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 811-5739
Name of Fund: MuniEnhanced Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, 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: 01/31/04
Date of reporting period: 02/01/03 - 01/31/04
Item 1 - Report to Shareholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
MuniEnhanced
Fund, Inc.
Annual Report
January 31, 2004
[LOGO] Merrill Lynch Investment Managers
MuniEnhanced Fund, Inc.
The Benefits and Risks of Leveraging
MuniEnhanced Fund, Inc. utilizes leveraging to seek to enhance the yield and net
asset value of its Common Stock. However, these objectives cannot be achieved in
all interest rate environments. To leverage, the Fund issues Preferred Stock,
which pays dividends at prevailing short-term interest rates, and invests the
proceeds in long-term municipal bonds. The interest earned on these investments,
net of dividends to Preferred Stock, is paid to Common Stock shareholders in the
form of dividends, and the value of these portfolio holdings is reflected in the
per share net asset value of the Fund's Common Stock. However, in order to
benefit Common Stock shareholders, the yield curve must be positively sloped;
that is, short-term interest rates must be lower than long-term interest rates.
At the same time, a period of generally declining interest rates will benefit
Common Stock shareholders. If either of these conditions change, then the risks
of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock capitalization of
$100 million and the issuance of Preferred Stock for an additional $50 million,
creating a total value of $150 million available for investment in long-term
municipal bonds. If prevailing short-term interest rates are approximately 3%
and long-term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million of Preferred
Stock based on the lower short-term interest rates. At the same time, the fund's
total portfolio of $150 million earns the income based on long-term interest
rates. Of course, increases in short-term interest rates would reduce (and even
eliminate) the dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term investments,
and therefore the Common Stock shareholders are the beneficiaries of the
incremental yield. However, if short-term interest rates rise, narrowing the
differential between short-term and long-term interest rates, the incremental
yield pickup on the Common Stock will be reduced or eliminated completely. At
the same time, the market value on the fund's Common Stock (that is, its price
as listed on the New York Stock Exchange), may, as a result, decline.
Furthermore, if long-term interest rates rise, the Common Stock's net asset
value will reflect the full decline in the price of the portfolio's investments,
since the value of the fund's Preferred Stock does not fluctuate. In addition to
the decline in net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses on invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities. As of January 31, 2004, the percentage of the Fund's
net assets invested in inverse floaters was 11.47%, before the deduction of
Preferred Stock.
Swap Agreements
The Fund may also invest in swap agreements, which are over-the-counter
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified bond, basket of bonds, or index in return
for periodic payments based on a fixed or variable interest rate or the change
in market value of a different bond, basket of bonds or index. Swap agreements
may be used to obtain exposure to a bond or market without owning or taking
physical custody of securities.
2 MUNIENHANCED FUND, INC. JANUARY 31, 2004
A Letter From the President
Dear Shareholder
In my 35 years in the asset management business, 2003 was among the more
memorable. The year, which opened with geopolitical turmoil, unrelenting
economic uncertainty and a dismal continuation of a three-year equity market
slump, vigorously reversed course in the months that followed.
As we entered 2004, the equity markets maintained their positive momentum from
year-end 2003. For the six-month and 12-month periods ended January 31, 2004,
the Standard & Poor's (S&P) 500 Index returned +15.23% and +34.57%,
respectively. In the fixed income markets, investors willing to accept the
greatest risk were rewarded the most. This trend held true in the municipal bond
market as well, where high yield issues generally outperformed investment grade
bonds. For the six-month and 12-month periods ended January 31, 2004, the Lehman
Brothers Non-Investment Grade Index of municipal bonds posted respective returns
of +9.99% and +15.33%.
The major signposts indicate that we are seeing a shift from economic growth
fueled primarily by fiscal and monetary stimulus to a broader-based,
self-sustaining economic expansion. Gross domestic product growth, which peaked
at an annualized rate of 8.2% in the third quarter of 2003, is estimated at a
more sustainable 4% in the fourth quarter. That level of growth is expected to
repeat itself in the first quarter of 2004. For its part, the Federal Reserve
Board has reiterated its willingness to keep short-term interest rates at
current low levels to ensure the economy's strength.
Accompanying the increase in economic activity was an improvement in corporate
earnings. By the end of January, 298 of the S&P 500 companies had reported their
fourth-quarter results, and 67.4% of those exceeded expectations. In the
meantime, the American consumer, who continued to spend despite the faltering
economy, may get further incentive from another round of Federal tax refunds in
2004.
At Merrill Lynch Investment Managers, we believe the events and efforts of 2003
leave us with a much stronger economy and recent optimism suggests it is time
for investors to consider what can go right in 2004. We encourage you to revisit
your portfolio and your asset allocation strategy to ensure you are well
positioned to take advantage of the opportunities that lie ahead.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
MUNIENHANCED FUND, INC. JANUARY 31, 2004 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
In anticipation of rising interest rates ahead, we ended the year in a
slightly defensive stance so as to protect the Fund's net asset value and the
returns earned for shareholders over the past several months.
Discuss the recent market environment relative to municipal bonds.
The year was characterized by considerable month-to-month interest rate
volatility. By January 31, 2004, yields on long-term U.S. Treasury bonds were
moderately higher than they were a year earlier while long-term tax-exempt bond
yields were slightly lower than one year ago.
Throughout most of the first five months of the fiscal year, long-term bond
yields headed significantly lower while bond prices -- which move opposite of
yields -- rose in response to volatile equity markets, concerns about the war in
Iraq and continued sub-par economic growth. To spur business and consumer
activity, the Federal Reserve Board continued to lower short-term interest
rates. By mid-June, with the target Federal Funds rate at 1%, long-term U.S.
Treasury bond yields had fallen approximately 65 basis points (0.65%) to 4.17%.
The tide turned in July and August, as yields rose in reaction to improving
economic conditions and increasing confidence that the Federal Reserve Board was
through cutting short-term interest rates. By mid-August, U.S. Treasury bond
yields reached 5.45%, their highest level during the reporting period, before
generally moving lower for the remainder of the fiscal year. The decline was
largely influenced by sluggish employment growth and the Federal Reserve Board's
indication that it would remain on hold in the absence of material inflationary
pressures.
At January 31, 2004, long-term U.S. Treasury bond yields stood at 4.96%, 10
basis points higher than a year earlier. In contrast, long-term municipal
revenue bond yields had fallen approximately 20 basis points to 5.02%, as
measured by the Bond Buyer Revenue Bond Index. Yields on long-term tax-exempt
bonds rated Aaa -- the highest rating -- fell approximately 25 basis points to
end the period at 4.60%, according to Municipal Market Data.
The municipal bond market's performance benefited from solid investor demand for
tax-exempt products and a notable improvement in supply/demand dynamics as the
year wore on. In recent months, the pace of new municipal bond issuance has
greatly declined. For the 12 months ended January 31, 2004, municipalities
issued more than $375 billion in new securities, an increase of approximately 5%
compared to last year's issuance. Clearly, municipalities viewed the
historically low interest rates over the past year as an opportunity to finance
existing infrastructure needs and to refinance outstanding, higher-coupon debt.
Over the past six months, however, new issuance fell 11.5% compared to the same
period a year earlier. The decline was even more pronounced in the last three
months, with a decrease of more than 13% versus the same three months last year.
This decline in supply helped strengthen the municipal market's positive
technical position and enhanced recent performance. New-issue supply is expected
to remain manageable in early 2004 and should help support the tax-exempt bond
market's position as an attractive fixed income investment alternative.
How did the Fund perform during the year in light of the existing market
conditions?
For the 12-month period ended January 31, 2004, the Common Stock of MuniEnhanced
Fund, Inc. had net annualized yields of 6.09% and 6.43%, based on a year-end per
share net asset value of $11.83 and a per share market price of $11.22,
respectively, and $.721 per share income dividends. During the same period, the
total investment return on the Fund's Common Stock was +8.46%, based on a change
in per share net asset value from $11.65 to $11.83, and assuming reinvestment of
$.720 per share ordinary income dividends.
For the six-month period ended January 31, 2004, the total investment return on
the Fund's Common Stock was +9.49%, based on a change in per share net asset
value from $11.17 to $11.83, and assuming reinvestment of $.360 per share
ordinary income dividends.
For the six-month period ended January 31, 2004, the Fund's Auction Market
Preferred Stock ("AMPS") had an average yield as follows: Series A, .95%; Series
B, .94%; and Series C, .89%.
The Fund's total return performance, based on net asset value, for the year
modestly lagged that of its comparable Lipper category of Insured Municipal Debt
Funds (Leveraged), which had an average return of +8.68% for the 12-month period
ended January 31, 2004. (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 agree-
4 MUNIENHANCED FUND, INC. JANUARY 31, 2004
ments.) Much of the relative underperformance is attributed to poor results from
the Fund's single-family housing bonds during the first half of the period.
Single-family housing bond prices were negatively affected by the significant
increase in refinancing activity, which dramatically shortened the duration of
these bonds as homeowners paid off their higher-interest mortgages. We reduced
the portfolio's exposure to this sector significantly and, for the six-month
period ended January 31, 2004, the Fund outperformed its Lipper category average
return of +9.22%.
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
included in 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 return based on
changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
Changes during the year generally followed three themes. First, we replaced
bonds that were called during the period, including the single-family housing
bonds mentioned earlier. In making new purchases, we moved further out on the
yield curve to the 25-year range. These maturities were favored because the
municipal yield curve flattened out past this range, meaning there was no
significant yield to be gained by extending further. We also continued to favor
premium-coupon bonds when making new purchases. Second, given their heavy
supply, we took the opportunity to purchase California municipal bonds at
relatively inexpensive levels. Our goal is to achieve generous returns on these
bonds when conditions improve in the state and prices return to their
historically higher levels -- that is, to buy low and sell high as supply
dwindles and demand increases. The third change was a move to a slightly
defensive market position late in the period in recognition of certain robust
economic indicators. While strong payroll growth has yet to materialize, recent
indicators point to continued progress in this area. A defensive stance on
interest rates should help us to protect the portfolio's net asset value when
interest rates rise.
We generally maintained the Fund's fully invested position during the period in
an effort to enhance shareholder income. As short-term interest rates stayed at
historic lows, the cost of holding cash reserves would have been relatively
high. Given the low level of short-term interest rates, the Fund's borrowing
costs also remained at or below 1%. These attractive funding levels, in
combination with a positively sloped yield curve, provided a generous income
benefit to the Common Stock shareholder from the leveraging of Preferred Stock.
While further material declines in short-term interest rates are not expected,
neither is an imminent increase in rates. We believe that the Fund's borrowing
costs should remain at current levels for the foreseeable future. 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, based
on AMPS, was 30.16% of total assets. (For a more complete explanation of the
benefits and risks of leveraging, see page 2 of this report to shareholders.)
How would you characterize the portfolio's position at the close of the period?
At the end of the period, the portfolio remained essentially fully invested in
high-quality municipal bonds. The fully invested position should continue to
provide a material benefit to the Common Stock shareholder as short-term
interest rates stay near historic lows. Additionally, the Fund remained
overweight in premium-coupon bonds, favoring maturities in the 25-year range.
The Fund is positioned in a slightly defensive manner, which we believe prepares
it for favorable investment results in a stable-to-rising interest rate
environment.
Michael Kalinoski
Vice President and Portfolio Manager
February 26, 2004
MUNIENHANCED FUND, INC. JANUARY 31, 2004 5
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (in Thousands)
S&P Moody's Face
State Ratings+ Ratings+ Amount Municipal Bonds Value
===================================================================================================================================
Alabama--1.0% AAA NR* $ 3,000 Birmingham, Alabama, Capital Improvement Warrants, GO, Series A, 5.55%
due 8/01/2021 (f) $ 3,313
===================================================================================================================================
California--20.3% AAA Aaa 5,000 Anaheim, California, Public Financing Authority, Lease Revenue Bonds
(Public Improvements Project), Senior--Series A, 6% due 9/01/2024 (d) 5,949
AAA Aaa 1,800 California State Department of Water Resources, Power Supply Revenue
Bonds, Series A, 5.375% due 5/01/2022 (f) 1,939
California State, GO, Refunding:
AAA Aaa 1,500 5.25% due 2/01/2022 (l) 1,608
AAA Aaa 6,000 5.25% due 2/01/2030 (f) 6,251
AA NR* 4,400 5.25% due 2/01/2033 (k) 4,498
BBB Baa1 8,490 California State, Various Purpose, GO, 5.50% due 11/01/2033 8,761
Golden State Tobacco Securitization Corporation of California, Tobacco
Settlement Revenue Bonds:
BBB Baa2 2,400 Series 2003-A-1, 6.75% due 6/01/2039 2,352
BBB- Baa2 3,150 Series B, 5.60% due 6/01/2028 3,170
AAA NR* 2,200 Series B, 5.50% due 6/01/2033 (c) 2,327
AAA Aaa 1,400 Series B, 5.625% due 6/01/2033 (c) 1,494
AAA Aaa 15,500 Series B, 5% due 6/01/2038 (a) 15,713
AAA Aaa 6,800 Series B, 5.625% due 6/01/2038 (l) 7,228
BBB- Baa2 1,260 Series B, 5.50% due 6/01/2043 1,246
AA NR* 2,000 Series B, 5.50% due 6/01/2043 (k) 2,083
AAA Aaa 1,595 San Diego, California, Unified School District, Election 1998, GO,
Series D, 5.25% due 7/01/2024 (b) 1,701
AAA Aaa 4,210 San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, AMT, Second Series, Issue 6,
6.60% due 5/01/2024 (a) 4,346
===================================================================================================================================
Colorado--14.0% Boulder County, Colorado, Hospital Development Revenue Bonds
(Longmont United Hospital Project) (k):
AA NR* 2,705 5.60% due 12/01/2015 2,986
AA NR* 2,135 5.75% due 12/01/2020 2,331
AAA NR* 2,130 Boulder County, Colorado, Sales and Use Tax, Open Space Revenue Bonds,
Series A, 6% due 12/15/2019 (b) 2,490
AAA Aaa 500 Broomfield, Colorado, COP, Refunding, 5.75% due 12/01/2024 (a) 556
Colorado HFA, Revenue Bonds, AMT:
NR* Aa2 3,820 DRIVERS, Series 251, 12.301% due 4/01/2030 (h) 4,164
NR* Aa2 470 (S/F Program), Senior Series A-1, 7.40% due 11/01/2027 475
NR* Aa2 1,880 Colorado HFA, Revenue Refunding Bonds (S/F Program), AMT, Senior
Series A-2, 7.50% due 4/01/2031 1,938
AA Aa2 1,200 Colorado Health Facilities Authority Revenue Bonds (Catholic Health
Initiatives), Series A, 5.50% due 3/01/2032 1,248
Colorado Health Facilities Authority Revenue Bonds (Covenant
Retirement Communities Inc.), Series A (k):
AA NR* 1,200 5.50% due 12/01/2027 1,263
AA NR* 675 5.50% due 12/01/2033 708
AAA Aaa 4,280 Colorado Water Resource Power Development Authority, Clean Water
Revenue Bonds, Series A, 6.25% due 9/01/2016 5,095
AAA Aaa 5,500 Denver, Colorado, City and County Airport Revenue Bonds, AMT,
Series D, 7.75% due 11/15/2013 (f) 6,942
AAA Aaa 2,000 Denver, Colorado, City and County Airport Revenue Refunding Bonds,
AMT, Series A, 6% due 11/15/2018 (a) 2,254
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
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
6 MUNIENHANCED FUND, INC. JANUARY 31, 2004
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings+ Ratings+ Amount Municipal Bonds Value
===================================================================================================================================
Colorado AAA Aaa $ 5,450 El Paso County, Colorado, School District Number 49, Falcon, GO,
(concluded) Series A, 6% due 12/01/2018 (d) $ 6,392
AAA Aaa 10,745 Northwest Parkway, Colorado, Public Highway Authority, Capital
Appreciation Revenue Bonds, Senior Convertible, Series C, 5.392%**
due 6/15/2025 (d) 7,863
AAA Aaa 1,900 Northwest Parkway, Colorado, Public Highway Authority Revenue Bonds,
Series A, 5.50% due 6/15/2021 (a) 2,081
===================================================================================================================================
Connecticut--1.0% AAA Aaa 3,500 Connecticut State Special Tax Obligation Revenue Bonds, 6.25% due
10/01/2004 (b)(g) 3,657
===================================================================================================================================
Florida--1.7% NR* Aaa 2,500 Escambia County, Florida, Health Facilities Authority, Health Facility
Revenue Bonds (Florida Health Care Facility Loan), 5.95% due
7/01/2020 (a) 2,638
A A3 3,000 Highlands County, Florida, Health Facilities Authority, Hospital
Revenue Bonds (Adventist Health System), Series D, 5.875% due
11/15/2029 3,168
===================================================================================================================================
Georgia--4.4% Georgia Municipal Electric Authority, Power Revenue Refunding Bonds:
AAA Aaa 7,725 Series EE, 7% due 1/01/2025 (a) 10,261
AAA Aaa 940 Series W, 6.60% due 1/01/2018 (f) 1,183
AAA Aaa 60 Series W, 6.60% due 1/01/2018 (f)(i) 75
AAA Aaa 3,500 Metropolitan Atlanta, Georgia, Rapid Transit Authority, Sales Tax
Revenue Bonds, Second Indenture, Series A, 6.90% due 7/01/2004 (f)(g) 3,656
===================================================================================================================================
Illinois--18.5% NR* Aaa 5,125 Chicago, Illinois, Board of Education, GO, RIB, Series 467, 10.27%
due 12/01/2027 (a)(h) 6,264
AAA Aaa 3,750 Chicago, Illinois, Gas Supply Revenue Refunding Bonds (People's Gas
Light & Coke), Series A, 6.10% due 6/01/2025 (a) 4,035
Chicago, Illinois, O'Hare International Airport Revenue Bonds,
3rd Lien, AMT, Series B-2:
AAA Aaa 5,670 5.75% due 1/01/2023 (d) 6,203
AAA Aaa 2,500 6% due 1/01/2029 (c) 2,772
AAA NR* 4,550 Chicago, Illinois, O'Hare International Airport Revenue Refunding
Bonds, DRIVERS, AMT, Series 250, 10.195% due 1/01/2021 (f)(h) 5,300
AAA Aaa 3,000 Cook County, Illinois, Capital Improvement, GO, Series C, 5.50% due
11/15/2026 (a) 3,247
AAA Aaa 2,240 Cook County, Illinois, Community College District No. 508, Chicago,
COP, Refunding, 8.75% due 1/01/2007 (b) 2,660
AAA Aaa 3,000 Illinois Health Facilities Authority, Revenue Refunding Bonds
(Servantcor Project), Series A, 6.375% due 8/15/2006 (d)(g) 3,350
AAA Aaa 17,870 Illinois Sports Facilities Authority Revenue Bonds, 5.427%** due
6/15/2030 (a) 13,475
AAA Aaa 3,000 Metropolitan Pier and Exposition Authority, Illinois, Dedicated State
Tax Revenue Refunding Bonds (McCormick Place Expansion), Series B,
5.75% due 6/15/2023 (f) 3,360
AAA Aaa 10,115 Regional Transportation Authority, Illinois, Revenue Bonds, Series A,
7.20% due 11/01/2020 (a) 13,451
===================================================================================================================================
Indiana--2.1% AAA Aaa 2,500 Brownsburg, Indiana, School Building Corporation, First Mortgage
Revenue Bonds (Brownsburg Community School), 5.55% due 2/01/2024 (f) 2,706
AAA Aaa 4,080 Hammond, Indiana, Multi-School Building Corporation, First Mortgage
Revenue Refunding Bonds, 6.125% due 7/15/2019 (f) 4,643
===================================================================================================================================
Kansas--2.2% Sedgwick and Shawnee Counties, Kansas, S/F Revenue Bonds
(Mortgage-Backed Securities Program), AMT (e):
NR* Aaa 1,370 Series A-1, 6.875% due 12/01/2026 1,447
AAA Aaa 2,285 Series A-1, 6.875% due 12/01/2026 (f) 2,414
NR* Aaa 1,005 Series A-2, 7.60% due 12/01/2031 1,087
AAA Aaa 2,500 Wamego, Kansas, PCR, Refunding (Kansas Gas and Electric Company
Project), 7% due 6/01/2031 (f) 2,625
===================================================================================================================================
Louisiana--4.1% AAA Aaa 6,000 Louisiana Local Government, Environmental Facilities, Community
Development Authority Revenue Bonds (Capital Projects and Equipment
Acquisition), Series A, 6.30% due 7/01/2030 (a) 7,304
AAA Aaa 5,150 New Orleans, Louisiana, Ernest N. Morial Exhibit Hall Authority,
Special Tax, Sub-Series A, 5.25% due 7/15/2028 (a) 5,431
AAA Aaa 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) 1,501
===================================================================================================================================
Massachusetts--2.8% Massachusetts State Port Authority, Special Facilities Revenue Bonds
(Delta Air Lines Inc. Project), AMT, Series A (a):
AAA Aaa 3,100 5.50% due 1/01/2016 3,328
AAA Aaa 4,000 5.50% due 1/01/2018 4,264
AAA Aaa 1,970 5.50% due 1/01/2019 2,091
MUNIENHANCED FUND, INC. JANUARY 31, 2004 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings+ Ratings+ Amount Municipal Bonds Value
===================================================================================================================================
Michigan--3.5% AAA NR* $ 2,200 Michigan Higher Education Student Loan Authority, Student Loan
Revenue Refunding Bonds, AMT, Series XVII-G, 5.20% due 9/01/2020 (a) $ 2,273
Michigan State Strategic Fund, Limited Obligation Revenue Refunding
Bonds (Detroit Edison Company Project) (c):
AAA Aaa 1,150 5.45% due 9/01/2029 1,219
AAA Aaa 1,300 AMT, Series A, 5.50% due 6/01/2030 1,375
AAA Aaa 2,500 AMT, Series C, 5.65% due 9/01/2029 2,648
AAA Aaa 4,300 AMT, Series C, 5.45% due 12/15/2032 4,501
===================================================================================================================================
Minnesota--2.0% AAA NR* 5,840 Minneapolis and St. Paul, Minnesota, Metropolitan Airports Commission,
Airport Revenue Bonds, DRIVERS, AMT, Series 203, 10.197% due
1/01/2012 (b)(h) 7,096
===================================================================================================================================
Mississippi--0.8% AAA Aaa 2,400 Walnut Grove, Mississippi, Correctional Authority, COP, 6% due
11/01/2019 (a) 2,797
===================================================================================================================================
Missouri--0.9% AAA Aaa 3,000 Kansas City, Missouri, Airport Revenue Bonds, General Improvement,
Series B, 6.875% due 9/01/2004 (d)(g) 3,132
===================================================================================================================================
Nebraska--0.5% A+ A1 1,700 Washington County, Nebraska, Wastewater Facilities Revenue Bonds
(Cargill Inc. Project), AMT, 5.90% due 11/01/2027 1,785
===================================================================================================================================
Nevada--6.2% AA NR* 3,100 Carson City, Nevada, Hospital Revenue Bonds (Carson-Tahoe Hospital
Project), Series A, 5.50% due 9/01/2033 (k) 3,250
Director of the State of Nevada, Department of Business and Industry
Revenue Bonds (Las Vegas Monorail Company Project), First Tier (a):
AAA Aaa 750 5.625% due 1/01/2032 823
AAA Aaa 3,280 5.375% due 1/01/2040 3,478
AAA Aaa 10,450 Washoe County, Nevada, Gas and Water Facilities Revenue Refunding
Bonds (Sierra Pacific Power Company), 6.30% due 12/01/2014 (a) 10,736
AAA Aaa 3,000 Washoe County, Nevada, Water Facility Revenue Bonds (Sierra Pacific
Power Company), AMT, 6.65% due 6/01/2017 (f) 3,150
===================================================================================================================================
New Hampshire--2.3% AAA Aaa 7,390 New Hampshire Health and Education Facilities Authority Revenue Bonds
(Dartmouth-Hitchcock Obligation Group, 5.50% due 8/01/2027 (d) 7,995
===================================================================================================================================
New Jersey--1.2% BBB Baa2 4,250 Tobacco Settlement Financing Corporation of New Jersey Revenue Bonds,
6.75% due 6/01/2039 4,165
===================================================================================================================================
New York--10.3% AAA Aaa 550 Erie County, New York, IDA, School Facility Revenue Bonds (City of
Buffalo Project), 5.75% due 5/01/2023 (d) 614
New York City, New York, GO, DRIVERS (h):
AAA A2 1,500 Series 194, 10.268% due 2/01/2015 (d) 1,762
AAA NR* 6,960 Series 356, 9.748% due 6/01/2011 (c) 8,401
New York City, New York, GO, Refunding:
AAA Aaa 4,000 Series A, 6.375% due 5/15/2013 (b) 4,772
AAA Aaa 3,995 Series A, 6.375% due 5/15/2014 (b) 4,770
A Aaa 3,190 Series A, 6.375% due 5/15/2015 (b) 3,828
AAA Aaa 2,000 Series L, 5.75% due 8/01/2013 (c) 2,238
AAA Aaa 3,290 New York City, New York, GO, Series E, 5.75% due 5/15/2018 (c) 3,712
AAA Aaa 5,400 Tobacco Settlement Financing Corporation of New York, Revenue Bonds,
Series A-1, 5.25% due 6/01/2022 (a) 5,752
===================================================================================================================================
North Carolina--1.7% AAA Aaa 5,000 North Carolina, Eastern Municipal Power Agency, Power System Revenue
Refunding Bonds, Series B 6.125% due 1/01/2009 (f) 5,799
===================================================================================================================================
Ohio--0.8% AAA Aaa 2,500 North Canton, Ohio, City School District GO, 6.70% due
12/01/2004 (a)(g) 2,667
===================================================================================================================================
Pennsylvania--4.5% AAA Aaa 600 Allegheny County, Pennsylvania, Sanitation Authority, Sewer Revenue
Bonds, 5.50% due 12/01/2030 (f) 648
AAA Aaa 6,500 Philadelphia, Pennsylvania, Authority for Industrial Development,
Lease Revenue Bonds, Series B, 5.50% due 10/01/2020 (d) 7,132
AAA Aaa 4,500 Philadelphia, Pennsylvania, School District, GO, Series B, 5.625% due
8/01/2020 (b) 5,040
AAA Aaa 2,250 Washington County, Pennsylvania, Capital Funding Authority Revenue
Bonds (Capital Projects and Equipment Program), 6.15% due
12/01/2029 (a) 2,692
8 MUNIENHANCED FUND, INC. JANUARY 31, 2004
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings+ Ratings+ Amount Municipal Bonds Value
===================================================================================================================================
Rhode Island--2.6% AAA Aaa $ 4,345 Providence, Rhode Island, Public Building Authority, General Revenue
Bonds, Series A, 6.25% due 12/15/2020 (d) $ 5,163
AAA Aaa 3,355 Rhode Island State Economic Development Corporation, Airport Revenue
Bonds, Series B, 6.50% due 7/01/2015 (b) 4,029
===================================================================================================================================
South Carolina--1.6% AA NR* 2,590 South Carolina Educational Facilities Authority for Private Nonprofit
Institutions Revenue Bonds (The Benedict College), 5.625% due
7/01/2031 (k) 2,787
NR* Aaa 1,000 South Carolina Housing Finance and Development Authority, Mortgage
Revenue Refunding Bonds, AMT, Series A-2, 5.875% due 7/01/2009 (d) 1,070
BBB Baa2 2,000 Tobacco Settlement Revenue Management Authority of South Carolina,
Tobacco Settlement Revenue Bonds, Series B, 6.375% due 5/15/2030 1,885
===================================================================================================================================
South Dakota--2.4% AAA NR* 7,000 South Dakota State Health and Educational Facilities Authority Revenue
Refunding Bonds, Series A, 7.625% due 7/01/2014 (f) 8,320
===================================================================================================================================
Tennessee--0.7% AAA Aaa 2,280 Tennessee HDA, Revenue Refunding Bonds (Homeownership Program), AMT,
Series 1, 5.95% due 7/01/2012 (f) 2,434
===================================================================================================================================
Texas--8.1% AAA Aaa 1,615 Bexar, Texas, Metropolitan Water District, Waterworks System Revenue
Refunding Bonds, 6.35% due 5/01/2025 (f) 1,738
Dallas-Fort Worth, Texas, International Airport Revenue Bonds,
DRIVERS, AMT (h):
AAA NR* 2,000 Series 202, 10.697% due 11/01/2028 (b) 2,430
AAA NR* 7,250 Series 353, 9.681% due 5/01/2011 (f) 8,113
AAA Aaa 900 Houston, Texas, Airport System Revenue Refunding Bonds, Sub-Lien,
Series B, 5.50% due 7/01/2030 (d) 971
AA Baa2 3,200 Sam Rayburn, Texas, Municipal Power Agency Revenue Refunding Bonds,
5.75% due 10/01/2021 (k) 3,487
San Antonio, Texas, Airport System, Improvement Revenue Bonds
(Passenger Facility), AMT, Sub Lien (b):
AAA Aaa 1,465 5.75% due 7/01/2016 1,625
AAA Aaa 1,550 5.75% due 7/01/2017 1,710
AAA Aaa 5,200 Travis County, Texas, Health Facilities Development Corporation,
Revenue Refunding Bonds, RITR, Series 4, 10.393% due 11/15/2024 (a)(h) 7,094
AAA Aaa 1,000 University of Houston, Texas, University Revenue Bonds, 5.50% due
2/15/2030 (f) 1,078
===================================================================================================================================
Virginia--4.0% AAA Aaa 10,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue Refunding
Bonds, AMT, Series A, 6.10% due 2/01/2010 (a) 11,532
AAA Aaa 2,300 Halifax County, Virginia, IDA, Exempt Facility Revenue Refunding Bonds
(Old Dominion Electric Cooperative Project), AMT, 5.625% due
6/01/2028 (a) 2,491
===================================================================================================================================
Washington--8.6% AAA NR* 5,000 Energy Northwest, Washington, Electric Revenue Bonds, DRIVERS,
Series 242, 10.237% due 7/01/2017 (f)(h) 6,433
AAA Aaa 2,150 King County, Washington, Sewer Revenue Refunding Bonds, Series B,
5.50% due 1/01/2027 (d) 2,311
NR* Aaa 4,500 Snohomish County, Washington, Arlington School District Number 016,
GO, 6.50% due 12/01/2015 (b) 5,448
AAA Aaa 2,000 Snohomish County, Washington, Public Utility District Number 001,
Electric Revenue Refunding Bonds, 5.375% due 12/01/2024 (d) 2,134
A NR* 1,750 Vancouver, Washington, Downtown Redevelopment Authority Revenue Bonds
(Conference Center Project), Senior Series A, 6% due 1/01/2034 1,859
Washington State, GO:
AAA Aaa 3,000 Series 2000 A, 5.625% due 7/01/2021 (d) 3,312
AAA Aaa 7,000 Series A and AT-6, 6.25% due 2/01/2011 (f) 8,379
MUNIENHANCED FUND, INC. JANUARY 31, 2004 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded) (in Thousands)
S&P Moody's Face
State Ratings+ Ratings+ Amount Municipal Bonds Value
===================================================================================================================================
Wisconsin--1.3% BBB Baa2 $ 1,900 Badger, Wisconsin, Tobacco Asset Securitization Corporation,
Asset-Backed Revenue Bonds, 6.375% due 6/01/2032 $ 1,788
AA- Aa3 2,500 Madison, Wisconsin IDR (Madison Gas & Electric Co.), Refunding, AMT,
Series A, 5.875% due 10/01/2034 2,634
=============================================================================================================
Total Municipal Bonds (Cost--$438,687)--136.1% 472,866
===================================================================================================================================
Shares
Held Short-Term Securities
=============================================================================================================
6,901 Merrill Lynch Institutional Tax-Exempt Fund (j) 6,901
=============================================================================================================
Total Short-Term Securities (Cost--$6,901)--2.0% 6,901
===================================================================================================================================
Total Investments (Cost--$445,588)--138.1% 479,767
Unrealized Depreciation on Forward Interest Rate Swaps***--(0.2%) (598)
Other Assets Less Liabilities--5.3% 18,301
Preferred Stock, at Redemption Value--(43.2%) (150,081)
---------
Net Assets Applicable to Common Stock--100.0% $ 347,389
=========
(a) AMBAC Insured.
(b) FGIC Insured.
(c) XL Capital Insured.
(d) FSA Insured.
(e) GNMA Collateralized.
(f) MBIA Insured.
(g) Prerefunded.
(h) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at January 31, 2004.
(i) Escrowed to maturity.
(j) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) are as follows:
(in Thousands)
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Institutional
Tax-Exempt Fund (1,000) $54
--------------------------------------------------------------------------
(k) Radian Insured.
(l) CIFG Insured.
+ Ratings of issues shown are unaudited.
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
*** Forward interest rate swaps entered into as of January 31, 2004 were as
follows:
(in Thousands)
--------------------------------------------------------------------------
Unrealized
Notional Appreciation
Amount (Depreciation)
--------------------------------------------------------------------------
Receive a variable rate equal to 7-Day
Bond Market Association Municipal Swap
Index Rate and pay a fixed rate equal
to 4.356%
Broker, J.P. Morgan Chase Bank
Expires March 2024 $30,000 $(801)
Receive a variable rate equal to 7-Day
Bond Market Association Municipal Swap
Index Rate and pay a fixed rate equal
to 4.115%
Broker, Morgan Stanley Capital
Services, Inc.
Expires March 2024 $20,000 203
--------------------------------------------------------------------------
Total $(598)
=====
See Notes to Financial Statements.
10 MUNIENHANCED FUND, INC. JANUARY 31, 2004
Statement of Net Assets
As of January 31, 2004
=======================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------
Investments, at value (identified cost--$445,588,135) ....... $ 479,766,976
Cash ........................................................ 39,223
Unrealized appreciation on forward interest rate swaps ...... 203,220
Receivables:
Securities sold .......................................... $ 12,115,000
Interest ................................................. 6,616,651
Dividends from affiliates ................................ 153 18,731,804
-------------
Prepaid expenses ............................................ 4,692
-------------
Total assets ................................................ 498,745,915
-------------
=======================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------
Unrealized depreciation on forward interest rate swaps ...... 801,060
Payables:
Investment adviser ....................................... 238,699
Dividends to Common Stock shareholders ................... 191,690
Other affiliates ......................................... 3,480 433,869
-------------
Accrued expenses ............................................ 40,647
-------------
Total liabilities ........................................... 1,275,576
-------------
=======================================================================================================================
Preferred Stock
-----------------------------------------------------------------------------------------------------------------------
Preferred Stock, at redemption value, par value $.025 per
share (2,000 Series A Shares, 2,000 Series B Shares and
2,000 Series C Shares of AMPS* issued and outstanding at
$25,000 per share liquidation preference) .................. 150,081,120
-------------
=======================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock ....................... $ 347,389,219
=============
=======================================================================================================================
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 ............................ 323,104,599
Undistributed investment income--net ........................ $ 5,642,152
Accumulated realized capital losses on investments--net ..... (17,875,520)
Unrealized appreciation on investments--net ................. 33,581,001
-------------
Total accumulated earnings--net ............................. 21,347,633
-------------
Total--Equivalent to $11.83 net asset value per share of
Common Stock (market price--$11.22) ........................ $ 347,389,219
=============
* Auction Market Preferred Stock .........................
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JANUARY 31, 2004 11
[LOGO] Merrill Lynch Investment Managers
Statement of Operations
For the Year Ended January 31, 2004
=======================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------
Interest .................................................... $ 27,110,002
Dividends from affiliates ................................... 54,028
-------------
Total income ................................................ 27,164,030
-------------
=======================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------
Investment advisory fees .................................... $ 2,464,723
Commission fees ............................................. 379,580
Accounting services ......................................... 163,562
Transfer agent fees ......................................... 100,716
Professional fees ........................................... 54,076
Printing and shareholder reports ............................ 38,227
Custodian fees .............................................. 29,073
Listing fees ................................................ 28,965
Directors' fees and expenses ................................ 21,772
Pricing fees ................................................ 19,521
Other ....................................................... 40,872
-------------
Total expenses before reimbursement ......................... 3,341,087
Reimbursement of expenses ................................... (12,279)
-------------
Total expenses after reimbursement .......................... 3,328,808
-------------
Investment income--net ...................................... 23,835,222
-------------
=======================================================================================================================
Realized & Unrealized Gain on Investments--Net
-----------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ........................... 3,552,827
Change in unrealized appreciation on investments--net ....... 762,392
-------------
Total realized and unrealized gain on investments--net ...... 4,315,219
-------------
=======================================================================================================================
Dividends to Preferred Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------
Investment income--net ...................................... (1,628,600)
-------------
Net Increase in Net Assets Resulting from Operations ........ $ 26,521,841
=============
See Notes to Financial Statements.
12 MUNIENHANCED FUND, INC. JANUARY 31, 2004
Statements of Changes in Net Assets
For the Year Ended
January 31,
-------------------------------
Increase (Decrease) in Net Assets: 2004 2003
=======================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------
Investment income--net ...................................... $ 23,835,222 $ 24,422,005
Realized gain (loss) on investments--net .................... 3,552,827 (2,307,740)
Change in unrealized appreciation on investments--net ....... 762,392 7,101,055
Dividends to Preferred Stock shareholders ................... (1,628,600) (2,373,840)
-------------------------------
Net increase in net assets resulting from operations ........ 26,521,841 26,841,480
-------------------------------
=======================================================================================================================
Dividends to Common Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------
Investment income--net ...................................... (21,146,311) (20,441,432)
-------------------------------
Net decrease in net assets resulting from dividends to Common
Stock shareholders ......................................... (21,146,311) (20,441,432)
-------------------------------
=======================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------
Total increase in net assets applicable to Common Stock ..... 5,375,530 6,400,048
Beginning of year ........................................... 342,013,689 335,613,641
-------------------------------
End of year* ................................................ $ 347,389,219 $ 342,013,689
===============================
* Undistributed investment income--net ................... $ 5,642,152 $ 4,581,841
===============================
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JANUARY 31, 2004 13
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended January 31,
-------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001+ 2000+
==============================================================================================================================
Per Share Operating Performance
------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ........................ $ 11.65 $ 11.43 $ 11.38 $ 10.10 $ 12.06
-------------------------------------------------------
Investment income--net*** ................................. .81 .83 .80 .80 .80
Realized and unrealized gain (loss) on investments--net ... .15 .17 .02 1.33 (1.95)
Dividends to Preferred Stock shareholders from investment
income--net .............................................. (.06) (.08) (.13) (.21) (.17)
-------------------------------------------------------
Total from investment operations .......................... .90 .92 .69 1.92 (1.32)
-------------------------------------------------------
Less dividends to Common Stock shareholders from investment
income--net .............................................. (.72) (.70) (.64) (.64) (.64)
-------------------------------------------------------
Net asset value, end of year .............................. $ 11.83 $ 11.65 $ 11.43 $ 11.38 $ 10.10
=======================================================
Market price per share, end of year ....................... $ 11.22 $ 10.62 $ 11.05 $ 10.79 $9.1875
=======================================================
==============================================================================================================================
Total Investment Return*
------------------------------------------------------------------------------------------------------------------------------
Based on market price per share ........................... 12.84% 2.43% 8.61% 25.36% (18.52%)
=======================================================
Based on net asset value per share ........................ 8.46% 8.62% 6.52% 20.27% (10.87%)
=======================================================
==============================================================================================================================
Ratios Based on Average Net Assets of Common Stock
------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement** .................... .97% 1.00% 1.00% 1.01% 1.00%
=======================================================
Total expenses** .......................................... .97% 1.00% 1.00% 1.01% 1.00%
=======================================================
Total investment income--net** ............................ 6.95% 7.17% 7.00% 7.44% 7.16%
=======================================================
Amount of dividends to Preferred Stock shareholders ....... .48% .70% 1.18% 1.95% 1.52%
=======================================================
Investment income--net, to Common Stock shareholders ...... 6.47% 6.47% 5.82% 5.49% 5.64%
=======================================================
==============================================================================================================================
Ratios Based on Average Net Assets of Common & Preferred Stock**
------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement ...................... .68% .70% .69% .69% .69%
=======================================================
Total expenses ............................................ .68% .70% .69% .69% .69%
=======================================================
Total investment income--net .............................. 4.84% 4.97% 4.84% 5.04% 4.91%
=======================================================
==============================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
------------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders ................. 1.09% 1.57% 2.64% 4.10% 3.32%
=======================================================
14 MUNIENHANCED FUND, INC. JANUARY 31, 2004
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. 2004 2003 2002 2001+ 2000+
=================================================================================================================================
Supplemental Data
---------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock, end of year (in thousands) $347,389 $342,014 $335,614 $334,300 $296,644
====================================================
Preferred Stock outstanding, end of year (in thousands) ......... $150,000 $150,000 $150,000 $150,000 $150,000
====================================================
Portfolio turnover .............................................. 50.47% 31.35% 43.12% 70.39% 124.61%
====================================================
=================================================================================================================================
Leverage
---------------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ....................................... $ 3,316 $ 3,280 $ 3,237 $ 3,229 $ 2,978
====================================================
=================================================================================================================================
Dividends Per Share on Preferred Stock Outstanding
---------------------------------------------------------------------------------------------------------------------------------
Series A--Investment income--net ................................ $ 233 $ 350 $ 671 $ 1,017 $ 825
====================================================
Series B--Investment income--net ................................ $ 354 $ 510 $ 680 $ 1,036 $ 835
====================================================
Series C--Investment income--net ................................ $ 227 $ 327 $ 628 $ 1,031 $ 829
====================================================
* 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.
+ Certain prior year amounts have been reclassified to conform to current
year presentation.
See Notes to Financial Statements.
MUNIENHANCED FUND, INC. JANUARY 31, 2004 15
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements
1. Significant Accounting Policies:
MuniEnhanced Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a non-diversified, closed-end management investment
company. The Fund's financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. The Fund determines
and makes available for publication the net asset value of its Common Stock on a
weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange
under the symbol MEN. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained by the
Fund's pricing service from one or more dealers that make markets in the
securities. Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of such exchanges.
Options written or purchased are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-the-counter
market, valuation is the last asked price (options written) or the last bid
price (options purchased). Swap agreements are valued by quoted fair values
received daily by the Fund from the counterparty. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts--The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Options--The Fund may write covered call options and purchase call and put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked to market reflecting
the current market value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the
basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option to
the extent of the premiums received or paid (or gain or loss to the extent
the cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
o Forward interest rate swaps--The Fund may enter into forward interest rate
swaps. In a forward interest rate swap, the Fund and the counterparty
agree to make periodic net payments on a specified notional contract
amount, commencing on a specified future effective date, unless terminated
earlier. When the agreement is closed, the Fund records a realized gain or
loss in an amount equal to the value of the agreement.
16 MUNIENHANCED FUND, INC. JANUARY 31, 2004
Notes to Financial Statements (continued)
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(e) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .50% of the Fund's average weekly net assets, including assets
acquired from the issuance of Preferred Stock. For the year ended January 31,
2004, FAM reimbursed the Fund in the amount of $12,279.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of
FAM, received $2,000 in commissions on the execution of portfolio security
transactions for the Fund for the year ended January 31, 2004.
For the year ended January 31, 2004, the Fund reimbursed FAM $10,454 for certain
accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended January 31, 2004 were $243,242,361 and $255,432,945, respectively.
Net realized gains (losses) for the year ended January 31, 2004 and net
unrealized gains (losses) as of January 31, 2004 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
--------------------------------------------------------------------------------
Long-term investments ................ $ 4,770,879 $ 34,178,841
Financial futures contracts .......... (390,927) --
Forward interest rate swaps .......... (827,125) (597,840)
--------------------------------
Total ................................ $ 3,552,827 $ 33,581,001
================================
As of January 31, 2004, net unrealized appreciation for Federal income tax
purposes aggregated $34,196,630, of which $34,932,610 related to appreciated
securities and $735,980 related to depreciated securities. The aggregate cost of
investments at January 31, 2004 for Federal income tax purposes was
$445,570,346.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of stock, par value $.10 per
share, all of which were initially classified as Common Stock. The Board of
Directors is authorized, however, to reclassify any unissued shares of stock
without the approval of the holders of Common Stock.
Preferred Stock
Auction Market Preferred Stock are shares of Preferred Stock of the Fund, with a
par value of $.025 per share and a liquidation preference of $25,000 per share,
plus accrued and unpaid dividends, that entitle their holders to receive cash
dividends at an annual rate that may vary for the successive dividend period for
each series. The yields in effect at January 31, 2004 were as follows: Series A,
..97%; Series B, .97%; and Series C, .70%.
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, 2004, MLPF&S received $148,355 as
commissions.
MUNIENHANCED FUND, INC. JANUARY 31, 2004 17
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
5. Distributions to Shareholders:
The Fund paid a tax-exempt income dividend to holders of Common Stock in the
amount of $.061000 per share on February 26, 2004 to shareholders of record on
February 13, 2004.
The tax character of distributions paid during the fiscal years ended January
31, 2004 and January 31, 2003 was as follows:
--------------------------------------------------------------------------------
1/31/2004 1/31/2003
--------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income .................... $22,774,911 $22,815,272
-------------------------------
Total distributions .................... $22,774,911 $22,815,272
===============================
As of January 31, 2004, the components of accumulated earnings on a tax basis
were as follows:
-----------------------------------------------------------------------------
Undistributed tax-exempt income--net .................... $ 5,624,362
Undistributed long-term capital gains--net .............. --
------------
Total undistributed earnings--net ....................... 5,624,362
Capital loss carryforward ............................... (15,033,608)*
Unrealized gains--net ................................... 30,756,879**
------------
Total accumulated earnings--net ......................... $ 21,347,633
============
* On January 31, 2004, the Fund had a net capital loss carryforward of
$15,033,608, of which $4,572,805 expires in 2008, $8,505,599 expires in
2009 and $1,955,204 expires in 2011. 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, 2004
Independent Auditors' Report
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, 2004, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of January 31, 2004, by correspondence with the custodian
and broker; where a reply was not received from the broker, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, 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, 2004, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and its financial highlights for each of the five
years in the period then ended, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
March 12, 2004
MUNIENHANCED FUND, INC. JANUARY 31, 2004 19
[LOGO] Merrill Lynch Investment Managers
Automatic Dividend Reinvestment Plan
The following description of the Fund's Automatic Dividend Reinvestment Plan
(the "Plan") is sent to you annually as required by Federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects,
all dividend and capital gains distributions will be automatically reinvested by
EquiServe (the "Plan Agent"), as agent for shareholders in administering the
Plan, in additional shares of Common Stock of the Fund. Holders of Common Stock
who elect not to participate in the Plan will receive all distributions in cash
paid by check mailed directly to the shareholder of record (or, if the shares
are held in street or other nominee name then to such nominee) by EquiServe, as
dividend paying agent. Such participants may elect not to participate in the
Plan and to receive all distributions of dividends and capital gains in cash by
sending written instructions to EquiServe, as dividend paying agent, at the
address set forth below. Participation in the Plan is completely voluntary and
may be terminated or resumed at any time without penalty by written notice if
received by the Plan Agent not less than ten days prior to any dividend record
date; otherwise such termination will be effective with respect to any
subsequently declared dividend or distribution.
Whenever the Fund declares an income dividend or capital gains distribution
(collectively referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized shares of Common Stock from the Fund ("newly issued shares") or (ii)
by purchase of outstanding shares of Common Stock on the open market
("open-market purchases") on the New York Stock Exchange or elsewhere. If on the
payment date for the dividend, the net asset value per share of the Common Stock
is equal to or less than the market price per share of the Common Stock plus
estimated brokerage commissions (such conditions being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares of
Common Stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If on
the dividend payment date the net asset value per share is greater than the
market value (such condition being referred to herein as "market discount"), the
Plan Agent will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. It is contemplated that the Fund
will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisitions of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date determined by dividing the
uninvested portion of the dividend by the net asset value per share.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
20 MUNIENHANCED FUND, INC. JANUARY 31, 2004
In the case of shareholders such as banks, brokers or nominees which hold shares
of others who are the beneficial owners, the Plan Agent will administer the Plan
on the basis of the number of shares certified from time to time by the record
shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus commissions
of the Fund's shares is above the net asset value, participants in the Plan will
receive shares of the Fund at less than they could otherwise purchase them and
will have shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market price plus
commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
The value of shares acquired pursuant to the Plan will generally be excluded
from gross income to the extent that the cash amount reinvested would be
excluded from gross income. If, when the Fund's shares are trading at a premium
over net asset value, the Fund issues shares pursuant to the Plan that have a
greater fair market value than the amount of cash reinvested, it is possible
that all or a portion of such discount (which may not exceed 5% of the fair
market value of the Fund's shares) could be viewed as a taxable distribution. If
the discount is viewed as a taxable distribution, it is also possible that the
taxable character of this discount would be allocable to all the shareholders,
including shareholders who do not participate in the Plan. Thus, shareholders
who do not participate in the Plan might be required to report as ordinary
income a portion of their distributions equal to their allocable share of the
discount.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at
EquiServe, P.O. Box 43010, Providence, RI 02940-3010, Telephone: 800-426-5523.
MUNIENHANCED FUND, INC. JANUARY 31, 2004 21
[LOGO] Merrill Lynch Investment Managers
Officers and Directors (unaudited)
Number of
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held with of Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 1999 to President of the Merrill Lynch Investment Managers, 123 Funds None
Glenn* Princeton, NJ and present L.P. ("MLIM")/Fund Asset Management, L.P. ("FAM") 159 Portfolios
08543-9011 Director and -- Advised Funds since 1999; Chairman (Americas
Age: 63 1989 to Region) of MLIM from 2000 to 2002; Executive Vice
present President of FAM and MLIM (which terms as used
herein include their corporate predecessors) from
1983 to 2002; President of FAM Distributors, Inc.
("FAMD") from 1986 to 2002 and Director thereof
from 1991 to 2002; Executive Vice President and
Director of Princeton Services, Inc. ("Princeton
Services") from 1993 to 2002; President of Princeton
Administrators, L.P. from 1989 to 2002; Director of
Financial Data Services, Inc. since 1985.
------------------------------------------------------------------------------------------------------------------------
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or
MLIM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of
the Fund based on his former positions with FAM, MLIM, FAMD, Princeton Services and Princeton Administrators, L.P. The
Director's term is unlimited. Directors serve until their resignation, removal, or death, or until December 31 of the
year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board of Directors.
====================================================================================================================================
Independent Directors*
------------------------------------------------------------------------------------------------------------------------------------
James H. P.O. Box 9095 Director 1995 to Director of The China Business Group, Inc. since 1996 39 Funds None
Bodurtha Princeton, NJ present and Executive Vice President thereof from 1996 to 56 Portfolios
08543-9095 2003; Chairman of the Board of Berkshire Holding
Age: 59 Corporation since 1980; Partner of Squire, Sanders
& Dempsey from 1980 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Joe Grills P.O. Box 9095 Director 2002 to Member of the Committee of Investment of 39 Funds Kimco Realty
Princeton, NJ present Employee Benefit Assets of the Association of 56 Portfolios Corporation
08543-9095 Financial Professionals ("CIEBA") since 1986 and
Age: 68 its Chairman from 1991 to 1992; Member of the
Investment Advisory Committees of the State of
New York Common Retirement Fund since 1989;
Member of the Investment Advisory Committee of
the Howard Hughes Medical Institute from 1997
to 2000; Director of Duke Management Company
since 1992 and Vice Chairman thereof since 1998;
Director of LaSalle Street Fund from 1995 to 2001;
Director of Kimco Realty Corporation since 1997;
Member of the Investment Advisory Committee of
the Virginia Retirement System since 1998 and Vice
Chairman thereof since 2002; Director of Montpelier
Foundation since 1998 and Vice Chairman thereof
since 2000; Member of the Investment Committee of
the Woodberry Forest School since 2000; Member of
the Investment Committee of the National Trust
for Historic Preservation since 2000.
------------------------------------------------------------------------------------------------------------------------------------
22 MUNIENHANCED FUND, INC. JANUARY 31, 2004
Officers and Directors (unaudited) (continued)
Number of
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held with of Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors* (concluded)
------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9095 Director 1989 to John M. Olin Professor of Humanities, New York 39 Funds None
London Princeton, NJ present University since 1993 and Professor thereof since 56 Portfolios
08543-9095 1980; President of Hudson Institute since 1997 and
Age: 64 Trustee thereof since 1980; Director of Level
Playing Field from 2000 to 2003.
------------------------------------------------------------------------------------------------------------------------------------
Andre F. P.O. Box 9095 Director 1989 to Harvard Business School, George Gund Professor 39 Funds None
Perold Princeton, NJ present of Finance and Banking, since 2000; Senior Associate 56 Portfolios
08543-9095 Dean and Director of Faculty Recruiting since 2001
Age: 51 and Finance Area Chair from 1996 to 2001; Sylvan C.
Coleman Professor of Financial Management from
1993 to 2000; Director of Genbel Securities Limited
and Gensec Bank from 1999 to 2003; Director of
Stockback.com from 2000 to 2002; Director of Sanlam
Limited from 2001 to 2003; Trustee of Commonfund
from 1989 to 2001; Director of Sanlam Investment
Management from 1999 to 2001; Director of
Bulldogresearch.com from 2000 to 2001; Director of
Quantec Limited from 1991 to 1999; Director and
Chairman of the Board of UNX Inc. since 2003.
------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Director 1999 to Shareholder of Modrall, Sperling, Roehl, Harris & 39 Funds None
Cooper Ramo Princeton, NJ present Sisk, P.A. since 1993; Director of Cooper's, Inc. 56 Portfolios
08543-9095 since 1999 and Chairman of the Board since 2000;
Age: 61 Director of ECMC, Inc. since 2001.
------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Director 2002 to Principal of STI Management since 1994; Trustee of 39 Funds None
Salomon, Princeton, NJ present Commonfund from 1980 to 2001; Director of Rye 56 Portfolios
Jr. 08543-9095 County Day School since 2001.
Age: 67
------------------------------------------------------------------------------------------------------------------------------------
Stephen B. P.O. Box 9095 Director 2002 to Chairman of Fernwood Advisors (investment adviser) 40 Funds International
Swensrud Princeton, NJ present since 1996; Principal of Fernwood Associates 57 Portfolios Mobile Com-
08543-9095 (financial consultant) since 1975; Chairman of RPP munications,
Age: 70 Corporation since 1978; Director of International Inc.
Mobile Communications, Inc. since 1998.
------------------------------------------------------------------------------------------------------------------------
* The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72.
------------------------------------------------------------------------------------------------------------------------------------
MUNIENHANCED FUND, INC. JANUARY 31, 2004 23
[LOGO] Merrill Lynch Investment Managers
Officers and Directors (unaudited) (concluded)
Position(s) Length
Held with of 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 FAM and MLIM since 1997 and Treasurer thereof since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999; Vice
08543-9011 and and President of FAMD since 1999; Director of MLIM Taxation since 1990.
Age: 43 Treasurer 1999 to
present
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9011 Senior Vice 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
Jacob Princeton, NJ President present Management) of MLIM from 1997 to 2000.
08543-9011
Age: 52
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior Vice 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
Loffredo Princeton, NJ President present Management) of MLIM from 1998 to 2000.
08543-9011
Age: 40
------------------------------------------------------------------------------------------------------------------------------------
Michael P.O. Box 9011 Vice 2000 to Vice President (Municipal Tax-Exempt Fund Management) of MLIM since 1999;
Kalinoski Princeton, NJ President present Municipal Bond Trader with Strong Capital Management from 1993 to 1999.
08543-9011
Age: 33
------------------------------------------------------------------------------------------------------------------------------------
Brian D. P.O. Box 9011 Secretary 2003 to Vice President (Legal Advisory) of MLIM since 2002; Attorney with Reed Smith from
Stewart Princeton, NJ present 2001 to 2002; Attorney with Saul Ewing from 1999 to 2001.
08543-9011
Age: 34
---------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and
Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agents
Common Stock:
EquiServe Trust Company, I.A.
P.O. Box 43010
Providence, RI 02940-3010
Preferred Stock:
The Bank of New York
101 Barclay Street - 7 West
New York, NY 10286
NYSE Symbol
MEN
24 MUNIENHANCED FUND, INC. JANUARY 31, 2004
Important Tax Information (unaudited)
All of the net investment income distributions paid by MuniEnhanced Fund, Inc.
during its taxable year ended January 31, 2004 qualify as tax-exempt interest
dividends for Federal income tax purposes.
Please retain this information for your records.
Quality Profile (unaudited)
The quality ratings of securities in the Fund as of January 31, 2004 were as
follows:
--------------------------------------------------------------------------------
Percent of
Total
S&P Rating/Moody's Rating Investments
--------------------------------------------------------------------------------
AAA/Aaa ............................................................. 85.2%
AA/Aa ............................................................... 7.1
A/A ................................................................. 1.4
BBB/Baa ............................................................. 4.9
Other* .............................................................. 1.4
--------------------------------------------------------------------------------
* Temporary investments in short-term securities.
MUNIENHANCED FUND, INC. JANUARY 31, 2004 25
[LOGO] Merrill Lynch Investment Managers
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.
26 MUNIENHANCED FUND, INC. JANUARY 31, 2004
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 website
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, 2004 27
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
MuniEnhanced Fund, Inc. seeks to provide shareholders with as high a level of
current income exempt from Federal income taxes as is consistent with its
investment policies by investing primarily in a portfolio of long-term,
investment grade municipal obligations, the interest on which is exempt from
Federal income taxes in the opinion of the bond counsel to the issuer.
This report, including the financial information herein, is transmitted to
shareholders of MuniEnhanced Fund, Inc. for their information. It is not a
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. The Fund has leveraged its
Common Stock and intends to remain leveraged by issuing Preferred Stock to
provide the Common Stock shareholders with a potentially higher rate of return.
Leverage creates risks for Common Stock shareholders, including the likelihood
of greater volatility of net asset value and market price of shares of the
Common Stock, and the risk that fluctuations in the short-term dividend rates of
the Preferred Stock may affect the yield to Common Stock shareholders.
Statements and other information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
on www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
website at http://www.sec.gov.
MuniEnhanced Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
#10874 -- 1/04
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Joe Grills,
(2) Andre F. Perold, (3) Robert S. Salomon, Jr., and (4) Stephen B.
Swensrud.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Current Year -- $26,000 Prior Year -- $25,000
(b) Audit-Related Fees - Current Year -- $5,600 Prior Year -- $10,400
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 above.
(c) Tax Fees - Current Year -- $5,610 Prior Year -- $4,800
The nature of the services include tax compliance, tax
advice and tax planning
(d) All Other Fees - Current Year -- $0 Prior Year -- $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 the
project as a whole. 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) N/A
(g) Current Year -- $18,176,900 Prior Year -- $17,134,248
(h) The registrant's audit committee has considered 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.
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
James H. Bodurtha
Joe Grills
Herbert I. London
Andre F. Perold
Roberta Cooper Ramo
Robert S. Solomon, Jr.
Stephen B. Swensrud
Item 6 - Reserved
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 - Reserved
Item 9 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 10 - Controls and Procedures
10(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.
10(b) - There were no significant changes in the registrant's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Item 11 - Exhibits attached hereto
11(a) - Not Applicable
11(b) - 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/ Terry K. Glenn
-------------------------------
Terry K. Glenn,
President of
MuniEnhanced Fund, Inc.
Date: March 19, 2004
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/ Terry K. Glenn
-------------------------------
Terry K. Glenn,
President of
MuniEnhanced Fund, Inc.
Date: March 19, 2004
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
MuniEnhanced Fund, Inc.
Date: March 19, 2004