, long-term fixed income interest rates
generally declined as the U.S. economy gained strength. Gross
domestic product growth expanded at an annualized rate of 8.2% in
the third quarter of 2003, with fourth-quarter growth estimated at
4.0%. These figures were well above the 1.4% rate of growth
registered in the first quarter of 2003. Improving economic
conditions benefited equity markets, as the Standard & Poor's 500
Index, a widely recognized measure of U.S. stock market performance,
returned +15.23% for the six months ended January 31, 2004. Despite
the strong growth, the Federal Reserve Board seemed apt to leave
short-term interest rates at their current low levels, citing
subdued employment growth and the absence of material inflationary
pressures.
While short-term interest rates remained at historic lows, long-term
interest rates generally declined over the past six months. At the
end of January 2004, long-term U.S. Treasury bond yields stood at
4.96%, having dropped 40 basis points (.40%) from six months
earlier. In the tax-exempt bond market, long-term revenue bond
yields also fell 40 basis points to 5.02%, as measured by the Bond
Buyer Revenue Bond Index. Both 30-year and 10-year Aaa-rated
municipal issues--the highest rated--saw their yields decrease
approximately 50 basis points during the six-month period ended
January 31, 2004, as reported by Municipal Market Data.
Although improving U.S. equity valuations took some attention away
from fixed income markets, overall demand for tax-exempt products
remained positive. With tax-exempt money market rates at or below 1%
and low nominal municipal bond yields in general, many investors
have moved increasingly further out on the municipal yield curve to
generate the desired level of tax-exempt income. This gravitation
toward longer maturities helped support the strong demand and
performance exhibited by tax-exempt products during the period.
The municipal bond market's performance also benefited from a
notable improvement in supply/demand dynamics. In recent months, the
pace of new municipal bond issuance has greatly declined. For the
12 months ended January 31, 2004, municipalities issued more than
$375 billion in new securities, an increase of approximately 5%
compared to last year's issuance. Clearly, municipalities viewed the
historically low interest rates over the past year as an opportunity
to finance existing infrastructure needs and to refinance
outstanding, higher-coupon debt. Over the past six months, however,
new issuance fell 11.5% compared to the same period a year earlier.
The decline was even more pronounced in the last three months, with
a decrease of more than 13% compared to the same three months last
year. This decline in supply helped strengthen the municipal
market's positive technical position and enhanced recent
performance. New-issue supply is expected to remain manageable in
early 2004 and should help support the tax-exempt bond market's
position as an attractive fixed income investment alternative.
How did the Fund perform during the period in light of the existing
market conditions?
For the six-month period ended January 31, 2004, the Common Stock of
MuniHoldings Fund II, Inc. had net annualized yields of 7.08% and
6.95%, based on a period-end per share net asset value of $14.34 and
a per share market price of $14.61, respectively, and $.512 per
share income dividends. Over the same period, the total investment
return on the Fund's Common Stock was +10.47%, based on a change in
per share net asset value from $13.46 to $14.34, and assuming
reinvestment of $.509 per share ordinary income dividends.
For the six-month period ended January 31, 2004, the Fund's Auction
Market Preferred Stock (AMPS) had average yields of .82% for Series
A and 1.57% for Series B.
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
The Fund's return, based on net asset value, outpaced the +9.69%
average return of its comparable Lipper category of General
Municipal Debt Funds (Leveraged) for the six-month period ended
January 31, 2004. (Funds in this Lipper category invest primarily in
municipal debt issues rated in the top four credit-rating
categories. These funds can be leveraged via use of debt, preferred
equity and/or reverse repurchase agreements.) The Fund's strong
relative performance is attributed to our focus on yield and an
overweight position in spread product - that is, lower-quality
issues that traditionally offer higher yields than higher-quality
issues with comparable maturities. Credit spreads contracted
significantly in recent months, reflecting investors' increased
appetite for higher yields and willingness to assume the associated
risk. The Fund's yield and total return benefited as a result.
Our exposure to the high yield sector emphasized corporate-backed
municipal debt. Our position in the airline sector, for example,
benefited performance significantly as the outlook for an economic
recovery and strong third-quarter earnings increased demand for the
sector. In addition to airlines, spreads narrowed considerably in
other sectors, including convention centers, chemical companies,
paper and pulp companies and refineries.
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 included in 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 return based on changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
We began reducing the Fund's exposure to spread product about midway
through the six-month period given the significant outperformance of
the high yield sector. We have since shifted to a hold strategy. We
have seen considerable demand in the municipal high yield market
within the past several months combined with a dearth of new
issuance. This has created a strong market from a technical
perspective. We anticipate that spreads will continue to narrow
until demand for high yield instruments subsides or supply
increases. We intend to revisit our strategy and will consider
reducing our exposure to spread product toward the end of the first
quarter of 2004.
In terms of leverage, the Fund's borrowing costs remained between
..75% - 1.60% during the period. These attractive funding levels, in
combination with a steep tax-exempt yield curve, generated a
significant 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, neither is an imminent increase
in short-term interest rates. We expect short-term borrowing costs
to remain near current attractive levels for the coming months.
However, should the spread between short-term and long-term interest
rates narrow, the benefits of leverage 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, based on AMPS, was 35.31% of
total assets. (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 portfolio's position at the close of
the period?
We believe the Fund is well positioned for a stable-to-rising
interest rate environment. In our opinion, the economy is on track
for continued growth, which we expect should push interest rates
higher over time. Under these conditions, we will continue to focus
on maintaining the Fund's competitive yield while seeking to mute
net asset value volatility as interest rates move.
As the economy improves and corporate earnings grow, credit spreads
should continue to narrow. We will monitor these trends closely to
determine the most prudent time to reduce our exposure and take
profits from our positions in spread product.
Robert A. DiMella
Vice President and Portfolio Manager
February 13, 2004
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Schedule of Investments (In Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
Alabama--2.8% AAA Aaa $ 4,000 Jefferson County, Alabama, Sewer Revenue Bonds, Series D, 5.70%
due 2/01/2007 (b)(h) $ 4,490
Arizona--3.9% BBB Baa1 1,000 Arizona Health Facilities Authority Revenue Bonds (Catholic
Healthcare West), Series A, 6.625% due 7/01/2020 1,110
NR* Caa3 2,800 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds
(America West Airlines Inc. Project), AMT, 6.30% due 4/01/2023 2,247
Pima County, Arizona, IDA, M/F Housing Revenue Bonds (Columbus
Village), Series A (f):
AAA NR* 585 6% due 10/20/2031 642
AAA NR* 770 6.05% due 10/20/2041 842
NR* NR* 1,325 Show Low, Arizona, Improvement District No. 5, Special Assessment
Bonds, 6.375% due 1/01/2015 1,386
California-- AAA Aaa 2,000 Benicia, California, Unified School District, GO, Refunding,
22.1% Series A, 5.615%** due 8/01/2020 (b) 894
BBB Baa1 5,250 California State, GO, Refunding, 5.375% due 10/01/2027 5,336
BBB- Baa2 5,200 California State Public Works Board, Lease Revenue Bonds
(Department of Corrections), Series C, 5.25% due 6/01/2028 5,202
A- A2 4,000 Chula Vista, California, IDR, Refunding (San Diego Gas & Electric
Co.), AMT, Series A, 6.75% due 3/01/2023 4,015
Golden State Tobacco Securitization Corporation of California,
Tobacco Settlement Revenue Bonds:
BBB Baa2 870 Series A-3, 7.875% due 6/01/2042 937
BBB- Baa2 2,000 Series B, 5.75% due 6/01/2021 2,129
BBB- Baa2 1,330 Series B, 5.625% due 6/01/2033 1,343
BBB- Baa2 2,690 Series B, 5.50% due 6/01/2043 2,660
Sacramento County, California, Sanitation District, Financing
Authority Revenue Refunding Bonds (e):
AA Aa3 1,000 RIB, Series 366, 10.522% due 12/01/2027 1,153
AA Aa3 2,500 Trust Receipts, Class R, Series A, 10.695% due 12/01/2019 2,939
San Marino, California, Unified School District, GO, Series A (d):
AAA Aaa 1,820 5.50%** due 7/01/2017 981
AAA Aaa 1,945 5.55%** due 7/01/2018 988
AAA Aaa 2,070 5.60%** due 7/01/2019 989
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) 5,583
Colorado--1.9% NR* NR* 1,890 Elk Valley, Colorado, Public Improvement Revenue Bonds (Public
Improvement Fee), Series A, 7.10% due 9/01/2014 1,956
BB+ Ba1 1,110 Northwest Parkway, Colorado, Public Highway Authority Revenue
Bonds, First Tier, Sub-Series D, 7.125% due 6/15/2041 1,141
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 at right.
AMT Alternative Minimum Tax (subject to)
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
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
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
Florida--7.2% NR* NR* $ 265 Bonnet Creek Resort, Florida, Community Development District,
Special Assessment Revenue Bonds, 7.50% due 5/01/2034 $ 281
AA- A3 5,000 Broward County, Florida, Resource Recovery Revenue Refunding
Bonds (Wheelabrator South Broward), Series A, 5.375% due 12/01/2009 5,557
BBB- Baa1 1,900 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric
Company Project), 5.10% due 10/01/2013 1,922
A- A2 3,490 Orange County, Florida, Health Facilities Authority, Hospital
Revenue Bonds (Orlando Regional Healthcare), 6% due 12/01/2028 3,701
Georgia--0.8% NR* NR* 1,250 Atlanta, Georgia, Tax Allocation Revenue Bonds (Atlantic Station
Project), 7.90% due 12/01/2024 1,294
Idaho--1.2% 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 1,954
Illinois--1.9% NR* NR* 1,000 Chicago, Illinois, Special Assessment Bonds (Lake Shore East),
6.75% due 12/01/2032 1,004
AA Aa2 2,000 Illinois HDA, Homeowner Mortgage Revenue Bonds, AMT, Sub-Series C-2,
5.25% due 8/01/2022 2,061
Indiana--1.7% NR* NR* 2,595 Indiana State Educational Facilities Authority, Revenue Refunding
Bonds (Saint Joseph's College Project), 7% due 10/01/2029 2,752
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 895
Louisiana-- B NR* 1,150 Hodge, Louisiana, Utility Revenue Refunding Bonds (Stone Container
0.8% Corporation), AMT, 7.45% due 3/01/2024 1,196
Maine--2.3% AA+ Aa1 3,500 Maine State Housing Authority, Mortgage Purchase Revenue Refunding
Bonds, Series B, 5.30% due 11/15/2023 3,651
Maryland--1.5% NR* Baa3 1,250 Maryland State Economic Development Corporation, Student Housing
Revenue Bonds (University of Maryland College Park Project), 6.50%
due 6/01/2027 1,351
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
1.9% (Neville Communities Home), Series A (f):
AAA NR* 600 5.75% due 6/20/2022 664
AAA NR* 1,500 6% due 6/20/2044 1,653
BB+ NR* 1,000 Massachusetts State Development Finance Agency, Revenue Refunding
Bonds (Eastern Nazarine College), 5.625% due 4/01/2029 754
Michigan--6.7% 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 2,782
BBB- Baa3 1,100 Flint, Michigan, Hospital Building Authority, Revenue Refunding
Bonds (Hurley Medical Center), 6% due 7/01/2020 1,056
B Ba1 2,000 Michigan State Hospital Finance Authority, Revenue Refunding
Bonds (Detroit Medical Center Obligation Group), Series A, 6.50%
due 8/15/2018 1,483
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 (i) 5,297
Minnesota-- A- NR* 1,680 Minneapolis, Minnesota, Community Development Agency, Supported
4.8% Development Revenue Refunding Bonds (Common Bond), Series G-3,
5.35% due 12/01/2021 1,758
Rockford, Minnesota, Independent School District Number 883, GO (c):
AAA Aaa 2,870 5.60% due 2/01/2019 3,208
AAA Aaa 2,390 5.60% due 2/01/2020 2,667
Mississippi-- Mississippi Business Finance Corporation, Mississippi, PCR,
2.9% Refunding (System Energy Resources Inc. Project):
BBB- Ba1 2,500 5.875% due 4/01/2022 2,508
BBB- Ba1 2,050 5.90% due 5/01/2022 2,060
Missouri--2.0% Fenton, Missouri, Tax Increment Revenue Refunding and Improvement
Bonds (Gravois Bluffs):
NR* NR* 995 6.75% due 10/01/2015 1,031
NR* NR* 1,000 7% due 10/01/2021 1,086
BBB+ Baa1 1,000 Missouri State Development Finance Board, Infrastructure Facilities
Revenue Refunding Bonds (Branson), Series A, 5.50% due 12/01/2032 1,019
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
New Jersey-- New Jersey EDA, Retirement Community Revenue Bonds, Series A:
7.1% NR* NR* $ 1,000 (Cedar Crest Village Inc. Facility), 7.25% due 11/15/2031 $ 1,019
NR* NR* 2,000 (Seabrook Village Inc.), 8.125% due 11/15/2023 2,083
B Caa2 2,000 New Jersey EDA, Special Facility Revenue Bonds (Continental
Airlines Inc. Project), AMT, 6.625% due 9/15/2012 1,904
New Jersey Health Care Facilities Financing Authority Revenue
Bonds:
BB+ NR* 1,250 (Pascack Valley Hospital Association), 6.625% due 7/01/2036 1,284
NR* Baa1 2,375 (South Jersey Hospital), 6% due 7/01/2026 2,483
BBB Baa2 2,575 Tobacco Settlement Financing Corporation of New Jersey Revenue
Bonds, 7% due 6/01/2041 2,610
New Mexico-- BBB- Baa3 3,675 Farmington, New Mexico, PCR, Refunding (Public Service Company--
2.3% San Juan Project), Series A, 5.80% due 4/01/2022 3,695
New York-- NR* NR* 415 New York City, New York, City IDA, Civic Facility Revenue Bonds,
16.5% Series C, 6.80% due 6/01/2028 432
BB+ Ba2 825 New York City, New York, City IDA, Special Facility Revenue Bonds
(British Airways PLC Project), AMT, 7.625% due 12/01/2032 828
AAA Aaa 7,860 New York City, New York, City Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, RITR, Series 11, 10.44% due
6/15/2026 (c)(e) 9,478
New York State Dormitory Authority Revenue Bonds (Mental Health
Services), Series B (d):
AAA Aaa 2,550 5.75% due 2/15/2010 (h) 2,975
AAA Aaa 950 5.75% due 2/15/2020 1,067
A+ NR* 4,610 New York State Municipal Bond Bank Agency, Special School Purpose
Revenue Bonds, Series C, 5.25% due 12/01/2019 4,940
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
Tobacco Settlement Financing Corporation of New York Revenue Bonds,
Series A-1:
AA- A3 1,100 5.50% due 6/01/2014 1,200
AA- A3 1,100 5.50% due 6/01/2015 1,186
AA- A3 2,400 5.50% due 6/01/2018 2,593
NR* NR* 1,575 Westchester County, New York, IDA, Continuing Care Retirement,
Mortgage Revenue Bonds (Kendal on Hudson Project), Series A, 6.50%
due 1/01/2034 1,568
North BBB Baa3 2,000 North Carolina Eastern Municipal Power Agency, Power System Revenue
Carolina--1.4% Bonds, Series D, 6.75% due 1/01/2026 2,221
Ohio--6.4% 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) 10,136
Oklahoma--0.9% Tulsa, Oklahoma, Municipal Airport Trust Revenue Refunding Bonds
(AMR Corporation), AMT, Series A:
B- Caa2 430 5.80% due 6/01/2035 424
B- Caa2 1,075 5.375% due 12/01/2035 994
Pennsylvania-- Pennsylvania Economic Development Financing Authority, Exempt
4.7% Facilities Revenue Bonds (National Gypsum Company), AMT:
NR* NR* 2,750 Series A, 6.25% due 11/01/2027 2,816
NR* NR* 2,000 Series B, 6.125% due 11/01/2027 2,032
NR* NR* 540 Philadelphia, Pennsylvania, Authority for IDR, Commercial
Development, 7.75% due 12/01/2017 548
A- NR* 2,000 Sayre, Pennsylvania, Health Care Facilities Authority, Revenue
Refunding Bonds (Guthrie Health), Series A, 5.875% due 12/01/2031 2,085
Rhode Island-- Rhode Island State Health and Educational Building Corporation,
1.4% Hospital Financing Revenue Bonds (Lifespan Obligation Group):
BBB Baa2 1,000 6.375% due 8/15/2021 1,043
BBB Baa2 1,165 6.50% due 8/15/2032 1,196
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
South BBB+ Baa2 $ 2,080 Medical University, South Carolina, Hospital Authority,
Carolina--4.6% Hospital Facilities Revenue Refunding Bonds, Series A, 6.375%
due 8/15/2027 $ 2,180
BBB- NR* 2,000 South Carolina Jobs, EDA, Economic Development Revenue Bonds
(Westminster Presbyterian Center), 7.75% due 11/15/2030 2,203
Tobacco Settlement Revenue Management Authority of South Carolina,
Tobacco Settlement Revenue Bonds, Series B:
BBB Baa2 1,700 6.375% due 5/15/2028 1,614
BBB Baa2 1,400 6.375% due 5/15/2030 1,319
Tennessee-- NR* NR* 2,200 Hardeman County, Tennessee, Correctional Facilities Corporation
3.8% Revenue Bonds, Series B, 7.375% due 8/01/2017 2,283
A- Baa1 3,450 Shelby County, Tennessee, Health, Educational and Housing Facility
Board, Hospital Revenue Refunding Bonds (Methodist Healthcare),
6.50% due 9/01/2026 3,767
Texas--11.3% BBB- Baa3 2,665 Austin, Texas, Convention Center Revenue Bonds (Convention
Enterprises Inc.), First Tier, Series A, 6.70% due 1/01/2028 2,826
Brazos River Authority, Texas, PCR, Refunding:
BBB Baa2 1,000 (TXU Electric Company LLC Project), Series B, 4.75% due
5/01/2029 1,057
BBB Baa2 1,100 (TXU Energy Company LLC Project), AMT, Series C, 6.75% due
10/01/2038 1,196
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 3,130
BBB Baa2 2,685 Gulf Coast, Texas, Waste Disposal Authority Revenue Refunding Bonds
(International Paper Company), AMT, Series A, 6.10% due 8/01/2024 2,818
BBB- Ba1 2,965 Matagorda County, Texas, Navigation District Number 1, Revenue
Refunding Bonds (Reliant Energy Inc.), Series C, 8% due 5/01/2029 3,252
BB Ba3 1,100 Port Corpus Christi, Texas, Individual Development Corporation,
Environmental Facilities Revenue Bonds (Citgo Petroleum Corporation
Project), AMT, 8.25% due 11/01/2031 1,151
BBB Baa2 2,495 Red River Authority, Texas, PCR, Refunding (Celanese Project),
Series A, 6.45% due 11/01/2030 2,613
Vermont--0.6% 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 1,028
Virginia-- Chesterfield County, Virginia, IDA, PCR (Virginia Electric and
16.0% Power Company):
BBB+ A3 425 Series A, 5.875% due 6/01/2017 460
BBB+ A3 575 Series B, 5.875% due 6/01/2017 622
AAA Aaa 10,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue Refunding
Bonds, AMT, Series A, 6.10% due 2/01/2011 (a) 11,551
Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2030 271
BB NR* 18,400 Senior-Series B, 5.90%** due 8/15/2030 2,402
BB NR* 30,000 Senior-Series B, 5.95%** due 8/15/2033 3,201
AAA Aaa 2,400 Virginia State, HDA, Commonwealth Mortgage Revenue Bonds, Series J,
Sub-Series J-1, 5.20% due 7/01/2019 (d) 2,464
AA+ Aa1 1,095 Virginia State, HDA, Rental Housing Revenue Bonds, AMT, Series B,
5.625% due 8/01/2011 1,157
AA+ Aa1 3,200 Virginia State, HDA, Revenue Bonds, AMT, Series D, 6% due 4/01/2024 3,372
Washington-- NR* NR* 1,065 Seattle, Washington, Housing Authority Revenue Bonds (Replacement
0.7% Housing Project), 6.125% due 12/01/2032 1,056
Wisconsin-- BBB+ NR* 1,360 Wisconsin State Health and Educational Facilities Authority
0.9% Revenue Bonds (Synergyhealth Inc.), 6% due 11/15/2032 1,378
Virgin BBB- Baa3 3,600 Virgin Islands Government Refinery Facilities, Revenue Refunding
Islands--2.4% Bonds (Hovensa Coker Project), AMT, 6.50% due 7/01/2021 3,886
Total Municipal Bonds (Cost--$226,647)--148.0% 235,831
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Schedule of Investments (concluded) (In Thousands)
Shares Held Short-Term Securities Value
6,512 Merrill Lynch Institutional Tax-Exempt Fund (g) $ 6,512
Total Short-Term Securities (Cost--$6,512)--4.1% 6,512
Total Investments (Cost--$233,159)--152.1% 242,343
Other Assets Less Liabilities--2.5% 4,082
Preferred Stock, at Redemption Value--(54.6%) (87,058)
---------
Net Assets Applicable to Common Stock--100.0% $ 159,367
=========
(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, 2004.
(f)GNMA Collateralized.
(g)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 Dividend
Affiliate Activity Income
Merrill Lynch Institutional
Tax-Exempt Fund 6,000 $35
(h)Prerefunded.
(i)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.
See Notes to Financial Statements.
Quality Profile
The quality ratings of securities in the Fund for the six months
ended January 31, 2004 were as follows:
Percent of
Total
S&P Rating/Moody's Rating Investments
AAA/Aaa 27.5%
AA/Aa 10.2
A/A 10.1
BBB/Baa 29.7
BB/Ba 6.0
B/B 1.9
CCC/Caa 0.9
NR (Not Rated) 11.0
Other* 2.7
*Temporary investments in short-term securities.
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Statement of Net Assets
As of January 31, 2004
Assets
Investments, at value (identified cost--$233,159,020) $ 242,343,295
Cash 38,640
Receivables:
Interest $ 4,078,982
Securities sold 982,575
Dividends from affiliates 144 5,061,701
---------------
Prepaid expenses 170,079
---------------
Total assets 247,613,715
---------------
Liabilities
Payables:
Securities purchased 978,690
Investment adviser 127,622
Other affiliates 4,310 1,110,622
---------------
Accrued expenses 78,105
---------------
Total liabilities 1,188,727
---------------
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) 87,058,064
---------------
Net Assets Applicable to Common Stock
Net assets applicable to Common Stock $ 159,366,924
===============
Analysis of Net Assets Applicable to Common Stock
Common Stock, par value $.10 per share (11,114,112 shares issued
and outstanding) $ 1,111,411
Paid-in capital in excess of par 164,424,938
Undistributed investment income--net $ 3,883,173
Accumulated realized capital losses on investments--net (19,236,873)
Unrealized appreciation on investments--net 9,184,275
---------------
Total accumulated losses--net (6,169,425)
---------------
Total--Equivalent to $14.34 net asset value per share of Common Stock
(market price--$14.61) $ 159,366,924
===============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Statement of Operations
For the Six Months Ended January 31, 2004
Investment Income
Interest $ 7,310,540
Dividends from affiliates 34,546
---------------
Total income 7,345,086
---------------
Expenses
Investment advisory fees $ 672,329
Commission fees 110,652
Accounting services 48,115
Professional fees 29,951
Transfer agent fees 21,025
Printing and shareholder reports 18,626
Directors' fees and expenses 16,998
Listing fees 14,518
Pricing fees 7,312
Custodian fees 7,140
Other 14,357
---------------
Total expenses before reimbursement 961,023
Reimbursement of expenses (7,995)
---------------
Total expenses after reimbursement 953,028
---------------
Investment income--net 6,392,058
---------------
Realized & Unrealized Gain on Investments--Net
Realized gain on investments--net 976,512
Change in unrealized appreciation on investments--net 8,570,286
---------------
Total realized and unrealized gain on investments--net 9,546,798
---------------
Dividends to Preferred Stock Shareholders
Investment income--net (527,237)
---------------
Net Increase in Net Assets Resulting from Operations $ 15,411,619
===============
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
January 31, July 31,
Increase (Decrease) in Net Assets: 2004 2003
Operations
Investment income--net $ 6,392,058 $ 12,794,858
Realized gain on investments--net 976,512 1,901,703
Change in unrealized appreciation on investments--net 8,570,286 (3,570,923)
Dividends to Preferred Stock shareholders (527,237) (1,117,585)
--------------- ---------------
Net increase in net assets resulting from operations 15,411,619 10,008,053
--------------- ---------------
Dividends to Common Stock Shareholders
Investment income--net (5,647,595) (10,608,927)
--------------- ---------------
Net decrease in net assets resulting from dividends to Common Stock
shareholders (5,647,595) ( 10,608,927)
--------------- ---------------
Common Stock Transactions
Value of shares issued to Common Stock shareholders in reinvestment of
dividends 341,278 229,423
--------------- ---------------
Net Assets Applicable to Common Stock
Total increase (decrease) in net assets applicable to Common Stock 10,105,302 (371,451)
Beginning of year 149,261,622 149,633,073
--------------- ---------------
End of year* $ 159,366,924 $ 149,261,622
=============== ===============
*Undistributed investment income--net $ 3,883,173 $ 3,665,947
=============== ===============
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Financial Highlights
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
January 31, For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001+++ 2000+++
Per Share Operating Performance
Net asset value, beginning of period $ 13.46 $ 13.51 $ 13.42 $ 12.45 $ 14.16
----------- ---------- ---------- ---------- ----------
Investment income--net .58++++ 1.16++++ 1.10 1.06 1.08
Realized and unrealized gain (loss)
on investments--net .86 (.15) (.04) .95 (1.67)
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.05) (.10) (.13) (.28) (.29)
In excess of realized gain on
investments--net -- -- -- -- --++
----------- ---------- ---------- ---------- ----------
Total from investment operations 1.39 .91 .93 1.73 (.88)
----------- ---------- ---------- ---------- ----------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.51) (.96) (.84) (.76) (.82)
In excess of realized gain on
investments--net -- -- -- -- (.01)
----------- ---------- ---------- ---------- ----------
Total dividends and distributions to
Common Stock shareholders (.51) (.96) (.84) (.76) (.83)
----------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 14.34 $ 13.46 $ 13.51 $ 13.42 $ 12.45
=========== ========== ========== ========== ==========
Market price per share, end of period $ 14.61 $ 13.16 $ 12.96 $ 12.35 $ 11.4375
=========== ========== ========== ========== ==========
Total Investment Return***
Based on market price per share 15.12%+++++ 9.21% 12.12% 15.06% (4.93%)
=========== ========== ========== ========== ==========
Based on net asset value per share 10.47%+++++ 7.15% 7.56% 14.86% (5.44%)
=========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Common Stock
Total expenses, net of reimbursement** 1.22%* 1.26% 1.29% 1.28% 1.32%
=========== ========== ========== ========== ==========
Total expenses** 1.23%* 1.26% 1.29% 1.28% 1.32%
=========== ========== ========== ========== ==========
Total investment income--net** 8.16%* 8.48% 8.27% 8.29% 8.71%
=========== ========== ========== ========== ==========
Amount of dividends to Preferred Stock
shareholders .67%* .74% .95% 2.20% 2.34%
=========== ========== ========== ========== ==========
Investment income--net, to Common Stock
shareholders 7.49%* 7.74% 7.32% 6.09% 6.36%
=========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Common & Preferred Stock**
Total expenses, net of reimbursement .78%* .80% .81% .79% .81%
=========== ========== ========== ========== ==========
Total expenses .79%* .80% .81% .79% .81%
=========== ========== ========== ========== ==========
Total investment income--net 5.22%* 5.38% 5.19% 5.14% 5.34%
=========== ========== ========== ========== ==========
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Financial Highlights (concluded)
For the Six
Months Ended
The following per share data and ratios have been derived January 31, For the Year Ended July 31,
from information provided in the financial statements. 2004 2003 2002 2001+++ 2000+++
Ratios Based on Average Net Assets of Preferred Stock
Dividends to Preferred Stock shareholders 1.20%* 1.28% 1.60% 3.59% 3.72%
=========== ========== ========== ========== ==========
Supplemental Data
Net assets applicable to Common Stock,
end of period (in thousands) $ 159,367 $ 149,262 $ 149,633 $ 148,618 $ 137,819
=========== ========== ========== ========== ==========
Preferred Stock outstanding, end of
period (in thousands) $ 87,000 $ 87,000 $ 87,000 $ 87,000 $ 87,000
=========== ========== ========== ========== ==========
Portfolio turnover 13.47% 44.03% 46.31% 57.57% 129.35%
=========== ========== ========== ========== ==========
Leverage
Asset coverage per $1,000 $ 2,832 $ 2,716 $ 2,720 $ 2,708 $ 2,584
=========== ========== ========== ========== ==========
Dividends Per Share on Preferred Stock Outstanding
Series A--Investment income--net $ 104 $ 279 $ 409 $ 908 $ 967
=========== ========== ========== ========== ==========
Series B--Investment income--net $ 199 $ 363 $ 394 $ 890 $ 893
=========== ========== ========== ========== ==========
*Annualized.
**Do not reflect the effect of dividends to Preferred Stock
shareholders.
***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.
++Amount is less than $(.01) per share.
++++Based on average shares outstanding.
+++Certain prior year amounts have been reclassified to conform to
current year presentation.
+++++Aggregate total investment return.
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Notes to Financial Statements
1. Significant Accounting Policies:
MuniHoldings 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 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 last available
bid price in the over-the-counter market or on the basis of yield
equivalents as obtained by the Fund's pricing service from one or
more dealers that make markets in the 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). Swap
agreements are valued by quoted fair values received daily by the
Fund from the counterparty. Short-term investments with a remaining
maturity 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 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 write covered call options and purchase call
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Notes to Financial Statements (continued)
Written and purchased options are non-income producing investments.
* 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.
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,
2004, FAM reimbursed the Fund in the amount of $7,995.
For the six months ended January 31, 2004, the Fund reimbursed FAM
$2,549 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, 2004 were $31,482,312 and
$37,017,576, respectively.
Net realized gains for the six months ended January 31, 2004 and net
unrealized gains as of January 31, 2004 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $ 976,512 $ 9,184,275
------------- -------------
Total $ 976,512 $ 9,184,275
============= =============
As of January 31, 2004, net unrealized appreciation for Federal
income tax purposes aggregated $9,415,786, of which $14,236,117
related to appreciated securities and $4,820,331 related to
depreciated securities. The aggregate cost of investments at January
31, 2004 for Federal income tax purposes was $232,927,509.
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, 2004 and the year ended July 31, 2003 increased by 24,124 and
16,654, respectively, as a result of dividend reinvestment.
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Notes to Financial Statements (concluded)
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 January 31, 2004 were as follows: Series A, .80% and
Series B, 1.55%.
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, 2004, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, an affiliate of FAM, earned $19,341 as commissions.
5. Capital Loss Carryforward:
On July 31, 2003, the Fund had a net capital loss carryforward of
$20,213,383, of which $7,226,789 expires in 2008, $12,107,981
expires in 2009, $689,205 expires in 2010 and $189,408 expires in
2011. This amount will be available to offset like amounts of any
future taxable gains.
6. Subsequent Event:
The Fund paid a tax-exempt income dividend to holders of Common
Stock in the amount of $.087000 per share on February 26, 2004 to
shareholders of record on February 13, 2004.
Proxy Results
During the six-month period ended January 31, 2004, MuniHoldings
Fund II, Inc.'s Common Stock shareholders voted on the following
proposal. The proposal was approved at a shareholders' meeting on
January 30, 2004. 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 10,369,883 411,562
Cynthia A. Montgomery 10,367,383 414,062
Kevin A. Ryan 10,370,383 411,062
Roscoe S. Suddarth 10,367,383 414,062
Edward D. Zinbarg 10,372,883 408,562
During the six-month period ended January 31, 2004, MuniHoldings
Fund, II Inc.'s Preferred Stock (Series A & B) shareholders voted on
the following proposal. The proposal was approved at a shareholders'
meeting on January 30, 2004. 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, Kevin A. Ryan,
Roscoe S. Suddarth, Richard R. West and Edward D. Zinbarg 3,394 1
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Officers and Directors
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, 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
Charles C. Reilly, Director of MuniHoldings Fund II, Inc., has
recently retired. The Fund's Board of Directors wishes Mr. Reilly
well in his retirement.
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
101 Barclay Street--7 West
New York, NY 10286
NYSE Symbol
MUH
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 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.
Electronic Delivery
The Fund offers electronic delivery of communications to its
shareholders. In order to receive this service, you must
register your account and provide us with e-mail information.
To sign up for this service, simply access this website
http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification
number (PIN). You will need this PIN should you wish to update your
e-mail address, choose to discontinue this service and/or make any
other changes to the service. This service is not available for
certain retirement accounts at this time.
MUNIHOLDINGS FUND II, INC., JANUARY 31, 2004
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this
semi-annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to
this semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to
this semi-annual report
Item 6 - Reserved
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 - Reserved
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 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 11 - Exhibits attached hereto
11(a) - Not Applicable
11(b) - 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 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 Fund II, Inc.
Date: March 19, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
MuniHoldings Fund II, Inc.
Date: March 19, 2004