MuniEnhanced
Fund, Inc.
STRATEGIC
Performance
Annual Report
January 31, 1998
<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.
Managed Dividend
Policy
The Fund's dividend policy is to distribute substantially all of its net
investment income to its shareholders on a monthly basis. However, in order to
provide shareholders with a more consistent yield to the current trading price
of shares of Common Stock of the Fund, the Fund may at times pay out less than
the entire amount of net investment income earned in any particular month and
may at times in any particular month pay out such accumulated but undistributed
income in addition to net investment income earned in that month. As a result,
the dividends paid by the Fund for any particular month may be more or less than
the amount of net investment income earned by the Fund during such month. The
Fund's current accumulated but undistributed net investment income, if any, is
disclosed in the Statement of Assets, Liabilities and Capital, which comprises
part of the financial information included in this report.
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1998
TO OUR SHAREHOLDERS
For the year ended January 31, 1998, the Common Stock of MuniEnhanced Fund, Inc.
earned $0.708 per share income dividends, which included earned and unpaid
dividends of $0.058. This represents a net annualized yield of 5.72%, based on a
month-end net asset value of $12.38 per share. Over the same period, the total
investment return on the Fund's Common Stock was +12.06%, based on a change in
per share net asset value from $11.75 to $12.38, and assuming reinvestment of
$0.710 per share income dividends.
For the six months ended January 31, 1998, the total investment return on the
Fund's Common stock was +4.20%, based on a change in per share net asset value
from $12.24 to $12.38, and assuming reinvestment of $0.353 per share income
dividends.
For the six-month period ended January 31, 1998, the Fund's Preferred Stock had
an average dividend yield as follows: Series A, 3.74%; Series B, 3.24%; and
Series C, 3.39%.
The Municipal Market Environment
During the six months ended January 31, 1998, long-term bond yields declined to
recent historic lows. Prior to late October, the ongoing positive combination of
moderate economic growth and low inflation had allowed interest rates to
gradually move lower. During the last three months, however, the decline in
interest rates was driven more by the continued turmoil in Asian equity markets
than by fundamental concerns. A significant "flight to quality" has benefited
the US Treasury bond market, particularly longer-maturity US Treasury bonds, as
foreign investors have sought safe haven in the relative stability of US
financial markets. Over the six months ended January 31, 1998, US Treasury bond
yields declined approximately 50 basis points (0.50%) to 5.81%.
Without the ability to benefit from the tax advantage inherent in municipal
bonds, foreign investors have not participated in the tax-exempt market.
Consequently, municipal bond yields have not declined as dramatically as have
taxable US Treasury securities. Long-term municipal revenue bond yields, as
measured by the Bond Buyer Revenue Index, declined only 15 basis points to end
the six-month period ended January 31, 1998 at 5.33%. Nevertheless, tax-exempt
bond yields have not reached these levels since the mid-1970s.
The increase in new municipal bond issuance over the past six months has also
prevented the tax-exempt bond market from more closely mirroring the yield
declines exhibited by its taxable counterpart. During the last six months, over
$120 billion in new long-term municipal bonds were underwritten, an increase of
over 30% compared to the same six-month period one year ago. As interest rates
have continued to decline in recent months, new tax-exempt bond issuance has
remained strong. Over $60 million in new long-term municipal securities were
issued during the last three months, an increase of over 20% compared to the
same three-month period ended January 31, 1997. During the past month, over $16
billion in new long-term municipal securities were underwritten, representing an
increase of over 40% compared to the January 1997 level.
In our opinion, the recent correction in world equity markets has enhanced the
near-term prospects for continued low, if not declining, interest rates in the
United States. It is likely that the recent correction will result in slower US
domestic growth in the coming months. This decline should be generated in part
by reduced US export growth. Additionally, some decline in consumer spending can
also be expected because of reduced consumer confidence. Perhaps more
importantly, it is likely that, barring a dramatic and unexpected resurgence in
domestic growth, the Federal Reserve Board will be unwilling to raise interest
rates until the full impact of the equity market's corrections can be
established.
All of these factors suggest that over the near term, interest rates, including
tax-exempt bond yields, are unlikely to rise by any appreciable amount. It is
probable that municipal bond yields will remain under some relative pressure
because of continued strong new-issue supply. However, the recent pace of
municipal bond issuance is likely to be unsustainable. Continued increases in
bond issuance will require lower and lower tax-exempt bond yields to generate
the economic savings necessary for additional municipal bond refinancings.
Preliminary estimates of 1998 total municipal bond issuance are presently in the
$195 billion-$220 billion range. These estimates suggest that recent supply
pressures are likely to abate somewhat next year, or at least exert only minimal
technical pressure during 1998. Additionally, municipal bond investors received
approximately $23 billion in January coupon payments, bond maturities and
proceeds from early redemptions, which should serve to intensify investor demand
in the near future. With tax-exempt bond yields at already attractive yield
ratios relative to US Treasury bonds (approximately 90% at the end of December
1997), any further pressure on the municipal market may well represent an
attractive investment opportunity.
Portfolio Strategy
During the first half of the Fund's fiscal year ended January 31, 1998, interest
rates reached both the high and low of their trading range. As we stated in our
last report to shareholders, the strategy of the Fund was to capture as much of
the price appreciation of this market move as possible for our shareholders.
However, when the economy produced a 4.9% growth in gross domestic product
during the first quarter of 1997, the bond market retreated. We took advantage
of this time to restructure the Fund to a defensive posture by purchasing
higher-coupon, shorter-duration municipal bonds. We also raised the Fund's cash
reserves to 5%. After it became clearer that the economy would not overheat, we
became much more constructive on the outlook for the market.
Since the spring of 1997, the portfolio has been fully invested in high-quality,
long-duration municipal bonds which allowed the Fund to fully participate in the
powerful bond market appreciation. Our portfolio strategy over the last six
months was a continuation of our positive outlook on the market. Although we
stated in our last report to shareholders that we would restructure the
portfolio to become more defensive as interest rates continued to decline, we
chose not to do so because of the significant turmoil caused by the Asian
financial crisis. As world markets experienced periods of volatility, investors
sought the safe haven of US Treasury bonds which, in turn, benefited
fixed-income securities.
Looking forward, we anticipate keeping our present portfolio strategy in place
until the situation in Asia stabilizes or the US economy shows signs of pushing
inflation higher.
In Conclusion
We appreciate your ongoing interest in MuniEnhanced Fund, Inc., and we look
forward to serving your investment needs in the months and years to come.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Hugh T. Hurley III
Hugh T. Hurley III
Vice President and Portfolio Manager
March 5, 1998
================================================================================
Portfolio Insurance
MuniEnhanced Fund, Inc. seeks to provide its shareholders with the benefits of
an insured municipal bond portfolio. Previously, the Fund generally achieved
this objective by limiting at least 80% of portfolio investments to municipal
bonds insured under policies obtained by the issuer or another party, including
the Fund itself, and issued by insurance carriers with claims paying ability
ratings of AAA or its equivalent from at least two nationally recognized rating
agencies, such as Standard & Poor's Ratings Services, Moody's Investor Service,
Inc., or Fitch IBCA, Inc. In order to increase the Fund's flexibility to obtain
appropriate investments, the Fund has modified its practice with respect to the
ratings criteria it applies to the carriers that provide insurance for the
municipal bonds in its portfolio. Currently, the Fund may also invest in
municipal bonds insured by, or may itself purchase an insurance policy for all
or a portion of its municipal bond portfolio from, an insurance carrier with a
claims paying ability rating of AAA or its equivalent from at least one of such
nationally recognized rating agencies. There can be no assurance that insurance
of the kind described above will continue to be available to the Fund, and the
Fund has reserved its right to modify its criteria for portfolio insurance, or
discontinue its policy of maintaining an insured portfolio if such insurance is
no longer available or if the cost of such insurance outweighs the benefits to
the Fund. Although we periodically review the financial condition of each
insurer, there can be no assurance that the insurers will be able to honor their
obligations under the circumstances of any claim thereunder.
================================================================================
2 & 3
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1998
PROXY RESULTS
During the six-month period ended January 31, 1998, MuniEnhanced Fund, Inc.
Common Stock shareholders voted on the following proposals. The proposals were
approved at the annual shareholders' meeting on September 18, 1997. The
description of each proposal and number of shares voted are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha 27,513,497 582,762
Robert R. Martin 27,517,257 579,002
Joseph L. May 27,515,657 580,602
Arthur Zeikel 27,499,182 597,077
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<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. 27,616,059 128,594 351,606
- -----------------------------------------------------------------------------------------------------
</TABLE>
During the six-month period ended January 31, 1998, MuniEnhanced Fund, Inc.
Preferred Stock shareholders (Series A, B and C) voted on the following
proposals. The proposals were approved at the annual shareholders' meeting on
September 1, 1997. The description of each proposal and number of shares voted
are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
1. To elect the Fund's Board of Directors as follows:
James H. Bodurtha, Herbert I. London, Robert R. Martin,
Joseph L. May, Andre F. Perold, Arthur Zeikel. Series A 1,602 28
Series B 1,626 0
Series C 1,904 76
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<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
as follows: Series A 1,590 0 40
Series B 1,543 27 56
Series C 1,904 60 16
- -----------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Alabama--0.6% AAA Aaa $2,500 Huntsville, Alabama, Health Care Authority, Health Care Facilities
Revenue Bonds, Series B, 6.625% due 6/01/2004 (c)(g) $ 2,876
===================================================================================================================================
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 5,622
===================================================================================================================================
Arizona--1.4% A1+ P1 2,300 Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding
(Arizona Public Service Company), VRDN, Series E, 3.65% due 5/01/2029 (a) 2,300
A1+ P1 4,700 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont Mining Corporation),
VRDN, 3.75% due 12/01/2009 (a) 4,700
===================================================================================================================================
California--9.8% Anaheim, California, Public Financing Authority, Lease Revenue Bonds
(Public Improvements Project) (f):
AAA Aaa 5,250 Senior Series A, 6% due 9/01/2024 6,051
AAA Aaa 10,000 Sub-Series C, 5.28%** due 9/01/2036 1,385
AAA Aaa 2,500 California State Public Works Board, Lease Revenue
Bonds (Various University of California Projects), Series B, 6.625%
due 12/01/2004 (g) 2,912
A+ A1 2,500 Contra Costa County, California, COP, 6.50% due 8/01/2019 2,760
AAA Aaa 6,305 Fresno, California, Sewer Revenue Bonds, Series A, 4.75% due 9/01/2026 (c) 5,966
AAA Aaa 8,235 Los Angeles County, California, Transportation Commission, Sales Tax
Revenue Refunding Bonds, Series B, 6.50% due 7/01/2015 (b) 8,972
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) 1,632
Monterey County, California, COP (Natividad Medical Improvement Center),
Series E (c):
AAA Aaa 3,300 4.75% due 8/01/2018 3,166
AAA Aaa 3,340 4.75% due 8/01/2019 3,184
AAA Aaa 2,000 4.75% due 8/01/2027 1,888
AAA Aaa 1,500 Northern California Transmission Revenue Bonds (California-Oregon
Transmission Project), Series A, 6.50% due 5/01/2016 (c) 1,651
AA- Aa3 3,300 San Diego County, California, Water Authority, Revenue Refunding Bonds,
COP, Series A, 4.75% due 5/01/2020 3,130
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) 4,675
AAA Aaa 2,000 Santa Clara County, California, Financing Authority, Lease Revenue Bonds
(VMC Facility Replacement Project), Series A, 6.75% due 11/15/2004 (d)(g) 2,343
===================================================================================================================================
</TABLE>
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
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1998
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Colorado--5.8% AAA Aaa $3,000 Adams County, Colorado, School District No. 012, UT, Series A, 5.95%**
due 12/15/2012 (c) $ 1,456
NR* Aa2 2,990 Colorado HFA, S/F Program, AMT, Senior Series A-1, 7.40% due 11/01/2027 3,377
NR* Aa2 3,160 Colorado HFA, S/F Project, AMT, Senior Series C-1, 7.65% due 12/01/2025 3,572
AAA Aaa 16,000 Denver, Colorado, City and County Airport, Revenue Refunding Bonds,
Series E, 5.25% due 11/15/2023 (c) 16,125
AAA NR* 7,000 Larimer County, Colorado, S/F Mortgage Revenue Bonds, Series A, 5.24%**
due 8/01/2015 (j) 2,919
A1+ VMIG1+ 2,000 Moffat County, Colorado, PCR, Refunding (Pacificorp Projects), VRDN, 3.70%
due 5/01/2013 (a)(d) 2,000
===================================================================================================================================
Connecticut-- AA- A1 2,000 Connecticut State Health and Educational Facilities Authority Revenue
1.2% Bonds (Nursing Home Program--AHF/Hartford), 7.125% due 11/01/2024 2,316
AAA Aaa 3,500 Connecticut State Special Tax Obligation Revenue Bonds, Series B, 6.25%
due 10/01/2014 (b) 3,886
===================================================================================================================================
Delaware--0.5% AAA Aaa 2,000 Delaware Transportation Authority, Transportation System Revenue Bonds,
Senior Series, 7% due 7/01/2004 (b)(g) 2,345
===================================================================================================================================
Florida--6.3% AAA Aaa 11,800 Gulf Breeze, Florida, Capital Funding Revenue Bonds, Series B, 4.50% due
10/01/2027 (c) 10,756
Miami--Dade County, Florida, Special Obligation Bonds (c):
AAA Aaa 25,445 Refunding, Series A, 5.62%** due 10/01/2026 5,428
AAA Aaa 9,680 Series B, 5% due 10/01/2037 9,419
AAA Aaa 7,000 Tampa, Florida, Health Systems Revenue Bonds (Catholic Health), Series
A-2, 4.875% due 11/15/2028 (d) 6,683
===================================================================================================================================
Georgia--3.7% Georgia Municipal Electric Authority, Power Revenue Bonds:
AAA Aaa 7,725 Series EE, 7% due 1/01/2025 (d) 10,011
AAA Aaa 1,000 Series W, UT, 6.60% due 1/01/2018 (c) 1,207
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) 4,082
AAA Aaa 3,000 Municipal Electric Authority, Georgia, Project One, Sub-Series A,
6.50% due 1/01/2004 (d)(g) 3,409
===================================================================================================================================
Hawaii--1.3% 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) 6,648
===================================================================================================================================
Illinois--9.8% AAA Aaa 7,650 Chicago, Illinois, Wastewater Transmission Revenue Refunding Bonds,
5.125% due 1/01/2025 (b) 7,589
Chicago, Illinois, Water Revenue Bonds (b):
AAA Aaa 16,640 5% due 11/01/2020 16,306
AAA Aaa 6,000 5% due 11/01/2025 5,867
AAA Aaa 2,240 Cook County, Illinois, Chicago Community College District No. 508, COP,
UT, 8.75% due 1/01/2007 (b) 2,926
AAA Aaa 3,000 Illinois Health Facilities Authority Revenue Bonds (Servantcor Project),
Series A, 6.375% due 8/15/2021 (f) 3,327
AAA Aaa 10,000 Metropolitan Pier and Exposition Authority, Illinois, Dedicated State
Tax Revenue Refunding Bonds (McCormick Place Expansion Project), Series B,
5.44%** due 6/15/2029 (b) 1,976
AAA Aaa 9,115 Regional Transportation Authority, Illinois, Series A, 7.20% due
11/01/2020 (d) 11,744
===================================================================================================================================
Indiana--1.5% Hammond, Indiana, Multi-School Building Corporation, Refunding
(First Mortgage) (c):
AAA Aaa 3,150 5.75% due 1/15/2017 3,353
AAA Aaa 1,360 6.125% due 7/15/2019 1,499
NR* Aaa 2,635 Indiana State, HFA, S/F Mortgage Revenue Bonds (Home Mortgage Program),
AMT, Series B-2, 7.80% due 1/01/2022 (h) 2,777
===================================================================================================================================
Kansas--5.3% AAA Aaa 5,500 Burlington, Kansas, PCR, Refunding (Kansas Gas and Electric Company
Project), 7% due 6/01/2031 (c) 6,020
AAA Aaa 14,740 Kansas City, Kansas, Utility System Revenue Bonds, RITR, Series 1, 8.77%
due 9/01/2023 (b)(i) 18,462
AAA Aaa 2,500 Wamego, Kansas, PCR, Refunding (Kansas Gas and Electric Company Project),
7% due 6/01/2031 (c) 2,736
===================================================================================================================================
Louisiana--1.0% AAA Aaa 4,340 Louisiana Public Facilities Authority, Revenue Refunding Bonds (Jefferson
Parish Eastbank Project), 7.70% due 8/01/2010 (b) 4,637
A1+ VMIG1+ 500 Louisiana State Offshore Terminal Authority, Deepwater Port Revenue
Refunding Bonds (Loop Inc.--First Stage), VRDN, Series A, 3.70% due
9/01/2008 (a) 500
===================================================================================================================================
Maine--0.6% NR* Aa2 3,000 Maine State Housing Authority, Mortgage Purchase, AMT, Series C-2, 6.875%
due 11/15/2023 3,213
===================================================================================================================================
Massachusetts-- AAA Aaa 1,915 Massachusetts State Port Authority Revenue Bonds, AMT, Series A, 7.50%
due 7/01/2020 (b) 2,083
15.8% AAA Aaa 54,090 Massachusetts State Turnpike Authority, Metropolitan Highway System
Revenue Bonds, Series A, 5% due 1/01/2037 (c) 52,377
AAA Aaa 7,500 Massachusetts State Turnpike Authority, Western Turnpike Revenue Bonds,
Series A, 5.55% due 1/01/2017 (c) 7,608
AAA Aaa 20,000 Massachusetts State Water Resource Authority, General Revenue Bonds,
Series A, 4.75% due 8/01/2037 (f) 18,592
===================================================================================================================================
Michigan--2.8% AAA Aaa 10,000 Michigan State Building Authority, Revenue Refunding Bonds, Series I,
6.25% due 10/01/2020 (c) 10,797
AAA Aaa 3,000 Monroe County, Michigan, PCR (Detroit Edison Company Project--Monroe and
Fermi Plants), AMT, Series 1, 7.65% due 9/01/2020 (b) 3,287
===================================================================================================================================
Minnesota--0.3% A1+ VMIG1+ 300 Duluth, Minnesota, Tax Increment Revenue Bonds (Lake Superior Paper),
VRDN, 3.55% due 9/01/2010 (a) 300
AA A1 1,000 Minneapolis, Minnesota, Community Development Agency, PCR (Northern States
Power Company Project), VRDN, 3.60% due 3/01/2011 (a) 1,000
===================================================================================================================================
Missouri--4.6% AAA Aaa 3,000 Kansas City, Missouri, Airport Revenue Bonds (General Improvement),
Series B, 6.875% due 9/01/2004 (f)(g) 3,484
AAA Aaa 20,385 Kansas City, Missouri, Municipal Assistance Corporation, Revenue Refunding
Bonds (Leasehold--H. Roe Bartle), Series A, 5% due 4/15/2020 (c) 20,141
===================================================================================================================================
Montana--0.7% AAA Aaa 2,185 Forsyth, Montana, PCR, Refunding (Puget Sound Power and Light), AMT,
Series B, 7.25% due 8/01/2021 (d) 2,413
BBB Baa2 1,370 Lewis and Clark County, Montana, Environmental Revenue Refunding Bonds
(Asarco Inc. Project), 5.60% due 1/01/2027 1,398
===================================================================================================================================
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) 3,320
===================================================================================================================================
New Jersey--1.8% 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 3,768
AAA Aaa 5,000 Series K, 6.375% due 10/01/2026 5,298
===================================================================================================================================
</TABLE>
6 & 7
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1998
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
New Mexico--1.0% AAA Aaa $2,375 Albuquerque, New Mexico, Airport Revenue Bonds, AMT, Series A, 6.60% due
7/01/2016 (d) $ 2,610
AAA Aaa 2,300 Santa Fe, New Mexico, Revenue Bonds, Series A, 6.30% due 6/01/2004 (d)(g) 2,569
===================================================================================================================================
New York--6.1% New York City, New York, GO, UT:
BBB+ Baa1 2,875 Refunding, Series F, 5% due 8/01/2013 2,771
BBB+ Baa1 900 Series D, 9.50% due 8/01/2002 1,059
BBB+ Baa1 2,000 Series L, 5.75% due 8/01/2013 2,100
A- A2 10,000 New York City, New York, Municipal Water Finance Authority, Water and
Sewer System Revenue Bonds, Series D, 4.75% due 6/15/2025 9,360
A1+ VMIG1+ 1,400 New York State Dormitory Authority Revenue Bonds (Cornell University),
VRDN, Series B, 3.50% due 7/01/2025 (a) 1,400
AAA Aaa 3,500 New York State Local Government Assistance Corporation, Refunding,
Series B, 4.875% due 4/01/2020 (c) 3,387
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) 4,933
Port Authority of New York and New Jersey, Special Obligation Revenue
Bonds (Versatile Structure Obligation), VRDN (a):
A1+ VMIG1+ 5,600 Refunding, Series 2, 3.55% due 5/01/2019 5,600
A1+ VMIG1+ 400 Series 3, 3.60% due 6/01/2020 400
===================================================================================================================================
North Carolina-- A-1 VMIG1+ 3,500 Charlotte, North Carolina, Airport Revenue Refunding Bonds, VRDN, AMT,
1.0% Series A, 3.60% due 7/01/2017 (a)(c) 3,500
A1+ NR* 1,600 Raleigh-Durham, North Carolina, Airport Authority, Special Facility
Revenue Refunding Bonds (American Airlines), VRDN, Series A, 3.65% due
11/01/2015 (a) 1,600
===================================================================================================================================
North Dakota-- AAA Aaa 3,000 Bismarck, North Dakota, Hospital Revenue Refunding and Improvement Bonds
0.6% (MedCenter One, Inc.), 7.50% due 5/01/2013 (e) 3,182
===================================================================================================================================
Ohio--1.0% AAA Aaa 2,500 North Canton, Ohio, City School District Improvement Bonds, UT, 6.70% due
12/01/2019 (d) 2,867
AAA Aaa 2,150 Ohio State Air Quality Development Authority, PCR, Refunding (Ohio Edison),
Series A, 7.45% due 3/01/2016 (b) 2,323
===================================================================================================================================
Oklahoma--0.1% AAA Aaa 515 Muskogee County, Oklahoma, Home Financing Authority, S/F Mortgage
Revenue Refunding Bonds, Series A, 7.60% due 12/01/2010 (b) 541
===================================================================================================================================
Pennsylvania-- A1+ P1 400 Delaware County, Pennsylvania, IDA, PCR, Refunding (British Petroleum
3.8% 3.8% Exploration and Oil), VRDN, 3.65% due 10/01/2019 (a) 400
A Baa1 6,000 Delaware County, Pennsylvania, IDA, Revenue Refunding Bonds (Resource
Recovery Facility), Series A, 6.10% due 7/01/2013 6,519
AAA Aaa 2,000 Pennsylvania State Higher Educational Assistance Agency, Student Loan
Revenue Bonds, RIB, AMT, Series B, 10.788% due 3/01/2020 (c)(i) 2,290
A1+ NR* 1,500 Pennsylvania State Higher Educational Facilities Authority, Revenue
Refunding Bonds (Carnegie Mellon University), VRDN, Series C, 3.60% due
11/01/2029 (a) 1,500
AAA Aaa 8,850 Philadelphia, Pennsylvania, Water and Wastewater Revenue Bonds, Series A,
5% due 8/01/2022 (d) 8,691
===================================================================================================================================
South Dakota-- AAA Aaa 7,000 South Dakota State Health and Educational Facilities Authority, Revenue
1.7% Refunding Bonds (McKennan Hospital), Series A, 7.625% due 1/01/2008 (c)(g) 8,599
===================================================================================================================================
Tennessee--2.0% AAA Aaa 3,225 Metropolitan Nashville Airport Authority, Tennessee, Airport Revenue Bonds,
Series C, 6.60% due 7/01/2015 (b) 3,516
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) 6,906
===================================================================================================================================
Texas--3.8% AAA Aaa 2,750 Bexar, Texas, Metropolitan Water District, Waterworks System Revenue
Refunding Bonds, 6.35% due 5/01/2025 (c) 3,092
A1+ Aaa 300 Harris County, Texas, Industrial Development Corporation, PCR (Exxon
Project), DATES, Series 1984-B, 3.60% due 3/01/2024 (a) 300
AAA Aaa 4,700 Houston, Texas, Water and Sewer Systems Revenue Bonds, Junior Lien,
Series C, 6.375% due 12/01/2017 (d) 5,098
AAA Aaa 10,420 Texas Water Resource Finance Authority Revenue Bonds, 7.50% due
8/15/2013 (d) 10,961
===================================================================================================================================
Virginia--3.4% AAA Aaa 6,000 Loudoun County, Virginia, COP, 6.80% due 3/01/2014 (f) 6,774
Virginia State, HDA, Commonwealth Mortgage, AMT:
AAA Aaa 5,000 Series A, Sub-Series A-4, 6.45% due 7/01/2028 (c) 5,363
AA+ Aa 5,000 Series B, Sub-Series B-3, 6.75% due 7/01/2021 5,273
===================================================================================================================================
Washington--1.5% AAA Aaa 7,790 University of Washington, University Revenue Refunding Bonds (Housing
and Dining), Junior Lien, 5% due 12/01/2021 (c) 7,651
===================================================================================================================================
Total Investments (Cost--$490,302)--102.6% 522,785
Liabilities in Excess of Other Assets--(2.6%) (13,257)
--------
Net Assets--100.0% $509,528
========
===================================================================================================================================
</TABLE>
(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,
1998.
(b) FGIC Insured.
(c) MBIA Insured.
(d) AMBAC Insured.
(e) BIG Insured.
(f) FSA Insured.
(g) Prerefunded.
(h) GNMA Collateralized.
(i) 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
January 31, 1998.
(j) Escrowed to maturity.
* 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. Ratings of
issues shown have not been audited by Deloitte & Touche llp.
See Notes to Financial Statements.
Quality Profile
The quality ratings of securities in the Fund as of January 31, 1998 were as
follows:
--------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
--------------------------------------------
AAA/Aaa........................... 83.2%
AA/Aa............................. 5.2
A/A............................... 3.7
BBB/Baa........................... 1.4
Other+............................ 6.5
--------------------------------------------
+ Temporary investments in short-term municipal securities.
8 & 9
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1998
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of January 31, 1998
===================================================================================================================================
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$490,301,623) (Note 1a) .................. $522,784,726
Receivables:
Securities sold ................................................................ $ 8,747,834
Interest ....................................................................... 5,566,124 14,313,958
------------
Prepaid expenses and other assets ................................................ 16,459
------------
Total assets ..................................................................... 537,115,143
------------
===================================================================================================================================
Liabilities: Payables:
Securities purchased ............................................................. 25,681,933
Custodian bank (Note 1f) ......................................................... 1,521,159
Investment adviser (Note 2) ...................................................... 217,208
Dividends to shareholders (Note 1e) .............................................. 32,473 27,452,773
------------
Accrued expenses and other liabilities ............................................. 133,946
------------
Total liabilities .................................................................. 27,586,719
------------
===================================================================================================================================
Net Assets: Net assets $509,528,424
============
===================================================================================================================================
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 (29,039,176 shares issued and outstanding) $2,903,918
Paid-in capital in excess of par ................................................. 319,486,540
Undistributed investment income--net ............................................. 3,634,396
Undistributed realized capital gains on investments--net ......................... 1,020,467
Unrealized appreciation on investments--net ...................................... 32,483,103
------------
Total--Equivalent to $12.38 net asset value per share of Common Stock
(market price--$12.4375) ....................................................... 359,528,424
------------
Total capital .................................................................... $509,528,424
============
===================================================================================================================================
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended January 31, 1998
===================================================================================================================================
<C> <S> <C> <C>
Investment Interest and amortization of premium and discount earned ......................... $ 28,882,083
Income (Note 1d):
===================================================================================================================================
Expenses: Investment advisory fees (Note 2) ................................................ $ 2,479,958
Commission fees (Note 4) ......................................................... 379,580
Transfer agent fees .............................................................. 111,396
Accounting services (Note 2) ..................................................... 89,702
Professional fees ................................................................ 83,677
Directors' fees and expenses ..................................................... 45,653
Printing and shareholder reports ................................................. 36,758
Listing fees ..................................................................... 32,235
Custodian fees ................................................................... 29,961
Pricing fees ..................................................................... 12,099
Other ............................................................................ 20,419
------------
Total expenses ................................................................... 3,321,438
------------
Investment income--net ........................................................... 25,560,645
------------
===================================================================================================================================
Realized & Realized gain on investments--net ................................................ 9,934,890
Unrealized Gain Change in unrealized appreciation on investments--net ............................ 8,858,515
on Investments-- ------------
Net (Notes 1b, Net Increase in Net Assets Resulting from Operations ............................. $ 44,354,050
1d & 3): ============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended
January 31,
------------------
Increase (Decrease) in Net Assets: 1998 1997
===================================================================================================================================
<C> <S> <C> <C>
Operations: Investment income--net ............................................................. $ 25,560,645 $ 26,207,501
Realized gain (loss) on investments--net ........................................... 9,934,890 (4,884,441)
Change in unrealized appreciation on investments--net .............................. 8,858,515 (11,265,687)
------------ ------------
Net increase in net assets resulting from operations ............................... 44,354,050 10,057,373
------------ ------------
===================================================================================================================================
Dividends & Investment income--net:
Distributions Common Stock ..................................................................... (20,605,408) (20,745,023)
to Shareholders Preferred Stock .................................................................. (5,358,480) (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 .................................................................. (25,963,888) (29,069,343)
------------ ------------
===================================================================================================================================
Common Stock Value of shares issued to Common Stock shareholders in reinvestment of
Transactions dividends ........................................................................ 387,550 --
(Note 4): ------------ ------------
===================================================================================================================================
Net Assets: Total increase (decrease) in net assets ............................................ 18,777,712 (19,011,970)
Beginning of year .................................................................. 490,750,712 509,762,682
------------ ------------
End of year* ....................................................................... $509,528,424 $490,750,712
============ ============
===================================================================================================================================
*Undistributed investment income--net ............................................... $ 3,634,396 $ 4,037,639
============ ============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements
10 & 11
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1998
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived
from information provided in the financial statements.
<TABLE>
<CAPTION>
For the Year Ended January 31,
------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996+ 1995 1994
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ..................... $ 11.75 $ 12.40 $ 11.17 $ 12.99 $ 12.29
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ................................. .88 .90 .92 .96 1.01
Realized and unrealized gain (loss) on investments--net .64 (.54) 1.23 (1.71) 1.09
-------- -------- -------- -------- --------
Total from investment operations ....................... 1.52 .36 2.15 (.75) 2.10
-------- -------- -------- -------- --------
Less dividends and distributions to Common shareholders:
Investment income--net ................................. (.71) (.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 ........................................... (.71) (.83) (.72) (.91) (1.28)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Investment income--net ................................. (.18) (.18) (.20) (.16) (.12)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity ............... (.18) (.18) (.20) (.16) (.12)
-------- -------- -------- -------- --------
Net asset value, end of year ........................... $ 12.38 $ 11.75 $ 12.40 $ 11.17 $ 12.99
======== ======== ======== ======== ========
Market price per share, end of year .................... $12.4375 $ 11.00 $ 11.375 $ 10.25 $ 13.125
======== ======== ======== ======== ========
==================================================================================================================================
Total Investment Based on market price per share ........................ 20.26% 4.28% 18.67% (14.88%) 9.28%
Return:* ======== ======== ======== ======== ========
Based on net asset value per share ..................... 12.06% 2.18% 18.71% (6.27%) 16.61%
======== ======== ======== ======== ========
==================================================================================================================================
Ratios to Average Expenses ............................................... .0.67% .67% .68% .69% .68%
Net Assets:** ======== ======== ======== ======== ========
Investment income--net ................................. 5.16% 5.27% 5.42% 5.76% 5.54%
======== ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, net of Preferred Stock, end of year
Data: (in thousands) ......................................... $359,528 $340,751 $359,763 $324,122 $376,726
======== ======== ======== ======== ========
Preferred Stock outstanding, end of year (in thousands) $150,000 $150,000 $150,000 $150,000 $150,000
======== ======== ======== ======== ========
Portfolio turnover ..................................... 128.79% 138.12% 114.30% 60.88% 41.61%
======== ======== ======== ======== ========
==================================================================================================================================
Leverage: Asset coverage per $1,000 .............................. $ 3,397 $ 3,272 $ 3,398 $ 3,161 $ 3,512
======== ======== ======== ======== ========
==================================================================================================================================v
Dividends Per Series A--Investment income--net ....................... $ 891 $ 860 $ 961 $ 752 $ 597
Share on ======== ======== ======== ======== ========
Preferred Stock Series B--Investment income--net ....................... $ 900 $ 865 $ 959 $ 764 $ 608
Outstanding:++ ======== ======== ======== ======== ========
Series C--Investment income--net ....................... $ 889 $ 876 $ 971 $ 755 $ 580
======== ======== ======== ======== ========
==================================================================================================================================
</TABLE>
* 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. See Notes to Financial Statements.
** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Based on average shares outstanding.
++ 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
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.
o 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.
o Options--The Fund is authorized to write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market 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.
(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.
(f) Custodian bank--The Fund recorded an amount payable to the Custodian Bank
reflecting an overnight overdraft which resulted from a failed trade which
settled the next day.
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
12 & 13
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
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, 1998 were $620,312,978 and $624,867,397, respectively.
Net realized and unrealized gains as of January 31, 1998 were as follows:
- -------------------------------------------------------
Realized Unrealized
Gains Gains
- -------------------------------------------------------
Long-term investments...... $ 9,934,890 $32,483,103
----------- -----------
Total...................... $ 9,934,890 $32,483,103
=========== ===========
- -------------------------------------------------------
As of January 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $32,266,156, of which $33,409,930 is related to appreciated
securities and $1,143,774 is related to depreciated securities. The aggregate
cost of investments at January 31, 1998 for Federal income tax purposes was
$490,518,570.
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
Shares issued and outstanding during the year ended January 31, 1998 increased
by 31,406 as a result of dividend reinvestment and during the year ended January
31, 1997 remained constant.
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, 1998 were as follows: Series A, 3.40%; Series B, 3.44%;
and Series C, 3.38%.
For the year ended January 31, 1998, 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, 1998, Merrill Lynch, Pierce, Fenner
& Smith Inc., an affiliate of FAM, received $171,630 as commissions.
5. Subsequent Event:
On February 5, 1998, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.058023 per share,
payable on February 26, 1998 to shareholders of record as of February 19, 1998.
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, 1998, 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.
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 the 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, 1998 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 financial highlights present
fairly, in all material respects, the financial position of MuniEnhanced Fund,
Inc. as of January 31, 1998, 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 6, 1998
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid monthly by MuniEnhanced
Fund, Inc. during its taxable year ended January 31, 1998 qualify as tax-exempt
interest dividends for Federal income tax purposes.
Additionally, there were no capital gains distributed by the Fund during the
year.
Please retain this information for your records.
14 & 15
<PAGE>
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
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 10874--1/98
[RECYCLED LOGO] Printed on post-consumer recycled paper
