MuniEnhanced
Fund, Inc.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
January 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., January 31, 2000
TO OUR SHAREHOLDERS
For the year ended January 31, 2000, the Common Stock of MuniEnhanced Fund, Inc.
earned $0.635 per share income dividends, which included earned and unpaid
dividends of $0.053. This represents a net annualized yield of 6.29%, based on a
month-end net asset value of $10.10 per share. Over the same period, the total
investment on the Fund's Common Stock was -10.87%, based on a change in per
share net asset value from $12.06 to $10.10 and assuming reinvestment of $0.638
per share income dividends.
For the six-month period ended January 31, 2000, the total investment return on
the Fund's Common Stock was - 6.72%, based on a change in per share net asset
value from $11.20 to $10.10, and assuming reinvestment of $0.320 per share
income dividends.
For the six-month period ended January 31, 2000, the Fund's Preferred Stock had
an average dividend yield as follows: Series A, 3.19%; Series B, 3.75%; and
Series C, 3.56%.
The Municipal Market Environment
During the six months ended January 31, 2000, continued strong domestic growth,
gradual improvement in foreign economies and investor concerns regarding future
inflationary pressures pushed long-term fixed-income bond yields higher. The
Federal Reserve Board continued to raise short-term interest rates in August and
November 1999 as well as just after the period's close, seeking to moderate US
economic growth and maintain the existing benign inflationary environment. US
economic growth, in part intensified by Year 2000 preparations, grew 5.8% during
the last fiscal quarter of 1999 and had an annual rate of 4.1% for 1999. A
number of inflationary indicators have also begun to signal some increase in
price pressures.
However, most investors believe that the Federal Reserve Board will be extremely
vigilant in preventing such pressures from any material escalation. US Treasury
bond yields responded by rising approximately 60 basis points (0.60%) by mid-
January 2000. A strong rally, largely based upon an expected significant
reduction in the future supply of US Treasury 30-year maturity bonds, pushed
yields lower to 6.50% at January 31, 2000. Over the last six months, yields on
30-year US Treasury bonds rose approximately 40 basis points.
The tax-exempt bond market was also under pressure throughout the entire period.
Despite receiving more than $30 billion in coupon payments, bond maturities and
proceeds from early redemptions in December and January, overall investor demand
has diminished. It is likely that the returns generated by the US equity market
have continued to attract investor attention and have left little demand for
competing investment alternatives. At January 31, 2000, the long-term tax-exempt
revenue bond yield, as measured by the Bond Buyer Revenue Index, was 6.34%, an
increase of nearly 70 basis points over the last six months.
Issuance by municipalities has significantly declined in recent months. Over the
last six months, less than $100 billion in long-term tax-exempt bonds were
issued, representing a decline of over 20% compared to the same period a year
ago. During the last three months, less than $45 billion in long-term bonds were
issued by various municipalities. This most recent quarterly issuance is 30%
below the level of the January 31, 1999 quarter. Additionally, during January
2000, less than $8 billion in municipal debt was underwritten, down more than
50% from January 1999 levels. This represents the lowest monthly issuance in
over five years. Toward the end of 1999, consensus estimates for 2000 annual
issuance were in the $210 billion - $215 billion range. January's underwritings,
as well as those expected to be issued in the near future, have led some
analysts to revise their forecasts to the $190 billion range.
We believe an overall reduction in bond supply in the coming year should help
support the municipal bond market's overall technical position. While tax-exempt
bond yields, which are at their highest level in over three years, have
attracted significant retail investor interest, institutional demand declined
sharply. Long-term municipal mutual funds have seen consistent outflows in
recent months as the yields of individual securities rose faster than those of
larger, more diverse mutual funds. During the six months ended January 31, 2000,
tax-exempt mutual funds have had net redemptions of approximately $9 billion.
Also, the demand from property and casualty insurance companies has weakened as
a result of the losses and anticipated losses incurred from a series of damaging
storms across much of the eastern United States. Additionally, many
institutional investors who have in recent years been attracted to the municipal
bond market by historically attractive tax-exempt bond yield ratios of over 90%,
found other asset classes even more attractive. Even with a reduced supply
position, tax-exempt issuers have been forced to repeatedly raise municipal bond
yields in an attempt to attract adequate demand. We believe a reduced bond
supply going forward is likely to promote a more closely balanced supply/demand
structure and foster a more stable tax-exempt interest rate environment.
Looking ahead, it appears to us that long-term tax-exempt bond yields will
remain under pressure, trading in a broad range centered around current levels.
Investors are also likely to remain concerned regarding future action by the
Federal Reserve Board in early 2000. Any improvement in bond prices may be
contingent upon weakening in both US employment growth and consumer spending.
The 100 basis point rise in US Treasury bond yields seen thus far could
negatively affect US economic growth. The US housing market is likely to be
among the first sectors to be affected, as some declines have already been
evidenced because of higher mortgage rates. We believe it is also unrealistic to
expect double-digit returns in US equity markets to continue indefinitely. Much
of the US consumer's wealth is tied to recent stock market appreciation. Any
slowing in these incredible growth rates may reduce consumer spending. We
believe that these factors suggest that the worst of the recent increase in bond
yields has passed and stable, if not slightly improving, bond prices may be
expected.
Portfolio Strategy
During the six months ended January 31, 2000, we initially retained a defensive
position toward the municipal bond market, then gradually shifted to a neutral
stance. We accomplished this goal by investing a substantial portion of the
Fund's cash reserves. Since the spring of 1997, our strategy has been to seek to
enhance income and to take advantage of the highest absolute municipal yields.
During the period, we also sought to capitalize on market discrepancies, caused
in part by Year 2000 concerns, by purchasing bonds we believed to be undervalued
combined with selling bonds we believed to be overvalued. (For a complete
explanation of the benefits and risks of leveraging, see page 1 of this report
to shareholders.)
Looking ahead, we intend to remain fully invested in the municipal market in an
effort to enhance shareholder income. We do not expect to significantly alter
our present position toward the market given the current economic backdrop. We
will continue to take advantage of any opportunities in the municipal
marketplace that we believe is appropriate.
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
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Michael Kalinoski
Michael Kalinoski
Vice President and Portfolio Manager
March 2, 2000
================================================================================
We are pleased to announce that Michael A. Kalinoski is responsible for the
day-to-day management of MuniEnhanced Fund, Inc. Mr. Kalinoski has been employed
by Merrill Lynch Asset Management, L.P. (an affiliate of the Investment Adviser)
since 1999 as Vice President and Portfolio Manager. Mr. Kalinoski was previously
employed from 1993 to 1999 as a municipal bond trader with Strong Capital
Management.
================================================================================
2 & 3
<PAGE>
MuniEnhanced Fund, Inc., January 31, 2000
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<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) $ 2,700
====================================================================================================================================
Alaska -- 1.3% Valdez, Alaska, Marine Terminal Revenue Refunding Bonds:
A1+ VMIG1+ 500 (Exxon Pipeline Company Project), VRDN, Series C, 3.55% due
12/01/2033 (g) 500
AA+ NR* 5,000 (Sohio Pipeline -- British Petroleum Oil), 7.125% due
12/01/2025 5,189
====================================================================================================================================
Arizona -- 1.1% Maricopa County, Arizona, Pollution Control Corporation, PCR,
Refunding (Arizona Public Service Company), VRDN (g):
A1+ P1 900 Series D, 3.60% due 5/01/2029 900
A1+ P1 1,200 Series E, 3.65% due 5/01/2029 1,200
AAA Aaa 2,845 Phoenix, Arizona, Civic Improvement Corporation, Wastewater System
Revenue Bonds, Junior Lien, 6.50% due 7/01/2008 (d) 3,059
====================================================================================================================================
California -- 5.3% AAA Aaa 5,250 Anaheim, California, Public Financing Authority, Lease Revenue Bonds
(Public Improvements Project), Senior Series A, 6% due 9/01/2024 (c) 5,297
AAA Aaa 8,235 Los Angeles County, California, Transportation Commission, Sales
Tax Revenue Refunding Bonds, Series B, 6.50% due 7/01/2015 (b) 8,575
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) 1,563
AAA Aaa 1,500 Northern California Transmission Revenue Bonds (California-Oregon
Transmission Project), Series A, 6.50% due 5/01/2016 (d) 1,553
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) 4,297
AAA Aaa 3,000 San Jose, California, Redevelopment Agency Tax Allocation Bonds
(Merged Area Redevelopment Project), 4.75% due 8/01/2023 (a) 2,446
====================================================================================================================================
Colorado -- 10.2% Colorado HFA, Revenue Bonds, S/F Program, AMT:
NR* Aa2 2,360 Senior Series A-1, 7.40% due 11/01/2027 2,521
NR* Aa2 12,000 Senior Series B-2, 6.80% due 4/01/2030 12,431
Colorado HFA, Revenue Refunding Bonds, S/F Program:
NR* Aa2 3,000 AMT, Senior Series A-2, 7.50% due 4/01/2031 3,255
NR* Aa2 4,000 Senior Series A-3, 6.05% due 10/01/2016 3,981
NR* Aa2 16,415 Colorado Springs, Colorado, Utilities Revenue Refunding Bonds,
RITR, Series 19, 7.045% due 11/15/2026 (f) 12,973
NR* Aaa 12,025 Denver, Colorado, City and County Airport Revenue Refunding Bonds,
RITR, Series 13, 6.87% due 11/15/2023 (d)(f) 8,931
A1+c VMIG1+ 1,500 Moffat County, Colorado, PCR, Refunding (Pacificorp Projects), VRDN,
3.60% due 5/01/2013 (a)(g) 1,500
====================================================================================================================================
Connecticut -- 0.8% AAA Aaa 3,500 Connecticut State Special Tax Obligation Revenue Bonds, 6.25% due
10/01/2004 (b)(e) 3,714
====================================================================================================================================
Delaware -- 0.5% AAA Aaa 2,000 Delaware Transportation Authority, Transportation System Revenue
Bonds, 7% due 7/01/2004 (b)(e) 2,191
====================================================================================================================================
District of District of Columbia, GO, Refunding, Series B (c):
Columbia -- 6.7% AAA Aaa 5,000 5.50% due 6/01/2013 4,844
AAA Aaa 5,000 5.50% due 6/01/2014 4,785
AAA Aaa 7,500 District of Columbia, Revenue Refunding Bonds (Catholic University
of America Project), 5.625% due 10/01/2029 (a) 6,768
AAA Aaa 17,350 Washington, D.C., Convention Center Authority, Dedicated Tax
Revenue Bonds, Senior Lien, 4.75% due 10/01/2028 (a) 13,424
====================================================================================================================================
Florida -- 2.1% AAA Aaa 6,500 Florida State Division of Bond Finance Department, General Services
Revenue Refunding Bonds (Department of Environmental Protection),
Series B, 6% due 7/01/2009 (a) 6,843
NR* VMIG1+ 2,600 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric
Company Project), VRDN, 3.60% due 9/01/2025 (g) 2,600
====================================================================================================================================
Georgia -- 3.8% Georgia Municipal Electric Authority, Power Revenue Refunding Bonds:
AAA Aaa 7,725 Series EE, 7% due 1/01/2025 (a) 8,630
AAA Aaa 1,000 Series W, 6.60% due 1/01/2018 (d) 1,076
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) 3,827
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) 3,218
====================================================================================================================================
Hawaii -- 1.4% 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) 6,306
====================================================================================================================================
Illinois -- 9.9% AAA Aaa 4,000 Chicago, Illinois, Airport Revenue Refunding Bonds (O'Hare
International Airport), Second Lien, AMT, 5.50% due 1/01/2015 (a) 3,771
AAA Aaa 3,000 Chicago, Illinois, GO, Project and Refunding, Series A, 5.125%
due 1/01/2029 (b) 2,486
AAA Aaa 10,805 Chicago, Illinois, Sales Tax Revenue Refunding Bonds, 5.25% due
1/01/2028 (b) 9,191
AAA Aaa 2,240 Cook County, Illinois, Community College District No. 508, Chicago,
COP, Refunding, 8.75% due 1/01/2007 (b) 2,670
AAA Aaa 10,000 Cook County, Illinois, GO, Capital Improvement, Series A, 5% due
11/15/2023 (b) 8,237
Illinois Development Finance Authority Revenue Bonds (Bradley
University Project) (a):
AAA NR* 1,810 5.375% due 8/01/2019 1,629
AAA NR* 1,795 5.375% due 8/01/2024 1,579
AAA Aaa 3,000 Illinois Health Facilities Authority, Revenue Refunding Bonds
(Servantcor Project), Series A, 6.375% due 8/15/2006 (c)(e) 3,203
AAA Aaa 10,115 Regional Transportation Authority, Illinois, Revenue Bonds,
Series A, 7.20% due 11/01/2020 (a) 11,406
====================================================================================================================================
</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.
ACES Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
EDA Economic Development Authority
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniEnhanced Fund, Inc., January 31, 2000
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Indiana -- 3.8% AAA Aaa $ 2,500 Brownsburg, Indiana, School Building Corporation, First
Mortgage Revenue Bonds (Brownsburg Community School),
5.55% due 2/01/2024 (d) $ 2,267
AAA Aaa 1,360 Hammond, Indiana, Multi-School Building Corporation, Revenue
Refunding Bonds, First Mortgage, 6.125% due 7/15/2019 (d) 1,359
A1 VMIG1+ 1,600 Jasper County, Indiana, PCR, Refunding (Northern Indiana Public
Service), VRDN, Series C, 3.60% due 4/01/2019 (g) 1,600
AAA Aaa 13,985 Marion County, Indiana, Convention and Recreational Facilities
Authority, Excise Tax Revenue Bonds (Lease Rental), Sub-Series A,
5% due 6/01/2022 (d) 11,601
====================================================================================================================================
Kansas -- 5.3% AAA Aaa 5,500 Burlington, Kansas, PCR, Refunding (Kansas Gas and Electric
Company Project), 7% due 6/01/2031 (d) 5,740
NR* Aaa 14,740 Kansas City, Kansas, Utility System Revenue Refunding Bonds,
RITR, Series 1, 9.12% due 9/01/2023 (b)(f) 15,124
AAA Aaa 2,500 Wamego, Kansas, PCR, Refunding (Kansas Gas and Electric Company
Project), 7% due 6/01/2031 (d) 2,608
====================================================================================================================================
Louisiana -- 0.2% NR* VMIG1+ 1,000 Louisiana State Offshore Terminal Authority, Deepwater Port
Revenue Refunding Bonds (First Stage A-Loop Inc.), ACES, 3.60%
due 9/01/2006 (g) 1,000
====================================================================================================================================
Maine -- 0.4% AA Aa2 1,685 Maine State Housing Authority, Mortgage Purchase Revenue Bonds,
AMT, Series C-2, 6.875% due 11/15/2023 1,732
====================================================================================================================================
Maryland -- 0.4% AAA Aaa 1,750 Baltimore, Maryland, COP, Refunding (Board of Education
Administration Project), Series A, 5.80% due 4/01/2011 (d) 1,798
====================================================================================================================================
Massachusetts AAA Aaa 4,000 Massachusetts State, HFA, Housing Development Revenue Refunding
- -- 6.1% Bonds, Series B, 5.40% due 12/01/2028 (d) 3,490
Massachusetts State Port Authority Revenue Bonds, AMT (b):
AAA Aaa 1,915 Series A, 7.50% due 7/01/2020 1,974
AAA Aaa 2,600 Series E, 5% due 7/01/2028 2,087
AAA Aaa 10,020 Massachusetts State Turnpike Authority, Western Turnpike Revenue
Refunding Bonds, Series A, 5.55% due 1/01/2017 (d) 9,945
AAA Aaa 11,785 Massachusetts State Water Resource Authority, Revenue Refunding
Bonds, Series D, 5% due 8/01/2024 (d) 9,808
====================================================================================================================================
Michigan -- 4.1% AAA Aaa 9,175 Chippewa Valley, Michigan, Schools, GO, Refunding, 5% due
5/01/2027 (a) 7,576
NR* P1 3,100 Delta County, Michigan, Economic Development Corporation,
Environmental Improvement Revenue Refunding Bonds (Mead-Escanaba
Paper), DATES, Series F, 3.60% due 12/01/2013 (g) 3,100
AAA Aaa 4,315 Michigan State Building Authority, Revenue Refunding Bonds,
Series I, 6.25% due 10/01/2020 (d) 4,333
AAA Aaa 3,000 Monroe County, Michigan, PCR (Detroit Edison Company Project),
AMT, Series 1, 7.65% due 9/01/2020 (b) 3,106
====================================================================================================================================
Mississippi NR* VMIG1+ 2,900 Jackson County, Mississippi, PCR, Refunding (Chevron U.S.A. Inc.
- -- 1.2% Project), VRDN, 3.60% due 12/01/2016 (g) 2,900
AAA Aaa 2,400 Walnut Grove, Mississippi, Correctional Authority, COP, 6% due
11/01/2019 (a) 2,338
====================================================================================================================================
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) 3,260
====================================================================================================================================
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) 2,288
====================================================================================================================================
Nevada -- 3.0% BBB+ Baa1 5,000 Henderson, Nevada, Health Care Facility Revenue Bonds (Catholic
Healthcare West--Saint Rose Dominican Hospital), 5.375% due 7/01/2026 3,681
AAA Aaa 5,375 Washoe County, Nevada, Gas and Water Facilities Revenue Refunding
Bonds (Sierra Pacific Power Company), 6.30% due 12/01/2014 (a) 5,501
Washoe County, Nevada, Water Facility Revenue Bonds (Sierra
Pacific Power Company Project), AMT:
AAA Aaa 3,000 6.65% due 6/01/2017 (d) 3,081
A1+ P1 1,200 VRDN, 3.80% due 12/01/2020 (g) 1,200
====================================================================================================================================
New Jersey -- 1.2% A1+ NR* 1,495 New Jersey EDA, Economic Development Revenue Refunding Bonds
(Foreign Trade Zone Project), VRDN, 3.55% due 12/01/2007 (g) 1,495
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) 4,064
====================================================================================================================================
New Mexico -- 0.5% AAA Aaa 2,300 Santa Fe, New Mexico, Revenue Bonds, 6.30% due 6/01/2004 (a)(e) 2,422
====================================================================================================================================
New York -- 1.3% AAA Aaa 2,750 New York City, New York, City Transitional Finance Authority
Revenue Bonds, Future Tax Secured, Series B, 4.75% due 11/15/2018 (b) 2,297
A- A3 2,000 New York City, New York, GO, Refunding, Series L, 5.75% due
8/01/2013 1,985
AAA NR* 1,795 New York State Dormitory Authority Revenue Bonds (Northeast
Parent and Child), Series D, 5.50% due 7/01/2018 (a) 1,677
====================================================================================================================================
North Carolina AAA Aaa 2,000 Fayetteville, North Carolina, Public Works Commission Revenue
- -- 3.9% Bonds, 5.125% due 3/01/2017 (c) 1,785
AAA Aaa 13,940 North Carolina, Eastern Municipal Power Agency, Power System
Revenue Refunding Bonds, Series B, 6.125% due 1/01/2009 (d) 14,607
A1+ NR* 1,000 Raleigh Durham, North Carolina, Airport Authority, Special
Facility Revenue Refunding Bonds (American Airlines Inc.),
VRDN, Series B, 3.65% due 11/01/2015 (g) 1,000
====================================================================================================================================
Ohio -- 1.1% A1+ VMIG1+ 110 Cuyahoga County, Ohio, Hospital Revenue Bonds (The Cleveland
Clinic), VRDN, Series D, 3.70% 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) 2,728
AAA Aaa 2,150 Ohio State Air Quality Development Authority, PCR, Refunding
(Ohio Edison Company), Series A, 7.45% due 3/01/2016 (b) 2,198
====================================================================================================================================
Pennsylvania AAA Aaa 3,000 Philadelphia, Pennsylvania, Hospitals and Higher Educational
- -- 0.6% Facilities Authority, Revenue Refunding Bonds (Jefferson Health
System), Series A, 5.125% due 5/15/2018 (a) 2,591
====================================================================================================================================
</TABLE>
6 & 7
<PAGE>
MuniEnhanced Fund, Inc., January 31, 2000
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
South Dakota -- 1.8% AAA NR* $ 7,000 South Dakota State Health and Educational Facilities Authority,
Revenue Refunding Bonds, Series A, 7.625% due 7/01/2014 (d) $ 7,973
====================================================================================================================================
Tennessee -- 2.6% Metropolitan Nashville, Tennessee, Airport Authority, Airport
Revenue Refunding Bonds (b):
AAA Aaa 2,090 4.95% due 7/01/2011 1,950
AAA Aaa 3,225 Series C, 6.60% due 7/01/2015 3,352
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) 6,464
====================================================================================================================================
Texas -- 8.7% 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 1,525
AAA Aaa 1,555 6.25% due 8/15/2011 1,618
AAA Aaa 1,650 6.25% due 8/15/2012 1,706
Bexar, Texas, Metropolitan Water District, Waterworks System
Revenue Refunding Bonds (d):
AAA Aaa 1,135 6.35% due 5/01/2005 (e) 1,222
AAA NR* 1,615 6.35% due 5/01/2025 1,613
AAA Aaa 5,000 Dallas, Texas, Special Tax Revenue Bonds, Series A, 5% due
8/15/2025 (a) 4,147
A1+ VMIG1+ 1,300 Gulf Coast, Texas, Waste Disposal Authority, PCR, Refunding
(Amoco Oil Company Project), VRDN, 3.55% due 10/01/2017 (g) 1,300
A1+ NR* 1,800 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Refunding Bonds (Methodist Hospital), VRDN,
3.65% due 12/01/2025 (g) 1,800
AAA Aaa 2,660 Houston, Texas, Airport System Revenue Bonds, Special Facilities
(People Mover), AMT, Series A, 6% due 7/15/2007 (c) 2,745
AAA Aaa 5,000 Houston, Texas, Water and Sewer System Revenue Bonds, Junior Lien,
Series C, 5.375% due 12/01/2027 (b) 4,405
Houston, Texas, Water and Sewer System, Revenue Refunding Bonds,
Junior Lien (a):
AAA Aaa 4,405 6.375% due 12/01/2017 4,444
AAA Aaa 295 Series C, 6.375% due 12/01/2001 (e) 310
AAA Aaa 2,500 Matagorda County, Texas, Navigation District No. 1 Revenue
Refunding Bonds (Houston Lighting), AMT, 5.125% due 11/01/2028 (a) 2,075
AAA Aaa 10,400 Travis County, Texas, Health Facilities Development Corporation,
Revenue Refunding Bonds (Ascension Health Credit), Series A,
5.875% due 11/15/2024 (a) 9,848
====================================================================================================================================
Utah -- 3.6% AAA Aaa 2,500 Central Utah, Water Conservancy District, GO, Refunding, Series D,
5% due 4/01/2027 (a) 2,038
AAA Aaa 5,055 Salt Lake City, Utah, Metropolitan Water District, Water Revenue
Bonds, 5.375% due 7/01/2029 (a) 4,384
NR* P1 2,100 Salt Lake County, Utah, PCR, Refunding (Service Station Holdings
Project), VRDN, 3.60% due 2/01/2008 (g) 2,100
Utah Water Finance Agency Revenue Bonds (Pooled Loan Financing
Program), Series A (a):
AAA Aaa 2,210 5.40% due 10/01/2024 1,951
AAA Aaa 6,135 5.50% due 10/01/2029 5,442
====================================================================================================================================
Virginia -- 3.8% AAA Aaa 10,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue Refunding
Bonds, AMT, Series A, 6.10% due 2/01/2010 (a)(h) 10,426
AAA Aaa 6,000 Loudoun County, Virginia, COP, 6.80% due 3/01/2014 (c) 6,400
====================================================================================================================================
Washington -- 2.7% AAA Aaa 1,950 Port Seattle, Washington, Passenger Facility Charge Revenue Bonds,
Series A, 5% due 12/01/2023 (d) 1,612
AAA Aaa 11,750 Snohomish County, Washington, Public Utility District Number 001,
Electric Revenue Refunding Bonds, 5.375% due 12/01/2024 (c) 10,367
====================================================================================================================================
Wyoming -- 0.5% AAA Aaa 2,500 Central Wyoming Regional Water System, Joint Powers Board Revenue
Refunding Bonds, 5.25% due 6/01/2030 (c) 2,129
====================================================================================================================================
Total Investments (Cost -- $471,953) -- 101.7% 454,071
Variation Margin on Financial Futures Contracts** -- 0.0% 162
Liabilities in Excess of Other Assets -- (1.7%) (7,589)
--------
Net Assets -- 100.0% $446,644
========
====================================================================================================================================
</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 January 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 January 31, 2000.
(h) All or a portion of security held as collateral in connection with
open financial futures contracts.
+ Highest short-term rating by Moody's Investors Service, Inc.
* Not Rated.
** Financial futures contracts sold as of January 31, 2000 were as
follows:
--------------------------------------------------------------------------
(in Thousands)
--------------------------------------------------------------------------
Number of Expiration
Contracts Issue Date Value
--------------------------------------------------------------------------
225 US Treasury Bonds March 2000 $20,749
--------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price -- $20,447) $20,749
=======
--------------------------------------------------------------------------
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, 2000 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa ........................................................... 85.5%
AA/Aa ............................................................. 9.4
A/A ............................................................... 0.5
BBB/Baa ........................................................... 0.8
Other+ ............................................................ 5.5
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
8 & 9
<PAGE>
MuniEnhanced Fund, Inc., January 31, 2000
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of January 31, 2000
====================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $471,952,818) ............................. $454,071,274
Cash ................................................................................ 67,542
Receivables:
Interest .......................................................................... $ 6,692,961
Variation margin .................................................................. 161,719 6,854,680
------------
Prepaid expenses and other assets ................................................... 16,533
------------
Total assets ........................................................................ 461,010,029
------------
====================================================================================================================================
Liabilities: Payables:
Securities purchased .............................................................. 13,719,547
Dividends to shareholders ......................................................... 321,770
Investment adviser ................................................................ 178,051 14,219,368
------------
Accrued expenses .................................................................... 146,551
------------
Total liabilities ................................................................... 14,365,919
------------
====================================================================================================================================
Net Assets: Net assets .......................................................................... $446,644,110
============
====================================================================================================================================
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 .............................................. 3,560,616
Accumulated realized capital losses on investments -- net ........................... (10,835,414)
Accumulated distribution in excess of realized capital gains on investments -- net .. (4,220,324)
Unrealized depreciation on investments -- net ....................................... (18,183,887)
------------
Total -- Equivalent to $10.10 net asset value per share of Common Stock
(market price -- $9.1875) ........................................................... 296,644,110
------------
Total capital ....................................................................... $446,644,110
============
====================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended January 31, 2000
====================================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ............................ $ 26,759,218
Income:
====================================================================================================================================
Expenses: Investment advisory fees ............................................................ $ 2,383,428
Commission fees ..................................................................... 379,600
Transfer agent fees ................................................................. 164,570
Professional fees ................................................................... 90,115
Accounting services ................................................................. 60,041
Printing and shareholder reports .................................................... 56,439
Directors' fees and expenses ........................................................ 48,314
Listing fees ........................................................................ 35,035
Custodian fees ...................................................................... 29,316
Pricing fees ........................................................................ 14,923
Other ............................................................................... 24,696
------------
Total expenses ...................................................................... 3,286,477
------------
Investment income -- net ............................................................ 23,472,741
------------
====================================================================================================================================
Realized & Realized loss on investments -- net ................................................. (10,823,948)
Unrealized Change in unrealized appreciation/depreciation on investments -- net ................ (46,491,865)
Loss On ------------
Investments Net Decrease in Net Assets Resulting from Operations ................................ $(33,843,072)
- -- Net: ============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
10 & 11
<PAGE>
MuniEnhanced Fund, Inc., January 31, 2000
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended
January 31,
----------------------------------
Increase (Decrease) in Net Assets: 2000 1999
====================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income -- net ............................................. $ 23,472,741 $ 24,669,565
Realized gain (loss) on investments -- net ........................... (10,823,948) 9,268,459
Change in unrealized appreciation/depreciation on investments -- net . (46,491,865) (4,175,125)
------------- -------------
Net increase (decrease) in net assets resulting from operations ...... (33,843,072) 29,762,899
------------- -------------
====================================================================================================================================
Dividends & Investment income -- net:
Distributions to Common Stock ....................................................... (18,740,807) (19,359,816)
Shareholders: Preferred Stock .................................................... (4,977,080) (5,149,880)
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 ...................................................... (23,717,887) (39,018,946)
------------- -------------
====================================================================================================================================
Common Stock Value of shares issued to Common Stock shareholders in reinvestment
Transactions: of dividends and distributions........................................ 602,065 3,330,627
------------- -------------
====================================================================================================================================
Net Assets: Total decrease in net assets ......................................... (56,958,894) (5,925,420)
Beginning of year .................................................... 503,603,004 509,528,424
------------- -------------
End of year * ........................................................ $ 446,644,110 $ 503,603,004
============= =============
====================================================================================================================================
*Undistributed investment income -- net............................... $ 3,560,616 $ 3,805,762
============= =============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
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: 2000 1999 1998 1997 1996
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ............. $ 12.06 $ 12.38 $ 11.75 $ 12.40 $ 11.17
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net ....................... .80 .85 .88 .90 .92
Realized and unrealized gain (loss)
on investments -- net .......................... (1.95) .18 .64 (.54) 1.23
-------- -------- -------- -------- --------
Total from investment operations ............... (1.15) 1.03 1.52 .36 2.15
-------- -------- -------- -------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income -- net ..................... (.64) (.67) (.71) (.72) (.72)
Realized gain on investments -- net .......... -- (.35) -- -- --
In excess of realized gain on investments
-- net ....................................... -- (.15) -- (.11) --
-------- -------- -------- -------- --------
Total dividends and distributions to
Common Stock shareholders....................... (.64) (1.17) (.71) (.83) (.72)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Investment income -- net ..................... (.17) (.18) (.18) (.18) (.20)
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 10.10 $ 12.06 $ 12.38 $ 11.75 $ 12.40
======== ======== ======== ======== ========
Market price per share, end of year ............ $ 9.1875 $ 12.00 $12.4375 $ 11.00 $ 11.375
======== ======== ======== ======== ========
====================================================================================================================================
Total Investment Based on market price per share ................ (18.52%) 6.36 20.26% 4.28% 18.67%
Return:* ======== ======== ======== ======== ========
Based on net asset value per share ............. (10.87%) 7.38 12.06% 2.18% 18.71%
======== ======== ======== ======== ========
====================================================================================================================================
Ratios Based on Total expenses * * ............................. 1.00% .94% .96% .95% .97%
Average Net Assets ======== ======== ======== ======== ========
Of Common Stock: Total investment income -- net * * ............. 7.16% 6.93% 7.39% 7.55% 7.77%
======== ======== ======== ======== ========
Amount of dividends to Preferred Stock
shareholders ................................... 1.52% 1.45% 1.55% 1.50% 1.68%
======== ======== ======== ======== ========
Investment income -- net, to Common
Stock shareholders ............................. 5.64% 5.48% 5.84% 6.05% 6.09%
======== ======== ======== ======== ========
====================================================================================================================================
Ratios Based on Total expenses ................................. .69% .66% .67% .67% .68%
Total Average ======== ======== ======== ======== ========
Net Assets:++** Total investment income -- net ................. 4.91% 4.88% 5.16% 5.27% 5.42%
======== ======== ======== ======== ========
====================================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ...... 3.32% 3.43% 3.57% 3.47% 3.85%
Average Net Assets ======== ======== ======== ======== ========
Of Preferred Stock:
====================================================================================================================================
Supplemental Net assets, net of Preferred Stock, end of
Data: year (in thousands)............................. $296,644 $353,603 $359,528 $340,751 $359,763
======== ======== ======== ======== ========
Preferred Stock outstanding, end of year
(in thousands) ................................. $150,000 $150,000 $150,000 $150,000 $150,000
======== ======== ======== ======== ========
Portfolio turnover ............................. 124.61% 144.46% 128.79% 138.12% 114.30%
======== ======== ======== ======== ========
====================================================================================================================================
Leverage: Asset coverage per $ 1,000 ..................... $ 2,978 $ 3,357 $ 3,397 $ 3,272 $ 3,398
======== ======== ======== ======== ========
====================================================================================================================================
Dividends Per Series A -- Investment income -- net ........... $ 825 $ 862 $ 891 $ 860 $ 961
Share on ======== ======== ======== ======== ========
Preferred Stock Series B -- Investment income -- net ........... $ 835 $ 868 $ 900 $ 865 $ 959
Outstanding: ======== ======== ======== ======== ========
Series C -- Investment income -- net ........... $ 829 $ 845 $ 889 $ 876 $ 971
======== ======== ======== ======== ========
====================================================================================================================================
</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 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.
See Notes to Financial Statements.
12 & 13
<PAGE>
MuniEnhanced Fund, Inc., January 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 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.
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
year ended January 31, 2000 were $555,130,217 and $546,906,078, respectively.
Net realized gains (losses) for the year ended January 31, 2000 and net
unrealized losses as of January 31, 2000 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- --------------------------------------------------------------------------------
Long-term investments .............. $(14,135,136) $(17,881,544)
Financial futures contracts ........ 3,311,188 (302,343)
------------ ------------
Total .............................. $(10,823,948) $(18,183,887)
============ ============
- --------------------------------------------------------------------------------
As of January 31, 2000, net unrealized depreciation for Federal income tax
purposes aggregated $17,881,544, of which $7,716,131 related to appreciated
securities and $25,597,675 related to depreciated securities. The aggregate cost
of investments at January 31, 2000 for Federal income tax purposes was
$471,952,818.
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, 2000 and
January 31, 1999 increased by 50,578 and 280,120, 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
14 & 15
<PAGE>
MuniEnhanced Fund, Inc., January 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
may vary for the successive dividend period for each series. The yields in
effect at January 31, 2000 were as follows: Series A, 3.65%; Series B, 3.525%;
and Series C, 3.45%.
Shares issued and outstanding during the years ended January 31, 2000 and
January 31, 1999 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 year ended January 31, 2000, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, an affiliate of FAM, received $141,230 as commissions.
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 February 7, 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 February 28, 2000 to shareholders of record as of February 17, 2000.
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, 2000, 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, 2000 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, 2000, 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 7, 2000
16 & 17
<PAGE>
MuniEnhanced Fund, Inc., January 31, 2000
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by Muni-Enhanced Fund, Inc.
during its taxable year ended January 31, 2000 qualify as tax-exempt interest
dividends for Federal income tax purposes. Additionally, there were no capital
gains distributions paid by the Fund during the year.
Please retain this information for your records.
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
- --------------------------------------------------------------------------------
Robert R. Martin, Director of MuniEnhanced Fund, Inc. has recently retired. The
Fund's Board of Directors wishes Mr. Martin well in his retirement.
- --------------------------------------------------------------------------------
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:
The Bank of New York
100 Church Street
New York, NY 10286
18 & 19
<PAGE>
This report, including the financial information herein, is transmitted to the
shareholders of MuniEnhanced Fund, Inc. for their information. It is not a
prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a representation of future
performance. The Fund has leveraged its Common Stock by issuing Preferred Stock
to provide the Common Stock shareholders with a potentially higher rate of
return. Leverage creates risks for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price of shares
of the Common Stock, and the risk that fluctuations in the short-term dividend
rates of the Preferred Stock may affect the yield to Common Stock shareholders.
Statements and other information herein are as dated and are subject to change.
MuniEnhanced
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #10874--1/00
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