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 811-21793
Name of Fund: Enhanced Government Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Enhanced Government 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: 12/31/05
Date of reporting period: 01/01/05 - 12/31/05
Item 1 - Report to Stockholders
Enhanced Government
Fund, Inc.
Annual Report
December 31, 2005
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Enhanced Government Fund, Inc. seeks to provide stockholders with current
income and gains by investing primarily in a portfolio of U.S. Government
securities and U.S. Government Agency securities, including U.S. Government
mortgage-backed securities, that pay interest in an attempt to generate
current income and by employing a strategy of writing (selling) call options
on individual or baskets of U.S. Government or U.S. Government Agency
securities or other debt securities held by the Fund in an attempt to
generate gains from option premiums.
This report, including the financial information herein, is transmitted to
shareholders of Enhanced Government 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. Statements and other
information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling toll-free 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and
(2) on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Enhanced Government Fund, Inc.
Box 9011
Princeton, NJ 08543-9011
(GO PAPERLESS LOGO)
It's Fast, Convenient, & Timely!
To sign up today, go to www.icsdelivery.com/live.
Enhanced Government Fund, Inc.
Important Tax Information
The following information is provided with respect to the ordinary income
distribution paid by Enhanced Government Fund, Inc. to shareholders of record
on December 20, 2005:
Federal Obligation Interest 27.02%*
Interest-Related Dividends for Non-U.S. Residents 85.74%**
Short-Term Capital Gain Dividends for Non-U.S. Residents 12.90%**
* The law varies in each state as to whether and what percentage of dividend
income attributable to federal obligations is exempt from state income tax.
We recommend that you consult your tax adviser to determine if any portion
of the dividends you received is exempt from state income tax.
** Represents the portion of the taxable ordinary income dividends eligible
for exemption from U.S. withholding tax for nonresident aliens and foreign
corporations.
Fundamental Periodic Repurchase Policy
The Board of Directors approved a fundamental policy whereby the Fund has
adopted an "interval fund" structure pursuant to Rule 23c-3 under the
Investment Company Act of 1940, as amended (the "1940 Act"). As an interval
fund, the Fund will make annual repurchase offers at net asset value (less
repurchase fee not to exceed 2%) to all Fund shareholders. The percentage of
outstanding shares that the Fund can repurchase in each offer will be
established by the Fund's Board of Directors shortly before the commencement
of each offer, and will be between 5% and 25% of the Fund's then outstanding
shares.
The Fund has adopted the following fundamental policy regarding periodic
repurchases:
(a) The Fund will make repurchase offers at periodic intervals pursuant to
Rule 23c-3 under the 1940 Act.
(b) The periodic interval between repurchase request deadlines will be
approximately 12 months.
(c) The repurchase request deadline for each repurchase offer will be 14 days
prior to the second Friday in December, commencing in December 2006;
provided, that in the event that such day is not a business day, the
repurchase request deadline will be the subsequent business day.
(d) The maximum number of days between a repurchase request deadline and the
next repurchase pricing date will be 14 days; provided that if the 14th
day after a repurchase request deadline is not a business day, the
repurchase pricing date shall be the next business day.
The Board of Directors may place such conditions and limitations on a
repurchase offer as may be permitted under Rule 23c-3. Repurchase offers may
be suspended or postponed under certain circumstances, as provided in Rule
23c-3.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
A Letter From the President
Dear Shareholder
On balance, 2005 was a year of "muddling through" for the U.S. financial
markets, as oil prices reached new record highs, the Federal Reserve Board
(the Fed) increased the target federal funds rate from 2.25% to 4.25%, the
housing market and the consumer finally showed some signs of slowing, and
Hurricanes Katrina and Rita ravaged the Gulf Coast, causing yet untold
economic damage.
Although they struggled, stocks managed to post their third straight year of
positive performance. The year was equally uncertain for fixed income
markets, which were bemused by a flattening yield curve and a number of
significant credit events that brought a slowdown in high yield market
returns. Notably, the one-year results for the major asset classes - stocks,
bonds and cash - were the closest they have been in more than 100 years. For
the 12- and six-month periods ended December 31, 2005, most of the major
market indexes managed to land in positive territory:
Total Returns as of December 31, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 5.77% + 4.91%
Small-cap U.S. equities (Russell 2000 Index) + 5.88 + 4.55
International equities (MSCI Europe Australasia Far East Index) +14.88 +13.54
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.08 + 2.43
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.60 + 3.51
High yield bonds (Credit Suisse First Boston High Yield Index) + 1.48 + 2.26
In hindsight, these numbers are reasonably good given the headwinds facing
the markets in 2005. U.S. equities found support in strong corporate
earnings, low core inflation and healthy company balance sheets. Strength in
the global economy and non-U.S. equity markets helped, as did robust dividend-
distribution, share-buyback and merger-and-acquisition activity. International
stocks had an excellent year, with many markets benefiting from strong
economic statistics, trade surpluses and solid finances. In the U.S. bond
market, long-term yields remained low and, at year-end, the Treasury curve
appeared ready to invert.
As 2006 begins, the largest question marks center on the Fed's future moves,
the U.S. consumer's ability (or inability) to continue spending, the direction
of the U.S. dollar following a year of appreciation and the potential for
continued strong economic and corporate earnings growth. As you turn the
calendar and consider how these factors might impact your investments, remember
that the new year is a good time to meet with your financial advisor to review
your financial goals, and to make portfolio changes where necessary. For
investing insights and timely "food for thought" for investors, we also invite
you to visit Shareholder magazine at www.mlim.ml.com/shareholdermagazine.
As always, we thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the new year
and beyond.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
A Discussion With Your Fund's Portfolio Managers
We are pleased to provide you with this first annual report to shareholders
for Enhanced Government Fund, Inc., a diversified, closed-end fund that
commenced trading on the New York Stock Exchange on October 31, 2005.
What is the Fund's investment objective?
The Fund seeks to provide shareholders with current income and gains through
investment primarily in a portfolio of U.S. government and U.S. government
agency securities - including U.S. government mortgage-backed securities -
that pay interest. The Fund also will write (sell) call options on individual
securities or baskets of U.S. government and U.S. government agency securities
or other debt securities in an attempt to generate gains from option premiums.
Under normal market conditions, the Fund will invest at least 80% of the value
of its net assets, plus the amount of any outstanding debt securities or
borrowings for investment purposes, in U.S. government and U.S. government
agency securities. The Fund also may invest up to 20% of its net assets in
non-U.S. government debt securities of foreign or domestic issuers. As part
of its option strategy, the Fund also may write options on these other debt
securities.
Describe the recent market environment.
The Federal Reserve Board (the Fed) continued to advance its monetary
tightening campaign with short-term interest rate hikes at each of its
eight meetings in 2005. The federal funds rate began the year at 2.25% and
finished at 4.25%. We saw two interest rate hikes since the Fund's inception
on October 31.
As short-term interest rates continued to rise over the past two months, long-
term interest rates declined. The yield curve, which flattened significantly
over the course of the year, had inverted at year-end, with the two-year
Treasury yielding 4.41% and the 10-year Treasury yielding 4.39%. This
represented the first yield curve inversion in more than five years.
Consumer spending remained solid throughout 2005, thanks in large part to
the continued strength of the U.S. housing market. One source of difficulty
remained high energy prices, which rose particularly rapidly in the wake of
Hurricanes Katrina and Rita, which together seriously damaged much of the oil-
refining operations in the Gulf Coast region. Despite record energy prices,
inflationary data was generally benign during the year and not a major source
of concern for investors.
How has the Fund performed since its inception?
Since its inception on October 31, 2005 through December 31, 2005, the Common
Stock of Enhanced Government Fund, Inc. had net annualized yields of 7.16% and
7.59%, based on a period-end per share net asset value of $19.18 and a per
share market price of $18.09, respectively, and $.233 per share income
dividends. Over the same period, the total investment return on the Fund's
Common Stock was +1.06%, based on a change in per share net asset value from
$19.10 to $19.18, and assuming reinvestment of all distributions. The
Citigroup Government and Mortgage Index returned +1.45% since the Fund's
inception. On a total return basis, the Fund was somewhat disadvantaged versus
its benchmark given that we required some time to commit the assets gathered
in the initial offering and become fully invested in the market.
A significant part of the Fund's investment strategy is to sell call options
on individual securities or baskets of securities in an effort to generate
gains from the options premiums. However, the options strategy detracted from
performance over the past two months as the bond market rallied (yields fell
and prices rose). This is because, when a call option is sold, you essentially
forfeit the upside capital appreciation potential that occurs in a declining
yield environment. If bond prices rise above the strike price by more than the
premium that was received, then the Fund would be expected to underperform the
passive index, which does not write options. We continue to maximize the use
of our options writing strategy, which seeks to increase the monthly
distributions and lower volatility while protecting the Fund's net asset value
in a rising interest rate environment. The Fund made its first dividend
distribution in December.
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 Portfolio's shares on the New York Stock Exchange), and
assuming reinvestment of dividends, please refer to the Financial Highlights
section of this report. As a closed-end fund, the Fund's shares may trade in
the secondary market at a premium or discount to the Fund's net asset value.
As a result, total investment returns based on changes in the market value of
the Fund's Common Stock can vary significantly from total investment returns
based on changes in the Portfolio's net asset value.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
How have you managed the portfolio since its inception?
The first few weeks since inception were spent investing the proceeds from the
initial offering. Once fully invested, we focused on adding yield to the
portfolio, placing 8% of net assets into hybrid adjustable-rate mortgages
(ARMs) while remaining underweighted in 15-year pass-through securities.
Hybrid ARMs provided slightly more yield than 15-year mortgages with lower
volatility and less extension risk. In addition, we invested 4% of the
portfolio in Government National Mortgage Association (GNMA or Ginnie Mae)
project loans while keeping the Fund underweighted in Treasury issues. The
project loans are agency commercial mortgages that have minimal prepay and
extension risk but provide a significant pickup in yield compared to Treasury
securities. Spreads on these securities had widened to an attractive level,
prompting us to begin adding them to the portfolio.
The Fund also was slightly overweighted in securities with durations exceeding
nine years - compared to a neutral exposure to securities with maturities
between six years and nine years - because we believe that investor demand for
longer-duration holdings is likely to continue.
How would you characterize the Fund's position at the close of the period?
The latest minutes released by the Fed provide more reason for us to believe
that the U.S. central bank will soon stop raising short-term interest rates.
Accordingly, at period-end, the portfolio's duration, excluding options, was
neutral to that of its benchmark. Just after the close of the period, we
purchased additional agency commercial mortgages in an effort to add more
yield to the portfolio. These securities should provide incremental yield
without the call risk associated with residential mortgages.
Thomas F. Musmanno
Vice President and Portfolio Manager
Frank Viola
Vice President and Portfolio Manager
January 24, 2006
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Schedule of Investments (in U.S. dollars)
Face Interest Maturity
Issue Amount Rate Date(s) Value
Government & Agency Obligations--47.6%
Fannie Mae-- $ 5,000,000 2.375% 2/15/2007 $ 4,869,830
10.3% 3,500,000 5.25 4/15/2007 3,520,479
5,250,000 6.375 6/15/2009 5,515,545
3,000,000 6.625 9/15/2009 3,190,023
4,500,000 7.25 1/15/2010 4,903,115
3,000,000 6.00 5/15/2011 3,172,911
Federal Farm 3,500,000 4.55 6/08/2020 3,307,668
Credit Bank--
1.4%
Federal Home 1,000,000 4.125 10/19/2007 989,617
Loan Bank
System--
0.4%
Freddie Mac-- 1,500,000 5.875 3/21/2011 1,563,059
1.8% 1,500,000 5.00 7/15/2014 1,520,211
1,000,000 6.25 7/15/2032 1,190,213
U.S. Treasury 2,720,000 8.50 2/15/2020 3,815,648
Bonds-- 7,200,000 8.00 11/15/2021 9,919,404
6.7% 2,400,000 5.375 2/15/2031 2,695,874
U.S. Treasury 8,000,000 6.50 10/15/2006 8,121,560
Notes-- 11,500,000 3.625 6/30/2007(d) 11,368,831
27.0% 6,000,000 3.00 2/15/2008 5,831,016
3,750,000 3.00 2/15/2009 3,599,122
15,000,000 3.50 2/15/2010(d) 14,508,990
5,750,000 4.00 4/15/2010 5,666,447
10,000,000 4.00 2/15/2015(d) 9,695,310
4,800,000 8.75 5/15/2020 6,886,310
Total Government & Agency Obligations
(Cost--$115,150,901)--47.6% 115,851,183
Government Agency Mortgage-Backed
Obligations**--51.4%
Fannie Mae 9,921,662 4.50 4/01/2020-
Guaranteed 11/01/2020 9,654,905
Pass Through 9,473,951 5.324 10/01/2035(a) 9,459,052
Certificates-- 23,188,752 5.50 11/01/2020-
18.4% 11/01/2035 23,008,892
2,685,943 6.00 10/01/2035 2,711,404
Freddie Mac 1,132,249 4.50 5/01/2034 1,069,498
Mortgage 7,876,456 5.00 5/01/2020 7,798,706
Participation 18,843,233 5.00 11/01/2035 18,242,604
Certificates-- 9,735,281 5.009 10/01/2035(a) 9,644,012
26.0% 5,483,727 5.50 10/01/2035 5,434,602
14,246,641 6.00 10/01/2035 14,390,592
6,641,727 6.50 9/01/2035-
10/01/2035 6,807,078
Ginnie Mae MBS 3,296,005 5.00 11/15/2035 3,254,805
Certificates-- 3,696,253 5.50 11/15/2035 3,721,665
2.9%
Ginnie Mae 10,000,000 5.328 9/16/2034(a) 10,091,465
Trust Series
2005-87
Class C--
4.1%
Total Government Agency
Mortgage-Backed Obligations
(Cost--$124,773,765)--51.4% 125,289,280
Beneficial
Interest Value
Short-Term Securities--15.7%
$ 1,920,250 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (c) $ 1,920,250
36,383,750 Merrill Lynch Liquidity Series, LLC
Money Market Series(b)(c) 36,383,750
Total Short-Term Securities
(Cost--$38,304,000)--15.7% 38,304,000
Total Investments
(Cost--$278,228,666)--114.7% 279,444,463
Number of
Contracts Options Written
Call Options Written--(0.4%)
7 3-Year U.S. Treasury Notes, expiring
January 2006 at USD 100.117,
Broker JPMorgan Chase Bank (9,205)
1,500 FNMA, expiring January 2006 at
USD 96.156, Broker Deutsche Bank AG (106,635)
1,200 FNMA, expiring January 2006 at
USD 96.687, Broker Lehman Brothers
Special Finance (72,588)
2,800 FNMA, expiring January 2006 at
USD 98.421, Broker JPMorgan
Chase Bank (163,604)
1,450 FNMA, expiring January 2006 at
USD 98.515, Broker Lehman Brothers
Special Finance (61,190)
2,300 FNMA, expiring January 2006 at
USD 100.5, Broker Lehman Brothers
Special Finance (90,275)
11++ Pay fixed rate of 4.86375% and receive
a floating rate based on 3-month
LIBOR, expiring January 2006,
Broker HSBC Bank USA (e) (13,299)
6++ Pay fixed rate of 4.885% and receive
a floating rate based on 3-month
LIBOR, expiring January 2006,
Broker HSBC Bank USA (e) (14,244)
6++ Pay fixed rate of 4.937% and receive
a floating rate based on 3-month
LIBOR, expiring January 2006,
Broker HSBC Bank USA (e) (28,607)
2++ Pay fixed rate of 5.055% and receive
a floating rate based on 3-month
LIBOR, expiring January 2006, Broker
Lehman Brothers Special Finance (e) (27,438)
18 U.S. Treasury Notes, expiring January
2006 at USD 100.015 (19,687)
30 U.S. Treasury Notes, expiring January
2006 at USD 100.304, Broker
Lehman Brothers Special Finance (96,090)
15 U.S. Treasury Notes, expiring January
2006 at USD 101.265 (58,575)
5 U.S. Treasury Bonds, expiring January
2006 at USD 113.65, Broker
JPMorgan Chase Bank (43,125)
Total Options Written
(Premiums Received--$688,822)--(0.4%) (804,562)
Total Investments, Net of Options Written
(Cost--$277,539,844*)--114.3% 278,639,901
Liabilities in Excess of Other Assets--(14.3%) (34,950,246)
-------------
Net Assets--100.0% $ 243,689,655
=============
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments, net
of options written, as of December 31, 2005, as computed for federal
income tax purposes, were as follows:
Aggregate cost $ 277,539,844
==================
Gross unrealized appreciation $ 1,346,760
Gross unrealized depreciation (246,703)
------------------
Net unrealized appreciation $ 1,100,057
==================
** Mortgage-Backed Securities are subject to principal paydowns as a
result of prepayments or refinancing of the underlying mortgage
instruments. As a result, the average life may be substantially less
than the original maturity.
++ One contract represents a notional amount of $1,000,000.
(a) Floating rate note.
(b) Security was purchased with the cash proceeds from securities loans.
(c) Investments in companies considered to be an affiliate of the Fund,
for purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $ 1,920,250 $ 128,674
Merrill Lynch Liquidity Series, LLC
Money Market Series $36,383,750 $ 11,563
(d) Security, or a portion of security, is on loan.
(e) This European style swaption, which can be exercised only on the
expiration date, represents a standby commitment whereby the writer
of the option is obligated to enter into a predetermined interest rate
swap contract upon exercise of swaption.
See Notes to Finacial Statements.
Portfolio Information as of December 31, 2005
Percent of
Total
Asset Mix Investments
Government Agency Mortgage-Backed
Obligations 45.0%
Government & Agency Obligations 41.6
Other* 13.4
* Includes portfolio holdings in short-term investments and options.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Statement of Assets, Liabilities and Capital
As of December 31, 2005
Assets
Investments in unaffiliated securities, at value (including securities
loaned of $35,078,690) (identified cost--$239,924,666) $ 241,140,463
Investments in affiliated securities, at value (identified cost--$38,304,000) 38,304,000
Receivables:
Interest $ 2,206,282
Options written 281,446
Securities lending 10,510
Principal paydowns 1,330 2,499,568
--------------- ---------------
Total assets 281,944,031
---------------
Liabilities
Collateral on securities loaned, at value 36,383,750
Options written, at value (premiums received--$688,822) 804,562
Payables:
Dividends to shareholders 417,505
Securities purchased 347,266
Investment adviser 164,448
Offering costs 99,708
Other affiliates 793 1,029,720
---------------
Accrued expenses and other liabilities 36,344
---------------
Total liabilities 38,254,376
---------------
Net Assets
Net Assets $ 243,689,655
===============
Capital
Common Stock, par value $.10 per share, 200,000,000 shares authorized $ 1,270,524
Paid-in capital in excess of par 241,051,490
Undistributed investment income--net $ 345,787
Accumulated realized capital losses--net (78,203)
Unrealized appreciation--net 1,100,057
---------------
Total accumulated earnings--net 1,367,641
---------------
Total capital--Equivalent to $19.18 per share based on 12,705,236 shares
of capital stock outstanding (market value--$18.09) $ 243,689,655
===============
See Notes to Financial Statements.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Statement of Operations
For the Period October 31, 2005++ to December 31, 2005
Investment Income
Interest (including $128,674 from affiliates) $ 2,022,870
Securities lending--net 11,563
---------------
Total income 2,034,433
---------------
Expenses
Investment advisory fees $ 357,767
Accounting services 15,319
Custodian fees 5,110
Professional fees 4,468
Directors' fees and expenses 4,354
Pricing services 3,858
Transfer agent fees 2,304
Other 4,443
---------------
Total expenses 397,623
---------------
Investment income--net 1,636,810
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net (95,236)
Short sales--net (188,125)
Options written--net 396,417 113,056
---------------
Unrealized appreciation/depreciation on:
Investments--net 1,215,797
Options written--net (115,740) 1,100,057
--------------- ---------------
Total realized and unrealized gain--net 1,213,113
---------------
Net Increase in Net Assets Resulting from Operations $ 2,849,923
===============
++ Commencement of operations.
See Notes to Financial Statements.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Statement of Changes in Net Assets
For the Period
October 31, 2005++
to December 31,
Increase (Decrease) in Net Assets: 2005
Operations
Investment income--net $ 1,636,810
Realized gain--net 113,056
Unrealized appreciation--net 1,100,057
---------------
Net increase in net assets resulting from operations 2,849,923
---------------
Dividends & Distributions to Shareholders
Investment income--net (1,291,023)
Realized gain--net (191,259)
---------------
Net decrease in net assets resulting from dividends and distributions to shareholders (1,482,282)
---------------
Capital Stock Transactions
Net proceeds from issuance of Common Stock 242,570,000
Offering costs resulting from the issuance of Common Stock (347,994)
---------------
Net increase in net assets resulting from capital stock transactions 242,222,006
---------------
Net Assets
Total increase in net assets 243,589,647
Beginning of period 100,008
---------------
End of period* $ 243,689,655
===============
* Undistributed investment income--net $ 345,787
===============
++ Commencement of operations.
See Notes to Financial Statements.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Financial Highlights
For the Period
October 31, 2005++
The following per share data and ratios have been derived to December 31,
from information provided in the financial statements. 2005
Per Share Operating Performance
Net asset value, beginning of period $ 19.10
---------------
Investment income--net** .13
Realized and unrealized gain--net .10
---------------
Total from investment operations .23
---------------
Less dividends and distributions:
Investment income--net (.10)
Realized gain--net (.02)
---------------
Total dividends and distributions (.12)
---------------
Offering costs resulting from the issuance of Common Stock (.03)
---------------
Net asset value, end of period $ 19.18
===============
Market price per share, end of period $ 18.09
===============
Total Investment Return***
Based on net asset value per share 1.06%+++
===============
Based on market price per share (8.97%)+++
===============
Ratios to Average Net Assets
Expenses .94%*
===============
Investment income--net 3.89%*
===============
Supplemental Data
Net assets, end of period (in thousands) $ 243,690
===============
Portfolio turnover 20.10%
===============
* Annualized.
** Based on average shares outstanding.
*** Total investment returns based on market price, 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.
++ Commencement of operations.
+++ Aggregate total investment return.
See Notes to Financial Statements.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Notes to Financial Statements
1. Significant Accounting Policies:
Enhanced Government Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a diversified, closed-end management
investment company. Prior to commencement of operations on October 31, 2005,
the Fund had no operations other than those relating to organizational matters
and the sale of 5,236 shares of Common Stock on October 14, 2005 to Fund Asset
Management, L.P. ("FAM") for $100,008. The Fund's financial statements are
prepared in conformity with U.S generally accepted accounting principles,
which may require the use of management accruals and estimates. Actual results
may differ from these estimates The Fund determines and makes available for
publication the net asset value of its Common Stock on a daily basis. The
Fund's Common Stock shares are listed on the New York Stock Exchange ("NYSE")
under the symbol EGF. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Debt securities are traded primarily in the over-
the-counter ("OTC") markets and are valued at the last available bid price in
the OTC market or on the basis of values obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
direction of the Board of Directors. Such valuations and procedures will be
reviewed periodically by the Board of Directors of the Fund. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their closing prices as of the close of such exchanges. Options written or
purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the OTC market, valuation is the
last asked price (options written) or the last bid price (options purchased).
Swap agreements are valued based upon quoted fair valuations received daily by
the Fund from a pricing service or counterparty. Short-term investments with a
remaining maturity of 60 days or less are valued at amortized cost, which
approximates market value, under which method the investment is valued at cost
and any premium or discount is amortized on a straight line basis to maturity.
Repurchase agreements are valued at cost plus accrued interest. Investments in
open-end investment companies are valued at their net asset value each
business day. Securities and other assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund.
Equity securities that are held by the Fund, which are traded on stock
exchanges or the Nasdaq National Market, are valued at the last sale price or
official close price on the exchange, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last available
bid price for long positions, and at the last available asked price for short
positions. In cases where equity securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Directors of the Fund. Long
positions traded in the OTC market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price obtained from one or more dealers or
pricing services approved by the Board of Directors of the Fund. Short
positions traded in the OTC market are valued at the last available asked
price. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market.
Generally, trading in foreign securities, as well as U.S. government
securities, money market instruments and certain fixed income securities is
substantially completed each day at various times prior to the close of
business on the New York Stock Exchange ("NYSE"). The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates also are
generally determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of business
on the NYSE that may not be reflected in the computation of the Fund's net
asset value. If events (for example, a company announcement, market volatility
or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Fund's Board of
Directors or by the Investment Adviser using a pricing service and/or
procedures approved by the Fund's Board of Directors.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Notes to Financial Statements (continued)
(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.
* Options--The Fund may write 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 to reflect 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.
* 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.
* Swaps--The Fund may enter into swap agreements, which are OTC contracts in
which the Fund and a counterparty agree to make periodic net payments on a
specified notional amount. The net payments can be made for a set period of
time or may be triggered by a predetermined credit event. The net periodic
payments may be based on a fixed or variable interest rate; the change in
market value of a specified security, basket of securities, or index; or the
return generated by a security. These periodic payments received or made by
the Fund are recorded in the accompanying Statement of Operations as realized
gains or losses, respectively. Gains or losses are realized upon termination
of the swap agreements. Swaps are marked-to-market daily and changes in value
are recorded as unrealized appreciation (depreciation). Risks include changes
in the returns of the underlying instruments, failure of the counterparties to
perform under the contracts' terms and the possible lack of liquidity with
respect to the swap agreements.
(c) 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 are declared and paid monthly.
(f) Offering expenses--Direct expenses relating to the public offering of the
Fund's Common Stock were charged to capital at the time of issuance of the
shares.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Notes to Financial Statements (continued)
(g) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on the loaned securities but does not receive the income
on the collateral. Where the Fund receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any other reason, the Fund could experience
delays and costs in gaining access to the collateral. The Fund also could
suffer a loss where the value of the collateral falls below the market value
of the borrowed securities, in the event of borrower default or in the event
of losses on investments made with cash collateral.
(h) Short sales--When the Fund engages in a short sale, an amount equal to the
proceeds received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked-to-market to
reflect the market value of the short sale. The Fund maintains a segregated
account of securities as collateral for the short sales. The Fund is exposed
to market risk based on the amount, if any, that the market value of the stock
exceeds the market value of the securities in the segregated account. The Fund
is required to repay the counterparty any dividends or interest received on
the security sold short.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with 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 .85% of the Fund's average daily net assets.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, or its
affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private
investment company managed by MLIM, LLC or in registered money market funds
advised by FAM or its affiliates. For the period October 31, 2005 to December
31, 2005, MLIM, LLC received $5,593 in securities lending agent fees.
For the period October 31, 2005 to December 31, 2005, MLPF&S received gross
fees from underwriting of $7,277,360 in connection with the issuance of the
Fund's Common Stock. In addition, the Fund reimbursed MLPF&S $50,367 as a
partial reimbursement of expenses incurred in connection with the issuance of
the Fund's Common Stock.
For the period October 31, 2005 to December 31, 2005, the Fund reimbursed FAM
$793 for certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, ML & Co., and/or MLIM, LLC.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the period October 31, 2005 to December 31, 2005 were
$284,825,695 and $44,774,773, respectively.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Notes to Financial Statements (concluded)
Transactions in options written for the period October 31, 2005 to December
31, 2005 were as follows:
Number of Premiums
Contracts++ Received
Outstanding call options written,
beginning of period -- --
Options written 97,027 $ 1,686,875
Options expired (79,427) (292,422)
Options closed (8,250) (705,631)
-------------- --------------
Outstanding call options written,
end of period 9,350 $ 688,822
============== ==============
++ Some contracts include a notional amount of $1,000,000.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, par value
$.10, all of which were initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued
shares of capital stock without approval of the holders of Common Stock.
Shares issued and outstanding during the period October 31, 2005 to December
31, 2005 increased 12,700,000 from shares sold.
5. Distributions to Shareholders:
The tax character of distributions paid during the period October 31, 2005 to
December 31, 2005 was as follows:
10/31/2005++ to
12/31/2005
Distributions paid from:
Ordinary income $ 1,482,282
--------------
Total taxable distributions $ 1,482,282
==============
++ Commencement of operations.
As of December 31, 2005, the components of accumulated earnings on a
tax basis were as follows:
Undistributed ordinary income--net $ 345,787
Undistributed long-term capital gains--net --
--------------
Total undistributed earnings--net 345,787
Capital loss carryforward --
Unrealized gains--net 1,021,854*
--------------
Total accumulated earnings--net $ 1,367,641
==============
* The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the tax deferral of losses on
straddles.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
of Enhanced Government Fund, Inc.:
We have audited the accompanying statement of net assets, liabilities and
capital of Enhanced Government Fund, Inc., including the schedule of
investments, as of December 31, 2005, and the related statement of operations,
the statement of changes in net assets and the financial highlights for the
period October 31, 2005 (commencement of operations) to December 31, 2005.
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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. We were not engaged to perform an audit of the Fund's internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of December 31, 2005, by
correspondence with the custodian and brokers. We believe that our audit
provides 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
Enhanced Government Fund, Inc. at December 31, 2005, the results of its
operations, the changes in its net assets and the financial highlights for the
period October 31, 2005 to December 31, 2005, in conformity with U.S.
generally accepted accounting principles.
(Ernst & Young, LLP)
Philadelphia, Pennsylvania
February 8, 2006
Fund Certification (unaudited)
In September 2005, the Fund filed its Chief Executive Officer Certification
for the prior year with the New York Stock Exchange pursuant to Section
303A.12(a) of the New York Stock Exchange Corporate Governance Listing
Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Automatic Dividend Reinvestment Plan
How the Plan Works--The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by The Bank of New York
(the "Plan Agent"). Under the Plan, whenever the Fund declares a dividend,
participants in the Plan will receive the equivalent in shares of Common Stock
of the Fund. The Plan Agent will acquire the shares for the participant's
account either (i) through receipt of additional unissued but authorized
shares of the Fund ("newly issued shares") or (ii) by purchase of outstanding
shares of Common Stock on the open market on the New York Stock Exchange or
elsewhere. If, on the dividend payment date, the Fund's net asset value per
share is equal to or less than the market price per share plus estimated
brokerage commissions (a condition often referred to as a "market premium"),
the Plan Agent will invest the dividend amount in newly issued shares. If the
Fund's net asset value per share is greater than the market price per share (a
condition often referred to as a "market discount"), the Plan Agent will
invest the dividend amount by purchasing on the open market additional shares.
If the Plan Agent is unable to invest the full dividend amount in open market
purchases, or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will invest any uninvested portion in newly
issued shares. The shares acquired are credited to each shareholder's account.
The amount credited is determined by dividing the dollar amount of the
dividend by either (i) when the shares are newly issued, the net asset value
per share on the date the shares are issued or (ii) when shares are purchased
in the open market, the average purchase price per share.
Participation in the Plan--Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan, must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any
time without penalty by writing to the Plan Agent.
Benefits of the Plan--The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares
acquired pursuant to the Plan receive voting rights. In addition, if the
market price plus commissions of the Fund's shares is above the net asset
value, participants in the Plan will receive shares of the Fund for less than
they could otherwise purchase them and with a cash value greater than the
value of any cash distribution they would have received. However, there may
not be enough shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
Plan Fees--There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders
will pay a pro rata share of any such commissions.
Tax Implications--The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that
may be payable (or required to be withheld) on such dividends. Therefore,
income and capital gains may still be realized even though shareholders do not
receive cash. Participation in the Plan generally will not effect the tax-
exempt status of exempt interest dividends paid by the Fund. If, when the
Fund's shares are trading at a market premium, the Fund issues shares pursuant
to the Plan that have a greater fair market value than the amount of cash
reinvested, it is possible that all or a portion of the discount from the
market value (which may not exceed 5% of the fair market value of the Fund's
shares) could be viewed as a taxable distribution. If the discount is viewed
as a taxable distribution, it is also possible that the taxable character of
this discount would be allocable to all the shareholders, including
shareholders who do not participate in the Plan. Thus, shareholders who do not
participate in the Plan might be required to report as ordinary income a
portion of their distributions equal to their allocable share of the discount.
Contact Information--All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at The Bank of
New York, Church Street Station, P.O. Box 11258, New York, NY 10286-1258,
Telephone: 800-432-8224.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Robert C. Doll, Jr.* President 2005 to President of the MLIM/FAM-advised funds since 131 Funds None
P.O. Box 9011 and present 2005; President of MLIM and FAM since 2001; 177 Portfolios
Princeton, Director Co-Head (Americas Region) thereof from 2000
NJ 08543-9011 to 2001 and Senior Vice President from 1999
Age: 51 to 2001; President and Director of Princeton
Services, Inc. ("Princeton Services") since
2001; President of Princeton Administrators,
L.P. ("Princeton Administrators") since 2001;
Chief Investment Officer of OppenheimerFunds,
Inc. in 1999 and Executive Vice President
thereof from 1991 to 1999.
* Mr. Doll is a director, trustee or member of an advisory board of certain other
investment companies for which MLIM or FAM acts as investment adviser. Mr. Doll
is an "interested person," as described in the Investment Company Act, of the
Fund based on his current positions with MLIM, FAM, Princeton Services and
Princeton Administrators. Directors serve until their resignation, removal or
death, or until December 31 of the year in which they turn 72. As Fund
President, Mr. Doll serves at the pleasure of the Board of Directors.
Independent Directors*
David O. Beim** Director 2005 to Professor of Finance and Economics at the 20 Funds None
P.O. Box 9095 present Columbia University Graduate School of 26 Portfolios
Princeton, Business since 1991; Chairman of Outward
NJ 08543-9095 Bound USA from 1997 to 2001; Chairman of Wave
Age: 65 Hill Inc., since 1990; Trustee of Phillips
Exeter Academy from 2002 to present.
James T. Flynn Director 2005 to Chief Financial Officer of JPMorgan & Co., 20 Funds None
P.O. Box 9095 present Inc. from 1990 to 1995 and an employee of 26 Portfolios
Princeton, JPMorgan in various capacities from 1967
NJ 08543-9095 to 1995.
Age: 66
W. Carl Kester Director 2005 to Mizuho Financial Group, Professor of Finance, 21 Funds None
P.O. Box 9095 present Harvard Business School, Unit Head, Finance 27 Portfolios
Princeton, since 2005; Senior Associate Dean and Chairman
NJ 08543-9095 of the MBA Program of Harvard Business School,
Age: 54 1999 to 2005, Member of the faculty of Harvard
Business School since 1981; Independent
Consultant since 1978.
Karen P. Robards*** Director 2005 to President of Robards & Company, a financial 20 Funds AtriCure, Inc.
P.O. Box 9095 present advisory firm since 1987; formerly an 26 Portfolios (medical
Princeton, investment banker with Morgan Stanley for more devices)
NJ 08543-9095 than ten years; Director of Enable Medical
Age: 55 Corp. from 1996 to 2005; Director of AtriCure,
Inc. since 2000; Director of the Cooke Center
for Learning and Development, a not-for-profit
organization, since 1987.
* Directors serve until their resignation, removal or death, or until December 31
of the year in which they turn 72.
** Chairman of the Audit Committee.
*** Chair of the Board.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 2005 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
P.O. Box 9011 President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
Princeton, and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999 and
NJ 08543-9011 Treasurer Director since 2004; Vice President of MLIM and FAM from 1990 to 1997; Director
Age: 45 of Taxation of MLIM from 1990 to 2001; Vice President, Treasurer and Secretary of
the IQ Funds since 2004.
Thomas Musmanno Vice 2005 to Director (Global Fixed Income) of MLIM since 2004; Vice President of MLIM from
P.O. Box 9011 President present 1996 to 2004; Derivatives and Structured Products Specialist with MLIM from 2000
Princeton, to 2002.
NJ 08543-9011
Age: 36
Frank Viola Vice 2005 to Managing Director of MLIM since 2002; Head of the Global Fixed Income
P.O. Box 9011 President present Structured Asset Team since 2002; Director (Global Fixed Income) of MLIM
Princeton, from 2000 to 2001 and Vice President from 1997 to 2000.
NJ 08543-9011
Age: 41
Jeffrey Hiller Chief 2005 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
P.O. Box 9011 Compliance present and Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance
Princeton, Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
NJ 08543-9011 Investment Management from 2002 to 2004; Managing Director and Global Director
Age: 54 of Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Commission's Division of
Enforcement in Washington, D.C. from 1990 to 1995.
Alice A. Pellegrino Secretary 2005 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
P.O. Box 9011 present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD
Princeton, and Princeton Services since 2004.
NJ 08543-9011
Age: 45
* Officers of the Fund serve at the pleasure of the Board of Directors.
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
The Bank of New York
101 Barclay Street--11 East
New York, NY 10286
NYSE Symbol
EGF
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2005
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)
David O. Beim, (2) W. Carl Kester, (3) James T. Flynn and (4) Karen
P. Robards.
The registrant's board of directors has determined that David O.
Beim, W. Carl Kester and Karen P. Robards qualify as financial
experts pursuant to Item 3(c)(4) of Form N-CSR.
Mr. Beim has a thorough understanding of generally accepted
accounting principles, financial statements and internal control
over financial reporting as well as audit committee functions. For
25 years, Mr. Beim was an investment banker actively engaged in
financial analysis for securities transactions and mergers. These
transactions presented a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised
by the Registrant's financial statements. Mr. Beim has also been a
professor of finance and economics at the Columbia University
Graduate School of Business for the past 13 years.
Prof. Kester has a thorough understanding of generally accepted
accounting principles, financial statements and internal control
over financial reporting as well as audit committee functions.
Prof. Kester has been involved in providing valuation and other
financial consulting services to corporate clients since 1978.
Prof. Kester's financial consulting services present a breadth and
level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the Registrant's financial
statements.
Ms. Robards has a thorough understanding of generally accepted
accounting principles, financial statements and internal control
over financial reporting as well as audit committee functions. Ms.
Robards has been President of Robards & Company, a financial
advisory firm, since 1987. Ms. Robards was formerly an investment
banker for more than 10 years where she was responsible for
evaluating and assessing the performance of companies based on
their financial results. Ms. Robards has over 30 years of
experience analyzing financial statements. She also is the member
of the Audit Committees of two privately held companies and a non-
profit organization.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending December 31, 2005 - $34,000
Fiscal Year Ending December 31, 2004 - N/A
(b) Audit-Related Fees -
Fiscal Year Ending December 31, 2005 - $0
Fiscal Year Ending December 31, 2004 - N/A
(c) Tax Fees - Fiscal Year Ending December 31, 2005 - $5,700
Fiscal Year Ending December 31, 2004 - N/A
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending December 31, 2005 - $0
Fiscal Year Ending December 31, 2004 - N/A
(e)(1) The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services
provided to the registrant on an annual basis require specific pre-
approval by the Committee. The Committee also must approve other
non-audit services provided to the registrant and those non-audit
services provided to the registrant's affiliated service providers
that relate directly to the operations and the financial reporting
of the registrant. Certain of these non-audit services that the
Committee believes are a) consistent with the SEC's auditor
independence rules and b) routine and recurring services that will
not impair the independence of the independent accountants may be
approved by the Committee without consideration on a specific case-
by-case basis ("general pre-approval"). However, such services
will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any
proposed services exceeding the pre-approved cost levels will
require specific pre-approval by the Committee, as will any other
services not subject to general pre-approval (e.g., unanticipated
but permissible services). The Committee is informed of each
service approved subject to general pre-approval at the next
regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending December 31, 2005 - $5,700
Fiscal Year Ending December 31, 2004 - N/A
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal
accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $0, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals
are members of the registrant's separately-designated standing
audit committee established in accordance with Section 3(a)(58)(A)
of the Exchange Act (15 U.S.C. 78c(a)(58)(A)):
David O. Beim
James T. Flynn
W. Carl Kester
Karen P. Robards
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill
Lynch Investment Managers, L.P. and/or Fund Asset Management, L.P.
(the "Investment Adviser") authority to vote all proxies relating
to the Fund's portfolio securities. The Investment Adviser has
adopted policies and procedures ("Proxy Voting Procedures") with
respect to the voting of proxies related to the portfolio
securities held in the account of one or more of its clients,
including a Fund. Pursuant to these Proxy Voting Procedures, the
Investment Adviser's primary objective when voting proxies is to
make proxy voting decisions solely in the best interests of each
Fund and its shareholders, and to act in a manner that the
Investment Adviser believes is most likely to enhance the economic
value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser
considers the interests of its clients, including the Funds, and
not the interests of the Investment Adviser, when voting proxies
and that real (or perceived) material conflicts that may arise
between the Investment Adviser's interest and those of the
Investment Adviser's clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment
professionals appointed by the CIO, portfolio managers and
investment analysts appointed by the CIO and any other personnel
the CIO deems appropriate. The Committee will also include two non-
voting representatives from the Investment Adviser's Legal
department appointed by the Investment Adviser's General Counsel.
The Committee's membership shall be limited to full-time employees
of the Investment Adviser. No person with any investment banking,
trading, retail brokerage or research responsibilities for the
Investment Adviser's affiliates may serve as a member of the
Committee or participate in its decision making (except to the
extent such person is asked by the Committee to present information
to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser
might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy
voting authority to the Investment Adviser and seeks to ensure that
all votes are consistent with the best interests of those clients
and are free from unwarranted and inappropriate influences. The
Committee establishes general proxy voting policies for the
Investment Adviser and is responsible for determining how those
policies are applied to specific proxy votes, in light of each
issuer's unique structure, management, strategic options and, in
certain circumstances, probable economic and other anticipated
consequences of alternate actions. In so doing, the Committee may
determine to vote a particular proxy in a manner contrary to its
generally stated policies. In addition, the Committee will be
responsible for ensuring that all reporting and recordkeeping
requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and
requires a case-by-case determination. In such cases, the
Committee may elect not to adopt a specific voting policy
applicable to that issue. The Investment Adviser believes that
certain proxy voting issues require investment analysis - such as
approval of mergers and other significant corporate transactions -
akin to investment decisions, and are, therefore, not suitable for
general guidelines. The Committee may elect to adopt a common
position for the Investment Adviser on certain proxy votes that are
akin to investment decisions, or determine to permit the portfolio
manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected
that the Investment Adviser will generally seek to vote proxies
over which the Investment Adviser exercises voting authority in a
uniform manner for all the Investment Adviser's clients, the
Committee, in conjunction with a Fund's portfolio manager, may
determine that the Fund's specific circumstances require that its
proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee
has retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address
special circumstances that can arise in connection with proxy
voting. For instance, under the Proxy Voting Procedures, the
Investment Adviser generally will not seek to vote proxies related
to portfolio securities that are on loan, although it may do so
under certain circumstances. In addition, the Investment Adviser
will vote proxies related to securities of foreign issuers only on
a best efforts basis and may elect not to vote at all in certain
countries where the Committee determines that the costs associated
with voting generally outweigh the benefits. The Committee may at
any time override these general policies if it determines that such
action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or
if the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary
to advise the Committee on how to vote or to cast votes on behalf of the
Investment Adviser's clients.
In the event that the Committee determines not to retain an
independent fiduciary, or it does not follow the advice of such an
independent fiduciary, the powers of the Committee shall pass to a
subcommittee, appointed by the CIO (with advice from the Secretary
of the Committee), consisting solely of Committee members selected
by the CIO. The CIO shall appoint to the subcommittee, where
appropriate, only persons whose job responsibilities do not include
contact with the Client and whose job evaluations would not be
affected by the Investment Adviser's relationship with the Client
(or failure to retain such relationship). The subcommittee shall
determine whether and how to vote all proxies on behalf of the
Investment Adviser's clients or, if the proxy matter is, in their
judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting
guidelines or, on matters where the Investment Adviser's policy is
case-by-case, does not follow the voting recommendation of any
proxy voting service or other independent fiduciary that may be
retained to provide research or advice to the Investment Adviser on
that matter, no proxies relating to the Client may be voted unless
the Secretary, or in the Secretary's absence, the Assistant
Secretary of the Committee concurs that the subcommittee's
determination is consistent with the Investment Adviser's fiduciary
duties
In addition to the general principles outlined above, the
Investment Adviser has adopted voting guidelines with respect to
certain recurring proxy issues that are not expected to involve
unusual circumstances. These policies are guidelines only, and the
Investment Adviser may elect to vote differently from the
recommendation set forth in a voting guideline if the Committee
determines that it is in a Fund's best interest to do so. In
addition, the guidelines may be reviewed at any time upon the
request of a Committee member and may be amended or deleted upon
the vote of a majority of Committee members present at a Committee
meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
* 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.
* 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.
* 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.
* 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.
* 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.
* Routine proposals related to requests regarding the formalities of
corporate meetings.
* 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.
* Proposals related to limiting corporate conduct in some manner that relates
to the shareholder's environmental or social concerns. The Committee
generally believes that annual shareholder meetings are inappropriate
forums for discussion of larger social issues, and opposes shareholder
resolutions "micromanaging" corporate conduct or requesting release of
information that would not help a shareholder evaluate an investment in the
corporation as an economic matter. While the Committee is generally
supportive of proposals to require corporate disclosure of matters that
seem relevant and material to the economic interests of shareholders, the
Committee is generally not supportive of proposals to require disclosure of
corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
as of December 31, 2005.
(a)(1) The portfolio managers are Frank Viola and Thomas Musmanno.
They are jointly responsible for the day-to-day management
of the Fund's portfolio. Mr. Viola has been a portfolio
manager at MLIM since 1997 and a Managing Director of MLIM
since 2002, and was a Director of MLIM from 2000 to 2002 and
a Vice President of MLIM from 1997 to 2000. Mr. Viola has
five years of experience as a portfolio manager for
registered investment companies. He has been a portfolio
manager and Vice President of the Fund since 2005. Mr.
Musmanno has been a Director of MLIM since 2004 and was a
Vice President of MLIM from 1996 to 2004. He has been the
Derivatives and Structured Products Specialist with MLIM
since 2000 and has been a portfolio manager in the fixed
income management group with MLIM since 1996. Mr. Musmanno
has five years of experience as a portfolio manager for
registered investment companies. He has been a portfolio
manager and Vice President of the Fund since 2005.
(a)(2) As of December 31, 2005:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other Other
(i) Name of Registered Other Pooled Registered Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
Frank Viola 15 4 12 0 0 1
$ 9,853,248,850 $ 10,823,692,465 $ 3,668,683,883 $ 0 $ 0 $ 150,619,370
Thomas F.
Musmanno 6 1 0 0 0 0
$ 4,409,946,502 $ 10,221,241,717 $ 0 $ 0 $ 0 $ 0
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for
other clients advised by the Investment. Adviser and its affiliates, including
other client accounts managed by the Fund's portfolio management team.
Investment decisions for the Fund and other clients are made with a view to
achieving their respective investment objectives and after consideration of
such factors as their current holdings, availability of cash for investment and
the size of their investments generally. Frequently, a particular security may
be bought or sold for only one client or in different amounts and at different
times for more than one but less than all clients. Likewise, because clients of
the Investment Adviser and its affiliates may have differing investment
strategies, a particular security may be bought for one or more clients when
one or more other clients are selling the security. The investment results for
the Fund may differ from the results achieved by other clients of the
Investment Adviser and its affiliates and results among clients may differ. In
addition, purchases or sales of the same security may be made for two or more
clients on the same day. In such event, such transactions will be allocated
among the clients in a manner believed by the Investment Adviser and its
affiliates to be equitable to each. The Investment Adviser will not determine
allocations based on whether it receives a performance based fee from the
client. In some cases, the allocation procedure could have an adverse effect on
the price or amount of the securities purchased or sold by the Fund. Purchase
and sale orders for the Fund may be combined with those of other clients of the
Investment Adviser and its affiliates in the interest of achieving the most
favorable net results to the Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a portfolio
manager will need to divide his time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also
arise where (i) the Investment Adviser may have an incentive, such as a
performance based fee, in managing one account and not with respect to other
accounts it manages or (ii) where a member of the Fund's portfolio management
team owns an interest in one fund or account he or she manages and not another.
(a)(3) As of December 31, 2005:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its affiliates,
including the Investment Adviser (collectively, "MLIM"), is critical to MLIM's
ability to attract and retain the most talented asset management professionals.
This program ensures that compensation is aligned with maximizing investment
returns and it provides a competitive pay opportunity for competitive
performance.
Compensation Program
The elements of total compensation for MLIM portfolio managers are a
fixed base salary, annual performance-based cash and stock compensation (cash
and stock bonus) and other benefits. MLIM has balanced these components of pay
to provide portfolio managers with a powerful incentive to achieve consistently
superior investment performance. By design, portfolio manager compensation
levels fluctuate--both up and down--with the relative investment performance of
the portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms, base
salaries that are fixed on an annual basis represent a relatively small portion
of a portfolio manager's total compensation. This approach serves to enhance
the motivational value of the performance-based (and therefore variable)
compensation elements of the compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent.
To that end, portfolio manager incentive compensation for MLIM and its
affiliates is based on a formulaic compensation program. MLIM's formulaic
portfolio manager compensation program includes: investment performance
relative to general closed-end, non-leveraged, fixed income funds over 1-, 3-,
and 5-year performance periods and a measure of operational efficiency.
Portfolio managers are compensated based on the pre-tax performance of the
products they manage. A discretionary element of portfolio manager compensation
may include consideration of: financial results of MLIM, expense control,
profit margins, strategic planning and implementation, quality of client
service, market share, corporate reputation, capital allocation, compliance and
risk control, leadership, workforce diversity, technology and innovation. MLIM
and its affiliates also consider the extent to which individuals exemplify and
foster Merrill Lynch's principles of client focus, respect for the individual,
teamwork, responsible citizenship and integrity. All factors are considered
collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in
a combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based
bonus is paid in restricted shares of Merrill Lynch & Co., Inc. (herein, the
"Company") stock. Paying a portion of annual bonuses in stock puts compensation
earned by a portfolio manager for a given year "at risk" based on the Company's
ability to sustain and improve its performance over future periods. The
ultimate value of stock bonuses is dependent on future Company stock price
performance. As such, the stock bonus aligns each portfolio manager's financial
interests with those of the Company shareholders and encourages a balance
between short-term goals and long-term strategic objectives. Management
strongly believes that providing a significant portion of competitive
performance-based compensation in stock is in the best interests of investors
and shareholders. This approach ensures that portfolio managers participate as
shareholders in both the "downside risk" and "upside opportunity" of the
Company's performance. Portfolio managers therefore have a direct incentive to
protect the Company's reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and
financial management objectives during a performance year are eligible to
participate in a deferred cash program. Awards under this program are in the
form of deferred cash that may be benchmarked to a menu of MLIM mutual funds
(including their own fund) during a five-year vesting period. The deferred cash
program aligns the interests of participating portfolio managers with the
investment results of MLIM products and promotes continuity of successful
portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based
plans offered generally to the Company's employees, including broad-based
retirement, 401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of December 31,
2005, Mr. Viola does not beneficially own any stock issued
by the Fund. As of December 31, 2005, Mr. Musmanno does not
beneficially own any stock issued by the Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined
that the registrant's disclosure controls and procedures are
effective based on our evaluation of these controls and procedures
as of a date within 90 days prior to the filing date of this
report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the second fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Enhanced Government Fund, Inc.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Enhanced Government Fund, Inc.
Date: February 21, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Enhanced Government Fund, Inc.
Date: February 21, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
Enhanced Government Fund, Inc.
Date: February 21, 2006