MuniEnhanced
Fund, Inc.
FUND LOGO
Semi-Annual Report
July 31, 1997
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.
<PAGE>
MuniEnhanced
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
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, 1997, the Common Stock of
MuniEnhanced Fund, Inc. earned $0.357 per share income dividends,
which included earned and unpaid dividends of $0.060. This
represents a net annualized yield of 5.87%, based on a month-end per
share net asset value of $12.24. Over the same period, total
investment return on the Fund's Common Stock was +7.55%, based on a
change in per share net asset value from $11.75 to $12.24, and
assuming reinvestment of $0.357 per share income dividends.
<PAGE>
For the six-month period ended July 31, 1997, the Fund's Preferred
Stock had an average dividend yield as follows: Series A, 3.82%;
Series B, 3.31%; and Series C, 3.47%.
The Municipal Market
Environment
During the six months ended July 31, 1997, a number of very
favorable factors combined to push both tax-exempt and taxable bond
yields to recent historic lows. A slowing domestic economy, a
continued benign, if not improving, inflationary environment, a
declining Federal budget deficit with resultant reduced Treasury
borrowing needs, and a successful Congressional budget accord all
resulted in significant declines in fixed-income yields. By the end
of July, 30-year US Treasury bond yields had declined approximately
50 basis points (0.50%) to 6.30%, their lowest level in over a year.
Similarly, as measured by the Bond Buyer Revenue Bond Index, long-
term municipal revenue bond yields fell over 50 basis points to end
the July 31, 1997 quarter at 5.49%, their lowest level since early
1994.
The decline in tax-exempt yields in recent months was even more
impressive given that the municipal market lost much of the
technical support it enjoyed for over a year. In previous quarters,
new tax-exempt bond issuance declined, or remained stable. During
the six months ended July 31, 1997, approximately $100 billion in
new long-term municipal securities was underwritten, an increase of
over 7.5% versus the comparable period in 1996. As tax-exempt bond
yields declined, many municipal bond issuers took this opportunity
to both issue new debt as well as refinance older, higher-couponed
debt with new, lower-yielding issues. This refinancing led to a
surge in tax-exempt issuance in recent months. Over the three months
ended July 31, 1997, new long-term tax-exempt bond issuance totaled
approximately $55 billion, an increase of over 15% versus the July
31, 1996 quarter.
The decline in municipal bond yields also resulted in some reduc-
tion in retail investor demand. In earlier episodes of rapidly
declining interest rates, individual investor demand initially fell
until investors became more acclimated to the current levels. Should
interest rates stabilize, we expect investor demand to return to
earlier levels. Also, this past June and July, municipal bond
investors received over $50 billion in assets from coupon income
payments, bond maturities, and the proceeds from early bond
redemptions. Despite the continued allure of the US equity market,
it is likely that much of these assets will be reallocated to the
municipal bond market as investors adjust to the new investment
environment.
<PAGE>
Looking forward, given the extent of the recent bond market rally,
some retrenchment or at least a period of consolidation is likely.
However, the positive backdrop of modest economic growth and low
inflation suggests that any such adjustment is not likely to be
excessive. Despite recent increases in new bond issuance, supply for
all of 1997 is not expected to be materially different than earlier
estimates of approximately $175 billion. It is likely that the
recent increase in issuance has largely borrowed from that
originally scheduled for later this year. Additionally, any
significant increase in tax-exempt bond yields will prevent any
further bond refinancings, reducing future supply. Unless the
current positive economic fundamentals undergo immediate and
significant deterioration, any increase in municipal bond yields is
likely to be viewed as an opportunity to purchase more attractively
priced tax-exempt securities.
Portfolio Strategy
During the six months ended July 31, 1997, interest rates reached
both the high and low ends of their trading range over the last
year. Our strategy for the MuniEnhanced Fund, Inc. attempted to
capture as much of this market move as possible for our
shareholders.
The economy during the first quarter of 1997 produced a robust 4.9%
gross domestic product, and the bond market retreated. At that time,
we restructured the Fund to a defensive posture by purchasing large-
coupon, shorter-duration municipal bonds, and we also raised cash
reserves to 5%. After it became clear that the second quarter would
show a significant slowdown from the first quarter, we became much
more constructive on our outlook for the market and reduced cash
reserves by purchasing long-term, tax-exempt bonds. Since April the
Fund has been fully invested and fully participated in the powerful
market appreciation. As interest rates continue to decline, our
strategy for the portfolio is expected to become slightly more
defensive in order to seek to protect some of the gains the Fund has
enjoyed during the period.
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
<PAGE>
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Hugh T. Hurley III)
Hugh T. Hurley III
Vice President and Portfolio Manager
August 29, 1997
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
UPDATES Unit Priced Demand Adjustable Tax-Exempt Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<PAGE>
<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--0.6% AAA Aaa $ 2,500 Huntsville, Alabama, Health Care Authority, Health Care
Facilities Revenue Bonds, Series B, 6.625% due 6/01/2023 (c) $ 2,839
Alaska--2.2% AAA Aaa 5,500 Alaska Student Loan Corporation, Student Loan Revenue Bonds,
AMT, Series A, 5.75% due 7/01/2014 (d) 5,676
AA Aa3 5,000 Valdez, Alaska, Marine Terminal Revenue Refunding Bonds
(Sohio Pipeline--British Petroleum Oil), 7.125% due 12/01/2025 5,637
Arizona--1.0% AAA Aaa 2,000 Chandler, Arizona, Water and Sewer Revenue Bonds, 6.50% due
7/01/2014 (c) 2,257
AAA Aaa 2,500 Phoenix, Arizona, Civic Improvement Corporation, Municipal
Facilities Excise Tax, Revenue Refunding Bonds, 5.25% due
7/01/2015 (c) 2,525
California--8.7% AAA Aaa 5,250 Anaheim, California, Public Financing Authority, Lease Revenue
Bonds (Public Improvements Project), Senior Series A, 6% due
9/01/2024 (f) 5,906
California State Public Works Board, Lease Revenue Bonds
(Various University of California Projects) (g):
AAA Aaa 2,000 Series A, 6.40% due 12/01/2002 (d) 2,255
A Aaa 2,500 Series B, 6.625% due 12/01/2004 2,907
Central Coast Water Authority, California, Revenue Bonds (State
Water Project Regional Facilities) (d):
AAA Aaa 5,000 6.60% due 10/01/2002 (g) 5,667
AAA Aaa 5,480 Refunding, Series A, 5% due 10/01/2022 5,312
A+ A1 2,500 Contra Costa County, California, COP, 6.50% due 8/01/2019 2,734
AAA Aaa 8,235 Los Angeles County, California, Transportation Commission, Sales
Tax Revenue Refunding Bonds, Series B, 6.50% due 7/01/2015 (b) 9,024
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) 1,644
AAA Aaa 1,500 Northern California Transmission Revenue Bonds (California-Oregon
Transmission Project), Series A, 6.50% due 5/01/2016 (c) 1,657
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) 4,637
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) 2,295
Colorado--2.1% AAA Aaa 3,000 Adams County, Colorado, School District No. 012, UT, Series A,
5.95%** due 12/15/2012 (c) 1,365
Colorado, HFA, S/F Project, AMT:
NR* Aa2 2,990 Senior Series A-1, 7.40% due 11/01/2027 3,370
NR* Aa2 3,400 Senior Series C-1, 7.65% due 12/01/2025 3,823
AAA Aaa 2,000 Douglas County, Colorado, School District No. RE-1, Refunding
(Douglas and Elbert Counties), UT, 5.125% due 12/15/2016 (c) 1,996
<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 2,293
AAA Aaa 3,500 Connecticut State Special Tax Obligation Revenue Bonds, Series B,
6.25% due 10/01/2014 (b) 3,836
Delaware--0.5% AAA Aaa 2,000 Delaware Transportation Authority, Transportation System Revenue
Bonds, Senior Series, 7% due 7/01/2013 (b) 2,295
Georgia--3.7% AAA Aaa 7,725 Georgia Municipal Electric Authority, Power Revenue Bonds, Series
EE, 7% due 1/01/2025 (d) 9,811
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) 4,071
AAA Aaa 3,000 Municipal Electric Authority, Georgia, Project One, Sub-Series A,
6.50% due 1/01/2004 (d) (g) 3,396
AAA Aaa 1,000 Municipal Electric Authority, Georgia, Special Obligation, Third
Crossover, 6.60% due 1/01/2018 (c) 1,190
Hawaii--5.1% AAA Aaa 11,250 Hawaii State Airports 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) 6,699
AAA Aaa 5,835 Hawaii State, GO, Series CM, 6% due 12/01/2006 (b) 6,491
Idaho--0.3% NR* VMIG1++ 1,700 Idaho Health Facilities Authority, Pooled Financing Program
Revenue Bonds, ACES, 3.75% due 10/01/2010 (a) 1,700
Illinois--9.5% AAA Aaa 7,650 Chicago, Illinois, Wastewater Transmission Revenue Refunding
Bonds, 5.125% due 1/01/2025 (b) 7,446
AAA Aaa 16,640 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2020 (b) 16,062
AAA Aaa 2,240 Cook County, Illinois, Chicago Community College District No.
508, COP, UT, 8.75% due 1/01/2007 (b) 2,924
AAA Aaa 3,000 Illinois Health Facilities Authority Revenue Bonds (Servantcor
Project), Series A, 6.375% due 8/15/2021 (f) 3,249
Illinois State, GO, UT (b):
AAA Aaa 5,000 5.25% due 7/01/2022 4,925
AAA Aaa 2,000 Refunding, 5.125% due 12/01/2017 1,966
AAA Aaa 9,115 Regional Transportation Authority, Illinois, Series A, 7.20% due
11/01/2020 (d) 11,543
Indiana--1.5% Hammond, Indiana, Multi-School Building Corporation, Refunding
(First Mortgage) (c):
AAA Aaa 3,150 5.75% due 1/15/2017 3,297
AAA Aaa 1,360 6.125% due 7/15/2019 1,473
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 (h) 2,924
<PAGE>
Iowa--0.5% NR* Aaa 2,550 Iowa Finance Authority, S/F Mortgage Revenue Bonds, AMT,
Series A, 7.90% due 11/01/2022 (h) 2,679
</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>
Kansas--8.3% AAA Aaa $ 5,500 Burlington, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (c) $ 6,090
AAA Aaa 29,685 Kansas City, Kansas, Utility System Revenue Refunding and
Improvement Bonds, 6.375% due 9/01/2023 (b) 32,944
AAA Aaa 2,500 Wamego, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (c) 2,768
Louisiana--0.9% AAA Aaa 4,340 Louisiana Public Facilities Authority, Revenue Refunding Bonds
(Jefferson Parish Eastbank Project), 7.70% due 8/01/2010 (b) 4,680
Maine--0.6% NR* Aa2 3,000 Maine State Housing Authority, Mortgage Purchase, AMT, Series
C-2, 6.875% due 11/15/2023 3,200
Massachusetts-- AAA Aaa 4,105 Massachusetts Bay Transportation Authority, Massachusetts
6.3% General Transportation System, Series A, 6% due 3/01/2005 (b) 4,508
AAA Aaa 2,500 Massachusetts State Consolidated Loan, Series D, 5% due
11/01/2016 (d) 2,460
AAA Aaa 4,300 Massachusetts State, HFA, Housing Revenue Refunding Bonds
(Insured Rental), AMT, Series A, 6.75% due 7/01/2028 (d) 4,600
AAA NR* 3,290 Massachusetts State Health and Educational Facilities Authority
Revenue Bonds (Berklee College of Music), Series E, 5.10% due
10/01/2027 (c) 3,179
AAA Aaa 13,250 Massachusetts State Industrial Finance Agency Revenue Bonds
(Brandeis University), Series C, 6.80% due 10/01/2019 (c) 14,272
AAA Aaa 2,500 Massachusetts State Port Authority Revenue Bonds, AMT, Series A,
7.50% due 7/01/2020 (b) 2,743
Michigan--2.8% AAA Aaa 10,000 Michigan State Building Authority, Revenue Refunding Bonds,
Series I, 6.25% due 10/01/2020 (c) 10,879
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) 3,317
Minnesota--0.0% A1+ Aa3 200 Hubbard County, Minnesota, Solid Waste Disposal Revenue Bonds
(Potlatch Corporation Project), VRDN, AMT, 3.70% due 8/01/2014 (a) 200
<PAGE>
Missouri--5.1% AAA Aaa 3,000 Kansas City, Missouri, Airport Revenue Bonds (General
Improvement), Series B, 6.875% due 9/01/2004 (f) (g) 3,472
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 2,084
AAA Aaa 20,885 5% due 4/15/2020 20,276
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) 2,418
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) 3,291
New Jersey--7.3% New Jersey Casino Reinvestment Development Authority, Parking Fee
Revenue Bonds, Series A (f):
AAA Aaa 4,580 5.25% due 10/01/2011 4,688
AAA Aaa 5,450 5.25% due 10/01/2012 5,557
AAA Aaa 5,735 5.25% due 10/01/2013 5,820
New Jersey State Housing and Mortgage Finance Agency Revenue
Bonds (Home Buyer), AMT (c):
AAA Aaa 3,595 Series D, 7.70% due 10/01/2029 3,774
AAA Aaa 5,000 Series K, 6.375% due 10/01/2026 5,233
AAA Aaa 11,460 Series U, 5.75% due 4/01/2018 11,711
New Mexico--1.0% AAA Aaa 2,375 Albuquerque, New Mexico, Airport Revenue Bonds, AMT, Series A,
6.60% due 7/01/2016 (d) 2,602
AAA Aaa 2,300 Santa Fe, New Mexico, Revenue Bonds, Series A, 6.30% due
6/01/2004 (d) (g) 2,555
New York--5.2% New York City, New York, GO, UT:
AAA Aaa 2,935 Series B, 8.25% due 6/01/2001 (g) 3,400
BBB+ Aaa 1,595 Series D, 9.50% due 8/01/2001 (g) 1,928
BBB+ Baa1 1,405 Series D, 9.50% due 8/01/2002 1,669
BBB+ Baa1 2,000 Series L, 5.75% due 8/01/2013 2,063
AAA Aaa 5,000 Series M, 5.375% due 6/01/2013 (d) 5,143
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) 5,010
BBB Aaa 1,500 New York State Urban Development Corporation Revenue Bonds
(State Facilities), 7.50% due 4/01/2001 (g) 1,700
AAA Aaa 5,000 Suffolk County, New York, Southwest Sewer District, Refunding,
UT, 6% due 2/01/2005 (c) 5,496
North Carolina--0.3% A1+ NR* 1,700 Raleigh-Durham, North Carolina, Airport Authority, Special
Facility Revenue Refunding Bonds (American Airlines), VRDN,
Series A, 3.65% due 11/01/2005 (a) 1,700
North Dakota--0.6% AAA Aaa 3,000 Bismarck, North Dakota, Hospital Revenue Refunding and
Improvement Bonds (MedCenter One, Inc.), 7.50% due 5/01/2013 (e) 3,220
<PAGE>
Ohio--1.0% AAA Aaa 2,500 North Canton, Ohio, City School District Improvement Bonds, UT,
6.70% due 12/01/2019 (d) 2,848
AAA Aaa 2,150 Ohio State Air Quality Development Authority, PCR, Refunding
(Ohio Edison), Series A, 7.45% due 3/01/2016 (b) 2,356
Oklahoma--0.1% AAA Aaa 620 Muskogee County, Oklahoma, Home Financing Authority, S/F Mortgage
Revenue Refunding Bonds, Series A, 7.60% due 12/01/2010 (b) 654
Pennsylvania--4.1% NR* Aaa 10,000 Bethlehem, Pennsylvania, Area School District, 5% due
9/01/2015 (b) 9,848
A Baa1 6,000 Delaware County, Pennsylvania, IDA, Resource Recovery Facility,
Revenue Refunding Bonds, Series A, 6.10% due 7/01/2013 6,290
AAA Aaa 4,000 Pennsylvania State Higher Education Assistance Agency, Student
Loan Revenue Bonds, AMT, 7.437% due 3/01/2020 (c) 4,323
South Dakota--1.8% AAA Aaa 8,000 South Dakota State Health and Educational Facilities Authority,
Revenue Refunding Bonds (McKennan Hospital), Series A, 7.625%
due 7/01/2014 (c) 9,104
Tennessee--2.7% AA Aa 3,000 Metropolitan Government, Nashville and Davidson Counties,
Tennessee, UT, 6.15% due 5/15/2025 3,194
AAA Aaa 3,225 Metropolitan Nashville Airport Authority, Tennessee, Airport
Revenue Bonds, Series C, 6.60% due 7/01/2015 (b) 3,555
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) 6,897
</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>
Texas--5.3% AAA Aaa $ 2,750 Bexar, Texas, Metropolitan Water District, Waterworks System
Revenue Refunding Bonds, 6.35% due 5/01/2025 (c) $ 3,036
AAA Aaa 4,700 Houston, Texas, Water and Sewer Systems Revenue Bonds, Junior
Lien, Series C, 6.375% due 12/01/2017 (d) 5,148
Nueces River Authority, Texas, Water Supply Facilities Revenue
Bonds (Corpus Christi Lake Project) (f):
AAA Aaa 4,105 5.25% due 7/15/2015 4,152
AAA Aaa 3,320 5.25% due 7/15/2016 3,343
AAA Aaa 10,420 Texas Water Resource Finance Authority Revenue Bonds, 7.50% due
8/15/2013 (d) 11,135
Utah--1.1% A+ A1 5,000 Intermountain Power Agency, Utah, Power Supply Revenue Bonds,
Series B, 7% due 7/01/2021 5,322
Vermont--1.7% AAA Aaa 8,150 Vermont, HFA, Home Mortgage Purchase, AMT, Series B, 7.60% due
12/01/2024 (c) 8,617
<PAGE>
Virginia--4.8% AA Aa2 6,250 Fairfax County, Virginia, Water Authority, Water Revenue
Refunding Bonds, 5% due 4/01/2029 6,010
AAA Aaa 6,000 Loudoun County, Virginia, COP, 6.80% due 3/01/2014 (f) 6,740
AAA Aa2 700 Peninsula Ports Authority, Virginia, Port Facility Revenue
Refunding Bonds (Shell Oil Company), UPDATES, Series A, 3.65%
due 12/01/2005 (a) 700
Virginia State, HDA, Commonwealth Mortgage, AMT:
AAA Aaa 5,000 Series A, Sub-Series A-4, 6.45% due 7/01/2028 (c) 5,332
AA+ Aa 5,000 Series B, Sub-Series B-3, 6.75% due 7/01/2021 5,251
Washington--3.3% AAA Aaa 7,790 University of Washington, University Revenue Refunding Bonds
(Housing and Dining), Junior Lien, 5% due 12/01/2021 (c) 7,544
AA+ Aa1 7,965 Washington State, GO, Series E, 6% due 7/01/2006 8,840
Total Investments (Cost--$479,627)--102.4% 517,029
Liabilities in Excess of Other Assets--(2.4%) (12,081)
--------
Net Assets--100.0% $504,948
========
<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, 1997.
(b)FGIC Insured.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)BIG Insured.
(f)FSA Insured.
(g)Prerefunded.
(h)GNMA Collateralized.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown
is the effective yield at the time of purchase by the
Fund.
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of July 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$479,626,714) (Note 1a) $517,029,000
Cash 92,761
Receivables:
Interest $ 6,956,559
Securities sold 441,037 7,397,596
------------
Prepaid expenses and other assets 20,714
------------
Total assets 524,540,071
------------
Liabilities: Payables:
Securities purchased 18,951,409
Dividends to shareholders (Note 1e) 379,239
Investment adviser (Note 2) 212,100 19,542,748
------------
Accrued expenses and other liabilities 48,888
------------
Total liabilities 19,591,636
------------
Net Assets: Net assets $504,948,435
============
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 3,769,009
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) (2,432,465)
Unrealized appreciation on investments--net 37,402,286
------------
Total--Equivalent to $12.24 net asset value per share of Common
Stock (market price--$11.6875) 354,948,435
------------
Total capital $504,948,435
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended July 31, 1997
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 14,333,576
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 1,206,126
Commission fees (Note 4) 185,465
Transfer agent fees 55,227
Professional fees 40,450
Accounting services (Note 2) 35,277
Directors' fees and expenses 22,259
Printing and shareholder reports 21,257
Listing fees 15,749
Custodian fees 14,645
Pricing fees 6,338
Other 11,180
------------
Total expenses 1,613,973
------------
Investment income--net 12,719,603
------------
Realized & Realized gain on investments--net 688,655
Unrealized Gain on Change in unrealized appreciation on investments--net 13,777,698
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 27,185,956
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
July 31, January 31,
Increase (Decrease) in Net Assets: 1997 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 12,719,603 $ 26,207,501
Realized gain (loss) on investments--net 688,655 (4,884,441)
Change in unrealized appreciation on investments--net 13,777,698 (11,265,687)
------------ ------------
Net increase in net assets resulting from operations 27,185,956 10,057,373
------------ ------------
<PAGE>
Dividends & Investment income--net:
Distributions to Common Stock (10,361,053) (20,745,023)
Shareholders Preferred Stock (2,627,180) (5,203,200)
(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 (12,988,233) (29,069,343)
------------ ------------
Net Assets: Total increase (decrease) in net assets 14,197,723 (19,011,970)
Beginning of period 490,750,712 509,762,682
------------ ------------
End of period* $504,948,435 $490,750,712
============ ============
<FN>
*Undistributed investment income--net $ 3,769,009 $ 4,037,639
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have
been derived from information provided in For the Six
the financial statements. Months Ended
July 31, For the Year Ended January 31,
Increase (Decrease) in Net Asset Value: 1997++ 1997++ 1996++ 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.75 $ 12.40 $ 11.17 $ 12.99 $ 12.29
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .44 .90 .92 .96 1.01
Realized and unrealized gain (loss) on
investments--net .50 (.54) 1.23 (1.71) 1.09
-------- -------- -------- -------- --------
Total from investment operations .94 .36 2.15 (.75) 2.10
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.36) (.72) (.72) (.79) (.85)
Realized gain on investments--net -- -- -- (.06) (.43)
In excess of realized gain on investments
--net -- (.11) -- (.06) --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders (.36) (.83) (.72) (.91) (1.28)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Investment income--net (.09) (.18) (.20) (.16) (.12)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.09) (.18) (.20) (.16) (.12)
-------- -------- -------- -------- --------
Net asset value, end of period $ 12.24 $ 11.75 $ 12.40 $ 11.17 $ 12.99
======== ======== ======== ======== ========
Market price per share, end of period $11.6875 $ 11.00 $ 11.375 $ 10.25 $ 13.125
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on market price per share 9.69%+++ 4.28% 18.67% (14.88%) 9.28%
Return:** ======== ======== ======== ======== ========
Based on net asset value per share 7.55%+++ 2.18% 18.71% (6.27%) 16.61%
======== ======== ======== ======== ========
Ratios to Average Expenses .67%* .67% .68% .69% .68%
Net Assets:*** ======== ======== ======== ======== ========
Investment income--net 5.28%* 5.27% 5.42% 5.76% 5.54%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end of
Data: period (in thousands) $354,948 $340,751 $359,763 $324,122 $376,726
======== ======== ======== ======== ========
Preferred Stock outstanding, end of
period (in thousands) $150,000 $150,000 $150,000 $150,000 $150,000
======== ======== ======== ======== ========
Portfolio turnover 55.74% 138.12% 114.30% 60.88% 41.61%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,366 $ 3,272 $ 3,398 $ 3,161 $ 3,512
======== ======== ======== ======== ========
Dividends Per Series A--Investment income--net $ 474 $ 860 $ 961 $ 752 $ 597
Share on ======== ======== ======== ======== ========
Preferred Stock Series B--Investment income--net $ 410 $ 865 $ 959 $ 764 $ 608
Outstanding:++++ ======== ======== ======== ======== ========
Series C--Investment income--net $ 430 $ 876 $ 971 $ 755 $ 580
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value,
may result in substantially different returns. Total
investment returns exclude the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
+++Aggregate total investment return.
++Based on average shares outstanding during the period.
++++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. 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.
(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.
<PAGE>
* 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.
NOTES TO FINANCIAL STATEMENTS (concluded)
<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. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for futures transactions.
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 six months ended July 31, 1997 were $300,589,468 and
$268,842,252, respectively.
Net realized and unrealized gains as of July 31, 1997 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $ 688,655 $ 37,402,286
------------ ------------
Total $ 688,655 $ 37,402,286
============ ============
As of July 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $37,402,286, all of which is related to
appreciated securities. The aggregate cost of investments at July
31, 1997 for Federal income tax purposes was $479,626,714.
<PAGE>
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.
Common Stock
For the six months ended July 31, 1997, shares issued and
outstanding remained constant at 29,007,770. At July 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 July 31,
1997 were as follows: Series A, 3.55%; Series B, 3.613%; and Series
C, 3.00%.
For the six months ended July 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 six months ended
July 31, 1997, Merrill Lynch, Pierce, Fenner & Smith Inc., an
affiliate of FAM, received $81,721 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 August 7, 1997, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.060141 per share, payable on August 28, 1997 to shareholders of
record as of August 18, 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
Philip M. Mandel, 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
