MuniEnhanced
Fund, Inc.
FUND LOGO
Annual Report
January 31, 1997
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
<PAGE>
Custodian
State Street Bank and Trust Company
225 Franklin Square
Boston, MA 02110
NYSE Symbol
MEN
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
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
Printed on post-consumer recycled paper
<PAGE>
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.
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.
<PAGE>
TO OUR SHAREHOLDERS
For the six-month period ended January 31, 1997, the Common Stock of
MuniEnhanced Fund, Inc. earned $0.466 per share income dividends,
which included earned and unpaid dividends of $0.061. This
represents a net annualized yield of 7.87%, based on a month-end per
share net asset value of $11.75. Over the same period, the total
investment return on the Fund's Common Stock was +4.35%, based on an
unchanged per share net asset value of $11.75, and assuming
reinvestment of $0.465 per share income dividends.
For the year ended January 31, 1997, the Common Stock of
MuniEnhanced Fund, Inc. earned $0.821 per share income dividends,
representing a net annualized yield of 6.99%, based on a month-end
per share net asset value of $11.75. Over the same period, the total
investment return on the Fund's Common Stock was +2.18%, based on a
change in per share net asset value from $12.40 to $11.75, and
assuming reinvestment of $0.823 per share income dividends.
For the six-month period ended January 31, 1997, the Fund's
Preferred Stock had an average dividend yield as follows: Series A,
3.11%; Series B, 3.65%; and Series C, 3.47%.
The Municipal Market
Environment
Long-term fixed-income bond yields generally declined over the six
months ended January 31, 1997. Initially, US Treasury bond yields
fell over 45 basis points (0.45%) to 6.45% by late November as low
employment growth and continued low inflation combined to support
lower bond yields. Concurrently, long-term municipal revenue bond
yields, as measured by the Bond Buyer Revenue Bond Index, declined
over 20 points to approximately 5.80%. However, signs of increased
economic activity and renewed inflation fears pushed bond yields up
for the remainder of the period. By the end of January 1997, US
Treasury bonds yield rose 35 basis points to end the period at
approximately 6.80%. Similarly, long-term municipal revenue bonds
yields rose approximately 20 basis points from their lows in late
November to approximately 6.00%. During the last six months, US
Treasury bond yields declined approximately 10 basis points, while
tax-exempt bond yields were essentially unchanged.
Recently, tax-exempt bond yields underperformed their taxable
counterparts despite a continued strong supply position. During the
six-month period ended January 31, 1997, over $88 billion in long-
term tax-exempt bonds was underwritten, essentially unchanged from
issuance for the same period a year ago. Approximately $50 billion
in new municipal bonds was issued during the three-month period
ended January 31, 1997, representing a decline of over 5% compared
to the same period in 1996. This declining trend in bond issuance
was even more apparent recently. Slightly more than $10 billion in
long-term bonds were issued in January 1997, a decrease of over 15%
compared to January 1996 issuance.
<PAGE>
The municipal bond market's recent underperformance relevant to
Treasury issues was the result of a number of other factors. The
historic strength of the US equity market has attracted significant
investor interest. Additionally, as tax-exempt bond yields declined
again below 6%, some investors temporarily lost interest in the
municipal bond market. If interest rates continue to decline, as
they did at the end of 1994 and throughout 1995, investors, in
general, will quickly adjust to the new levels. The tax advantages
generated by municipal bonds quickly outweigh low nominal yields and
investor demand increases.
The Presidential and Congressional elections this past November
resurrected some investor concerns regarding continued Federal
deficit reduction and potential legislative restrictions upon the
municipal bond market. This situation was similar to that at the
beginning of 1996 when tax-exempt bond yields were negatively
impacted by fears that legislation reducing the tax advantage of
municipal bonds would be introduced to aid further deficit
reductions.
However, the US Treasury bond market's recent relatively strong
performance resulted in municipal bonds becoming a particularly
attractive investment alternative. At current levels, long-term tax-
exempt revenue bonds yield over 88% of comparable US Treasury bond
yields. Current levels make tax-advantaged products more attractive
than they were mid-year when yield ratios declined to approximately
85%. For example, to an investor in the 36% Federal income tax
bracket, a current tax-exempt bond yield of 6% represents a taxable
equivalent yield of approximately 9.37%.
Looking forward, the supply of new bond issuance for 1997 is
expected to be very similar to that of 1996, with most annual
estimates falling in the $170 billion--$175 billion range. Investor
demand is also expected to regain its former strength with 1997
total municipal redemptions (refundings, maturities and coupon
payments) in the $175 billion--$185 billion range. This overall
balance suggests that the positive technical backdrop the municipal
bond market enjoyed in 1996 should continue in 1997. However, it is
likely that seasonal factors may temporarily distort this overall
balanced technical scenario. During periods of reduced bond
issuance, the ease and ability to purchase tax-advantaged products
at their current attractive levels may be greatly restricted.
Portfolio Strategy
During much of the first half of the fiscal year ended January 31,
1997, we restructured MuniEnhanced Fund, Inc.'s portfolio in order
to make it more defensive to seek to preserve shareholder capital.
As a result, at times the Fund had more than a 10% cash reserve
position. We bought higher-coupon, lower duration bonds to stabilize
the Fund, which enabled it to pay out an attractive dividend yield.
<PAGE>
During the months of September 1996 to January 1997, we anticipated
the rally in municipal bonds and restructured the portfolio once
again. We purchased long duration performance-oriented bonds,
thereby reducing our cash reserves to a minimal level. By being
fully invested with a longer duration, the Fund was able to fully
participate in the fall bond market rally. We have also carefully
monitored our call protection in the portfolio so that our
shareholders may receive an attractive tax-exempt income.
Looking ahead, we will continue to monitor signs of economic growth
or a possible slowdown in the economy. We are also keenly interested
to see if a balanced Federal budget can be achieved this year.
Should that occur, it would be a positive backdrop for long-term
interest rates and MuniEnhanced Fund, Inc. would adopt a more
aggressive strategy to seek to enhance the Fund's total return
potential.
In Conclusion
We appreciate your ongoing interest in 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
March 7, 1997
<PAGE>
PROXY RESULTS
<TABLE>
During the six-month period ended January 31, 1997, MuniEnhanced
Fund, Inc. Common Stock shareholders voted on the following
proposals. The proposals were approved at a special shareholders'
meeting on September 19, 1996. The description of each proposal and
number of shares voted are as follows:
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha 27,521,666 606,217
Robert R. Martin 27,517,504 610,828
Joseph L. May 27,536,216 591,666
Arthur Zeikel 27,524,088 603,795
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To ratify the selection of Deloitte & Touche LLP as the Fund's
independent auditors for the current fiscal year. 27,502,966 210,870 414,046
</TABLE>
<TABLE>
During the six-month period ended January 31, 1997, MuniEnhanced
Fund, Inc. Preferred Stock shareholders (Series A, Series B and
Series C) voted on the following proposals. The proposals were
approved at a special shareholders' meeting on September 19, 1996.
The description of each proposal and number of shares voted are as
follows:
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha,
Herbert I. London, Robert R. Martin, Joseph L. May,
Andre F. Perold and Arthur Zeikel as follows: Series A 1,967 32
Series B 1,582 0
Series C 1,689 155
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <S> <C> <C> <C>
2. To ratify the selection of Deloitte & Touche LLP as the Fund's
independent auditors for the current fiscal year as follows: Series A 1,967 32 0
Series B 1,560 0 22
Series C 1,689 32 123
</TABLE>
<PAGE>
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.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
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> <C> <C> <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) $ 2,726
Alaska--1.1% AA Aa3 5,000 Valdez, Alaska, Marine Terminal Revenue Refunding Bonds
(Sohio Pipeline--British Petroleum Oil), 7.125% due 12/01/2025 5,547
Arizona--1.1% AAA Aaa 2,000 Chandler, Arizona, Water and Sewer Revenue Bonds, 6.50%
due 7/01/2014 (c) 2,176
A1+ P1 3,200 Maricopa County, Arizona, Pollution Control Corporation, PCR,
Refunding (Arizona Public Service Co.), VRDN, Series B, 3.70%
due 5/01/2029 (a) 3,200
<PAGE>
California--9.4% 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) 2,157
A A1 2,500 Series B, 6.625% due 12/01/2019 2,699
AAA Aaa 5,000 Central Coast Water Authority, California, Revenue Bonds
(State Water Project Regional Facilities), 6.60% due
10/01/2002 (d)(g) 5,623
A+ A1 2,500 Contra Costa County, California, COP, 6.50% due 8/01/2019 2,625
AAA Aaa 8,235 Los Angeles County, California, Transportation Commission,
Sales Tax Revenue Refunding Bonds, Series B, 6.50% due
7/01/2015 (b) 8,868
AAA Aaa 1,500 M-S-R Public Power Agency, California, Revenue Bonds
(San Juan Project), Series E, 6.50% due 7/01/2017 (c) 1,615
AAA Aaa 1,500 Northern California Transmission Revenue Bonds (California-
Oregon Transmission Project), Series A, 6.50% due 5/01/2016 (c) 1,615
AAA Aaa 3,000 Port Oakland, California, Port Revenue Bonds, Series J,
5.50% due 11/01/2026 (c) 2,893
AAA Aaa 4,210 San Francisco, California, City and County Airports
Commission, Airport International Revenue Bonds, AMT, Second
Series, Issue 6, 6.60% due 5/01/2024 (d) 4,553
AAA Aaa 12,000 San Francisco, California, State Building Authority,
Lease Revenue Bonds (San Francisco Civic Center Complex),
Series A, 5.25% due 12/01/2021 (d) 11,317
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) 2,226
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <S> <C>
Colorado--3.6% AAA Aaa $ 1,675 Adams and Weld Counties, Colorado, School District No.
027-J (Brighton), Series C, 5.50% due 12/01/2016 (b) $ 1,665
AAA Aaa 3,000 Adams County, Colorado, School District No. 012, UT,
Series A, 5.95% due 12/15/2012 (c)(h) 1,248
AAA Aaa 2,000 Alamosa and Conejos Counties, Colorado, School District
No. RE-11J, UT, 5% due 12/01/2015 (c) 1,875
AAA Aaa 1,750 Auraria, Colorado, Higher Education Center, Revenue
Refunding Bonds (Student Fee), 5.30% due 5/01/2021 (d) 1,661
AA+ Aa1 1,250 Colorado, HFA, S/F Housing, Refunding, Series AA, 5.60%
due 11/01/2016 1,231
Colorado, HFA, S/F Project, AMT:
NR* Aa 3,000 Senior Series A-1, 7.40% due 11/01/2027 3,282
NR* Aa 3,480 Senior Series C-1, 7.65% due 12/01/2025 3,848
AAA Aaa 3,250 Douglas County, Colorado, School District No. RE-1,
Refunding (Douglas and Elbert Counties), UT, 5.125% due
12/15/2016 (c) 3,074
<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 2,259
AAA Aaa 3,500 Connecticut State Special Tax Obligation Revenue Bonds,
Series B, 6.25% due 10/01/2014 (b) 3,690
Delaware--0.5% AAA Aaa 2,000 Delaware Transportation Authority, Transportation
System Revenue Bonds, Senior Series, 7% due 7/01/2013 (b) 2,249
Florida--2.9% AAA Aaa 15,000 Dade County, Florida, Water and Sewer System Revenue
Bonds, 5.25% due 10/01/2026 (b) 14,079
Georgia--3.8% A-1 NR* 800 Burke County, Georgia, Development Authority, PCR,
Refunding (Georgia Power Company,Plant Vogtle Project),
VRDN, 3.65% due 9/01/2026 (a) 800
AAA Aaa 7,725 Georgia Municipal Electric Authority, Power Revenue Bonds,
Series EE, 7% due 1/01/2025 (d) 9,205
AAA Aaa 3,500 Metropolitan Atlanta, Georgia, Rapid Transit Authority,
Sales Tax Revenue Bonds,Second Indenture, Series A, 6.90%
due 7/01/2004 (c)(g) 4,021
AAA Aaa 3,000 Municipal Electric Authority, Georgia, Project 1, Sub-Series
A, 6.50% due 1/01/2026 (d) 3,270
AAA Aaa 1,000 Municipal Electric Authority, Georgia, Special Obligation,
Third Crossover, 6.60% due 1/01/2018 (c) 1,126
Hawaii--3.9% AAA Aaa 11,250 Hawaii State Airport System Revenue Bonds, AMT, Second Series,
7.50% due 7/01/2020 (b) 12,324
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) 6,674
Illinois--5.9% NR* P1 200 Chicago, Illinois, O'Hare International Airport Revenue
Bonds (American Airlines), DATES, Series D, 3.65% due
12/01/2017 (a) 200
AAA Aaa 7,000 Chicago, Illinois, Refunding, Series B, 5.125% due
1/01/2025 (b) 6,377
AAA Aaa 3,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2025 (b) 2,689
AAA Aaa 2,240 Cook County, Illinois, Chicago Community College District
No. 508, COP, UT, 8.75% due 1/01/2007 (b) 2,852
AAA Aaa 3,000 Illinois Health Facilities Authority Revenue Bonds
(Servantcor Project), Series A, 6.375% due 8/15/2021 (f) 3,116
AAA Aaa 3,000 Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue Refunding Bonds (McCormick Plant
Expansion Project), Series A, 5.25% due 6/15/2027 (d) 2,777
AAA Aaa 9,115 Regional Transportation Authority, Illinois, Series A, 7.20%
due 11/01/2020 (d) 10,908
<PAGE>
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 (i) 2,913
Iowa--0.6% NR* Aaa 2,685 Iowa Finance Authority, S/F Mortgage Revenue Bonds, AMT,
Series A, 7.90% due 11/01/2022 (i) 2,812
Kansas--6.9% AAA Aaa 5,500 Burlington, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (c) 6,055
AAA Aaa 23,385 Kansas City, Kansas, Utility System Revenue Refunding and
Improvement Bonds, 6.375% due 9/01/2023 (b) 24,928
AAA Aaa 2,500 Wamego, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (c) 2,752
Kentucky--0.9% AAA Aaa 5,000 Louisville and Jefferson Counties, Kentucky, Metropolitan
Sewer District, Sewer and Drain System Revenue Bonds, Series
A, 5.20% due 5/15/2026 (b) 4,652
Louisiana--1.1% AAA Aaa 4,340 Louisiana Public Facilities Authority, Revenue Refunding Bonds
(Jefferson Parish Eastbank Project), 7.70% due 8/01/2010 (b) 4,711
A1+ VMIG1++ 900 Saint Charles Parish, Louisiana, PCR (Shell Oil Company-Norco
Project), VRDN, AMT, 3.75% due 11/01/2021 (a) 900
Maine--0.6% AA Aa2 3,000 Maine State Housing Authority, Mortgage Purchase, AMT, Series
C-2, 6.875% due 11/15/2023 3,110
Massachusetts-- AAA Aaa 4,300 Massachusetts State, HFA, Housing Revenue Refunding Bonds
1.5% (Insured Rental), AMT, Series A, 6.75% due 7/01/2028 (d) 4,495
AAA Aaa 2,500 Massachusetts State Port Authority Revenue Bonds, AMT,
Series A, 7.50% due 7/01/2020 (b) 2,739
Michigan--3.9% AAA Aaa 3,000 Monroe County, Michigan, PCR (Detroit Edison Company
Project-Monroe and Fermi Plants), AMT, Project 1, 7.65%
due 9/01/2020 (b) 3,302
AAA Aaa 15,125 Western Michigan University, General Revenue Bonds, 6.125%
due 11/15/2022 (b) 15,600
Minnesota--0.3% A1+ Aa3 700 Hubbard County, Minnesota, Solid Waste Disposal Revenue
Bonds (Potlatch Corporation Project), VRDN, AMT, 3.65%
due 8/01/2014 (a) 700
AA- A1 900 Minneapolis, Minnesota, Community Development Agency, PCR
(Nothern States Power Company Project), VRDN, 3.65% due
3/01/2011 (a) 900
<PAGE>
Missouri--2.8% AAA Aaa 3,000 Kansas City, Missouri, Airport Revenue Bonds (General
Improvement), Series B, 6.875% due 9/01/2014 (f) 3,336
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 2,003
AAA Aaa 9,385 5% due 4/15/2020 8,601
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) 2,408
Nebraska--6.3% Nebraska Public Power District Revenue Bonds, Series A (c):
AAA Aaa 2,995 (Electric System), 5.25% due 1/01/2022 2,824
AAA Aaa 17,215 (Electric System), 5.25% due 1/01/2028 16,141
AAA Aaa 12,500 (Power Supply System), 5.25% due 1/01/2022 11,788
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <S> <C>
Nevada--0.7% AAA Aaa $ 3,000 Washoe County, Nevada, Water Facility Revenue Bonds
(Sierra Pacific Power), AMT, 6.65% due 6/01/2017 (c) $ 3,226
New Jersey--1.9% New Jersey State Housing and Mortgage Finance Agency,
(Revenue Bonds Home Buyer), AMT (c):
AAA Aaa 4,025 Series D, 7.70% due 10/01/2029 4,218
AAA Aaa 5,000 Series K, 6.375% due 10/01/2026 5,108
New Mexico--1.0% AAA Aaa 2,375 Albuquerque, New Mexico, Airport Revenue Bonds, AMT,
Series A, 6.60% due 7/01/2016 (d) 2,568
AAA Aaa 2,300 Santa Fe, New Mexico, Revenue Bonds, Series A, 6.30%
due 6/01/2004 (d) (g) 2,520
New York--6.0% New York City, New York, GO, UT:
AAA Aaa 2,935 Series B, 8.25% due 6/01/2001 (g) 3,398
BBB+ Aaa 1,435 Series D, 9.50% due 8/01/2001 (g) 1,740
BBB+ Baa1 1,565 Series D, 9.50% due 8/01/2002 1,851
AAA Aaa 3,300 Series G, 5.75% due 2/01/2014 (c) 3,321
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds:
AAA Aaa 2,400 Series B, 5.75% due 6/15/2026 (c) 2,390
A1+ VMIG1++ 9,900 VRDN, Series C, 3.65% due 6/15/2023 (a) (b) 9,900
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) 5,047
BBB Aaa 1,500 New York State Urban Development Corporation Revenue Bonds
(State Facilities) 7.50% due 4/01/2001 (g) 1,700
<PAGE>
North Carolina-- A1+ NR* 1,000 Raleigh-Durham, North Carolina, Airport Authority, Special
0.2% Facility Revenue Refunding Bonds (American Airlines), VRDN,
Series B, 3.70% due 11/01/2015 (a) 1,000
North Dakota-- AAA Aaa 3,000 Bismarck, North Dakota, Hospital Revenue Refunding and
0.7% Improvement Bonds (MedCenter One, Inc.), 7.50% due
5/01/2013 (e) 3,233
Ohio--1.0% AAA Aaa 2,500 North Canton, Ohio, City School District Improvement Bonds,
UT, 6.70% due 12/01/2019 (d) 2,775
AAA Aaa 2,150 Ohio State Air Quality Development Authority, PCR, Refunding
(Ohio-Edison), Series A, 7.45% due 3/01/2016 (b) 2,357
Oklahoma--0.1% AAA Aaa 680 Muskogee County, Oklahoma, Home Financing Authority, S/F
Mortgage Revenue Refunding Bonds, Series A, 7.60% due
12/01/2010 (b) 715
Pennsylvania--0.9% AAA Aaa 4,000 Pennsylvania State Higher Educational Assistance Agency,
Student Loan Revenue Bonds, AMT, 7.437% due 3/01/2020 (c) 4,319
South Dakota-- AAA Aaa 8,000 South Dakota State Health and Educational Facilities Authority,
1.9% Revenue Refunding Bonds (McKennan Hospital), Series A, 7.625%
due 7/01/2014 (c) 9,372
Tennessee--2.7% AA Aa 3,000 Metropolitan Government Nashville and Davidson Counties,
Tennessee, UT, 6.15% due 5/15/2025 3,088
AAA Aaa 3,225 Metropolitan Nashville Airport Authority, Tennessee Airport
Revenue Bonds, Series C, 6.60% due 7/01/2015 (b) 3,491
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)(g) 6,822
Texas--12.8% AAA Aaa 2,750 Bexar, Texas, Metropolitan Water District, Waterworks
System Revenue Refunding Bonds, 6.35% due 5/01/2025 (c) 2,938
A1+ VMIG1++ 200 Gulf Coast Waste Disposal Authority, Texas, PCR (Amoco Oil
Company Project), VRDN, AMT, 3.75% due 5/01/2023 (a) 200
AAA Aaa 3,000 Harris County, Texas, Refunding (Permanent Improvement),
6% due 10/01/2016 (c) (h) 956
Houston, Texas, Water and Sewer System, Revenue Refunding
Bonds (Junior Lien):
AAA Aaa 6,000 Series A, 5.25% due 12/01/2025 (b) 5,620
AAA Aaa 300 Series C, 6.375% due 12/01/2001 (d) (g) 317
AAA Aaa 4,700 Series C, 6.375% due 12/01/2017 (d) 4,967
AAA Aaa 40,000 Texas State Turnpike Authority, Dallas North Thruway Revenue
Bonds (President George Bush Turnpike), 5% due 1/01/2025 (b) 36,160
AAA Aaa 10,440 Texas Water Resource Finance Authority Revenue Bonds, 7.50%
due 8/15/2013 (d) 11,147
A1+ Aa3 600 West Side Calhoun County, Texas, Navigation District, Sewer
and Solid Waste Disposal Revenue Bonds (BP Chemicals Inc.
Project), VRDN, AMT, 3.75% due 4/01/2031 (a) 600
<PAGE>
Utah--1.8% A+ Aa 5,000 Intermountain Power Agency, Utah, Power Supply Revenue Bonds,
Series B, 7% due 7/01/2021 5,318
NR* P1 3,400 Salt Lake County, Utah, PCR, Refunding (Service Station
Holdings Project), VRDN, 3.70% due 2/01/2008 (a) 3,400
Vermont--1.8% AAA Aaa 8,150 Vermont, HFA, Home Mortgage Purchase, AMT, Series B, 7.60%
due 12/01/2024 (c) 8,626
Virginia--3.5% AAA Aaa 6,000 Loudoun County, Virginia, COP, GO, 6.80% due 3/01/2014 (f) 6,650
Virginia State, HDA, Commonwealth Mortgage, AMT:
AAA Aaa 5,000 Series A, Sub-Series A-4, 6.45% due 7/01/2028 (c) 5,110
AA+ Aa 5,000 Series B, Sub-Series B-3, 6.75% due 7/01/2021 5,181
Washington--1.4% AAA Aaa 7,790 University of Washington, University Revenue Refunding Bonds
(Housing and Dining), Junior Lien, 5% due 12/01/2021 (c) 7,060
Wisconsin--1.2% AAA Aaa 6,000 Wisconsin State Health and Educational Facilities Authority
Revenue Bonds (Sinai Samaritan Medical Center Inc. Project),
5.875% due 8/15/2026 (c) 5,962
Total Investments (Cost--$464,756)--99.5% 488,381
Other Assets Less Liabilities--0.5% 2,370
--------
Net Assets--100.0% $490,751
========
<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 January 31, 1997.
(b)FGIC Insured.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)BIG Insured.
(f)FSA Insured.
(g)Prerefunded.
(h)Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
(i)GNMA Collateralized.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
<PAGE>
See Notes to Financial Statements.
</TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
As of January 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$464,755,982) (Note 1a) $488,380,570
Cash 88,175
Receivables:
Securities sold $ 19,023,458
Interest 6,202,277 25,225,735
------------
Prepaid expenses and other assets 17,029
------------
Total assets 513,711,509
------------
Liabilities: Payables:
Securities purchased 22,187,004
Dividends to shareholders (Note 1e) 443,568
Investment adviser (Note 2) 214,305 22,844,877
------------
Accrued expenses and other liabilities 115,920
------------
Total liabilities 22,960,797
------------
Net Assets: Net assets $490,750,712
============
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 4,037,639
Accumulated realized capital losses on investments--net (Note 5) (5,793,303)
Accumulated distributions in excess of realized capital gains
on investments--net (Note 1e) (3,121,120)
Unrealized appreciation on investments--net 23,624,588
------------
Total--Equivalent to $11.75 net asset value per share of
Common Stock (market price--$11.00) 340,750,712
------------
Total capital $490,750,712
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
For the Year Ended January 31, 1997
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 29,521,787
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 2,478,865
Commission fees (Note 4) 379,600
Transfer agent fees 105,878
Professional fees 91,435
Accounting services (Note 2) 64,076
Directors' fees and expenses 45,355
Printing and shareholder reports 44,880
Listing fees 32,140
Custodian fees 28,666
Pricing fees 17,961
Other 25,430
------------
Total expenses 3,314,286
------------
Investment income--net 26,207,501
------------
Realized & Realized loss on investments--net (4,884,441)
Unrealized Loss Change in unrealized appreciation on investments--net (11,265,687)
on Investments-- ------------
Net (Notes 1b,: Net Increase in Net Assets Resulting from Operations $ 10,057,373
1d & 3) ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
January 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 26,207,501 $ 26,777,376
Realized gain (loss) on investments--net (4,884,441) 5,498,127
Change in unrealized appreciation on investments--net (11,265,687) 30,124,671
------------ ------------
Net increase in net assets resulting from operations 10,057,373 62,400,174
------------ ------------
<PAGE>
Dividends & Investment income--net:
Distributions to Common Stock (20,745,023) (20,979,145)
Shareholders Preferred Stock (5,203,200) (5,780,540)
(Note 1e): In excess of realized gain on investments--net:
Common Stock (3,121,120) --
------------ ------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (29,069,343) (26,759,685)
============ ============
Net Assets: Total increase (decrease) in net assets (19,011,970) 35,640,489
Beginning of year 509,762,682 474,122,193
------------ ------------
End of year* $490,750,712 $509,762,682
============ ============
<FN>
*Undistributed investment income--net (Note 1f) $ 4,037,639 $ 3,774,715
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended January 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.40 $ 11.17 $ 12.99 $ 12.29 $ 11.96
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .90 .92 .96 1.01 1.06
Realized and unrealized gain (loss) on
investments--net (.54) 1.23 (1.71) 1.09 .68
-------- -------- -------- -------- --------
Total from investment operations .36 2.15 (.75) 2.10 1.74
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.72) (.72) (.79) (.85) (.91)
Realized gain on investments--net -- -- (.06) (.43) (.35)
In excess of realized gain on
investments--net (.11) -- (.06) -- --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders (.83) (.72) (.91) (1.28) (1.26)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Investment income--net (.18) (.20) (.16) (.12) (.15)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.18) (.20) (.16) (.12) (.15)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.75 $ 12.40 $ 11.17 $ 12.99 $ 12.29
======== ======== ======== ======== ========
Market price per share, end of year $ 11.00 $ 11.375 $ 10.25 $ 13.125 $ 13.25
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on market price per share 4.28% 18.67% (14.88%) 9.28% 16.27%
Return:* ======== ======== ======== ======== ========
Based on net asset value per share 2.18% 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,
Data: end of year (in thousands) $340,751 $359,763 $324,122 $376,726 $350,843
======== ======== ======== ======== ========
Preferred Stock outstanding, end of year
(in thousands) $150,000 $150,000 $150,000 $150,000 $150,000
======== ======== ======== ======== ========
Portfolio turnover 138.12% 114.30% 60.88% 41.61% 34.42%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,272 $ 3,398 $ 3,161 $ 3,512 $ 3,339
======== ======== ======== ======== ========
Dividends Per Series A--Investment income--net $ 860 $ 961 $ 752 $ 597 $ 749
Share on ======== ======== ======== ======== ========
Preferred Stock Series B--Investment income--net $ 865 $ 959 $ 764 $ 608 $ 733
Outstanding:++++ ======== ======== ======== ======== ========
Series C--Investment income--net $ 876 $ 971 $ 755 $ 580 $ 735
======== ======== ======== ======== ========
<FN>
*Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effect of sales loads.
**Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Based on average shares outstanding during the year.
++++Dividends per share have been adjusted to reflect a four-for-one
stock split that occurred on December 1, 1994.
See Notes to Financial Statements.
</TABLE>
<PAGE>
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. 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.
(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.
<PAGE>
* 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 require-
ments of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) 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. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for futures transactions.
NOTES TO FINANCIAL STATEMENTS (concluded)
(f) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of $3,646
have been reclassified between accumulated net realized capital
losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value
per share.
<PAGE>
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, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended January 31, 1997 were $640,915,350 and
$655,141,158, respectively.
Net realized and unrealized gains (losses) as of January 31, 1997
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $(1,636,288) $23,624,588
Short-term investments (591) --
Financial futures contracts (3,247,562) --
----------- -----------
Total $(4,884,441) $23,624,588
=========== ===========
As of January 31, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $23,566,972, of which $23,987,746
related to appreciated securities and $420,774 related to
depreciated securities. The aggregate cost of investments at January
31, 1997 for Federal income tax purposes was $464,813,598.
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.
<PAGE>
Common Stock
For the year ended January 31, 1997, shares issued and outstanding
remained constant at 29,007,770. At January 31, 1997, 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 January 31,
1997 were as follows: Series A, 3.38%; Series B, 3.395%; and Series
C, 3.40%.
For the year ended January 31, 1997, 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 an annual rate ranging from 0.25% to 0.50%, calculated
on the proceeds of each auction. For the year ended January 31, 1997,
Merrill Lynch, Pierce, Fenner & Smith Inc., an affiliate of FAM,
received $159,643 as commissions.
5. Capital Loss Carryforward:
At January 31, 1997, the Fund had a net capital loss carryforward of
approximately $5,270,000, all of which expires in 2005. This amount
will be available to offset like amounts of any future taxable
gains.
6. Subsequent Event:
On February 10, 1997, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.060759 per share, payable on February 27, 1997 to shareholders
of record as of February 20, 1997.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MuniEnhanced Fund, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of MuniEnhanced
Fund, Inc., as of January 31, 1997, the related statements of
operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period
then ended. These financial statements and the financial highlights
are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the
financial highlights based on our audits.
<PAGE>
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at January
31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and the financial high-
lights present fairly, in all material respects, the financial
position of MuniEnhanced Fund, Inc. as of January 31, 1997, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
March 7, 1997
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid monthly by
MuniEnhanced Fund, Inc. during its taxable year ended January 31,
1997 qualify as tax-exempt interest dividends for Federal income tax
purposes.
Additionally, the following taxable capital gains distribution has
been paid by the Fund to Common Stock shareholders during the Fund's
fiscal year:
Record Date Payable Date Short-Term Capital Gains
12/22/96 12/30/96 $.107596
<PAGE>
Please retain this information for your records.
