-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, HQwCnujccUdfkjX265PrMGZZZ7qzibuVi4YhAoi0YCGd8seEF3LD6WfgH1vORFYt IqDVWdcAUJRFm8PWNgZx8w== 0000900092-94-000466.txt : 19940923 0000900092-94-000466.hdr.sgml : 19940923 ACCESSION NUMBER: 0000900092-94-000466 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940731 FILED AS OF DATE: 19940922 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUNIENHANCED FUND INC CENTRAL INDEX KEY: 0000844172 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05739 FILM NUMBER: 94549919 BUSINESS ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543 BUSINESS PHONE: 6092823319 N-30D 1 SEMI-ANNUAL REPORT MuniEnhanced Fund, Inc. FUND LOGO Semi-Annual Report July 31, 1994 This report, including the financial information herein, is transmitted to the shareholders of MuniEnhanced Fund, Inc. for their information. It is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in the report. Past performance results shown in this report should not be considered a representation of future performance. The Fund has leveraged its Common Stock by issuing Preferred Stock to provide the Common Stock shareholders with a poten- tially 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. MuniEnhanced Fund, Inc. Box 9011 Princeton, NJ 08543-9011 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 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. 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 share- holders 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 pick-up on the Common Stock will be reduced. 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. TO OUR SHAREHOLDERS For the six-month period ended July 31, 1994, the Common Stock of MuniEnhanced Fund, Inc. earned $0.395 per share income divi- dends, representing a net annualized yield of 6.78%, based on a month-end per share net asset value of $11.76. Over the same per- iod, total investment return on the Fund's Common Stock was -6.18%, based on a change in per share net asset value from $12.99 to $11.76, and assuming reinvestment of $0.398 per share income dividends. For the six-month period ended July 31, 1994, the Fund's Preferred Stock had an average dividend yield as follows: Series A, 2.61%; Series B, 2.67%; and Series C, 2.59%. The Environment The expectation of increasing inflationary pressures and higher interest rates initially heightened investor concerns and increased financial market volatility during the July quarter. However, as the quarter progressed, it was the weakness of the US dollar in foreign exchange markets that dominated the finan- cial news and prolonged stock and bond market declines. Although the US dollar had strengthened slightly by July quarter-end, which may have improved investor confidence in the stock and bond markets, the possibility of continued tightening by the Federal Reserve Board resurfaced following Chairman Alan Greenspan's recent congressional testimony. Nevertheless, as the quarter drew to a close, a lower-than-expected rate of growth reported for the US economy during the second calendar quarter allayed investor concerns and led to stock and bond market rallies. During the July quarter, the US dollar's weakness relative to other major currencies reflected the deteriorating US trade deficit and widening net long-term capital outflows. In 1993, an expanding US economy and recession in other industrial countries led to a higher level of imports and weaker export growth, widening the US trade deficit further. In addition, global investors favored non-US dollar denominated assets throughout 1993, which has further depressed the dollar's value. This trend is not improving signif- icantly thus far in 1994 since foreign inflows into US capital markets continue to decline, although US investors are investing outside of the United States to a lesser degree. Over the longer term, if the economies of United States' major trading partners expand (improving the prospects for US export growth), the outlook for the US dollar is likely to improve. In the near term, central banks have attempted to reverse the dollar's decline through currency market intervention. These efforts have met with limited success thus far, giving rise to the concern that the Federal Reserve Board will be forced to continue to raise short-term interest rates to attract investment capital back to the United States and bolster the dollar's value. However, further interest rate increases may jeopardize the US economic expansion. Despite evidence of a moderating trend in the US economy, Federal Reserve Board Chairman Alan Greenspan indicated in his July Humphrey- Hawkins testimony that the central bank would prefer to err on the side of too much monetary tightening rather than too little. In the weeks ahead, investors will continue to assess economic data and inflationary trends as they focus on the US dollar in order to gauge whether further increases in short-term interest rates are imminent. Continued indications of moderate and sustainable levels of economic growth would be positive for the US capital markets. The Municipal Market The municipal bond market's performance over the last six months has largely been dominated by reactions to repeated interest rate increases by the Federal Reserve Board. After the initial move by the Federal Reserve Board in February, municipal bond yields quickly rose in anticipation of additional tightenings. By early March, long-term tax-exempt bond yields, as measured by the Bond Buyer Revenue Bond Index, had risen over 50 basis points (0.50%) to 6.07%. Further Federal Reserve Board moves and a strengthening economy combined to push tax-exempt yields to a yearly high of 6.60% by mid-May. As evidence of a weakening economy accumulated, yields declined somewhat for the remainder of the period with the Reserve Bond Index falling to approximately 6.45% at the end of July. Long-term US Treasury bonds ended the July reporting period yielding approximately 7.40%, rising over 120 basis points in the last six months. The tax-exempt bond market has continued to be very volatile with yields fluctuating by as much as 15 basis points from week to week. This continued volatility is mainly a reflection of the same lack of conviction regarding the near-term direction of interest rates which has prevailed for much of 1994. Over the past six months, the municipal bond market had been unable to maintain a consensus regarding either the potential strength of the current economic recovery or the resultant response by the Federal Reserve Board. However, a number of economic indicators released in late July began to suggest that the robust pace of recent economic growth was slowing. This promoted a more positive market environment toward the end of July. The municipal bond market's technical position has remained supportive. Approximately $85 billion in long-term securities were issued during the six months ended July 31, 1994. This represents a decline of over 44% versus the July period from a year ago. As discussed in earlier reports, this reduction in new- issue supply has minimized the selling pressure by larger insti- tutional investors who fear being unable to purchase sizable amounts of securities in the future. Such a significant decline in issuance would normally be expected to trigger a decline in yields as investors chase a commodity in scarce supply. Investor demand, however, has also diminished somewhat in recent months as net flows into long-term municipal bond funds have dramatically slowed or, in some instances, reversed. Consequently, the supply/ demand relationship within the municipal bond market has remained in balance, promoting the overall stability in yield levels seen in the past months. With after-tax equivalents in excess of 10%, long-term tax-exempt bonds continue to represent considerable value relative to other investment alternatives. We continue to anticipate municipal bond yields will decline further in late 1994 and into 1995. The economic impact of the significant interest rate increases experienced since early February have yet to be totally realized. The resultant drag on the economy should provide the foundation for further interest rate declines. Under such a scenario, current tax-exempt bond yields may prove to represent considerable value. Portfolio Strategy During the six months ended July 31, 1994, the Fund's structure and strategy basically were unchanged. We believe long-term interest rates are likely to remain at present levels for the near term and continue to be subject to spurts of market volatility because of conflicting indications of economic strength. Our focus is on relative value in the municipal bond market. Within this context the Fund engaged in the sale of prerefunded bonds with approaching call dates and particular issues we regarded to be fully valued in relation to the market as a whole. Emphasis was put on the purchase of high-quality, current coupon, income-oriented issues in specific high tax states because they offered the best overall value in the insured sector of the municipal market. The Fund's cash reserves have been kept at a minimum to take advantage of the steep yield spread between short-term and long-term interest rates, which continue to generate positive benefits to Common Stock share- holders because of the leveraging of Preferred Stock. However, if the yield curve were to flatten, the benefits of leverage would decline and reduce the overall performance of the Fund. (See page 1 of this report to shareholders for a complete ex- planation of the risks and benefits of leveraging.) In Conclusion We appreciate your ongoing interest in MuniEnhanced Fund, Inc., and we look forward to assisting you with your financial needs in the months and years ahead. Sincerely, (Arthur Zeikel) Arthur Zeikel President (Vincent R. Giordano) Vincent R. Giordano Vice President and Portfolio Manager August 25, 1994 PER SHARE INFORMATION Per Share Selected Quarterly Financial Data*
Net Realized Unrealized Dividends/Distributions Investment Gains Gains Net Investment Income Capital For the Quarter Income (Losses) (Losses) Common Preferred Gains August 1, 1992 to October 31, 1992 $.26 $ .23 $(1.02) $.23 $.03 -- November 1, 1992 to January 31, 1993 .26 .02 .58 .22 .04 $.35 February 1, 1993 to April 30, 1993 .26 .12 .33 .21 .03 -- May 1, 1993 to July 31, 1993 .25 .19 .05 .21 .03 -- August 1, 1993 to October 31, 1993 .25 .11 .31 .22 .03 -- November 1,1993 to January 31,1994 .25 .07 .01 .21 .03 .43 February 1, 1994 to April 30, 1994 .23 .12 (1.47) .20 .03 -- May 1, 1994 to July 31, 1994 .24 (.13) .25 .20 .04 -- Net Asset Value Market Price** For the Quarter High Low High Low Volume*** August 1, 1992 to October 31, 1992 $12.79 $11.98 $13.875 $12.00 2,669 November 1, 1992 to January 31, 1993 12.58 12.05 13.50 12.375 1,811 February 1, 1993 to April 30, 1993 13.04 12.29 13.625 12.75 1,497 May 1, 1993 to July 31, 1993 13.09 12.68 13.125 12.375 1,806 August 1, 1993 to October 31, 1993 13.56 12.92 13.625 12.75 1,760 November 1, 1993 to January 31, 1994 13.33 12.74 13.375 12.375 2,084 February 1, 1994 to April 30, 1994 12.96 11.26 13.125 10.75 2,600 May 1, 1994 to July 31, 1994 12.05 11.32 11.125 10.50 2,603 *Calculations are based upon shares of Common Stock outstanding at the end of each quarter. **As reported in the consolidated transaction reporting system. ***In thousands.
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 GO General Obligation Bonds HFA Housing Finance Authority IDR Industrial Development Revenue Bonds IRS Interest Residual Securities M/F Multi-Family PCR Pollution Control Revenue Bonds RAN Revenue Anticipation Notes S/F Single-Family TRAN Tax Revenue Anticipation Notes UT Unlimited Tax VRDN Variable Rate Demand Notes SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) Alabama--2.0% AA Aa $10,000 Birmingham, Alabama, Waterworks and Sewer Board, Water and Sewer Revenue Refunding Bonds, Series A, 6% due 1/01/2020 $ 9,884 Alaska--0.6% A+ Aa1 3,000 Alaska State Housing Finance Corporation, Revenue Refunding Bonds (Insured Mortgage Program), First Series, 7.75% due 12/01/2014 3,109 Arkansas--0.9% AAA Aaa 4,100 Fort Smith, Arkansas, Water and Sewer Construction, Revenue Refunding Bonds, 6% due 10/01/2012(c) 4,148 California--18.8% AA Aa 2,500 California State Department of Water Resources, Revenue Refunding Bonds (Central Valley Project), Series L, 5.70% due 12/01/2016 2,353 California State Public Works Board, Lease Revenue Bonds (Various University of California Projects), Series A: AAA Aaa 2,000 6.40% due 12/01/2016 (d) 2,038 A- A 8,000 Refunding, 5.50% due 6/01/2021 6,917 AAA Aaa 2,500 California State, RAN, Series C, 5.75% due 4/25/1996 (b) 2,542 AAA Aaa 5,000 Central Coast Water Authority, California, Revenue Bonds (State Water Project Regional Facilities), 6.60% due 10/01/2022 (d) 5,177 AAA Aaa 4,450 Compton, California, Community Redevelopment Agency, Tax Allocation Refunding Bonds (Walnut Industrial Park), Series A, 7.50% due 8/01/2013 (d) 4,975 AAA Aaa 4,000 East Bay, California, Municipal Utilities District, Wastewater Treatment System Revenue Bonds, 6.375% due 6/01/2021 (d) 4,066 AAA Aaa 2,000 Irvine, California, Unified School District, Special Tax Community Facilities Bonds (District No. 86-1), Series A, 8.10% due 11/15/2013 (c) 2,272 AA Aa 2,000 Los Angeles, California, Department of Water and Power, Electric Plant Revenue Bonds, 5.30% due 2/15/2021 1,746 Los Angeles, California, Wastewater System Revenue Bonds: AAA Aaa 3,000 Refunding, Series D, 4.70% due 11/01/2017 (b) 2,418 AAA Aaa 5,000 Refunding, Series D, 5.20% due 11/01/2021 (b) 4,311 AAA Aaa 6,950 Series B, 6% due 6/01/2022 (d) 6,848 Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax Revenue Bonds: AAA Aaa 5,935 Proposition C, Series B, 4.75% due 7/01/2018 (d) 4,806 AAA Aaa 2,875 Refunding Proposition A, Series A, 5.625% due 7/01/2018 (c) 2,670 AAA Aaa 8,235 Los Angeles County, California, Transportation Commission, Sales Tax Revenue Refunding Bonds, Series B, 6.50% due 7/01/2015 (b) 8,464 AAA Aaa 1,500 M-S-R Public Power Agency, California, Revenue Bonds (San Juan Project), Series E, 6.50% due 7/01/2017 (c) 1,538 AA Aa 5,000 Metropolitan Water District, Southern California, Waterworks Revenue Bonds, 5.50% due 7/01/2019 4,558 AAA Aaa 1,500 Northern California Transmission Revenue Bonds (California-Oregon Trans- mission Project), Series A, 6.50% due 5/01/2016 (c) 1,552 SP1+ NR 4,000 San Diego, California, Area Local Government, COP, TRAN, 4.50% due 6/30/1995 4,013 AAA Aaa 2,985 San Francisco, California, City and County, GO (Various Purpose Projects), UT, Series A, 10% due 12/15/2000 (c) 3,778 SP1+ MIG1++ 9,000 Santa Clara County, California, TRAN, UT, 4.25% due 7/07/1995 8,966 AAA Aaa 2,000 Southern California Public Power Authority, Transmission Project Revenue Refunding Bonds, Sub-Series A, 4.875% due 7/01/2020 (c) 1,638 NR Aa 5,000 University of California, COP, Refunding (UCLA Center Chiller/Cogen Project), 5.60% due 11/01/2020 4,523
SCHEDULE OF INVESTMENTS(continued) (in Thousands)
S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) Colorado--0.5% A-1 Aa3 $ 1,100 Colorado, HFA, M/F Housing Revenue Bonds (Central Park, Coven & Greenwood), VRDN, 2.85% due 5/01/1997 (a) $ 1,100 A-1 NR 1,100 Pitkin County, Colorado, IDR, Refunding (Aspen Skiing Co. Project), VRDN, Series A, 2.85% due 4/01/2016 (a) 1,100 Connecticut--0.7% A-1 VMIG1 1,100 Connecticut State, Economic Recreation Notes, VRDN, Series B, 2.85% due 6/01/1996 (a) 1,100 AA Aa 2,400 Connecticut State HFA, Housing Mortgage Finance Program, Sub-Series B-1, 6.50% due 5/15/2018 2,437 District of AAA Aaa 3,000 District of Columbia, UT, Series B, 6.10% due 6/01/2011 (c) 3,010 Columbia--0.6% Florida--1.5% AA Aa 1,500 Florida, HFA, S/F Mortgage, Refunding, Series B, 6.55% due 7/01/2017 1,506 AAA Aaa 4,000 Florida State Municipal Power Agency Revenue Bonds (Power Supply Project), 5.10% due 10/01/2025 (d) 3,401 AAA Aaa 2,000 Florida State Turnpike Authority, Revenue Bonds, Series A, 9.50% due 7/01/2000 (d) 2,457 Georgia--2.2% A A2 1,775 Burke County, Georgia, Development Authority, PCR (Georgia Power Company Plant--Vogtle Project), AMT, 9.375% due 12/01/2017 2,023 AAA Aaa 7,725 Georgia Municipal Electric Authority, Power Revenue Bonds, Series EE, 7% due 1/01/2025 (d) 8,811 Hawaii--3.9% AAA Aaa 11,250 Hawaii State Airport System Revenue Bonds, AMT, Second Series, 7.50% due 7/01/2020 (b) 12,268 AAA Aaa 6,070 Hawaii State Department of Budget and Finance, Special Purpose Mortgage Revenue Bonds (Hawaiian Electric Company), AMT, Series C, 7.375% due 12/01/2020 (c) 6,655 Idaho--0.6% AAA Aaa 1,000 Idaho Health Facilities Authority, Health Care Corporation Revenue Bonds (Saint Joseph Regional Medical Center), 5.25% due 7/01/2016 (c) 886 NR Aa 2,000 Idaho Housing Agency Refunding Bonds, S/F Mortgage, Series B, 5.70% due 7/01/2013 1,845 Illinois--8.2% AAA Aaa 4,500 Chicago, Illinois, Wastewater Transmission Revenue Bonds, 6.375% due 1/01/2024 (c) 4,521 AAA Aaa 2,240 Cook County, Illinois, Chicago Community College District No. 508, COP, UT, 8.75% due 1/01/2007 (b) 2,842 AAA Aaa 3,025 Cook County, Illinois, Community Consolidated School District No. 54 Revenue Bonds (Schaumburg Township), UT, Series A, 6.50% due 1/01/2010 (b) 3,140 Cook County, Illinois, GO, UT, Series A (c): AAA Aaa 2,000 6.50% due 11/15/2010 2,082 AAA Aaa 5,000 6.50% due 11/15/2012 5,185 Illinois Health Facilities Authority Revenue Bonds: AAA Aaa 1,000 (Ingalls Health System Project), Series A, 6.25% due 5/15/2024 987 AA Aa 5,000 Refunding (Northwestern Memorial Hospital), Series A, 6% due 8/15/2024 4,741 AAA Aaa 3,500 Illinois Health Facilities Authority Revenue Bonds (Servantcor Project), Series A, 6.375% due 8/15/2021 3,462 AAA Aaa 3,025 Northwest Suburban Municipal Joint Action Water Agency, Illinois, Water Supply System, Revenue Refunding Bonds, Series A, 5.90% due 5/01/2015 (c) 2,906 AAA Aaa 9,115 Regional Transportation Authority, Illinois, GO, Series A, 7.20% due 11/01/2020 (d) 10,457 Indiana--1.3% NR Aaa 2,990 Indiana State HFA, S/F Mortgage Revenue Bonds (Home Mortgage Program), AMT Series B-2, 7.80% due 1/01/2022 (g) 3,141 AAA Aaa 3,000 Indianapolis, Indiana, Airport Authority Revenue Bonds, AMT, 8.40% due 7/01/2008 (c) 3,378 Iowa--2.8% NR Aaa 3,700 Iowa Finance Authority, S/F Mortgage Revenue Bonds, AMT, Series A, 7.90% due 11/01/2022 (g) 3,846 Iowa Finance Authority, Solid Waste Disposal Revenue Bonds (Cedar River Paper Company Project), VRDN, Series A (a): A-1+ NR 2,500 2.90% due 7/01/2023 2,500 A-1+ NR 7,400 2.90% due 6/01/2024 7,400 Kansas--1.2% AAA Aaa 3,000 Burlington, Kansas, PCR, Refunding (Kansas Gas and Electric Company Project), 7% due 6/01/2031 (c) 3,234 AAA Aaa 2,500 Wamego, Kansas, PCR, Refunding (Kansas Gas and Electric Company Project), 7% due 6/01/2031 (c) 2,689 Kentucky--1.0% AAA Aaa 5,000 Kenton County, Kentucky, Airport Board, Airport Revenue Bonds (Cincinnati/Northern Kentucky International Airport), AMT, Series A, 6.30% due 3/01/2015 (f) 5,017 Louisiana--2.8% AAA Aaa 4,000 Louisiana Public Facilities Authority Revenue Bonds (General Health Inc. Project), 6.375% due 11/01/2024 (c) 4,056 AAA Aaa 4,340 Louisiana Public Facilities Authority, Revenue Refunding Bonds (Jefferson Parish Eastbank Project), 7.70% due 8/01/2010 (b) 4,890 AAA Aaa 4,700 Louisiana Stadium and Expo District, Hotel Revenue Refunding Bonds (Occupancy Tax), Series A, 6% due 7/01/2024 (b) 4,579 Massachusetts-- AAA Aaa 4,530 Boston, Massachusetts, GO, UT, Series A, 10% due 7/01/2000 (c) 5,655 3.1% AAA Aaa 3,000 Massachusetts Bay Transportation Authority, COP, Series A, 7.65% due 8/01/2015 (f) 3,371 A+ A 3,500 Massachusetts Bay Transportation Authority Revenue Bonds (Massachusetts General Transportation System), Series B, 5.90% due 3/01/2024 3,326 AAA Aaa 2,500 Massachusetts State Port Authority Revenue Bonds, AMT, Series A, 7.50% due 7/01/2020 (b) 2,749 Michigan--2.2% A- A 1,500 Michigan State Hospital Finance Authority, Hospital Revenue Refunding Bonds (Detroit Medical Center), Series A, 6.50% due 8/15/2018 1,477 AAA Aaa 5,000 Michigan State Trunk Line Bonds, Series A, 5.75% due 11/15/2020 (b) 4,747 A-1 P1 1,100 Midland County, Michigan, Economic Development Corp., Limited Obligation Revenue Bonds (Dow Chemical Co. Project), AMT, VRDN, Series A, 3.15% due 12/01/2023 (a) 1,100 AAA Aaa 3,000 Monroe County, Michigan, PCR (Detroit Edison Company Project), AMT, Series 1, 7.65% due 9/01/2020 (b) 3,320 Minnesota--0.6% A-1+ VMIG1 1,600 Duluth, Minnesota, Tax Increment Revenue Bonds (Lake Superior Paper), VRDN, 2.75% due 4/01/2010 (a) 1,600 NR VMIG1 1,300 Minneapolis, Minnesota, Community Development Agency Revenue Bonds (Riverplace Project-Pinnacle Apartments), VRDN, 3.10% due 2/01/2012 (a) 1,300 Mississippi--1.1% Mississippi Hospital Equipment and Facilities Authority Revenue Bonds: AAA Aaa 2,000 (Mississippi Baptist Medical Center), Series A, 7.50% due 5/01/2012 (c) 2,199 AAA Aaa 3,400 Refunding and Improvement (North Mississippi Health Service), Series 1, 5.25% due 5/15/2013 (d) 3,079 Missouri--1.9% AAA Aaa 7,545 Kansas City, Missouri, School District Building Corporation, Leasehold Revenue Refunding Bonds (Capital Improvements Project), Series A, 10.50% due 2/01/1999 (b) 9,190 NR VMIG1 300 Missouri Higher Education Loan Authority, Student Loan Revenue Bonds, VRDN, AMT, Series A, 3% due 6/01/2017 (a) 300
SCHEDULE OF INVESTMENTS(continued) (in Thousands)
S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) Montana--0.5% AAA Aaa $ 2,185 Forsyth, Montana, PCR, Refunding (Puget Sound Power and Light), AMT, Series B, 7.25% due 8/01/2021 (d) $ 2,343 Nevada--0.7% AAA Aaa 3,500 Washoe County, Nevada, Gas and Water Facilities, Revenue Refunding Bonds (Sierra Pacific), 6.30% due 12/01/2014 (d) 3,544 New Jersey--4.0% AAA Aaa 2,500 New Jersey State Health Care Facilities Financing Authority Revenue Bonds (Newark Beth Israel Medical Center), 6% due 7/01/2024 (f) 2,442 New Jersey State Housing and Mortgage Finance Agency, Home Buyer Revenue Bonds, AMT: AAA Aaa 3,840 Series B, 7.90% due 10/01/2022 (c) 4,003 AAA Aaa 8,060 Series D, 7.70% due 10/01/2029 8,386 AAA Aaa 4,600 Salem County, New Jersey, Industrial Pollution Control Financing Authority, Revenue Refunding Bonds (Public Service Electric & Gas Company Project), Series B, 6.25% due 6/01/2031 (c) 4,607 New Mexico--0.5% AAA Aaa 2,300 Santa Fe, New Mexico, Revenue Bonds, Series A, 6.30% due 6/01/2024 (d) 2,318 New York--8.6% AAA Aaa 5,700 Metropolitan Transportation Authority, New York, Commuter Facilities Revenue Bonds, Series A, 6.375% due 7/01/2018 (c) 5,792 AAA Aaa 2,000 Metropolitan Transportation Authority, New York, Service Contract Revenue Refunding Bonds (Transportation Facilities), Series L, 7.50% due 7/01/2017 (d) 2,207 New York City, New York, GO, UT: A- NR 265 Series B, 8% due 6/01/2001 (i) 308 A- Baa1 3,235 Series B, 8.25% due 6/01/2002 3,749 A- Baa1 3,000 Series D, 9.50% due 8/01/2002 3,731 A- Baa1 1,600 Series H, 7.20% due 2/01/2015 1,708 A- Baa1 2,000 Series H, 7% due 2/01/2017 2,088 AAA Aaa 12,000 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds, Registered IRS, 5.35% due 6/15/2012 (a) (c) 10,979 New York State Medical Care Facilities Financing Agency Revenue Bonds: BBB+ Baa1 2,800 Refunding (Mental Health Services), Series F, 5.375% due 2/15/2014 2,474 AAA Aaa 5,250 (Saint Francis Hospital Project), Series A, 7.625% due 11/01/2021 (b) 5,840 A+ Aa 4,000 Triborough Bridge and Tunnel Authority, New York, General Purpose Revenue Bonds, Series A, 5.20% due 1/01/2020 3,477 North Carolina-- AAA Aaa 1,000 Fayetteville, North Carolina, Public Works Commission Revenue 0.2% Refunding Bonds, 7% due 3/01/2000 (b) (h) 1,112 North Dakota-- AAA Aaa 3,000 Bismarck, North Dakota, Hospital Revenue Refunding and Improvement Bonds 0.7% (Medical Center One, Inc.), 7.50% due 5/01/2013 (e) 3,325 Ohio--0.9% AAA Aaa 2,000 Ohio Municipal Electric Generation Agency, Joint Venture 5 Revenue Bonds, 5.375% due 2/15/2024 (d) 1,778 AAA Aaa 2,150 Ohio State Air Quality Development Authority, PCR, Refunding (Ohio- Edison), Series A, 7.45% due 3/01/2016 (b) 2,384 Oklahoma--0.2% AAA Aaa 1,170 Muskogee County, Oklahoma, Home Financing Authority, S/F Mortgage Revenue Refunding Bonds, Series A, 7.60% due 12/01/2010 (b) 1,202 Oregon--0.5% A+ A1 2,400 Portland, Oregon, Sewer System Revenue Bonds, Series A, 6.25% due 6/01/2015 2,418 Pennsylvania-- AAA Aaa 3,350 Pennsylvania Convention Center Authority Revenue Bonds, Series A, 6.70% 2.4% due 9/01/2016 (b) 3,674 AAA Aaa 4,000 Pennsylvania State Higher Education Assistance Agency, Student Loan Revenue Bonds, AMT, 7.437% due 3/01/2020 (c) 4,248 AAA Aaa 4,590 Philadelphia, Pennsylvania, Water and Wastewater Revenue Refunding Bonds, 5% due 6/15/2017 (c) 3,901 Rhode Island-- AAA Aaa 10,000 Rhode Island Depositors Economic Protection Corporation, Special 1.9% Obligation Refunding Bonds, Series A, 5.75% due 8/01/2019 (f) 9,444 South Carolina-- Richland County, South Carolina, Hospital Facilities Revenue Refunding 1.3% Bonds (South Carolina Baptist Hospital), Series B (d): AAA Aaa 1,515 10% due 8/01/1999 1,854 AAA Aaa 1,855 10% due 8/01/2000 2,332 AAA Aaa 2,500 South Carolina Public Service Authority, Revenue Refunding Bonds, Series A, 5.50% due 7/01/2021 (c) 2,257 South Dakota-- AAA Aaa 8,000 South Dakota State Health and Educational Facilities Authority, Revenue 1.8% Refunding Bonds (McKennan Hospital), Series A, 7.625% due 7/01/2014 (c) 8,890 Tennessee--4.6% AAA Aaa 2,250 Chattanooga--Hamilton County, Tennessee, Hospital Authority, Revenue Refunding Bonds (Erlanger Medical Center), 5.50% due 10/01/2013 (f) 2,077 Metropolitan Nashville Airport Authority, Tennessee, Airport Revenue Bonds, Series B (b): AAA Aaa 7,350 7.75% due 7/01/2006 8,563 AAA Aaa 4,985 7.75% due 7/01/2007 5,808 AAA Aaa 5,450 Mount Juliet, Tennessee, Public Building Authority Revenue Bonds (Madison Suburban Utility District Loan), Series B, 7.80% due 2/01/2019 (c) 6,420 Texas--6.3% AAA Aaa 3,900 Austin, Texas, Utility System Revenue Refunding Bonds, 5.75% due 11/15/2016 (d) 3,707 AAA Aaa 3,000 Brazos River Authority, Texas, Revenue Refunding Bonds (Houston Light and Power Company Project), Series C, 8.10% due 5/01/2019 (e) 3,358 AAA Aaa 5,000 Houston, Texas, Water and Sewer System Revenue Refunding Bonds (Junior Lien), Series C, 6.375% due 12/01/2017 (d) 5,064 Matagorda County, Texas, Navigational District No. 1, PCR (Houston Power and Light Company Project), AMT (b): AAA Aaa 3,000 7.875% due 11/01/2016 3,257 AAA Aaa 4,000 Series D, 7.60% due 10/01/2019 4,416 AAA Aaa 10,485 Texas Water Resource Finance Authority Revenue Bonds, 7.50% due 8/15/2013 (d) 11,226 Utah--2.1% AA Aa 5,000 Intermountain Power Agency, Utah, Power Supply Revenue Bonds, Series B, 7% due 7/01/2021 5,274 AA Aa 5,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospitals Incorporated), 6.30% due 2/15/2015 5,182 Vermont--1.4% AAA Aaa 6,635 Vermont HFA, Home Mortgage Purchase Revenue Bonds, AMT, Series B, 7.60% due 12/01/2024 (c) 6,916
SCHEDULE OF INVESTMENTS(concluded) (in Thousands)
S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) Washington--2.6% Washington State Public Power Supply System, Revenue Refunding Bonds: AAA Aaa 5,000 (Nuclear Project No. 1), Series A, 6.25% due 7/01/2017 (c) $ 5,003 AAA Aaa 3,440 (Nuclear Project No. 3), Series A, 6% due 7/01/2018 (e) 3,380 AAA Aaa 4,000 (Nuclear Project No. 3), Series C, 7.50% due 7/01/2008 (c) 4,647 Wisconsin--2.4% AAA Aaa 7,885 Wisconsin Public Power Incorporated, System Power Supply, System Revenue Bonds, Series A, 7.40% due 7/01/2020 (d) (i) 8,971 AAA Aaa 2,750 Wisconsin State Health and Educational Facilities Authority, Revenue Refunding Bonds (Wheaton Franciscan Services), 6.50% due 8/15/2011 (c) 2,824 Total Investments (Cost--$487,008)--102.1% 501,283 Liabilities in Excess of Other Assets--(2.1%) (10,227) -------- Net Assets--100.0% $491,056 ======== (a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1994. (b)FGIC Insured. (c)MBIA Insured. (d)AMBAC Insured. (e)BIG Insured. (f)FSA Insured. (g)FNMA/GNMA Collateralized. (h)Prerefunded. (i)Escrowed to Maturity. ++Highest short-term rating issued by Moody's Investors Service, Inc. See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of July 31, 1994 Assets: Investments, at value (identified cost--$487,007,725) (Note 1a) $501,282,960 Cash 4,115,046 Interest receivables 6,766,451 Deferred organization expenses (Note 1e) 852 Prepaid expenses and other assets 22,652 ------------ Total assets 512,187,961 ------------ Liabilities: Payables: Securities purchased $ 20,227,300 Dividends 617,994 Investment adviser (Note 2) 192,487 21,037,781 ------------ Accrued expenses and other liabilities 94,225 ------------ Total liabilities 21,132,006 ------------ Net Assets: Net assets $491,055,955 ============ Capital: Capital Stock (200,000,000 shares authorized) (Note 4): Preferred Stock, par value $.10 per share (1,500 shares of AMPS* issued and outstanding at $100,000 per share liquidation preference) $150,000,000 Common Stock, par value $.10 per share (29,007,770 shares issued and outstanding) $ 2,900,777 Paid-in capital in excess of par 319,102,131 Undistributed investment income--net 3,531,299 Undistributed realized capital gains--net 1,246,513 Unrealized appreciation on investments--net 14,275,235 ------------ Total--Equivalent to $11.76 net asset value per share of Common Stock (market price--$11.125) 341,055,955 ------------ Total capital $491,055,955 ============ *Auction Market Preferred Stock. See Notes to Financial Statements.
STATEMENT OF OPERATIONS
For the Six Months Ended Ended July 31, 1994 Investment Interest and amortization of premium and discount earned $ 15,317,420 Income (Note 1d): Expenses: Investment advisory fees (Note 2) $ 1,211,668 Commission fees (Note 4) 188,935 Transfer agent fees 72,912 Professional fees 42,498 Printing and shareholder reports 33,951 Accounting services (Note 2) 29,891 Directors' fees and expenses 22,038 Custodian fees 20,114 Listing fees 16,384 Pricing fees 8,859 Amortization of organization expenses (Note 1e) 412 Other 12,389 ------------ Total expenses 1,660,051 ------------ Investment income--net 13,657,369 ------------ Realized & Realized loss on investments--net (405,315) Unrealized Change in unrealized appreciation on investments--net (35,436,439) Loss on ------------ Investments--Net Net Decrease in Net Assets Resulting from Operations $(22,184,385) (Notes 1d & 3): ============ See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Six For the Year Months Ended Ended Increase (Decrease) in Net Assets: July 31, 1994 Jan. 31, 1994 Operations: Investment income--net $ 13,657,369 $ 29,038,208 Realized gain (loss) on investments--net (405,315) 13,988,460 Change in unrealized appreciation on investments--net (35,436,439) 17,230,790 ------------ ------------ Net increase (decrease) in net assets resulting from operations (22,184,385) 60,257,458 ------------ ------------ Dividends & Investment income--net: Distributions to Preferred Stock (1,951,465) (3,568,270) Shareholders Common Stock (11,534,186) (24,266,522) (Note 1g): Realized gain on investments--net: Common Stock -- (12,392,997) ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders (13,485,651) (40,227,789) ------------ ------------ Common Stock Net increase in net assets derived from Common Stock transactions -- 5,852,928 Transactions ------------ ------------ (Note 4): Net Assets: Total increase (decrease) in net assets (35,670,036) 25,882,597 Beginning of period 526,725,991 500,843,394 ------------ ------------ End of period* $491,055,955 $526,725,991 ============ ============ *Undistributed investment income--net $ 3,531,299 $ 3,359,581 ============ ============ See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived from information For the Six provided in the financial statements. Months Ended July 31, For the Year Ended January 31, Increase (Decrease) in Net Asset Value: 1994 1994 1993 1992 1991 Per Share Net asset value, beginning of period $ 12.99 $ 12.29 $ 11.96 $ 11.45 $ 11.15 Operating -------- -------- -------- -------- -------- Performance: Investment income--net .47 1.01 1.06 1.09 1.12 Realized and unrealized gain (loss) on investments--net (1.23) 1.09 .68 .71 .30 -------- -------- -------- -------- -------- Total from investment operations (.76) 2.10 1.74 1.80 1.42 -------- -------- -------- -------- -------- Less dividends and distributions to Common Stock shareholders: Investment income--net (.40) (.85) (.91) (.84) (.79) Realized gain on investments--net -- (.43) (.35) (.20) -- -------- -------- -------- -------- -------- Total dividends and distributions to Common Stock shareholders (.40) (1.28) (1.26) (1.04) (.79) -------- -------- -------- -------- -------- Effect of Preferred Stock activity: Dividends to Preferred Stock shareholders: Investment income--net (.07) (.12) (.15) (.25) (.33) -------- -------- -------- -------- -------- Total effect of Preferred Stock activity (.07) (.12) (.15) (.25) (.33) -------- -------- -------- -------- -------- Net asset value, end of period $ 11.76 $ 12.99 $ 12.29 $ 11.96 $ 11.45 ======== ======== ======== ======== ======== Market price per share, end of period $ 11.125 $ 13.125 $ 13.25 $ 12.625 $ 11.375 ======== ======== ======== ======== ======== Total Investment Based on market price per share (12.17%)+++ 9.28% 16.27% 21.23% 8.61% Return:** ======== ======== ======== ======== ======== Based on net asset value per share (6.18%)+++ 16.61% 13.84% 14.09% 5.40% ======== ======== ======== ======== ======== Ratios to Average Expenses .68%* .68% .69% .70% .71% Net Assets:*** ======== ======== ======== ======== ======== Investment income--net 5.62%* 5.54% 6.13% 6.41% 6.68% ======== ======== ======== ======== ======== Supplemental Net assets, net of Preferred Stock, end of Data: period (in thousands) $341,056 $376,726 $350,843 $335,268 $313,765 ======== ======== ======== ======== ======== Preferred Stock outstanding, end of period (in thousands) $150,000 $150,000 $150,000 $150,000 $150,000 ======== ======== ======== ======== ======== Portfolio turnover 28.75% 41.61% 34.42% 70.17% 116.42% ======== ======== ======== ======== ======== Dividends Per Series A--Investment income--net $ 1,388 $ 2,388 $ 2,995 $ 4,539 $ 6,017 Share on Series B--Investment income--net 1,223 2,430 2,931 4,338 6,014 Preferred Stock Series C--Investment income--net 1,292 2,318 2,938 4,378 5,942 Outstanding: *Annualized. **Total investment returns based on market value, which can be significantly greater or lesser than the net asset value, result in substantially different returns. Total investment returns exclude the effects of sales loads. ***Do not reflect the effect of dividends to Preferred Stock Shareholders. +++Aggregate total investment return. See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: MuniEnhanced Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a non-diversified, closed-end management investment company. 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 most recent bid price or yield equivalent as obtained by the Fund's pricing service from dealers that make markets in such securities. Financial futures contracts, which are traded on exchanges, are valued at their closing prices as of the close of such exchanges. Options, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges or, lacking any sales, at the last available bid price. Securities with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value. Securities for which market quotations are not readily available are valued at their fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. (b) Financial futures contracts--The Fund may purchase or sell interest rate futures contracts and options on such futures con- tracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. 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. (c) Income taxes--It is the Fund's policy to comply with the re- quirements 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). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. (e) Deferred organization expenses--Deferred organization expenses are amortized on a straight-line basis over a five-year period beginning with the commencement of operations of the Fund. (f) Non-income producing investments--Written and purchased options are non-income producing investments. (g) Dividends and distributions--Dividends from net investment income are declared 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., an indirect wholly-owned sub- sidiary of Merrill Lynch & Co., Inc. ("ML & Co."). The limited partners are ML & Co. and Fund Asset Management, Inc. ("FAMI"), which is also an indirect wholly-owned subsidiary of ML & Co. 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 0.50% of the Fund's average weekly net assets. Accounting services are provided to the Fund by FAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of FAM, FAMI, MLIM, Merrill Lynch, Pierce Fenner & Smith Inc. ("MLPF&S"), and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the six months ended July 31, 1994 were $142,412,197 and $135,161,562, respectively. Net realized and unrealized gains (losses) as of July 31, 1994 were as follows: Realized Unrealized Gains (Losses) Gains (Losses) Long-term investments $(1,131,767) $14,351,153 Short-term investments (1,117) (75,918) Financial futures contracts 727,569 -- ----------- ----------- Total $ (405,315) $14,275,235 =========== =========== As of July 31, 1994, net unrealized appreciation for Federal income tax purposes aggregated $14,275,235, of which $19,948,792 related to appreciated securities and $5,673,557 related to depreciated securities. The aggregate cost of investments at July 31, 1994 for Federal income tax purposes was $487,007,725. 4. Capital Share Transactions: The Fund is authorized to issue 200,000,000 shares of capital 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 capital stock without the approval of the holders of Common Stock. For the six months ended July 31, 1994, shares issued and outstanding remained constant. At July 31, 1994, total paid-in capital amounted to $322,002,908. Preferred Stock The Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the Fund that entitle their holders to receive cash dividends at an annual rate that may vary for the successive dividend period for each series. In connection with the offering of AMPS, the Board of Directors reclassified 1,500 shares of unissued Common Stock as AMPS. The number of AMPS shares authorized, issued and outstanding for the year ended January 31, 1994 was as follows: Series A AMPS Series B AMPS Series C AMPS 500 500 500 Liquidation preference is $100,000 per share, plus accumulated and unpaid dividends of $18,664. The yields in effect at July 31, 1994 were as follows: Series A, 2.875%; Series B, 2.80%; and Series C, 2.85%. The Fund pays commissions to certain broker-dealers at the end of each auction at the annual rate of one-quarter of 1% calculated on the proceeds of each auction. For the six months ended July 31, 1994, MLPF&S, an affiliate of FAM, received $156,196 as commissions. 5. Subsequent Event: On August 9, 1994, the Fund's Board of Directors declared an ordinary income dividend to Common Stock shareholders in the amount of $.067131 per share, payable on August 30, 1994 to shareholders of record as of August 19, 1994. OFFICERS AND DIRECTORS Arthur Zeikel, President and Director Kenneth S. Axelson, Director Herbert I. London, Director Robert R. Martin, Director Joseph L. May, Director Andre F. Perold, Director Terry K. Glenn, Executive Vice President Donald C. Burke, Vice President Vincent R. Giordano, Vice President Kenneth A. Jacob, Vice President Gerald M. Richard, Treasurer Mark B. Goldfus, Secretary Custodian State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 NYSE Symbol MEN Transfer Agents Common Stock: State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 Preferred Stock: IBJ Schroder Bank & Trust Company One State Street New York, New York 10004 -----END PRIVACY-ENHANCED MESSAGE-----