MuniEnhanced
Fund, Inc.
FUND LOGO
Semi-Annual Report
July 31, 1996
Officers and Directors
Arthur Zeikel, President and Director
James H. Bodurtha, Director
Robert R. Martin, Director
Herbert I. London, Director
Joseph L. May, Director
Andre F. Perold, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Hugh T. Hurley III, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Mark B. Goldfus, Secretary
Custodian
State Street Bank and Trust Company
225 Franklin Square
Boston, MA 02110
Transfer Agents
Common Stock:
State Street Bank and Trust Company
225 Franklin Square
Boston, MA 02110
Preferred Stock:
IBJ Schroder Bank & Trust Company
One State Street
New York, NY 10004
<PAGE>
NYSE Symbol
MEN
This report, including the financial information herein, is
transmitted to the shareholders of MuniEnhanced Fund, Inc. for their
information. It is not a prospectus, circular or representation
intended for use in the purchase of shares of the Fund or any
securities mentioned in the report. Past performance results shown
in this report should not be considered a representation of future
performance. The Fund has leveraged its Common Stock by issuing
Preferred Stock to provide the Common Stock shareholders with a
potentially higher rate of return. Leverage creates risks for Common
Stock shareholders, including the likelihood of greater volatility
of net asset value and market price of shares of the Common Stock,
and the risk that fluctuations in the short-term dividend rates of
the Preferred Stock may affect the yield to Common Stock
shareholders. Statements and other information herein are as dated
and are subject to change.
MuniEnhanced
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MuniEnhanced Fund, Inc.
The Benefits and
Risks of
Leveraging
MuniEnhanced Fund, Inc. utilizes leveraging to seek to enhance the
yield and net asset value of its Common Stock. However, these
objectives cannot be achieved in all interest rate environments. To
leverage, the Fund issues Preferred Stock, which pays dividends at
prevailing short-term interest rates, and invests the proceeds in
long-term municipal bonds. The interest earned on these investments
is paid to Common Stock shareholders in the form of dividends, and
the value of these portfolio holdings is reflected in the per share
net asset value of the Fund's Common Stock. However, in order to
benefit Common Stock shareholders, the yield curve must be
positively sloped; that is, short-term interest rates must be lower
than long-term interest rates. At the same time, a period of
generally declining interest rates will benefit Common Stock
shareholders. If either of these conditions change, then the risks
of leveraging will begin to outweigh the benefits.
<PAGE>
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 pick-up on the
Common Stock will be reduced or eliminated completely. At the same
time, the market value on 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.
TO OUR SHAREHOLDERS
For the six-month period ended July 31, 1996, the Common Stock of
MuniEnhanced Fund, Inc. earned $0.355 per share income dividends,
which included earned and unpaid dividends of $0.059. This
represents a net annualized yield of 6.06%, based on a month-end per
share net asset value of $11.75. Over the same period, total
investment return on the Fund's Common Stock was -2.08%, based on a
change in per share net asset value from $12.40 to $11.75, and
assuming reinvestment of $0.358 per share income dividends.
For the six-month period ended January 31, 1996, the Fund's
Preferred Stock had an average dividend yield as follows: Series A,
3.75%; Series B, 3.25%; and Series C, 3.53%.
<PAGE>
The Municipal Market
Environment
Municipal bond yields rose dramatically over the six-month period
ended July 31, 1996. Investors became increasingly alarmed that
earlier forecasts of continued moderate growth were overly
optimistic. As indications of stronger growth were released,
particularly the strong employment reports released beginning in
March, fears of associated inflationary pressures mounted and yields
rose in response. By May and June, long-term municipal bond yields
rose into the 6.25%--6.30% range. However, in early July the
combination of the Federal Reserve Board suggesting that growth was
expected to slow later in 1996 and a temporary stock market
correction allowed municipal bond yields to fall as investors
scrambled to purchase relatively scarce securities. As measured by
the Bond Buyer Revenue Bond Index, long-term, A-rated uninsured tax-
exempt bonds yielded 6.02% at July 31, 1996, an increase of over 30
basis points (0.30%) in the last six months. Long-term US Treasury
bond yields rose significantly higher over the same period. By July
31, 1996, yields on US Treasury bonds increased almost 100 basis
points to end the six-month period at 6.97%.
The municipal bond market's recent outperformance as compared to its
taxable counterpart was largely the result of two principal factors.
First, much of the concern in the tax-exempt market regarding the
potential loss of the inherent tax-advantage of the municipal bonds
dissipated. For much of 1995, various tax proposals, such as the
flat-tax or national sales tax, were put forward either to reduce
the national debt or reform the current tax system. Most of these
proposals would have severely limited the tax advantages enjoyed by
the municipal bond market. However, in February 1996, the Kemp
Commission released its findings regarding various tax reform
proposals. While noting that numerous changes should be made, no
mention of curtailing or stopping municipal bonds' current favored
tax status was made.
The second major factor leading to the municipal bond market's
recent outperformance was the return of a more favorable technical
environment. The rate of increase in new bond issuance recently
slowed. Over the last 12 months, approximately $175 billion in long-
term municipal securities were issued, an increase of over 27% as
compared to the same period a year earlier. Much of this increase
was the result of issuers seeking to refinance their existing higher-
couponed debt as interest rates declined in 1995 and early 1996. As
interest rates rose, these financings became increasingly
economically impractical and issuance declined. Over the last six
months, less than $70 billion in long-term tax-exempt securities
were underwritten, an increase of 20% versus the comparable period a
year earlier. Only $43 billion in tax-exempt securities were issued
in the last three months, a total essentially unchanged from the
comparable quarter in 1995. In July 1996, less than $10 billion in
long-term municipal bonds were issued, representing the lowest
issuance for the month of July since 1990.
<PAGE>
At the same time investor demand remained consistently strong. With
nominal new issue yields above 6%, retail investor interest was
steady. Additionally, investors received over $50 billion this June
and July in assets derived from coupon income, bond maturities, and
proceeds from early redemptions. Annual new bond issuance has
declined in recent years and is expected to remain below levels seen
in the early 1990s. Consequently, as the higher-coupon bonds issued
in the early-to-mid 1980s were redeemed at their first optional call
dates, the total number of outstanding tax-exempt bonds has
declined. This combination of a declining net supply and significant
amounts of assets helped maintain investor demand in recent months.
It is unlikely that the municipal bond market will continue to
significantly outperform US Treasury securities in the near future.
The tax-exempt bond market's recent performance led to the yield
ratio between long-term taxable and tax-exempt securities falling
from in excess of 90% to approximately 85%. While still historically
very attractive, some institutional investors, particularly short-
term traders, began to view the tax-exempt bond market's recent
outperformance as an opportunity to sell a relatively expensive
asset. However, to the long-term investor, such a sale would
represent the loss of an attractively priced asset which may not be
easily replaced given the relative scarcity of municipal bonds under
present supply conditions.
Looking ahead, no clear consensus for the direction of interest
rates currently exists. Perhaps, the primary focus going forward
will be the extent to which the increase in interest rates seen thus
far in 1996 will negatively impact future economic growth. Should
growth slow in the interest rate-sensitive sectors of the economy,
like housing, auto, and consumer spending, as many economists assert
is likely, then bond yields are likely to decline. Under such a
scenario, the municipal bond market's performance is likely to
closely mirror that of the US Treasury bond market.
Portfolio Strategy
During the six-month period ended July 31, 1996, the economy grew at
an above-average rate, which caused municipal bond yields to rise
dramatically. During this period, the municipal bond market became
increasingly volatile, as investors tried to sort out higher
economic growth, a lack of new-issue supply and an apparent end to
the flat-tax concept. Because of all this uncertainty, we chose a
conservative investment strategy for the portfolio. On average, we
held about 10% of net assets as cash reserves, and sought to
purchase higher-coupon, lower-duration bonds when prices became
attractive. We bought lower-coupon, longer-duration bonds when we
believed we were at the lower end of a trading range. In keeping
with our conservative approach thus far this year, we continued to
emphasize high-quality municipal bonds even among the insured bonds
we purchase.
<PAGE>
Looking ahead, we will continue to monitor events on both political
and economic fronts that may affect the marketplace. We believe that
it is appropriate to continue to follow a conservative investment
strategy until a more promising interest rate scenario unfolds.
In Conclusion
We appreciate your ongoing interest in the MuniEnhanced Fund, Inc.,
and we look forward to assisting you with your financial needs in
the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Hugh T. Hurley III)
Hugh T. Hurley III
Vice President and Portfolio Manager
<PAGE>
August 28, 1996
Portfolio
Abbreviations
To simplify the listings of MuniEnhanced Fund, Inc.'s
portfolio holdings in the Schedule of Investments,
we have abbreviated the names of many of the securities
according to the list below and at right.
ACES SM Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Alabama--0.5% AAA Aaa $ 2,500 Huntsville, Alabama, Health Care Authority, Health Care
Facilities Revenue Bonds, Series B, 6.625% due 6/01/2023 (c) $ 2,664
Alaska--1.1% AA Aa3 5,000 Valdez, Alaska, Marine Terminal Revenue Refunding Bonds
(Sohio Pipeline), 7.125% due 12/01/2025 5,479
Arizona--0.4% AAA Aaa 1,875 Maricopa County, Arizona, School District No. 4 (Mesa Unified),
UT, 1995 Series B, 5% due 7/01/2012 (b) 1,773
<PAGE>
California--9.9% A1+ VMIG1++ 5,500 California Pollution Control Financing Authority, Solid Waste
Disposal Revenue Bonds (Shell Oil Company--Martinez Project),
VRDN, AMT, Series A, 3.60% due 10/01/2024 (a) 5,500
California State Public Works Board, Lease Revenue Bonds
(Various University of California Projects):
AAA Aaa 2,000 Series A, 6.40% due 12/01/2016 (d) 2,119
A- A1 2,500 Series B, 6.625% due 12/01/2019 2,664
AAA Aaa 5,000 Central Coast Water Authority, California, Revenue Bonds (State
Water Project Regional Facilities), 6.60% due 10/01/2022 (d) 5,383
AAA Aaa 4,450 Compton, California, Community Redevelopment Agency, Tax Allocation
Refunding Bonds (Walnut Industrial Park), Series A, 7.50%
due 8/01/1999 (d)(h) 4,941
A+ A1 2,500 Contra Costa County, California, COP, 6.50% due 8/01/2019 2,587
AAA Aaa 4,000 East Bay, California, Municipal Utility District, Wastewater
Treatment System Revenue Bonds, 6.375% due 12/01/2001 (d)(h) 4,425
AAA Aaa 2,000 Irvine, California, Unified School District, Special Tax
Community Facilities(District No. 86-1), Series A, 8.10% due
11/15/2013 (c) 2,191
AAA Aaa 8,235 Los Angeles County, California, Transportation Commission,
Sales Tax Revenue Refunding Bonds, AMT, Series B, 6.50% due
7/01/2015 (b) 8,755
AAA Aaa 1,500 M-S-R Public Power Agency, California, Revenue Bonds (San
Juan E, Project), Series 6.50% due 7/01/2017 (c) 1,593
AAA Aaa 1,500 Northern California Transmission Revenue Bonds (California-Oregon
Transmission Project), Series A, 6.50% due 5/01/2016 (c) 1,598
AAA Aaa 4,210 San Francisco, California, City and County Airports Commission,
International Airport Revenue Bonds, AMT, Second-Series, Issue
6, 6.60% due 5/01/2024 (d) 4,451
AAA Aaa 2,000 Santa Clara County, California, Financing Authority, Lease
Revenue Bonds (VMC Facility Replacement Project), Series A,
6.75% due 11/15/2020 (d) 2,180
Colorado--4.2% AAA Aaa 1,000 Adams County, Colorado, School District No. 012 (Adam Twelve
Five Star School), Series C, UT, 5.60% due 12/15/2012 (c) 999
Adams County, Colorado, School District No. 012, UT, Series A
(c)(k):
AAA Aaa 3,000 5.90% due 12/15/2011 1,236
AAA Aaa 3,000 5.95% due 12/15/2012 1,158
AAA Aaa 1,000 Alamosa and Conejos Counties, Colorado, School District No.
RE-11J, UT, 5% due 12/01/2015 (c)(i) 923
AA Aa 1,800 Arapahoe County, Colorado, School District No. 005 (Cherry Creek),
B, UT, Series 5.15% due 12/15/2015 1,691
AAA Aaa 1,750 Auraria, Colorado, Higher Education Center, Revenue Refunding
Bonds (Student Fee), 5.30% due 5/01/2021 (d) 1,620
Colorado, HFA, S/F Project, AMT:
NR* Aa 3,000 Senior Series A-1, 7.40% due 11/01/2027 3,242
NR* Aa 3,540 Senior Series C-1, 7.65% due 12/01/2025 3,900
AAA Aaa 4,250 Douglas County, Colorado, School District No. RE-1 (Douglas and
Elbert Counties Improvement Project), Series A, 6.50% due
12/15/2016 (c) 4,561
AAA Aaa 1,000 Gunnison Watershed, Colorado, School District No. RE-001J, UT, 5%
due 12/01/2015 (c) 935
AAA Aaa 500 Left Hand Water District, Colorado, Water Revenue Bonds, 5.70%
due 11/15/2015 (c)(i) 501
<PAGE>
Connecticut--1.2% AA- A1 2,000 Connecticut State Health and Educational Facilities Authority
Revenue Bonds(Nursing Home Program--AHF/Hartford), 7.125% due
11/01/2024 2,240
AAA Aaa 3,500 Connecticut State Special Tax Obligation Revenue Bonds, Series B,
6.25% due 10/01/2014 (b) 3,651
Delaware--0.5% AAA Aaa 2,000 Delaware Transportation Service Authority Revenue Bonds, 7% due
7/01/2013 (b) 2,244
Florida--0.4% AA- VMIG1++ 2,200 Dade County, Florida, IDA, Exempt Facilities Revenue Refunding
Bonds (Florida Power and Light Company), VRDN, 3.60% due
6/01/2021 (a) 2,200
Georgia--4.6% AAA Aaa 3,975 Cherokee County, Georgia, Water and Sewer Authority Revenue
Bonds, 5.20% due 8/01/2025 (c) 3,689
Georgia Municipal Electric Authority, Power Revenue Bonds:
AAA Aaa 1,500 Refunding, Series Z, 5.50% due 1/01/2020 (c) 1,448
AAA Aaa 7,725 Series EE, 7% due 1/01/2025 (d) 9,130
AAA Aaa 3,500 Metropolitan Atlanta, Georgia, Rapid Transit Authority, Sales
Tax Revenue Bonds, Second Indenture, Series A, 6.90% due
7/01/2020 (c) 3,842
AAA Aaa 3,000 Municipal Electric Authority of Georgia, Project 1, Sub-
Series A, 6.50% due 1/01/2026 (d) 3,168
AAA Aaa 1,000 Municipal Electric Authority of Georgia, Special Obligation,
Third Crossover, 6.60% due 1/01/2018 (c) 1,117
Hawaii--3.9% AAA Aaa 11,250 Hawaii State Airport System Revenue Bonds, AMT, Second Series,
7.50% due 7/01/2020 (b) 12,344
AAA Aaa 6,070 Hawaii State Department of Budget and Finance, Special Purpose
Mortgage Revenue Bonds (Hawaiian Electric Company), AMT,
Series C, 7.375% due 12/01/2020 (c) 6,668
Illinois--3.7% AAA Aaa 2,240 Cook County, Illinois, Chicago Community College District No.
508, COP, UT, 8.75% due 1/01/2007 (b) 2,842
AAA Aaa 3,000 Illinois Health Facilities Authority Revenue Bonds (Servantcor
Project), Series A, 6.375% due 8/15/2021 (f) 3,095
AAA Aaa 9,115 Regional Transportation Authority, Illinois, Series A, 7.20% due
11/01/2020 (d) 10,831
A1+ VMIG1++ 1,500 Southwestern Illinois Development Authority, Environmental
Improvement Revenue Bonds (Shell Oil Company--Wood River Project),
VRDN, AMT, 3.75% due 10/01/2025 (a) 1,500
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Indiana--0.6% NR* Aaa $ 2,770 Indiana State HFA, S/F Mortgage Revenue Bonds (Home Mortgage
Program), AMT, Series B-2, 7.80% due 1/01/2022 (j) $ 2,915
<PAGE>
Iowa--0.6% NR* Aaa 2,950 Iowa Finance Authority, S/F Mortgage Revenue Bonds, AMT, Series
A, 7.90% due 11/01/2022 (j) 3,094
Kansas--3.9% AAA Aaa 5,500 Burlington, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (c) 6,018
AAA Aaa 10,000 Kansas City, Kansas, Utility System Revenue Refunding and
Improvement Bonds, 6.375% due 9/01/2023 (b) 10,512
AAA Aaa 2,500 Wamego, Kansas, PCR, Refunding (Kansas Gas and Electric Company
Project), 7% due 6/01/2031 (c) 2,736
Kentucky--1.4% A1+ VMIG1++ 7,000 Daviess County, Kentucky, Solid Waste Disposal Facilities
Revenue Bonds (Scott Paper Company Project), VRDN, AMT, Series B,
3.75% due 12/01/2023 (a) 7,000
Louisiana--1.2% AAA Aaa 4,340 Louisiana Public Facilities Authority, Revenue Refunding Bonds
(Jefferson Parish Eastbank Project), 7.70% due 8/01/2010 (b) 4,760
A1+ P1 200 Louisiana State Offshore Terminal Authority, Deepwater Port
Revenue Refunding Bonds (Loop Inc.--First Stage), ACES, 3.55% due
9/01/2006 (g) 200
A1+ VMIG1++ 1,000 Saint Charles Parish, Louisiana, PCR (Shell Oil Company Project),
VRDN, AMT, Series A, 3.75% due 10/01/2022 (a) 1,000
Maine--0.6% AA- A1 3,000 Maine State Housing Authority, Mortgage Purchase Revenue Bonds,
AMT, Series C-2, 6.875% due 11/15/2023 3,089
Maryland--0.9% AAA Aaa 5,000 Baltimore, Maryland, Revenue Refunding Bonds (Water Projects),
Series A, 5% due 7/01/2024 (b) 4,514
Massachusetts-- AAA Aaa 3,000 Massachusetts Bay Transportation Authority, COP, Series A, 7.65%
2.2% due 8/01/2000 (f)(h) 3,395
AAA Aaa 4,300 Massachusetts State, HFA, Housing Revenue Refunding Bonds
(Insured Rental), AMT, Series A, 6.75% due 7/01/2028 (d) 4,441
AAA Aaa 2,500 Massachusetts State Port Authority Revenue Bonds, AMT, Series A,
7.50% due 7/01/2020 (b) 2,746
Michigan--0.7% AAA Aaa 3,000 Monroe County, Michigan, PCR (Detroit Edison Company Project),
AMT, Project 1,7.65% due 9/01/2020 (b) 3,313
Mississippi-- NR* P1 5,600 Jackson County, Mississippi, PCR, Refunding (Chevron USA, Inc.
2.1% 3.50% Project), VRDN, due 12/01/2016 (a) 5,600
AAA Aaa 2,000 Mississippi Hospital Equipment and Facilities Authority Revenue
Bonds (Mississippi Baptist Medical Center), Series A, 7.50%
due 5/01/2000 (c)(h) 2,233
NR* P1 2,400 Perry County, Mississippi, PCR, Refunding (Leaf River Forest
Project), VRDN, 3.55% due 3/01/2002 (a) 2,400
Missouri--2.8% AAA Aaa 3,000 Kansas City, Missouri, Airport Improvement Revenue Bonds
(General Projects), Series B, 6.875% due 9/01/2014 (f) 3,263
Kansas City, Missouri, Municipal Assistance Corporation, Revenue
Refunding Bonds(Leasehold--H. Roe Bartle), Series A (c):
AAA Aaa 2,100 5.125% due 4/15/2015 1,978
AAA Aaa 9,385 5% due 4/15/2020 8,524
<PAGE>
Montana--0.5% AAA Aaa 2,185 Forsyth, Montana, PCR, Refunding (Puget Sound Power and Light),
AMT, Series B, 7.25% due 8/01/2021 (d) 2,397
Nebraska--5.4% Nebraska Public Power District Revenue Bonds, Series A (c):
AAA Aaa 2,995 Electric Systems, 5.25% due 1/01/2022 2,785
AAA Aaa 17,215 Electric Systems, 5.25% due 1/01/2028 (l) 15,899
AAA Aaa 8,500 Power Supply, 5.25% due 1/01/2022 7,903
Nevada--0.6% AAA Aaa 3,000 Washoe County, Nevada, Water Facility Revenue Bonds (Sierra
Pacific Power), AMT, 6.65% due 6/01/2017 (c) 3,173
New Jersey--3.9% Montgomery Township, New Jersey, Board of Education, UT (b):
AAA Aaa 1,250 5.50% due 8/01/2021 1,220
AAA Aaa 1,250 5.50% due 8/01/2022 1,220
AAA Aaa 1,250 5.50% due 8/01/2023 1,219
AAA Aaa 1,250 5.50% due 8/01/2024 1,219
AAA Aaa 1,240 5.50% due 8/01/2025 1,208
New Jersey State Housing and Mortgage Finance Agency Revenue
Bonds (Home Buyer), AMT (c):
AAA Aaa 2,885 Series B, 7.90% due 10/01/2022 3,024
AAA Aaa 4,805 Series D, 7.70% due 10/01/2029 4,995
AAA Aaa 5,000 Series K, 6.375% due 10/01/2026 5,042
New Mexico--1.4% AAA Aaa 2,375 Albuquerque, New Mexico, Airport Revenue Bonds, AMT, Series A,
6.60% due 7/01/2016 (d) 2,519
A1+ P1 1,600 Farmington, New Mexico, PCR (Arizona Public Service Company),
VRDN, AMT, Series C, 3.75% due 9/01/2024 (a) 1,600
AAA Aaa 2,300 Santa Fe, New Mexico, Revenue Bonds, Series A, 6.30% due
6/01/2004 (d)(h) 2,523
New York--5.3% AAA Aaa 2,000 Metropolitan Transportation Authority, New York, Service
Contract Refunding Bonds (Transportation Facilities), Series L,
7.50% due 7/01/2017 (d) 2,148
New York City, New York, GO, UT:
AAA Aaa 2,935 Series B, 8.25% due 6/01/2001 (h) 3,428
BBB+ Baa1 300 Series B, 8.25% due 6/01/2002 335
BBB+ Baa1 3,000 Series D, 9.50% due 8/01/2002 3,534
BBB+ Baa1 4,450 New York State Dormitory Authority Revenue Bonds (Court
Facilities Lease), Series A, 5.25% due 5/15/2021 3,908
AAA Aaa 5,325 New York State Local Government Assistance Corporation,
Series A, 7.125% due 4/01/2002 (h) 6,057
AAA Aaa 4,710 New York State Medical Care Facilities Finance Agency Revenue
Bonds (Saint Francis Hospital Project), Series A, 7.625% due
11/01/2021 (b) 5,097
BBB Aaa 1,500 New York State Urban Development Corporation, State Facilities
Revenue Bonds, 7.50% due 4/01/2001 (h) 1,711
<PAGE>
North Dakota-- AAA Aaa 3,000 Bismarck, North Dakota, Hospital Revenue Refunding and Improvement
0.7% Bonds (Medical Center One, Inc.), 7.50% due 5/01/2013 (e) 3,256
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Ohio--1.2% NR* A1 $ 1,000 Dayton, Ohio, Special Facilities Revenue Bonds (Emery Air
Freight Project), VRDN, Series C, 3.60% due 10/01/2009 (a) $ 1,000
AAA Aaa 2,500 North Canton, Ohio, City School District, Improvement Bonds,
UT, 6.70% due 12/01/2019 (d) 2,719
AAA Aaa 2,150 Ohio State Air Quality Development Authority, PCR, Refunding
(Ohio Edison), Series A, 7.45% due 3/01/2016 (b) 2,360
Oklahoma--0.2% AAA Aaa 800 Muskogee County, Oklahoma, Home Financing Authority, S/F Mortgage
Revenue Refunding Bonds, Series A, 7.60% due 12/01/2010 (b) 842
Pennsylvania-- AAA Aaa 4,000 Pennsylvania State Higher Educational Assistance Agency, Student
1.5% Loan Revenue Bonds, AMT, 7.437% due 3/01/2020 (c)(g) 4,281
AAA Aaa 3,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds, 15th Series
3, 5.25% due 8/01/2024 (f) 2,765
South Dakota-- AAA Aaa 8,000 South Dakota State Health and Educational Facilities Authority,
1.8% Revenue Refunding Bonds (McKennan Hospital), Series A, 7.625%
due 7/01/2014 (c) 8,745
Tennessee--1.4% AAA Aaa 5,450 Mount Juliet, Tennessee, Public Building Authority Revenue Bonds
(Madison Suburban Utility District Loan), Series B, 7.80% due
2/01/2004 (c)(h) 6,822
Texas--19.2% AAA Aaa 2,750 Bexar, Texas, Metropolitan Water District, Waterworks System
Revenue Refunding Bonds, 6.35% due 5/01/2025 (c) 2,878
Brazos River Authority, Texas, PCR (Texas Utilities Electric
Company), VRDN, AMT (a):
A1+ VMIG1++ 1,900 Refunding, Series C, 3.80% due 6/01/2030 1,900
A1+ VMIG1++ 500 Series A, 3.75% due 4/01/2030 500
AAA Aaa 3,000 Brazos River Authority, Texas, Revenue Refunding Bonds (Houston
Light and Power Company Project), Series C, 8.10% due 5/01/2019 (e) 3,239
NR* VMIG1++ 1,100 Gulf Coast, Texas, IDA, Solid Waste Disposal Revenue Bonds
(CITGO Petroleum Corp. Project), VRDN, AMT, 3.80% due
5/01/2025 (a) 1,100
Gulf Coast Waste Disposal Authority, Texas, PCR (Amoco Oil
Company Project), VRDN, AMT (a):
A1+ VMIG1++ 300 3.75% due 5/01/2023 300
A1+ VMIG1++ 600 3.75% due 6/01/2024 600
A1+ NR* 300 Gulf Coast Waste Disposal Authority, Texas, Pollution Control and
Solid Waste Disposal Revenue Refunding Bonds (Amoco Oil Co.
Project), VRDN, AMT, 3.75% due 5/01/2024 (a) 300
Harris County, Texas, Toll Road Revenue Refunding Bonds
(Senior Lien)(b):
AAA Aaa 13,000 5% due 8/15/2016 11,863
AAA Aaa 10,000 5.375% due 8/15/2020 9,465
AAA Aaa 5,000 Houston, Texas, Water and Sewer System, Revenue Refunding Bonds
(Junior Lien), Series C, 6.375% due 12/01/2017 (d) 5,203
NR* NR* 1,200 Port Corpus Christi, Texas, Industrial Development Corporation,
Sewage and Solid Waste Disposal Revenue Bonds (CITGO Petroleum
Corp. Project), VRDN, AMT, 3.80% due 4/01/2026 (a) 1,200
AAA Aaa 50,000 Texas State Turnpike Authority, Dallas North Thruway Revenue
Bonds (President George Bush Turnpike), 5% due 1/01/2025 (b) 44,523
AAA Aaa 10,475 Texas Water Resource Finance Authority Revenue Bonds, 7.50% due
8/15/2013 (d) 11,180
<PAGE>
Utah--1.1% AA- Aa 5,000 Intermountain Power Agency, Utah, Power Supply Revenue Bonds,
Series B, 7% due 7/01/2021 5,321
NR* P1 200 Salt Lake County, Utah, PCR, Refunding (Service Station Holdings
Project), VRDN, 3.60% due 2/01/2008 (a) 200
Vermont--1.7% AAA Aaa 8,150 Vermont, HFA, Home Mortgage Purchase Bonds, AMT, Series B, 7.60%
due 12/01/2024 (c) 8,555
Virginia--3.4% AAA Aaa 6,000 Loudoun County, Virginia, COP, GO, 6.80% due 3/01/2014 (f) 6,522
Virginia State, HDA, Commonwealth Mortgage, AMT:
AAA Aaa 5,000 Series A, Sub-Series A-4, 6.45% due 7/01/2028 (c) 5,076
AA+ Aa 5,000 Series B, Sub-Series B-3, 6.75% due 7/01/2021 5,093
Washington--0.9% AAA Aaa 5,000 University of Washington, University Revenue Refunding Bonds
(Housing and Dining), Junior Lien, 5% due 12/01/2021 (c) 4,418
Total Investments (Cost--$457,237)--97.6% 479,199
Variation Margin on Futures Contracts+++--0.0% (337)
Other Assets Less Liabilities--2.4% 11,953
--------
Net Assets--100.0% $490,815
========
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)FGIC Insured.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)BIG Insured.
(f)FSA Insured.
(g)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at July 31, 1996.
(h)Prerefunded.
(i)Bank Qualified.
(j)GNMAInsured.
(k)Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
(l)All or a portion of security held as collateral in connection
with open financial futures contracts.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
+++Futures contracts sold as of July 31, 1996 were as follows (in
thousands):
<PAGE>
<CAPTION>
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
<S> <S>
490 United States Treasury Bonds Sept. 1996 $ 53,471
Total (Contract Price--$52,475) $ 53,471
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of July 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$457,237,140) (Note 1a) $479,199,277
Cash 27,994
Receivables:
Securities sold $ 8,976,202
Interest 6,546,211 15,522,413
------------
Prepaid expenses and other assets 20,920
------------
Total assets 494,770,604
------------
Liabilities: Payables:
Securities purchased 2,906,532
Dividends to shareholders (Note 1e) 379,456
Variation margin (Note 1b) 336,875
Investment adviser (Note 2) 219,713 3,842,576
------------
Accrued expenses and other liabilities 112,699
------------
Total liabilities 3,955,275
------------
Net Assets: Net assets $490,815,329
============
<PAGE>
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.025 per share (6,000 shares
of AMPS* issued and outstanding at $25,000 per share
liquidation preference) $150,000,000
Common Stock, par value $.10 per share (29,007,770 shares
issued and outstanding) $ 2,900,777
Paid-in capital in excess of par 319,102,131
Undistributed investment income--net 3,705,603
Accumulated realized capital losses on investments--net (5,859,319)
Unrealized appreciation on investments--net 20,966,137
------------
Total--Equivalent to $11.75 net asset value per share of
Common Stock (market price--$10.50) 340,815,329
------------
Total capital $490,815,329
============
<FN>
*Auction Market Preferred Stock.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended July 31, 1996
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 14,597,027
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 1,223,886
Commission fees (Note 4) 191,384
Transfer agent fees 56,123
Professional fees 45,757
Accounting services (Note 2) 34,186
Printing and shareholder reports 26,152
Directors' fees and expenses 22,940
Listing fees 16,204
Custodian fees 15,068
Pricing fees 8,886
Other 11,599
------------
Total expenses 1,652,185
------------
Investment income--net 12,944,842
------------
<PAGE>
Realized & Realized loss on investments (4,954,103)
Unrealized Loss on Change in unrealized appreciation on investments--net (13,924,138)
Investments--Net ------------
(Notes 1b, 1d & 3): Net Decrease in Net Assets Resulting from Operations $ (5,933,399)
============
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the
Six Months Year Ended
Ended July 31, January 31,
Increase (Decrease) in Net Assets: 1996 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 12,944,842 $ 26,777,376
Realized gain (loss) on investments--net (4,954,103) 5,498,127
Change in unrealized appreciation on investments--net (13,924,138) 30,124,671
------------ ------------
Net increase (decrease) in net assets resulting from operations (5,933,399) 62,400,174
------------ ------------
Dividends to Investment income--net:
Shareholders Common Stock (10,390,554) (20,979,145)
(Note 1e): Preferred Stock (2,623,400) (5,780,540)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (13,013,954) (26,759,685)
============ ============
Net Assets: Total increase (decrease) in net assets (18,947,353) 35,640,489
Beginning of period 509,762,682 474,122,193
------------ ------------
End of period* $490,815,329 $509,762,682
============ ============
<FN>
*Undistributed investment income--net $ 3,705,603 $ 3,774,715
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and
ratios have been derived from information
provided in the financial statements. For the Six
Months Ended For the Year Ended January 31,
Increase (Decrease) in Net Asset Value: July 31, 1996+++ 1996+++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 12.40 $ 11.17 $ 12.99 $ 12.29 $ 11.96
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .45 .92 .96 1.01 1.06
Realized and unrealized gain (loss) on
investments--net (.65) 1.23 (1.71) 1.09 .68
-------- -------- -------- -------- --------
Total from investment operations (.20) 2.15 (.75) 2.10 1.74
-------- -------- -------- -------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.36) (.72) (.79) (.85) (.91)
Realized gain on investments--net -- -- (.06) (.43) (.35)
In excess of realized gain on investments
--net -- -- (.06) -- --
-------- -------- -------- -------- --------
Total dividends and distributions to
Common Stock shareholders (.36) (.72) (.91) (1.28) (1.26)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Investment income--net (.09) (.20) (.16) (.12) (.15)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.09) (.20) (.16) (.12) (.15)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.75 $ 12.40 $ 11.17 $ 12.99 $ 12.29
======== ======== ======== ======== ========
Market price per share, end of period $ 10.50 $ 11.375 $ 10.25 $ 13.125 $ 13.25
======== ======== ======== ======== ========
Total Investment Based on market price per share (4.61%)++ 18.67% (14.88%) 9.28% 16.27%
Return:** ======== ======== ======== ======== ========
Based on net asset value per share (2.08%)++ 18.71% (6.27%) 16.61% 13.84%
======== ======== ======== ======== ========
Ratios to Average Expenses .67%* .68% .69% .68% .69%
Net Assets:*** ======== ======== ======== ======== ========
Investment income--net 5.27%* 5.42% 5.76% 5.54% 6.13%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end
Data: of period (in thousands) $340,815 $359,763 $324,122 $376,726 $350,843
======== ======== ======== ======== ========
Preferred Stock outstanding, end of
period (in thousands) $150,000 $150,000 $150,000 $150,000 $150,000
======== ======== ======== ======== ========
Portfolio turnover 77.14% 114.30% 60.88% 41.61% 34.42%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,272 $ 3,398 $ 3,161 $ 3,512 $ 3,339
======== ======== ======== ======== ========
<PAGE>
Dividends Per Share Series A--Investment income--net $ 467 $ 961 $ 752 $ 597 $ 749
On Preferred Stock ======== ======== ======== ======== ========
Outstanding:++++ Series B--Investment income--net $ 405 $ 959 $ 764 $ 608 $ 733
======== ======== ======== ======== ========
Series C--Investment income--net $ 440 $ 971 $ 755 $ 580 $ 735
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantlygreater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Aggregate total investment return.
++++Dividends per share have been adjusted to reflect a four-for-one
stock split that occurred on December 1, 1994.
+++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniEnhanced Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature.
The Fund determines and makes available for publication the net
asset value of its Common Stock on a weekly basis. The Fund's Common
Stock is listed on the New York Stock Exchange under the symbol MEN.
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 the 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, which are traded on exchanges, are valued at their last
sale price as of the close of such exchanges or, lacking any sales,
at the last available bid price. 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.
<PAGE>
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell interest
rate futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase 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 reflecting the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing
investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
<PAGE>
(e) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
NOTES TO FINANCIAL STATEMENTS (concluded)
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended July 31, 1996 were $355,612,366 and
$387,143,247, respectively.
Net realized and unrealized gains (losses) as of July 31, 1996 were
as follows:
Realized Unrealized
Losses Gains (Losses)
Long-term investments $ (4,099,924) $ 21,962,137
Short-term investments (592) --
Financial futures contracts (853,587) (996,000)
------------ ------------
Total $ (4,954,103) $ 20,966,137
============ ============
<PAGE>
As of July 31, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $21,962,137, of which $22,795,994 related to
appreciated securities and $833,857 related to depreciated
securities. The aggregate cost of investments at July 31, 1996 for
Federal income tax purposes was $457,237,140.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
par value $.10 per share, all of which were initially classified as
Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without the approval
of the holders of Common Stock.
For the six months ended July 31, 1996, shares issued and
outstanding remained constant at 29,007,770. At July 31, 1996, total
paid-in capital amounted to $322,002,908.
Preferred Stock
The Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund that entitle their holders to receive cash
dividends at an annual rate that may vary for the successive
dividend period for each series. The yields in effect at July 31,
1996 were as follows: Series A, 3.448%; Series B, 3.46%; and Series
C, 3.39%.
For the six months ended July 31, 1996, there were 6,000 AMPS shares
authorized, issued and outstanding with a liquidation preference of
$25,000 per share.
The Fund pays commissions to certain broker-dealers at the end of
each auction at the annual rate of one-quarter of 1% calculated on
the proceeds of each auction. For the six months ended July 31,
1996, MLPF&S, an affiliate of FAM, received $80,065 as commissions.
5. Subsequent Event:
On August 8, 1996, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.059077 per share, payable on August 29, 1996 to shareholders of
record as of August 19, 1996.
