UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-05739
Name of Fund: MuniEnhanced Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, MuniEnhanced Fund, Inc., 800 Scudders Mill Road, Plainsboro, NJ
08536. Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 01/31/06
Date of reporting period: 02/01/05 - 07/31/05
Item 1 - Report to Stockholders
MuniEnhanced
Fund, Inc.
Semi-Annual Report
July 31, 2005
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,
net of dividends to Preferred Stock, 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 pickup 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. As of July 31, 2005, the percentage of the Fund's
total net assets invested in inverse floaters was 11.89%, before the deduction
of Preferred Stock.
Swap Agreements
The Fund may invest in swap agreements, which are over-the-counter contracts in
which one party agrees to make periodic payments based on the change in market
value of a specified bond, basket of bonds, or index in return for periodic
payments based on a fixed or variable interest rate or the change in market
value of a different bond, basket of bonds or index. Swap agreements may be used
to obtain exposure to a bond or market without owning or taking physical custody
of securities. Swap agreements involve the risk that the party with whom the
Fund has entered into the swap will default on its obligation to pay the Fund
and the risk that the Fund will not be able to meet its obligations to pay the
other party to the agreement.
2 MUNIENHANCED FUND, INC. JULY 31, 2005
A Letter From the President
Dear Shareholder
We have been referring to 2005 as a "muddle through" year for the financial
markets, characterized by positive and negative crosscurrents that have
conspired to create a fairly complicated investing environment. Amid these
conditions, the major market benchmarks managed to post positive results for the
current reporting period, as follows:
Total Returns as of July 31, 2005 6-month 12-month
=============================================================================================
U.S. equities (Standard & Poor's 500 Index) +5.45% +14.05%
---------------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) +9.58% +24.78%
---------------------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) +3.76% +21.06%
---------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) +0.95% + 4.79%
---------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +1.48% + 6.35%
---------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) +2.16% +10.19%
---------------------------------------------------------------------------------------------
On August 9, the Federal Reserve Board (the Fed) increased the federal funds
rate for the tenth consecutive time since June 2004, bringing the target
short-term interest rate to 3.5%. Just months ago, some observers felt that
slowing global economic growth and subdued inflation might cause the Fed to end
its monetary tightening campaign. Most recently, however, positive economic news
(including a favorable employment report for July and resilient consumer
spending) has prompted new concerns that the Fed may increase interest rates
more than is necessary to moderate economic growth and keep inflation in check.
After ending 2004 in a strong rally, equity markets fell slightly into negative
territory in the first half of 2005. July, however, brought the strongest
monthly gain of the calendar year and helped to boost equity market returns for
the current reporting period. Working in favor of equities have been
surprisingly strong corporate earnings reports and low long-term bond yields.
Conversely, continued high oil prices and Fed interest rate hikes have exerted
downward pressure on stocks.
In the fixed income markets, the yield curve flattened considerably as
short-term rates rose in concert with the Fed rate hikes and long-term bond
yields fell. Over the past 12 months, the two-year Treasury yield rose 134 basis
points (1.34%) to 4.02% while the 10-year Treasury yield declined 22 basis
points to 4.28% -- making the spread between the two just 26 basis points. At
period-end, the 10-year Treasury yield finally appeared to be on a slow upward
trend after falling below 4% in June.
Financial markets are likely to face continued crosscurrents for the remainder
of 2005. Nevertheless, opportunities do exist and we encourage you to work with
your financial advisor to diversify your portfolio among a variety of asset
types. This can help to diffuse risk while also tapping into the potential
benefits of a broader range of investment alternatives. As always, we thank you
for trusting Merrill Lynch Investment Managers with your investment assets, and
we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Director
MUNIENHANCED FUND, INC. JULY 31, 2005 3
A Discussion With Your Fund's Portfolio Manager
The Fund outperformed its comparable Lipper category average and continued
to provide shareholders with an above-average dividend throughout the six-month
period.
Discuss the recent market environment relative to municipal bonds.
Over the past six months, long-term bond yields generally moved lower as their
prices, which move in the opposite direction, increased. In the meantime, the
Federal Reserve Board (the Fed) continued to raise short-term interest rates at
each of its meetings during the period, lifting the federal funds target to
3.25% by period-end (and to 3.5% on August 9). As shorter-term interest rates
moved higher in concert with Fed interest rate hikes and longer-term bond yields
declined, the result was a continued flattening of the yield curve. During the
past six months, the 30-year U.S. Treasury bond yield declined 12 basis points
(.12%) to 4.47% while the yield on the 10-year Treasury note rose 14 basis
points to 4.28%. In keeping with Fed interest rate hikes, the two-year Treasury
yield increased a more dramatic 73 basis points.
Tax-exempt bond yields exhibited a similar pattern during the period. Yields on
30-year revenue bonds, as measured by the Bond Buyer Revenue Bond Index, fell 4
basis points to 4.86%. According to Municipal Market Data, yields on AAA-rated
bonds maturing in 30 years declined 8 basis points to 4.35% while AAA-rated
bonds maturing in 10 years saw their yields rise 18 basis points by July 31,
2005 at 3.66%.
Low tax-exempt bond yields continued to encourage municipalities to issue both
new debt and refund outstanding, higher-couponed issues. During the six-month
period, more than $222 billion in new municipal bonds was underwritten, an
increase of 13.8% compared to issuance during the same six months of 2004.
Issuance so far in 2005 has been boosted by nearly a 50% increase in refunding
issues, which have been heavily weighted in the 10-year - 20-year maturity range
to lower the overall interest cost of the refunding issue. This concentration
has put pressure on intermediate tax-exempt bond yields while supporting
longer-term bond prices.
Investor demand for municipal product has remained generally positive. According
to statistics from the Investment Company Institute, through June 30, 2005,
year-to-date net new cash flows into long-term municipal bond funds exceeded
$2.5 billion. This represents a significant improvement from the $4.6 billion
net outflow seen during the same period in 2004. Recent July weekly figures, as
reported by AMG Data Service, also pointed to positive flows. Throughout much of
the past six months, higher-yielding tax-exempt bond funds have been the
principal target for the new cash inflows. The need to invest these cash flows
has led to strong demand for lower-rated issues and a consequent narrowing of
credit spreads. Additionally, in the first six months of 2005, we saw an
increased percentage of new issues bearing an insurer's guarantee. This further
reduced the availability of lower-rated municipal securities, lending more
support to higher prices for these issues.
Municipal bond issues have underperformed their taxable counterparts in recent
months as U.S. Treasury bonds have enjoyed increased demand from foreign
governments, which are unable to benefit from the tax advantage inherent in
tax-exempt products. This underperformance, however, has resulted in very
attractive tax-exempt bond yield ratios. We believe this should continue to
attract investors to the municipal marketplace, especially if new municipal bond
issuance remains manageable, as expected.
How did the Fund perform during the period?
For the six-month period ended July 31, 2005, the Common Stock of MuniEnhanced
Fund, Inc. had net annualized yields of 6.28% and 6.36%, based on a period-end
per share net asset value of $11.76 and a per share market price of $11.60,
respectively, and $.366 per share income dividends. Over the same period, the
total investment return on the Fund's Common Stock was +2.52%, based on a change
in per share net asset value from $11.85 to $11.76, and assuming reinvestment of
all distributions.
The Fund's total return, based on net asset value, exceeded the +1.66% average
return of the Lipper Insured Municipal Debt Funds (Leveraged) category for the
six-month period. (Funds in this Lipper category invest primarily in municipal
debt issues insured as to timely payment. These funds can be leveraged via use
of debt, preferred equity and/or reverse repurchase agreements.)
Our focus on the long end of the municipal yield curve benefited performance as
the curve flattened and longer-maturity bonds significantly outperformed
shorter-maturity issues. The Fund's above-average yield also contributed to
performance, as did the advance refunding of certain issues. When munici-
4 MUNIENHANCED FUND, INC. JULY 31, 2005
pal bonds are refinanced ahead of their maturity date, their prices generally
increase sharply. Finally, the Fund continued to benefit from our increased use
of leverage, a change we made last year to bring the Fund's borrowing level more
in line with that of its peers.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
this report. As a closed-end fund, the Fund's shares may trade in the secondary
market at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the Fund's
Common Stock can vary significantly from total investment returns based on
changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
We did not significantly alter the Fund's structure or our strategy over the
past six months. Although we generally maintained a defensive posture throughout
the period, we did take advantage of episodes of market weakness (rising yields
and falling prices) to reduce our defensive stance. This does not reflect a
change in our underlying thesis. We continue to believe that a conservative
interest rate stance is appropriate in an environment where the Fed is raising
short-term interest rates and is clearly focused on moving long-term bond yields
higher. However, we are well aware that the long end of the curve has not
responded as anticipated. Thus, we remained flexible enough to modify our
approach, as appropriate, to take advantage of the changing shape of the curve.
Having said that, our theme of moving toward the longer end of the yield curve
remained intact. As opportunities presented themselves, we sold bonds in the
five-year - 10-year area of the curve in favor of bonds in the 25-year - 30-year
range. This strategy continued to be the main driver of performance throughout
the period, although that effect declined somewhat as the yield curve continued
to flatten. We also have been careful to retain shorter-term bonds in the
portfolio that were purchased in a higher-yield environment and provide a
meaningful income benefit to the portfolio. Finally, we generally maintained the
Fund's fully invested position throughout the period in an effort to enhance the
level of income available to shareholders. This allowed the Fund to maintain a
stable monthly dividend.
For the six-month period ended July 31, 2005, the Fund's Auction Market
Preferred Stock (AMPS) had average yields as follows: Series A, 2.06%; Series B,
2.37%; Series C, 2.21%; and Series D, 2.19%. At this point in the Fed's monetary
tightening cycle, interest rate increases are having an impact on the Fund's
borrowing costs. The Fed raised the short-term interest rate target 100 basis
points during the six-month period. Nevertheless, we are still able to borrow at
a lower rate than where we invest, and this has continued to generate an income
benefit to the holders of Common Stock. However, should the spread between
short-term and long-term interest rates continue to narrow, the benefits of
leveraging will decline and, as a result, reduce the yield on the Fund's Common
Stock. At the end of the period, the Fund's leverage amount, due to AMPS, was
35.13% of total net assets. (For a more complete explanation of the benefits and
risks of leveraging, see page 2 of this report to shareholders.)
How would you characterize the Fund's position at the close of the period?
We remain focused on high-quality municipal bonds and continue to favor issues
with longer maturities. We maintained a slightly defensive market posture at the
close of the period in recognition of generally healthy economic conditions and
the Fed's apparent intention to continue increasing interest rates. We believe
this positioning prepares the Fund for relative outperformance once long-term
market rates eventually begin to follow short-term interest rates higher. In the
meantime, our fully invested stance should continue to provide an income benefit
to Common Stock shareholders. We will continue to monitor the market in an
effort to take advantage of periods of yield volatility and any distortions in
supply that may present opportunities to purchase attractively structured bonds.
Michael Kalinoski, CFA
Vice President and Portfolio Manager
August 11, 2005
MUNIENHANCED FUND, INC. JULY 31, 2005 5
Special Message to Shareholders
A Municipal Bonds Update in the Aftermath of Hurricane Katrina
Hurricane Katrina caused tremendous human suffering, and the total damage
estimates are currently ranging in excess of $50 billion, making it the worst
natural disaster to hit the United States. Despite the widespread devastation
from the storm, we believe that there should be no long-term negative effect on
the credit ratings of state and local governments in Louisiana, Mississippi and
Alabama. It is our view that the affected states should recover with no major
long-term financial or economic damage. These states possess broad-based
economies outside of the areas suffering hurricane destruction, and, as
sovereign entities, maintain the exclusive right to collect a broad array of tax
revenues.
Given the extent of the damage from the hurricane, the local entities most
heavily affected, including New Orleans, Biloxi and Mobile, could possibly face
credit rating downgrades in the near term due to constrained financial
operations resulting from reduced economic activity and short-term cash flow
disruptions. However, we do not view any credit deterioration as a long-term
trend and believe these areas also will recover. Like states, these
municipalities retain strong revenue-raising abilities, particularly property
and sales taxes, and also can reduce expenses.
The region's recovery likely will be aided by an injection of revenues in the
form of federal emergency aid, private insurance and charitable contributions.
However, given the severity of the damage from Hurricane Katrina, it is
difficult to predict the length of recovery and the amount and timing of
additional federal aid or claims paid by private municipal bond insurers. Many
public entities have issued insured debt, for which private insurers guarantee
timely payment of principal and interest. This especially benefits holders of
bonds secured by more economically sensitive revenues, such as hotel and sales
taxes, which are expected to slow significantly in the short term. We do not
foresee any widespread or prolonged debt service defaults. The few defaults that
may occur should be temporary in nature, and we believe there will be a complete
recovery over a short period of time.
John M. Loffredo
Managing Director and Co-Chief Investment Officer
Municipal Products Group of Merrill Lynch Investment Managers
September 6, 2005
Portfolio Information as of July 31, 2005
Percent of
Quality Ratings by Total
S&P/Moody's Investments
--------------------------------------------------------------------------------
AAA/Aaa ........................................................... 91.2%
AA/Aa ............................................................. 1.9
A/A ............................................................... 5.6
BBB/Baa ........................................................... 0.4
NR (Not Rated) .................................................... 0.9
--------------------------------------------------------------------------------
6 MUNIENHANCED FUND, INC. JULY 31, 2005
Schedule of Investments (in Thousands)
Face
Amount Municipal Bonds Value
================================================================================================
Alabama--0.9%
$ 2,750 Jefferson County, Alabama, Limited Obligation School
Warrants, Series A, 5.50% due 1/01/2022 $ 2,995
================================================================================================
California--32.2%
9,000 Alameda Corridor Transportation Authority, California,
Capital Appreciation Revenue Refunding Bonds,
Subordinate Lien, Series A,
5.543%* due 10/01/2024 (a) 6,709
6,000 Alameda Corridor Transportation Authority, California,
Revenue Refunding Bonds, Subordinated Lien,
Series A, 5.495%* due 10/01/2025 (a) 4,462
5,000 Anaheim, California, Public Financing Authority, Lease
Revenue Bonds (Public Improvements Project),
Senior Series A, 6% due 9/01/2024 (d) 6,035
California State Department of Water Resources, Power
Supply Revenue Bonds, Series A:
1,395 5.375% due 5/01/2022 1,509
1,800 5.375% due 5/01/2022 (f) 1,989
5,400 California State, GO, 5.125% due 2/01/2027 5,711
California State, GO, Refunding:
3,000 5.25% due 9/01/2026 3,201
6,000 5.25% due 2/01/2030 (f) 6,433
5,000 5.125% due 6/01/2031 5,185
2,200 ROLS, Series II-R-272, 8.026% due 2/01/2033 (i)(j) 2,460
8,490 California State, Various Purpose, GO,
5.50% due 11/01/2033 9,264
Golden State Tobacco Securitization Corporation of
California, Tobacco Settlement Revenue Bonds,
Series B (g):
3,805 5.60% due 6/01/2010 4,206
5,000 5% due 6/01/2013 (a) 5,441
10,000 5.50% due 6/01/2013 (b) 11,220
5,035 5.50% due 6/01/2013 (c) 5,649
1,400 5.625% due 6/01/2013 (c) 1,583
6,800 5.625% due 6/01/2013 (k) 7,687
3,250 Golden State Tobacco Securitization Corporation of
California, Tobacco Settlement Revenue Refunding
Bonds, Series A, 5% due 6/01/2035 (b) 3,409
3,500 Los Angeles, California, Unified School District, GO,
Series A, 5% due 1/01/2028 (f) 3,694
5,000 Norco, California, Redevelopment Agency, Tax Allocation
Refunding Bonds (Norco Redevelopment Project--
Area Number 1), 5.125% due 3/01/2030 (f) 5,251
1,750 Poway, California, Redevelopment Agency, Tax Allocation
Refunding Bonds (Paguay Redevelopment Project),
5.125% due 6/15/2033 (a) 1,835
6,145 Stockton, California, Public Financing Authority, Lease
Revenue Bonds (Parking & Capital Projects),
5.125% due 9/01/2030 (b) 6,504
1,600 Tamalpais, California, Union High School District, GO
(Election of 2001), 5% due 8/01/2028 (d) 1,683
================================================================================================
Colorado--8.5%
2,135 Boulder County, Colorado, Hospital Development
Revenue Bonds (Longmont United Hospital Project),
5.75% due 12/01/2020 (i) 2,331
185 Colorado HFA, Revenue Bonds (S/F Program), AMT,
Senior Series A-1, 7.40% due 11/01/2027 187
930 Colorado HFA, Revenue Refunding Bonds (S/F Program),
AMT, Senior Series A-2, 7.50% due 4/01/2031 972
Colorado Health Facilities Authority Revenue Bonds,
Series A:
1,200 (Catholic Health Initiatives),
5.50% due 3/01/2032 (h) 1,324
1,200 (Covenant Retirement Communities Inc.),
5.50% due 12/01/2027 (i) 1,285
675 (Covenant Retirement Communities Inc.),
5.50% due 12/01/2033 (i) 720
3,875 Colorado Water Resources and Power Development
Authority, Clean Water Revenue Bonds, Series A,
6.25% due 9/01/2010 (g) 4,415
2,000 Denver, Colorado, City and County Airport Revenue
Refunding Bonds, AMT, Series A,
6% due 11/15/2018 (a) 2,207
5,450 El Paso County, Colorado, School District Number 49,
Falcon, GO, Series A, 6% due 12/01/2018 (d) 6,289
8,950 Northwest Parkway, Colorado, Public Highway Authority,
Capital Appreciation Revenue Bonds, Senior
Convertible, Series C, 5,337%* due 6/15/2025 (d) 7,488
1,900 Northwest Parkway, Colorado, Public Highway Authority
Revenue Bonds, Series A, 5.50% due 6/15/2021 (a) 2,110
================================================================================================
Florida--1.4%
285 Escambia County, Florida, Health Facilities Authority,
Health Facility Revenue Bonds (Florida Health Care
Facility Loan), 5.95% due 7/01/2020 (a) 287
4,200 Orange County, Florida, Sales Tax Revenue Refunding
Bonds, Series B, 5.125% due 1/01/2032 (b) 4,442
================================================================================================
Georgia--10.6%
18,655 Atlanta, Georgia, Airport General Revenue Refunding
Bonds, Series B, 5.25% due 1/01/2033 (d) 20,028
2,300 Augusta, Georgia, Water and Sewer Revenue Bonds,
5.25% due 10/01/2039 (d) 2,473
3,500 Fulton County, Georgia, Water and Sewer Revenue
Bonds, 5.25% due 1/01/2035 (b) 3,779
7,725 Georgia Municipal Electric Authority, Power Revenue
Refunding Bonds, Series EE, 7% due 1/01/2025 (a) 10,502
================================================================================================
Illinois--19.6%
5,125 Chicago, Illinois, Board of Education, GO, RIB, Series 467,
8.91% due 12/01/2027 (a)(j) 5,964
Chicago, Illinois, O'Hare International Airport Revenue
Bonds, 3rd Lien, AMT, Series B-2:
5,670 5.75% due 1/01/2023 (d) 6,271
2,500 6% due 1/01/2029 (c) 2,814
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 at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DRIVERS Derivative Inverse Tax-Exempt Receipts
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
ROLS Reset Option Long Securities
S/F Single-Family
MUNIENHANCED FUND, INC. JULY 31, 2005 7
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
================================================================================================
Illinois (concluded)
$ 4,550 Chicago, Illinois, O'Hare International Airport, Revenue
Refunding Bonds, DRIVERS, AMT, Series 250,
8.824% due 1/01/2021 (f)(j) $ 5,385
3,000 Cook County, Illinois, Capital Improvement, GO, Series C,
5.50% due 11/15/2026 (a) 3,316
2,240 Cook County, Illinois, Community College District No. 508,
Chicago, COP, Refunding, 8.75% due 1/01/2007 (b) 2,416
3,000 Illinois Health Facilities Authority, Revenue Refunding
Bonds (Servantcor Project), Series A,
6.375% due 8/15/2006 (d)(g) 3,110
Illinois Sports Facilities Authority, State Tax Supported
Revenue Bonds (a):
20,695 5.339%* due 6/15/2030 17,369
4,500 5% due 6/15/2032 4,690
3,000 Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue Refunding Bonds
(McCormick Place Expansion Project), Series B,
5.75% due 6/15/2023 (f) 3,386
10,115 Regional Transportation Authority, Illinois, Revenue
Bonds, Series A, 7.20% due 11/01/2020 (a) 12,807
================================================================================================
Indiana--5.0%
2,500 Brownsburg, Indiana, School Building Corporation,
First Mortgage Revenue Bonds (Brownsburg
Community School), 5.55% due 2/01/2010 (f)(g) 2,764
4,080 Hammond, Indiana, Multi-School Building Corporation,
First Mortgage Revenue Refunding Bonds,
6.125% due 7/15/2019 (f) 4,354
Indiana Transportation Finance Authority, Highway
Revenue Bonds, Series A (b):
4,250 5.25% due 6/01/2028 4,576
3,750 5.25% due 6/01/2029 4,035
1,500 Indianapolis, Indiana, Local Public Improvement Bond
Bank Revenue Bonds (Waterworks Project), Series A,
5.25% due 7/01/2033 (f) 1,606
================================================================================================
Louisiana--4.3%
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) 6,530
3,735 Louisiana State Transportation Authority, Senior Lien
Toll Revenue Capital Appreciation Bonds, Series B,
5.31%* due 12/01/2027 (a) 1,169
5,150 New Orleans, Louisiana, Ernest N. Morial Exhibit Hall
Authority, Special Tax, Sub-Series A,
5.25% due 7/15/2028 (a) 5,509
1,400 Terrebonne Parish, Louisiana, Hospital Service District
Number 1, Hospital Revenue Bonds (Terrebonne
General Medical Center Project),
5.50% due 4/01/2033 (a) 1,522
================================================================================================
Massachusetts--9.3%
Massachusetts Bay Transportation Authority, Sales Tax
Revenue Refunding Bonds, Senior Series A:
1,500 5% due 7/01/2032 1,561
1,625 5% due 7/01/2035 1,675
2,800 Massachusetts State, HFA, Housing Revenue Bonds,
DRIVERS, AMT, Series 982, 7.832% due 1/01/2011 (d)(j) 2,925
4,985 Massachusetts State Port Authority, Special Facilities
Revenue Bonds, DRIVERS, AMT, Series 501,
8.32% due 7/01/2009 (a)(j) 5,560
6,200 Massachusetts State School Building Authority,
Dedicated Sales Tax Revenue Bonds, Series A,
5% due 8/15/2030 (d) 6,577
11,800 Massachusetts State Special Obligation Dedicated Tax
Revenue Bonds, 5.25% due 1/01/2014 (b)(g) 13,041
650 Massachusetts State Water Resource Authority,
General Revenue Refunding Bonds, Series B,
5.125% due 8/01/2027 (f) 686
================================================================================================
Michigan--6.1%
6,200 Detroit, Michigan, Water Supply System Revenue Bonds,
Series B, 5.25% due 7/01/2032 (f) 6,635
2,200 Michigan Higher Education Student Loan Authority,
Student Loan Revenue Refunding Bonds, AMT,
Series XVII-G, 5.20% due 9/01/2020 (a) 2,305
Michigan State Strategic Fund, Limited Obligation
Revenue Refunding Bonds (Detroit Edison Company
Project), AMT (c):
1,300 Series A, 5.50% due 6/01/2030 1,400
2,500 Series C, 5.65% due 9/01/2029 2,676
4,300 Series C, 5.45% due 12/15/2032 4,568
3,090 Wayne County, Michigan, Airport Authority Revenue
Bonds, DRIVERS, AMT, Series 986,
7.844% due 6/01/2013 (f)(j) 3,501
================================================================================================
Mississippi--0.8%
2,400 Walnut Grove, Mississippi, Correctional Authority, COP,
6% due 11/01/2009 (a)(g) 2,707
================================================================================================
Nebraska--0.5%
1,700 Washington County, Nebraska, Wastewater Facilities
Revenue Bonds (Cargill Inc. Project), AMT,
5.90% due 11/01/2027 1,859
================================================================================================
Nevada--7.0%
3,100 Carson City, Nevada, Hospital Revenue Bonds
(Carson-Tahoe Hospital Project), Series A,
5.50% due 9/01/2033 (i) 3,306
Clark County, Nevada, Airport System Subordinate Lien
Revenue Bonds (b):
1,500 Series A-2, 5% due 7/01/2030 1,566
3,200 Series A-2, 5% due 7/01/2036 3,331
2,000 Series B, 5.25% due 7/01/2034 2,103
10,450 Washoe County, Nevada, Gas and Water Facilities
Revenue Refunding Bonds (Sierra Pacific Power
Company), 6.30% due 12/01/2014 (a) 10,721
3,000 Washoe County, Nevada, Water Facility Revenue Bonds
(Sierra Pacific Power Company), AMT,
6.65% due 6/01/2017 (f) 3,100
================================================================================================
8 MUNIENHANCED FUND, INC. JULY 31, 2005
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
================================================================================================
New Hampshire--2.4%
$ 7,390 New Hampshire Health and Education Facilities
Authority Revenue Bonds (Dartmouth-Hitchcock
Obligation Group, 5.50% due 8/01/2027 (d) $ 8,166
================================================================================================
New Jersey--8.7%
New Jersey EDA, Cigarette Tax Revenue Bonds:
700 5.50% due 6/15/2031 734
1,165 5.75% due 6/15/2034 1,242
New Jersey EDA, Motor Vehicle Surcharge Revenue
Bonds, Series A (f):
2,600 5% due 7/01/2029 2,751
7,250 5.25% due 7/01/2031 7,848
5,200 5.25% due 7/01/2033 5,627
New Jersey EDA, Revenue Bonds, ROLS (e)(j):
7,625 Series II-R-309-1, 8.543% due 6/15/2024 8,931
2,500 Series II-R-309-2, 8.543% due 6/15/2031 2,954
================================================================================================
New York--6.5%
6,960 New York City, New York, GO, DRIVERS, Series 356,
8.358% due 6/01/2011 (c)(j) 8,570
New York City, New York, GO, Refunding, Series A (b):
3,560 6.375% due 5/15/2010 (g) 4,088
440 6.375% due 5/15/2013 500
435 6.375% due 5/15/2014 494
550 6.375% due 5/15/2015 627
7,650 Tobacco Settlement Financing Corporation of New York
Revenue Bonds, Series A-1, 5.25% due 6/01/2022 (a) 8,282
================================================================================================
Pennsylvania--6.1%
Allegheny County, Pennsylvania, Sanitation Authority,
Sewer Revenue Bonds (f):
510 5.50% due 12/01/2010 (g) 568
90 5.50% due 12/01/2030 99
7,750 Pennsylvania State Public School Building Authority,
School Lease Revenue Bonds (The School District of
Philadelphia Project), 5% due 6/01/2033 (d) 8,092
6,500 Philadelphia, Pennsylvania, Authority for Industrial
Development, Lease Revenue Bonds, Series B,
5.50% due 10/01/2020 (d) 7,179
4,500 Philadelphia, Pennsylvania, School District, GO, Series B,
5.625% due 8/01/2012 (b)(g) 5,077
================================================================================================
Rhode Island--2.5%
4,345 Providence, Rhode Island, Public Building Authority,
General Revenue Bonds, Series A,
6.25% due 12/15/2020 (d) 4,962
3,355 Rhode Island State Economic Development Corporation,
Airport Revenue Bonds, Series B,
6.50% due 7/01/2010 (b)(g) 3,872
================================================================================================
South Dakota--2.2%
7,000 South Dakota State Health and Educational Facilities
Authority, Revenue Refunding Bonds, Series A,
7.625% due 1/01/2008 (f)(g) 7,681
================================================================================================
Tennessee--0.7%
2,280 Tennessee HDA, Revenue Refunding Bonds
(Homeownership Program), AMT, Series 1,
5.95% due 7/01/2012 (f) 2,369
================================================================================================
Texas--10.5%
1,615 Bexar, Texas, Metropolitan Water District, Waterworks
System, Revenue Refunding Bonds,
6.35% due 5/01/2025 (f) 1,652
Dallas-Fort Worth, Texas, International Airport Revenue
Bonds, DRIVERS, AMT (j):
2,000 Series 202, 9.325% due 11/01/2028 (b) 2,364
7,250 Series 353, 8.32% due 5/01/2011 (f) 8,301
900 Houston, Texas, Airport System, Revenue Refunding
Bonds, Sub-Lien, Series B, 5.50% due 7/01/2030 (d) 970
9,345 Leander, Texas, Independent School District, Capital
Appreciation, GO, Refunding (School Building),
5.484%* due 8/15/2029 (b) 2,609
5,820 North Harris County, Texas, Regional Water Authority,
Senior Lien Revenue Bonds,
5.125% due 12/15/2035 (f) 6,152
6,250 Texas State Turnpike Authority, Central Texas Turnpike
System Revenue Bonds, First Tier, Series A,
5.50% due 8/15/2039 (a) 6,885
5,200 Travis County, Texas, Health Facilities Development
Corporation, Revenue Refunding Bonds, RITR,
Series 4, 8.983% due 11/15/2024 (a)(j) 6,372
1,000 University of Houston, Texas, University Revenue Bonds,
5.50% due 2/15/2030 (f) 1,074
================================================================================================
Virginia--3.9%
10,000 Fairfax County, Virginia, EDA, Resource Recovery
Revenue Refunding Bonds, AMT, Series A,
6.10% due 2/01/2010 (a) 11,011
2,300 Halifax County, Virginia, IDA, Exempt Facility Revenue
Refunding Bonds (Old Dominion Electric Cooperative
Project), AMT, 5.625% due 6/01/2028 (a) 2,530
================================================================================================
Washington--2.9%
2,150 King County, Washington, Sewer Revenue Refunding
Bonds, Series B, 5.50% due 1/01/2027 (d) 2,346
2,000 Snohomish County, Washington, Public Utility District
Number 001, Electric Revenue Refunding Bonds,
5.375% due 12/01/2024 (d) 2,161
5,000 Washington State, GO, Series A and AT-6,
6.25% due 2/01/2011 (f) 5,486
------------------------------------------------------------------------------------------------
Total Municipal Bonds (Cost--$492,585)--152.6% 526,976
================================================================================================
Shares
Held Short-Term Securities
================================================================================================
5,000 Merrill Lynch Institutional Tax-Exempt Fund (l) 5,000
------------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$5,000)--1.4% 5,000
================================================================================================
Total Investments (Cost--$497,585**)--154.0% 531,976
Other Assets Less Liabilities--0.1% 407
Preferred Stock, at Redemption Value--(54.1%) (187,022)
--------
Net Assets Applicable to Common Stock--100.0% $345,361
========
MUNIENHANCED FUND, INC. JULY 31, 2005 9
Schedule of Investments (concluded)
* Represents a zero coupon or a step bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
** The cost and unrealized appreciation (depreciation) of investments as of
July 31, 2005, as computed for federal income tax purposes, were as
follows:
(in Thousands)
--------------------------------------------------------------------------
Aggregate cost ............................................. $497,571
========
Gross unrealized appreciation .............................. $ 34,654
Gross unrealized depreciation .............................. (249)
--------
Net unrealized appreciation ................................ $ 34,405
========
(a) AMBAC Insured.
(b) FGIC Insured.
(c) XL Capital Insured.
(d) FSA Insured.
(e) AGC Insured.
(f) MBIA Insured.
(g) Prerefunded.
(h) Escrowed to maturity.
(i) Radian Insured.
(j) The rate disclosed is that currently in effect. This rate changes
periodically and inversely based upon prevailing market rates.
(k) CIFG Insured.
(l) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
(in Thousands)
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Institutional
Tax-Exempt Fund 5,000 $23
--------------------------------------------------------------------------
Forward interest rate swaps outstanding as of July 31, 2005 were as
follows:
(in Thousands)
--------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
--------------------------------------------------------------------------
Receive a variable rate equal to 7-Day
Bond Market Association Municipal Swap
Index Rate and pay a fixed rate of 3.593%
Broker, JPMorgan Chase Bank
Expires August 2015 $10,000 $ 33
Receive a variable rate equal to 7-Day
Bond Market Association Municipal Swap
Index Rate and pay a fixed rate of 3.654%
Broker, JPMorgan Chase Bank
Expires October 2015 $10,000 11
Receive a variable rate equal to 7-Day
Bond Market Association Municipal Swap
Index Rate and pay a fixed rate of 3.542%
Broker, JPMorgan Chase Bank
Expires October 2015 $25,000 236
Receive a variable rate equal to 7-Day
Bond Market Association Municipal Swap
Index Rate and pay a fixed rate of 3.933%
Broker, JPMorgan Chase Bank
Expires August 2025 $15,000 28
Receive a variable rate equal to 7-Day
Bond Market Association Municipal Swap
Index Rate and pay a fixed rate of 3.88%
Broker, Morgan Stanley Capital Services, Inc.
Expires September 2025 $10,000 110
--------------------------------------------------------------------------
Total $ 418
========
See Notes to Financial Statements.
10 MUNIENHANCED FUND, INC. JULY 31, 2005
Statement of Net Assets
As of July 31, 2005
=======================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$492,585,104) ............................ $ 526,975,616
Investments in affiliated securities, at value
(identified cost--$5,000,000) .............................. 5,000,000
Unrealized appreciation on forward interest rate swaps ...... 417,945
Cash ........................................................ 24,673
Receivables:
Interest ................................................. $ 5,504,371
Securities sold .......................................... 4,872,745
Dividends from affiliates ................................ 300 10,377,416
-------------
Prepaid expenses ............................................ 6,843
-------------
Total assets ................................................ 542,802,493
-------------
=======================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------
Payables:
Securities purchased ..................................... 10,015,879
Investment adviser ....................................... 196,093
Dividends to Common Stock shareholders ................... 181,363
Other affiliates ......................................... 16,086 10,409,421
-------------
Accrued expenses ............................................ 10,438
-------------
Total liabilities ........................................... 10,419,859
-------------
=======================================================================================================================
Preferred Stock
-----------------------------------------------------------------------------------------------------------------------
Preferred Stock, at redemption value, par value $.025 per
share on Series A Shares, Series B Shares and Series C
Shares and $.10 per share on Series D Shares (2,000 Series
A Shares, 2,000 Series B Shares, 2,000 Series C Shares and
1,480 Series D Shares of AMPS* authorized, issued and
outstanding at $25,000 per share liquidation preference) ... 187,022,060
-------------
=======================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock ....................... $ 345,360,574
=============
=======================================================================================================================
Analysis of Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10 per share (29,369,874 shares
issued and outstanding) .................................... $ 2,936,987
Paid-in capital in excess of par ............................ 322,587,662
Undistributed investment income--net ........................ $ 3,966,571
Accumulated realized capital losses--net .................... (18,939,103)
Unrealized appreciation--net ................................ 34,808,457
-------------
Total accumulated earnings--net ............................. 19,835,925
-------------
Total--Equivalent to $11.76 net asset value per share of
Common Stock (market price--$11.60) ........................ $ 345,360,574
=============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JULY 31, 2005 11
Statement of Operations
For the Six Months Ended July 31, 2005
=======================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------
Interest .................................................... $ 13,275,635
Dividends from affiliates ................................... 22,564
-------------
Total income ................................................ 13,298,199
-------------
=======================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------
Investment advisory fees .................................... $ 1,318,742
Commission fees ............................................. 228,942
Accounting services ......................................... 84,639
Transfer agent fees ......................................... 55,127
Professional fees ........................................... 28,056
Printing and shareholder reports ............................ 22,688
Custodian fees .............................................. 14,166
Directors' fees and expenses ................................ 11,411
Pricing fees ................................................ 10,090
Listing fees ................................................ 10,048
Other ....................................................... 20,231
-------------
Total expenses before reimbursement ......................... 1,804,140
Reimbursement of expenses ................................... (1,969)
-------------
Total expenses after reimbursement .......................... 1,802,171
-------------
Investment income--net ...................................... 11,496,028
-------------
=======================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-----------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ......................................... 1,216,834
Forward interest rate swaps--net ......................... (2,720,160) (1,503,326)
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ......................................... (2,298,621)
Forward interest rate swaps--net ......................... 2,438,105 139,484
-------------------------------
Total realized and unrealized loss--net ..................... (1,363,842)
-------------
=======================================================================================================================
Dividends to Preferred Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------
Investment income--net ...................................... (2,049,037)
-------------
Net Increase in Net Assets Resulting from Operations ........ $ 8,083,149
=============
See Notes to Financial Statements.
12 MUNIENHANCED FUND, INC. JULY 31, 2005
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
July 31, January 31,
Increase (Decrease) in Net Assets: 2005 2005
=======================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------
Investment income--net ...................................... $ 11,496,028 $ 23,143,067
Realized gain (loss)--net ................................... (1,503,326) 439,743
Change in unrealized appreciation/depreciation--net ......... 139,484 1,087,972
Dividends to Preferred Stock shareholders ................... (2,049,037) (2,017,517)
-------------------------------
Net increase in net assets resulting from operations ........ 8,083,149 22,653,265
-------------------------------
=======================================================================================================================
Dividends to Common Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------
Investment income--net ...................................... (10,749,374) (21,498,748)
-------------------------------
Net decrease in net assets resulting from dividends to Common
Stock shareholders ......................................... (10,749,374) (21,498,748)
-------------------------------
=======================================================================================================================
Capital Stock Transactions
-----------------------------------------------------------------------------------------------------------------------
Offering and underwriting costs resulting from issuance of
Preferred Stock ............................................ -- (516,937)
-------------------------------
=======================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets applicable to Common
Stock ...................................................... (2,666,225) 637,580
Beginning of period ......................................... 348,026,799 347,389,219
-------------------------------
End of period* .............................................. $ 345,360,574 $ 348,026,799
===============================
* Undistributed investment income--net ................... $ 3,966,571 $ 5,268,954
===============================
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JULY 31, 2005 13
Financial Highlights
For the Six
Months Ended For the Year Ended January 31,
The following per share data and ratios have been derived July 31, -----------------------------------------------------
from information provided in the financial statements. 2005 2005 2004 2003 2002
=================================================================================================================================
Per Share Operating Performance
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period . $ 11.85 $ 11.83 $ 11.65 $ 11.43 $ 11.38
--------------------------------------------------------------------
Investment income--net@ .............. .39 .79 .81 .83 .80
Realized and unrealized gain (loss)--net (.04) .05 .15 .17 .02
Less dividends to Preferred Stock
shareholders from investment income--net (.07) (.07) (.06) (.08) (.13)
--------------------------------------------------------------------
Total from investment operations ..... .28 .77 .90 .92 .69
--------------------------------------------------------------------
Less dividends to Common Stock
shareholders from investment income--net (.37) (.73) (.72) (.70) (.64)
Offering and underwriting costs resulting
from the issuance of Preferred Stock -- (.02) -- -- --
--------------------------------------------------------------------
Net asset value, end of period ....... $ 11.76 $ 11.85 $ 11.83 $ 11.65 $ 11.43
====================================================================
Market price per share, end of period $ 11.60 $ 10.93 $ 11.22 $ 10.62 $ 11.05
====================================================================
=================================================================================================================================
Total Investment Return**
---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 2.52%+ 7.20% 8.46% 8.62% 6.52%
====================================================================
Based on market price per share ...... 9.63%+ 4.25% 12.84% 2.43% 8.61%
====================================================================
=================================================================================================================================
Ratios Based on Average Net Assets of Common Stock
---------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement*** 1.05%* 1.01% .97% 1.00% 1.00%
====================================================================
Total expenses*** .................... 1.05%* 1.01% .97% 1.00% 1.00%
====================================================================
Total investment income--net*** ...... 6.72%* 6.80% 6.95% 7.17% 7.00%
====================================================================
Amount of dividends to Preferred Stock
shareholders ........................ 1.20%* .59% .48% .70% 1.18%
====================================================================
Investment income--net, to Common Stock
shareholders ........................ 5.52%* 6.21% 6.47% 6.47% 5.82%
====================================================================
=================================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
---------------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders 2.21%* 1.22% 1.09% 1.57% 2.64%
====================================================================
14 MUNIENHANCED FUND, INC. JULY 31, 2005
Financial Highlights (concluded)
For the Six
Months Ended For the Year Ended January 31,
The following per share data and ratios have been derived July 31, -----------------------------------------------------
from information provided in the financial statements. 2005 2005 2004 2003 2002
=================================================================================================================================
Supplemental Data
---------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock,
end of period (in thousands) ........ $345,361 $348,027 $347,389 $342,014 $335,614
====================================================================
Preferred Stock outstanding, end of
period (in thousands) ............... $187,000 $187,000 $150,000 $150,000 $150,000
====================================================================
Portfolio turnover ................... 14.39% 40.17% 50.47% 31.35% 43.12%
====================================================================
=================================================================================================================================
Leverage
---------------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ............ $ 2,847 $ 2,861 $ 3,316 $ 3,280 $ 3,237
====================================================================
=================================================================================================================================
Dividends Per Share on Preferred Stock Outstanding
---------------------------------------------------------------------------------------------------------------------------------
Series A--Investment income--net ..... $ 255 $ 309 $ 233 $ 350 $ 671
====================================================================
Series B--Investment income--net ..... $ 294 $ 289 $ 354 $ 510 $ 680
====================================================================
Series C--Investment income--net ..... $ 274 $ 295 $ 227 $ 327 $ 628
====================================================================
Series D--Investment income--net ..... $ 272 $ 156 -- -- --
====================================================================
* 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.
+ Aggregate total investment return.
@ Based on average shares outstanding.
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JULY 31, 2005 15
Notes to Financial Statements
1. Significant Accounting Policies:
MuniEnhanced Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a non-diversified, closed-end management investment
company. The Fund's financial statements are prepared in conformity with U.S.
generally accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from these
estimates. These unaudited financial statements reflect all adjustments, which
are, in the opinion of management, necessary to present a fair statement of the
results for the interim period. 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 daily basis. The Fund's Common Stock shares are
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 ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general direction
of the Board of Directors. Such valuations and procedures are reviewed
periodically by the Board of Directors of the Fund. 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 OTC market, valuation is the last asked price
(options written) or the last bid price (options purchased). Swap agreements are
valued by quoted fair values received daily by the Fund's pricing service.
Short-term investments with a remaining maturity of 60 days or less are valued
at amortized cost, which approximates market value, under which method the
investment is valued at cost and any premium or discount is amortized on a
straight line basis to maturity. Investments in open-end investment companies
are valued at their net asset value each business day. Securities and other
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. Such valuations and procedures will be reviewed
periodically by the Board of Directors of the Fund.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
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. 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 may write covered call options and purchase call and
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.
o Forward interest rate swaps -- The Fund may enter into forward interest
rate swaps. In a forward interest rate swap, the Fund and the counterparty
agree to make periodic net payments on a specified notional contract
amount, commencing on a specified future effective date,
16 MUNIENHANCED FUND, INC. JULY 31, 2005
Notes to Financial Statements (concluded)
unless terminated earlier. When the agreement is closed, the Fund records
a realized gain or loss in an amount equal to the value of the agreement.
(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).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(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.
(f) Offering costs -- Direct expenses relating to the public offering of the
Fund's Preferred Stock were charged to capital at the time of issuance of the
shares.
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 daily net assets, including assets
acquired from the issuance of Preferred Stock. The Investment Adviser agreed to
reimburse its management fee by the amount of management fees the Fund pays to
FAM indirectly through its investment in Merrill Lynch Institutional Tax-Exempt
Fund. For the six months ended July 31, 2005, FAM reimbursed the Fund in the
amount of $1,969.
For the six months ended July 31, 2005, the Fund reimbursed FAM $5,835 for
certain accounting services.
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, 2005 were $76,700,458 and $74,371,050, respectively.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of 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 stock
without the approval of the holders of Common Stock.
Preferred Stock
Auction Market Preferred Stock are shares of Preferred Stock of the Fund, with a
par value of $.025 per share for Series A, Series B, and Series C and $.10 per
share for Series D and a liquidation preference of $25,000 per share, plus
accrued and unpaid dividends, 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, 2005 were as follows: Series A,
2.20%; Series B, 2.25%; Series C, 2.30%; and Series D, 2.25%.
Shares issued and outstanding during the six months ended July 31, 2005 remained
constant. Shares issued and outstanding during the year ended January 31, 2005
increased by 1,480 shares from the issuance of an additional series of Preferred
Stock.
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, 2005, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, an affiliate of FAM, received $126,643 as commissions.
5. Capital Loss Carryforward:
On January 31, 2005, the Fund had a net capital loss carryforward of
$15,398,322, of which $4,572,805 expires in 2008, $8,505,599 expires in 2009,
$1,955,204 expires in 2011 and $364,714 expires in 2013. This amount will be
available to offset like amounts of any future taxable gains.
6. Subsequent Event:
The Fund paid a tax-exempt income dividend to holders of Common Stock in the
amount of $.061000 on August 30, 2005 to shareholders of record on August 15,
2005.
MUNIENHANCED FUND, INC. JULY 31, 2005 17
Officers and Directors
Robert C. Doll, Jr., President and Director
James H. Bodurtha, Director
Kenneth A. Froot, Director
Joe Grills, Director
Herbert I. London, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
Donald C. Burke, Vice President and Treasurer
Kenneth A. Jacob, Senior Vice President
John M. Loffredo, Senior Vice President
Michael A. Kalinoski, Vice President
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agents
Common Stock:
Equiserve Trust Company N.A.
(c/o Computershare Investor Services)
P.O. Box 43010
Providence, RI 02940-3010
1-800-426-5523
Preferred Stock:
The Bank of New York
101 Barclay Street -- 7 West
New York, NY 10286
NYSE Symbol
MEN
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 stable level of dividend distributions, 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 Net Assets, which
comprises part of the financial information included in this report.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
18 MUNIENHANCED FUND, INC. JULY 31, 2005
Proxy Results
During the six-month period ended July 31, 2005, MuniEnhanced Fund, Inc.`s
Common Stock shareholders voted on the following proposals. Proposal 1 was
approved at a shareholders' meeting on April 28, 2005. With respect to Proposal
2, the meeting was adjourned until May 27, 2005, at which time the proposal
passed. A description of the proposals and number of shares voted were as
follows:
Shares Voted Shares Withheld
For From Voting
--------------------------------------------------------------------------------------------------------------------
1. To elect the Fund's Directors: Robert C. Doll, Jr. 16,197,569 435,104
James H. Bodurtha 16,198,918 433,755
Joe Grills 16,182,720 449,953
Roberta Cooper Ramo 16,172,537 460,136
Stephen B. Swensrud 16,185,953 446,720
--------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
--------------------------------------------------------------------------------------------------------------------
2. To approve an amendment to fundamental investment restriction. 11,948,308 535,259 472,747
--------------------------------------------------------------------------------------------------------------------
During the six-month period ended July 31, 2005, MuniEnhanced Fund, Inc.`s
Preferred Stock shareholders (Series A - D) voted on the following proposals.
Proposal 1 was approved at a shareholders' meeting on April 28, 2005. With
respect to Proposal 2, the meeting was adjourned until May 27, 2005, at which
time the proposal passed. A description of the proposals and number of shares
voted were as follows:
Shares Voted Shares Withheld
For From Voting
--------------------------------------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors: Robert C. Doll, Jr.,
James H. Bodurtha, Joe Grills, Herbert I. London, Roberta
Cooper Ramo, Robert S. Salomon, Jr. and Stephen B. Swensrud 4,877 11
--------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
--------------------------------------------------------------------------------------------------------------------
2. To approve an amendment to fundamental investment restriction. 7,115 53 116
--------------------------------------------------------------------------------------------------------------------
Electronic Delivery
The Fund offers electronic delivery of communi cations to its shareholders. In
order to receive this service, you must regis ter your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MUNIENHANCED FUND, INC. JULY 31, 2005 19
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
--------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
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 and intends to remain leveraged 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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
MuniEnhanced Fund, Inc.
Box 9011
Princeton, NJ 08543-9011
#10874 -- 7/05
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable to this semi-annual report
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MuniEnhanced Fund, Inc.
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
MuniEnhanced Fund, Inc.
Date: September 23, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
MuniEnhanced Fund, Inc.
Date: September 23, 2005
By: /s/ Donald C. Burke
-----------------------
Donald C. Burke,
Chief Financial Officer of
MuniEnhanced Fund, Inc.
Date: September 23, 2005