MUNIHOLDINGS
FUND II, INC.
FUND LOGO
Annual Report
July 31, 2000
MuniHoldings Fund II, Inc. 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 the interest on which, in the opinion of the bond
counsel to the issuer, is exempt from Federal income taxes.
This report, including the financial information herein, is
transmitted to shareholders of MuniHoldings Fund II, Inc. for their
information. It is not a prospectus. 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. utilizes leveraging 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, 2000
DEAR SHAREHOLDER
For the 12-month period ended July 31, 2000, the Common Stock of
MuniHoldings Fund II, Inc. earned $0.815 per share income dividends,
which included earned and unpaid dividends of $0.063. This
represents a net annualized yield of 6.54%, based on a month-end per
share net asset value of $12.45. During the same period, the total
investment return on the Fund's Common Stock was -5.44%, based on a
change in per share net asset value from $14.16 to $12.45, and
assuming reinvestment of $6.822 per share income dividends and
$0.015 per share capital gains distributions.
For the six-month period ended July 31, 2000, the Fund's Auction
Market Preferred Stock had an average yield of 4.09% for Series A
and 3.81% for Series B.
The Municipal Market Environment
During the six months ended July 31, 2000, US domestic economic
growth remained robust. After growing at a 4.2% annual rate in 1999,
US domestic economic growth expanded at a 4.8% rate during the first
quarter of 2000 and at a 5.2% rate during the second quarter.
However, despite these significant growth rates, few price measure
indicators have shown any meaningful signs of future price pressures
at the consumer level, despite the lowest unemployment rates since
1970. With few signs of any economic slowdown, the Federal Reserve
Board continued to raise short-term interest rates in February,
March and May 2000. The Federal Reserve Board cited both the
continued growth of US employment and the continued strength of US
equity markets as reasons for attempting to moderate US economic
growth before inflationary price pressures can occur.
However, since then fixed-income markets have largely ignored strong
economic fundamentals and concentrated upon very positive technical
supply factors. Declining bond issuance - both current, and more
importantly, expected future issuance - helped push bond yields
lower into mid-April 2000. In late January and early February 2000,
the US Treasury announced its intention to reduce the amounts to be
auctioned in the quarterly Treasury note and bond auctions.
Furthermore, budgetary surpluses allowed the US Treasury to
repurchase outstanding, higher-couponed Treasury issues, primarily
in the 15-year and longer maturity sector. Both these actions
resulted in significant reduction in the outstanding supply of
longer-dated maturity US Treasury debt. Domestic and international
investors quickly began to accumulate what was expected to become a
scarce commodity and bond prices quickly rose.
By mid-April 2000, US Treasury bond yields had declined more than 80
basis points (0.80%) to 5.67%. During the remainder of the period,
US Treasury bond prices were volatile as strong economic reports and
investors' concerns of additional moves by the Federal Reserve Board
occasionally overshadowed the positive technical position of the
long-term US Treasury bond market.
Recently, a number of economic indicators have begun to suggest that
the actions taken by the Federal Reserve Board in 1999 and early
2000 have started to affect US economic growth. Both new home sales
and consumer spending have slowed, suggesting that economic growth
may subside into a 4% - 4.5% range by late 2000. In our opinion,
this range of growth was targeted by the Federal Reserve Board as
being sustainable, given current productivity measures, without
endangering the present benign inflationary environment.
By June, investor focus returned to the dwindling supply of long-
term US Treasury securities and bond prices generally rose for the
remainder of the period. The decline in long-term US Treasury bond
yields resulted in an inverted yield curve as short-term and
intermediate-term interest rates did not fall proportionately to
long-term interest rates as the Federal Reserve Board was expected
to continue to raise short-term interest rates. The current
inversion has had as much to do with debt reduction and US Treasury
buybacks as with investor expectations of slower economic growth.
During the last six months, US Treasury bond yields have declined
more than 70 basis points to end the period at 5.78%, their lowest
monthly closing level since May 1999.
Tax-exempt bond yields also have declined in recent months. The
decline has largely been in response to the rally in US Treasury
securities, as well as a continued positive technical supply
environment. States such as California and Maryland have announced
that their large current and anticipated future budget surpluses
will permit the cancellation or postponement of expected bond
issuance. Additionally, some issuers have also initiated tenders to
repurchase existing debt, reducing the supply of tax-exempt bonds in
the secondary market as well. Given the decline in available long-
term US Treasury securities, some investors who need longer maturity
investment vehicles have begun to consider long-term municipal bonds
as potential substitutes. This has further strengthened the overall
positive technical position of the tax-exempt market. During the
last six months, long-term municipal revenue bond yields have
declined nearly 50 basis points to 5.85%, their lowest level since
late August 1999, as measured by the Bond Buyer Revenue Bond Index.
The relative underperformance of the municipal bond market in recent
months has been especially disappointing given the strong technical
position the tax-exempt bond market has enjoyed. The issuance of
long-term tax-exempt securities has dramatically declined. During
the last year, almost $200 billion in new long-term municipal
securities was issued, a decline of almost 20% compared to the same
period a year earlier. For the six months ended July 31, 2000,
approximately $100 billion in new tax-exempt bonds was underwritten,
a decline of 17% compared to the same period in 1999.
Although investors received more than $45 billion in coupon
payments, bond maturities and the proceeds from early bond
redemptions during June and July, overall investor demand has
diminished. Long-term municipal bond mutual funds have seen
consistent outflows in recent months as the yields of individual
securities have risen faster than those larger, more diverse mutual
funds. Thus far this year, tax-exempt mutual funds have had net
redemptions of more than $12 billion.
However, the rate at which these redemptions have been occurring has
slowed in recent months. Recent US equity market volatility,
especially in the NASDAQ, has reduced some investor interest in the
stock market. This investor interest, especially earlier this year,
had been siphoning away demand for municipal bonds by retail
investors. Also, the demand from property and casualty companies is
expected to increase in the coming months. These firms are becoming
more profitable after experiencing losses in the past few years
resulting from a series of weather-related natural disasters. Yet as
positive as the tax-exempt bond market's technical environment has
been for much of this year, investor response to the reduction in
both current and future supply of US Treasury bonds has been
overwhelmingly positive and municipal bond yields have
underperformed their taxable counterparts.
Significantly lower municipal bond yields are still likely to
require weaker US employment growth and consumer spending. The
actions taken in recent months by the Federal Reserve Board should
eventually slow US economic growth. Recent declines in US new home
sales are perhaps the first sign that consumer spending is being
slowed by higher interest rates. Until further signs develop, it is
likely that the municipal bond market's current favorable technical
position will dampen significant tax-exempt interest rate volatility
and provide a stable environment for eventual improvement in
municipal bond prices.
Portfolio Matters
MuniHoldings Fund II, Inc. focuses on enhancing tax-exempt income,
through the use of leverage, to its Common Stock shareholders. (For
a complete explanation of the benefits and risks of leveraging, see
page 1 of this report to shareholders.) For the 12-month period
ended July 31, 2000, we believe that the Fund's structure has been
conducive to accomplishing this goal. The fixed-income marketplace
was subject to above-average price volatility, resulting from
continuously strong economic growth and uncertainty surrounding the
magnitude of future monetary tightening by the Federal Reserve
Board. The Fund's fully invested position subjected the portfolio's
net asset valuation to the volatility that accompanies such a
drastic rise and fall in interest rates, although the Fund generated
a highly competitive yield.
In addition to the increase in volatility in the municipal
marketplace, there was a widening of credit spreads in all fixed-
income markets during the past year. This caused the Fund's lower
investment-grade and below investment-grade issues to underperform
the general market. Sectors coming under considerable pressure were
healthcare, airlines and industrial development bonds. We swapped
several of these issues for tax reasons, but believed these credits
were providing incremental yield that could help the long-term
performance of the Fund.
New purchases during the past few months were concentrated in the 15-
year - 20-year maturity range, with premium coupons. The increase in
interest rates and the flattening of the yield curve allowed us to
invest in issues with less interest rate risk and a limited
sacrifice in yield. However, most of the Fund's underperformance
occurred before these purchases.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Robert A. DiMella)
Robert A. DiMella
Vice President and Portfolio Manager
September 7, 2000
MuniHoldings Fund II, Inc., July 31, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
<S> <S> <S> <C> <S> <C>
Alabama--4.7% Jefferson County, Alabama, Sewer Revenue Bonds, Series D:
AAA Aaa $ 4,000 5.70% due 2/01/2018 (d) $ 4,040
AAA Aaa 6,420 5.70% due 2/01/2020 6,459
Arizona--5.4% B+ Ba3 2,500 Apache County, Arizona, IDA, PCR, Refunding (Tucson
Electric Power Co. Project), Series B, 5.875% due 3/01/2033 2,222
BBB+ Baa1 2,170 Arizona Health Facilities Authority Revenue Bonds
(Catholic Healthcare West), Series A, 6.625% due 7/01/2020 2,154
NR* B1 2,800 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding
Bonds (America West Airlines Inc. Project), AMT, 6.30%
due 4/01/2023 2,503
B+ Ba3 4,000 Pima County, Arizona, IDA, Industrial Revenue Refunding
Bonds (Tucson Electric Power Company Project), Series B,
6% due 9/01/2029 3,643
NR* NR* 1,695 Show Low, Arizona, Improvement District No. 5, Special
Assessment Bonds, 6.375% due 1/01/2015 1,719
California--6.3% BBB NR* 1,000 Contra Costa County, California, Public Financing
Authority, Tax Allocation Revenue Refunding Bonds
(Pleasant Hill Bart Etc. Redevelopment), 5.25% due 8/01/2028 888
AA Aa3 5,000 Sacramento County, California, Sanitation District,
Financing Authority Revenue Refunding Bonds, Series A, 6%
due 12/01/2019 5,183
NR* NR* 3,000 Santa Margarita, California, Water District, Special
Tax Refunding Bonds (Community Facilities District Number 99),
Series 1, 6.25% due 9/01/2029 2,976
AAA Aaa 5,000 Tracy, California, Area Public Facilities Financing
Agency, Special Tax Refunding Bonds (Community Facilities
District Number 87-1), Series H, 5.875% due 10/01/2019 (b) 5,145
Connecticut--1.1% AA Aa2 2,470 Connecticut State, HFA, Revenue Bonds (Housing Mortgage
Finance Program), Series C-1, 6% due 11/15/2028 2,486
District of AAA Aaa 2,450 Metropolitan Washington D.C., Airports Authority,
Columbia--1.1% Virginia General Airport Revenue Bonds,
AMT, Series A, 6.625% due 10/01/2019 (b) 2,566
Florida--3.3% AAA Aaa 7,050 Florida State Department of Environmental Protection,
Preservation Revenue Bonds, Series A, 5.75% due 7/01/2009 (d) 7,536
Georgia--3.8% A1 VMIG1++ 3,000 Bartow County, Georgia, Development Authority, PCR,
Refunding (Georgia Power Company Plant-Bowen Project), VRDN,
Second Series, 4.40% due 3/01/2025 (f) 3,000
Burke County, Georgia, Development Authority, PCR,
Refunding (Georgia Power Company Plant-Vogtle
Project), VRDN (f):
A1 VMIG1++ 1,000 2nd Series, 4.35% due 4/01/2025 1,000
A1 VMIG1++ 4,500 3rd Series, 4.35% due 9/01/2025 4,500
Illinois--1.0% AAA Aaa 2,500 Illinois Development Finance Authority, PCR,
Refunding (Illinois Power Company Project),
Series B, 5.40% due 3/01/2028 (b) 2,366
Indiana--2.5% NR* NR* 3,500 Indiana Health Facilities Financing Authority Revenue
Bonds (Community-Hartsfield Village Project), Series A,
6.375% due 8/15/2027 3,047
NR* NR* 2,595 Indiana State Educational Facilities Authority,
Revenue Refunding Bonds (Saint Joseph's
College Project), 7% due 10/01/2029 2,627
Kentucky--0.5% NR* NR* 1,165 Kenton County, Kentucky, Airport Board, Special
Facilities Revenue Bonds (Mesaba Aviation Inc. Project),
AMT, Series A, 6.625% due 7/01/2019 1,107
Maryland--4.1% NR* NR* 9,000 Maryland State Energy Financing Administration,
Limited Obligation Revenue Bonds (Cogeneration-AES Warrior
Run), AMT, 7.40% due 9/01/2019 9,142
Minnesota--4.0% A1+ NR* 100 Beltrami County, Minnesota, Environmental Control
Revenue Refunding Bonds (Northwood Panelboard Co. Project),
VRDN, 4.25% due 12/01/2021 (f) 100
Rockford, Minnesota, Independent School District
Number 883, GO (c):
NR* Aaa 2,870 5.60% due 2/01/2019 2,895
NR* Aaa 2,390 5.60% due 2/01/2020 2,408
AAA Aaa 3,525 Western Minnesota, Municipal Power Agency Revenue
Refunding Bonds, Series A, 5.50% due 1/01/2011 (a) 3,626
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 4,438
BBB- Ba1 2,050 5.90% due 5/01/2022 1,825
Missouri--1.2% AAA Aaa 2,705 Saint Joseph, Missouri, School District, GO
(Missouri Direct Deposit Program), 5.75% due
3/01/2016 (c) 2,780
Nevada--4.2% BBB NR* 1,900 Clark County, Nevada, IDR, Refunding (Nevada Power
Company Project), Series C, 5.50% due 10/01/2030 1,585
Henderson, Nevada, Health Care Facility Revenue Bonds
(Catholic Healthcare West-Saint Rose Dominican Hospital):
BBB+ Baa1 5,000 5.375% due 7/01/2026 3,972
BBB+ Baa1 5,000 5.125% due 7/01/2028 3,785
New Hampshire-- BB- NR* 1,250 New Hampshire Higher Educational and Health Facilities
0.4% Authority, Revenue Refunding Bonds (Littleton Hospital
Association), Series A, 6% due 5/01/2028 984
New Jersey--1.0% BBB- NR* 2,630 New Jersey EDA, Revenue Bonds (First Mortgage-Fellowship
Village Project), Series C, 5.50% due 1/01/2018 2,162
New Mexico--1.6% NR* Baa3 4,000 Farmington, New Mexico, PCR, Refunding (Public Service
Company-San Juan Project), Series A, 5.80% due 4/01/2022 3,558
</TABLE>
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)
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Agency
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
VRDN Variable Rate Demand Notes
MuniHoldings Fund II, Inc., July 31, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
<S> <S> <S> <C> <S> <C>
New York--13.8% A1+ VMIG1++ $ 500 Long Island Power Authority, New York, Electric
System Revenue Bonds, VRDN, Sub-Series 5,
4.25% due 5/01/2033 (f) $ 500
AAA Aaa 6,250 Long Island Power Authority, New York, Electric
System Revenue Refunding Bonds, Series A, 5.50%
due 12/01/2029 (b) 6,004
AAA Aaa 2,000 Nassau County, New York, GO, General Improvement,
Series Q, 5.20% due 8/01/2014 (d) 1,969
NR* Aaa 7,860 New York City, New York, City Municipal Water
Finance Authority, Water and Sewer System
Revenue Bonds, RITR, Series 11, 7.12% due 6/15/2026 (c)(e) 8,031
A1+ VMIG1++ 5,200 New York City, New York, City Municipal Water
Finance Authority, Water and Sewer System
Revenue Refunding Bonds, VRDN, Series G, 4.25%
due 6/15/2024 (f) 5,200
AAA Aaa 3,500 New York State Dormitory Authority, Mental Health
Services Facilities Improvement Revenue Bonds,
Series B, 5.75% due 2/15/2020 (b) 3,538
A Baa1 5,450 New York State Urban Development Corporation,
Revenue Refunding Bonds (State Facilities),
5.75% due 4/01/2011 5,688
North AAA Aaa 3,000 Charlotte, North Carolina, Airport Revenue
Carolina--2.3% Bonds, AMT, Series B, 6% due 7/01/2016 (b) 3,092
BBB Baa3 2,000 North Carolina Eastern Municipal Power Agency,
Power System Revenue Bonds, Series D, 6.75%
due 1/01/2026 2,043
Ohio--5.4% NR* Ba2 2,000 Cleveland, Ohio, Airport Special Revenue
Refunding Bonds (Continental Airlines Inc.
Project), AMT, 5.70% due 12/01/2019 1,713
AAA Aaa 10,000 Ohio State Air Quality Development Authority,
Revenue Refunding Bonds (Dayton Power &
Light Company), Series B, 6.40% due 8/15/2027 (b) 10,324
Pennsylvania A1+ VMIG1++ 1,800 Geisinger Authority, Pennsylvania, Health System
--5.2% Revenue Refunding Bonds (Penn State-Geisinger Health),
VRDN, Series B, 4.35% due 8/15/2028 (f) 1,800
NR* NR* 2,000 Lancaster County, Pennsylvania, Hospital Authority
Revenue Bonds (Health Center-Saint Annes Home), 6.625%
due 4/01/2028 1,779
NR* NR* 3,000 Montgomery County, Pennsylvania, IDA, Revenue
Refunding Bonds (First Mortgage-Meadowood),
Series A, 6.25% due 12/01/2017 2,650
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 2,267
AAA Aaa 2,350 Philadelphia, Pennsylvania, Airport Revenue Refunding
Bonds, AMT, 5.375% due 6/15/2015 (d) 2,290
NR* NR* 1,000 Philadelphia, Pennsylvania, Authority for IDR, Refunding,
Commercial Development (Doubletree), Series A, 6.50%
due 10/01/2027 959
South BBB NR* 2,000 South Carolina Jobs, EDA, Economic Development
Carolina--0.9% Revenue Bonds (Westminster Presbyterian Center),
7.75% due 11/15/2030 2,011
Tennessee--1.0% NR* NR* 2,200 Hardeman County, Tennessee, Correctional Facilities
Corporation Revenue Bonds, Series B, 7.375% due 8/01/2017 2,206
Texas--9.7% Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Refunding Bonds (Methodist
Hospital), VRDN (f):
A1+ NR* 2,400 4.35% due 12/01/2025 2,400
A1+ NR* 6,100 4.35% due 12/01/2026 6,100
BBB- Baa3 2,000 Lower Colorado River Authority, Texas, PCR
(Samsung Austin Semiconductor), AMT, 6.95%
due 4/01/2030 2,011
AAA Aaa 12,025 Texas State Turnpike Authority, Dallas North Thruway
Revenue Bonds (President George Bush Turnpike),
5.25% due 1/01/2023 (d) 11,373
Virginia--12.7% NR* NR* 2,500 Dulles Town Center, Virginia, Community Development
Authority, Special Assessment Tax (Dulles Town Center
Project), 6.25% due 3/01/2026 2,356
AAA Aaa 10,000 Fairfax County, Virginia, EDA, Resource Recovery
Revenue Refunding Bonds, AMT, Series A, 6.10%
due 2/01/2011 (a) 10,865
NR* NR* 2,500 Peninsula Ports Authority, Virginia, Revenue
Refunding Bonds (Port Facility-Zeigler Coal),
6.90% due 5/02/2022 1,375
Pocahontas Parkway Association, Virginia,
Toll Road Revenue Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2030 635
BBB- Baa3 18,400 Senior-Series B, 7.35%** due 8/15/2030 2,160
BBB- Baa3 30,000 Senior-Series B, 5.95%** due 8/15/2033 2,844
Virginia State, HDA, Commonwealth Mortgage
Revenue Bonds, AMT, Series A, Sub-Series A-2:
AA+ Aa1 2,430 5.65% due 7/01/2011 2,459
AA+ Aa1 2,615 5.70% due 7/01/2012 2,641
AA+ Aa1 3,200 Virginia State, HDA, Revenue Bonds, AMT, Series D,
6% due 4/01/2024 3,200
Total Investments (Cost--$231,072)--100.0% 224,910
Liabilities in Excess of Other Assets--0.0% (91)
--------
Net Assets--100.0% $224,819
========
(a)AMBAC Insured.
(b)MBIA Insured.
(c)FSA Insured.
(d)FGIC 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, 2000.
(f)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, 2000.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown reflects
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>
Quality Profile
(unaudited)
The quality ratings of securities in the Fund as of July 31, 2000
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 43.3%
AA/Aa 7.1
A/A 2.5
BBB/Baa 15.8
BB/Ba 4.1
B/B 1.1
NR (Not Rated) 15.2
Other++ 10.9
++Temporary investments in short-term municipal securities.
MuniHoldings Fund II, Inc., July 31, 2000
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of July 31, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$231,071,871) $224,909,566
Cash 27,685
Interest receivable 3,413,545
Prepaid expenses 3,918
------------
Total assets 228,354,714
------------
Liabilities: Payables:
Securities purchased $ 3,180,000
Dividends to shareholders 180,973
Investment adviser 97,771 3,458,744
------------
Accrued expenses 77,435
------------
Total liabilities 3,536,179
------------
Net Assets: Net assets $224,818,535
============
Capital: Capital Stock (200,000,000 shares authorized):
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 873,027
Accumulated realized capital losses on investments--net (21,646,728)
Accumulated distributions in excess of realized capital
gains on investments--net (211,107)
Unrealized depreciation on investments--net (6,162,305)
------------
Total--Equivalent to $12.45 net asset value per share of
Common Stock (market price--$11.4375) 137,818,535
------------
Total capital $224,818,535
============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended July 31, 2000
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 13,843,961
Income:
Expenses: Investment advisory fees $ 1,232,537
Commission fees 228,102
Professional fees 98,787
Accounting services 76,011
Listing fees 58,269
Transfer agent fees 40,360
Directors' fees and expenses 21,379
Custodian fees 17,362
Organization expenses 13,579
Printing and shareholder reports 11,446
Pricing fees 6,963
Other 12,700
------------
Total expenses 1,817,495
------------
Investment income--net 12,026,466
------------
Realized & Realized loss on investments--net (21,857,824)
Unrealized Change in unrealized depreciation on investments--net 3,449,283
Gain (Loss) on ------------
Investments--Net: Net Decrease in Net Assets Resulting from Operations $ (6,382,075)
============
See Notes to Financial Statements.
</TABLE>
MuniHoldings Fund II, Inc., July 31, 2000
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 2000 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 12,026,466 $ 12,254,471
Realized gain (loss) on investments--net (21,857,824) 778,981
Change in unrealized appreciation/depreciation
n investments--net 3,449,283 (10,544,761)
------------ ------------
Net increase (decrease) in net assets resulting
from operations (6,382,075) 2,488,691
------------ ------------
Dividends & Investment income--net:
Distributions to Common Stock (9,098,172) (9,214,198)
Shareholders: Preferred Stock (3,235,443) (2,777,110)
In excess of realized gain on investments--net:
Common Stock (163,066) --
Preferred Stock (48,041) --
------------ ------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (12,544,722) (11,991,308)
------------ ------------
Net Assets: Total decreasein net assets (18,926,797) (9,502,617)
Beginning of year 243,745,332 253,247,949
------------ ------------
End of year* $224,818,535 $243,745,332
============ ============
*Undistributed investment income--net $ 873,027 $ 1,180,176
============ ============
See Notes to Financial Statements.
<CAPTION>
FINANCIAL HIGHLIGHTS
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: 2000 1999 1998
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 14.16 $ 15.01 $ 15.00
Operating ------------ ------------ ------------
Performance: Investment income--net 1.08 1.11 .47
Realized and unrealized gain (loss)
on investments--net (1.67) (.88) .04
------------ ------------ ------------
Total from investment operations (.59) .23 .51
------------ ------------ ------------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.82) (.83) (.29)
In excess of realized gain on investments--net (.01) -- --
------------ ------------ ------------
Total dividends and distributions to
Common Stock shareholders (.83) (.83) (.29)
------------ ------------ ------------
Capital charge resulting from issuance of Common Stock -- -- (.03)
------------ ------------ ------------
Effect of Preferred Stock activity:+++++
Dividends and distributions to Preferred Stock
shareholders:
Investment income--net (.29) (.25) (.10)
In excess of realized gain on investments--net --++++ -- --
Capital charge resulting from issuance of Preferred Stock -- -- (.08)
------------ ------------ ------------
Total effect of Preferred Stock activity (.29) (.25) (.18)
------------ ------------ ------------
Net asset value, end of period $ 12.45 $ 14.16 $ 15.01
============ ============ ============
Market price per share, end of period $ 11.4375 $ 12.9375 $ 14.25
============ ============ ============
Total Investment Based on market price per share (4.93%) (3.79%) (3.14%)+++
Return:** ============ ============ ============
Based on net asset value per share (5.44%) (.03%) 2.03%+++
============ ============ ============
Ratios Based on Total expenses, net of reimbursement*** 1.32% 1.11% .45%*
Average Net Assets ============ ============ ============
Of Common Stock: Total expenses*** 1.32% 1.14% 1.04%*
============ ============ ============
Total investment income--net*** 8.71% 7.35% 7.66%*
============ ============ ============
Amount of dividends to Preferred Stock shareholders 2.34% 1.66% 1.69%*
============ ============ ============
Investment income--net, to Common Stock shareholders 6.36% 5.68% 5.96%*
============ ============ ============
Ratios Based Total expenses, net of reimbursement .81% .73% .30%*
on Total ============ ============ ============
Average Net Total expenses .81% .75% .71%*
Assets:++++++*** ============ ============ ============
Total investment income--net 5.34% 4.83% 5.21%*
============ ============ ============
Ratios Based on Dividends to Preferred Stock shareholders 3.72% 3.20% 3.60%*
Average Net Assets ============ ============ ============
Of Preferred Stock:
Supplemental Net assets, net of Preferred Stock, end of period
Data: (in thousands) $ 137,819 $ 156,745 $ 166,248
============ ============ ============
Preferred Stock outstanding, end of period
(in thousands) $ 87,000 $ 87,000 $ 87,000
============ ============ ============
Portfolio turnover 129.35% 71.07% 64.62%
============ ============ ============
Leverage: Asset coverage per $1,000 $ 2,584 $ 2,802 $ 2,911
============ ============ ============
Dividends Series A--Investment income--net $ 967 $ 807 $ 325
Per Share on ============ ============ ============
Preferred Stock Series B--Investment income--net $ 893 $ 789 $ 340
Outstanding: ============ ============ ============
*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.
++++Amount is less than $.01 per share.
++++++Includes Common and Preferred Stock average net assets.
+++Aggregate total investment return.
+++++The Fund's Preferred Stock was issued on March 19, 1998.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Fund II, Inc., July 31, 2000
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 accounting principles generally accepted
in the United States of America, 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 investment strategies to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. 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) Organization expenses--In accordance with Statement of Position
98-5, unamortized organization expenses of $13,579 were expensed
during the year ended July 31, 2000. This was considered to be a
change in accounting principle and had no material impact on the
operations of the Fund.
(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. Distributions in excess of
realized capital gains are due primarily to differing tax treatments
for post-October losses.
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.
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, 2000 were $274,121,409 and $288,612,163,
respectively.
Net realized losses for the year ended July 31, 2000 and net
unrealized losses as of July 31, 2000 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $ (21,857,824) $ (6,162,305)
-------------- ------------
Total $ (21,857,824) $ (6,162,305)
============== ============
As of July 31, 2000, net unrealized depreciation for Federal income
tax purposes aggregated $6,162,305, of which $3,550,918 related to
appreciated securities and $9,713,223 related to depreciated
securities. The aggregate cost of investments at July 31, 2000 for
Federal income tax purposes was $231,071,871.
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 years ended July 31, 2000
and July 31, 1999 remained constant.
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, 2000 were as follows: Series A, 4.10% and Series B, 3.94%.
Shares issued and outstanding during the years ended July 31, 2000
and July 31, 1999 remained constant.
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, 2000, Merrill Lynch, Pierce, Fenner & Smith Incorporated, an
affiliate of FAM, earned $117,002 as commissions.
5. Capital Loss Carryforward:
At July 31, 2000, the Fund had a net capital loss carryforward of
approximately $7,227,000, all of which expires in 2008. This amount
will be available to offset like amounts of any future taxable
gains.
6. Subsequent Event:
On August 8, 2000, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.063210 per share, payable on August 30, 2000 to shareholders of
record as of August 18, 2000.
MuniHoldings Fund II, Inc., July 31, 2000
<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, 2000, and the related statement of
operations for the year then ended, the statements of changes in net
assets for each of the two years in the period then ended and
financial highlights for each of the periods indicated therein.
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 auditing standards
generally accepted in the United States. 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, 2000, 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, 2000
and the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the indicated
periods in conformity with accounting principles generally accepted
in the United States.
MetroPark, New Jersey
August 28, 2000
</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, 2000 qualify as
tax-exempt interest dividends for Federal income tax purposes.
Additionally, the following table summarizes the taxable per share
distributions paid by the Fund during the year.
Payable Long-Term
Date Capital Gains*
Common Stock Shareholders 12/30/99 $.014726
Preferred Stock Shareholders: Series A 11/17/99 $ 14.09
Series B 11/22/99 $ 13.52
*All of the distributions are subject to a maximum 20% tax rate.
Please retain this information for your records.
MANAGED DIVIDEND POLICY (unaudited)
The Fund's dividend policy is to distribute all or a portion of its
net investment income to its shareholders on a monthly basis. 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:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MUH
