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: BlackRock 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, BlackRock 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: 12/31/06
Date of reporting period: 01/01/06 - 12/31/06
Item 1 - Report to Stockholders
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY
REAL ESTATE
BlackRock Enhanced Government Fund, Inc.
ANNUAL REPORT DECEMBER 31, 2006
(BLACKROCK logo)
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
BlackRock 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 BlackRock 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 1-800-441-7762; (2) at
www.blackrock.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.blackrock.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
BlackRock Enhanced Government Fund, Inc.
P.O. Box 9011
Princeton, NJ 08543-9011
(GO PAPERLESS... logo)
It's Fast, Convenient, & Timely!
BlackRock Enhanced Government Fund, Inc.
Portfolio Information as of December 31, 2006
Percent of
Total
Asset Mix Investments
Government Agency Mortgage-Backed
Securities 58.3%
Government & Agency Obligations 27.3
Non-Government Agency
Mortgage-Backed Securities 10.4
Other* 4.0
* Includes portfolio holdings in options written and short-term
investments.
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.
During the fiscal year ended December 31, 2006, the Fund conducted a
repurchase offer for its shares pursuant to Rule 23c-3 under the 1940 Act as
summarized in the following table:
Number of Amount of Number of Shares
Repurchase Offers Repurchase Offer Tendered
1 638,178 23,997
For additional information, see Note 4 in the Notes to Financial Statements.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
A Letter to Shareholders
Dear Shareholder
As 2007 begins, we are able to look back on 2006 as a volatile, but ultimately,
a positive year for most major markets. Returns for the annual and semi-annual
periods ended December 31, 2006 were as follows:
Total Returns as of December 31, 2006 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) +12.74% +15.79%
Small cap U.S. equities (Russell 2000 Index) + 9.38 +18.37
International equities (MSCI Europe, Australasia, Far East Index) +14.69 +26.34
Fixed income (Lehman Brothers Aggregate Bond Index) + 5.09 + 4.33
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 4.55 + 4.84
High yield bonds (Credit Suisse High Yield Index) + 8.14 +11.92
After raising the target short-term interest rate 17 times between June 2004
and June 2006, the Federal Reserve Board (the Fed) finally opted to pause on
August 8, 2006. This left the federal funds rate at 5.25%, where it remained
through year-end. In interrupting its two-year interest rate-hiking campaign,
the Fed acknowledged that economic growth is slowing, led by a downturn in the
housing market, but has maintained a cautionary view on inflation.
Overall, it was a good 12 months for U.S. equities, despite a significant
correction in the middle of the year that was largely triggered by rising
interest rates, inflation fears, elevated oil prices and geopolitical
uncertainties. Nevertheless, strong corporate earnings, abundant liquidity and
record merger-and-acquisition activity provided a solid backdrop for stocks.
Many international equity markets (with the notable exception of Japan)
performed even better, outpacing U.S. stocks for the fifth consecutive year.
Strength was especially notable in European equities and select emerging
markets.
Bonds experienced a more modest annual return than stocks. Interest rates and
bond yields moved higher for much of the year as bond prices, which move
opposite of yields, declined. Prices began to improve in the summer as the
economy showed signs of weakening and the Fed paused. Notably, the Treasury
curve remained inverted for much of 2006. The 10-year Treasury yield ended
December at 4.71%, well below the federal funds rate.
As we begin a new year, investors are left with a few key questions: Will the
U.S. economy achieve a soft landing, will the Fed reverse its prior policy and
cut interest rates, and how might these outcomes impact the investment
climate. As you navigate the uncertainties inherent in the financial markets,
we encourage you to start the year by reviewing your investment goals with
your financial professional and making portfolio changes, as needed. For more
reflection on 2006 and our thoughts on the year ahead, please ask your
financial professional for a copy of "What's Ahead in 2007: An Investment
Perspective," or view it online at www.blackrock.com/funds. We thank you for
trusting BlackRock with your investment assets, and we look forward to
continuing to serve you in the new year and beyond.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
A Discussion With Your Fund's Portfolio Managers
The Fund continued to meet its primary objective of providing shareholders
with an attractive level of monthly income.
How did the Fund perform during the fiscal year in light of the existing
market conditions?
For the 12-month period ended December 31, 2006, the Common Stock of BlackRock
Enhanced Government Fund, Inc. (formerly Enhanced Government Fund, Inc.) had
net annualized yields of 7.57% and 7.55%, based on a year-end per share net
asset value of $18.50 and a per share market price of $18.54, respectively,
and $1.400 per share distribution (see the Financial Highlights section for a
breakdown of the distribution). Over the same period, the total investment
return on the Fund's Common Stock was +4.08%, based on a change in per share
net asset value from $19.18 to $18.50, and assuming reinvestment of all
distributions. The Citigroup Government and Mortgage Index returned +4.26% for
the same period.
Short-term interest rates, which rose steadily between January and June,
declined for most of the remainder of 2006 before backing up sharply in
December. Bond prices move in the opposite direction of yields and, as such,
this meant that the latter half of the fiscal year was generally characterized
by a return to strength for fixed income assets. The improvement in bond
prices came amid a slowdown in U.S. economic growth and the Federal Reserve
Board's decision at its August 8 meeting to refrain from raising its target
interest rate after 17 consecutive increases since June 2004. Bond prices
found additional support in moderating oil prices. Between June 30 and
November 30, 10-year Treasury yields declined 69 basis points (0.69%) from
5.15% to 4.46%. However, stronger-than-expected economic releases and year-end
profit taking pushed yields higher during December.
For the 12-month period overall, 10-year Treasury note yields rose to 4.71%
and two-year Treasury yields rose to 4.82%. These yields reflect the inverted
shape of the yield curve at year-end. In fact, for much of 2006, short-term
issues had higher yields than longer-term bonds.
The Fund posted a total return similar to that of the benchmark index while
also providing shareholders with attractive monthly income. Performance was
stronger in the first half of the year when the options-writing strategy,
which helps to cushion the portfolio from the negative price impact associated
with rising interest rates, was a clear positive. The Fund sells call options
on individual securities or baskets of securities in an effort to generate
gains from the premiums that the buyer pays on the options. In the first six
months, most of the options we wrote expired "worthless," allowing us to keep
the premium on the underlying security and thereby producing additional return
for the portfolio above that offered by the underlying securities. We also saw
a slight increase in the level of implied volatility in the market during this
time, which is a positive for the Fund. The increased volatility meant we
received slightly higher premiums for the options we were selling.
For the most part, this phenomenon reversed in the second half of the year as
interest rates fell. We still maintained an active call-writing strategy on a
portion of the portfolio, and this detracted from performance as the market
rallied. As such, the primary drivers of Fund performance in the latter six
months included sector overweights to residential and commercial mortgage-
backed securities (CMBS), as both outperformed comparable-duration Treasury
issues. In addition, our allocation to hybrid adjustable-rate mortgages (ARMs)
benefited performance as spreads continued to tighten in advance of these
securities' inclusion in the Lehman Brothers Aggregate Bond Index.
For the six-month period ended December 31, 2006, the total investment return
on the Fund's Common Stock was +3.74%, based on a change in per share net
asset value from $18.52 to $18.50, and assuming reinvestment of all
distributions. For the same period, the Citigroup Government/Mortgage Index
returned +4.86%.
For a description of the Fund's total investment return based on a change in
the per share market value of the Fund's Common Stock (as measured by the
trading price of the Fund's shares on the New York Stock Exchange), and
assuming reinvestment of dividends, please refer to the Financial Highlights
section of this report. As a closed-end fund, the Fund's shares may trade in
the secondary market at a premium or discount to the Fund's net asset value.
As a result, total investment returns based on changes in the market value of
the Fund's Common Stock can vary significantly from total investment returns
based on changes in the Fund's net asset value.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
What changes were made to the portfolio during the period?
The Fund's distribution yield is derived by combining the income from its
underlying securities with the premiums received from the options-writing
strategy. As interest rates rose in the first half of the year, we wanted to
structure the portfolio so that the majority of the yield was being generated
by the underlying securities in the portfolio, with supplemental income from
the options premiums. As such, we reduced the options position from a high of
94% in January to 69% by June 30. We returned to a position of 94% by year-end
after interest rates declined in the third quarter.
In an effort to augment yield within our portfolio of under-lying securities,
we reduced exposure to Treasury issues in favor of agency commercial mortgage-
backed securities. CMBS generate incremental yield over Treasury securities
without the maturity variability of residential mortgages. We also increased
our use of the portfolio's non-agency bucket by establishing a position in
AAA-rated mortgage-backed securities. We believe this should enhance yield in
the portfolio without increasing risk appreciably given the high credit
quality of the securities added.
We sold some of our holdings of residential mortgages in favor of hybrid ARMs
and collateralized mortgage obligations (CMOs), which are pools of mortgages
structured to provide certain cash flow based on the prepayments on the
underlying collateral. In addition to offering more stable cash flow, CMOs,
as well as ARMs, tend to withstand interest rate volatility better than
residential mortgages. Given these characteristics, we would expect them to
outperform as the yield curve resteepens.
As noted earlier, the bond market rallied and interest rates fell between June
30 and September 30, causing the covered call (options) strategy to detract
from Fund returns. We reduced some of the losses by writing out-of-the-money
options to mitigate some of the negative returns. In the case of out-of-the-
money options, the strike price is greater than the price of the underlying
security. (The assumption is that the price of the underlying security will
rise slightly). This provided us with some flexibility to participate in any
rally in bond prices.
In terms of duration, the Fund's underlying portfolio (excluding the options)
remained close to the benchmark duration for much of the year.
How would you characterize the Fund's position at the close of the period?
At year-end, the Fund continued to focus on mortgages and high-quality short-
duration spread product, including CMBS, ARMs and CMOs. We maintained a
preference for high-coupon securities relative to discounted securities and
continued to favor 15-year mortgages over 30-year securities.
Andrew Phillips
Portfolio Manager
Eric Pellicciaro
Portfolio Manager
Stuart Spodek
Portfolio Manager
January 31, 2007
Effective October 2, 2006, Andrew Phillips, Eric Pellicciaro and Stuart Spodek
assumed responsibility for the day-to-day management of the Fund's portfolio.
Mr. Phillips is a Managing Director of and portfolio manager with BlackRock,
Inc. and a member of the firm's Investment Strategy Group. He joined BlackRock
in 1991. Mr. Pellicciaro is a Managing Director of and portfolio manager with
BlackRock and a member of the Investment Strategy Group. He joined BlackRock,
Inc. in 1996 and joined the Fixed Income Portfolio Management Group in 1999.
Mr. Spodek is a Managing Director of and portfolio manager with BlackRock,
Inc. and a member of the firm's Investment Strategy Group. He joined BlackRock
in 1993 as an analyst in the Portfolio Management Group.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Schedule of Investments as of December 31, 2006 (in U.S. dollars)
Face Interest Maturity
Issue Amount Rate Date(s) Value
Government & Agency Obligations--29.2%
Fannie Mae $ 5,000,000 2.375% 2/15/2007 $ 4,983,430
3,500,000 5.25 4/15/2007 3,500,714
3,050,000 6.375 6/15/2009 3,146,728
2,000,000 6.625 9/15/2009 2,082,486
1,375,000 7.25 1/15/2010 1,462,854
3,000,000 6.00 5/15/2011 3,123,699
Federal Farm Credit Bank 3,500,000 4.55 6/08/2020 3,283,014
Federal Home Loan Bank System 1,000,000 4.125 10/19/2007 991,313
3,525,000 5.40 10/27/2011 (g) 3,523,875
Freddie Mac 1,000,000 6.25 7/15/2032 1,150,850
U.S. Treasury Bonds 789,000 8.125 8/15/2019 1,030,816
1,220,000 8.50 2/15/2020 1,647,667
2,500,000 6.25 5/15/2030 2,978,125
1,500,000 4.50 2/15/2036 1,426,407
U.S. Treasury Notes 11,500,000 3.625 6/30/2007 11,422,732
1,990,000 3.00 2/15/2008 1,947,247
75,000 4.875 8/15/2009 75,226
11,000,000 4.25 8/15/2013 10,724,142
3,885,000 4.625 11/15/2016 3,859,507
4,800,000 8.75 5/15/2020 6,619,497
Total Government & Agency Obligations (Cost--$69,494,712)--29.2% 68,980,329
Government Agency Mortgage-Backed Securities**--62.4%
Fannie Mae Guaranteed Pass-Through Certificates 8,886,441 4.50 4/01/2020 - 11/01/2020 8,573,650
1,945,533 4.66 7/01/2010 1,905,731
6,428,973 4.681 2/01/2013 6,376,008
8,242,979 5.316 10/01/2035 (a) 8,236,887
20,654,447 5.50 11/01/2020 - 11/01/2035 20,445,972
2,838,893 5.707 2/01/2012 2,939,227
20,297,167 6.00 10/01/2035 - 1/15/2037 (d) 20,431,339
5,571,538 6.60 1/01/2011 5,771,140
Fannie Mae Trust 353-2 4,935,004 5.00 8/01/2034 (e) 1,180,452
378-5 4,963,189 5.00 7/01/2036 (e) 1,138,429
Freddie Mac Mortgage Participation Certificates 1,111,374 4.50 5/01/2034 1,043,681
4,523,701 5.00 5/01/2020 4,444,626
15,442,799 5.00 11/01/2035 14,905,653
4,657,401 5.012 10/01/2035 (a) 4,619,504
675,787 5.50 10/01/2035 668,458
2,538,395 6.00 10/01/2035 2,557,741
4,936,189 6.50 9/01/2035 - 10/01/2035 5,028,537
Freddie Mac Multiclass Certificates 2958-MD 5,000,000 5.50 1/15/2031 4,972,787
3042-EA 2,680,000 4.50 9/15/2035 2,433,546
3081-CP 1,600,000 5.50 10/15/2034 1,574,320
3136-PD 1,674,840 6.00 12/15/2034 1,694,160
Ginnie Mae MBS Certificates 3,050,713 5.00 11/15/2035 2,967,261
3,180,475 5.50 11/15/2035 3,165,950
Ginnie Mae Trust 2005-87-C 10,000,000 5.328 9/16/2034 (a) 9,961,878
2006-3-C 10,000,000 5.235 4/16/2039 (a) 9,770,147
2006-30-IO 8,955,258 0.80 5/16/2046 (a)(e) 502,917
Total Government Agency Mortgage-Backed Securities (Cost--$147,777,040)--62.4% 147,310,001
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Schedule of Investments (continued) (in U.S. dollars)
Face Interest Maturity
Issue Amount Rate Date(s) Value
Non-Government Agency Mortgage-Backed Securities**--11.2%
CS First Boston Mortgage Securities Corp.
Series 2005-11 Class 6A5 $ 1,996,246 6.00 % 12/25/2035 $ 2,013,161
Countrywide Alternative Loan Trust Series
2006-41CB Class 2A17 3,333,118 6.00 1/25/2037 3,302,477
Greenwich Capital Commercial Funding Corp.
Series 2006-GG7 Class A4 1,500,000 5.912 7/10/2038 (a) 1,570,065
JPMorgan Mortgage Trust:
Series 2005-A2 Class 4A1 4,252,667 5.21 4/25/2035 (a) 4,170,304
Series 2006-CB14 Class A2 1,400,000 5.437 12/12/2044 1,409,060
Series 2006-CB15 Class A4 2,500,000 5.814 6/12/2043 (a) 2,585,732
Series 2006-LDP7 Class A4 2,000,000 5.875 4/15/2045 (a) 2,089,442
LB-UBS Commercial Mortgage Trust Series 2004-C6 Class A3 5,000,000 4.547 8/15/2029 4,877,536
Residential Funding Mortgage Security I Series
2006-S1 Class 1A5 1,677,000 5.25 1/25/2036 1,663,516
Wells Fargo Mortgage Backed Securities Trust Series
2005-13 Class A1 2,683,483 5.00 11/25/2020 2,645,981
Total Non-Government Agency Mortgage-Backed Securities (Cost--$26,093,734)--11.2% 26,327,274
Beneficial
Interest
Short-Term Securities--4.5%
$ 10,517,087 BlackRock Liquidity Series, LLC Cash Sweep Series, 5.26% (b)(c) 10,517,087
Total Short-Term Securities (Cost--$10,517,087)--4.5% 10,517,087
Total Investments (Cost--$253,882,573)--107.3% 253,134,691
Number of
Contracts Options Written
Options Written--(0.1%)
Call Options Written--(0.1%) 50++ Pay a fixed rate of 4.74% and receive a floating rate based
on 3-month LIBOR, expiring January 2007, Broker JPMorgan Chase (f) (11,750)
40++ Pay a fixed rate of 4.96% and receive a floating rate based
on 3-month LIBOR, expiring January 2007, Broker UBS Warburg (f) (33,000)
15++ Pay a fixed rate of 5.14% and receive a floating rate based
on 3-month LIBOR, expiring January 2007, Broker UBS Warburg (f) (42,000)
23++ Pay a fixed rate of 5.21% and receive a floating rate based
on 3-month LIBOR, expiring January 2007, Broker Credit Suisse
First Boston International (f) (126,270)
--------------
(213,020)
Put Options Written--(0.0%) 50++ Pay a fixed rate of 5.24% and receive a floating rate based
on 3-month LIBOR, expiring January 2007, Broker JPMorgan Chase (f) (69,300)
Total Options Written (Premiums Received--$538,030)--(0.1%) (282,320)
Total Investments, Net of Options Written (Cost--$253,344,543*)--107.2% 252,852,371
Liabilities in Excess of Other Assets--(7.2%) (16,877,862)
--------------
Net Assets--100.0% $ 235,974,509
==============
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments,
net of options written, as of December 31, 2006, as computed for
federal income tax purposes, were as follows:
Aggregate cost $ 253,344,543
==============
Gross unrealized appreciation $ 928,575
Gross unrealized depreciation (1,420,747)
--------------
Net unrealized depreciation $ (492,172)
==============
** Mortgage-Backed Securities are subject to principal paydowns. As
a result of prepayments or refinancing of the underlying mortgage
instruments, the average life may be substantially less than the
original maturity.
++ One contract represents a notional amount of $1,000,000.
(a) Floating rate security.
(b) 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
BlackRock Liquidity Series, LLC
Cash Sweep Series $ 8,596,837 $364,225
BlackRock Liquidity Series, LLC
Money Market Series $(36,383,750) $ 10,938
(c) Represents the current yield as of December 31, 2006.
(d) Represents or includes a "to-be-announced" transaction. The Fund
has committed to purchasing securities for which all specific
information is not available at this time.
(e) Represents the interest only portion of a mortgage-backed security and
has either a nominal or a notional amount of principle.
(f) 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 the swaption.
(g) All or a portion of the security is on hold as collateral in connection
with open financial futures contracts.
o Financial futures contracts sold as of December 31, 2006 were
as follows:
Number of Expiration Face Unrealized
Contracts Issue Date Value Appreciation
143 5-Year U.S. March
Treasury Note 2007 $15,170,688 $ 146,750
200 10-Year U.S. March
Treasury Note 2007 $21,833,688 339,938
---------
Total Unrealized Appreciation $ 486,688
=========
o Swaps outstanding as of December 31, 2006 were as follows:
Notional Unrealized
Amount Appreciation
Receive a fixed rate of 5.158%
and pay a floating rate based on
3-month LIBOR
Broker, Credit Suisse
First Boston International
Expires November 2011 $15,000,000 $ 37,024
Receive a fixed rate of 4.8825%
and pay a floating rate based on
3-month LIBOR
Broker, Union Bank of
Switzerland, A.G.
Expires December 2013 $20,000,000 303,207
---------
Total $ 340,231
=========
See Notes to Financial Statements.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Statement of Assets, Liabilities and Capital
As of December 31, 2006
Assets
Investments in unaffiliated securities, at value (identified cost--$243,365,486) $ 242,617,604
Investments in affiliated securities, at value (identified cost--$10,517,087) 10,517,087
Unrealized appreciation on swaps 340,231
Receivables:
Interest $ 1,688,630
Swaps 192,005
Variation margin 33,936
Principal paydowns 536 1,915,107
---------------
Prepaid expenses 5,604
---------------
Total assets 255,395,633
---------------
Liabilities
Options written, at value (premiums received--$538,030) 282,320
Payables:
Securities purchased 18,221,250
Capital shares redeemed 435,066
Swaps 209,700
Investment adviser 176,473
Other affiliates 2,280 19,044,769
---------------
Accrued expenses and other liabilities 94,035
---------------
Total liabilities 19,421,124
---------------
Net Assets
Net assets $ 235,974,509
===============
Capital
Common Stock, par value $.10 per share; 200,000,000 shares authorized $ 1,275,825
Paid-in capital in excess of par 234,852,103
Accumulated realized capital losses--net $ (488,166)
Unrealized appreciation--net 334,747
---------------
Total accumulated losses--net (153,419)
---------------
Total capital--Equivalent to $18.50 per share based on 12,758,250 shares of capital stock
outstanding (market value--$18.54) $ 235,974,509
===============
See Notes to Financial Statements.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Statement of Operations
For the Year Ended December 31, 2006
Investment Income
Interest (including $364,225 from affiliates) $ 12,289,869
Securities lending--net 10,938
---------------
Total income 12,300,807
---------------
Expenses
Investment advisory fees $ 2,014,257
Accounting services 89,801
Professional fees 49,334
Printing and shareholder reports 48,436
Transfer agent fees 45,723
Repurchase offer fees 33,943
Directors' fees and expenses 23,136
Listing fees 19,022
Custodian fees 14,599
Pricing services 5,127
Other 42,387
---------------
Total expenses 2,385,765
---------------
Investment income--net 9,915,042
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net (282,883)
Futures contracts and swaps--net (333,967)
Short sales 2,782
Options written--net 576,150 (37,918)
---------------
Change in unrealized appreciation/depreciation on:
Investments--net (1,963,679)
Financial futures contracts and swaps--net 826,919
Options written--net 371,450 (765,310)
--------------- ---------------
Total realized and unrealized loss--net (803,228)
---------------
Net Increase in Net Assets Resulting from Operations $ 9,111,814
===============
See Notes to Financial Statements.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Statements of Changes in Net Assets
For the For the Period
Year Ended October 31, 2005++
December 31, to December 31,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 9,915,042 $ 1,636,810
Realized gain (loss)--net (37,918) 113,056
Change in unrealized appreciation/depreciation--net (765,310) 1,100,057
--------------- ---------------
Net increase in net assets resulting from operations 9,111,814 2,849,923
--------------- ---------------
Dividends & Distributions to Shareholders
Investment income--net (10,234,534) (1,291,023)
Realized gain--net (437,155) (191,259)
Tax return of capital (7,129,386) --
--------------- ---------------
Net decrease in net assets resulting from dividends and distributions to shareholders (17,801,075) (1,482,282)
--------------- ---------------
Capital Stock Transactions
Net proceeds from issuance of Common Stock -- 242,570,000
Value of shares issued to Common Stock Shareholders in reinvestment of dividends 1,428,985 --
Net redemption of Common Stock resulting from repurchase offer
(includes $8,789 of repurchase fees) (435,066) --
Offering costs, including adjustments, resulting from the issuance of Common Stock (19,804) (347,994)
--------------- ---------------
Net increase in net assets resulting from capital stock transactions 974,115 242,222,006
--------------- ---------------
Net Assets
Total increase (decrease) in net assets (7,715,146) 243,589,647
Beginning of period 243,689,655 100,008
--------------- ---------------
End of period* $ 235,974,509 $ 243,689,655
=============== ===============
* Undistributed investment income--net -- $ 345,787
=============== ===============
++ Commencement of operations.
See Notes to Financial Statements.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Financial Highlights
For the For the Period
Year Ended October 31, 2005++
The following per share data and ratios have been derived December 31, to December 31,
from information provided in the financial statements. 2006 2005
Per Share Operating Performance
Net asset value, beginning of period $ 19.18 $ 19.10
--------------- ---------------
Investment income--net** .78 .13
Realized and unrealized gain (loss)--net (.06) .10
--------------- ---------------
Total from investment operations .72 .23
--------------- ---------------
Less dividends and distributions:
Investment income--net (.81) (.10)
Realized gain--net (.03) (.02)
Tax return of capital (.56) --
--------------- ---------------
Total dividends and distributions (1.40) (.12)
--------------- ---------------
Offering costs, including adjustments, resulting from the issuance of Common Stock --*** (.03)
--------------- ---------------
Net asset value, end of period $ 18.50 $ 19.18
=============== ===============
Market price per share, end of period $ 18.54 $ 18.09
=============== ===============
Total Investment Return++++
Based on net asset value per share 4.08% 1.06%+++
=============== ===============
Based on market price per share 10.59% (8.97%)+++
=============== ===============
Ratios to Average Net Assets
Expenses 1.01% .94%*
=============== ===============
Investment income--net 4.18% 3.89%*
=============== ===============
Supplemental Data
Net assets, end of period (in thousands) $ 235,975 $ 243,690
=============== ===============
Portfolio turnover 75.57% 20.10%
=============== ===============
* Annualized.
** Based on average shares outstanding.
*** Amount is less than $(.01) per share.
++ Commencement of operations.
++++ 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.
+++ Aggregate total investment return.
See Notes to Financial Statements.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
On September 29, 2006, Enhanced Government Fund, Inc. was renamed BlackRock
Enhanced Government Fund, Inc. (the "Fund"). The Fund is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Fund's financial statements are prepared in
conformity with U.S generally accepted accounting principles, which may
require the use of management accruals and estimates. Actual results may
differ from these estimates. The Fund determines and makes available for
publication the net asset value of its Common Stock on a daily basis. The
Fund's Common Stock shares are listed on the New York Stock Exchange ("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 Global 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 Capital Market 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 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 generally will be determined as of 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 BlackRock Advisors, LLC
(the "Manager"), an indirect, wholly owned subsidiary of BlackRock, Inc.,
using a pricing service and/or procedures approved by the Fund's Board of
Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the
securities markets. Losses may arise due to changes in the value of the
contract due to an unfavorable change in the price of the underlying security
or index, or if the counterparty does not perform under the contract.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Notes to Financial Statements (continued)
* 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 financial futures contracts. Financial 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 from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates. A portion of the dividends paid by the Fund during the year
ended December 31, 2006 is characterized as a tax return of capital.
(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. Any adjustments to estimates of offering costs were recorded to
capital.
(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.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Notes to Financial Statements (continued)
(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.
(i) Recent accounting pronouncements--In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109."
FIN 48 prescribes the minimum recognition threshold a tax position must meet
in connection with accounting for uncertainties in income tax positions taken
or expected to be taken by an entity including mutual funds before being
measured and recognized in the financial statements. Adoption of FIN 48 is
required for the last net asset value calculation in the first required
financial statement reporting period for fiscal years beginning after December
15, 2006. The impact on the fund's financial statements, if any, is currently
being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("FAS 157"), was issued and is effective
for fiscal years beginning after November 15, 2007. FAS 157 defines fair
value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. Management is currently evaluating
the implications of FAS 157. At this time, its impact on the fund's financial
statements has not been determined.
(j) Reclassifications--U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the
current year, $38,815 has been reclassified between paid-in capital in excess
of par and undistributed net investment income and $65,110 has been
reclassified between undistributed net investment income and accumulated
realized net capital losses as a result of permanent differences attributable
to non-deductible expenses and accounting for paydowns and swap agreements.
These reclassifications have no effect on net assets or net asset values per
share.
2. Investment Advisory Agreement and Transactions with Affiliates:
On September 29, 2006, BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill
Lynch") combined Merrill Lynch's investment management business, Merrill Lynch
Investment Managers, L.P. ("MLIM"), and its affiliates, including Fund Asset
Management, L.P. ("FAM") with BlackRock, Inc. to create a new independent
company. Merrill Lynch has a 49.8% economic interest and a 45% voting interest
in the combined company and The PNC Financial Services Group, Inc. has
approximately a 34% economic and voting interest. The new company operates
under the BlackRock name and is governed by a board of directors with a
majority of independent members.
On August 15, 2006, shareholders of the Fund approved a new Investment
Advisory Agreement with the Manager. BlackRock Advisors, Inc. was recently
reorganized into a limited liability company and renamed BlackRock Advisors,
LLC. The new Investment Advisory Agreement between the Fund and the Manager
became effective on September 29, 2006. Prior to September 29, 2006, FAM was
the Fund's Manager. The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly owned subsidiary of Merrill Lynch, which is the
limited partner.
The Manager is responsible for the management of each 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 aggregate of the Fund's
average daily net assets and the proceeds of any outstanding debt securities
or borrowings used for leverage. In addition, the Manager has entered into a
sub-advisory agreement with BlackRock Financial Management, Inc., an affiliate
of the Manager, under which the Manager pays the Sub-Adviser for services it
provides a monthly fee that is a percentage of the management fee paid by the
Fund to the Manager.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Notes to Financial Statements (continued)
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 the Manager or
its affiliates. Pursuant to that order, the Fund also has retained BlackRock
Investment Management, LLC. ("BIM"), an affiliate of the Manager, as the
securities lending agent for a fee based on a share of the returns on
investment of cash collateral. Prior to September 29, 2006, BIM was organized
as Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM,
and MLIM, LLC was the securities lending agent. BIM 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 the Manager or in
registered money market funds advised by the Manager or its affiliates. For
the year ended December 31, 2006, BIM received $4,051 in securities lending
agent fees.
For the year ended December 31, 2006, the Fund reimbursed FAM and the Manager
$4,368 and $1,134, respectively, for certain accounting services.
Prior to September 29, 2006, certain officers and/or directors of the Fund
were officers and/or directors of FAM, MLIM, PSI, Merrill Lynch and/or
MLIM, LLC.
Commencing September 29, 2006, certain officers and/or directors of the Fund
are officers and/or directors of BlackRock, Inc. or its affiliates.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the year ended December 31, 2006 were $180,572,110 and
$176,596,887, respectively.
Transactions in options written for the year ended December 31, 2006 were
as follows:
Number of Premiums
Contracts++ Received
Outstanding call options written,
beginning of year 9,350 $ 688,822
Options written 6,129,922 6,458,433
Options expired (3,379,178) (3,796,159)
Options closed (2,759,966) (2,843,066)
-------------- ---------------
Outstanding call options written,
end of year 128 $ 508,030
============== ===============
++ Some contracts include a notional amount of $1,000,000.
Number of Premiums
Contracts++ Received
Outstanding put options written,
beginning of year -- --
Options written 50 $ 30,000
-------------- ---------------
Outstanding put options written,
end of year 50 $ 30,000
============== ===============
++ 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 year ended December 31, 2006
increased by 77,011 as a result of dividend reinvestment and decreased by
23,997 as a result of a repurchase offer. Shares issued and outstanding during
the period October 31, 2005 to December 31, 2005 increased 12,700,000 from
shares sold.
The Fund will make offers to repurchase its share at annual (approximately
12-month) intervals. The shares tendered in the repurchase offer will be
subject to a repurchase fee retained by the Fund to compensate the Fund for
expenses directly related to the repurchase offer.
5. Distributions to Shareholders:
The tax character of distributions paid by the Fund during the year ended
December 31, 2006 and the period October 31, 2005 to December 31, 2005 was
as follows:
10/31/2005++
12/31/2006 to 12/31/2005
Distributions paid from:
Ordinary income $ 10,275,940 $ 1,482,282
Net long-term capital gains 395,749 --
Tax return of capital 7,129,386 --
-------------- ---------------
Total distributions $ 17,801,075 $ 1,482,282
============== ===============
++ Commencement of operations.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Notes to Financial Statements (concluded)
As of December 31, 2006, the components of accumulated losses on a tax
basis were as follows:
Undistributed ordinary income--net $ --
Undistributed long-term capital gains--net --
---------------
Total undistributed earnings--net --
Capital loss carryforward --
Unrealized losses--net (153,419)*
---------------
Total accumulated losses--net $ (153,419)
===============
* The difference between book-basis and tax-basis net unrealized
losses is attributable primarily to the tax deferral of losses on
straddles and the realization for tax purposes of unrealized gains
(losses) on certain futures contracts.
6. Subsequent Event:
The Fund paid an ordinary income dividend in the amount of $.116667
per share on January 31, 2007 to shareholders of record on January 16,
2007.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
BlackRock Enhanced Government Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of BlackRock Enhanced Government Fund,
Inc. (formerly Enhanced Government Fund, Inc.) as of December 31, 2006, and
the related statement of operations, the statement of changes in net assets,
and the financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The financial
statements and financial highlights of the Fund for the period October 31,
2005 (commencement of operations) to December 31, 2005, were audited by other
auditors whose report, dated February 8, 2006, expressed an unqualified
opinion on those financial statements and financial highlights.
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. The Fund is not required to have, nor were we engaged to
perform, an audit of its 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, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. Our
procedures included confirmation of securities owned as of December 31, 2006,
by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. We believe that
our 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
BlackRock Enhanced Government Fund, Inc. as of December 31, 2006, the results
of its operations, the changes in its net assets, and its financial highlights
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
February 27, 2007
Fund Certification (unaudited)
In September 2006, 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.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Change in Fund's Independent Registered Public Accounting Firm
On August 28, 2006, Ernst & Young LLP ("E&Y") resigned as the Independent
Registered Public Accounting Firm of BlackRock Enhanced Government Fund, Inc.
(the "Fund").
E&Y's reports on the financial statements of the Fund for the period ended
December 31, 2005 (the Fund commenced operations on October 31, 2005) did not
contain an adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principles.
In connection with its audit for the period ended December 31, 2005 and
through August 28, 2006 (1) there were no disagreements with E&Y on any matter
of accounting principle or practice, financial statement disclosure or
auditing scope or procedure, whereby such disagreements, if not resolved to
the satisfaction of E&Y, would have caused them to make reference to the
subject matter of the disagreements in connection with their report on the
financial statements for such period; and (2) there have been no reportable
events (as defined in item 304(a)(1)(v) of Regulation S-K).
The Audit Committee of the Fund's Board of Directors approved the engagement
of Deloitte & Touche LLP as the Fund's Independent Registered Public
Accounting Firm for the fiscal year ended December 31, 2006.
Important Tax Information
The following information is provided with respect to the ordinary income
distributions paid by BlackRock Enhanced Government Fund, Inc. during the
fiscal year ended December 31, 2006:
Federal Obligation Interest* 13.95%
Interest-Related Dividends for Non-U.S. Residents
Month Paid: January 2006 94.70%**
February 2006 - December 2006 99.31%**
Short-Term Capital Gain Dividends for Non-U.S. Residents 1.24%**
* 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 taxes.
** Represents the portion of the taxable ordinary income dividends eligible
for exemption from U.S. withholding tax for nonresident aliens and foreign
corporations.
Additionally, the Fund distributed long-term capital gains of $.03115 to
shareholders of record on December 19, 2006.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Disclosure of Investment Advisory Agreement
BlackRock Investment Advisory Agreement--Matters Considered by the Board
The following disclosure appeared in the June 30, 2006 Semi-Annual Report of
the Fund and is the discussion referred to in "New BlackRock Sub-Advisory
Agreement - Matters Considered by the Board" below. The term "Investment
Adviser" as used herein refers to Fund Asset Management, L.P.
In connection with the Transaction between Merrill Lynch and BlackRock, the
Fund's Board of Directors considered a new investment advisory agreement (the
"New Investment Advisory Agreement") between the Fund and BlackRock Advisors,
Inc. or its successor ("BlackRock Advisors"). If the New Investment Advisory
Agreement is approved by the Fund's shareholders, it will become effective
upon the closing of the Transaction, which is expected in the third quarter
of 2006.
The Board discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Board, including the
independent directors, approved the New Investment Advisory Agreement at a
meeting held on May 10, 2006.
To assist the Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent directors, through their independent legal
counsel, also requested and received additional information from Merrill Lynch
and BlackRock in connection with their consideration of the New Investment
Advisory Agreement. The additional information was provided in advance of the
May 10, 2006 meeting. In addition, the independent directors consulted with
their counsel and Fund counsel on numerous occasions, discussing, among other
things, the legal standards and certain other considerations relevant to the
directors' deliberations.
At the Board meetings, the directors discussed with Merrill Lynch management
and certain BlackRock representatives the Transaction, its strategic rationale
and BlackRock's general plans and intentions regarding the Fund. At these
Board meetings, representatives of Merrill Lynch and BlackRock made
presentations to and responded to questions from the Board. The directors also
inquired about the plans for and anticipated roles and responsibilities of
certain employees and officers of the Investment Adviser and certain
affiliates being transferred to BlackRock in connection with the Transaction.
The independent directors also conferred separately and with their counsel
about the Transaction and other matters related to the Transaction on a number
of occasions, including in connection with the April and May 2006 meetings.
After the presentations and after reviewing the written materials provided,
the independent directors met in executive sessions with their counsel to
consider the New Investment Advisory Agreement.
In connection with the Board's review of the New Investment Advisory
Agreement, Merrill Lynch and/or BlackRock advised the directors about a
variety of matters. The advice included the following, among other matters:
* that there is not expected to be any diminution in the nature, quality and
extent of services provided to the Fund and its shareholders by BlackRock
Advisors, including compliance services;
* that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented professionals;
* that the Fund should benefit from having access to BlackRock's state of the
art technology and risk management analytic tools, including investment
tools, provided under the BlackRock Solutions (R) brand name;
* that BlackRock has no present intention to alter any applicable expense
waivers or reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of the Board
before making any changes;
* that in connection with the Transaction, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in compliance
with the conditions of Section 15(f) of the Investment Company Act of 1940
(the "1940 Act") in relation to any public funds advised by BlackRock or
the Investment Adviser (or its affiliates), respectively; and
* that Merrill Lynch and BlackRock would derive benefits from the Transaction
and that, as a result, they have a different financial interest in the
matters that were being considered than do Fund shareholders.
The directors considered the information provided by Merrill Lynch and
BlackRock above, and, among other factors, the following:
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
* the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies of
scale and access to investment opportunities;
* the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength and
resources of New BlackRock;
* the compliance policies and procedures of BlackRock Advisors;
* the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Fund's total advisory fees will
not increase by virtue of the New Investment Advisory Agreement, but will
remain the same;
* that the Board had earlier performed an initial review of the investment
advisory agreement currently in effect for the Fund (the "Current
Investment Advisory Agreement") as required by the 1940 Act and determined
that the Investment Adviser has the capabilities, resources and personnel
necessary to provide the advisory and administrative services currently
provided to the Fund; and that the advisory and/or management fees to be
paid by the Fund, taking into account any applicable agreed-upon fee
waivers and breakpoints, represented reasonable compensation to the
Investment Adviser in light of the services to be provided, the expected
costs to the Investment Adviser of providing those services, potential
economies of scale, the fees and other expenses paid by similar funds
(including information provided by Lipper Inc. ["Lipper"]), and such other
matters as the directors considered relevant in the exercise of their
reasonable judgment; and
* that Merrill Lynch agreed to pay all expenses of the Fund in connection
with the Board's consideration of the New Investment Advisory Agreement and
related agreements and all costs of shareholder approval of the New
Investment Advisory Agreement and as a result the Fund would bear no costs
in obtaining shareholder approval of the New Investment Advisory Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, the Board assessed the
nature, scope and quality of the services to be provided to the Fund by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting and assistance in
meeting legal and regulatory requirements. In its review of the New Investment
Advisory Agreement, the Board also considered a range of information in
connection with its oversight of the services to be provided by BlackRock
Advisors and its affiliates. Among the matters considered were: (a) fees (in
addition to management fees) to be paid to BlackRock Advisors and its
affiliates by the Fund; (b) Fund operating expenses paid to third parties; (c)
the resources devoted to and compliance reports relating to the Fund's
investment objective, policies and restrictions, and its compliance with its
Code of Ethics and BlackRock Advisors' compliance policies and procedures; and
(d) the nature, cost and character of non-investment management services to be
provided by BlackRock Advisors and its affiliates.
In the period prior to the Board meeting to consider the initial approval of
the Current Investment Advisory Agreement, the Board had requested and
received materials specifically relating to the Current Investment Advisory
Agreement. These materials included (a) information compiled by Lipper on the
expected fees and expenses of the Fund as compared to a comparable group of
funds as classified by Lipper; (b) information on the Fund's portfolio
management team and investment strategies to be used by the Fund; and (c)
information on the payments expected to be received by the Investment Adviser
and its affiliates from the Fund.
In their deliberations, the directors considered information received in
connection with their initial consideration of the Current Investment Advisory
Agreement, in addition to information provided by BlackRock and BlackRock
Advisors in connection with their evaluation of the terms and conditions of
the New Investment Advisory Agreement. The directors did not identify any
particular information that was all-important or controlling, and each
director attributed different weights to the various factors. The directors,
including a majority of the independent directors, concluded that the terms of
the New Investment Advisory Agreement are appropriate, that the fees to be
paid are reasonable in light of the services to be provided to the Fund, and
that the New Investment Advisory Agreement should be approved and recommended
to Fund shareholders.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Disclosure of Investment Advisory Agreement (continued)
Nature, Quality and Extent of Services Provided--The Board reviewed the
nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of
the Fund, as well as the nature, quality and extent of services expected to be
provided by BlackRock Advisors. The Board focused primarily on the Investment
Adviser's advisory services and the Fund's investment performance, but also
considered certain areas in which both the Investment Adviser and the Fund
receive services as part of the Merrill Lynch complex. The Board compared the
Fund's performance - both including and excluding the effects of the Fund's
fees and expenses - to the performance of a comparable group of funds, and the
performance of a relevant index or combination of indexes. While the Board
reviews performance data at least quarterly, consistent with the Investment
Adviser's investment goals, the Board will attach more importance to
performance over relatively long periods of time, typically three to five
years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the New Investment Advisory Agreement, the directors
considered, among other things, the expected impact of the Transaction on the
operations, facilities, organization and personnel of BlackRock Advisors and
how it would affect the Fund; the ability of BlackRock Advisors to perform its
duties after the Transaction; and any anticipated changes to the current
investment and other practices of the Fund. The directors considered
BlackRock's advice as to proposed changes in portfolio management personnel of
the Fund after the closing of the Transaction.
The directors were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the
art technology and risk management analytic tools, including the investment
tools provided under the BlackRock Solutions brand name.
The directors were advised that, as a result of Merrill Lynch's equity
interest in BlackRock after the Transaction, the Fund will continue to be
subject to restrictions concerning certain transactions involving Merrill
Lynch affiliates (for example, transactions with a Merrill Lynch broker-dealer
acting as principal) absent revised or new regulatory relief. The directors
were advised that a revision of existing regulatory relief with respect to
these restrictions was being sought from the Securities and Exchange
Commission and were advised of the possibility of receipt of such revised
regulatory relief. There can be no assurance that such relief will be
obtained.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the directors
determined that the nature and quality of services to be provided to the Fund
under the New Investment Advisory Agreement were expected to be as good as or
better than that provided under the Current Investment Advisory Agreement. It
was noted, however, that it is expected that there will be changes in
personnel following the Transaction and the combination of the operations of
the Investment Adviser and its affiliates with those of BlackRock. The
directors noted that if current portfolio managers or other personnel cease to
be available, the Board would consider all available options, which could
include seeking the investment advisory or other services of BlackRock
affiliates. Accordingly, the directors concluded that, overall, they were
satisfied at the present time with assurances from BlackRock and BlackRock
Advisors as to the expected nature, extent and quality of the services to be
provided to the Fund under the New Investment Advisory Agreement.
Costs of Services Provided and Profitability--It was noted that, in
conjunction with their initial consideration of the Current Investment
Advisory Agreement, the directors had received, among other things, a report
from Lipper comparing the Fund's expected fees and expenses to those of a peer
group selected by Lipper, and information as to the fees charged by the
Investment Adviser or its affiliates to other registered investment company
clients for investment management services. The Board reviewed the Fund's
contractual management fee rate and actual management fee rate as a percentage
of total assets at common asset levels - the actual rate includes advisory
fees and the effects of any fee waivers - compared to the other funds in its
Lipper category. They also compared the Fund's total expenses to those of
other comparable funds. The information showed that the Fund had fees and
expenses within the range of fees and expenses of comparable funds. The Board
considered the services to be provided by and the fees to be charged by
BlackRock Advisors to other funds with similar investment mandates and noted
that the fees charged by BlackRock Advisors in those cases, including fee
waivers and expense reimbursements, were generally comparable to those being
charged to the Fund. The Board also noted that, as a general matter, according
to the information provided by BlackRock, fees charged to institutional
clients were lower than the fees charged to the Fund, but BlackRock Advisors
provided less extensive services to such clients. The Board concluded that the
Fund's management fee and fee rate and overall expense ratio are reasonable
compared to those of other comparable funds.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, the directors considered, among
other things, whether advisory fees or other expenses would change as a result
of the Transaction. Based on their review of the materials provided and the
fact that the New Investment Advisory Agreement is substantially similar to
the Current Investment Advisory Agreement in all material respects, including
the rate of compensation, the directors determined that the Transaction should
not increase the total fees payable, including any fee waivers and expense
reimbursements, for advisory and administrative services. The directors noted
that it was not possible to predict with certainty New BlackRock's future
profitability from its relationship with the Fund.
The directors discussed with BlackRock Advisors its general methodology to be
used in determining New BlackRock's profitability with respect to its
relationship with the Fund. The directors noted that they expect to receive
profitability information from New BlackRock on at least an annual basis and
thus be in a position to evaluate whether any adjustments in Fund fees and/or
fee breakpoints would be appropriate.
Fees and Economies of Scale--The Board considered the extent to which
economies of scale might be realized as the assets of the Fund increase and
whether there should be changes in the management fee rate or structure in
order to enable the Fund to participate in these economies of scale. The Board
determined that changes were not currently necessary and that the Fund
appropriately participated in these economies of scale.
In reviewing the Transaction, the directors considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, the directors
determined that as a result of the Transaction, the Fund's total advisory fees
would be no higher than the fees under its Current Investment Advisory
Agreement. The directors noted that in conjunction with their initial
deliberations concerning the Current Investment Advisory Agreement, they had
determined that the expected total fees for advisory and administrative
services for the Fund were reasonable in light of the services to be provided.
It was noted that in conjunction with their initial consideration of the
Current Investment Advisory Agreement, the directors had received, among other
things, a report from Lipper comparing the Fund's expected fees and expenses
to those of a peer group selected by Lipper, and information as to the fees
charged by the Investment Adviser or its affiliates to other registered
investment company clients for investment management services. The directors
concluded that, because the rates for advisory fees for the Fund would be no
higher than its current fee rates, the proposed management fee structure,
including any fee waivers, was reasonable and that no additional changes were
currently necessary.
Fall-Out Benefits--In evaluating the fall-out benefits to be received by
BlackRock Advisors under the New Investment Advisory Agreement, the directors
considered whether the Transaction would have an impact on the fall-out
benefits received by the Investment Adviser by virtue of the Current
Investment Advisory Agreement. Based on their review of the materials
provided, including materials received in connection with their initial
approval of the Current Investment Advisory Agreement, and their discussions
with management of the Investment Adviser and BlackRock, the directors
determined that those benefits could include increased ability for BlackRock
to distribute shares of its funds and other investment products. The directors
noted that any fall-out benefits were difficult to quantify with certainty at
this time, and indicated that they would continue to evaluate them going
forward.
Investment Performance--The directors considered investment performance for
the Fund. The directors compared the Fund's performance - both including and
excluding the effects of fees and expenses - to the performance of a
comparable group of funds, and the performance of a relevant index or
combination of indexes. The comparative information received from Lipper
showed Fund performance at various levels within the range of performance of
comparable funds over different time periods. While the Board reviews
performance data at least quarterly, consistent with the Investment Adviser's
investment goals, the Board will attach more importance over relatively long
periods of time, typically three to five years. The directors believed the
Fund's performance was satisfactory. Also, the directors took into account the
investment performance of funds currently advised by BlackRock Advisors. The
Board considered comparative information from Lipper which showed that the
performance of the funds advised by BlackRock Advisors was within the range of
performance of comparable funds over different time periods. The Board noted
BlackRock's considerable investment management experience and capabilities,
but was unable to predict what effect, if any, consummation of the Transaction
would have on the future performance of the Fund.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Disclosure of Investment Advisory Agreement (concluded)
Conclusion--After the independent directors of the Fund deliberated in
executive session, the entire Board, including the independent directors,
approved the New Investment Advisory Agreement, concluding that the advisory
fee rate was reasonable in relation to the services provided and that the New
Investment Advisory Agreement was in the best interests of the shareholders.
In approving the New Investment Advisory Agreement, the Board noted that it
anticipated reviewing the continuance of the agreement in advance of the
expiration of the initial two-year period.
Contingent BlackRock Sub-Advisory Agreement--Matters Considered by the Board
At the telephonic and in-person meetings held during April and May 2006 at
which the Board of Directors discussed and approved the New Investment
Advisory Agreement, the Board, including the independent directors, also
considered and approved a contingent subadvisory agreement (the "Contingent
Sub-Advisory Agreement") between the Investment Adviser and BlackRock Advisors
(the "BlackRock Subadviser"). The Contingent Sub-Advisory Agreement is
intended to ensure that the Fund operates with efficient portfolio management
services until the closing of the Transaction, in the event that the Board
deems it necessary and in the best interests of the Fund and its shareholders
that the BlackRock Sub-Adviser assist in managing the operations of the Fund
during the interim period until the closing of the Transaction. If
shareholders approve the Contingent Sub-Advisory Agreement, it will take
effect only upon recommendation from the Investment Adviser and upon
subsequent approval of the Board in the period up to the closing of the
Transaction. The effectiveness of the Contingent Sub-Advisory Agreement,
therefore, would be contingent on further Board approval after shareholders
approve it. Pursuant to the Contingent Sub-Advisory Agreement, the BlackRock
Sub-Adviser would receive a monthly fee from the Investment Adviser equal to
50% of the advisory fee received by the Investment Adviser. The Investment
Adviser would pay the BlackRock Sub-Adviser out of its own resources. There
would be no increase in Fund expenses as a result of the Contingent Sub-
Advisory Agreement.
In making its approval at the May in-person meeting, the Board considered the
Contingent Sub-Advisory Agreement in conjunction with the New Investment
Advisory Agreement and reviewed the same information and factors discussed
above. The Board also considered in conjunction with the Contingent Sub-
Advisory Agreement the necessity of ensuring that the Fund operates with
effective management services until the closing of the Transaction. In
reviewing the subadvisory fee rate provided in the Contingent Sub-Advisory
Agreement, the Board took note of the fact that both the Investment Adviser
and the BlackRock Sub-Adviser would have significant responsibilities under
their respective advisory agreements. The Investment Adviser would remain
responsible for oversight of the Fund's operations and administration and the
BlackRock Sub-Adviser would provide advisory services to the Fund under the
Contingent Sub-Advisory Agreement. The Board also took into account the
expected short duration of the term of any Contingent Sub-Advisory Agreement
and the fact that total advisory fees paid by the Fund would not increase
as a result of the Contingent Sub-Advisory Agreement. Under all of the
circumstances, the Board concluded that it was a reasonable allocation of fees
for the BlackRock Sub-Adviser to receive 50% of the advisory fee paid by the
Fund to the Investment Adviser.
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved the Contingent Sub-
Advisory Agreement, concluding that the advisory fee was reasonable in
relation to the services provided and that the Contingent Sub-Advisory
Agreement was in the best interests of shareholders.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Disclosure of Sub-Advisory Agreement
New BlackRock Sub-Advisory Agreement--Matters Considered by the Board
At an in-person meeting held on August 24 - 25, 2006, the Board of Directors,
including the independent directors, discussed and approved the sub-advisory
agreement with respect to the Fund between BlackRock Advisors, LLC (previously
organized as BlackRock Advisors, Inc.) ("BlackRock Advisors") and its
affiliate, BlackRock Financial Management, Inc. (the "Sub-Adviser") (the
"BlackRock Sub-Advisory Agreement"). The BlackRock Sub-Advisory Agreement
became effective on September 29, 2006, at the same time the New Investment
Advisory Agreement with BlackRock Advisors (which had been approved by the
Fund's shareholders) became effective.
Pursuant to the BlackRock Sub-Advisory Agreement, the Sub-Adviser receives a
monthly fee from BlackRock Advisors at an annual rate equal to 59% of the
advisory fee received by BlackRock Advisors from the Fund. BlackRock Advisors
pays the Sub-Adviser out of its own resources, and there is no increase in
Fund expenses as a result of the BlackRock Sub-Advisory Agreement.
In approving the BlackRock Sub-Advisory Agreement at the August in-person
meeting, the Board reviewed its considerations in connection with its approval
of the New Investment Advisory Agreement in May 2006. The Board relied on the
same information and considered the same factors as those discussed above in
connection with the approval of the New Investment Advisory Agreement. In
reviewing the sub-advisory fee rate provided for in the BlackRock Sub-Advisory
Agreement, the Board noted the fact that both BlackRock Advisors and the Sub-
Adviser have significant responsibilities under their respective advisory
agreements. Under the New Investment Advisory Agreement, BlackRock Advisors
remains responsible for the overall management of the Fund and for oversight
of the Fund's operations and administration. Under the BlackRock Sub-Advisory
Agreement, the Sub-Adviser provides advisory services to the Fund and is
responsible for the day-to-day management of the Fund's portfolio. The Board
also took into account the fact that there is no increase in total advisory
fees paid by the Fund as a result of the BlackRock Sub-Advisory Agreement.
Based on its considerations, the Board concluded that it was a reasonable
allocation of fees for the Sub-Adviser to receive a fee at an annual rate
equal to 59% of the advisory fee paid by the Fund to BlackRock Advisors.
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved the BlackRock Sub-
Advisory Agreement, concluding that the sub-advisory fee was reasonable in
relation to the services provided and that the BlackRock Sub-Advisory
Agreement was in the best interests of the Fund's shareholders.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Officers and Directors
Number of
Funds and
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Robert C. Doll, Jr.* President 2005 to Vice Chairman and Director of BlackRock, Inc., 122 Funds None
P.O. Box 9011 and present Global Chief Investment Officer for Equities, 168 Portfolios
Princeton, Director Chairman of the BlackRock Retail Operating
NJ 08543-9011 Committee, and member of the BlackRock
Age: 52 Executive Committee since 2006; President of
the Funds advised by Merrill Lynch Investment
Managers, L.P. ("MLIM") and its affiliates
("MLIM/FAM-advised funds") from 2005 to
2006 and Chief Investment Officer thereof from
2001 to 2006; President of MLIM and Fund Asset
Management, L.P. ("FAM") from 2001 to 2006;
Co-Head (Americas Region) thereof from 2000
to 2001 and Senior Vice President from 1999 to
2001; President and Director of Princeton Services,
Inc. ("Princeton Services") and President of
Princeton Administrators, L.P. ("Princeton
Administrators") from 2001 to 2006; 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 BlackRock Advisors, LLC and its affiliates
act as investment adviser. Mr. Doll is an "interested person," as described in
the Investment Company Act, of the Fund based on his positions with BlackRock,
Inc. and its affiliates. 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 17 Funds None
P.O. Box 9095 present Columbia University Graduate School of Business 24 Portfolios
Princeton, since 1991; Chairman of Outward Bound USA
NJ 08543-9095 from 1997 to 2001; Chairman of Wave Hill Inc.,
Age: 66 from 1990 to 2006; Trustee of Phillips Exeter
Academy from 2002 to present.
James T. Flynn Director 2005 to Chief Financial Officer of JP Morgan & Co., 17 Funds None
P.O. Box 9095 present Inc. from 1990 to 1995 and an employee of 24 Portfolios
Princeton, JP Morgan in various capacities from 1967
NJ 08543-9095 to 1995.
Age: 67
W. Carl Kester Director 2005 to Deputy Dean for Academic Affairs, Harvard 17 Funds None
P.O. Box 9095 present Business School since 2006; Mizuho Financial 24 Portfolios
Princeton, Group, Professor of Finance, Harvard Business
NJ 08543-9095 School; Unit Head, Finance from 2005 to 2006;
Age: 55 Senior Associate Dean and Chairman of the MBA
Program of Harvard Business School from 1999 to
2005, Member of the faculty of Harvard Business
School since 1981; Independent Consultant
since 1978.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Number of
Funds and
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors (concluded)
Karen P. Robards*** Director 2005 to President of Robards & Company, LLC, a 17 Funds AtriCure, Inc.
P.O. Box 9095 present financial advisory firm since 1987; formerly 24 Portfolios (medical
Princeton, an investment banker with Morgan Stanley for devices)
NJ 08543-9095 more than ten years; Director of Enable Medical
Age: 56 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 of Directors.
Position(s) Length of
Held with Time
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 2005 to Managing Director of BlackRock, Inc. since 2006; Managing Director of Merrill
P.O. Box 9011 President Present Lynch Investment Managers, L.P. ("MLIM") and Fund Asset Management, L.P.
Princeton, and ("FAM") in 2006; First Vice President of MLIM and FAM from 1997 to 2005 and
NJ 08543-9011 Treasurer Treasurer thereof from 1999 to 2006; Vice President of MLIM and FAM from 1990
Age: 46 to 1997.
Jeffrey Hiller Fund Chief 2005 to Managing Director of BlackRock, Inc. and Fund Chief Compliance Officer since 2006;
P.O. Box 9011 Compliance present Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
Princeton, Officer and Chief Compliance Officer of MLIM (Americas Region) from 2004 to 2006; Chief
NJ 08543-9011 Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
Age: 54 Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance
Officer at Prudential Financial from 1995 to 2000; Senior Counsel in the
Securities and Exchange Commission's Division of Enforcement in Washington,
D.C. from 1990 to 1995.
Alice A. Pellegrino Secretary 2005 to Director of BlackRock, Inc. since 2006; Director (Legal Advisory) of MLIM from
P.O. Box 9011 present 2002 to 2006; Vice President of MLIM from 1999 to 2002; Attorney associated
Princeton, with MLIM from 1997 to 2006; Secretary of MLIM, FAM, FAM Distributors, Inc.
NJ 08543-9011 and Princeton Services from 2004 to 2006.
Age: 46
* 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
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
Proxy Results
During the six-month period ended December 31, 2006, BlackRock Enhanced
Government Fund, Inc.'s shareholders voted on the following proposals, which
were approved at an annual shareholders' meeting on August 15, 2006. A
description of the proposals and number of shares voted are as follows:
Shares Voted Shares Withheld
For From Voting
To elect the Fund's Board of Directors: Robert C. Doll, Jr. 6,563,667 400,024
David O. Beim 6,561,392 402,299
James T. Flynn 6,564,598 399,093
W. Carl Kester 6,562,392 401,299
Karen P. Robards 6,560,241 403,450
Shares Voted Shares Voted Shares Voted
For Against Abstain
To approve a new investment advisory agreement with
BlackRock Advisors, Inc. 5,571,081 162,331 308,736
To approve a contingent sub-advisory agreement with
BlackRock Advisors, Inc. 5,563,956 166,552 311,640
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
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 affect 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.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
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
Electronic copies of most financial reports and prospectuses are available on
the Fund's Web site. Shareholders can sign up for e-mail notifications of
quarterly statements, annual and semi-annual reports and prospectuses by
enrolling in the Fund's electronic delivery program.
To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:
Please contact your financial advisor. Please note that not all investment
advisers, banks or brokerages may offer this service.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
BlackRock Privacy Principles
BlackRock is committed to maintaining the privacy of its current and former
fund investors and individual clients (collectively, "Clients") and to
safeguarding their nonpublic personal information. The following information
is provided to help you understand what personal information BlackRock
collects, how we protect that information and why in certain cases we share
such information with select parties.
If you are located in a jurisdiction where specific laws, rules or regulations
require BlackRock to provide you with additional or different privacy-related
rights beyond what is set forth below, then BlackRock will comply with those
specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about
you from different sources, including the following: (i) information we
receive from you or, if applicable, your financial intermediary, on
applications, forms or other documents; (ii) information about your
transactions with us, our affiliates, or others; (iii) information we receive
from a consumer reporting agency; and (iv) from visits to our Web sites.
BlackRock does not sell or disclose to nonaffiliated third parties any
nonpublic personal information about its Clients, except as permitted by law
or as is necessary to service Client accounts. These nonaffiliated third
parties are required to protect the confidentiality and security of this
information and to use it only for its intended purpose.
We may share information with our affiliates to service your account or to
provide you with information about other BlackRock products or services that
may be of interest to you. In addition, BlackRock restricts access to
nonpublic personal information about its Clients to those BlackRock employees
with a legitimate business need for the information. BlackRock maintains
physical, electronic and procedural safeguards that are designed to protect
the nonpublic personal information of its Clients, including procedures
relating to the proper storage and disposal of such information.
BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2006
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 at www.blackrock.com.
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, 2006 - $33,500
Fiscal Year Ending December 31, 2005 - $34,000
(b) Audit-Related Fees -
Fiscal Year Ending December 31, 2006 - $0
Fiscal Year Ending December 31, 2005 - $0
(c) Tax Fees - Fiscal Year Ending December 31, 2006 - $6,000
Fiscal Year Ending December 31, 2005 - $5,700
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending December 31, 2006 - $0
Fiscal Year Ending December 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services provided
to the registrant on an annual basis require specific pre-approval
by the Committee. The Committee also must approve other non-audit
services provided to the registrant and those non-audit services
provided to the registrant's affiliated service providers that
relate directly to the operations and the financial reporting of the
registrant. Certain of these non-audit services that the Committee
believes are a) consistent with the SEC's auditor independence rules
and b) routine and recurring services that will not impair the
independence of the independent accountants may be approved by the
Committee without consideration on a specific case-by-case basis
("general pre-approval"). However, such services will only be
deemed pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for all of
the registrants the Committee oversees. Any proposed services
exceeding the pre-approved cost levels will require specific pre-
approval by the Committee, as will any other services not subject to
general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person board
meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending December 31, 2006 - $3,071,450
Fiscal Year Ending December 31, 2005 - $5,700
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation
S-X is compatible with maintaining the principal accountant's
independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,739,500, 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 has delegated to the Manager
authority to vote all proxies relating to the Fund's portfolio
securities. The Manager has adopted policies and procedures (the
"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 Manager'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 Manager 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 Manager considers the
interests of its clients, including each Fund, and not the interests
of the Manager, when voting proxies and that real (or perceived)
material conflicts that may arise between the Manager's interest and
those of the Manager's clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Manager has
formed a Proxy Voting Committee (the "Committee"). The Committee,
which is a subcommittee of the Manager's Equity Investment Policy
Oversight Committee ("EIPOC"), is comprised of a senior member of
the Manager's equity management group who is also a member of EIPOC,
one or more other senior investment professionals appointed by
EIPOC, portfolio managers and investment analysts appointed by EIPOC
and any other personnel EIPOC deems appropriate. The Committee will
also include two non-voting representatives from the Manager's Legal
Department appointed by the Manager's General Counsel. The
Committee's membership shall be limited to full-time employees of
the Manager. No person with any investment banking, trading, retail
brokerage or research responsibilities for the Manager'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
Manager 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 Manager 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
Manager 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
Manager 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 Manager 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 Manager will generally seek to vote proxies over
which the Manager exercises voting authority in a uniform manner for
all the Manager'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 Manager 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 Manager by ISS include in-
depth research, voting recommendations (although the Manager 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 Manager's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Manager 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 Manager 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 Manager may be required to vote proxies in
respect of an issuer where an affiliate of the Manager (each, an
"Affiliate"), or a money management or other client of the Manager,
including investment companies for which the Manager provides
investment advisory, administrative and/or other services (each, a
"Client"), is involved. The Proxy Voting Procedures and the
Manager'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 Manager'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 Committee may pass the voting power to a
subcommittee, appointed by EIPOC (with advice from the Secretary of
the Committee), consisting solely of Committee members selected by
EIPOC. EIPOC 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
Manager'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 Manager'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 Manager's normal voting
guidelines or, on matters where the Manager'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 Manager 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
Manager's fiduciary duties.
In addition to the general principles outlined above, the Manager
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 Manager 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 Manager 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 number of other directorships,
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, which 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.
Information about how a Fund voted proxies relating to securities
held in the Fund's portfolio during the most recent 12 month
period ended December 31 is available without charge (1) at
www.blackrock.com and (2) on the Commission's web site at
http://www.sec.gov.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
as of December 31, 2006.
(a)(1) The portfolio managers are Eric Pellicciaro, Colm Murtagh,
Jack Hattem, Andrew Phillips and Stuart Spodek. They are
jointly responsible for the day-to-day management of the
Fund's portfolio.
Mr. Pellicciaro is a Managing Director and portfolio manager with
BlackRock and is a member of the Fixed Income Portfolio Management
Group and the lead mortgage sector specialist. His primary
responsibility is managing client portfolios, with a sector emphasis
on fixed-rate mortgage securities, including pass-throughs and CMOs.
Mr. Pellicciaro has been with BlackRock since 1999.
Mr. Murtagh is a Director and portfolio manager with BlackRock and
is a member of the Fixed Income Portfolio Management Group. His
primary responsibility is managing client portfolios, with sector
emphasis on fixed-income rate mortgage securities, including pass-
throughs and CMOs. Mr. Murtagh has been with BlackRock since 1997.
Mr. Hattem is a Vice President and portfolio manager with BlackRock
and is a member of the Fixed Income Portfolio Management Group. His
primary responsibility is the management of fixed income portfolios
with a sector emphasis on interest rate derivatives. He also works
on the implementation and management of hedging strategies across
global portfolios. Mr. Hattem has been with BlackRock since 2000.
Mr. Phillips is a Managing Director and portfolio manager with
BlackRock and is Co-Chair of the Fixed Income Operating Committee
and also a member of the Fixed Income Portfolio Management Group.
His primary responsibility is the consistent implementation of
investment strategies across all total return accounts. He is
Chairman of the monthly Account Review Meeting which examines
performance, compliance, and operations for all client portfolios.
Mr. Phillips is also a member of the mortgage securities team.
Mr. Phillips has been with BlackRock since 1991.
Mr. Spodek is a Managing Director and portfolio manager with
BlackRock and is a member of the Fixed Income Portfolio Management
Group. His primary responsibility is managing fixed income
portfolios, with a sector emphasis on global government bonds,
derivative instruments, and implementing yield curve strategy across
global portfolios. Mr. Spodek has been with BlackRock since 1993.
(a)(2) As of December 31, 2006:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
Eric
Pellicciaro 7 4 36 0 1 2
$ 2,398,404,723 $ 6,371,459,537 $ 656,198,904 $ 0 $ 208,220,903 $ 471,152,124
Colm
Murtagh 7 3 30 0 1 2
$ 2,684,645,101 $ 2,157,738,098 $ 13,583,434,661 $ 0 $ 208,220,903 $ 471,152,124
Jack Hattem 0 3 8 0 0 1
$0 $ 62,305,100 $ 208,613,025 $ 0 $0 $ 78,714,386
Andrew
Phillips 24 18 333 0 3 18
$ 13,191,837,735 $ 7,581,332,124 $ 129,369,152,475 $ 0 $ 1,421,844,799 $ 6,869,620,056
Stuart
Spodek 6 9 252 0 2 13
$ 3,857,411,670 $ 4,353,050,094 $ 39,490,317,214 $ 0 $ 1,236,895,686 $ 3,076,839,848
(iv) Potential Material Conflicts of Interest
BlackRock has built a professional working environment, firm-wide
compliance culture and compliance procedures and systems designed to
protect against potential incentives that may favor one account over
another. BlackRock has adopted policies and procedures that address
the allocation of investment opportunities, execution of portfolio
transactions, personal trading by employees and other potential
conflicts of interest that are designed to ensure that all client
accounts are treated equitably over time. Nevertheless, BlackRock
furnishes investment management and advisory services to numerous
clients in addition to the Fund, and BlackRock may, consistent with
applicable law, make investment recommendations to other clients or
accounts (including accounts which are hedge funds or have
performance or higher fees paid to BlackRock, or in which portfolio
managers have a personal interest in the receipt of such fees),
which may be the same as or different from those made to the Fund.
In addition, BlackRock, its affiliates and any officer, director,
stockholder or employee may or may not have an interest in the
securities whose purchase and sale BlackRock recommends to the Fund.
BlackRock, or any of its affiliates, or any officer, director,
stockholder, employee or any member of their families may take
different actions than those recommended to the Fund by BlackRock
with respect to the same securities. Moreover, BlackRock may refrain
from rendering any advice or services concerning securities of
companies of which any of BlackRock's (or its affiliates') officers,
directors or employees are directors or officers, or companies as to
which BlackRock or any of its affiliates or the officers, directors
and employees of any of them has any substantial economic interest
or possesses material non-public information. Each portfolio manager
also may manage accounts whose investment strategies may at times be
opposed to the strategy utilized for the Fund. In this connection,
it should be noted that certain portfolio managers currently manage
certain accounts that are subject to performance fees. In addition,
certain portfolio managers assist in managing certain hedge funds
and may be entitled to receive a portion of any incentive fees
earned on such funds and a portion of such incentive fees may be
voluntarily or involuntarily deferred. Additional portfolio managers
may in the future manage other such accounts or funds and may be
entitled to receive incentive fees.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and
must treat each client fairly. When BlackRock purchases or sells
securities for more than one account, the trades must be allocated
in a manner consistent with its fiduciary duties. BlackRock attempts
to allocate investments in a fair and equitable manner among client
accounts, with no account receiving preferential treatment. To this
end, BlackRock has adopted a policy that is intended to ensure that
investment opportunities are allocated fairly and equitably among
client accounts over time. This policy also seeks to achieve
reasonable efficiency in client transactions and provide BlackRock
with sufficient flexibility to allocate investments in a manner that
is consistent with the particular investment discipline and client
base.
(a)(3) As of December 31, 2006:
Portfolio Manager Compensation
Compensation Program
BlackRock's financial arrangements with its portfolio
managers, its competitive compensation and its career path emphasis
at all levels reflect the value senior management places on key
resources. Compensation may include a variety of components and may
vary from year to year based on a number of factors. The principal
components of compensation include a base salary, a discretionary
bonus, participation in various benefits programs and one or more of
the incentive compensation programs established by BlackRock such as
its Long-Term Retention and Incentive Plan and Restricted Stock
Program.
Base Compensation
Generally, portfolio managers receive base compensation based
on their seniority and/or their position with the firm.
Discretionary Compensation
In addition to base compensation, portfolio managers may
receive discretionary compensation, which can be a substantial
portion of total compensation. Discretionary compensation can
include a discretionary cash bonus as well as one or more of the
following:
Long-Term Retention and Incentive Plan (LTIP)
The LTIP is a long-term incentive plan that seeks to reward
certain key employees. The plan provides for the grant of awards
that are expressed as an amount of cash that, if properly vested and
subject to the attainment of certain performance goals, will be
settled in cash and/or in BlackRock, Inc. common stock.
Deferred Compensation Program
A portion of the compensation paid to each portfolio manager
may be voluntarily deferred by the portfolio manager into an account
that tracks the performance of certain of the firm's investment
products. Each portfolio manager is permitted to allocate his
deferred amounts among various options, including to certain of the
firm's hedge funds and other unregistered products. In addition,
prior to 2005, a portion of the annual compensation of certain
senior managers was mandatorily deferred in a similar manner for a
number of years. Beginning in 2005, a portion of the annual
compensation of certain senior managers was paid in the form of
BlackRock, Inc. restricted stock units which vest ratably over a
number of years.
Options and Restricted Stock Awards
While incentive stock options are not currently being awarded
to BlackRock employees, BlackRock, Inc. previously granted stock
options to key employees, including certain portfolio managers who
may still hold unexercised or unvested options. BlackRock, Inc. also
has a restricted stock award program designed to reward certain key
employees as an incentive to contribute to the long-term success of
BlackRock. These awards vest over a period of years.
Incentive Savings Plans
BlackRock, Inc. has created a variety of incentive savings
plans in which BlackRock employees are eligible to participate,
including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP)
and the BlackRock Employee Stock Purchase Plan (ESPP). The employer
contribution components of the RSP include a company match equal to
50% of the first 6% of eligible pay contributed to the plan capped
at $4,000 per year, and a company retirement contribution equal to
3% of eligible compensation, plus an additional contribution of 2%
for any year in which BlackRock has positive net operating income.
The RSP offers a range of investment options, including registered
investment companies managed by the firm. Company contributions
follow the investment direction set by participants for their own
contributions or absent, employee investment direction, are invested
into a stable value fund. The ESPP allows for investment in
BlackRock common stock at a 5% discount on the fair market value of
the stock on the purchase date. Annual participation in the ESPP
is limited to the purchase of 1,000 shares or a dollar value of
$25,000. Each portfolio manager is eligible to participate in these
plans.
Annual incentive compensation for each portfolio manager is a
function of several components: the performance of BlackRock, Inc.,
the performance of the portfolio manager's group within BlackRock,
the investment performance, including risk-adjusted returns and
income generation, of the firm's assets under management or
supervision by that portfolio manager relative to predetermined
benchmarks, and the individual's teamwork and contribution to the
overall performance of these portfolios and BlackRock. Unlike many
other firms, portfolio managers at BlackRock compete against
benchmarks rather than each other. In most cases, including for the
portfolio managers of the Registrant, these benchmarks are the same
as the benchmark or benchmarks against which the investment
performance, including risk-adjusted returns and income generation,
of the Registrant or other accounts are measured. A group of
BlackRock, Inc.'s officers determines which benchmarks against which
to compare the performance of funds and other accounts managed by
each portfolio manager.
The group of BlackRock, Inc.'s officers then makes a
subjective determination with respect to the portfolio manager's
compensation based on the performance of the funds and other
accounts managed by each portfolio manager relative to the various
benchmarks. This determination may take into consideration the fact
that a benchmark may not perfectly correlate to the way the
Registrant or other accounts are managed, even if it is the
benchmark that is most appropriate for the Registrant or other
account. For example, a benchmark's return may be based on the total
return of the securities comprising the benchmark, but the
Registrant or other account may be managed to maximize income and
not total return. Senior portfolio managers who perform additional
management functions within BlackRock may receive additional
compensation for serving in these other capacities.
(a)(4) Beneficial Ownership of Securities. As of December 31,
2006, none of the managers listed below beneficially owns
any stock issued by the Fund:
Eric Pellicciaro
Colm Murtagh
Jack Hattem
Andrew Phillips
Stuart Spodek
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers
Period (a) Total (b) Average (c) Total Number (d) Maximum Number
Number of Price Paid of Shares Purchased (or Approx. Dollar Value)
Shares per Share as Part of Publicly of Shares that
Purchased Announced Plans May Yet Be Purchased
or Programs Under the Plans
or Programs
June 1-30, 2006
July 1-31, 2006
August 1-31, 2006
September 1-30, 2006
October 1-31, 2006
November 1-30, 2006
December 1-31, 2006 23,997 18.50 23,997 614,181
Total:
On November 14, 2006, the repurchase offer was announced to repurchase up to 5%
of outstanding shares. The expiration date of the offer was December 15, 2006.
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) - As of September 29, 2006, with the conclusion of the combination of
Merrill Lynch's asset management business with BlackRock, the
registrant was migrated to BlackRock's trading and compliance
monitoring systems, and various personnel changes occurred. In
conjunction with these business improvements, there were no changes
in the registrants internal control over financial reporting (as
defined in Rule 30a-3(d) under Act (17 CFR 270.30a-3(d)) that
occurred during the last fiscal half-year of the period covered by
this report that has materially affected, or is reasonably likely to
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.
BlackRock Enhanced Government Fund, Inc.
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock Enhanced Government Fund, Inc.
Date: February 20, 2007
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
BlackRock Enhanced Government Fund, Inc.
Date: February 20, 2007
By: /s/ Donald C. Burke
-------------------
Donald C. Burke,
Chief Financial Officer of
BlackRock Enhanced Government Fund, Inc.
Date: February 20, 2007