MuniEnhanced
Fund, Inc.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
July 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.
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, interest rates on inverse
floaters will decrease when short-term interest rates increase and increase when
short-term interest rates decrease. Investments in inverse floaters may be
characterized as derivative securities and may subject the Fund to the risks of
reduced or eliminated interest payments and losses on invested principal. In
addition, inverse floaters have the effect of providing investment leverage and,
as a result, the market value of such securities will generally be more volatile
than that of fixed rate, tax-exempt securities.
<PAGE>
MuniEnhanced Fund, Inc., July 31, 1998
TO OUR SHAREHOLDERS
For the six-month period ended July 31, 1998, the Common Stock of MuniEnhanced
Fund, Inc. earned $0.328 per share income dividends, which included earned and
unpaid dividends of $0.056. This represents a net annualized yield of 5.43%,
based on a month-end per share net asset value of $12.20. Over the same period,
total investment return on the Fund's Common Stock was +1.40%, based on a change
in per share net asset value from $12.38 to $12.20, and assuming reinvestment of
$0.331 per share income dividends.
For the six-month period ended July 31, 1998, the Fund's Preferred Stock had an
average dividend yield as follows: Series A, 3.77%; Series B, 3.30%; and Series
C, 3.53%.
The Municipal Market Environment
During the six months ended July 31, 1998, long-term tax-exempt revenue bond
yields were little changed. Thus far this year, the near absence of inflationary
pressures continued to support low interest rates. However, consistently strong
domestic economic growth has caused some investors to fear that the Federal
Reserve Board will be forced eventually to raise short-term interest rates. Such
action would be taken to ensure that the US economy's present rate of growth
would decelerate before any inflationary pressures could develop. These concerns
served to push bond yields modestly higher by mid-April.
However, the weakening financial conditions in many Asian countries subsequently
calmed investor fears of Federal Reserve Board intervention, and fixed-income
prices again moved higher. As measured by the Bond Buyer Revenue Bond Index,
long-term uninsured municipal bond yields fell approximately 5 basis points
(0.05%) to end the six-month period at 5.36%. As in late 1997 and early 1998, US
Treasury bond yields benefited from a "flight to quality" as foreign investors
were drawn to the relative safe haven of US Government securities. Long-term US
Treasury bond yields declined approximately 10 basis points to end the six-month
period at 5.71%.
Thus far in 1998, the municipal bond market has experienced unexpectedly strong
supply pressures. These supply pressures have prevented tax-exempt bond yields
from declining as much as US Treasury bond yields. During the first seven months
of 1998, almost $153 billion in new tax-exempt bonds were underwritten, an
increase of almost 50% compared to the same period a year ago. During the most
recent three months, municipalities issued over $75 billion in new securities,
an increase of nearly 35% compared to the same three-month period in 1997.
Additionally, corporate issuers have also viewed current interest rate levels as
an opportunity to issue significant amounts of taxable securities. For the first
half of 1998, over $500 billion in investment-grade corporate bonds have been
underwritten, an increase of more than 70% compared to the same period a year
ago. This sizeable corporate bond issuance has tended to both support generally
higher fixed-income yields and reduce the demand for tax-exempt bonds.
However, the recent pace of new municipal bond issuance is unlikely to be
maintained. Continued increases in bond issuance will require lower and lower
municipal bond yields to generate the economic savings necessary for additional
tax-exempt bond refinancings. Preliminary estimates for 1998 total municipal
bond issuance are in the $200 billion-$225 billion range. These estimates
suggest that recent supply pressures are likely to abate later in the year.
Recently, municipal bond investors received approximately $30 billion in June
and July in coupon payments, bond maturities and proceeds from early
redemptions. The demand generated by these assets has helped to offset the
increase in supply seen thus far this year.
The continued impact of the Asian financial crisis on the US domestic economy's
future growth remains unclear. Current Asian economic conditions continue to
reflect ongoing weakness. Recent trade data indicated that reduced US exports to
these countries might have lowered US economic growth by as much as 2% in the
first half of 1998. Since further trade deterioration is possible in the coming
months, we do not believe the Federal Reserve Board will be willing to raise
interest rates, barring a dramatic and unexpected resurgence of domestic
inflation.
These factors suggest that over the near term, interest rates in general are
unlikely to rise by any appreciable amount. Recent supply pressures have caused
municipal bond yield ratios to rise relative to US Treasury bond yields. At July
31, 1998, long-term tax-exempt bond yields were at attractive yield ratios
relative to US Treasury securities of comparable maturities (over 90%), well in
excess of their expected range of 85%-88%. Tax-exempt bond yield ratios rarely
exceeded 90% in the 1980s and 1990s. Previous instances have usually been
associated with potential changes in Federal tax codes that would have adversely
affected the tax-favored status of municipal bonds. The present situation has
developed largely because of a temporary supply imbalance. These imbalances
should soon be corrected as tax-exempt bond issuance slows from its current
rapid pace later this year. Any further pressure on the municipal market may
well represent a very attractive investment opportunity.
Portfolio Strategy
During the six-month period ended July 31, 1998, we maintained a constructive
outlook toward the municipal market because we believed that the robust economic
growth seen in late 1997 and thus far this year would be offset by the
combination of the extremely constructive inflationary environment and
deteriorating economic conditions in Asia. Consequently, we expected tax-exempt
bond yields to trade in a relatively narrow range, with a bias toward lower bond
yields. We maintained a fully invested position in order to seek to enhance
shareholder income and participate in any investment appreciation that arose.
Looking ahead, we expect little change to the Fund's present structure. Current
economic fundamentals and a strong domestic economy offset by equally favorable
inflationary pressures suggest that interest rates could trade in a narrow
range. Should economic weakness in Asia reverse in the coming months--which
would remove constraints to US economic growth--we would expect to adopt a more
defensive posture. We expect to remain fully invested to seek to generate an
optimal level of income.
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 ahead.
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
September 1, 1998
2 & 3
<PAGE>
MuniEnhanced Fund, Inc., July 31, 1998
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)(h) $ 2,844
==================================================================================================================================
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 5,549
==================================================================================================================================
California--6.6% AAA Aaa 5,250 Anaheim, California, Public Financing Authority, Lease
Revenue Bonds (Public Improvements Project), Senior
Series A, 6% due 9/01/2024 (f) 5,977
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 (h) 2,883
A+ A1 2,500 Contra Costa County, California, COP, 6.50% due 8/01/2004 (h) 2,841
AAA Aaa 8,235 Los Angeles County, California, Transportation Commission,
Sales TaxRevenue Refunding Bonds, Series B, 6.50% due
7/01/2015 (b) 8,893
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) 1,620
AAA Aaa 1,500 Northern California Transmission Revenue Bonds (California-
Oregon Transmission Project), Series A, 6.50% due 5/01/2016 (c) 1,637
AAA Aaa 2,750 San Diego, California, Special Tax Refunding Bonds (Community
Facilities District No. 1), 4.75% due 9/01/2020 (c) 2,599
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) 4,617
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)(h) 2,318
==================================================================================================================================
Colorado--7.5% AA Aa2 2,000 Colorado Housing Finance Authority, Refunding (M/F
Insured Mortgage), Series C-3,5.65% due 10/01/2015 2,059
NR* Aa2 2,990 Colorado Housing Finance Authority, S/F Program, AMT,
Senior Series A-1, 7.40% due 11/01/2027 3,372
NR* Aa2 2,895 Colorado Housing Finance Authority, S/F Project, AMT,
Senior Series C-1, 7.65% due 12/01/2025 3,250
AA Aa2 16,415 Colorado Springs, Colorado, Utilities Revenue Bonds, RITR,
Series 19, 6.695% due 11/15/2026 (i) 16,927
AAA Aaa 12,025 Denver, Colorado, City and County Airport Revenue Bonds,
RITR, Series 13, 6.52% due 11/15/2023 (c)(i) 12,084
==================================================================================================================================
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 10/01/2004 (b)(h) 3,909
==================================================================================================================================
Delaware--0.5% AAA Aaa 2,000 Delaware Transportation Authority, Transportation System
Revenue Bonds, 7% due 7/01/2004 (b)(h) 2,318
==================================================================================================================================
Florida--6.5% AAA Aaa 10,000 Florida State Turnpike Authority, Turnpike Revenue Bonds
(Department of Transportation), Series A, 4.50% due
7/01/2027 (b) 9,028
AAA Aaa 25,445 Miami--Dade County, Florida, Special Obligation Bonds,
Refunding, Series A, 5.62%** due 10/01/2026 (c) 5,547
Tampa, Florida, Health System Revenue Bonds (Catholic Health):
AAA Aaa 3,000 Series A-1, 4.875% due 11/15/2018 (c) 2,882
AAA Aaa 4,000 Series A-2, 4.875% due 11/15/2028 (d) 3,785
AAA Aaa 12,300 Series A-3, 4.75% due 11/15/2028 (c) 11,407
==================================================================================================================================
Georgia--5.3% BBB- Baa3 8,250 Fulton County, Georgia, Development Authority, Special Facilities
Revenue Bonds (Delta Airlines Inc. Project), AMT, 5.45% due
5/01/2023 8,116
Georgia Municipal Electric Authority, Power Revenue Bonds:
AAA Aaa 7,725 Series EE, 7% due 1/01/2025 (d) 9,828
AAA Aaa 1,000 Series W, UT, 6.60% due 1/01/2018 (c) 1,189
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)(h) 4,039
AAA Aaa 3,000 Municipal Electric Authority, Georgia, Project One, Sub-Series
A, 6.50% due 1/01/2004 (d)(h) 3,374
==================================================================================================================================
Hawaii--3.2% 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) 6,574
AAA Aaa 10,295 Hawaii State, GO, Series CR, 4.75% due 4/01/2018 (c) 9,801
==================================================================================================================================
Illinois--7.0% AAA Aaa 16,640 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2020 (b) 16,139
AAA Aaa 2,240 Cook County, Illinois, Chicago Community College District No.
508, COP, UT, 8.75% due 1/01/2007 (b) 2,877
AAA Aaa 3,000 Illinois Health Facilities Authority Revenue Bonds (Servantcor
Project), Series A, 6.375% due 8/15/2006 (f)(h) 3,402
AAA Aaa 10,115 Regional Transportation Authority, Illinois, Series A, 7.20% due
11/01/2020 (d) 12,873
==================================================================================================================================
Indiana--1.5% Hammond, Indiana, Multi-School Building Corporation, Refunding
(First Mortgage) (c):
AAA Aaa 3,150 5.75% due 1/15/2017 3,334
AAA Aaa 1,360 6.125% due 7/15/2019 1,484
NR* Aaa 2,345 Indiana State Housing Finance Authority, S/F Mortgage Revenue
Bonds (Home Mortgage Program), AMT, Series B-2, 7.80% due
1/01/2022 (g) 2,457
==================================================================================================================================
Kansas--5.5% AAA Aaa 5,500 Burlington, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (c) 5,972
AAA Aaa 14,740 Kansas City, Kansas, Utility System Revenue Bonds, RITR,
Series 1, 8.77% due 9/01/2023 (b)(i) 18,081
NR* Aaa 6,000 Sedgwick and Shawnee Counties, Kansas, S/F Revenue Bonds
(Mortgage-Backed Securities Program), AMT, Series A-1,
5.60%** due 12/01/2029 (g) 1,066
AAA Aaa 2,500 Wamego, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (c) 2,708
==================================================================================================================================
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) 4,564
==================================================================================================================================
==================================================================================================================================
</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
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
M/F Multi-Family
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., July 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>
Maine--0.6% AA Aa2 $ 2,660 Maine State Housing Authority, Mortgage Purchase, AMT, Series
C-2, 6.875% due 11/15/2023 $ 2,845
==================================================================================================================================
Massachusetts-- AAA Aaa 17,045 Massachusetts Bay Transportation Authority, Refunding (General
10.1% Transportation System), Series A, 4.75% due 3/01/2021 (c) 16,075
AAA Aaa 1,915 Massachusetts State Port Authority Revenue Bonds, AMT, Series
A, 7.50% due 7/01/2020 (b) 2,058
AAA Aaa 27,250 Massachusetts State Turnpike Authority, Western Turnpike
Revenue Bonds, Series A, 5.55% due 1/01/2017 (c) 27,879
AAA Aaa 5,500 Massachusetts State Water Resources Authority, Refunding,
Series B, 4.50% due 8/01/2022 (f) 4,990
==================================================================================================================================
Michigan--4.1% AAA Aaa 10,000 Michigan State Building Authority, Revenue Refunding Bonds,
Series I, 6.25% due 10/01/2020 (c) 10,727
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) 3,246
AAA Aaa 7,025 Wayne Charter County, Michigan, Airport Revenue Bonds
(Detroit Metropolitan--Wayne County), AMT, Series A, 5% due
12/01/2028 (c) 6,688
==================================================================================================================================
Minnesota--2.1% Beltrami County, Minnesota, Environmental Control Revenue
Bonds (Northwood Panelboard Company Project), VRDN (a):
AA+ NR* 400 3.75% due 7/01/2025 400
AA+ NR* 1,500 Refunding, 3.70% due 12/01/2021 1,500
AAA Aaa 7,210 Minneapolis and Saint Paul, Minnesota, Metropolitan Airports
Commission, Airport Revenue Bonds, Series A, 5% due
1/01/2022 (d) 7,041
AA+ Aa2 2,025 Saint Paul, Minnesota, GO (Block 39 Project), 4.75% due 2/01/2025 1,884
==================================================================================================================================
Missouri--0.7% AAA Aaa 3,000 Kansas City, Missouri, Airport Revenue Bonds (General
Improvement), Series B, 6.875% due 9/01/2004 (f)(h) 3,443
==================================================================================================================================
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) 2,386
BBB Baa2 1,370 Lewis and Clark County, Montana, Environmental Revenue
Refunding Bonds (Asarco Inc. Project), 5.60% due 1/01/2027 1,385
==================================================================================================================================
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) 3,282
==================================================================================================================================
New Jersey--1.9% A1+ VMIG1+ 790 New Jersey Sports and Exposition Authority Revenue Bonds
(State Contract), VRDN, Series C, 3.25% due 9/01/2024 (a)(c) 790
New Jersey State Housing and Mortgage Finance Agency
Revenue Bonds (Home Buyer), AMT (c):
AAA Aaa 3,500 Series D, 7.70% due 10/01/2029 3,642
AAA Aaa 5,000 Series K, 6.375% due 10/01/2026 5,346
==================================================================================================================================
New Mexico--1.0% AAA Aaa 2,375 Albuquerque, New Mexico, Airport Revenue Bonds, AMT,
Series A, 6.60% due 7/01/2016 (d) 2,581
AAA Aaa 2,300 Santa Fe, New Mexico, Revenue Bonds, Series A, 6.30% due
6/01/2004 (d)(h) 2,541
==================================================================================================================================
New York--9.6% Metropolitan Transportation Authority of New York, Revenue
Bonds, Series B (b):
AAA Aaa 6,550 (Commuter Facilities), 4.75% due 7/01/2026 6,127
AAA Aaa 10,000 (Transportation Facilities), 4.75% due 7/01/2026 9,355
A- A3 2,000 New York City, New York, GO, UT, Series L, 5.75% due 8/01/2013 2,109
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, Series D:
AAA Aaa 15,000 4.75% due 6/15/2025 (b) 14,048
AAA Aaa 10,000 4.75% due 6/15/2025 (c) 9,366
AAA Aaa 2,500 New York City, New York, Transitional Finance Authority
Revenue Bonds (Future Tax Secured), Series B, 4.75% due
11/15/2018 (b) 2,381
AAA Aaa 5,000 New York State Dormitory Authority Revenue Bonds (Mental
Health Service Facilities Improvement), Series D, 5% due
8/15/2017 (c) 4,915
NR* VMIG1+ 200 New York State HFA, Housing Revenue Bonds (East 84th Street),
VRDN, AMT, Series A, 3.55% due 11/01/2028 (a) 200
==================================================================================================================================
North Carolina-- A1 VMIG1+ 2,040 Charlotte, North Carolina, Airport Revenue Refunding Bonds,
0.5% VRDN, AMT, Series A, 3.60% due 7/01/2017 (a)(c) 2,040
A1+ NR* 600 Raleigh-Durham, North Carolina, Airport Authority, Special
Facility Revenue Refunding Bonds (American Airlines), VRDN,
Series A, 3.65% due 11/01/2015 (a) 600
==================================================================================================================================
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) 3,135
==================================================================================================================================
Ohio--2.2% AAA Aaa 6,235 Hamilton County, Ohio, Sales Tax (Hamilton County Football
Project), Series A, 4.75% due 12/01/2017 (c) 5,939
AAA Aaa 2,500 North Canton, Ohio, City School District Improvement Bonds,
UT, 6.70% due 12/01/2004 (d)(h) 2,875
AAA Aaa 2,150 Ohio State Air Quality Development Authority, PCR, Refunding
(Ohio Edison), Series A, 7.45% due 3/01/2016 (b) 2,294
==================================================================================================================================
Pennsylvania--2.1% A Baa1 6,000 Delaware County, Pennsylvania, IDA, Revenue Refunding Bonds
(Resource Recovery Facility), Series A, 6.10% due 7/01/2013 6,450
AAA Aaa 2,000 Pennsylvania State Higher Educational Assistance Agency, Student
Loan Revenue Bonds, RIB, AMT, Series B, 10.889% due
3/01/2020 (c)(i) 2,250
AAA Aaa 1,825 Pennsylvania State Higher Educational Facilities Authority
Revenue Bonds (Drexel University), 4.80% due 5/01/2028 (c) 1,720
==================================================================================================================================
South Dakota--1.7% AAA Aaa 7,000 South Dakota State Health and Educational Facilities Authority,
Revenue Refunding Bonds (McKennan Hospital), Series A,
7.625% due 1/01/2008 (c)(h) 8,558
==================================================================================================================================
Tennessee--4.7% AAA Aaa 9,130 Metropolitan Government, Nashville and Davidson Counties,
Tennessee, Health and Educational Facilities Board Revenue
Bonds (Baptist Hospital Inc.), Series A, 4.875% due 11/01/2028 (c) 8,574
AAA Aaa 5,000 Metropolitan Government, Nashville and Davidson Counties,
Tennessee, Water and Sewer Revenue Refunding Bonds, Series
A, 4.75% due 1/01/2022 (b) 4,729
AAA Aaa 3,225 Metropolitan Nashville Airport Authority, Tennessee, Airport
Revenue Bonds, Series C, 6.60% due 7/01/2015 (b) 3,487
AAA Aaa 5,450 Mount Juliet, Tennessee, Public Building Authority Revenue
Bonds (Madison Suburban Utility District Loan), Series B, 7.80%
due 2/01/2004 (c)(h) 6,823
==================================================================================================================================
</TABLE>
6 & 7
<PAGE>
MuniEnhanced Fund, Inc., July 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>
Texas--5.6% AAA Aaa $ 2,750 Bexar, Texas, Metropolitan Water District, Waterworks System
Revenue Refunding Bonds, 6.35% due 5/01/2025 (c) $ 3,046
AAA Aaa 4,700 Houston, Texas, Water and Sewer Systems Revenue Bonds,
Junior Lien, Series C, 6.375% due 12/01/2017 (d) 5,057
AAA Aaa 8,640 Lower Colorado River Authority, Texas, Revenue Bonds, Junior
Lien, Series 7, 4.75% due 1/01/2028 (f) 8,082
BBB Baa2 2,500 Nueces River Authority, Texas, Environmental Improvement
Revenue Refunding Bonds (Asarco Inc. Project), 5.60% due
1/01/2027 2,525
AAA Aaa 9,305 Texas Water Resource Finance Authority Revenue Bonds, 7.50%
due 8/15/2013 (d) 9,635
==================================================================================================================================
Virginia--3.4% AAA Aaa 6,000 Loudoun County, Virginia, COP, 6.80% due 3/01/2014 (f) 6,698
Virginia State, Housing Development Authority, Commonwealth
Mortgage, AMT:
AAA Aaa 5,000 Series A, Sub-Series A-4, 6.45% due 7/01/2028 (c) 5,318
AA+ Aa 5,000 Series B, Sub-Series B-3, 6.75% due 7/01/2021 5,257
==================================================================================================================================
Total Investments (Cost--$478,358)--99.7% 502,839
Other Assets Less Liabilities--0.3% 1,384
--------
Net Assets--100.0% $504,223
========
==================================================================================================================================
</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 July 31, 1998.
(b) FGIC Insured.
(c) MBIA Insured.
(d) AMBAC Insured.
(e) BIG Insured.
(f) FSA Insured.
(g) GNMA Collateralized.
(h) Prerefunded.
(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 July 31, 1998.
* 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.
Quality Profile
The quality ratings of securities in the Fund as of July 31, 1998 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa .............................................................. 85.4%
AA/Aa ................................................................ 8.6
A/A .................................................................. 2.2
BBB/Baa .............................................................. 2.4
Other+ ............................................................... 1.1
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of July 31, 1998
=========================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$478,357,671) (Note 1a) ........... $502,839,089
Cash ...................................................................... 76,893
Receivables:
Interest .............................................................. $ 6,740,149
Securities sold ....................................................... 1,190,815 7,930,964
------------
Prepaid expenses and other assets ......................................... 16,458
------------
Total assets .............................................................. 510,863,404
------------
=========================================================================================================================
Liabilities: Payables:
Securities purchased .................................................. 5,981,946
Dividends to shareholders (Note 1e) ................................... 359,498
Investment adviser (Note 2) ........................................... 228,472 6,569,916
------------
Accrued expenses and other liabilities .................................... 70,060
------------
Total liabilities ......................................................... 6,639,976
------------
=========================================================================================================================
Net Assets: Net assets ................................................................ $504,223,428
============
=========================================================================================================================
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 ...................................... 3,832,098
Undistributed realized capital gains on investments--net .................. 3,519,454
Unrealized appreciation on investments--net ............................... 24,481,418
------------
Total--Equivalent to $12.20 net asset value per share of Common Stock
(market price--$11.4375) .................................................. 354,223,428
------------
Total capital ............................................................. $504,223,428
============
=========================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
8 & 9
<PAGE>
MuniEnhanced Fund, Inc., July 31, 1998
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended July 31, 1998
===============================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ... $ 14,128,748
Income (Note 1d):
===============================================================================================================
Expenses: Investment advisory fees (Note 2) .......................... $ 1,259,206
Commission fees (Note 4) ................................... 191,199
Transfer agent fees ........................................ 53,999
Professional fees .......................................... 46,883
Accounting services (Note 2) ............................... 46,762
Directors' fees and expenses ............................... 22,897
Custodian fees ............................................. 17,294
Listing fees ............................................... 16,290
Printing and shareholder reports ........................... 12,001
Pricing fees ............................................... 6,695
Other ...................................................... 10,659
------------
Total expenses ............................................. 1,683,885
------------
Investment income--net ..................................... 12,444,863
------------
===============================================================================================================
Realized & Unreal- Realized gain on investments--net .......................... 2,498,987
lized Gain (Loss) on Change in unrealized appreciation on investments--net ...... (8,001,685)
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations ....... $ 6,942,165
============
===============================================================================================================
</TABLE>
See Notes to Financial Statements
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
July 31, January 31,
Increase (Decrease) in Net Assets: 1998 1998
==============================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ......................................................... $ 12,444,863 $ 25,560,645
Realized gain on investments--net .............................................. 2,498,987 9,934,890
Change in unrealized appreciation on investments--net .......................... (8,001,685) 8,858,515
------------- -------------
Net increase in net assets resulting from operations ........................... 6,942,165 44,354,050
------------- -------------
==============================================================================================================================
Dividends to Investment income--net:
Shareholders Common Stock ............................................................... (9,602,501) (20,605,408)
(Note 1e): Preferred Stock ............................................................ (2,644,660) (5,358,480)
------------- -------------
Net decrease in net assets resulting from dividends to shareholders ............ (12,247,161) (25,963,888)
------------- -------------
==============================================================================================================================
Common Stock Value of shares issued to Common Stock shareholders in reinvestment of dividends -- 387,550
Transactions ------------- -------------
(Note 4):
==============================================================================================================================
Net Assets: Total increase (decrease) in net assets ........................................ (5,304,996) 18,777,712
Beginning of period ............................................................ 509,528,424 490,750,712
------------- -------------
End of period* ................................................................. $ 504,223,428 $ 509,528,424
============= =============
==============================================================================================================================
*Undistributed investment income--net ........................................... $ 3,832,098 $ 3,634,396
============= =============
==============================================================================================================================
</TABLE>
See Notes to Financial Statements.
10 & 11
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Six
from information provided in the financial statements Months Ended For the Year Ended January 31,
July 31, --------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1998+ 1997+ 1996+ 1995
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ..................... $ 12.38 $ 11.75 $ 12.40 $ 11.17 $ 12.99
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ................................... .43 .88 .90 .92 .96
Realized and unrealized gain (loss) on investments--net .. (.19) .64 (.54) 1.23 (1.71)
-------- -------- -------- -------- --------
Total from investment operations ......................... .24 1.52 .36 2.15 (.75)
-------- -------- -------- -------- --------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net ............................... (.33) (.71) (.72) (.72) (.79)
Realized gain on investments--net .................... -- -- -- -- (.06)
In excess of realized gain on investments--net ....... -- -- (.11) -- (.06)
-------- -------- -------- -------- --------
Total dividends and distributions to Common Stock
shareholders ............................................ (.33) (.71) (.83) (.72) (.91)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Investment income--net ............................... (.09) (.18) (.18) (.20) (.16)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity ................. (.09) (.18) (.18) (.20) (.16)
-------- -------- -------- -------- --------
Net asset value, end of period ........................... $ 12.20 $ 12.38 $ 11.75 $ 12.40 $ 11.17
======== ======== ======== ======== ========
Market price per share, end of period .................... $11.4375 $12.4375 $ 11.00 $ 11.375 $ 10.25
======== ======== ======== ======== ========
==================================================================================================================================
Total Investment Based on market price per share .......................... (5.37%)++ 20.26% 4.28% 18.67% (14.88%)
Return:** ======== ======== ======== ======== ========
Based on net asset value per share ....................... 1.40%++ 12.06% 2.18% 18.71% (6.27%)
======== ======== ======== ======== ========
==================================================================================================================================
Ratios to Average Expenses ................................................. .67%* .67% .67% .68% .69%
Net Assets:*** ======== ======== ======== ======== ========
Investment income--net ................................... 4.94%* 5.16% 5.27% 5.42% 5.76%
======== ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, net of Preferred Stock, end of period
Data: (in thousands)........................................... $354,223 $359,528 $340,751 $359,763 $324,122
======== ======== ======== ======== ========
Preferred Stock outstanding, end of period (in
thousands) .............................................. $150,000 $150,000 $150,000 $150,000 $150,000
======== ======== ======== ======== ========
Portfolio turnover ....................................... 79.45% 128.79% 138.12% 114.30% 60.88%
======== ======== ======== ======== ========
==================================================================================================================================
Leverage: Asset coverage per $1,000 ................................ $ 3,361 $ 3,397 $ 3,272 $ 3,398 $ 3,161
======== ======== ======== ======== ========
==================================================================================================================================
Dividends Per Series A--Investment income--net ......................... $ 471 $ 891 $ 860 $ 961 $ 752
Share on ======== ======== ======== ======== ========
Preferred Stock Series B--Investment income--net ......................... $ 411 $ 900 $ 865 $ 959 $ 764
Outstanding: ======== ======== ======== ======== ========
Series C--Investment income--net ......................... $ 441 $ 889 $ 876 $ 971 $ 755
======== ======== ======== ======== ========
==================================================================================================================================
</TABLE>
* 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.
+ Based on average shares outstanding.
++ Aggregate total investment return.
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.
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.
o Financial futures contracts--The Fund may purchase or sell financial 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
12 & 13
<PAGE>
MuniEnhanced Fund, Inc., July 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
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.
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, 1998 were $393,193,880 and $387,687,237, respectively.
Net realized gains for the six months ended July 31, 1998 and net unrealized
gains as of July 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments ................... $2,498,987 $24,481,418
---------- -----------
Total ................................... $2,498,987 $24,481,418
========== ===========
- --------------------------------------------------------------------------------
As of July 31, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $24,481,418, of which $25,596,788 is related to appreciated
securities and $1,115,370 is related to depreciated securities. The aggregate
cost of investments at July 31, 1998 for Federal income tax purposes was
$478,357,671.
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 six months ended July 31, 1998 remained
constant and during the year ended January 31, 1998 increased by 31,406 as a
result of dividend reinvestment.
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, 1998 were as follows: Series A, 3.55%; Series B, 3.39%; and
Series C, 3.40%.
For the six months ended July 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 six months ended July 31, 1998, Merrill Lynch, Pierce,
Fenner & Smith Inc., an affiliate of FAM, received $74,154 as commissions.
5. Subsequent Event:
On August 6, 1998, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.055678 per share,
payable on August 28, 1998 to shareholders of record as of August 21, 1998.
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.
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
14 & 15
<PAGE>
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--7/98
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