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: MuniEnhanced Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, MuniEnhanced Fund, Inc., 800 Scudders Mill Road, Plainsboro,
NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 01/31/05
Date of reporting period: 02/01/04 - 01/31/05
Item 1 - Report to Stockholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
MuniEnhanced
Fund, Inc.
Annual Report
January 31, 2005
[LOGO] Merrill Lynch Investment Managers
MuniEnhanced Fund, Inc.
The Benefits and Risks of Leveraging
MuniEnhanced Fund, Inc. utilizes leveraging to seek to enhance the yield and net
asset value of its Common Stock. However, these objectives cannot be achieved in
all interest rate environments. To leverage, the Fund issues Preferred Stock,
which pays dividends at prevailing short-term interest rates, and invests the
proceeds in long-term municipal bonds. The interest earned on these investments,
net of dividends to Preferred Stock, is paid to Common Stock shareholders in the
form of dividends, and the value of these portfolio holdings is reflected in the
per share net asset value of the Fund's Common Stock. However, in order to
benefit Common Stock shareholders, the yield curve must be positively sloped;
that is, short-term interest rates must be lower than long-term interest rates.
At the same time, a period of generally declining interest rates will benefit
Common Stock shareholders. If either of these conditions change, then the risks
of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock capitalization of
$100 million and the issuance of Preferred Stock for an additional $50 million,
creating a total value of $150 million available for investment in long-term
municipal bonds. If prevailing short-term interest rates are approximately 3%
and long-term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million of Preferred
Stock based on the lower short-term interest rates. At the same time, the fund's
total portfolio of $150 million earns the income based on long-term interest
rates. Of course, increases in short-term interest rates would reduce (and even
eliminate) the dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term investments,
and therefore the Common Stock shareholders are the beneficiaries of the
incremental yield. However, if short-term interest rates rise, narrowing the
differential between short-term and long-term interest rates, the incremental
yield pickup on the Common Stock will be reduced or eliminated completely. At
the same time, the market value on the fund's Common Stock (that is, its price
as listed on the New York Stock Exchange), may, as a result, decline.
Furthermore, if long-term interest rates rise, the Common Stock's net asset
value will reflect the full decline in the price of the portfolio's investments,
since the value of the fund's Preferred Stock does not fluctuate. In addition to
the decline in net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses on invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities. As of January 31, 2005, the percentage of the Fund's
total net assets invested in inverse floaters was 11.01%, before the deduction
of Preferred Stock.
Swap Agreements
The Fund may also invest in swap agreements, which are over-the-counter
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified bond, basket of bonds, or index in return
for periodic payments based on a fixed or variable interest rate or the change
in market value of a different bond, basket of bonds or index. Swap agreements
may be used to obtain exposure to a bond or market without owning or taking
physical custody of securities. Swap agreements involve the risk that the party
with whom the Fund has entered into the swap will default on its obligation to
pay the Fund and the risk that the Fund will not be able to meet its obligations
to pay the other party to the agreement.
2 MUNIENHANCED FUND, INC. JANUARY 31, 2005
A Letter From the President
Dear Shareholder
The U.S. equity market ended the current reporting period in positive territory,
although not without some suspense along the way. Fixed income markets also
performed well, with high yield bond investors enjoying some of the best
returns.
Total Returns as of January 31, 2005 6-month 12-month
============================================================================================
Equities (Standard & Poor's 500 Index) +8.16% +6.23%
--------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) +3.81 +4.16
--------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +4.80 +4.86
--------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) +7.85 +9.81
--------------------------------------------------------------------------------------------
Over the past year, the U.S. economy transitioned from dependence on record
monetary and fiscal stimulus to a broad-based, high-productivity,
high-profit-margin growth engine. The year also marked the end of one of the
most aggressive Federal Reserve Board (Fed) policy periods in history as
deflation concerns, prevalent at the beginning of 2004, gave way to modest
inflation scares -- notably, food prices in the spring and energy prices in the
fall.
The Fed more than doubled the federal funds rate, increasing it from 1% to 2.25%
in five separate moves between June and December 2004. Yet, even as the Fed
raised its target short-term interest rate, long-term bond yields were little
changed year over year as buying interest on the part of foreign central banks
remained strong. The yield on the 10-year Treasury note stood at 4.14% on
January 31, 2005. Despite very strong earnings growth, stocks remained in a
narrow trading range for most of 2004, but rebounded nicely in the fourth
quarter as election uncertainties and energy price concerns dissipated. January,
the first month of the new year and the final month of the current reporting
period, was a challenging one for equities as reflected in the -2.44% return of
the S&P 500 Index for the month.
As we ended the current reporting period, the economy and earnings growth were
beginning to slow and the Fed appeared poised to continue moving interest rates
higher (and, in fact, raised the federal funds rate another 25 basis points on
February 2, 2005). Progress was being monitored on many fronts in Washington,
although concerns remained about the structural problems of debt and deficits,
as reflected by a significant decline in the U.S. dollar.
Looking ahead, the environment is likely to be a challenging one for investors.
At the start of the new year, we encourage you to meet with your financial
advisor to review your goals and asset allocation and to rebalance your
portfolio, as necessary, to ensure it remains aligned with your objectives and
risk tolerance. As always, we thank you for trusting Merrill Lynch Investment
Managers with your investment assets, and we look forward to serving you in the
months and years ahead.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Director
MUNIENHANCED FUND, INC. JANUARY 31, 2005 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
The Fund outperformed its comparable Lipper category average for the
fiscal year and continued to provide shareholders with stable monthly income.
Discuss the recent market environment relative to municipal bonds.
U.S. Treasury bond yields were mixed but generally moved lower over the past 12
months, while displaying considerable monthly volatility along the way. Early in
the year, yields declined as bond prices, which move in the opposite direction,
rose. This came as somewhat of a surprise given that economic conditions in the
United States generally continued to improve. However, solid job creation
remained elusive and investors seemed convinced that the Federal Reserve Board
(the Fed) would hold short-term interest rates at their historic lows. By
mid-March, long-term U.S. Treasury bond yields had declined 31 basis points
(.31%) to 4.65%.
The tide turned in early April as monthly employment reports began to show
unexpectedly large gains. Associated improvements in consumer confidence and
spending led some investors to believe that the Fed soon would be forced to
raise short-term interest rates to ensure that resurgent economic activity did
not endanger the positive inflationary environment. By early June, long-term
U.S. Treasury bond yields had risen above 5.50%.
For the remainder of the period, bond yields generally declined. Earlier
strength in payroll growth waned while inflationary measures remained
negligible. More important, in late June, the Fed raised its short-term interest
rate target by 25 basis points to 1.25%, the first change in more than a year.
In its accompanying statement, the Fed called for a "measured" approach to
monetary tightening, removing much of the earlier concern over the possibility
of a dramatic series of interest rate hikes. The prospect for a more moderate
tightening sequence helped support higher bond prices for the remainder of the
Fund's fiscal year. Four subsequent Fed rate increases brought the federal funds
rate to 2.25% by period-end, but had limited market impact as monthly U.S.
employment gains remained modest. By the end of January 2005, long-term U.S.
Treasury bond yields stood at 4.59%, a decline of 37 basis points over the past
year. The 10-year U.S. Treasury note yield was 4.14%, unchanged during the
course of the period.
Yield volatility was more subdued in the municipal market. Long-term revenue
bond yields, as measured by the Bond Buyer Revenue Bond Index, declined 12 basis
points over the past year. According to Municipal Market Data, AAA-rated issues
maturing in 30 years saw their yields fall 13 basis points to 4.43%, while
yields on AAA-rated issues maturing in 10 years declined six basis points to
3.48%.
During the past 12 months, $363 billion in new long-term tax-exempt bonds was
underwritten, a decline of approximately 3% versus the same period a year ago.
New-issue municipal volume is expected to be easily manageable into early 2005
and should continue to support the tax-exempt market's favorable technical
position.
How did the Fund perform during the fiscal year?
For the 12-month period ended January 31, 2005, the Common Stock of MuniEnhanced
Fund, Inc. had net annualized yields of 6.18% and 6.70%, based on a year-end per
share net asset value of $11.85 and a per share market price of $10.93,
respectively, and $.732 per share income dividends. Over the same period, the
total investment return on the Fund's Common Stock was +7.20%, based on a change
in per share net asset value from $11.83 to $11.85, and assuming reinvestment of
all distributions.
The Fund's total return, based on net asset value, exceeded the +6.25% 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 was
able to achieve this positive result despite a defensive market posture in what
surprisingly happened to be a very strong period for the bond market,
particularly in the last six months.
Total return performance benefited from our strategic move further out on the
municipal yield curve, generally from the 10-year - 25-year range. This worked
particularly well as the curve began to flatten significantly, especially toward
the end of the year as short-term rates increased and long-term rates declined
(meaning the prices on longer-dated bonds rose). The Fund's above-average yield
also contributed to the outperformance, as did the advance refunding of certain
issues. When municipal bonds are refinanced ahead of their maturity date, their
prices generally increase sharply. The Fund's
4 MUNIENHANCED FUND, INC. JANUARY 31, 2005
exposure to California bonds also was additive to performance as the valuations
on these bonds increased to more historic norms as the state began to get its
finances in order. Finally, we increased the Fund's use of leverage during the
year, bringing it more in line with that of our peers. The timing of this
transaction was auspicious, as we were able to reinvest the proceeds from our
increased borrowings just as the market rallied, benefiting Fund performance.
For the six-month period ended January 31, 2005, the total investment return on
the Fund's Common Stock was +7.77%, based on a change in per share net asset
value from $11.37 to $11.85, and assuming reinvestment of all distributions. The
Fund outpaced the Lipper category's average return of +6.91% for the six-month
period as well.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
this report. As a closed-end fund, the Fund's shares may trade in the secondary
market at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the Fund's
Common Stock can vary significantly from total investment returns based on
changes in the Fund's net asset value.
What changes were made to the portfolio during the year?
Changes to the portfolio involved a continued move toward the longer end of the
yield curve, generally leaving the 10-year area in favor of bonds in the 25-year
range. We curtailed this effort somewhat toward period-end as the curve
flattened and the yield advantage we had enjoyed by extending the portfolio's
maturity began to wane.
Early in the year, as California grappled with fiscal challenges, we took
advantage of the heavy supply and relatively low prices by increasing our
exposure to the state's debt. As mentioned previously, this strategy proved
beneficial to Fund performance as valuations on California bonds returned to
more typical levels later in the period. Heavy supply in the State of New Jersey
presented us with a similar buying opportunity. Similar to California, the State
of New Jersey is challenged to get its finances in order and has been actively
issuing debt to close its budget gap. The increased issuance served to cheapen
the New Jersey market, and we took advantage of the heavy supply and attractive
valuations to increase the Fund's exposure to the state's debt.
Finally, we generally maintained the Fund's fully invested position throughout
the year in an effort to enhance the level of income available to shareholders.
This allowed the Fund to maintain a stable monthly dividend.
For the six-month period ended January 31, 2005, the Fund's Auction Market
Preferred Stock (AMPS) had average yields as follows: Series A, 1.56%; Series B,
1.34%; Series C, 1.48%; and Series D, 1.80%. Although the Fed's interest rate
tightening program has resulted in increases in borrowing costs, funding levels
still remain quite favorable. This, in combination with continued steepness at
the long end of the municipal yield curve, continued to provide a significant
income benefit to the Fund's Common Stock shareholders 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. At the end of the period, the
Fund's leverage amount, due to AMPS, was 34.95% of total net assets. (For a more
complete explanation of the benefits and risks of leveraging, see page 2 of this
report to shareholders.)
How would you characterize the Fund's position at the close of the period?
We remain focused on high-quality municipal bonds and continue to favor issues
with longer maturities. We maintained the Fund's defensive market posture at
period-end in recognition of generally healthy economic conditions and the Fed's
stated intention to continue raising short-term interest rates. (In fact, the
Fed increased its target interest rate another 25 basis points shortly after the
close of the period, on February 2.) A defensive stance on interest rates should
help us to protect the portfolio's value as long-term rates eventually begin to
follow short-term rates higher. In the meantime, our fully invested stance
should continue to benefit Common Stock shareholders as short-term interest
rates remain historically quite low.
Michael Kalinoski, CFA
Vice President and Portfolio Manager
February 9, 2005
MUNIENHANCED FUND, INC. JANUARY 31, 2005 5
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (in Thousands)
Face
State Amount Municipal Bonds Value
==========================================================================================================================
Alabama--0.9% $ 2,750 Jefferson County, Alabama, Limited Obligation School Warrants, Series A,
5.50% due 1/01/2022 $ 3,022
==========================================================================================================================
Alaska--1.3% 700 Alaska State Housing Finance Corporation, General Housing Revenue Bonds,
Series A, 5.25% due 12/01/2034 (b) 751
3,600 Valdez, Alaska, Marine Terminal Revenue Refunding Bonds (BP Pipelines Inc.
Project), VRDN, Series C, 1.83% due 7/01/2037 (i) 3,600
==========================================================================================================================
California--28.4% 9,000 Alameda Corridor Transportation Authority, California, Capital Appreciation
Revenue Refunding Bonds, Subordinate Lien, Series A, 5.543%*
due 10/01/2024 (a) 6,589
6,000 Alameda Corridor Transportation Authority, California, Revenue Refunding
Bonds, Subordinated Lien, Series A, 5.471%* due 10/01/2025 (a) 4,372
5,000 Anaheim, California, Public Financing Authority, Lease Revenue Bonds
(Public Improvements Project), Senior Series A, 6% due 9/01/2024 (d) 6,125
California State Department of Water Resources, Power Supply Revenue Bonds,
Series A:
1,270 5.375% due 5/01/2022 1,385
1,800 5.375% due 5/01/2022 (f) 1,982
California State, GO, Refunding:
3,000 5.25% due 9/01/2026 3,226
6,000 5.25% due 2/01/2030 (f) 6,427
5,000 5.125% due 6/01/2031 5,159
2,200 ROLS, Series II-R-272, 8.539% due 2/01/2033 (h)(k) 2,456
8,490 California State, Various Purpose, GO, 5.50% due 11/01/2033 9,194
Golden State Tobacco Securitization Corporation of California, Tobacco
Settlement Revenue Bonds, Series B:
3,805 5.60% due 6/01/2028 4,031
2,200 5.50% due 6/01/2033 (c) 2,394
1,400 5.625% due 6/01/2033 (c) 1,541
5,000 5% due 6/01/2038 (a) 5,151
6,800 5.625% due 6/01/2038 (l) 7,460
10,000 5.50% due 6/01/2043 (b) 10,884
2,835 5.50% due 6/01/2043 (c) 3,079
3,500 Los Angeles, California, Unified School District, GO, Series A, 5%
due 1/01/2028 (f) 3,676
5,000 Norco, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Norco Redevelopment Project--Area Number 1), 5.125% due 3/01/2030 (f) 5,244
1,750 Poway, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Paguay Redevelopment Project), 5.125% due 6/15/2033 (a) 1,831
6,145 Stockton, California, Public Financing Authority, Lease Revenue Bonds
(Parking & Capital Projects), 5.125% due 9/01/2030 (b) 6,490
==========================================================================================================================
Colorado--10.3% Boulder County, Colorado, Hospital Development Revenue Bonds (Longmont
United Hospital Project) (k):
2,705 5.60% due 12/01/2015 2,962
2,135 5.75% due 12/01/2020 2,361
Colorado HFA, Revenue Bonds, AMT:
2,375 DRIVERS, Series 251, 11.423% due 4/01/2030 (h) 2,477
235 (S/F Program), Senior Series A-1, 7.40% due 11/01/2027 241
1,085 Colorado HFA, Revenue Refunding Bonds (S/F Program), AMT, Senior
Series A-2, 7.50% due 4/01/2031 1,111
Portfolio Abbreviations
To simplify the listings of MuniEnhanced Fund, Inc.'s portfolio holdings in the
Schedule of Investments, we have abbreviated the names of many of the securities
according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DRIVERS Derivative Inverse Tax-Exempt Receipts
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
ROLS Reset Option Long Securities
S/F Single-Family
VRDN Variable Rate Demand Notes
6 MUNIENHANCED FUND, INC. JANUARY 31, 2005
Schedule of Investments (continued) (in Thousands)
Face
State Amount Municipal Bonds Value
==========================================================================================================================
Colorado Colorado Health Facilities Authority Revenue Bonds, Series A:
(concluded) $ 1,200 (Catholic Health Initiatives), 5.50% due 3/01/2032 (j) $ 1,355
1,200 (Covenant Retirement Communities Inc.), 5.50% due 12/01/2027 (k) 1,290
675 (Covenant Retirement Communities Inc.), 5.50% due 12/01/2033 (k) 720
Colorado Water Resources and Power Development Authority, Clean Water
Revenue Bonds, Series A:
3,875 6.25% due 9/01/2010 (g) 4,518
405 6.25% due 9/01/2016 469
2,000 Denver, Colorado, City and County Airport Revenue Refunding Bonds, AMT,
Series A, 6% due 11/15/2018 (a) 2,243
5,450 El Paso County, Colorado, School District Number 49, Falcon, GO, Series A,
6% due 12/01/2018 (d) 6,438
Northwest Parkway, Colorado, Public Highway Authority Revenue Bonds:
9,450 Capital Appreciation, Senior Convertible, Series C, 5.332%*
due 6/15/2025 (d) 7,655
1,900 Series A, 5.50% due 6/15/2021 (a) 2,147
==========================================================================================================================
Florida--0.7% 2,500 Escambia County, Florida, Health Facilities Authority, Health Facility
Revenue Bonds (Florida Health Care Facility Loan), 5.95% due 7/01/2020 (a) 2,538
==========================================================================================================================
Georgia--9.9% 18,655 Atlanta, Georgia, Airport General Revenue Refunding Bonds, Series B, 5.25%
due 1/01/2033 (d) 19,985
3,500 Fulton County, Georgia, Water and Sewer Revenue Bonds, 5.25%
due 1/01/2035 (b) 3,757
7,725 Georgia Municipal Electric Authority, Power Revenue Refunding Bonds,
Series EE, 7% due 1/01/2025 (a) 10,598
==========================================================================================================================
Illinois--20.8% 5,125 Chicago, Illinois, Board of Education, GO, RIB, Series 467, 9.39%
due 12/01/2027 (a)(h) 6,139
3,750 Chicago, Illinois, Gas Supply Revenue Refunding Bonds (People's Gas Light
& Coke), Series A, 6.10% due 6/01/2025 (a) 3,870
Chicago, Illinois, O'Hare International Airport Revenue Bonds, 3rd Lien,
AMT, Series B-2:
5,670 5.75% due 1/01/2023 (d) 6,331
2,500 6% due 1/01/2029 (c) 2,810
4,550 Chicago, Illinois, O'Hare International Airport Revenue Refunding Bonds,
DRIVERS, AMT, Series 250, 9.318% due 1/01/2021 (f)(h) 5,579
3,000 Cook County, Illinois, Capital Improvement, GO, Series C, 5.50%
due 11/15/2026 (a) 3,373
2,240 Cook County, Illinois, Community College District No. 508, Chicago, COP,
Refunding, 8.75% due 1/01/2007 (b) 2,494
3,000 Illinois Health Facilities Authority, Revenue Refunding Bonds (Servantcor
Project), Series A, 6.375% due 8/15/2006 (d)(g) 3,180
Illinois Sports Facilities Authority, State Tax Supported Revenue
Bonds (a):
21,160 5.349%* due 6/15/2030 17,098
4,500 5% due 6/15/2032 4,678
3,000 Metropolitan Pier and Exposition Authority, Illinois, Dedicated State Tax
Revenue Refunding Bonds (McCormick Place Expansion), Series B, 5.75%
due 6/15/2023 (f) 3,463
10,115 Regional Transportation Authority, Illinois, Revenue Bonds, Series A, 7.20%
due 11/01/2020 (a) 13,327
==========================================================================================================================
Indiana--5.0% 2,500 Brownsburg, Indiana, School Building Corporation, First Mortgage Revenue
Bonds (Brownsburg Community School), 5.55% due 2/01/2024 (f) 2,771
4,080 Hammond, Indiana, Multi-School Building Corporation, First Mortgage Revenue
Refunding Bonds, 6.125% due 7/15/2019 (f) 4,459
Indiana Transportation Finance Authority, Highway Revenue Bonds,
Series A (b):
4,250 5.25% due 6/01/2028 4,602
3,750 5.25% due 6/01/2029 4,048
1,500 Indianapolis, Indiana, Local Public Improvement Bond Bank Revenue Bonds
(Waterworks Project), Series A, 5.25% due 7/01/2033 (f) 1,604
==========================================================================================================================
Kansas--0.7% Sedgwick and Shawnee Counties, Kansas, S/F Revenue Bonds (Mortgage-Backed
Securities Program), AMT (e):
740 Series A-1, 6.875% due 12/01/2026 748
1,240 Series A-1, 6.875% due 12/01/2026 (f) 1,254
550 Series A-2, 7.60% due 12/01/2031 567
==========================================================================================================================
MUNIENHANCED FUND, INC. JANUARY 31, 2005 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in Thousands)
Face
State Amount Municipal Bonds Value
==========================================================================================================================
Louisiana--3.9% $ 6,000 Louisiana Local Government, Environmental Facilities, Community Development
Authority Revenue Bonds (Capital Projects and Equipment Acquisition),
Series A, 6.30% due 7/01/2030 (a) $ 6,581
5,150 New Orleans, Louisiana, Ernest N. Morial Exhibit Hall Authority, Special
Tax, Sub-Series A, 5.25% due 7/15/2028 (a) 5,543
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) 1,519
==========================================================================================================================
Massachusetts--5.2% 4,985 Massachusetts State Port Authority, Special Facilities Revenue Bonds,
DRIVERS, AMT, Series 501, 8.814% due 7/01/2009 (a)(h) 5,564
Massachusetts State Special Obligation Dedicated Tax Revenue Bonds (b):
1,800 5.25% due 1/01/2028 1,941
10,000 5.25% due 1/01/2029 10,751
==========================================================================================================================
Michigan--5.4% 6,200 Detroit, Michigan, Water Supply System Revenue Bonds, Series B, 5.25%
due 7/01/2032 (f) 6,639
2,200 Michigan Higher Education Student Loan Authority, Student Loan Revenue
Refunding Bonds, AMT, Series XVII-G, 5.20% due 9/01/2020 (a) 2,327
Michigan State Strategic Fund, Limited Obligation Revenue Refunding Bonds
(Detroit Edison Company Project) (c):
1,150 5.45% due 9/01/2029 1,270
1,300 AMT, Series A, 5.50% due 6/01/2030 1,394
2,500 AMT, Series C, 5.65% due 9/01/2029 2,674
4,300 AMT, Series C, 5.45% due 12/15/2032 4,554
==========================================================================================================================
Mississippi--0.8% 2,400 Walnut Grove, Mississippi, Correctional Authority, COP, 6%
due 11/01/2009 (a)(g) 2,774
==========================================================================================================================
Nebraska--0.5% 1,700 Washington County, Nebraska, Wastewater Facilities Revenue Bonds (Cargill
Inc. Project), AMT, 5.90% due 11/01/2027 1,855
==========================================================================================================================
Nevada--8.2% 3,100 Carson City, Nevada, Hospital Revenue Bonds (Carson-Tahoe Hospital
Project), Series A, 5.50% due 9/01/2033 (k) 3,316
Clark County, Nevada, Airport System Subordinate Lien Revenue Bonds (b):
1,500 Series A-2, 5% due 7/01/2030 1,559
3,200 Series A-2, 5% due 7/01/2036 3,314
2,000 Series B, 5.25% due 7/01/2034 2,099
Director of the State of Nevada, Department of Business and Industry
Revenue Bonds (Las Vegas Monorail Company Project), First Tier (a):
750 5.625% due 1/01/2032 833
3,280 5.375% due 1/01/2040 3,471
10,450 Washoe County, Nevada, Gas and Water Facilities Revenue Refunding Bonds
(Sierra Pacific Power Company), 6.30% due 12/01/2014 (a) 10,757
3,000 Washoe County, Nevada, Water Facility Revenue Bonds (Sierra Pacific Power
Company), AMT, 6.65% due 6/01/2017 (f) 3,114
==========================================================================================================================
New Hampshire--2.4% 7,390 New Hampshire Health and Education Facilities Authority Revenue Bonds
(Dartmouth-Hitchcock Obligation Group), 5.50% due 8/01/2027 (d) 8,305
==========================================================================================================================
New Jersey--9.4% New Jersey EDA, Cigarette Tax Revenue Bonds:
5,250 5.50% due 6/15/2024 (m) 5,738
700 5.50% due 6/15/2031 728
1,165 5.75% due 6/15/2034 1,229
New Jersey EDA, Motor Vehicle Surcharge Revenue Bonds, Series A (f):
2,600 5% due 7/01/2029 2,733
7,250 5.25% due 7/01/2031 7,837
5,200 5.25% due 7/01/2033 5,617
New Jersey EDA, Revenue Bonds, ROLS (h)(m):
5,000 Series II-R-309-1, 9.026% due 6/15/2024 5,929
2,500 Series II-R-309-2, 9.026% due 6/15/2031 2,938
==========================================================================================================================
8 MUNIENHANCED FUND, INC. JANUARY 31, 2005
Schedule of Investments (continued) (in Thousands)
Face
State Amount Municipal Bonds Value
==========================================================================================================================
New York--10.5% $ 3,000 Erie County, New York, IDA, School Facility Revenue Bonds (City of Buffalo
Project), 5.75% due 5/01/2025 (d) $ 3,468
New York City, New York, GO, DRIVERS (h):
1,500 Series 194, 9.381% due 2/01/2015 (d) 1,646
6,960 Series 356, 8.862% due 6/01/2011 (c) 8,852
New York City, New York, GO, Refunding:
5,865 Series A, 6.375% due 5/15/2010 (b)(g) 6,895
440 Series A, 6.375% due 5/15/2013 (b) 513
435 Series A, 6.375% due 5/15/2014 (b) 507
550 Series A, 6.375% due 5/15/2015 (b) 643
2,000 Series L, 5.75% due 8/01/2013 (c) 2,164
3,290 New York City, New York, GO, Series E, 5.75% due 5/15/2018 (c) 3,728
7,650 Tobacco Settlement Financing Corporation of New York Revenue Bonds,
Series A-1, 5.25% due 6/01/2022 (a) 8,282
==========================================================================================================================
Oklahoma--0.3% 1,200 Oklahoma State Industries Authority, Revenue Refunding Bonds (Integris
Baptist), VRDN, Series B, 1.84% due 8/15/2029 (f)(i) 1,200
==========================================================================================================================
Pennsylvania--6.7% 600 Allegheny County, Pennsylvania, Sanitation Authority, Sewer Revenue Bonds,
5.50% due 12/01/2030 (f) 666
7,750 Pennsylvania State Public School Building Authority, School Lease Revenue
Bonds (The School District of Philadelphia Project), 5% due 6/01/2033 (d) 8,049
6,500 Philadelphia, Pennsylvania, Authority for Industrial Development, Lease
Revenue Bonds, Series B, 5.50% due 10/01/2020 (d) 7,321
4,500 Philadelphia, Pennsylvania, School District, GO, Series B, 5.625%
due 8/01/2020 (b) 5,038
1,200 Philadelphia, Pennsylvania, Water and Wastewater Revenue Refunding Bonds,
VRDN, 1.83% due 6/15/2023 (d)(i) 1,200
840 Washington County, Pennsylvania, Capital Funding Authority Revenue Bonds
(Capital Projects and Equipment Program), 6.15% due 12/01/2029 (a) 893
==========================================================================================================================
Rhode Island--2.6% 4,345 Providence, Rhode Island, Public Building Authority, General Revenue Bonds,
Series A, 6.25% due 12/15/2020 (d) 5,083
3,355 Rhode Island State Economic Development Corporation, Airport Revenue Bonds,
Series B, 6.50% due 7/01/2015 (b) 3,922
==========================================================================================================================
South Carolina--0.2% 855 South Carolina Housing Finance and Development Authority, Mortgage Revenue
Refunding Bonds, AMT, Series A-2, 5.875% due 7/01/2009 (d) 863
==========================================================================================================================
South Dakota--2.3% 7,000 South Dakota State Health and Educational Facilities Authority, Revenue
Refunding Bonds, Series A, 7.625% due 1/01/2008 (f)(g) 7,852
==========================================================================================================================
Tennessee--0.7% 2,280 Tennessee HDA, Revenue Refunding Bonds (Homeownership Program), AMT,
Series 1, 5.95% due 7/01/2012 (f) 2,343
==========================================================================================================================
Texas--8.1% 1,615 Bexar, Texas, Metropolitan Water District, Waterworks System Revenue
Refunding Bonds, 6.35% due 5/01/2025 (f) 1,663
Dallas-Fort Worth, Texas, International Airport Revenue Bonds, DRIVERS,
AMT (h):
2,000 Series 202, 9.83% due 11/01/2028 (b) 2,418
7,250 Series 353, 8.814% due 5/01/2011 (f) 8,266
300 Harris County, Texas, Health Facilities Development Corporation, Hospital
Revenue Bonds (Texas Children's Hospital), VRDN, Series B-1, 1.84%
due 10/01/2029 (f)(i) 300
900 Houston, Texas, Airport System Revenue Refunding Bonds, Sub-Lien, Series B,
5.50% due 7/01/2030 (d) 983
6,250 Texas State Turnpike Authority, Central Texas Turnpike System Revenue
Bonds, First Tier, Series A, 5.50% due 8/15/2039 (a) 6,900
5,200 Travis County, Texas, Health Facilities Development Corporation, Revenue
Refunding Bonds, RITR, Series 4, 9.514% due 11/15/2024 (a)(h) 6,652
1,000 University of Houston, Texas, University Revenue Bonds, 5.50%
due 2/15/2030 (f) 1,089
==========================================================================================================================
Virginia--4.0% 10,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue Refunding Bonds,
AMT, Series A, 6.10% due 2/01/2010 (a) 11,269
2,300 Halifax County, Virginia, IDA, Exempt Facility Revenue Refunding Bonds (Old
Dominion Electric Cooperative Project), AMT, 5.625% due 6/01/2028 (a) 2,524
==========================================================================================================================
MUNIENHANCED FUND, INC. JANUARY 31, 2005 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded) (in Thousands)
Face
State Amount Municipal Bonds Value
==========================================================================================================================
Washington--3.6% $ 2,150 King County, Washington, Sewer Revenue Refunding Bonds, Series B, 5.50%
due 1/01/2027 (d) $ 2,393
2,000 Snohomish County, Washington, Public Utility District Number 001, Electric
Revenue Refunding Bonds, 5.375% due 12/01/2024 (d) 2,205
7,000 Washington State, GO, Series A and AT-6, 6.25% due 2/01/2011 (f) 7,917
--------------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Cost--$495,250)--152.9% 531,939
==========================================================================================================================
Total Investments (Cost--$495,250**)--152.8% 531,939
Other Assets Less Liabilities--0.9% 3,169
Preferred Stock, at Redemption Value--(53.7%) (187,081)
---------
Net Assets Applicable to Common Stock--100.0% $ 348,027
=========
* Represents a step bond; the interest rate shown reflects the effective
yield at the time of purchase by the Fund.
** The cost and unrealized appreciation (depreciation) of investments as of
January 31, 2005, as computed for federal income tax purposes, were as
follows:
(in Thousands)
-------------------------------------------------------------------------
Aggregate cost ................................. $ 495,244
=========
Gross unrealized appreciation .................. $ 37,420
Gross unrealized depreciation .................. (725)
---------
Net unrealized appreciation .................... $ 36,695
=========
(a) AMBAC Insured.
(b) FGIC Insured.
(c) XL Capital Insured.
(d) FSA Insured.
(e) GNMA Collateralized.
(f) MBIA Insured.
(g) Prerefunded.
(h) The rate disclosed is that currently in effect. The rate changes
periodically and inversely based upon prevailing market rates.
(i) Security has a maturity of more than one year, but has variable rate and
demand features, which qualify it as a short-term security. The rate
disclosed is that currently in effect. The rate changes periodically based
upon prevailing market rates.
(j) Escrowed to maturity.
(k) Radian Insured.
(l) CIFG Insured
(m) AGC Insured.
Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) were as follows:
(in Thousands)
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Institutional
Tax-Exempt Fund (6,901) $72
--------------------------------------------------------------------------
Forward interest rate swaps outstanding as of January 31, 2005 were as
follows:
(in Thousands)
-------------------------------------------------------------------------
Notional Unrealized
Amount Depreciation
-------------------------------------------------------------------------
Receive a variable rate equal to 7-Day
Bond Market Association Municipal Swap
Index Rate and pay a fixed rate
of 3.621%
Broker, JPMorgan Chase Bank
Expires March 2015 $20,000 $ (184)
Receive a variable rate equal to 7-Day
Bond Market Association Municipal
Swap Index Rate and pay a fixed rate
of 3.658%
Broker, JPMorgan Chase Bank
Expires April 2015 $25,000 (277)
Receive a variable rate equal to 7-Day
Bond Market Association Municipal
Swap Index Rate and pay a fixed rate
of 4.251%
Broker, JPMorgan Chase Bank
Expires February 2025 $25,000 (1,144)
Receive a variable rate equal to 7-Day
Bond Market Association Municipal
Swap Index Rate and pay a fixed rate
of 4.073%
Broker, Morgan Stanley Capital
Services, Inc.
Expires March 2025 $20,000 (415)
-------------------------------------------------------------------------
Total $(2,020)
=======
See Notes to Financial Statements.
10 MUNIENHANCED FUND, INC. JANUARY 31, 2005
Statement of Net Assets
As of January 31, 2005
=============================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified
cost--$495,249,612) .............................................. $ 531,938,745
Cash .............................................................. 30,889
Interest receivable ............................................... 5,736,907
Prepaid expenses .................................................. 6,843
-------------
Total assets ...................................................... 537,713,384
-------------
=============================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------
Unrealized depreciation on forward interest rate swaps ............ 2,020,160
Payables:
Investment adviser ............................................. $ 210,541
Dividends to Common Stock shareholders ......................... 199,740
Other affiliates ............................................... 7,680 417,961
-------------
Accrued expenses and other liabilities ............................ 167,904
-------------
Total liabilities ................................................. 2,606,025
-------------
=============================================================================================================================
Preferred Stock
-----------------------------------------------------------------------------------------------------------------------------
Preferred Stock, at redemption value, par value $.025 per share on
Series A Shares, Series B Shares and Series C Shares and $.10 per
share on Series D Shares (2,000 Series A Shares, 2,000 Series B
Shares, 2,000 Series C Shares and 1,480 Series D Shares of AMPS*
authorized, issued and outstanding at $25,000 per share
liquidation preference) .......................................... 187,080,560
-------------
=============================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock ............................. $ 348,026,799
=============
=============================================================================================================================
Analysis of Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10 per share (29,369,874 shares issued
and outstanding) ................................................. $ 2,936,987
Paid-in capital in excess of par .................................. 322,587,662
Undistributed investment income--net .............................. $ 5,268,954
Accumulated realized capital losses--net .......................... (17,435,777)
Unrealized appreciation--net ...................................... 34,668,973
-------------
Total accumulated earnings--net ................................... 22,502,150
-------------
Total--Equivalent to $11.85 net asset value per share of Common
Stock (market price--$10.93) ..................................... $ 348,026,799
=============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JANUARY 31, 2005 11
[LOGO] Merrill Lynch Investment Managers
Statement of Operations
For the Year Ended January 31, 2005
=============================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------
Interest .......................................................... $ 26,507,536
Dividends from affiliates ......................................... 71,623
-------------
Total income ...................................................... 26,579,159
-------------
=============================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------
Investment advisory fees .......................................... $ 2,521,879
Commission fees ................................................... 419,943
Accounting services ............................................... 169,074
Transfer agent fees ............................................... 93,152
Professional fees ................................................. 59,410
Printing and shareholder reports .................................. 52,201
Custodian fees .................................................... 29,010
Directors' fees and expenses ...................................... 22,853
Listing fees ...................................................... 22,725
Pricing fees ...................................................... 19,675
Other ............................................................. 39,652
-------------
Total expenses before reimbursement ............................... 3,449,574
Reimbursement of expenses ......................................... (13,482)
-------------
Total expenses after reimbursement ................................ 3,436,092
-------------
Investment income--net ............................................ 23,143,067
-------------
=============================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-----------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ............................................... 4,300,116
Forward interest rate swaps--net ............................... (3,860,373) 439,743
-------------
Change in unrealized appreciation (depreciation) on:
Investments--net ............................................... 2,510,292
Forward interest rate swaps--net ............................... (1,422,320) 1,087,972
-------------------------------
Total realized and unrealized gain--net ........................... 1,527,715
-------------
=============================================================================================================================
Dividends to Preferred Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................ (2,017,517)
-------------
Net Increase in Net Assets Resulting from Operations .............. $ 22,653,265
=============
See Notes to Financial Statements.
12 MUNIENHANCED FUND, INC. JANUARY 31, 2005
Statements of Changes in Net Assets
For the Year Ended
January 31,
-------------------------------
Increase (Decrease) in Net Assets: 2005 2004
=============================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................ $ 23,143,067 $ 23,835,222
Realized gain--net ................................................ 439,743 3,552,827
Change in unrealized appreciation (depreciation)--net ............. 1,087,972 762,392
Dividends to Preferred Stock shareholders ......................... (2,017,517) (1,628,600)
-------------------------------
Net increase in net assets resulting from operations .............. 22,653,265 26,521,841
-------------------------------
=============================================================================================================================
Dividends to Common Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................ (21,498,748) (21,146,311)
-------------------------------
Net decrease in net assets resulting from dividends to Common Stock
shareholders ..................................................... (21,498,748) (21,146,311)
-------------------------------
=============================================================================================================================
Capital Stock Transactions
-----------------------------------------------------------------------------------------------------------------------------
Offering and underwriting costs resulting from issuance of
Preferred Stock .................................................. (516,937) --
-------------------------------
=============================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------
Total increase in net assets applicable to Common Stock ........... 637,580 5,375,530
Beginning of year ................................................. 347,389,219 342,013,689
-------------------------------
End of year* ...................................................... $ 348,026,799 $ 347,389,219
===============================
* Undistributed investment income--net ......................... $ 5,268,954 $ 5,642,152
===============================
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JANUARY 31, 2005 13
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
For the Year Ended January 31,
------------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements. 2005 2004 2003 2002 2001
=========================================================================================================================
Per Share Operating Performance
-------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 11.83 $ 11.65 $ 11.43 $ 11.38 $ 10.10
------------------------------------------------------------
Investment income--net** ......... .79 .81 .83 .80 .80
Realized and unrealized gain--net .05 .15 .17 .02 1.33
Dividends to Preferred Stock
shareholders from investment
income--net ..................... (.07) (.06) (.08) (.13) (.21)
------------------------------------------------------------
Total from investment operations . .77 .90 .92 .69 1.92
------------------------------------------------------------
Less dividends to Common Stock
shareholders from investment
income--net ..................... (.73) (.72) (.70) (.64) (.64)
Offering and underwriting costs
resulting from the issuance of
Preferred Stock ................. (.02) -- -- -- --
------------------------------------------------------------
Net asset value, end of year ..... $ 11.85 $ 11.83 $ 11.65 $ 11.43 $ 11.38
============================================================
Market price per share, end of year $ 10.93 $ 11.22 $ 10.62 $ 11.05 $ 10.79
============================================================
=========================================================================================================================
Total Investment Return*
-------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 7.20% 8.46% 8.62% 6.52% 20.27%
============================================================
Based on market price per share .. 4.25% 12.84% 2.43% 8.61% 25.36%
============================================================
=========================================================================================================================
Ratios Based on Average Net Assets of Common Stock
-------------------------------------------------------------------------------------------------------------------------
Total expenses, net of
reimbursement*** ................ 1.01% .97% 1.00% 1.00% 1.01%
============================================================
Total expenses*** ................ 1.01% .97% 1.00% 1.00% 1.01%
============================================================
Total investment income--net*** .. 6.80% 6.95% 7.17% 7.00% 7.44%
============================================================
Amount of dividends to Preferred
Stock shareholders .............. .59% .48% .70% 1.18% 1.95%
============================================================
Investment income--net, to Common
Stock shareholders .............. 6.21% 6.47% 6.47% 5.82% 5.49%
============================================================
=========================================================================================================================
Ratios Based on Average Net Assets of Common & Preferred Stock***
-------------------------------------------------------------------------------------------------------------------------
Total expenses, net of
reimbursement ................... .68% .68% .70% .69% .69%
============================================================
Total expenses ................... .68% .68% .70% .69% .69%
============================================================
Total investment income--net ..... 4.58% 4.84% 4.97% 4.84% 5.04%
============================================================
=========================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
-------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock
shareholders .................... 1.22% 1.09% 1.57% 2.64% 4.10%
============================================================
14 MUNIENHANCED FUND, INC. JANUARY 31, 2005
Financial Highlights (concluded)
For the Year Ended January 31,
------------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements. 2005 2004 2003 2002 2001
=========================================================================================================================
Supplemental Data
-------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common
Stock, end of year (in thousands) $348,027 $347,389 $342,014 $335,614 $334,300
============================================================
Preferred Stock outstanding, end
of year (in thousands) .......... $187,000 $150,000 $150,000 $150,000 $150,000
============================================================
Portfolio turnover ............... 40.17% 50.47% 31.35% 43.12% 70.39%
============================================================
=========================================================================================================================
Leverage
-------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ........ $ 2,861 $ 3,316 $ 3,280 $ 3,237 $ 3,229
============================================================
=========================================================================================================================
Dividends Per Share on Preferred Stock Outstanding
-------------------------------------------------------------------------------------------------------------------------
Series A--Investment income--net . $ 309 $ 233 $ 350 $ 671 $ 1,017
============================================================
Series B--Investment income--net . $ 289 $ 354 $ 510 $ 680 $ 1,036
============================================================
Series C--Investment income--net . $ 295 $ 227 $ 327 $ 628 $ 1,031
============================================================
Series D+--Investment income--net $ 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. The Fund's Investment Adviser agreed to reimburse a portion of
its fee. Without such reimbursement, the Fund's performance would have
been lower.
** Based on average shares outstanding.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Series D was issued on August 31, 2004.
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JANUARY 31, 2005 15
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements
1. Significant Accounting Policies:
MuniEnhanced Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a non-diversified, closed-end management investment
company. The Fund's financial statements are prepared in conformity with U.S.
generally accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from these
estimates. 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 is listed on
the New York Stock Exchange under the symbol MEN. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the last available bid price in the
over-the-counter market or on the basis of 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 over-the-counter market, valuation
is the last asked price (options written) or the last bid price (options
purchased). Swap agreements are valued by quoted fair values received daily by
the Fund's pricing service. Short-term investments with a remaining maturity of
60 days or less are valued at amortized cost, which approximates market value,
under which method the investment is valued at cost and any premium or discount
is amortized on a straight line basis to maturity. Investments in open-end
investment companies are valued at their net asset value each business day.
Securities and other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund. Such valuations and procedures
will be reviewed periodically by the Board of Directors of the Fund.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Options -- The Fund may write covered call options and purchase call and
put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked-to-market
reflecting the current market value of the option written. When a security
is purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent
of the premiums received or paid (or gain or loss to the extent the cost
of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
16 MUNIENHANCED FUND, INC. JANUARY 31, 2005
Notes to Financial Statements (continued)
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.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(e) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
(f) Offering costs -- Direct expenses relating to the public offering of the
Fund's Preferred Stock were charged to capital at the time of issuance of the
shares.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .50% of the Fund's average daily net assets, including assets
acquired from the issuance of Preferred Stock. The Investment Adviser agreed to
reimburse its management fee by the amount of management fees the Fund pays to
FAM indirectly through its investment in Merrill Lynch Institutional Tax-Exempt
Fund. For the year ended January 31, 2005, FAM reimbursed the Fund in the amount
of $13,482.
For the year ended January 31, 2005, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), an affiliate of FAM, received underwriting fees of
$370,000 in connection with the issuance of the Fund's Series D Preferred Stock.
For the year ended January 31, 2005, the Fund reimbursed FAM $11,693 for certain
accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended January 31, 2005 were $244,297,826 and $198,271,526, respectively.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of stock, par value $.10 per
share, all of which were initially classified as Common Stock. The Board of
Directors is authorized, however, to reclassify any unissued shares of stock
without the approval of the holders of Common Stock.
Preferred Stock
Auction Market Preferred Stock are shares of Preferred Stock of the Fund, with a
par value of $.025 per share for Series A, Series B and Series C and $.10 per
share for Series D and a liquidation preference of $25,000 per share, plus
accrued and unpaid dividends, that entitle their holders to receive cash
dividends at an annual rate that may vary for the successive dividend period for
each series. The yields in effect at January 31, 2005 were as follows: Series A,
1.688%; Series B, 1.619%; Series C, 1.65%; and Series D, 1.80%.
Shares issued and outstanding for the year ended January 31, 2005 increased by
1,480 shares from the issuance of an additional series of Preferred Stock.
Shares issued and outstanding for the year ended January 31, 2004 remained
constant.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from .25% to .50%, calculated on the proceeds of each
auction. For the year ended January 31, 2005, MLPF&S received $241,713 as
commissions.
MUNIENHANCED FUND, INC. JANUARY 31, 2005 17
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
5. Distributions to Shareholders:
The Fund paid a tax-exempt income dividend to holders of Common Stock in the
amount of $.061000 per share on February 25, 2005 to shareholders of record on
February 15, 2005.
The tax character of distributions paid during the fiscal years ended January
31, 2005 and January 31, 2004 was as follows:
--------------------------------------------------------------------------------
1/31/2005 1/31/2004
--------------------------------------------------------------------------------
Distributions paid from
tax-exempt income ................. $23,516,265 $22,774,911
--------------------------------
Total distributions .................. $23,516,265 $22,774,911
================================
As of January 31, 2005, the components of accumulated earnings on a tax basis
were as follows:
-----------------------------------------------------------------------------
Undistributed tax-exempt income--net .................... $ 5,243,264
Undistributed long-term capital gains--net .............. --
------------
Total undistributed earnings--net ....................... 5,243,264
Capital loss carryforward ............................... (15,398,322)*
Unrealized gains--net ................................... 32,657,208**
------------
Total accumulated earnings--net ......................... $ 22,502,150
============
* On January 31, 2005, the Fund had a net capital loss carryforward of
$15,398,322, of which $4,572,805 expires in 2008, $8,505,599 expires in
2009, $1,955,204 expires in 2011 and $364,714 expires in 2013. This amount
will be available to offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales, the
tax deferral of losses on straddles and the difference between book and
tax amortization methods for premiums and discounts on fixed income
securities.
18 MUNIENHANCED FUND, INC. JANUARY 31, 2005
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
MuniEnhanced Fund, Inc.:
We have audited the accompanying statement of net assets, including the schedule
of investments, of MuniEnhanced Fund, Inc., as of January 31, 2005, 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. An audit includes 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, 2005, by correspondence with the custodian
and broker; where a reply was not received from the broker, 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
MuniEnhanced Fund, Inc. as of January 31, 2005, 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 U.S. generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
March 22, 2005
Fund Certification (unaudited)
In May 2004, 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.
MUNIENHANCED FUND, INC. JANUARY 31, 2005 19
[LOGO] Merrill Lynch Investment Managers
Automatic Dividend Reinvestment Plan
The following description of the Fund's Automatic Dividend Reinvestment Plan
(the "Plan") is sent to you annually as required by federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects,
all dividend and capital gains distributions will be automatically reinvested by
EquiServe (the "Plan Agent"), as agent for shareholders in administering the
Plan, in additional shares of Common Stock of the Fund. Holders of Common Stock
who elect not to participate in the Plan will receive all distributions in cash
paid by check mailed directly to the shareholder of record (or, if the shares
are held in street or other nominee name then to such nominee) by EquiServe, as
dividend paying agent. Such participants may elect not to participate in the
Plan and to receive all distributions of dividends and capital gains in cash by
sending written instructions to EquiServe, as dividend paying agent, at the
address set forth below. Participation in the Plan is completely voluntary and
may be terminated or resumed at any time without penalty by written notice if
received by the Plan Agent not less than ten days prior to any dividend record
date; otherwise such termination will be effective with respect to any
subsequently declared dividend or distribution.
Whenever the Fund declares an income dividend or capital gains distribution
(collectively referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized shares of Common Stock from the Fund ("newly issued shares") or (ii)
by purchase of outstanding shares of Common Stock on the open market
("open-market purchases") on the New York Stock Exchange or elsewhere. If, on
the payment date for the dividend, the net asset value per share of the Common
Stock is equal to or less than the market price per share of the Common Stock
plus estimated brokerage commissions (such conditions being referred to herein
as "market premium"), the Plan Agent will invest the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares of
Common Stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If, on
the dividend payment date, the net asset value per share is greater than the
market value (such condition being referred to herein as "market discount"), the
Plan Agent will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. It is contemplated that the Fund
will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisitions of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date determined by dividing the
uninvested portion of the dividend by the net asset value per share.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
20 MUNIENHANCED FUND, INC. JANUARY 31, 2005
In the case of shareholders such as banks, brokers or nominees which hold shares
of others who are the beneficial owners, the Plan Agent will administer the Plan
on the basis of the number of shares certified from time to time by the record
shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
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.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. 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 at less than they could otherwise purchase them and
will have shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market price plus
commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient 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.
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 premium
over net asset value, 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 such discount (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.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at
EquiServe, P.O. Box 43010, Providence, RI 02940-3010, Telephone: 800-426-5523.
MUNIENHANCED FUND, INC. JANUARY 31, 2005 21
[LOGO] Merrill Lynch Investment Managers
Officers and Directors
Number of
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 President of MLIM/FAM-advised funds since 2005; 114 Funds None
Doll, Jr.* Princeton, NJ and present President of MLIM and FAM since 2001; Co-Head 150 Portfolios
08543-9011 Director (Americas Region) thereof from 2000 to 2001 and
Age: 50 Senior Vice President from 1999 to 2001; President
and Director of Princeton Services, Inc. since 2001;
President of Princeton Administrators, L.P. since
2001; Chief Investment Officer of Oppenheimer
Funds, 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 MLIM or
FAM acts as investment adviser. Mr. Doll is an "interested person," as described in the Investment Company Act, of the
Fund based on his current positions with MLIM, FAM, Princeton Services and Princeton Administrators, L.P. The
Director's term is unlimited. 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 38 Funds None
Bodurtha Princeton, NJ present and Executive Vice President thereof from 1996 to 55 Portfolios
08543-9095 2003; Chairman of the Board, Berkshire Holding
Age: 60 Corporation since 1980; Partner, Squire, Sanders &
Dempsey from 1980 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Joe Grills P.O. Box 9095 Director 2002 to Member of the Committee of Investment of 38 Funds Kimco Realty
Princeton, NJ present Employee Benefit Assets of the Association of 55 Portfolios Corporation
08543-9095 Financial Professionals ("CIEBA") since 1986; Member
Age: 69 of 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
Committees of the State of New York Common
Retirement Fund since 1989; 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 and Vice Chairman thereof since 2002; Director,
Montpelier Foundation since 1998 and its Vice Chairman
since 2000; 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.
------------------------------------------------------------------------------------------------------------------------------------
22 MUNIENHANCED FUND, INC. JANUARY 31, 2005
Officers and Directors (continued)
Number of
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)
------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9095 Director 1989 to John M. Olin Professor of Humanities, New York 38 Funds None
London Princeton, NJ present University since 1993 and Professor thereof since 55 Portfolios
08543-9095 1980; President, Hudson Institute since 1997 and
Age: 65 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; Director, Damon Corp.
from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Director 1999 to Shareholder, Modrall, Sperling, Roehl, Harris & 38 Funds None
Cooper Princeton, NJ present Sisk, P.A. since 1993; President, American Bar 55 Portfolios
Ramo 08543-9095 Association from 1995 to 1996 and Member of the Board
Age: 62 of Governors thereof from 1994 to 1997; Shareholder,
Poole, Kelly & Ramo, Attorneys at Law, P.C. from
1977 to 1993; Director, 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) 38 Funds None
Salomon, Princeton, NJ present since 1994; Chairman and CEO of Salomon Brothers 55 Portfolios
Jr. 08543-9095 Asset Management from 1992 to 1995; Chairman
Age: 68 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 from 1975 to
1991; Trustee, Commonfund from 1980 to 2001.
------------------------------------------------------------------------------------------------------------------------------------
Stephen B. P.O. Box 9095 Director 2002 to Chairman of Fernwood Advisors, Inc. (investment 39 Funds None
Swensrud Princeton, NJ present adviser) since 1996; Principal, Fernwood Associates 56 Portfolios
08543-9095 (financial consultants) since 1975; Chairman of R.P.P.
Age: 71 Corporation (manufacturing company) since 1978;
Director of International Mobile Communications,
Incorporated (telecommunications) since 1998.
------------------------------------------------------------------------------------------------------------------------
* The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72.
------------------------------------------------------------------------------------------------------------------------------------
MUNIENHANCED FUND, INC. JANUARY 31, 2005 23
[LOGO] Merrill Lynch Investment Managers
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 First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
08543-9011 and and since 2004; Vice President of FAMD since 1999; Vice President of MLIMand FAM from
Age: 44 Treasurer 1999 to 1990 to 1997; Director of Taxation of MLIM from 1990 to 2001.
present
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9011 Senior Vice 2002 to Managing Director of MLIM since 2000 (Municipal Tax-Exempt Fund Management);
Jacob Princeton, NJ President present Director of MLIM from 1997 to 2000.
08543-9011
Age: 53
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior Vice 2002 to Managing Director of MLIM since 2000 (Municipal Tax-Exempt Fund Management);
Loffredo Princeton, NJ President present Director of MLIM from 1998 to 2000.
08543-9011
Age: 41
------------------------------------------------------------------------------------------------------------------------------------
Michael P.O. Box 9011 Vice 2000 to Vice President of MLIM (Municipal Tax-Exempt Fund Management) since 1999; Municipal
Kalinoski Princeton, NJ President present Bond Trader with Strong Capital Management from 1993 to 1999.
08543-9011
Age: 34
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
Hiller Princeton, NJ Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Global Director of
08543-9011 Officer Compliance at Morgan Stanley Investment Management from 2002 to 2004; Managing
Age: 53 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
Commission's Division of Enforcement in Washington, D.C. from 1990 to 1995.
------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
Pellegrino Princeton, NJ present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD and
08543-9011 Princeton Services since 2004.
Age: 44
------------------------------------------------------------------------------------------------------------------------
* 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:
EquiServe
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
--------------------------------------------------------------------------------
Andre F. Perold resigned as a Director of MuniEnhanced Fund, Inc. effective
October 22, 2004.
Effective January 1, 2005, Terry K. Glenn retired as President and Director of
the Fund. The Fund's Board of Directors wishes Mr. Glenn well in his retirement.
Effective January 1, 2005, Robert C. Doll, Jr. became President and Director of
the Fund.
--------------------------------------------------------------------------------
24 MUNIENHANCED FUND, INC. JANUARY 31, 2005
Important Tax Information
All of the net investment income distributions paid by MuniEnhanced Fund, Inc.
during its taxable year ended January 31, 2005 qualify as tax-exempt interest
dividends for federal income tax purposes.
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.
MUNIENHANCED FUND, INC. JANUARY 31, 2005 25
[LOGO] Merrill Lynch Investment Managers
Portfolio Information as of January 31, 2005
Percent of
Quality Ratings by Total
S&P/Moody's Investments
--------------------------------------------------------------------------------
AAA/Aaa ................................................. 89.8%
AA/Aa ................................................... 3.7
A/A ..................................................... 5.2
BBB/Baa ................................................. 0.4
NR (Not Rated) .......................................... 0.9
--------------------------------------------------------------------------------
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.
26 MUNIENHANCED FUND, INC. JANUARY 31, 2005
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MUNIENHANCED FUND, INC. JANUARY 31, 2005 27
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
MuniEnhanced Fund, Inc. seeks to provide shareholders with as high a level of
current income exempt from federal income taxes as is consistent with its
investment policies by investing primarily in a portfolio of long-term,
investment grade municipal obligations, the interest on which is exempt from
federal income taxes in the opinion of the bond counsel to the issuer.
This report, including the financial information herein, is transmitted to
shareholders of MuniEnhanced Fund, Inc. for their information. It is not a
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. The Fund has leveraged its
Common Stock and intends to remain leveraged by issuing Preferred Stock to
provide the Common Stock shareholders with a potentially higher rate of return.
Leverage creates risks for Common Stock shareholders, including the likelihood
of greater volatility of net asset value and market price of shares of the
Common Stock, and the risk that fluctuations in the short-term dividend rates of
the Preferred Stock may affect the yield to Common Stock shareholders.
Statements and other information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
MuniEnhanced Fund, Inc.
Box 9011
Princeton, NJ 08543-9011
#10874 -- 1/05
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
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
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,
(2) Andre F. Perold (resigned as of October 1, 2004), (3) Robert S.
Salomon, Jr., and (4) Stephen B. Swensrud.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending January 31, 2005 - $28,000
Fiscal Year Ending January 31, 2004 - $26,000
(b) Audit-Related Fees - Fiscal Year Ending January 31, 2005 - $13,200
Fiscal Year Ending January 31, 2004 - $5,600
The nature of the services include assurance and related services
reasonably related to the performance of the audit of financial
statements not included in Audit Fees.
(c) Tax Fees - Fiscal Year Ending January 31, 2005 - $5,700
Fiscal Year Ending January 31, 2004 - $5,610
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending January 31, 2005 - $0
Fiscal Year Ending January 31, 2004 - $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, 2005 - $11,220,181
Fiscal Year Ending January 31, 2004 - $18,176,900
(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) - $945,000, 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
Joe Grills
Herbert I. London
Andre F. Perold (resigned as of October 1, 2004)
Roberta Cooper Ramo
Robert S. Solomon, Jr.
Stephen B. Swensrud
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/Trustees has delegated to Merrill Lynch
Investment Managers, L.P. and/or Fund Asset Management, L.P. (the
"Investment Adviser") authority to vote all proxies relating to the
Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("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 Investment Adviser'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 Investment Adviser 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 that the Investment Adviser
considers the interests of its clients, including the Funds, and not
the interests of the Investment Adviser, when voting proxies and that
real (or perceived) material conflicts that may arise between the
Investment Adviser's interest and those of the Investment Adviser's
clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment professionals
appointed by the CIO, portfolio managers and investment analysts
appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Investment Adviser's Legal department appointed by the Investment
Adviser's General Counsel. The Committee's membership shall be limited
to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser'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 Investment Adviser 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 Investment Adviser 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 Investment Adviser
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
Investment Adviser 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 Investment Adviser 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 Investment Adviser will generally seek to vote proxies over which
the Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser'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 Investment Adviser 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 Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser 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 Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Investment Adviser
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 Investment Adviser 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 Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser'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 Investment
Adviser'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 powers of the Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by the CIO. The CIO
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 Investment Adviser'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 Investment Adviser'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 Investment Adviser's normal voting guidelines
or, on matters where the Investment Adviser'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 Investment Adviser 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 Investment
Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser 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 Investment Adviser 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 Investment Adviser 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 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, that 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.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable at this time
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - 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.
MuniEnhanced Fund, Inc.
By: /s/ Robert C. Doll, Jr.
----------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
MuniEnhanced Fund, Inc.
Date: March 21, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
----------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
MuniEnhanced Fund, Inc.
Date: March 21, 2005
By: /s/ Donald C. Burke
----------------------------------
Donald C. Burke,
Chief Financial Officer of
MuniEnhanced Fund, Inc.
Date: March 21, 2005