MUNIHOLDINGS
FUND, INC.
STRATEGIC
Performance
Semi-Annual Report
October 31, 1997
<PAGE>
MUNIHOLDINGS FUND, INC.
The Benefits and Risks of Leveraging
MuniHoldings Fund, Inc. has the ability to leverage to seek to enhance the yield
and net asset value of its Common Stock. However, these objectives cannot be
achieved in all interest rate environments. To leverage, the Fund issues
Preferred Stock, which pays dividends at prevailing short-term interest rates,
and invests the proceeds in long-term municipal bonds. The interest earned on
these investments is paid to Common Stock shareholders in the form of dividends,
and the value of these portfolio holdings is reflected in the per share net
asset value of the Fund's Common Stock. However, in order to benefit Common
Stock shareholders, the yield curve must be positively sloped; that is,
short-term interest rates must be lower than long-term interest rates. At the
same time, a period of generally declining interest rates will benefit Common
Stock shareholders. If either of these conditions change, then the risks of
leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Com mon 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 on 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.
<PAGE>
MuniHoldings Fund, Inc., October 31, 1997
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report for
MuniHoldings Fund, Inc. In this and future shareholder reports, we will
highlight the Fund's performance and describe recent investment activities. The
Fund seeks to provide shareholders with current income exempt from Federal
income taxes by investing primarily in a portfolio of long-term,
investment-grade municipal obligations.
Since inception (May 2, 1997) through October 31, 1997, the Common Stock of
MuniHoldings Fund, Inc. earned $0.484 per share income dividends, which included
earned and unpaid dividends of $0.082. This represents a net annualized yield of
6.14%, based on a month-end per share net asset value of $15.82. Over the same
period, the total investment return on the Fund's Common Stock was +8.23%, based
on a change in per share net asset value from $15.00 to $15.82, and assuming
reinvestment of $0.402 per share income dividends.
Since inception (May 2, 1997) through October 31, 1997, the Fund's Auction
Market Preferred Stock had an average yield of 3.01% for Series A and 2.75% for
Series B.
The Municipal Market Environment
Long-term interest rates generally declined during the six-month period ended
October 31, 1997. The general financial environment has remained one of solid
economic growth tempered by few or no inflationary pressures. While economic
growth has been conducive to declining bond yields, it has remained strong
enough to suggest that the Federal Reserve Board (FRB) might find it necessary
to raise short-term interest rates. This would be intended to slow economic
growth and ensure that any incipient inflationary pressures would be curtailed.
There were investor concerns that the FRB would be forced to raise interest
rates prior to year-end, thus preventing an even more dramatic decline in
interest rates. Long-term tax-exempt revenue bonds, as measured by the Bond
Buyer Revenue Bond Index, declined over 50 basis points (0.50%) to end the
six-month period ended October 31, 1997 at 5.60%.
Similarly, long-term US Treasury bond yields generally moved lower during most
of the six-month period ended October 31, 1997. However, the turmoil in the
world's equity markets during the last week in October has resulted in a
significant rally in the Treasury bond market. The US Treasury bond market was
the beneficiary of a flight to quality mainly by foreign investors whose own
domestic markets have continued to be very volatile. Prior to the initial
decline in Asian equity markets, long-term US Treasury bond yields were
essentially unchanged. By the end of October, US Treasury bond yields declined
80 basis points to 6.15%, their lowest level of 1997.
The tax-exempt bond market's continued underperformance as compared to its
taxable counterpart has been largely in response to its ongoing weakening
technical position. As municipal bond yields have declined, municipalities have
hurriedly rushed to refinance outstanding higher-couponed debt with new issues
financed at present low rates. During the last six months, over $118 billion in
new long-term tax-exempt issues were underwritten, an increase of over 25%
versus the comparable period a year ago. As interest rates have continued to
decline, these refinancings have intensified municipal bond issuance. During the
past three months, approximately $60 billion in new long-term municipal
securities were underwritten, an increase of over 34% as compared to the October
31, 1996 quarter.
The recent trend toward larger and larger bond issues has also continued.
However, issues of such magnitude usually must be attractively priced to ensure
adequate investor interest. Obviously, the yields of other municipal bond issues
are impacted by the yield premiums such large issuers have been required to pay.
Much of the municipal bond market's recent underperformance can be traced to
market pressures that these large bond issuances have exerted.
In our opinion, the recent correction in world equity markets has enhanced the
near-term prospects for continued low, if not declining, interest rates in the
United States. It is likely that the recent correction will result in slower US
domestic growth in the coming months. This decline is likely to be generated in
part by reduced US export growth. Additionally, some decline in consumer
spending also can be expected in response to reduced consumer confidence.
Perhaps more importantly, it is likely that barring a dramatic and unexpected
resurgence in domestic growth, the FRB may be unwilling to raise interest rates
until the full impact of the equity market's corrections can be established.
All of these factors suggest that for at least the near term, interest rates,
including tax-exempt bond yields, are unlikely to rise by any appreciable
amount. It is probable that municipal bond yields will remain under some
pressure as a result of continued strong new-issue supply. However, the recent
pace of municipal bond issuance is likely to be unsustainable. Continued
increases in bond issuance will require lower tax-exempt bond yields to generate
the economic savings necessary for additional municipal bond refinancing. With
tax-exempt bond yields at already attractive yield ratios relative to US
Treasury bonds (approximately 90% at the end of October), any further pressure
on the municipal market may represent an attractive investment opportunity.
Portfolio Strategy
The Fund commenced operations on May 2, 1997, and we quickly became fully
invested. We concentrated on purchasing bonds less sensitive to interest rate
volatility, such as shorter-duration bonds, in an attempt to seek to provide as
high a level as possible of tax-exempt income and to protect the Fund's net
asset value. The bond market staged a significant rally through the summer
months and long-term tax-exempt yields declined approximately 50 basis points.
In our opinion, this occurred as a result of the economy turning decidedly
weaker in the second quarter of 1997 while inflation remained benign. Being
fully invested, the Fund benefited from the bond market rally realizing a total
return above the industry average. We maintained this fully invested position
for the Fund for the remainder of the period as the bond market remained in a
narrow 20 basis point trading range.
The total return of the Fund's Common Stock since inception was achieved largely
through our high-yield investments. These types of issues provide a significant
yield advantage over investment-grade bonds in addition to price appreciation
potential. Since the Fund's inception to October 31, 1997, the yield on
AAA-rated municipal bonds declined approximately 35 basis points as compared to
an average of an 85 basis point decline in the high-yield sector. In addition,
the credit quality of the Fund's high-yield issues improved during this time.
The current outlook for bonds appears favorable. Economic growth is expected to
slow and inflation remains benign. In this environment, we expect to continue to
invest in municipal bonds that will maintain a reasonably high level of
tax-exempt income.
The Fund began auctioning its Auction Market Preferred Stock during the first
week of June. Since that time, the yield on the Auction Market Preferred Stock
was trading between 3.40%-4.05%. Leverage benefits the Fund's Common Stock
shareholders by significantly augmenting their yield. However, should the spread
between short-term and long-term tax-exempt interest rates narrow, the benefits
of leverage will decline and, as a result, reduce the yield to the Fund's Common
Stock. (For a complete explanation of the benefits and risks of leveraging, see
page 1 of this report to shareholders.)
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Robert A. DiMella
Robert A. DiMella
Vice President and Portfolio Manager
/s/ John M. Loffredo
John M. Loffredo
Vice President and Portfolio Manager
December 5, 1997
2 & 3
<PAGE>
MuniHoldings Fund, Inc., October 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<C> <C> <C> <C> <S> <C>
Arizona--3.3% Navajo County, Arizona, IDA, IDR (Stone Container Corp. Project), AMT:
NR* NR* $ 3,000 7.40% due 4/01/2026 $3,311
NR* NR* 1,500 7.20% due 6/01/2027 1,647
B B2 4,000 Pima County, Arizona, IDA, Industrial Revenue Bonds (Tucson Electrical
Power Co. Project), Series B, 6% due 9/01/2029 4,039
NR* NR* 1,875 Show-Low, Arizona, Improvement District No. 5, 6.375% due 1/01/2015 1,877
====================================================================================================================================
California--4.8% AAA Aaa 11,090 Anaheim, California, Public Financing Authority, Lease Revenue Bonds
(Public Improvements Project), Sub-Series C, 5.68%** due 9/01/2028 (e) 2,085
NR* Baa2 1,340 California Educational Facilities Authority Revenue Bonds (Pooled
College and University Projects), Series B, 6.125% due 4/01/2013 1,404
Riverside County, California, Asset Leasing Corporation, Leasehold
Revenue Bonds (Riverside County Hospital Project) (d):
AAA Aaa 7,500 6.04%** due 6/01/2022 1,971
AAA Aaa 8,255 6.07%** due 6/01/2026 1,755
AAA Aaa 7,500 San Diego, California, IDR, RITR, 8.185% due 9/01/2018 (b) 8,513
====================================================================================================================================
Colorado--1.4% NR* Aa2 4,000 Colorado HFA, S/F Program, AMT, Senior Series B-2, 7% due 5/01/2026 4,440
====================================================================================================================================
Connecticut--4.6% A+ NR* 5,000 Connecticut State Development Authority, Water Facility Revenue Bonds
(Bridgeport Hydraulic), AMT, 6.15% due 4/01/2035 5,289
AA Aa 3,500 Connecticut State, HFA, Housing Mortgage Finance Program, Sub-Series
D-1, 6% due 5/15/2027 3,638
BBB- Ba2 3,000 Connecticut State Health and Educational Facilities Authority, Revenue
Refunding Bonds (University of Hartford), Series D, 6.80% due 7/01/2022 3,133
NR* Baa3 3,000 Mashantucket Western Pequot Tribe, Connecticut, Special Revenue Bonds,
Sub-Series B, 5.75% due 9/01/2027 3,028
====================================================================================================================================
Florida--2.2% AAA Aaa 3,000 Charlotte County, Florida, Health Care Facilities Revenue Bonds (Bon
Secours Health System), RIB, 7.974% due 8/26/2027 (b)(e) 3,304
A1+ VMIG1+ 400 Dade County, Florida, IDA, PCR, Refunding (Florida Power and Light
Company Project), VRDN, AMT, 4% due 4/01/2020 (a) 400
AAA Aaa 2,000 Lee County, Florida, Hospital Board of Directors, Hospital Revenue
Bonds, INFLOS, 9.296% due 4/01/2001 (b)(d)(h) 2,395
NR* NR* 1,050 Lee County, Florida, IDA, Healthcare Facilities Revenue Bonds (Cypress
Cove Healthpark), Series A, 6.375% due 10/01/2025 1,070
====================================================================================================================================
Idaho--0.4% BBB Baa2 1,375 Power County, Idaho, PCR, Refunding (FMC Corporation Project), 5.625%
due 10/01/2014 1,382
====================================================================================================================================
Illinois--4.7% NR* NR* 975 Beardstown, Illinois, IDR (Jefferson Smurfit Corp. Project), 8% due
10/01/2016 1,109
BBB NR* 5,000 Illinois Development Finance Authority, Revenue Refunding Bonds
(Community Rehabilitation Providers), Series A, 6.05% due 7/01/2019 5,143
Illinois Health Facilities Authority Revenue Bonds, Series A:
AAA Aaa 1,050 (Highland Park Hospital Project), 5.75% due 10/01/2026 (d) 1,073
AAA Aaa 1,710 Refunding (Advocate Healthcare), 5.875% due 8/15/2022 (d) 1,772
A A3 2,880 Refunding (Riverside Health Systems), 6% due 11/15/2015 2,988
NR* NR* 3,000 Round Lake Beach, Illinois, Tax Increment Revenue Refunding Bonds,
7.50% due 12/01/2013 3,257
====================================================================================================================================
Indiana--2.2% NR* NR* 8,985 Allen County, Indiana, Redevelopment District, Tax Incremental Revenue
Bonds (General Motors Development Area), 7%** due 11/15/2013 3,135
NR* Aaa 3,930 Indiana State Housing Finance Authority, S/F Mortgage Revenue Bonds, Series
A-1, 6.25% due 1/01/2017 4,124
====================================================================================================================================
Kentucky--2.7% AAA Aaa 5,000 Louisville and Jefferson County, Kentucky, Metropolitan Sewer District, Sewer
and Drain System Revenue Refunding Bonds, Series A, 6.25% due 5/15/2026 (d) 5,453
NR* NR* 3,150 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds (TJ International
Project), AMT, 6.55% due 4/15/2027 3,380
====================================================================================================================================
Louisiana--3.2% BB NR* 10,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain Company
Project), 6.50% due 1/01/2017 10,581
====================================================================================================================================
Massachusetts--0.3% AAA Aaa 1,000 Massachusetts State, HFA, Housing Revenue Bonds (Rental-Mortgage), AMT,
Series B, 6.40% due 7/01/2038 (c) 1,059
====================================================================================================================================
Michigan--1.6% AAA Aaa 5,000 Michigan State, HDA, Rental Housing Revenue Refunding Bonds, Series A, 5.875%
due 10/01/2017 (c) 5,097
====================================================================================================================================
Mississippi--2.4% BBB- Ba1 7,675 Claiborne County, Mississippi, PCR, Refunding (System Energy Resources Inc.
Project), 6.20% due 2/01/2026 7,867
====================================================================================================================================
Missouri--0.3% BB NR* 755 Missouri State Health and Educational Facilities Authority Revenue Bonds
(Southwest Baptist University Project), 9.50% due 10/01/2001 819
====================================================================================================================================
Nebraska--0.6% AAA NR* 2,000 Nebraska Investment Finance Authority, S/F Housing Revenue Bonds, AMT,
Series C, 6.30% due 9/01/2028 2,093
====================================================================================================================================
Nevada--4.2% Nevada Housing Division, Senior Bonds, AMT, Series B-1:
NR* Aaa 4,335 6.05% due 10/01/2018 4,464
NR* Aaa 2,810 6.15% due 4/01/2029 2,905
Nevada Housing Division, S/F Program:
NR* Aaa 4,315 Senior Series D-1, 6.15% due 10/01/2017 4,521
NR* Aaa 1,890 Senior Series D-2, AMT, 6.35% due 4/01/2028 1,975
====================================================================================================================================
New Hampshire--1.7% NR* Aa3 5,185 New Hampshire State Housing Finance Authority, S/F Revenue Bonds (Mortgage
Acquisition), AMT, Series G, 6.30% due 1/01/2026 5,390
====================================================================================================================================
</TABLE>
Portfolio Abbreviations
To simplify the listings of MuniHoldings Fund, Inc.'s portfolio holdings in the
Schedule of Investments, we have abbreviated the names of the securities
according to the list at right.
AMT Alternative Minimum Tax (subject to)
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniHoldings Fund, Inc., October 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<C> <C> <C> <C> <S> <C>
New Jersey--1.7% BBB Baa2 $ 3,425 New Jersey Health Care Facilities Financing Authority, Revenue Refunding
Bonds (Saint Elizabeth Hospital Obligation Group), 6% due 7/01/2020 $ 3,541
BBB Baa2 2,000 New Jersey State Educational Facilities Authority Revenue Bonds (Monmouth
University), Series C, 5.80% due 7/01/2022 2,039
====================================================================================================================================
New Mexico--2.7% Farmington, New Mexico, PCR, Refunding (Public Service Company of San Juan):
BB+ Ba1 2,000 Series A, 6.30% due 12/01/2016 2,114
BB+ Ba1 2,500 Series B, 6.30% due 12/01/2016 2,632
AAA Aaa 1,825 Los Alamos County, New Mexico, Utility System Revenue Refunding Bonds,
Series A, 6% due 7/01/2015 (e) 1,932
AAA NR* 2,000 New Mexico Mortgage Finance Authority, S/F Mortgage Program, AMT, Series
B-2, 6.30% due 7/01/2028 2,094
====================================================================================================================================
New York--16.0% New York City, New York, Municipal Water Finance Authority, Water and Sewer
System Revenue Bonds:
AAA Aaa 1,065 RITR, Series 1997-6, 7.495% due 6/15/2026 (b)(d) 1,128
AAA Aaa 12,000 Series B, 5.875% due 6/15/2026 (e) 12,477
New York City, New York, UT:
BBB+ Baa1 10,000 Refunding, Series F, 6% due 8/01/2016 10,384
BBB+ Baa1 7,035 Series E, 6% due 8/01/2016 7,305
New York State Dormitory Authority Revenue Bonds:
A- Baa1 15,145 Refunding (Mental Health Services Facilities), Series B, 5.50% due
8/15/2017 15,144
A- A3 6,000 (State University Educational Facilities), 5.50% due 5/15/2026 6,000
====================================================================================================================================
Oklahoma--2.1% BB+ NR* 985 Blaine County, Oklahoma, Industrial Authority, IDR (US Gypsum Co. Project),
7.25% due 10/01/2010 1,066
BBB- Baa2 5,400 Tulsa, Oklahoma, Municipal Airport Trust, Revenue Refunding Bonds (American
Airlines Project), 6.25% due 6/01/2020 5,727
====================================================================================================================================
Oregon--0.4% NR* NR* 1,300 Western Generation Agency, Oregon, Cogeneration Project Revenue Bonds (Wauna
Cogeneration Project), AMT, Series B, 7.40% due 1/01/2016 1,418
====================================================================================================================================
Pennsylvania--6.2% Beaver County, Pennsylvania, IDA, PCR, Refunding (Cleveland Electric Project):
BB+ Ba2 1,600 7.625% due 5/01/2025 1,816
BB+ Ba2 1,500 Series A, 7.75% due 7/15/2025 1,717
AAA Aaa 4,750 Lehigh County, Pennsylvania, IDA, PCR, Refunding (Pennsylvania Power and
Light Company Project), Series A, 6.40% due 11/01/2021 (d) 5,193
NR* NR* 1,750 Montgomery County, Pennsylvania, IDA, Revenue Refunding Bonds
(Meadowood--1st Mortgage), Series A, 6.25% due 12/01/2017 1,765
NR* NR* 4,970 Pennsylvania State Higher Educational Facilities Authority, College and
University Revenue Bonds (Eastern College), Series B, 8% due 10/15/2025 5,709
NR* NR* 4,000 Philadelphia, Pennsylvania, Authority for IDR, Refunding (Commercial
Development--Days Inn), Series B, 6.50% due 10/01/2027 4,176
====================================================================================================================================
Tennessee--7.6% AA Aa 3,400 Educational Funding South Inc., Tennessee, Educational Loan Revenue Bonds,
AMT, Senior Sub-Series B, 6.20% due 12/01/2021 3,542
Hardeman County, Tennessee, Correctional Facilities Corporation Revenue Bonds:
NR* NR* 680 7% due 8/01/2004 723
NR* NR* 4,500 7.75% due 8/01/2017 5,010
NR* NR* 1,700 Series B, 7.375% due 8/01/2017 1,843
AA Aa2 8,500 Tennessee Housing Development Agency, Homeowner Program, AMT, Series 3, 6%
due 1/01/2028 8,714
A+ A1 4,750 Tennessee Housing Development Agency, Mortgage Finance Refunding Bonds,
Series A, 5.95% due 7/01/2028 4,864
====================================================================================================================================
Texas--10.6% A- A3 5,615 Cass County, Texas, Industrial Development Corporation, Environmental
Improvement Revenue Bonds (International Paper Co. Project), AMT, Series A,
6.25% due 4/01/2021 5,944
AAA Aaa 4,000 Harris County, Texas, Health Facilities Development Corporation, Hospital
Revenue Bonds, RITR, Series 12, 8.67% due 10/01/2024 (b)(d) 4,640
BB Ba2 5,000 Houston, Texas, Airport System Revenue Bonds (Special Facilities--
Continental Airline Terminal Improvement), AMT, Series B, 6.125% due
7/15/2017 5,160
A- Baa1 3,500 Lower Colorado River Authority, Texas, PCR (Samsung Austin Semiconductor),
AMT, 6.375% due 4/01/2027 3,714
AA Aa2 5,000 Lower Neches Valley Authority, Texas, Industrial Development Corporation,
Sewer Facilities Revenue Bonds (Mobil Oil Refining Corp. Project), AMT,
6.40% due 3/01/2030 5,355
AAA NR* 1,825 Lubbock, Texas, Housing Finance Corporation, S/F Mortgage Revenue Refunding
Bonds (Mortgage Backed Securities Program), Series A, 6.125% due
\ 12/01/2017 (g) 1,907
BB Ba2 5,000 Odessa, Texas, Junior College District, Revenue Refunding Bonds, Series A,
8.125% due 12/01/2018 5,679
AAA Aaa 2,500 Tarrant County, Texas, Health Facilities Development Corporation, Health
System Revenue Bonds (Texas Health Resources System), Series A, 5% due
2/15/2026 (d) 2,352
====================================================================================================================================
Utah--5.6% AAA Aaa 7,000 Intermountain Power Agency, Utah, Power Supply Revenue Refunding Bonds,
Series B, 5.75% due 7/01/2019 (d) 7,259
AA Aa 7,200 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospitals Inc.),
6.25% due 2/15/2023 7,606
NR* NR* 3,000 Toole County, Utah, PCR, Refunding (Laidlaw Environmental), AMT, Series A,
7.55% due 7/01/2027 3,285
====================================================================================================================================
Virginia--3.2% AA- Aa3 500 Metropolitan Washington D.C. Airports Authority, Virginia, General Airport
Revenue Bonds, AMT, Series B, 5.50% due 10/01/2023 501
AAA NR* 1,500 Prince William County, Virginia, IDA, Revenue Refunding Bonds (Potomac
Place), Series A, 6.25% due 12/20/2027 (g) 1,582
AAA Aaa 7,750 Richmond, Virginia, Metropolitan Authority, Expressway Revenue Refunding
Bonds, Series B, 6.25% due 7/15/2022 (f) 8,348
====================================================================================================================================
Washington--1.6% AAA Aaa 5,000 Washington State Public Power Supply Systems, Revenue Refunding Bonds
(Nuclear Project No. 1), Series A, 6.25% due 7/01/2017 (d) 5,364
====================================================================================================================================
</TABLE>
6 & 7
<PAGE>
MuniHoldings Fund, Inc., October 31, 1997
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<C> <C> <C> <C> <S> <C>
West Virginia--0.3% A A2 $ 925 Braxton County, West Virginia, Solid Waste Disposal Revenue Bonds
(Weyerhaeuser Company Project), AMT, 6.125% due 4/01/2026 971
====================================================================================================================================
Wisconsin--0.9% AA Aa2 2,800 Wisconsin Housing and Economic Development Authority, Home Ownership
Revenue Refunding Bonds, AMT, Series B, 6.25% due 9/01/2027 2,918
====================================================================================================================================
Total Investments (Cost--$311,879)--99.5% 25,544
Other Assets Less Liabilities--0.5% 1,586
--------
Net Assets--100.0% $327,130
========
====================================================================================================================================
</TABLE>
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at October 31,
1997.
(b) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1997.
(c) AMBAC Insured.
(d) MBIA Insured.
(e) FSA Insured.
(f) FGIC Insured.
(g) GNMA Collateralized.
(h) Prerefunded.
+ Highest short-term rating by Moody's Investors Service, Inc.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown is the effective
yield at the time of purchase by the Fund.
See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of October 31, 1997
============================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$311,879,135) (Note 1a)............ $325,544,118
Cash....................................................................... 304,010
Interest receivable........................................................ 5,261,053
Deferred organization expenses (Note 1e)................................... 20,974
------------
Total assets............................................................... 331,130,155
------------
============================================================================================================================
Liabilities: Payables:
Securities purchased.................................................... $ 3,384,859
Investment adviser (Note 2)............................................. 142,118
Dividends to shareholders (Note 1f)..................................... 76,402 3,603,379
-----------
Accrued expenses........................................................... 396,699
------------
Total liabilities.......................................................... 4,000,078
------------
============================================================================================================================
Net Assets: Net assets................................................................. $327,130,077
============
============================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (4,400 shares of AMPS* issued
and outstanding at $25,000 per share liquidation preference) ........... $110,000,000
Common Stock, par value $.10 per share (13,728,989 shares issued
and outstanding)........................................................ $ 1,372,899
Paid-in capital in excess of par........................................... 203,143,909
Undistributed investment income--net....................................... 1,239,583
Accumulated realized capital losses on investments--net.................... (2,291,297)
Unrealized appreciation on investments--net................................ 13,664,983
-----------
Total--Equivalent to $15.82 net asset value per share of Common Stock
(market price-- $15.3125).................................................. 217,130,077
------------
Total capital.............................................................. $327,130,077
============
============================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
8 & 9
<PAGE>
MuniHoldings Fund, Inc., October 31, 1997
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period May 2, 1997+ to October 31, 1997
===========================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned.................. $ 9,021,533
Income (Note 1d):
===========================================================================================================================
Expenses: Investment advisory fees (Note 2)......................................... $ 847,161
Commission fees (Note 4).................................................. 118,828
Accounting services (Note 2).............................................. 25,772
Professional fees......................................................... 21,849
Transfer agent fees....................................................... 16,580
Directors' fees and expenses.............................................. 11,550
Custodian fees............................................................ 9,529
Listing fees.............................................................. 7,642
Pricing fees.............................................................. 5,198
Printing and shareholder reports.......................................... 4,227
Amortization of organization expenses (Note 1e)........................... 2,515
Other..................................................................... 10,730
----------
Total expenses before reimbursement....................................... 1,081,581
Reimbursement of expenses (Note 2)........................................ (429,866)
----------
Total expenses after reimbursement........................................ 651,715
------------
Investment income--net.................................................... 8,369,818
------------
===========================================================================================================================
Realized & Realized loss on investments--net......................................... (2,291,297)
Unrealized Gain Unrealized appreciation on investments--net............................... 13,664,983
(Loss) On ------------
Investments--Net Net Increase in Net Assets Resulting from Operations...................... $ 19,743,504
(Notes 1b, 1d ============
& 3):
===========================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
May 2, 1997+ to
Increase (Decrease) in Net Assets: Oct. 31, 1997
============================================================================================================================
<S> <C> <C>
Operations: Investment income--net............................................................... $ 8,369,818
Realized loss on investments--net.................................................... (2,291,297)
Unrealized appreciation on investments--net.......................................... 13,664,983
------------
Net increase in net assets resulting from operations................................. 19,743,504
------------
============================================================================================================================
Dividends to Investment income--net:
Shareholders Common Stock...................................................................... (5,522,541)
(Note 1f): Preferred Stock................................................................... (1,607,694)
------------
Net decrease in net assets resulting from dividends to shareholders.................. (7,130,235)
------------
============================================================================================================================
Capital Stock Net proceeds from issuance of Common Stock........................................... 205,834,830
Transactions Proceeds from issuance of Preferred Stock............................................ 110,000,000
(Notes 1e & 4): Offering and underwriting costs resulting from the issuance of Common Stock.......... (368,027)
Offering and underwriting costs resulting from the issuance of Preferred Stock....... (1,050,000)
------------
Net increase in net assets derived from capital stock transactions................... 314,416,803
------------
============================================================================================================================
Net Assets: Total increase in net assets......................................................... 327,030,072
Beginning of period.................................................................. 100,005
------------
End of period*....................................................................... $327,130,077
============
============================================================================================================================
* Undistributed investment income-- net............................................. $ 1,239,583
============
============================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
10 & 11
<PAGE>
MuniHoldings Fund, Inc., October 31, 1997
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
May 2, 1997+ to
Increase (Decrease) in Net Asset Value: Oct. 31, 1997
===============================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period................................................ $ 15.00
Operating ----------
Performance: Investment income--net.............................................................. .61
Realized and unrealized gain on investments--net.................................... .84
----------
Total from investment operations.................................................... 1.45
----------
Less dividends to Common Stock shareholders:
Investment income--net........................................................... (.40)
----------
Capital charge resulting from issuance of Common Stock.............................. (.03)
----------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income--net......................................................... (.12)
Capital charge resulting from issuance of Preferred Stock........................ (.08)
----------
Total effect of Preferred Stock activity............................................ (.20)
----------
Net asset value, end of period...................................................... $ 15.82
==========
Market price per share, end of period............................................... $ 15.3125
==========
===============================================================================================================================
Total Investment Based on market price per share..................................................... 4.76%++
Return:** ==========
Based on net asset value per share.................................................. 8.23%++
==========
===============================================================================================================================
Ratios to Average Expenses, net of reimbursement...................................................... .43%*
Net Assets:*** ==========
Expenses............................................................................ .72%*
==========
Investment income--net.............................................................. 5.53%*
==========
===============================================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands).................... $ 217,130
==========
Preferred Stock outstanding, end of period (in thousands)........................... $ 110,000
==========
Portfolio turnover.................................................................. 40.28%
==========
===============================================================================================================================
Leverage: Asset coverage per $1,000........................................................... $ 2,974
==========
===============================================================================================================================
Dividends Per Series A--Investment income--net...................................................... $ 382
Share on Preferred ==========
Stock Outstanding: Series B--Investment income--net...................................................... $ 349
==========
===============================================================================================================================
</TABLE>
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on June 5, 1997.
++ Aggregate total investment return.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940 as a non-diversified, closed-end management investment company.
These unaudited financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal recurring nature.
Prior to commencement of operations on May 2, 1997 the Fund had no operations
other than those relating to organizational matters and the sale of 6,667 shares
of Common Stock on April 25, 1997, to Fund Asset Management, L.P. ("FAM") for
$100,005. The Fund's Common Stock is listed on the New York Stock Exchange under
the symbol MHD. The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options, which are traded on exchanges, are valued at
their last sale price as of the close of such exchanges or, lacking any sales,
at the last available bid price. Securities with remaining maturities of sixty
days or less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund, including valuations furnished by a pricing
service retained by the Fund, which may utilize a matrix system for valuations.
The procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
o Financial futures contracts--The Fund may purchase or sell interest rate
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
o Options--The Fund is authorized to write covered call options and purchase 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.
12 & 13
<PAGE>
MuniHoldings Fund, Inc., October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
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.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization and offering expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period. Direct expenses
relating to the public offering of the Fund's shares were charged to capital at
the time of issuance of the shares.
(f) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of 0.55% of the Fund's average weekly net assets. For the period
May 2, 1997 to October 31, 1997, FAM earned fees of $847,161, of which $392,886
was voluntarily waived. FAM also reimbursed the Fund additional expenses of
$36,980.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period May 2, 1997 to October 31, 1997 were $401,485,380 and $112,048,737,
respectively.
Net realized and unrealized gains (losses) as of October 31, 1997 were as
follows:
- --------------------------------------------------------------------------------
Realized
Gains Unrealized
(Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments ..................... $ 1,377,969 $13,664,983
Financial futures contracts ............... (3,669,266) --
----------- -----------
Total ..................................... $(2,291,297) $13,664,983
=========== ===========
- --------------------------------------------------------------------------------
As of October 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $13,664,983, all of which related to appreciated securities.
The aggregate cost of investments at October 31, 1997 for Federal income tax
purposes was $311,879,135.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital 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 capital stock without approval of holders of
Common Stock.
Common Stock
During the period May 2, 1997 to October 31, 1997, 13,722,322 shares were sold.
Prior to May 2, 1997 (commencement of operations), the Fund issued 6,667 shares
to FAM for $100,005.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund 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 October
31, 1997 were as follows: Series A, 3.58% and Series B, 3.62%.
As of October 31, 1997, there were 4,400 AMPS shares authorized, issued and
outstanding, with a liquidation preference of $25,000 per share.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from 0.25% to 0.375%, calculated on the proceeds of
each auction.0 For the period May 2, 1997 to October 31, 1997, Merrill Lynch,
Pierce, Fenner & Smith Inc., an affiliate of FAM, earned $102,623 as
commissions.
5. Subsequent Event:
On November 6, 1997, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.081850 per share,
payable on November 26, 1997 to shareholders of record as of November 17, 1997.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
John Loffredo, Vice President
Gerald M. Richard, Treasurer
Patrick D. Sweeney, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
IBJ Schroder Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MHD
14 & 15
<PAGE>
This report, including the financial information herein, is transmitted to the
shareholders of MuniHoldings Fund, Inc. for their information. It is not a
prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a representation of future
performance. The Fund has the ability to leverage its Common Stock by issuing
Preferred Stock to provide the Common Stock shareholders with a potentially
higher rate of return. Leverage creates risks for Common Stock shareholders,
including the likelihood of greater volatility of net asset value and market
price of shares of the Common Stock, and the risk that fluctuations in the
short-term dividend rates of the Preferred Stock may affect the yield to Common
Stock shareholders. Statements and other information herein are as dated and are
subject to change.
MuniHoldings Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #HOLD01--10/97
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