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: 07/31/04
Date of reporting period: 08/01/03 - 07/31/04
Item 1 - Report to Stockholders
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
MuniHoldings Fund II, Inc.
Annual Report
July 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) at www.mutualfunds.ml.com;
and (3) on the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the
most recent 12-month period ended June 30 is available (1) at
www.mutualfunds.ml.com; and (2) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
MuniHoldings 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. 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. As of July 31, 2004,
the percentage of the Fund's total net assets invested in inverse
floaters was 5.35%, before the deduction of Preferred Stock.
Swap Agreements
The Fund may also invest in swap agreements, which are over-the-
counter contracts in which one party agrees to make periodic
payments based on the change in market value of a specified bond,
basket of bonds, or index in return for periodic payments based on a
fixed or variable interest rate or the change in market value of a
different bond, basket of bonds or index. Swap agreements may be
used to obtain exposure to a bond or market without owning or taking
physical custody of securities. Swap agreements involve the risk
that the party with whom the Fund has entered into the swap will
default on its obligation to pay the Fund and the risk that the Fund
will not be able to meet its obligations to pay the other party to
the agreement.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
A Letter From the President
Dear Shareholder
In recent months, the Federal Reserve Board (the Fed) has taken
center stage as it shifts away from its long-accommodative monetary
stance. In a much-anticipated move, the Fed raised the Federal Funds
rate 25 basis points (.25%) on June 30, representing the first
interest rate increase in four years. Shortly after period-end, the
Fed announced an additional 25 basis point rate hike, bringing the
target short-term interest rate to 1.50% - still low by historical
standards. The Fed has been very deliberate in telegraphing its
intention to take a "measured" approach to the interest rate
increases so as to avoid upsetting the economy or the financial
markets. Still, the Fed has stated that it may move more
aggressively if inflation and economic growth accelerate more than
anticipated. In addition to the Fed policy change, the financial
markets recently have had to grapple with a tense geopolitical
environment, higher oil prices and the worry and anticipation that
accompanies a presidential election.
While inflation has moved up on a cyclical basis, this is an
indication that the Fed has been successful in avoiding deflation -
just as it set out to do a year ago. The challenge now is to
normalize interest rates in order to keep inflation within
acceptable limits. The futures curve currently projects further
increases in short-term interest rates before year-end.
The transition to higher rates can cause concern among equity and
fixed income investors alike. For bond investors, rising rates
means the value of older issues declines because they bear the
former lower rates. In addition, increasing inflation erodes the
purchasing power of fixed income securities. But because municipal
bonds offer the advantage of tax-exempt income, they continue to be
an attractive alternative for many fixed income investors. For the
six-month and 12-month periods ended July 31, 2004, municipal bonds
posted returns of +.06% and +5.79%, respectively, as measured by the
Lehman Brothers Municipal Bond Index.
As always, our investment professionals are closely monitoring the
markets, the economy and the overall environment in an effort to
make well-informed decisions for the portfolios they manage. Our
goal is to provide shareholders with competitive returns, while
always keeping one eye on managing the unavoidable risk inherent in
investing.
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., JULY 31, 2004
A Discussion With Your Fund's Portfolio Manager
The Fund provided an attractive total return and competitive yields
for the year, outperforming its peer group as well as the broader
municipal bond market.
Discuss the recent market environment relative to municipal bonds.
Over the past 12 months, long-term U.S. Treasury bond yields, while
displaying considerable month-to-month volatility, were little
changed. As the period began, bond prices were on the rise as
yields, which move in the opposite direction, declined. Despite
continued improvement in U.S. economic conditions, solid job
creation remained elusive. Consumer confidence faltered, and
investors became increasingly convinced that the Federal Reserve
Board (the Fed) would hold short-term interest rates at their
historic lows. Under the circumstances, long-term U.S. Treasury bond
yields fell to 4.65% by mid-March 2004.
Beginning in early April, however, monthly employment reports
began to show unexpectedly large gains. In response, bond prices
fell (yields increased). Associated improvements in consumer
confidence and spending led some investors to reverse their earlier
expectations, believing instead that the Fed would soon be forced to
raise short-term interest rates to ward off potential inflation. By
early June, long-term U.S. Treasury bond yields had risen to over
5.50%.
For the remainder of the period, bond yields generally declined.
While economic growth remained positive, inflationary measures
continued to be negligible. More importantly, on June 30, the Fed
raised its short-term interest rate target for the first time in
four years - from 1% to 1.25%. In doing so, the Fed indicated a
tendency toward a measured, moderate monetary tightening cycle,
which helped support higher bond prices (and lower yields). By the
end of July 2004, long-term U.S. Treasury bond yields stood at
5.20%, a decline of 10 basis points (.10%) over the past year. The
10-year U.S. Treasury note yield ended the period at 4.48%, an
increase of less than 10 basis points during the past 12 months.
Tax-exempt issues, supported by a favorable technical backdrop,
experienced less volatility than their taxable counterparts during
the year. Declining supply trends allowed tax-exempt bond prices to
register modest gains. Long-term revenue bond yields, as measured by
the Bond Buyer Revenue Bond Index, fell approximately 10 basis
points over the last year to 5.31%. According to Municipal Market
Data, yields on AAA-rated issues maturing in 30 years declined more
than 15 basis points to 4.90% at July 31, while yields on 10-year
AAA-rated issues fell more than 25 basis points to 3.79%.
During the past 12 months, more than $360 billion in new long-term
tax-exempt bonds was underwritten, a decline of approximately 8%
compared to last year. Approximately $100 billion in long-term tax-
exempt bonds was issued in the last three months of the period, a
decline of more than 15% versus the same period a year ago. The tax-
exempt bond market maintained a positive supply/demand position
throughout the year, allowing municipal issues to outperform their
taxable counterparts.
How did the Fund perform during the fiscal year in light of the
existing market conditions?
For the 12-month period ended July 31, 2004, the Common Stock of
MuniHoldings Fund II, Inc. had net annualized yields of 7.40% and
7.64%, based on a year-end per share net asset value of $13.98 and a
per share market price of $13.53, respectively, and $1.034 per share
income dividends. Over the same period, the total investment return
on the Fund's Common Stock was +11.88%, based on a change in per
share net asset value from $13.46 to $13.98, and assuming
reinvestment of $1.031 per share ordinary income dividends.
The Fund's total return, based on net asset value, significantly
exceeded the +9.50% average return of the Lipper General Municipal
Debt Funds (Leveraged) for the 12-month period. (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 outperformance is attributed to our focus on
yield. To this end, our bond selection was guided by our in-house
team of 12 full-time credit analysts. During the period, we also
maintained the Fund's exposure to the high yield portion of the
market. Spread products are lower-quality issues that traditionally
offer higher yields than higher-quality issues with comparable
maturities. The Fund's yield and total return benefited as municipal
credit spreads tightened significantly over the past 12 months.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
For the six-month period ended July 31, 2004, the total investment
return on the Fund's Common Stock was +1.28%, based on a change in
per share net asset value from $14.34 to $13.98, and assuming
reinvestment of $.522 per share income dividends.
For the six-month period ended July 31, 2004, the Fund's Auction
Market Preferred Stock (AMPS) had average yields of .96% for Series
A and 1.57% for Series B.
For a description of the Fund's total investment return based on a
change in the per share market value of the Fund's Common Stock (as
measured by the trading price of the Fund's shares on the New York
Stock Exchange), and assuming reinvestment of dividends, please
refer to the Financial Highlights section of this report. As a
closed-end fund, the Fund's shares may trade in the secondary market
at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the
Fund's Common Stock can vary significantly from total investment
returns based on changes in the Fund's net asset value.
What changes were made to the portfolio during the fiscal year?
At the beginning of the period, we increased the Fund's exposure to
corporate-backed bonds in the tax-exempt market. These included
utility companies, such as TXU Electric Company LLC, CenterPoint
Energy, Inc., Tucson Electric Power Company, Public Service New
Mexico and Tampa Electric Company, as well as paper companies and
airline credits.
In addition, we increased our holdings in tax-backed development
districts in Florida and California. Both of these states attract
demand for retail and commercial development and have strong
historical track records for such financing. These purchases
increased the Fund's competitive yield and positioned the portfolio
to perform well in the event of a continued narrowing of credit
spreads. We also increased our position in California general
obligation debt, taking advantage of relatively low prices during
the state's budgetary turmoil last year and early this year. We
have since trimmed these holdings as California debt recently
outperformed the broader municipal market.
During the period, the Fund's borrowing costs remained in the
..85% - 1.57% range. These attractive funding levels, in combination
with a steep tax-exempt yield curve, continued to generate a
significant income benefit to the Fund's Common Stock shareholders.
At this time, the Fed has articulated its intention to bring short-
term interest rates to a neutral level, starting with modest rate
hikes at its June and August 2004 meetings. Nevertheless, future
interest rate increases are expected to be gradual and should not
have a material impact on the positive advantage leverage has upon
the Fund's Common Stock yield. Of course, should the spread between
short-term and long-term interest rates narrow, the benefits of
leveraging will decline and, as a result, reduce the yield on the
Fund's Common Stock. At the end of the period, the Fund's leverage
amount, due to AMPS, was 35.86% of total net 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 Fund's position at the close of the
period?
Our primary focus is to seek to maintain the portfolio's current
yield and protect the Fund's net asset value should interest rates
rise in the future. We expect the economy to continue to gain
strength over the next several quarters, pushing interest rates
slightly higher. Under this scenario, credit spreads should continue
to narrow, albeit at a slower pace than witnessed over the past 12
months, as corporate earnings grow.
Robert A. DiMella, CFA
Vice President and Portfolio Manager
August 17, 2004
MUNIHOLDINGS FUND II, INC., JULY 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) $ 4,367
Arizona--4.5% BBB+ Baa1 1,000 Arizona Health Facilities Authority Revenue Bonds
(Catholic Healthcare West), Series A, 6.625% due 7/01/2020 1,091
NR* Caa2 2,800 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding
Bonds (America West Airlines Inc. Project), AMT, 6.30% due
4/01/2023 2,096
NR* Baa3 1,000 Pima County, Arizona, IDA, Education Revenue Bonds (Arizona
Charter Schools Project), Series C, 6.75% due 7/01/2031 1,014
Pima County, Arizona, IDA, M/F Housing Revenue Bonds
(Columbus Village), Series A (f):
AAA NR* 585 6% due 10/20/2031 589
AAA NR* 770 6.05% due 10/20/2041 776
NR* NR* 1,325 Show Low, Arizona, Improvement District No. 5, Special
Assessment Bonds, 6.375% due 1/01/2015 1,376
California-- AAA Aaa 2,000 Benicia, California, Unified School District, GO, Refunding,
22.5% Series A, 5.615%** due 8/01/2020 (b) 893
BBB+ A2 5,000 California State Department of Water Resources, Power Supply
Revenue Bonds, Series A, 5.25% due 5/01/2020 5,224
BBB A3 5,250 California State, GO, Refunding, 5.375% due 10/01/2027 5,340
BBB- Baa1 5,200 California State Public Works Board, Lease Revenue Bonds
(Department of Corrections), Series C, 5.25% due 6/01/2028 5,199
Golden State Tobacco Securitization Corporation of California,
Tobacco Settlement Revenue Bonds:
BBB Baa3 870 Series A-3, 7.875% due 6/01/2042 887
BBB- Baa1 2,000 Series B, 5.75% due 6/01/2021 2,066
BBB- Baa1 1,330 Series B, 5.625% due 6/01/2033 1,345
NR* NR* 1,750 Poway, California, Unified School District, Special Tax
(Community Facilities District Number 6 Area), Series A,
6.125% due 9/01/2033 1,774
Sacramento County, California, Sanitation District, Financing
Authority Revenue Refunding Bonds (e):
AA Aa3 1,000 RIB, Series 366, 10.392% due 12/01/2027 1,122
AA Aa3 2,500 Trust Receipts, Class R, Series A, 10.57% due 12/01/2019 2,798
San Marino, California, Unified School District, GO,
Series A (d):
AAA Aaa 1,820 5.50%** due 7/01/2017 982
AAA Aaa 1,945 5.55%**due 7/01/2018 987
AAA Aaa 2,070 5.60%** due 7/01/2019 988
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) 5,442
Colorado--1.3% NR* NR* 1,890 Elk Valley, Colorado, Public Improvement Revenue Bonds
(Public Improvement Fee), Series A, 7.10% due 9/01/2014 1,963
Florida--5.8% NR* NR* 1,700 Ballantrae, Florida, Community Development District, Capital
Improvement Revenue Bonds, 6% due 5/01/2035 1,683
AA- A3 1,250 Broward County, Florida, Resource Recovery Revenue Refunding
Bonds (Wheelabrator South Broward), Series A, 5.375% due
12/01/2009 1,354
NR* NR* 2,250 Midtown Miami, Florida, Community Development District,
Special Assessment Revenue Bonds, Series A, 6.25% due 5/01/2037 2,279
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
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
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings++ Ratings++ Amount Municipal Bonds Value
Florida A A2 $ 2,400 Orange County, Florida, Health Facilities Authority,
(concluded) Hospital Revenue Bonds (Orlando Regional Healthcare),
6% due 12/01/2028 $ 2,507
NR* NR* 1,300 Preserve at Wilderness Lake, Florida, Community Development
District, Capital Improvement Bonds, Series A, 5.90% due
5/01/2034 1,263
Georgia--1.6% NR* NR* 1,250 Atlanta, Georgia, Tax Allocation Revenue Bonds (Atlantic
Station Project), 7.90% due 12/01/2024 1,301
BBB NR* 1,250 Milledgeville-Baldwin County, Georgia, Development Authority
Revenue Bonds (Georgia College and State University Foundation),
5.50% due 9/01/2024 1,254
Idaho--1.3% 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 2,041
Illinois--2.5% CCC Caa2 1,000 Chicago, Illinois, O'Hare International Airport, Special
Facility Revenue Refunding Bonds (American Airlines Inc.
Project), 8.20% due 12/01/2024 770
NR* NR* 1,000 Chicago, Illinois, Special Assessment Bonds (Lake Shore East),
6.75% due 12/01/2032 1,025
AA Aa2 2,000 Illinois HDA, Homeowner Mortgage Revenue Bonds, AMT,
Sub-Series C-2, 5.25% due 8/01/2022 2,041
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 2,712
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 954
Louisiana--0.8% B NR* 1,150 Hodge, Louisiana, Utility Revenue Refunding Bonds (Stone
Container Corporation), AMT, 7.45% due 3/01/2024 1,174
Maine--2.3% AA+ Aa1 3,455 Maine State Housing Authority, Mortgage Purchase Revenue
Refunding Bonds, Series B, 5.30% due 11/15/2023 3,566
Maryland--1.6% 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 1,336
NR* NR* 1,050 Maryland State Energy Financing Administration, Limited
Obligation Revenue Bonds (Cogeneration--AES Warrior Run),
AMT, 7.40% due 9/01/2019 1,073
Massachusetts-- Massachusetts State Development Finance Agency Revenue
2.6% Bonds (Neville Communities Home), Series A (f):
AAA NR* 600 5.75% due 6/20/2022 652
AAA NR* 1,500 6% due 6/20/2044 1,591
BB+ NR* 1,000 Massachusetts State Development Finance Agency, Revenue
Refunding Bonds (Eastern Nazarene College), 5.625% due
4/01/2029 846
AAA Aaa 1,000 Massachusetts State, HFA, Housing Revenue Bonds (Rental
Mortgage), AMT, Series C, 5.625% due 7/01/2040 (a) 1,010
Michigan--6.9% 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 2,731
A NR* 1,100 Flint, Michigan, Hospital Building Authority, Revenue
Refunding Bonds (Hurley Medical Center), Series A, 6% due
7/01/2020 1,157
B Ba3 2,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds (Detroit Medical Center Obligation Group),
Series A, 6.50% due 8/15/2018 1,730
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) 5,161
Minnesota--4.8% 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 1,737
Rockford, Minnesota, Independent School District
Number 883, GO (c):
AAA Aaa 2,870 5.60% due 2/01/2019 3,145
AAA Aaa 2,390 5.60% due 2/01/2020 2,607
Mississippi-- Mississippi Business Finance Corporation, Mississippi, PCR,
1.9% Refunding (System Energy Resources Inc. Project):
BBB- Ba1 2,500 5.875% due 4/01/2022 2,507
BBB- Ba1 500 5.90% due 5/01/2022 504
Missouri--2.5% Fenton, Missouri, Tax Increment Revenue Refunding and
Improvement Bonds (Gravois Bluffs):
NR* NR* 770 6.75% due 10/01/2015 786
NR* NR* 1,000 7% due 10/01/2021 1,073
NR* NR* 1,000 Kansas City, Missouri, IDA, First Mortgage Health Facilities
Revenue Bonds (Bishop Spencer Place), Series A, 6.50% due
1/01/2035 981
BBB+ Baa1 1,000 Missouri State Development Finance Board, Infrastructure
Facilities Revenue Refunding Bonds (Branson), Series A,
5.50% due 12/01/2032 1,003
MUNIHOLDINGS FUND II, INC., JULY 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,
5.8% Series A:
NR* NR* $ 1,000 (Cedar Crest Village Inc. Facility), 7.25% due 11/15/2031 $ 1,013
NR* NR* 2,000 (Seabrook Village Inc.), 8.125% due 11/15/2023 2,130
B Caa2 2,000 New Jersey EDA, Special Facility Revenue Bonds (Continental
Airlines Inc. Project), AMT, 6.625% due 9/15/2012 1,789
NR* Baa1 2,375 New Jersey Health Care Facilities Financing Authority
Revenue Bonds (South Jersey Hospital), 6% due 7/01/2026 2,452
BBB Baa3 1,725 Tobacco Settlement Financing Corporation of New Jersey
Revenue Bonds, 7% due 6/01/2041 1,595
New Mexico--2.4% BBB- Baa2 3,675 Farmington, New Mexico, PCR, Refunding (Public Service
Company--San Juan Project), Series A, 5.80% due 4/01/2022 3,687
New York--21.0% NR* NR* 1,000 Dutchess County, New York, IDA, Civic Facility Revenue
Refunding Bonds (Saint Francis Hospital), Series A, 7.50%
due 3/01/2029 976
NR* NR* 415 New York City, New York, City IDA, Civic Facility Revenue
Bonds, Series C, 6.80% due 6/01/2028 426
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 815
NR* Aaa 7,860 New York City, New York, City Municipal Water Finance
Authority, Water and Sewer System Revenue Bonds, RITR,
Series 11, 10.29% due 6/15/2026 (c)(e) 9,047
New York State Dormitory Authority Revenue Bonds (d):
AAA A3 2,550 (Mental Health Services), Series B, 5.75% due 2/15/2010 (h) 2,879
AAA A3 950 (Mental Health Services), Series B, 5.75% due 2/15/2020 1,042
AAA Aaa 2,030 (School Districts Financing Program), Series D, 5.25%
due 10/01/2023 2,134
AA Aaa 1,785 New York State Dormitory Authority, State Personal Income
Tax Education Revenue Bonds, Series A, 5% due 3/15/2020 (d) 1,858
A+ NR* 4,610 New York State Municipal Bond Bank Agency, Special School
Purpose Revenue Bonds, Series C, 5.25% due 12/01/2019 4,839
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 1,173
AA- A3 1,100 5.50% due 6/01/2015 1,175
AA- A3 2,400 5.50% due 6/01/2018 2,570
AAA Aaa 2,000 5.25% due 6/01/2022 (a) 2,082
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 1,552
North Carolina-- BBB Baa2 2,000 North Carolina Eastern Municipal Power Agency, Power System
1.4% Revenue Bonds, Series D, 6.75% due 1/01/2026 2,187
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) 10,034
Oklahoma--1.0% Tulsa, Oklahoma, Municipal Airport Trust, Revenue Refunding
Bonds (AMR Corporation), AMT, Series A:
B- Caa2 430 5.80% due 6/01/2035 426
B- Caa2 1,075 5.375% due 12/01/2035 1,014
Pennsylvania-- Pennsylvania Economic Development Financing Authority, Exempt
6.0% Facilities Revenue Bonds (National Gypsum Company), AMT:
NR* NR* 2,750 Series A, 6.25% due 11/01/2027 2,745
NR* NR* 2,000 Series B, 6.125% due 11/01/2027 1,966
NR* NR* 540 Philadelphia, Pennsylvania, Authority for IDR, Commercial
Development, 7.75% due 12/01/2017 553
A- NR 2,630 Sayre, Pennsylvania, Health Care Facilities Authority,
Revenue Bonds (Guthrie Health Issue), Series B, 7.125%
due 12/01/2031 2,998
A- NR* 1,000 Sayre, Pennsylvania, Health Care Facilities Authority, Revenue
Refunding Bonds (Guthrie Health), Series A, 5.875% due 12/01/2031 1,013
Rhode Island-- BBB Baa2 2,190 Rhode Island State Health and Educational Building Corporation,
1.4% Hospital Financing Revenue Bonds (Lifespan Obligation Group),
6.50% due 8/15/2032 2,271
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings++ Ratings++ Amount Municipal Bonds Value
South Carolina-- BBB+ Baa2 $ 2,080 Medical University, South Carolina, Hospital Authority,
3.7% Hospital Facilities Revenue Refunding Bonds, Series A,
6.375% due 8/15/2027 $ 2,145
BBB- NR* 2,000 South Carolina Jobs, EDA, Economic Development Revenue
Bonds (Westminster Presbyterian Center), 7.75% due 11/15/2030 2,192
BBB Baa3 1,700 Tobacco Settlement Revenue Management Authority of South
Carolina, Tobacco Settlement Revenue Bonds, Series B, 6.375%
due 5/15/2028 1,472
Tennessee--3.8% NR* NR* 2,200 Hardeman County, Tennessee, Correctional Facilities
Corporation Revenue Bonds, Series B, 7.375% due 8/01/2017 2,244
A- A3 3,450 Shelby County, Tennessee, Health, Educational and Housing
Facility Board, Hospital Revenue Refunding Bonds (Methodist
Healthcare), 6.50% due 9/01/2026 3,738
Texas--12.4% BBB- Baa3 2,665 Austin, Texas, Convention Center Revenue Bonds (Convention
Enterprises Inc.), First Tier, Series A, 6.70% due 1/01/2028 2,771
Brazos River Authority, Texas, PCR, Refunding:
BBB- Baa2 1,000 (TXU Electric Company LLC Project), Series B, 4.75%
due 5/01/2029 1,034
BBB Baa2 1,100 (TXU Energy Company LLC Project), AMT, Series C, 6.75%
due 10/01/2038 1,142
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 3,067
BBB- Baa3 2,300 Dallas-Fort Worth, Texas, International Airport Facility,
Improvement Corporation Revenue Bonds (Learjet Inc.), AMT,
Series 2001-A-1, 6.15% due 1/01/2016 2,294
CCC Caa2 1,000 Dallas-Fort Worth, Texas, International Airport Facility,
Improvement Corporation Revenue Refunding Bonds (American
Airlines), AMT, Series B, 6.05% due 5/01/2029 953
NR* NR* 1,300 Houston, Texas, Health Facilities Development Corporation,
Retirement Facility Revenue Bonds (Buckingham Senior Living
Community), Series A, 7.125% due 2/15/2034 1,323
BBB- Ba2 2,965 Matagorda County, Texas, Navigation District Number 1 Revenue
Refunding Bonds (Reliant Energy Inc.), Series C, 8% due 5/01/2029 3,264
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 1,160
BBB Ba3 2,495 Red River Authority, Texas, PCR, Refunding (Celanese Project),
Series A, 6.45% due 11/01/2030 2,371
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 1,015
Virginia--16.0% Chesterfield County, Virginia, IDA, PCR (Virginia Electric
and Power Company):
BBB+ A3 425 Series A, 5.875% due 6/01/2017 458
BBB+ A3 575 Series B, 5.875% due 6/01/2017 620
AAA Aaa 10,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue
Refunding Bonds, AMT, Series A, 6.10% due 2/01/2011 (a) 11,226
Pocahontas Parkway Association, Virginia, Toll Road
Revenue Bonds:
NR* B1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2030 520
BB NR* 18,400 Senior-Series B, 5.90%** due 8/15/2030 2,477
BB NR* 30,000 Senior-Series B, 5.95%** due 8/15/2033 3,206
AAA Aaa 1,925 Virginia State, HDA, Commonwealth Mortgage Revenue Bonds,
Series J, Sub-Series J-1, 5.20% due 7/01/2019 (d) 1,967
AA+ Aa1 1,095 Virginia State, HDA, Rental Housing Revenue Bonds, AMT,
Series B, 5.625% due 8/01/2011 1,139
AA+ Aa1 3,200 Virginia State, HDA, Revenue Bonds, AMT, Series D, 6% due
4/01/2024 3,339
Washington--0.7% NR* NR* 1,065 Seattle, Washington, Housing Authority Revenue Bonds
(Replacement Housing Project), 6.125% due 12/01/2032 1,034
Wisconsin--0.9% BBB+ NR* 1,360 Wisconsin State Health and Educational Facilities Authority
Revenue Bonds (Synergyhealth Inc.), 6% due 11/15/2032 1,368
Virgin Islands-- BBB- Baa3 3,600 Virgin Islands Government Refinery Facilities Revenue
2.5% Refunding Bonds (Hovensa Coker Project), AMT, 6.50% due
7/01/2021 3,832
Total Municipal Bonds (Cost--$235,033)--154.1% 239,740
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Schedule of Investments (concluded) (In Thousands)
Shares
Held Short-Term Securities Value
12 Merrill Lynch Institutional Tax-Exempt Fund (g) $ 12
Total Short-Term Securities (Cost--$12)--0.0% 12
Total Investments (Cost--$235,045++++)--154.1% 239,752
Other Assets Less Liabilities--1.9% 2,891
Preferred Stock, at Redemption Value--(56.0%) (87,060)
---------
Net Assets Applicable to Common Stock--100.0% $ 155,583
=========
(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 July 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) were as
follows:
(in Thousands)
Net Dividend
Affiliate Activity Income
Merrill Lynch Institutional
Tax-Exempt Fund (500) $48
(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.
++Ratings of issues shown are unaudited.
++++The cost and unrealized appreciation/depreciation of investments
as of July 31, 2004, as computed for federal income tax purposes,
were as follows:
(in Thousands)
Aggregate cost $ 234,764
============
Gross unrealized appreciation $ 10,386
Gross unrealized depreciation (5,398)
------------
Net unrealized appreciation $ 4,988
============
See Notes to Financial Statements.
Quality Profile (unaudited)
The quality ratings of securities in the Fund as of July 31, 2004
were as follows:
Percent of
Total
S&P Rating/Moody's Rating Investments
AAA/Aaa 29.8%
AA/Aa 6.8
A/A 14.8
BBB/Baa 24.7
BB/Ba 4.4
B/B 2.8
CCC/Caa 1.6
NR (Not Rated) 15.1
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Statement of Net Assets
As of July 31, 2004
Assets
Investments in unaffiliated securities, at value
(identified cost--$235,033,107) $ 239,740,227
Investments in affiliated securities, at value (identified cost--$11,703) 11,703
Cash 119,614
Receivables:
Interest $ 3,964,447
Dividends from affiliates 1,801 3,966,248
---------------
Prepaid expenses 54,084
---------------
Total assets 243,891,876
---------------
Liabilities
Payables:
Securities purchased 983,499
Investment adviser 126,782
Dividends to Common Stock shareholders 96,104
Other affiliates 1,690 1,208,075
---------------
Accrued expenses 40,611
---------------
Total liabilities 1,248,686
---------------
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* authorized,
issued and outstanding at $25,000 per share liquidation preference) 87,059,926
---------------
Net Assets Applicable to Common Stock
Net assets applicable to Common Stock $ 155,583,264
===============
Analysis of Net Assets Applicable to Common Stock
Common Stock, par value $.10 per share (11,128,829 shares issued and
outstanding) $ 1,112,883
Paid-in capital in excess of par 164,637,007
Undistributed investment income--net $ 3,859,076
Accumulated realized capital losses on investments--net (18,732,822)
Unrealized appreciation on investments--net 4,707,120
---------------
Total accumulated losses--net (10,166,626)
---------------
Total--Equivalent to $13.98 net asset value per share of Common Stock
(market price--$13.53) $ 155,583,264
===============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Statement of Operations
For the Year Ended July 31, 2004
Investment Income
Interest $ 14,585,682
Dividends from affiliates 47,606
---------------
Total income 14,633,288
---------------
Expenses
Investment advisory fees $ 1,339,902
Commission fees 220,770
Accounting services 96,162
Professional fees 58,115
Transfer agent fees 44,630
Printing and shareholder reports 35,548
Directors' fees and expenses 33,848
Listing fees 20,887
Custodian fees 15,237
Pricing fees 14,921
Other 33,685
---------------
Total expenses before reimbursement 1,913,705
Reimbursement of expenses (11,156)
---------------
Total expenses after reimbursement 1,902,549
---------------
Investment income--net 12,730,739
---------------
Realized & Unrealized Gain on Investments--Net
Realized gain from investments--net 1,473,299
Change in unrealized appreciation on investments--net 4,093,131
---------------
Total realized and unrealized gain on investments--net 5,566,430
---------------
Dividends to Preferred Stock Shareholders
Investment income--net (1,075,425)
---------------
Net Increase in Net Assets Resulting from Operations $ 17,221,744
===============
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Statements of Changes in Net Assets
For the Year Ended
July 31,
Increase (Decrease) in Net Assets: 2004 2003
Operations
Investment income--net $ 12,730,739 $ 12,794,858
Realized gain on investments--net 1,473,299 1,901,703
Change in unrealized appreciation on investments--net 4,093,131 (3,570,923)
Dividends to Preferred Stock shareholders (1,075,425) (1,117,585)
--------------- ---------------
Net increase in net assets resulting from operations 17,221,744 10,008,053
--------------- ---------------
Dividends to Common Stock Shareholders
Investment income--net (11,454,921) (10,608,927)
--------------- ---------------
Net decrease in net assets resulting from dividends to Common Stock
shareholders (11,454,921) ( 10,608,927)
--------------- ---------------
Common Stock Transactions
Value of shares issued to Common Stock shareholders in reinvestment
of dividends 554,819 229,423
--------------- ---------------
Net Assets Applicable to Common Stock
Total increase (decrease) in net assets applicable to Common Stock 6,321,642 (371,451)
Beginning of year 149,261,622 149,633,073
--------------- ---------------
End of year* $ 155,583,264 $ 149,261,622
=============== ===============
*Undistributed investment income--net $ 3,859,076 $ 3,665,947
=============== ===============
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements.
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 year $ 13.46 $ 13.51 $ 13.42 $ 12.45 $ 14.16
---------- ---------- ---------- ---------- ----------
Investment income--net 1.15++++ 1.16++++ 1.10 1.06 1.08
Realized and unrealized gain (loss) on
investments--net .50 (.15) (.04) .95 (1.67)
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.10) (.10) (.13) (.28) (.29)
In excess of realized gain on
investments--net -- -- -- -- --++
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.55 .91 .93 1.73 (.88)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (1.03) (.96) (.84) (.76) (.82)
In excess of realized gain on
investments--net -- -- -- -- (.01)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions to
Common Stock shareholders (1.03) (.96) (.84) (.76) (.83)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 13.98 $ 13.46 $ 13.51 $ 13.42 $ 12.45
========== ========== ========== ========== ==========
Market price per share, end of year $ 13.53 $ 13.16 $ 12.96 $ 12.35 $ 11.4375
========== ========== ========== ========== ==========
Total Investment Return**
Based on market price per share 10.75% 9.21% 12.12% 15.06% (4.93%)
========== ========== ========== ========== ==========
Based on net asset value per share 11.88% 7.15% 7.56% 14.86% (5.44%)
========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Common Stock
Total expenses, net of reimbursement* 1.21% 1.26% 1.29% 1.28% 1.32%
========== ========== ========== ========== ==========
Total expenses* 1.22% 1.26% 1.29% 1.28% 1.32%
========== ========== ========== ========== ==========
Total investment income--net* 8.13% 8.48% 8.27% 8.29% 8.71%
========== ========== ========== ========== ==========
Amount of dividends to Preferred Stock
shareholders .69% .74% .95% 2.20% 2.34%
========== ========== ========== ========== ==========
Investment income--net, to Common Stock
shareholders 7.44% 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 .78% .80% .81% .79% .81%
========== ========== ========== ========== ==========
Total investment income--net 5.22% 5.38% 5.19% 5.14% 5.34%
========== ========== ========== ========== ==========
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Financial Highlights (concluded)
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001+++ 2000+++
Ratios Based on Average Net Assets of Preferred Stock
Dividends to Preferred Stock shareholders 1.23% 1.28% 1.60% 3.59% 3.72%
========== ========== ========== ========== ==========
Supplemental Data
Net assets applicable to Common Stock,
end of year (in thousands) $ 155,583 $ 149,262 $ 149,633 $ 148,618 $ 137,819
========== ========== ========== ========== ==========
Preferred Stock outstanding, end of year
(in thousands) $ 87,000 $ 87,000 $ 87,000 $ 87,000 $ 87,000
========== ========== ========== ========== ==========
Portfolio turnover 31.03% 44.03% 46.31% 57.57% 129.35%
========== ========== ========== ========== ==========
Leverage
Asset coverage per $1,000 $ 2,788 $ 2,716 $ 2,720 $ 2,708 $ 2,584
========== ========== ========== ========== ==========
Dividends Per Share on Preferred Stock Outstanding
Series A--Investment income--net $ 223 $ 279 $ 409 $ 908 $ 967
========== ========== ========== ========== ==========
Series B--Investment income--net $ 395 $ 363 $ 394 $ 890 $ 893
========== ========== ========== ========== ==========
* 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.
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JULY 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 U.S. generally accepted
accounting principles, which may require the use of management
accruals and estimates. Actual results may differ from these
estimates. The Fund determines and makes available for publication
the net asset value of its Common Stock on a daily basis. The Fund's
Common Stock is listed on the New York Stock Exchange under the
symbol 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).
Written and purchased options are non-income producing investments.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Notes to Financial Statements (continued)
* Forward interest rate swaps--The Fund may enter into forward
interest rate swaps. In a forward interest rate swap, the Fund and
the counterparty agree to make periodic net payments on a specified
notional contract amount, commencing on a specified future effective
date, unless terminated earlier. When the agreement is closed, the
Fund records a realized gain or loss in an amount equal to the value
of the agreement.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Realized gains and losses on security
transactions are determined on the identified cost basis. Dividend
income is recorded on the ex-dividend dates. Interest income is
recognized on the accrual basis. The Fund amortizes all premiums and
discounts on debt securities.
(e) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
(f) Reclassification--U.S. generally accepted accounting principles
require that certain components of net assets be adjusted to
reflect permanent differences between financial and tax reporting.
Accordingly, during the current year, $7,264 has been reclassified
between undistributed net investment income and accumulated net
realized capital losses on investments as a result of permanent
differences attributable to amortization methods on fixed income
securities. This reclassification has no effect on net assets or net
asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of .55% of
the Fund's average daily net assets, including proceeds from the
issuance of Preferred Stock. For the year ended July 31, 2004, FAM
reimbursed the Fund in the amount of $11,156.
For the year ended July 31, 2004, the Fund reimbursed FAM $5,137 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 2004 were $75,273,197 and $73,253,247,
respectively.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of stock
without approval of holders of Common Stock.
Common Stock
Shares issued and outstanding during the years ended July 31, 2004
and July 31, 2003 increased by 38,841 and 16,654, respectively, as a
result of dividend reinvestment.
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 July 31, 2004 were as follows: Series A,
1.05% 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 year ended
July 31, 2004, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
an affiliate of FAM, earned $45,009 as commissions.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Notes to Financial Statements (concluded)
5. Distributions to Shareholders:
The Fund paid a tax-exempt income dividend to holders of Common
Stock in the amount of $.087000 per share on August 30, 2004 to
share holders of record on August 16, 2004.
The tax character of distributions paid during the fiscal years
ended July 31, 2004 and July 31, 2003 was as follows:
7/31/2004 7/31/2003
Distributions paid from:
Tax-exempt income $ 12,530,346 $ 11,726,512
-------------- --------------
Total distributions $ 12,530,346 $ 11,726,512
============== ==============
As of July 31, 2004, the components of accumulated losses on a tax
basis were as follows:
Undistributed tax-exempt income--net $ 3,578,703
Undistributed long-term capital gains--net --
--------------
Total undistributed earnings--net 3,578,703
Capital loss carryforward (18,732,822)*
Unrealized gains--net 4,987,493**
--------------
Total accumulated losses--net $ (10,166,626)
==============
* On July 31, 2004, the Fund had a net capital loss carryforward
of $18,732,822, of which $5,746,228 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.
** The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the difference between book
and tax amortization methods for premiums and discounts on fixed
income securities.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors,
MuniHoldings Fund II, Inc.
We have audited the accompanying statement of net assets of
MuniHoldings Fund II, Inc., including the schedule of investments,
as of July 31, 2004, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of
the two years in the period then ended and financial highlights for
each of the periods indicated therein. These financial statements
and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial
highlights. Our procedures included confirmation of securities owned
as of July 31, 2004, by correspondence with the custodian and
others. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of MuniHoldings Fund II, Inc. at July 31, 2004
and the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the indicated
periods in conformity with U.S. generally accepted accounting
principles.
(Ernst & Young)
Philadelphia, Pennsylvania
September 10, 2004
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Important Tax Information (unaudited)
All of the net investment income distributions paid by MuniHoldings
Fund II, Inc. during its taxable year ended July 31, 2004 qualify as
tax-exempt interest dividends for federal income tax purposes.
Please retain this information for your records.
Dividend Policy (unaudited)
The Fund's dividend policy is to distribute all or a portion of its
net investment income to its shareholders on a monthly basis. In
order to provide shareholders with a more stable level of dividend
distributions, the Fund may at times pay out less than the entire
amount of net investment income earned in any particular month and
may at times in any particular month pay out such accumulated but
undistributed income in addition to net investment income earned in
that month. As a result, the dividends paid by the Fund for any
particular month may be more or less than the amount of net
investment income earned by the Fund during such month. The Fund's
current accumulated but undistributed net investment income, if any,
is disclosed in the Statement of Net Assets, which comprises part of
the financial information included in this report.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third
quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are
available on the SEC's Web site at http://www.sec.gov. The Fund's
Forms N-Q may also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Automatic Dividend Reinvestment Plan (unaudited)
The following description of the Fund's Automatic Dividend
Reinvestment Plan (the "Plan') is sent to you annually as required
by federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock
otherwise elects, all dividend and capital gains distributions will
be automatically reinvested by The Bank of New York (the "Plan
Agent"), as agent for shareholders in administering the Plan, in
additional shares of Common Stock of the Fund. Holders of Common
Stock who elect not to participate in the Plan will receive all
distributions in cash paid by check mailed directly to the
shareholder of record (or, if the shares are held in street or other
nominee name then to such nominee) by The Bank of New York, as
dividend paying agent. Such participants may elect not to
participate in the Plan and to receive all distributions of
dividends and capital gains in cash by sending written instructions
to The Bank of New York, as dividend paying agent, at the address
set forth below. Participation in the Plan is completely voluntary
and may be terminated or resumed at any time without penalty by
written notice if received by the Plan Agent not less than ten days
prior to any dividend record date; otherwise such termination will
be effective with respect to any subsequently declared dividend or
distribution.
Whenever the Fund declares an income dividend or capital gains
distribution (collectively referred to as "dividends") payable
either in shares or in cash, non-participants in the Plan will
receive cash and participants in the Plan will receive the
equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of
additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by purchase of outstanding
shares of Common Stock on the open market ("open-market purchases")
on the New York Stock Exchange or elsewhere. If on the payment date
for the dividend, the net asset value per share of the Common Stock
is equal to or less than the market price per share of the Common
Stock plus estimated brokerage commissions (such conditions being
referred to herein as "market premium"), the Plan Agent will invest
the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be
credited to the participant's account will be determined by dividing
the dollar amount of the dividend by the net asset value per share
on the date the shares are issued, provided that the maximum
discount from the then current market price per share on the date of
issuance may not exceed 5%. If on the dividend payment date the net
asset value per share is greater than the market value (such
condition being referred to herein as "market discount"), the Plan
Agent will invest the dividend amount in shares acquired on behalf
of the participant in open-market purchases.
In the event of a market discount on the dividend payment date, the
Plan Agent will have until the last business day before the next
date on which the shares trade on an "ex-dividend" basis or in no
event more than 30 days after the dividend payment date (the "last
purchase date") to invest the dividend amount in shares acquired in
open-market purchases. It is contemplated that the Fund will pay
monthly income dividends. Therefore, the period during which open-
market purchases can be made will exist only from the payment date
on the dividend through the date before the next "ex-dividend" date,
which typically will be approximately ten days. If, before the Plan
Agent has completed its open-market purchases, the market price of a
share of Common Stock exceeds the net asset value per share, the
average per share purchase price paid by the Plan Agent may exceed
the net asset value of the Fund's shares, resulting in the
acquisitions of fewer shares than if the dividend had been paid in
newly issued shares on the dividend payment date. Because of the
foregoing difficulty with respect to open-market purchases, the Plan
provides that if the Plan Agent is unable to invest the full
dividend amount in open-market purchases during the purchase period
or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market
purchases and will invest the uninvested portion of the dividend
amount in newly issued shares at the close of business on the last
purchase date determined by dividing the uninvested portion of the
dividend by the net asset value per share.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account,
including information needed by shareholders for tax records. Shares
in the account of each Plan participant will be held by the Plan
Agent in non-certificated form in the name of the participant, and
each shareholder's proxy will include those shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees
which hold shares of others who are the beneficial owners, the
Plan Agent will administer the Plan on the basis of the number of
shares certified from time to time by the record shareholders as
representing the total amount registered in the record shareholder's
name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued
directly by the Fund as a result of dividends or capital gains
distributions payable either in shares or in cash. However, each
participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open-market purchases in
connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not
relieve participants of any federal, state or local income tax that
may be payable (or required to be withheld) on such dividends.
Shareholders participating in the Plan may receive benefits not
available to shareholders not participating in the Plan. If the
market price plus commissions of the Fund's shares is above the net
asset value, participants in the Plan will receive shares of the
Fund at less than they could otherwise purchase them and will have
shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants
will receive distributions in shares with a net asset value greater
than the value of any cash distribution they would have received on
their shares. However, there may be insufficient shares available in
the market to make distributions in shares at prices below the net
asset value. Also, since the Fund does not redeem shares, the price
on resale may be more or less than the net asset value.
The value of shares acquired pursuant to the Plan will generally be
excluded from gross income to the extent that the cash amount
reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund
issues shares pursuant to the Plan that have a greater fair market
value than the amount of cash reinvested, it is possible that all or
a portion of such discount (which may not exceed 5% of the fair
market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution,
it is also possible that the taxable character of this discount
would be allocable to all the shareholders, including shareholders
who do not participate in the Plan. Thus, shareholders who do not
participate in the Plan might be required to report as ordinary
income a portion of their distributions equal to their allocable
share of the discount.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the
Plan. There is no direct service charge to participants in the Plan;
however, the Fund reserves the right to amend the Plan to include a
service charge payable by the participants.
All correspondence concerning the Plan should be directed to the
Plan Agent at The Bank of New York, Church Street Station, P.O. Box
11258, New York , NY 10286-1258, Telephone: 800-432-8224.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Officers and Directors (unaudited)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Terry K. Glenn* President 1999 to President of the Merrill Lynch Investment 125 Funds None
P.O. Box 9011 and present Managers, L.P. ("MLIM")/Fund Asset 160 Portfolios
Princeton, Director and Management, L.P. ("FAM")--Advised Funds
NJ 08543-9011 1998 to since 1999; Chairman (Americas Region) of
Age: 63 present MLIM from 2000 to 2002; Executive Vice
President of MLIM and FAM (which terms as
used herein include their corporate
predecessors) from 1983 to 2002; President
of FAM Distributors, Inc. ("FAMD") from
1986 to 2002 and Director thereof from 1991
to 2002; Executive Vice President and
Director of Princeton Services, Inc.
("Princeton Services") from 1993 to 2002;
President of Princeton Administrators, L.P.
from 1989 to 2002; Director of Financial
Data Services, Inc. from 1985 to present.
* Mr. Glenn is a director, trustee or member of an advisory board of
certain other investment companies for which MLIM or FAM acts as
investment adviser. Mr. Glenn is an "interested person," as
described in the Investment Company Act, of the Fund based on his
present and former positions with MLIM, FAM, FAMD, Princeton
Services and Princeton Administrators, L.P. The Director's term is
unlimited. Directors serve until their resignation, removal or
death, or until December 31 of the year in which they turn 72. As
Fund President, Mr. Glenn serves at the pleasure of the Board of
Directors.
Independent Directors*
Ronald W. Forbes Director 1998 to Professor Emeritus of Finance, School of 49 Funds None
P.O. Box 9095 present Business, State University of New York at 49 Portfolios
Princeton, Albany since 2000 and Professor thereof
NJ 08543-9095 from 1989 to 2000; International Consultant,
Age: 63 Urban Institute, Washington, D.C. from 1995
to 1999.
Cynthia A. Montgomery Director 1998 to Professor, Harvard Business School since 49 Funds Newell Rubber-
P.O. Box 9095 present 1989; Associate Professor, J.L. Kellogg 49 Portfolios maid, Inc.
Princeton, Graduate School of Management, Northwestern
NJ 08543-9095 University from 1985 to 1989; Associate
Age: 52 Professor, Graduate School of Business
Administration, University of Michigan
from 1979 to 1985.
Kevin A. Ryan Director 1998 to Founder and currrently Director Emeritus 49 Funds None
P.O. Box 9095 present of the Boston University Center for the 49 Portfolios
Princeton, Advancement of Ethics and Character and
NJ 08543-9095 Director thereof from 1989 to 1999;
Age: 71 Professor from 1982 to 1999 and currently
Professor Emeritus of Education of Boston
University; formerly taught on the faculties
of The University of Chicago, Stanford
University and Ohio State University.
Roscoe S. Suddarth Director 2000 to President, Middle East Institute from 1995 49 Funds None
P.O. Box 9095 present to May 2001; Foreign Service Officer, 49 Portfolios
Princeton, United States Foreign Service from 1961
NJ 08543-9095 to 1995; Career Minister thereof from 1989
Age: 69 to 1995; Deputy Inspector General, U.S.
Department of State from 1991 to 1994; U.S.
Ambassador to the Hashemite Kingdom of
Jordan from 1987 to 1990.
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Officers and Directors (unaudited)(concluded)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors* (concluded)
Richard R. West Director 1998 to Professor of Finance since 1984, Dean from 49 Funds Bowne & Co.,
P.O. Box 9095 present 1984 to 1993 and currently Dean Emeritus, 49 Portfolios Inc.; Vornado
Princeton, Leonard N. Stern School of Business Realty Trust;
NJ 08543-9095 Administration, New York University from Vornado
Age: 66 1994 to present; Professor of Finance Operating
thereof from 1982 to 1994. Company;
Alexander's, Inc.
Edward D. Zinbarg Director 2000 to Self-employed financial consultant since 49 Funds None
P.O. Box 9095 present 1994; Executive Vice President of The 49 Portfolios
Princeton, Prudential Insurance Company of America
NJ 08543-9095 from 1988 to 1994; former Director of
Age: 69 Prudential Reinsurance Company and former
Trustee of the Prudential Foundation.
* The Director's term is unlimited. Directors serve until their
resignation, removal or death, or until December 31 of the year in
which they turn 72.
Position(s) Length of
Held with Time
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since
P.O. Box 9011 President present 1999; Senior Vice President and Treasurer of Princeton Services since 1999;
Princeton, and and Vice President of FAMD since 1999; Director of MLIM Taxation since 1990.
NJ 08543-9011 Treasurer 1999 to
Age: 44 present
Kenneth A. Jacob Senior 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
P.O. Box 9011 Vice present Management) of MLIM from 1997 to 2000.
Princeton, President
NJ 08543-9011
Age: 53
John M. Loffredo Senior 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
P.O. Box 9011 Vice present Management) of MLIM from 1998 to 2000.
Princeton, President
NJ 08543-9011
Age: 40
Robert A. DiMella Vice 1998 to Managing Director of MLIM since 2004; Director (Municipal Tax-Exempt Fund
P.O. Box 9011 President present Management) of MLIM from 2002 to 2004; Vice President of MLIM from 1996
Princeton, to 2002.
NJ 08543-9011
Age: 37
Phillip S. Gillespie Secretary 2003 to First Vice President of MLIM since 2001; Director (Legal Advisory) of MLIM
P.O. Box 9011 present since 2001; Vice President of MLIM from 1999 to 2000 and Attorney associated
Princeton, with MLIM since 1998.
NJ 08543-9011
Age: 40
* Officers of the Fund serve at the pleasure of the Board of
Directors.
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
MUNIHOLDINGS FUND II, INC., JULY 31, 2004
Item 2 - Code of Ethics - The registrant has adopted a code of
ethics, as of the end of the period covered by this report, that
applies to the registrant's principal executive officer, principal
financial officer and principal accounting officer, or persons
performing similar functions. A copy of the code of ethics
is available without charge upon request by calling toll-free
1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board
of directors has determined that (i) the registrant has the
following audit committee financial experts serving on its audit
committee and (ii) each audit committee financial expert is
independent: (1) Ronald W. Forbes, (2) Richard R. West, and (3)
Edward D. Zinbarg.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending July 31, 2004 - $31,500
Fiscal Year Ending July 31, 2003 - $30,550
(b) Audit-Related Fees - Fiscal Year Ending July 31, 2004 - $3,000
Fiscal Year Ending July 31, 2003 - $3,000
The nature of the services include assurance and related services
reasonably related to the performance of the audit of financial
statements not included in Audit Fees.
(c) Tax Fees - Fiscal Year Ending July 31, 2004 - $5,200
Fiscal Year Ending July 31, 2003 - $5,000
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending July 31, 2004 - $0
Fiscal Year Ending July 31, 2003 - $0
(e)(1) The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services provided
to the registrant on an annual basis require specific pre-approval
by the Committee. The Committee also must approve other non-audit
services provided to the registrant and those non-audit services
provided to the registrant's affiliated service providers that
relate directly to the operations and the financial reporting of the
registrant. Certain of these non-audit services that the Committee
believes are a) consistent with the SEC's auditor independence rules
and b) routine and recurring services that will not impair the
independence of the independent accountants may be approved by the
Committee without consideration on a specific case-by-case basis
("general pre-approval"). However, such services will only be
deemed pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for all of
the registrants the Committee oversees. Any proposed services
exceeding the pre-approved cost levels will require specific pre-
approval by the Committee, as will any other services not subject to
general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person board
meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending July 31, 2004 - $8,200
Fiscal Year Ending July 31, 2003 - $8,000
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation
S-X is compatible with maintaining the principal accountant's
independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $945,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following
individuals are members of the registrant's separately-designated
standing audit committee established in accordance with Section
3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)):
Ronald W. Forbes
Cynthia A. Montgomery
Charles C. Reilly (retired as of December 31, 2003)
Kevin A. Ryan
Roscoe S. Suddarth
Richard R. West
Edward D. Zinbarg
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill
Lynch Investment Managers, L.P. and/or Fund Asset Management, L.P.
(the "Investment Adviser") authority to vote all proxies relating to
the Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to
the voting of proxies related to the portfolio securities held in
the account of one or more of its clients, including a Fund.
Pursuant to these Proxy Voting Procedures, the Investment Adviser's
primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its
shareholders, and to act in a manner that the Investment Adviser
believes is most likely to enhance the economic value of the
securities held by the Fund. The Proxy Voting Procedures are
designed to ensure that that the Investment Adviser considers the
interests of its clients, including the Funds, and not the interests
of the Investment Adviser, when voting proxies and that real (or
perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment
professionals appointed by the CIO, portfolio managers and
investment analysts appointed by the CIO and any other personnel the
CIO deems appropriate. The Committee will also include two non-
voting representatives from the Investment Adviser's Legal
department appointed by the Investment Adviser's General Counsel.
The Committee's membership shall be limited to full-time employees
of the Investment Adviser. No person with any investment banking,
trading, retail brokerage or research responsibilities for the
Investment Adviser's affiliates may serve as a member of the
Committee or participate in its decision making (except to the
extent such person is asked by the Committee to present information
to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser
might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy
voting authority to the Investment Adviser and seeks to ensure that
all votes are consistent with the best interests of those clients
and are free from unwarranted and inappropriate influences. The
Committee establishes general proxy voting policies for the
Investment Adviser and is responsible for determining how those
policies are applied to specific proxy votes, in light of each
issuer's unique structure, management, strategic options and, in
certain circumstances, probable economic and other anticipated
consequences of alternate actions. In so doing, the Committee may
determine to vote a particular proxy in a manner contrary to its
generally stated policies. In addition, the Committee will be
responsible for ensuring that all reporting and recordkeeping
requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires
a case-by-case determination. In such cases, the Committee may
elect not to adopt a specific voting policy applicable to that
issue. The Investment Adviser believes that certain proxy voting
issues require investment analysis - such as approval of mergers and
other significant corporate transactions - akin to investment
decisions, and are, therefore, not suitable for general guidelines.
The Committee may elect to adopt a common position for the
Investment Adviser on certain proxy votes that are akin to
investment decisions, or determine to permit the portfolio manager
to make individual decisions on how best to maximize economic value
for a Fund (similar to normal buy/sell investment decisions made by
such portfolio managers). While it is expected that the Investment
Adviser will generally seek to vote proxies over which the
Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in
conjunction with a Fund's portfolio manager, may determine that the
Fund's specific circumstances require that its proxies be voted
differently.
To assist the Investment Adviser in voting proxies, the Committee
has retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address
special circumstances that can arise in connection with proxy
voting. For instance, under the Proxy Voting Procedures, the
Investment Adviser generally will not seek to vote proxies related
to portfolio securities that are on loan, although it may do so
under certain circumstances. In addition, the Investment Adviser
will vote proxies related to securities of foreign issuers only on a
best efforts basis and may elect not to vote at all in certain
countries where the Committee determines that the costs associated
with voting generally outweigh the benefits. The Committee may at
any time override these general policies if it determines that such
action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote
proxies in respect of an issuer where an affiliate of the Investment
Adviser (each, an "Affiliate"), or a money management or other
client of the Investment Adviser (each, a "Client") is involved.
The Proxy Voting Procedures and the Investment Adviser's adherence
to those procedures are designed to address such conflicts of
interest. The Committee intends to strictly adhere to the Proxy
Voting Procedures in all proxy matters, including matters involving
Affiliates and Clients. If, however, an issue representing a non-
routine matter that is material to an Affiliate or a widely known
Client is involved such that the Committee does not reasonably
believe it is able to follow its guidelines (or if the particular
proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes
of ensuring that an independent determination is reached, retain an
independent fiduciary to advise the Committee on how to vote or to
cast votes on behalf of the Investment Adviser's clients.
In the event that the Committee determines not to retain an
independent fiduciary, or it does not follow the advice of such an
independent fiduciary, the powers of the Committee shall pass to a
subcommittee, appointed by the CIO (with advice from the Secretary
of the Committee), consisting solely of Committee members selected
by the CIO. The CIO shall appoint to the subcommittee, where
appropriate, only persons whose job responsibilities do not include
contact with the Client and whose job evaluations would not be
affected by the Investment Adviser's relationship with the Client
(or failure to retain such relationship). The subcommittee shall
determine whether and how to vote all proxies on behalf of the
Investment Adviser's clients or, if the proxy matter is, in their
judgment, akin to an investment decision, to defer to the applicable
portfolio managers, provided that, if the subcommittee determines to
alter the Investment Adviser's normal voting guidelines or, on
matters where the Investment Adviser's policy is case-by-case, does
not follow the voting recommendation of any proxy voting service or
other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies
relating to the Client may be voted unless the Secretary, or in the
Secretary's absence, the Assistant Secretary of the Committee
concurs that the subcommittee's determination is consistent with the
Investment Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain
recurring proxy issues that are not expected to involve unusual
circumstances. These policies are guidelines only, and the
Investment Adviser may elect to vote differently from the
recommendation set forth in a voting guideline if the Committee
determines that it is in a Fund's best interest to do so. In
addition, the guidelines may be reviewed at any time upon the
request of a Committee member and may be amended or deleted upon the
vote of a majority of Committee members present at a Committee
meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
* Proposals related to the composition of the Board of Directors of
issuers other than investment companies. As a general matter, the
Committee believes that a company's Board of Directors (rather than
shareholders) is most likely to have access to important, nonpublic
information regarding a company's business and prospects, and is
therefore best-positioned to set corporate policy and oversee
management. The Committee, therefore, believes that the foundation
of good corporate governance is the election of qualified,
independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of
the corporation in a manner that will seek to maximize shareholder
value over time. In individual cases, the Committee may look at a
nominee's history of representing shareholder interests as a
director of other companies or other factors, to the extent the
Committee deems relevant.
* Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the interests
of shareholders and provide an independent view on the propriety of
financial reporting decisions of corporate management. While the
Committee will generally defer to a corporation's choice of auditor,
in individual cases, the Committee may look at an auditors' history
of representing shareholder interests as auditor of other companies,
to the extent the Committee deems relevant.
* Proposals related to management compensation and employee
benefits. As a general matter, the Committee favors disclosure of
an issuer's compensation and benefit policies and opposes excessive
compensation, but believes that compensation matters are normally
best determined by an issuer's board of directors, rather than
shareholders. Proposals to "micro-manage" an issuer's compensation
practices or to set arbitrary restrictions on compensation or
benefits will, therefore, generally not be supported.
* Proposals related to requests, principally from management, for
approval of amendments that would alter an issuer's capital
structure. As a general matter, the Committee will support requests
that enhance the rights of common shareholders and oppose requests
that appear to be unreasonably dilutive.
* Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the Committee
opposes poison pill provisions.
* Routine proposals related to requests regarding the formalities of
corporate meetings.
* Proposals related to proxy issues associated solely with holdings
of investment company shares. As with other types of companies, the
Committee believes that a fund's Board of Directors (rather than its
shareholders) is best-positioned to set fund policy and oversee
management. However, the Committee opposes granting Boards of
Directors authority over certain matters, such as changes to a
fund's investment objective, that the Investment Company Act
envisions will be approved directly by shareholders.
* Proposals related to limiting corporate conduct in some manner
that relates to the shareholder's environmental or social concerns.
The Committee generally believes that annual shareholder meetings
are inappropriate forums for discussion of larger social issues, and
opposes shareholder resolutions "micromanaging" corporate conduct or
requesting release of information that would not help a shareholder
evaluate an investment in the corporation as an economic matter.
While the Committee is generally supportive of proposals to require
corporate disclosure of matters that seem relevant and material to
the economic interests of shareholders, the Committee is generally
not supportive of proposals to require disclosure of corporate
matters for other purposes.
Item 8 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 10 - Controls and Procedures
10(a) - The registrant's certifying officers have reasonably
designed such disclosure controls and procedures to ensure material
information relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
10(b) - There were no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the second fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - See Item 2
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MuniHoldings Fund II, Inc.
By: _/s/ Terry K. Glenn_______
Terry K. Glenn,
President of
MuniHoldings Fund II, Inc.
Date: September 17, 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: September 17, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
MuniHoldings Fund II, Inc.
Date: September 17, 2004