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: 01/31/06
Date of reporting period: 02/01/05 - 01/31/06
Item 1 - Report to Stockholders
MuniEnhanced
Fund, Inc.
Annual Report
January 31, 2006
MuniEnhanced Fund, Inc.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to merge Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), and BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with nearly $1 trillion in assets under management (based on combined
assets under management as of December 31, 2005). The transaction is expected to
close in the third quarter of 2006, at which time the new company will operate
under the BlackRock name. As a result of the above transaction, the combined
company is expected to become the investment adviser of the Fund, contingent
upon the approval of the Fund's Board of Directors and Fund shareholders.
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.
Portfolio Information as of January 31, 2006
Percent of
Quality Ratings by Total
S&P/Moody's Investments
--------------------------------------------------------------------------------
AAA/Aaa ............................................... 90.1%
AA/Aa ................................................. 3.8
A/A ................................................... 5.3
BBB/Baa ............................................... 0.4
Other* ................................................ 0.4
--------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments.
2 MUNIENHANCED FUND, INC. JANUARY 31, 2006
A Letter From the President
Dear Shareholder
After "muddling through" most of 2005, the financial markets saw increased
volatility in January that resulted in a roller coaster of highs and lows for
stocks and a similar ride for bonds. In the end, the major market indexes
managed to post positive returns for the current reporting period:
Total Returns as of January 31, 2006 6-month 12-month
=======================================================================================
U.S. equities (Standard & Poor's 500 Index) + 4.68% +10.38%
---------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) + 8.50 +18.89
---------------------------------------------------------------------------------------
International equities (MSCI Europe, Australasia, Far East Index) +18.31 +22.76
---------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) + 0.84 + 1.80
---------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 1.33 + 2.83
---------------------------------------------------------------------------------------
High yield bonds (Credit Suisse High Yield Index) + 1.40 + 3.59
---------------------------------------------------------------------------------------
The Federal Reserve Board (the Fed) advanced its monetary tightening campaign
with eight quarter-point interest rate hikes in 2005 and another on January 31,
2006. This brought the federal funds rate to 4.5%. Notably, Ben Bernanke
replaced Alan Greenspan as Fed chairman in January, a month after the central
bank removed the critical word "measured" from the description of its interest
rate-hiking program. Still, most observers expect another rate increase in
March.
Stocks recorded their third straight year of positive performance in 2005
despite struggling amid rising interest rates, record-high oil prices and a
devastating hurricane season. U.S. equities found support in strong corporate
earnings, low core inflation and healthy company balance sheets. Strength in the
global economy and non-U.S. equity markets helped, as did robust
dividend-distribution, share-buyback and merger-and-acquisition activity.
International markets, in the meantime, continued to benefit from strong
economic statistics, trade surpluses and solid finances.
In the U.S. bond market, short-term interest rates continued to move higher as
longer-term rates advanced more moderately, resulting in a flattening yield
curve. We saw the curve invert temporarily at the end of December and again at
the end of January into early February, with the two-year Treasury note offering
a slightly higher yield than the 10-year note.
Looking ahead, the largest questions center on the Fed's future moves, the
consumer's ability (or inability) to continue spending, the direction of the
U.S. dollar following a year of appreciation and the potential for continued
strong economic and corporate earnings growth. As you consider how these factors
might impact your investments in 2006, we encourage you to review your goals
with your financial advisor and to make portfolio changes, as needed. For
additional insight and timely "food for thought" for investors, we also invite
you to visit Shareholder magazine at www.mlim.ml.com/shareholdermagazine. As
always, we thank you for trusting Merrill Lynch Investment Managers with your
investment assets, and we look forward to continuing to serve your investment
needs.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Director
MUNIENHANCED FUND, INC. JANUARY 31, 2006 3
A Discussion With Your Fund's Portfolio Manager
With the Federal Reserve Board nearing the end of its monetary tightening
cycle, we expected a more stable interest rate environment ahead and shifted the
portfolio toward a more neutral position with respect to interest rate risk.
Discuss the recent market environment relative to municipal bonds.
Over the past 12 months, long-term bond yields rose slightly while their prices,
which move in the opposite direction, fell. Early in the year, bond prices
rallied strongly, prompting the 30-year Treasury bond yield to decline 40 basis
points (.40%) to 4.19% by June 30. In more recent months, inflationary fears
fueled by high commodity prices, coupled with sustained economic growth in the
United States, pushed bond yields higher. By the end of January 2006, 30-year
U.S. Treasury bond yields stood at 4.68%, an increase of nine basis points
compared to a year ago.
The Federal Reserve Board (the Fed) continued to raise short-term interest rates
at each of its meetings during the period, most recently lifting the federal
funds target rate to 4.5% on January 31, 2006. As short-term interest rates
continued to rise more than longer-term interest rates, the yield curve
flattened significantly. During the past year, 10-year Treasury note yields rose
39 basis points to 4.53% and two-year Treasury yields rose 125 basis points to
4.54%, reflecting a modest inversion of the Treasury yield curve.
Tax-exempt bond yields generally mirrored the movement of their taxable
counterparts throughout the year. According to Municipal Market Data, the yield
on AAA-rated issues maturing in 30 years increased just two basis points to
4.45%, while the yield on AAA-rated issues maturing in 10 years rose 30 basis
points to 3.78%. Notably, the municipal yield curve remained steep compared to
the Treasury curve.
During the past 12 months, municipalities issued more than $403 billion in
tax-exempt debt, exceeding the previous year's new-issue volume by 13.8%.
Refunding issues were a prominent component of municipal volume in 2005 as
issuers took advantage of low bond yields and a flattening yield curve to
refinance their outstanding higher-couponed debt. In 2005, refunding activity of
$130.3 billion exceeded 2004 refunding volume by more than 47%. However, January
2006 brought a dramatic reversal in this trend, with refunding activity
declining to approximately $3.5 billion, down more than 50% from January 2005.
It remains to be seen if this is the beginning of a sustained decline in
refunding issuance.
Investor demand for municipal product remained strong in recent quarters.
According to information from the Investment Company Institute, long-term
tax-exempt bond funds received net new monies of $5.04 billion during 2005. This
represented a sharp reversal from the $13.67 billion outflow experienced in
2004. Net new cash flows remained strong in the first month of 2006. Recent
statistics from AMG Data Services indicate that average weekly cash inflows have
risen to approximately $300 million, a significant improvement from the weekly
average of $65 million in December.
Looking ahead, the fundamentals for the tax-exempt bond market appear favorable,
and continued positive cash flows are anticipated. Given their attractive yields
relative to comparable U.S. Treasury bonds, and the prospects for reduced annual
issuance in 2006, we believe municipal bonds could enjoy solid results in the
coming months.
How did the Fund perform during the fiscal year?
For the 12-month period ended January 31, 2006, the Common Stock of MuniEnhanced
Fund, Inc. had net annualized yields of 6.18% and 6.46%, based on a year-end per
share net asset value of $11.52 and a per share market price of $11.03,
respectively, and $.712 per share income dividends. Over the same period, the
total investment return on the Fund's Common Stock was +3.63%, based on a change
in per share net asset value from $11.85 to $11.52, and assuming reinvestment of
all distributions.
The Fund's total return, based on net asset value, exceeded the +2.77% 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 bulk of the Fund's outperformance for the fiscal year occurred in the first
six months. Several significant holdings were advance refunded during this time,
which generated very strong returns. When municipal bonds are refinanced ahead
of their maturity date, their prices generally increase sharply. Also in the
first half, our focus on the long end of the municipal yield curve benefited the
portfolio as the curve flattened and longer-maturity bonds significantly
outperformed shorter-maturity issues. We continued to emphasize longer-dated
issues in the second half of the year, although the
4 MUNIENHANCED FUND, INC. JANUARY 31, 2006
incremental advantage was less of a factor as the curve continued to flatten.
Also worth noting, our focus on maintaining an above-average yield contributed
to Fund results throughout the year and, in January, as municipal supply dropped
markedly, our fully invested stance provided an incremental boost to
performance.
For the six-month period ended January 31, 2006, the total investment return on
the Fund's Common Stock was +1.09%, based on a change in net asset value from
$11.76 to $11.52, and assuming reinvestment of all distributions. The Lipper
category posted an average return of +1.09% for the six-month period.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
this report. As a closed-end fund, the Fund's shares may trade in the secondary
market at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the Fund's
Common Stock can vary significantly from total investment returns based on
changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
We made a gradual shift from a defensive market posture early in the year to a
neutral stance by period-end. As the Fed appeared closer to ending its monetary
tightening campaign, we took the opportunity to become a bit more constructive
in terms of duration. This involved using episodes of market weakness (rising
yields and falling prices) to become slightly more aggressive in our
restructuring efforts and reduce our defensive stance.
For the most part, we continued to move further out on the yield curve
throughout the year, although we employed this strategy more selectively in the
second half as the flattening curve meant there was less incremental yield
available in longer maturities. New purchases were generally in the 25-year -
30-year maturity range, as heavy municipal supply in calendar year 2005
periodically presented opportunities. One notable new transaction in which we
participated involved bonds issued to fund the expansion of Chicago O'Hare
International Airport. This $1 billion transaction was announced in the second
half of the period, and offered attractively priced bonds with maturities in the
area of 25 years. Importantly, when making sales to fund our new purchases, we
carefully considered whether it was advantageous to retain certain shorter-term
bonds that were purchased in higher-yield environments and which, therefore,
provide a meaningful income benefit to the portfolio.
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.
For the six-month period ended January 31, 2006, the Fund's Auction Market
Preferred Stock (AMPS) had average yields as follows: Series A, 2.76%; Series B,
2.66%; Series C, 2.67%; and Series D, 2.71%. The Fed's interest rate hikes are
clearly having an impact on the Fund's borrowing costs. The Fed raised the
short-term interest rate target 225 basis points during the 12-month period.
Still, the tax-exempt yield curve remained relatively steep and continued to
generate an income benefit to the holders of Common Stock from the leveraging of
Preferred Stock. However, should the spread between short-term and long-term
interest rates narrow, the benefits of leveraging will decline and, as a result,
reduce the yield on the Fund's Common Stock. At the end of the period, the
Fund's leverage amount, due to AMPS, was 35.57% of total net assets, before the
deduction of Preferred Stock. (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?
The portfolio ended its fiscal year essentially fully invested in high-quality
municipal bonds. We would characterize our current interest rate posture as
"neutral," an appropriate stance in our view given that Fed tightening appears
to be nearing an end. In December 2005, the central bank removed the word
"measured" from the description of its rate-hiking campaign and in January, 2006
indicated that it would become more "data-dependent" in determining monetary
policy. Although this leaves room for interpretation, we believe our current
posture positions the Fund for competitive performance. In the meantime, we will
continue to monitor the market in an effort to take advantage of periods of
yield volatility and any distortions in supply that may present opportunities to
purchase attractively structured bonds.
Michael Kalinoski, CFA
Vice President and Portfolio Manager
February 8, 2006
MUNIENHANCED FUND, INC. JANUARY 31, 2006 5
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, 2006, the percentage of the Fund's
total net assets invested in inverse floaters was 12.48%, before the deduction
of Preferred Stock.
Swap Agreements
The Fund may invest in swap agreements, which are over-the-counter contracts in
which one party agrees to make periodic payments based on the change in market
value of a specified bond, basket of bonds, or index in return for periodic
payments based on a fixed or variable interest rate or the change in market
value of a different bond, basket of bonds or index. Swap agreements may be used
to obtain exposure to a bond or market without owning or taking physical custody
of securities. Swap agreements involve the risk that the party with whom the
Fund has entered into the swap will default on its obligation to pay the Fund
and the risk that the Fund will not be able to meet its obligations to pay the
other party to the agreement.
6 MUNIENHANCED FUND, INC. JANUARY 31, 2006
Schedule of Investments (in Thousands)
Face
Amount Municipal Bonds Value
=============================================================================================
Alabama--0.9%
$ 2,750 Jefferson County, Alabama, Limited Obligation School
Warrants, Series A, 5.50% due 1/01/2022 $ 2,969
=============================================================================================
California--25.9%
Alameda Corridor Transportation Authority, California,
Capital Appreciation Revenue Refunding Bonds,
Subordinate Lien, Series A (a):
9,000 5.543%** due 10/01/2024 6,866
6,000 5.495%** due 10/01/2025 4,572
950 Anaheim, California, Public Financing Authority, Electric
System Distribution Facilities Revenue Bonds, Series A,
5% due 10/01/2031 (d) 976
5,000 Anaheim, California, Public Financing Authority, Lease
Revenue Bonds (Public Improvements Project),
Senior Series A, 6% due 9/01/2024 (d) 6,014
1,800 California State Department of Water Resources, Power
Supply Revenue Bonds, Series A, 5.375%
due 5/01/2012 (f)(g) 1,997
5,400 California State, GO, 5.125% due 2/01/2027 5,647
California State, GO, Refunding:
2,350 5.25% due 9/01/2010 (g) 2,522
175 5.25% due 9/01/2026 185
3,100 5.25% due 2/01/2030 (f) 3,284
5,000 5.125% due 6/01/2031 5,177
2,200 ROLS, Series II-R-272, 7.346% due 2/01/2033 (i)(j) 2,436
8,490 California State, Various Purpose, GO, 5.50%
due 11/01/2033 9,258
850 Chino Valley, California, Unified School District, GO
(Election of 2002), Series C, 5.25% due 8/01/2030 (f) 915
Golden State Tobacco Securitization Corporation of
California, Tobacco Settlement Revenue Bonds,
Series B (g):
3,000 5% due 6/01/2013 (a) 3,238
2,835 5.50% due 6/01/2013 (c) 3,150
4,600 5.625% due 6/01/2013 (k) 5,147
5,950 Los Angeles, California, Unified School District, GO,
Series A, 5% due 1/01/2028 (f) 6,209
5,000 Norco, California, Redevelopment Agency, Tax
Allocation Refunding Bonds (Norco Redevelopment
Project--Area Number 1), 5.125% due 3/01/2030 (f) 5,194
1,750 Poway, California, Redevelopment Agency, Tax
Allocation Refunding Bonds (Paguay Redevelopment
Project), 5.125% due 6/15/2033 (a) 1,810
1,000 San Diego, California, Community College District, GO
(Election of 2002), 5% due 5/01/2030 (d) 1,045
1,150 Santa Monica, California, Community College District,
GO (Election of 2002), Refunding, Series C, 5%
due 8/01/2029 (f) 1,202
6,145 Stockton, California, Public Financing Authority, Lease
Revenue Bonds (Parking and Capital Projects),
5.125% due 9/01/2030 (b) 6,425
1,600 Tamalpais, California, Union High School District, GO
(Election of 2001), 5% due 8/01/2028 (d) 1,664
1,200 University of California, Limited Project Revenue Bonds,
Series B, 5% due 5/15/2033 (d) 1,244
1,550 University of California Revenue Bonds (Multiple
Purpose Projects), Series Q, 5% due 9/01/2034 (d) 1,601
=============================================================================================
Colorado--8.3%
2,135 Boulder County, Colorado, Hospital Development
Revenue Bonds (Longmont United Hospital Project),
5.75% due 12/01/2020 (i) 2,284
140 Colorado HFA, Revenue Bonds (S/F Program), AMT,
Senior Series A-1, 7.40% due 11/01/2027 141
855 Colorado HFA, Revenue Refunding Bonds (S/F Program),
AMT, Senior Series A-2, 7.50% due 4/01/2031 897
Colorado Health Facilities Authority Revenue Bonds
Series A:
1,200 (Catholic Health Initiatives), 5.50%
due 3/01/2032 (h) 1,303
1,200 (Covenant Retirement Communities Inc.), 5.50%
due 12/01/2027 (i) 1,271
675 (Covenant Retirement Communities Inc.), 5.50%
due 12/01/2033 (i) 709
3,875 Colorado Water Resources and Power Development
Authority, Clean Water Revenue Bonds, Series A,
6.25% due 9/01/2010 (g) 4,323
2,000 Denver, Colorado, City and County Airport Revenue
Refunding Bonds, AMT, Series A, 6%
due 11/15/2018 (a) 2,165
5,450 El Paso County, Colorado, School District Number 49,
Falcon, GO, Series A, 6% due 12/01/2018 (d) 6,153
7,900 Northwest Parkway, Colorado, Public Highway
Authority, Capital Appreciation Revenue Bonds,
Senior Convertible, Series C, 5.345%**
due 6/15/2025 (d) 6,784
1,900 Northwest Parkway, Colorado, Public Highway
Authority Revenue Bonds, Series A, 5.50%
due 6/15/2021 (a) 2,078
=============================================================================================
Florida--1.3%
4,200 Orange County, Florida, Sales Tax Revenue Refunding
Bonds, Series B, 5.125% due 1/01/2032 (b) 4,395
=============================================================================================
Georgia--11.9%
18,655 Atlanta, Georgia, Airport General Revenue Refunding
Bonds, Series B, 5.25% due 1/01/2033 (d) 19,773
3,480 Atlanta, Georgia, Development Authority, Student
Housing Revenue Bonds (Georgia State University),
5% due 9/01/2035 (c) 3,595
2,610 Augusta, Georgia, Water and Sewer Revenue Bonds,
5.25% due 10/01/2039 (d) 2,780
3,500 Fulton County, Georgia, Water and Sewer Revenue
Bonds, 5.25% due 1/01/2035 (b) 3,721
Portfolio Abbreviations
To simplify the listings of MuniEnhanced Fund, Inc.'s portfolio holdings in the
Schedule of Investments, we have abbreviated the names of many of the securities
according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DRIVERS Derivative Inverse Tax-Exempt Receipts
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
ROLS Reset Option Long Securities
S/F Single-Family
MUNIENHANCED FUND, INC. JANUARY 31, 2006 7
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
=============================================================================================
Georgia (concluded)
$ 7,725 Georgia Municipal Electric Authority, Power Revenue
Refunding Bonds, Series EE, 7% due 1/01/2025 (a) $ 10,394
=============================================================================================
Illinois--21.5%
5,125 Chicago, Illinois, Board of Education, GO, RIB,
Series 467, 8.22% due 12/01/2027 (a)(j) 5,759
Chicago, Illinois, O'Hare International Airport, General
Revenue Bonds, 3rd Lien, Series A:
2,700 5.25% due 1/01/2026 (f) 2,901
3,300 5% due 1/01/2033 (b) 3,409
Chicago, Illinois, O'Hare International Airport Revenue
Bonds, 3rd Lien, AMT, Series B-2:
5,670 5.75% due 1/01/2023 (d) 6,224
2,500 6% due 1/01/2029 (c) 2,775
4,550 Chicago, Illinois, O'Hare International Airport Revenue
Refunding Bonds, DRIVERS, AMT, Series 250, 8.129%
due 1/01/2021 (f)(j) 5,252
3,000 Cook County, Illinois, Capital Improvement, GO,
Series C, 5.50% due 11/15/2012 (a)(g) 3,253
2,240 Cook County, Illinois, Community College District
Number 508, Chicago, COP, Refunding, 8.75%
due 1/01/2007 (b) 2,346
3,000 Illinois Health Facilities Authority, Revenue Refunding
Bonds (Servantcor Project), Series A, 6.375%
due 8/15/2006 (d)(g) 3,048
Illinois Sports Facilities Authority, State Tax Supported
Revenue Bonds (a):
20,120 5.341%** due 6/15/2030 17,311
4,500 5% due 6/15/2032 4,631
3,000 Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue Refunding Bonds
(McCormick Place Expansion Project), Series B,
5.75% due 6/15/2023 (f) 3,336
10,115 Regional Transportation Authority, Illinois, Revenue
Bonds, Series A, 7.20% due 11/01/2020 (a) 12,644
=============================================================================================
Indiana--3.8%
4,080 Hammond, Indiana, Multi-School Building Corporation,
First Mortgage Revenue Refunding Bonds, 6.125%
due 7/15/2019 (f) 4,272
Indiana Transportation Finance Authority, Highway
Revenue Bonds, Series A (b):
4,250 5.25% due 6/01/2028 4,539
3,750 5.25% due 6/01/2029 3,997
=============================================================================================
Louisiana--4.4%
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) 6,608
3,735 Louisiana State Transportation Authority, Senior Lien
Toll Revenue Capital Appreciation Bonds, Series B,
5.31%** due 12/01/2027 (a) 1,203
5,150 New Orleans, Louisiana, Ernest N. Morial Exhibit Hall
Authority, Special Tax, Sub-Series A, 5.25%
due 7/15/2028 (a) 5,399
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) 1,510
=============================================================================================
Massachusetts--12.6%
Massachusetts Bay Transportation Authority, Sales Tax
Revenue Refunding Bonds, Senior Series A:
1,810 5% due 7/01/2032 1,864
1,625 5% due 7/01/2035 1,678
2,000 Massachusetts Bay Transportation Authority, Special
Assessment Revenue Refunding Bonds, Series A, 5%
due 7/01/2031 2,089
2,500 Massachusetts State, Consolidated Loan, GO, Series C,
5% due 9/01/2025 2,634
2,800 Massachusetts State, HFA, Housing Revenue Bonds,
DRIVERS, AMT, Series 982, 7.145%
due 1/01/2011 (d)(j) 2,928
4,985 Massachusetts State Port Authority, Special Facilities
Revenue Bonds, DRIVERS, AMT, Series 501, 7.624%
due 7/01/2009 (a)(j) 5,454
8,300 Massachusetts State School Building Authority,
Dedicated Sales Tax Revenue Bonds, Series A, 5%
due 8/15/2030 (d) 8,684
11,800 Massachusetts State Special Obligation Dedicated Tax
Revenue Bonds, 5.25% due 1/01/2014 (b)(g) 12,926
950 Massachusetts State Water Resource Authority,
General Revenue Refunding Bonds, Series B, 5.125%
due 8/01/2027 (f) 994
3,100 University of Massachusetts Building Authority,
Facilities Revenue Bonds, Senior Series 4-A, 5.125%
due 11/01/2034 (f) 3,251
=============================================================================================
Michigan--6.1%
6,200 Detroit, Michigan, Water Supply System Revenue Bonds,
Series B, 5.25% due 7/01/2032 (f) 6,546
2,200 Michigan Higher Education Student Loan Authority,
Student Loan Revenue Refunding Bonds, AMT,
Series XVII-G, 5.20% due 9/01/2020 (a) 2,291
Michigan State Strategic Fund, Limited Obligation
Revenue Refunding Bonds (Detroit Edison Company
Project), AMT (c):
1,300 Series A, 5.50% due 6/01/2030 1,377
2,500 Series C, 5.65% due 9/01/2029 2,639
4,300 Series C, 5.45% due 12/15/2032 4,503
3,090 Wayne County, Michigan, Airport Authority Revenue
Bonds, DRIVERS, AMT, Series 986, 7.126%
due 6/01/2013 (f)(j) 3,405
=============================================================================================
Mississippi--0.8%
2,400 Walnut Grove, Mississippi, Correctional Authority, COP,
6% due 11/01/2009 (a)(g) 2,654
=============================================================================================
Nebraska--0.5%
1,700 Washington County, Nebraska, Wastewater Facilities
Revenue Bonds (Cargill Inc. Project), AMT, 5.90%
due 11/01/2027 1,844
=============================================================================================
Nevada--6.1%
3,100 Carson City, Nevada, Hospital Revenue Bonds
(Carson-Tahoe Hospital Project), Series A, 5.50%
due 9/01/2033 (i) 3,255
Clark County, Nevada, Airport System Subordinate
Lien Revenue Bonds, Series A-2 (b):
1,500 5% due 7/01/2030 1,548
3,200 5% due 7/01/2036 3,288
8 MUNIENHANCED FUND, INC. JANUARY 31, 2006
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
=============================================================================================
Nevada (concluded)
$ 9,000 Washoe County, Nevada, Gas and Water Facilities,
Revenue Refunding Bonds (Sierra Pacific Power
Company), 6.30% due 12/01/2014 (a) $ 9,310
3,000 Washoe County, Nevada, Water Facility Revenue Bonds
(Sierra Pacific Power Company), AMT, 6.65%
due 6/01/2017 (f) 3,138
=============================================================================================
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) 8,007
=============================================================================================
New Jersey--9.7%
New Jersey EDA, Cigarette Tax Revenue Bonds:
700 5.50% due 6/15/2031 724
1,165 5.75% due 6/15/2034 1,224
New Jersey EDA, Motor Vehicle Surcharge Revenue
Bonds, Series A (f):
2,600 5% due 7/01/2029 2,707
7,250 5.25% due 7/01/2031 7,737
5,200 5.25% due 7/01/2033 5,546
New Jersey EDA, Revenue Bonds, ROLS (e)(j):
7,625 Series II-R-309-1, 7.843% due 6/15/2024 8,749
2,500 Series II-R-309-2, 7.843% due 6/15/2031 2,878
3,100 New Jersey EDA, School Facilities Construction
Revenue Bonds, Series O, 5.125% due 3/01/2028 3,238
=============================================================================================
New York--7.9%
2,250 Metropolitan Transportation Authority, New York,
Transportation Revenue Bonds, Series A, 5%
due 11/15/2032 (b) 2,329
7,325 New York City, New York, City Municipal Water Finance
Authority, Water and Sewer System, Revenue
Refunding Bonds, Series A, 5% due 6/15/2035 (f) 7,566
6,960 New York City, New York, GO, DRIVERS, Series 356,
7.653% due 6/01/2011 (c)(j) 8,296
435 New York City, New York, GO, Refunding, Series A,
6.375% due 5/15/2014 (b) 486
7,650 Tobacco Settlement Financing Corporation of New York
Revenue Bonds, Series A-1, 5.25% due 6/01/2022 (a) 8,197
=============================================================================================
Pennsylvania--6.5%
9,525 Pennsylvania State Public School Building Authority,
School Lease Revenue Bonds (The School District of
Philadelphia Project), 5% due 6/01/2033 (d) 9,819
6,500 Philadelphia, Pennsylvania, Authority for Industrial
Development, Lease Revenue Bonds, Series B, 5.50%
due 10/01/2020 (d) 7,113
4,500 Philadelphia, Pennsylvania, School District, GO, Series B,
5.625% due 8/01/2012 (b)(g) 5,031
=============================================================================================
Rhode Island--2.6%
4,345 Providence, Rhode Island, Public Building Authority,
General Revenue Bonds, Series A, 6.25%
due 12/15/2020 (d) 4,892
3,355 Rhode Island State Economic Development
Corporation, Airport Revenue Bonds, Series B, 6.50%
due 7/01/2010 (b)(g) 3,801
=============================================================================================
South Carolina--1.2%
Charleston Educational Excellence Financing
Corporation, South Carolina, Revenue Bonds,
ROLS (e)(j):
1,560 Series II-R-481X-1, 7.366% due 12/01/2028 1,772
1,383 Series II-R-481X-2, 7.366% due 12/01/2029 1,564
505 Series II-R-481X-3, 7.366% due 12/01/2030 570
=============================================================================================
South Dakota--2.2%
7,000 South Dakota State Health and Educational Facilities
Authority, Revenue Refunding Bonds, Series A,
7.625% due 1/01/2008 (f)(g) 7,481
=============================================================================================
Tennessee--0.7%
2,280 Tennessee HDA, Revenue Refunding Bonds
(Homeownership Program), AMT, Series 1, 5.95%
due 7/01/2012 (f) 2,334
=============================================================================================
Texas--10.2%
1,615 Bexar, Texas, Metropolitan Water District, Waterworks
System Revenue Refunding Bonds, 6.35%
due 5/01/2025 (f) 1,651
Dallas-Fort Worth, Texas, International Airport
Revenue Bonds, DRIVERS, AMT (j):
2,000 Series 202, 8.629% due 11/01/2028 (b) 2,281
7,250 Series 353, 7.624% due 5/01/2011 (f) 8,043
900 Houston, Texas, Airport System Revenue Refunding
Bonds, Sub-Lien, Series B, 5.50% due 7/01/2030 (d) 956
9,345 Leander, Texas, Independent School District, Capital
Appreciation, GO, Refunding (School Building),
5.84%** due 8/15/2029 (b) 2,728
5,820 North Harris County, Texas, Regional Water Authority,
Senior Lien Revenue Bonds, 5.125%
due 12/15/2035 (f) 6,060
6,250 Texas State Turnpike Authority, Central Texas Turnpike
System Revenue Bonds, First Tier, Series A, 5.50%
due 8/15/2039 (a) 6,766
5,200 Travis County, Texas, Health Facilities Development
Corporation, Revenue Refunding Bonds, RITR,
Series 4, 8.393% due 11/15/2024 (a)(j) 6,164
=============================================================================================
Virginia--3.9%
10,000 Fairfax County, Virginia, EDA, Resource Recovery
Revenue Refunding Bonds, AMT, Series A, 6.10%
due 2/01/2010 (a) 10,845
2,300 Halifax County, Virginia, IDA, Exempt Facility Revenue
Refunding Bonds (Old Dominion Electric Cooperative
Project), AMT, 5.625% due 6/01/2028 (a) 2,492
=============================================================================================
MUNIENHANCED FUND, INC. JANUARY 31, 2006 9
Schedule of Investments (concluded) (in Thousands)
Face
Amount Municipal Bonds Value
=============================================================================================
Washington--2.4%
$ 2,150 King County, Washington, Sewer Revenue Refunding
Bonds, Series B, 5.50% due 1/01/2027 (d) $ 2,307
3,600 Seattle, Washington, Municipal Light and Power
Revenue Refunding Bonds, 5% due 11/01/2028 (d) 3,726
2,000 Snohomish County, Washington, Public Utility District
Number 001, Electric Revenue Refunding Bonds,
5.375% due 12/01/2009 (d)(g) 2,156
---------------------------------------------------------------------------------------------
Total Municipal Bonds
(Cost--$494,297)--153.8% 520,466
=============================================================================================
Shares
Held Short-Term Securities
=============================================================================================
2,205 Merrill Lynch Institutional Tax-Exempt Fund (l) 2,205
---------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$2,205)--0.6% 2,205
=============================================================================================
Total Investments (Cost--$496,502*)--154.4% 522,671
Other Assets Less Liabilities--0.9% 2,890
Preferred Stock, at Redemption Value--(55.3%) (187,111)
---------
Net Assets Applicable to Common Stock--100.0% $ 338,450
=========
* The cost and unrealized appreciation (depreciation) of investments as of
January 31, 2006, as computed for federal income tax purposes were as
follows:
Aggregate cost ................................. $ 496,460
=========
Gross unrealized appreciation .................. $ 26,780
Gross unrealized depreciation .................. (569)
---------
Net unrealized appreciation .................... $ 26,211
=========
** Represents a zero coupon or a step bond; the interest rate shown is the
effective yield at the time of purchase.
(a) AMBAC Insured.
(b) FGIC Insured.
(c) XL Capital Insured.
(d) FSA Insured.
(e) AGC Insured.
(f) MBIA Insured.
(g) Prerefunded.
(h) Escrowed to maturity.
(i) Radian Insured.
(j) The rate disclosed is that currently in effect. This rate changes
periodically and inversely based upon prevailing market rates.
(k) CIFG Insured.
(l) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Institutional
Tax-Exempt Fund 2,205 $72
--------------------------------------------------------------------------
o Forward interest rate swaps outstanding as of January 31, 2006 were as
follows:
-------------------------------------------------------------------------
Unrealized
Notional Appreciation
Amount (Depreciation)
-------------------------------------------------------------------------
Pay a fixed rate of 3.94% and receive
a floating rate based on 1-week Bond
Market Association Municipal Swap Index
Broker, JPMorgan Chase Bank
Expires February 2016 $35,000 $ (462)
Pay a fixed rate of 3.767% and receive
a floating rate based on 1-week Bond
Market Association Municipal Swap Index
Broker, JPMorgan Chase Bank
Expires April 2016 $20,000 41
-------------------------------------------------------------------------
Total $ (421)
===========
See Notes to Financial Statements.
10 MUNIENHANCED FUND, INC. JANUARY 31, 2006
Statement of Net Assets
As of January 31, 2006
===================================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$494,296,979) ......................................... $520,466,138
Investments in affiliated securities, at value
(identified cost--$2,205,342) ........................................... 2,205,342
Unrealized appreciation on forward interest rate swaps ................... 41,520
Cash ..................................................................... 85,312
Receivables:
Interest .............................................................. $ 5,412,334
Securities sold ....................................................... 651,145 6,063,479
------------
Prepaid expenses ......................................................... 9,127
------------
Total assets ............................................................. 528,870,918
------------
===================================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Unrealized depreciation on forward interest rate swaps ................... 462,420
Payables:
Securities purchased .................................................. 2,415,205
Investment adviser .................................................... 209,160
Dividends to Common Stock shareholders ................................ 141,569
Other affiliates ...................................................... 6,521 2,772,455
------------
Accrued expenses ......................................................... 75,069
------------
Total liabilities ........................................................ 3,309,944
------------
===================================================================================================================================
Preferred Stock
-----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock, at redemption value, par value $.025 (2,000 Series A
Shares, 2,000 Series B Shares and 2,000 Series C Shares) and $.10 per
share (1,480 Series D Shares) of AMPS* authorized, issued and
outstanding at $25,000 per share liquidation preference.................. 187,110,952
------------
===================================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock .................................... $338,450,022
============
===================================================================================================================================
Analysis of Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10 per share (29,369,874 shares issued and
outstanding) ............................................................ $ 2,936,987
Paid-in capital in excess of par ......................................... 322,587,682
Undistributed investment income--net ..................................... $ 2,188,557
Accumulated realized capital losses--net ................................. (15,011,463)
Unrealized appreciation--net ............................................. 25,748,259
------------
Total accumulated earnings--net .......................................... 12,925,353
------------
Total--Equivalent to $11.52 net asset value per share of Common Stock
(market price--$11.03) .................................................. $338,450,022
============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JANUARY 31, 2006 11
Statement of Operations
For the Year Ended January 31, 2006
===================================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------------
Interest and amortization of premium and discount earned .......... $ 26,311,833
Dividends from affiliates ......................................... 71,868
-------------
Total income ...................................................... 26,383,701
-------------
===================================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees .......................................... $ 2,647,541
Commission fees ................................................... 485,622
Accounting services ............................................... 171,694
Transfer agent fees ............................................... 123,581
Professional fees ................................................. 53,438
Printing and shareholder reports .................................. 41,460
Custodian fees .................................................... 26,407
Directors' fees and expenses ...................................... 25,412
Listing fees ...................................................... 20,887
Pricing fees ...................................................... 20,230
Other ............................................................. 57,190
-------------
Total expenses before reimbursement ............................... 3,673,462
Reimbursement of expenses ......................................... (6,219)
-------------
Total expenses after reimbursement ................................ 3,667,243
-------------
Investment income--net ............................................ 22,716,458
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-----------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ............................................... 4,371,469
Forward interest rate swaps--net ............................... (1,947,154) 2,424,315
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ............................................... (10,519,974)
Forward interest rate swaps--net ............................... 1,599,260 (8,920,714)
---------------------------------
Total realized and unrealized loss--net ........................... (6,496,399)
-------------
===================================================================================================================================
Dividends to Preferred Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................ (4,591,787)
-------------
Net Increase in Net Assets Resulting from Operations .............. $ 11,628,272
=============
See Notes to Financial Statements.
12 MUNIENHANCED FUND, INC. JANUARY 31, 2006
Statements of Changes in Net Assets
For the Year Ended
January 31,
-------------------------------
Increase (Decrease) in Net Assets: 2006 2005
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net .................................................. $ 22,716,458 $ 23,143,067
Realized gain--net ...................................................... 2,424,315 439,743
Change in unrealized appreciation/depreciation--net ..................... (8,920,714) 1,087,972
Dividends to Preferred Stock shareholders ............................... (4,591,787) (2,017,517)
-------------------------------
Net increase in net assets resulting from operations .................... 11,628,272 22,653,265
-------------------------------
===================================================================================================================================
Dividends to Common Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net .................................................. (21,205,049) (21,498,748)
-------------------------------
Net decrease in net assets resulting from dividends to Common Stock
shareholders ........................................................... (21,205,049) (21,498,748)
-------------------------------
===================================================================================================================================
Capital Stock Transactions
-----------------------------------------------------------------------------------------------------------------------------------
Offering and underwriting costs resulting from issuance of Preferred
Stock .................................................................. -- (516,937)
-------------------------------
===================================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets applicable to Common Stock ...... (9,576,777) 637,580
Beginning of year ....................................................... 348,026,799 347,389,219
-------------------------------
End of year* ............................................................ $ 338,450,022 $ 348,026,799
===============================
* Undistributed investment income--net ............................... $ 2,188,557 $ 5,268,954
===============================
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JANUARY 31, 2006 13
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. 2006 2005 2004 2003 2002
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ........................... $11.85 $11.83 $11.65 $11.43 $11.38
------------------------------------------------------
Investment income--net*** .................................... .77 .79 .81 .83 .80
Realized and unrealized gain (loss)--net ..................... (.22) .05 .15 .17 .02
Less dividends to Preferred Stock shareholders from investment
income--net ................................................. (.16) (.07) (.06) (.08) (.13)
------------------------------------------------------
Total from investment operations ............................. .39 .77 .90 .92 .69
------------------------------------------------------
Less dividends to Common Stock shareholders from investment
income--net ................................................. (.72) (.73) (.72) (.70) (.64)
Offering and underwriting costs resulting from the issuance of
Preferred Stock ............................................. -- (.02) -- -- --
------------------------------------------------------
Net asset value, end of year ................................. $11.52 $11.85 $11.83 $11.65 $11.43
======================================================
Market price per share, end of year .......................... $11.03 $10.93 $11.22 $10.62 $11.05
======================================================
==================================================================================================================================
Total Investment Return*
----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ........................... 3.63% 7.20% 8.46% 8.62% 6.52%
======================================================
Based on market price per share .............................. 7.58% 4.25% 12.84% 2.43% 8.61%
======================================================
==================================================================================================================================
Ratios Based on Average Net Assets of Common Stock
----------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement** ....................... 1.07% 1.01% .97% 1.00% 1.00%
======================================================
Total expenses** ............................................. 1.07% 1.01% .97% 1.00% 1.00%
======================================================
Total investment income--net** ............................... 6.63% 6.80% 6.95% 7.17% 7.00%
======================================================
Amount of dividends to Preferred Stock shareholders .......... 1.34% .59% .48% .70% 1.18%
======================================================
Investment income--net, to Common Stock shareholders ......... 5.29% 6.21% 6.47% 6.47% 5.82%
======================================================
==================================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
----------------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders .................... 2.46% 1.22% 1.09% 1.57% 2.64%
======================================================
14 MUNIENHANCED FUND, INC. JANUARY 31, 2006
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. 2006 2005 2004 2003 2002
===================================================================================================================================
Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock, end of year
(in thousands) ......................................... $338,450 $348,027 $347,389 $342,014 $335,614
============================================================
Preferred Stock outstanding, end of year (in thousands) . $187,000 $187,000 $150,000 $150,000 $150,000
============================================================
Portfolio turnover ...................................... 27.72% 40.17% 50.47% 31.35% 43.12%
============================================================
===================================================================================================================================
Leverage
-----------------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ............................... $ 2,810 $ 2,861 $ 3,316 $ 3,280 $ 3,237
============================================================
===================================================================================================================================
Dividends Per Share on Preferred Stock Outstanding
-----------------------------------------------------------------------------------------------------------------------------------
Series A--Investment income--net ........................ $ 603 $ 309 $ 233 $ 350 $ 671
============================================================
Series B--Investment income--net ........................ $ 629 $ 289 $ 354 $ 510 $ 680
============================================================
Series C--Investment income--net ........................ $ 610 $ 295 $ 227 $ 327 $ 628
============================================================
Series D--Investment income--net ........................ $ 614 $ 156 -- -- --
============================================================
* Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
** Do not reflect the effect of dividends to Preferred Stock shareholders.
*** Based on average shares outstanding.
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JANUARY 31, 2006 15
Notes to Financial Statements
1. Significant Accounting Policies:
MuniEnhanced Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a non-diversified, closed-end management investment
company. The Fund's financial statements are prepared in conformity with U.S.
generally accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from these
estimates. The Fund determines and makes available for publication the net asset
value of its Common Stock on a daily basis. The Fund's Common Stock shares are
listed on the New York Stock Exchange under the symbol MEN. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general direction
of the Board of Directors. Such valuations and procedures are reviewed
periodically by the Board of Directors of the Fund. Financial futures contracts
and options thereon, which are traded on exchanges, are valued at their closing
prices as of the close of such exchanges. Options written or purchased are
valued at the last sale price in the case of exchange-traded options. In the
case of options traded in the OTC market, valuation is the last asked price
(options written) or the last bid price (options purchased). Swap agreements are
valued by quoted fair valuations received daily by the Fund's pricing service.
Short-term investments with a remaining maturity of 60 days or less are valued
at amortized cost, which approximates market value, under which method the
investment is valued at cost and any premium or discount is amortized on a
straight line basis to maturity. Investments in open-end investment companies
are valued at their net asset value each business day. Securities and other
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund. Such valuations and procedures will be reviewed
periodically by the Board of Directors of the Fund.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract 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, 2006
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 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.
(g) Reclassifications -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. There were no significant
reclassifications in the current year. These reclassifications have no effect on
net assets or net asset values per share.
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, 2006, FAM reimbursed the Fund in the amount
of $6,219.
For the year ended January 31, 2006, the Fund reimbursed FAM $12,234 for certain
accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
merge ML & Co.'s investment management business, including FAM, with the
investment management business of BlackRock, Inc. The transaction is expected to
close in the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended January 31, 2006 were $145,624,568 and $144,814,265, respectively.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of stock, par value $.10 per
share, all of which were initially classified as Common Stock. The Board of
Directors is authorized, however, to reclassify any unissued shares of stock
without the approval of the holders of Common Stock.
Preferred Stock
Auction Market Preferred Stock are redeemable shares of Preferred Stock of the
Fund, with a liquidation preference of $25,000 per share plus accrued and unpaid
dividends that entitle their holders to receive cash dividends at an annual rate
that may vary for the successive dividend periods. The yields in effect at
January 31, 2006 were as follows: Series A, 3.01%; Series B, 2.91%; Series C,
3.05%; and Series D, 2.95%.
MUNIENHANCED FUND, INC. JANUARY 31, 2006 17
Notes to Financial Statements (concluded)
Shares issued and outstanding during the year ended January 31, 2006 remained
constant. Shares issued and outstanding during the year ended January 31, 2005
increased by 1,480 shares from the issuance of an additional series of Preferred
Stock.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from .25% to .50%, calculated on the proceeds of each
auction. For the year ended January 31, 2006, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, an affiliate of FAM, received $246,601 as commissions.
5. Distributions to Shareholders:
The Fund paid a tax-exempt income dividend to holders of Common Stock in the
amount of $.051000 on February 27, 2006 to shareholders of record on February
14, 2006.
The tax character of distributions paid during the fiscal years ended January
31, 2006 and January 31, 2005 was as follows:
--------------------------------------------------------------------------------
1/31/2006 1/31/2005
--------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income .................... $25,796,836 $23,516,265
-------------------------------
Total distributions .................... $25,796,836 $23,516,265
===============================
As of January 31, 2006, the components of accumulated earnings on a tax basis
were as follows:
-----------------------------------------------------------------------------
Undistributed tax-exempt income--net .................... $ 2,146,534
Undistributed long-term capital gains--net .............. --
------------
Total undistributed earnings--net ....................... 2,146,534
Capital loss carryforward ............................... (14,205,719)*
Unrealized gains--net ................................... 24,984,538**
------------
Total accumulated earnings--net ......................... $ 12,925,353
============
* On January 31, 2006, the Fund had a net capital loss carryforward of
$14,205,719, of which $3,380,202 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 straddles and the
difference between book and tax amortization methods for premiums and
discounts on fixed income securities.
18 MUNIENHANCED FUND, INC. JANUARY 31, 2006
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, 2006, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. The
Fund is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of January 31, 2006, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
MuniEnhanced Fund, Inc. as of January 31, 2006, 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, 2006
Fund Certification (unaudited)
In May 2005, the Fund filed its Chief Executive Officer Certification for the
prior year with the New York Stock Exchange pursuant to Section 303A. 12(a) of
the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Important Tax Information (unaudited)
All of the net investment income distributions paid by MuniEnhanced Fund, Inc.
during its taxable year ended January 31, 2006 qualify as tax-exempt interest
dividends for federal income tax purposes.
MUNIENHANCED FUND, INC. JANUARY 31, 2006 19
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director whose
only affiliation with Fund Asset Management, L.P. (the "Investment Adviser") or
other Merrill Lynch affiliates is as a director of the Fund and certain other
funds advised by the Investment Adviser or its affiliates. The Co-chairmen of
the Board are also independent directors. New director nominees are chosen as
nominees by a Nominating Committee comprised of independent directors. All
independent directors also are members of the Board's Audit Committee and the
independent directors meet in executive session at each in-person Board meeting.
The Board and the Audit Committee meet in person for at least two days each
quarter and conduct other in-person and telephone meetings throughout the year,
some of which are formal board meetings, and some of which are informational
meetings. The independent counsel to the independent directors attends all
in-person Board and Audit Committee meetings and other meetings at the
independent directors' request.
Investment Advisory Agreement -- Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). The Board assesses the nature,
scope and quality of the services provided to the Fund by the personnel of the
Investment Adviser and its affiliates, including administrative services,
shareholder services, oversight of fund accounting, marketing services and
assistance in meeting legal and regulatory requirements. The Board also receives
and assesses information regarding the services provided to the Fund by certain
unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates. Among the matters considered are: (a)
fees (in addition to management fees) paid to the Investment Adviser and its
affiliates by the Fund; (b) Fund operating expenses paid to third parties; (c)
the resources devoted to and compliance reports relating to the Fund's
investment objective, policies and restrictions, and its compliance with its
Code of Ethics and the Investment Adviser's compliance policies and procedures;
and (d) the nature, cost and character of non-investment management services
provided by the Investment Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by the
Investment Adviser to be of high quality. The Board also believes that the
Investment Adviser is financially sound and well managed and notes that the
Investment Adviser is affiliated with one of America's largest financial firms.
The Board works closely with the Investment Adviser in overseeing the Investment
Adviser's efforts to achieve good performance. As part of this effort, the Board
discusses portfolio manager effectiveness and, when performance is not
satisfactory, discusses with the Investment Adviser taking steps such as
changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement, the Board requests and receives materials specifically
relating to the Fund's Investment Advisory Agreement. These materials include
(a) information compiled by Lipper Inc. ("Lipper") on the fees and expenses and
the investment performance of the Fund as compared to a comparable group of
funds as classified by Lipper; (b) information comparing the Fund's market price
with its net asset value per share; (c) a discussion by the Fund's portfolio
management team on investment strategies used by the Fund during its most recent
fiscal year; and (d) information on the profitability to the Investment Adviser
and its affiliates of the Investment Advisory Agreement and other relationships
with the Fund. The Board also considers other matters it deems important to the
approval process such as services related to the valuation and pricing of Fund
portfolio holdings, allocation of Fund portfolio transactions, the Fund's
portfolio turnover statistics, and direct and indirect benefits to the
Investment Adviser and its affiliates from their relationship with the Fund.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement which occurred in August 2005, the independent directors' and Board's
review included the following:
Services Provided by the Investment Adviser -- The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including the
investment advisory services and the resulting performance of the Fund. The
Board focused primarily on the Investment Adviser's investment advisory services
and the Fund's investment performance. The Board compared Fund performance --
both including and excluding the effects of the Fund's fees and
20 MUNIENHANCED FUND, INC. JANUARY 31, 2006
expenses -- to the performance of a comparable group of funds, and the
performance of a relevant index or combination of indexes. While the Board
reviews performance data at least quarterly, consistent with the Investment
Adviser's investment goals, the Board attaches more importance to performance
over relatively long periods of time, typically three to five years. The Fund's
performance after fees and expenses ranked in the second quintile for the
one-year period, in the fourth quintile for the three-year period, and in the
third quintile for the five-year period ended May 31, 2005. Considering these
factors, the Board concluded that the nature and quality of these services
supported the continuation of the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process -- The Board reviews
at least annually the Fund's investment objectives and strategies. The Board
discusses with senior management of the Investment Adviser responsible for
investment operations and the senior management of the Investment Adviser's
municipal investing group the strategies being used to achieve the stated
objectives. Among other things, the Board considers the size, education and
experience of the Investment Adviser's investment staff, its use of technology,
and the Investment Adviser's approach to training and retaining portfolio
managers and other research, advisory and management personnel. The Board also
reviews the Investment Adviser's compensation policies and practices with
respect to the Fund's portfolio managers. The Board also considered the
experience of the Fund's portfolio manager and noted that Mr. Kalinoski has more
than five years of experience in portfolio management. The Investment Adviser
and its investment staff have extensive experience in analyzing and managing the
types of investments used by the Fund. The Board concluded that the Fund
benefits from that expertise.
Management Fees and Other Expenses -- The Board reviews the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory and
administrative service fees and the effects of any fee waivers -- compared to
the other funds in its Lipper category. It also compares the Fund's total
expenses to those of other comparable funds. The Fund's contractual management
fee rate was lower than the median contractual management fee charged by
comparable funds as determined by Lipper, and the Fund's actual management fee
rate and total expenses were slightly higher than the median fees and expenses
charged by such comparable funds. The Board has concluded that the Fund's
management fee and fee rate and overall expense ratio are reasonable compared to
those of other comparable funds.
Profitability -- The Board considers the cost of the services provided to the
Fund by the Investment Adviser, and the Investment Adviser's and its affiliates'
profits relating to the management and distribution of the Fund and the
MLIM/FAM-advised funds. As part of its analysis, the Board reviewed the
Investment Adviser's methodology in allocating its costs to the management of
the Fund and concluded that there was a reasonable basis for the allocation. The
Board also considered federal court decisions discussing an investment adviser's
profitability and profitability levels considered to be reasonable in those
decisions. The Board believes the Investment Adviser's profits are acceptable in
relation to the nature and quality of services provided.
Economies of Scale -- The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable the
Fund to participate in these economies of scale. The Board considered economies
of scale to the extent applicable to the Fund's closed-end structure and
determined that the Fund currently appropriately benefits from any economies of
scale and no changes were currently necessary.
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing Investment Advisory Agreement, concluding that the advisory fee was
reasonable in relation to the services provided and that a contract renewal was
in the best interests of the shareholders.
MUNIENHANCED FUND, INC. JANUARY 31, 2006 21
Automatic Dividend Reinvestment Plan
How the Plan Works -- The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by Computershare Trust
Company, N.A. (the "Plan Agent"). Under the Plan, whenever the Fund declares a
dividend, participants in the Plan will receive the equivalent in shares of
Common Stock of the Fund. The Plan Agent will acquire the shares for the
participant's account either (i) through receipt of additional unissued but
authorized shares of the Fund ("newly issued shares") or (ii) by purchase of
outstanding shares of Common Stock on the open market on the New York Stock
Exchange or elsewhere. If, on the dividend payment date, the Fund's net asset
value per share is equal to or less than the market price per share plus
estimated brokerage commissions (a condition often referred to as a "market
premium"), the Plan Agent will invest the dividend amount in newly issued
shares. If the Fund's net asset value per share is greater than the market price
per share (a condition often referred to as a "market discount"), the Plan Agent
will invest the dividend amount by purchasing on the open market additional
shares. If the Plan Agent is unable to invest the full dividend amount in open
market purchases, or if the market discount shifts to a market premium during
the purchase period, the Plan Agent will invest any uninvested portion in newly
issued shares. The shares acquired are credited to each shareholder's account.
The amount credited is determined by dividing the dollar amount of the dividend
by either (i) when the shares are newly issued, the net asset value per share on
the date the shares are issued or (ii) when shares are purchased in the open
market, the average purchase price per share.
Participation in the Plan -- Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by writing to the Plan Agent.
Benefits of the Plan -- The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares acquired
pursuant to the Plan receive voting rights. In addition, if the market price
plus commissions of the Fund's shares is above the net asset value, participants
in the Plan will receive shares of the Fund for less than they could otherwise
purchase them and with a cash value greater than the value of any cash
distribution they would have received. However, there may not be enough shares
available in the market to make distributions in shares at prices below the net
asset value. Also, since the Fund does not redeem shares, the price on resale
may be more or less than the net asset value.
Plan Fees -- There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders will
pay a pro rata share of any such commissions.
Tax Implications -- The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that may
be payable (or required to be withheld) on such dividends. Therefore, income and
capital gains may still be realized even though shareholders do not receive
cash. The value of shares acquired pursuant to the Plan will generally be
excluded from gross income to the extent that the cash amount reinvested would
be excluded from gross income. If, when the Fund's shares are trading at a
market premium, the Fund issues shares pursuant to the Plan that have a greater
fair market value than the amount of cash reinvested, it is possible that all or
a portion of the discount from the market value (which may not exceed 5% of the
fair market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution, it is also
possible that the taxable character of this discount would be allocable to all
the shareholders, including shareholders who do not participate in the Plan.
Thus, shareholders who do not participate in the Plan might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.
Contact Information -- All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at Computershare
Trust Company, N.A., P.O. Box 43010, Providence, RI 02940-3010, Telephone:
800-426-5523.
22 MUNIENHANCED FUND, INC. JANUARY 31, 2006
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 the MLIM/FAM-advised funds since 2005; 131 Funds None
Doll, Jr.* Princeton, NJ and present President of MLIM and FAM since 2001; Co-Head 177 Portfolios
08543-9011 Director (Americas Region) thereof from 2000 to 2001 and
Age: 51 Senior Vice President from 1999 to 2001; President
and Director of Princeton Services, Inc. ("Princeton
Services") since 2001; President of Princeton
Administrators, L.P. ("Princeton Administrators")
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 defined in the Investment Company
Act, of the Fund based on his positions with MLIM, FAM, Princeton Services and Princeton Administrators, L.P.
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 39 Funds None
Bodurtha Princeton, NJ present 1996 and Executive Vice President thereof from 59 Portfolios
08543-9095 1996 to 2003; Chairman of the Board, Berkshire
Age: 61 Holding Corporation since 1980; Partner, Squire,
Sanders & Dempsey from 1980 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9095 Director 2005 to Professor, Harvard University since 1992; Professor, 39 Funds None
Froot Princeton, NJ present Massachusetts Institute of Technology from 59 Portfolios
08543-9095 1986 to 1992.
Age: 48
------------------------------------------------------------------------------------------------------------------------------------
Joe P.O. Box 9095 Director 2002 to Member of the Committee of Investment of Employee 39 Funds Kimco
Grills** Princeton, NJ present Benefit Assets of the Association of Financial 59 Portfolios Realty
08543-9095 Professionals ("CIEBA") since 1986; Member of Corporation
Age: 70 CIEBA's Executive Committee since 1988 and its
Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Corporation
("IBM") and Chief Investment Officer of IBM
Retirement Funds from 1986 to 1993; Member of the
Investment Advisory Committee of the State of New
York Common Retirement Fund 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, Vice
Chairman thereof from 2002 to 2005, and Chairman
thereof since 2005; 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.
MUNIENHANCED FUND, INC. JANUARY 31, 2006 23
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 Professor Emeritus, New York University since 39 Funds None
London Princeton, NJ present 2005; John M. Olin Professor of Humanities, New 59 Portfolios
08543-9095 York University from 1993 to 2005; and Professor
Age: 66 thereof from 1980 to 2005; President, Hudson
Institute since 1997 and Trustee thereof since
1980; Dean, Gallatin Division of New York
University from 1976 to 1993; Distinguished
Fellow, Herman Kahn Chair, Hudson Institute from
1984 to 1985; 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 & 39 Funds None
Cooper Princeton, NJ present Sisk, P.A. since 1993; President, American Bar 59 Portfolios
Ramo 08543-9095 Association from 1995 to 1996 and Member of the
Age: 63 Board of Governors thereof from 1994 to 1997;
Shareholder, Poole, Kelly & Ramo, Attorneys at
Law, P.C. from 1977 to 1993; Director of ECMC
Group (service provider to students, schools and
lenders) since 2001; Director, United New Mexico
Bank (now Wells Fargo) from 1983 to 1988;
Director, First National Bank of New Mexico (now
Wells Fargo) from 1975 to 1976; Vice President,
American Law Institute since 2004.
------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Director 2002 to Principal of STI Management (investment adviser) 39 Funds None
Salomon, Princeton, NJ present since 1994; Chairman and CEO of Salomon Brothers 59 Portfolios
Jr. 08543-9095 Asset Management Inc. from 1992 to 1995; Chairman
Age: 69 of Salomon Brothers Equity Mutual Funds from 1992
to 1995; regular columnist with Forbes Magazine
from 1992 to 2002; Director of Stock Research and
U.S. Equity Strategist at Salomon Brothers Inc.
from 1975 to 1991; Trustee, Commonfund from 1980
to 2001.
------------------------------------------------------------------------------------------------------------------------
* Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Chairman of the Board of Directors and the Audit Committee.
24 MUNIENHANCED FUND, INC. JANUARY 31, 2006
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
Burke Princeton, NJ President present 1999; Senior Vice President and Treasurer of Princeton Services since 1999 and
08543-9011 and and Director since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since
Age: 45 Treasurer 1999 to 1999 and Director since 2004; Vice President of MLIM and FAM from 1990 to 1997;
present Director of Taxation of MLIM from 1990 to 2001; Vice President, Treasurer and
Secretary of the IQ Funds since 2004.
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9011 Senior Vice 2002 to Managing Director (Municipal Tax-Exempt Fund Management) of MLIM since 2000;
Jacob Princeton, NJ President present Director of MLIM from 1997 to 2000.
08543-9011
Age: 54
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior Vice 2002 to Managing Director (Municipal Tax-Exempt Fund Management) of MLIM since 2000;
Loffredo Princeton, NJ President present Director of MLIM from 1997 to 2000.
08543-9011
Age: 42
------------------------------------------------------------------------------------------------------------------------------------
Michael P.O. Box 9011 Vice 2000 to Director (Municipal Tax-Exempt Fund Management) of MLIM since 2006; Vice President
Kalinoski Princeton, NJ President present of MLIM from 1999 to 2006.
08543-9011
Age: 35
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
Hiller Princeton, NJ Compliance present and Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief
08543-9011 Officer Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
Age: 54 Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance
Officer at Prudential Financial from 1995 to 2000; Senior Counsel in the
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
Pellegrino Princeton, NJ present to 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD
08543-9011 and Princeton Services since 2004.
Age: 45
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and
Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agents
Common Stock:
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
800-426-5523
Preferred Stock:
The Bank of New York
101 Barclay Street - 7 West
New York, NY 10286
NYSE Symbol
MEN
MUNIENHANCED FUND, INC. JANUARY 31, 2006 25
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, 2006
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, 2006 27
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
--------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
MuniEnhanced Fund, Inc. seeks to provide shareholders with as high a level of
current income exempt from federal income taxes as is consistent with its
investment policies by investing primarily in a portfolio of long-term,
investment grade municipal obligations, the interest on which is exempt from
federal income taxes in the opinion of the bond counsel to the issuer.
This report, including the financial information herein, is transmitted to
shareholders of MuniEnhanced Fund, Inc. for their information. It is not a
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. The Fund has leveraged its
Common Stock and intends to remain leveraged by issuing Preferred Stock to
provide the Common Stock shareholders with a potentially higher rate of return.
Leverage creates risks for Common Stock shareholders, including the likelihood
of greater volatility of net asset value and market price of shares of the
Common Stock, and the risk that fluctuations in the short-term dividend rates of
the Preferred Stock may affect the yield to Common Stock shareholders.
Statements and other information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-637-3863; (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 -- 1/06
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) Robert S. Salomon, Jr., and (3) Stephen B. Swensrud (retired as of
December 31, 2005).
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending January 31, 2006 - $28,500
Fiscal Year Ending January 31, 2005 - $28,000
(b) Audit-Related Fees - Fiscal Year Ending January 31, 2006 - $3,500
Fiscal Year Ending January 31, 2005 - $13,200
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, 2006 - $6,000
Fiscal Year Ending January 31, 2005 - $5,700
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending January 31, 2006 - $0
Fiscal Year Ending January 31, 2005 - $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, 2006 - $5,477,788
Fiscal Year Ending January 31, 2005 - $11,220,181
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,227,000, 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
Kenneth A. Froot (as of June 1, 2005)
Joe Grills
Herbert I. London
Roberta Cooper Ramo
Robert S. Salomon, Jr.
Stephen B. Swensrud (retired as of December 31, 2005)
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 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 - as
of January 31, 2006.
(a)(1) Mr. Michael A. Kalinoski is primarily responsible for the
day-to-day management of the registrant's portfolio ("Portfolio
Manager"). Mr. Kalinoski has been a portfolio manager and Director
of MLIM since 2006. He was Vice President of MLIM since 1999 and
has 12 years of experience investing in Municipal Bonds, including
six years as a portfolio manager on behalf of registered investment
companies. He has been a Vice President and portfolio manager of
the Fund since 2000.
(a)(2) As of January 31, 2006:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
-------------- --------------
Michael A.
Kalinoski 3 0 0 0 0 0
$1,276,272,441 $ 0 $ 0 $ 0 $ 0 $ 0
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for other
clients advised by the Investment. Adviser and its affiliates, including other
client accounts managed by the Fund's portfolio management team. Investment
decisions for the Fund and other clients are made with a view to achieving their
respective investment objectives and after consideration of such factors as
their current holdings, availability of cash for investment and the size of
their investments generally. Frequently, a particular security may be bought or
sold for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, because clients of the Investment
Adviser and its affiliates may have differing investment strategies, a
particular security may be bought for one or more clients when one or more other
clients are selling the security. The investment results for the Fund may differ
from the results achieved by other clients of the Investment Adviser and its
affiliates and results among clients may differ. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Investment Adviser and its affiliates to be equitable to each.
The Investment Adviser will not determine allocations based on whether it
receives a performance based fee from the client. In some cases, the allocation
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Investment Adviser and its
affiliates in the interest of achieving the most favorable net results to the
Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a portfolio
manager will need to divide his time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise where
(i) the Investment Adviser may have an incentive, such as a performance based
fee, in managing one account and not with respect to other accounts it manages
or (ii) where a member of the Fund's portfolio management team owns an interest
in one fund or account he or she manages and not another.
(a)(3) As of January 31, 2006:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its affiliates,
including the Investment Adviser, is critical to MLIM's ability to attract and
retain the most talented asset management professionals. This program ensures
that compensation is aligned with maximizing investment returns and it provides
a competitive pay opportunity for competitive performance.
Compensation Program
The elements of total compensation for MLIM and its affiliates portfolio
managers are a fixed base salary, annual performance-based cash and stock
compensation (cash and stock bonus) and other benefits. MLIM has balanced these
components of pay to provide portfolio managers with a powerful incentive to
achieve consistently superior investment performance. By design, portfolio
manager compensation levels fluctuate -- both up and down -- with the relative
investment performance of the portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms, base
salaries represent a relatively small portion of a portfolio manager's total
compensation. This approach serves to enhance the motivational value of the
performance-based (and therefore variable) compensation elements of the
compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent. To
that end, MLIM and its affiliates portfolio manager incentive compensation is
based on a formulaic compensation program. MLIM's formulaic portfolio manager
compensation program includes: investment performance relative to a subset of
general closed-end, insured, leveraged, municipal debt funds over 1-, 3- and
5-year performance periods and a measure of operational efficiency. Portfolio
managers are compensated based on the pre-tax performance of the products they
manage. If a portfolio manager's tenure is less than 5 years, performance
periods will reflect time in position. Portfolio managers are compensated based
on products they manage. A discretionary element of portfolio manager
compensation may include consideration of: financial results, expense control,
profit margins, strategic planning and implementation, quality of client
service, market share, corporate reputation, capital allocation, compliance and
risk control, leadership, workforce diversity, supervision, technology and
innovation. MLIM and its affiliates also consider the extent to which
individuals exemplify and foster ML & Co.'s principles of client focus, respect
for the individual, teamwork, responsible citizenship and integrity. All factors
are considered collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in a
combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based bonus
is paid in restricted shares of ML & Co. stock. Paying a portion of annual
bonuses in stock puts compensation earned by a portfolio manager for a given
year "at risk" based on the company's ability to sustain and improve its
performance over future periods. The ultimate value of stock bonuses is
dependent on future ML & Co. stock price performance. As such, the stock bonus
aligns each portfolio manager's financial interests with those of the ML & Co.
shareholders and encourages a balance between short-term goals and long-term
strategic objectives. Management strongly believes that providing a significant
portion of competitive performance-based compensation in stock is in the best
interests of investors and shareholders. This approach ensures that portfolio
managers participate as shareholders in both the "downside risk" and "upside
opportunity" of the company's performance. Portfolio managers therefore have a
direct incentive to protect ML & Co.'s reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and financial
management objectives during a performance year are eligible to participate in a
deferred cash program. Awards under this program are in the form of deferred
cash that may be benchmarked to a menu of MLIM mutual funds (including their own
fund) during a five-year vesting period. The deferred cash program aligns the
interests of participating portfolio managers with the investment results of
MLIM products and promotes continuity of successful portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based plans
offered generally to employees of ML & Co. and its affiliates, including
broad-based retirement, 401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of January 31, 2006, Mr.
Kalinoski does not beneficially own any stock issued by the Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - 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 20, 2006
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 20, 2006
By: /s/ Donald C. Burke
------------------------------------
Donald C. Burke,
Chief Financial Officer of
MuniEnhanced Fund, Inc.
Date: March 20, 2006