UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-6728
Name of Fund: MuniYield Quality Fund II, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, MuniYield
Quality Fund II, Inc., 800 Scudders Mill Road, Plainsboro, NJ 08536.
Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 10/31/03
Date of reporting period: 11/01/02 - 10/31/03
Item 1 - Attach shareholder report
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
MuniYield Quality
Fund II, Inc.
Annual Report
October 31, 2003
[LOGO] Merrill Lynch Investment Managers
MuniYield Quality Fund II, Inc.
The Benefits and Risks of Leveraging
MuniYield Quality 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, net of dividends to Preferred Stock, 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. As of October 31, 2003, the percentage of the Fund's
total net assets invested in inverse floaters was 12.89%.
Swap Agreements
The Fund may also invest in swap agreements, which are over-the-counter
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified bond, basket of bonds, or index in return
for periodic payments based on a fixed or variable interest rate or the change
in market value of a different bond, basket of bonds or index. Swap agreements
may be used to obtain exposure to a bond or market without owning or taking
physical custody of securities.
2 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
A Letter From the President
Dear Shareholder
As 2003 draws to a close, it seems appropriate to reflect on what has been a
meaningful year in many respects. We saw the beginning and the end of all-out
war in Iraq, equity market uncertainty turned to strength and sub par gross
domestic product growth of 1.4% in the first quarter of 2003 grew to an
extraordinary 8.2% in the third quarter. Amid the good news, fixed income
investments, which had become the asset class of choice during the preceding
three-year equity market decline, faced new challenges.
During 2003, municipal bond yields rose and fell in reaction to geopolitical
events, equity market performance, economic activity and employment figures. By
the end of October, long-term municipal revenue bond yields were slightly higher
than they were one year earlier, at 5.24% as measured by the Bond Buyer Revenue
Bond Index. With many state deficits at record levels, municipalities issued
nearly $400 billion in new long-term tax-exempt bonds during the 12-month period
ended October 31, 2003. The availability of bonds, together with attractive
yield ratios relative to U.S. Treasury issues, made municipal bonds a popular
fixed income investment alternative.
Throughout the year, our portfolio managers continued to work diligently to
deliver on our commitment to provide superior performance within reasonable
expectations for risk and return. This included striving to outperform our peers
and the market indexes. With that said, remember that the advice and guidance of
a skilled financial advisor often can mean the difference between successful and
unsuccessful investing. A financial professional can help you choose those
investments that will best serve you as you plan for your financial future.
Finally, I am proud to premiere a new look to our shareholder communications.
Our portfolio manager commentaries have been trimmed and organized in such a way
that you can get the information you need at a glance, in plain language.
Today's markets are confusing enough. We want to help you put it all in
perspective. The report's new size also allows us certain mailing efficiencies.
Any cost savings in production or postage are passed on to the Fund and,
ultimately, to Fund shareholders.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
The Fund outperformed its comparable Lipper category for the fiscal year
and was effectively able to enhance yield while preserving net asset value in a
volatile interest rate environment.
Describe the market environment relative to municipal bonds during the fiscal
year.
At the end of October, long-term tax-exempt bond yields were 90% - 95% of
comparable U.S. Treasury securities, substantially exceeding their historical
average of 85% - 88%. Considering their tax-free status, this made long-term
municipal bonds an attractive investment alternative during the past 12 months.
Long-term U.S. Treasury bond yields declined throughout most of the first seven
months of the fiscal year, while bond prices -- which move in the opposite
direction of yields -- rose in response to weak equity markets, concerns about a
growing conflict in Iraq and continued sub par U.S. economic growth. The Federal
Reserve Board continued to lower short-term interest rates to stimulate business
and consumer economic activity. Bond yields reversed course in July and August,
rising sharply as economic conditions began to improve and as most analysts
agreed the Federal Reserve Board had finished lowering interest rates. In
mid-August, U.S. Treasury bond yields reached 5.45%, their highest level during
the period, before again moving lower for the remainder of the fiscal year. At
the end of the 12-month period, long-term U.S. Treasury bond yields were 5.13%,
15 basis points (.15%) higher than a year earlier. The relatively modest yield
increase year-over-year masks the considerable month-to-month volatility in
interest rates during the period.
Long-term tax-exempt bond yields also rose from year-ago levels, although to a
lesser extent than U.S. Treasury bonds. Yield movements were less volatile than
those experienced by U.S. Treasury issues, because municipal bond prices
typically are less sensitive to short-term economic and geopolitical pressures.
By the end of October, long-term municipal revenue bond yields stood at 5.24%, a
small increase compared to the previous year. Yields for long-term Aaa-rated
tax-exempt bonds (the highest rated) declined 10 basis points during the past
year. The decline largely reflected investors' growing demand for high-quality
bonds, which provided valuable stability in an uncertain market.
The municipal market's outperformance of the U.S. Treasury market was especially
impressive given the dramatic increase in new bond issuance during the fiscal
year. State and local governments took advantage of historically low interest
rates to finance existing infrastructure needs and refinance outstanding
high-interest-rate debt. During the past 12 months, municipalities issued nearly
$400 billion in new securities, an increase of more than 12% compared to last
year's issuance. More recently, however, new municipal bond issuance slowed as
tax-exempt bond yields rose, making borrowing more expensive. Less than $90
billion in long-term tax-exempt bonds was underwritten during the period's last
three months, a decline of nearly 10% versus the same three months of 2002. This
decline in supply helped support the tax-exempt market's recent performance.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the year ended October 31, 2003, the Common Stock of MuniYield Quality Fund
II, Inc. had a net annualized yield of 6.13%, based on a year-end per share net
asset value of $13.44 and $.824 per share income dividends. Over the same
period, the total investment return on the Fund's Common Stock was +8.28%, based
on a change in per share net asset value from $13.27 to $13.44, and assuming
reinvestment of $.822 per share ordinary income dividends. During the year, the
Fund was able to generate an above-average tax-exempt yield for our
shareholders.
For the six-month period ended October 31, 2003, the total investment return on
the Fund's Common Stock was +1.64%, based on a change in per share net asset
value from $13.67 to $13.44, and assuming reinvestment of $.414 per share
ordinary income dividends.
For the six-month period ended October 31, 2003, the Fund's Auction Market
Preferred Stock had an average yield of .95% for Series A, .93% for Series B and
..82% for Series C.
4 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
the Financial Statements included in this report. As a closed-end fund, the
Fund's shares may trade in the secondary market at a premium or discount to the
Fund's net asset value. As a result, total investment returns based on changes
in the market value of the Fund's Common Stock can vary significantly from total
investment return based on changes in the Fund's net asset value.
The Fund's return, based on net asset value, outperformed its comparable Lipper
category of Insured Municipal Debt Funds (Leveraged), which had an average
return of +6.72% for the 12-month period ended October 31, 2003. The Fund's
strong performance is attributed to several factors, including favorable
security selection, a strategic approach to market positioning during a period
of particularly volatile yields and the prerefunding of several holdings. When
municipal bonds are prerefunded, they are essentially refinanced ahead of their
maturity date. The proceeds from the refinancing are typically used to purchase
government-backed debt. This is then pledged to pay off the original debt at an
earlier call date. Because of the steepness of the yield curve during the
period, the Fund's prerefunded positions resulted in strong price appreciation.
What changes were made to the portfolio during the fiscal year?
Changes to the portfolio during the period generally followed three themes.
First, new purchases were made further out on the municipal yield curve,
generally in the 20-year - 25-year range. These maturities were favored because
the municipal yield curve flattened out past this range, meaning there was no
significant yield to be gained. We also continued to favor premium-coupon bonds
when making new purchases. Second, given their heavy supply, we took the
opportunity to purchase California municipal bonds at relatively inexpensive
levels. The goal is to achieve relative outperformance on these bonds when
conditions improve in the state and prices return to their historically higher
levels -- that is, to buy low and sell high as supply dwindles and demand
increases. The third and final change was a move to a more defensive market
posture late in the period in recognition of stronger-than-anticipated economic
data and a more favorable outlook. A defensive stance on interest rates should
help us to protect the portfolio from any increase in interest rates.
As short-term interest rates moved to historic lows during the period, the cost
of holding cash reserves would have been relatively high. Therefore, the Fund
generally maintained its fully invested position throughout the period in an
effort to enhance shareholder income.
Because short-term interest rates were low, the Fund's borrowing costs also
moved to attractive levels of approximately 1%. These levels, in combination
with a positively sloped tax-exempt yield curve, provided a generous income
benefit to the Fund's Common Stock shareholder from the leveraging of Preferred
Stock. Further material declines in short-term interest rates are not expected.
We believe the Fund's borrowing costs should remain at relatively low levels for
the foreseeable future. However, should the spread between short-term and
long-term interest rates narrow, the benefits of leveraging will decline and, as
a result, reduce the yield on the Fund's Common Stock. (For a more complete
explanation of the benefits and risks of leveraging, see page 2 of this report
to shareholders.)
How would you characterize the portfolio's position at the close of the period?
The portfolio essentially remained fully invested in high-quality municipal
bonds at the end of the period. We believe the Fund's fully invested position
should continue to provide a material benefit to the Common Stock shareholder as
short-term interest rates remain near their historic lows. We maintained our
defensive market posture at the close of the period in recognition of improving
economic conditions. Finally, we remained overweight in premium-coupon bonds and
continued to favor maturities in the 20-year - 25-year range.
Michael A. Kalinoski
Vice President and Portfolio Manager
November 12, 2003
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 5
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (in Thousands)
S&P Moody's Face
State Ratings+ Ratings+ Amount Municipal Bonds Value
===================================================================================================================================
Alabama--1.0% AAA NR* $ 2,645 Birmingham, Alabama, Capital Improvement Warrants, GO, Series A,
5.55% due 8/01/2021 (e) $ 2,880
===================================================================================================================================
Alaska--0.5% AAA Aaa 1,400 Alaska State International Airports Revenue Bonds, Series B,
5.75% due 10/01/2019 (a) 1,557
===================================================================================================================================
California--13.2% AAA NR* 2,500 California Health Facilities Finance Authority Revenue Bonds
(Kaiser Permanente), RIB, Series 26, 9.65% due 6/01/2022 (c)(h) 2,863
AAA Aaa 2,490 California State Department of Water Resources, Power Supply
Revenue Bonds, Series A, 5.375% due 5/01/2022 (e) 2,633
California State, GO, Refunding:
AAA Aaa 1,500 5.25% due 2/01/2022 1,578
AAA Aaa 1,780 5.25% due 2/01/2030 (i) 1,831
California State, Various Purpose, GO:
BBB A3 2,750 5.25% due 11/01/2029 2,719
BBB A3 4,500 5.50% due 11/01/2033 4,566
Golden State Tobacco Securitization Corporation of California,
Tobacco Settlement Revenue Bonds:
BBB Baa2 4,000 Series A-3, 7.875% due 6/01/2042 4,109
BBB- Baa1 1,000 Series B, 5.625% due 6/01/2033 987
AAA Aaa 1,300 Series B, 5.625% due 6/01/2033 (i) 1,362
AAA NR* 7,075 Series B, 5.625% due 6/01/2038 7,386
BBB- Baa1 2,500 Series B, 5.50% due 6/01/2043 2,373
AA NR* 1,500 Series B, 5.50% due 6/01/2043 (i) 1,503
AA Aa3 3,650 Sacramento County, California, Sanitation District, Financing
Authority Revenue Refunding Bonds, Trust Receipts, Class R,
Series A, 10.591% due 12/01/2019 (h) 4,390
AAA Aaa 1,450 San Diego, California, Unified School District, Election 1998,
GO, Series D, 5.25% due 7/01/2024 (b) 1,516
===================================================================================================================================
Colorado--12.1% AAA NR* 11,020 Colorado Department of Transportation Revenue Bonds, DRIVERS,
Series 249, 10.63% due 6/15/2014 (a)(h) 15,044
Colorado Health Facilities Authority Revenue Bonds, Series A:
AA Aa2 1,725 (Catholic Health Initiatives), 5.50% due 3/01/2032 1,756
AA NR* 1,200 (Covenant Retirement Communities Inc.), 5.50% due
12/01/2027 (l) 1,246
AA NR* 675 (Covenant Retirement Communities Inc.), 5.50% due
12/01/2033 (l) 698
Colorado Housing and Finance Authority Revenue Refunding Bonds,
AMT (e):
AAA NR* 875 (S/F Program), Series A-2, 6.45% due 4/01/2030 921
AAA Aaa 3,450 (S/F Program), Series B-2, 6.80% due 2/01/2031 3,789
AAA Aaa 625 (S/F Program), Series C-1, 7.65% due 12/01/2025 (j) 633
AAA Aaa 1,440 Series E-2, 7% due 2/01/2030 1,492
Northwest Parkway, Colorado, Public Highway Authority, Capital
Appreciation Revenue Bonds, Senior Convertible, Series C:
AAA Aaa 1,000 5.116%** due 6/15/2021 713
AAA Aaa 11,900 5.378%** due 6/15/2025 8,245
AAA Aaa 1,735 Northwest Parkway, Colorado, Public Highway Authority Revenue
Bonds, Series A, 5.50% due 6/15/2021 (a) 1,878
Portfolio Abbreviations
To simplify the listings of MuniYield Quality 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 at right.
AMT Alternative Minimum Tax (subject to)
DRIVERS Derivative Inverse Tax-Exempt Receipts
GO General Obligation Bonds
HDA Housing Development Authority
IDA Industrial Development Authority
IDB Industrial Development Board
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
6 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings+ Ratings+ Amount Municipal Bonds Value
===================================================================================================================================
Connecticut--4.3% Connecticut State Regional Learning Educational Service Center
Revenue Bonds (Office/Education Center Facility):
NR* NR* $ 430 7.50% due 2/01/2005 $ 432
NR* NR* 1,100 7.75% due 2/01/2015 1,128
AAA NR* 9,325 Connecticut State Resource Recovery Authority Revenue Refunding
Bonds, DRIVERS, Series 187, 9.68% due 11/15/2011 (e)(h) 11,440
===================================================================================================================================
Georgia--2.9% AAA Aaa 7,850 Atlanta, Georgia, Airport Revenue Refunding Bonds, Series A,
5.875% due 1/01/2017 (b) 8,838
===================================================================================================================================
Illinois--18.9% AAA Aaa 3,250 Chicago, Illinois, Board of Education, GO (Chicago School Reform
Project), Series A, 5.25% due 12/01/2030 (a) 3,311
AAA Aaa 3,500 Chicago, Illinois, Gas Supply Revenue Refunding Bonds (People's
Gas, Light & Coke), Series A, 6.10% due 6/01/2025 (a) 3,783
Chicago, Illinois, O'Hare International Airport, Airport Revenue
Bonds, Third Lien, AMT, Series B-2:
AAA Aaa 5,200 5.75% due 1/01/2023 (c) 5,542
AAA Aaa 2,200 6% due 1/01/2029 (i) 2,388
AAA Aaa 2,830 Chicago, Illinois, Park District, GO, Refunding, Series C, 5.50%
due 1/01/2021 (b) 3,039
AAA Aaa 3,000 Cook County, Illinois, Capital Improvement, GO, Series C, 5.50%
due 11/15/2026 (a) 3,184
AAA Aaa 10,000 Illinois Regional Transportation Authority Revenue Bonds, 6.50%
due 7/01/2026 (e) 12,285
AAA Aaa 15,100 Illinois Sports Facilities Authority Revenue Bonds, 5.368%**
due 6/15/2030 (a) 10,805
AAA Aaa 7,000 Illinois State, GO, First Series, 5.625% due 6/01/2025 (e) 8,090
AAA NR* 3,625 Metropolitan Pier and Exposition Authority, Illinois, Dedicated
State Tax Revenue Refunding Bonds, DRIVERS, Series 269, 10.13%
due 6/15/2023 (e)(h) 4,343
===================================================================================================================================
Indiana--1.0% AAA NR* 2,675 Indiana Bond Bank Revenue Bonds, Guarantee State Revolver, 6.75%
due 2/01/2017 (a) 2,897
===================================================================================================================================
Kansas--3.6% AAA NR* 3,745 Sedgwick and Shawnee Counties, Kansas, S/F Mortgage-Backed Revenue
Bonds, AMT, Series A-2, 7.60% due 12/01/2031 (d)(e) 4,090
AAA Aaa 2,855 Sedgwick and Shawnee Counties, Kansas, S/F Mortgage-Backed Revenue
Refunding Bonds, AMT, Series A-2, 6.45% due 12/01/2033 (e)(k) 3,120
AAA Aaa 3,300 Sedgwick and Shawnee Counties, Kansas, S/F Revenue Bonds, AMT,
Series A-1, 6.875% due 12/01/2026 (d)(e) 3,529
===================================================================================================================================
Kentucky--1.0% BBB Baa2 3,000 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds (TJ
International Project), AMT, 7% due 6/01/2024 3,112
===================================================================================================================================
Louisiana--4.9% AAA Aaa 3,665 Jefferson Parish, Louisiana, Home Mortgage Authority, S/F Mortgage
Revenue Bonds, AMT, Series B-1, 6.65% due 12/01/2033 (e)(k) 3,997
AAA Aaa 3,900 Louisiana Local Government, Environmental Facilities, Community
Development Authority Revenue Bonds (Capital Projects and
Equipment Acquisition), Series A, 6.30% due 7/01/2030 (a) 4,621
AAA Aaa 4,650 New Orleans, Louisiana, Ernest N. Morial Exhibit Hall Authority,
Special Tax, Sub-Series A, 5.25% due 7/15/2028 (a) 4,805
AAA Aaa 1,300 Terrebonne Parish, Louisiana, Hospital Service District Number 1,
Hospital Revenue Bonds (Terrebonne General Medical Center
Project), 5.50% due 4/01/2033 (a) 1,375
===================================================================================================================================
Massachusetts--1.7% Massachusetts State Health and Educational Facilities Authority,
Revenue Refunding Bonds (New England Memorial Hospital),
Series B (f):
NR* Ca 1,907 6% due 7/01/2008 114
NR* Ca 3,317 6.125% due 7/01/2013 199
Massachusetts State Port Authority, Special Facilities Revenue
Bonds (Delta Air Lines Inc. Project), AMT, Series A (a):
AAA Aaa 2,900 5.50% due 1/01/2016 3,050
AAA Aaa 1,775 5.50% due 1/01/2019 1,843
===================================================================================================================================
Michigan--3.9% AAA NR* 1,300 Michigan Higher Education Student Loan Authority, Student Loan
Revenue Refunding Bonds, AMT, Series XVII-G, 5.20% due
9/01/2020 (a) 1,332
AAA Aaa 2,685 Michigan State, HDA, Revenue Refunding Bonds, Series C, 5.90%
due 12/01/2015 (c)(j) 2,825
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings+ Ratings+ Amount Municipal Bonds Value
===================================================================================================================================
Michigan Michigan State Strategic Fund, Limited Obligation Revenue
(concluded) Refunding Bonds (Detroit Edison Company Project), AMT (i):
AAA Aaa $ 2,450 5.45% due 9/01/2029 $ 2,552
AAA Aaa 1,000 Series A, 5.50% due 6/01/2030 1,033
AAA Aaa 3,900 Series C, 5.45% due 12/15/2032 3,999
===================================================================================================================================
Missouri--2.1% Saint Louis County, Missouri, Pattonville R-3 School District, GO
(Missouri Direct Deposit Program) (b):
AAA Aaa 2,000 5.75% due 3/01/2015 2,257
AAA Aaa 2,000 5.75% due 3/01/2016 2,257
AAA Aaa 1,500 6% due 3/01/2019 1,717
===================================================================================================================================
Nevada--1.2% Director of the State of Nevada, Department of Business and
Industry Revenue Bonds (Las Vegas Monorail Company Project),
First Tier (a):
AAA Aaa 250 5.625% due 1/01/2032 269
AAA Aaa 3,300 5.375% due 1/01/2040 3,449
===================================================================================================================================
New Jersey--4.8% AAA Aaa 5,000 Cape May County, New Jersey, Industrial Pollution Control
Financing Authority, Revenue Refunding Bonds (Atlantic City
Electric Company Project), Series B, 7% due 11/01/2029 (e) 5,376
AAA Aaa 5,000 Salem County, New Jersey, Industrial Pollution Control Financing
Authority, Revenue Refunding Bonds (Public Service Electric &
Gas), RIB, Series 380, 11.17% due 6/01/2031 (e)(h) 5,465
BBB Baa2 3,800 Tobacco Settlement Financing Corporation of New Jersey Revenue
Bonds, 6.75% due 6/01/2039 3,447
===================================================================================================================================
New Mexico--4.5% New Mexico State Highway Commission, Tax Revenue Bonds, Senior
Sub-Lien, Series A (c):
AAA Aaa 6,295 6% due 6/15/2014 7,226
AAA Aaa 5,495 6% due 6/15/2015 6,308
===================================================================================================================================
New York--12.3% AAA Aaa 500 Erie County, New York, IDA, School Facility Revenue Bonds (City of
Buffalo Project), 5.75% due 5/01/2023 (c) 548
AAA Aaa 9,280 Nassau Health Care Corporation, New York, Health System Revenue
Bonds, 5.75% due 8/01/2022 (c) 10,239
AA+ Aa2 2,500 New York City, New York, City Transitional Finance Authority,
Revenue Refunding Bonds, Future Tax Secured, Series C, 5.50%
due 11/01/2024 2,665
New York City, New York, GO:
AAA Aaa 4,000 Series D, 5.875% due 6/01/2021 (e) 4,502
AAA Aaa 1,000 Series E, 5.75% due 5/15/2018 (i) 1,103
AAA Aaa 8,000 New York State Dormitory Authority Revenue Refunding Bonds (State
University Educational Facilities), 5.75% due 5/15/2010 (b)(g) 9,395
AAA Aaa 1,000 New York State Mortgage Agency Revenue Bonds, AMT, 24th Series,
5.875% due 10/01/2015 (e) 1,061
AAA NR* 7,115 Tobacco Settlement Financing Corporation of New York, Revenue
Bonds, Series A-1, 5.25% due 6/01/2022 (a) 7,425
===================================================================================================================================
North Carolina--2.6% BBB Baa2 7,500 Martin County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds (Solid Waste
Disposal--Weyerhaeuser Company), AMT, 6.80% due 5/01/2024 7,767
===================================================================================================================================
Ohio--2.5% Plain, Ohio, Local School District, GO, Refunding (b):
NR* Aaa 5,120 6% due 6/01/2011 (g) 6,044
NR* Aaa 1,170 6% due 12/01/2020 1,340
===================================================================================================================================
Pennsylvania--5.2% AAA Aaa 600 Allegheny County, Pennsylvania, Sanitation Authority, Sewer
Revenue Bonds, 5.50% due 12/01/2030 (e) 634
NR* Aaa 3,335 Delaware River Port Authority of Pennsylvania and New Jersey
Revenue Bonds, RIB, Series 396, 10.643% due 1/01/2019 (c)(h) 4,260
AAA Aaa 3,230 Philadelphia, Pennsylvania, Authority for Industrial Development,
Lease Revenue Bonds, Series B, 5.50% due 10/01/2020 (c) 3,490
AAA Aaa 4,500 Philadelphia, Pennsylvania, School District, GO, Series B, 5.625%
due 8/01/2022 (b) 4,886
AAA Aaa 2,000 Washington County, Pennsylvania, Capital Funding Authority Revenue
Bonds (Capital Projects and Equipment Program), 6.15% due
12/01/2029 (a) 2,320
8 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings+ Ratings+ Amount Municipal Bonds Value
===================================================================================================================================
Rhode Island--1.4% AAA Aaa $ 4,010 Rhode Island State Health and Educational Building Corporation,
Higher Education Facilities Revenue Bonds (University of Rhode
Island), Series A, 5.70% due 9/15/2024 (e) $ 4,337
===================================================================================================================================
South Carolina--1.8% AAA NR* 2,250 South Carolina State Public Service Authority, Revenue Refunding
Bonds, DRIVERS, Series 277, 10.12% due 1/01/2022 (e)(h) 2,656
NR* A1 2,500 Spartanburg County, South Carolina, Solid Waste Disposal
Facilities Revenue Bonds (BMW Project), AMT, 7.55% due 11/01/2024 2,685
===================================================================================================================================
Tennessee--2.7% AAA Aaa 7,365 Chattanooga, Tennessee, IDB, Lease Rent Revenue Bonds (Southside
Redevelopment Corporation), 5.875% due 10/01/2024 (a) 8,144
===================================================================================================================================
Texas--13.6% A+ Aa3 4,000 Austin, Texas, Convention Center Revenue Bonds (Convention
Enterprises Inc.), Trust Certificates, Second Tier, Series B,
5.75% due 1/01/2032 4,181
AAA Aaa 2,730 Corpus Christi, Texas, Utility System Revenue Refunding Bonds,
Series A, 6% due 7/15/2016 (c) 3,131
AAA Aaa 3,000 Dallas-Fort Worth, Texas, International Airport Joint Revenue
Refunding and Improvement Bonds, AMT, Series A, 5.50% due
11/01/2031 (b) 3,090
Dallas-Fort Worth, Texas, International Airport Revenue Bonds,
AMT:
AAA NR* 3,250 DRIVERS, Series 202, 10.60% due 11/01/2028 (b)(h) 3,838
AAA Aaa 6,000 Series A, 5.375% due 11/01/2022 (c) 6,165
Dickinson, Texas, Independent School District, GO, Refunding (e):
AAA Aaa 1,180 6% due 2/15/2017 1,344
AAA Aaa 1,250 6% due 2/15/2018 1,423
AA NR* 4,000 Gregg County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Good Shepherd Medical Center Project),
6.875% due 10/01/2020 (l) 4,765
Houston, Texas, Airport System, Revenue Refunding Bonds,
Sub-Lien (c):
AAA Aaa 1,065 AMT, Series A, 5.625% due 7/01/2020 1,124
AAA Aaa 1,900 Series B, 5.50% due 7/01/2030 2,004
A- A3 3,500 Lower Colorado River Authority, Texas, PCR (Samsung Austin
Semiconductor), AMT, 6.375% due 4/01/2027 3,675
AAA Aaa 4,800 Texas State Turnpike Authority, Central Texas Turnpike System
Revenue Bonds, First Tier, Series A, 5.75% due 8/15/2038 (a) 5,170
AAA Aaa 1,000 University of Houston, Texas, University Revenue Bonds, 5.50%
due 2/15/2030 (e) 1,055
===================================================================================================================================
Virginia--2.4% AAA Aaa 2,100 Halifax County, Virginia, IDA, Exempt Facility Revenue Refunding
Bonds (Old Dominion Electric Cooperative Project), AMT, 5.625%
due 6/01/2028 (a) 2,223
BB NR* 26,500 Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds,
Senior-Series B, 5.875%** due 8/15/2024 5,045
===================================================================================================================================
Washington--10.1% AAA Aaa 2,550 Energy Northwest, Washington, Electric Revenue Refunding Bonds
(Columbia Generating), Series B, 6% due 7/01/2018 (a) 2,892
AAA Aaa 2,150 King County, Washington, Sewer Revenue Refunding Bonds, Series B,
5.50% due 1/01/2027 (c) 2,270
AAA Aaa 7,470 Port Seattle, Washington, Revenue Bonds, AMT, Series B, 6%
due 2/01/2016 (e) 8,143
AAA Aaa 6,150 Seattle, Washington, Municipal Light and Power Revenue Bonds, 6%
due 10/01/2019 (e) 6,994
NR* Aaa 4,500 Snohomish County, Washington, Arlington School District Number
016, GO, 6.50% due 12/01/2015 (b) 5,347
AAA Aaa 4,250 Washington State, Various Purpose, GO, Series A, 5.625% due
7/01/2021 (c) 4,627
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded) (in Thousands)
S&P Moody's Face
State Ratings+ Ratings+ Amount Municipal Bonds Value
===================================================================================================================================
Wisconsin--3.7% Wisconsin State, GO:
AAA Aaa $ 2,000 Series C, 5.55% due 5/01/2021 (e) $ 2,176
AAA Aaa 3,000 Series F, 5.50% due 5/01/2019 (c) 3,259
AAA Aaa 5,000 Wisconsin State Transportation Revenue Bonds, Series A, 5.50%
due 7/01/2015 (b) 5,549
===================================================================================================================================
Puerto Rico--4.0% AAA Aaa 5,000 Puerto Rico Commonwealth, Highway and Transportation Authority,
Transportation Revenue Bonds, Series B, 6% due 7/01/2026 (e) 5,381
NR* Aaa 3,250 Puerto Rico Electric Power Authority, Power Revenue Refunding
Bonds, RIB, Series 449X, 9.72% due 7/01/2016 (a)(h) 3,759
AAA Aaa 2,500 Puerto Rico Municipal Finance Agency, GO, Series A, 5.50% due
8/01/2023 (c) 2,732
=========================================================================================================
Total Municipal Bonds (Cost--$416,016)--143.9% 432,403
=========================================================================================================
===================================================================================================================================
Shares
Held Short-Term Securities
===================================================================================================================================
9,366 Merrill Lynch Institutional Tax-Exempt Fund (m) 9,366
=========================================================================================================
Total Short-Term Securities (Cost--$9,366)--3.1% 9,366
===================================================================================================================================
Total Investments (Cost--$425,382)--147.0% 441,769
Unrealized Depreciation on Forward Interest Rate Swaps***--(0.2%) (651)
Other Assets Less Liabilities--3.1% 9,452
Preferred Stock, at Redemption Value--(49.9%) (150,068)
---------
Net Assets Applicable to Common Stock--100.0% $ 300,502
=========
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) GNMA Collateralized.
(e) MBIA Insured.
(f) Non-income producing security.
(g) Prerefunded.
(h) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at October 31, 2003.
(i) XL Capital Insured.
(j) FHA Insured.
(k) FNMA/GNMA Collateralized.
(l) Radian Insured.
(m) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2 (a)(3) of the
Investment Company Act of 1940) are as follows:
(in Thousands)
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Institutional Tax-Exempt Fund 6,109 $45
--------------------------------------------------------------------------
+ Ratings of issues shown are unaudited.
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
*** Forward interest rate swaps entered into as of October 31, 2003 were as
follows:
(in Thousands)
Unrealized
Notional Appreciation
Amount (Depreciation)
--------------------------------------------------------------------------
Receive a variable rate equal to 7-Day
Bond Market Association Municipal
Swap Index Rate and pay a fixed rate
equal to 4.55%
Broker, J.P. Morgan Chase Bank
Expires December 2023 $26,000 $(1,004)
Receive a variable rate equal to 7-Day
Bond Market Association Municipal
Swap Index Rate and pay a fixed rate
equal to 4.14%
Broker, Morgan Stanley Capital Services, Inc.
Expires December 2023 $19,000 353
--------------------------------------------------------------------------
Total $ (651)
=======
See Notes to Financial Statements.
10 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Statement of Net Assets
As of October 31, 2003
=====================================================================================================================
Assets
---------------------------------------------------------------------------------------------------------------------
Investments, at value (identified cost--$425,381,878) ............ $ 441,768,775
Cash ............................................................. 29,205
Receivables:
Securities sold ............................................... $ 8,961,488
Interest ...................................................... 8,184,393
Dividends from affiliates ..................................... 226 17,146,107
-----------
Prepaid expenses ................................................. 6,025
-------------
Total assets ..................................................... 458,950,112
-------------
=====================================================================================================================
Liabilities
---------------------------------------------------------------------------------------------------------------------
Unrealized depreciation on forward interest rate swaps ........... 650,552
Payables:
Securities purchased .......................................... 7,263,690
Investment adviser ............................................ 213,589
Dividends to Common Stock shareholders ........................ 208,676
Other affiliates .............................................. 3,200 7,689,155
-----------
Accrued expenses ................................................. 40,827
-------------
Total liabilities ................................................ 8,380,534
-------------
=====================================================================================================================
Preferred Stock
---------------------------------------------------------------------------------------------------------------------
Preferred Stock, at redemption value, par value $.05 per share
(2,000 Series A Shares, 2,000 Series B Shares and 2,000 Series C
Shares of AMPS* issued and outstanding at $25,000 per share
liquidation preference) ........................................ 150,067,880
-------------
=====================================================================================================================
Net Assets Applicable to Common Stock
---------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock ............................ $ 300,501,698
=============
=====================================================================================================================
Analysis of Net Assets Applicable to Common Stock
---------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10 per share (22,366,930 shares issued
and outstanding) ............................................... $ 2,236,693
Paid-in capital in excess of par ................................. 311,763,292
Undistributed investment income--net ............................. $ 5,204,329
Accumulated realized capital losses on investments--net .......... (34,438,961)
Unrealized appreciation on investments--net ...................... 15,736,345
-----------
Total accumulated losses--net .................................... (13,498,287)
-------------
Total--Equivalent to $13.44 net asset value per share of Common
Stock (market price--$12.18) ................................... $ 300,501,698
=============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 11
[LOGO] Merrill Lynch Investment Managers
Statement of Operations
For the Year Ended October 31, 2003
=====================================================================================================================
Investment Income
---------------------------------------------------------------------------------------------------------------------
Interest ......................................................... $ 24,737,301
Dividends from affiliates ........................................ 45,040
-------------
Total income ..................................................... 24,782,341
-------------
=====================================================================================================================
Expenses
---------------------------------------------------------------------------------------------------------------------
Investment advisory fees ......................................... $ 2,265,983
Commission fees .................................................. 379,480
Accounting services .............................................. 151,720
Transfer agent fees .............................................. 68,157
Professional fees ................................................ 60,510
Printing and shareholder reports ................................. 35,253
Listing fees ..................................................... 28,965
Custodian fees ................................................... 26,933
Directors' fees and expenses ..................................... 26,425
Pricing fees ..................................................... 18,797
Other ............................................................ 48,724
-----------
Total expenses before reimbursement .............................. 3,110,947
Reimbursement of expenses ........................................ (9,311)
-----------
Total expenses after reimbursement ............................... 3,101,636
-------------
Investment income--net ........................................... 21,680,705
-------------
=====================================================================================================================
Realized & Unrealized Gain (Loss) on Investments--Net
---------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ................................ 2,981,291
Change in unrealized appreciation on investments--net ............ (1,118,913)
-------------
Total realized and unrealized gain on investments--net ........... 1,862,378
-------------
=====================================================================================================================
Dividends to Preferred Stock Shareholders
---------------------------------------------------------------------------------------------------------------------
Investment income--net ........................................... (1,502,640)
-------------
Net Increase in Net Assets Resulting from Operations ............. $ 22,040,443
=============
See Notes to Financial Statements.
12 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Statements of Changes in Net Assets
For the Year Ended
October 31,
-------------------------------
Increase (Decrease) in Net Assets: 2003 2002
=============================================================================================================
Operations
-------------------------------------------------------------------------------------------------------------
Investment income--net ................................ $ 21,680,705 $ 21,083,958
Realized gain (loss) on investments--net .............. 2,981,291 (727,453)
Change in unrealized appreciation/depreciation on
investments--net .................................... (1,118,913) 802,420
Dividends to Preferred Stock shareholders ............. (1,502,640) (2,259,120)
-------------------------------
Net increase in net assets resulting from operations .. 22,040,443 18,899,805
-------------------------------
=============================================================================================================
Dividends to Common Stock Shareholders
-------------------------------------------------------------------------------------------------------------
Investment income--net ................................ (18,385,617) (17,510,018)
-------------------------------
Net decrease in net assets resulting from dividends to
Common Stock shareholders ........................... (18,385,617) (17,510,018)
-------------------------------
=============================================================================================================
Net Assets Applicable to Common Stock
-------------------------------------------------------------------------------------------------------------
Total increase in net assets applicable to Common Stock 3,654,826 1,389,787
Beginning of year ..................................... 296,846,872 295,457,085
-------------------------------
End of year* .......................................... $ 300,501,698 $ 296,846,872
===============================
* Undistributed investment income--net ............. $ 5,204,329 $ 3,411,881
===============================
See Notes to Financial Statements.
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 13
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended October 31,
-------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2003 2002 2001@ 2000@ 1999@
=============================================================================================================================
Per Share Operating Performance
-----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ...................... $ 13.27 $ 13.21 $ 12.39 $ 12.31 $ 15.52
-------------------------------------------------------
Investment income--net .................................. .97+ .94 .94 .99 1.04
Realized and unrealized gain (loss) on
investments--net ...................................... .09 --++ .84 .17 (2.65)
Dividends and distributions to Preferred Stock
shareholders:
Investment income--net ............................... (.07) (.10) (.22) (.27) (.19)
Realized gain on investments--net .................... -- -- -- -- --
In excess of realized gain on investments--net ....... -- -- -- -- (.06)
-------------------------------------------------------
Total from investment operations ........................ .99 .84 1.56 .89 (1.86)
-------------------------------------------------------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net ............................... (.82) (.78) (.74) (.81) (.86)
Realized gain on investments--net .................... -- -- -- -- --
In excess of realized gain on investments--net ....... -- -- -- -- (.49)
-------------------------------------------------------
Total dividends and distributions to Common
Stock shareholders .................................... (.82) (.78) (.74) (.81) (1.35)
-------------------------------------------------------
Net asset value, end of year ............................ $ 13.44 $ 13.27 $ 13.21 $ 12.39 $ 12.31
=======================================================
Market price per share, end of year ..................... $ 12.18 $ 11.75 $ 12.07 $ 11.50 $ 11.50
=======================================================
=============================================================================================================================
Total Investment Return*
-----------------------------------------------------------------------------------------------------------------------------
Based on market price per share ......................... 10.83% 3.95% 11.70% 7.35% (16.70%)
=======================================================
Based on net asset value per share ...................... 8.28% 7.27% 13.47% 8.04% (12.74%)
=======================================================
=============================================================================================================================
Ratios Based on Average Net Assets of Common Stock
-----------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement** .................. 1.03% 1.06% 1.07% 1.08% .99%
=======================================================
Total expenses** ........................................ 1.03% 1.06% 1.07% 1.08% .99%
=======================================================
Total investment income--net** .......................... 7.17% 7.26% 7.36% 8.04% 7.31%
=======================================================
Amount of dividends to Preferred Stock shareholders ..... .50% .78% 1.74% 2.21% 1.30%
=======================================================
Investment income--net, to Common Stock shareholders .... 6.67% 6.48% 5.62% 5.83% 6.01%
=======================================================
=============================================================================================================================
Ratios Based on Average Net Assets of Common & Preferred Stock**
-----------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement .................... .68% .70% .70% .70% .67%
=======================================================
Total expenses .......................................... .69% .70% .70% .70% .67%
=======================================================
Total investment income--net ............................ 4.79% 4.79% 4.83% 5.19% 4.97%
=======================================================
=============================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
-----------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders ............... 1.00% 1.51% 3.31% 4.02% 2.75%
=======================================================
14 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Financial Highlights (concluded)
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended October 31,
------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2003 2002 2001@ 2000@ 1999@
=========================================================================================================================
Supplemental Data
-------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock, end of
year (in thousands) ....................... $300,502 $296,847 $295,457 $277,229 $275,281
============================================================
Preferred Stock outstanding, end of year
(in thousands) ............................ $150,000 $150,000 $150,000 $150,000 $150,000
============================================================
Portfolio turnover .......................... 42.06% 42.89% 98.99% 142.46% 164.45%
============================================================
=========================================================================================================================
Leverage
-------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ................... $ 3,003 $ 2,979 $ 2,970 $ 2,848 $ 2,835
============================================================
=========================================================================================================================
Dividends Per Share on Preferred Stock Outstanding
-------------------------------------------------------------------------------------------------------------------------
Series A--Investment income--net ............ $ 276 $ 390 $ 855 $ 1,017 $ 706
============================================================
Series B--Investment income--net ............ $ 240 $ 388 $ 853 $ 1,024 $ 702
============================================================
Series C--Investment income--net ............ $ 235 $ 351 $ 777 $ 986 $ 650
============================================================
* 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.
+ Based on average shares outstanding.
++ Amount is less than $.01 per share.
@ Certain prior year amounts have been reclassified to conform to current
year presentation.
See Notes to Financial Statements.
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 15
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements
1. Significant Accounting Policies:
MuniYield Quality Fund II, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in conformity
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 MQT. 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 last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained by the
Fund's pricing service from one or more 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). Swap agreements are valued by quoted fair values
received daily by the Fund from the counterparty. Short-term investments with a
remaining maturity 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 both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movement and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell 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.
o Options -- The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently marked
to market to reflect the current market value of the option written. 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.
o Forward interest rate swaps -- The Fund may enter into forward interest
rate swaps. In a forward interest rate swap, the Fund and the counterparty
agree to make periodic net payments on a specified notional contract
amount, commencing on a specified future effective date, unless terminated
earlier. When the agreement is closed, the Fund records a realized gain or
loss in an amount equal to the value of the agreement.
16 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Notes to Financial Statements (continued)
(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).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(e) 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 .50% of the Fund's average weekly net assets, including
proceeds from the issuance of Preferred Stock. For the year ended October 31,
2003, FAM reimbursed the Fund in the amount of $9,311.
For the year ended October 31, 2003, the Fund reimbursed FAM $9,804 for certain
accounting services.
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 October 31, 2003 were $185,108,036 and $193,841,515 respectively.
Net realized gains (losses) for the year ended October 31, 2003 and net
unrealized gains (losses) as of October 31, 2003 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
--------------------------------------------------------------------------------
Long-term investments .................... $ 4,451,167 $ 16,386,897
Financial futures contracts .............. (1,905,532) --
Forward interest rate swaps .............. 435,656 (650,552)
---------------------------------
Total .................................... $ 2,981,291 $ 15,736,345
=================================
As of October 31, 2003, net unrealized appreciation for Federal income tax
purposes aggregated $16,386,897, of which $24,944,392 related to appreciated
securities and $8,557,495 related to depreciated securities. The aggregate cost
of investments at October 31, 2003 for Federal income tax purposes was
$425,381,878.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of 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 stock without approval of the holders of Common Stock.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are redeemable shares of Preferred Stock
of the Fund, with a par value of $.05 per share and a liquidation preference of
$25,000 per share plus accrued and unpaid dividends, that entitle their holders
to receive cash dividends at an annual rate that may vary for the successive
dividend periods. The yields in effect at October 31, 2003 were as follows:
Series A, .81%; Series B, .81%; and Series C, .60%.
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 17
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
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 October 31, 2003, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, an affiliate of FAM, earned $143,340 as commissions.
5. Distributions to Shareholders:
The Fund paid a tax-exempt income dividend to holders of Common Stock in the
amount of $.069000 per share on November 26, 2003 to shareholders of record on
November 14, 2003.
The tax character of distributions paid during the fiscal years ended October
31, 2003 and October 31, 2002 was as follows:
--------------------------------------------------------------------------------
10/31/2003 10/31/2002
--------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income .................... $19,888,257 $19,769,138
-------------------------------
Total distributions .................... $19,888,257 $19,769,138
===============================
As of October 31, 2003, the components of accumulated losses on a tax basis were
as follows:
-----------------------------------------------------------------------------
Undistributed tax-exempt income--net ................... $ 5,204,329
Undistributed long-term capital gains--net ............. --
------------
Total undistributed earnings--net ...................... 5,204,329
Capital loss carryforward .............................. (32,151,759)*
Unrealized gains--net .................................. 13,449,143**
------------
Total accumulated losses--net .......................... $(13,498,287)
============
* On October 31, 2003, the Fund had a net capital loss carryforward of
$32,151,759, of which $4,975,019 expires in 2007, $26,079,903 expires in
2008 and $1,096,837 expires in 2010. This amount will be available to
offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on straddles.
18 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Independent Auditors' Report
To the Shareholders and Board of Directors of
MuniYield Quality Fund II, Inc.:
We have audited the accompanying statement of net assets, including the schedule
of investments, of MuniYield Quality Fund II, Inc. as of October 31, 2003, 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
the financial highlights for each of the five years in the period then ended.
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 of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2003, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. 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
MuniYield Quality Fund II, Inc. as of October 31, 2003, 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 its financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
December 17, 2003
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 19
[LOGO] Merrill Lynch Investment Managers
Automatic Dividend Reinvestment Plan
The following description of the Fund's Automatic Dividend Reinvestment Plan
(the "Plan") is sent to you annually as required by Federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects,
all dividend and capital gains distributions will be automatically reinvested by
The Bank of New York (the "Plan Agent"), as agent for shareholders in
administering the Plan, in additional shares of Common Stock of the Fund.
Holders of Common Stock who elect not to participate in the Plan will receive
all distributions in cash paid by check mailed directly to the shareholder of
record (or, if the shares are held in street or other nominee name then to such
nominee) by The Bank of New York, as dividend paying agent. Such participants
may elect not to participate in the Plan and to receive all distributions of
dividends and capital gains in cash by sending written instructions to The Bank
of New York, as dividend paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date; otherwise such
termination will be effective with respect to any subsequently declared dividend
or distribution.
Whenever the Fund declares an income dividend or capital gains distribution
(collectively referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized shares of Common Stock from the Fund ("newly issued shares") or (ii)
by purchase of outstanding shares of Common Stock on the open market
("open-market purchases") on the New York Stock Exchange or elsewhere. If on the
payment date for the dividend, the net asset value per share of the Common Stock
is equal to or less than the market price per share of the Common Stock plus
estimated brokerage commissions (such conditions being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares of
Common Stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If on
the dividend payment date the net asset value per share is greater than the
market value (such condition being referred to herein as "market discount"), the
Plan Agent will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. It is contemplated that the Fund
will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisitions of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date determined by dividing the
uninvested portion of the dividend by the net asset value per share.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
20 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Automatic Dividend Reinvestment Plan (concluded)
In the case of shareholders such as banks, brokers or nominees which hold shares
of others who are the beneficial owners, the Plan Agent will administer the Plan
on the basis of the number of shares certified from time to time by the record
shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus commissions
of the Fund's shares is above the net asset value, participants in the Plan will
receive shares of the Fund at less than they could otherwise purchase them and
will have shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market price plus
commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
The value of shares acquired pursuant to the Plan will generally be excluded
from gross income to the extent that the cash amount reinvested would be
excluded from gross income. If, when the Fund's shares are trading at a premium
over net asset value, the Fund issues shares pursuant to the Plan that have a
greater fair market value than the amount of cash reinvested, it is possible
that all or a portion of such discount (which may not exceed 5% of the fair
market value of the Fund's shares) could be viewed as a taxable distribution. If
the discount is viewed as a taxable distribution, it is also possible that the
taxable character of this discount would be allocable to all the shareholders,
including shareholders who do not participate in the Plan. Thus, shareholders
who do not participate in the Plan might be required to report as ordinary
income a portion of their distributions equal to their allocable share of the
discount.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at
The Bank of New York, Church Street Station, P.O. Box 11258, New York, NY
10286-1258, Telephone: 800-432-8224.
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 21
[LOGO] Merrill Lynch Investment Managers
Officers and Directors (unaudited)
Number of
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held of Time Overseen by Held by
Name Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 1999 to President and Chairman of Merrill Lynch Investment 124 Funds None
Glenn* Princeton, NJ and present Managers, L.P. ("MLIM")/Fund Asset Management, 163 Portfolios
08543-9011 Director and L.P. ("FAM")--Advised Funds since 1999; Chairman
Age: 63 1992 to (Americas Region) of MLIM from 2000 to 2002;
present Executive Vice President of FAM and MLIM (which
terms as used herein include their corporate
predecessors) from 1983 to 2002; President of
FAM Distributors, Inc. ("FAMD") from 1986 to 2002
and Director thereof from 1991 to 2002; Executive
Vice President and Director of Princeton Services,
Inc. ("Princeton Services") from 1993 to 2002;
President of Princeton Administrators, L.P. from
1989 to 2002; Director of Financial Data Services,
Inc. since 1985.
------------------------------------------------------------------------------------------------------------------------
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or
MLIM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of
the Fund based on his former positions with FAM, MLIM, FAMD, Princeton Services and Princeton Administrators, L.P. The
Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the
year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board of Directors.
====================================================================================================================================
Independent Directors*
------------------------------------------------------------------------------------------------------------------------------------
James H. P.O. Box 9095 Director 1995 to Director, The China Business Group, Inc. since 40 Funds None
Bodurtha Princeton, NJ present 1996 and Executive Vice President thereof from 59 Portfolios
08543-9095 1996 to 2003; Chairman of the Board, Berkshire
Age: 59 Holding Corporation since 1980; Partner, Squire,
Sanders & Dempsey from 1980 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Joe Grills P.O. Box 9095 Director 2002 to Member of the Committee of Investment of 40 Funds Kimco
Princeton, NJ present Employee Benefit Assets of the Association of 59 Portfolios Realty
08543-9095 Financial Professionals ("CIEBA") since 1986 Corporation
Age: 68 and its Chairman from 1991 to 1992; Member
of the Investment Advisory Committees of the
State of New York Common Retirement Fund
since 1989; Member of the Investment Advisory
Committee of the Howard Hughes Medical
Institute from 1997 to 2000; Director, Duke
Management Company since 1992 and Vice
Chairman thereof since 1998; Director, LaSalle
Street Fund from 1995 to 2001; Director, Kimco
Realty Corporation since 1997; Member of the
Investment Advisory Committee of the Virginia
Retirement System since 1998 and Vice Chairman
thereof since 2002; Director, Montpelier
Foundation since 1998 and Vice Chairman
thereof since 2000; Member of the Investment
Committee of the Woodberry Forest School since
2000; Member of the Investment Committee of
the National Trust for Historic Preservation
since 2000.
------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9095 Director 1992 to John M. Olin Professor of Humanities, New York 40 Funds None
London Princeton, NJ present University since 1993 and Professor thereof since 59 Portfolios
08543-9095 1980; President of Hudson Institute since 1997
Age: 64 and Trustee thereof since 1980.
------------------------------------------------------------------------------------------------------------------------------------
22 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Officers and Directors (unaudited) (continued)
Number of
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held of Time Overseen by Held by
Name Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors* (concluded)
------------------------------------------------------------------------------------------------------------------------------------
Andre F. P.O. Box 9095 Director 1992 to George Gund Professor of Finance and Banking, 40 Funds None
Perold Princeton, NJ present Harvard Business School since 2000 and a member 59 Portfolios
08543-9095 of the faculty since 1979; Director and Chairman of
Age: 51 the Board,UNX, Inc. since 2003; Director, Sanlam
Limited and Sanlam Life since 2001; Director,
Genbel Securities and Gensec Bank since 1999;
Director, Stockback.com from 2002 to 2002;
Director, Bulldogresearch.com from 2000 to 2001;
Director, Sanlam Investment Management from
1999 to 2001; Director, Quantec Limited from
1991 to 1999.
------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Director 1999 to Shareholder, Modrall, Sperling, Roehl, Harris & 40 Funds None
Cooper Princeton, NJ present Sisk, P.A. since 1993; Director of Cooper's, Inc. 59 Portfolios
Ramo 08543-9095 since 1999 and Chairman of the Board since
Age: 61 2000; Director of ECMC, Inc. since 2001.
------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Director 2002 to Principal of STI Management since 1994; Trustee 40 Funds None
Salomon, Princeton, NJ present of Commonfund from 1980 to 2001; Director of 59 Portfolios
Jr. 08543-9095 Rye Country Day School since 2001.
Age: 66
------------------------------------------------------------------------------------------------------------------------------------
Stephen B. P.O. Box 9095 Director 2002 to Chairman, Fernwood Advisors (investment adviser) 41 Funds None
Swensrud Princeton, NJ present since 1996; Principal of Fernwood Associates 60 Portfolios
08543-9095 (financial consultant) since 1975; Chairman of
Age: 70 RPP Corporation since 1978; Director, International
Mobile Communications, Inc. since 1998.
------------------------------------------------------------------------------------------------------------------------
* The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72.
------------------------------------------------------------------------------------------------------------------------------------
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 23
[LOGO] Merrill Lynch Investment Managers
Officers and Directors (unaudited) (concluded)
Position(s) Length
Held of Time
Name Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to First Vice President of FAM and MLIM since 1997 and Treasurer thereof
Burke Princeton, NJ President present since 1999; Senior Vice President and Treasurer of Princeton Services since
08543-9011 and and 1999; Vice President of FAMD since 1999; Director of MLIM Taxation since 1990.
Age: 43 Treasurer 1999 to
present
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9011 Senior 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
Jacob Princeton, NJ Vice present Management) of MLIM from 1997 to 2000.
08543-9011 President
Age: 52
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
Loffredo Princeton, NJ Vice present Management) of MLIM from 1998 to 2000.
08543-9011 President
Age: 39
------------------------------------------------------------------------------------------------------------------------------------
Michael A. P.O. Box 9011 Vice 2000 to Vice President of MLIM since 1999.
Kalinoski Princeton, NJ President present
08543-9011
Age: 33
------------------------------------------------------------------------------------------------------------------------------------
Brian D. P.O. Box 9011 Secretary 2003 to Vice President (Legal Advisory) of MLIM since 2002; Attorney with Reed Smith
Stewart Princeton, NJ present from 2001 to 2002; Attorney with Saul Ewing from 1999 to 2001.
08543-9011
Age: 34
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
The Bank of New York
100 Church 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
MQT
24 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Dividend Policy
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 stable level of dividend distributions, 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 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.
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 25
[LOGO] Merrill Lynch Investment Managers
Quality Profile (unaudited)
The quality ratings of securities in the Fund as of October 31, 2003 were as
follows:
--------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Total Investments
--------------------------------------------------------------------------------
AAA/Aaa ........................................................... 83.5%
AA/Aa ............................................................. 4.8
A/A ............................................................... 3.1
BBB/Baa ........................................................... 4.9
BB/Ba ............................................................. 1.1
CC/Ca ............................................................. 0.1
NR (Not Rated) .................................................... 2.5
--------------------------------------------------------------------------------
Important Tax Information (unaudited)
All of the net investment income distributions paid by MuniYield Quality Fund
II, Inc. during its taxable year ended October 31, 2003 qualify as tax-exempt
interest dividends for Federal income tax purposes.
Please retain this information for your records.
26 MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003
Electronic Delivery
The Fund is now offering electronic delivery of communications to its
shareholders. In order to receive this service, you must register your account
and provide us with e-mail information. To sign up for this service, simply
access this website http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification number
(PIN). You will need this PIN should you wish to update your e-mail address,
choose to discontinue this service and/or make any other changes to the service.
This service is not available for certain retirement accounts at this time.
MUNIYIELD QUALITY FUND II, INC. OCTOBER 31, 2003 27
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
MuniYield Quality Fund II, Inc. seeks to provide shareholders with as high a
level of current income exempt from Federal income taxes as is consistent with
its investment policies and prudent investment management by investing primarily
in a portfolio of long-term, high-grade municipal obligations, the interest on
which is exempt from Federal income taxes in the opinion of bond counsel to the
issuer. The Fund invests primarily in insured municipal bonds.
This report, including the financial information herein, is transmitted to
shareholders of MuniYield Quality 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 leveraged its
Common Stock and intends to remain leveraged 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.
MuniYield Quality Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
#16433 -- 10/03
Item 2 - Did registrant adopt a code of ethics, as of the end of the period
covered by this report, that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party? If not, why not? Briefly describe any amendments or
waivers that occurred during the period. State here if code of
ethics/amendments/waivers are on website and give website address-.
State here if fund will send code of ethics to shareholders without
charge upon request--
The registrant has adopted a code of ethics, as of the end of the
period covered by this report, that applies to the registrant's
principal executive officer, principal financial officer and principal
accounting officer, or persons performing similar functions. A copy of
the code of ethics is available without charge upon request by calling
toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Did the registrant's board of directors determine that the registrant
either: (i) has at least one audit committee financial expert serving
on its audit committee; or (ii) does not have an audit committee
financial expert serving on its audit committee? If yes, disclose name
of financial expert and whether he/she is "independent," (fund may, but
is not required, to disclose name/independence of more than one
financial expert) If no, explain why not. -
The registrant's board of directors has determined that (i) the
registrant has the following audit committee financial experts serving
on its audit committee and (ii) each audit committee financial expert
is independent: (1) Joe Grills, (2) Andre Perold, (3) Robert S.
Salomon, Jr., and (4) Stephen B. Swensrud.
Item 4 - Disclose annually only (not answered until December 15, 2003)
(a) Audit Fees - Disclose aggregate fees billed for each of the last
two fiscal years for professional services rendered by
the principal accountant for the audit of the
registrant's annual financial statements or services
that are normally provided by the accountant in
connection with statutory and regulatory filings or
engagements for those fiscal years. N/A.
(b) Audit-Related Fees - Disclose aggregate fees billed in each of the
last two fiscal years for assurance and
related services by the principal accountant
that are reasonably related to the performance
of the audit of the registrant's financial
statements and are not reported under
paragraph (a) of this Item. Registrants shall
describe the nature of the services comprising
the fees disclosed under this category. N/A.
(c) Tax Fees - Disclose aggregate fees billed in each of the last two
fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and
tax planning. Registrants shall describe the nature of
the services comprising the fees disclosed under this
category. N/A.
(d) All Other Fees - Disclose aggregate fees billed in each of the last
two fiscal years for products and services
provided by the principal accountant, other than
the services reported in paragraphs (a) through
(c) of this Item. Registrants shall describe the
nature of the services comprising the fees
disclosed under this category. N/A.
(e)(1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of
Regulation S-X. N/A.
(e)(2) Disclose the percentage of services described in each of
paragraphs (b) through (d) of this Item that were approved by
the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule
2-01 of Regulation S-X. N/A.
(f) If greater than 50%, disclose the percentage of hours expended on
the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal
accountant's full-time, permanent employees. N/A.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for each
of the last two fiscal years of the registrant. N/A.
(h) Disclose whether the registrant's audit committee has considered
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence. N/A.
Item 5 - If the registrant is a listed issuer as defined in Rule 10A-3 under the
Exchange Act, state whether or not the registrant has a
separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. If the
registrant has such a committee, however designated, identify each
committee member. If the entire board of directors is acting as the
registrant's audit committee in Section 3(a)(58)(B) of the Exchange
Act, so state.
If applicable, provide the disclosure required by Rule 10A-3(d) under
the Exchange Act regarding an exemption from the listing standards for
audit committees. N/A
(Listed issuers must be in compliance with the new listing rules by the
earlier of their first annual shareholders meeting after January 2004,
or October 31, 2004 (annual requirement))
Item 6 - Reserved
Item 7 - For closed-end funds that contain voting securities in their portfolio,
describe the policies and procedures that it uses to determine how to
vote proxies relating to those portfolio securities.
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch
Investment Managers, L.P. and/or Fund Asset Management, L.P. (the
"Investment Adviser") authority to vote all proxies relating to the
Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the
account of one or more of its clients, including a Fund. Pursuant to
these Proxy Voting Procedures, the Investment Adviser's primary
objective when voting proxies is to make proxy voting decisions solely
in the best interests of each Fund and its shareholders, and to act in
a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers
the interests of its clients, including the Funds, and not the
interests of the Investment Adviser, when voting proxies and that real
(or perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment professionals
appointed by the CIO, portfolio managers and investment analysts
appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Investment Adviser's Legal department appointed by the Investment
Adviser's General Counsel. The Committee's membership shall be limited
to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a
member of the Committee or participate in its decision making (except
to the extent such person is asked by the Committee to present
information to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser might
be asked to do so). The Committee determines how to vote the proxies of
all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes
are consistent with the best interests of those clients and are free
from unwarranted and inappropriate influences. The Committee
establishes general proxy voting policies for the Investment Adviser
and is responsible for determining how those policies are applied to
specific proxy votes, in light of each issuer's unique structure,
management, strategic options and, in certain circumstances, probable
economic and other anticipated consequences of alternate actions. In so
doing, the Committee may determine to vote a particular proxy in a
manner contrary to its generally stated policies. In addition, the
Committee will be responsible for ensuring that all reporting and
recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not
to adopt a specific voting policy applicable to that issue. The
Investment Adviser believes that certain proxy voting issues require
investment analysis - such as approval of mergers and other significant
corporate transactions - akin to investment decisions, and are,
therefore, not suitable for general guidelines. The Committee may elect
to adopt a common position for the Investment Adviser on certain proxy
votes that are akin to investment decisions, or determine to permit the
portfolio manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that
the Investment Adviser will generally seek to vote proxies over which
the Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in conjunction
with a Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Investment Adviser
generally will not seek to vote proxies related to portfolio securities
that are on loan, although it may do so under certain circumstances. In
addition, the Investment Adviser will vote proxies related to
securities of foreign issuers only on a best efforts basis and may
elect not to vote at all in certain countries where the Committee
determines that the costs associated with voting generally outweigh the
benefits. The Committee may at any time override these general policies
if it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by the CIO. The CIO
shall appoint to the subcommittee, where appropriate, only persons
whose job responsibilities do not include contact with the Client and
whose job evaluations would not be affected by the Investment Adviser's
relationship with the Client (or failure to retain such relationship).
The subcommittee shall determine whether and how to vote all proxies on
behalf of the Investment Adviser's clients or, if the proxy matter is,
in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines
or, on matters where the Investment Adviser's policy is case-by-case,
does not follow the voting recommendation of any proxy voting service
or other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies relating
to the Client may be voted unless the Secretary, or in the Secretary's
absence, the Assistant Secretary of the Committee concurs that the
subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring
proxy issues that are not expected to involve unusual circumstances.
These policies are guidelines only, and the Investment Adviser may
elect to vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any
time upon the request of a Committee member and may be amended or
deleted upon the vote of a majority of Committee members present at a
Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of issuers
other than investment companies. As a general matter, the Committee
believes that a company's Board of Directors (rather than shareholders) is
most likely to have access to important, nonpublic information regarding a
company's business and prospects, and is therefore best-positioned to set
corporate policy and oversee management. The Committee, therefore,
believes that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of the
corporation in a manner that will seek to maximize shareholder value over
time. In individual cases, the Committee may look at a nominee's history
of representing shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent auditors. As
a general matter, the Committee believes that corporate auditors have a
responsibility to represent the interests of shareholders and provide an
independent view on the propriety of financial reporting decisions of
corporate management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the Committee may
look at an auditors' history of representing shareholder interests as
auditor of other companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits. As a
general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive compensation, but
believes that compensation matters are normally best determined by an
issuer's board of directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore, generally not be
supported.
o Proposals related to requests, principally from management, for approval
of amendments that would alter an issuer's capital structure. As a general
matter, the Committee will support requests that enhance the rights of
common shareholders and oppose requests that appear to be unreasonably
dilutive.
o Proposals related to requests for approval of amendments to an issuer's
charter or by-laws. As a general matter, the Committee opposes poison pill
provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the Committee
believes that a fund's Board of Directors (rather than its shareholders)
is best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that the
Investment Company Act envisions will be approved directly by
shareholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the shareholder's environmental or social concerns. The
Committee generally believes that annual shareholder meetings are
inappropriate forums for discussion of larger social issues, and opposes
shareholder resolutions "micromanaging" corporate conduct or requesting
release of information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the Committee
is generally supportive of proposals to require corporate disclosure of
matters that seem relevant and material to the economic interests of
shareholders, the Committee is generally not supportive of proposals to
require disclosure of corporate matters for other purposes.
Item 8 -- Reserved
Item 9(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
Item 9(b) -- There were no significant changes in the registrant's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 10 - Exhibits
10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or
amendments/waivers is on website or offered to shareholders upon request
without charge. N/A.
10(b) - Attach certifications pursuant to Section 302 of the Sarbanes-Oxley Act.
Attached hereto.
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MuniYield Quality Fund II, Inc.
By: /s/ Terry K. Glenn
------------------------------
Terry K. Glenn,
President of
MuniYield Quality Fund II, Inc.
Date: December 22, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Terry K. Glenn
------------------------------
Terry K. Glenn,
President of
MuniYield Quality Fund II, Inc.
Date: December 22, 2003
By: /s/ Donald C. Burke
------------------------------
Donald C. Burke,
Chief Financial Officer of
MuniYield Quality Fund II, Inc.
Date: December 22, 2003
Attached hereto as a furnished exhibit are the certifications pursuant
to Section 906 of the Sarbanes-Oxley Act.