MUNIENHANCED FUND INC, DEF 14A, 1994-07-26

MUNIENHANCED FUND INC
DEF 14A, 1994-07-26

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1994

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the registrant /X/
Filed by a party other than the registrant / /

Check the appropriate box:
/ / Preliminary proxy statement
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12

MuniEnhanced Fund, Inc.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)

MuniEnhanced Fund, Inc.
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of filing fee (Check the appropriate box):

/X/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(i)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.

(1) Title of each class of securities to which transaction applies:
- - --------------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:
- - --------------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11:1
- - --------------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:
- - --------------------------------------------------------------------------------

/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.

(1) Amount previously paid:
- - --------------------------------------------------------------------------------

(2) Form, schedule or registration statement no.:
- - --------------------------------------------------------------------------------

(3) Filing party:
- - --------------------------------------------------------------------------------

(4) Date filed:
- - --------------------------------------------------------------------------------
- - ---------------
1Set forth the amount on which the filing fee is calculated and state how it was
determined.
<PAGE> 2

MUNIENHANCED FUND, INC.
BOX 9011
PRINCETON, NEW JERSEY 08543-9011

------------------------
NOTICE OF 1994 ANNUAL MEETING OF STOCKHOLDERS

SEPTEMBER 9, 1994
------------------------

TO THE STOCKHOLDERS OF MUNIENHANCED FUND, INC.:

Notice is hereby given that the 1994 Annual Meeting of Stockholders (the
"Meeting") of MuniEnhanced Fund, Inc. (the "Fund") will be held at the offices
of Merrill Lynch Asset Management, 800 Scudders Mill Road, Plainsboro, New
Jersey, on Friday, September 9, 1994 at 10:00 A.M. for the following purposes:

(1) To elect a Board of Directors to serve for the ensuing year;

(2) To consider and act upon a proposal to ratify the selection of
Deloitte & Touche to serve as independent auditors of the Fund for its
current fiscal year; and

(3) To transact such other business as may properly come before the
Meeting or any adjournment thereof.

The Board of Directors has fixed the close of business on July 15, 1994 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Meeting or any adjournment thereof.

A complete list of the stockholders of the Fund entitled to vote at the
Meeting will be available and open to the examination of any stockholder of the
Fund for any purpose germane to the Meeting during ordinary business hours from
and after August 19, 1994, at the office of the Fund, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536. You are cordially invited to attend the Meeting.
STOCKHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE REQUESTED TO
COMPLETE, DATE AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE
ENVELOPE PROVIDED FOR THIS PURPOSE. The enclosed proxy is being solicited on
behalf of the Board of Directors of the Fund.

By Order of the Board of Directors

MARK B. GOLDFUS
Secretary
Plainsboro, New Jersey
Dated: July 25, 1994
<PAGE> 3

PROXY STATEMENT
------------------------

MUNIENHANCED FUND, INC.
BOX 9011
PRINCETON, NEW JERSEY 08543-9011
------------------------

1994 ANNUAL MEETING OF STOCKHOLDERS

SEPTEMBER 9, 1994

INTRODUCTION

This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of MuniEnhanced Fund, Inc., a
Maryland corporation (the "Fund"), to be voted at the 1994 Annual Meeting of
Stockholders of the Fund (the "Meeting"), to be held at the offices of Merrill
Lynch Asset Management ("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey,
on Friday, September 9, 1994 at 10:00 A.M. The approximate mailing date of this
Proxy Statement is July 27, 1994.

All properly executed proxies received prior to the Meeting will be voted
at the Meeting in accordance with the instructions marked thereon or otherwise
as provided therein. Unless instructions to the contrary are marked, proxies
will be voted for the election of the Board of Directors to serve for the
ensuing year, and for the ratification of the selection of independent auditors
to serve for the Fund's current fiscal year. Any proxy may be revoked at any
time prior to the exercise thereof by giving written notice to the Secretary of
the Fund.

The Board of Directors has fixed the close of business on July 15, 1994 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Meeting and at any adjournment thereof. Stockholders on the
record date will be entitled to one vote for each share held, with no shares
having cumulative voting rights. As of July 15, 1994, the Fund had outstanding
29,007,770 shares of common stock, par value $.10 per share ("Common Stock"),
and 1,500 shares of auction market preferred stock, par value $.10 per share and
liquidation preference of $100,000 per share plus an amount equal to accumulated
but unpaid dividends thereon ("AMPS"). To the knowledge of the Fund, as of July
15, 1994, no person is the beneficial owner of more than five percent of the
outstanding shares of Common Stock or five percent of the outstanding AMPS.

The Board of Directors of the Fund knows of no business other than that
mentioned in Items 1 and 2 of the Notice of Meeting which will be presented for
consideration at the Meeting. If any other matter is properly presented, it is
the intention of the persons named in the enclosed proxy to vote in accordance
with their best judgment.
<PAGE> 4

ITEM 1. ELECTION OF DIRECTORS

At the Meeting, each member of the Board of Directors will be elected to
serve until the next Annual Meeting of Stockholders and until his successor is
elected and qualified, until his death, until he resigns or is otherwise removed
under the charter or until December 31 of the year in which he reaches age 72.
It is intended that all properly executed proxies will be voted (unless such
authority has been withheld in the proxy) as follows:

(1) All such proxies of the holders of AMPS, voting separately by
class, in favor of the two (2) persons designated as Directors to be
elected by holders of AMPS; and

(2) All such proxies of the holders of AMPS and Common Stock, voting
together as a single class, in favor of the four (4) persons designated as
Directors to be elected by holders of AMPS and Common Stock.

The Board of Directors of the Fund knows of no reason why any of these
nominees will be unable to serve, but in the event of any such unavailability,
the proxies received will be voted for such substitute nominee or nominees as
the Board of Directors may recommend.

Certain information concerning the nominees, including their designated
classes, is set forth as follows:

TO BE ELECTED BY HOLDERS OF AMPS, VOTING SEPARATELY BY CLASS

2
<PAGE> 5

TO BE ELECTED BY HOLDERS OF AMPS AND COMMON STOCK, VOTING TOGETHER AS A SINGLE
CLASS

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AT
JULY 15, 1994
PRINCIPAL OCCUPATIONS -----------------
DURING PAST FIVE YEARS DIRECTOR COMMON
NAME AND ADDRESS OF NOMINEE AGE AND PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
--------------------------- --- --------------------------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Kenneth S. Axelson(1)(2)...... 72 Executive Vice President and 1989 0 0
75 Jameson Point Rd. Director, J.C. Penney Company,
Rockland, Maine 04841 Inc., until 1982; Director,
UNUM Corporation, Protection
Mutual Insurance Company, Zurn
Industries, Inc. and, until
1994, Grumman Corporation,
and, until 1992, Central Maine
Power Company and Key Trust
Company of Maine; Trustee, The
Chicago Dock and Canal Trust.
Robert R. Martin(1)(2)........ 67 Chairman and Chief Executive 1993 0 0
513 Grand Hill Officer, Kinnard Investments,
St. Paul, Minnesota 55102 Inc. from 1990 to 1993;
Executive Vice President, Dain
Bosworth from 1974 to 1989;
Director, Carnegie Capital
Management from 1977 to 1985
and Chairman thereof in 1979;
Director, Securities Industry
Association from 1981 to 1982
and Public Securities
Association from 1979 to 1980;
Chairman, WTC Industries, Inc.
since 1994; Trustee, Northland
College since 1992.
Joseph L. May(1)(2)........... 65 Attorney in private practice 1989 0 0
424 Church Street since 1984; President, May and
Suite 2000 Athens Hosiery Mills Division,
Nashville, Tennessee Wayne-Gossard Corporation from
37219 1954 to 1983; Vice President,
Wayne-Gossard Corporation from
1972 to 1983; Chairman, The
May Corporation (personal
holding company) from 1972 to
1983; Director, Signal Apparel
Co. from 1972 to 1989.
</TABLE>

3
<PAGE> 6

- - ---------------

(1) Each of the nominees is a director, trustee or member of an advisory board
of certain other investment companies for which FAM or MLAM acts as
investment adviser. See "Merrill Lynch Investment Company Directorships"
below.

(2) Member of Audit Committee of the Board of Directors.

(3) Interested person, as defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act"), of the Fund.

Committees and Board of Directors Meetings. The Board of Directors has a
standing Audit Committee, which consists of the Directors who are not
"interested persons" of the Fund within the meaning of the Investment Company
Act. The principal purpose of the Audit Committee is to review the scope of the
annual audit conducted by the Fund's independent auditors and the evaluation by
such auditors of the accounting procedures followed by the Fund. The
non-interested Directors have retained independent legal counsel to assist them
in connection with these duties. The Board of Directors does not have a
nominating committee.

During the fiscal year ended January 31, 1994, the Board of Directors held
four meetings and the Audit Committee held four meetings. Each of the Directors
attended at least 75% of the aggregate of the total number of meetings of the
Board of Directors and the total number of meetings held by all committees on
which he served.

Compliance with Section 16(a) of the Securities Exchange Act of
1934. Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Fund's officers, directors and persons

4
<PAGE> 7

who own more than ten percent of a registered class of the Fund's equity
securities, to file reports of ownership and changes in ownership on Forms 3, 4
and 5 with the Securities and Exchange Commission ("SEC") and the New York Stock
Exchange. Officers, directors and greater than ten percent stockholders are
required by SEC regulations to furnish the Fund with copies of all Forms 3, 4
and 5 they file.

Based solely on the Fund's review of the copies of such forms, and
amendments thereto, furnished to it during or with respect to its most recent
fiscal year, and written representations from certain reporting persons that
they were not required to file Form 5 with respect to the most recent fiscal
year, the Fund believes that all of its officers, directors, greater than ten
percent beneficial owners and other persons subject to Section 16 of the
Exchange Act because of the requirements of Section 30 of the Investment Company
Act, i.e., any advisory board member, investment adviser or affiliated person of
the Fund's investment adviser, have complied with all filing requirements
applicable to them with respect to transactions during the Fund's most recent
fiscal year except that (i) Mr. Martin inadvertently neglected to file a Form 3
to report his election as a Director of the Fund and (ii) Donald C. Burke
inadvertently neglected to file a Form 3 to report his election as Vice
President of the Fund. This information was, however, included in a Form 5 which
was filed by each of them in a timely manner.

Interested Persons. The Fund considers Mr. Zeikel to be an "interested
person" of the Fund within the meaning of Section 2(a)(19) of the Investment
Company Act as a result of the positions he holds with FAM and its affiliates.
Mr. Zeikel is the President of the Fund and the President of FAM and MLAM.

Compensation of Directors. FAM, the Fund's investment adviser, pays all
compensation of all officers of the Fund and all Directors of the Fund who are
affiliated with ML&Co. or its subsidiaries. The Fund pays each Director not
affiliated with FAM a fee of $5,000 per year plus $500 per regular meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also pays each member of its Audit
Committee, which consists of all of the non-affiliated Directors, a fee of
$1,000 per year plus $250 per meeting attended, together with such Director's
out-of-pocket expenses relating to attendance at meetings. These fees and
expenses aggregated $38,667 for the fiscal year ended January 31, 1994.

Merrill Lynch Investment Company Directorships. FAM and its affiliate,
MLAM, act as the investment adviser for more than 90 other registered investment
companies. Mr. Zeikel is a trustee or director of each of these companies except
for Merrill Lynch Series Fund, Inc., Merrill Lynch Institutional Intermediate
Fund and Merrill Lynch Funds for Institutions Series. Messrs. Axelson, London,
Martin, May and Perold are trustees or directors of Merrill Lynch Balanced Fund
for Investment and Retirement, Merrill Lynch California Municipal Series Trust,
Convertible Holdings Inc., Merrill Lynch Consults International Portfolio,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch World Income Fund, Inc., Merrill Lynch Global
Convertible Fund, Inc., MuniEnhanced Fund, Inc., MuniYield Fund, Inc., MuniYield
Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield California Fund,
Inc., MuniYield California Insured Fund, Inc., MuniYield California Insured Fund
II, Inc., MuniYield Florida Fund, MuniYield Michigan Fund, Inc., MuniYield New
Jersey Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc. and MuniVest Pennsylvania Insured Fund.

5
<PAGE> 8

Officers of the Fund. The Board of Directors has elected seven officers of
the Fund. The following sets forth information concerning each of these
officers:

<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
----------------------------- ------ --- -------
<S> <C> <C> <C>
Arthur Zeikel..................................... President 62 1989
President and Chief Investment Officer of FAM
since 1977; President of MLAM since 1977 and
Chief Investment Officer since 1976;
President and Director of Princeton Services
since 1993; Executive Vice President of
ML&Co. since 1990; Executive Vice President
of Merrill Lynch since 1990 and Senior Vice
President from 1985 to 1990; Director of MLFD
since 1991.

Terry K. Glenn.................................... Executive Vice President 53 1989
Executive Vice President of FAM and MLAM since
1983; Executive Vice President and Director
of Princeton Services since 1993; President
of MLFD since 1986 and Director since 1991;
President of Princeton Administrators, L.P.
since 1988.

Vincent R. Giordano............................... Vice President 49 1989
Senior Vice President of FAM and MLAM since 1984
and Vice President of MLAM from 1980 to 1984;
Portfolio Manager of FAM and MLAM since 1977;
Senior Vice President of Princeton Services
since 1993.

Kenneth A. Jacob.................................. Vice President 43 1989
Vice President of FAM and MLAM since 1984;
employed by MLAM since 1978.

Donald C. Burke................................... Vice President 34 1993
Vice President and Director of Taxation of MLAM
since 1990; Employee of Deloitte & Touche
from 1982 to 1990.

Gerald M. Richard................................. Treasurer 45 1989
Senior Vice President and Treasurer of FAM and
MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993;
Treasurer of MLFD since 1984 and Vice
President since 1981.

Mark B. Goldfus................................... Secretary 47 1989
Vice President of FAM and MLAM since 1985.
</TABLE>

Stock Ownership. At July 15, 1994, the Directors and officers of the Fund
as a group (12 persons) owned an aggregate of less than 1/4 of 1% of the Common
Stock of the Fund outstanding at such date and owned none of the AMPS
outstanding at such date. At such date, Mr. Zeikel, an officer and Director of
the

6
<PAGE> 9

Fund, and the other officers of the Fund owned an aggregate of less than 1/4 of
1% of the outstanding shares of common stock of ML&Co.

ITEM 2. SELECTION OF INDEPENDENT AUDITORS

The Board of Directors of the Fund, including a majority of the Directors
who are not interested persons of the Fund, has selected the firm of Deloitte &
Touche ("D&T"), independent auditors, to examine the financial statements of the
Fund for the current fiscal year. The Fund knows of no direct or indirect
financial interest of D&T in the Fund. Such appointment is subject to
ratification or rejection by the stockholders of the Fund. Unless a contrary
specification is made, the accompanying proxy will be voted in favor of
ratifying the selection of such auditors.

D&T also acts as independent auditors for ML&Co. and all of its
subsidiaries and for most other investment companies for which FAM or MLAM acts
as investment adviser. The fees received by D&T from these other entities are
substantially greater, in the aggregate, than the total fees received by it from
the Fund. The Board of Directors of the Fund considered the fact that D&T has
been retained as the independent auditors for ML&Co. and the other entities
described above, in its evaluation of the independence of D&T with respect to
the Fund.

Representatives of D&T are expected to be present at the Meeting and will
have the opportunity to make a statement if they so desire and to respond to
questions from stockholders.

THE INVESTMENT ADVISORY AGREEMENT

FAM acts as the investment adviser for the Fund and provides the Fund with
management services pursuant to an investment advisory agreement dated February
16, 1989 (the "Investment Advisory Agreement"). The stockholders of the Fund
most recently approved the Investment Advisory Agreement on August 27, 1990. FAM
has acted as the investment adviser for the Fund since the Fund commenced
operations.

On March 31, 1994, the Board of Directors of the Fund, including a majority
of the Directors who are not interested persons of the Fund, approved the
continuance of the Investment Advisory Agreement for a period of one year. On
that date, Arthur Zeikel, a Director of the Fund, owned securities of ML&Co. In
their consideration of this matter, the Board received extensive information
relating to, among other things, the nature, quality and extent of the advisory,
administrative and other services provided to the Fund by FAM and its affiliates
(including Merrill Lynch), comparative data with respect to the advisory and
management fees paid by other municipal bond funds, the operating expenses and
expense ratio of the Fund as compared to such funds and the performance of the
Fund as compared to the performance of such other municipal bond funds. The
Board also has received information as to the costs of FAM and its affiliates
for providing services to the Fund.

INFORMATION CONCERNING FAM

Effective January 1, 1994, FAM was reorganized as a Delaware limited
partnership. FAM (the general partner of which is Princeton Services, a
wholly-owned subsidiary of ML & Co.) is owned and controlled by ML&Co. and is
located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. ML&Co. is
located at 250 Vesey Street, New York, New York 10281. The reorganization did
not result in a change of management of FAM, in any of its personnel, or in an
adverse change in its financial condition. Prior to the reorganization,

7
<PAGE> 10

FAM, which was known as Fund Asset Management, Inc. ("FAMI"), was a Delaware
corporation which had been incorporated in 1976. Prior to its reorganization,
FAMI was a wholly-owned subsidiary of MLAM, a Delaware corporation, which was
also reorganized as a Delaware limited partnership effective January 1, 1994.
MLAM was a wholly-owned subsidiary of ML&Co. prior to its reorganization, and
continues to be owned and controlled by ML&Co. after its reorganization. MLAM is
also located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. MLAM or
FAM acts as the investment adviser to more than 90 other registered investment
companies. In addition, MLAM offers portfolio management and portfolio analysis
services to individuals and institutions. FAMI's audited balance sheet for its
most recent fiscal year is appended to this Proxy Statement as Exhibit A.

Securities held by the Fund may also be held by or be appropriate
investments for other funds or clients (collectively referred to as "clients")
for which MLAM or FAM acts as an adviser. Because of different investment
objectives or other factors, a particular security may be bought for one or more
clients when one or more other clients are selling the security. If purchases or
sales of securities for the Fund or other clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective clients in a manner deemed equitable to all by MLAM
or FAM. To the extent that transactions on behalf of more than one client of
MLAM or FAM during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.

The following table sets forth the name, title and principal occupation of
the principal executive officer of FAM and the directors of Princeton Services,
the general partner of FAM.

<TABLE>
<CAPTION>
NAME* TITLE PRINCIPAL OCCUPATION
----- ----- --------------------
<S> <C> <C>
ARTHUR ZEIKEL.................... President and Chief Investment President and Chief
Officer of FAM and President Investment Officer of MLAM
and Director of Princeton and FAM; Executive Vice
Services President of ML&Co.;
President and Director of
Princeton Services
TERRY K. GLENN................... Executive Vice President of Executive Vice President of
FAM and Executive Vice MLAM and FAM; Executive Vice
President and Director of President and Director of
Princeton Services Princeton Services
PHILIP L. KIRSTEIN............... Senior Vice President and Senior Vice President,
General Counsel of FAM and General Counsel and Secretary
Senior Vice President and of MLAM and FAM; Senior Vice
Director of Princeton Services President and Director of
Princeton Services
</TABLE>

- - ---------------
*Mr. Zeikel is presently a Director of the Fund. The address of Messrs. Zeikel,
Glenn and Kirstein is Box 9011, Princeton, New Jersey 08543-9011, which is also
the address of FAM and MLAM.

TERMS OF INVESTMENT ADVISORY AGREEMENT

The Investment Advisory Agreement provides that, subject to the direction
of the Board of Directors of the Fund, FAM is responsible for the actual
management of the Fund's portfolio and for the review of the Fund's holdings in
light of its own research analysis and analyses from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with FAM, subject to review

8
<PAGE> 11

by the Board of Directors. FAM provides the portfolio managers for the Fund, who
consider analyses from various sources (including brokerage firms with which the
Fund does business), make the necessary investment decisions and place
transactions accordingly. FAM is also obligated to perform certain
administrative and management services for the Fund and is obligated to provide
all the office space, facilities, equipment and personnel necessary to perform
its duties under the Investment Advisory Agreement.

Investment Advisory Fee. The Investment Advisory Agreement provides that
as compensation for its services to the Fund, FAM receives from the Fund at the
end of each month a fee at an annual rate of 0.50 of 1% of the Fund's average
weekly net assets (i.e., the average weekly value of the total assets of the
Fund, minus the sum of accrued liabilities of the Fund and accumulated dividends
on the shares of AMPS). For purposes of this calculation, average weekly net
assets is determined at the end of each month on the basis of the average net
assets of the Fund for each week during the month. The assets for each weekly
period are determined by averaging the net assets at the last business day of a
week with the net assets at the last business day of the prior week. For the
fiscal year ended January 31, 1994, the investment advisory fee paid by the Fund
to FAM aggregated $2,624,002 (based on average net assets of approximately
$521.4 million). At May 31, 1994, the Fund had net assets of approximately
$489.8 million. At this asset level the Fund's annual investment advisory fee
would aggregate approximately $2.4 million.

Payment of Expenses. The Investment Advisory Agreement obligates FAM to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with the
investment and economic research, trading and investment management of the Fund,
as well as the fees of all Directors of the Fund who are affiliated persons of
FAM or any of its affiliates. The Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, expenses for legal and
auditing services, taxes, costs of printing proxies, listing fees, stock
certificates and shareholder reports, charges of the custodian and transfer
agent, dividend disbursing agent and registrar fees and expenses with respect to
the issuance of preferred stock, SEC fees, fees and expenses of unaffiliated
Directors, accounting and pricing costs, insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, mailing and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by FAM, and the Fund reimburses FAM for its costs in connection with such
services. For the fiscal year ended January 31, 1994, the Fund reimbursed
$64,026 to FAM for such accounting services.

Duration and Termination. The Investment Advisory Agreement will continue
in effect from year to year if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of capital stock of the
Fund and (b) by a majority of the Directors who are not parties to such
agreement or interested persons (as defined in the Investment Company Act) of
any such party. Such agreement is not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the stockholders of the Fund.

PORTFOLIO TRANSACTIONS

Subject to policies established by the Board of Directors of the Fund, FAM
is primarily responsible for the execution of the Fund's portfolio transactions
and the allocation of the brokerage. In executing such transactions, FAM seeks
to obtain the best results for the Fund, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. While FAM generally
seeks reasonably competitive commission rates, the Fund does not necessarily pay
the lowest commission or spread available.

9
<PAGE> 12

The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the best
price and execution, brokers or dealers who provided supplemental investment
research (such as information concerning money market securities, economic data
and market forecasts) to FAM, including Merrill Lynch, may receive orders for
transactions by the Fund. Information so received will be in addition to and not
in lieu of the services required to be performed by FAM under the Investment
Advisory Agreement and the expenses of FAM will not necessarily be reduced as a
result of the receipt of such supplemental information.

The securities in which the Fund will invest are traded primarily in the
over-the-counter markets, and the Fund intends to deal directly with dealers who
make markets in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Under the Investment
Company Act, except as permitted by exemptive order, persons affiliated with the
Fund are prohibited from dealing with the Fund as principal in the purchase and
sale of securities. Since transactions in the over-the-counter market usually
involve transactions with dealers acting as principal for their own account, the
Fund will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions except that pursuant to an
exemptive order obtained by FAM, the Fund may engage in principal transactions
with Merrill Lynch in high quality, short-term, tax-exempt securities. For the
fiscal year ended January 31, 1994, pursuant to such order, the Fund engaged in
one transaction with Merrill Lynch in the aggregate amount of approximately $3
million representing 0.3% of the Fund's aggregate dollar amount of transactions
for the year. An affiliated person of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis. For the fiscal year
ended January 31, 1994, the Fund paid no brokerage commissions. In addition, in
connection with AMPS (which are securities issued by the Fund, not portfolio
transactions), the Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate of 0.25 of 1% calculated on the proceeds of each
auction. For the fiscal year ended January 31, 1994, the Fund paid $379,080 in
such commissions, of which approximately $295,760 (78%) was paid to Merrill
Lynch.

The Board of Directors has considered the possibility of recapturing for
the benefit of the Fund brokerage commissions, dealer spreads and other expenses
of possible portfolio transactions, such as underwriting commissions, by
conducting portfolio transactions through affiliated entities, including Merrill
Lynch. For example, brokerage commissions received by Merrill Lynch could be
offset against the investment advisory fee paid by the Fund to FAM. After
considering all factors deemed relevant, the Directors made a determination not
to seek such recapture. The Directors will reconsider this matter from time to
time.

ADDITIONAL INFORMATION

The expenses of preparation, printing and mailing of the enclosed form of
proxy and accompanying Notice and Proxy Statement will be borne by the Fund. The
Fund will reimburse banks, brokers and others for their reasonable expenses in
forwarding proxy solicitation material to the beneficial owners of the shares of
the Fund. The Fund may also hire proxy solicitors at the expense of the Fund.

In order to obtain the necessary quorum at the Meeting (i.e., a majority of
the shares of each class of the Fund's securities entitled to vote at the
Meeting, present in person or by proxy), supplementary solicitation may be made
by mail, telephone, telegraph or personal interview by officers of the Fund. It
is anticipated that the cost of such supplementary solicitation, if any, will be
nominal.

The Directors are to be elected by class vote, two Directors being elected
by the holders of AMPS and the remaining Directors by the holders of AMPS and
Common Stock, voting together as a single class. The affirmative vote of a
majority of the votes cast by the holders of AMPS, present in person or by
proxy, at a

10
<PAGE> 13

meeting at which a quorum is duly constituted, voting separately as a class, is
required for the election of the two (2) persons designated as Directors to be
elected by the holders of AMPS. The affirmative vote of a majority of the votes
cast by the holders of AMPS and Common Stock, present in person or by proxy, at
a meeting at which a quorum is duly constituted, voting together as a single
class, is required for the election of the remaining Directors (Item 1). The
proposal to ratify the selection of the Fund's independent auditors (Item 2) may
be approved by the affirmative vote of a majority of the votes cast by the
holders of Common Stock and AMPS, present in person or by proxy, at a meeting at
which a quorum is duly constituted, voting together as a single class.

All shares represented by properly executed proxies, unless such proxies
have previously been revoked, will be voted at the Meeting in accordance with
the directions on the proxies; if no direction is indicated, the shares will be
voted "FOR" the Director nominees and "FOR" the ratification of D&T as
independent auditors.

Broker-dealer firms, including Merrill Lynch, holding Fund shares in
"street name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares on each
Item before the Meeting. The Fund understands that, under the rules of the New
York Stock Exchange, such broker-dealer firms may, without instructions from
their customers and clients, grant authority to the proxies designated to vote
on the election of Directors (Item 1) and ratification of the selection of
independent auditors (Item 2) if no instructions have been received prior to the
date specified in the broker-dealer firm's request for voting instructions.
Merrill Lynch has advised that it intends to exercise discretion over shares
held in its name for which no instructions are received by voting such shares in
the same proportion as it has voted shares for which it has received
instructions. The Fund will include shares held of record by broker-dealers as
to which such authority has been granted in its tabulation of the total number
of votes present for purposes of determining whether the necessary quorum of
stockholders exists. Proxies which are returned but which are marked "abstain"
or on which a broker-dealer has declined to vote on any Item ("broker
non-vote"), will be counted as present for the purpose of a quorum. However,
abstentions and broken non-votes will not be counted as votes cast. An
abstention or a broker non-vote will have no effect with respect to the vote on
Item 1 or Item 2.

STOCKHOLDER PROPOSALS

If a stockholder intends to present a proposal at the 1995 Annual Meeting
of Stockholders of the Fund, which is anticipated to be held in September 1995,
and desires to have the proposal included in the Fund's proxy statement and form
of proxy for that meeting, the stockholder must deliver the proposal to the
offices of the Fund by March 27, 1995.

By Order of the Board of Directors

MARK B. GOLDFUS
Secretary

Dated: July 25, 1994.

11
<PAGE> 14

EXHIBIT A

FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET AS OF
DECEMBER 31, 1993 AND INDEPENDENT AUDITORS' REPORT

A-1
<PAGE> 15

INDEPENDENT AUDITORS' REPORT
FUND ASSET MANAGEMENT, INC.:

We have audited the accompanying consolidated balance sheet of Fund Asset
Management, Inc. and subsidiary (the "Company") as of December 31, 1993. This
balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on the balance sheet based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, such consolidated balance sheet presents fairly, in all material
respects, the financial position of the Company at December 31, 1993 in
conformity with generally accepted accounting principles.

DELOITTE & TOUCHE
Parsippany, New Jersey
February 28, 1994

A-2
<PAGE> 16

FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C>
ASSETS

Cash........................................................................ $ 996,680
Receivable from affiliated companies:
Lease transactions........................................................ 24,501,523
Sale of leased investment................................................. 48,312,532
Fund management fees receivable............................................. 28,927,938
Investments in leases:
Leveraged leases.......................................................... 57,431,668
Sales-type lease.......................................................... 3,362,521
Investments in affiliated investment companies--(market: $19,731,088)....... 18,181,262
Investment in affiliated limited partnership................................ 31,109,264
------------
TOTAL ASSETS................................................................ $212,823,388
============
LIABILITIES AND STOCKHOLDER'S EQUITY

LIABILITIES:
Payable to Merrill Lynch & Co., Inc. and affiliates......................... $ 21,554,955
Deferred income taxes:
Arising from leveraged leases............................................. 52,938,886
Arising from sales-type lease............................................. 1,351,622
Other..................................................................... 15,838,124
Other....................................................................... 8,501
------------
Total liabilities........................................................... 91,692,088
------------
STOCKHOLDER'S EQUITY:
Common stock, par value $1.00 per share--authorized 25,000 shares;
outstanding 1,000 shares.................................................. 1,000
Additional paid-in capital.................................................. 686,215,876
Retained earnings........................................................... 119,029,472
Proceeds receivable from Merrill Lynch & Co., Inc. from sale of
subsidiary................................................................ (684,115,048)
------------
Total stockholder's equity.................................................. 121,131,300
------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................. $212,823,388
============
</TABLE>

See notes to consolidated balance sheet.

A-3
<PAGE> 17

FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1993

ORGANIZATION

Fund Asset Management, Inc. and subsidiary (the "Company"), a wholly-owned
subsidiary of Merrill Lynch Investment Management, Inc. (the "Parent"), or
"MLIM" which is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("ML&Co."), serves as an investment adviser to various registered open-end
investment companies. The Company is also a lessor participant in certain
leveraged and sales-type lease agreements.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Income Taxes--The results of the operations of the Company are included in
the consolidated Federal and combined state and local income tax returns filed
by ML&Co. It is the policy of ML&Co. to allocate the tax associated with such
operating results to each respective subsidiary in a manner which approximates
the separate company method. In 1992, ML&Co. adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") which
requires an asset and liability method in recording income taxes on all
transactions that have been recognized in the financial statements. SFAS 109
provides that deferred taxes be adjusted to reflect tax rates at which future
tax liabilities or assets are expected to be settled or realized.

TRANSACTIONS WITH AFFILIATES

The Company serves as an investment adviser for certain affiliated
investment companies. The Company maintains investments in certain of these
investment companies. Such investments are carried at the lower of cost or
market value. Market value is determined based upon quoted market prices.

The Company has an arrangement with Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S") an affiliate which provides that the Company, which
receives revenue as investment adviser to certain investment companies (the
"Funds"), reimburse MLPF&S for certain costs incurred in processing transactions
involving shares of the Funds.

ML&Co. is the holder of the Company's excess cash, which is available on
demand to meet current liabilities. ML&Co. credits the Company for interest, at
a floating rate approximating ML&Co.'s average borrowing rate, based on the
Company's average daily balances due to/from ML&Co.

The "Receivable from affiliated companies" arising from lease transactions
is summarized as follows:

<TABLE>
<S> <C>
Monies advanced to fund lease transactions................ $(103,476,954)
Tax benefits allocated to the Company by ML&Co............ 88,699,254
Other..................................................... 39,279,223
-------------
Total..................................................... $ 24,501,523
=============
</TABLE>

The Company has a 49 percent limited partnership interest in ML Plainsboro
Limited Partnership ("MLP") whose general partner is an affiliate. Profits and
losses are allocated to the Company based on its percentage interest.

A-4
<PAGE> 18

FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1993--(CONTINUED)

During 1992, the Company sold its investment in Merrill Lynch Interfunding,
Inc. and Merlease Leasing Corp. to an affiliate at book value, resulting in a
receivable from ML&Co. This receivable is reflected as a reduction to
stockholder's equity.

INVESTMENTS IN LEASES

The Company is a lessor participant in leveraged leases.

Pertinent information relating to the Company's investments in leveraged
leases is summarized as follows:

<TABLE>
<CAPTION>
ESTIMATED
LENGTH OF RESIDUAL VALUE
LEASE EQUITY OF LEASED
TYPE OF PROPERTY (YEARS) INVESTMENT PROPERTY
---------------- --------- ---------- --------------
<S> <C> <C> <C>
Generating plant................... 24-25 34.06% 15.0%
</TABLE>

Financing beyond the Company's equity interest in the purchase price of the
properties was furnished by outside parties in the form of long-term debt that
provides for no recourse against the Company and is secured by a first lien on
the properties and related rentals. At the end of the respective lease terms,
ownership of the properties remains with the Company.

The Company's net investment in leveraged leases is summarized as follows:

<TABLE>
<S> <C>
Rentals receivable (net of principal and interest on
nonrecourse debt)........................................ $66,075,030
Estimated residual values of leased assets................. 18,964,143
Less:
Unearned and deferred income............................. (26,617,505)
Allowance for uncollectibles............................. (990,000)
-----------
Investment in leveraged leases............................. 57,431,668
Less deferred taxes arising from leveraged leases.......... (52,938,886)
-----------
Net investment in leveraged leases......................... $ 4,492,782
===========
</TABLE>

During 1993, the Company sold its equity interest in the chemical tanker
previously accounted for as a leveraged lease. The sale resulted in an after-tax
gain of $112,000.

A-5
<PAGE> 19

FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1993--(CONTINUED)

The Company's investment in the sales-type leases consisted of the
following elements at December 31, 1993:

<TABLE>
<S> <C>
Minimum lease payments receivable.......................... $ 3,672,000
Less:
Unearned income.......................................... (59,479)
Allowance for uncollectibles............................. (250,000)
-----------
Investment in sales type financing leases.................. $ 3,362,521
===========
</TABLE>

At December 31, 1993 minimum lease payments receivable are $3,672,000 for
1994.

For Federal income tax purposes, the Company receives the investment tax
credit and has the benefit of tax deductions for (i) depreciation on the entire
amount of leased assets and (ii) interest on the outstanding long-term debt. For
state and local tax purposes, the Company also receives the benefits of tax
deductions from (i) and (ii) above. Since, during the early years of the leases,
those deductions exceed the Company's lease rental income, substantial excess
deductions are available to be applied against the Company's other income and
the consolidated income of ML&Co. In the later years of these leases, rental
income will exceed the related deductions and taxes will be payable (to the
extent that net deductions arising from additional leveraged lease transactions
do not offset such net lease income). Deferred taxes have been provided to
reflect these temporary differences.

INCOME TAXES

As part of the consolidated group, the Company transfers its current
Federal and state tax liabilities to MLIM. No such amounts were due to MLIM at
December 31, 1993.

PENSION PLAN

The Company participates in the ML&Co. Comprehensive Retirement Program
(the "Program") consisting of the Retirement Accumulation Plan ("RAP") and the
Employee Stock Ownership Plan (the "ESOP"). Under the Program, cash
contributions made by the Company and the ML&Co. stock held by the ESOP will be
allocated quarterly to participants' accounts. Allocations will be based on
years of service, age and eligible compensation. Actuarial data regarding the
Company's Plan participants is not separately available.

NAME CHANGE

Effective December 28, 1991, the Company's Parent, through an amendment of
its certificate of incorporation, changed its name to Merrill Lynch Investment
Management, Inc. ("MLIM"). MLIM does business under the name "Merrill Lynch
Asset Management".

A-6
<PAGE> 20

FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1993--(CONCLUDED)

SUBSEQUENT EVENT

Effective January 1, 1994, Fund Asset Management, Inc. contributed certain
net investment advisory assets to Fund Asset Management, L.P., a newly formed
Delaware limited partnership, in exchange for a 99% limited partnership
interest. The general partner, Princeton Services, Inc. (a wholly-owned
subsidiary of Merrill Lynch & Co., Inc.) contributed 1% of the value of the net
investment advisory assets in exchange for its 1% general partnership interest.
The partnership's profits and losses are to be allocated in proportion to the
capital contributions of the partners.

A-7
<PAGE> 21

BY SIGNING AND PROMPTLY RETURNING THE ENCLOSED PROXY YOU MAY SAVE YOUR FUND THE
EXPENSE OF ADDITIONAL SOLICITATION COSTS.

THE ENCLOSED PROXY CARD HAS BEEN FORWARDED TO YOU BECAUSE YOU WERE A SHAREHOLDER
ON THE RECORD DATE.

IT IS IMPORTANT THAT YOU VOTE AND SIGN THIS PROXY AND RETURN IT IN THE ENCLOSED
ENVELOPE AS SOON AS POSSIBLE.
<PAGE> 22
<TABLE>
<S> <C>
COMMON STOCK
MUNIENHANCED FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011

P R O X Y

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Mark B.
Goldfus as proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse hereof,
all the Common Stock of MuniEnhanced Fund, Inc. (the "Fund") held of record by
the undersigned on July 15, 1994 at the annual meeting of stockholders of the
Fund to be held on September 9, 1994 or any adjournment thereof.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1 AND 2.

(Continued and to be signed on the reverse side)

1. ELECTION OF DIRECTORS FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below)[ ] to vote for all nominees listed below [ ]

(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
KENNETH S. AXELSON, ROBERT R. MARTIN, JOSEPH L. MAY, ARTHUR ZEIKEL

2. Proposal to ratify the selection of Deloitte &Touche as the independent
auditors of the Fund to serve for the current fiscal year
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. In the discretion of such proxies, upon such other business as may properly
come before the meeting or any adjournment thereof.

Please sign exactly as name appears hereon.
When shares are held by joint tenants, both
should sign. When signing as attorney or as
executor, administrator, trustee or guardian,
please give full title as such. If a corporation,
please sign in full corporate name by president
or other authorized officer. If a partnership,
please sign in partnership name by authorized persons.

Dated: _________________________________ , 1994

X _______________________________________________
Signature

X _______________________________________________
Signature, if held jointly

PLEASE MARK BOXES [ ] OR [ X ] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE PROXY
CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

</TABLE>

<PAGE> 23
<TABLE>
<S> <C>
AUCTION MARKET
MUNIENHANCED FUND, INC. PREFERRED STOCK
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011

P R O X Y

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Mark B.
Goldfus as proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse hereof,
all the Auction Market Preferred Stock of MuniEnhanced Fund, Inc. (the "Fund")
held of record by the undersigned on July 15, 1994 at the annual meeting of
stockholders of the Fund to be held on September 9, 1994 or any adjournment
thereof.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1 AND 2.

(Continued and to be signed on the reverse side)

1. ELECTION OF DIRECTORS FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below)[ ] to vote for all nominees listed below [ ]

(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
KENNETH S. AXELSON, HERBERT I. LONDON, ROBERT R. MARTIN, JOSEPH L. MAY, ANDRE F. PEROLD, ARTHUR ZEIKEL

2. Proposal to ratify the selection of Deloitte & Touche as the independent
auditors of the Fund to serve for the current fiscal year
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. In the discretion of such proxies, upon such other business as may properly
come before the meeting or any adjournment thereof.

Dated: __________________________________ , 1994

X _______________________________________________
Signature

X _______________________________________________
Signature, if held jointly

PLEASE MARK BOXES [ ] OR [ X ] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE PROXY
CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

</TABLE>