MUNIHOLDINGS
FUND II, INC.
FUND LOGO
Annual Report
July 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., July 31, 1999
DEAR SHAREHOLDER
For the 12-month period ended July 31, 1999, the Common Stock of
MuniHoldings Fund II, Inc. earned $0.833 per share income dividends,
which included earned and unpaid dividends of $0.070. This
represents a net annualized yield of 5.89%, based on a month-end per
share net asset value of $14.16. During the same period, the total
investment return on the Fund's Common Stock was -0.03%, based on a
change in per share net asset value from $15.01 to $14.16, and
assuming reinvestment of $0.832 per share income dividends.
For the 12-month period ended July 31, 1999, the Fund's Auction
Market Preferred Stock had an average yield of 3.18% for Series A
and 3.09% for Series B.
The Municipal Market Environment
During the six months ended July 31, 1999, long-term bond yields
rose significantly. Steady US economic growth combined with
improvement in foreign economies, most notably Japan and Brazil, as
well as an inflation scare in early May put upward pressure on bond
yields throughout the period. Continued strong US employment growth,
particularly the decline in the US unemployment rate to 4.2% in
early June, was among the reasons the Federal Reserve Board cited
for raising short-term interest rates in late June. US Treasury bond
yields reacted by climbing above 6.15% by late June before improving
somewhat to 6.10% by July 31, 1999. During the six-month period
ended July 31, 1999, yields on long-term US Treasury bonds increased
approximately 100 basis points (1.00%).
Long-term tax-exempt bond yields also rose during the last six
months. Until early May, the municipal bond market had been able to
withstand much of the upward pressure on bond yields. However,
investor concerns regarding ongoing US economic strength and the
fear of additional moves by the Federal Reserve Board eventually
pushed municipal bond yields higher throughout June and July. During
the period, the yields on long-term tax-exempt revenue bonds rose
almost 50 basis points to 5.65%, as measured by the Bond Buyer
Revenue Bond Index.
The ability of the tax-exempt bond market to withstand much of the
recent upward pressure on long-term fixed-income bond yields has
been a reflection of the continued strong technical position the
municipal bond market has enjoyed in recent quarters. During the
last six months, more than $120 billion in long-term municipal bonds
was underwritten, a decrease of more than 20% compared to the same
period a year ago. During the past three months, more than $60
billion in municipal bonds was underwritten. This quarterly issuance
represents a decline of nearly 25% compared to the same three-month
period in 1998.
Recently, the municipal supply position deteriorated even further.
Total issuance in July 1999 of $16.5 billion was more than 30% lower
than July 1998 levels. Additionally, in June and July, investors
received more than $40 billion in coupon income and proceeds from
bond maturities and early bond redemptions. These proceeds have
generated significant retail investor interest, easily absorbing the
recent diminished supply. This very favorable supply/demand position
allowed the tax-exempt bond market to outperform its taxable
counterpart in recent months.
However, the recent relative outperformance of the municipal bond
market has somewhat reduced the very attractive tax-exempt bond
yield ratios that were available at the end of 1998. In December
1998, long-term, uninsured municipal bond yields were higher than
those of their taxable counterparts. Historically, long-term tax-
exempt bond yields have been approximately 82%--85% of long-term US
Treasury bond yields. Municipal bond yields rose at a lower rate in
recent months than US Treasury bond yields, causing the yield ratio
to decline. At July 31, 1999, long-term municipal bond yields were
approximately 92% of their taxable counterparts. Current ratios,
while lower than those available at the end of 1998, still represent
historically attractive levels. We expect the municipal bond market
to maintain its strong technical position for the remainder of 1999.
Consequently, there appears to be little reason for the tax-exempt
bond market to underperform the taxable US Treasury bond market.
This suggests that the present bond yield ratio is likely to be
stable in the coming months and a return to a ratio in excess of
100% of taxable Treasury securities is improbable.
Looking ahead, it appears to us that long-term municipal bond yields
will trade in a relatively tight range near current levels. Strong
US economic performance is being balanced by nearly negligible
inflation data, as well as improvements in productivity in both
manufacturing and service industries. We believe that future moves
by the Federal Reserve Board have largely been discounted by bond
markets and are to a great extent reflected in present bond yields.
Any improvement in bond prices is likely to be contingent upon
weakening in both US employment growth and consumer spending. The
100 basis point rise in US Treasury bond yields seen thus far this
year is likely to negatively affect US economic growth. The US
housing market will be among the first sectors likely to be
affected, as some declines have already been evidenced because of
higher mortgage rates. We believe it is also unrealistic to expect
double-digit returns in US equity markets to continue indefinitely.
Much of the US consumer's wealth is tied to recent stock market
appreciation. Any slowing in these incredible growth rates is likely
to reduce consumer spending. We believe that these factors suggest
that the worst of the recent increase in bond yields has passed and
stable, if not slightly improving, bond prices may be expected.
Fiscal Year in Review
At the start of the fiscal year ended July 31, 1999, the US economy
was strong and inflation was low. We opted to maintain a fully
invested position going into the second half of the year and sought
to maintain a high level of tax-exempt income. We believed that in
the absence of any material inflationary pressures and given the
enhanced productivity of US companies, any increases in US economic
strength would not result in significant increases in interest
rates.
However, the Federal Reserve Board raised interest rates in May.
Modest improvements in foreign economies also played a factor in the
Federal Reserve Board's decision to raise short-term interest rates,
which pushed long-term interest rates higher as well. We remained
fully invested, believing that the recent spike in bond yields would
be temporary. Unfortunately, concerns lingered that the Federal
Reserve Board would continue to tighten monetary policy, which
occurred after the close of the period at the end of August. These
concerns pushed long-term bond yields higher and faster than we
expected, negatively affecting Fund performance for the later half
of the fiscal year.
Short-term tax-exempt interest rates provided a significant yield
benefit to MuniHoldings Fund II, Inc.'s Common Stock shareholders.
Although the Federal Reserve Board increased short-term taxable
interest rates, with a possibility of more tightening to follow,
interest rates on the Fund's Preferred Stock for the Fund have
remained at or below historical averages for much of 1999. However,
should the spread between long-term and short-term interest rates
narrow, the benefits of the leverage will decline and as a result,
reduce the yield on the Fund's Common Stock. (See page 1 of this
report to shareholders for a complete explanation of the benefits
and risks of leveraging.)
In Conclusion
We appreciate your ongoing interest in MuniHoldings Fund II, Inc.,
and we look forward to serving your investment needs in the months
and years to come.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Robert A. DiMella)
Robert A. DiMella
Vice President and Portfolio Manager
September 14, 1999
MuniHoldings Fund II, Inc., July 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
GO General Obligation Bonds
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> <C> <C> <C> <S> <C>
Alabama--3.7% 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 $ 8,991
Arizona--4.4% B B2 2,500 Apache County, Arizona, IDA, PCR, Refunding (Tucson Electric
Power Co. Project), Series B, 5.875% due 3/01/2033 2,386
NR* B1 2,800 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds
(America West Airlines Inc.), AMT, 6.30% due 4/01/2023 2,749
B B2 4,000 Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds
(Tucson Electric Power Company Project), Series B, 6% due 9/01/2029 3,841
NR* NR* 1,750 Show Low, Arizona, Improvement District No. 5, Special Assessment
Bonds, 6.375% due 1/01/2015 1,793
California--2.7% NR* Aaa 6,500 California Statewide Communities Development Authority, COP, RIB,
Series 24, 7.315% due 12/01/2015 (c)(i) 6,533
Colorado--2.3% NR* Aa2 2,365 Colorado HFA, S/F Program, Revenue Refunding Bonds, Senior
Series A-3, 6.50% due 5/01/2016 2,568
NR* Aaa 2,000 Denver, Colorado, City and County Airport Revenue Refunding Bonds,
RIB, Series 136, 7.51% due 11/15/2025 (b)(i) 1,934
NR* NR* 1,000 Eaglebend, Colorado, Affordable Housing Corporation, M/F Revenue
Refunding Bonds (Housing Project), Series A, 6.45% due 7/01/2021 1,035
Connecticut BB- Ba1 5,000 Connecticut State Development Authority, PCR, Refunding (Connecticut
- --2.0% Light & Power Company), Series A, 5.85% due 9/01/2028 4,824
Florida--2.3% A- Baa1 3,500 Highlands County, Florida, Health Facilities Authority Revenue Bonds
(Adventist Hospital Health System), 5.25% due 11/15/2020 3,234
NR* Aaa 2,500 Orange County, Florida, School Board COP, RIB, Series 130, 7.01% due
8/01/2023 (b)(i) 2,367
Georgia--2.3% A1 VMIG1++ 5,600 Burke County, Georgia, Development Authority, PCR (Georgia Power
Company Plant-Vogtle Project), VRDN, 3rd Series, 3.30% due 7/01/2024 (h) 5,600
Illinois--9.9% AAA Aaa 5,000 Chicago, Illinois, Board of Education, GO (Chicago School Reform),
Series A, 5.25% due 12/01/2022 (a) 4,779
AAA Aaa 5,000 Chicago, Illinois, GO (Lakefront Millennium Parking Facilities), 5% due
1/01/2018 (b) 4,729
NR* Aaa 4,500 Chicago, Illinois, S/F Mortgage Revenue Bonds, AMT, Series A-1, 6.45%
due 9/01/2029 (e)(f) 4,838
AAA Aaa 10,000 Illinois Development Finance Authority, PCR, Refunding (Illinois Power
Company Project), Series B, 5.40% due 3/01/2028 (b) 9,675
Indiana--1.4% NR* NR* 3,500 Indiana Health Facilities Financing Authority Revenue Bonds (Community-
Hartsfield Village Project), Series A, 6.375% due 8/15/2027 3,473
Maryland--4.0% NR* NR* 9,000 Maryland State Energy Financing Administration, Limited Obligation
Revenue Bonds (Cogeneration-AES Warrior Run), AMT, 7.40% due 9/01/2019 9,612
Massachusetts NR* Aaa 10,000 Massachusetts State, HFA Revenue Refunding Bonds, RITR, 7.22% due
- --4.0% 12/01/2028 (b)(i) 9,595
Mississippi--2.8% Mississippi Business Finance Corporation, Mississippi, PCR, Refunding
(System Energy Resources Inc. Project):
BBB- Ba1 5,000 5.875% due 4/01/2022 4,830
BBB- Ba1 2,050 5.90% due 5/01/2022 1,982
Montana--0.6% AA+ Aa2 1,465 Montana State Board of Housing, S/F Mortgage Revenue Refunding Bonds,
Series A-1, 5.95% due 12/01/2027 (d) 1,518
Nevada--3.6% BBB+ A2 10,000 Henderson, Nevada, Health Care Facilities Revenue Bonds (Catholic
Healthcare West), 5.375% due 7/01/2026 8,808
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 1,186
New Jersey BBB- NR* 2,630 New Jersey EDA, Revenue Bonds (First Mortgage--Fellowship Village
- --3.7% Project), Series C, 5.50% due 1/01/2018 2,490
AAA Aaa 6,760 New Jersey Sports and Exposition Authority, Convention Center Luxury
Tax, Revenue Refunding Bonds, 5% due 9/01/2016 (b) 6,563
New York--15.9% A1+ VMIG1++ 6,000 Long Island Power Authority, New York, Electric System Revenue Bonds,
VRDN, Sub-Series 7, 3.40% due 4/01/2025 (b)(h) 6,000
A- Baa1 15,500 Long Island Power Authority, New York, Electric System Revenue
Refunding Bonds, Series A, 5.50% due 12/01/2029 15,075
AAA Aaa 3,505 Metropolitan Transportation Authority, New York, Transit Facilities
Revenue Bonds, Series A, 5.625% due 7/01/2025 (b) 3,535
NR* Aaa 7,860 New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Bonds, RITR, Series 11, 8.22% due
6/15/2026 (c)(i) 8,352
AAA Aaa 4,000 New York State Dormitory Authority Revenue Bonds (State University
Educational Facilities), Series B, 4.75% due 5/15/2028 (b) 3,532
AAA Aaa 2,500 New York State Dormitory Authority, Revenue Refunding Bonds (Saint
John's University), 4.75% due 7/01/2028 (b) 2,201
</TABLE>
MuniHoldings Fund II, Inc., July 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <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 $ 3,653
A1+ NR* 100 Raleigh Durham, North Carolina, Airport Authority, Special Facility
Revenue Refunding Bonds (American Airlines), VRDN, Series A, 3.35%
due 11/01/2015 (h) 100
Ohio--2.0% NR* NR* 5,000 Ohio State, HFA, Mortgage Revenue Refunding Bonds, RITR, AMT, Series
15, 7.12% due 9/01/2019 (c)(g)(i) 4,951
Pennsylvania AAA Aaa 12,930 Allegheny County, Pennsylvania, Hospital Development Authority
- --13.2% Revenue Bonds (University of Pittsburgh Medical Center), 5.375% due
12/01/2025 (b) 12,428
BBB- Baa2 7,000 Allegheny County, Pennsylvania, IDA, Revenue Refunding Bonds
(Environmental Improvement--USX Corporation Project), 5.60% due
9/01/2030 6,659
BBB- Baa2 6,000 Bucks County, Pennsylvania, IDA, Environmental Improvement Revenue
Refunding Bonds (USX Corporation Project), 5.60% due 3/01/2033 5,693
NR* NR* 2,000 Lancaster County, Pennsylvania, Hospital Authority Revenue Bonds
(Health Center-Saint Annes Home), 6.625% due 4/01/2028 1,963
NR* NR* 3,000 Montgomery County, Pennsylvania, IDA, Revenue Refunding Bonds
(First Mortgage--Meadowood), Series A, 6.25% due 12/01/2017 3,037
NR* NR* 2,500 Pennsylvania Economic Development Financing Authority, Exempt
Facilities Revenue Bonds (National Gypsum Company), AMT, Series A,
6.25% due 11/01/2027 2,487
Tennessee--3.6% NR* NR* 2,200 Hardeman County, Tennessee, Correctional Facilities Corporation
Revenue Bonds, Series B, 7.375% due 8/01/2017 2,351
AAA Aaa 6,830 Harpeth Valley Utilities District, Tennessee, Davidson and
Williamson Counties Utility Improvement Revenue Bonds, Series A,
5% due 9/01/2020 (b) 6,447
Texas--6.3% A1+ NR* 5,150 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Refunding Bonds (Methodist Hospital), VRDN, 3.30%
due 12/01/2025 (h) 5,150
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 2,907
AA+ Aa2 7,455 Texas A & M, University Revenue Refunding Bonds, Financing
Systems, 5.50% due 5/15/2020 7,400
Virginia--4.9% NR* NR* 2,500 Dulles Town Center Community Development Authority, Virginia,
Special Assessment Tax (Dulles Town Center Project), 6.25% due
3/01/2026 2,507
NR* NR* 2,500 Peninsula Ports Authority, Virginia, Revenue Refunding Bonds
(Port Facility-Zeigler Coal), 6.90% due 5/02/2022 2,498
Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2030 826
BBB- Baa3 48,400 Senior-Series B, 5.95%** due 8/15/2033 6,067
West A A2 12,800 Braxton County, West Virginia, Solid Waste Disposal Revenue
Virginia--4.9% Refunding Bonds (Weyerhaeuser Company Project), AMT, 5.40%
due 5/01/2025 12,021
Total Investments (Cost--$259,385)--102.5% 249,773
Liabilities in Excess of Other Assets--(2.5%) (6,028)
--------
Net Assets--100.0% $243,745
========
<FN>
(a)AMBAC Insured.
(b)MBIA Insured.
(c)FSA Insured.
(d)FHA Insured.
(e)FNMA/GNMA Collateralized.
(f)FHLMC Collateralized.
(g)GNMA Collateralized.
(h)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, 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 July 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.
Ratings of issues have not been audited by Ernst & Young LLP.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of July 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$259,384,848) (Note 1a) $249,773,260
Cash 91,766
Interest receivable 3,762,038
Deferred organization expenses (Note 1e) 13,579
Prepaid expenses and other assets 20,694
------------
Total assets 253,661,337
------------
Liabilities: Payables:
Securities purchased $ 9,463,010
Dividends to shareholders (Note 1f) 249,473
Investment adviser (Note 2) 118,369 9,830,852
------------
Accrued expenses and other liabilities 85,153
------------
Total liabilities 9,916,005
------------
Net Assets: Net assets $243,745,332
============
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 1,180,176
Undistributed realized capital gains on investments--net 211,096
Unrealized depreciation on investments--net (9,611,588)
------------
Total--Equivalent to $14.16 net asset value per share of Common
Stock (market price--$12.9375) 156,745,332
------------
Total capital $243,745,332
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Fund II, Inc., July 31, 1999
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended July 31, 1999
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 14,106,135
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 1,393,855
Commission fees (Note 4) 220,649
Professional fees 77,657
Accounting services (Note 2) 75,681
Transfer agent fees 33,075
Listing fees 28,453
Directors' fees and expenses 19,556
Custodian fees 19,450
Printing and shareholder reports 17,300
Pricing fees 8,587
Amortization of organization expenses (Note 1e) 3,787
Other 7,652
------------
Total expenses before reimbursement 1,905,702
Reimbursement of expenses (Note 2) (54,038)
------------
Total expenses after reimbursement 1,851,664
------------
Investment income--net 12,254,471
------------
Realized & Realized gain on investments--net 778,981
Unrealized Change in unrealized appreciation/depreciation on investments--net (10,544,761)
Gain (Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 2,488,691
(Notes 1b, ============
1d & 3):
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the Period
Year Ended Feb. 27, 1998++
July 31, to July 31,
Increase (Decrease) in Net Assets: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 12,254,471 $ 5,237,576
Realized gain (loss) on investments--net 778,981 (567,885)
Change in unrealized appreciation/depreciation on
investments--net (10,544,761) 933,173
------------ ------------
Net increase in net assets resulting from operations 2,488,691 5,602,864
------------ ------------
Dividends to Investment income--net:
Shareholders Common Stock (9,214,198) (3,162,976)
(Note 1f): Preferred Stock (2,777,110) (1,157,587)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (11,991,308) (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 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 (decrease)in net assets (9,502,617) 253,147,944
Beginning of period 253,247,949 100,005
------------ ------------
End of period* $243,745,332 $253,247,949
============ ============
<FN>
*Undistributed investment income--net $ 1,180,176 $ 917,013
============ ============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Fund II, Inc., July 31, 1999
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived For the For the Period
from information provided in the financial statements. Year Ended Feb. 27, 1998++
July 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 1.11 .47
Realized and unrealized gain (loss) on investments--net (.88) .04
------------ ------------
Total from investment operations .23 .51
------------ ------------
Less dividends to Common Stock shareholders:
Investment income--net (.83) (.29)
------------ ------------
Capital charge resulting from issuance of Common Stock -- (.03)
------------ ------------
Effect of Preferred Share activity++++:
Dividends to Preferred Stock shareholders:
Investment income--net (.25) (.10)
Capital charge resulting from issuance of Preferred Stock -- (.08)
------------ ------------
Total effect of Preferred Stock activity (.25) (.18)
------------ ------------
Net asset value, end of period $ 14.16 $ 15.01
============ ============
Market price per share, end of period $ 12.9375 $ 14.25
============ ============
Total Investment Based on market price per share (3.79%) (3.14%)+++
Return:** ============ ============
Based on net asset value per share (.03%) 2.03%+++
============ ============
Ratios Based on Total expenses, net of reimbursement*** 1.11% .45%*
Average ============ ============
Net Assets of Total expenses*** 1.14% 1.04%*
Common Stock: ============ ============
Total investment income--net*** 7.35% 7.66%*
============ ============
Amount of dividends to Preferred Stock shareholders 1.66% 1.69%*
============ ============
Investment income--net, to Common Stock shareholders 5.68% 5.96%*
============ ============
Ratios Based on Total expenses, net of reimbursement .73% .30%*
Total Average ============ ============
Net Total expenses .75% .71%*
Assets:++++++*** ============ ============
Total investment income--net 4.83% 5.21%*
============ ============
Ratios Based on Dividends to Preferred Stock shareholders 3.20% 3.60%*
Average ============ ============
Net Assets of
Preferred Stock:
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 156,745 $ 166,248
Data: ============ ============
Preferred Stock outstanding, end of period (in thousands) $ 87,000 $ 87,000
============ ============
Portfolio turnover 71.07% 64.62%
============ ============
Leverage: Asset coverage per $1,000 $ 2,802 $ 2,911
============ ============
Dividends Series A--Investment income--net $ 807 $ 325
Per Share on ============ ============
Preferred Stock Series B--Investment income--net $ 789 $ 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 charges.
***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.
++++++Includes Common and Preferred Stock average net assets.
+++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. 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).
MuniHoldings Fund II, Inc., July 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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 August 1, 1999. 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.
(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 .55% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Stock. For the year ended July 31, 1999, FAM
earned fees of $1,393,855, 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 year ended July 31, 1999 were $177,822,041 and $183,070,439,
respectively.
Net realized gains (losses) for the year ended July 31, 1999 and net
unrealized losses as of July 31, 1999 were as follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $ (245,453) $ (9,611,588)
Financial futures contracts 1,024,434 --
------------ ------------
Total $ 778,981 $ (9,611,588)
============ ============
As of July 31, 1999, net unrealized depreciation for Federal income
tax purposes aggregated $9,611,588, of which $31,586 related to
appreciated securities and $9,643,174 related to depreciated
securities. The aggregate cost of investments at July 31, 1999 for
Federal income tax purposes was $259,384,848.
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 year ended July 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 July
31, 1999 were as follows: Series A, 3.10% and Series B, 3.15%.
Shares issued and outstanding during the year ended July 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 .25% to .375%,
calculated on the proceeds of each auction. For the year ended July
31, 1999, MLPF&S earned $52,985 as commissions.
5. Subsequent Event:
On August 6, 1999, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.070000 per share, payable on August 30, 1999 to shareholders of
record as of August 23, 1999.
REPORT OF INDEPENDENT AUDITORS (unaudited)
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, 1999, and the related statements of
operations for the year then ended, the statements of changes in net
assets and financial highlights for the year then ended and 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audits 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, 1999, 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of MuniHoldings Fund II, Inc. at July 31, 1999
and the results of its operations for the year then ended, and the
changes in its net assets and the financial highlights for the
indicated periods in conformity with generally accepted accounting
principles.
Ernst & Young LLP
MetroPark, New Jersey
August 26, 1999
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniHoldings
Fund II, Inc. during its taxable year ended July 31, 1999 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, 1999
YEAR 2000 ISSUES (unaudited)
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 (unaudited)
The quality ratings of securities in the Fund as of July 31, 1999
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 35.9%
AA/Aa 7.4
A/A 19.7
BBB/Baa 11.4
BB/Ba 2.8
B/B 3.7
NR (Not Rated) 14.7
Other++ 6.9
[FN]
++Temporary investments in short-term municipal securities.
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
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Donald C. Burke, Vice President and Treasurer
William E. Zitelli, 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
