MUNIHOLDINGS
FUND II, INC.
FUND LOGO
Annual Report
July 31, 1998
This report, including the financial information herein, is
transmitted to the shareholders of MuniHoldings Fund II, 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 II, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MUNIHOLDINGS FUND II, INC.
The Benefits and
Risks of
Leveraging
MuniHoldings Fund II, 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 Common Stock
capitalization of $100 million and the issuance of Preferred Stock
for an additional $50 million, creating a total value of $150
million available for investment in long-term municipal bonds. If
prevailing short-term interest rates are approximately 3% and long-
term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million
of Preferred Stock based on the lower short-term interest rates. At
the same time, the fund's total portfolio of $150 million earns the
income based on long-term interest rates. Of course, increases in
short-term interest rates would reduce (and even eliminate) the
dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term
investments, and therefore the Common Stock shareholders are the
beneficiaries of the incremental yield. However, if short-term
interest rates rise, narrowing the differential between short-term
and long-term interest rates, the incremental yield pickup on the
Common Stock will be reduced or eliminated completely. At the same
time, the market value of the fund's Common Stock (that is, its
price as listed on the New York Stock Exchange) may, as a result,
decline. Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price
of the portfolio's investments, since the value of the fund's
Preferred Stock does not fluctuate. In addition to the decline in
net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain
securities whose potential income return is inversely related to
changes in a floating interest rate ("inverse floaters"). In
general, interest rates on inverse floaters will decrease when short-
term interest rates increase and increase when short-term interest
rates decrease. Investments in inverse floaters may be characterized
as derivative securities and may subject the Fund to the risks of
reduced or eliminated interest payments and losses of invested
principal. In addition, inverse floaters have the effect of
providing investment leverage and, as a result, the market value of
such securities will generally be more volatile than that of fixed
rate, tax-exempt securities.
MuniHoldings Fund II, Inc., July 31, 1998
DEAR SHAREHOLDER
We are pleased to provide you with this first annual report for
MuniHoldings Fund II, 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 (February 27, 1998), through July 31, 1998, the
Common Stock of MuniHoldings Fund II, Inc. earned $0.354 per share
income dividends, which included earned and unpaid dividends of
$0.069. This represents a net annualized yield of 5.56%, based on a
month-end per share net asset value of $15.01. Over the same period,
the total investment return on the Fund's Common Stock was +2.03%,
based on a change in per share net asset value from $15.00 to
$15.01, and assuming reinvestment of $0.286 per share income
dividends.
For the period February 27, 1998 through July 31, 1998, the Fund's
Auction Market Preferred Stock had an average yield of 3.02% for
Series A and 3.17% for Series B.
The Municipal Market Environment
During the five-month period since the Fund's inception (February
27, 1998) through July 31, 1998, long-term tax-exempt revenue bond
yields were little changed. Thus far this year, the near absence of
inflationary pressures continued to support low interest rates.
However, consistently strong domestic economic growth has caused
some investors to fear that the Federal Reserve Board will be forced
eventually to raise short-term interest rates. Such action would be
taken to ensure that the US economy's present rate of growth would
decelerate before any inflationary pressures could develop. These
concerns served to push bond yields modestly higher by mid-April.
However, the weakening financial conditions in many Asian countries
subsequently calmed investor fears of Federal Reserve Board
intervention, and fixed-income prices again moved higher. As
measured by the Bond Buyer Revenue Bond Index, long-term uninsured
municipal bond yields fell approximately 5 basis points (0.05%) to
end the five-month period at 5.36%. As in late 1997 and early 1998,
US Treasury bond yields benefited from a "flight to quality" as
foreign investors were drawn to the relative safe haven of US
Government securities. Long-term US Treasury bond yields declined
approximately 10 basis points to end the six-month period at 5.71%.
Thus far in 1998, the municipal bond market has experienced
unexpectedly strong supply pressures. These supply pressures have
prevented tax-exempt bond yields from declining as much as US
Treasury bond yields. During the first seven months of 1998, almost
$153 billion in new tax-exempt bonds were underwritten, an increase
of almost 50% compared to the same period a year ago. During the
most recent three months, municipalities issued over $75 billion in
new securities, an increase of nearly 35% compared to the same three-
month period in 1997. Additionally, corporate issuers have also
viewed current interest rate levels as an opportunity to issue
significant amounts of taxable securities. For the first half of
1998, over $500 billion in investment-grade corporate bonds have
been underwritten, an increase of more than 70% compared to the same
period a year ago. This sizeable corporate bond issuance has tended
to both support generally higher fixed-income yields and reduce the
demand for tax-exempt bonds.
However, the recent pace of new municipal bond issuance is unlikely
to be maintained. Continued increases in bond issuance will require
lower and lower municipal bond yields to generate the economic
savings necessary for additional tax-exempt bond refinancings.
Preliminary estimates for 1998 total municipal bond issuance are in
the $200 billion--$225 billion range. These estimates suggest that
recent supply pressures are likely to abate later in the year.
Recently, municipal bond investors received approximately $30
billion in June and July in coupon payments, bond maturities and
proceeds from early redemptions. The demand generated by these
assets has helped to offset the increase in supply seen thus far
this year.
The continued impact of the Asian financial crisis on the US
domestic economy's future growth remains unclear. Current Asian
economic conditions continue to reflect ongoing weakness. Recent
trade data indicated that reduced US exports to these countries
might have lowered US economic growth by as much as 2% in the first
half of 1998. Since further trade deterioration is possible in the
coming months, we do not believe the Federal Reserve Board will be
willing to raise interest rates, barring a dramatic and unexpected
resurgence of domestic inflation.
These factors suggest that over the near term, interest rates in
general are unlikely to rise by any appreciable amount. Recent
supply pressures have caused municipal bond yield ratios to rise
relative to US Treasury bond yields. At July 31, 1998, long-term tax-
exempt bond yields were at attractive yield ratios relative to US
Treasury securities of comparable maturities (over 90%), well in
excess of their expected range of 85%--88%. Tax-exempt bond yield
ratios rarely exceeded 90% in the 1980s and 1990s. Previous
instances have usually been associated with potential changes in
Federal tax codes that would have adversely affected the tax-favored
status of municipal bonds. The present situation has developed
largely because of a temporary supply imbalance. These imbalances
should soon be corrected as tax-exempt bond issuance slows from its
current rapid pace later this year. Any further pressure on the
municipal market may well represent a very attractive investment
opportunity.
Portfolio Strategy
In the five months since the Fund's inception, our strategy was to
maintain a fully invested posture. This aggressive stance enabled
the Fund to perform extremely well in the declining interest rate
environment recently experienced by the tax-exempt fixed-income
market. Although the market is bound to experience periods of
volatility during which setbacks will occur, it is our opinion that
these instances should be short-lived. A slow growth, low-inflation
economic picture should continue to supply a positive backdrop for
debt securities, and the relatively tight technical supply/demand
environment for municipal bonds would be likely to cushion any
temporary downward moves in tax-exempt bond prices. Because the Fund
is already aggressively structured, in the months ahead we expect to
concentrate more on improving the call feature of the underlying
securities in the portfolio and on adjusting the sector
diversification of our holdings.
In Conclusion
We appreciate your ongoing interest in MuniHoldings Fund II, Inc.,
and we look forward to assisting you with your financial needs in
the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Robert A. DiMella)
Robert A. DiMella
Vice President and Portfolio Manager
September 2, 1998
Portfolio Abbreviations
To simplify the listings of MuniHoldings Fund II, Inc.'s portfolio
holdings in the Schedule of Investments, we have abbreviated the
names of many of the securities according to the list below and at
right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
EDA Economic Development Authority
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
MuniHoldings Fund II, Inc., July 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Alabama--3.8% A- A3 $ 9,750 Phenix City, Alabama, IDB, Environmental Improvement Revenue
Refunding Bonds (Mead Coated Board Project), Series B, 5.25%
due 4/01/2028 $ 9,677
Arizona--3.5% NR* B1 2,800 Phoenix, Arizona, IDA, Airport Facilities Revenue Refunding
Bonds (America West Airlines Inc.), AMT, 6.30% due 4/01/2023 2,909
B B2 4,000 Pima County, Arizona, IDA, IDR (Tucson Electric Power Co.
Project), Series B, 6% due 9/01/2029 4,038
NR* NR* 1,750 Show-Low, Arizona, Improvement District No. 5, 6.375%
due 1/01/2015 1,843
California AAA Aaa 5,000 Anaheim, California, Public Financing Authority, Lease
- --4.4% ` Revenue Bonds (Public Improvement Projects), Sub-Series C,
5.38%** due 9/01/2032 (a) 844
A A 1,500 California State Public Works Board, Department of Corrections,
Lease Revenue Bonds (Madera State Prison), Series E, 5.50%
due 6/01/2015 1,592
NR* Aaa 6,500 California Statewide Communities Development Authority, COP,
RITR, Series 24, 6.595% due 12/01/2015 (a)(e) 6,741
NR* NR* 1,750 Stockton, California, Community Facilites District No. 90-2,
Special Tax Refunding Bonds (Brookside Estates), 6.20% due
8/01/2015 1,820
Colorado--3.1% NR* Aa2 2,365 Colorado Housing Finance Authority, S/F Program, Senior
Series A-3, 6.50% due 5/01/2016 2,609
AAA Aaa 4,000 Denver, Colorado, City and County Airport Revenue Bonds,
Series A, 5.50% due 11/15/2025 (c) 4,139
NR* NR* 1,000 Eaglebend, Colorado, Affordable Housing Corporation, Revenue
Refunding Bonds (M/F Housing Project), Series A, 6.45% due
7/01/2021 1,038
Connecticut NR* Baa3 5,000 Mashantucket Western Pequot Tribe, Connecticut, Special
- --2.0% Revenue Bonds, Sub-Series B, 5.75% due 9/01/2027 5,111
Florida--5.3% AAA Aaa 7,170 Florida State Board of Education, Lottery Revenue Bonds,
Series A, 5% due 7/01/2014 (f) 7,176
AAA Aaa 5,000 Florida State Division Board/Department of Finance, General
Services Revenue Bonds (Environmental Preservation 2000
Project), Series A, 5.25% due 7/01/2010 (c) 5,220
NR* NR* 1,050 Lee County, Florida, IDA, Healthcare Facilities Revenue
Bonds (Cypress Cove Health Park),Series A, 6.375% due 10/01/2025 1,101
Illinois--7.1% NR* Aaa 4,500 Chicago, Illinois, S/F Mortgage Revenue Bonds, AMT, Series A-1,
6.45% due 9/01/2029 4,920
Illinois Development Finance Authority, PCR, Refunding
(Illinois Power Company Village Project) (c):
AAA Aaa 3,000 Series A, 5.40% due 3/01/2028 3,022
AAA Aaa 10,000 Series B, 5.40% due 3/01/2028 10,069
Indiana--1.4% NR* NR* 3,500 Indiana Health Facilities Financing Authority Revenue
Bonds (Hartsfield Community Village Project), Series A,
6.375% due 8/15/2027 3,587
Louisiana--0.4% A1+ P1 1,000 Saint Charles Parish, Louisiana, PCR, Refunding
(Shell Oil Company Project), VRDN, 3.65% due 10/01/2025 (b) 1,000
Maryland--3.9% NR* NR* 9,000 Maryland State Energy Financing Administration, Limited
Obligation Revenue Bonds (Cogeneration-AES Warrior Run),
AMT, 7.40% due 9/01/2019 9,956
Massachusetts AAA Aaa 10,000 Massachusetts State, HFA, RITR, Series 29, 6.82% due
- --4.0% 12/01/2028 (c)(e) 10,172
Michigan--0.7% A1+ P1 300 Michigan State Strategic Fund, Limited Obligation Revenue
Refunding Bonds (Detroit Edison Company), VRDN, Series CC,
3.65% due 9/01/2030 (b) 300
NR* NR* 1,375 Tawas City, Michigan, Hospital Finance Authority, Revenue
Refunding Bonds (St. Joseph Health System), Series A,
5.75% due 2/15/2023 1,377
Montana--1.2% AA Aa2 2,965 Montana State Board of Housing, S/F Mortgage Refunding Bonds,
Series A-1, 5.95% due 12/01/2027 3,107
New Hampshire New Hampshire Higher Educational and Health Facilities
- --3.4% Authority Revenue Bonds:
NR* Aaa 5,000 (Dartmouth College), Series A, AMT, 5.55% due 6/01/2023 5,047
BB- NR* 1,250 (Littleton Hospital Association), Series A, 6% due 5/01/2028 1,258
NR* Aaa 2,355 Refunding (Dartmouth College), 5.375% due 6/01/2023 2,380
New Jersey BBB- NR* 3,500 New Jersey EDA, Revenue Refunding Bonds (First Mortgage-Fellowship
- --1.4% Village), Series A, 5.50% due 1/01/2018 3,454
New Mexico AA Aa2 3,795 New Mexico State Severance Tax, Series B, 4.75% due 7/01/2008 3,826
- --1.5%
New York--12.4% AAA Aaa 3,505 Metropolitan Transportation Authority of New York, Transportation
Facilities Revenue Bonds, Series A, 5.625% due 7/01/2025 (c) 3,675
AAA Aaa 3,955 Nassau County, New York, General Improvement Bonds, UT, Series X,
5.10% due 11/01/2014 (d) 3,978
A- A3 5,000 New York City, New York, GO, Refunding, Series G, 5.25%
due 8/01/2016 4,983
AAA Aaa 7,860 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, RITR, Series 11, 7.82% due
6/15/2026 (a)(e) 8,857
AAA Aaa 4,000 New York State Dormitory Authority Revenue Bonds (North Shore
University Hospital),5.25% due 11/01/2019 (c) 4,021
AAA Aaa 5,735 New York State Urban Development Corporation Revenue Bonds
(Correctional Capital Facilities), Series 6, 5.375% due
1/01/2025 (d) 5,834
North Carolina AA Aa2 3,650 North Carolina HFA, S/F Project, Series TT, AMT, 5.60%
- --1.5% due 9/01/2019 3,713
Ohio--4.0% AAA Aaa 5,000 Ohio HFA, Mortgage Revenue Bonds, RITR, AMT, Series 15,
6.62% due 9/01/2019 (a)(e)(h) 5,051
NR* NR* 2,500 Ohio State Water Development Authority, Solid Waste Disposal
Revenue Bonds (Bay Shore Power Project), AMT, Series A,
5.875% due 9/01/2020 2,525
A- NR* 2,500 Parma, Ohio, Hospital Improvement Revenue Refunding Bonds
(Parma Community General Hospital Association), 5.35% due
11/01/2018 2,500
</TABLE>
MuniHoldings Fund II, Inc., July 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Pennsylvania AAA Aaa $12,930 Allegheny County, Pennsylvania, Hospital Development Authority,
- --13.8% Health Center Revenue Bonds (University of Pittsburgh Medical
Center System), 5.375% due 12/01/2025 (c) $ 13,057
BBB- Baa2 7,000 Allegheny County, Pennsylvania, IDA, Revenue Refunding Bonds
(Environmental Improvement--USX Corporation), 5.60% due 9/01/2030 7,036
BBB- Baa2 6,000 Bucks County, Pennsylvania, IDA, Environmental Improvement
Revenue Refunding Bonds (USX Corporation Project),
5.60% due 3/01/2033 6,040
AAA Aaa 2,200 Butler, Pennsylvania, Area School District Refunding Bonds,
UT, Series B, 5.375% due 10/01/2018 (f) 2,242
NR* NR* 1,800 Dauphin County, Pennsylvania, General Authority Revenue Bonds
(Office and Parking--Forum Place), Series A, 6% due 1/15/2025 1,796
NR* NR* 3,000 Montgomery County, Pennsylvania, IDA, Revenue Refunding Bonds
(First Mortgage--Meadowood), Series A, 6.25% due 12/01/2017 3,127
NR* NR* 1,600 Philadelphia, Pennsylvania, Hospitals and Higher Educational
Facilities Authority Revenue Refunding Bonds (The Philadelphia
Protestant Home Project), Series A, 6.50% due 7/01/2027 1,665
Tennessee--0.7% NR* NR* 1,700 Hardeman County, Tennessee, Correctional Facilities Corporation
Revenue Bonds, Series B, 7.375% due 8/01/2017 (g) 1,871
Texas--12.1% A1+ NR* 4,000 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Methodist Hospital), VRDN, 3.65% due
12/01/2025 (b) 4,000
AA Aa2 3,000 Lower Neches Valley Authority, Texas, Industrial Development
Corporation Revenue Refunding Bonds (Mobil Oil Corporation),
AMT, 5.55% due 3/01/2033 3,077
BBB- Baa3 13,300 Port Corpus Christi, Texas, Industrial Development Corporation,
Revenue Refunding Bonds (Valero), Series C, 5.40% due 4/01/2018 13,202
AAA Aaa 10,225 Texas State Turnpike Authority, Dallas North Thruway
Revenue Bonds (President George Bush Turnpike), 5.25% due
1/01/2023 (f) 10,232
Virginia--3.8% NR* NR* 2,500 Dulles Town Center Community Development Authority, Virginia,
Special Assessment Tax Bonds (Dulles Town Center Project),
6.25% due 3/01/2026 2,527
Pocahontas Parkway Association, Virginia, Toll Road Revenue
Bonds (Route 895 Connector):
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2030 852
BBB- Baa3 48,400 Senior Series B, 5.95%** due 8/15/2033 6,247
West Virginia A A2 12,800 Braxton County, West Virginia, Solid Waste Disposal Revenue
- --5.0% Refunding Bonds (Weyerhaeuser Company Project), AMT,
5.40% due 5/01/2025 12,700
Total Investments (Cost--$253,115)--100.4% 254,141
Variation Margin on Financial Futures Contracts--0.0%*** (3)
Liabilities in Excess of Other Assets--0.4% (890)
--------
Net Assets--100.0% $253,248
========
<FN>
(a)FSA Insured.
(b)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1998.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at July 31, 1998.
(f)FGIC Insured.
(g)All or a portion of security held as collateral in connection
with open financial futures contracts.
See Notes to Financial Statements.
(h)GNMA Collateralized.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
***Financial futures contracts sold as of July 31, 1998 were as
follows:
(in Thousands)
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
100 US Treasury Bonds September 1998 $12,259
-------
Total Financial Futures Contracts Sold
(Total Contract Price--$12,165) $12,259
=======
Ratings of issues shown have not been audited by Ernst & Young LLP.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of July 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$253,114,549) (Note 1a) $254,141,472
Cash 82,730
Receivables:
Interest $ 3,831,301
Securities sold 2,425,670 6,256,971
------------
Deferred organization expenses (Note 1e) 17,366
Prepaid expenses and other assets 5,628
------------
Total assets 260,504,167
------------
Liabilities: Payables:
Securities purchased 6,540,633
Dividends to shareholders (Note 1f) 263,570
Offering costs (Note 1e) 114,659
Investment adviser (Note 2) 91,604
Variation margin (Note 1b) 3,125 7,013,591
------------
Accrued expenses and other liabilities 242,627
------------
Total liabilities 7,256,218
------------
Net Assets: Net assets $253,247,949
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (3,480 shares
of AMPS* issued and outstanding at $25,000 per share
liquidation preference) $ 87,000,000
Common Stock, par value $.10 per share (11,073,334
shares issued and outstanding) $ 1,107,333
Paid-in capital in excess of par 163,858,315
Undistributed investment income--net 917,013
Accumulated realized capital losses on investments--net (Note 5) (567,885)
Unrealized appreciation on investments--net 933,173
------------
Total--Equivalent to $15.01 net asset value per share of
Common Stock (market price--$14.25) 166,247,949
------------
Total capital $253,247,949
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Fund II, Inc., July 31, 1998
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period February 27, 1998++ to July 31, 1998
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 5,542,969
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 562,316
Commission fees (Note 4) 59,421
Professional fees 20,778
Accounting services (Note 2) 18,296
Directors' fees and expenses 11,913
Transfer agent fees 8,402
Listing fees 8,085
Custodian fees 7,701
Pricing fees 2,799
Amortization of organization expenses (Note 1e) 1,634
Other 12,283
------------
Total expenses before reimbursement 713,628
Reimbursement of expenses (Note 2) (408,235)
------------
Total expenses after reimbursement 305,393
------------
Investment income--net 5,237,576
------------
Realized & Realized loss on investments--net (567,885)
Unrealized Gain Unrealized appreciation on investments--net 933,173
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 5,602,864
(Notes 1b, 1d & 3): ============
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
Feb. 27, 1998++ to
Increase (Decrease) in Net Assets: July 31, 1998
<S> <S> <C>
Operations: Investment income--net $ 5,237,576
Realized loss on investments--net (567,885)
Unrealized appreciation on investments--net 933,173
------------
Net increase in net assets resulting from operations 5,602,864
------------
Dividends to Investment income--net:
Shareholders Common Stock (3,162,976)
(Note 1f): Preferred Stock (1,157,587)
------------
Net decrease in net assets resulting from dividends to shareholders (4,320,563)
------------
Capital Stock Proceeds from issuance of Common Stock 166,000,005
Transactions Proceeds from issuance of Preferred Stock 87,000,000
(Notes 1e & 4): Offering and underwriting costs resulting from the issuance of Common Stock (314,402)
Offering and underwriting costs resulting from the issuance of Preferred Stock (819,960)
------------
Net increase in net assets derived from capital stock transactions 251,865,643
------------
Net Assets: Total increase in net assets 253,147,944
Beginning of period 100,005
------------
End of period* $253,247,949
============
<FN>
*Undistributed investment income--net $ 917,013
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Fund II, Inc., July 31, 1998
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Feb. 27, 1998++ to
Increase (Decrease) in Net Asset Value: July 31, 1998
<S> <S> <C>
Per Share Net asset value, beginning of period $ 15.00
Operating --------
Performance: Investment income--net .47
Realized and unrealized gain on investments--net .04
--------
Total from investment operations .51
--------
Less dividends to Common Stock shareholders:
Investment income--net (.29)
--------
Capital charge resulting from issuance of Common Stock (.03)
--------
Effect of Preferred Share activity++++:
Dividends to Preferred Stock shareholders:
Investment income--net (.10)
Capital charge resulting from issuance of Preferred Stock (.08)
--------
Total effect of Preferred Stock activity (.18)
--------
Net asset value, end of period $ 15.01
========
Market price per share, end of period $ 14.25
========
Total Investment Based on market price per share (3.14%)+++
Return:** ========
Based on net asset value per share 2.03%+++
========
Ratios to Average Expenses, net of reimbursement .30%*
Net Assets:*** ========
Expenses .71%*
========
Investment income--net 5.21%*
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $166,248
Data: ========
Preferred Stock outstanding, end of period (in thousands) $ 87,000
========
Portfolio turnover 64.62%
========
Leverage: Asset coverage per $1,000 $ 2,911
========
Dividends Series A--Investment income--net $ 325
Per Share on ========
Preferred Stock Series B--Investment income--net $ 340
Outstanding: ========
<FN>
*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.
See Notes to Financial Statements.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Commencement of operations.
++++The Fund's Preferred Stock was issued on March 19, 1998.
+++Aggregate total investment return.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings Fund II, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. Prior to commencement of operations
on February 27, 1998, the Fund had no operations other than those
relating to organizational matters and the sale of 6,667 shares of
Common Stock on February 18, 1998 to Fund Asset Management, L.P.
("FAM") for $100,005. The Fund determines and makes available for
publication the net asset value of its Common Stock on a weekly
basis. The Fund's Common Stock is listed on the New York Stock
Exchange under the symbol MUH. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options, 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 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.
* Financial futures contracts--The Fund may purchase or sell
financial 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.
* Options--The Fund is authorized to write covered call options and
purchase call and put options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(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
period not exceeding five years. In accordance with Statement of
Position 98-5, any unamortized organization expenses will be
expensed on the first day of the next fiscal year beginning after
December 15, 1998. This change will not have any material impact on
the operations of the Fund. Direct expenses relating to the public
offering of the Fund's Common and Preferred Stock were charged to
capital at the time of issuance of the shares.
MuniHoldings Fund II, Inc., July 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
(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 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 February 27,
1998 to July 31, 1998, FAM earned fees of $562,316, of which
$366,801 was reimbursed. In addition, FAM reimbursed the Fund
$41,434 in additional expenses.
During the period February 27, 1998 to July 31, 1998, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate of FAM,
received underwriting fees of $652,500 in connection with the
issuance of the Fund's Preferred Stock.
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 February 27, 1998 to July 31, 1998 were $383,468,022
and $135,327,137, respectively.
Net realized losses for the period February 27, 1998 to July 31,
1998 and net unrealized gains (losses) as of July 31, 1998 were as
follows:
Unrealized
Realized Gains
Losses (Losses)
Long-term investments $ (273,291) $ 1,026,923
Financial futures contracts (294,594) (93,750)
------------ ------------
Total $ (567,885) $ 933,173
============ ============
As of July 31, 1998, net unrealized appreciation for Federal income
tax purposes aggregated $1,026,923, of which $1,323,335 related to
appreciated securities and $296,412 related to depreciated
securities. The aggregate cost of investments at July 31, 1998 for
Federal income tax purposes was $253,114,549.
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
Shares issued and outstanding during the period February 27, 1998 to
July 31, 1998 increased by 11,066,667 as a result of the initial
offering. Prior to February 27, 1998 (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 July 31, 1998 were as
follows: Series A, 3.35% and Series B, 3.35%.
In connection with the offering of AMPS, the Board of Directors
reclassified 3,480 shares of unissued capital stock as AMPS. Shares
issued and outstanding during the period February 27, 1998 to July
31, 1998 increased by 3,480 as a result of the AMPS offering.
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. For the period February
27, 1998 to July 31, 1998, MLPF&S earned $52,985 as commissions.
5. Capital Loss Carryforward:
At July 31, 1998, the Fund had a net capital loss carryforward of
approximately $662,000, all of which expires in 2006. This amount
will be available to offset like amounts of any future taxable
gains.
6. Subsequent Event:
On August 6, 1998, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.068655 per share, payable on August 28, 1998 to shareholders of
record as of August 21, 1998.
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
MuniHoldings Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital of MuniHoldings Fund II, Inc., including the schedule of
investments, as of July 31, 1998, and the related statements of
operations and changes in net assets, and financial highlights for
the period from February 27, 1998 (commencement of operations) to
July 31, 1998. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements
and financial highlights. Our procedures included confirmation of
securities owned as of July 31, 1998 by correspondence with the
custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of MuniHoldings Fund II, Inc. at July 31, 1998
and the results of its operations, the changes in its net assets,
and the financial highlights for the period from February 27, 1998
to July 31, 1998 in conformity with generally accepted accounting
principles.
(Ernst & Young LLP)
Princeton, New Jersey
September 2, 1998
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by
MuniHoldings Fund II, Inc. during its taxable year ended
July 31, 1998 qualify as tax-exempt interest dividends for
Federal income tax purposes. Additionally, there were no
capital gains distributed by the Fund during the year.
Please retain this information for your records.
MuniHoldings Fund II, Inc., July 31, 1998
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute substantially all of its
net investment income to its shareholders on a monthly basis.
However, in order to provide shareholders with a more consistent
yield to the current trading price of shares of Common Stock of the
Fund, the Fund may at times pay out less than the entire amount of
net investment income earned in any particular month and may at
times in any particular month pay out such accumulated but
undistributed income in addition to net investment income earned in
that month. As a result, the dividends paid by the Fund for any
particular month may be more or less than the amount of net
investment income earned by the Fund during such month. The Fund's
current accumulated but undistributed net investment income, if any,
is disclosed in the Statement of Assets, Liabilities and Capital,
which comprises part of the financial information included in this
report.
QUALITY PROFILE (unaudited)
The quality ratings of securities in the Fund as of July 31, 1998
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 46.1%
AA/Aa 6.5
A/A 12.4
BBB/Baa 16.2
BB/Ba 0.8
B/B 2.8
NR (Not Rated) 13.5
Other++ 2.1
[FN]
++Temporary investments in short-term municipal securities.
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
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
MUH
