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 811-21586
First Trust Enhanced Equity Income Fund
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
Date of fiscal year end: December 31
Date of reporting period: June 30, 2010
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
JUNE 30, 2010
(GRAPHIC)
FIRST TRUST
ENHANCED EQUITY
INCOME FUND
(FIRST TRUST LOGO) CHARTWELL INVESTMENT PARTNERS
INSTITUTIONAL AND PRIVATE ASSET MANAGEMENT
(GRAPHIC)
TABLE OF CONTENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
JUNE 30, 2010
Shareholder Letter ........................................................ 1
At a Glance ............................................................... 2
Portfolio Commentary ...................................................... 3
Portfolio of Investments .................................................. 6
Statement of Assets and Liabilities ....................................... 12
Statement of Operations ................................................... 13
Statements of Changes in Net Assets ....................................... 14
Financial Highlights ...................................................... 15
Notes to Financial Statements ............................................. 16
Additional Information .................................................... 23
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Chartwell Investment Partners, L.P. ("Chartwell"
or the "Sub-Advisor") and their respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Enhanced Equity Income Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market value
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Chartwell are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
JUNE 30, 2010
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust Enhanced Equity Income Fund (the "Fund").
First Trust Advisors L.P. ("First Trust") has always believed that staying
invested in quality products and having a long-term horizon can help investors
reach their financial goals. The past eighteen months have been challenging, but
successful investors understand that the success they have achieved is typically
because of their long-term investment perspective through all kinds of markets.
The report you hold contains detailed information about your investment; a
portfolio commentary from the Fund's management team that provides a recap of
the period; a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the six months this report
covers. I encourage you to read this document and discuss it with your financial
advisor.
First Trust offers a variety of products that can fit many financial plans to
help those investors who are seeking long-term financial success. You may want
to talk to your advisor about the other investments we offer that might fit your
financial plan.
At First Trust we continue to be committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio. We value our relationship with you, and
we thank you for the opportunity to assist you in achieving your financial
goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust Enhanced Equity Income Fund
Page 1
FIRST TRUST ENHANCED EQUITY INCOME FUND
"AT A GLANCE"
AS OF JUNE 30, 2010 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FFA
Common Share Price $10.15
Common Share Net Asset Value ("NAV") $11.30
Premium (Discount) to NAV (10.18)%
Net Assets Applicable to Common Shares $225,649,340
Current Quarterly Distribution per Common Share (1) $0.220
Current Annualized Distribution per Common Share $0.880
Current Distribution Rate on Closing Common Share Price (2) 8.67%
Current Distribution Rate on NAV (2) 7.79%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Common
Share
Price NAV
------ -----
6/30/09 8.82 10.67
7/2/09 8.78 10.5
7/10/09 8.45 10.31
7/17/09 9.01 10.94
7/24/09 9.47 11.29
7/31/09 9.55 11.36
8/7/09 9.8 11.44
8/14/09 9.8 11.44
8/21/09 10.02 11.68
8/28/09 9.94 11.7
9/4/09 10.02 11.63
9/11/09 10.35 11.89
9/18/09 10.58 12.05
9/25/09 10.14 11.64
10/2/09 9.97 11.47
10/9/09 10.38 11.93
10/16/09 10.49 12.05
10/23/09 10.59 11.99
10/30/09 9.97 11.59
11/6/09 10.49 11.91
11/13/09 10.69 12.13
11/20/09 10.89 12.12
11/27/09 10.8 12.17
12/4/09 11.16 12.34
12/11/09 11.38 12.38
12/18/09 11.5 12.36
12/24/09 11.75 12.39
12/31/09 11.7 12.32
1/8/10 11.68 12.55
1/15/10 12.04 12.5
1/22/10 11.7 12.12
1/29/10 10.97 11.95
2/5/10 11.18 11.9
2/12/10 10.96 12.08
2/19/10 11.55 12.44
2/26/10 11.41 12.42
3/5/10 11.73 12.71
3/12/10 11.72 12.81
3/19/10 11.56 12.66
3/26/10 11.73 12.76
4/1/10 11.98 12.92
4/9/10 11.97 13.05
4/16/10 11.94 13.03
4/23/10 12.1 13.19
4/30/10 12.01 12.94
5/7/10 10.51 12.11
5/14/10 11 12.35
5/21/10 10.36 11.83
5/28/10 10.5 11.94
6/4/10 10.34 11.66
6/11/10 10.62 12.05
6/18/10 10.85 12.31
6/25/10 10.37 11.72
6/30/10 10.15 11.30
PERFORMANCE
Average Annual Total Return
-------------------------------------
6 Months Ended 1 Year Ended 5 Years Ended Inception (8/26/2004)
6/30/2010 6/30/2010 6/30/2010 to 6/30/2010
-------------- ------------ ------------- ---------------------
Fund Performance(3)
NAV -4.65% 14.58% -0.15% 0.69%
Market Value -9.74% 24.62% -2.68% -1.90%
Index Performance
S&P 500 Index -6.65% 14.43% -0.79% 0.87%
% OF LONG-TERM
TOP 10 HOLDINGS INVESTMENTS
--------------- ---------------
Intel Corp. 4.0%
Occidental Petroleum Corp. 4.0
Bristol-Myers Squibb Co. 3.9
Exxon Mobil Corp. 3.1
International Business Machines Corp. 3.0
SPDR KBW Bank ETF 2.7
Microchip Technology, Inc. 2.5
PPG Industries, Inc. 2.4
Caterpillar, Inc. 2.4
JPMorgan Chase & Co. 2.4
----
Total 30.4%
====
% OF LONG-TERM
SECTOR CLASSIFICATION INVESTMENTS
--------------------- --------------
Information Technology 17.4%
Financials 14.3
Energy 14.3
Industrials 12.6
Consumer Staples 11.7
Health Care 10.8
Consumer Discretionary 7.0
Materials 4.9
Telecommunication Services 2.9
Other 2.7
Utilities 1.4
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 6/30/2010. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share Price or NAV, as applicable, as of 6/30/2010. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan, and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
Chartwell Investment Partners, L.P. ("Chartwell") is an employee-owned
investment advisory firm founded on April 1, 1997 by nine investment
professionals from Delaware Investment Advisers. The firm is 75% owned by the
partners and employees of Chartwell and 25% owned by a limited partnership
comprised of three passive investors in the Philadelphia area. There are no
affiliates at this time. The firm is a research-based equity and fixed-income
manager with a disciplined, team-oriented investment process.
Timothy J. Riddle, an executive with 30 years of investment industry experience,
is the Chief Executive Officer of Chartwell. Michael J. McCloskey, an executive
with 22 years of management experience, serves as President. G. Gregory Hagar is
Chartwell's Chief Financial Officer and Chief Compliance Officer. He has 21
years of related experience.
PORTFOLIO MANAGEMENT TEAM
(PHOTO OF BERNARD P. SCHAFFER)
BERNARD P. SCHAFFER
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Schaffer is a founding partner of Chartwell and has 38 years of investment
industry experience. He serves as senior portfolio manager for Chartwell's
closed-end fund and hedged large-cap equity strategies. As the lead portfolio
manager for the Fund since 2007, he focuses on securities in the Energy,
Financials and Consumer Staples sectors. He was employed as a Senior Portfolio
Manager at Delaware Investment Advisers from 1990 to 1997, managing two
closed-end equity income funds that utilized option strategies to generate
portfolio gains. Mr. Schaffer earned a Bachelor's degree in Economics from
Villanova University and an MBA from the University of Pennsylvania's Wharton
School.
(PHOTO OF DOUGLAS W. KUGLER)
DOUGLAS W. KUGLER, CFA
PRINCIPAL, PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 12 years of investment industry experience. His areas of
focus include the Transportation and Consumer Discretionary sectors of the
market. He has been a portfolio manager for the Fund since 2007. From 1993 to
2003, he held several positions at Morgan Stanley Investment Management (Miller
Anderson & Sherrerd) including Head of Mutual Fund Administration and Vice
President and Treasurer of the MAS Funds, Junior Associate in the Equity
Department, and his last position held prior to joining Chartwell was Senior
Associate and Analyst for the Large Cap Value team. Prior to joining Morgan
Stanley, he was an Assistant Vice President and Senior Accounting Officer at
Provident Financial Processing Corporation. Mr. Kugler holds the Chartered
Financial Analyst designation and is a member of the CFA (Chartered Financial
Analysts) Institute and the CFA Society of Philadelphia. Mr. Kugler earned a
Bachelor's degree in Accounting from the University of Delaware.
(PHOTO OF KEVIN A. MELICH)
KEVIN A. MELICH, CFA
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Melich is a founding partner of Chartwell and has 45 years of investment
industry experience. He is a member of Chartwell's large-cap equity portfolio
management team and implements portfolio management decisions for high-yield
equity institutional portfolios, including the Fund. He has been a portfolio
manager for the Fund since 2007. His areas of focus are in the Automotive,
Machinery, Office Electronics and REITs sectors. He was employed as a Senior
Portfolio Manager at Delaware Investment Advisers from 1983 to 1997. There he
managed over $1.6 billion for institutional accounts in the value style. From
1979 to 1983, Mr. Melich was a Partner with the economics consulting firm, A.B.
Laffer Associates. From 1964 to 1979, he was the Senior Investment Officer and
Manager of the Trust and Investment Division of Security Trust Company. Mr.
Melich holds the Chartered Financial Analyst designation and is a member of the
CFA Institute and the CFA Society of Philadelphia. He earned a Bachelor of
Science degree in Economics from St. John Fisher College.
Page 3
PORTFOLIO COMMENTARY - CONTINUED
COMMENTARY
FIRST TRUST ENHANCED EQUITY INCOME FUND
The investment objective of First Trust Enhanced Equity Income Fund (the "Fund")
is to provide a high level of current income and gains and, to a lesser extent,
capital appreciation. The Fund pursues its investment objective by investing in
a diversified portfolio of equity securities. Under normal market conditions,
the Fund pursues an integrated investment strategy in which the Fund invests
substantially all of its managed assets in a diversified portfolio of common
stocks of U.S. corporations and U.S. dollar-denominated equity securities of
foreign issuers. These securities are traded on U.S. securities exchanges. In
addition, on an ongoing and consistent basis, the Fund will write (sell) covered
call options on a portion of the Fund's managed assets. There can be no
assurance that the Fund's investment objective will be achieved.
MARKET RECAP
Stock market performance for the six months ended June 30, 2010 was volatile.
Strong corporate earnings growth excited investors while weak macro-economic
news dampened investor enthusiasm at times. From the start of the period through
the third week of January 2010, the market continued its advance that started in
the fall of 2009. However, in that third week of January, news surrounding
sovereign debt worries in Greece and other southern European nations began to
weigh on the market. This news created concerns of another credit crunch and the
Standard & Poor's 500 Index ("S&P 500") reversed course and fell approximately
8%. Then, on February 9, 2010, news broke that the European Central Bank had
developed a plan to support the bonds of the governments that were in fiscal
turmoil. The stock market responded positively to that news and the continued
strong corporate earnings which were being reported. The S&P 500 rose 15.2% from
its February low to its highest levels since the start of the US mortgage crisis
in September 2008. This peak was reached in late April 2010. At this point, the
European debt crisis garnered headlines again as Greece's debt rating was cut to
"junk" status by Standard & Poor's. The market remained weak for a time and then
on May 6, 2010 saw the most volatile trading day in many years as the Dow Jones
Industrial Average dropped by nearly 1,000 points intra-day - its biggest
intra-day drop ever - before rallying late in the day. While there were many
rumors regarding what caused this "flash-crash" as it has come to be known, the
events of that day and weaker than expected economic data weakened the market's
resolve and questions regarding a "double-dip" recession of the U.S. economy
began to gain prominence. These economic concerns, combined with the uncertain
environment in Europe and continued questions as to the strength of China's
economy, drove the S&P 500 down just over 15% from its peak to the close on June
30, 2010. Therefore, at the end of this volatile six-month period the S&P 500
had fallen 6.65%.
PERFORMANCE ANALYSIS
The net asset value ("NAV") total return(1) of the Fund for the six-month period
ending June 30, 2010 was -4.65% and the market value total return(1) of the Fund
was -9.74%. Both these returns were inclusive of dividends paid during the
period. During this same time period, the S&P 500 returned -6.65% also inclusive
of dividends. The main positive contributors to the Fund's relative performance
versus the S&P 500 during the first half of 2010 were in the Energy, Consumer
Discretionary and Industrials sectors. Within the Energy sector, the allocation
to Master Limited Partnerships ("MLPs") was the main driver of performance as
the four MLPs owned by the portfolio were up in the range of 7% to 20% in the
weak market. Capano Energy LLC and Enterprise Product Partners L.P. were the
best-performing stocks. The strength in the Consumer Discretionary sector was
the result of stock selection with Limited Brands, Inc., performing the best.
Meanwhile, the success in the Industrials sector was based on stock selection,
with overweights in Emerson Electric Co. and Caterpillar Inc., leading the way.
Disappointing performance within the Fund's portfolio came mostly from the
Consumer Staples and Telecommunications sectors with Avon Products, Inc. and
Verizon Communications Inc., being the most significant. The Fund continued to
sell call options on a significant percentage of the Fund's holdings during the
period. With the market rising during the first part of the reporting period the
program detracted from relative performance which is typical with written
options programs. However, during the market retreat the program was additive to
performance. Overall for the period, the options program aided performance. We
continue to believe the strategy of combining high dividend-paying stocks and an
option overwrite program is an excellent long-term strategy.
----------
(1) Total return is based on the combination of reinvested dividends, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan and changes in NAV per share for net asset value
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
Page 4
PORTFOLIO COMMENTARY - CONTINUED
MARKET & FUND OUTLOOK
As we have discussed in previous reports, the stock market is a forward-looking
indicator. Given its recent and continued volatility, it appears to be
anticipating a continuation of mixed economic results. The economic recovery
that began in early 2009 has seemingly hit a "soft patch". There are questions
regarding the continued strength of this recovery going forward, some of which
are: Will the employment situation improve and at what pace? Will the consumer
reduce spending if employment does not improve? How will the situation in Europe
play out and what impacts will there be to the U.S. economy? Will China engineer
a soft landing or will their economy slow too fast? On the other hand, corporate
earnings of U.S. companies have generally continued to grow and outpace
expectations based on growing revenues and strong productivity; many U.S.
corporations have significant cash on the their balance sheets and appear to be
in strong financial position; the situation in Europe has appeared to stabilize
at this point; and monetary policy will likely remain supportive of economic
growth for longer than expected. As these uncertain conditions continue, we are
likely to maintain a significant level of covered calls written on the Fund's
holdings. We will continue to run the portfolio with the dual objectives of
earning dividend income and options gains while seeking capital appreciation
opportunities over the market cycle.
Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
JUNE 30, 2010 (UNAUDITED)
SHARES DESCRIPTION VALUE
------- -------------------------------------------------- ------------
COMMON STOCKS - 91.6%
AEROSPACE & DEFENSE - 3.2%
75,900 Honeywell International, Inc. .................... $ 2,962,377
64,000 United Technologies Corp. ........................ 4,154,240
------------
7,116,617
------------
AIR FREIGHT & LOGISTICS - 0.9%
35,000 United Parcel Service, Inc., Class B ............. 1,991,150
------------
BEVERAGES - 5.3%
80,000 Coca-Cola (The) Co. .............................. 4,009,600
50,000 Diageo PLC, ADR .................................. 3,137,000
80,000 PepsiCo, Inc. .................................... 4,876,000
------------
12,022,600
------------
CAPITAL MARKETS - 3.1%
56,300 Ameriprise Financial, Inc. ....................... 2,034,119
250,000 Apollo Investment Corp. .......................... 2,332,500
160,000 Invesco, Ltd. .................................... 2,692,800
------------
7,059,419
------------
CHEMICALS - 4.8%
100,000 Dow Chemical (The) Co. ........................... 2,372,000
90,000 E.I. du Pont de Nemours & Co. .................... 3,113,100
90,000 PPG Industries, Inc. (b) ......................... 5,436,900
------------
10,922,000
------------
COMMERCIAL SERVICES & SUPPLIES - 1.1%
80,000 Waste Management, Inc. ........................... 2,503,200
------------
COMMUNICATIONS EQUIPMENT - 3.3%
245,200 Cisco Systems, Inc. (c) .......................... 5,225,212
70,000 QUALCOMM, Inc. ................................... 2,298,800
------------
7,524,012
------------
COMPUTERS & PERIPHERALS - 4.9%
100,000 Hewlett-Packard Co. .............................. 4,328,000
55,000 International Business Machines Corp. (d) ........ 6,791,400
------------
11,119,400
------------
DIVERSIFIED FINANCIAL SERVICES - 3.4%
147,000 JPMorgan Chase & Co. (b) ......................... 5,381,670
80,000 NYSE Euronext .................................... 2,210,400
------------
7,592,070
------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 2.3%
62,100 AT&T, Inc. ....................................... 1,502,199
130,000 Verizon Communications, Inc. ..................... 3,642,600
------------
5,144,799
------------
ELECTRIC UTILITIES - 0.7%
50,000 Southern Co. ..................................... 1,664,000
------------
See Notes to Financial Statements
Page 6
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
SHARES DESCRIPTION VALUE
------- -------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
ELECTRICAL EQUIPMENT - 1.9%
99,100 Emerson Electric Co. ............................. $ 4,329,679
------------
FOOD & STAPLES RETAILING - 1.9%
75,000 CVS Caremark Corp. (d) ........................... 2,199,000
70,000 Sysco Corp. (b) .................................. 1,999,900
------------
4,198,900
------------
FOOD PRODUCTS - 0.6%
50,000 Kraft Foods, Inc., Class A ....................... 1,400,000
------------
HEALTHCARE EQUIPMENT & SUPPLIES - 1.4%
90,000 Medtronic, Inc. .................................. 3,264,300
------------
HOTELS, RESTAURANTS & LEISURE - 0.8%
60,000 Carnival Corp. ................................... 1,814,400
------------
INDUSTRIAL CONGLOMERATES - 2.4%
40,000 3M Co. ........................................... 3,159,600
160,000 General Electric Co. (b) ......................... 2,307,200
------------
5,466,800
------------
INSURANCE - 5.5%
62,500 ACE Ltd. ......................................... 3,217,500
120,000 Lincoln National Corp. (b) ....................... 2,914,800
85,000 MetLife, Inc. .................................... 3,209,600
55,000 Prudential Financial, Inc. (b) ................... 2,951,300
------------
12,293,200
------------
IT SERVICES - 0.6%
50,000 Paychex, Inc. .................................... 1,298,500
------------
LEISURE EQUIPMENT & PRODUCTS - 0.7%
70,000 Mattel, Inc. (d) ................................. 1,481,200
------------
MACHINERY - 2.4%
90,000 Caterpillar, Inc. (b) ............................ 5,406,300
------------
MARINE - 0.7%
150,000 Seaspan Corp. .................................... 1,500,000
------------
MEDIA - 1.5%
200,000 Regal Entertainment Group, Class A ............... 2,608,000
25,500 Walt Disney (The) Co. (d) ........................ 803,250
------------
3,411,250
------------
MULTILINE RETAIL - 3.0%
100,000 J.C. Penney Co., Inc. ............................ 2,148,000
95,000 Target Corp. ..................................... 4,671,150
------------
6,819,150
------------
See Notes to Financial Statements
Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
SHARES DESCRIPTION VALUE
------- -------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
OIL, GAS & CONSUMABLE FUELS - 9.2%
40,000 Chevron Corp. .................................... $ 2,714,400
120,000 Exxon Mobil Corp. ................................ 6,848,400
40,000 Nordic American Tanker Shipping, Ltd. ............ 1,123,600
115,000 Occidental Petroleum Corp. (b) ................... 8,872,250
60,000 Williams (The) Cos., Inc. ........................ 1,096,800
------------
20,655,450
------------
PERSONAL PRODUCTS - 1.4%
120,000 Avon Products, Inc. (b) .......................... 3,180,000
------------
PHARMACEUTICALS - 9.3%
95,000 Abbott Laboratories .............................. 4,444,100
350,100 Bristol-Myers Squibb Co. (b) ..................... 8,731,494
100,000 Merck & Co., Inc. ................................ 3,497,000
300,000 Pfizer, Inc. ..................................... 4,278,000
------------
20,950,594
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 2.2%
184,300 Annaly Capital Management, Inc. (b) .............. 3,160,745
250,000 MFA Mortgage Investments, Inc. ................... 1,850,000
------------
5,010,745
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 6.4%
457,300 Intel Corp. (b) .................................. 8,894,485
200,000 Microchip Technology, Inc. (b) ................... 5,548,000
------------
14,442,485
------------
SOFTWARE - 2.0%
200,000 Microsoft Corp. .................................. 4,602,000
------------
SPECIALTY RETAIL - 1.0%
100,000 Limited Brands, Inc. ............................. 2,207,000
------------
TOBACCO - 2.4%
160,000 Altria Group, Inc. ............................... 3,206,400
50,000 Philip Morris International, Inc. ................ 2,292,000
------------
5,498,400
------------
WATER UTILITIES - 0.7%
74,200 American Water Works Co., Inc. ................... 1,528,520
------------
WIRELESS TELECOMMUNICATION SERVICES - 0.6%
67,000 Vodafone Group PLC, ADR. ......................... 1,384,890
------------
TOTAL COMMON STOCKS
(Cost $239,036,228) .............................. 206,803,030
------------
See Notes to Financial Statements
Page 8
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
SHARES/
UNITS DESCRIPTION VALUE
------- ------------------------------------------------------ ------------
MASTER LIMITED PARTNERSHIPS - 5.0%
OIL, GAS & CONSUMABLE FUELS - 5.0%
105,000 Copano Energy, LLC ................................... $ 2,885,400
90,000 Energy Transfer Partners, L.P. ....................... 4,176,000
40,000 Enterprise Products Partners, L.P. ................... 1,414,800
60,000 Magellan Midstream Partners, L.P. .................... 2,805,000
------------
TOTAL MASTER LIMITED PARTNERSHIPS
(Cost $8,335,672) .................................... 11,281,200
------------
EXCHANGE-TRADED FUNDS - 2.7%
CAPITAL MARKETS - 2.7%
264,200 SPDR KBW Bank ETF .................................... 6,047,538
------------
TOTAL EXCHANGE-TRADED FUNDS
(Cost $3,925,808) .................................... 6,047,538
------------
TOTAL INVESTMENTS - 99.3%
(Cost $251,297,708) (e) .............................. 224,131,768
------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ---------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (0.1%)
Annaly Capital Management, Inc. Call
1,000 @ 18 due Jul 10 .................................... (6,000)
------------
Avon Products, Inc. Call
200 @ 30 due Jul 10 .................................... (2,000)
------------
Bristol-Myers Squibb Co. Call
2,000 @ 26 due Jul 10 .................................... (32,000)
------------
Caterpillar, Inc. Call
300 @ 67.5 due Jul 10 .................................. (6,900)
------------
CVS Caremark Corp. Call
750 @ 33 due Jul 10 .................................... (6,000)
------------
General Electric Co. Call
200 @ 17 due Jul 10 .................................... (600)
------------
Intel Corp. Call
1,000 @ 23 due Jul 10 .................................... (3,000)
------------
International Business Machines Corp. Call
550 @ 135 due Jul 10 ................................... (6,050)
------------
See Notes to Financial Statements
Page 9
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ---------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
JPMorgan Chase & Co. Call
470 @ 41 due Jul 10 .................................... $ (5,640)
------------
Lincoln National Corp. Call
300 @ 30 due Jul 10 .................................... (1,500)
------------
Mattel, Inc. Call
700 @ 24 due Jul 10 .................................... (3,500)
------------
Microchip Technology, Inc. Call
500 @ 30 due Jul 10 .................................... (5,000)
------------
Occidental Petroleum Corp. Calls
150 @ 85 due Jul 10 .................................... (4,050)
500 @ 90 due Jul 10 .................................... (3,000)
------------
(7,050)
------------
PPG Industries, Inc. Call
400 @ 70 due Jul 10 .................................... (3,000)
------------
Prudential Financial, Inc. Call
250 @ 65 due Jul 10 .................................... (1,375)
------------
S&P 500 Index Calls (f)
200 @ 1130 due Jul 10 .................................. (12,000)
500 @ 1140 due Jul 10 .................................. (22,500)
200 @ 1150 due Jul 10 .................................. (5,000)
200 @ 1160 due Jul 10 .................................. (4,000)
------------
(43,500)
------------
Sysco Corp. Call
400 @ 30 due Jul 10 .................................... (4,000)
------------
Walt Disney (The) Co. Call
255 @ 37 due Jul 10 .................................... (765)
------------
TOTAL CALL OPTIONS WRITTEN - (0.1)% ...................... (137,880)
(Premiums received $1,489,555)
------------
NET OTHER ASSETS AND LIABILITIES - 0.8% .................. 1,655,452
------------
NET ASSETS - 100.0% ...................................... $225,649,340
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Call options were written on a portion of the common stock position and are
fully covered by the common stock position.
(c) Non-income producing security.
(d) Call options were written on this entire common stock position and are
fully covered by the common stock position.
See Notes to Financial Statements
Page 10
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of June 30, 2010, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $12,111,971 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $39,277,911.
(f) Call options on securities indices were written on a portion of the common
stock positions that were not used to cover call options on individual
equity securities held in the Fund's portfolio.
ADR American Depositary Receipt
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2010
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
--------------------------------------------------------
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2010 PRICES INPUTS INPUTS
------------ ------------ ----------- ------------
Common Stocks* ................. $206,803,030 $206,803,030 $-- $--
Master Limited Partnerships* ... 11,281,200 11,281,200 -- --
Exchange-Traded Funds* ......... 6,047,538 6,047,538 -- --
------------ ------------ --- ---
Total Investments .............. $224,131,768 $224,131,768 $-- $--
============ ============ === ===
LIABILITIES TABLE
--------------------------------------------------------
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2010 PRICES INPUTS INPUTS
------------ ------------ ----------- ------------
Call Options Written ........... $ (137,880) $ (137,880) $-- $--
============ ============ === ===
* See the Portfolio of Investments for industry breakdown.
See Notes to Financial Statements
Page 11
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2010 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $251,297,708) ........................................................................ $224,131,768
Prepaid expenses .............................................................................. 33,379
Receivables:
Investment securities sold ................................................................. 4,289,397
Dividends .................................................................................. 641,379
Interest ................................................................................... 211
------------
Total Assets ............................................................................ 229,096,134
------------
LIABILITIES:
Options written, at value (Premiums received $1,489,555) ...................................... 137,880
Payables:
Due to custodian ........................................................................... 3,029,344
Investment advisory fees ................................................................... 195,803
Audit and tax fees ......................................................................... 27,219
Legal fees ................................................................................. 22,874
Administrative fees ........................................................................ 17,973
Printing fees .............................................................................. 10,633
Transfer agent fees ........................................................................ 3,253
Other liabilities ............................................................................. 1,815
------------
Total Liabilities ....................................................................... 3,446,794
------------
NET ASSETS .................................................................................... $225,649,340
============
NET ASSETS CONSIST OF:
Paid-in capital ............................................................................... $343,864,427
Par value ..................................................................................... 199,732
Accumulated net investment income (loss) ...................................................... (6,703,584)
Accumulated net realized gain (loss) on investments and written options transactions .......... (85,896,970)
Net unrealized appreciation (depreciation) on investments and written options ................. (25,814,265)
------------
NET ASSETS .................................................................................... $225,649,340
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .......................... $ 11.30
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) ... 19,973,164
============
See Notes to Financial Statements
Page 12
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED)
INVESTMENT INCOME:
Dividends ........................................................ $ 3,439,388
Interest ......................................................... 482
------------
Total investment income .................................... 3,439,870
------------
EXPENSES:
Investment advisory fees ......................................... 1,231,860
Administrative fees .............................................. 112,225
Printing fees .................................................... 54,937
Legal fees ....................................................... 32,082
Custodian fees ................................................... 24,199
Audit and tax fees ............................................... 22,019
Trustees' fees and expenses ...................................... 19,520
Transfer agent fees .............................................. 17,072
Other ............................................................ 28,897
------------
Total expenses ............................................. 1,542,811
------------
NET INVESTMENT INCOME (LOSS) ..................................... 1,897,059
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ................................................... 4,517,419
Written option transactions * ................................. 528,955
------------
Net realized gain (loss) ......................................... 5,046,374
------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................... (19,554,160)
Written options held * ........................................ 1,000,251
------------
Net change in unrealized appreciation (depreciation) ............. (18,553,909)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) .......................... (13,507,535)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .. $(11,610,476)
============
* Primary risk exposure is equity contracts.
See Notes to Financial Statements
Page 13
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
6/30/2010 ENDED
(UNAUDITED) 12/31/2009
------------ ------------
OPERATIONS:
Net investment income (loss) ............................................... $ 1,897,059 $ 3,977,623
Net realized gain (loss) ................................................... 5,046,374 (55,181,310)
Net change in unrealized appreciation (depreciation) ....................... (18,553,909) 93,750,564
------------ ------------
Net increase (decrease) in net assets resulting from operations ............ (11,610,476) 42,546,877
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ...................................................... (8,788,192) (3,797,356)
Return of capital .......................................................... -- (15,376,882)
------------ ------------
Total distributions to shareholders ........................................ (8,788,192) (19,174,238)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested ..................................... -- --
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions .. -- --
------------ ------------
Total increase (decrease) in net assets .................................... (20,398,668) 23,372,639
NET ASSETS:
Beginning of period ........................................................ 246,048,008 222,675,369
------------ ------------
End of period .............................................................. $225,649,340 $246,048,008
============ ============
Accumulated net investment income (loss) at end of period .................. $ (6,703,584) $ 187,549
============ ============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ....................................... 19,973,164 19,973,164
Common Shares issued as reinvestment under the Dividend Reinvestment Plan .. -- --
------------ ------------
Common Shares at end of period ............................................. 19,973,164 19,973,164
============ ============
See Notes to Financial Statements
Page 14
FIRST TRUST ENHANCED EQUITY INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
6/30/2010 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 12/31/2009 12/31/2008 12/31/2007 (a) 12/31/2006 12/31/2005
----------- ---------- ---------- -------------- ---------- ----------
Net asset value, beginning of period ........... $ 12.32 $ 11.15 $ 18.38 $ 18.65 $ 18.99 $ 19.97
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.09 0.20 0.42 0.14 0.02 0.01
Net realized and unrealized gain (loss) ........ (0.67) 1.93 (6.05) 1.24 1.24 0.61
-------- -------- -------- -------- -------- --------
Total from investment operations ............... (0.58) 2.13 (5.63) 1.38 1.26 0.62
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.44) (0.19) (0.43) (0.14) (0.02) (0.01)
Net realized gain .............................. -- -- (0.10) (1.51) (1.58) (1.59)
Return of capital .............................. -- (0.77) (1.07) -- -- --
-------- -------- -------- -------- -------- --------
Total distributions ............................ (0.44) (0.96) (1.60) (1.65) (1.60) (1.60)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................. $ 11.30 $ 12.32 $ 11.15 $ 18.38 $ 18.65 $ 18.99
======== ======== ======== ======== ======== ========
Market value, end of period .................... $ 10.15 $ 11.70 $ 8.85 $ 16.14 $ 18.41 $ 17.12
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (B) ...... (4.65)% 22.24% (30.54)% 8.19% 7.09% 3.48%
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (B) ......... (9.74)% 46.26% (37.22)% (3.76)% 17.26% (6.85)%
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $225,649 $246,048 $222,675 $367,009 $372,576 $379,245
Ratio of total expenses to average net assets .. 1.25%(c) 1.34% 1.31% 1.21% 1.24% 1.23%
Ratio of net investment income (loss) to
average net assets .......................... 1.54%(c) 1.80% 2.80% 0.76% 0.13% 0.04%
Portfolio turnover rate ........................ 23% 74% 121% 174% 131% 266%
----------
(a) On September 14, 2007, Chartwell Investment Partners, L.P. became the
sub-advisor to the Fund.
(b) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan and changes in net asset value per share for net
asset value returns and changes in Common Share price for market value
returns. Total returns do not reflect sales load and are not annualized for
periods less than one year. Past performance is not indicative of future
results.
(c) Annualized.
See Notes to Financial Statements
Page 15
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
1. FUND DESCRIPTION
First Trust Enhanced Equity Income Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 20, 2004 and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FFA on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to provide a high level of current income and
gains and, to a lesser extent, capital appreciation. The Fund pursues its
investment objective by investing in a diversified portfolio of equity
securities. Under normal market conditions, the Fund pursues an integrated
investment strategy in which the Fund invests substantially all of its managed
assets in a diversified portfolio of common stocks of U.S. corporations and U.S.
dollar-denominated equity securities of non-U.S. issuers, in each case that are
traded on U.S. securities exchanges, and on an ongoing and consistent basis
writes (sells) covered call options on a portion of the Fund's managed assets.
There can be no assurance that the Fund's investment objective will be achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. The NAV per Common Share is calculated
by dividing the value of all assets of the Fund (including accrued interest and
dividends), less all liabilities (including accrued expenses, the value of call
options written (sold) and dividends declared but unpaid), by the total number
of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities
and other investments. Additionally, if events occur after the close of the
principal markets for particular securities (e.g., domestic debt and foreign
securities), but before the Fund values its assets, that could materially affect
NAV, First Trust may use a fair value method to value the Fund's securities and
other investments. The use of fair value pricing by the Fund is governed by
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with the provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, or
no official closing price in the case of securities traded on the NASDAQ, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in less than 60 days when purchased are valued at amortized cost.
The Fund values exchange-traded options and other derivative contracts at the
closing price on the exchange on which they are principally traded, or if not
traded, or no closing price is available, at the mean between the last bid and
asked price.
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
- Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
- Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
- Quoted prices for similar securities in active markets.
- Quoted prices for identical or similar securities in markets
that are non-active. A non-active market is a market where
there are few transactions for the security, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
- Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and
default rates).
- Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
- Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the assumptions
that market participants would use in pricing the security.
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of June 30, 2010, is
included with the Fund's Portfolio of Investments.
B. WRITTEN OPTIONS:
The Fund may write (sell) covered call options ("options") on all or a portion
of the equity securities held in the Fund's portfolio and on securities indices
as determined to be appropriate by Chartwell Investment Partners, L.P.
("Chartwell" or the "Sub-Advisor"), consistent with the Fund's investment
objective. The number of options the Fund can write (sell) is limited by the
amount of equity securities the Fund holds in its portfolio. Options on
securities indices are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security and are similar to options on single securities, except that
the exercise of securities index options requires cash settlement payments and
does not involve the actual purchase or sale of securities. The Fund will not
write (sell) "naked" or uncovered options. If certain equity securities held in
the Fund's portfolio are not covered by a related call option on the individual
equity security, securities index options may be written on all or a portion of
such uncovered securities. By writing (selling) options, the Fund seeks to
generate additional income, in the form of premiums received, for writing
(selling) the options, and to provide a partial hedge against a market decline
in the underlying equity security. When the Fund writes (sells) an option, an
amount equal to the premium received by the Fund is recorded as an asset with an
equal liability and is subsequently marked-to-market daily to reflect the
current market value of the option written (sold). The options are
marked-to-market daily and their value will be affected by changes in the value
and dividend rates of the underlying equity securities, changes in interest
rates, changes in the actual or perceived volatility of the securities markets
and the underlying equity securities and the remaining time to the options'
expiration. The value of options may also be adversely affected if the market
for the options becomes less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the exercise price. In this case, the
option premium received by the Fund will be added to the amount realized on the
sale of the underlying equity security for purposes of determining gain or loss.
If the price of the underlying equity security is less than the option's
exercise price, the option will likely expire without being exercised. The
option premium received by the Fund will, in this case, be treated as short-term
capital gain on the expiration date of the option. The Fund may also elect to
close out its position in an option prior to its expiration by purchasing an
option of the same series as the option written (sold) by the Fund.
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the Fund's covered call investment strategy depends on the ability of Chartwell
to predict pertinent market movements, which cannot be assured. Thus, the use of
options may require the Fund to sell portfolio securities at inopportune times
or for prices other than current market value, which may limit the amount of
appreciation the Fund can realize on an investment, or may cause the Fund to
hold a security that it might otherwise sell. As the writer (seller) of a
covered option, the Fund forgoes, during the option's life, the opportunity to
profit from increases in the market value of the security covering the option
above the sum of the premium received and the exercise price of the option, but
has retained the risk of loss should the price of the underlying security
decline. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective. Over-the-counter ("OTC") options have the risk of the
potential inability of counterparties to meet the terms of their contracts. The
Fund's maximum equity price risk for purchased options is limited to the premium
initially paid. In addition, certain risks may arise upon entering into option
contracts including the risk that an illiquid secondary market will limit the
Fund's ability to close out an option contract prior to the expiration date and
that a change in the value of the option contract may not correlate exactly with
changes in the value of the securities hedged.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis, including amortization of premiums and accretion of
discounts.
The Fund may hold publicly-traded master limited partnerships ("MLPs") and real
estate investment trusts ("REITs"). Distributions from such investments may
include a return of capital component from the MLP or REIT to the extent of the
cost basis of such MLP or REIT investments. The actual character of amounts
received during the year is not known until after the fiscal year end. The Fund
records the character of distributions received from the MLPs or REITs during
the year based on estimates available. The Fund's characterization may be
subsequently revised based on information received from the MLPs or REITs after
their tax reporting periods conclude.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income of the Fund are declared and paid quarterly
or as the Board of Trustees may determine from time to time. Distributions of
any net realized capital gains earned by the Fund are distributed at least
annually. Distributions will automatically be reinvested into additional Common
Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
Distributions from income and realized capital gains are determined in
accordance with income tax regulations, which may differ from accounting
principles generally accepted in the United States of America. These differences
are primarily due to differing treatments of income and gains on various
investment securities held by the Fund, timing differences and differing
characterization of distributions made by the Fund. The character of
distributions for tax reporting purposes will depend on the Fund's investment
experience during the remainder of its fiscal year; however, based on
information for the fiscal year through June 30, 2010, it is likely that the
Fund's distributions will include a return of capital component for the fiscal
year ending on December 31, 2010.
The tax character of distributions paid during the fiscal year ended December
31, 2009 was as follows:
Distributions paid from:
Ordinary Income .... $ 3,797,356
Return of Capital .. 15,376,882
As of December 31, 2009, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income ............... $ --
Net Unrealized Appreciation (Depreciation) .. (13,727,702)
Accumulated Capital and Other Losses ........ (84,288,449)
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
E. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes.
The Fund intends to utilize provisions of the federal income tax laws, which
allows it to carry a realized capital loss forward for eight years following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At December 31, 2009, the
Fund had a capital loss carryforward for federal income tax purposes of
$83,364,751, with $15,025,062 and $68,339,689 expiring on December 31, 2016 and
2017, respectively.
Certain capital losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended December 31, 2009, the Fund intends to elect to defer net realized capital
losses of $923,698 incurred from November 1, 2009 through December 31, 2009.
The Fund is subject to tax accounting standards that establish a minimum
threshold for recognizing, and a system for measuring, the benefits of a tax
position taken or expected to be taken in a tax return. Taxable years ending
2006, 2007, 2008 and 2009 remain open to federal and state audit. As of June 30,
2010, management has evaluated the application of these standards to the Fund,
and has determined that no provision for income tax is required in the Fund's
financial statements for uncertain tax positions.
F. EXPENSES:
The Fund pays all expenses directly related to its operations.
G. ACCOUNTING PRONOUNCEMENT:
In January 2010, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2010-06, "Improving Disclosures about
Fair Value Measurements." ASU No. 2010-06 amends FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, to require
additional disclosures regarding fair value measurements. Certain disclosures
required by ASU No. 2010-06 are currently effective for interim and annual
reporting periods beginning after December 15, 2009, and other required
disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. Management is currently
evaluating the impact ASU No. 2010-06 will have on the Fund's financial
statement disclosures, if any.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets, which means the average daily gross
assets of the Fund minus the sum of the Fund's accrued and unpaid dividends on
any outstanding Common Shares and accrued liabilities, including the value of
call options written (sold).
Chartwell serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.50% of Managed Assets
that is paid monthly by First Trust out of its investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., formerly an indirect, wholly-owned
subsidiary of The PNC Financial Services Group, Inc. ("PNC"), serves as the
Fund's Administrator, Fund Accountant and Transfer Agent in accordance with
certain fee arrangements. PFPC Trust Company, also an indirect, majority-owned
subsidiary of PNC, serves as the Fund's Custodian in accordance with certain fee
arrangements.
On July 1, 2010, The PNC Financial Services Group, Inc. sold the outstanding
stock of PNC Global Investment Servicing Inc. to The Bank of New York Mellon
Corporation. At the closing of the sale, PNC Global Investment Servicing (U.S.)
Inc. changed its name to BNY Mellon Investment Servicing (US) Inc. PFPC Trust
Company will not change its name until a later date to be announced.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each additional trust in the First
Trust Fund Complex. The annual retainer is allocated equally among each of the
trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and Valuation Committee are
paid $2,500 annually to serve in such capacities, with such compensation paid by
the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. The Lead
Independent Trustee and each Committee chairman will serve two-year terms ending
December 31, 2011, before rotating to serve as chairman of another Committee or
as Lead Independent Trustee. The officers and "Interested" Trustee receive no
compensation from the trusts for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES AND OPTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments and written options, for the six months ended June 30,
2010, were $55,605,080 and $61,879,136, respectively.
Written option activity for the Fund was as follows:
NUMBER
OF
CONTRACTS PREMIUMS
--------- -----------
WRITTEN OPTIONS
Options outstanding at December 31, 2009 .. 24,445 $ 2,227,651
Options written ........................... 140,126 11,965,317
Options expired ........................... (78,231) (5,987,091)
Options exercised ......................... (10,012) (551,546)
Options closed ............................ (65,303) (6,164,776)
------- -----------
Options outstanding at June 30, 2010 ...... 11,025 $ 1,489,555
======= ===========
5. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
6. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
MLP RISK: An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest exist between common unit holders and the general partner,
including those arising from incentive distribution payments.
EQUITY SECURITIES RISK: The Fund invests in equity securities. An adverse event
affecting an issuer, such as an unfavorable earnings report, may depress the
value of a particular equity security held by the Fund. Also, the prices of
equity securities are sensitive to general movements in the stock market and a
drop in the stock market may depress the prices of equity securities to which
the Fund has exposure. Equity securities prices fluctuate for several reasons,
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, or when political
or economic events affecting the issuers or their industries occur.
OPTION RISK: The Fund may write (sell) covered call options on a portion of the
equity securities held in the Fund's portfolio as determined to be appropriate
by the Fund's Sub-Advisor, consistent with the Fund's investment objective. The
ability to successfully implement the Fund's investment strategy depends on the
Sub-Advisor's ability to predict pertinent market movements, which can not be
assured. Thus, the use of options may require the Fund to sell portfolio
securities at inopportune times or for prices other than current market values,
may limit the amount of appreciation the Fund can realize on an investment, or
may cause the Fund to hold an equity security that it might otherwise sell.
There can be no assurance that a liquid market for the options will exist when
the Fund seeks to close out an option position. Additionally, to the extent that
the Fund purchases options pursuant to a hedging strategy, the Fund will be
subject to additional risks.
INDUSTRY RISK: The Fund may not invest 25% or more of its total assets in
securities of issuers in any single industry. If the Fund is focused in an
industry, it may present more risks than if it were broadly diversified over
numerous industries of the economy. Individual industries may be subject to
unique risks which may include, among others, governmental regulation,
inflation, technological innovations that may render existing products and
equipment obsolete, competition from new entrants, high research and development
costs, and rising interest rates.
INCOME RISK: Net investment income paid by the Fund to its Common Shareholders
is derived from the dividends and interest it receives from the equity
securities and other investments held in the Fund's portfolio and from
short-term gains derived from the premiums it receives from writing (selling)
call options. Premiums from writing (selling) call options and dividends and
interest payments made by the securities in the Fund's portfolio can vary widely
over time. Dividends on equity securities are not fixed but are declared at the
discretion of an issuer's board of directors. There is no guarantee that the
issuers of the equity securities in which the Fund invests will declare
dividends in the future or that if declared they will remain at current levels.
The Fund cannot assure as to what percentage of the distributions paid on the
Common Shares, if any, will consist of qualified dividend income or long-term
capital gains, both of which are taxed at lower rates for individuals than are
ordinary income and short-term capital gains.
NON-U.S. RISK: The Fund may invest a portion of its assets in the equity
securities of issuers domiciled in jurisdictions other than the U.S. Investments
in the securities and instruments of non-U.S. issuers involve certain
considerations and risks not ordinarily associated with investments in
securities and instruments of U.S. issuers. Non-U.S. companies are not generally
subject to uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Non-U.S. securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may be
subject to withholding and other non-U.S. taxes, which may adversely affect the
net return on such investments. A related risk is that there may be difficulty
in obtaining or enforcing a court judgment abroad.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that besides
the subsequent events that have already been disclosed there was the following
subsequent event:
On August 24, 2010, members of the Robert Donald Van Kampen family entered into
a Stock Purchase Agreement to sell 100% of the common stock of The Charger
Corporation to James A. Bowen, the President of First Trust. The transaction is
expected to be completed by September 21, 2010 and is subject to normal closing
conditions. The consummation of the transaction will be deemed to be "an
assignment" (as defined in the 1940 Act) of the Investment Management Agreement
between the Fund and First Trust, and will result in
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
the automatic termination of the agreement. Prior to consummation of the
transaction, it is anticipated that the Board of Trustees of the Fund will
consider an interim investment management agreement and a new ongoing investment
management agreement with First Trust, which will contain terms substantially
identical to the existing Investment Management Agreement. If approved by the
Board of Trustees of the Fund, the new ongoing investment management agreement
will be presented for shareholder approval.
Page 22
ADDITIONAL INFORMATION
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions on your Common Shares, will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc., (formerly PNC Global Investment Servicing
(U.S.) Inc.) (the "Plan Agent") in additional Common Shares under the Plan. If
you elect to receive cash distributions, you will receive all distributions in
cash paid by check mailed directly to you by the Plan Agent as dividend paying
agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above NAV at the time of valuation,
the Fund will issue new shares at a price equal to the greater of (i)
NAV per Common Share on that date or (ii) 95% of the market price on
that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts. It is possible
that the market price for the Common Shares may increase before the
Plan Agent has completed its purchases. Therefore, the average
purchase price per share paid by the Plan Agent may exceed the market
price at the time of valuation, resulting in the purchase of fewer
shares than if the dividend or distribution had been paid in Common
Shares issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
Page 23
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
PORTFOLIO HOLDINGS
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 (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and
Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen
Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First
Trust Strategic High Income Fund, First Trust Strategic High Income Fund II,
First Trust/Aberdeen Emerging Opportunity Fund, First Trust Strategic High
Income Fund III, First Trust Specialty Finance and Financial Opportunities Fund
and First Trust Active Dividend Income Fund was held on April 14, 2010. At the
Annual Meeting, Trustees James A. Bowen and Niel B. Nielson were elected by the
Common Shareholders of the First Trust Enhanced Equity Income Fund as Class III
Trustees for a three-year term expiring at the Fund's annual meeting of
shareholders in 2013. The number of votes cast in favor of Mr. Bowen was
17,536,210, the number of votes against was 313,173 and the number of
abstentions was 2,123,781. The number of votes cast in favor of Mr. Nielson was
17,538,579, the number of votes against was 310,804 and the number of
abstentions was 2,123,781. Richard E. Erickson, Thomas R. Kadlec and Robert F.
Keith are the other current and continuing Trustees.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Enhanced Equity Income Fund (the "Fund"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and Chartwell
Investment Partners (the "Sub-Advisor"), at a meeting held on March 21-22, 2010.
The Board determined that the terms of the Agreements are fair and reasonable
and that the Agreements continue to be in the best interests of the Fund.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs. The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor and the Sub-Advisor. The Board
applied its business judgment to determine whether the arrangements between the
Fund and the Advisor and among the Fund, the Advisor and the Sub-Advisor are
reasonable business arrangements from the Fund's perspective as well as from the
perspective of shareholders.
Page 24
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
In reviewing the Agreements, the Board considered the nature, quality and extent
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund, including
the oversight of the Sub-Advisor. The Board noted the compliance program that
had been developed by the Advisor and considered that the compliance program
includes policies and procedures for monitoring the Sub-Advisor's compliance
with the 1940 Act and the Fund's investment objective and policies. The Board
also noted the enhancements made by the Advisor to the compliance program in
2009. With respect to the Sub-Advisory Agreement, the Board received a
presentation from representatives of the Sub-Advisor discussing the services
that the Sub-Advisor provides to the Fund and how the Sub-Advisor manages the
Fund's investments. In light of the information presented and the considerations
made, the Board concluded that the nature, quality and extent of services
provided to the Fund by the Advisor and the Sub-Advisor under the Agreements
have been and are expected to remain satisfactory and that the Sub-Advisor,
under the oversight of the Advisor, has managed the Fund consistent with its
investment objective and policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, and noted that the Advisor does not
provide advisory services to other clients with investment objectives and
policies similar to the Fund's. The Board also considered information provided
by the Sub-Advisor as to the fee it charges to other similar clients, noting
that the sub-advisory fee is lower than the fees charged by the Sub-Advisor to
another closed-end fund with similar investment strategies to which it provides
advisory services. In addition, the Board received data prepared by Lipper Inc.
("Lipper"), an independent source, showing the management fees and expense
ratios of the Fund as compared to the management fees and expense ratios of a
combined peer group selected by Lipper and the Advisor. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer group
for the Fund, including that (i) most peer funds do not employ an
advisor/sub-advisor management structure; (ii) the peer funds may not have the
same fiscal year as the Fund, which may cause the expense data used by Lipper to
be measured over different time periods; and (iii) many of the peer funds are
larger than the Fund. The Board reviewed the Lipper materials, but based on its
discussions with the Advisor, the Board determined that the Lipper data was of
limited value for purposes of its consideration of the renewal of the
Agreements.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance on an ongoing basis, and had been enhanced to assess portfolio risk
as well. The Board determined that this process continues to be effective for
reviewing the Fund's performance. In addition to the Board's ongoing review of
performance, the Board also received data prepared by Lipper comparing the
Fund's performance to the combined peer group selected by Lipper and the
Advisor, as well as to a larger group and to a benchmark. The Board reviewed the
Lipper materials, but for similar reasons to those described above, the Board
determined that the performance data provided by Lipper was of limited value. In
addition, the Board considered the market price and net asset value performance
of the Fund since inception, and compared the Fund's premium/discount to the
average and median premium/discount of the combined peer group, noting that the
Fund's premium/discount was generally indicative of the asset class and market
events. Based on the information provided and the Board's ongoing review of the
Fund's performance, the Board concluded that the Fund's performance was
reasonable.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, quality and extent
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board concluded that the advisory fee
reflects an appropriate level of sharing of any economies of scale at current
asset levels. The Board also considered the costs of the services provided and
profits realized by the Advisor from serving as investment manager to the Fund
for the twelve months ended December 31, 2009, as set forth in the materials
provided to the Board. The Board noted the inherent limitations in the
profitability analysis, and concluded that the Advisor's profitability appeared
to be not excessive in light of the services provided to the Fund. In addition,
the Board considered and discussed any ancillary benefits derived by the Advisor
from its relationship with the Fund and noted that the typical fall out benefits
to the Advisor such as soft dollars are not present. The Board concluded that
any other fall out benefits received by the Advisor or its affiliates would
appear to be limited.
The Board considered that the Sub-Advisor had continually reinvested its capital
to build a large, experienced group of professionals to serve its clients,
including the Fund. The Board considered that the sub-advisory fee rate was
negotiated at arm's length between the Advisor and the Sub-Advisor, an
unaffiliated third party. The Board also considered data provided by the
Sub-Advisor as to the profitability of the Sub-
Page 25
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2010 (UNAUDITED)
Advisory Agreement to the Sub-Advisor. The Board noted the inherent limitations
in this profitability analysis and concluded that the profitability analysis for
the Advisor was more relevant, although the profitability of the Sub-Advisory
Agreement appeared to be not excessive in light of the services provided to the
Fund. The Board considered the fall-out benefits realized by the Sub-Advisor
from its relationship with the Fund, including soft-dollar arrangements, and
considered a summary of such arrangements.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreements continue to be fair and reasonable and that the continuation of the
Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 26
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners, L.P.
1235 Westlakes Drive, Suite 400
Berwyn, PA 19312
ADMINISTRATOR, FUND ACCOUNTANT & TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
301 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(b) There have been no changes, as of the date of filing, in any of the
Portfolio Managers identified in response to paragraph (a)(1) of this item
in the Registrant's most recent annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
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.
(registrant) First Trust Enhanced Equity Income Fund
By (Signature and Title)* /s/ James A. Bowen
------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date August 19, 2010
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 (Signature and Title)* /s/ James A. Bowen
------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date August 19, 2010
By (Signature and Title)* /s/ Mark R. Bradley
------------------------------------------------------
Mark R. Bradley, Treasurer, Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
Date August 19, 2010
* Print the name and title of each signing officer under his or her
signature.