MuniEnhanced
Fund, Inc.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
January 31, 1999
<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, income 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. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities.
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1999
TO OUR SHAREHOLDERS
For the year ended January 31, 1999, the Common Stock of MuniEnhanced Fund, Inc.
earned $0.664 per share income dividends, which included earned and unpaid
dividends of $0.056. This represents a net annualized yield of 5.51%, based on a
month-end net asset value of $12.06 per share. Over the same period, the total
investment return on the Fund's Common Stock was +7.38%, based on a change in
per share net asset value from $12.38 to $12.06 and assuming reinvestment of
$0.859 per share ordinary income dividends and $0.307 per share capital gains
distributions.
For the six months ended January 31, 1999, the total investment return on the
Fund's Common Stock was +5.90%, based on a change in per share net asset value
from $12.20 to $12.06, and assuming reinvestment of $0.528 per share ordinary
income dividends and $0.307 per share capital gains distributions.
For the six-month period ended January 31, 1999, the Fund's Preferred Stock had
an average dividend yield as follows: Series A, 3.14%; Series B, 3.67%; and
Series C, 3.24%.
The Municipal Market Environment
During the six months ended January 31, 1999, long-term bond yields moved
significantly lower. US domestic economic growth remained moderate, with losses
in the manufacturing sector offset by strong growth in service-oriented
industries. Industrial commodity prices recently fell to their lowest level in
over a decade. This suggests that the current positive inflationary environment
is unlikely to be challenged in the near term. During the six-month period ended
January 31, 1999, the yield on the US Treasury 30-year bond fell over 60 basis
points (0.60%) to 5.09%, and long-term municipal revenue bond yields declined
almost 20 basis points to 5.17%, as measured by the Bond Buyer Revenue Bond
Index.
Throughout most of 1998, the municipal bond market's performance was impeded by
a significant increase in new-issue supply. However, in recent months, the
technical position of the tax-exempt market improved. Over the last 12 months,
almost $285 billion in new long-term tax-exempt bonds was underwritten, an
increase of almost 30% compared to the same period a year ago. As municipal bond
yields declined in recent years, it has taken increasingly lower bond yields to
generate the cost savings necessary to refinance remaining higher-couponed debt.
Consequently, the rate of increases in municipal bond issuance slowed in recent
quarters. During the last six months, more than $125 billion in new tax-exempt
bonds was issued, an increase of approximately 5% compared to the same period a
year ago. During the January 31, 1999 quarter, $63 billion in new long-term
municipal bonds was underwritten, representing an increase of 5% compared to the
January 31, 1998 quarter.
The pace of tax-exempt issuance continued to slow in 1999. January's monthly
issuance was less than $15 billion, representing a decline of almost 25%
compared to January 1998's volume. Additionally, investors received more than
$22 billion in coupon payments, maturities and proceeds from early redemptions
in January. Investors can also expect to receive an additional $15 billion-$18
billion in February for reinvestment. Consequently, investor demand has been
strong in recent months, easily matching, if not at times exceeding, available
supply. We will monitor this trend closely in the coming months to determine if
the supply pressures exerted in 1998 are abating and fostering a more balanced
supply/demand environment for 1999. Such an environment should allow the
tax-exempt market's performance to more closely mirror that of its taxable
counterpart.
Foreign investors have rarely been active investors in the tax-exempt bond
market since they are unable to benefit from the inherent tax advantage of
municipal securities. Consequently, the municipal bond market has not been able
to benefit from the strong flight to quality demand enjoyed by US Treasury
securities since late 1997. This inability has in large part resulted in
significantly smaller declines in municipal bond yields compared to US Treasury
securities. However, this has resulted in the opportunity to purchase tax-exempt
securities with yields very close to or, in some instances, exceeding those of
comparable US Treasury bonds. By January 31, 1999, long-term tax-exempt bond
yields were at 102% of US Treasury securities of comparable maturities, nearly
matching the least expensive level of the past year. Municipal bond yield ratios
have averaged approximately 95% for the last six months and 92% for all of 1998.
During 1997, tax-exempt bond yield ratios averaged 84%. It is likely that the
combination of the increase in new-issue volume and the "safe-haven" status of
US Treasury securities drove municipal bond yield ratios to their present
attractive levels. Should new volume decline and/or foreign financial markets
regain stability in 1999, tax-exempt bond yield ratios could quickly return to
their more historic levels (85%-88%).
Looking ahead, the expected combination of moderate economic growth in the
United States and continued negligible inflation suggests a relatively stable
interest rate environment into early 1999. However, it is likely that foreign
financial markets will again be a critical factor in determining US bond yields.
Economic problems in Russia and Brazil remain unresolved, suggesting that
additional shocks to the world's financial system are possible. On the other
hand, the continued robustness of the US economy has led to some back up in
interest rates. However, at present these factors indicate that there is little
immediate risk of sustained significant increases in long-term bond yields.
Portfolio Strategy
Throughout the six months ended January 31, 1999, we maintained a constructive
investment strategy for MuniEnhanced Fund, Inc. We believed that strong domestic
economic growth seen in late 1998 and thus far this year would be offset by a
combination of deteriorating global economic conditions and low inflation.
Consequently, as 1998 ended, we expected tax-exempt bond yields to trade in a
relatively narrow range, with a bias toward lower bond yields. We maintained the
Fund's fully invested position in order to seek to enhance shareholder income
and participate fully in any market improvement.
Looking ahead, we expect little change in the Fund's existing structure. Current
economic fundamentals and a strong domestic economy offset by the lack of
significant inflationary pressures suggest that interest rates should remain
stable.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
Executive Vice 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, 1999
Important Tax Information (unaudited)
All of the net investment income distributions paid monthly by MuniEnhanced
Fund, Inc. during its taxable year ended January 31, 1999 qualify as tax-exempt
interest dividends for Federal income tax purposes.
Additionally, the following table summarizes the taxable distributions paid by
the Fund during the year:
- --------------------------------------------------------------------------------
Record Payable Ordinary Long-Term
Date Date Income Capital Gains
- --------------------------------------------------------------------------------
12/23/98 12/30/98 $0.192927 $0.306717*
- --------------------------------------------------------------------------------
*The entire distribution is subject to the 20% tax rate.
Please retain this information for your records.
2 & 3
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1999
PROXY RESULTS
During the six-month period ended January 31, 1999, MuniEnhanced Fund, Inc.
Common Stock shareholders voted on the following proposals. The proposals were
approved at a shareholders' meeting on September 23, 1998. The description of
each proposal and number of shares voted are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Shares Voted Shares Voted
For Without Authority
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To elect the Fund's Directors: James H. Bodurtha 26,981,306 701,434
Robert R. Martin 26,982,693 700,047
Joseph L. May 26,986,393 696,347
Arthur Zeikel 26,979,227 703,513
- ------------------------------------------------------------------------------------------------
<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. 26,939,866 240,103 502,772
- ------------------------------------------------------------------------------------------------
</TABLE>
During the six-month period ended January 31, 1999, MuniEnhanced Fund, Inc.
Preferred Stock shareholders (Series A, B, and C) voted on the following
proposals. The proposals were approved at a shareholders' meeting on September
23, 1998. The description of each proposal and number of shares voted are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Shares Voted Shares Voted
For Without Authority
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1. To elect the Fund's Board of Directors as follows:
Series A:
James H. Bodurtha, Herbert I. London, Robert R. Martin,
Joseph L. May, Andre F. Perold and Arthur Zeikel 1,763 15
Series B:
James H. Bodurtha and Andre F. Perold 1,958 2
Herbert I. London, Robert R. Martin, Joseph L. May and
Arthur Zeikel 1,884 76
Series C:
James H. Bodurtha, Herbert I. London, Robert R. Martin,
Joseph L. May, Andre F. Perold and Arthur Zeikel 1,434 425
- ------------------------------------------------------------------------------------------------
<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 1,779 0 0
Series B 1,958 2 0
Series C 1,738 121 0
- ------------------------------------------------------------------------------------------------
</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 (d)(e) $ 2,895
==================================================================================================================================
Alaska--2.7% AAA Aaa 8,400 Alaska Energy Authority, Power Revenue Refunding Bonds, 5% due
7/01/2021 (c) 8,212
AA+ NR* 5,000 Valdez, Alaska, Marine Terminal Revenue Refunding Bonds (Sohio
Pipeline--British Petroleum Oil), 7.125% due 12/01/2025 5,556
==================================================================================================================================
California--8.2% AAA Aaa 5,250 Anaheim, California, Public Financing Authority, Lease Revenue
Bonds (Public Improvements Project), Senior Series A, 6% due
9/01/2024 (c) 6,164
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 (e) 2,943
NR* A1 2,500 Contra Costa County, California, COP, 6.50% due 8/01/2004 (e) 2,895
AAA Aaa 8,235 Los Angeles County, California, Transportation Commission, Sales
Tax Revenue Refunding Bonds, Series B, 6.50% due 7/01/2015 (b)(e) 8,919
AAA Aaa 1,500 M-S-R Public Power Agency, California, Revenue Bonds (San Juan
Project), Series E, 6.50% due 7/01/2017 (d) 1,625
AAA Aaa 1,500 Northern California Transmission Revenue Bonds (California-Oregon
Transmission Project), Series A, 6.50% due 5/01/2016 (d) 1,648
AAA Aaa 5,000 San Diego County, California, Water Authority, COP, 4.50% due
5/01/2024 (b) 4,712
San Diego State University, California, Parking System Revenue
Bonds, Series A (a):
AAA Aaa 1,730 4.75% due 11/01/2018 1,717
AAA Aaa 2,100 4.75% due 11/01/2023 2,040
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 (a) 4,711
AAA Aaa 2,280 San Francisco, California, City and County Airports Commission,
International Airport Revenue Refunding Bonds, Second Series,
Issue 20, 4.50% due 5/01/2017 (d) 2,219
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 (a)(e) 2,365
==================================================================================================================================
</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
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing 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., January 31, 1999
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--9.4% AA Aa2 $ 2,000 Colorado Housing Finance Authority, Refunding (M/F Insured
Mortgage), Series C-3, 5.65% due 10/01/2015 $ 2,103
NR* Aa2 2,865 Colorado Housing Finance Authority, S/F Program, AMT, Senior
Series A-1, 7.40% due 11/01/2027 3,262
NR* Aa2 16,415 Colorado Springs, Colorado, Utilities Revenue Bonds, RITR, Series
19, 7.395% due 11/15/2026 (g) 17,468
NR* Aaa 12,025 Denver, Colorado, City and County Airport Revenue Bonds, RITR,
Series 13, 7.22% due 11/01/2023 (g) 12,681
AAA Aaa 11,875 Denver, Colorado, City and County Airport Revenue Refunding Bonds,
AMT, Series A, 5% due 11/15/2025 (c) 11,651
AAA Aaa 600 Moffat County, Colorado, COP, Public Safety Project, 5.125% due
6/01/2023 (a) 607
==================================================================================================================================
Connecticut--1.3% AA- A1 2,000 Connecticut State Health and Educational Facilities Authority,
Revenue Refunding Bonds (Nursing Home Program--AHF/Hartford),
7.125% due 11/01/2004 (e) 2,380
AAA Aaa 3,500 Connecticut State Special Tax Obligation Revenue Bonds, 6.25% due
10/01/2004 (b)(e) 3,983
==================================================================================================================================
Delaware--0.5% AAA Aaa 2,000 Delaware Transportation Authority, Transportation System Revenue
Bonds, 7% due 7/01/2004 (b)(e) 2,353
==================================================================================================================================
Florida--5.2% AAA Aaa 5,000 Florida State Board of Education, Public Education Capital
Outlay, Series B, 4.50% due 6/01/2028 (d) 4,683
AAA Aaa 10,000 Florida State Turnpike Authority, Turnpike Revenue Bonds
(Department of Transportation), Series A, 4.50% due 7/01/2027 (b) 9,374
AAA Aaa 12,300 Tampa, Florida, Health System Refunding Bonds (Catholic Health),
Series A-3, 4.75% due 11/15/2028 (d) 11,844
==================================================================================================================================
Georgia--4.6% Georgia Municipal Electric Authority, Power Revenue Refunding
Bonds:
AAA Aaa 7,725 Series EE, 7% due 1/01/2025 (a) 10,146
AAA Aaa 1,000 UT, Series W, 6.60% due 1/01/2018 (d) 1,228
AAA Aaa 3,500 Metropolitan Atlanta, Georgia, Rapid Transit Authority, Sales Tax
Revenue Bonds, Second Indenture, Series A, 6.90% due 7/01/2004
(d)(e) 4,107
Municipal Electric Authority, Georgia, Refunding (Project One),
Sub-Series A:
AAA Aaa 3,000 6.50% due 1/01/2004 (a)(e) 3,428
AAA Aaa 5,000 4.50% due 1/01/2019 (d) 4,753
==================================================================================================================================
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 (d) 6,563
==================================================================================================================================
Illinois--3.9% AAA Aaa 2,240 Cook County, Illinois, Chicago Community College District No. 508,
COP, UT, 8.75% due 1/01/2007 (b) 2,936
AAA Aaa 3,000 Illinois Health Facilities Authority, Revenue Refunding Bonds
(Servantcor Project), Series A, 6.375% due 8/15/2006 (c)(e) 3,477
AAA Aaa 10,115 Regional Transportation Authority Revenue Bonds, Illinois, Series
A, 7.20% due 11/01/2020 (a) 13,173
==================================================================================================================================
Indiana--1.0% Hammond, Indiana, Multi-School Building Corporation, Revenue
Refunding Bonds (First Mortgage) (d):
AAA Aaa 3,150 5.75% due 1/15/2017 3,400
AAA Aaa 1,360 6.125% due 7/15/2019 1,531
==================================================================================================================================
Kansas--5.4% AAA Aaa 5,500 Burlington, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (d) 5,991
NR* Aaa 14,740 Kansas City, Kansas, Utility System Revenue Bonds, RITR, Series 1,
9.47% due 9/01/2023 (g) 18,635
AAA Aaa 2,500 Wamego, Kansas, PCR, Refunding (Kansas Gas and Electric Company
Project), 7% due 6/01/2031 (d) 2,717
==================================================================================================================================
Maine--0.6% AA Aa2 2,660 Maine State Housing Authority, Mortgage Purchase Revenue Bonds,
AMT, Series C-2, 6.875% due 11/15/2023 2,897
==================================================================================================================================
Massachusetts-- AAA Aaa 1,915 Massachusetts State Port Authority Revenue Bonds, AMT, Series A,
6.4% 7.50% due 7/01/2020 (b) 2,049
AAA Aaa 25,020 Massachusetts State Turnpike Authority, Western Turnpike Revenue
Refunding Bonds, Series A, 5.55% due 1/01/2017 (d) 25,364
AAA Aaa 5,500 Massachusetts State Water Resources Authority, Refunding,
Series B, 4.50% due 8/01/2022 (c) 5,158
==================================================================================================================================
Michigan--2.7% AAA Aaa 10,000 Michigan State Building Authority, Revenue Refunding Bonds,
Series I, 6.25% due 10/01/2020 (d) 10,803
AAA Aaa 3,000 Monroe County, Michigan, PCR (Detroit Edison Company Project),
AMT, Series 1, 7.65% due 9/01/2020 (b) 3,231
==================================================================================================================================
Missouri--0.7% AAA Aaa 3,000 Kansas City, Missouri, Airport Revenue Improvement Bonds (General
Projects), Series B, 6.875% due 9/01/2004 (c)(e) 3,506
==================================================================================================================================
Montana--0.5% AAA Aaa 2,185 Forsyth, Montana, PCR, Refunding (Puget Sound Power and Light
Company), AMT, 7.25% due 8/01/2021 (a) 2,395
==================================================================================================================================
Nevada--2.8% AAA Aaa 5,760 Clark County, Nevada, Transportation Improvements, GO, Series B,
4.50% due 12/01/2019 (b) 5,447
A A2 5,000 Henderson, Nevada, Health Care Facilities Revenue Bonds (Catholic
Healthcare West), Series A, 5.375% due 7/01/2026 5,063
AAA Aaa 3,000 Washoe County, Nevada, Water Facility Revenue Bonds (Sierra
Pacific Power), AMT, 6.65% due 6/01/2017 (d) 3,297
==================================================================================================================================
New Jersey--2.8% A1+ VMIG1+ 800 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI
Corporation Project), VRDN, AMT, Series A, 3.15% due 6/01/2026
(a)(f) 800
AAA Aaa 9,000 New Jersey Health Care Facilities Financing Authority, Revenue
Refunding Bonds (Saint Barnabas Health Center), Series B, 4.75%
due 7/01/2028 (d) 8,695
AAA Aaa 4,000 New Jersey State Housing and Mortgage Finance Agency Revenue
Bonds, Home Buyer, AMT, Series K, 6.375% due 10/01/2026 4,298
==================================================================================================================================
New Mexico--1.0% AAA NR* 2,715 Rio Rancho, New Mexico, Water and Wastewater System, Revenue
Refunding Bonds, 4.75% due 5/15/2022 (a) 2,636
AAA Aaa 2,300 Santa Fe, New Mexico, Water Utility Improvements Revenue Bonds,
Series A, 6.30% due 6/01/2004 (a)(e) 2,589
==================================================================================================================================
New York--14.2% AAA VMIG1+ 5,800 Long Island Power Authority, New York, Electric System Revenue
Bonds, VRDN, Sub-Series 7, 3.15% due 4/01/2025 (d)(f) 5,800
AAA Aaa 6,550 Metropolitan Transportation Authority, New York, Commuter
Facilities Revenue Refunding Bonds, Series B, 4.75% due
7/01/2026 (b) 6,335
A- A3 2,000 New York City, New York, GO, Refunding, UT, Series L, 5.75% due
8/01/2013 2,186
AAA Aaa 15,000 New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Bonds, Series A, 4.75% due 6/15/2031 (b) 14,378
AAA Aaa 10,000 New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Refunding Bonds, Series D, 4.75% due
6/15/2025 (d) 9,678
</TABLE>
6 & 7
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1999
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 York New York State Dormitory Authority, Mental Health Service
(concluded) Facilities Improvement Revenue Bonds (a):
AAA Aaa $ 4,600 Series F, 4.50% due 8/15/2028 $ 4,287
AAA Aaa 4,000 Series G, 4.50% due 8/15/2018 3,805
A1+ NR* 3,400 New York State Energy Research and Development Authority, PCR
(Niagara Power Corporation), VRDN, AMT, Series B, 3.25% due
7/01/2027 (f) 3,400
AAA Aaa 16,955 Port Authority of New York and New Jersey, Consolidated Revenue
Bonds, 116th Series, 4.25% due 10/01/2026 (b) 15,247
Port Authority of New York and New Jersey, Special Obligation
Revenue Refunding Bonds (Versatile Structure Obligation Project),
VRDN (f):
NR* VMIG1+ 600 AMT, Series 6, 3.25% due 12/01/2017 600
A1+ VMIG1+ 4,800 Series 2, 3.20% due 5/01/2019 4,800
==================================================================================================================================
North Carolina-- AA Aa3 7,500 North Carolina Medical Care Commission, Health Care Facilities,
1.4% Revenue Refunding Bonds (Duke University Health Systems),
Series A, 4.75% due 6/01/2028 7,102
==================================================================================================================================
Ohio--1.1% AAA Aaa 2,500 North Canton, Ohio, City School District, GO, 6.70% due
12/01/2004 (a)(e) 2,935
AAA Aaa 2,150 Ohio State Air Quality Development Authority, PCR, Refunding (Ohio
Edison), Series A, 7.45% due 3/01/2016 (b) 2,276
==================================================================================================================================
Pennsylvania--5.8% AAA Aaa 2,000 Pennsylvania State Higher Education Assistance Agency, Student
Loan Revenue Bonds, RIB, AMT, Series B, 11.355% due 3/01/2020
(d)(g) 2,218
AAA Aaa 23,720 Pennsylvania State Turnpike Commission, Tax Revenue Bonds (Oil
Franchise), Senior Series A, 4.75% due 12/01/2027 (a) 22,888
AAA Aaa 5,000 Philadelphia, Pennsylvania, School District, GO, Series A, 4.50%
due 4/01/2023 (d) 4,671
==================================================================================================================================
South Carolina-- AAA Aaa 3,650 Charleston County, South Carolina, Refunding (Care Alliance Health
0.7% Services), Series A, 5% due 8/15/2028 (c) 3,605
==================================================================================================================================
South Dakota--1.7% AAA NR* 7,000 South Dakota State Health and Educational Facilities Authority,
Revenue Refunding Bonds, Series A, 7.625% due 1/01/2008 (d)(e) 8,742
==================================================================================================================================
Tennessee--2.1% AAA Aaa 3,225 Metropolitan Nashville Airport Authority, Tennessee, Airport
Revenue Refunding Bonds, Series C, 6.60% due 7/01/2015 (b) 3,496
AAA Aaa 5,450 Mount Juliet, Tennessee, Public Buildings Authority Revenue Bonds
(Madison Suburban Utility District Loan), Series B, 7.80% due
2/01/2004 (d)(e) 6,925
==================================================================================================================================
Texas--3.9% Bexar, Texas, Metropolitan Water District, Waterworks System
Revenue Refunding Bonds (c):
AAA NR* 1,135 6.35% due 5/01/2005 (e) 1,315
AAA Aaa 1,615 6.35% due 5/01/2025 1,826
AAA VMIG1+ 200 Harris County, Texas, Industrial Development Corporation Revenue
Refunding Bonds (Shell Oil Company Project), VRDN, 3.125% due
4/01/2027 (f) 200
AAA Aaa 4,700 Houston, Texas, Water and Sewer Systems, Revenue Refunding Bonds,
Junior Lien, Series C, 6.375% due 12/01/2017 (a)(e) 5,096
AAA Aaa 8,640 Lower Colorado River Authority, Texas, Revenue Refunding Bonds,
Junior Lien, Series 7, 4.75% due 1/01/2028 (c) 8,324
BBB Baa3 2,500 Nueces River Authority, Texas, Refunding (Asarco Inc. Project),
Series A, 5.60% due 1/01/2027 2,448
==================================================================================================================================
Virginia--3.5% AAA Aaa 6,000 Loudon County, Virginia, Public Improvements, COP, 6.80% due
3/01/2014 (c) 6,799
Virginia State, HDA, Commonwealth Mortgage, AMT:
AAA Aaa 5,000 Series A, Sub-Series A-4, 6.45% due 7/01/2028 (d) 5,370
AA+ Aa1 5,000 Series B, Sub-Series B-3, 6.75% due 7/01/2021 5,261
==================================================================================================================================
Wisconsin--1.4% AAA Aaa 7,500 Wisconsin State Health and Educational Facilities, Revenue
Refunding Bonds (Marquette University), 4.75% due 6/01/2023 (d) 7,217
==================================================================================================================================
Wyoming--0.7% A1 VMIG1+ 3,400 Sweetwater County, Wyoming, PCR, Refunding (Idaho Power Company
Project), VRDN, Series C, 3.20% due 7/15/2026 (f) 3,400
==================================================================================================================================
Puerto Rico--1.4% A Baa1 7,500 Puerto Rico Commonwealth, Public Improvement, GO, 4.75% due
7/01/2023 7,268
==================================================================================================================================
Total Investments (Cost--$472,913)--99.5% 501,221
Other Assets Less Liabilities--0.5% 2,382
--------
Net Assets--100.0% $503,603
========
==================================================================================================================================
</TABLE>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) Prerefunded.
(f) 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, 1999.
(g) The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at January 31, 1999.
* Not Rated.
+ 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, 1999 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa............................................................. 82.0%
AA/Aa............................................................... 9.1
A/A................................................................. 4.1
BBB/Baa............................................................. 0.5
Other+.............................................................. 3.8
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
8 & 9
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1999
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of January 31, 1999
===============================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$472,913,010) (Note 1a) ......... $501,220,988
Receivables:
Securities sold ....................................................... $ 35,474,797
Interest .............................................................. 5,764,649 41,239,446
------------
Prepaid expenses and other assets ....................................... 21,809
------------
Total assets ............................................................ 542,482,243
------------
===============================================================================================================================
Liabilities: Payables:
Securities purchased .................................................. 32,401,881
Custodian bank (Note 1f) .............................................. 5,795,364
Dividends to shareholders (Note 1e) ................................... 385,372
Investment adviser (Note 2) ........................................... 190,903 38,773,520
------------
Accrued expenses and other liabilities .................................. 105,719
------------
Total liabilities ....................................................... 38,879,239
------------
===============================================================================================================================
Net Assets: Net assets .............................................................. $503,603,004
============
===============================================================================================================================
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 (29,319,296 shares issued
and outstanding) ...................................................... $ 2,931,930
Paid-in capital in excess of par ........................................ 322,789,124
Undistributed investment income--net .................................... 3,805,762
Accumulated realized capital losses on investments--net ................. (11,466)
Accumulated distributions in excess of realized capital gains--net
(Note 1e) ............................................................... (4,220,324)
Unrealized appreciation on investments--net ............................. 28,307,978
------------
Total--Equivalent to $12.06 net asset value per share of Common Stock
(market price--$12.00) .................................................. 353,603,004
------------
Total capital ........................................................... $503,603,004
============
===============================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended January 31, 1999
===============================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ................ $ 28,008,535
Income (Note 1d):
===============================================================================================================================
Expenses: Investment advisory fees (Note 2) ....................................... $ 2,528,913
Commission fees (Note 4) ................................................ 379,600
Transfer agent fees ..................................................... 96,373
Professional fees ....................................................... 88,906
Accounting services (Note 2) ............................................ 86,374
Directors' fees and expenses ............................................ 45,647
Custodian fees .......................................................... 33,864
Listing fees ............................................................ 26,950
Printing and shareholder reports ........................................ 25,476
Pricing fees ............................................................ 13,401
Other ................................................................... 13,466
------------
Total expenses .......................................................... 3,338,970
------------
Investment income--net .................................................. 24,669,565
------------
===============================================================================================================================
Realized & Realized gain on investments--net ....................................... 9,268,459
Unrealized Gain (Loss) Change in unrealized appreciation on investments--net ................... (4,175,125)
On Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations .................... $ 29,762,899
============
===============================================================================================================================
</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: 1999 1998
================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net .................................................. $ 24,669,565 $ 25,560,645
Realized gain on investments--net ....................................... 9,268,459 9,934,890
Change in unrealized appreciation on investments--net ................... (4,175,125) 8,858,515
------------ ------------
Net increase in net assets resulting from operations .................... 29,762,899 44,354,050
------------ ------------
================================================================================================================================
Dividends & Investment income--net:
Distributions to Common Stock .......................................................... (19,359,816) (20,605,408)
Shareholders Preferred Stock ....................................................... (5,149,880) (5,358,480)
(Note 1e): Realized gain on investments to Common Stock shareholders--net .......... (10,288,926) --
In excess of realized gain on investments to Common Stock
shareholders--net ....................................................... (4,220,324) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions
to shareholders ......................................................... (39,018,946) (25,963,888)
------------ ------------
================================================================================================================================
Common Stock Value of shares issued to Common Stock shareholders in reinvestment
Transactions (Note 4): of dividends and distributions .......................................... 3,330,627 387,550
------------ ------------
================================================================================================================================
Net Assets: Total increase (decrease) in net assets ................................. (5,925,420) 18,777,712
Beginning of year ....................................................... 509,528,424 490,750,712
------------ ------------
End of year* ............................................................ $503,603,004 $509,528,424
============ ============
================================================================================================================================
*Undistributed investment income--net (Note 1g) .......................... $ 3,805,762 $ 3,634,396
============ ============
================================================================================================================================
</TABLE>
See Notes to Financial Statements.
10 & 11
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been
derived from information provided in the financial
statements. For the Year Ended January 31,
----------------------------------------------------
Increase (Decrease) in Net Asset Value: 1999+ 1998+ 1997+ 1996+ 1995
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ...................... $ 12.38 $ 11.75 $ 12.40 $ 11.17 $ 12.99
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .................................. .85 .88 .90 .92 .96
Realized and unrealized gain (loss) on investments--net . .18 .64 (.54) 1.23 (1.71)
-------- -------- -------- -------- --------
Total from investment operations ........................ 1.03 1.52 .36 2.15 (.75)
-------- -------- -------- -------- --------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net ................................ (.67) (.71) (.72) (.72) (.79)
Realized gain on investments--net ..................... (.35) -- -- -- (.06)
In excess of realized gain on investments--net ........ (.15) -- (.11) -- (.06)
-------- -------- -------- -------- --------
Total dividends and distributions to Common Stock
shareholders ............................................ (1.17) (.71) (.83) (.72) (.91)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Investment income--net ................................ (.18) (.18) (.18) (.20) (.16)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity ................ (.18) (.18) (.18) (.20) (.16)
-------- -------- -------- -------- --------
Net asset value, end of year ............................ $ 12.06 $ 12.38 $ 11.75 $ 12.40 $ 11.17
======== ======== ======== ======== ========
Market price per share, end of year ..................... $ 12.00 $12.4375 $ 11.00 $ 11.375 $ 10.25
======== ======== ======== ======== ========
==================================================================================================================================
Total Investment Based on market price per share ......................... 6.36% 20.26% 4.28% 18.67% (14.88%)
Return:* ======== ======== ======== ======== ========
Based on net asset value per share ...................... 7.38% 12.06% 2.18% 18.71% (6.27%)
======== ======== ======== ======== ========
==================================================================================================================================
Ratios to Average Expenses ................................................ .66% .67% .67% .68% .69%
Net Assets:** ======== ======== ======== ======== ========
Investment income--net .................................. 4.88% 5.16% 5.27% 5.42% 5.76%
======== ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, net of Preferred Stock, end of year
Data: (in thousands) .......................................... $353,603 $359,528 $340,751 $359,763 $324,122
======== ======== ======== ======== ========
Preferred Stock outstanding, end of year (in thousands).. $150,000 $150,000 $150,000 $150,000 $150,000
======== ======== ======== ======== ========
Portfolio turnover ...................................... 144.46% 128.79% 138.12% 114.30% 60.88%
======== ======== ======== ======== ========
==================================================================================================================================
Leverage: Asset coverage per $1,000 ............................... $ 3,357 $ 3,397 $ 3,272 $ 3,398 $ 3,161
======== ======== ======== ======== ========
==================================================================================================================================
Dividends Per Series A--Investment income--net ........................ $ 862 $ 891 $ 860 $ 961 $ 752
Share on ======== ======== ======== ======== ========
Preferred Stock Series B--Investment income--net ........................ $ 868 $ 900 $ 865 $ 959 $ 764
Outstanding: ======== ======== ======== ======== ========
Series C--Investment income--net ........................ $ 845 $ 889 $ 876 $ 971 $ 755
======== ======== ======== ======== ========
==================================================================================================================================
</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.
** Do not reflect the effect of dividends to Preferred Stock
shareholders.
+ Based on average shares outstanding.
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's financial statements are prepared in accordance with generally accepted
accounting principles which may require the use of management accruals and
estimates. 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 written or purchased are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-the-counter
market, valuation is the last asked price (options written) or the last bid
price (options purchased). 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 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 post-October losses.
12 & 13
<PAGE>
MuniEnhanced Fund, Inc., January 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
(f) Custodian bank--The Fund recorded an amount payable to the Custodian Bank
reflecting an overnight overdraft which resulted from a timing difference of a
security transaction settlement.
(g) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $11,497 have been reclassified between accumulated net
realized capital losses and undistributed net investment income and $31 has been
reclassified between paid-in capital in excess of par and accumulated net
realized capital losses. These reclassifications have no effect on net assets or
net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of 0.50% of the Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended January 31, 1999 were $711,243,063 and $731,315,979, respectively.
Net realized gains for the year ended January 31, 1999 and net unrealized gains
as of January 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments .................. $ 9,268,459 $28,307,978
----------- -----------
Total .................................. $ 9,268,459 $28,307,978
=========== ===========
- --------------------------------------------------------------------------------
As of January 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $28,307,978, of which $28,380,193 related to appreciated
securities and $72,215 related to depreciated securities. The aggregate cost of
investments at January 31, 1999 for Federal income tax purposes was
$472,913,010.
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 years ended January 31, 1999 and
January 31, 1998 increased by 280,120 and 31,406, respectively, as a result of
dividend reinvestment.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund, with a par value of $.025 per share and a liquidation preference of
$25,000 per share, 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, 1999 were as follows: Series A, 3.09%;
Series B, 3.094%; and Series C, 3.00%.
Shares issued and outstanding during the years ended January 31, 1999 and
January 31, 1998 remained constant.
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, 1999, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, an affiliate of FAM, received $160,954 as commissions.
5. Subsequent Event:
On February 4, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.056148 per share,
payable on February 25, 1999 to shareholders of record as of February 19, 1999.
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, 1999, 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, 1999 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, 1999, 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 11, 1999
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.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on securities in which the
Fund invests, and this could hurt the Fund's investment returns.
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
Hugh T. Hurley III, Vice President
Kenneth A. Jacob, Vice President
Donald C. Burke, Vice President and 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 Whitehall 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--1/99
[RECYCLE LOGO] Printed on post-consumer recycled paper
