UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-05739
Name of Fund: BlackRock 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, BlackRock 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: 01/31/07
Date of reporting period: 02/01/06 - 01/31/07
Item 1 - Report to Stockholders
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES
FIXED INCOME LIQUIDITY REAL ESTATE
BlackRock MuniEnhanced BLACKROCK
Fund, Inc.
ANNUAL REPORT | JANUARY 31, 2007
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
BlackRock MuniEnhanced Fund, Inc.
Announcement of Annual Stockholders Meeting
The Fund has determined that its annual stockholders meeting originally
scheduled to be held in April 2007 will be postponed and will be held in
September 2007. Proposals of stockholders intended to be presented at the
meeting must be received by the Fund by May 15, 2007 for inclusion in the Fund's
proxy statement and form of proxy for that meeting. The persons named as proxies
in the proxy materials for the Fund's 2007 annual meeting of stockholders may
exercise discretionary authority with respect to any stockholder proposal
presented at such meeting if written notice of such proposal has not been
received by the Fund by July 1, 2007. Written proposals and notices should be
sent to the Secretary of the Fund, 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
Portfolio Information as of January 31, 2007
Percent of
Quality Ratings by Total
S&P/Moody's Investments
--------------------------------------------------------------------------------
AAA/Aaa .............................................................. 86.9%
AA/Aa ................................................................ 4.7
A/A .................................................................. 7.1
BBB/Baa .............................................................. 0.3
Other ................................................................ 1.0
--------------------------------------------------------------------------------
Proxy Results
During the six-month period ended January 31, 2007, BlackRock MuniEnhanced Fund,
Inc.'s shareholders voted on the following proposals, which were approved at a
special shareholders' meeting on August 15, 2006. A description of the proposals
and number of shares voted are as follows:
--------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
--------------------------------------------------------------------------------------------
To approve a new investment advisory agreement
with BlackRock Advisors, Inc. 15,690,204 517,630 853,985
--------------------------------------------------------------------------------------------
To approve a contingent sub-advisory agreement
with BlackRock Advisors, Inc. 15,644,873 543,882 873,064
--------------------------------------------------------------------------------------------
2 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
A Letter to Shareholders
Dear Shareholder
The new year began on a positive note for most financial markets, continuing the
momentum from the fourth quarter of 2006. Returns for the annual and semi-annual
periods ended January 31, 2007 were as follows:
Total Returns as of January 31, 2007 6-month 12-month
============================================================================================================
U.S. equities (Standard & Poor's 500 Index) +13.75% +14.51%
------------------------------------------------------------------------------------------------------------
Small cap U.S. equities (Russell 2000 Index) +14.95 +10.44
------------------------------------------------------------------------------------------------------------
International equities (MSCI Europe, Australasia, Far East Index) +14.33 +19.84
------------------------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) + 3.65 + 4.28
------------------------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 3.06 + 4.29
------------------------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse High Yield Index) + 8.45 +11.76
------------------------------------------------------------------------------------------------------------
After raising the target short-term interest rate 17 times between June 2004 and
June 2006, the Federal Reserve Board (the Fed) finally opted to pause on August
8, 2006. This left the target rate at 5.25%, where it remained through
period-end. In interrupting its interest rate-hiking campaign, the Fed initially
acknowledged that economic growth was slowing, but maintained a cautionary view
on inflation. Most recently, the central bankers have pointed to a firming in
economic data and moderation in inflation, causing many to believe the Fed will
likely remain on hold for the time being.
Overall, 2006 was a good year for U.S. equities, despite a mid-year correction
that was largely triggered by rising interest rates, inflation fears, elevated
oil prices and geopolitical uncertainties. Nevertheless, strong corporate
earnings, abundant liquidity and record merger-and-acquisition activity provided
a solid backdrop for stocks. Many international markets (with the notable
exception of Japan) performed even better, outpacing U.S. stocks for the fifth
consecutive year. European equities and select emerging markets fared
particularly well. This broad equity strength carried into January.
For much of 2006, bond yields moved higher as their prices declined. Prices
began to improve (yields fell) in the summer as the economy showed signs of
weakening and the Fed paused. Notably, the Treasury curve remained inverted for
much of 2006 and into 2007. The 30-year Treasury yield stood at 4.93% at January
31, 2007, while the six-month Treasury offered the highest yield on the curve at
5.16% -- both still below the federal funds rate.
As 2007 began, investors were left with a few key questions: Will the U.S.
economy achieve a soft landing, will the Fed reverse its prior policy and cut
interest rates, and how might these outcomes impact the investment climate. As
you navigate these and other uncertainties inherent in the financial markets, we
encourage you to review your investment goals with your financial professional
and to make portfolio changes, as needed. For more reflection on 2006 and our 10
predictions for 2007, please ask your financial professional for a copy of
"What's Ahead in 2007: An Investment Perspective," or view it online at
www.blackrock.com/funds. We thank you for trusting BlackRock with your
investment assets, and we look forward to continuing to serve you in the months
and years ahead.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
Fund President and Director
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 3
A Discussion With Your Fund's Portfolio Manager
The Fund's return outpaced its comparable Lipper category average for the
fiscal year, as we remained essentially fully invested in high-quality municipal
bonds.
Describe the recent market environment relative to municipal bonds.
The tax-exempt bond market outperformed the U.S. Treasury market during most of
the 12-month period ended January 31, 2007. Over the course of the period,
long-term U.S. Treasury yields rose moderately (and their prices fell) while
long-term municipal bond yields declined (and their prices rose). U.S. Treasury
yields rose sharply in the first half of the reporting period as commodity
prices, especially oil and gasoline prices, and domestic economic activity
surged. By late June, 30-year Treasury bond yields had increased 60 basis points
(.60%) to 5.28%.
Yields began to fall, and bond prices improve, later in the summer as economic
growth softened and the Federal Reserve Board (the Fed), at its August 8, 2006
meeting, refrained from raising its target interest rate. This came after 17
consecutive increases since June 2004. Bond prices found additional support from
moderating oil prices, and by the end of November, 30-year Treasury bond yields
had declined to 4.56%. However, stronger-than-expected economic releases and
year-end profit taking again pushed yields higher for the remainder of the
reporting period. Ultimately, 30-year U.S. Treasury bond yields rose 25 basis
points over the course of the 12-month period to 4.93%, while 10-year Treasury
note yields rose 30 basis points to 4.83%.
The tax-exempt bond market outperformed comparable U.S. Treasury issues during
the year as investor demand for municipal product outstripped a resurgent
new-issue calendar. As reported by Municipal Market Data, yields on 30-year,
AAA-rated municipal issues declined 30 basis points to 4.17%, while yields on
10-year, AAA-rated issues increased 8 basis points to 3.86%.
Investor demand for municipal product remained strong throughout the reporting
period. Statistics from the Investment Company Institute indicate that, in 2006,
long-term municipal bond funds had net new cash flows of over $15 billion, a
200% increase compared to 2005. Meanwhile, new-issue volume in recent months has
surged as municipalities rushed to take advantage of low market yields and solid
investor demand. In the three months ended January 31, 2007 more than $117
billion in new long-term municipal bonds was issued, an increase of over 30%
versus the same period a year ago. Issuance in January, which totaled $29
billion, was the highest January volume on record. For all of 2006, new bond
underwritings totaled $385 billion, just 6% off of 2005's record issuance and
close to initial estimates. The recent increase in issuance has made the
municipal market's outperformance even more impressive.
Looking ahead, the tax-exempt bond market's technical position is expected to
remain supportive of continued strong performance. Attractive yield ratios,
combined with a relatively steep municipal yield curve and manageable new
issuance, should help to sustain investor demand for municipal product.
How did the Fund perform during the fiscal year?
For the 12-month period ended January 31, 2007, the Common Stock of BlackRock
MuniEnhanced Fund, Inc. (formerly MuniEnhanced Fund, Inc.) had net annualized
yields of 4.88% and 5.24%, based on a year-end per share net asset value of
$11.55 and a per share market price of $10.77, respectively, and $.564 per share
income dividends. Over the same period, the total investment return on the
Fund's Common Stock was +5.66%, based on a change in per share net asset value
from $11.52 to $11.55, and assuming reinvestment of all distributions.
The Fund's total return, based on net asset value, exceeded the +5.00% average
return of the Lipper Insured Municipal Debt Funds (Leveraged) category for the
12-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.) The Fund also
provided an above-average yield relative to its Lipper peers.
Fund performance was driven primarily by our yield curve strategies and the
advance refunding of a number of positions. Our previous strategy of focusing on
the long end of the municipal yield curve benefited performance as the curve
flattened and longer-dated issues outperformed during the past year. Likewise,
the advance refunding of several Fund holdings was additive to total return
performance, as the refundings generally cause the bonds to move up in price.
Fund performance also benefited from our essentially fully invested stance, a
posture we assumed in an effort to produce as much tax-exempt income as
possible. Our relatively neutral duration posture also provided some benefit
relative to our peers.
4 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
For the six-month period ended January 31, 2007, the total investment return on
the Fund's Common Stock was +4.41%, based on a change in per share net asset
value from $11.34 to $11.55, and assuming reinvestment of all distributions.
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 distributions, 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?
Portfolio activity was fairly limited during the year. For the most part, the
low absolute level of interest rates did not make for many appealing investment
opportunities. Most of the yields in the portfolio are booked at higher levels
than those currently available in the market, and we wanted to avoid
compromising the Fund's advantageous yield when making transactions.
In general, we only sold bonds with book yields that were not significantly
higher than current market yields, allowing us to take proceeds from our sales
and invest in bonds with relatively high current yields -- thereby trying to
replicate those kinds of trades again. As such, we were focusing on issues that
could be advance refunded, primarily premium-coupon, high-quality bonds in the
15-year to 20-year maturity range. We were not sufficiently compensated for
extending much further out on the curve.
New issuance in the municipal market increased sharply in late 2006 and early
2007. However, the new supply was readily absorbed by the market, thereby
limiting potential reinvestment opportunities. One notable new opportunity in
which we did participate involved bonds issued by the state of South Carolina as
it prepared to implement an innovative new school district structure. The state
had to bring the bonds to market by December 31, and this created an opportunity
to invest at relatively inexpensive levels given the unusually heavy new
issuance.
Finally, the Fund has the ability to invest in bonds that are not insured, and
we made use of that uninsured basket in an effort to enhance yield in the
portfolio. Of course, "uninsured" does not necessarily mean substantially lower
quality. In many cases, uninsured bonds are AAA-rated due to other types of
enhancements. As such, our use of the uninsured basket did not translate into a
meaningful drop in the Fund's credit quality.
For the six-month period ended January 31, 2007, the Fund's Auction Market
Preferred Stock had average yields as follows: Series A, 3.47%; Series B, 3.47%;
Series C, 3.44%; and Series D, 3.46%. The Fund's borrowing costs began to
stabilize once the Fed halted its interest rate-hiking campaign in the summer.
Notably, the tax-exempt yield curve has maintained a positive slope,
particularly relative to the taxable curve, allowing us to borrow at a lower
rate than where we invest. This continued to generate an income benefit to the
holders of Common Stock from the leveraging of Preferred Stock. However, should
the spread between short-term and long-term interest rates narrow, the benefits
of leveraging will decline and, as a result, reduce the yield on the Fund's
Common Stock. For a more complete explanation of the benefits and risks of
leveraging, see page 6 of this report to shareholders.
How would you characterize the Fund's position at the close of the period?
The Fund was fully invested at period-end and positioned neutrally with respect
to interest rate risk. We believe this is the appropriate posture with the Fed
on hold and given the historical flatness of the yield curve. We will look for a
steepening of the yield curve to provide attractive investment opportunities for
the portfolio. In particular, we believe the 15-year to 20-year area of the
curve could offer strong relative performance in the future. Overall, we
maintain our focus on providing shareholders with a competitive yield and
preservation of net asset value within the context of a high-quality portfolio.
Michael Kalinoski, CFA
Vice President and Portfolio Manager
February 8, 2007
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 5
The Benefits and Risks of Leveraging
BlackRock 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 of January 31, 2007, the Fund's leverage amount, due to Auction Market
Preferred Stock, was 35.54%, before the deduction of Preferred Stock.
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.
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.
6 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Schedule of Investments as of January 31, 2007 (in Thousands)
Face
Amount Municipal Bonds Value
-------------------------------------------------------------------------------------------
Alabama -- 1.5%
Jefferson County, Alabama, Limited Obligation School
Warrants, Series A:
$ 2,750 5.50% due 1/01/2022 $ 2,978
2,200 4.75% due 1/01/2025 2,231
-------------------------------------------------------------------------------------------
California -- 29.2%
Alameda Corridor Transportation Authority, California,
Capital Appreciation Revenue Refunding Bonds,
Subordinate Lien, Series A (a)(m):
10,000 5.464% due 10/01/2024 8,121
6,000 5.495% due 10/01/2025 4,873
950 Anaheim, California, Public Financing Authority, Electric
System Distribution Facilities Revenue Bonds, Series A,
5% due 10/01/2031 (d) 990
5,000 Anaheim, California, Public Financing Authority, Lease
Revenue Bonds (Public Improvements Project), Senior
Series A, 6% due 9/01/2024 (d) 6,024
California State, GO, Refunding:
2,350 5.25% due 9/01/2010 (g) 2,476
1,700 5.125% due 6/01/2027 1,760
5,000 5.125% due 6/01/2031 5,171
1,900 California State Public Works Board, Lease Revenue
Bonds (Department of Corrections), Series C, 5%
due 6/01/2025 1,976
2,600 California State University, Systemwide Revenue Bonds,
Series A, 5% due 11/01/2035 (b) 2,713
8,490 California State, Various Purpose, GO, 5.50%
due 11/01/2033 9,221
2,750 Chabot-Las Positas, California, Community College
District, GO (Election of 2004), Series B, 4.812%
due 8/01/2025 (a)(m) 1,145
850 Chino Valley, California, Unified School District, GO
(Election of 2002), Series C, 5.25% due 8/01/2030 (f) 918
1,600 East Side Union High School District, California, Santa
Clara County, GO (Election of 2002), Series D, 5%
due 8/01/2026 (c) 1,686
Golden State Tobacco Securitization Corporation of
California, Tobacco Settlement Revenue Bonds,
Series B (g):
2,835 5.50% due 6/01/2013 (c) 3,109
3,000 5.625% due 6/01/2013 (k) 3,302
5,300 Los Angeles, California, Department of Water and
Power, Waterworks Revenue Bonds, Series C, 5%
due 7/01/2029 (f) 5,571
5,150 Los Angeles, California, Unified School District, GO,
Series A, 5% due 7/01/2013 (f)(g) 5,520
Metropolitan Water District of Southern California,
Waterworks Revenue Bonds, Series B-1 (b):
2,965 5% due 10/01/2029 3,105
1,655 5% due 10/01/2036 1,731
5,000 Norco, California, Redevelopment Agency, Tax
Allocation Refunding Bonds (Norco Redevelopment
Project -- Area Number 1), 5.125%
due 3/01/2030 (f) 5,235
7,455 Orange County, California, Sanitation District, COP, 5%
due 2/01/2033 (b) 7,761
1,750 Poway, California, Redevelopment Agency, Tax Allocation
Refunding Bonds (Paguay Redevelopment Project),
5.125% due 6/15/2033 (a) 1,830
3,850 Sacramento, California, Unified School District, GO
(Election of 2002), 5% due 7/01/2030 (f) 4,066
6,145 Stockton, California, Public Financing Authority, Lease
Revenue Bonds (Parking & Capital Projects), 5.125%
due 9/01/2030 (b) 6,478
1,600 Tamalpais, California, Union High School District, GO
(Election of 2001), 5% due 8/01/2028 (d) 1,672
2,325 Ventura County, California, Community College District,
GO (Election of 2002), Series B, 5% due 8/01/2030 (f) 2,455
-------------------------------------------------------------------------------------------
Colorado -- 8.2%
2,135 Boulder County, Colorado, Hospital Development
Revenue Bonds (Longmont United Hospital Project),
5.75% due 12/01/2010 (g)(i) 2,279
80 Colorado HFA, Revenue Bonds (S/F Program), AMT,
Senior Series A-1, 7.40% due 11/01/2027 80
650 Colorado HFA, Revenue Refunding Bonds (S/F Program),
AMT, Senior Series A-2, 7.50% due 4/01/2031 660
Colorado Health Facilities Authority Revenue Bonds
Series A:
1,200 (Catholic Health Initiatives), 5.50%
due 3/01/2032 (h) 1,285
1,200 (Covenant Retirement Communities Inc.), 5.50%
due 12/01/2027 (i) 1,277
675 (Covenant Retirement Communities Inc.), 5.50%
due 12/01/2033 (i) 716
3,875 Colorado Water Resources and Power Development
Authority, Clean Water Revenue Bonds, Series A,
6.25% due 9/01/2010 (g) 4,195
2,000 Denver, Colorado, City and County Airport Revenue
Refunding Bonds, AMT, Series A, 6%
due 11/15/2018 (a) 2,130
5,450 El Paso County, Colorado, School District Number 49,
Falcon, GO, Series A, 6% due 12/01/2009 (d)(g) 6,025
7,900 Northwest Parkway, Colorado, Public Highway Authority,
Capital Appreciation Revenue Bonds, Senior
Convertible, Series C, 5.345% due 6/15/2025 (d)(m) 7,132
1,900 Northwest Parkway, Colorado, Public Highway Authority
Revenue Bonds, Series A, 5.50% due 6/15/2021 (a) 2,046
-------------------------------------------------------------------------------------------
District of Columbia -- 0.8%
2,700 District of Columbia, COP, 5% due 1/01/2025 (b) 2,841
-------------------------------------------------------------------------------------------
Portfolio Abbreviations
To simplify the listings of BlackRock 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
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
S/F Single-Family
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 7
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
-------------------------------------------------------------------------------------------
Florida -- 2.4%
$ 1,400 Highlands County, Florida, Health Facilities Authority,
Hospital Revenue Bonds (Adventist Health System),
Series C, 5.25% due 11/15/2036 $ 1,479
2,000 Highlands County, Florida, Health Facilities Authority,
Hospital Revenue Refunding Bonds (Adventist Health
System), Series G, 5.125% due 11/15/2032 2,082
4,200 Orange County, Florida, Sales Tax Revenue Refunding
Bonds, Series B, 5.125% due 1/01/2032 (b) 4,404
-------------------------------------------------------------------------------------------
Georgia -- 12.5%
17,355 Atlanta, Georgia, Airport General Revenue Refunding
Bonds, Series B, 5.25% due 1/01/2033 (d) 18,517
Atlanta, Georgia, Water and Wastewater Revenue Bonds:
2,900 5% due 11/01/2034 (d) 3,036
1,000 Series A, 5% due 11/01/2033 (f) 1,037
4,250 Series A, 5% due 11/01/2039 (f) 4,406
2,300 Augusta, Georgia, Water and Sewer Revenue Bonds,
5.25% due 10/01/2039 (d) 2,465
2,500 Fulton County, Georgia, Water and Sewer Revenue
Bonds, 5.25% due 1/01/2035 (b) 2,668
7,725 Georgia Municipal Electric Authority, Power Revenue
Refunding Bonds, Series EE, 7% due 1/01/2025 (a) 10,394
-------------------------------------------------------------------------------------------
Illinois -- 14.6%
Chicago, Illinois, O'Hare International Airport Revenue
Bonds, Third Lien, AMT, Series B-2:
5,670 5.75% due 1/01/2023 (d) 6,193
2,500 6% due 1/01/2029 (c) 2,785
2,460 Cook County, Illinois, Capital Improvement, GO,
Series C, 5.50% due 11/15/2012 (a)(g) 2,677
Illinois Sports Facilities Authority, State Tax Supported
Revenue Bonds (a):
20,120 5.341% due 6/15/2030 (m) 18,561
4,500 5% due 6/15/2032 4,676
2,000 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) 2,181
10,115 Regional Transportation Authority, Illinois, Revenue
Bonds, Series A, 7.20% due 11/01/2020 (a) 12,460
-------------------------------------------------------------------------------------------
Indiana -- 4.4%
4,080 Hammond, Indiana, Multi-School Building Corporation,
First Mortgage Revenue Refunding Bonds, 6.125%
due 7/15/2019 (f) 4,162
Indiana Transportation Finance Authority, Highway
Revenue Bonds, Series A:
2,150 5% due 6/01/2028 (d) 2,245
4,250 5.25% due 6/01/2028 (b) 4,548
3,750 5.25% due 6/01/2029 (b) 4,013
-------------------------------------------------------------------------------------------
Louisiana -- 8.5%
4,500 Lafayette, Louisiana, Utilities Revenue Bonds, 5%
due 11/01/2028 (f) 4,721
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) 7,126
2,035 Louisiana State Citizens Property Insurance
Corporation, Assessment Revenue Bonds, Series B,
5% due 6/01/2023 (a) 2,153
3,250 Louisiana State, Gas and Fuels Tax Revenue Bonds,
Series A, 4.75% due 5/01/2039 (d) 3,313
3,735 Louisiana State Transportation Authority, Senior Lien
Toll Revenue Capital Appreciation Bonds, Series B,
5.31% due 12/01/2027 (a)(m) 1,283
4,650 New Orleans, Louisiana, Ernest N. Morial Exhibit Hall
Authority, Special Tax, Sub-Series A, 5.25%
due 7/15/2028 (a) 4,934
3,650 Rapides Financing Authority, Louisiana, Revenue Bonds
(Cleco Power LLC Project), AMT, 4.70%
due 11/01/2036 (a) 3,640
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) 1,508
-------------------------------------------------------------------------------------------
Massachusetts -- 6.6%
8,800 Massachusetts State School Building Authority,
Dedicated Sales Tax Revenue Bonds, Series A, 5%
due 8/15/2030 (d) 9,281
11,300 Massachusetts State Special Obligation Dedicated Tax
Revenue Bonds, 5.25% due 1/01/2014 (b)(g) 12,253
950 Massachusetts State Water Resource Authority, General
Revenue Refunding Bonds, Series B, 5.125%
due 8/01/2027 (f) 995
-------------------------------------------------------------------------------------------
Michigan -- 3.6%
1,900 Detroit, Michigan, Sewage Disposal System, Second
Lien Revenue Bonds, Series B, 5% due 7/01/2036 (b) 1,997
1,700 Michigan Higher Education Student Loan Authority,
Student Loan Revenue Refunding Bonds, AMT,
Series XVII-G, 5.20% due 9/01/2020 (a) 1,773
Michigan State Strategic Fund, Limited Obligation
Revenue Refunding Bonds (Detroit Edison Company
Pollution Control Project), AMT (c):
1,300 Series A, 5.50% due 6/01/2030 1,394
2,500 Series C, 5.65% due 9/01/2029 2,648
4,300 Series C, 5.45% due 12/15/2032 4,554
-------------------------------------------------------------------------------------------
Minnesota -- 0.5%
1,550 Dakota County, Minnesota, Community Development
Agency, S/F Mortgage Revenue Bonds (Mortgage-
Backed Securities Program), Series B, 5.15%
due 12/01/2038 (n)(p) 1,611
-------------------------------------------------------------------------------------------
Mississippi -- 0.8%
2,400 Walnut Grove, Mississippi, Correctional Authority, COP,
6% due 11/01/2009 (a)(g) 2,584
-------------------------------------------------------------------------------------------
Nebraska -- 0.5%
1,700 Washington County, Nebraska, Wastewater Facilities
Revenue Bonds (Cargill Inc. Project), AMT, 5.90%
due 11/01/2027 1,851
-------------------------------------------------------------------------------------------
Nevada -- 3.9%
3,100 Carson City, Nevada, Hospital Revenue Bonds (Carson-
Tahoe Hospital Project), Series A, 5.50%
due 9/01/2033 (i) 3,311
Clark County, Nevada, Airport System Subordinate Lien
Revenue Bonds, Series A-2 (b):
1,500 5% due 7/01/2030 1,563
3,200 5% due 7/01/2036 3,326
5,060 Clark County, Nevada, IDR (Southwest Gas Corp.
Project), AMT, Series A, 4.75% due 9/01/2036 (b) 5,052
-------------------------------------------------------------------------------------------
8 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
-------------------------------------------------------------------------------------------
New Hampshire -- 2.3%
$ 7,390 New Hampshire Health and Education Facilities
Authority Revenue Bonds (Dartmouth-Hitchcock
Obligation Group), 5.50% due 8/01/2027 (d) $ 7,902
-------------------------------------------------------------------------------------------
New Jersey -- 7.5%
New Jersey EDA, Cigarette Tax Revenue Bonds:
700 5.50% due 6/15/2031 737
1,165 5.75% due 6/15/2034 1,244
New Jersey EDA, Motor Vehicle Surcharge Revenue
Bonds, Series A (f):
2,600 5% due 7/01/2029 2,725
9,325 5.25% due 7/01/2031 9,961
5,200 5.25% due 7/01/2033 5,555
4,960 New Jersey EDA, School Facilities Construction Revenue
Bonds, Series O, 5.125% due 3/01/2028 5,244
-------------------------------------------------------------------------------------------
New York -- 1.5%
2,250 Metropolitan Transportation Authority, New York,
Transportation Revenue Bonds, Series A, 5%
due 11/15/2032 (b) 2,362
2,400 Tobacco Settlement Financing Corporation of New York
Revenue Bonds, Series A-1, 5.25% due 6/01/2022 (a) 2,557
-------------------------------------------------------------------------------------------
Ohio -- 0.8%
2,550 Ohio State Air Quality, Development Authority Revenue
Bonds (Dayton Power and Light Company Project),
4.80% due 9/01/2036 (b) 2,570
-------------------------------------------------------------------------------------------
Pennsylvania -- 4.5%
7,750 Pennsylvania State Public School Building Authority,
School Lease Revenue Bonds (The School District of
Philadelphia Project), 5% due 6/01/2013 (d)(g) 8,278
6,500 Philadelphia, Pennsylvania, Authority for Industrial
Development, Lease Revenue Bonds, Series B, 5.50%
due 10/01/2020 (d) 6,985
-------------------------------------------------------------------------------------------
Rhode Island -- 2.5%
4,345 Providence, Rhode Island, Public Building Authority,
General Revenue Bonds, Series A, 6.25%
due 12/15/2020 (d) 4,751
3,355 Rhode Island State Economic Development
Corporation, Airport Revenue Bonds, Series B, 6.50%
due 7/01/2010 (b)(g) 3,673
-------------------------------------------------------------------------------------------
South Carolina -- 3.0%
3,800 Berkeley County, South Carolina, School District,
Installment Lease Revenue Bonds (Securing Assets
for Education Project), 5.125% due 12/01/2030 4,005
2,365 Kershaw County, South Carolina, Public Schools
Foundation, Installment Power Revenue Refunding
Bonds, 5% due 12/01/2029 (k) 2,481
3,500 Scago Educational Facilities Corporation for Pickens
County School District, South Carolina, Revenue
Bonds, 5% due 12/01/2031 (d) 3,666
-------------------------------------------------------------------------------------------
South Dakota -- 2.1%
6,825 South Dakota State Health and Educational Facilities
Authority Revenue Refunding Bonds, Series A,
7.625% due 1/01/2008 (f)(g) 7,043
-------------------------------------------------------------------------------------------
Tennessee -- 1.1%
6,500 Knox County, Tennessee, Health, Educational and
Housing Facilities Board, Hospital Facilities Revenue
Refunding Bonds (Covenant Health), Series A,
5.039% due 1/01/2038 (m) 1,354
2,280 Tennessee HDA, Revenue Refunding Bonds
(Homeownership Program), AMT, Series 1, 5.95%
due 7/01/2012 (f) 2,315
-------------------------------------------------------------------------------------------
Texas -- 6.8%
1,615 Bexar, Texas, Metropolitan Water District, Waterworks
System Revenue Refunding Bonds, 6.35%
due 5/01/2025 (f) 1,624
Leander, Texas, Independent School District, Capital
Appreciation, GO, Refunding (School Building) (m):
9,345 5.49% due 8/15/2029 (b) 2,935
10,000 5.58% due 8/15/2035 2,207
4,475 Lewisville, Texas, Independent School District, Capital
Appreciation and School Building, GO, Refunding,
4.67% due 8/15/2024 (b)(m) 1,959
5,820 North Harris County, Texas, Regional Water Authority,
Senior Lien Revenue Bonds, 5.125% due 12/15/2035 (f) 6,108
1,600 Texas State Affordable Housing Corporation,
S/F Mortgage Revenue Bonds (Professional
Educators Program), AMT, Series A-1, 5.50%
due 12/01/2039 (n)(p) 1,703
6,250 Texas State Turnpike Authority, Central Texas Turnpike
System Revenue Bonds, First Tier, Series A, 5.50%
due 8/15/2039 (a) 6,686
-------------------------------------------------------------------------------------------
Virginia -- 6.2%
10,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue
Refunding Bonds, AMT, Series A, 6.10%
due 2/01/2010 (a) 10,595
2,300 Halifax County, Virginia, IDA, Exempt Facility Revenue
Refunding Bonds (Old Dominion Electric Cooperative
Project), AMT, 5.625% due 6/01/2028 (a) 2,503
2,400 James City County, Virginia, EDA, Revenue Bonds
(Pub Facility Projects), 5% due 6/15/2026 (d) 2,554
5,000 Stafford County, Virginia, EDA, Hospital Facilities Revenue
Bonds (MediCorp Health System), 5.25% due 6/15/2037 5,292
-------------------------------------------------------------------------------------------
Washington -- 0.6%
2,000 Snohomish County, Washington, Public Utility District
Number 001, Electric Revenue Refunding Bonds, 5.375%
due 12/01/2009 (d)(g) 2,106
-------------------------------------------------------------------------------------------
Puerto Rico -- 0.5%
1,700 Puerto Rico Electric Power Authority, Power Revenue
Bonds, Series NN, 5.125% due 7/01/2029 1,775
-------------------------------------------------------------------------------------------
Total Municipal Bonds
(Cost -- $441,994) -- 137.4% 466,099
-------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Municipal Bonds Held in Trust (j)
-------------------------------------------------------------------------------------------
California -- 1.4%
4,400 California State, GO, Refunding, 5.25%
due 2/01/2033 (i) 4,693
-------------------------------------------------------------------------------------------
Illinois -- 6.0%
10,250 Chicago, Illinois, Board of Education, GO (Chicago
School Reform Project), 5.75% due 12/01/2027 (a) 10,624
9,100 Chicago, Illinois, O'Hare International Airport,
General Airport Revenue Refunding Bonds, Third Lien,
AMT, Series A,5.75% due 1/01/2021 (f) 9,729
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 9
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Held in Trust (j) Value
-------------------------------------------------------------------------------------------
Massachusetts -- 4.8%
$ 3,100 Massachusetts State Port Authority, Special Facilities
Revenue Bonds (Delta Air Lines Inc. Project),
AMT, Series A, 5.50% due 1/01/2016 (a) $ 3,269
4,000 Massachusetts State Port Authority, Special Facilities
Revenue Bonds (Delta Air Lines Inc. Project), AMT,
Series A, 5.50% due 1/01/2018 (a) 4,219
2,870 Massachusetts State Port Authority, Special Facilities
Revenue Bonds (Delta Air Lines Inc. Project), AMT,
Series A, 5.50% due 1/01/2019 (a) 3,027
5,600 Massachusetts State HFA, Housing Revenue Bonds
(Rental Mortgage), AMT, Series F, 5.25%
due 1/01/2046 (d) 5,778
-------------------------------------------------------------------------------------------
New Jersey -- 6.4%
15,250 New Jersey EDA, Cigarette Tax Revenue Bonds, 5.50%
due 6/15/2024 (e) 16,370
5,000 New Jersey EDA, Cigarette Tax Revenue Bonds, 5.50%
due 6/15/2031 (e) 5,409
-------------------------------------------------------------------------------------------
New York -- 1.3%
4,200 New York City, New York, GO, Series J, 5.50%
due 6/01/2021 (c) 4,573
-------------------------------------------------------------------------------------------
South Carolina -- 2.2%
3,120 Charleston Educational Excellence Financing
Corporation, South Carolina, Revenue Bonds
(Charleston County School District), 5.25%
due 12/01/2028 (e) 3,355
2,765 Charleston Educational Excellence Financing
Corporation, South Carolina, Revenue Bonds
(Charleston County School District), 5.25%
due 12/01/2029 (e) 2,973
1,010 Charleston Educational Excellence Financing
Corporation, South Carolina, Revenue Bonds
(Charleston County School District), 5.25%
due 12/01/2030 (e) 1,085
-------------------------------------------------------------------------------------------
Texas -- 9.1%
14,500 Dallas-Fort Worth, Texas, International Airport Revenue
Bonds, AMT, Series A, 5.50% due 11/01/2033 (f) 15,527
4,000 Dallas-Fort Worth, Texas, International Airport Revenue
Bonds, AMT, Series A, 6% due 11/01/2028 (b) 4,197
10,400 Travis County, Texas, Health Facilities Development
Corporation, Revenue Refunding Bonds (Ascension
Health Credit), Series A, 5.875%
due 11/15/2009 (a)(g) 11,076
-------------------------------------------------------------------------------------------
Total Municipal Bonds Held in Trust
(Cost -- $102,911) -- 31.2% 105,904
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Shares
Held Short-Term Securities
-------------------------------------------------------------------------------------------
5,318 Merrill Lynch Institutional Tax-Exempt Fund,
3.46% (l)(o) 5,318
-------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost -- $5,318) -- 1.6% 5,318
-------------------------------------------------------------------------------------------
Total Investments (Cost -- $550,223*) -- 170.2% 577,321
Liabilities in Excess of Other Assets -- (0.3%) (892)
Liability for Trust Certificates, Including
Interest Expense Payable -- (14.7%) (50,043)
Preferred Stock, at Redemption Value -- (55.2%) (187,149)
---------
Net Assets Applicable to Common Stock -- 100.0% $ 339,237
=========
* The cost and unrealized appreciation (depreciation) of investments as of
January 31, 2007, as computed for federal income tax purposes, were as
follows:
Aggregate cost .............................................. $501,011
========
Gross unrealized appreciation ............................... $ 26,804
Gross unrealized depreciation ............................... (277)
--------
Net unrealized appreciation ................................. $ 26,527
========
(a) AMBAC Insured.
(b) FGIC Insured.
(c) XL Capital Insured.
(d) FSA Insured.
(e) Assured Guaranty Insured.
(f) MBIA Insured.
(g) Prerefunded.
(h) Escrowed to maturity.
(i) Radian Insured.
(j) Securities represent underlying bonds transferred to a separate
securitization trust established in a tender option bond transaction in
which the Fund may have acquired the residual interest certificates. These
securities serve as collateral in a financing transaction. See Note 1(c)
to Financial Statements for details of Municipal Bonds Held in Trust.
(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:
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Institutional
Tax-Exempt Fund 3,113 $160
--------------------------------------------------------------------------
(m) Represents a zero coupon or a step bond; the interest rate shown reflects
the effective yield at the time of purchase.
(n) FNMA/GNMA Collateralized.
(o) Represents the current yield as of January 31, 2007.
(p) FHLMC Collateralized.
10 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Schedule of Investments (concluded) (in Thousands)
o Forward interest rate swaps outstanding as of January 31, 2007 were as
follows:
-----------------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
-----------------------------------------------------------------------------------
Pay a fixed rate of 3.728% and receive
a floating rate based on a 1-week Bond
Market Association rate
Broker, JPMorgan Chase
Expires February 2017 $25,000 $103
Pay a fixed rate of 3.777% and receive
a floating rate based on a 1-week Bond
Market Association rate
Broker, Citibank N.A.
Expires April 2017 $ 8,000 9
Pay a fixed rate of 3.872% and receive
a floating rate based on a 1-week Bond
Market Association rate
Broker, JPMorgan Chase
Expires February 2022 $ 7,500 24
Pay a fixed rate of 3.676% and receive
a floating rate based on a 1-week Bond
Market Association rate
Broker, JPMorgan Chase
Expires March 2022 $12,500 297
-----------------------------------------------------------------------------------
Total $433
====
See Notes to Financial Statements.
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 11
Statement of Net Assets
As of January 31, 2007
===================================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost -- $544,904,998) $ 572,003,278
Investments in affiliated securities, at value (identified cost -- $5,317,567) ... 5,317,567
Unrealized appreciation on forward interest rate swaps ........................... 432,965
Cash ............................................................................. 88,103
Interest receivable .............................................................. 5,538,852
Prepaid expenses ................................................................. 9,776
-------------
Total assets ..................................................................... 583,390,541
-------------
===================================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Trust certificates ............................................................... 49,782,500
Payables:
Securities purchased ........................................................... $ 5,371,539
Dividends to Common Stock shareholders ......................................... 1,262,904
Interest expense ............................................................... 260,540
Investment adviser ............................................................. 223,211
Other affiliates ............................................................... 3,372 7,121,566
-------------
Accrued expenses ................................................................. 99,956
-------------
Total liabilities ................................................................ 57,004,022
-------------
===================================================================================================================================
Preferred Stock
-----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock, at redemption value, par value $.025 (2,000 Series A Shares,
2,000 Series B Shares, 2,000 Series C Shares) and $.10 per share (1,480
Series D Shares) of AMPS* authorized, issued and outstanding at $25,000 per
share liquidation preference ................................................... 187,149,341
-------------
===================================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock ............................................ $ 339,237,178
=============
===================================================================================================================================
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 ................................................. 322,587,682
Undistributed investment income -- net ........................................... $ 1,242,997
Accumulated realized capital losses -- net ....................................... (15,061,733)
Unrealized appreciation -- net ................................................... 27,531,245
-------------
Total accumulated earnings -- net ................................................ 13,712,509
-------------
Total -- Equivalent to $11.55 net asset value per share of Common Stock
(market price -- $10.77) ....................................................... $ 339,237,178
=============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
12 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Statement of Operations
For the Year Ended January 31, 2007
===================================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------------
Interest and amortization of premium and discount earned ......................... $ 27,728,227
Dividends from affiliates ........................................................ 160,140
-------------
Total income ..................................................................... 27,888,367
-------------
===================================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ......................................................... $ 2,623,358
Interest expense and fees ........................................................ 2,067,476
Commission fees .................................................................. 473,456
Accounting services .............................................................. 177,013
Transfer agent fees .............................................................. 104,948
Professional fees ................................................................ 55,137
Printing and shareholder reports ................................................. 41,820
Custodian fees ................................................................... 33,613
Directors' fees and expenses ..................................................... 24,867
Pricing fees ..................................................................... 22,877
Listing fees ..................................................................... 18,106
Other ............................................................................ 65,335
-------------
Total expenses before reimbursement .............................................. 5,708,006
Reimbursement of expenses ........................................................ (9,515)
-------------
Total expenses after reimbursement ............................................... 5,698,491
-------------
Investment income -- net ......................................................... 22,189,876
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss) -- Net
-----------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments -- net ............................................................. 2,380,845
Forward interest rate swaps -- net ............................................. (1,677,645) 703,200
-------------
Change in unrealized appreciation/depreciation on:
Investments -- net ............................................................. 175,651
Forward interest rate swaps -- net ............................................. 853,865 1,029,516
------------------------------
Total realized and unrealized gain-- net ......................................... 1,732,716
-------------
===================================================================================================================================
Dividends to Preferred Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income -- net ......................................................... (6,335,868)
-------------
Net Increase in Net Assets Resulting from Operations ............................. $ 17,586,724
=============
See Notes to Financial Statements.
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 13
Statements of Changes in Net Assets (As Restated for the Year Ended 2006. See
Note 6)
For the Year Ended
January 31,
------------------------------
Increase (Decrease) in Net Assets: 2007 2006
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income -- net ......................................................... $ 22,189,876 $ 22,716,458
Realized gain -- net ............................................................. 703,200 2,335,036
Change in unrealized appreciation/depreciation -- net ............................ 1,029,516 (8,831,435)
Dividends to Preferred Stock shareholders ........................................ (6,335,868) (4,591,787)
------------------------------
Net increase in net assets resulting from operations ............................. 17,586,724 11,628,272
------------------------------
===================================================================================================================================
Dividends to Common Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income -- net ......................................................... (16,799,568) (21,205,049)
------------------------------
Net decrease in net assets resulting from dividends to Common Stock shareholders . (16,799,568) (21,205,049)
------------------------------
===================================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets applicable to Common Stock ............... 787,156 (9,576,777)
Beginning of year ................................................................ 338,450,022 348,026,799
------------------------------
End of year* ..................................................................... $ 339,237,178 $ 338,450,022
==============================
* Undistributed investment income -- net ...................................... $ 1,242,997 $ 2,188,557
==============================
See Notes to Financial Statements.
14 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Financial Highlights (As Restated for the Years Ended 2006, 2005, 2004 and 2003.
See Note 6 )
For the Year Ended January 31,
The following per share data and ratios have been derived ------------------------------------------------------------
from information provided in the financial statements. 2007 2006 2005 2004 2003
=================================================================================================================================
Per Share Operating Performance
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ........................ $ 11.52 $ 11.85 $ 11.83 $ 11.65 $ 11.43
------------------------------------------------------------
Investment income -- net*** ............................... .76 .77 .79 .81 .83
Realized and unrealized gain (loss) -- net ................ .06 (.22) .05 .15 .17
Less dividends to Preferred Stock shareholders from
investment income -- net ................................ (.22) (.16) (.07) (.06) (.08)
------------------------------------------------------------
Total from investment operations .......................... .60 .39 .77 .90 .92
------------------------------------------------------------
Less dividends to Common Stock shareholders from
investment income -- net ................................ (.57) (.72) (.73) (.72) (.70)
Offering and underwriting costs resulting from the
issuance of Preferred Stock ............................. -- -- (.02) -- --
------------------------------------------------------------
Net asset value, end of year .............................. $ 11.55 $ 11.52 $ 11.85 $ 11.83 $ 11.65
============================================================
Market price per share, end of year ....................... $ 10.77 $ 11.03 $ 10.93 $ 11.22 $ 10.62
============================================================
=================================================================================================================================
Total Investment Return*
---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ........................ 5.66% 3.63% 7.20% 8.46% 8.62%
============================================================
Based on market price per share ........................... 2.90% 7.58% 4.25% 12.84% 2.43%
============================================================
=================================================================================================================================
Ratios Based on Average Net Assets Applicable to Common Stock
---------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement and excluding interest
expense and fees** ...................................... 1.08% 1.07% 1.01% .97% 1.00%
============================================================
Total expenses, net of reimbursement** .................... 1.69% 1.51% 1.32% 1.26% 1.29%
============================================================
Total expenses** .......................................... 1.69% 1.51% 1.32% 1.27% 1.29%
============================================================
Total investment income -- net** .......................... 6.57% 6.63% 6.80% 6.95% 7.17%
============================================================
Amount of dividends to Preferred Stock shareholders ....... 1.88% 1.34% .59% .48% .70%
============================================================
Investment income -- net, to Common Stock shareholders .... 4.69% 5.29% 6.21% 6.47% 6.47%
============================================================
=================================================================================================================================
Ratios Based on Average Net Assets Applicable to Preferred Stock
---------------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders ................. 3.39% 2.46% 1.22% 1.09% 1.57%
============================================================
=================================================================================================================================
Supplemental Data
---------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock, end of year
(in thousands) .......................................... $339,237 $338,450 $348,027 $347,389 $342,014
============================================================
Preferred Stock outstanding at liquidation
preference, end of year (in thousands) .................. $187,000 $187,000 $187,000 $150,000 $150,000
============================================================
Portfolio turnover ........................................ 31% 22% 33% 41% 24%
============================================================
=================================================================================================================================
Leverage
---------------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ................................. $ 2,814 $ 2,810 $ 2,861 $ 3,316 $ 3,280
============================================================
=================================================================================================================================
Dividends Per Share on Preferred Stock Outstanding
---------------------------------------------------------------------------------------------------------------------------------
Series A -- Investment income -- net ...................... $ 841 $ 603 $ 309 $ 233 $ 350
============================================================
Series B -- Investment income -- net ...................... $ 854 $ 629 $ 289 $ 354 $ 510
============================================================
Series C -- Investment income -- net ...................... $ 845 $ 610 $ 295 $ 227 $ 327
============================================================
Series D -- Investment income -- net ...................... $ 848 $ 614 $ 156 -- --
============================================================
* 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.
See Notes to Financial Statements.
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 15
Notes to Financial Statements
1. Significant Accounting Policies:
On September 29, 2006, MuniEnhanced Fund, Inc. was renamed BlackRock
MuniEnhanced Fund, Inc. (the "Fund"). 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. 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 valuations 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 due to an
unfavorable change in the price of the underlying security or index, or if the
counterparty does not perform under the contract. The counterparty for certain
instruments may pledge cash or securities as collateral.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such financial futures contracts.
Financial 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, 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.
16 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Notes to Financial Statements (continued)
o Swaps -- The Fund may enter into swap agreements, which are OTC contracts
in which the Fund and a counterparty agree to make periodic net payments
on a specified notional amount. The net payments can be made for a set
period of time or may be triggered by a predetermined credit event. The
net periodic payments may be based on a fixed or variable interest rate;
the change in market value of a specified security, basket of securities,
or index; or the return generated by a security. These periodic payments
received or made by the Fund are recorded in the accompanying Statement of
Operations as realized gains or losses, respectively. Gains or losses are
also realized upon termination of the swap agreements. Swaps are
marked-to-market daily and changes in value are recorded as unrealized
appreciation (depreciation). Risks include changes in the returns of the
underlying instruments, failure of the counterparties to perform under the
contracts' terms and the possible lack of liquidity with respect to the
swap agreements.
(c) Municipal bonds held in trust -- The Fund invests in leveraged residual
certificates ("TOB Residuals") issued by tender option bond trusts ("TOBs"). A
TOB is established by a third party sponsor forming a special purpose entity,
into which the Fund, or an agent on behalf of the Fund, transfers municipal
securities. A TOB typically issues two classes of beneficial interests:
short-term floating rate certificates, which are sold to third party investors,
and residual certificates, which are generally issued to the Fund which made the
transfer or to affiliates of the Fund. The transfer of the municipal securities
to a TOB does not qualify for sale treatment under Statement of Financial
Accounting Standards No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," therefore the municipal
securities deposited into a TOB are presented in the Fund's schedule of
investments and the proceeds from the transaction are reported as a liability
for trust certificates of the Fund. Similarly, proceeds from residual
certificates issued to affiliates, if any, from the transaction are included in
the liability for trust certificates. Interest income from the underlying
security is recorded by the Fund on an accrual basis. Interest expense incurred
on the secured borrowing and other expenses related to remarketing,
administration and trustee services to a TOB are reported as expenses of the
Fund. The floating rate certificates have interest rates that generally reset
weekly and their holders have the option to tender certificates to the TOB for
redemption at par at each reset date. The residual interests held by the Fund
include the right of the Fund (1) to cause the holders of a proportional share
of the floating rate certificates to tender their certificates at par, and (2)
to transfer a corresponding share of the municipal securities from the TOB to
the Fund. At January 31, 2007, the aggregate value of the underlying municipal
securities transferred to TOBs was $105,904,412, the related liability for trust
certificates was $49,782,500 and the range of interest rates on the liability
for trust certificates was 3.55% to 3.68%.
Financial transactions executed through TOBs generally will underperform the
market for fixed rate municipal bonds in a rising interest rate environment, but
tend to outperform the market for fixed rate bonds when interest rates decline
or remain relatively stable. Should short-term interest rates rise, the Fund's
investments in TOB Residuals likely will adversely affect the Fund's investment
income -- net and distributions to shareholders. Fluctuations in the market
value of municipal securities deposited into the TOB may adversely affect the
Fund's net asset value per share.
While the Fund's investment policies and restrictions expressly permit
investments in inverse floating rate securities such as TOB Residuals, they
generally do not allow the Fund to borrow money for purposes of making
investments. The Fund's management believes that the Fund's restrictions on
borrowings do not apply to the secured borrowings deemed to have occurred for
accounting purposes.
(d) 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.
(e) 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.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(g) Reclassifications -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. There were no significant
reclassifications in the current year. These reclassifications have no effect on
net assets or net asset values per share.
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 17
Notes to Financial Statements (continued)
(h) Recent accounting pronouncements -- In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109."
FIN 48 prescribes the minimum recognition threshold a tax position must meet in
connection with accounting for uncertainties in income tax positions taken or
expected to be taken by an entity including mutual funds before being measured
and recognized in the financial statements. Adoption of FIN 48 is required for
the last net asset value calculation in the first required financial statement
reporting period for fiscal years beginning after December 15, 2006. The impact
on the Fund's financial statements, if any, is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, "Fair Value Measurements" ("FAS 157"), was issued and is effective for
fiscal years beginning after November 15, 2007. FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the implications of
FAS 157. At this time, its impact on the Fund's financial statements has not
been determined.
2. Investment Advisory Agreement and Transactions with Affiliates:
On September 29, 2006, BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill
Lynch") combined Merrill Lynch's investment management business, Merrill Lynch
Investment Managers, L.P. ("MLIM"), and its affiliates including Fund Asset
Management, L.P. ("FAM"), with BlackRock, Inc. to create a new independent
company. Merrill Lynch has a 49.8% economic interest and a 45% voting interest
in the combined company and The PNC Financial Services Group, Inc. ("PNC"), has
approximately a 34% economic and voting interest. The new company operates under
the BlackRock name and is governed by a board of directors with a majority of
independent members.
On August 15, 2006, shareholders of the Fund approved a new Investment Advisory
Agreement with BlackRock Advisors, Inc. (the "Manager"), an indirect, wholly
owned subsidiary of BlackRock, Inc. BlackRock Advisors, Inc. was recently
reorganized into a limited liability company and renamed BlackRock Advisors,
LLC. The new Investment Advisory Agreement between the Fund and the Manager
became effective on September 29, 2006. Prior to September 29, 2006, FAM was the
Fund's Manager. The general partner of FAM is Princeton Services, Inc. ("PSI"),
an indirect, wholly owned subsidiary of Merrill Lynch, which is the limited
partner.
The Manager 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 average daily value of the
Fund's net assets, including assets acquired from the issuance of Preferred
Stock. The Manager (and formerly FAM) has agreed to reimburse its management fee
by the amount of management fees the Fund pays to the Manager (and formerly FAM)
indirectly through its investment in Merrill Lynch Institutional Tax-Exempt
Fund. For the period February 1, 2006 to September 29, 2006, FAM reimbursed the
Fund $4,455. For the period September 30, 2006 to January 31, 2007, the Manager
reimbursed the Fund $5,060.
In addition, the Manager has entered into a sub-advisory agreement with
BlackRock Investment Management, LLC, an affiliate of the Manager, under which
the Manager pays the Sub-Adviser for services it provides a monthly fee that is
a percentage of the management fee paid by the Fund to the Manager.
For the year ended January 31, 2007, the Fund reimbursed FAM and the Manager
$7,870 and $3,372, respectively, for certain accounting services.
Prior to September 29, 2006, certain officers and/or directors of the Fund were
officers and/or directors of FAM, MLIM, PSI and/or Merrill Lynch.
Commencing September 29, 2006, certain officers and/or directors of the Fund are
officers and/or directors of BlackRock, Inc. or its affiliates.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended January 31, 2007 were $179,004,196 and $177,588,443, 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 redeemable shares of Preferred Stock of the
Fund, with 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
18 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Notes to Financial Statements (continued)
that may vary for the successive dividend periods. The yields in effect at
January 31, 2007 were as follows: Series A, 3.46%; Series B, 3.45%; Series C,
3.56%; and Series D, 3.52%.
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, 2007, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, a wholly owned subsidiary of Merrill Lynch, received
$223,647 in commissions.
5. Distributions to Shareholders:
The Fund paid a tax-exempt income dividend to holders of Common Stock in the
amount of $.043000 on March 1, 2007 to shareholders of record on February 15,
2007.
The tax character of distributions paid during the fiscal years ended January
31, 2007 and January 31, 2006 was as follows:
--------------------------------------------------------------------------------
1/31/2007 1/31/2006
--------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income ......................... $23,135,436 $25,796,836
-------------------------------
Total distributions ......................... $23,135,436 $25,796,836
===============================
As of January 31, 2007, the components of accumulated earnings on a tax basis
were as follows:
------------------------------------------------------------------------------
Undistributed tax-exempt income -- net ....................... $ 1,462,845
Undistributed long-term capital gains -- net ................. --
------------
Total undistributed earnings -- net .......................... 1,462,845
Capital loss carryforward .................................... (12,865,504)*
Unrealized gains -- net ...................................... 25,115,168**
------------
Total accumulated earnings -- net ............................ $ 13,712,509
============
* On January 31, 2007, the Fund had a net capital loss carryforward of
$12,865,504, of which $1,939,484 expires in 2008, $8,632,426 expires in
2009, $1,940,146 expires in 2011 and $353,448 expires in 2013. This amount
will be available to offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains
(losses) is attributable primarily to the tax deferral of losses on
straddles, the difference between book and tax amortization methods for
premiums and discounts on fixed income securities and the difference
between the book and tax treatment of residual interests in tender option
bond trusts.
6. Restatement Information:
During the year ended January 31, 2007, the Fund determined that the criteria
for sale accounting in Statement of Financial Accounting Standards No. 140 had
not been met for certain transfers of municipal bonds and that these transfers
should have been accounted for as secured borrowings rather than as sales.
Accordingly, the Fund has restated the Statements of Changes in Net Assets for
the year ended January 31, 2006 and certain financial highlights for the years
ended January 31, 2006, 2005, 2004, and 2003. The effects of the restatement
were to record the transfers of the municipal bonds as secured borrowings, to
give effect to offsetting changes in realized gain -- net and in the change in
unrealized appreciation/depreciation -- net on the transferred municipal
securities and to give effect to interest on the bonds as interest income and
interest on the secured borrowings as interest expense.
--------------------------------------------------------------------------------
Statements of Changes in Net Assets for the
Year Ended January 31, 2006
--------------------------------------------------------------------------------
Previously
Reported Restated
--------------------------------------------------------------------------------
Realized gain -- net ..................... $ 2,424,315 $ 2,335,036
Change in unrealized
appreciation/
depreciation -- net .................... $(8,920,714) $(8,831,435)
--------------------------------------------------------------------------------
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 19
Notes to Financial Statements (concluded)
------------------------------------------------------------------------------------------------------------------------------------
Financial Highlights
For the Years Ended January 31, 2006, 2005, 2004 and 2003
------------------------------------------------------------------------------------------------------------------------------------
2006 2005 2004 2003
-------------------- -------------------- -------------------- --------------------
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported Restated
------------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement** ..... 1.07% 1.51% 1.01% 1.32% .97% 1.26% 1.00% 1.29%
Total expenses** ........................... 1.07% 1.51% 1.01% 1.32% .97% 1.27% 1.00% 1.29%
Portfolio turnover ......................... 27.72% 22% 40.17% 33% 50.47% 41% 31.35% 24%
------------------------------------------------------------------------------------------------------------------------------------
** Do not reflect the effect of dividends to Preferred Stock shareholders.
While the Statements of Net Assets as of January 31, 2006, 2005, 2004 and 2003,
not presented herein, have not been reissued to give effect to the restatement,
the principal effects of the restatement would be to increase investments and
liability for trust certificates by corresponding amounts at each year, with no
effect on previously reported net assets. The Statements of Operations for the
years ended January 31, 2006, 2005, 2004, and 2003, not presented herein, have
not been reissued to give effect to the restatement. However, the principal
effects of the restatement would be to increase interest income and interest
expense and fees by corresponding amounts each year, and, where applicable, to
revise realized gain (loss) on investments -- net, and the change in unrealized
appreciation/depreciation on investments -- net, by corresponding and offsetting
amounts. The Statements of Changes in Net Assets for the years ended January 31,
2005, 2004 and 2003, not presented herein, have not been reissued to give effect
to the restatement, but the principal effects of a restatement, where
applicable, would be to revise previously reported realized gain (loss) -- net,
and change in unrealized appreciation/depreciation -- net, by corresponding and
offsetting amounts.
20 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
BlackRock MuniEnhanced Fund, Inc.:
We have audited the accompanying statement of net assets, including the schedule
of investments, of BlackRock MuniEnhanced Fund, Inc. (formerly MuniEnhanced
Fund, Inc.), as of January 31, 2007, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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. The
Fund is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of January 31, 2007, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
BlackRock MuniEnhanced Fund, Inc. as of January 31, 2007, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 6, the statement of changes in net assets for the year
ended January 31, 2006, and certain financial highlights for the years ended
January 31, 2006, 2005, 2004 and 2003 have been restated.
Deloitte & Touche LLP
Princeton, New Jersey
March 26, 2007
Fund Certification (unaudited)
In May 2006, the Fund filed its Chief Executive Officer Certification for the
prior year with the New York Stock Exchange pursuant to Section 303A. 12(a) of
the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Important Tax Information (unaudited)
All of the net investment income distributions paid by BlackRock MuniEnhanced
Fund, Inc. during the taxable year ended January 31, 2007 qualify as tax-exempt
interest dividends for federal income tax purposes.
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 21
Automatic Dividend Reinvestment Plan
How the Plan Works -- The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by Computershare Trust
Company, N.A. (the "Plan Agent"). Under the Plan, whenever the Fund declares a
dividend, participants in the Plan will receive the equivalent in shares of
Common Stock of the Fund. The Plan Agent will acquire the shares for the
participant's account either (i) through receipt of additional unissued but
authorized shares of the Fund ("newly issued shares") or (ii) by purchase of
outstanding shares of Common Stock on the open market on the New York Stock
Exchange or elsewhere. If, on the dividend payment date, the Fund's net asset
value per share is equal to or less than the market price per share plus
estimated brokerage commissions (a condition often referred to as a "market
premium"), the Plan Agent will invest the dividend amount in newly issued
shares. If the Fund's net asset value per share is greater than the market price
per share (a condition often referred to as a "market discount"), the Plan Agent
will invest the dividend amount by purchasing on the open market additional
shares. If the Plan Agent is unable to invest the full dividend amount in open
market purchases, or if the market discount shifts to a market premium during
the purchase period, the Plan Agent will invest any uninvested portion in newly
issued shares. The shares acquired are credited to each shareholder's account.
The amount credited is determined by dividing the dollar amount of the dividend
by either (i) when the shares are newly issued, the net asset value per share on
the date the shares are issued or (ii) when shares are purchased in the open
market, the average purchase price per share.
Participation in the Plan -- Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by writing to the Plan Agent.
Benefits of the Plan -- The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares acquired
pursuant to the Plan receive voting rights. In addition, if the market price
plus commissions of the Fund's shares is above the net asset value, participants
in the Plan will receive shares of the Fund for less than they could otherwise
purchase them and with a cash value greater than the value of any cash
distribution they would have received. However, there may not be enough shares
available in the market to make distributions in shares at prices below the net
asset value. Also, since the Fund does not redeem shares, the price on resale
may be more or less than the net asset value.
Plan Fees -- There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders will
pay a pro rata share of any such commissions.
Tax Implications -- The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that may
be payable (or required to be withheld) on such dividends. Therefore, income and
capital gains may still be realized even though shareholders do not receive
cash. The value of shares acquired pursuant to the Plan will generally be
excluded from gross income to the extent that the cash amount reinvested would
be excluded from gross income. If, when the Fund's shares are trading at a
market premium, the Fund issues shares pursuant to the Plan that have a greater
fair market value than the amount of cash reinvested, it is possible that all or
a portion of the discount from the market value (which may not exceed 5% of the
fair market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution, it is also
possible that the taxable character of this discount would be allocable to all
the shareholders, including shareholders who do not participate in the Plan.
Thus, shareholders who do not participate in the Plan might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.
Contact Information -- All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at Computershare
Trust Company, N.A., P.O. Box 43010, Providence, RI 02940-3010, Telephone:
800-426-5523.
22 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Disclosure of Investment Advisory Agreement
BlackRock Investment Advisory Agreement -- Matters Considered by the Board
The following disclosure appeared in the July 31, 2006 Semi-Annual Report of the
Fund and is the discussion referred to in "New BlackRock Sub-Advisory Agreement
-- Matters Considered by the Board" below. The term "Investment Adviser" as used
herein refers to Fund Asset Management, L.P.
In connection with the Transaction between Merrill Lynch and BlackRock, the
Fund's Board of Directors considered a new investment advisory agreement (the
"New Investment Advisory Agreement") between the Fund and BlackRock Advisors,
Inc. or its successor ("BlackRock Advisors"). The New Investment Advisory
Agreement has been approved by the Fund's shareholders and is expected to become
effective upon the closing of the Transaction in the third quarter of 2006.
The Board discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Board, including the
independent directors, approved the New Investment Advisory Agreement at a
meeting held on May 9, 2006.
To assist the Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent directors, through their independent legal counsel,
also requested and received additional information from Merrill Lynch and
BlackRock in connection with their consideration of the New Investment Advisory
Agreement. The additional information was provided in advance of the May 9, 2006
meeting. In addition, the independent directors consulted with their counsel and
Fund counsel on numerous occasions, discussing, among other things, the legal
standards and certain other considerations relevant to the directors'
deliberations.
At the Board meetings, the directors discussed with Merrill Lynch management and
certain BlackRock representatives the Transaction, its strategic rationale and
BlackRock's general plans and intentions regarding the Fund. At these Board
meetings, representatives of Merrill Lynch and BlackRock made presentations to
and responded to questions from the Board. The directors also inquired about the
plans for and anticipated roles and responsibilities of certain employees and
officers of the Investment Adviser and certain affiliates being transferred to
BlackRock in connection with the Transaction. The independent directors of the
Board also conferred separately and with their counsel about the Transaction and
other matters related to the Transaction on a number of occasions, including in
connection with the April and May 2006 meetings. After the presentations and
after reviewing the written materials provided, the independent directors met in
executive sessions with their counsel to consider the New Investment Advisory
Agreement.
In connection with the Board's review of the New Investment Advisory Agreement,
Merrill Lynch and/or BlackRock advised the directors about a variety of matters.
The advice included the following, among other matters:
o that there is not expected to be any diminution in the nature, quality and
extent of services provided to the Fund and its shareholders by BlackRock
Advisors, including compliance services;
o that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented
professionals;
o that the Fund should benefit from having access to BlackRock's state of
the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions(R) brand name;
o that BlackRock has no present intention to alter any applicable expense
waivers or reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of the Board
before making any changes;
o that in connection with the Transaction, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Investment Adviser (or its affiliates), respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they have a different financial
interest in the matters that were being considered than do Fund
shareholders.
The directors considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 23
Disclosure of Investment Advisory Agreement (continued)
o the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies
of scale and access to investment opportunities;
o the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Fund's total advisory fees
will not increase by virtue of the New Investment Advisory Agreement, but
will remain the same;
o that in August 2005, the Board performed a full annual review of the
investment advisory agreement currently in effect for the Fund (the
"Current Investment Advisory Agreement") as required by the 1940 Act and
has determined that the Investment Adviser has the capabilities, resources
and personnel necessary to provide the advisory and administrative
services currently provided to the Fund; and that the advisory and/or
management fees paid by the Fund, taking into account any applicable
agreed-upon fee waivers and breakpoints, represent reasonable compensation
to the Investment Adviser in light of the services provided, the costs to
the Investment Adviser of providing those services, economies of scale,
the fees and other expenses paid by similar funds (including information
provided by Lipper Inc. ["Lipper"]), and such other matters as the
directors have considered relevant in the exercise of their reasonable
judgment; and
o that Merrill Lynch agreed to pay all expenses of the Fund in connection
with the Board's consideration of the New Investment Advisory Agreement
and related agreements and all costs of shareholder approval of the New
Investment Advisory Agreement and as a result the Fund would bear no costs
in obtaining shareholder approval of the New Investment Advisory
Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, the Board assessed the
nature, scope and quality of the services to be provided to the Fund by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting and assistance in
meeting legal and regulatory requirements. In its review of the New Investment
Advisory Agreement, the Board also considered a range of information in
connection with its oversight of the services to be provided by BlackRock
Advisors and its affiliates. Among the matters considered were: (a) fees (in
addition to management fees) to be paid to BlackRock Advisors and its affiliates
by the Fund; (b) Fund operating expenses paid to third parties; (c) the
resources devoted to and compliance reports relating to the Fund's investment
objective, policies and restrictions, and its compliance with its Code of Ethics
and BlackRock Advisors' compliance policies and procedures; and (d) the nature,
cost and character of non-investment management services to be provided by
BlackRock Advisors and its affiliates.
In the period prior to the Board meetings to consider renewal of the Current
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the Current Investment Advisory Agreement. These
materials included (a) information compiled by Lipper on the fees and expenses
and the investment performance of the Fund as compared to a comparable group of
funds as classified by Lipper; (b) information comparing the Fund's market price
with its net asset value per share; (c) a discussion by the Fund's portfolio
management team on investment strategies used by the Fund during its most recent
fiscal year; (d) information on the profitability to the Investment Adviser of
the Current Investment Advisory Agreement and other payments received by the
Investment Adviser and its affiliates from the Fund; and (e) information
provided by the Investment Adviser concerning services related to the valuation
and pricing of Fund portfolio holdings, the Fund's portfolio turnover
statistics, and direct and indirect benefits to the Investment Adviser and its
affiliates from their relationship with the Fund.
In their deliberations, the directors considered information received in
connection with their most recent continuation of the Current Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the New Investment Advisory Agreement. The directors did not
identify any particular information that was
24 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
all-important or controlling. The directors, including a majority of the
independent directors, concluded that the terms of the New Investment Advisory
Agreement are appropriate, that the fees to be paid are reasonable in light of
the services to be provided to the Fund, and that the New Investment Advisory
Agreement should be approved and recommended to Fund shareholders.
Nature, Quality and Extent of Services Provided -- The Board reviewed the
nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of the
Fund, as well as the nature, quality and extent of services expected to be
provided by BlackRock Advisors. The Board focused primarily on the Investment
Adviser's advisory services and the Fund's investment performance, but also
considered certain areas in which both the Investment Adviser and the Fund
receive services as part of the Merrill Lynch complex. The Board compared the
Fund's performance -- both including and excluding the effects of fees and
expenses -- to the performance of a comparable group of funds, and the
performance of a relevant index or combination of indexes. While the Board
reviews performance data at least quarterly, consistent with the Investment
Adviser's investment goals, the Board attaches more importance to performance
over relatively long periods of time, typically three to five years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the New Investment Advisory Agreement, the directors
considered, among other things, the expected impact of the Transaction on the
operations, facilities, organization and personnel of New BlackRock and how it
would affect the Fund; the ability of BlackRock Advisors to perform its duties
after the Transaction; and any anticipated changes to the current investment and
other practices of the Fund.
The directors were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the art
technology and risk management analytic tools, including the investment tools
provided under the BlackRock Solutions brand name.
The directors were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Fund will continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch affiliates
(for example, transactions with a Merrill Lynch broker-dealer acting as
principal) absent revised or new regulatory relief. The directors were advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief. There can be no
assurance that such relief will be obtained.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the directors
determined that the nature and quality of services to be provided to the Fund
under the New Investment Advisory Agreement were expected to be as good as or
better than that provided under the Current Investment Advisory Agreement. It
was noted, however, that it is expected that there will be changes in personnel
following the Transaction and the combination of the operations of the
Investment Adviser and its affiliates with those of BlackRock. The directors
noted that if current portfolio managers or other personnel cease to be
available, the Board would consider all available options, which could include
seeking the investment advisory or other services of BlackRock affiliates.
Accordingly, the directors concluded that, overall, they were satisfied at the
present time with assurances from BlackRock and BlackRock Advisors as to the
expected nature, extent and quality of the services to be provided to the Fund
under the New Investment Advisory Agreement.
Costs of Services Provided and Profitability -- It was noted that, in
conjunction with the recent review of the Current Investment Advisory Agreement,
the directors had received, among other things, a report from Lipper comparing
the Fund's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser or its
affiliates to other registered investment company clients for investment
management services. The Board reviewed the Fund's contractual management fee
rate and actual management fee rate as a percentage of total assets at common
asset levels -- the actual rate includes advisory fees and the effects of any
fee waivers -- compared to the other funds in its Lipper category. They also
compared the Fund's total expenses to those of other comparable funds. The
information showed that the Fund had fees and expenses within the range of fees
and expenses of comparable funds. The Board considered the services to be
provided by and the fees to be charged by BlackRock Advisors to other funds with
similar investment mandates and noted that the fees charged by BlackRock
Advisors in those cases, including fee waivers and expense reimbursements, were
generally comparable to those being charged to the Fund. The Board concluded
that the Fund's
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 25
Disclosure of Investment Advisory Agreement (concluded)
management fee and fee rate and overall expense ratio are reasonable compared to
those of other comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, the directors considered, among
other things, whether advisory fees or other expenses would change as a result
of the Transaction. Based on their review of the materials provided and the fact
that the New Investment Advisory Agreement is substantially similar to the
Current Investment Advisory Agreement in all material respects, including the
rate of compensation, the directors determined that the Transaction should not
increase the total fees payable, including any fee waivers, or after any expense
caps or expense reimbursements, for advisory and administrative services. The
directors noted that it was not possible to predict how the Transaction would
affect BlackRock Advisors' profitability from its relationship with the Fund.
The directors discussed with BlackRock Advisors its general methodology to be
used in determining its profitability with respect to its relationship with the
Fund and noted that they expect to receive profitability information from
BlackRock Advisors on at least an annual basis.
Fees and Economies of Scale -- The Board considered the extent to which
economies of scale might be realized as the assets of the Fund increase and
whether there should be changes in the management fee rate or structure in order
to enable the Fund to participate in these economies of scale. The Board
considered economies of scale to the extent applicable to the Fund's closed-end
structure and determined that the Fund currently appropriately benefits from any
economies of scale and no changes were currently necessary.
In reviewing the Transaction, the directors considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, the directors determined
that as a result of the Transaction, the Fund's total advisory fees would be no
higher than the fees under its Current Investment Advisory Agreement. The
directors concluded that, because the rates for advisory fees for the Fund would
be no higher than its current fee rates, the proposed management fee structure,
including any fee waivers, was reasonable and that no additional changes were
currently necessary.
Fall-Out Benefits -- The directors considered whether the Fund would generate
any fall-out benefits to BlackRock Advisors. Fall-out benefits are indirect
profits from other activities that accrue to the adviser or its affiliates
solely because of the existence of the Fund. In evaluating the fall-out benefits
to be received by BlackRock Advisors under the New Investment Advisory
Agreement, the directors considered whether the Transaction would have an impact
on the fall out benefits received by the Investment Adviser by virtue of the
Current Investment Advisory Agreement. Based on their review of the materials
provided, including materials received in connection with their most recent
approval or continuance of the Current Investment Advisory Agreement, and their
discussions with management of the Investment Adviser and BlackRock, the
directors determined that those benefits could include increased ability for
BlackRock to distribute shares of its funds and other investment products. The
directors noted that any such benefits were difficult to quantify with certainty
at this time.
Investment Performance -- The directors considered investment performance for
the Fund. The directors compared the Fund's performance -- both including and
excluding the effects of fees and expenses -- to the performance of a comparable
group of funds, and the performance of a relevant index or combination of
indexes. The comparative information received from Lipper showed Fund
performance at various levels within the range of performance of comparable
funds over different time periods. The directors believed the Fund's performance
was satisfactory. Also, the directors took into account the investment
performance of funds currently advised by BlackRock Advisors. The Board
considered comparative information from Lipper which showed that the performance
of the funds advised by BlackRock Advisors was within the range of performance
of comparable funds over different time periods. The Board noted BlackRock's
considerable investment management experience and capabilities, but was unable
to predict what effect, if any, consummation of the Transaction would have on
the future performance of the Fund.
Conclusion -- After the independent directors of the Fund deliberated in
executive session, the entire Board, including the independent directors,
approved the New Investment Advisory Agreement, concluding that the advisory fee
rate was reasonable in relation to the services provided and that the New
Investment Advisory Agreement was in the best
26 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
interests of the shareholders. In approving the New Investment Advisory
Agreement, the Board noted that it anticipated reviewing the continuance of the
agreement in advance of the expiration of the initial two-year period.
Contingent BlackRock Sub-Advisory Agreement -- Matters Considered by the Board
At the telephonic and in-person meetings held during April and May 2006 at which
the Board of Directors discussed and approved the New Investment Advisory
Agreement, the Board, including the independent directors, also discussed and
approved a contingent sub-advisory agreement (the "Contingent Sub-Advisory
Agreement") between the Investment Adviser and BlackRock Advisors (the
"BlackRock Sub-Adviser"). The Contingent Sub-Advisory Agreement is intended to
ensure that the Fund operates with efficient portfolio management services until
the closing of the Transaction, in the event that the Board deems it necessary
and in the best interests of the Fund and its shareholders that the BlackRock
Sub-Adviser assist in managing the operations of the Fund during the interim
period until the closing of the Transaction. The Contingent Sub-Advisory
Agreement would take effect only upon recommendation from the Investment Adviser
and upon subsequent approval of the Board in the period up to the closing of the
Transaction. The effectiveness of the Contingent Sub-Advisory Agreement,
therefore, is contingent on further Board approval. Pursuant to the Contingent
Sub-Advisory Agreement, the BlackRock Sub-Adviser would receive a monthly fee
from the Investment Adviser equal to 50% of the advisory fee received by the
Investment Adviser. The Investment Adviser would pay the BlackRock Sub-Adviser
out of its own resources. There would be no increase in Fund expenses as a
result of the Contingent Sub-Advisory Agreement.
In making its approval at the May in-person meeting, the Board considered the
Contingent Sub-Advisory Agreement in conjunction with the New Investment
Advisory Agreement and reviewed the same information and factors discussed
above, and came to the same conclusions. The Board also considered in
conjunction with the Contingent Sub-Advisory Agreement the necessity of ensuring
that the Fund operates with effective management services until the closing of
the Transaction. In reviewing the sub-advisory fee rate provided in the
Contingent Sub-Advisory Agreement, the Board took note of the fact that both the
Investment Adviser and the BlackRock Sub-Adviser would have significant
responsibilities under their respective advisory agreements. The Investment
Adviser would remain responsible for oversight of the Fund's operations and
administration and the BlackRock Sub-Adviser would provide advisory services to
the Fund under the Contingent Sub-Advisory Agreement. The Board also took into
account the expected short duration of the term of any Contingent Sub-Advisory
Agreement and the fact that total advisory fees paid by the Fund would not
increase as a result of the Contingent Sub-Advisory Agreement. Under all of the
circumstances, the Board concluded that it was a reasonable allocation of fees
for the BlackRock Sub-Adviser to receive 50% of the advisory fee paid by the
Fund to the Investment Adviser.
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved the Contingent Sub-Advisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that the Contingent Sub-Advisory Agreement was in the best
interests of shareholders.
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 27
Disclosure of Sub-Advisory Agreement
New BlackRock Sub-Advisory Agreement -- Matters Considered by the Board
At an in-person meeting held on August 22-23, 2006, the Board of Directors,
including the independent directors, discussed and approved the sub-advisory
agreement with respect to the Fund between BlackRock Advisors, LLC (previously
organized as BlackRock Advisors, Inc.) ("BlackRock Advisors") and its affiliate,
BlackRock Investment Management, LLC (the "Sub-Adviser") (the "BlackRock
Sub-Advisory Agreement"). The BlackRock Sub-Advisory Agreement became effective
on September 29, 2006, at the same time the New Investment Advisory Agreement
with BlackRock Advisors (which had been approved by the Fund's shareholders)
became effective.
Pursuant to the BlackRock Sub-Advisory Agreement, the Sub-Adviser receives a
monthly fee from BlackRock Advisors at an annual rate equal to 59% of the
advisory fee received by BlackRock Advisors from the Fund. BlackRock Advisors
pays the Sub-Adviser out of its own resources, and there is no increase in Fund
expenses as a result of the BlackRock Sub-Advisory Agreement.
In approving the BlackRock Sub-Advisory Agreement at the August in-person
meeting, the Board reviewed its considerations in connection with its approval
of the New Investment Advisory Agreement in May 2006. The Board relied on the
same information and considered the same factors as those discussed above in
connection with the approval of the New Investment Advisory Agreement, and came
to the same conclusions. The Board considered all relevant factors and did not
identify any particular information that was all-important or controlling. In
reviewing the sub-advisory fee rate provided for in the BlackRock Sub-Advisory
Agreement, the Board noted the fact that both BlackRock Advisors and the
Sub-Adviser have significant responsibilities under their respective advisory
agreements. Under the New Investment Advisory Agreement, BlackRock Advisors
remains responsible for the overall management of the Fund and for oversight of
the Fund's operations and administration. Under the BlackRock Sub-Advisory
Agreement, the Sub-Adviser provides advisory services to the Fund and is
responsible for the day-to-day management of the Fund's portfolio. The Board
also took into account the fact that there is no increase in total advisory fees
paid by the Fund as a result of the BlackRock Sub-Advisory Agreement. Based on
its considerations, the Board concluded that it was a reasonable allocation of
fees for the Sub-Adviser to receive a fee at an annual rate equal to 59% of the
advisory fee paid by the Fund to BlackRock Advisors.
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved the BlackRock Sub-Advisory
Agreement, concluding that the sub-advisory fee was reasonable in relation to
the services provided and that the BlackRock Sub-Advisory Agreement was in the
best interests of the Fund's shareholders.
28 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Officers and Directors
Number of
Funds and
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to Vice Chairman and Director of BlackRock, Inc., 122 Funds None
Doll, Jr.* Princeton, NJ and present Global Chief Investment Officer for Equities, 168 Portfolios
08543-9011 Director Chairman of the BlackRock Retail Operating
Age: 52 Committee, and member of the BlackRock Executive
Committee since 2006; President of the funds advised
by Merrill Lynch Investment Managers, L.P. ("MLIM")
and its affiliates ("MLIM/FAM-advised funds") from
2005 to 2006; President and Chief Investment Officer
of MLIM and Fund Asset Management, L.P. ("FAM") from
2001 to 2006; Co-Head (Americas Region) thereof from
2000 to 2001 and Senior Vice President from 1999 to
2001; President and Director of Princeton Services,
Inc. ("Princeton Services") and President of
Princeton Administrators, L.P. ("Princeton
Administrators") from 2001 to 2006; Chief Investment
Officer of OppenheimerFunds, Inc. in 1999 and
Executive Vice President thereof from 1991 to 1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which
BlackRock Advisors, LLC and its affiliates act as investment adviser. Mr. Doll is an "interested person," as
defined in the Investment Company Act, of the Fund based on his positions with BlackRock, Inc. and its affiliates.
Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
As Fund President, Mr. Doll serves at the pleasure of the Board of Directors.
====================================================================================================================================
Independent Directors*
------------------------------------------------------------------------------------------------------------------------------------
James H. P.O. Box 9095 Director 1995 to Director, The China Business Group, Inc. since 1996 37 Funds None
Bodurtha** Princeton, NJ present and Executive Vice President thereof from 1996 to 57 Portfolios
08543-9095 2003; Chairman of the Board, Berkshire Holding
Age: 62 Corporation since 1980; Partner, Squire, Sanders &
Dempsey from 1980 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9095 Director 2005 to Professor, Harvard University since 1992; Professor, 37 Funds None
Froot Princeton, NJ present Massachusetts Institute of Technology from 57 Portfolios
08543-9095 1986 to 1992.
Age: 49
------------------------------------------------------------------------------------------------------------------------------------
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 29
Officers and Directors (continued)
Number of
Funds and
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors* (continued)
------------------------------------------------------------------------------------------------------------------------------------
Joe P.O. Box 9095 Director 2002 to Member of the Committee of Investment of Employee 37 Funds Kimco Realty
Grills** Princeton, NJ present Benefit Assets of the Association of Financial 57 Portfolios Corporation
08543-9095 Professionals ("CIEBA") since 1986; Member of
Age: 71 CIEBA's Executive Committee since 1988 and its
Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Corporation ("IBM")
and Chief Investment Officer of IBM Retirement Funds
from 1986 to 1993; Member of the Investment Advisory
Committee of the State of New York Common Retirement
Fund from 1989 to 2006; Member of the Investment
Advisory Committee of the Howard Hughes Medical
Institute from 1997 to 2000; Director, Duke
University Management Company from 1992 to 2004,
Vice Chairman thereof from 1998 to 2004, and
Director Emeritus thereof since 2004; Director,
LaSalle Street Fund from 1995 to 2001; Director,
Kimco Realty Corporation since 1997; Member of the
Investment Advisory Committee of the Virginia
Retirement System since 1998, Vice Chairman thereof
from 2002 to 2005, and Chairman thereof since 2005;
Director, Montpelier Foundation since 1998 and its
Vice Chairman from 2000 to 2006, and Chairman
thereof since 2006; Member of the Investment
Committee of the Woodberry Forest School since 2000;
Member of the Investment Committee of the National
Trust for Historic Preservation since 2000.
------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9095 Director 1989 to Professor Emeritus, New York University since 2005; 37 Funds None
London Princeton, NJ present John M. Olin Professor of Humanities, New York 57 Portfolios
08543-9095 University from 1993 to 2005; and Professor thereof
Age: 67 from 1980 to 2005; President, Hudson Institute since
1997 and Trustee thereof since 1980; Dean, Gallatin
Division of New York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Chairman of the Board
of Directors of Vigilant Research, Inc. since 2006;
Member of the Board of Directors for Grantham
University since 2006; Director of AIMS since 2006;
Director of Reflex Security since 2006; Director of
InnoCentive, Inc. since 2006; Director of Cerego,
LLC since 2005; Director, Damon Corp. from 1991 to
1995; Overseer, Center for Naval Analyses from 1983
to 1993.
------------------------------------------------------------------------------------------------------------------------------------
30 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
Officers and Directors (continued)
Number of
Funds and
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors* (concluded)
------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Director 1999 to Shareholder, Modrall, Sperling, Roehl, Harris & 37 Funds None
Cooper Princeton, NJ present Sisk, P.A. since 1993; President, American Bar 57 Portfolios
Ramo 08543-9095 Association from 1995 to 1996 and Member of the
Age: 64 Board of Governors thereof from 1994 to 1997;
Shareholder, Poole, Kelly and Ramo, Attorneys at
Law, P.C. from 1977 to 1993; Director of ECMC Group
(service provider to students, schools and lenders)
since 2001; Director, United New Mexico Bank (now
Wells Fargo) from 1983 to 1988; Director, First
National Bank of New Mexico (now Wells Fargo) from
1975 to 1976; Vice President, American Law Institute
since 2004.
------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Director 2002 to Principal of STI Management (investment adviser) 37 Funds None
Salomon, Princeton, NJ present from 1994 to 2005; Chairman and CEO of Salomon 57 Portfolios
Jr. 08543-9095 Brothers Asset Management Inc. from 1992 to 1995;
Age: 70 Chairman of Salomon Brothers Equity Mutual Funds
from 1992 to 1995; regular columnist with Forbes
Magazine from 1992 to 2002; Director of Stock
Research and U.S. Equity Strategist at Salomon
Brothers Inc. from 1975 to 1991; Trustee, Commonfund
from 1980 to 2001.
------------------------------------------------------------------------------------------------------------------------
* Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Co-Chairman of the Board of Directors and the Audit Committee.
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 31
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to Managing Director of BlackRock, Inc. since 2006; Managing Director of Merrill Lynch
Burke Princeton, NJ President present Investment Managers, L.P. ("MLIM") and Fund Asset Management, L.P. ("FAM") in 2006;
08543-9011 and and First Vice President of MLIM and FAM from 1997 to 2005 and Treasurer thereof from
Age: 46 Treasurer 1999 to 1999 to 2006; Vice President of MLIM and FAM from 1990 to 1997.
present
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior Vice 2002 to Managing Director of BlackRock, Inc. since 2006; Managing Director (Municipal
Loffredo Princeton, NJ President present Tax-Exempt Fund Management) of MLIM from 2000 to 2006; Director of MLIM from 1997
08543-9011 to 2000.
Age: 43
------------------------------------------------------------------------------------------------------------------------------------
Michael P.O. Box 9011 Vice 2000 to Director of BlackRock, Inc. since 2006; Director (Municipal Tax-Exempt Fund
Kalinoski Princeton, NJ President present Management) of MLIM in 2006; Vice President of MLIM from 1999 to 2006.
08543-9011
Age: 36
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Fund Chief 2004 to Managing Director of BlackRock, Inc. and Fund Chief Compliance Officer since 2006;
Hiller Princeton, NJ Compliance present Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
08543-9011 Officer Chief Compliance Officer of MLIM (Americas Region) from 2004 to 2006; Chief
Age: 55 Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance Officer
at Prudential Financial from 1995 to 2000; Senior Counsel in the Securities and
Exchange Commission's Division of Enforcement in Washington, D.C. from 1990 to
1995.
------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director of BlackRock, Inc. since 2006; Director (Legal Advisory) of MLIM from 2002
Pellegrino Princeton, NJ present to 2006; Vice President of MLIM from 1999 to 2002; Attorney associated with MLIM
08543-9011 from 1997 to 2006; Secretary of MLIM, FAM, FAM Distributors, Inc. and Princeton
Age: 46 Services from 2004 to 2006.
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agents
Common Stock:
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
Preferred Stock:
The Bank of New York
101 Barclay Street - 7 West
New York, NY 10286
NYSE Symbol
MEN
32 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
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.
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 33
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.
Electronic Delivery
Electronic copies of most financial reports and prospectuses are available on
the Fund's Web site. Shareholders can sign up for e-mail notifications of
quarterly statements, annual and semi-annual reports and prospectuses by
enrolling in the Fund's electronic delivery program.
To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:
Please contact your financial advisor. Please note that not all investment
advisers, banks or brokerages may offer this service.
34 BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007
BlackRock Privacy Principles
BlackRock is committed to maintaining the privacy of its current and former fund
investors and individual clients (collectively, "Clients") and to safeguarding
their nonpublic personal information. The following information is provided to
help you understand what personal information BlackRock collects, how we protect
that information and why in certain cases we share such information with select
parties.
If you are located in a jurisdiction where specific laws, rules or regulations
require BlackRock to provide you with additional or different privacy-related
rights beyond what is set forth below, then BlackRock will comply with those
specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about you
from different sources, including the following: (i) information we receive from
you or, if applicable, your financial intermediary, on applications, forms or
other documents; (ii) information about your transactions with us, our
affiliates, or others; (iii) information we receive from a consumer reporting
agency; and (iv) from visits to our Web sites.
BlackRock does not sell or disclose to nonaffiliated third parties any nonpublic
personal information about its Clients, except as permitted by law or as is
necessary to service Client accounts. These nonaffiliated third parties are
required to protect the confidentiality and security of this information and to
use it only for its intended purpose.
We may share information with our affiliates to service your account or to
provide you with information about other BlackRock products or services that may
be of interest to you. In addition, BlackRock restricts access to nonpublic
personal information about its Clients to those BlackRock employees with a
legitimate business need for the information. BlackRock maintains physical,
electronic and procedural safeguards that are designed to protect the nonpublic
personal information of its Clients, including procedures relating to the proper
storage and disposal of such information.
BLACKROCK MUNIENHANCED FUND, INC. JANUARY 31, 2007 35
BlackRock 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 BlackRock 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 1-800-441-7762; (2) at
www.blackrock.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.blackrock.com and (2) on the Securities
and Exchange Commission's Web site at http://www.sec.gov.
BlackRock MuniEnhanced Fund, Inc.
P.O. Box 9011
Princeton, NJ 08543-9011
BLACKROCK
#10874-1/07
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge at
www.blackrock.com.
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Joe Grills,
and (2) Robert S. Salomon, Jr.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending January 31, 2007 - $28,500
Fiscal Year Ending January 31, 2006 - $28,500
(b) Audit-Related Fees - Fiscal Year Ending January 31, 2007 - $3,500
Fiscal Year Ending January 31, 2006 - $3,500
The nature of the services relate to AMPs fees.
(c) Tax Fees - Fiscal Year Ending January 31, 2007 - $6,100
Fiscal Year Ending January 31, 2006 - $6,000
The nature of the services include tax compliance.
(d) All Other Fees - Fiscal Year Ending January 31, 2007 - $0
Fiscal Year Ending January 31, 2006 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending January 31, 2007 - $3,053,033
Fiscal Year Ending January 31, 2006 - $5,477,788
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,739,500, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
James H. Bodurtha
Kenneth A. Froot
Joe Grills
Herbert I. London
Roberta Cooper Ramo
Robert S. Salomon, Jr.
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Proxy Voting Policies and Procedures
Each Fund's Board of Directors has delegated to the Manager authority
to vote all proxies relating to the Fund's portfolio securities. The
Manager has adopted policies and procedures (the "Proxy Voting
Procedures") with respect to the voting of proxies related to the
portfolio securities held in the account of one or more of its clients,
including a Fund. Pursuant to these Proxy Voting Procedures, the
Manager's primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its
shareholders, and to act in a manner that the Manager believes is most
likely to enhance the economic value of the securities held by the
Fund. The Proxy Voting Procedures are designed to ensure that the
Manager considers the interests of its clients, including each Fund,
and not the interests of the Manager, when voting proxies and that real
(or perceived) material conflicts that may arise between the Manager's
interest and those of the Manager's clients are properly addressed and
resolved.
In order to implement the Proxy Voting Procedures, the Manager has
formed a Proxy Voting Committee (the "Committee"). The Committee, which
is a subcommittee of the Manager's Equity Investment Policy Oversight
Committee ("EIPOC"), is comprised of a senior member of the Manager's
equity management group who is also a member of EIPOC, one or more
other senior investment professionals appointed by EIPOC, portfolio
managers and investment analysts appointed by EIPOC and any other
personnel EIPOC deems appropriate. The Committee will also include two
non-voting representatives from the Manager's Legal Department
appointed by the Manager's General Counsel. The Committee's membership
shall be limited to full-time employees of the Manager. No person with
any investment banking, trading, retail brokerage or research
responsibilities for the Manager's affiliates may serve as a member of
the Committee or participate in its decision making (except to the
extent such person is asked by the Committee to present information to
the Committee on the same basis as other interested knowledgeable
parties not affiliated with the Manager might be asked to do so). The
Committee determines how to vote the proxies of all clients, including
a Fund, that have delegated proxy voting authority to the Manager and
seeks to ensure that all votes are consistent with the best interests
of those clients and are free from unwarranted and inappropriate
influences. The Committee establishes general proxy voting policies for
the Manager and is responsible for determining how those policies are
applied to specific proxy votes, in light of each issuer's unique
structure, management, strategic options and, in certain circumstances,
probable economic and other anticipated consequences of alternate
actions. In so doing, the Committee may determine to vote a particular
proxy in a manner contrary to its generally stated policies. In
addition, the Committee will be responsible for ensuring that all
reporting and recordkeeping requirements related to proxy voting are
fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not
to adopt a specific voting policy applicable to that issue. The Manager
believes that certain proxy voting issues require investment analysis -
such as approval of mergers and other significant corporate
transactions - akin to investment decisions, and are, therefore, not
suitable for general guidelines. The Committee may elect to adopt a
common position for the Manager on certain proxy votes that are akin to
investment decisions, or determine to permit the portfolio manager to
make individual decisions on how best to maximize economic value for a
Fund (similar to normal buy/sell investment decisions made by such
portfolio managers). While it is expected that the Manager will
generally seek to vote proxies over which the Manager exercises voting
authority in a uniform manner for all the Manager's clients, the
Committee, in conjunction with a Fund's portfolio manager, may
determine that the Fund's specific circumstances require that its
proxies be voted differently.
To assist the Manager in voting proxies, the Committee has retained
Institutional Shareholder Services ("ISS"). ISS is an independent
adviser that specializes in providing a variety of fiduciary-level
proxy-related services to institutional investment managers, plan
sponsors, custodians, consultants, and other institutional investors.
The services provided to the Manager by ISS include in-depth research,
voting recommendations (although the Manager is not obligated to follow
such recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Manager's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Manager generally will
not seek to vote proxies related to portfolio securities that are on
loan, although it may do so under certain circumstances. In addition,
the Manager will vote proxies related to securities of foreign issuers
only on a best efforts basis and may elect not to vote at all in
certain countries where the Committee determines that the costs
associated with voting generally outweigh the benefits. The Committee
may at any time override these general policies if it determines that
such action is in the best interests of a Fund.
From time to time, the Manager may be required to vote proxies in
respect of an issuer where an affiliate of the Manager (each, an
"Affiliate"), or a money management or other client of the Manager,
including investment companies for which the Manager provides
investment advisory, administrative and/or other services (each, a
"Client"), is involved. The Proxy Voting Procedures and the Manager's
adherence to those procedures are designed to address such conflicts of
interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates
and Clients. If, however, an issue representing a non-routine matter
that is material to an Affiliate or a widely known Client is involved
such that the Committee does not reasonably believe it is able to
follow its guidelines (or if the particular proxy matter is not
addressed by the guidelines) and vote impartially, the Committee may,
in its discretion for the purposes of ensuring that an independent
determination is reached, retain an independent fiduciary to advise the
Committee on how to vote or to cast votes on behalf of the Manager's
clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent
fiduciary, the Committee may pass the voting power to a subcommittee,
appointed by EIPOC (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by EIPOC. EIPOC shall
appoint to the subcommittee, where appropriate, only persons whose job
responsibilities do not include contact with the Client and whose job
evaluations would not be affected by the Manager's relationship with
the Client (or failure to retain such relationship). The subcommittee
shall determine whether and how to vote all proxies on behalf of the
Manager's clients or, if the proxy matter is, in their judgment, akin
to an investment decision, to defer to the applicable portfolio
managers, provided that, if the subcommittee determines to alter the
Manager's normal voting guidelines or, on matters where the Manager's
policy is case-by-case, does not follow the voting recommendation of
any proxy voting service or other independent fiduciary that may be
retained to provide research or advice to the Manager on that matter,
no proxies relating to the Client may be voted unless the Secretary, or
in the Secretary's absence, the Assistant Secretary of the Committee
concurs that the subcommittee's determination is consistent with the
Manager's fiduciary duties.
In addition to the general principles outlined above, the Manager has
adopted voting guidelines with respect to certain recurring proxy
issues that are not expected to involve unusual circumstances. These
policies are guidelines only, and the Manager may elect to vote
differently from the recommendation set forth in a voting guideline if
the Committee determines that it is in a Fund's best interest to do so.
In addition, the guidelines may be reviewed at any time upon the
request of a Committee member and may be amended or deleted upon the
vote of a majority of Committee members present at a Committee meeting
at which there is a quorum.
The Manager has adopted specific voting guidelines with respect to the
following proxy issues:
o Proposals related to the composition of the board of directors of
issuers other than investment companies. As a general matter, the
Committee believes that a company's board of directors (rather than
shareholders) is most likely to have access to important, nonpublic
information regarding a company's business and prospects, and is,
therefore, best-positioned to set corporate policy and oversee
management. The Committee, therefore, believes that the foundation of
good corporate governance is the election of qualified, independent
corporate directors who are likely to diligently represent the
interests of shareholders and oversee management of the corporation in
a manner that will seek to maximize shareholder value over time. In
individual cases, the Committee may look at a nominee's number of other
directorships, history of representing shareholder interests as a
director of other companies or other factors, to the extent the
Committee deems relevant.
o Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that corporate
auditors have a responsibility to represent the interests of
shareholders and provide an independent view on the propriety of
financial reporting decisions of corporate management. While the
Committee will generally defer to a corporation's choice of auditor, in
individual cases, the Committee may look at an auditors' history of
representing shareholder interests as auditor of other companies, to
the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits.
As a general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive compensation,
but believes that compensation matters are normally best determined by
an issuer's board of directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore, generally not
be supported.
o Proposals related to requests, principally from management, for
approval of amendments that would alter an issuer's capital structure.
As a general matter, the Committee will support requests that enhance
the rights of common shareholders and oppose requests that appear to be
unreasonably dilutive.
o Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the Committee opposes
poison pill provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the
Committee believes that a fund's board of directors (rather than its
shareholders) is best positioned to set fund policy and oversee
management. However, the Committee opposes granting boards of directors
authority over certain matters, such as changes to a fund's investment
objective, which the Investment Company Act envisions will be approved
directly by shareholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the shareholder's environmental or social concerns. The
Committee generally believes that annual shareholder meetings are
inappropriate forums for discussion of larger social issues, and
opposes shareholder resolutions "micromanaging" corporate conduct or
requesting release of information that would not help a shareholder
evaluate an investment in the corporation as an economic matter. While
the Committee is generally supportive of proposals to require corporate
disclosure of matters that seem relevant and material to the economic
interests of shareholders, the Committee is generally not supportive of
proposals to require disclosure of corporate matters for other
purposes.
Information about how a Fund voted proxies relating to securities held
in the Fund's portfolio during the most recent 12 month period ended
January 31 is available without charge (1) at www.blackrock.com and (2)
on the Commission's web site at http://www.sec.gov.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of January 31, 2007.
(a)(1) BlackRock MuniEnhanced Fund, Inc. is managed by a team of
investment professionals comprised of Michael A. Kalinoski, Director at
BlackRock, Theodore R. Jaeckel, Jr., CFA, Managing Director at
BlackRock, and Walter O'Connor, Managing Director at BlackRock. Each is
a member of BlackRock's municipal tax-exempt management group. Mr.
Jaeckel and Mr. O'Connor are responsible for setting the Fund's overall
investment strategy and overseeing the management of the Fund. Mr.
Kalinoski is the Fund's lead portfolio manager and is responsible for
the day-to-day management of the Fund's portfolio and the selection of
its investments. Messrs. Jaeckel and O'Connor have been members of the
Fund's management team since 2006 and Mr. Kalinoski has been the Fund's
portfolio manager since 2000.
Mr. Jaeckel joined BlackRock in 2006. Prior to joining BlackRock, he
was a Managing Director (Municipal Tax-Exempt Fund Management) of
Merrill Lynch Investment Managers, L.P. ("MLIM") from 2005 to 2006 and
a Director of MLIM from 1997 to 2005. He has been a portfolio manager
with BlackRock or MLIM since 1991.
Mr. O'Connor joined BlackRock in 2006. Prior to joining BlackRock, he
was a Managing Director (Municipal Tax-Exempt Fund Management) of MLIM
from 2003 to 2006 and was a Director of MLIM from 1997 to 2002. He has
been a portfolio manager with BlackRock or MLIM since 1991.
Mr. Kalinoski joined BlackRock in 2006. Prior to joining BlackRock, he
was Director (Municipal Tax-Exempt Fund Management) of MLIM since 2006
and a Vice President from 1999 to 2006. He has been a portfolio manager
of BlackRock or MLIM since 1999.
(a)(2) As of January 31, 2007:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
Registered Other Pooled Registered Other Pooled
(i) Name of Investment Investment Other Investment Investment Other
Portfolio Manager Companies Vehicles Accounts Companies Vehicles Accounts
---------- ----------
Michael A.
Kalinoski 10 0 0 0 0 0
$ 3,922,523,628 $ 0 $ 0 $ 0 $ 0 $ 0
Theodore R.
Jaeckel, Jr. 80 0 0 0 1 0
$ 28,915,758,285 $ 0 $ 0 $ 0 $ 26,524,194 $ 0
Walter O'Connor 80 0 0 0 0 0
$ 28,915,758,285 $ 0 $ 0 $ 0 $ 0 $ 0
(iv) Potential Material Conflicts of Interest
BlackRock has built a professional working environment, firm-wide
compliance culture and compliance procedures and systems designed to
protect against potential incentives that may favor one account over
another. BlackRock has adopted policies and procedures that address the
allocation of investment opportunities, execution of portfolio
transactions, personal trading by employees and other potential
conflicts of interest that are designed to ensure that all client
accounts are treated equitably over time. Nevertheless, BlackRock
furnishes investment management and advisory services to numerous
clients in addition to the Fund, and BlackRock may, consistent with
applicable law, make investment recommendations to other clients or
accounts (including accounts which are hedge funds or have performance
or higher fees paid to BlackRock, or in which portfolio managers have a
personal interest in the receipt of such fees), which may be the same
as or different from those made to the Fund. In addition, BlackRock,
its affiliates and any officer, director, stockholder or employee may
or may not have an interest in the securities whose purchase and sale
BlackRock recommends to the Fund. BlackRock, or any of its affiliates,
or any officer, director, stockholder, employee or any member of their
families may take different actions than those recommended to the Fund
by BlackRock with respect to the same securities. Moreover, BlackRock
may refrain from rendering any advice or services concerning securities
of companies of which any of BlackRock's (or its affiliates') officers,
directors or employees are directors or officers, or companies as to
which BlackRock or any of its affiliates or the officers, directors and
employees of any of them has any substantial economic interest or
possesses material non-public information. Each portfolio manager also
may manage accounts whose investment strategies may at times be opposed
to the strategy utilized for the Fund. In this connection, it should be
noted that certain portfolio managers currently manage certain accounts
that are subject to performance fees. In addition, certain portfolio
managers assist in managing certain hedge funds and may be entitled to
receive a portion of any incentive fees earned on such funds and a
portion of such incentive fees may be voluntarily or involuntarily
deferred. Additional portfolio managers may in the future manage other
such accounts or funds and may be entitled to receive incentive fees.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and
must treat each client fairly. When BlackRock purchases or sells
securities for more than one account, the trades must be allocated in a
manner consistent with its fiduciary duties. BlackRock attempts to
allocate investments in a fair and equitable manner among client
accounts, with no account receiving preferential treatment. To this
end, BlackRock has adopted a policy that is intended to ensure that
investment opportunities are allocated fairly and equitably among
client accounts over time. This policy also seeks to achieve reasonable
efficiency in client transactions and provide BlackRock with sufficient
flexibility to allocate investments in a manner that is consistent with
the particular investment discipline and client base.
(a)(3) As of January 31, 2007:
Portfolio Manager Compensation
Compensation Program
The elements of total compensation for portfolio managers on
BlackRock's municipal team include a fixed base salary, annual
performance-based cash and stock compensation (cash and stock bonus)
and other benefits. BlackRock has balanced these components of pay to
provide these portfolio managers with a powerful incentive to achieve
consistently superior investment performance. By design, compensation
levels for these portfolio managers fluctuate--both up and down--with
the relative investment performance of the portfolios that they manage.
Base compensation
Like that of many asset management firms, base salaries represent
a relatively small portion of a portfolio manager's total compensation.
This approach serves to enhance the motivational value of the
performance-based (and therefore variable) compensation elements of the
compensation program.
Performance-Based Compensation
BlackRock believes that the best interests of investors are
served by recruiting and retaining exceptional asset management talent
and managing their compensation within a consistent and disciplined
framework that emphasizes pay for performance in the context of an
intensely competitive market for talent. To that end, BlackRock and its
affiliates portfolio manager incentive compensation is based on a
formulaic compensation program. BlackRock's formulaic portfolio manager
compensation program includes: investment performance relative to a
subset of single-state, closed-end, leveraged municipal debt funds over
1-, 3- and 5-year performance periods and a measure of operational
efficiency. Portfolio managers are compensated based on the pre-tax
performance of the products they manage. If a portfolio manager's
tenure is less than 5 years, performance periods will reflect time in
position. Portfolio managers are compensated based on products they
manage. A discretionary element of portfolio manager compensation may
include consideration of: financial results, expense control, profit
margins, strategic planning and implementation, quality of client
service, market share, corporate reputation, capital allocation,
compliance and risk control, leadership, workforce diversity,
supervision, technology and innovation. All factors are considered
collectively by BlackRock management.
Long-Term Retention and Incentive Plan (LTIP)
The LTIP is a long-term incentive plan that seeks to reward
certain key employees. The plan provides for the grant of awards that
are expressed as an amount of cash that, if properly vested and subject
to the attainment of certain performance goals, will be settled in cash
and/or in BlackRock, Inc. common stock.
Cash Bonus
Performance-based compensation is distributed to portfolio
managers in a combination of cash and stock. Typically, the cash bonus,
when combined with base salary, represents more than 60% of total
compensation for portfolio managers.
Stock Bonus
A portion of the dollar value of the total annual
performance-based bonus is paid in restricted shares of BlackRock
stock. Paying a portion of annual bonuses in stock puts compensation
earned by a portfolio manager for a given year "at risk" based on the
company's ability to sustain and improve its performance over future
periods. The ultimate value of stock bonuses is dependent on future
BlackRock stock price performance. As such, the stock bonus aligns each
portfolio manager's financial interests with those of the BlackRock
shareholders and encourages a balance between short-term goals and
long-term strategic objectives. Management strongly believes that
providing a significant portion of competitive performance-based
compensation in stock is in the best interests of investors and
shareholders. This approach ensures that portfolio managers participate
as shareholders in both the "downside risk" and "upside opportunity" of
the company's performance. Portfolio managers therefore have a direct
incentive to protect BlackRock's reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and
financial management objectives during a performance year are eligible
to participate in a deferred cash program. Awards under this program
are in the form of deferred cash that may be benchmarked to a menu of
BlackRock mutual funds (including their own fund) during a five-year
vesting period. The deferred cash program aligns the interests of
participating portfolio managers with the investment results of
BlackRock products and promotes continuity of successful portfolio
management teams.
Other Benefits
Portfolio managers are also eligible to participate in
broad-based plans offered generally to employees of BlackRock and its
affiliates, including broad-based retirement, 401(k), health, and other
employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of January 31, 2007,
neither of Messrs. Kalinoski, Jaeckel or O'Connor beneficially
owns any stock issued by the Fund.
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) - As of September 29, 2006, with the conclusion of the combination of
Merrill Lynch's asset management business with BlackRock, the registrant
was migrated to BlackRock's trading and compliance monitoring systems,
and various personnel changes occurred. In conjunction with these
business improvements, there were no changes in the registrants internal
control over financial reporting (as defined in Rule 30a-3(d) under 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 affect, the registrant's internal control over
financial reporting. During the second fiscal quarter of the period
covered by this report, the registrant's disclosure controls and
procedures were modified to enhance the review and analysis of the
relevant terms and conditions of transfers of securities in connection
with inverse floating rate obligations with regard to Statement of
Financial Accounting Standards No. 140.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
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.
BlackRock MuniEnhanced Fund, Inc.
By: /s/ Robert C. Doll, Jr.
---------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock MuniEnhanced Fund, Inc.
Date: March 26, 2007
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
BlackRock MuniEnhanced Fund, Inc.
Date: March 26, 2007
By: /s/ Donald C. Burke
---------------------------------
Donald C. Burke,
Chief Financial Officer of
BlackRock MuniEnhanced Fund, Inc.
Date: March 26, 2007