MUNIHOLDINGS
FUND II, INC.
FUND LOGO
Semi-Annual Report
January 31, 1999
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, income on inverse floaters will decrease when short-term
interest rates increase and increase when short-term interest rates
decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of
reduced or eliminated interest payments and losses of invested
principal. In addition, inverse floaters have the effect of
providing investment leverage and, as a result, the market value of
such securities will generally be more volatile than that of fixed
rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the
net asset value of the Fund's shares may also be more volatile than
if the Fund did not invest in these securities.
MuniHoldings Fund II, Inc., January 31, 1999
DEAR SHAREHOLDER
For the six-month period ended January 31, 1999, the Common Stock of
MuniHoldings Fund II, Inc. earned $0.423 per share income dividends,
which included earned and unpaid dividends of $0.071. This
represents a net annualized yield of 5.47%, based on a month-end per
share net asset value of $15.34. Over the same period, the total
investment return on the Fund's Common Stock was +5.12%, based on a
change in per share net asset value from $15.01 to $15.34, and
assuming reinvestment of $0.421 per share income dividends.
For the six-month period ended January 31, 1999, the Fund's Auction
Market Preferred Stock had an average yield of 3.29% for Series A
and 3.24% for Series B.
The Municipal Market Environment
During the six months ended January 31, 1999, long-term bond yields
moved significantly lower. US domestic economic growth remained
moderate, with losses in the manufacturing sector offset by strong
growth in service-oriented industries. Industrial commodity prices
recently fell to their lowest level in over a decade. This suggests
that the current positive inflationary environment is unlikely to be
challenged in the near term. Additionally, the Federal Reserve Board
lowered short-term interest rates in September, October and
November, in part to ensure that US domestic economic growth would
not be negatively impacted by ongoing weak economic growth overseas.
However, various external factors, as well as increased volatility,
contributed to the decline in bond yields as they have for much of
the past year. Episodes of foreign economic instability generated a
significant "flight to quality" rally in US Treasury securities, as
well as fostering lower tax-exempt bond yields as a result. Periods
of strong foreign equity market appreciation, particularly in Asia,
have at times resulted in higher US bond yields as foreign investors
have sold US fixed-income instruments to reinvest the proceeds in
their own domestic equity markets. Additionally, the continued
distraction of President Clinton's impeachment trial added to recent
interest rate volatility. However, on balance, the favorable
fundamental economic scenario supported lower bond yields. During
the six-month period ended January 31, 1999, the yield on the US
Treasury 30-year bond fell over 60 basis points (0.60%) to 5.09%,
and long-term municipal revenue bond yields declined almost 20 basis
points to 5.17%, as measured by the Bond Buyer Revenue Bond Index.
Throughout most of 1998, the municipal bond market's performance was
impeded by a significant increase in new-issue supply. However, in
recent months, the technical position of the tax-exempt market
improved. Over the last 12 months, almost $285 billion in new long-
term tax-exempt bonds was underwritten, an increase of almost 30%
compared to the same period a year ago. As municipal bond yields
declined in recent years, it has taken increasingly lower bond
yields to generate the cost savings necessary to refinance remaining
higher-couponed debt. Consequently, the rate of increases in
municipal bond issuance slowed in recent quarters. During the last
six months, more than $125 billion in new tax-exempt bonds was
issued, an increase of approximately 5% compared to the same period
a year ago. During the January 31, 1999 quarter, $63 billion in new
long-term municipal bonds was underwritten, representing an increase
of 5% compared to the January 31, 1998 quarter.
The pace of tax-exempt issuance continued to slow in 1999. January's
monthly issuance was less than $15 billion, representing a decline
of almost 25% compared to January 1998's volume. Additionally,
investors received more than $22 billion in coupon payments,
maturities and proceeds from early redemptions in January. Investors
can also expect to receive an additional $15 billion--$18 billion in
February for reinvestment. Consequently, investor demand has been
strong in recent months, easily matching, if not at times exceeding,
available supply. We will monitor this trend closely in the coming
months to determine if the supply pressures exerted in 1998 are
abating and fostering a more balanced supply/demand environment for
1999. Such an environment should allow the tax-exempt market's
performance to more closely mirror that of its taxable counterpart.
Foreign investors have rarely been active investors in the tax-
exempt bond market since they are unable to benefit from the
inherent tax advantage of municipal securities. Consequently, the
municipal bond market has not been able to benefit from the strong
flight to quality demand enjoyed by US Treasury securities since
late 1997. This inability has in large part resulted in
significantly smaller declines in municipal bond yields compared to
US Treasury securities. However, this has resulted in the
opportunity to purchase tax-exempt securities with yields very close
to or, in some instances, exceeding those of comparable US Treasury
bonds. By January 31, 1999, long-term tax-exempt bond yields were at
102% of US Treasury securities of comparable maturities, nearly
matching the least expensive level of the past year. Municipal bond
yield ratios have averaged approximately 95% for the last six months
and 92% for all of 1998. During 1997, tax-exempt bond yield ratios
averaged 84%. It is likely that the combination of the increase in
new-issue volume and the "safe-haven" status of US Treasury
securities drove municipal bond yield ratios to their present
attractive levels. Should new volume decline and/or foreign
financial markets regain stability in 1999, tax-exempt bond yield
ratios could quickly return to their more historic levels
(85%--88%).
Looking ahead, the expected combination of moderate economic growth
in the United States and continued negligible inflation suggests a
relatively stable interest rate environment into early 1999.
However, it is likely that foreign financial markets will again be a
critical factor in determining US bond yields. Economic problems in
Russia and Brazil remain unresolved, suggesting that additional
shocks to the world's financial system are possible. On the other
hand, the continued robustness of the US economy has led to some
back up in interest rates. However, at present these factors
indicate that there is little immediate risk of sustained
significant increases in long-term bond yields.
Portfolio Strategy
During the six-month period ended January 31, 1999, our constructive
investment strategy remained unchanged. We believe economic weakness
in Asia, Russia and, more recently, in Brazil should offset the
current strength of the US economy. More important, the absence of
any material inflationary pressure in the United States and most of
the industrialized world should promote a relatively stable interest
rate environment in the near term. We do expect some interest rate
volatility as international economic crises, such as the recent
currency devaluation in Brazil, are by their nature difficult to
predict. However, we expect these episodes to be brief, allowing
interest rates in the United States to remain in their current
range.
The yield on the Fund's Auction Market Preferred Stock has been
trading between 2.80% and 3.80%. Leverage continues to benefit the
Common Stock shareholders by significantly augmenting their yield.
However, should the spread between short-term and long-term tax-
exempt rates narrow, the benefits of leverage would decline and the
yield to the Common stock will be reduced. (See page 1 of this
report to shareholders for a complete explanation of the benefits
and risks of leveraging.) Looking ahead, we expect little change in
our strategy or portfolio composition. We will focus on seeking to
preserve the Fund's net asset value while maintaining our current
income stream.
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,
(Terry K. Glenn)
Terry K. Glenn
Executive Vice President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Robert A. DiMella)
Robert A. DiMella
Vice President and Portfolio Manager
March 9, 1999
MuniHoldings Fund II, Inc., January 31, 1999
PROXY RESULTS
During the six-month period ended January 31, 1999, MuniHoldings
Fund II, Inc. Common Stock shareholders voted on the following
proposals. The proposals were approved at a shareholders' meeting on
December 16, 1998. The description of each proposal and number of
shares voted are as follows:
<TABLE>
<CAPTION>
Shares Voted Shares Withheld
For From Voting
<S> <S> <C> <C>
1. To elect the Fund's Directors: Ronald W. Forbes 10,928,075 133,597
Cynthia A. Montgomery 10,920,973 140,699
Kevin A. Ryan 10,921,062 140,610
Arthur Zeikel 10,921,492 140,180
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To ratify the selection of Ernst & Young LLP as the Fund's
independent auditors for the current fiscal year. 10,845,873 65,461 150,338
</TABLE>
During the six-month period ended January 31, 1999, MuniHoldings
Fund II, Inc. Preferred Stock shareholders voted on the
following proposals. The proposals were approved at a shareholders'
meeting on December 16, 1998. The description of each proposal and
number of shares voted are as follows:
<TABLE>
<CAPTION>
Shares Voted Shares Withheld
For From Voting
<S> <C> <C>
1. To elect the Fund's Board of Directors: Ronald W. Forbes,
Cynthia A. Montgomery, Charles C. Reilly, Kevin A. Ryan,
Richard R. West and Arthur Zeikel as follows:
Series A 1,660 0
Series B 1,655 0
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To ratify the selection of Ernst & Young LLP as the
Fund's independent auditors for the current fiscal
year as follows:
Series A 1,660 0 0
Series B 1,655 0 0
</TABLE>
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to
designate years. These systems may not be able to distinguish the
Year 2000 from the Year 1900 (commonly known as the "Year 2000
Problem"). The Fund could be adversely affected if the computer
systems used by the Fund's management or other Fund service
providers do not properly address this problem before January 1,
2000. The Fund's management expects to have addressed this problem
before then, and does not anticipate that the services it provides
will be adversely affected. The Fund's other service providers have
told the Fund's management that they also expect to resolve the Year
2000 Problem, and the Fund's management will continue to monitor the
situation as the Year 2000 approaches. However, if the problem has
not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the
securities in which the Fund invests, and this could hurt the Fund's
investment returns.
QUALITY PROFILE
The quality ratings of securities in the Fund as of January 31, 1999
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 33.8%
AA/Aa 4.3
A/A 20.5
BBB/Baa 17.3
BB/Ba 3.7
B/B 3.6
NR (Not Rated) 14.4
Other++ 1.0
[FN]
++Temporary investments in short-term municipal securities.
MuniHoldings Fund II, Inc., January 31, 1999
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
HFA Housing Finance Agency
IDA Industrial Development Authority
IDB Industrial Development Board
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
<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 $ 9,848
Arizona--6.0% B B2 2,500 Apache County, Arizona, IDA, PCR, Refunding (Tuscon Electric
Power Co. Project), Series B, 5.875% due 3/01/2033 2,464
A A2 4,300 Maricopa County, Arizona, IDA, Health Facilities Revenue
Refunding Bonds (Catholic Healthcare West Project), Series A,
5% due 7/01/2016 4,260
NR* B1 2,800 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds
(America West Airlines Inc.), AMT, 6.30% due 4/01/2023 2,902
B B2 4,000 Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds
(Tucson Electric Power Company Project), Series B, 6% due
9/01/2029 4,018
NR* NR* 1,750 Show Low, Arizona, Improvement District No. 5, 6.375% due
1/01/2015 1,873
California AAA Aaa 5,000 Anaheim, California, Public Financing Authority, Lease
- --3.9% Revenue Bonds (Public Improvements Project), Series C, 5.38%**
due 9/01/2032 (c) 900
NR* Aaa 6,500 California Statewide Communities Development Authority, COP,
RIB, Series 24, 7.625% due 12/01/2015 (c)(i) 7,181
NR* NR* 1,750 Stockton, California, Community Facilities District, Special Tax
Revenue Refunding Bonds (Brookside Estates), 6.20% due 8/01/2015 1,847
Colorado--3.1% NR* Aa2 2,365 Colorado HFA, S/F Program, Revenue Refunding Bonds, Senior
Series A-3, 6.50% due 5/01/2016 2,637
AAA Aaa 4,000 Denver, Colorado, City and County Airport, Revenue Refunding
Bonds, Series A, 5.50% due 11/15/2025 (b) 4,200
NR* NR* 1,000 Eaglebend, Colorado, Affordable Housing Corporation, M/F Revenue
Refunding Bonds (Housing Project), Series A, 6.45% due 7/01/2021 1,062
Connecticut B+ Ba3 5,000 Connecticut State Development Authority, PCR, Refunding
- --3.6% (Connecticut Light & Power Company), Series A, 5.85% due
9/01/2028 5,014
NR* Baa3 4,000 Mashantucket Western Pequot Tribe, Connecticut, Special Revenue
Refunding Bonds, Series B, 5.75% due 9/01/2027 4,174
Florida--1.8% A- Baa1 3,500 Highlands County, Florida, Health Facilities Authority Revenue
Bonds (Adventist Hospital Health System), 5.25% due 11/15/2020 3,482
NR* NR* 1,050 Lee County, Florida, IDA, Health Care Facilities Revenue Bonds
(Cypress Cove Healthpark), Series A, 6.375% due 10/01/2025 1,093
Illinois--7.1% NR* Aaa 4,500 Chicago, Illinois, S/F Mortgage Revenue Bonds, AMT, Series A-1,
6.45% due 9/01/2029 (e)(f) 4,997
Illinois Development Finance Authority, PCR, Refunding (Illinois
Power Company Project)(b):
AAA Aaa 3,000 Series A, 5.40% due 3/01/2028 3,066
AAA Aaa 10,000 Series B, 5.40% due 3/01/2028 10,221
Indiana--2.9% NR* NR* 3,500 Indiana Health Facilities Financing Authority Revenue Bonds
(Community-Hartsfield Village Project), Series A, 6.375% due
8/15/2027 3,594
AAA Aaa 3,850 Indiana Municipal Power Agency, Power Supply System, Special
Obligation Refunding Bonds, First Crossover, Series B, 5.30%
due 1/01/2020 (b) 3,887
Louisiana--0.1% A1+ VMIG1++ 200 Louisiana State, Offshore Term Authority, Deepwater Port Revenue
Refunding Bonds (First Stage A-Loop Inc.), VRDN, 3.20% due
9/01/2008 (h) 200
Maryland--3.7% NR* NR* 9,000 Maryland State Energy Financing Administration, Limited Obligation
Revenue Bonds (Cogeneration-AES Warrior Run), AMT, 7.40% due
9/01/2019 9,496
Massachusetts NR* Aaa 10,000 Massachusetts State, HFA, RITR, 7.57% due 12/01/2028 (i) 10,510
- --7.8% AAA Aaa 10,000 Massachusetts State Water Resources Authority Revenue Bonds,
Series A, 4.75% due 8/01/2027 (c) 9,637
Mississippi BBB- Ba1 5,000 Mississippi Business Finance Corporation, Mississippi, PCR,
- --2.0% Refunding (System Energy Resources Inc. Project), 5.875% due
4/01/2022 5,011
Montana--0.6% AA Aa1 1,465 Montana State Board of Housing, S/F Mortgage Refunding Bonds,
Series A-1, 5.95% due 12/01/2027 (d) 1,558
Nevada--3.9% A A2 10,000 Henderson, Nevada, Health Care Facilities Revenue Bonds (Catholic
Healthcare West), 5.375% due 7/01/2026 10,126
New Hampshire BB- NR* 1,250 New Hampshire Higher Educational and Health Facilities Authority,
- --0.5% Revenue Refunding Bonds (Littleton Hospital Association), Series
A, 6% due 5/01/2028 1,266
New Jersey BBB- NR* 2,630 New Jersey EDA, Revenue Bonds (First Mortgage-Fellowship Village
- --1.0% Project), Series C, 5.50% due 1/01/2018 2,581
New York Long Island Power Authority, New York, Electric System Revenue
- --12.0% Bonds, Series A:
A- Baa1 3,950 5.25% due 12/01/2026 3,990
A- Baa1 5,500 5.50% due 12/01/2029 5,683
AAA Aaa 3,505 Metropolitan Transportation Authority, New York, Transit
Facilities Revenue Bonds, Series A, 5.625% due 7/01/2025 (b) 3,746
New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Bonds:
NR* Aaa 7,860 RITR, Series 11, 8.52% due 6/15/2026 (i) 9,184
A1+ VMIG1++ 300 Refunding, VRDN, Series G, 3.15% due 6/15/2024 (g)(h) 300
AAA Aaa 5,735 New York State Urban Development Corporation Revenue Bonds
(Correctional Capital Facilities), Series 6, 5.375% due
1/01/2025 (a) 5,930
A1+ VMIG1++ 2,100 Port Authority of New York and New Jersey, Special Obligation
Revenue Refunding Bonds (Versatile Structure Obligation), VRDN,
Series 2, 3.20% due 5/01/2019 (h) 2,100
</TABLE>
MuniHoldings Fund II, Inc., January 31, 1999
<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>
North AA Aa2 $ 3,650 North Carolina HFA Revenue Bonds, S/F, AMT, Series TT, 5.60%
Carolina--1.5% due 9/01/2019 $ 3,765
Ohio--4.0% NR* NR* 5,000 Ohio State, HFA, Mortgage Revenue Bonds, RITR, Series 15, 7.42%
due 9/01/2019 (i) 5,210
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 2,547
A- NR* 2,500 Parma, Ohio, Hospital Improvement Revenue Refunding Bonds (Parma
Community General Hospital Association), 5.35% due 11/01/2018 2,554
Pennsylvania AAA Aaa 12,930 Allegheny County, Pennsylvania, Hospital Development Authority,
- --12.5% Health Center Revenue Bonds (University of Pittsburgh Medical
Center System), 5.375% due 12/01/2025 (b) 13,226
BBB- Baa2 7,000 Allegheny County, Pennsylvania, IDA, Environmental Improvement
Revenue Refunding Bonds (USX Corp.), 5.60% due 9/01/2030 7,023
BBB- Baa2 6,000 Bucks County, Pennsylvania, IDA, Environmental Improvement
Revenue Refunding Bonds (USX Corporation Project), 5.60% due
3/01/2033 6,029
NR* NR* 1,000 Lehigh County, Pennsylvania, General Purpose Authority Revenue
Bonds (Kidspeace Obligation Group), 6% due 11/01/2018 1,013
NR* NR* 3,000 Montgomery County, Pennsylvania, IDA, PCR, Refunding (First
Mortgage-Meadowood), Series A, 6.25% due 12/01/2017 3,143
NR* NR* 1,600 Philadelphia, Pennsylvania, Hospitals and Higher Education
Facilities Authority, Revenue Refunding Bonds (The Philadelphia
Protestant Home Projects), Series A, 6.50% due 7/01/2027 1,657
Tennessee NR* NR* 1,700 Hardeman County, Tennessee, Correctional Facilities Corporation
- --0.7% Revenue Bonds, Series B, 7.375% due 8/01/2017 1,865
Texas--7.2% BB Ba1 2,150 Houston, Texas, Airport System, Special Facilities Revenue
Bonds (Continental Airlines Terminal Improvement), AMT, Series B,
6.125% due 7/15/2027 2,209
AA Aa2 3,000 Lower Neches Valley Authority, Texas, Industrial Development
Corporation, Revenue Refunding Bonds (Mobil Oil Refunding
Corporation), AMT, 5.55% due 3/01/2033 3,116
BBB- Baa3 13,300 Port Corpus Christi, Texas, Industrial Development Corporation,
Revenue Refunding Bonds, Series C, 5.40% due 4/01/2018 13,172
Virginia--3.9% NR* NR* 2,500 Dulles Town Center Community Development Authority, Virginia,
Special Assessment Tax (Dulles Town Center Project), 6.25% due
3/01/2026 2,557
Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2030 890
BBB- Baa3 48,400 Senior-Series B, 5.95%** due 8/15/2033 6,479
West A A2 12,800 Braxton County, West Virginia, Solid Waste Disposal Revenue
Virginia--5.0% Refunding Bonds (Weyerhaeuser Company Project), AMT, 5.40% due
5/01/2025 12,719
Total Investments (Cost--$249,444)--98.6% 253,212
Other Assets Less Liabilities--1.4% 3,646
--------
Net Assets--100.0% $256,858
========
<FN>
(a)AMBAC Insured.
(b)MBIA Insured.
(c)FSA Insured.
(d)FHA Insured.
(e)FNMA/GNMA Collateralized.
(f)FHLMC Collateralized.
(g)FGIC Insured.
(h)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is
the rate in effect at January 31, 1999.
(i)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 January 31, 1999.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown is
the effective yield at the time of purchase by the Fund.
++Highest short-term rating by Moody's Investors Service,
Inc.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of January 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$249,444,291) (Note 1a) $253,211,550
Cash 52,493
Interest receivable 4,058,472
Deferred organization expenses (Note 1e) 17,366
Prepaid expenses and other assets 5,628
------------
Total assets 257,345,509
------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) $ 270,704
Investment adviser (Note 2) 107,730
Offering costs (Note 1e) 50,000 428,434
------------
Accrued expenses and other liabilities 58,881
------------
Total liabilities 487,315
------------
Net Assets: Net assets $256,858,194
============
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 962,726
Undistributed realized capital gains on investments--net (Note 5) 162,561
Unrealized appreciation on investments--net 3,767,259
------------
Total--Equivalent to $15.34 net asset value per share of Common
Stock (market price--$14.8125) 169,858,194
------------
Total capital $256,858,194
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Fund II, Inc., January 31, 1999
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended January 31, 1999
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 7,017,770
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 702,374
Commission fees (Note 4) 109,145
Professional fees 37,783
Accounting services (Note 2) 28,876
Transfer agent fees 17,145
Custodian fees 9,944
Directors' fees and expenses 9,568
Printing and shareholder reports 9,520
Pricing fees 5,039
Listing fees 3,623
Amortization of organization expenses (Note 1e) 1,873
Other 9,350
------------
Total expenses before reimbursement 944,240
Reimbursement of expenses (Note 2) (54,038)
------------
Total expenses after reimbursement 890,202
------------
Investment income--net 6,127,568
------------
Realized & Realized gain on investments--net 730,446
Unrealized Gain Change in unrealized appreciation on investments--net 2,834,086
on Investments ------------
- --Net (Notes 1b, Net Increase in Net Assets Resulting from Operations $ 9,692,100
1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the Period
Months Ended Feb. 27, 1998++
Jan. 31, to July 31,
Increase (Decrease) in Net Assets: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 6,127,568 $ 5,237,576
Realized gain (loss) on investments--net 730,446 (567,885)
Change in unrealized appreciation on investments--net 2,834,086 933,173
------------ ------------
Net increase in net assets resulting from operations 9,692,100 5,602,864
------------ ------------
Dividends to Investment income--net:
Shareholders Common Stock (4,664,642) (3,162,976)
(Note 1f): Preferred Stock (1,417,213) (1,157,587)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (6,081,855) (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 3,610,245 253,147,944
Beginning of period 253,247,949 100,005
------------ ------------
End of period* $256,858,194 $253,247,949
============ ============
<FN>
*Undistributed investment income--net $ 962,726 $ 917,013
============ ============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Fund II, Inc., January 31, 1999
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Feb. 27, 1998++
Jan. 31, to July 31,
Increase (Decrease) in Net Asset Value: 1999 1998
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 15.01 $ 15.00
Operating ------------ ------------
Performance: Investment income--net .56 .47
Realized and unrealized gain on investments--net .32 .04
------------ ------------
Total from investment operations .88 .51
------------ ------------
Less dividends to Common Stock shareholders:
Investment income--net (.42) (.29)
------------ ------------
Capital charge resulting from issuance of Common Stock -- (.03)
------------ ------------
Effect of Preferred Share activity++++:
Dividends to Preferred Stock shareholders:
Investment income--net (.13) (.10)
Capital charge resulting from issuance of Preferred Stock -- (.08)
------------ ------------
Total effect of Preferred Stock activity (.13) (.18)
------------ ------------
Net asset value, end of period $ 15.34 $ 15.01
============ ============
Market price per share, end of period $ 14.8125 $ 14.25
============ ============
Total Investment Based on market price per share 6.92%+++ (3.14%)+++
Return:** ============ ============
Based on net asset value per share 5.12%+++ 2.03%+++
============ ============
Ratios to Average Expenses, net of reimbursement .70%* .30%*
Net Assets:*** ============ ============
Expenses .74%* .71%*
============ ============
Investment income--net 4.80%* 5.21%*
============ ============
Supplemental Net assets, net of Preferred Stock, end of period (in
Data: thousands) $ 169,858 $ 166,248
============ ============
Preferred Stock outstanding, end of period (in thousands) $ 87,000 $ 87,000
============ ============
Portfolio turnover 28.03% 64.62%
============ ============
Leverage: Asset coverage per $1,000 $ 2,952 $ 2,911
============ ============
Dividends Series A--Investment income--net $ 410 $ 325
Per Share on ============ ============
Preferred Stock Series B--Investment income--net $ 404 $ 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.
***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.
See Notes to Financial Statements.
</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. The Fund's financial statements are
prepared in accordance with generally accepted accounting principles
which may require the use of management accruals and estimates.
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. The Fund determines and makes
available for publication the net asset value of its Common Stock on
a weekly basis. The Fund's Common Stock is listed on the New York
Stock Exchange under the symbol MUH. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). 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.
* 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 charge 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., January 31, 1999
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 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 six months ended
January 31, 1999, FAM earned fees of $702,374, of which $54,038 was
reimbursed.
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 six months ended January 31, 1999 were $71,382,423 and
$73,399,123, respectively.
Net realized gains (losses) for the six months ended January 31,
1999 and net unrealized gains as of January 31, 1999 were as
follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $ 928,621 $ 3,767,259
Financial futures contracts (198,175) --
------------- -------------
Total $ 730,446 $ 3,767,259
============= =============
As of January 31, 1999, net unrealized appreciation for Federal
income tax purposes aggregated $3,767,259, of which $4,502,434
related to appreciated securities and $735,175 related to
depreciated securities. The aggregate cost of investments at January
31, 1999 for Federal income tax purposes was $249,444,291.
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 six months ended January
31, 1999 remained constant and during the period February 27, 1998
to July 31, 1998 increased by 11,066,667 as a result of the initial
offering.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund, with a par value of $.10 per share and a
liquidation preference of $25,000 per share, 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 January
31, 1999 were as follows: Series A, 3.05% and Series B, 2.99%.
Shares issued and outstanding during the six months ended January
31, 1999 remained constant and 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 six months ended
January 31, 1999, MLPF&S earned $98,368 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 February 4, 1999, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.070697 per share, payable on February 25, 1999 to shareholders
of record as of February 19, 1999.
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.
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
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Donald C. Burke, Vice President and 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 Whitehall Bank &Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MUH
Gerald M. Richard, Treasurer of MuniHoldings Fund II, Inc. has
recently retired. His colleagues at Merrill Lynch Asset Management,
L.P. join the Fund's Board of Directors in wishing Mr. Richard well
in his retirement.
