MuniEnhanced
Fund, Inc.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
July 31, 2000
<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., July 31, 2000
TO OUR SHAREHOLDERS
For the six-month period ended July 31, 2000, the Common Stock of MuniEnhanced
Fund, Inc. earned $0.319 per share income dividends, which included earned and
unpaid dividends of $0.053. This represents a net annualized yield of 5.93%,
based on a month-end per share net asset value of $10.78. During the same
period, total investment return on the Fund's Common Stock was +10.41%, based on
a change in per share net asset value from $10.10 to $10.78, and assuming
reinvestment of $0.319 per share income dividends.
For the six months ended July 31, 2000, the Fund's Preferred Stock had an
average dividend yield as follows: Series A, 4.27%; Series B, 3.71%; and Series
C, 4.14%.
The Municipal Market Environment
During the six months ended July 31, 2000, US domestic economic growth remained
robust. After growing at a 4.2% annual rate in 1999, US domestic economic growth
expanded at a 4.8% rate during the first quarter of 2000 and at a 5.2% rate
during the second quarter. However, despite these significant growth rates, few
price measure indicators have shown any meaningful signs of future price
pressures at the consumer level, despite the lowest unemployment rates since
1970. With few signs of any economic slowdown, the Federal Reserve Board
continued to raise short-term interest rates in February, March and May 2000.
The Federal Reserve Board cited both the continued growth of US employment and
the continued strength of US equity markets as reasons for attempting to
moderate US economic growth before inflationary price pressures can occur.
However, since then fixed-income markets have largely ignored strong economic
fundamentals and concentrated upon very positive technical supply factors.
Declining bond issuance--both current, and more importantly, expected future
issuance--helped push bond yields lower into mid-April 2000. In late January and
early February 2000, the US Treasury announced its intention to reduce the
amounts to be auctioned in the quarterly Treasury note and bond auctions.
Furthermore, budgetary surpluses allowed the US Treasury to repurchase
outstanding, higher-couponed Treasury issues, primarily in the 15-year and
longer maturity sector. Both these actions resulted in significant reduction in
the outstanding supply of longer-dated maturity US Treasury debt. Domestic and
international investors quickly began to accumulate what was expected to become
a scarce commodity and bond prices quickly rose.
By mid-April 2000, US Treasury bond yields had declined more than 80 basis
points (0.80%) to 5.67%. During the remainder of the period, US Treasury bond
prices were volatile as strong economic reports and investors' concerns of
additional moves by the Federal Reserve Board occasionally overshadowed the
positive technical position of the long-term US Treasury bond market.
Recently, a number of economic indicators have begun to suggest that the actions
taken by the Federal Reserve Board in 1999 and early 2000 have started to affect
US economic growth. Both new home sales and consumer spending have slowed,
suggesting that economic growth may subside into a 4%-4.5% range by late 2000.
In our opinion, this range of growth was targeted by the Federal Reserve Board
as being sustainable, given current productivity measures, without endangering
the present benign inflationary environment.
By June, investor focus returned to the dwindling supply of long-term US
Treasury securities and bond prices generally rose for the remainder of the
period. The decline in long-term US Treasury bond yields resulted in an inverted
yield curve as short-term and intermediate-term interest rates did not fall
proportionately to long-term interest rates as the Federal Reserve Board was
expected to continue to raise short-term interest rates. The current inversion
has had as much to do with debt reduction and US Treasury buybacks as with
investor expectations of slower economic growth. During the last six months, US
Treasury bond yields have declined more than 70 basis points to end the period
at 5.78%, their lowest monthly closing level since May 1999.
Tax-exempt bond yields also have declined in recent months. The decline has
largely been in response to the rally in US Treasury securities, as well as a
continued positive technical supply environment. States such as California and
Maryland have announced that their large current and anticipated future budget
surpluses will permit the cancellation or postponement of expected bond
issuance. Additionally, some issuers have also initiated tenders to repurchase
existing debt, reducing the supply of tax-exempt bonds in the secondary market
as well. Given the decline in available long-term US Treasury securities, some
investors who need longer maturity investment vehicles have begun to consider
long-term municipal bonds as potential substitutes. This has further
strengthened the overall positive technical position of the tax-exempt market.
During the last six months, long-term municipal revenue bond yields have
declined nearly 50 basis points to 5.85%, their lowest level since late August
1999, as measured by the Bond Buyer Revenue Bond Index.
The recent relative underperformance of the municipal bond market has been
especially disappointing given the strong technical position the tax-exempt bond
market has enjoyed. The issuance of long-term tax-exempt securities has
dramatically declined. During the last year, almost $200 billion in new
long-term municipal securities was issued, a decline of almost 20% compared to
the same period a year earlier. For the six months ended July 31, 2000,
approximately $100 billion in new tax-exempt bonds was underwritten, a decline
of 17% compared to the same period in 1999.
Although investors received more than $45 billion in coupon payments, bond
maturities and the proceeds from early bond redemptions during June and July,
overall investor demand has diminished. Long-term municipal bond mutual funds
have seen consistent outflows in recent months as the yields of individual
securities have risen faster than those of larger, more diverse mutual funds.
Thus far this year, tax-exempt mutual funds have had net redemptions of more
than $12 billion.
However, the rate at which these redemptions have been occurring has slowed in
recent months. Recent US equity market volatility, especially in the NASDAQ, has
reduced some investor interest in the stock market. This investor interest,
especially earlier this year, had been siphoning away demand for municipal bonds
by retail investors. Also, the demand from property and casualty companies is
expected to increase in the coming months. These firms are becoming more
profitable after experiencing losses in the past few years resulting from a
series of weather-related natural disasters. Yet as positive as the tax-exempt
bond market's technical environment has been for much of this year, investor
response to the reduction in both current and future supply of US Treasury bonds
has been overwhelmingly positive and municipal bond yields have underperformed
their taxable counterparts.
Significantly lower municipal bond yields are still likely to require weaker US
employment growth and consumer spending. The actions taken in recent months by
the Federal Reserve Board should eventually slow US economic growth. Recent
declines in US new home sales are perhaps the first sign that consumer spending
is being slowed by higher interest rates. Until further signs develop, it is
likely that the municipal bond market's current favorable technical position
will dampen significant tax-exempt interest rate volatility and provide a stable
environment for eventual improvement in municipal bond prices.
Portfolio Strategy
We entered the six-month period ended July 31, 2000 in a neutral position in
consideration of the highest absolute municipal yields since the spring of 1997.
During this period, municipal yields reached or exceeded those of long-term
taxable US Treasury bonds. For the majority of the period, we retained our
neutral and materially fully invested position. We found it prudent to maintain
this strategy in anticipation of clearer signs regarding future economic growth
and inflation expectations. We did take advantage of the opportunity provided by
the backup in market
2 & 3
<PAGE>
MuniEnhanced Fund, Inc., July 31, 2000
yields to purchase higher coupon bonds that previously were not commonly
available. We purchased these bonds in an effort to provide a higher level of
tax-exempt income for the shareholder and to limit future interest rate
sensitivity. We believe purchasing these securities should also help offset
rising short-term interest rates experienced by the Fund's leveraged portfolio
and the dividends paid to the Fund's Common Stock shareholders. (For a complete
explanation of the benefits and risks of leveraging, see page 1 of this report
to shareholders.) However, the availability of these attractive new-issue higher
coupon bonds was still limited because of the ongoing decline of new long-term
municipal issuance. As previously noted, new issuance declined 20% from year-ago
levels. This decline in issuance somewhat inhibited the portfolio restructuring.
We continually monitor the call protection, credit quality, coupon structuring
and diversification of the portfolio in an effort to provide optimal
performance. We continue to focus on very highly rated bonds, with more than 80%
of the portfolio invested in bonds insured by AAA-rated municipal bond insurers.
The decline in new municipal bond issuance can be traced, in part, to the strong
fiscal performance of municipal entities at most levels of government.
Looking ahead, we intend to remain fully invested in the municipal market in an
effort to enhance shareholder income. We will be looking for opportunities
provided by new municipal issuance to enhance the Fund's call protection and
issuer diversification. We will also consider taking a more aggressive
investment position should the most recent economic indicators continue to point
to a cooling of growth and a more stable inflation environment.
In Conclusion
We appreciate your ongoing interest in MuniEnhanced Fund, Inc., and we look
forward to assisting you with your financial needs in the months and years
ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Michael Kalinoski
Michael Kalinoski
Vice President and
Portfolio Manager
September 11, 2000
PROXY RESULTS
During the six-month period ended July 31, 2000, MuniEnhanced Fund, Inc.'s
Common Stock shareholders voted on the following proposals. The proposals were
approved at the annual shareholders' meeting on May 24, 2000. The description of
each proposal and number of shares voted are as follows:
<TABLE>
<CAPTION>
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Shares Voted Shares Voted
For to Withhold Authority
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To elect the Fund's Board of Directors: Terry K. Glenn 20,933,474 449,969
James H. Bodurtha 20,979,260 404,184
Roberta Cooper Ramo 20,967,314 416,129
Joseph L. May 21,000,562 382,882
Arthur Zeikel 20,975,331 408,118
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<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. 20,536,289 77,066 190,569
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</TABLE>
During the six-month period ended July 31, 2000, MuniEnhanced Fund, Inc.'s
Preferred Stock shareholders (Series A, B and C) voted on the following
proposals. The proposals were approved at the annual shareholders' meeting on
May 24, 2000. The description of each proposal and number of shares voted are as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted
For to Withhold Authority
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To elect the Fund's Board of Directors: Terry K. Glenn,
James H. Bodurtha, Herbert I. London, Roberta Cooper Ramo,
Joseph L. May, Andre F. Perold and Arthur Zeikel as follows:
Series A 1,760 0
Series B 1,413 0
Series C 1,381 145
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<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
----------------------------------------------------------------------------------------------------------
<S> <C> <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 1,756 4 0
Series B 1,413 0 0
Series C 1,510 16 0
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</TABLE>
4 & 5
<PAGE>
MuniEnhanced Fund, Inc., July 31, 2000
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<C> <C> <C> <C> <S> <C>
Alabama--0.8% A1 VMIG1@ $ 800 Columbia, Alabama, IDB, PCR, Refunding (Alabama Power
Company Project), VRDN, Series E, 4.25%
due 10/01/2022 (g) $ 800
AAA Aaa 2,500 Huntsville, Alabama, Health Care Authority, Health Care
Facilities Revenue Bonds, Series B, 6.625%
due 6/01/2004 (d)(e) 2,717
====================================================================================================================================
Alaska--1.9% AAA Aaa 3,285 Alaska Energy Authority, Power Revenue Refunding Bonds
(Bradley Lake), Fourth Series, 6% due 7/01/2016 (c) 3,505
AA+ NR* 5,000 Valdez, Alaska, Marine Terminal Revenue Refunding Bonds
(Sohio Pipeline--British Petroleum Oil), 7.125%
due 12/01/2025 5,279
====================================================================================================================================
Arizona--2.1% AAA Aaa 2,345 Phoenix, Arizona, Civic Improvement Corporation,
Wastewater System Revenue Bonds, Junior Lien,
6.50% due 7/01/2008 (d) 2,580
AAA Aaa 4,450 Scottsdale, Arizona, IDA, Hospital Revenue Refunding
Bonds (Scottsdale Memorial Hospitals), Series A,
6% due 9/01/2012 (a) 4,738
AAA Aaa 2,000 Tucson, Arizona, Street and Highway User Revenue Bonds,
Junior Lien, Series 1994-E, 7% due 7/01/2011 (b) 2,344
====================================================================================================================================
California--5.1% AAA Aaa 5,250 Anaheim, California, Public Financing Authority, Lease
Revenue Bonds (Public Improvements Project),
Senior Series A, 6% due 9/01/2024 (c) 5,620
AAA NR* 3,250 California Rural Home Mortgage Finance Authority, S/F
Mortgage Revenue Bonds, AMT, Series D,
6% due 6/01/2031 (h) 3,501
AAA Aaa 8,235 Los Angeles County, California, Transportation
Commission, Sales Tax Revenue Refunding Bonds,
Series B, 6.50% due 7/01/2015 (b) 8,537
AAA Aaa 1,500 Northern California Transmission Revenue Bonds
(California-Oregon Transmission Project),
Series A, 6.50% due 5/01/2016 (d) 1,572
AAA Aaa 4,210 San Francisco, California, City and County Airport
Commission, International Airport Revenue Bonds, AMT,
Second Series, Issue 6, 6.60% due 5/01/2024 (a) 4,519
====================================================================================================================================
Colorado--11.6% Colorado HFA, Revenue Bonds (S/F Program), AMT:
NR* Aa2 2,220 Senior Series A-1, 7.40% due 11/01/2027 2,452
NR* Aa2 12,000 Senior Series B-2, 6.80% due 4/01/2030 12,894
Colorado HFA, Revenue Refunding Bonds (S/F Program):
NR* Aa2 3,000 AMT, Senior Series A-2, 7.50% due 4/01/2031 3,408
NR* Aa2 3,995 Senior Series A-3, 6.05% due 10/01/2016 4,118
AAA Aaa 4,280 Colorado Water Resource Power Development Authority,
Clean Water Revenue Bonds, Series A, 6.25% due 9/01/2016 4,594
AAA Aaa 11,000 Denver, Colorado, City and County Airport Revenue Bonds,
AMT, Series D, 7.75% due 11/15/2013 13,251
AAA Aaa 5,450 El Paso County, Colorado, School District Number 49,
Falcon, GO, Series A, 6% due 12/01/2018 (c) 5,794
Jefferson County, Colorado, School District
Number R-001, GO, Refunding (d):
AAA Aaa 2,000 6.25% due 12/15/2008 2,199
AAA Aaa 5,000 6.50% due 12/15/2010 5,635
====================================================================================================================================
Connecticut--0.8% AAA Aaa 3,500 Connecticut State Special Tax Obligation Revenue Bonds,
6.25% due 10/01/2004 (b)(e) 3,744
====================================================================================================================================
Delaware--0.5% AAA Aaa 2,000 Delaware Transportation Authority, Transportation System
Revenue Bonds, 7% due 7/01/2004 (b)(e) 2,202
====================================================================================================================================
District of Columbia-- District of Columbia, GO, Refunding, Series B (c):
4.5% AAA Aaa 5,000 5.50% due 6/01/2013 5,053
AAA Aaa 5,300 5.50% due 6/01/2014 5,313
AAA Aaa 6,000 District of Columbia, Revenue Refunding Bonds (Catholic
University of America Project), 5.625% due 10/01/2029 (a) 5,886
AAA Aaa 5,850 Washington, D.C., Convention Center Authority, Dedicated
Tax Revenue Bonds, Senior Lien, 4.75% due 10/01/2028 (a) 4,946
====================================================================================================================================
Georgia--6.3% A1 VMIG1@ 4,500 Burke County, Georgia, Development Authority, PCR
(Georgia Power Company Plant--Vogtle Project),
VRDN, 4.35% due 9/01/2026 (g) 4,500
Georgia Municipal Electric Authority, Power Revenue
Refunding Bonds:
AAA Aaa 7,725 Series EE, 7% due 1/01/2025 (a) 9,143
AAA Aaa 2,000 Series V, 6.60% due 1/01/2018 (d) 2,256
AAA Aaa 1,000 Series W, 6.60% due 1/01/2018 (d) 1,128
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) 3,844
Monroe County, Georgia, Development Authority, PCR,
Refunding (Oglethorpe Power Corporation), Series A (d):
AAA Aaa 2,500 6.70% due 1/01/2009 2,804
AAA Aaa 2,000 6.75% due 1/01/2010 2,263
AAA Aaa 3,000 Municipal Electric Authority of Georgia, Revenue
Refunding Bonds (Project 1), Sub-Series A,
6.50% due 1/01/2004 (a)(e) 3,231
====================================================================================================================================
Hawaii--1.3% AAA Aaa 6,070 Hawaii State Department of Budget and Finance, Special
Purpose Mortgage Revenue Bonds (Hawaiian Electric
Company, Inc. Project), AMT, Series C, 7.375% due
12/01/2020 (d) 6,243
====================================================================================================================================
</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
HFA Housing Finance Agency
IDA Industrial Development Authority
IDB Industrial Development Board
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
6 & 7
<PAGE>
MuniEnhanced Fund, Inc., July 31, 2000
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<C> <C> <C> <C> <S> <C>
Illinois--9.9% AAA Aaa $10,250 Chicago, Illinois, Board of Education, GO (Chicago School
Reform Project), 5.75% due 12/01/2027 (a) $ 10,209
AAA Aaa 10,805 Chicago, Illinois, Sales Tax Revenue Refunding Bonds,
5.25% due 1/01/2028 (b) 10,021
AAA Aaa 2,240 Cook County, Illinois, Community College District
No. 508, Chicago, COP, Refunding, 8.75% due 1/01/2007 (b) 2,714
AAA Aaa 5,000 Cook County, Illinois, GO, Capital Improvement, Series A,
5% due 11/15/2023 (b) 4,516
AAA Aaa 1,795 Illinois Development Finance Authority Revenue Bonds
(Bradley University Project), 5.375% due 8/01/2024 (a) 1,708
Illinois Health Facilities Authority, Revenue Refunding
Bonds:
AAA Aaa 3,000 (Servantcor Project), Series A, 6.375% due
8/15/2006 (c)(e) 3,258
A1 VMIG1@ 1,600 (University of Chicago Hospitals), VRDN,
4.35% due 8/01/2026 (d)(g) 1,600
AAA Aaa 10,115 Regional Transportation Authority, Illinois, Revenue
Bonds, Series A, 7.20% due 11/01/2020 (a) 12,044
====================================================================================================================================
Indiana--2.6% AAA Aaa 2,500 Brownsburg, Indiana, School Building Corporation, First
Mortgage Revenue Bonds (Brownsburg Community School),
5.55% due 2/01/2024 (d) 2,433
AAA Aaa 1,360 Hammond, Indiana, Multi-School Building Corporation,
Revenue Refunding Bonds, First Mortgage, 6.125% due
7/15/2019 (d) 1,411
AAA Aaa 8,985 Marion County, Indiana, Convention and Recreational
Facilities Authority, Excise Tax Revenue Bonds (Lease
Rental), Sub-Series A, 5% due 6/01/2022 (d) 8,111
====================================================================================================================================
Kansas--4.8% NR* Aaa 14,740 Kansas City, Kansas, Utility System Revenue Refunding
Bonds, RITR, Series 1, 8.02% due 9/01/2023 (b)(f) 16,393
NR* Aaa 3,000 Sedgwick and Shawnee Counties, Kansas, S/F Revenue Bonds
(Mortgage Backed Securities Program), AMT, Series A-2,
6% due 12/01/2031 (i) 3,338
AAA Aaa 2,500 Wamego, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (d) 2,593
====================================================================================================================================
Louisiana--1.4% AAA Aaa 6,000 Louisiana Local Government, Environmental Facilities,
Community Development Authority Revenue Bonds (Capital
Projects and Equipment Acquisition), Series A, 6.30%
due 7/01/2030 (a) 6,503
====================================================================================================================================
Maine--0.4% AA Aa2 1,625 Maine State Housing Authority, Mortgage Purchase Revenue
Bonds, AMT, Series C-2, 6.875% due 11/15/2023 1,683
====================================================================================================================================
Maryland--0.6% AAA Aaa 1,750 Baltimore, Maryland, COP, Refunding (Board of Education
Administration Project), Series A, 5.80% due 4/01/2011 (d) 1,871
AAA Aaa 1,000 Baltimore, Maryland, GO, Refunding, 7% due 10/15/2010 (d) 1,169
====================================================================================================================================
Massachusetts--0.3% AAA Aaa 1,500 Massachusetts State, HFA, Housing Development Revenue
Refunding Bonds, Series B, 5.40% due 12/01/2028 (d) 1,411
====================================================================================================================================
Michigan--0.7% AAA Aaa 3,000 Monroe County, Michigan, PCR (Detroit Edison Company
Project), AMT, Series 1, 7.65% due 9/01/2020 (b) 3,067
====================================================================================================================================
Mississippi--1.1% NR* VMIG1@ 2,600 Jackson County, Mississippi, PCR, Refunding (Chevron
U.S.A. Inc. Project), VRDN, 4.25% due 12/01/2016 (g) 2,600
AAA Aaa 2,400 Walnut Grove, Mississippi, Correctional Authority, COP,
6% due 11/01/2019 (a) 2,475
====================================================================================================================================
Missouri--0.7% AAA Aaa 3,000 Kansas City, Missouri, Airport Revenue Bonds, General
Improvement, Series B, 6.875% due 9/01/2004 (c)(e) 3,279
====================================================================================================================================
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) 2,274
====================================================================================================================================
Nevada--3.8% BBB+ Baa1 5,000 Henderson, Nevada, Health Care Facility Revenue Bonds
(Catholic Healthcare West--Saint Rose Dominican Hospital),
5.375% due 7/01/2026 3,972
AAA Aaa 10,450 Washoe County, Nevada, Gas and Water Facilities Revenue
Refunding Bonds (Sierra Pacific Power Company),
6.30% due 12/01/2014 10,829
AAA Aaa 3,000 Washoe County, Nevada, Water Facility Revenue Bonds
(Sierra Pacific Power Company), AMT, 6.65% due
6/01/2017 (d) 3,166
====================================================================================================================================
New Jersey--0.9% AAA Aaa 4,000 New Jersey State Housing and Mortgage Finance Agency,
Home Buyer Revenue Bonds, AMT, Series K,
6.375% due 10/01/2026 (d) 4,078
====================================================================================================================================
New Mexico--0.5% AAA Aaa 2,300 Santa Fe, New Mexico, Revenue Bonds,
6.30% due 6/01/2004 (a)(e) 2,435
====================================================================================================================================
New York--5.6% New York City, New York, GO, Refunding:
AAA Aaa 4,000 Series A, 6.375% due 5/15/2013 (b) 4,410
AAA Aaa 3,995 Series A, 6.375% due 5/15/2014 (b) 4,375
AAA Aaa 5,000 Series A, 6.375% due 5/15/2015 (b) 5,452
A- A3 6,790 Series B, 7.25% due 8/15/2007 7,732
A- A3 2,000 Series L, 5.75% due 8/01/2013 2,055
A1c VMIG1@ 500 New York City, New York, GO, VRDN, Series B, Sub-Series
B-6, 4.25% due 8/15/2005 (d)(g) 500
AAA NR* 1,795 New York State Dormitory Authority Revenue Bonds
(Northeast Parent and Child), Series D, 5.50%
due 7/01/2018 (a) 1,785
====================================================================================================================================
North Carolina--3.4% AAA Aaa 13,940 North Carolina, Eastern Municipal Power Agency, Power
System Revenue Refunding Bonds, Series B,
6.125% due 1/01/2009 (d) 15,036
A1+ NR* 1,000 Raleigh Durham, North Carolina, Airport Authority,
Special Facility Revenue Refunding Bonds (American
Airlines Inc.), VRDN, Series B, 4.30% due 11/01/2015 (g) 1,000
====================================================================================================================================
Ohio--0.6% A1+ VMIG1@ 110 Cuyahoga County, Ohio, Hospital Revenue Bonds (The
Cleveland Clinic), VRDN, Series D, 4.35% due 1/01/2026 (g) 110
AAA Aaa 2,500 North Canton, Ohio, City School District GO, 6.70%
due 12/01/2004 (a)(e) 2,747
====================================================================================================================================
</TABLE>
8 & 9
<PAGE>
MuniEnhanced Fund, Inc., July 31, 2000
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<C> <C> <C> <C> <S> <C>
Rhode Island--1.8% AAA Aaa $ 4,345 Providence, Rhode Island, Public Building Authority,
General Revenue Bonds, Series A, 6.25% due 12/15/2020 (c) $ 4,632
AAA Aaa 3,355 Rhode Island State Economic Development Corporation,
Airport Revenue Bonds, Series B, 6.50% due 7/01/2015 (b) 3,677
====================================================================================================================================
South Carolina--0.3% NR* Aaa 1,470 South Carolina Housing Finance and Development Authority,
Mortgage Revenue Refunding Bonds, AMT, Series A-2,
5.875% due 7/01/2009 (c) 1,524
====================================================================================================================================
South Dakota--1.7% AAA NR* 7,000 South Dakota State Health and Educational Facilities
Authority, Revenue Refunding Bonds, Series A,
7.625% due 7/01/2014 (d) 8,080
====================================================================================================================================
Tennessee--1.9% 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 (d)(e) 6,473
AAA Aaa 2,280 Tennessee HDA, Revenue Refunding Bonds (Homeownership
Program), AMT, Series 1, 5.95% due 7/01/2012 (d) 2,356
====================================================================================================================================
Texas--7.2% Bell County, Texas, Health Facilities Development
Corporation, Revenue Refunding Bonds (Scott & White
Memorial Hospital), Series A (d):
AAA Aaa 1,460 6.25% due 8/15/2010 1,585
AAA Aaa 1,555 6.25% due 8/15/2011 1,684
AAA Aaa 1,650 6.25% due 8/15/2012 1,775
Bexar, Texas, Metropolitan Water District, Waterworks
System Revenue Refunding Bonds (d):
AAA NR* 1,135 6.35% due 5/01/2005 (e) 1,235
AAA Aaa 1,615 6.35% due 5/01/2025 1,688
AAA Aaa 5,000 Dallas, Texas, Special Tax Revenue Bonds, Series A,
5% due 8/15/2025 (a) 4,469
A1+ NR* 3,245 Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Refunding Bonds (Methodist
Hospital), VRDN, 4.35% due 12/01/2025 (g) 3,245
AAA Aaa 3,000 Houston, Texas, Water and Sewer System Revenue Bonds,
Junior Lien, Series C, 5.375% due 12/01/2027 (b) 2,850
AAA Aaa 4,405 Houston, Texas, Water and Sewer System Revenue Refunding
Bonds, Junior Lien, 6.375% due 12/01/2017 (a) 4,589
Travis County, Texas, Health Facilities Development
Corporation, Revenue Refunding Bonds:
AAA Aaa 5,000 (Ascension Health Credit), Series A,
5.75% due 11/15/2011 (d) 5,225
AAAr Aaa 5,200 RITR, Series 4, 5.505% due 11/15/2024 (a)(f) 5,219
====================================================================================================================================
Utah--3.5% AAA Aaa 5,200 Intermountain Power Agency, Utah, Power Supply Revenue
Refunding Bonds, Series B, 6.50% due 7/01/2010 (d) 5,799
AAA Aaa 5,055 Salt Lake City, Utah, Metropolitan Water District, Water
Revenue Bonds, 5.375% due 7/01/2029 (a) 4,782
AAA Aaa 6,135 Utah Water Finance Agency Revenue Bonds (Pooled Loan
Financing Program), Series A, 5.50% due 10/01/2029 (a) 5,894
====================================================================================================================================
Virginia--3.7% AAA Aaa 10,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue
Refunding Bonds, AMT, Series A, 6.10% due 2/01/2010 (a) 10,855
AAA Aaa 6,000 Loudon County, Virginia, COP, 6.80% due 3/01/2014 (c) 6,444
====================================================================================================================================
Washington--4.5% AAA Aaa 13,750 Snohomish County, Washington, Public Utility District
Number 001, Electric Revenue Refunding Bonds,
5.375% due 12/01/2024 (c) 13,112
AAA NR* 7,000 Washington State, GO, Series A and AT-6,
6.25% due 2/01/2011 (d) 7,708
====================================================================================================================================
Wisconsin--0.5% AA NR* 2,700 Wisconsin State Health and Educational Facilities
Authority Revenue Bonds (Howard Young Medical Center Inc.
Project), 5.125% due 8/15/2028 2,295
====================================================================================================================================
Total Investments (Cost--$445,631)--97.8% 456,171
Other Assets Less Liabilities--2.2% 10,410
--------
Net Assets--100.0% $466,581
========
====================================================================================================================================
</TABLE>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured
(e) Prerefunded.
(f) 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, 2000.
(g) 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,
2000.
(h) FNMA/GNMA Collateralized.
(i) GNMA Collateralized.
* Not Rated.
@ 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, 2000 were as
follows:
--------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
--------------------------------------------------------------------------------
AAA/Aaa ........................................................... 84.9%
AA/Aa ............................................................. 6.9
A/A ............................................................... 2.1
BBB/Baa ........................................................... 0.8
Other+ ............................................................ 3.1
--------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
10 & 11
<PAGE>
MuniEnhanced Fund, Inc., July 31, 2000
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of July 31, 2000
===================================================================================================================================
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$445,631,167) ................................ $456,170,549
Cash ................................................................................. 59,045
Receivables:
Securities sold .................................................................. $ 6,707,058
Interest ......................................................................... 6,497,375 13,204,433
------------
Prepaid expenses and other assets .................................................... 16,533
------------
Total assets ......................................................................... 469,450,560
------------
===================================================================================================================================
Liabilities: Payables:
Securities purchased ............................................................. 2,209,800
Dividends to shareholders ........................................................ 312,634
Investment adviser ............................................................... 184,274 2,706,708
------------
Accrued expenses ..................................................................... 163,223
------------
Total liabilities .................................................................... 2,869,931
------------
===================================================================================================================================
Net Assets: Net assets ........................................................................... $466,580,629
============
===================================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized):
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 (29,369,874 shares issued and outstanding) $ 2,936,987
Paid-in capital in excess of par ..................................................... 323,386,132
Undistributed investment income--net ................................................. 2,970,068
Accumulated realized capital losses on investments--net .............................. (19,031,616)
Accumulated distributions in excess of realized capital gains on investments--net .... (4,220,324)
Unrealized appreciation on investments--net .......................................... 10,539,382
------------
Total--Equivalent to $10.78 net asset value per share of Common Stock
(market price--$9.625) ............................................................... 316,580,629
------------
Total capital ........................................................................ $466,580,629
============
===================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended July 31, 2000
===================================================================================================================================
<C> <S> <C> <C>
Investment Interest and amortization of premium and discount earned ....................... $ 13,370,330
Income:
===================================================================================================================================
Expenses: Investment advisory fees ....................................................... $ 1,137,365
Commission fees ................................................................ 202,482
Transfer agent fees ............................................................ 68,477
Professional fees .............................................................. 50,947
Accounting services ............................................................ 44,318
Printing and shareholder reports ............................................... 18,870
Listing fees ................................................................... 15,712
Directors' fees and expenses ................................................... 14,299
Custodian fees ................................................................. 11,067
Pricing fees ................................................................... 7,407
Other .......................................................................... 11,312
------------
Total expenses ................................................................. 1,582,256
------------
Investment income--net ......................................................... 11,788,074
------------
===================================================================================================================================
Realized & Unreal- Realized loss on investments--net .............................................. (8,196,202)
ized Gain (Loss) on Change in unrealized appreciation/depreciation on investments--net ............. 28,723,269
Investments--Net: ------------
Net Increase in Net Assets Resulting from Operations ........................... $ 32,315,141
============
===================================================================================================================================
</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: 2000 2000
===================================================================================================================================
<C> <S> <C> <C>
Operations: Investment income--net ............................................................. $ 11,788,074 $ 23,472,741
Realized loss on investments--net .................................................. (8,196,202) (10,823,948)
Change in unrealized appreciation/depreciation on investments--net ................. 28,723,269 (46,491,865)
------------ ------------
Net increase (decrease) in net assets resulting from operations .................... 32,315,141 (33,843,072)
------------ ------------
===================================================================================================================================
Dividends to Investment income--net:
Shareholders: Common Stock ................................................................... (9,357,242) (18,740,807)
Preferred Stock ................................................................ (3,021,380) (4,977,080)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders ................ (12,378,622) (23,717,887)
------------ ------------
===================================================================================================================================
Common Stock Value of shares issued to Common Stock shareholders in reinvestment of dividends ... -- 602,065
Transactions: ------------ ------------
===================================================================================================================================
Net Assets: Total increase (decrease) in net assets ............................................ 19,936,519 (56,958,894)
Beginning of period ................................................................ 446,644,110 503,603,004
------------ ------------
End of period* ..................................................................... $466,580,629 $446,644,110
============ ============
===================================================================================================================================
*Undistributed investment income--net ............................................... $ 2,970,068 $ 3,560,616
============ ============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements.
12 & 13
<PAGE>
MuniEnhanced Fund, Inc., July 31, 2000
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Six For the Year Ended
from information provided in the financial statements. Months Ended January 31,+
July 31, --------------------
Increase (Decrease) in Net Asset Value: 2000+ 2000 1999
===============================================================================================================================
<C> <S> <C> <C> <C>
Per Share Net asset value, beginning of period .............................. $ 10.10 $ 12.06 $ 12.38
Operating -------- -------- --------
Performance: Investment income--net ............................................ .40 .80 .85
Realized and unrealized gain (loss) on investments--net ........... .70 (1.95) .18
-------- -------- --------
Total from investment operations .................................. 1.10 (1.15) 1.03
-------- -------- --------
Less dividends and distributions to Common Stock shareholders:
Investment income--net ............................................ (.32) (.64) (.67)
Realized gain on investments--net ............................. -- -- (.35)
In excess of realized gain on investments--net ................ -- -- (.15)
-------- -------- --------
Total dividends and distributions to Common Stock shareholders .... (.32) (.64) (1.17)
-------- -------- --------
Effect of Preferred Stock activity:
Investment income--net ........................................ (.10) (.17) (.18)
-------- -------- --------
Net asset value, end of period .................................... $ 10.78 $ 10.10 $ 12.06
======== ======== ========
Market price per share, end of period ............................. $ 9.625 $ 9.1875 $ 12.00
======== ======== ========
===============================================================================================================================
Total Investment Based on market price per share ................................... 8.38%+++ (18.52%) 6.36%
Return:** ======== ======== ========
Based on net asset value per share ................................ 10.41%+++ (10.87%) 7.38%
======== ======== ========
===============================================================================================================================
Ratios Based on Total expenses*** ................................................. 1.03%* 1.00% .94%
Average Net Assets ======== ======== ========
Of Common Stock: Total investment income--net*** ................................... 7.71%* 7.16% 6.93%
======== ======== ========
Amount of dividends to Preferred Stock shareholders ............... 1.98%* 1.52% 1.45%
======== ======== ========
Investment income--net, to Common Stock shareholders .............. 5.73%* 5.64% 5.48%
======== ======== ========
===============================================================================================================================
Ratios Based on Total expenses .................................................... .69%* .69% .66%
Total Average ======== ======== ========
Net Assets:++*** Total investment income--net ...................................... 5.18%* 4.91% 4.88%
======== ======== ========
===============================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ......................... 4.04%* 3.32% 3.43%
Average Net Assets ======== ======== ========
Of Preferred Stock:
===============================================================================================================================
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) .. $316,581 $296,644 $353,603
Data: ======== ======== ========
Preferred Stock outstanding, end of period (in thousands) ......... $150,000 $150,000 $150,000
======== ======== ========
Portfolio turnover ................................................ 46.78% 124.61% 144.46%
======== ======== ========
===============================================================================================================================
Leverage: Asset coverage per $1,000 ......................................... $ 3,111 $ 2,978 $ 3,357
======== ======== ========
===============================================================================================================================
Dividends Per Series A--Investment income--net .................................. $ 532 $ 825 $ 862
Share on ======== ======== ========
Preferred Stock Series B--Investment income--net .................................. $ 462 $ 835 $ 868
Outstanding: ======== ======== ========
Series C--Investment income--net .................................. $ 516 $ 829 $ 845
======== ======== ========
===============================================================================================================================
<CAPTION>
The following per share data and ratios have been derived For the Year Ended
from information provided in the financial statements. January 31,+
--------------------
Increase (Decrease) in Net Asset Value: 1998 1997
================================================================================================================
<C> <S> <C> <C>
Per Share Net asset value, beginning of period .............................. $ 11.75 $ 12.40
Operating -------- --------
Performance: Investment income--net ............................................ .88 .90
Realized and unrealized gain (loss) on investments--net ........... .64 (.54)
-------- --------
Total from investment operations .................................. 1.52 .36
-------- --------
Less dividends and distributions to Common Stock shareholders:
Investment income--net ............................................ (.71) (.72)
Realized gain on investments--net ............................. -- --
In excess of realized gain on investments--net ................ -- (.11)
-------- --------
Total dividends and distributions to Common Stock shareholders .... (.71) (.83)
-------- --------
Effect of Preferred Stock activity:
Investment income--net ........................................ (.18) (.18)
-------- --------
Net asset value, end of period .................................... $ 12.38 $ 11.75
======== ========
Market price per share, end of period ............................. $12.4375 $ 11.00
======== ========
================================================================================================================
Total Investment Based on market price per share ................................... 20.26% 4.28%
Return:** ======== ========
Based on net asset value per share ................................ 12.06% 2.18%
======== ========
================================================================================================================
Ratios Based on Total expenses*** ................................................. .96% .95%
Average Net Assets ======== ========
Of Common Stock: Total investment income--net*** ................................... 7.39% 7.55%
======== ========
Amount of dividends to Preferred Stock shareholders ............... 1.55% 1.50%
======== ========
Investment income--net, to Common Stock shareholders .............. 5.84% 6.05%
======== ========
================================================================================================================
Ratios Based on Total expenses .................................................... .67% .67%
Total Average ======== ========
Net Assets:++*** Total investment income--net ...................................... 5.16% 5.27%
======== ========
================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ......................... 3.57% 3.47%
Average Net Assets ======== ========
Of Preferred Stock:
================================================================================================================
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) .. $359,528 $340,751
Data: ======== ========
Preferred Stock outstanding, end of period (in thousands) ......... $150,000 $150,000
======== ========
Portfolio turnover ................................................ 128.79% 138.12%
======== ========
================================================================================================================
Leverage: Asset coverage per $1,000 ......................................... $ 3,397 $ 3,272
======== ========
================================================================================================================
Dividends Per Series A--Investment income--net .................................. $ 891 $ 860
Share on ======== ========
Preferred Stock Series B--Investment income--net .................................. $ 900 $ 865
Outstanding: ======== ========
Series C--Investment income--net .................................. $ 889 $ 876
======== ========
================================================================================================================
</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
charges.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Based on average shares outstanding.
++ Includes Common and Preferred Stock average net assets.
+++ Aggregate total investment return.
See Notes to Financial Statements.
14 & 15
<PAGE>
MuniEnhanced Fund, Inc., July 31, 2000
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 accounting
principles generally accepted in the United States of America, which may require
the use of management accruals and estimates. 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 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
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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 futures transactions and post-October
losses.
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 .50% of the Fund's average weekly net assets, including assets
acquired from the issuance of Preferred Stock.
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, 2000 were $204,339,198 and $213,180,258, respectively.
Net realized losses for the six months ended July 31, 2000 and net unrealized
gains as of July 31, 2000 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Losses Gains
--------------------------------------------------------------------------------
Long-term investments ................... $(7,174,068) $10,539,382
Financial futures contracts ............. (1,022,134) --
----------- -----------
Total ................................... $(8,196,202) $10,539,382
=========== ===========
--------------------------------------------------------------------------------
As of July 31, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $10,539,382, of which $15,239,446 related to appreciated securities
and $4,700,064 related to depreciated securities. The aggregate cost of
investments at July 31, 2000 for Federal income tax purposes was $445,631,167.
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, 2000 remained
constant and during the year ended January 31, 2000 increased by 50,578 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 July 31, 2000 were as follows: Series A, 4.10%; Series
B, 4.187%; and Series C, 4.14%.
Shares issued and outstanding during the six months ended July 31, 2000 and the
year ended January 31, 2000 remained constant.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from .25% to .50%, calculated on the proceeds of each
auction. For the six months ended July 31, 2000, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, an affiliate of FAM, received $83,922 as commissions.
16 & 17
<PAGE>
MuniEnhanced Fund, Inc., July 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
5. Capital Loss Carryforward:
At January 31, 2000, the Fund had a net capital loss carryforward of
approximately $9,810,000, all of which expires in 2008. This amount will be
available to offset like amounts of any future taxable gains.
6. Subsequent Event:
On August 8, 2000, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.053100 per share,
payable on August 30, 2000 to shareholders of record as of August 18, 2000.
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute all or a portion of its net
investment income to its shareholders on a monthly basis. 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
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Roberta Cooper Ramo, Director
Herbert I. London, Director
Joseph L. May, Director
Andre F. Perold, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Michael A. Kalinoski, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
225 Franklin Square
Boston, MA 02110
Transfer Agents
Common Stock:
State Street Bank and Trust Company
225 Franklin Square
Boston, MA 02110
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MEN
18 & 19
<PAGE>
MuniEnhanced Fund, Inc. seeks to provide shareholders with as high a level of
current income exempt from Federal income taxes as is consistent with its
investment policies by investing primarily in a portfolio of long-term,
investment-grade municipal obligations, the interest on which is exempt from
Federal income taxes in the opinion of the bond counsel to the issuer.
This report, including the financial information herein, is transmitted to
shareholders of MuniEnhanced Fund, Inc. for their information. It is not a
prospectus. 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--7/00
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