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 811-08215
Name of Fund: MuniHoldings Fund II, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, 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: 07/31/06
Date of reporting period: 08/01/05 - 07/31/06
Item 1 - Report to Stockholders
Annual Report
July 31, 2006
MuniHoldings Fund II, Inc.
MuniHoldings New Jersey Insured
Fund, Inc.
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
These reports, including the financial information herein, are transmitted to
shareholders of MuniHoldings Fund II, Inc. and MuniHoldings New Jersey Insured
Fund, Inc. for their information. This is not a prospectus. Past performance
results shown in these reports should not be considered a representation of
future performance. The Funds have leveraged their Common Stock and intend 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 Funds use to determine
how to vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling toll-free 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Funds voted proxies
relating to securities held in the Funds' portfolios during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com; and
(2) on the Securities and Exchange Commission's Web site at http://www.sec.gov.
MuniHoldings Fund II, Inc.
MuniHoldings New Jersey Insured Fund, Inc.
Box 9011
Princeton, NJ 08543-9011
(GO PAPERLESS LOGO)
It's Fast, Convenient, & Timely!
To sign up today, go to www.icsdelivery.com/live.
MuniHoldings Fund II, Inc.
MuniHoldings New Jersey Insured Fund, Inc.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company ("New BlackRock") that will be one of the world's largest
asset management firms with over $1 trillion in assets under management (based
on combined assets under management as of June 30, 2006) (the "Transaction").
The Transaction is expected to close around the end of the third quarter of
2006, at which time the new company will operate under the BlackRock name.
Each Fund's Board of Directors and shareholders have approved a new investment
advisory agreement with BlackRock Advisors, Inc. or its successor on
substantially the same terms and for the same advisory fee as the Funds'
current investment advisory agreement with the Investment Adviser. BlackRock
Advisors, Inc. or its successor is expected to become the investment adviser
of the Funds upon the closing of the Transaction.
Quality Profiles as of July 31, 2006
Percent of
MuniHoldings Fund II, Inc. Total
By S&P/Moody's Rating Investments
AAA/Aaa 38.8%
AA/Aa 8.8
A/A 12.9
BBB/Baa 17.1
BB/Ba 0.6
B/B 1.3
CCC/Caa 2.5
NR (Not Rated) 17.2
Other* 0.8
* Includes portfolio holdings in short-term investments and
variable rate demand notes.
MuniHoldings New Jersey Percent of
Insured Fund, Inc. Total
By S&P/Moody's Rating Investments
AAA/Aaa 87.4%
AA/Aa 3.2
A/A 3.8
BBB/Baa 5.4
Other* 0.2
* Includes portfolio holdings in short-term investments.
ANNUAL REPORTS JULY 31, 2006
A Letter From the President
Dear Shareholder
By now, you have probably heard of the important changes unfolding at Merrill
Lynch Investment Managers ("MLIM"). We have been communicating with
shareholders, via letters like this and in a detailed proxy mailing, about
MLIM's impending union with another highly regarded investment manager -
BlackRock, Inc. ("BlackRock"). This transaction marks the next chapter in
MLIM's growth story and, we believe, will be a benefit to our investors.
MLIM, a division of Merrill Lynch with over $583 billion in assets under
management, is a leading investment manager offering more than 100 investment
strategies in vehicles ranging from mutual funds to institutional portfolios.
BlackRock, with $464.1 billion in assets under management, is one of the
largest publicly traded investment management firms in the United States
managing assets on behalf of institutional and individual investors worldwide
through a variety of equity, fixed income, liquidity and alternative investment
products. At the completion of the transaction, which is expected around the
end of the third quarter of 2006, the resultant firm will be a top-10
investment manager worldwide with over $1 trillion in assets under management.*
The combined company, to be known as BlackRock, will provide a wide selection
of high-quality investment solutions across a range of asset classes and
investment styles. The organization will have over 4,500 employees in 18
countries and a major presence in key markets worldwide. MLIM and BlackRock
possess complementary capabilities that together create a well-rounded
organization uniting some of the finest money managers in the industry. The
firms share similar values and beliefs - each strives for excellence in all
areas, and both make investment performance their single most important
mission. As such, our combination only reinforces our commitment to
shareholders.
Most of MLIM's investment products - including mutual funds, separately
managed accounts, annuities and variable insurance funds - eventually will
carry the "BlackRock" name. This will be reflected in newspaper and online
information sources beginning in October. Your account statements will reflect
the BlackRock name beginning with the October month-end reporting period.
Unless otherwise communicated via a proxy statement, your funds will maintain
the same investment objectives that they do today. Importantly, the MLIM/
BlackRock union will not affect your brokerage account or your relationship
with your financial advisor. If you are a client of Merrill Lynch, you will
remain a client of Merrill Lynch.
As always, we thank you for entrusting us with your investment assets. We look
forward to continuing to serve your investment needs with even greater
strength and scale as the new BlackRock.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.047 trillion in assets under management as of June 30, 2006.
Data, including assets under management, are as of June 30, 2006.
ANNUAL REPORTS JULY 31, 2006
A Discussion With Your Funds' Portfolio Managers
The Funds adopted a neutral stance on interest rates as the Federal Reserve
Board approached a pause in its prolonged interest rate tightening campaign.
Describe the recent market environment relative to municipal bonds.
During the past 12 months, long-term bond yields rose sharply while their
prices, which move in the opposite direction, declined. The drop in bond
prices largely reflects investors' focus on solid economic growth. Despite a
decline in gross domestic product growth between the first and second quarters
of 2006, U.S. economic activity so far this year has outpaced the 3.2% annual
growth rate posted in 2005. Rising commodity prices also have stoked
inflationary fears, further weighing on bond prices.
The Federal Reserve Board (the Fed) continued to raise short-term interest
rates at each of its meetings during the past year, bringing the federal funds
rate to 5.25%. Consequently, the yield curve continued to flatten, with short-
term interest rates rising more than longer-term interest rates. Overall,
30-year U.S. Treasury bond yields rose 60 basis points (.60%) during the
12-month period to 5.07%, while 10-year U.S. Treasury note yields rose 71 basis
points to 4.99%. Municipal bond yields also rose in recent months, although
the tax-exempt market's strong technical position provided significant price
support. This allowed municipal bond prices to decline less than their taxable
counterparts. As measured by Municipal Market Data, yields on AAA-rated issues
maturing in 30 years rose just 12 basis points to 4.47%, and yields on AAA-
rated issues maturing in 10 years rose 33 basis points to 3.99%.
The rise in yields prompted a revival in investor demand for municipal bonds.
The increased demand also was triggered by seasonal factors that served to
generate large cash flows into investor accounts. Investors received more than
$40 billion in June and July from coupon income and the proceeds from bond
maturities and early redemptions. Consequently, municipal bond fund flows have
continued to be supportive. As reported by the Investment Company Institute,
open-end tax-exempt bond funds received net new cash inflows of over $6.5
billion in the first six months of 2006, compared to $2.5 billion during the
same period in 2005.
Also contributing to the outperformance of the municipal bond market has been
declines in new issuance. During the past six months, more than $189 billion
in new long-term tax-exempt bonds was underwritten, a decline of 14% compared
to the same period a year earlier. Recent declines in issuance have largely
been the result of a 57% drop in refunding activity so far this year. Rising
bond yields have made the refinancing of existing higher-couponed debt issues
increasingly problematic, as the potential economic savings have rapidly
diminished. In addition, the improved fiscal condition of many state and local
governments has resulted in lower borrowing trends, with many new municipal
capital projects being financed from existing budget surpluses. The declines
in issuance have led many analysts to lower their annual issuance forecasts to
the $300 billion - $325 billion range. Lower annual issuance would further
solidify the tax-exempt market's already positive technical position.
Looking ahead, municipal market fundamentals are likely to remain favorable,
leading us to expect the tax-exempt market to perform at least as well as
comparable U.S. Treasury issues. Attractive yield ratios have continued to
draw both retail and institutional investors to the municipal market. Based on
this, and the prospect for reduced annual issuance in 2006, we believe the
municipal market should continue to perform well in the coming months.
MuniHoldings Fund II, Inc.
How did the Fund perform during the fiscal year?
For the 12-month period ended July 31, 2006, the Common Stock of MuniHoldings
Fund II, Inc. had net annualized yields of 6.00% and 6.30%, based on a year-
end per share net asset value of $14.82 and a per share market price of
$14.12, respectively, and $.889 per share income dividends. Over the same
period, the total investment return on the Fund's Common Stock was +4.89%,
based on a change in per share net asset value from $15.03 to $14.82, and
assuming reinvestment of all distributions.
The Fund's total return, based on net asset value, exceeded the +3.52% average
return of the Lipper General Municipal Debt Funds (Leveraged) category for the
12-month period. (Funds in this Lipper category invest primarily in municipal
debt issues rated in the top four credit-rating categories. These funds can be
leveraged via use of debt, preferred equity and/or reverse repurchase
agreements.)
ANNUAL REPORTS JULY 31, 2006
Fund performance during the year benefited from the continued contraction of
credit spreads in the municipal market. This had a favorable impact on our
positions in tax-backed and corporate-related debt, where we have a significant
concentration, as well as our healthcare-related holdings and land-secured
deals. The greatest contribution to performance came from the Fund's positions
in airline-related debt. While this sector lagged in the first six months,
airlines rallied strongly in the latter half of the period due to considerable
spread tightening. This proved beneficial to some of our larger holdings in
Continental Airlines, Inc., American Airlines Inc. and US Airways (formerly
America West Airlines). Also contributing to performance was strong
appreciation in the portfolio's holdings in the bonds of Pocahontas Parkway
Association, a toll road in Virginia that was constructed within the past few
years. The bonds increased in value as the roadway was sold to a private
entity resulting in the subsequent defeasance of the project's outstanding
debt. (When bonds are defeased, it typically means that the securities are
retired at their first call date, enabling the bonds to appreciate
significantly.) Finally, our yield curve strategy also proved advantageous.
For most of the period, the Fund was overweight in bonds with maturities
greater than 20 years. This benefited performance as the yield curve flattened
and longer-term bonds outperformed short-term issues.
For the six-month period ended July 31, 2006, the total investment return on
the Fund's Common Stock was +2.82%, based on a change in per share net asset
value from $14.84 to $14.82, and assuming reinvestment of all distributions.
For a description of the Fund's total investment return based on a change in
the per share market value of the Fund's Common Stock (as measured by the
trading price of the Fund's shares on the New York Stock Exchange), and
assuming reinvestment of dividends, please refer to the Financial Highlights
section of this report. As a closed-end fund, the Fund's shares may trade in
the secondary market at a premium or discount to the Fund's net asset value.
As a result, total investment returns based on changes in the market value of
the Fund's Common Stock may vary significantly from total investment returns
based on changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
Broadly speaking, we moved the portfolio from a slightly defensive stance to a
more neutral posture as the Fed appeared to be approaching a pause in its
interest rate-hiking campaign. Although both the Treasury and the municipal
yield curves continued to flatten during the past 12 months, the move was not
nearly as dramatic as we have seen in prior periods. Notably, the municipal
curve retained a positive slope, particularly relative to the Treasury curve,
which actually inverted early in 2006. This contributed to the municipal
market's and the Fund's positive performance.
The Fund maintained its focus on refundable, essential service securities from
high demand states. The lack of new-issue supply and increased demand for
municipal bonds has caused spreads to narrow in all sectors of the municipal
market. We took advantage of these tight spreads to move the Fund's exposure
to spread product to neutral while increasing its position in bonds exempt
from tax in specialty states. We believe this strategy should prove beneficial
with any shift in the demand/supply imbalance in both the high yield sector
and the broader municipal market.
For the six months ended July 31, 2006, the average yield for the Fund's
Auction Market Preferred Stock (AMPS) was 3.35% for Series A and 3.13% for
Series B. The Fed raised the short-term interest rate target 200 basis points
during the 12-month period, and this continued to affect the Fund's borrowing
costs. On August 8, 2006, the Fed opted to pause in its interest rate-hiking
campaign and is expected to be "data dependent" in determining monetary policy
going forward. As such, we would expect additional increases in the Fund's
cost of funds to be more limited. Despite the interest rate increases during
the period, the tax-exempt yield curve maintained a positive slope, allowing
us to borrow at a lower rate than where we invest. This continued to generate
an income benefit to the holders of Common Stock from the leveraging of
Preferred Stock. However, should the spread between short-term and long-term
interest rates narrow, the benefits of leveraging will decline and, as a
result, reduce the yield on the Fund's Common Stock. At the end of the period,
the Fund's leverage amount, due to AMPS, was 34.40% of total net assets,
before the deduction of Preferred Stock. (For a more complete explanation of
the benefits and risks of leveraging, see page 8 of this report to
shareholders.)
ANNUAL REPORTS JULY 31, 2006
A Discussion With Your Funds' Portfolio Managers (concluded)
How would you characterize the Fund's position at the close of the period?
We remain focused on generating an attractive level of tax-exempt income for
our shareholders. The Fund ended the period fully invested and with an overall
neutral market posture. After 17 consecutive interest rate hikes, the Fed
paused in its monetary tightening program in early August and has indicated
that it will look at the economic data when determining monetary policy going
forward. Because global economies and certain pockets of the U.S. economy
continue to show solid growth with higher headline inflationary figures, we
believe that it still may be early to become too aggressive in our investment
strategy. In our view, a neutral posture is prudent in the current environment
and should provide for competitive performance.
MuniHoldings New Jersey Insured Fund, Inc.
Describe conditions in the State of New Jersey.
Jon Corzine claimed victory in the state's November gubernatorial election
and, upon beginning his term in January, immediately faced the challenges of
the fiscal year 2007 budget. By the end of the second quarter, New Jersey had
failed to adopt a balanced budget for the new fiscal year (beginning July 1).
The point of contention was Governor Corzine's proposal to raise the state
sales tax to 7% from 6%. As a result, the governor ordered a shutdown of non-
essential state services for several days in early July until an agreement
could be reached with the State Assembly. In the past, deficit financing had
served as one alternative to deadlocked budget negotiations; however, the New
Jersey Supreme Court had recently prohibited the state from borrowing in order
to balance budgets. Nevertheless, throughout the shutdown, the rating agencies
maintained the state's ratings and outlook.
Ultimately, a $31 billion budget was adopted for fiscal year 2007. The 1%
sales tax increase was implemented and is expected to generate roughly
$1.2 billion in income. As part of the agreement with the Assembly, one-half
of the new sales tax receipts will be allocated to property tax rebates. The
budget also includes tax increases and surcharges on various items, such as
cigarettes, car rentals and luxury goods. Other key components in reducing the
projected $4.5 billion budget gap included approximately $2 billion in spending
reductions and freezes. The budget keeps state aid to municipalities and school
districts essentially flat for another year and, as such, local property taxes
are likely to increase. The budget also contributes $1.1 billion into the state
pension system, exceeding the entire amount allocated in the past 10 years.
The adopted budget significantly reduces reliance on onetime revenues and,
therefore, is more structurally balanced than the state's last several
budgets - a positive from a credit rating perspective.
New Jersey has a high and growing debt burden compared to similarly rated
states. In addition, the state recently started a five-year, $6 billion debt
financing program for transportation projects, and funding of billions of
dollars in court-mandated school construction projects is yet to be
determined.
How did the Fund perform during the fiscal year?
For the 12-month period ended July 31, 2006, the Common Stock of MuniHoldings
New Jersey Insured Fund, Inc. had net annualized yields of 5.74% and 5.71%,
based on a year-end per share net asset value of $14.91 and a per share market
price of $14.98, respectively, and $.856 per share income dividends. Over the
same period, the total investment return on the Fund's Common Stock was
+1.09%, based on a change in per share net asset value from $15.62 to $14.91,
and assuming reinvestment of all distributions.
The Fund's total return, based on net asset value, trailed the +2.70% average
return of the Lipper New Jersey Municipal Debt Funds category for the 12-month
period. (Funds in this Lipper category limit their investment to those
securities exempt from taxation in New Jersey or a city in New Jersey.
Notably, the Fund was disadvantaged relative to many of its peers by its
conservative investment parameters. Specifically, the Fund is limited in its
ability to invest in lower-quality issues, which outperformed during the year
as credit spreads (versus higher-quality issues of comparable maturity)
tightened dramatically. Per its investment parameters, at least 80% of the
portfolio was invested in AAA-rated, insured bonds throughout the year.
Another factor that weighed on the Fund's performance was the fact that a
number of seasoned holdings with higher coupons were called by their issuers.
Given our limited ability to buy lower-rated issues and a decline in new-issue
supply during the period, particularly in the early months of 2006, it was
especially difficult to compensate for the income lost to calls.
ANNUAL REPORTS JULY 31, 2006
For the six-month period ended July 31, 2006, the total investment return on
the Fund's Common Stock was +.53%, based on a change in per share net asset
value from $15.24 to $14.91, and assuming reinvestment of all distributions.
For a description of the Fund's total investment return based on a change in
the per share market value of the Fund's Common Stock (as measured by the
trading price of the Fund's shares on the New York Stock Exchange), and
assuming reinvestment of dividends, please refer to the Financial Highlights
section of this report. As a closed-end fund, the Fund's shares may trade in
the secondary market at a premium or discount to the Fund's net asset value.
As a result, total investment returns based on changes in the market value of
the Fund's Common Stock may vary significantly from total investment returns
based on changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
For most of the fiscal year, the portfolio was positioned for the yield curve
flattening we had anticipated, and we saw little need to make significant
changes as the Fed tirelessly increased interest rates and the long end of the
curve outperformed. In more recent months, as the Fed approached the end of
its monetary tightening campaign and the curve appeared ready to resteepen, we
began to see opportunities in the intermediate maturity range. This is an area
that suffered most as rates rose and, in a resteepening scenario, could be
positioned for strong relative performance. To take advantage, in the final
three months of the fiscal year, we focused mainly on trimming some of the
short-term investments in the portfolio, particularly bonds that are callable
or likely to be called within the next year or two. With the proceeds, we
invested in bonds in the 10-year - 15-year portion of the curve. Despite a
decline in new municipal bond issuance, we had little trouble finding
opportunities in this maturity range. Throughout the year, we continued to
maintain a high-quality portfolio consistent with our conservative investment
parameters. Approximately 83% - 84% of the Fund's net assets was invested in
insured municipal paper.
For the six-month period ended July 31, 2006, the Fund's Auction Market
Preferred Stock (AMPS) had average yields as follows: Series A, 3.07%; Series
B, 2.99%; Series C, 3.00%; Series D, 2.96%; and Series E, 2.94%. The Fed raised
the short-term interest rate target 200 basis points during the 12-month
period, and this continued to affect the Fund's borrowing costs. On August 8,
2006, the Fed opted to pause in its interest rate-hiking campaign and is
expected to be "data dependent" in determining monetary policy going forward.
As such, we would expect additional increases in the Fund's cost of funds to
be more limited. Despite the interest rate increases during the period, the
tax-exempt yield curve maintained a positive slope, allowing us to borrow at
a lower rate than where we invest. This continued to generate an income benefit
to the holders of Common Stock from the leveraging of Preferred Stock. However,
should the spread between short-term and long-term interest rates narrow, the
benefits of leveraging will decline and, as a result, reduce the yield on the
Fund's Common Stock. At the end of the period, the Fund's leverage amount, due
to AMPS, was 39.07% of total net assets, before the deduction of Preferred
Stock. (For a more complete explanation of the benefits and risks of
leveraging, see page 8 of this report to shareholders.)
How would you characterize the Fund's position at the close of the period?
At period-end, the Fund remained relatively neutral with respect to interest
rate risk. As mentioned earlier, our yield curve outlook changed in the final
months of the period on speculation that the Fed may be close to ending its
monetary tightening program. That pause in policy tightening came in early
August, affirming our revised yield curve strategy. Still, there remains
uncertainty as to whether the Fed will pursue additional interest rate hikes
down the road, as Chairman Bernanke and the governors have indicated that they
will let the economic and inflationary data guide their interest rate
decisions. Having said that, the consensus expectation is that economic growth
will continue to moderate, thereby alleviating inflationary pressures and
discouraging the Fed from pursuing further interest rate hikes. As such, we
will continue to seek out value closer to the middle of the municipal yield
curve, while maintaining a high-quality portfolio.
Robert A. DiMella, CFA
Vice President and Portfolio Manager
MuniHoldings Fund II, Inc.
Theodore R. Jaeckel Jr., CFA
Vice President and Portfolio Manager
MuniHoldings New Jersey Insured Fund, Inc.
August 9, 2006
ANNUAL REPORTS JULY 31, 2006
The Benefits and Risks of Leveraging
The Funds utilize leveraging to seek to enhance the yield and net asset value
of their Common Stock. However, these objectives cannot be achieved in all
interest rate environments. To leverage, each Fund issues Preferred Stock,
which pays dividends at prevailing short-term interest rates, and invests the
proceeds in long-term municipal bonds. The interest earned on these
investments, net of dividends to Preferred Stock, is paid to Common Stock
shareholders in the form of dividends, and the value of these portfolio
holdings is reflected in the per share net asset value of each Fund's Common
Stock. However, in order to benefit Common Stock shareholders, the yield curve
must be positively sloped; that is, short-term interest rates must be lower
than long-term interest rates. At the same time, a period of generally
declining interest rates will benefit Common Stock shareholders. If either of
these conditions change, then the risks of leveraging will begin to outweigh
the benefits.
To illustrate these concepts, assume a fund's Common Stock capitalization
of $100 million and the issuance of Preferred Stock for an additional
$50 million, creating a total value of $150 million available for investment
in long-term municipal bonds. If prevailing short-term interest rates are
approximately 3% and long-term interest rates are approximately 6%, the yield
curve has a strongly positive slope. The fund pays dividends on the $50
million of Preferred Stock based on the lower short-term interest rates. At
the same time, the fund's total portfolio of $150 million earns the income
based on long-term interest rates. Of course, increases in short-term interest
rates would reduce (and even eliminate) the dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term
investments, and therefore the Common Stock shareholders are the beneficiaries
of the incremental yield. However, if short-term interest rates rise,
narrowing the differential between short-term and long-term interest rates,
the incremental yield pickup on the Common Stock will be reduced or eliminated
completely. At the same time, the market value of the fund's Common Stock
(that is, its price as listed on the New York Stock Exchange) may, as a
result, decline. Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price of the
portfolio's investments, since the value of the fund's Preferred Stock does
not fluctuate. In addition to the decline in net asset value, the market value
of the fund's Common Stock may also decline.
As a part of its investment strategy, the Funds 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 Funds 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 Funds invest in inverse floaters, the market value of each
Fund's portfolio and the net asset value of each Fund's shares may also be
more volatile than if the Funds did not invest in these securities. As of July
31, 2006, the percentages of MuniHoldings Fund II, Inc. and MuniHoldings New
Jersey Insured Fund, Inc.'s total net assets invested in inverse floaters were
8.26% and 4.97%, respectively, before the deduction of Preferred Stock.
ANNUAL REPORTS JULY 31, 2006
Schedule of Investments MuniHoldings Fund II, Inc.
(in Thousands)
Face
Amount Municipal Bonds Value
Alabama--2.1%
$ 3,450 Jefferson County, Alabama, Limited Obligation
School Warrants, Series A, 5% due 1/01/2024 $ 3,531
Arizona--5.0%
1,000 Arizona Health Facilities Authority Revenue Bonds
(Catholic Healthcare West), Series A, 6.625%
due 7/01/2020 1,101
1,365 Maricopa County, Arizona, IDA, Education Revenue
Bonds (Arizona Charter Schools Project 1), Series A,
6.50% due 7/01/2012 1,375
2,560 Phoenix, Arizona, IDA, Airport Facility, Revenue
Refunding Bonds (America West Airlines Inc.
Project), AMT, 6.30% due 4/01/2023 2,526
1,000 Pima County, Arizona, IDA, Education Revenue Bonds
(Arizona Charter Schools Project), Series C, 6.75%
due 7/01/2031 1,040
1,000 Pinal County, Arizona, COP, 5% due 12/01/2029 1,015
1,095 Show Low, Arizona, Improvement District Number 5,
Special Assessment Bonds, 6.375%
due 1/01/2015 1,128
Arkansas--0.6%
1,000 University of Arkansas, University Construction
Revenue Bonds (UAMS Campus), Series B, 5%
due 11/01/2022 (d) 1,040
California--21.4%
2,000 Benicia, California, Unified School District, GO,
Refunding, Series A, 5.615% due 8/01/2020 (b)(m) 1,045
2,565 California Pollution Control Financing Authority, PCR,
Refunding, DRIVERS, AMT, Series 878Z, 6.719%
due 12/01/2009 (d)(e) 2,865
5,200 California State Public Works Board, Lease Revenue
Bonds (Department of Corrections), Series C, 5.25%
due 6/01/2028 5,398
1,000 East Side Union High School District, California,
Santa Clara County, GO (Election of 2002), Series D,
5% due 8/01/2020 (i) 1,052
870 Golden State Tobacco Securitization Corporation of
California, Tobacco Settlement Revenue Bonds,
Series A-3, 7.875% due 6/01/2042 1,044
6,030 Los Angeles, California, Unified School District, GO,
Series A, 5% due 1/01/2028 (d) 6,223
1,750 Poway, California, Unified School District, Special Tax
(Community Facilities District Number 6 Area),
Series A, 6.125% due 9/01/2033 1,859
San Marino, California, Unified School District, GO,
Series A (d)(m):
1,820 5.50% due 7/01/2017 1,121
1,945 5.55% due 7/01/2018 1,135
2,070 5.60% due 7/01/2019 1,145
(in Thousands)
Face
Amount Municipal Bonds Value
California (concluded)
$ 5,525 Sequoia, California, Unified High School District, GO,
Refunding, Series B, 5.50% due 7/01/2035 (c) $ 6,037
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) 5,149
1,250 Tustin, California, Unified School District, Senior Lien
Special Tax Bonds (Community Facilities District
Number 97-1), Series A, 5% due 9/01/2032 (c) 1,274
Colorado--1.7%
1,845 Elk Valley, Colorado, Public Improvement Revenue
Bonds (Public Improvement Fee), Series A, 7.10%
due 9/01/2014 1,971
860 Plaza Metropolitan District Number 1, Colorado, Tax
Allocation Revenue Bonds (Public Improvement Fees),
8.125% due 12/01/2025 862
Connecticut--0.8%
1,715 Bridgeport, Connecticut, Senior Living Facilities Revenue
Bonds (3030 Park Retirement Community Project),
7.25% due 4/01/2035 1,291
Florida--7.6%
1,640 Ballantrae, Florida, Community Development District,
Capital Improvement Revenue Bonds, 6%
due 5/01/2035 1,708
1,765 Miami-Dade County, Florida, Subordinate Special
Obligation Revenue Bonds, Series A, 5.24%
due 10/01/2037 (d)(m) 344
2,450 Midtown Miami, Florida, Community Development
District, Special Assessment Revenue Bonds, Series A,
6.25% due 5/01/2037 2,656
2,400 Orange County, Florida, Health Facilities Authority,
Hospital Revenue Bonds (Orlando Regional
Healthcare), 6% due 12/01/2012 (h) 2,669
1,515 Orlando, Florida, Greater Orlando Aviation Authority,
Airport Facilities Revenue Bonds (JetBlue Airways
Corp.), AMT, 6.50% due 11/15/2036 1,580
525 Palm Coast Park Community Development District,
Florida, Special Assesment Revenue Bonds, 5.70%
due 5/01/2037 527
1,270 Preserve at Wilderness Lake, Florida, Community
Development District, Capital Improvement Bonds,
Series A, 5.90% due 5/01/2034 1,307
1,700 West Villages Improvement District, Florida, Special
Assessment Revenue Refunding Bonds (Unit of
Development Number 2), 5.80% due 5/01/2036 1,742
Portfolio Abbreviations
To simplify the listings of portfolio holdings in the Schedules of
Investments, we have abbreviated the names of many of the securities
according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DRIVERS Derivative Inverse Tax-Exempt Receipts
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
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single Family
VRDN Variable Rate Demand Notes
ANNUAL REPORTS JULY 31, 2006
Schedule of Investments (continued) MuniHoldings Fund II, Inc.
(in Thousands)
Face
Amount Municipal Bonds Value
Georgia--3.7%
$ 1,250 Atlanta, Georgia, Tax Allocation Bonds (Atlantic Station
Project), 7.90% due 12/01/2024 $ 1,381
1,535 Brunswick & Glynn County, Georgia, Development
Authority, First Mortgage Revenue Bonds (Coastal
Community Retirement Corporation Project),
Series A, 7.25% due 1/01/2035 1,513
1,945 Fulton County, Georgia, Development Authority,
PCR (General Motors Corporation), Refunding,
VRDN, 8% due 4/01/2010 (j) 1,945
1,250 Milledgeville-Baldwin County, Georgia, Development
Authority Revenue Bonds (Georgia College and
State University Foundation), 5.50%
due 9/01/2024 1,300
Idaho--1.3%
2,000 Power County, Idaho, Industrial Development
Corporation, Solid Waste Disposal Revenue
Bonds (FMC Corporation Project), AMT, 6.45%
due 8/01/2032 2,130
Illinois--2.8%
1,000 Chicago, Illinois, O'Hare International Airport, Special
Facility Revenue Refunding Bonds (American Airlines
Inc. Project), 8.20% due 12/01/2024 1,027
1,000 Chicago, Illinois, Special Assessment Bonds (Lake Shore
East), 6.75% due 12/01/2032 1,074
2,000 Illinois HDA, Homeowner Mortgage Revenue Bonds,
AMT, Sub-Series C-2, 5.25% due 8/01/2022 2,039
500 Illinois State Finance Authority Revenue Bonds (Landing
at Plymouth Place Project), Series A, 6%
due 5/15/2025 517
Louisiana--2.8%
2,500 Louisiana Public Facilities Authority, Hospital Revenue
Bonds (Franciscan Missionaries of Our Lady Health
System, Inc.), Series A, 5.25% due 8/15/2036 2,573
760 Louisiana State, Gas and Fuels Tax Revenue Bonds,
Series A, 5% due 5/01/2030 (b) 782
1,275 New Orleans, Louisiana, Financing Authority Revenue
Bonds (Xavier University of Louisiana Project), 5.30%
due 6/01/2026 (d) 1,326
Maine--2.2%
3,455 Maine State Housing Authority, Mortgage Purchase
Revenue Refunding Bonds, Series B, 5.30%
due 11/15/2023 3,571
Maryland--3.2%
3,882 Baltimore, Maryland, Convention Center Hotel Revenue
Bonds, RIB, Series 1252X, 6.60% due 9/01/2039 (e)(i) 4,305
1,050 Maryland State Energy Financing Administration,
Limited Obligation Revenue Bonds (Cogeneration-AES
Warrior Run), AMT, 7.40% due 9/01/2019 1,059
Massachusetts--5.7%
Massachusetts State Development Finance Agency
Revenue Bonds (Neville Communities Home),
Series A (f):
600 5.75% due 6/20/2022 662
1,500 6% due 6/20/2044 1,661
2,100 Massachusetts State, HFA, Housing Revenue Bonds,
AMT, Series A, 5.25% due 12/01/2048 2,117
4,835 Massachusetts State School Building Authority,
Dedicated Sales Tax Revenue Bonds, Series A,
5% due 8/15/2030 (c) 5,009
(in Thousands)
Face
Amount Municipal Bonds Value
Michigan--2.4%
$ 1,100 Flint, Michigan, Hospital Building Authority, Revenue
Refunding Bonds (Hurley Medical Center), Series A,
6% due 7/01/2020 (k) $ 1,179
2,500 Michigan State Strategic Fund, Limited Obligation
Revenue Refunding Bonds, DRIVERS, AMT,
Series 857Z, 7.299% due 3/01/2010 (e)(i) 2,758
Minnesota--7.1%
1,680 Minneapolis, Minnesota, Community Development
Agency, Supported Development Revenue
Refunding Bonds (Common Bond), Series G-3,
5.35% due 12/01/2011 (h) 1,799
4,220 Minnesota State Municipal Power Agency, Electric
Revenue Bonds, 5.25% due 10/01/2021 4,449
Rockford, Minnesota, Independent School District
Number 883, GO (c):
2,870 5.60% due 2/01/2019 3,030
2,390 5.60% due 2/01/2020 2,523
Mississippi--1.5%
Mississippi Business Finance Corporation, Mississippi,
PCR, Refunding (System Energy Resources, Inc.
Project):
2,000 5.875% due 4/01/2022 2,006
500 5.90% due 5/01/2022 502
Missouri--1.9%
950 Fenton, Missouri, Tax Increment Revenue Refunding
and Improvement Bonds (Gravois Bluffs), 7%
due 10/01/2011 (h) 1,094
1,000 Kansas City, Missouri, IDA, First Mortgage Health
Facilities Revenue Bonds (Bishop Spencer Place),
Series A, 6.50% due 1/01/2035 1,045
1,000 Missouri State Development Finance Board,
Infrastructure Facilities Revenue Refunding Bonds
(Branson), Series A, 5.50% due 12/01/2032 1,030
New Jersey--11.3%
New Jersey EDA, Cigarette Tax Revenue Bonds:
4,050 5.75% due 6/15/2029 4,289
1,890 5.50% due 6/15/2031 1,958
New Jersey EDA, Retirement Community Revenue
Bonds, Series A:
1,000 (Cedar Crest Village Inc. Facility), 7.25%
due 11/15/2031 1,081
2,000 (Seabrook Village Inc.), 8.125%
due 11/15/2023 2,237
2,000 New Jersey EDA, Special Facility Revenue Bonds
(Continental Airlines, Inc. Project), AMT, 6.625%
due 9/15/2012 2,105
2,375 New Jersey Health Care Facilities Financing Authority
Revenue Bonds (South Jersey Hospital), 6%
due 7/01/2026 2,515
2,500 New Jersey State Turnpike Authority, Turnpike Revenue
Bonds, Series C, 5% due 1/01/2030 (c) 2,583
1,725 Tobacco Settlement Financing Corporation of New
Jersey, Asset-Backed Revenue Bonds, 7%
due 6/01/2041 1,965
ANNUAL REPORTS JULY 31, 2006
Schedule of Investments (continued) MuniHoldings Fund II, Inc.
(in Thousands)
Face
Amount Municipal Bonds Value
New Mexico--4.0%
$ 3,675 Farmington, New Mexico, PCR, Refunding (Public
Service Company of New Mexico--San Juan
Project), Series A, 5.80% due 4/01/2022 $ 3,708
2,675 New Mexico Finance Authority, Senior Lien State
Transportation Revenue Bonds, Series A, 5.125%
due 6/15/2018 (d) 2,849
New York--12.6%
900 Dutchess County, New York, IDA, Civic Facility
Revenue Refunding Bonds (Saint Francis Hospital),
Series A, 7.50% due 3/01/2029 977
415 New York City, New York, City IDA, Civic Facility
Revenue Bonds, Series C, 6.80% due 6/01/2028 446
New York City, New York, City IDA, Special Facility
Revenue Bonds (Continental Airlines, Inc. Project),
AMT:
525 8% due 11/01/2012 572
525 8.375% due 11/01/2016 580
New York City, New York, Sales Tax Asset
Receivable Corporation Revenue Bonds:
1,600 DRIVERS, Series 1133Z, 6.621%
due 10/15/2012 (a)(e) 1,808
3,855 Series A, 5% due 10/15/2020 (d) 4,056
2,725 New York State Dormitory Authority Revenue Bonds
(School Districts Financing Program), Series D,
5.25% due 10/01/2023 (d) 2,899
20 Suffolk County, New York, IDA, Civic Facility Revenue
Bonds (Special Needs Facilities Pooled Program),
Series D-1, 5.50% due 7/01/2007 20
Tobacco Settlement Financing Corporation of New
York Revenue Bonds:
1,100 Series A-1, 5.50% due 6/01/2015 1,158
2,400 Series A-1, 5.50% due 6/01/2018 2,565
2,750 Series C-1, 5.50% due 6/01/2020 (b) 2,959
1,100 Series C-1, 5.50% due 6/01/2022 1,173
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 1,671
North Carolina--1.3%
2,000 North Carolina Eastern Municipal Power Agency,
Power System Revenue Bonds, Series D, 6.75%
due 1/01/2026 2,169
Oklahoma--1.2%
945 Oklahoma State Housing Finance Agency, S/F
Mortgage Revenue Bonds (Homeownership
Loan Program), Series D-2, AMT, 6.25%
due 9/01/2029 (f)(g) 946
1,075 Tulsa, Oklahoma, Municipal Airport Trust Revenue
Refunding Bonds (AMR Corporation), AMT, Series A,
5.375% due 12/01/2035 1,075
Pennsylvania--4.0%
2,750 Pennsylvania Economic Development Financing
Authority, Exempt Facilities Revenue Bonds
(National Gypsum Company), AMT, Series A,
6.25% due 11/01/2027 2,894
540 Philadelphia, Pennsylvania, Authority for IDR,
Commercial Development, 7.75% due 12/01/2017 544
(in Thousands)
Face
Amount Municipal Bonds Value
Pennsylvania (concluded)
$ 2,630 Sayre, Pennsylvania, Health Care Facilities Authority,
Revenue Bonds (Guthrie Healthcare System),
Series B, 7.125% due 12/01/2031 $ 3,100
Rhode Island--1.5%
2,190 Rhode Island State Health and Educational Building
Corporation, Hospital Financing Revenue Bonds
(Lifespan Obligation Group), 6.50%
due 8/15/2012 (h) 2,490
South Carolina--5.5%
2,080 Medical University Hospital Authority, South Carolina,
Hospital Facilities Revenue Refunding Bonds, Series A,
6.375% due 8/15/2012 (h) 2,361
2,000 South Carolina Jobs, EDA, Economic Development
Revenue Bonds (Westminster Presbyterian Center),
7.75% due 11/15/2010 (h) 2,339
4,200 South Carolina State Ports Authority, Ports Revenue
Bonds, RIB, AMT, Series 1390X, 6.67%
due 7/01/2026 (c)(e) 4,413
Tennessee--6.7%
2,200 Hardeman County, Tennessee, Correctional Facilities
Corporation Revenue Bonds, Series B, 7.375%
due 8/01/2017 2,265
3,450 Shelby County, Tennessee, Health, Educational
and Housing Facility Board, Hospital Revenue
Refunding Bonds (Methodist Healthcare), 6.50%
due 9/01/2012 (h) 3,941
4,500 Tennessee Energy Acquisition Corporation, Gas
Revenue Bonds, Series A, 5.25% due 9/01/2026 4,881
Texas--10.3%
2,665 Austin, Texas, Convention Center Revenue Bonds
(Convention Enterprises Inc.), First Tier, Series A,
6.70% due 1/01/2028 2,830
1,000 Brazos River Authority, Texas, PCR, Refunding (TXU
Energy Company LLC Project), Series B, 4.75%
due 5/01/2029 1,002
2,500 Brazos River, Texas, Harbor Navigation District,
Brazoria County Environmental Revenue Refunding
Bonds (Dow Chemical Company Project), AMT,
Series A-7, 6.625% due 5/15/2033 2,795
Harris County, Texas, Revenue Refunding Bonds,
DRIVERS (c)(e):
2,610 Series 1111, 6.53% due 8/15/2009 2,809
1,755 Series 1172-Z, 6.541% due 8/15/2009 1,883
1,300 Houston, Texas, Health Facilities Development
Corporation, Retirement Facility Revenue Bonds
(Buckingham Senior Living Community), Series A,
7.125% due 2/15/2034 1,434
2,965 Matagorda County, Texas, Navigation District Number 1,
Revenue Refunding Bonds (Reliant Energy, Inc.),
Series C, 8% due 5/01/2029 3,167
1,100 Port Corpus Christi, Texas, Individual Development
Corporation, Environmental Facilities Revenue Bonds
(Citgo Petroleum Corporation Project), AMT, 8.25%
due 11/01/2031 1,144
ANNUAL REPORTS JULY 31, 2006
Schedule of Investments (concluded) MuniHoldings Fund II, Inc.
(in Thousands)
Face
Amount Municipal Bonds Value
Vermont--0.6%
$ 1,000 Vermont Educational and Health Buildings
Financing Agency, Revenue Bonds (Developmental
and Mental Health), Series A, 6.50%
due 6/15/2032 $ 1,044
Virginia--13.4%
575 Chesterfield County, Virginia, IDA, PCR, Refunding
(Virginia Electric and Power Company), Series B,
5.875% due 6/01/2017 622
425 Chesterfield County, Virginia, IDA, PCR (Virginia
Electric and Power Company), Series A, 5.875%
due 6/01/2017 457
5,000 Fairfax County, Virginia, EDA, Resource Recovery
Revenue Refunding Bonds, AMT, Series A, 6.10%
due 2/01/2011 (a) 5,398
Pocahontas Parkway Association, Virginia, Toll Road
Revenue Bonds (h):
3,885 Senior Series A, 5.50% due 8/15/2008 4,088
18,400 Senior Series B, 7.35% due 8/15/2008 (m) 4,818
2,185 Tobacco Settlement Financing Corporation of Virginia,
Asset-Backed Revenue Bonds, 5.625%
due 6/01/2037 2,267
1,095 Virginia State, HDA, Rental Housing Revenue Bonds,
AMT, Series B, 5.625% due 8/01/2011 1,139
3,200 Virginia State, HDA, Revenue Bonds, AMT, Series D,
6% due 4/01/2024 3,329
Washington--0.6%
1,040 Seattle, Washington, Housing Authority Revenue
Bonds (Replacement Housing Project), 6.125%
due 12/01/2032 1,055
(in Thousands)
Face
Amount Municipal Bonds Value
Wisconsin--0.9%
$ 1,360 Wisconsin State Health and Educational Facilities
Authority Revenue Bonds (Synergyhealth Inc.),
6% due 11/15/2032 $ 1,459
Puerto Rico--0.9%
1,550 Puerto Rico Industrial, Medical and Environmental
Pollution Control Facilities Financing Authority,
Special Facilities Revenue Bonds (American Airlines
Inc.), Series A, 6.45% due 12/01/2025 1,551
U.S. Virgin Islands--1.8%
2,680 Virgin Islands Government Refinery Facilities,
Revenue Refunding Bonds (Hovensa Coker
Project), AMT, 6.50% due 7/01/2021 3,002
Total Municipal Bonds
(Cost--$235,928)--150.4% 249,051
Shares
Held Short-Term Securities
12 Merrill Lynch Institutional Tax-Exempt Fund,
3.45% (l)(n) 12
Total Short-Term Securities
(Cost--$12)--0.0% 12
Total Investments (Cost--$235,940*)--150.4% 249,063
Other Assets Less Liabilities--2.1% 3,531
Preferred Stock, at Redemption Value--(52.5%) (87,029)
----------
Net Assets Applicable to Common Stock--100.0% $ 165,565
==========
* The cost and unrealized appreciation (depreciation) of investments
as of July 31, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 235,484
===============
Gross unrealized appreciation $ 14,555
Gross unrealized depreciation (976)
---------------
Net unrealized appreciation $ 13,579
===============
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) The rate disclosed is that currently in effect. This rate changes
periodically and inversely based upon prevailing market rates.
(f) GNMA Collateralized.
(g) FNMA Collateralized.
(h) Prerefunded.
(i) XL Capital Insured.
(j) Security may have a maturity of more than one year at time of issuance,
but has variable rate and demand features that qualify it as a short-
term security. The rate disclosed is that currently in effect. This rate
changes periodically based upon prevailing market rates.
(k) ACA Insured.
(l) Investments in companies considered to be an affiliate of the Fund,
for purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
Net Dividend
Affiliate Activity Income
Merrill Lynch Institutional Tax-Exempt Fund -- --*
* Amount is less than $1,000.
(m) Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase.
(n) Represents the current yield as of July 31, 2006.
See Notes to Financial Statements.
ANNUAL REPORTS JULY 31, 2006
Schedule of Investments MuniHoldings New Jersey Insured Fund, Inc.
(in Thousands)
Face
Amount Municipal Bonds Value
New Jersey--155.2%
$ 1,875 Atlantic Highlands, New Jersey, Highland Regional
Sewer Authority, Sewer Revenue Refunding Bonds,
5.50% due 1/01/2020 (b) $ 2,004
Camden County, New Jersey, Improvement Authority,
Lease Revenue Bonds (c)(e):
2,635 5.375% due 9/01/2010 2,792
1,540 5.50% due 9/01/2010 1,639
430 Carteret, New Jersey, Board of Education, COP, 6%
due 1/15/2010 (d)(e) 464
2,500 Delaware River and Bay Authority Revenue Bonds,
New Jersey, 5% due 1/01/2033 (d) 2,566
4,630 Delaware River Joint Toll Bridge Commission of New
Jersey and Pennsylvania, Bridge Revenue Refunding
Bonds, 5% due 7/01/2028 4,730
Delaware River Port Authority of New Jersey and
Pennsylvania Revenue Bonds (c):
5,000 5.50% due 1/01/2012 5,257
6,000 5.625% due 1/01/2013 6,338
500 5.75% due 1/01/2015 530
4,865 6% due 1/01/2018 5,182
5,525 6% due 1/01/2019 5,885
2,425 (Port District Project), Series B, 5.625%
due 1/01/2026 2,545
7,895 East Orange, New Jersey, Board of Education, COP,
5.50% due 8/01/2012 (c) 8,546
1,000 East Orange, New Jersey, Water Utility, GO, Refunding,
5.70% due 6/15/2008 (a)(e) 1,045
4,000 Essex County, New Jersey, Improvement Authority,
Lease Revenue Bonds (Correctional Facility Project),
6% due 10/01/2010 (b)(e) 4,338
3,300 Essex County, New Jersey, Improvement Authority,
Lease Revenue Refunding Bonds (County Jail and
Youth House Project), 5.35% due 12/01/2024 (a) 3,380
4,400 Essex County, New Jersey, Improvement Authority
Revenue Bonds, Series A, 5% due 10/01/2028 (b) 4,528
2,705 Essex County, New Jersey, Improvement Authority,
Utility System Revenue Bonds (East Orange Franchise),
6% due 7/01/2008 (d)(e) 2,843
Garden State Preservation Trust of New Jersey,
Capital Appreciation Revenue Bonds, Series B (c)(k):
9,000 5.12% due 11/01/2023 4,018
10,000 5.20% due 11/01/2025 4,028
Garden State Preservation Trust of New Jersey, Open
Space and Farmland Preservation Revenue Bonds,
Series A (c):
1,960 5.80% due 11/01/2021 2,212
2,730 5.80% due 11/01/2023 3,084
9,160 5.75% due 11/01/2028 10,773
Garden State Preservation Trust of New Jersey, Open
Space and Farmland Preservation, Revenue
Refunding Bonds, Series C (c):
5,000 5.25% due 11/01/2020 5,519
7,705 5.25% due 11/01/2021 8,517
Face
Amount Municipal Bonds Value
New Jersey (continued)
$ 2,230 Jersey City, New Jersey, GO, Series B, 5.25%
due 9/01/2023 (c) $ 2,372
5,250 Lafayette Yard, New Jersey, Community Development
Revenue Bonds (Hotel/Conference Center
Project-Trenton), 6% due 4/01/2010 (d)(e) 5,689
1,550 Middlesex County, New Jersey, COP, 5.25%
due 6/15/2023 (d) 1,608
1,375 Middlesex County, New Jersey, COP, Refunding,
5.50% due 8/01/2016 (d) 1,473
5,270 Middlesex County, New Jersey, Improvement Authority,
Lease Revenue Bonds (Educational Services
Commission Projects), 6% due 7/15/2010 (e) 5,739
500 Middlesex County, New Jersey, Improvement
Authority Revenue Bonds (Senior Citizens Housing
Project), AMT, 5.50% due 9/01/2030 (a) 518
Monmouth County, New Jersey, Improvement
Authority Revenue Refunding Bonds (a):
1,540 5.35% due 12/01/2017 1,622
1,470 5.375% due 12/01/2018 1,550
New Jersey EDA, Cigarette Tax Revenue Bonds:
2,700 5.625% due 6/15/2019 2,819
2,000 5.75% due 6/15/2029 2,118
585 5.50% due 6/15/2031 606
1,180 5.75% due 6/15/2034 1,242
5,000 New Jersey EDA, Lease Revenue Bonds (University
of Medicine and Dentistry--International Center
for Public Health Project), 6% due 6/01/2032 (a) 5,352
New Jersey EDA, Motor Vehicle Surcharge Revenue
Bonds, Series A (d):
7,500 5.25% due 7/01/2026 8,308
11,105 5.25% due 7/01/2033 11,707
4,485 5% due 7/01/2034 4,616
New Jersey EDA, Natural Gas Facilities Revenue
Refunding Bonds, RIB, AMT (d)(j):
3,155 Series 161, 7.43% due 6/01/2032 3,342
9,460 Series 1202, 7.49% due 6/01/2032 10,022
1,000 New Jersey EDA, Parking Facility Revenue Bonds
(Elizabeth Development Company Project),
5.60% due 10/15/2026 (b) 1,038
4,580 New Jersey EDA, Revenue Bonds, DRIVERS, Series 219,
8.021% due 5/01/2016 (c)(j) 5,108
New Jersey EDA, School Facilities Construction
Revenue Bonds:
9,000 Series L, 5% due 3/01/2030 (c) 9,278
8,420 Series O, 5.25% due 3/01/2023 8,914
2,500 New Jersey EDA, Solid Waste Disposal Facilities
Revenue Bonds (Waste Management, Inc.), AMT,
Series A, 5.30% due 6/01/2015 2,608
ANNUAL REPORTS JULY 31, 2006
Schedule of Investments (continued) MuniHoldings New Jersey Insured Fund, Inc.
(in Thousands)
Face
Amount Municipal Bonds Value
New Jersey (continued)
New Jersey EDA, State Lease Revenue Bonds:
$ 2,670 (Liberty State Park Project), Series C, 5%
due 3/01/2022 (c) $ 2,787
1,400 (Liberty State Park Project), Series C, 5%
due 3/01/2023 (c) 1,458
3,000 (State Office Buildings Projects), 6%
due 6/15/2010 (a)(e) 3,237
4,620 (State Office Buildings Projects), 6.25%
due 6/15/2010 (a)(e) 5,026
10,775 New Jersey Health Care Facilities Financing Authority,
Department of Human Services Revenue Bonds
(Greystone Park Psychiatric Hospital Project), 5%
due 9/15/2023 (a) 11,223
New Jersey Health Care Facilities Financing Authority
Revenue Bonds:
2,315 (RWJ Healthcare Corporation), Series B, 5%
due 7/01/2025 (i) 2,370
3,015 (RWJ Healthcare Corporation), Series B, 5%
due 7/01/2035 (i) 3,065
2,820 (Society of the Valley Hospital), 5.375%
due 7/01/2025 (a) 2,938
2,135 (Somerset Medical Center), 5.50%
due 7/01/2033 2,178
5,440 (South Jersey Hospital), 6% due 7/01/2026 5,761
New Jersey Health Care Facilities Financing Authority,
Revenue Refunding Bonds:
4,000 (AHS Hospital Corporation), Series A, 6%
due 7/01/2013 (a) 4,451
1,455 (Atlantic City Medical Center), 6.25%
due 7/01/2017 1,604
3,500 (Atlantic City Medical Center), 5.75%
due 7/01/2025 3,704
1,775 (Holy Name Hospital), 6% due 7/01/2025 1,827
1,000 (Meridian Health System Obligation Group),
5.375% due 7/01/2024 (c) 1,042
New Jersey Sports and Exposition Authority,
Luxury Tax Revenue Refunding Bonds
(Convention Center) (d):
5,890 5.50% due 3/01/2021 6,622
3,000 5.50% due 3/01/2022 3,380
2,400 New Jersey Sports and Exposition Authority,
State Contract Revenue Bonds, Series A, 6%
due 3/01/2013 (d) 2,570
7,500 New Jersey State Educational Facilities Authority,
Higher Education, Capital Improvement Revenue
Bonds, Series A, 5.125% due 9/01/2022 (a) 7,889
New Jersey State Educational Facilities Authority
Revenue Bonds:
9,420 (Capital Improvement Fund), Series A, 5.75%
due 9/01/2010 (c)(e) 10,112
1,200 (Montclair State University), Series A, 5%
due 7/01/2021 (a) 1,264
2,880 (Montclair State University), Series A, 5%
due 7/01/2022 (a) 3,027
3,615 (Rowan University), Series C, 5.125%
due 7/01/2028 (d) 3,769
3,260 (Rowan University), Series C, 5%
due 7/01/2034 (d) 3,360
Face
Amount Municipal Bonds Value
New Jersey (continued)
New Jersey State Educational Facilities Authority,
Revenue Refunding Bonds:
$ 7,510 (Montclair State University), Series L, 5%
due 7/01/2034 (d) $ 7,740
2,375 (Rowan University), Series C, 5.25%
due 7/01/2017 (b) 2,520
2,820 (Rowan University), Series C, 5.25%
due 7/01/2018 (b) 2,992
2,635 (Rowan University), Series C, 5.25%
due 7/01/2019 (b) 2,796
1,410 (Rowan University), Series C, 5%
due 7/01/2031 (b) 1,445
11,225 New Jersey State Housing and Mortgage Finance
Agency, Capital Fund Program Revenue Bonds,
Series A, 4.70% due 11/01/2025 (c) 11,304
New Jersey State Housing and Mortgage Finance
Agency, Home Buyer Revenue Bonds, AMT,
Series U (d):
1,000 5.60% due 10/01/2012 1,025
2,820 5.65% due 10/01/2013 2,890
3,000 5.75% due 4/01/2018 3,076
805 5.85% due 4/01/2029 824
5,000 New Jersey State Transit Corporation, COP (Federal
Transit Administration Grants), Series A, 6.125%
due 9/15/2009 (a)(e) 5,339
New Jersey State Transportation Trust Fund Authority,
Transportation System Revenue Bonds:
7,500 Series A, 6% due 6/15/2010 (e) 8,091
1,400 Series C, 5.05% due 12/15/2035 (a)(k) 340
5,500 Series C, 5.05% due 12/15/2036 (a)(k) 1,272
6,200 Series D, 5% due 6/15/2015 (c)(e) 6,659
7,800 Series D, 5% due 6/15/2019 (c) 8,181
New Jersey State Transportation Trust Fund Authority,
Transportation System Revenue Refunding Bonds:
10,750 Series A, 5.25% due 12/15/2020 (c) 11,812
9,165 Series B, 5.50% due 12/15/2021 (d) 10,337
7,615 New Jersey State Turnpike Authority, Turnpike
Revenue Bonds, Series B, 5.15%
due 1/01/2035 (a)(k) 5,101
New Jersey State Turnpike Authority, Turnpike
Revenue Refunding Bonds:
910 Series C, 6.50% due 1/01/2016 (d) 1,049
4,610 Series C, 6.50% due 1/01/2016 (d)(g) 5,327
4,665 Series C-1, 4.50% due 1/01/2031 (a) 4,550
North Bergen Township, New Jersey, Board of
Education, COP (c):
1,000 6% due 12/15/2010 (e) 1,097
3,260 6.25% due 12/15/2010 (e) 3,608
1,250 5% due 12/15/2018 1,293
4,335 North Hudson Sewage Authority, New Jersey,
Sewer Revenue Refunding Bonds, 5.125%
due 8/01/2020 (d) 4,718
ANNUAL REPORTS JULY 31, 2006
Schedule of Investments (concluded) MuniHoldings New Jersey Insured Fund, Inc.
(in Thousands)
Face
Amount Municipal Bonds Value
New Jersey (continued)
$ 3,035 Orange Township, New Jersey, Municipal Utility
and Lease, GO, Refunding, Series C, 5.10%
due 12/01/2017 (d) $ 3,135
Paterson, New Jersey, Public School District,
COP (d):
1,980 6.125% due 11/01/2015 2,131
2,000 6.25% due 11/01/2019 2,162
4,750 Port Authority of New Jersey and New York,
Consolidated Revenue Refunding Bonds, AMT,
119th Series, 5.50% due 9/15/2019 (b) 4,806
Port Authority of New Jersey and New York,
Special Obligation Revenue Bonds (JFK
International Air Terminal LLC), AMT (d):
2,165 RIB, Series 157, 7.52% due 12/01/2022 (j) 2,347
13,500 Series 6, 6.25% due 12/01/2011 14,852
1,500 Series 6, 6.25% due 12/01/2015 1,718
4,750 Series 6, 5.75% due 12/01/2025 4,860
9,600 Rahway Valley Sewerage Authority, New Jersey,
Sewer Revenue Bonds (Capital Appreciation),
Series A, 4.79% due 9/01/2028 (d)(k) 3,310
South Jersey Port Corporation of New Jersey,
Revenue Refunding Bonds:
3,750 4.50% due 1/01/2015 3,823
1,920 4.50% due 1/01/2016 1,945
1,500 5% due 1/01/2026 1,531
2,000 5.10% due 1/01/2033 2,046
4,755 Tobacco Settlement Financing Corporation of
New Jersey, Asset-Backed Revenue Bonds, 7%
due 6/01/2041 5,417
4,325 Trenton, New Jersey, Parking Authority, Parking
Revenue Bonds, DRIVERS, Series 221, 8.23%
due 4/01/2010 (b)(e)(j) 5,002
2,000 University of Medicine and Dentistry of New Jersey,
COP, 5% due 6/15/2029 (d) 2,054
4,740 University of Medicine and Dentistry of New
Jersey, Revenue Bonds, Series A, 5.50%
due 12/01/2027 (a) 5,077
Face
Amount Municipal Bonds Value
New Jersey (concluded)
$ 8,580 West Deptford Township, New Jersey, GO, 5.625%
due 9/01/2010 (b)(e) $ 9,170
3,615 West Orange, New Jersey, Board of Education, COP,
6% due 10/01/2009 (d)(e) 3,884
Puerto Rico--7.7%
Puerto Rico Commonwealth Highway and
Transportation Authority, Transportation
Revenue Refunding Bonds:
4,500 Series J, 5% due 7/01/2029 (d) 4,657
3,480 Series K, 5% due 7/01/2040 3,487
Puerto Rico Electric Power Authority, Power
Revenue Bonds:
6,830 Series HH, 5.25% due 7/01/2029 (c) 7,158
5,100 Series RR, 5% due 7/01/2028 (f) 5,282
Puerto Rico Industrial, Tourist, Educational, Medical
and Environmental Control Facilities Revenue Bonds,
Series A:
1,780 (Hospital Auxilio Mutuo Obligation Group),
6.25% due 7/01/2024 (d) 1,794
1,750 (Hospital de la Concepcion), 6.50%
due 11/15/2020 1,930
Total Municipal Bonds
(Cost--$496,650)--162.9% 514,040
Shares
Held Short-Term Securities
1,050 CMA New Jersey Municipal Money Fund, 3.03% (h)(l) 1,050
Total Short-Term Securities
(Cost--$1,050)--0.3% 1,050
Total Investments (Cost--$497,700*)--163.2% 515,090
Other Assets Less Liabilities--1.1% 3,645
Preferred Stock, at Redemption Value--(64.3%) (203,086)
----------
Net Assets Applicable to Common Stock--100.0% $ 315,649
==========
* The cost and unrealized appreciation (depreciation) of investments,
as of July 31, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 497,643
===============
Gross unrealized appreciation $ 18,120
Gross unrealized depreciation (673)
---------------
Net unrealized appreciation $ 17,447
===============
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) Prerefunded.
(f) CIFG Insured.
(g) Escrowed to maturity.
(h) Investments in companies considered to be an affiliate of the Fund,
for purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
Net Dividend
Affiliate Activity Income
CMA New Jersey Municipal Money Fund (5,082) $ 100
(i) Radian Insured.
(j) The rate disclosed is that currently in effect. This rate changes
periodically and inversely based upon prevailing market rates.
(k) Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase.
(l) Represents the current yield as of July 31, 2006.
See Notes to Financial Statements.
ANNUAL REPORTS JULY 31, 2006
Statements of Net Assets
MuniHoldings
New Jersey
MuniHoldings Insured
As of July 31, 2006 Fund II, Inc. Fund, Inc.
Assets
Investments in unaffiliated securities, at value* $ 249,051,334 $ 514,039,654
Investments in affiliated securities, at value** 11,739 1,050,414
Cash 75,137 17,202
Interest receivable 3,685,485 5,259,730
Receivable for securities sold -- 3,338,279
Prepaid expenses 6,086 18,000
--------------- ---------------
Total assets 252,829,781 523,723,279
--------------- ---------------
Liabilities
Payable for securities purchased -- 4,679,763
Payable to investment adviser 109,889 209,008
Payable for other affiliates 1,684 3,492
Payable for dividends to shareholders 63,643 --
Accrued expenses 60,186 95,661
--------------- ---------------
Total liabilities 235,402 4,987,924
--------------- ---------------
Preferred Stock
Preferred Stock, at redemption value, par value $.10 per share***
of AMPS+++ at $25,000 per share liquidation preference 87,029,202 203,086,423
--------------- ---------------
Net Assets Applicable to Common Stock
Net assets applicable to Common Stock $ 165,565,177 $ 315,648,932
=============== ===============
Net Assets Consist of
Undistributed investment income--net $ 1,625,541 $ 2,249,751
Accumulated realized capital losses--net (15,523,436) (24,392,890)
Unrealized appreciation--net 13,122,697 17,390,214
--------------- ---------------
Total accumulated losses--net (775,198) (4,752,925)
--------------- ---------------
Common Stock, par value $.10 per share++ 1,116,863 2,117,274
Paid-in capital in excess of par 165,223,512 318,284,583
--------------- ---------------
Net Assets $ 165,565,177 $ 315,648,932
=============== ===============
Net asset value per share of Common Stock $ 14.82 $ 14.91
=============== ===============
Market price $ 14.12 $ 14.98
=============== ===============
* Identified cost on unaffiliated securities $ 235,928,637 $ 496,649,440
=============== ===============
** Identified cost on affiliated securities $ 11,739 $ 1,050,414
=============== ===============
*** Preferred Shares authorized, issued and outstanding:
Series A Shares 1,740 1,360
=============== ===============
Series B Shares 1,740 1,360
=============== ===============
Series C Shares -- 2,400
=============== ===============
Series D Shares -- 1,880
=============== ===============
Series E Shares -- 1,120
=============== ===============
++ Common Shares issued and outstanding 11,168,632 21,172,744
=============== ===============
+++ Auction Market Preferred Stock.
See Notes to Financial Statements.
ANNUAL REPORTS JULY 31, 2006
Statements of Operations
MuniHoldings
New Jersey
MuniHoldings Insured
For the Year Ended July 31, 2006 Fund II, Inc. Fund, Inc.
Investment Income
Interest $ 13,600,684 $ 25,330,258
Dividends from affiliates 341 99,983
--------------- ---------------
Total income 13,601,025 25,430,241
--------------- ---------------
Expenses
Investment advisory fees 1,388,674 2,877,148
Commission fees 222,790 516,372
Accounting services 102,922 173,812
Professional fees 55,457 56,512
Transfer agent fees 46,395 82,387
Printing and shareholder reports 17,106 35,402
Directors' fees and expenses 32,773 32,773
Listing fees 16,671 16,572
Custodian fees 16,286 28,030
Pricing fees 18,194 19,552
Other (including $21,248 recovery of filing fees for MuniHoldings
New Jersey Insured Fund, Inc.) 35,962 24,411
--------------- ---------------
Total expenses before waiver and/or reimbursement 1,953,230 3,862,971
Waiver and/or reimbursement of expenses (22) (187,809)
--------------- ---------------
Total expenses after waiver and/or reimbursement 1,953,208 3,675,162
--------------- ---------------
Investment income--net 11,647,817 21,755,079
--------------- ---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain on:
Investments--net 1,052,644 3,907,246
Financial futures contracts and forward interest rate swaps--net -- 36,892
--------------- ---------------
Total realized gain--net 1,052,644 3,944,138
--------------- ---------------
Change in unrealized appreciation on:
Investments--net (2,329,402) (16,648,229)
Financial futures contracts and forward interest rate swaps--net -- (240,015)
--------------- ---------------
Total change in unrealized appreciation (2,329,402) (16,888,244)
--------------- ---------------
Total realized and unrealized loss--net (1,276,758) (12,944,106)
--------------- ---------------
Dividends to Preferred Shareholders
Investment income--net (2,570,803) (5,509,362)
--------------- ---------------
Net Increase in Net Assets Resulting from Operations $ 7,800,256 $ 3,301,611
=============== ===============
See Notes to Financial Statements.
ANNUAL REPORTS JULY 31, 2006
Statements of Changes in Net Assets MuniHoldings Fund II, Inc.
For the Year Ended
July 31,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 11,647,817 $ 12,054,853
Realized gain--net 1,052,644 2,156,742
Change in unrealized appreciation--net (2,329,402) 10,744,979
Dividends to Preferred Stock shareholders (2,570,803) (1,593,265)
--------------- ---------------
Net increase in net assets resulting from operations 7,800,256 23,363,309
--------------- ---------------
Dividends to Common Stock Shareholders
Investment income--net (10,146,661) (11,625,476)
--------------- ---------------
Net decrease in net assets resulting from dividends to Common Stock shareholders (10,146,661) (11,625,476)
--------------- ---------------
Common Stock Transactions
Value of shares issued to Common Stock shareholders in reinvestment of dividends 323,132 267,353
--------------- ---------------
Net Assets Applicable to Common Stock
Total increase (decrease) in net assets applicable to Common Stock (2,023,273) 12,005,186
Beginning of year 167,588,450 155,583,264
--------------- ---------------
End of year* $ 165,565,177 $ 167,588,450
=============== ===============
* Undistributed investment income--net $ 1,625,541 $ 2,695,188
=============== ===============
See Notes to Financial Statements.
MuniHoldings New Jersey Insured Fund, Inc.
For the Year Ended
July 31,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 21,755,079 $ 21,866,673
Realized gain--net 3,944,138 9,254,655
Change in unrealized appreciation--net (16,888,244) 4,642,719
Dividends to Preferred Stock shareholders (5,509,362) (3,321,072)
--------------- ---------------
Net increase in net assets resulting from operations 3,301,611 32,442,975
--------------- ---------------
Dividends to Common Stock Shareholders
Investment income--net (18,365,764) (19,944,606)
--------------- ---------------
Net decrease in net assets resulting from dividends to Common Stock shareholders (18,365,764) (19,944,606)
--------------- ---------------
Common Stock Transactions
Value of shares issued to Common Stock shareholders in reinvestment of dividends 1,860,277 183,190
--------------- ---------------
Net Assets Applicable to Common Stock
Total increase (decrease) in net assets applicable to Common Stock (13,203,876) 12,681,559
Beginning of year 328,852,808 316,171,249
--------------- ---------------
End of year* $ 315,648,932 $ 328,852,808
=============== ===============
* Undistributed investment income--net $ 2,249,751 $ 4,369,798
=============== ===============
See Notes to Financial Statements.
ANNUAL REPORTS JULY 31, 2006
Financial Highlights MuniHoldings Fund II, Inc.
The following per share data and ratios have been derived For the Year Ended July 31,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of year $ 15.03 $ 13.98 $ 13.46 $ 13.51 $ 13.42
---------- ---------- ---------- ---------- ----------
Investment income--net 1.04++ 1.08++ 1.15++ 1.16++ 1.10
Realized and unrealized gain (loss)--net (.11) 1.15 .50 (.15) (.04)
Less dividends to Preferred Stock shareholders from
investment income--net (.23) (.14) (.10) (.10) (.13)
---------- ---------- ---------- ---------- ----------
Total from investment operations .70 2.09 1.55 .91 .93
---------- ---------- ---------- ---------- ----------
Less dividends to Common Stock shareholders from
investment income--net (.91) (1.04) (1.03) (.96) (.84)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 14.82 $ 15.03 $ 13.98 $ 13.46 $ 13.51
========== ========== ========== ========== ==========
Market price per share, end of year $ 14.12 $ 15.25 $ 13.53 $ 13.16 $ 12.96
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 4.89% 15.46% 11.88% 7.15% 7.56%
========== ========== ========== ========== ==========
Based on market price per share (1.50%) 21.04% 10.75% 9.21% 12.12%
========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Common Stock
Total expenses, net of reimbursement* 1.18% 1.19% 1.21% 1.26% 1.29%
========== ========== ========== ========== ==========
Total expenses* 1.18% 1.19% 1.22% 1.26% 1.29%
========== ========== ========== ========== ==========
Total investment income--net* 7.04% 7.38% 8.13% 8.48% 8.27%
========== ========== ========== ========== ==========
Amount of dividends to Preferred Stock shareholders 1.55% .98% .69% .74% .95%
========== ========== ========== ========== ==========
Investment income--net, to Common Stock
shareholders 5.49% 6.40% 7.44% 7.74% 7.32%
========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Preferred Stock
Dividends to Preferred Stock shareholders 2.95% 1.84% 1.23% 1.28% 1.60%
========== ========== ========== ========== ==========
Supplemental Data
Net assets applicable to Common Stock, end of year
(in thousands) $ 165,565 $ 167,588 $ 155,583 $ 149,262 $ 149,633
========== ========== ========== ========== ==========
Preferred Stock outstanding, end of year (in thousands) $ 87,000 $ 87,000 $ 87,000 $ 87,000 $ 87,000
========== ========== ========== ========== ==========
Portfolio turnover 49.12% 45.11% 31.03% 44.03% 46.31%
========== ========== ========== ========== ==========
Leverage
Asset coverage per $1,000 $ 2,903 $ 2,926 $ 2,788 $ 2,716 $ 2,720
========== ========== ========== ========== ==========
Dividends Per Share on Preferred Stock Outstanding
Series A--Investment income--net $ 754 $ 445 $ 223 $ 279 $ 409
========== ========== ========== ========== ==========
Series B--Investment income--net $ 724 $ 471 $ 395 $ 363 $ 394
========== ========== ========== ========== ==========
* Do not reflect the effect of dividends to Preferred Stock shareholders.
** Total investment returns based on market value, which can be significantly greater or lesser
than the net asset value, may result in substantially different returns. Total investment returns
exclude the effects of sales charges.
++ Based on average shares outstanding.
See Notes to Financial Statements.
ANNUAL REPORTS JULY 31, 2006
Financial Highlights MuniHoldings New Jersey Insured Fund, Inc.
The following per share data and ratios have been derived For the Year Ended July 31,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of year $ 15.62 $ 15.03 $ 14.46 $ 14.90 $ 14.54
---------- ---------- ---------- ---------- ----------
Investment income--net* 1.03 1.04 1.07 1.08 1.06
Realized and unrealized gain (loss)--net (.61) .66 .51 (.54) .31
Less dividends to Preferred Stock shareholders from
investment income--net (.26) (.16) (.08) (.09) (.15)
---------- ---------- ---------- ---------- ----------
Total from investment operations .16 1.54 1.50 .45 1.22
---------- ---------- ---------- ---------- ----------
Less dividends to Common Stock shareholders from
investment income--net (.87) (.95) (.93) (.89) (.86)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 14.91 $ 15.62 $ 15.03 $ 14.46 $ 14.90
========== ========== ========== ========== ==========
Market price per share, end of year $ 14.98 $ 15.89 $ 14.17 $ 13.59 $ 14.24
========== ========== ========== ========== ==========
Total Investment Return***
Based on net asset value per share 1.09% 10.63% 10.90% 3.32% 9.16%
========== ========== ========== ========== ==========
Based on market price per share (.16%) 19.37% 11.24% 1.61% 20.01%
========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Common Stock
Total expenses, net of waiver and reimbursement
and excluding reorganization expenses** 1.15% 1.14% 1.13% 1.15% 1.19%
========== ========== ========== ========== ==========
Total expenses, net of waiver and reimbursement** 1.15% 1.14% 1.13% 1.15% 1.22%
========== ========== ========== ========== ==========
Total expenses** 1.21% 1.20% 1.21% 1.23% 1.29%
========== ========== ========== ========== ==========
Total investment income--net** 6.80% 6.69% 6.97% 7.05% 7.32%
========== ========== ========== ========== ==========
Amount of dividends to Preferred Stock shareholders 1.72% 1.02% .54% .61% 1.00%
========== ========== ========== ========== ==========
Investment income--net, to Common Stock
shareholders 5.08% 5.67% 6.43% 6.44% 6.32%
========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Preferred Stock
Dividends to Preferred Stock shareholders 2.71% 1.64% .86% .97% 1.51%
========== ========== ========== ========== ==========
Supplemental Data
Net assets applicable to Common Stock, end of year
(in thousands) $ 315,649 $ 328,853 $ 316,171 $ 304,126 $ 313,515
========== ========== ========== ========== ==========
Preferred Stock outstanding, end of year (in thousands) $ 203,000 $ 203,000 $ 203,000 $ 203,000 $ 203,000
========== ========== ========== ========== ==========
Portfolio turnover 19.11% 29.61% 8.53% 28.89% 20.05%
========== ========== ========== ========== ==========
Leverage
Asset coverage per $1,000 $ 2,555 $ 2,620 $ 2,557 $ 2,498 $ 2,544
========== ========== ========== ========== ==========
Dividends Per Share on Preferred Stock Outstanding
Series A--Investment income--net $ 683 $ 402 $ 206 $ 233 $ 356
========== ========== ========== ========== ==========
Series B--Investment income--net $ 682 $ 403 $ 210 $ 240 $ 381
========== ========== ========== ========== ==========
Series C--Investment income--net $ 689 $ 419 $ 235 $ 247 $ 389
========== ========== ========== ========== ==========
Series D--Investment income--net $ 673 $ 415 $ 210 $ 240 $ 363
========== ========== ========== ========== ==========
Series E--Investment income--net $ 655 $ 394 $ 197 $ 247 $ 393
========== ========== ========== ========== ==========
* Based on average shares outstanding.
** Do not reflect the effect of dividends to Preferred Stock shareholders.
*** Total investment returns based on market value, which can be significantly greater or lesser
than the net asset value, may result in substantially different returns. Total investment returns
exclude the effects of sales charges.
See Notes to Financial Statements.
ANNUAL REPORTS JULY 31, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
MuniHoldings Fund II, Inc. and MuniHoldings New Jersey Insured Fund, Inc. (the
"Funds" or individually as the "Fund") are registered under the Investment
Company Act of 1940, as amended, as non-diversified, closed-end management
investment companies. The Funds' financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may
require the use of management accruals and estimates. Actual results may
differ from these estimates. The Funds determine and make available for
publication the net asset value of their Common Stock on a daily basis. The
Funds' Common Stock shares are listed on the New York Stock Exchange under the
symbols MUH and MUJ, respectively. The following is a summary of significant
accounting policies followed by the Funds.
(a) Valuation of investments--Municipal bonds are traded primarily in the over-
the-counter ("OTC") markets and are valued at the last available bid price in
the OTC market or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Funds under the general
direction of the Board of Directors. Such valuations and procedures are
reviewed periodically by the Board of Directors of the Funds. 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 OTC market, valuation is
the last asked price (options written) or the last bid price (options
purchased). Swap agreements are valued by quoted fair values received daily by
the Funds' pricing service. Short-term investments with a remaining maturity
of 60 days or less are valued at amortized cost, which approximates market
value, under which method the investment is valued at cost and any premium or
discount is amortized on a straight line basis to maturity. Valuation of other
short-term investment vehicles is generally based on the net asset value of
the underlying investment vehicle or amortized cost. Investments in open-end
investment companies are valued at their net asset value each business day.
Securities and other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Funds.
(b) Derivative financial instruments--Each Fund may engage in various
portfolio investment strategies both to increase the return of the Fund and to
hedge, or protect, its exposure to interest rate movements and movements in
the securities markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--Each 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--Each Fund may write covered call options and purchase call and put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the
current market value of the option written. When a security is purchased or
sold through an exercise of an option, the related premium paid (or received)
is added to (or deducted from) the basis of the security acquired or deducted
from (or added to) the proceeds of the security sold. When an option expires
(or the Fund enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the premium
paid or received).
Written and purchased options are non-income producing investments.
ANNUAL REPORTS JULY 31, 2006
Notes to Financial Statements (continued)
* Forward interest rate swaps--Each Fund may enter into swap agreements, which
are OTC contracts in which the Fund and a counterparty agree to make periodic
net payments on a specified notional amount. The net payments can be made for
a set period of time or may be triggered by a predetermined credit event. The
net periodic payments may be based on a fixed or variable interest rate; the
change in market value of a specified security, basket of securities, or
index; or the return generated by a security. These periodic payments received
or made by the Fund are recorded in the accompanying Statement of Operations
as realized gains or losses, respectively. Gains or losses are also realized
upon termination of the swap agreements. Swaps are marked-to-market daily and
changes in value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments, failure of the
counterparties to perform under the contracts' terms and the possible lack of
liquidity with respect to the swap agreements.
(c) Income taxes--It is each 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 Funds amortize 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) Recent accounting pronouncement--In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48") entitled
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109." FIN 48 prescribes the minimum recognition threshold a tax
position must meet in connection with accounting for uncertainties in income
tax positions taken or expected to be taken by an entity including mutual
funds before being measured and recognized in the financial statements. FIN 48
is effective for fiscal years beginning after December 15, 2006. The Funds
will adopt FIN 48 during the fiscal 2008 year and the impact on the Funds'
financial statements, if any, is currently being assessed.
2. Investment Advisory Agreement and Transactions with Affiliates:
Each 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 each Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, each 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, 2006. The Investment Adviser has agreed to reimburse its management
fee by the amount of management fees each Fund pays to FAM indirectly through
its investment described below:
Reimbursement
For the
Year Ended
Investment July 31, 2006
MuniHoldings Fund II, Inc. Merrill Lynch
Institutional
Tax-Exempt Fund $ 22
MuniHoldings New Jersey CMA New Jersey
Insured Fund, Inc. Municipal Money Fund $19,874
In addition, for MuniHoldings New Jersey Insured Fund, Inc., the Investment
Adviser has agreed to reimburse its management fee based on the proceeds of
Preferred Stock that exceeds 35% of the Fund's total net assets. For the year
ended July 31, 2006, FAM earned fees of $2,877,148, of which $167,935 was
waived.
For the year ended July 31, 2006, MuniHoldings Fund II, Inc. and MuniHoldings
New Jersey Insured Fund, Inc. reimbursed FAM $5,584 and $11,597, respectively,
for certain accounting services.
Certain officers and/or directors of the Funds are officers and/or directors
of FAM, PSI, and/or ML & Co.
ANNUAL REPORTS JULY 31, 2006
Notes to Financial Statements (continued)
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction is expected
to close around the end of the third quarter of 2006.
On August 15, 2006, shareholders of each Fund approved a new Investment
Advisory Agreement with BlackRock Advisors, Inc., a subsidiary of BlackRock,
Inc., as well as a contingent sub-advisory agreement with BlackRock Advisors,
Inc. The new advisory agreement will become effective upon the closing of the
BlackRock transaction described above and the investment advisory fees will be
unchanged.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2006 were as follows:
MuniHoldings
New Jersey
MuniHoldings Insured
Fund II, Inc. Fund, Inc.
Total Purchases $121,363,405 $ 99,882,641
Total Sales $126,655,902 $115,921,256
4. Stock Transactions:
Each 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
MuniHoldings Fund II, Inc.
Shares issued and outstanding during the years ended July 31, 2006 and July
31, 2005 increased by 21,687 and 18,116, respectively, as a result of dividend
reinvestment.
MuniHoldings New Jersey Insured Fund, Inc.
Shares issued and outstanding during the years ended July 31, 2006 and July
31, 2005 increased by 122,432 and 11,698, respectively, as a result of
dividend reinvestment.
Preferred Stock
Auction Market Preferred Stock are shares of Preferred Stock of the Funds,
with 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, 2006 were as follows:
MuniHoldings
New Jersey
MuniHoldings Insured
Fund II, Inc. Fund, Inc.
Series A 3.50% 3.25%
Series B 3.50% 3.05%
Series C -- 3.25%
Series D -- 3.00%
Series E -- 3.25%
Each 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, 2006, Merrill Lynch,
Pierce, Fenner & Smith, Incorporated earned commissions as follows:
Commissions
MuniHoldings Fund II, Inc. $104,256
MuniHoldings New Jersey Insured Fund, Inc. $270,109
5. Distributions to Shareholders:
Each Fund paid a tax-exempt income dividend to holders of Common Stock in the
amounts of $.067000 per share and $.065000 per share relating to MuniHoldings
Fund II, Inc. and MuniHoldings New Jersey Insured Fund, Inc. respectively, on
August 30, 2006 to shareholders of record on August 14, 2006.
MuniHoldings Fund II, Inc.
The tax character of distributions paid during the fiscal years ended
July 31, 2006 and July 31, 2005 was as follows:
7/31/2006 7/31/2005
Distributions paid from:
Tax-exempt income $ 12,717,464 $ 13,218,741
--------------- ---------------
Total distributions $ 12,717,464 $ 13,218,741
=============== ===============
ANNUAL REPORTS JULY 31, 2006
Notes to Financial Statements (concluded)
As of July 31, 2006, the components of accumulated losses on a tax
basis were as follows:
Undistributed tax-exempt income--net $ 1,141,699
Undistributed long-term capital gains - net --
---------------
Total undistributed earnings--net 1,141,699
Capital loss carryforward (15,495,993)*
Unrealized gains--net 13,579,096**
---------------
Total accumulated losses--net $ (775,198)
===============
* On July 31, 2006, the Fund had a net capital loss carryforward of
$15,495,993, of which $2,509,399 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 tax deferral of losses on wash
sales and the difference between book and tax amortization
methods for premiums and discounts on fixed income securities.
MuniHoldings New Jersey Insured Fund, Inc.
The tax character of distributions paid during the fiscal years ended
July 31, 2006 and July 31, 2005 was as follows:
7/31/2006 7/31/2005
Distributions paid from:
Tax-exempt income $ 23,875,126 $ 23,265,678
--------------- ---------------
Total distributions $ 23,875,126 $ 23,265,678
=============== ===============
As of July 31, 2006, the components of accumulated losses on a tax
basis were as follows:
Undistributed tax-exempt income--net $ 2,192,503
Undistributed long-term capital gains--net --
---------------
Total undistributed earnings--net 2,192,503*
Capital loss carryforward (24,258,827)**
Unrealized gains--net 17,313,399
---------------
Total accumulated losses--net $ (4,752,925)
===============
* On July 31, 2006, the Fund had a net capital loss carryforward of
$24,258,827, of which $24,022,933 expires in 2009 and $235,894
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 tax deferral of losses on
straddles and the difference between book and tax amortization
methods for premiums and discounts on fixed income securities.
ANNUAL REPORTS JULY 31, 2006
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
MuniHoldings Fund II, Inc. and MuniHoldings
New Jersey Insured Fund, Inc.:
We have audited the accompanying statements of net assets, including the
schedules of investments, of MuniHoldings Fund II, Inc. and of MuniHoldings
New Jersey Insured Fund, Inc. (the "Funds") as of July 31, 2006, and the
related statements of operations, statements of changes in net assets, and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The respective financial statements
of each of the Funds for the year ended July 31, 2005 and the financial
highlights of each of the Funds for each of the four years in the period ended
July 31, 2005 were audited by other auditors whose report, dated September 12,
2005, expressed an unqualified opinion on those financial statements and
financial highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. The Funds are not required to have, nor were we engaged to
perform, an audit of their internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Funds' internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. Our procedures included confirmation of securities owned as of
July 31, 2006, by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. 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 respective financial
positions of MuniHoldings Fund II, Inc. and of MuniHoldings New Jersey Insured
Fund, Inc. as of July 31, 2006, the results of their operations, the changes
in their net assets, and their financial highlights for the year then ended,
in conformity with U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 20, 2006
Fund Certification (unaudited)
In February 2006, MuniHoldings Fund II, Inc. and MuniHoldings New Jersey
Insured Fund, Inc. filed their Chief Executive Officer Certification for the
prior year with the New York Stock Exchange pursuant to Section 303A.12(a) of
the New York Stock Exchange Corporate Governance Listing Standards.
The Funds' Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Funds' Form N-CSR and are available on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
Important Tax Information (unaudited)
All of the net investment income distributions paid by MuniHoldings Fund II,
Inc. and MuniHoldings New Jersey Insured Fund, Inc. during the taxable year
ended July 31, 2006 qualify as tax-exempt interest dividends for federal
income tax purposes.
ANNUAL REPORTS JULY 31, 2006
Automatic Dividend Reinvestment Plan
How the Plan Works--The Funds offer a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by each Fund are
automatically reinvested in additional shares of Common Stock of each Fund.
The Plan is administered on behalf of the shareholders by The Bank of New York
(the "Plan Agent"). Under the Plan, whenever the Funds declare a dividend,
participants in the Plan will receive the equivalent in shares of Common Stock
of each Fund. The Plan Agent will acquire the shares for the participant's
account either (i) through receipt of additional unissued but authorized
shares of each Fund ("newly issued shares") or (ii) by purchase of outstanding
shares of Common Stock on the open market on the New York Stock Exchange or
elsewhere. If, on the dividend payment date, each Fund's net asset value per
share is equal to or less than the market price per share plus estimated
brokerage commissions (a condition often referred to as a "market premium"),
the Plan Agent will invest the dividend amount in newly issued shares. If the
Funds' net asset value per share is greater than the market price per share (a
condition often referred to as a "market discount"), the Plan Agent will
invest the dividend amount by purchasing on the open market additional shares.
If the Plan Agent is unable to invest the full dividend amount in open market
purchases, or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will invest any uninvested portion in newly
issued shares. The shares acquired are credited to each shareholder's account.
The amount credited is determined by dividing the dollar amount of the
dividend by either (i) when the shares are newly issued, the net asset value
per share on the date the shares are issued or (ii) when shares are purchased
in the open market, the average purchase price per share.
Participation in the Plan--Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Funds unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any
time without penalty by writing to the Plan Agent.
Benefits of the Plan--The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Funds. The Plan
promotes a long-term strategy of investing at a lower cost. All shares
acquired pursuant to the Plan receive voting rights. In addition, if the
market price plus commissions of each Fund's shares is above the net asset
value, participants in the Plan will receive shares of the Funds for less than
they could otherwise purchase them and with a cash value greater than the
value of any cash distribution they would have received. However, there may
not be enough shares available in the market to make distributions in shares
at prices below the net asset value. Also, since each Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
Plan Fees--There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Funds. However, brokerage commissions may be
incurred when the Funds purchase shares on the open market and shareholders
will pay a pro rata share of any such commissions.
Tax Implications--The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that
may be payable (or required to be withheld) on such dividends. Therefore,
income and capital gains may still be realized even though shareholders do not
receive cash. Participation in the Plan generally will not effect the tax-
exempt status of exempt interest dividends paid by the Fund. If, when the
Funds' shares are trading at a market premium, the Funds issue 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 the discount from the
market value (which may not exceed 5% of the fair market value of each 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.
Contact Information--All correspondence concerning the Plan, including any
questions about 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.
ANNUAL REPORTS JULY 31, 2006
Disclosure of Investment Advisory Agreement
Activities and Composition of the Boards of Directors
All but one member of each Board of Directors is an independent director,
whose only association with Fund Asset Management, L.P. (the "Investment
Adviser") or other Merrill Lynch affiliates is as a director of each Fund and
as a trustee or director of certain other funds advised by the Investment
Adviser or its affiliates. The Chairman of the Boards is also an independent
director. New director nominees are chosen by a Nominating Committee comprised
of independent directors. All independent directors also are members of each
Board's Audit Committee, and the independent directors meet in executive
session at each in-person Board meeting. Each Board and each Audit Committee
meet in person for at least two days each quarter and conduct other in-person
and telephone meetings throughout the year, some of which are formal Board
meetings and some of which are informational meetings. The independent counsel
to the independent directors attends all in-person Board and Audit Committee
meetings and other meetings at the independent directors' request.
Investment Advisory Agreement--Matters Considered by the Boards
Every year, each Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). Each Board assesses the
nature, scope and quality of the services provided to the Fund by the personnel
of the Investment Adviser and its affiliates, including administrative
services, shareholder services, oversight of fund accounting, marketing
services and assistance in meeting legal and regulatory requirements. Each
Board also receives and assesses information regarding the services provided
to the Fund by certain unaffiliated service providers.
At various times throughout the year, each Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates. Among the matters considered are: (a)
fees (in addition to management fees) paid to the Investment Adviser and its
affiliates by the Fund; (b) Fund operating expenses paid to third parties; (c)
the resources devoted to and compliance reports relating to the Fund's
investment objective, policies and restrictions, and its compliance with its
Code of Ethics and compliance policies and procedures; and (d) the nature,
cost and character of non-investment management services provided by the
Investment Adviser and its affiliates.
Each Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by
the Investment Adviser to be of high quality. Each Board also believes that
the Investment Adviser is financially sound and well managed and notes that
the Investment Adviser is affiliated with one of America's largest financial
firms. Each Board works closely with the Investment Adviser in overseeing the
Investment Adviser's efforts to achieve good performance. As part of this
effort, each Board discusses portfolio manager effectiveness and, when
performance is not satisfactory, discusses with the Investment Adviser taking
steps such as changing investment personnel.
Annual Consideration of Approval by the Boards of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement, each Board requests and receives materials specifically
relating to the Investment Advisory Agreement. These materials are prepared
separately for each Fund and include (a) information compiled by Lipper Inc.
("Lipper") on the fees and expenses, investment performance and leverage of
the Fund as compared to a comparable group of funds as classified by Lipper;
(b) information comparing each Fund's market price with its net asset value
per share; (c) a discussion by the Fund's portfolio management team regarding
investment strategies used by the Fund during its most recent fiscal year; (d)
information on the profitability to the Investment Adviser and its affiliates
of the Investment Advisory Agreement and other relationships with the Fund;
and (e) information provided by the Investment Adviser concerning investment
advisory fees charged to other retail closed-end funds under similar
investment mandates. Each Board also considers other matters it deems
important to the approval process, such as payments made for services related
to the valuation and pricing of Fund portfolio holdings, the Fund's portfolio
turnover statistics, and direct and indirect benefits to the Investment
Adviser and its affiliates from their relationship with the Fund. The Boards
did not identify any particular information as controlling, and each member of
the Boards may have attributed different weights to the various items
considered.
Certain Specific Renewal Data
In connection with the most recent renewal of each Fund's Investment Advisory
Agreement in February 2006, the independent directors' and Boards' review
included the following:
ANNUAL REPORTS JULY 31, 2006
Disclosure of Investment Advisory Agreement (concluded)
Services Provided by the Investment Adviser--Each Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including
the investment advisory services and the resulting performance of the Fund.
Each Board focused primarily on the Investment Adviser's investment advisory
services and the Fund's investment performance. Each Board compared Fund
performance - both including and excluding the effects of the Fund's fees and
expenses - to the performance of a comparable group of funds and the
performance of a relevant index or combination of indexes. The Board
considered the small number of funds classified by Lipper as comparable funds
to MuniHoldings New Jersey Insured Fund, Inc. While each Board reviews
performance data at least quarterly, consistent with the Investment Adviser's
investment goals, the Boards attach more importance to performance over
relatively long periods of time, typically three to five years.
Relative to closed-end leveraged general municipal debt funds deemed
comparable by the Investment Adviser, the Board noted that for the periods
ended November 30, 2005, MuniHoldings Fund II, Inc.'s performance for the one-,
three- and five-year periods ranked in the first quintile. The Board also
reviewed MuniHoldings Fund II, Inc.'s performance based on annualized total
return and annualized yield. The Board noted that with respect to both total
return and yield the Fund ranked in the first quintile for the years ended
November 30, 2005, 2004 and 2003; with respect to total return in the third
quintile for the year ended November 30, 2002 and the first quintile for the
year ended November 30, 2001; and with respect to yield in the second quintile
for the years ended November 30, 2002 and 2001. The Board noted the lack of
any significant number of comparable closed-end leveraged New Jersey municipal
debt funds, but did note that relative to the three comparable funds
identified MuniHoldings New Jersey Insured Fund, Inc.'s performance for the
periods ended November 30, 2005 ranked third out of three funds for the one-
year period, second out of three funds for the three-year period and first out
of two funds for the five-year period. The Board also noted that MuniHoldings
New Jersey Insured Fund, Inc.'s performance based on annualized yields ranked
second out of three funds for the years ended November 30, 2005 and 2003,
third out of three funds for the year ended November 30, 2004, and second out
of two funds for the years ended November 30, 2002 and 2001. Each Board
concluded that the Fund's performance supported the continuation of the
Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process--Each Board reviewed
the Fund's investment objectives and strategies. Each Board discusses with
senior management of the Investment Adviser responsible for investment
operations and the senior management of the Investment Adviser's municipal
investing group the strategies being used to achieve the stated objectives.
Among other things, each Board considers the size, education and experience of
the Investment Adviser's investment staff, its use of technology, and the
Investment Adviser's approach to training and retaining portfolio managers and
other research, advisory and management personnel. Each Board also reviews the
Investment Adviser's compensation policies and practices with respect to the
Fund's portfolio manager. Each Board also considered the experience of the
Fund's portfolio manager. It was noted that Mr. DiMella, the portfolio manager
for MuniHoldings Fund II, Inc., has more than 13 years' experience in
portfolio management and Mr. Jaeckel, the portfolio manager for MuniHoldings
New Jersey Insured Fund, Inc., has more than 15 years' experience. The Boards
considered that the Investment Adviser and its investment staff have extensive
experience in analyzing and managing the types of investments used by the
Funds. The Boards concluded that the Funds benefit from that experience.
Management Fees and Other Expenses--Each Board reviews the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels - the actual rate includes advisory and
administrative service fees and the effects of any fee waivers - compared to
the other funds in its Lipper category. It also compares the Fund's total
expenses to those of other comparable funds. Each Board considered the
services provided to and the fees charged by the Investment Adviser to retail
closed-end funds with similar investment mandates. The Boards noted that the
investment advisory fees charged to each of the Funds was equal to or slightly
more than the fees charged to other retail closed-end funds of the Investment
Adviser. With respect to MuniHoldings Fund II, Inc., the Board noted that the
contractual and actual management fee rates and total expense ratio were below
the median fees charged by comparable funds, as determined by Lipper. With
respect to MuniHoldings New Jersey Insured Fund, Inc., the Board noted that
the contractual management fee rate was equal to and the actual management fee
rate was higher than the median fee charged by comparable funds, as determined
by Lipper, while the actual total expense ratio was slightly lower than the
median charged by such comparable funds. The Boards concluded that each Fund's
management fee rate (including fee waivers) and overall expense ratio are
reasonable compared to those of other comparable funds.
ANNUAL REPORTS JULY 31, 2006
Profitability--Each Board considers the cost of the services provided to the
Fund by the Investment Adviser and the Investment Adviser's and its affiliates'
profits relating to the management and distribution of the Fund and the MLIM/
FAM-advised funds. As part of its analysis, each Board reviewed the Investment
Adviser's methodology in allocating its costs to the management of the Fund and
concluded that there was a reasonable basis for the allocation. The Boards
also considered federal court decisions discussing an investment adviser's
profitability and profitability levels considered to be reasonable in those
decisions. Each Board concluded that the profits of the Investment Adviser and
its affiliates are acceptable in relation to the nature and quality of
services provided and given the level of fees and expenses overall.
Economies of Scale--Each Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable
the Fund to participate in these economies of scale. Each Board considered
economies of scale to the extent applicable to each Fund's closed-end
structure and determined that each Fund appropriately benefits from any
economies of scale. Each Board determined that no changes were currently
necessary.
Conclusion
After the independent directors deliberated in executive session, each entire
Board, including all of the independent directors, approved the renewal of the
existing Investment Advisory Agreement, concluding that the advisory fee was
reasonable in relation to the services provided and that a contract renewal
was in the best interests of the shareholders.
ANNUAL REPORTS JULY 31, 2006
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreements--Matters Considered by the Boards
In connection with the Transaction between Merrill Lynch and BlackRock, each
Fund's Board of Directors considered a new investment advisory agreement (each
a "New Investment Advisory Agreement") between the Fund and BlackRock
Advisors, Inc. or its successor ("BlackRock Advisors"). Each Fund's New
Investment Advisory Agreement has been approved by the Fund's shareholders and
is expected to become effective upon the closing of the Transaction in the
third quarter of 2006.
The Boards discussed the New Investment Advisory Agreements at telephonic and
in-person meetings held during April and May 2006. Each Board, including the
independent directors, approved the applicable New Investment Advisory
Agreement at a meeting held on May 12, 2006.
To assist each Fund's Board in its consideration of the Fund's New Investment
Advisory Agreement, BlackRock provided materials and information about
BlackRock, including its financial condition and asset management capabilities
and organization, and Merrill Lynch provided materials and information about
the Transaction. Each Fund's independent directors, through their independent
legal counsel, also requested and received additional information from Merrill
Lynch and BlackRock in connection with their consideration of the Fund's New
Investment Advisory Agreement. The additional information was provided in
advance of the May 12, 2006 meetings. In addition, each Fund's independent
directors consulted with their counsel and Fund counsel on numerous occasions,
discussing, among other things, the legal standards and certain other
considerations relevant to the directors' deliberations.
At each Fund's Board meetings, the directors discussed with Merrill Lynch
management and certain BlackRock representatives the Transaction, its
strategic rationale and BlackRock's general plans and intentions regarding the
Fund. At these Board meetings, representatives of Merrill Lynch and BlackRock
made presentations to and responded to questions from the Boards. The
directors also inquired about the plans for and anticipated roles and
responsibilities of certain employees and officers of the Investment Adviser
and certain affiliates being transferred to BlackRock in connection with the
Transaction. The independent directors also conferred separately and with
their counsel about the Transaction and other matters related to the
Transaction on a number of occasions, including in connection with the April
and May 2006 meetings. After the presentations and after reviewing the written
materials provided, each Fund's independent directors met in executive
sessions with their counsel to consider the Fund's New Investment Advisory
Agreement.
In connection with each Board's review of the New Investment Advisory
Agreement, Merrill Lynch and/or BlackRock advised the directors about a
variety of matters. The advice included the following, among other matters:
* that there is not expected to be any diminution in the nature, quality and
extent of services provided to each Fund and its shareholders by BlackRock
Advisors, including compliance services;
* that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented
professionals;
* that each Fund should benefit from having access to BlackRock's state of
the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions (R) brand name;
* that BlackRock has no present intention to alter any applicable expense
waivers or reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek Board approval before making
any changes;
* that in connection with the Transaction, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Investment Adviser (or its affiliates), respectively; and
* that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they have a different financial
interest in the matters that were being considered than do Fund
shareholders.
The directors considered the information provided by Merrill Lynch and
BlackRock above, and, among other factors, the following:
* the potential benefits to each Fund's shareholders from being part of a
combined fund family with BlackRock-sponsored funds, including possible
economies of scale and access to investment opportunities;
ANNUAL REPORTS JULY 31, 2006
* the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
* the compliance policies and procedures of BlackRock Advisors;
* the terms and conditions of each New Investment Advisory Agreement,
including the fact that neither Fund's schedule of total advisory fees
will increase by virtue of the Fund's New Investment Advisory Agreement,
but will remain the same;
* that in February 2006, each Fund's Board performed a full annual review of
the investment advisory agreement currently in effect for the Fund (each a
"Current Investment Advisory Agreement") as required by the 1940 Act and
determined that the Investment Adviser has the capabilities, resources and
personnel necessary to provide the advisory and administrative services
currently provided to the Fund; and that the advisory and/or management
fees to be paid by the Fund, taking into account any applicable agreed-
upon fee waivers and breakpoints, represented reasonable compensation to
the Investment Adviser in light of the services to be provided, the
expected costs to the Investment Adviser of providing those services,
potential economies of scale, the fees and other expenses paid by similar
funds (including information provided by Lipper Inc. ["Lipper"]), and such
other matters as the directors considered relevant in the exercise of
their reasonable judgment; and
* that Merrill Lynch agreed to pay all expenses of each Fund in connection
with the Board's consideration of the New Investment Advisory Agreement
and related agreements and all costs of shareholder approval of the New
Investment Advisory Agreement and as a result the Fund would bear no costs
in obtaining shareholder approval of the New Investment Advisory
Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, each Board assessed
the nature, scope and quality of the services to be provided to the applicable
Fund by the personnel of BlackRock Advisors and its affiliates, including
administrative services, shareholder services, oversight of fund accounting
and assistance in meeting legal and regulatory requirements. In its review of
the New Investment Advisory Agreement, each Board also considered a range of
information in connection with its oversight of the services to be provided by
BlackRock Advisors and its affiliates. Among the matters considered by each
Board were: (a) fees (in addition to management fees) to be paid to BlackRock
Advisors and its affiliates by the Fund; (b) Fund operating expenses paid to
third parties; (c) the resources devoted to and compliance reports relating to
the Fund's investment objective, policies and restrictions, and its compliance
with its Code of Ethics and BlackRock Advisors' compliance policies and
procedures; and (d) the nature, cost and character of non-investment
management services to be provided by BlackRock Advisors and its affiliates.
In the period prior to each Fund's Board meeting to consider the renewal of
the Fund's Current Investment Advisory Agreement, the Board had requested and
received materials specifically relating to the Current Investment Advisory
Agreement. For each Fund, these materials included (a) information compiled
by Lipper on the fees and expenses and the investment performance of the
Fund as compared to a comparable group of funds as classified by Lipper;
(b) information comparing the Fund's market price with its net asset value per
share; (c) a discussion by the Fund's portfolio management team on investment
strategies used by the Fund during its most recent fiscal year; (d)
information on the profitability to the Investment Adviser of the Current
Investment Advisory Agreement and other payments received by the Investment
Adviser and its affiliates from the Fund; and (e) information provided by the
Investment Adviser concerning services related to the valuation and pricing of
Fund portfolio holdings, the Fund's portfolio turnover statistics, and direct
and indirect benefits to the Investment Adviser and its affiliates from their
relationship with the Fund.
In their deliberations, each Fund's directors considered information received
in connection with their recent continuation of the Fund's Current Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the Fund's New Investment Advisory Agreement. Neither Fund's
directors identified any particular information that was all-important or
controlling, and each director attributed different weights to the various
factors. The directors of each Fund, including a majority of the independent
directors, concluded that the terms of the Fund's New Investment Advisory
Agreement are appropriate, that the fees to be paid are reasonable in light of
the services to be provided to the Fund, and that the New Investment Advisory
Agreement should be approved and recommended to Fund shareholders.
ANNUAL REPORTS JULY 31, 2006
Disclosure of New Investment Advisory Agreement (continued)
Nature, Quality and Extent of Services Provided--Each Fund's Board reviewed
the nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of
the Fund, as well as the nature, quality and extent of services expected to be
provided by BlackRock Advisors. Each Fund's Board focused primarily on the
Investment Adviser's advisory services and the Fund's investment performance,
but also considered certain areas in which both the Investment Adviser and the
Fund receive services as part of the Merrill Lynch complex. Each Fund's Board
compared the Fund's performance - both including and excluding the effects of
the Fund's fees and expenses - to the performance of a comparable group of
funds, and the performance of a relevant index or combination of indexes.
While each Board reviews performance data at least quarterly, consistent with
the Investment Adviser's investment goals, the Board attaches more importance
to performance over relatively long periods of time, typically three to five
years.
In evaluating the nature, quality and extent of the services to be provided
by BlackRock Advisors under the New Investment Advisory Agreement, each
Fund's directors considered, among other things, the expected impact of the
Transaction on the operations, facilities, organization and personnel of New
BlackRock and how it would affect the Fund; the ability of BlackRock Advisors
to perform its duties after the Transaction; and any anticipated changes to
the current investment and other practices of the Fund.
Each Fund's directors were given information with respect to the potential
benefits to the Fund and its shareholders from having access to BlackRock's
state of the art technology and risk management analytic tools, including the
investment tools provided under the BlackRock Solutions brand name.
Each Fund's directors were advised that, as a result of Merrill Lynch's equity
interest in BlackRock after the Transaction, the Fund will continue to be
subject to restrictions concerning certain transactions involving Merrill
Lynch affiliates (for example, transactions with a Merrill Lynch broker-dealer
acting as principal) absent revised or new regulatory relief. Each Fund's
directors were advised that a revision of existing regulatory relief with
respect to these restrictions was being sought from the Securities and
Exchange Commission and were advised of the possibility of receipt of such
revised regulatory relief. There can be no assurance that such relief will be
obtained.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, each Fund's
directors determined that the nature and quality of services to be provided to
the Fund under the New Investment Advisory Agreement were expected to be as
good as or better than that provided under the Fund's Current Investment
Advisory Agreement. It was noted, however, that it is expected that there will
be changes in personnel following the Transaction and the combination of the
operations of the Investment Adviser and its affiliates with those of
BlackRock. Each Fund's directors noted that if current portfolio managers or
other personnel cease to be available, the Board would consider all available
options, which could include seeking the investment advisory or other services
of BlackRock affiliates. Accordingly, each Fund's directors concluded that,
overall, they were satisfied at the present time with assurances from
BlackRock and BlackRock Advisors as to the expected nature, extent and quality
of the services to be provided to the Fund under its New Investment Advisory
Agreement.
Costs of Services Provided and Profitability--It was noted that, in
conjunction with their recent review of each Fund's Current Investment
Advisory Agreement, the Fund's directors had received, among other things, a
report from Lipper comparing the Fund's expected fees and expenses to those of
a peer group selected by Lipper, and information as to the fees charged by the
Investment Adviser or its affiliates to other registered investment company
clients for investment management services. Each Fund's Board reviewed the
Fund's contractual management fee rate and actual management fee rate as a
percentage of total assets at common asset levels - the actual rate includes
advisory fees and the effects of any fee waivers - compared to the other funds
in its Lipper category. Each Fund's Board also compared the Fund's total
expenses to those of other comparable funds. The information showed that each
Fund had fees and expenses within the range of fees and expenses of comparable
funds. Each Fund's Board considered the services to be provided by and the
fees to be charged by BlackRock Advisors to other funds with similar
investment mandates and noted that the fees charged by BlackRock Advisors in
those cases, including fee waivers and expense reimbursements, were generally
comparable to those being charged to the Fund. Each Fund's Board concluded
that the Fund's management fee and fee rate and overall expense ratio are
reasonable compared to those of other comparable funds.
ANNUAL REPORTS JULY 31, 2006
In evaluating the costs of the services to be provided by BlackRock Advisors
under each Fund's New Investment Advisory Agreement, the Fund's directors
considered, among other things, whether advisory fees or other expenses would
change as a result of the Transaction. Based on their review of the materials
provided and the fact that each New Investment Advisory Agreement is
substantially similar to the applicable Current Investment Advisory Agreement
in all material respects, including the rate of compensation, each Fund's
directors determined that the Transaction should not increase the total fees
payable, including any fee waivers and expense reimbursements, for advisory
and administrative services. Each Fund's directors noted that it was not
possible to predict how the Transaction would affect BlackRock Advisors'
profitability from its relationship with the Fund.
Each Fund's directors discussed with BlackRock Advisors its general
methodology to be used in determining its profitability with respect to its
relationship with the Fund. The directors noted that they expect to receive
profitability information from BlackRock Advisors on at least an annual basis
and thus be in a position to evaluate whether any adjustments in Fund fees
and/or fee breakpoints would be appropriate.
Fees and Economies of Scale--Each Fund's Board considered the extent to which
economies of scale might be realized as the assets of the Fund increase and
whether there should be changes in the management fee rate or structure in
order to enable the Fund to participate in these economies of scale. Each
Fund's Board determined that changes were not currently necessary.
In reviewing the Transaction, the directors considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that each New Investment Advisory Agreement is
substantially similar to the applicable Current Investment Advisory Agreement
in all material respects, including the rate of compensation, each Fund's
directors determined that as a result of the Transaction, the Fund's total
advisory fees would be no higher than the fees under Investment Advisory
Agreement. Each Fund's directors noted that in conjunction with their most
recent deliberations concerning the Current Investment Advisory Agreement,
they had determined that the expected total fees for advisory and
administrative services for the Fund were reasonable in light of the services
to be provided. It was noted that in conjunction with the recent review of
each Current Investment Advisory Agreement, each Fund's directors had
received, among other things, a report from Lipper comparing the Fund's
expected fees and expenses to those of a peer group selected by Lipper, and
information as to the fees charged by the Investment Adviser or its affiliates
to other registered investment company clients for investment management
services. Each Fund's directors concluded that, because the rates for advisory
fees for the Fund would be no higher than its current fee rates, the proposed
management fee structure, including any fee waivers, was reasonable and that
no additional changes were currently necessary.
Fall-Out Benefits--In evaluating the fall-out benefits to be received by
BlackRock Advisors under the New Investment Advisory Agreement, each Fund's
directors considered whether the Transaction would have an impact on the fall-
out benefits received by the Investment Adviser by virtue of the Current
Investment Advisory Agreement. Based on their review of the materials
provided, including materials received in connection with their most recent
approval of the Current Investment Advisory Agreement, and their discussions
with management of the Investment Adviser and BlackRock, each Fund's directors
determined that those benefits could include increased ability for BlackRock
to distribute shares of its funds and other investment products. The directors
noted that any fall-out benefits were difficult to quantify with certainty at
this time, and indicated that they would continue to evaluate them going
forward.
ANNUAL REPORTS JULY 31, 2006
Disclosure of New Investment Advisory Agreement (concluded)
Investment Performance--Each Fund's directors considered investment
performance for the Fund. Each Fund's directors compared the Fund's
performance - both including and excluding the effects of the Fund's fees and
expenses - to the performance of a comparable group of funds, and the
performance of a relevant index or combination of indexes. The comparative
information received from Lipper showed each Fund's performance at various
levels within the range of performance of comparable funds over different time
periods. While each Board reviews performance data at least quarterly,
consistent with the Investment Adviser's investment goals, the Board attaches
more importance over relatively long periods of time, typically three to five
years. Each Fund's directors believed the Fund's performance was satisfactory.
Also, the directors took into account the investment performance of funds
currently advised by BlackRock Advisors. Each Board considered comparative
information from Lipper which showed that the performance of the funds advised
by BlackRock Advisors was within the range of performance of comparable funds
over different time periods. Each Fund's Board noted BlackRock's considerable
investment management experience and capabilities, but was unable to predict
what effect, if any, consummation of the Transaction would have on the future
performance of the Fund.
Conclusion--After the independent directors of each Fund deliberated in
executive session, the Fund's entire Board, including the independent
directors, approved the Fund's New Investment Advisory Agreement, concluding
that the advisory fee rate was reasonable in relation to the services provided
and that the New Investment Advisory Agreement was in the best interests of
the Fund's shareholders. In approving the New Investment Advisory Agreement,
each Board noted that it anticipated reviewing the continuance of the
agreement in advance of the expiration of the initial two-year period.
Contingent BlackRock Subadvisory Agreements--Matters Considered by the Boards
At the telephonic and in-person meetings held during April and May 2006 at
which each Board of Directors discussed and approved the New Investment
Advisory Agreement, the Board, including the independent directors, also
considered and approved a contingent subadvisory agreement (each a "Contingent
Subadvisory Agreement") between the Investment Adviser and BlackRock Advisors
(the "BlackRock Subadviser"). Each Fund's Contingent Subadvisory Agreement is
intended to ensure that the Fund operates with efficient portfolio management
services until the closing of the Transaction, in the event that the Fund's
Board deems it necessary and in the best interests of the Fund and its
shareholders that the BlackRock Subadviser assist in managing the operations
of the Fund during the interim period until the closing of the Transaction.
Each Fund's Contingent Subadvisory Agreement would take effect only upon
recommendation from the Investment Adviser and upon subsequent approval of the
Fund's Board in the period up to the closing of the Transaction. The
effectiveness of each Fund's Contingent Subadvisory Agreement, therefore, is
contingent on further Board approval. Pursuant to each Contingent Subadvisory
Agreement, the BlackRock Subadviser would receive a monthly fee from the
Investment Adviser equal to 50% of the advisory fee received by the Investment
Adviser. The Investment Adviser would pay the BlackRock Subadviser out of its
own resources. There would be no increase in either Fund's expenses as a
result of the Contingent Subadvisory Agreement.
In making its approval at the May in-person meeting, each Board considered the
Contingent Subadvisory Agreement in conjunction with the New Investment
Advisory Agreement and reviewed the same information and factors discussed
above, and came to the same conclusions. Each Fund's Board also considered in
conjunction with the Contingent Subadvisory Agreement the necessity of
ensuring that the Fund operates with effective management services until the
closing of the Transaction. In reviewing the subadvisory fee rate provided in
each Fund's Contingent Subadvisory Agreement, the Fund's Board took note of
the fact that both the Investment Adviser and the BlackRock Subadviser would
have significant responsibilities under their respective advisory agreements.
The Investment Adviser would remain responsible for oversight of each Fund's
operations and administration and the BlackRock Subadviser would provide
advisory services to the Fund under the Contingent Subadvisory Agreement. Each
Fund's Board also took into account the expected short duration of the term of
any Contingent Subadvisory Agreement and the fact that total advisory fees
paid by the Fund would not increase as a result of the Contingent Subadvisory
Agreement. Under all of the circumstances, each Fund's Board concluded that it
was a reasonable allocation of fees for the BlackRock Subadviser to receive
50% of the advisory fee paid by the Fund to the Investment Adviser.
After the independent directors of each Fund deliberated in executive session,
the Fund's entire Board, including the independent directors, approved the
applicable Contingent Subadvisory Agreement, concluding that the advisory fee
was reasonable in relation to the services provided and that the Contingent
Subadvisory Agreement was in the best interests of the Fund's shareholders.
ANNUAL REPORTS JULY 31, 2006
Swap Agreements
The Funds may invest in swap agreements, which are over-the-counter contracts
in which one party agrees to make periodic payments based on the change in
market value of a specified bond, basket of bonds, or index in return for
periodic payments based on a fixed or variable interest rate or the change in
market value of a different bond, basket of bonds or index. Swap agreements
may be used to obtain exposure to a bond or market without owning or taking
physical custody of securities. Swap agreements involve the risk that the
party with whom each Fund has entered into the swap will default on its
obligation to pay the Fund and the risk that the Fund will not be able to meet
its obligations to pay the other party to the agreement.
Dividend Policy
The Funds' dividend policy is to distribute all or a portion of their net
investment income to their shareholders on a monthly basis. In order to
provide shareholders with a more stable level of dividend distributions, the
Funds 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
Funds for any particular month may be more or less than the amount of net
investment income earned by the Funds during such month. The Funds' 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 these reports.
Change in Funds' Independent Registered Public Acccounting Firm
On August 28, 2006, Ernst & Young llp ("E&Y") resigned as the Independent
Registered Public Accounting Firm of MuniHoldings Fund II, Inc. and
MuniHoldings New Jersey Insured Fund, Inc. (each a "Fund" and collectively the
"Funds").
E&Y's reports on the financial statements of the Funds for the past two fiscal
years did not contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principles.
In connection with its audits for the two most recent fiscal years and through
August 28, 2006 (1) there were no disagreements with E&Y on any matter of
accounting principle or practices, financial statement disclosure or auditing
scope or procedure, whereby such disagreements, if not resolved to the
satisfaction of E&Y, would have caused them to make reference to the subject
matter of the disagreements in connection with their report on the financial
statements for such years; and (2) there have been no reportable events (as
defined in Item 304(a)(1)(v) of Regulation S-K).
The Audit Committee of each of the Funds' Board of Directors approved the
engagement of Deloitte & Touche llp as the Funds' Independent Registered
Public Accounting Firm for the fiscal years ended July 31, 2006.
ANNUAL REPORTS JULY 31, 2006
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Robert C. Doll, Jr.* President 2005 to President of the MLIM/FAM-advised funds 131 Funds None
P.O. Box 9011 and present since 2005; President and Chief Investment 178 Portfolios
Princeton, Director Officer of MLIM and FAM since 2001; Co-Head
NJ 08543-9011 (Americas Region) thereof from 2000 to 2001
Age: 51 and Senior Vice President from 1999 to 2001;
President and Director of Princeton Services,
Inc. ("Princeton Services") since 2001;
President of Princeton Administrators, L.P.
("Princeton Administrators") since 2001; Chief
Investment Officer of OppenheimerFunds, Inc. in
1999 and Executive Vice President thereof from
1991 to 1999.
* Mr. Doll 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. Doll
is an "interested person," as defined in the Investment Company Act, of the
Fund based on his positions with MLIM, FAM, Princeton Services and Princeton
Administrators. Directors serve until their resignation, removal or death, or
until December 31 of the year in which they turn 72. As Fund President, Mr. Doll
serves at the pleasure of the Board of Directors.
ANNUAL REPORTS JULY 31, 2006
Officers and Directors (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors*
Ronald W. Forbes** Director 1998 to Professor Emeritus of Finance, School of 49 Funds None
P.O. Box 9095 present Business, State University of New York at 51 Portfolios
Princeton, Albany since 2000 and Professor thereof from
NJ 08543-9095 1989 to 2000; International Consultant, Urban
Age: 65 Institute, Washington, D.C. from 1995 to 1999.
Cynthia A. Montgomery Director 1998 to Professor, Harvard Business School since 49 Funds Newell
P.O. Box 9095 present 1989; Associate Professor, J.L. Kellogg 51 Portfolios Rubbermaid, Inc.
Princeton, Graduate School of Management, Northwestern (manufacturing)
NJ 08543-9095 University from 1985 to 1989; Associate
Age: 54 Professor, Graduate School of Business
Administration, University of Michigan from
1979 to 1985; Director, Harvard Business
School Publishing since 2005; Director,
McLean Hospital since 2005.
Jean Margo Reid Director 2004 to Self-employed consultant since 2001; Counsel 49 Funds None
P.O. Box 9095 present of Alliance Capital Management (investment 51 Portfolios
Princeton, adviser) in 2000; General Counsel, Director and
NJ 08543-9095 Secretary of Sanford C. Bernstein & Co., Inc.
Age: 60 (investment adviser/broker-dealer) from 1997
to 2000; Secretary, Sanford C. Bernstein Fund,
Inc. from 1994 to 2000; Director and Secretary of
SCB, Inc. since 1998; Director and Secretary of
SCB Partners, Inc. since 2000; and Director of
Covenant House from 2001 to 2004.
Roscoe S. Suddarth Director 2000 to President, Middle East Institute, from 1995 49 Funds None
P.O. Box 9095 present to 2001; Foreign Service Officer, United 51 Portfolios
Princeton, States Foreign Service, from 1961 to 1995
NJ 08543-9095 and Career Minister from 1989 to 1995; Deputy
Age: 70 Inspector General, U.S. Department of State,
from 1991 to 1994; U.S. Ambassador to the
Hashemite Kingdom of Jordan from 1987 to 1990.
Richard R. West Director 1998 to Professor of Finance from 1984 to 1995, Dean 49 Funds Bowne & Co.,
P.O. Box 9095 present from 1984 to 1993 and since 1995 Dean 51 Portfolios Inc. (financial
Princeton, Emeritus of New York University's Leonard N. printers);
NJ 08543-9095 Stern School of Business Administration. Vornado Realty
Age: 68 Trust (real estate
company);
Alexander's, Inc.
(real estate
company)
Edward D. Zinbarg Director 2000 to Self-employed financial consultant since 49 Funds None
P.O. Box 9095 present 1994; Executive Vice President of the 51 Portfolios
Princeton, Prudential Insurance Company of America from
NJ 08543-9095 1988 to 1994; Former Director of Prudential
Age: 71 Reinsurance Company and former Trustee of
the Prudential Foundation.
* Directors serve until their resignation, removal or death, or until December 31
of the year in which they turn 72.
** Chairman of the Board of Directors and the Audit Committee.
ANNUAL REPORTS JULY 31, 2006
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 1993 to Managing Director of MLIM and FAM since 2006 and Treasurer thereof since 1999;
P.O. Box 9011 President present First Vice President of MLIM and FAM from 1997 to 2005; Senior Vice President
Princeton, and and and Treasurer of Princeton Services since 1999 and Director since 2004; Vice
NJ 08543-9011 Treasurer 1999 to President of FAM Distributors, Inc. ("FAMD") since 1999 and Director since 2004;
Age: 46 present Vice President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM
from 1990 to 2001; Vice President, Treasurer and Secretary of the IQ Funds since
2004.
Kenneth A. Jacob Senior 2002 to Managing Director (Tax-Exempt Fund Management) of MLIM since 2000; Director
P.O. Box 9011 Vice present of MLIM from 1997 to 2000.
Princeton, President
NJ 08543-9011
Age: 55
John M. Loffredo Senior 2002 to Managing Director (Tax-Exempt Fund Management) of MLIM since 2000; Director
P.O. Box 9011 Vice present of MLIM from 1997 to 2000.
Princeton, President
NJ 08543-9011
Age: 42
Robert A. DiMella Vice 1998 to Managing Director (Tax-Exempt Fund Management) of MLIM since 2004; Director
P.O. Box 9011 President present of MLIM from 2002 to 2004; Vice President of MLIM from 1996 to 2001.
Princeton,
NJ 08543-9011
Age: 39
Theodore R. Jaeckel Jr. Vice 1998 to Managing Director (Tax-Exempt Fund Management) of MLIM since 2005; Director
P.O. Box 9011 President present of MLIM from 1997 to 2005; Vice President of MLIM from 1991 to 1997.
Princeton,
NJ 08543-9011
Age: 46
Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
P.O. Box 9011 Compliance present and Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief
Princeton, Officer Compliance Officer of the IQ Funds since 2004; Global Director of Compliance
NJ 08543-9011 at Morgan Stanley Investment Management from 2002 to 2004; Managing Director
Age: 54 and Global Director of Compliance at Citigroup Asset Management from 2000 to
2002; Chief Compliance Officer at Soros Fund Management in 2000; Chief
Compliance Officer at Prudential Financial from 1995 to 2000; Senior Counsel
in the Securities and Exchange Commission's Division of Enforcement in
Washington, D.C. from 1990 to 1995.
Alice A. Pellegrino Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999
P.O. Box 9011 present to 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD
Princeton, and Princeton Services since 2004.
NJ 08543-9011
Age: 46
* Officers of the Funds serve at the pleasure of the Board of Directors.
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street - 11 East
New York, NY 10286
Preferred Stock:
The Bank of New York
101 Barclay Street - 7 West
New York, NY 10286
Investment Objectives
NYSE Symbol MuniHoldings Fund II, Inc. seeks to provide shareholders with
MUH 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 the bond
counsel to the issuer, is exempt from federal income taxes.
NYSE Symbol MuniHoldings New Jersey Insured Fund, Inc. seeks to provide
MUJ shareholders with current income exempt from federal income tax
and New Jersey personal income taxes by investing 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 tax and New Jersey personal income taxes.
ANNUAL REPORTS JULY 31, 2006
Availability of Quarterly Schedule of Investments
The Funds file their complete schedules of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third quarters
of each fiscal year on Form N-Q. The Funds' Forms N-Q are available on the
SEC's Web site at http://www.sec.gov. The Funds' Forms N-Q may also be
reviewed and copied at the SEC's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330.
Electronic Delivery
The Funds offer electronic delivery of communications to their shareholders.
In order to receive this service, you must register your account and provide
us with e-mail information. To sign up for this service, simply access this
Web site at http://www.icsdelivery.com/live and follow the instructions. When
you visit this site, you will obtain a personal identification number (PIN).
You will need this PIN should you wish to update your e-mail address, choose
to discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
ANNUAL REPORTS JULY 31, 2006
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of
the end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial
officer and principal accounting officer, or persons performing
similar functions. A copy of the code of ethics is available
without charge upon request by calling toll-free 1-800-MER-FUND
(1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of
directors has determined that (i) the registrant has the following
audit committee financial experts serving on its audit committee and
(ii) each audit committee financial expert is independent: (1)
Ronald W. Forbes, (2) Richard R. West, and (3) Edward D. Zinbarg.
Item 4 - Principal Accountant Fees and Services
Note: The Fund changed auditors effective August, 28, 2006. Prior
to that date, Ernst & Young LLP provided services as the Fund's
independent registered public accountant.
(a) Audit Fees - Fiscal Year Ending July 31, 2006 - $26,500
Fiscal Year Ending July 31, 2005 - $32,000
(b) Audit-Related Fees - Fiscal Year Ending July 31, 2006 - $3,500
Fiscal Year Ending July 31, 2005 - $3,500
The nature of the services include assurance and related services
reasonably related to the performance of the audit of financial
statements not included in Audit Fees.
(c) Tax Fees - Fiscal Year Ending July 31, 2006 - $6,000
Fiscal Year Ending July 31, 2005 - $5,700
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending July 31, 2006 - $0
Fiscal Year Ending July 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services provided
to the registrant on an annual basis require specific pre-approval
by the Committee. The Committee also must approve other non-audit
services provided to the registrant and those non-audit services
provided to the registrant's affiliated service providers that
relate directly to the operations and the financial reporting of the
registrant. Certain of these non-audit services that the Committee
believes are a) consistent with the SEC's auditor independence rules
and b) routine and recurring services that will not impair the
independence of the independent accountants may be approved by the
Committee without consideration on a specific case-by-case basis
("general pre-approval"). However, such services will only be
deemed pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for all of
the registrants the Committee oversees. Any proposed services
exceeding the pre-approved cost levels will require specific pre-
approval by the Committee, as will any other services not subject to
general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person board
meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending July 31, 2006 - $2,186,750
Fiscal Year Ending July 31, 2005 - $7,926,666
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation
S-X is compatible with maintaining the principal accountant's
independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,409,500, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals
are members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
Ronald W. Forbes
Cynthia A. Montgomery
Jean Margo Reid
Roscoe S. Suddarth
Richard R. West
Edward D. Zinbarg
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill
Lynch Investment Managers, L.P. and/or Fund Asset Management, L.P.
(the "Investment Adviser") authority to vote all proxies relating to
the Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to
the voting of proxies related to the portfolio securities held in
the account of one or more of its clients, including a Fund.
Pursuant to these Proxy Voting Procedures, the Investment Adviser's
primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its
shareholders, and to act in a manner that the Investment Adviser
believes is most likely to enhance the economic value of the
securities held by the Fund. The Proxy Voting Procedures are
designed to ensure that 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 - Portfolio Managers of Closed-End Management Investment Companies -
as of July 31, 2006.
(a)(1) Mr. Robert A. DiMella is primarily responsible for the day-
to-day management of the registrant's portfolio ("Portfolio
Manager"). Mr. DiMella has been a portfolio manager with MLIM since
1997, was a Vice President of MLIM from 1997 to 2001, was a Director
(Tax-Exempt Fund Management) of MLIM from 2002 to 2004, has been a
Managing Director of MLIM since 2004 and has 15 years of experience
investing in Municipal Bonds as a portfolio manager on behalf of
registered investment companies. He has been the portfolio manager
and a Vice President of the Fund since 1998.
(a)(2) As of July 31, 2006:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
Robert A.
DiMella 5 1 0 0 1 0
$ 3,012,641,695 $ 23,221,741 $ 0 $ 0 $ 23,221,741 $ 0
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for
other clients advised by the Investment. Adviser and its affiliates, including
other client accounts managed by the Fund's portfolio management team.
Investment decisions for the Fund and other clients are made with a view to
achieving their respective investment objectives and after consideration of
such factors as their current holdings, availability of cash for investment and
the size of their investments generally. Frequently, a particular security may
be bought or sold for only one client or in different amounts and at different
times for more than one but less than all clients. Likewise, because clients of
the Investment Adviser and its affiliates may have differing investment
strategies, a particular security may be bought for one or more clients when
one or more other clients are selling the security. The investment results for
the Fund may differ from the results achieved by other clients of the
Investment Adviser and its affiliates and results among clients may differ. In
addition, purchases or sales of the same security may be made for two or more
clients on the same day. In such event, such transactions will be allocated
among the clients in a manner believed by the Investment Adviser and its
affiliates to be equitable to each. The Investment Adviser will not determine
allocations based on whether it receives a performance based fee from the
client. In some cases, the allocation procedure could have an adverse effect on
the price or amount of the securities purchased or sold by the Fund. Purchase
and sale orders for the Fund may be combined with those of other clients of the
Investment Adviser and its affiliates in the interest of achieving the most
favorable net results to the Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a portfolio
manager will need to divide his time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise
where (i) the Investment Adviser may have an incentive, such as a performance
based fee, in managing one account and not with respect to other accounts it
manages or (ii) where a member of the Fund's portfolio management team owns an
interest in one fund or account he or she manages and not another.
(a)(3) As of July 31, 2006:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its
affiliates, including the Investment Adviser, is critical to MLIM's ability to
attract and retain the most talented asset management professionals. This
program ensures that compensation is aligned with maximizing investment returns
and it provides a competitive pay opportunity for competitive performance.
Compensation Program
The elements of total compensation for MLIM and its affiliates
portfolio managers are a fixed base salary, annual performance-based cash and
stock compensation (cash and stock bonus) and other benefits. MLIM has balanced
these components of pay to provide portfolio managers with a powerful incentive
to achieve consistently superior investment performance. By design, portfolio
manager compensation levels fluctuate--both up and down--with the relative
investment performance of the portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms,
base salaries represent a relatively small portion of a portfolio manager's
total compensation. This approach serves to enhance the motivational value of
the performance-based (and therefore variable) compensation elements of the
compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent.
To that end, MLIM and its affiliates portfolio manager incentive compensation
is based on a formulaic compensation program. MLIM's formulaic portfolio
manager compensation program includes: investment performance relative to a
subset of general closed-end, leveraged, municipal debt funds over 1-, 3- and 5-
year performance periods and a measure of operational efficiency. Portfolio
managers are compensated based on the pre-tax performance of the products they
manage. If a portfolio manager's tenure is less than 5 years, performance
periods will reflect time in position. Portfolio managers are compensated based
on products they manage. A discretionary element of portfolio manager
compensation may include consideration of: financial results, expense control,
profit margins, strategic planning and implementation, quality of client
service, market share, corporate reputation, capital allocation, compliance and
risk control, leadership, workforce diversity, supervision, technology and
innovation. MLIM and its affiliates also consider the extent to which
individuals exemplify and foster ML & Co.'s principles of client focus, respect
for the individual, teamwork, responsible citizenship and integrity. All
factors are considered collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers
in a combination of cash and stock. Typically, the cash bonus, when combined
with base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based
bonus is paid in restricted shares of ML & Co. stock. Paying a portion of
annual bonuses in stock puts compensation earned by a portfolio manager for a
given year "at risk" based on the company's ability to sustain and improve its
performance over future periods. The ultimate value of stock bonuses is
dependent on future ML & Co. stock price performance. As such, the stock bonus
aligns each portfolio manager's financial interests with those of the ML & Co.
shareholders and encourages a balance between short-term goals and long-term
strategic objectives. Management strongly believes that providing a significant
portion of competitive performance-based compensation in stock is in the best
interests of investors and shareholders. This approach ensures that portfolio
managers participate as shareholders in both the "downside risk" and "upside
opportunity" of the company's performance. Portfolio managers therefore have a
direct incentive to protect ML & Co.'s reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and
financial management objectives during a performance year are eligible to
participate in a deferred cash program. Awards under this program are in the
form of deferred cash that may be benchmarked to a menu of MLIM mutual funds
(including their own fund) during a five-year vesting period. The deferred cash
program aligns the interests of participating portfolio managers with the
investment results of MLIM products and promotes continuity of successful
portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based
plans offered generally to employees of ML & Co. and its affiliates, including
broad-based retirement, 401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of July 31, 2006,
Mr. DiMella does not beneficially own any stock issued by the
Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(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.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the second fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
MuniHoldings Fund II, Inc.
By: /s/Robert C. Doll, Jr.
------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
MuniHoldings Fund II, Inc.
Date: September 20, 2006
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/Robert C. Doll, Jr.
------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
MuniHoldings Fund II, Inc.
Date: September 20, 2006
By: /s/Donald C. Burke
---------------------
Donald C. Burke,
Chief Financial Officer of
MuniHoldings Fund II, Inc.
Date: September 20, 2006