UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-8215
Name of Fund: MuniHoldings Fund II, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President,
MuniHoldings Fund II, Inc., 800 Scudders Mill Road, Plainsboro, NJ,
08536. Mailing address: P.O. Box 9011, Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 07/31/03
Date of reporting period: 08/01/02 - 07/31/03
Item 1 - Attach shareholder report
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
MuniHoldings Fund II, Inc.
Annual Report
July 31, 2003
MuniHoldings Fund II, Inc. seeks to provide shareholders with
current income exempt from Federal income taxes by investing
primarily in a portfolio of long-term, investment-grade municipal
obligations the interest on which, in the opinion of bond counsel to
the issuer, is exempt from Federal income taxes.
This report, including the financial information herein, is
transmitted to shareholders of MuniHoldings Fund II, Inc. for their
information. It is not a prospectus. Past performance results shown
in this report should not be considered a representation of future
performance. The Fund has leveraged its Common Stock and intends to
remain leveraged by issuing Preferred Stock to provide the Common
Stock shareholders with a potentially higher rate of return.
Leverage creates risks for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price
of shares of the Common Stock, and the risk that fluctuations in the
short-term dividend rates of the Preferred Stock may affect the
yield to Common Stock shareholders. Statements and other information
herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities is
available (1) without charge, upon request, by calling toll-free
1-800-MER-FUND (1-800-637-3863); (2) on www.mutualfunds.ml.com; and
(3) on the Securities and Exchange Commission's website at
http://www.sec.gov.
MuniHoldings Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
MuniHoldings Fund II, Inc.
The Benefits and Risks of Leveraging
MuniHoldings Fund II, Inc. utilizes leveraging to seek to enhance
the yield and net asset value of its Common Stock. However, these
objectives cannot be achieved in all interest rate environments. To
leverage, the Fund issues Preferred Stock, which pays dividends at
prevailing short-term interest rates, and invests the proceeds in
long-term municipal bonds. The interest earned on these investments
is paid to Common Stock shareholders in the form of dividends, and
the value of these portfolio holdings is reflected in the per share
net asset value of the Fund's Common Stock. However, in order to
benefit Common Stock shareholders, the yield curve must be
positively sloped; that is, short-term interest rates must be lower
than long-term interest rates. At the same time, a period of
generally declining interest rates will benefit Common Stock
shareholders. If either of these conditions change, then the risks
of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock
capitalization of $100 million and the issuance of Preferred
Stock for an additional $50 million, creating a total value of
$150 million available for investment in long-term municipal bonds.
If prevailing short-term interest rates are approximately 3% and
long-term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million
of Preferred Stock based on the lower short-term interest rates. At
the same time, the fund's total portfolio of $150 million earns the
income based on long-term interest rates. Of course, increases in
short-term interest rates would reduce (and even eliminate) the
dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term
investments, and therefore the Common Stock shareholders are the
beneficiaries of the incremental yield. However, if short-term
interest rates rise, narrowing the differential between short-term
and long-term interest rates, the incremental yield pickup on the
Common Stock will be reduced or eliminated completely. At the same
time, the market value of the fund's Common Stock (that is, its
price as listed on the New York Stock Exchange) may, as a result,
decline. Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price
of the portfolio's investments, since the value of the fund's
Preferred Stock does not fluctuate. In addition to the decline in
net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investments 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, 2003,
the percentage of the Fund's total net assets invested in inverse
floaters was 5.82%.
Swap Agreements
The Fund may also invest in swap agreements, which are over-the-
counter contracts in which one party agrees to make periodic
payments based on the change in market value of a specified bond,
basket of bonds, or index in return for periodic payments based on a
fixed or variable interest rate or the change in market value of a
different bond, basket of bonds or index. Swap agreements may be
used to obtain exposure to a bond or market without owning or taking
physical custody of securities.
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
A Letter From the President
Dear Shareholder
Now more than half behind us, 2003 has been a meaningful year in
many respects. Perhaps the most significant development was the
conclusion of all-out war in Iraq. Although not especially sensitive
to geopolitical events, the municipal market has not been exempt
from the general market excitement we have seen since fighting gave
way to restructuring in Iraq.
Municipal bond yields rose and fell in response to war fears, equity
market uncertainty, sub par economic growth, unemployment and
deflation. By the end of July, long-term municipal revenue bond
yields stood at 5.4%, as measured by the Bond Buyer Revenue Bond
Index. With many state deficits at record levels, municipalities
issued more than $200 billion in new long-term tax-exempt bonds
during the six-month period ended July 31, 2003, an increase of more
than 20% versus the same six months of 2002. The availability of
bonds, together with attractive yield ratios relative to U.S.
Treasury issues, made municipal bonds a popular fixed income
investment alternative.
Against this backdrop, our portfolio managers continued to work
diligently to deliver on our commitment to provide superior
performance within reasonable expectations for risk and return. This
included striving to outperform our peers and the market indexes.
With that said, remember also that the advice and guidance of a
skilled financial advisor can mean the difference between fruitful
and fruitless investing. A financial professional can help you
choose those investments that will best serve you as you plan for
your financial future.
Finally, I am proud to premiere a new look to our shareholder
communications. Our portfolio manager commentaries have been trimmed
and organized in such a way that you can get the information you
need at a glance, in plain language. Today's markets are confusing
enough. We want to help you put it all in perspective. The report's
new size also allows us certain mailing efficiencies. The cost
savings in both production and postage are passed on to the fund
and, ultimately, to fund shareholders.
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, 2003
A Discussion With Your Fund's Portfolio Manager
The Fund remained focused on generating yield, emphasizing those
issues that we believe would benefit the most from a tightening
in credit spreads.
Discuss the recent market environment relative to municipal bonds.
Amid considerable interest rate volatility, U.S. Treasury bond
yields were higher at 5.35% at the end of July, 2003 than they had
been six months earlier. Volatile equity markets, concerns over the
Iraqi conflict, and sub par economic growth combined to generally
push interest rates lower through June. Bond yields, however, moved
sharply higher in July in response to more positive business
activity, especially continued strong home sales and improving
employment trends.
Long-term tax-exempt bond yields increased over the six months ended
July 31, 2003, although to a lesser extent than U.S. Treasury
obligations. Yield volatility was lower than that seen in U.S.
Treasury issues, as municipal bond prices typically are less
sensitive to worldwide geopolitical pressures on a daily and weekly
basis. By the end of July, long-term municipal revenue bond yields,
as measured by the Bond Buyer Revenue Bond Index, stood at 5.4%.
The municipal market outperformed the U.S. Treasury market over the
past six months, despite a dramatic increase in new bond issuance.
Recent semi-annual issuance has, in fact, exceeded the annual
issuance seen during much of the mid-1990s. The monthly issuance for
July 2003, at almost $30 billion, represented the largest amount of
tax-exempt bonds ever sold in the month of July. Historically low
interest rates over the past year have been used by state and local
governments as an opportunity to finance existing infrastructure
needs and refinance outstanding, higher-coupon issues. Current
estimates for 2003 municipal bond new issuance are approximately
$350 billion, similar to 2002's record high issuance.
A number of factors continue to foster strong investor demand for
municipal bonds. Tax-exempt money market rates have remained below
1% for much of this year, forcing investors to invest in longer
maturities to generate desired levels of coupon income. In July
and August 2003, investors are expected to receive approximately
$60 billion in coupon income, bond maturities and the proceeds from
early redemptions. We believe much of these proceeds are likely to
be reinvested in the municipal market.
As an asset class, municipal bonds have remained an attractive
investment alternative, especially relative to U.S. Treasury issues.
At the end of July 2003, tax-exempt bond yields were 85% - 93% of
comparable U.S. Treasury issues, well in excess of their historic
average of 82% - 88%. Current yield ratios have made municipal
securities attractive to both retail and institutional investors. We
expect the tax-exempt market's favorable technical position to
remain stable in the near term, therefore, an increase in bond
issuance during the remainder of 2003 is not likely to significantly
impact the municipal bond market's performance.
While many investors are concerned about how economic growth might
affect bond prices and yield, we believe moderate economic growth,
especially within a context of negligible inflationary pressures,
should not greatly endanger the positive fixed income environments
tax-exempt products have enjoyed.
How did the Fund perform during the fiscal year?
For the year ended July 31, 2003, the Common Stock of MuniHoldings
Fund II, Inc. had a net annualized yield of 7.20%, based on a year-
end per share net asset value of $13.46 and $.969 per share income
dividends. For the same period, the total investment return on the
Fund's Common Stock was +7.15%, based on a change in per share net
asset value from $13.51 to $13.46, and assuming reinvestment of
$.958 per share ordinary income dividends.
For the six-month period ended July 31, 2003, the total investment
return on the Fund's Common Stock was +3.79%, based on a change in
per share net asset value from $13.46 to $13.46, and assuming
reinvestment of $.504 per share ordinary income dividends.
For the six-month period ended July 31, 2003, the Fund's Auction
Market Preferred Stock had an average yield of .93% for Series A and
1.57% for Series B.
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
For a description of the Fund's total investment return based on a
change in the per share market value (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and
assuming reinvestment of dividends, please refer to the Financial
Highlights section included in this report. As a closed-end fund,
the Fund's shares may trade in the secondary market at a premium or
discount to the Fund's net asset value. As a result, total
investment returns based on changes in the Fund's market value can
vary significantly from total investment return based on changes in
the Fund's net asset value.
For the fiscal year ended July 31, 2003, the Fund outperformed its
Lipper peer group of Leveraged Municipal Debt Funds, which provided
a total return of +3.51% for the same 12-month period. The Fund's
outperformance of the peer group is attributed to our focus on
yield. During the period, we increased the Fund's exposure to the
high yield portion of the market. With an anticipation of a firming
economy, we felt the interest rate required on lower quality credits
would fall, meaning credit spreads would narrow over time. Although
they did not keep pace with the rally seen in the taxable high yield
market, municipal credit spreads did tighten over the past 12
months. This shift helped enhance the Fund's yield and total return
during the period.
Another factor that helped the portfolio during the period was our
limited exposure to tobacco-backed bonds. Spreads in this sector
widened significantly as the prospect of heavy issuance and
continued litigation risk combined to put additional selling
pressure on the sector. Our low exposure to this area of the market
enabled the Fund to outperform its peers.
What changes were made to the portfolio during the fiscal year?
About a year ago, we began increasing the Fund's exposure to issues
that could benefit from a tightening in credit spreads.
Predominantly, we started to focus on corporate-backed bonds in the
tax-exempt market. These included utility companies, such as TXU
Electric Company, CenterPoint Energy, Inc., Tucson Electric Power,
Co., Public Service Company of New Mexico and Tampa Electric
Company, as well as paper companies and airline credits. These
purchases increased the Fund's competitive yield and positioned the
portfolio to perform well in the event of narrowing credit spreads.
We have found this to be an effective strategy and one that we
expect to maintain for the near term.
During the period, the Fund's borrowing costs remained in the
..85% - 1.25% range. These attractive funding levels, in combination
with a steep tax-exempt yield curve, have generated a significant
income benefit to the Fund's Common Stock shareholders. Further
declines in the Fund's borrowing costs would require significant
easing of monetary policy by the Federal Reserve Board. While such
action is not expected, neither is an increase in short-term
interest rates. We expect short-term borrowing costs to remain near
current attractive levels for the coming months. However, should the
spread between short-term and long-term interest rates narrow, the
benefits of leverage will decline, and as a result, reduce the yield
on the Fund's Common Stock. (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 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 slowly gain strength over the next
several quarters, pushing interest rates slightly higher. Under this
scenario, credit spreads should continue to narrow as corporate
earnings grow. We will look to reduce the Fund's exposure to the
high yield market if we see either a significant improvement in
credit spreads or the risk of another economic slowdown.
Robert A. DiMella, CFA
Vice President and Portfolio Manager
August 13, 2003
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Schedule of Investments (In Thousands)
S&P Moody's Face
State Ratings++ Ratings++ Amount Municipal Bonds Value
Alabama--2.9% AAA Aaa $ 4,000 Jefferson County, Alabama, Sewer Revenue Bonds, Series D, 5.70%
due 2/01/2018 (b) $ 4,325
Arizona--5.2% BBB Baa2 1,000 Arizona Health Facilities Authority Revenue Bonds (Catholic
Healthcare West), Series A, 6.625% due 7/01/2020 1,047
NR* Caa3 2,800 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds
(America West Airlines Inc. Project), AMT, 6.30% due 4/01/2023 1,591
Phoenix, Arizona, IDA, M/F Housing Revenue Bonds (Bay Club
Apartments Project) (f):
AAA NR* 915 5.90% due 11/20/2031 935
AAA NR* 1,265 5.95% due 11/20/2036 1,294
Pima County, Arizona, IDA, M/F Housing Revenue Bonds (Columbus
Village), Series A (f):
AAA NR* 585 6% due 10/20/2031 607
AAA NR* 770 6.05% due 10/20/2041 798
NR* NR* 1,450 Show Low, Arizona, Improvement District No. 5, Special Assessment
Bonds, 6.375% due 1/01/2015 1,507
California-- AAA Aaa 2,000 Benicia, California, Unified School District, GO, Refunding,
15.3% Series A, 5.615%** due 8/01/2020 (b) 782
BBB A2 6,000 California State, GO, Refunding, 5.25% due 2/01/2033 5,690
A A2 4,000 Chula Vista, California, IDR, Refunding (San Diego Gas &
Electric Co.), AMT, Series A, 6.75% due 3/01/2023 (h) 4,035
Sacramento County, California, Sanitation District Financing
Authority, Revenue Refunding Bonds (e):
AA Aa3 1,000 RIB, Series 366, 10.622% due 12/01/2027 1,207
AA Aa3 2,500 Trust Receipts, Class R, Series A, 10.822% due 12/01/2019 2,962
San Marino, California, Unified School District, GO, Series A (d):
AAA Aaa 1,820 5.50%** due 7/01/2017 881
AAA Aaa 1,945 5.55%** due 7/01/2018 880
AAA Aaa 2,070 5.60%** due 7/01/2019 873
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) 5,498
Colorado--2.0% NR* NR* 1,890 Elk Valley, Colorado, Public Improvement Revenue Bonds (Public
Improvement Fee), Series A, 7.10% due 9/01/2014 1,917
BB+ Ba1 1,110 Northwest Parkway, Colorado, Public Highway Authority Revenue
Bonds, First Tier, Sub-Series D, 7.125% due 6/15/2041 1,114
Florida--8.3% NR* NR* 525 Bonnet Creek Resort, Florida, Community Development District,
Special Assessment Revenue Bonds, 7.50% due 5/01/2034 543
AA- A3 5,000 Broward County, Florida, Resource Recovery Revenue Refunding
Bonds (Wheelabrator South Broward), Series A, 5.375% due 12/01/2009 5,405
BBB- Baa1 1,900 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric
Company Project), 5.10% due 10/01/2013 1,864
A- A2 3,490 Orange County, Florida, Health Facilities Authority, Hospital
Revenue Bonds (Orlando Regional Healthcare), 6% due 12/01/2028 3,603
NR* NR* 1,000 Palm Beach County, Florida, HFA, M/F Housing Revenue Bonds
(Lake Delray Apartment Project), AMT, Series A, 6.40% due 1/01/2031 911
Georgia--0.9% NR* NR* 1,250 Atlanta, Georgia, Tax Allocation Revenue Bonds (Atlantic Station
Project), 7.90% due 12/01/2024 1,278
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, 2003
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings++ Ratings++ Amount Municipal Bonds Value
Idaho--1.2% BB+ Ba3 $ 2,000 Power County, Idaho, Industrial Development Corporation, Solid
Waste Disposal Revenue Bonds (FMC Corporation Project), AMT,
6.45% due 8/01/2032 $ 1,753
Illinois--3.5% NR* NR* 1,000 Chicago, Illinois, Special Assessment Bonds (Lake Shore East),
6.75% due 12/01/2032 975
BBB NR* 2,315 Illinois, Development Finance Authority Revenue Bonds (Community
Rehabilitation Providers Facilities), Series A, 6.625% due
7/01/2032 2,332
AA Aa2 2,000 Illinois HDA, Homeowner Mortgage Revenue Bonds, AMT,
Sub-Series C-2, 5.25% due 8/01/2022 1,986
Indiana--1.8% NR* NR* 2,595 Indiana State Educational Facilities Authority, Revenue Refunding
Bonds (Saint Joseph's College Project), 7% due 10/01/2029 2,723
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 888
Louisiana--0.6% NR* NR* 900 Hodge, Louisiana, Utility Revenue Bonds (Stone Container Corporation),
AMT, 9% due 3/01/2010 922
Maine--2.4% AA+ Aa1 3,500 Maine State Housing Authority, Mortgage Purchase Revenue Refunding
Bonds, Series B, 5.30% due 11/15/2023 3,541
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 1,332
NR* NR* 1,050 Maryland State Energy Financing Administration, Limited Obligation
Revenue Bonds (Cogeneration--AES Warrior Run), AMT, 7.40% due
9/01/2019 1,065
Massachusetts-- Massachusetts State Development Finance Agency Revenue Bonds
2.0% (Neville Communities Home), Series A (f):
AAA NR* 600 5.75% due 6/20/2022 626
AAA NR* 1,500 6% due 6/20/2044 1,552
BB+ NR* 1,000 Massachusetts State Development Finance Agency, Revenue Refunding
Bonds (Eastern Nazarine College), 5.625% due 4/01/2029 755
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 2,690
BBB- Baa3 1,100 Flint, Michigan, Hospital Building Authority, Revenue Refunding
Bonds (Hurley Medical Center), 6% due 7/01/2020 1,004
B Ba1 2,000 Michigan State Hospital Finance Authority, Revenue Refunding
Bonds (Detroit Medical Center Obligation Group), Series A,
6.50% due 8/15/2018 1,539
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) 5,099
Minnesota-- A- NR* 1,680 Minneapolis, Minnesota, Community Development Agency, Supported
4.9% Development Revenue Refunding Bonds (Common Bond), Series G-3,
5.35% due 12/01/2021 1,687
Rockford, Minnesota, Independent School District Number 883, GO (c):
AAA Aaa 2,870 5.60% due 2/01/2019 3,051
AAA Aaa 2,390 5.60% due 2/01/2020 2,525
Mississippi-- Mississippi Business Finance Corporation, Mississippi, PCR,
3.0% Refunding (System Energy Resources Inc. Project):
BBB- Ba1 2,500 5.875% due 4/01/2022 2,450
BBB- Ba1 2,050 5.90% due 5/01/2022 2,016
Missouri--2.1% Fenton, Missouri, Tax Increment Revenue Refunding and Improvement
Bonds (Gravois Bluffs):
NR* NR* 1,025 6.75% due 10/01/2015 1,047
NR* NR* 1,000 7% due 10/01/2021 1,072
BBB+ Baa1 1,000 Missouri State Development Finance Board, Infrastructure Facilities
Revenue Bonds (Branson), Series A, 5.50% due 12/01/2032 963
New Jersey-- New Jersey EDA, Retirement Community Revenue Bonds, Series A:
9.0% NR* NR* 1,000 (Cedar Crest Village Inc. Facility), 7.25% due 11/15/2031 1,012
NR* NR* 2,000 (Seabrook Village Inc.), 8.125% due 11/15/2023 2,066
New Jersey EDA, Special Facility Revenue Bonds (Continental
Airlines Inc. Project), AMT:
B Caa2 2,000 6.625% due 9/15/2012 1,781
B Caa2 2,250 6.25% due 9/15/2029 1,887
New Jersey Health Care Facilities Financing Authority Revenue
Bonds:
BB+ NR* 1,250 (Pascack Valley Hospital Association), 6.625% due 7/01/2036 1,233
NR* Baa1 2,375 (South Jersey Hospital), 6% due 7/01/2026 2,388
A- Baa2 3,430 Tobacco Settlement Financing Corporation of New Jersey Revenue
Bonds, 7% due 6/01/2041 3,116
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings++ Ratings++ Amount Municipal Bonds Value
New Mexico-- Farmington, New Mexico, PCR, Refunding:
4.6% BBB- Baa3 $ 3,675 (Public Service Company--San Juan Project), Series A, 5.80%
due 4/01/2022 $ 3,597
BBB- Baa3 1,000 (Public Service Company--San Juan Project), Series D, 6.375%
due 4/01/2022 1,028
B+ Ba3 2,150 (Tucson Electric Power Co.--San Juan Project), Series A, 6.95%
due 10/01/2020 2,171
New York--12.0% New York City, New York, City IDA, Civic Facility Revenue Bonds:
NR* NR* 415 Series C, 6.80% due 6/01/2028 417
NR* NR* 1,925 (Special Needs Facilities Pooled Program), Series C-1, 5.50%
due 7/01/2007 1,915
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 728
NR* Aaa 7,860 New York City, New York, City Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, RITR, Series 11, 10.52% due
6/15/2026 (c)(e) 9,587
AAA Aaa 3,500 New York State Dormitory Authority, Mental Health Services
Facilities Improvement Revenue Bonds, Series B, 5.75% due
2/15/2020 (d) 3,705
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
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 1,546
North BBB Baa3 2,000 North Carolina Eastern Municipal Power Agency, Power System
Carolina--2.8% Revenue Bonds, Series D, 6.75% due 1/01/2026 2,119
NR* NR* 2,000 North Carolina Medical Care Commission, Health Care Facilities,
First Mortgage Revenue Refunding Bonds (Presbyterian Homes Project),
7% due 10/01/2031 2,127
Ohio--6.8% 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) 10,135
Oklahoma--0.8% Tulsa, Oklahoma, Municipal Airport Trust Revenue Refunding
Bonds (AMR Corporation), AMT, Series A:
B- Caa2 430 5.80% due 6/01/2035 367
B- Caa2 1,075 5.375% due 12/01/2035 790
Pennsylvania-- Pennsylvania Economic Development Financing Authority,
5.8% Exempt Facilities Revenue Bonds (National Gypsum Company), AMT:
NR* NR* 4,750 Series A, 6.25% due 11/01/2027 4,342
NR* NR* 2,000 Series B, 6.125% due 11/01/2027 1,799
NR* NR* 540 Philadelphia, Pennsylvania, Authority for IDR, Commercial
Development, 7.75% due 12/01/2017 549
A- NR* 2,000 Sayre, Pennsylvania, Health Care Facilities Authority Revenue
Bonds (Guthrie Health), Series A, 5.875% due 12/01/2031 1,997
Rhode Island-- Rhode Island State Health and Educational Building Corporation,
1.4% Hospital Financing Revenue Bonds (Lifespan Obligation Group):
BBB Baa2 1,000 6.375% due 8/15/2021 1,004
BBB Baa2 1,165 6.50% due 8/15/2032 1,147
South BBB+ Baa2 2,080 Medical University, South Carolina, Hospital Authority, Hospital
Carolina--4.6% Facilities Revenue Refunding Bonds, Series A, 6.375% due 8/15/2027 2,119
BBB NR* 2,000 South Carolina Jobs, EDA, Economic Development Revenue Bonds
(Westminster Presbyterian Center), 7.75% due 11/15/2030 2,198
Tobacco Settlement Revenue Management Authority, South Carolina,
Tobacco Settlement Revenue Bonds, Series B:
A- Baa2 1,700 6.375% due 5/15/2028 1,453
A- Baa2 1,400 6.375% due 5/15/2030 1,170
Tennessee-- NR* NR* 2,200 Hardeman County, Tennessee, Correctional Facilities Corporation
3.9% Revenue Bonds, Series B, 7.375% due 8/01/2017 2,213
A- Baa1 3,450 Shelby County, Tennessee, Health, Educational and Housing Facility
Board, Hospital Revenue Refunding Bonds (Methodist Healthcare),
6.50% due 9/01/2026 3,666
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Schedule of Investments (continued) (In Thousands)
S&P Moody's Face
State Ratings++ Ratings++ Amount Municipal Bonds Value
Texas--16.4% BBB- Baa3 $ 2,665 Austin, Texas, Convention Center Revenue Bonds (Convention
Enterprises Inc.), First Tier, Series A, 6.70% due 1/01/2028 $ 2,762
Brazos River Authority, Texas, PCR, Refunding:
BBB Baa2 1,000 (TXU Electric Company Project), Series B, 4.75% due 5/01/2029 1,034
BBB Baa2 2,100 (Texas Utility Company), AMT, Series A, 7.70% due 4/01/2033 2,314
BBB Baa2 1,915 (Utilities Electric Company), AMT, Series B, 5.05% due 6/01/2030 1,980
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 3,011
CCC Caa2 195 Dallas-Fort Worth, Texas, International Airport Facility,
Improvement Corporation Revenue Bonds (American Airlines Inc.),
6% due 11/01/2014 97
CCC Caa2 1,000 Dallas-Fort Worth, Texas, International Airport Facility,
Improvement Corporation Revenue Refunding Bonds (American
Airlines), AMT, Series A, 5.95% due 5/01/2029 911
NR* Ba3 1,100 Gulf Coast, Texas, IDA, Solid Waste Disposal Revenue Bonds
(Citgo Petroleum Corporation Project), AMT, 7.50% due 5/01/2025 1,085
BBB Baa2 2,685 Gulf Coast, Texas, Waste Disposal Authority, Revenue Refunding
Bonds (International Paper Company), AMT, Series A, 6.10% due
8/01/2024 2,698
A- A3 585 Lower Colorado River Authority, Texas, PCR (Samsung Austin
Semiconductor), AMT, 6.95% due 4/01/2030 645
BBB- Ba1 2,965 Matagorda County, Texas, Navigation District Number 1 Revenue
Refunding Bonds (Reliant Energy Inc.), Series C, 8% due 5/01/2029 3,187
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 1,116
BBB Baa2 2,495 Red River Authority, Texas, PCR, Refunding (Celanese Project),
Series A, 6.45% due 11/01/2030 2,591
BBB Baa2 1,050 Sabine River Authority, Texas, PCR, Refunding (TXU Electric
Company Project), Series C, 4% due 5/01/2028 1,054
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 997
Virginia--17.1% Chesterfield County, Virginia, IDA, PCR (Virginia Electric and
Power Company):
BBB+ A3 425 Series A, 5.875% due 6/01/2017 432
BBB+ A3 575 Series B, 5.875% due 6/01/2017 585
AAA Aaa 10,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue Refunding
Bonds, AMT, Series A, 6.10% due 2/01/2011 (a) 11,081
BBB- Baa3 1,100 Mecklenburg County, Virginia, IDA, Exempt Facility Revenue Refunding
Bonds (UAE LP Project), 6.50% due 10/15/2017 1,116
Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2030 228
BB NR* 18,400 Senior-Series B, 5.90%** due 8/15/2030 1,999
BB NR* 30,000 Senior-Series B, 5.95%** due 8/15/2033 2,548
AAA Aaa 3,000 Virginia State, HDA, Commonwealth Mortgage Revenue Bonds, Series J,
Sub-Series J-1, 5.20% due 7/01/2019 (d) 3,035
AA+ Aa1 1,095 Virginia State, HDA, Rental Housing Revenue Bonds, AMT, Series B,
5.625% due 8/01/2011 1,154
AA+ Aa1 3,200 Virginia State, HDA, Revenue Bonds, AMT, Series D, 6% due 4/01/2024 3,284
Washington-- NR* NR* 1,075 Seattle, Washington, Housing Authority, Housing Revenue Bonds
0.7% (Replacement Housing Project), 6.125% due 12/01/2032 1,061
Wisconsin-- BBB+ NR* 1,360 Wisconsin State Health and Educational Facilities Authority
0.9% Revenue Bonds (Synergyhealth Inc.), 6% due 11/15/2032 1,320
Virgin BBB- Baa3 3,600 Virgin Islands Government Refinery Facilities Revenue Bonds
Islands--2.4% (Hovensa Coker Project), AMT, 6.50% due 7/01/2021 3,601
Total Municipal Bonds (Cost--$230,879)--155.1% 231,493
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Schedule of Investments (concluded) (In Thousands)
Shares Held Short-Term Securities Value
512 Merrill Lynch Institutional Tax-Exempt Fund (g) $ 512
Total Short-Term Securities (Cost--$512)--0.3% 512
Total Investments (Cost--$231,391)--155.4% 232,005
Other Assets Less Liabilities--2.9% 4,315
Preferred Stock, at Redemption Value--(58.3%) (87,058)
---------
Net Assets Applicable to Common Stock--100.0% $ 149,262
=========
(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, 2003.
(f)GNMA Collateralized.
(g)Investments in companies considered to be an affiliate of the
Fund (such companies are defined as "Affiliated Companies" in
Section 2(a)(3) of the Investment Company Act of 1940) are as
follows:
(in Thousands)
Net Dividend
Affiliate Activity Income
Merrill Lynch Institutional
Tax-Exempt Fund 512 $28
(h)Variable rate note.
(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.
See Notes to Financial Statements.
Quality Profile (unaudited)
The quality ratings of securities in the Fund as of July 31, 2003
were as follows:
Percent of
Total
S&P Rating/Moody's Rating Investments
AAA/Aaa 29.0%
AA/Aa 8.4
A/A 13.4
BBB/Baa 24.1
BB/Ba 7.0
B/B 2.1
CCC/Caa 1.1
NR (Not Rated) 14.9
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Statement of Net Assets
As of July 31, 2003
Assets
Investments, at value (identified cost--$231,390,798) $ 232,004,787
Cash 77,595
Receivables:
Interest $ 4,219,343
Dividends from affiliates 11 4,219,354
---------------
Prepaid expenses 170,079
---------------
Total assets 236,471,815
---------------
Liabilities
Payables:
Investment adviser $ 115,883
Other affiliates 1,780 117,663
---------------
Accrued expenses 34,466
---------------
Total liabilities 152,129
---------------
Preferred Stock
Preferred Stock, at redemption value, par value $.10 per share (1,740
Series A shares and 1,740 Series B shares of AMPS* issued and outstanding
at $25,000 per share liquidation preference) 87,058,064
---------------
Net Assets Applicable to Common Stock
Net assets applicable to Common Stock $ 149,261,622
===============
Analysis of Net Assets Applicable to Common Stock
Common Stock, par value $.10 per share (11,089,988 shares issued and
outstanding) $ 1,108,999
Paid-in capital in excess of par 164,086,072
Undistributed investment income--net $ 3,665,947
Accumulated realized capital losses on investments--net (20,213,385)
Unrealized appreciation on investments--net 613,989
---------------
Total accumulated losses--net (15,933,449)
---------------
Total--Equivalent to $13.46 net asset value per share of Common Stock
(market price--$13.16) $ 149,261,622
===============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Statement of Operations
For the Year Ended July 31, 2003
Investment Income
Interest $ 14,665,179
Dividends from affiliates 28,249
---------------
Total income 14,693,428
---------------
Expenses
Investment advisory fees $ 1,308,404
Commission fees 220,684
Accounting services 93,953
Professional fees 72,621
Transfer agent fees 48,209
Directors' fees and expenses 37,208
Listing fees 28,965
Printing and shareholder reports 27,852
Pricing fees 15,815
Custodian fees 15,330
Other 34,247
---------------
Total expenses before reimbursement 1,903,288
Reimbursement of expenses (4,718)
---------------
Total expenses after reimbursement 1,898,570
---------------
Investment income--net 12,794,858
---------------
Realized & Unrealized Gain (Loss) on Investments--Net
Realized gain on investments--net 1,901,703
Change in unrealized appreciation on investments--net (3,570,923)
---------------
Total realized and unrealized loss on investments--net (1,669,220)
---------------
Dividends to Preferred Stock Shareholders
Investment income--net (1,117,585)
---------------
Net Increase in Net Assets Resulting from Operations $ 10,008,053
===============
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Statements of Changes in Net Assets
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 2003 2002
Operations
Investment income--net $ 12,794,858 $ 12,156,016
Realized gain (loss) on investments--net 1,901,703 (1,561,536)
Change in unrealized appreciation on investments--net (3,570,923) 1,167,576
Dividends to Preferred Stock shareholders (1,117,585) (1,396,089)
--------------- ---------------
Net increase in net assets resulting from operations 10,008,053 10,365,967
--------------- ---------------
Dividends to Common Stock Shareholders
Investment income--net (10,608,927) (9,350,545)
--------------- ---------------
Net decrease in net assets resulting from dividends to Common Stock
shareholders (10,608,927) (9,350,545)
--------------- ---------------
Common Stock Transactions
Value of shares issued to Common Stock shareholders in reinvestment
of dividends 229,423 --
--------------- ---------------
Net Assets Applicable to Common Stock
Total increase (decrease) in net assets applicable to Common Stock (371,451) 1,015,422
Beginning of year 149,633,073 148,617,651
--------------- ---------------
End of year* $ 149,261,622 $ 149,633,073
=============== ===============
*Undistributed investment income--net $ 3,665,947 $ 2,606,470
=============== ===============
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
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: 2003 2002 2001 2000 1999
Per Share Operating Performance+++
Net asset value, beginning of year $ 13.51 $ 13.42 $ 12.45 $ 14.16 $ 15.01
--------- --------- --------- --------- ---------
Investment income--net 1.16++++ 1.10 1.06 1.08 1.11
Realized and unrealized gain (loss) on
investments--net (.15) (.04) .95 (1.67) (.88)
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.10) (.13) (.28) (.29) (.25)
In excess of realized gain on
investments--net -- -- -- --++ --
--------- --------- --------- --------- ---------
Total from investment operations .91 .93 1.73 (.88) (.02)
--------- --------- --------- --------- ---------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.96) (.84) (.76) (.82) (.83)
In excess of realized gain on
investment--net -- -- -- (.01) --
--------- --------- --------- --------- ---------
Total dividends and distributions to Common
Stock shareholders (.96) (.84) (.76) (.83) (.83)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 13.46 $ 13.51 $ 13.42 $ 12.45 $ 14.16
========= ========= ========= ========= =========
Market price per share, end of year $ 13.16 $ 12.96 $ 12.35 $ 11.4375 $ 12.9375
========= ========= ========= ========= =========
Total Investment Return*
Based on market price per share 9.21% 12.12% 15.06% (4.93%) (3.79%)
========= ========= ========= ========= =========
Based on net asset value per share 7.15% 7.56% 14.86% (5.44%) (.03%)
========= ========= ========= ========= =========
Ratios Based on Average Net Assets of Common Stock
Total expenses, net of reimbursement** 1.26% 1.29% 1.28% 1.32% 1.11%
========= ========= ========= ========= =========
Total expenses** 1.26% 1.29% 1.28% 1.32% 1.14%
========= ========= ========= ========= =========
Total investment income--net** 8.48% 8.27% 8.29% 8.71% 7.35%
========= ========= ========= ========= =========
Amount of dividends to Preferred Stock
shareholders .74% .95% 2.20% 2.34% 1.66%
========= ========= ========= ========= =========
Investment income--net, to Common Stock
shareholders 7.74% 7.32% 6.09% 6.36% 5.68%
========= ========= ========= ========= =========
Ratios Based on Average Net Assets of Common & Preferred Stock**
Total expenses, net of reimbursement .80% .81% .79% .81% .73%
========= ========= ========= ========= =========
Total expenses .80% .81% .79% .81% .75%
========= ========= ========= ========= =========
Total investment income--net 5.38% 5.19% 5.14% 5.34% 4.83%
========= ========= ========= ========= =========
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
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: 2003 2002 2001 2000 1999
Ratios Based on Average Net Assets of Preferred Stock
Dividends to Preferred Stock shareholders 1.28% 1.60% 3.59% 3.72% 3.20%
========= ========= ========= ========= =========
Supplemental Data
Net assets applicable to Common Stock,
end of year (in thousands) $ 149,262 $ 149,633 $ 148,618 $ 137,819 $ 156,745
========= ========= ========= ========= =========
Preferred Stock outstanding, end of year
(in thousands) $ 87,000 $ 87,000 $ 87,000 $ 87,000 $ 87,000
========= ========= ========= ========= =========
Portfolio turnover 44.03% 46.31% 57.57% 129.35% 71.07%
========= ========= ========= ========= =========
Leverage
Asset coverage per $1,000 $ 2,716 $ 2,720 $ 2,708 $ 2,584 $ 2,802
========= ========= ========= ========= =========
Dividends Per Share on Preferred Stock Outstanding
Series A--Investment income--net $ 279 $ 409 $ 908 $ 967 $ 807
========= ========= ========= ========= =========
Series B--Investment income--net $ 363 $ 394 $ 890 $ 893 $ 789
========= ========= ========= ========= =========
*Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales charges. If applicable, the Fund's Investment
Adviser waived a portion of its management fees. Without such
waiver, the Fund's performance would have been lower.
**Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Amount is less than $(.01) per share.
++++Based on average shares outstanding.
+++Certain prior year amounts have been reclassified to conform to
current year presentation.
See Notes to Financial Statements.
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Notes to Financial Statements
1. Significant Accounting Policies:
MuniHoldings Fund II, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a non-diversified,
closed-end management investment company. The Fund's financial
statements are prepared in conformity with accounting principles
generally accepted in the United States of America, which may
require the use of management accruals and estimates. The Fund
determines and makes available for publication the net asset value
of its Common Stock on a weekly basis. The Fund's Common Stock is
listed on the New York Stock Exchange under the symbol MUH. The
following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). Forward interest rate swaps are valued by quoted fair
values received daily by the Fund from the counterparty. Securities
with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and
assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies both to increase the return of the
Fund and to hedge, or protect, its exposure to interest rate
movement 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 is authorized to write covered call options and
purchase call and put options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward interest rate swaps--The Fund may enter into forward
interest rate swaps. In a forward interest rate swap, the Fund and
the counterparty agree to make periodic net payments 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.
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Notes to Financial Statements (continued)
(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--Accounting principles generally accepted in
the United States of America require that certain components of net
assets be adjusted to reflect permanent differences between
financial and tax reporting. Accordingly, the current year's
permanent book/tax difference of $8,869 has been reclassified
between undistributed net investment income and accumulated net
realized capital losses. This reclassification has no effect on net
assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of .55% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Stock. For the year ended July 31, 2003, FAM
reimbursed the Fund in the amount of $4,718.
For the year ended July 31, 2003, the Fund reimbursed FAM $5,103 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, 2003 were $105,887,773 and $102,269,465,
respectively.
Net realized gains for the year ended July 31, 2003 and net
unrealized gains as of July 31, 2003 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $1,901,703 $ 613,989
---------- ----------
Total $1,901,703 $ 613,989
========== ==========
As of July 31, 2003, net unrealized appreciation for Federal income
tax purposes aggregated $803,631, of which $8,998,647 related to
appreciated securities and $8,195,016 related to depreciated
securities. The aggregate cost of investments at July 31, 2003 for
Federal income tax purposes was $231,201,156.
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 year ended July 31, 2003
increased by 16,654 as a result of dividend reinvestment and for the
year ended July 31, 2002 remained constant.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund, with a par value of $.10 per share and a
liquidation preference of $25,000 per share, plus accrued and unpaid
dividends, that entitle their holders to receive cash dividends at
an annual rate that may vary for the successive dividend periods.
The yields in effect at July 31, 2003 were as follows: Series A,
..50% and Series B, 1.55%.
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Notes to Financial Statements (concluded)
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from .25% to .375%,
calculated on the proceeds of each auction. For the year ended July
31, 2003, Merrill Lynch, Pierce, Fenner & Smith Incorporated, an
affiliate of FAM, earned $71,601 in commissions.
5. Distributions to Shareholders:
The Fund paid a tax-exempt income dividend to holders of Common
Stock in the amount of $.084000 per share on August 28, 2003 to
shareholders of record on August 15, 2003.
The tax character of distributions paid during the fiscal years
ended July 31, 2003 and July 31, 2002 was as follows:
7/31/2003 7/31/2002
Distributions paid from:
Tax-exempt income $11,726,512 $10,746,634
----------- -----------
Total distributions $11,726,512 $10,746,634
=========== ===========
As of July 31, 2003, the components of accumulated earnings on a tax
basis were as follows:
Undistributed tax-exempt income--net $ 3,476,304
Undistributed long-term capital gains--net --
--------------
Total undistributed earnings--net 3,476,304
Capital loss carryforward (20,213,383)*
Unrealized gains--net 803,630**
--------------
Total accumulated losses--net $ (15,933,449)
==============
*On July 31, 2003, the Fund had a net capital loss carryforward of
$20,213,383, of which $7,226,789 expires in 2008, $12,107,981
expires in 2009, $689,205 expires in 2010 and $189,408 expires in
2011. This amount will be available to offset like amounts of any
future taxable gains.
**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.
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Report of Independent Auditors
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, 2003, 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 auditing standards
generally accepted in the 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, 2003, by
correspondence with the custodian. 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, 2003
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 accounting principles generally accepted
in the United States.
(Ernst & Young)
MetroPark, New Jersey
September 5, 2003
Important Tax Information (unaudited)
All of the net investment income distributions paid by MuniHoldings
Fund II, Inc. during its taxable year ended July 31, 2003 qualify as
tax-exempt interest dividends for Federal income tax purposes.
Please retain this information for your records.
Managed 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 consistent yield to the
current trading price of shares of Common Stock of the Fund, the
Fund may at times pay out less than the entire amount of net
investment income earned in any particular month and may at times in
any particular month pay out such accumulated but undistributed
income in addition to net investment income earned in that month. As
a result, the dividends paid by the Fund for any particular month
may be more or less than the amount of net investment income earned
by the Fund during such month. The Fund's current accumulated but
undistributed net investment income, if any, is disclosed in the
Statement of Net Assets, which comprises part of the financial
information included in this report.
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
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, 2003
Automatic Dividend Reinvestment Plan (unaudited)(concluded)
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 with-held) 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, 2003
Officers and Directors (unaudited)
Number of
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held Of Time Overseen by Held by
Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Terry K. Glenn* President 1999 to President and Chairman of Merrill Lynch 118 Funds None
P.O. Box 9011 and present Investment Managers, L.P. ("MLIM")/Fund 163 Portfolios
Princeton, Director and Asset Management, L.P. ("FAM")--Advised
NJ 08543-9011 1998 to Funds since 1999; Chairman (Americas
Age: 62 present Region) of MLIM from 2000 to 2002;
Executive Vice President of MLIM and FAM
(which terms as used herein include their
corporate predecessors) from 1983 to 2002;
President of FAM Distributors, Inc.,
("FAMD") from 1986 to 2002 and Director
thereof from 1991 to 2002; Executive Vice
President and Director of Princeton Services,
Inc. ("Princeton Services") from 1993 to
2002; President of Princeton Administrators,
L.P. from 1989 to 2002; Director of Financial
Data Services, Inc. from 1985 to 2002.
*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
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 44 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: 62 at the Urban Institute from 1995 to 1999.
Cynthia A. Montgomery Director 1998 to Professor, Harvard Business School since 44 Funds Unum Provident
P.O. Box 9095 present 1989; Director, Unum Provident Corporation 49 Portfolios Corporation;
Princeton, since 1990; Director, Newell Rubbermaid, Newell Rubber-
NJ 08543-9095 Inc. since 1995. maid, Inc.
Age: 51
Charles C. Reilly Director 1998 to Self-employed financial consultant since 44 Funds None
P.O. Box 9095 present 1990; Partner of Small Cities Cable 49 Portfolios
Princeton, Television from 1986 to 1997.
NJ 08543-9095
Age: 72
Kevin A. Ryan Director 1998 to Founder and Director Emeritus of the Boston 44 Funds None
P.O. Box 9095 present University Center for the Advancement of 49 Portfolios
Princeton, Ethics and Character; Professor of
NJ 08543-9095 Education at Boston University from
Age: 70 1982 to 1999 and Professor Emeritus
thereof since 1999.
Roscoe S. Suddarth Director 2000 to President, Middle East Institute from 44 Funds None
P.O. Box 9095 present 1995 to 2001; Foreign Service Officer, 49 Portfolios
Princeton, United States Foreign Service from 1961 to
NJ 08543-9095 1995; Career Minister from 1989 to 1995;
Age: 67 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, 2003
Officers and Directors (unaudited)(concluded)
Number of
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held Of Time Overseen by Held by
Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors* (concluded)
Richard R. West Director 1998 to Dean Emeritus of New York University, 44 Funds Bowne & Co.,
P.O. Box 9095 present Leonard N. Stern School of Business 49 Portfolios Inc.; Vornado
Princeton, Administration since 1994. Realty Trust;
NJ 08543-9095 Vornado
Age: 65 Operating
Company;
Alexander's,
Inc.
Edward D. Zinbarg Director 2000 to Self-employed financial consultant since 1994. 44 FundsNone
P.O. Box 9095 present 49 Portfolios
Princeton,
NJ 08543-9095
Age: 68
* 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
Held Of Time
Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers
Donald C. Burke Vice 1998 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: 43 present
Kenneth A. Jacob Senior 2002 to Managing Director of MLIM since 2000 and Director (Municipal Tax-Exempt Fund
P.O. Box 9011 Vice present Management) of MLIMfrom 1997 to 2000.
Princeton, President
NJ 08543-9011
Age: 52
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: 39
Robert A. DiMella Vice 1998 to Director (Municipal Tax-Exempt Fund Management) of MLIM since 2002; Vice
P.O. Box 9011 President present President of MLIM from 1996 to 2001.
Princeton,
NJ 08543-9011
Age: 36
Brian D. Stewart Secretary 2002 to Vice President of MLIM since 2002; Attorney with Reed Smith from 2001 to 2002;
P.O. Box 9011 present Attorney with Saul Ewing from 1999 to 2001.
Princeton,
NJ 08543-9011
Age: 34
*Officers of the Fund serve at the pleasure of the Board of
Directors.
Further information about the Fund's Officers and Directors/Trustees
is available in the Fund's Statement of Additional Information,
which can be obtained without charge by calling 1-800-MER-FUND.
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MUH
MUNIHOLDINGS FUND II, INC., JULY 31, 2003
Item 2 - Did registrant adopt a code of ethics, as of the end of the
period covered by this report, that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by
the registrant or a third party? If not, why not? Briefly describe
any amendments or waivers that occurred during the period. State
here if code of ethics/amendments/waivers are on website and give
website address-. State here if fund will send code of ethics to
shareholders without charge upon request--
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 - Did the registrant's board of directors determine that the
registrant either: (i) has at least one audit committee financial
expert serving on its audit committee; or (ii) does not have an
audit committee financial expert serving on its audit committee? If
yes, disclose name of financial expert and whether he/she is
"independent," (fund may, but is not required, to disclose
name/independence of more than one financial expert) If no, explain
why not. -
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 - Disclose annually only (not answered until December 15,
2003)
(a) Audit Fees - Disclose aggregate fees billed for each of the last
two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant
in connection with statutory and regulatory filings or engagements
for those fiscal years. N/A.
(b) Audit-Related Fees - Disclose aggregate fees billed in each of
the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance
of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item. Registrants shall
describe the nature of the services comprising the fees disclosed
under this category. N/A.
(c) Tax Fees - Disclose aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning.
Registrants shall describe the nature of the services comprising the
fees disclosed under this category. N/A.
(d) All Other Fees - Disclose aggregate fees billed in each of the
last two fiscal years for products and services provided by the
principal accountant, other than the services reported in paragraphs
(a) through (c) of this Item. Registrants shall describe the nature
of the services comprising the fees disclosed under this category.
N/A.
(e)(1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of Regulation
S-X. N/A.
(e)(2) Disclose the percentage of services described in each of
paragraphs (b) through (d) of this Item that were approved by the
audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X. N/A.
(f) If greater than 50%, disclose the percentage of hours expended
on the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal
accountant's full-time, permanent employees. N/A.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the adviser
that provides ongoing services to the registrant for each of the
last two fiscal years of the registrant. N/A.
(h) Disclose whether the registrant's audit committee has considered
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence. N/A.
Item 5 - If the registrant is a listed issuer as defined in Rule
10A-3 under the Exchange Act, state whether or not the registrant
has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. If the
registrant has such a committee, however designated, identify each
committee member. If the entire board of directors is acting as the
registrant's audit committee in Section 3(a)(58)(B) of the Exchange
Act, so state.
If applicable, provide the disclosure required by Rule 10A-3(d)
under the Exchange Act regarding an exemption from the listing
standards for audit committees. N/A
(Listed issuers must be in compliance with the new listing rules by
the earlier of their first annual shareholders meeting after January
2004, or October 31, 2004 (annual requirement))
Item 6 - Reserved
Item 7 - For closed-end funds that contain voting securities in
their portfolio, describe the policies and procedures that it uses
to determine how to vote proxies relating to those portfolio
securities.
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill
Lynch Investment Managers, L.P. and/or Fund Asset Management, L.P.
(the "Investment Adviser") authority to vote all proxies relating to
the Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to
the voting of proxies related to the portfolio securities held in
the account of one or more of its clients, including a Fund.
Pursuant to these Proxy Voting Procedures, the Investment Adviser's
primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its
shareholders, and to act in a manner that the Investment Adviser
believes is most likely to enhance the economic value of the
securities held by the Fund. The Proxy Voting Procedures are
designed to ensure that that the Investment Adviser considers the
interests of its clients, including the Funds, and not the interests
of the Investment Adviser, when voting proxies and that real (or
perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment
professionals appointed by the CIO, portfolio managers and
investment analysts appointed by the CIO and any other personnel the
CIO deems appropriate. The Committee will also include two non-
voting representatives from the Investment Adviser's Legal
department appointed by the Investment Adviser's General Counsel.
The Committee's membership shall be limited to full-time employees
of the Investment Adviser. No person with any investment banking,
trading, retail brokerage or research responsibilities for the
Investment Adviser's affiliates may serve as a member of the
Committee or participate in its decision making (except to the
extent such person is asked by the Committee to present information
to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser
might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy
voting authority to the Investment Adviser and seeks to ensure that
all votes are consistent with the best interests of those clients
and are free from unwarranted and inappropriate influences. The
Committee establishes general proxy voting policies for the
Investment Adviser and is responsible for determining how those
policies are applied to specific proxy votes, in light of each
issuer's unique structure, management, strategic options and, in
certain circumstances, probable economic and other anticipated
consequences of alternate actions. In so doing, the Committee may
determine to vote a particular proxy in a manner contrary to its
generally stated policies. In addition, the Committee will be
responsible for ensuring that all reporting and recordkeeping
requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires
a case-by-case determination. In such cases, the Committee may
elect not to adopt a specific voting policy applicable to that
issue. The Investment Adviser believes that certain proxy voting
issues require investment analysis - such as approval of mergers and
other significant corporate transactions - akin to investment
decisions, and are, therefore, not suitable for general guidelines.
The Committee may elect to adopt a common position for the
Investment Adviser on certain proxy votes that are akin to
investment decisions, or determine to permit the portfolio manager
to make individual decisions on how best to maximize economic value
for a Fund (similar to normal buy/sell investment decisions made by
such portfolio managers). While it is expected that the Investment
Adviser will generally seek to vote proxies over which the
Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in
conjunction with a Fund's portfolio manager, may determine that the
Fund's specific circumstances require that its proxies be voted
differently.
To assist the Investment Adviser in voting proxies, the Committee
has retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address
special circumstances that can arise in connection with proxy
voting. For instance, under the Proxy Voting Procedures, the
Investment Adviser generally will not seek to vote proxies related
to portfolio securities that are on loan, although it may do so
under certain circumstances. In addition, the Investment Adviser
will vote proxies related to securities of foreign issuers only on a
best efforts basis and may elect not to vote at all in certain
countries where the Committee determines that the costs associated
with voting generally outweigh the benefits. The Committee may at
any time override these general policies if it determines that such
action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote
proxies in respect of an issuer where an affiliate of the Investment
Adviser (each, an "Affiliate"), or a money management or other
client of the Investment Adviser (each, a "Client") is involved.
The Proxy Voting Procedures and the Investment Adviser's adherence
to those procedures are designed to address such conflicts of
interest. The Committee intends to strictly adhere to the Proxy
Voting Procedures in all proxy matters, including matters involving
Affiliates and Clients. If, however, an issue representing a non-
routine matter that is material to an Affiliate or a widely known
Client is involved such that the Committee does not reasonably
believe it is able to follow its guidelines (or if the particular
proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes
of ensuring that an independent determination is reached, retain an
independent fiduciary to advise the Committee on how to vote or to
cast votes on behalf of the Investment Adviser's clients.
In the event that the Committee determines not to retain an
independent fiduciary, or it does not follow the advice of such an
independent fiduciary, the powers of the Committee shall pass to a
subcommittee, appointed by the CIO (with advice from the Secretary
of the Committee), consisting solely of Committee members selected
by the CIO. The CIO shall appoint to the subcommittee, where
appropriate, only persons whose job responsibilities do not include
contact with the Client and whose job evaluations would not be
affected by the Investment Adviser's relationship with the Client
(or failure to retain such relationship). The subcommittee shall
determine whether and how to vote all proxies on behalf of the
Investment Adviser's clients or, if the proxy matter is, in their
judgment, akin to an investment decision, to defer to the applicable
portfolio managers, provided that, if the subcommittee determines to
alter the Investment Adviser's normal voting guidelines or, on
matters where the Investment Adviser's policy is case-by-case, does
not follow the voting recommendation of any proxy voting service or
other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies
relating to the Client may be voted unless the Secretary, or in the
Secretary's absence, the Assistant Secretary of the Committee
concurs that the subcommittee's determination is consistent with the
Investment Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain
recurring proxy issues that are not expected to involve unusual
circumstances. These policies are guidelines only, and the
Investment Adviser may elect to vote differently from the
recommendation set forth in a voting guideline if the Committee
determines that it is in a Fund's best interest to do so. In
addition, the guidelines may be reviewed at any time upon the
request of a Committee member and may be amended or deleted upon the
vote of a majority of Committee members present at a Committee
meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
* Proposals related to the composition of the Board of Directors of
issuers other than investment companies. As a general matter, the
Committee believes that a company's Board of Directors (rather than
shareholders) is most likely to have access to important, nonpublic
information regarding a company's business and prospects, and is
therefore best-positioned to set corporate policy and oversee
management. The Committee, therefore, believes that the foundation
of good corporate governance is the election of qualified,
independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of
the corporation in a manner that will seek to maximize shareholder
value over time. In individual cases, the Committee may look at a
nominee's history of representing shareholder interests as a
director of other companies or other factors, to the extent the
Committee deems relevant.
* Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the interests
of shareholders and provide an independent view on the propriety of
financial reporting decisions of corporate management. While the
Committee will generally defer to a corporation's choice of auditor,
in individual cases, the Committee may look at an auditors' history
of representing shareholder interests as auditor of other companies,
to the extent the Committee deems relevant.
* Proposals related to management compensation and employee
benefits. As a general matter, the Committee favors disclosure of
an issuer's compensation and benefit policies and opposes excessive
compensation, but believes that compensation matters are normally
best determined by an issuer's board of directors, rather than
shareholders. Proposals to "micro-manage" an issuer's compensation
practices or to set arbitrary restrictions on compensation or
benefits will, therefore, generally not be supported.
* Proposals related to requests, principally from management, for
approval of amendments that would alter an issuer's capital
structure. As a general matter, the Committee will support requests
that enhance the rights of common shareholders and oppose requests
that appear to be unreasonably dilutive.
* Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the Committee
opposes poison pill provisions.
* Routine proposals related to requests regarding the formalities of
corporate meetings.
* Proposals related to proxy issues associated solely with holdings
of investment company shares. As with other types of companies, the
Committee believes that a fund's Board of Directors (rather than its
shareholders) is best-positioned to set fund policy and oversee
management. However, the Committee opposes granting Boards of
Directors authority over certain matters, such as changes to a
fund's investment objective, that the Investment Company Act
envisions will be approved directly by shareholders.
* Proposals related to limiting corporate conduct in some manner
that relates to the shareholder's environmental or social concerns.
The Committee generally believes that annual shareholder meetings
are inappropriate forums for discussion of larger social issues, and
opposes shareholder resolutions "micromanaging" corporate conduct or
requesting release of information that would not help a shareholder
evaluate an investment in the corporation as an economic matter.
While the Committee is generally supportive of proposals to require
corporate disclosure of matters that seem relevant and material to
the economic interests of shareholders, the Committee is generally
not supportive of proposals to require disclosure of corporate
matters for other purposes.
Item 8--Reserved
Item 9(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.
Item 9(b)--There were no significant changes in the registrant's
internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Item 10 - Exhibits
10(a) - Attach code of ethics or amendments/waivers, unless code of
ethics or amendments/waivers is on website or offered to
shareholders upon request without charge. N/A.
10(b) - Attach certifications pursuant to Section 302 of the
Sarbanes-Oxley Act. 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 23, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: _/s/ Terry K. Glenn________
Terry K. Glenn,
President of
MuniHoldings Fund II, Inc.
Date: September 23, 2003
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
MuniHoldings Fund II, Inc.
Date: September 23, 2003
Attached hereto as a furnished exhibit are the certifications
pursuant to Section 906 of the Sarbanes-Oxley Act.