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, 2009
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, 2009
(GRAPHIC)
FIRST TRUST ENHANCED EQUITY INCOME FUND
(FIRST TRUST LOGO) CHARTWELL INVESTMENT PARTNERS
INSTITUTIONAL AND PRIVATE ASSET MANAGEMENT
(CHARTWELL INVESTMENT PARTNERS LOGO)
TABLE OF CONTENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009
Shareholder Letter ....................................................... 1
At a Glance .............................................................. 2
Portfolio Commentary ..................................................... 3
Portfolio of Investments ................................................. 5
Statement of Assets and Liabilities ...................................... 13
Statement of Operations .................................................. 14
Statements of Changes in Net Assets ...................................... 15
Financial Highlights ..................................................... 16
Notes to Financial Statements ............................................ 17
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 Chartwell 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. Of course, 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, 2009
Dear Shareholders:
2008 brought all sorts of challenges to investors. Throughout the year, the
financial sector was plagued with failures in banking, insurance and brokerage
firms. By year's end, after a meltdown in the credit markets, historically high
levels of volatility in the stock market, and the resulting turmoil to the
overall economy, the Dow Jones Industrial Average's total return was -31.92% (as
of 12/31/08). In fact, 2008 was the Dow's third worst calendar year since its
inception in 1896. For the year, the negative total return performance of the
Dow was surpassed only by 1931 and 1907, two years in which the U.S. was also
enduring a major banking crisis. Of the thirty stocks in the Dow, only two were
up in 2008. However, many economists believe the recession that began in
December, 2007 ended in March, 2009. In fact, the Dow's total return from March
9 (the statistical end of the bear market) to June 30, 2009, was 30.30%. Of
course, no one can predict that this trend will continue.
Yet, regardless of the market, First Trust Advisors L.P. ("First Trust") has
always believed that in order to be successful in reaching your financial goals,
you should be invested for the long term. A long-term investor understands that
the market, from a historical perspective, has always experienced ups and downs.
But history has shown that the patient investor is typically rewarded over the
long term. While no one has the ability to predict when the markets will
recover, we believe that staying invested in quality products and having a
long-term perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in First
Trust Enhanced Equity Income Fund (the "Fund"). It contains a portfolio
commentary from the Fund's portfolio management team that provides a market
recap for the period, a performance analysis and a market and Fund outlook.
Additionally, the report provides the Fund's financial statements for the period
covered by the report. I encourage you to read this document and discuss it with
your financial advisor.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to making available up-to-date information
about your investments so you and your financial advisor have current
information on your portfolio.
We continue to 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, 2009 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FFA
Common Share Price $ 8.82
Common Share Net Asset Value ("NAV") $ 10.67
Premium (Discount) to NAV (17.34)%
Net Assets Applicable to Common Shares $213,192,623
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) 9.98%
Current Distribution Rate on NAV (2) 8.25%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Common
Share Price NAV
----------- -----
6/30/08 13.28 15.07
7/3/08 12.97 14.91
7/11/08 12.64 14.67
7/18/08 12.96 14.88
7/25/08 12.88 14.85
8/1/08 13.11 14.92
8/8/08 13.39 15.36
8/15/08 13.35 15.44
8/22/08 13.21 15.35
8/29/08 13.29 15.36
9/5/08 12.97 14.99
9/12/08 12.82 15.12
9/19/08 11.92 14.74
9/26/08 11.38 14.31
10/3/08 10.7 13.07
10/10/08 7.77 10.84
10/17/08 9.22 11.36
10/24/08 8.77 10.71
10/31/08 9.76 11.61
11/7/08 9.3 11.36
11/14/08 8.59 10.76
11/21/08 8.45 10.01
11/28/08 8.55 10.98
12/5/08 8.2 10.94
12/12/08 8.31 11.11
12/19/08 8.1 10.82
12/26/08 8.36 10.82
1/2/09 9.31 11.32
1/9/09 9.2 11.07
1/16/09 8.93 10.74
1/23/09 8.84 10.59
1/30/09 8.67 10.55
2/6/09 9.11 10.96
2/13/09 8.86 10.6
2/20/09 8.02 9.95
2/27/09 7.73 9.66
3/6/09 6.97 9.12
3/13/09 7.89 9.76
3/20/09 7.56 9.46
3/27/09 8.01 9.9
4/3/09 8.29 10.22
4/9/09 8.45 10.31
4/17/09 8.55 10.37
4/24/09 8.39 10.22
5/1/09 8.59 10.35
5/8/09 8.89 10.69
5/15/09 8.41 10.38
5/22/09 8.65 10.45
5/29/09 8.86 10.74
6/5/09 9.09 10.9
6/12/09 9.09 11.01
6/19/09 8.75 10.64
6/26/09 8.85 10.67
6/30/09 8.82 10.67
PERFORMANCE
Average Annual
Total Return
6 Months Ended 1 Year Ended Inception (8/26/2004)
6/30/2009 6/30/2009 to 6/30/2009
-------------- ------------ ---------------------
Fund Performance
NAV (3) 1.72% (18.56)% (1.96)%
Market Value (4) 5.93% (23.61)% (6.63)%
Index Performance
S&P 500(R) Index 3.16% (26.21)% (8.08)%
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------- -----------
Exxon Mobil Corp. 3.9%
Bristol-Myers Squibb Company 3.8
Intel Corp. 3.5
Occidental Petroleum Corp. 3.3
Abbott Laboratories 3.1
International Business Machines Corp. 2.9
Annaly Capital Management, Inc. 2.8
Emerson Electric Company 2.7
PPG Industries, Inc. 2.7
JPMorgan Chase & Company 2.6
----
Total 31.3%
====
% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
--------------------- -----------
Financials 15.8%
Information Technology 15.6
Energy 14.3
Industrials 13.2
Health Care 9.6
Consumer Discretionary 9.3
Consumer Staples 8.1
Telecommunication Services 5.5
Materials 3.7
Utilities 2.7
Other 2.2
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 6/30/2009. 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 6/30/2009.
(3) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load. Past performance is not indicative of future
results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share Price. 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 29 years of investment industry experience,
is the Chief Executive Officer of Chartwell. Michael J. McCloskey, an executive
with 21 years of management experience, serves as President. G. Gregory Hagar is
Chartwell's Chief Financial Officer and Chief Compliance Officer. He has 20
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 37 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 11 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 is a member of the CFA
(Chartered Financial Analysts) Institute and the CFA Society of Philadelphia. He
holds the Chartered Financial Analyst designation. 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 44 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 is a member of the CFA Institute and the CFA Society of Philadelphia. He
holds the Chartered Financial Analyst designation. He earned a Bachelor of
Science degree in Economics from St. John Fisher College.
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
Page 3
PORTFOLIO COMMENTARY - CONTINUED
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, 2009 was the tale of
two markets. From the start of the period through March 9, 2009, the market
continued its significant decline from previous highs. After March 9, 2009, the
Standard & Poor's 500 Index ("S&P 500") reversed course and rebounded through
June 30, 2009. Overall for the period, the market (as measured by the S&P 500)
was up 3.16%. The first months of 2009 saw a continuation of the economic and
financial crises that we wrote about in our portfolio commentary for the 2008
Annual Report. Home prices continued to decline and unemployment increased. This
combination continued to exacerbate the challenging financial position of the
banking system as banks had to absorb significant losses on mortgage and
construction loans. Additionally, the economic decline continued to affect
banks' credit card and commercial real estate portfolios. All of this
uncertainty drove the S&P 500 down to its intra-day low of 667 on March 6, 2009.
On March 10, 2009, it appears as if the "all clear bell" was rung and market
participants saw "green shoots," representing the beginning of nascent economic
improvement. Around that time, several of the financial institutions that were
viewed to be in the most trouble declared that they had made significant profits
in the first two months of the year. The rates of decline of many economic
indicators began to ebb. Job losses slowed, China started to experience benefits
of their economic stimulus package, and the Baltic Dry Index began to increase,
indicating that demand for seaborne shipping was on the rise. These and other
"green shoots" incited the market to rally almost 37% from its lows through the
end of May. However, uncertainty still exists regarding the overall outcome and
impact of the various government programs that have been put in place. As the
pace of the growth in the "green shoots" slowed in June, this uncertainty crept
back into the market and the rally stalled in June, with the S&P 500 essentially
unchanged from May.
PERFORMANCE ANALYSIS
The Net Asset Value ("NAV") total return(1) of the Fund for the six-month period
ending June 30, 2009 was 1.72% and the market value total return(2) of the Fund
was 5.93%. Both these returns were inclusive of dividends paid during the
period. During this same time period, the S&P 500 returned 3.16%. The Fund
continued to take full advantage of the high volatility in the market and sold
call options on a high percentage of the Fund's holdings. This supplemented the
dividend stream and provided strong support to the Fund's performance. We
continue to believe this strategy of combining high dividend-paying stocks and
an option overwrite program is an excellent long-term strategy which could
provide solid cash flows and lower volatility.
The main positive contributors to Fund performance versus the S&P 500 during the
first half of 2009 were in the Consumer Staples and Energy sectors. The
outperformance in Consumer Staples was driven by the Fund's underweight position
and good stock selection while outperformance in the Energy sector was driven by
strong stock selection. Underperformance of the Fund's portfolio came mostly
from the Technology and Financial sectors. The Technology group was the
best-performing sector in the S&P 500 by a significant margin (up almost 25% for
the period) while the portfolio was underweight this group and stock selection
did not match the torrid performance of the S&P 500. The main driver of the
underperformance in the Financials sector was stock selection.
MARKET & FUND OUTLOOK
As the stock market is a forward-looking indicator, it appears to be
anticipating an economic recovery beginning sometime later this year. In
general, we are in agreement with this notion. We believe that the economy will
be on better footing in either late 2009 or early 2010. In our opinion, this
improvement will come as a result of inventory restocking, the impact of the
domestic stimulus package, continued low interest rates, global economic
improvement and a steep yield curve helping the banking industry. Therefore, the
economic sensitivity of the portfolio has been increased, but this has been done
cautiously through investments in high quality, dividend-paying companies. The
main question for investors is "will an economic recovery be sustainable or will
the economy slip back into another slowdown?" As these uncertain conditions
continue, we are likely to maintain a fairly high 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.
----------
(1) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load.
(2) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share Price.
Page 4
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
JUNE 30, 2009 (UNAUDITED)
SHARES DESCRIPTION VALUE
-------- --------------------------------------------------------------------- ------------
COMMON STOCKS - 98.4%
AEROSPACE & DEFENSE - 3.8%
150,000 Honeywell International, Inc. (b) ................................... $ 4,710,000
64,200 United Technologies Corp. (b) ....................................... 3,335,832
------------
8,045,832
------------
BEVERAGES - 5.0%
80,000 Coca-Cola (The), Company (b) ........................................ 3,839,200
90,000 Diageo PLC, SP ADR (b) .............................................. 5,152,500
30,000 PepsiCo, Inc. (b) ................................................... 1,648,800
------------
10,640,500
------------
CAPITAL MARKETS - 2.8%
56,300 Ameriprise Financial, Inc. (b) ...................................... 1,366,401
160,000 Bank of New York Mellon (The), Corp. (b) ............................ 4,689,600
------------
6,056,001
------------
CHEMICALS - 2.7%
130,000 PPG Industries, Inc. (b) ............................................ 5,707,000
------------
COMMERCIAL BANKS - 0.9%
55,000 SunTrust Banks, Inc. (b) ............................................ 904,750
45,000 Wells Fargo & Company (b) ........................................... 1,091,700
------------
1,996,450
------------
COMMERCIAL SERVICES & SUPPLIES - 1.2%
89,200 Waste Management, Inc. (b) .......................................... 2,511,872
------------
COMMUNICATIONS EQUIPMENT - 3.2%
295,200 Cisco Systems, Inc. (b) (c) ......................................... 5,502,528
30,000 QUALCOMM, Inc. (b) . ................................................ 1,356,000
------------
6,858,528
------------
COMPUTERS & PERIPHERALS - 4.1%
65,000 Hewlett-Packard Company (b) ......................................... 2,512,250
60,000 International Business Machines Corp. (b) ........................... 6,265,200
------------
8,777,450
------------
DIVERSIFIED FINANCIAL SERVICES - 2.6%
165,000 JPMorgan Chase & Company (b) ........................................ 5,628,150
------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 5.6%
300,000 Alaska Communications Systems Group, Inc. (b) ....................... 2,196,000
172,000 AT&T, Inc. (b) ...................................................... 4,272,480
175,000 Verizon Communications, Inc. (b) .................................... 5,377,750
------------
11,846,230
------------
ELECTRIC UTILITIES - 2.7%
70,000 Exelon Corp. (b) .................................................... 3,584,700
70,000 Southern Company (b) ................................................ 2,181,200
------------
5,765,900
------------
ELECTRICAL EQUIPMENT - 2.7%
180,000 Emerson Electric Company (b) ........................................ 5,832,000
------------
See Notes to Financial Statements
Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2009 (UNAUDITED)
SHARES DESCRIPTION VALUE
-------- --------------------------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
FOOD & STAPLES RETAILING - 0.6%
40,000 CVS Caremark Corp. .................................................. $ 1,274,800
------------
FOOD PRODUCTS - 1.0%
85,000 Kraft Foods, Inc., Class A .......................................... 2,153,900
------------
HEALTHCARE EQUIPMENT & SUPPLIES - 1.0%
58,900 Medtronic, Inc. (b) ................................................. 2,055,021
------------
HOTELS, RESTAURANTS & LEISURE - 1.7%
121,100 Carnival Corp. (b) .................................................. 3,120,747
10,000 McDonald's Corp. .................................................... 574,900
------------
3,695,647
------------
INDUSTRIAL CONGLOMERATES - 0.9%
30,000 3M Company (b) ...................................................... 1,803,000
------------
INSURANCE - 5.0%
80,000 ACE Ltd. (b) ........................................................ 3,538,400
33,300 Lincoln National Corp. (b) .......................................... 573,093
130,000 MetLife, Inc. (b) ................................................... 3,901,300
70,000 Prudential Financial, Inc. (b) ...................................... 2,605,400
------------
10,618,193
------------
IT SERVICES - 1.2%
100,000 Paychex, Inc. (b) ................................................... 2,520,000
------------
MACHINERY - 2.3%
151,000 Caterpillar, Inc. (b) ............................................... 4,989,040
------------
MARINE - 0.3%
110,000 Seaspan Corp. (b) ................................................... 676,500
------------
MEDIA - 1.3%
145,000 Regal Entertainment Group, Class A (b) .............................. 1,927,050
40,000 Walt Disney (The), Company (b) ...................................... 933,200
------------
2,860,250
------------
METALS & MINING - 1.0%
40,000 BHP Billiton Ltd., SP ADR (b) ....................................... 2,189,200
------------
MULTILINE RETAIL - 4.1%
125,000 J.C. Penney Company, Inc. (b) ....................................... 3,588,750
131,000 Target Corp. (b) .................................................... 5,170,570
------------
8,759,320
------------
OIL, GAS & CONSUMABLE FUELS - 14.4%
60,000 Chevron Corp. ....................................................... 3,975,000
200,000 Copano Energy, LLC (d) .............................................. 3,210,000
100,000 Energy Transfer Partners, L.P. (d) .................................. 4,049,000
40,000 Enterprise Products Partners, L.P. (d) .............................. 997,600
120,000 Exxon Mobil Corp. (b) ............................................... 8,389,200
60,000 Magellan Midstream Partners, L.P. (d) ............................... 2,085,600
See Notes to Financial Statements
Page 6
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2009 (UNAUDITED)
SHARES DESCRIPTION VALUE
-------- --------------------------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
OIL, GAS & CONSUMABLE FUELS - (CONTINUED)
107,700 Occidental Petroleum Corp. (b) ...................................... $ 7,087,737
60,000 Williams Companies (The), Inc. (b) .................................. 936,600
------------
30,730,737
------------
PHARMACEUTICALS - 8.7%
140,000 Abbott Laboratories (b) ............................................. 6,585,600
400,000 Bristol-Myers Squibb Company (b) .................................... 8,124,000
250,000 Pfizer, Inc. (b) .................................................... 3,750,000
------------
18,459,600
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 4.5%
400,000 Annaly Capital Management, Inc. (b) ................................. 6,056,000
500,000 MFA Mortgage Investments, Inc. ...................................... 3,460,000
------------
9,516,000
------------
ROAD & RAIL - 2.1%
85,000 Union Pacific Corp. (b) ............................................. 4,425,100
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 5.5%
459,800 Intel Corp. (b) ..................................................... 7,609,690
185,000 Microchip Technology, Inc. (b) ...................................... 4,171,750
------------
11,781,440
------------
SOFTWARE - 1.7%
150,000 Microsoft Corp. (b) ................................................. 3,565,500
------------
SPECIALTY RETAIL - 2.3%
400,000 Limited Brands, Inc. (b) ............................................ 4,788,000
------------
TOBACCO - 1.5%
120,000 Altria Group, Inc. (b) .............................................. 1,966,800
30,000 Philip Morris International, Inc. ................................... 1,308,600
------------
3,275,400
------------
TOTAL COMMON STOCKS ................................................. 209,802,561
(Cost $264,116,185) ------------
EXCHANGE-TRADED FUNDS - 2.2%
CAPITAL MARKETS/COMMERCIAL BANKS - 2.2%
265,000 SPDR KBW Bank ETF ................................................... 4,783,250
------------
TOTAL EXCHANGE -TRADED FUNDS ........................................ 4,783,250
(Cost $3,934,721) ------------
TOTAL INVESTMENTS - 100.6% .......................................... 214,585,811
(Cost $268,050,906) (e) ------------
See Notes to Financial Statements
Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2009 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- --------------------------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (1.2%)
3M Company Call
200 @ 60 due Jul 09 .................................................. $ (26,000)
------------
Abbott Laboratories Call
400 @ 49 due Jul 09 .................................................. (8,800)
------------
Ace Ltd. Call
300 @ 45 due Jul 09 .................................................. (24,000)
------------
Alaska Communications Group, Inc. Call
320 @ 7.5 due Jul 09 ................................................. (4,000)
------------
Altria Group, Inc. Call
500 @ 17 due Jul 09 .................................................. (4,000)
------------
Ameriprise Financial, Inc. Call
563 @ 25 due Jul 09 .................................................. (33,780)
------------
Annaly Capital Management, Inc. Calls
1,000 @ 15 due Jul 09 .................................................. (45,000)
500 @ 16 due Aug 09 .................................................. (12,500)
------------
(57,500)
------------
AT&T, Inc. Call
720 @ 25 due Jul 09 .................................................. (16,560)
------------
Bank of New York Mellon (The), Corp. Calls
300 @ 30 due Jul 09 .................................................. (19,500)
600 @ 31 due Jul 09 .................................................. (18,000)
------------
(37,500)
------------
BHP Billiton Ltd., SP ADR Call
400 @ 60 due Jul 09 .................................................. (14,400)
------------
Bristol-Myers Squibb Company Call
1,000 @ 21 due Jul 09 .................................................. (12,000)
------------
Carnival Corp. Calls
410 @ 26 due Jul 09 .................................................. (36,900)
400 @ 27.5 due Jul 09 ................................................ (12,000)
400 @ 29 due Jul 09 .................................................. (4,000)
------------
(52,900)
------------
Caterpillar, Inc. Calls
310 @ 33 due Jul 09 .................................................. (35,340)
1,200 @ 36 due Jul 09 .................................................. (21,600)
------------
(56,940)
------------
Cisco Systems, Inc. Call
1,000 @ 21 due Jul 09 .................................................. (3,000)
------------
See Notes to Financial Statements
Page 8
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2009 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- --------------------------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
Coca-Cola (The), Company Call
500 @ 50 due Jul 09 .................................................. $ (7,500)
------------
Diageo PLC, SP ADR Call
700 @ 60 due Jul 09 .................................................. (21,000)
------------
Emerson Electric Company Calls
800 @ 35 due Jul 09 .................................................. (12,000)
400 @ 36 due Jul 09 .................................................. (4,000)
------------
(16,000)
------------
Energy Transfer Partners L.P. Call
200 @ 40 due Jul 09 .................................................. (20,000)
------------
Exelon Corp. Call
700 @ 55 due Jul 09 .................................................. (14,000)
------------
Exxon Mobil Corp. Call
1,200 @ 75 due Jul 09 .................................................. (18,000)
------------
Hewlett-Packard Company Call
350 @ 40 due Jul 09 .................................................. (10,500)
------------
Honeywell International, Inc. Call
1,000 @ 35 due Jul 09 .................................................. (5,000)
------------
Intel Corp. Call
1,000 @ 16 due Jul 09 .................................................. (87,000)
------------
International Business Machines Corp. Call
500 @ 110 due Jul 09 ................................................. (24,500)
------------
J.C. Penney Company, Inc. Call
600 @ 30 due Jul 09 .................................................. (33,000)
------------
JPMorgan Chase & Company Call
850 @ 37 due Jul 09 .................................................. (34,850)
------------
Limited Brands, Inc. Calls
1,500 @ 12.5 due Jul 09 ................................................ (30,000)
1,000 @ 15 due Jul 09 .................................................. (5,000)
------------
(35,000)
------------
Lincoln National Corp. Call
333 @ 17.5 due Jul 09 ................................................ (26,640)
------------
Medtronic, Inc. Call
500 @ 35 due Jul 09 .................................................. (28,500)
------------
See Notes to Financial Statements
Page 9
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2009 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- --------------------------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
Metlife, Inc. Calls
300 @ 32 due Jul 09 .................................................. $ (16,500)
1,000 @ 35 due Jul 09 .................................................. (10,000)
------------
(26,500)
------------
Microchip Technology, Inc. Call
1,850 @ 22.5 due Jul 09 ................................................ (111,000)
------------
Microsoft Corp. Calls
750 @ 23 due Jul 09 .................................................. (86,250)
750 @ 24 due Jul 09 .................................................. (43,500)
------------
(129,750)
------------
Occidental Petroleum Corp. Call
1,077 @ 70 due Jul 09 .................................................. (70,005)
------------
Paychex, Inc. Call
1,000 @ 27.5 due Jul 09 ................................................ (5,000)
------------
PepsiCo, Inc. Call
150 @ 55 due Jul 09 .................................................. (15,000)
------------
Pfizer, Inc. Call
1,000 @ 15 due Jul 09 .................................................. (36,000)
------------
PPG Industries, Inc. Call
700 @ 45 due Jul 09 .................................................. (64,400)
------------
Prudential Financial, Inc. Calls
500 @ 40 due Jul 09 .................................................. (42,500)
200 @ 43 due Jul 09 .................................................. (6,000)
------------
(48,500)
------------
QUALCOMM, Inc. Call
150 @ 46 due Jul 09 .................................................. (10,950)
------------
Regal Entertainment Group, Class A Call
300 @ 12.5 due Jul 09 ................................................ (33,000)
------------
S&P 500 Index Calls
150 @ 900 due Jul 09 ................................................. (435,000)
450 @ 930 due Jul 09 ................................................. (548,550)
------------
(983,550)
------------
Seaspan Corp. Call
400 @ 7.5 due Jul 09 ................................................. (2,000)
------------
Southern Company Call
500 @ 32 due Jul 09 .................................................. (7,500)
------------
See Notes to Financial Statements
Page 10
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2009 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- --------------------------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
SPDR KBW Bank ETF Calls
1,000 @ 18 due Jul 09 .................................................. $ (90,000)
1,650 @ 19 due Jul 09 .................................................. (49,500)
------------
(139,500)
------------
SunTrust Banks, Inc. Call
550 @ 16 due Jul 09 .................................................. (57,750)
------------
Target Corp. Call
1,200 @ 42.5 due Jul 09 ................................................ (25,200)
------------
Union Pacific Corp. Call
850 @ 55 due Jul 09 .................................................. (55,250)
------------
United Technologies Corp. Call
642 @ 55 due Jul 09 .................................................. (19,260)
------------
Verizon Communications, Inc. Call
750 @ 31 due Jul 09 .................................................. (22,500)
------------
Walt Disney (The), Company Call
400 @ 24 due Jul 09 .................................................. (12,000)
------------
Waste Management, Inc. Call
892 @ 30 due Jul 09 .................................................. (6,690)
------------
Wells Fargo & Company Calls
250 @ 25 due Jul 09 .................................................. (20,000)
200 @ 26 due Jul 09 .................................................. (8,200)
------------
(28,200)
------------
Williams Companies (The), Inc. Call
600 @ 17.5 due Jul 09 ................................................ (3,000)
------------
TOTAL CALL OPTIONS WRITTEN - (1.2%) ................................. (2,645,375)
(Premiums received $3,552,327)
NET OTHER ASSETS AND LIABILITIES - 0.6% ............................. 1,252,187
------------
NET ASSETS - 100.0% ................................................. $213,192,623
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Call options were written on either entire or partial Common Stock
positions; all Common Stocks in the Portfolio may be used to cover call
options written by the Fund. Call options on securities indices were
written on a portion of the Common Stock positions that were not covered by
call options on individual equity securities held in the Fund's Portfolio.
(c) Non-income producing security.
(d) Master Limited Partnership ("MLP")
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of June 30, 2009, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $5,218,103 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $58,683,198.
SP ADR Sponsored American Depositary Receipt
See Notes to Financial Statements
Page 11
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2009 (UNAUDITED)
VALUATION INPUTS
A summary of inputs used to value the Fund's investments as of June 30, 2009 is
as follows
(See Note 2A- Portfolio Valuation in the Notes to Financial Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL MARKET LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2009 PRICE INPUTS INPUTS
------------ ------------ ----------- ------------
Common Stocks $209,802,561 $209,802,561 $-- $--
Exchange-Traded Funds 4,783,250 4,783,250 -- --
------------ ------------ --- ---
Total Investments* 214,585,811 214,585,811 -- --
============ ============ === ===
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL MARKET LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2009 PRICE INPUTS INPUTS
------------ ------------ ----------- ------------
Call Options Written $(2,645,375) $(2,645,375) $-- --
=========== =========== === ===
* See the Portfolio of Investments for industry breakdown.
See Notes to Financial Statements
Page 12
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2009 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $268,050,906) ....................................................................... $214,585,811
Cash ......................................................................................... 2,740,602
Prepaid expenses ............................................................................. 33,923
Receivables:
Dividends ................................................................................. 484,349
Interest .................................................................................. 759
------------
Total Assets ........................................................................... 217,845,444
------------
LIABILITIES:
Options written, at value (Premiums received $3,552,327) ..................................... 2,645,375
Payables:
Investment securities purchased ........................................................... 1,699,785
Investment advisory fees .................................................................. 177,208
Custodian fees ............................................................................ 31,212
Printing fees ............................................................................. 27,124
Audit and tax fees ........................................................................ 25,922
Legal fees ................................................................................ 20,580
Administrative fees ....................................................................... 16,578
Transfer agent fees ....................................................................... 5,715
Trustees' fees and expenses ............................................................... 17
Accrued expenses and other liabilities ....................................................... 3,305
------------
Total Liabilities ...................................................................... 4,652,821
------------
NET ASSETS ................................................................................... $213,192,623
============
NET ASSETS CONSIST OF:
Paid-in capital .............................................................................. $359,083,801
Par value .................................................................................... 199,732
Accumulated net investment income (loss) ..................................................... (8,769,627)
Accumulated net realized gain (loss) on investments sold and written options transactions .... (84,763,140)
Net unrealized appreciation (depreciation) on investments held and options written ........... (52,558,143)
------------
NET ASSETS ................................................................................... $213,192,623
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) ......................... $ 10.67
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) .. 19,973,164
============
See Notes to Financial Statements
Page 13
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2009 (UNAUDITED)
INVESTMENT INCOME:
Dividends .................................................................................... $ 3,047,004
Interest ..................................................................................... 6,855
------------
Total investment income ................................................................ 3,053,859
------------
EXPENSES:
Investment advisory fees ..................................................................... 1,030,151
Administrative fees .......................................................................... 96,948
Legal fees ................................................................................... 73,357
Custodian fees ............................................................................... 71,967
Printing fees ................................................................................ 68,612
Audit and tax fees ........................................................................... 21,441
Trustees' fees and expenses .................................................................. 19,475
Transfer agent fees .......................................................................... 19,159
Other ........................................................................................ 36,332
------------
Total expenses ......................................................................... 1,437,442
------------
NET INVESTMENT INCOME (LOSS) ................................................................. 1,616,417
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ............................................................................... (57,829,660)
Written option transactions ............................................................... 8,663,764
------------
Net realized gain (loss) ..................................................................... (49,165,896)
------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................................................... 48,819,033
Written options held ...................................................................... (366,256)
------------
Net change in unrealized appreciation (depreciation) ......................................... 48,452,777
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ...................................................... (713,119)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .............................. $ 903,298
============
See Notes to Financial Statements
Page 14
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
6/30/2009 ENDED
(UNAUDITED) 12/31/2008
------------ -------------
OPERATIONS:
Net investment income (loss) ...................................... $ 1,616,417 $ 8,341,860
Net realized gain (loss) .......................................... (49,165,896) (33,263,036)
Net change in unrealized appreciation (depreciation) .............. 48,452,777 (87,455,886)
------------ -------------
Net increase (decrease) in net assets resulting from operations ... 903,298 (112,377,062)
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. (10,386,044) (8,517,786)
Net realized gains ................................................ -- (2,088,601)
Return of capital ................................................. -- (21,350,675)
------------ -------------
Total distributions to shareholders ............................... (10,386,044) (31,957,062)
------------ -------------
Total increase (decrease) in net assets ........................... (9,482,746) (144,334,124)
NET ASSETS:
Beginning of period ............................................... 222,675,369 367,009,493
------------ -------------
End of period ..................................................... $213,192,623 $ 222,675,369
============ =============
Accumulated net investment income (loss) at end of period ......... $ (8,769,627) $ --
============ =============
See Notes to Financial Statements
Page 15
FIRST TRUST ENHANCED EQUITY INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR PERIOD
6/30/09 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 12/31/2008 12/31/2007(a) 12/31/2006 12/31/2005 12/31/2004(b)
----------- ---------- ------------- ---------- ---------- -------------
Net asset value, beginning of period ........... $ 11.15 $ 18.38 $ 18.65 $ 18.99 $ 19.97 $ 19.10(c)
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.08 0.42 0.14 0.02 0.01 (0.01)
Net realized and unrealized gain (loss) ........ (0.04) (6.05) 1.24 1.24 0.61 1.46
-------- -------- -------- -------- -------- --------
Total from investment operations ............... 0.04 (5.63) 1.38 1.26 0.62 1.45
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.52) (0.43) (0.14) (0.02) (0.01) --
Net realized gain .............................. -- (0.10) (1.51) (1.58) (1.59) (0.54)
Return of capital .............................. -- (1.07) -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions ............................ (0.52) (1.60) (1.65) (1.60) (1.60) (0.54)
-------- -------- -------- -------- -------- --------
Common Shares offering costs charged
to paid-in capital .......................... -- -- -- -- -- (0.04)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................. $ 10.67 $ 11.15 $ 18.38 $ 18.65 $ 18.99 $ 19.97
======== ======== ======== ======== ======== ========
Market value, end of period .................... $ 8.82 $ 8.85 $ 16.14 $ 18.41 $ 17.12 $ 20.00
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (d) (e) .. 1.72% (30.54)% 8.19% 7.09% 3.48% 7.29%
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (e) (f) ..... 5.93% (37.22)% (3.76)% 17.26% (6.85)% 2.62%
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $213,193 $222,675 $367,009 $372,576 $379,245 $395,024
Ratio of total expenses to average net assets .. 1.40%(g) 1.31% 1.21% 1.24% 1.23% 1.26%(g)
Ratio of net investment income (loss) to average
net assets .................................. 1.57%(g) 2.80% 0.76% 0.13% 0.04% (0.09)%(g)
Portfolio turnover rate ........................ 52% 121% 174% 131% 266% 73%
----------
(a) On September 14, 2007, Chartwell Investment Partners, L.P. became the
sub-advisor to the Fund.
(b) Initial seed date of August 17, 2004. The Fund commenced operations on
August 26, 2004.
(c) Net of sales load of $0.90 per Common Share on initial offering.
(d) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in net
asset value per share and does not reflect sales load.
(e) Total return is not annualized for periods less than one year.
(f) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in Common
Share Price.
(g) Annualized.
See Notes to Financial Statements
Page 16
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009 (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 seeks to achieve
its investment objective by investing in a diversified portfolio of equity
securities. 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 in
accordance with valuation procedures adopted by the Fund's Board of Trustees.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") and the London Stock Exchange Alternative Investment Market
("AIM") are valued at the last sale price on the business day as of which such
value is being determined. Securities listed on the NASDAQ or the AIM are valued
at the official closing 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 or the AIM, the securities
are valued at the mean of the most recent bid and asked prices on such day.
Portfolio securities traded on more than one securities exchange are valued at
the last sale price or official closing price, as applicable, 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 trading on the
NASDAQ and the AIM, 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.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. The three levels of the
fair value hierarchy under FAS 157 are described below:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds,
credit risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
In April 2009, FASB issued FASB Staff Position No. 157-4, "Determining Fair
Value when the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP
157-4"). FSP 157-4 is effective for fiscal years and interim periods ending
after June 15, 2009. FSP 157-4 provides additional guidance for estimating fair
value in accordance with FAS 157, when the volume and level of activity for the
asset or liability have significantly decreased. FSP 157-4 also
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009 (UNAUDITED)
includes guidance on identifying circumstances that indicate a transaction is
not orderly. FSP 157-4 requires entities to describe the inputs used in
valuation techniques used to measure fair value and changes in inputs over the
period. FSP 157-4 expands the three-level hierarchy disclosure and the Level 3
roll-forward disclosure for each major security type.
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, 2009 is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS:
The Fund has adopted Statement of Financial Accounting Standards No. 161,
"Disclosures about Derivative Instruments and Hedging Activities" ("FAS 161"),
an amendment of FASB Statement 133, which was issued in March of 2008 and is
effective for fiscal years and interim periods beginning after November 15,
2008. The Fund has option contracts outstanding as of June 30, 2009, which are
considered derivative instruments under FAS 161.
COVERED 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. 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.
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 and the strike 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.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009 (UNAUDITED)
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.
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, 2009, it is likely that the
Fund's distributions will include a return of capital component for the fiscal
year ending on December 31, 2009.
The tax character of distributions paid during the year ended December 31, 2008
is as follows:
Ordinary Income ...... $10,606,387
Return of Capital .... 21,350,675
As of December 31, 2008, the components of distributable earnings on a tax basis
were as follows:
Undistributed Net Investment Income .......... $ --
Net Unrealized Appreciation (Depreciation) ... (104,641,107)
Accumulated Capital and Other Losses ......... (31,967,057)
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.
At December 31, 2008, the Fund had available realized capital losses of
$15,798,407 to offset future net capital gains through the fiscal year ending
2016.
POST-OCTOBER LOSSES. Under current laws, 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, 2008, the Fund
intends to elect to defer net realized capital losses of $16,168,650 incurred
from November 1, 2008 through December 31, 2008.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" ("FIN 48"). FIN 48 establishes the minimum threshold for
recognizing, and a system for measuring, the benefits of a tax position taken or
expected to be taken on a tax-return, and is effective for the Fund's current
fiscal year. As of June 30, 2009, management has evaluated the application of
FIN 48 to the Fund, and has determined that no provision for income tax is
required in the Fund's financial statements for uncertain tax positions.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009 (UNAUDITED)
F. EXPENSES:
The Fund pays all expenses directly related to its operations.
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 manages the Fund's portfolio subject to First Trust's supervision.
Chartwell receives a monthly portfolio management fee calculated at an annual
rate of 0.50% of the Fund's Managed Assets that is paid monthly by First Trust
out of its investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., an indirect, majority-owned
subsidiary of The PNC Financial Services Group, Inc., 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
The PNC Financial Services Group, Inc., serves as the Fund's Custodian in
accordance with certain fee arrangements.
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 subsequent 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 and the
Audit Committee Chairman 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 equally allocated 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, 2009, 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 ACTIVITY
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments and options, for the six months ended June 30, 2009, were
$109,032,650 and $109,347,850, respectively.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009 (UNAUDITED)
Written option activity for the six months ended June 30, 2009 was as follows:
NUMBER OF
CONTRACTS PREMIUMS
--------- ------------
WRITTEN OPTIONS
Options outstanding at December 31, 2008 .. 58,717 $ 8,449,321
Options written ........................... 423,843 55,989,551
Options closed ............................ (314,485) (50,245,023)
Options expired ........................... (119,136) (9,829,860)
Options exercised ......................... (6,072) (811,662)
-------- ------------
Options outstanding at June 30, 2009 ...... 42,867 $ 3,552,327
======== ============
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.
The Fund's performance was adversely impacted by the weakness in the credit
markets and broad stock market that occurred beginning in late 2008, and may
continue to be adversely affected if the weakness in the credit and stock
markets continue. In response to the financial crises affecting the banking
system and financial markets, the U.S. and foreign governments have intervened
to an unprecedented degree in the financial and credit markets. Among other
things, U.S. government regulators have encouraged, and in some cases structured
and provided financial assistance for, banks, securities firms, insurers and
other financial companies. Additional intervention programs have been adopted
and proposed which may have a further impact on the financial and credit
markets. Many of the recently enacted or proposed government measures are
far-reaching and without historical precedent. Furthermore, the U.S. government
has stated its willingness to implement additional measures as it may see fit to
address changes in market conditions. There can be no assurance that any or all
of these measures will succeed in stabilizing and providing liquidity to the
U.S. financial markets, including the extreme levels of volatility currently
being experienced. Such continued volatility could materially and adversely
affect the financial condition of the Fund.
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.
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009 (UNAUDITED)
OPTION RISK: The Fund may write (sell) covered call options on all or 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 premiums it receives from writing (selling) call options and
from the dividends and interest it receives from the equity securities and other
investments held in the Fund's portfolio and short-term gains thereon. 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. There may be difficulty in obtaining or
enforcing a court judgment abroad.
7. SUBSEQUENT EVENT
Management has evaluated the impact of all subsequent events on the Fund through
August 21, 2009, the date the financial statements were issued, and has
determined that there were no subsequent events requiring recognition or
disclosure in the financial statements.
Page 22
ADDITIONAL INFORMATION
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009 (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 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 PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
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.
Page 23
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009 (UNAUDITED)
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 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
Tax-Advantaged Preferred Income Fund, First Trust Specialty Finance and
Financial Opportunities Fund and First Trust Active Dividend Income Fund was
held on April 16, 2009. At the Annual Meeting, Independent Trustees Richard E.
Erickson and Thomas R. Kadlec were elected by holders of the Common Shares of
the First Trust Enhanced Equity Income Fund as Class II Trustees for three-year
terms expiring at the Fund's annual meeting of shareholders in 2012. The number
of votes cast in favor of Dr. Erickson was 17,247,996, the number of votes
against was 954,965 and the number of abstentions was 1,770,203. The number of
votes cast in favor of Mr. Kadlec was 17,245,837, the number of votes against
was 957,124 and the number of abstentions was 1,770,203. James A. Bowen, Robert
F. Keith and Niel B. Nielson are the current and continuing Trustees.
MANAGEMENT AGREEMENT
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT CONTRACT
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 1-2, 2009.
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.
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
Page 24
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009 (UNAUDITED)
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 2008. 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. The Board noted
that shareholders had approved the Sub-Advisory Agreement with the Sub-Advisor
at a special meeting held on January 8, 2008, and that the Sub-Advisor had begun
serving as such on September 14, 2007. 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 paid to the Advisor by
similar funds, 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 fees it
charges to other similar clients, noting that the sub-advisory fee is lower than
the fee 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;
(iii) many of the peer funds are larger than the Fund; and (iv) many of the peer
funds have an inception date prior to the Fund's inception date and their fee
and expense structures may not reflect newer pricing practices in the market.
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,
similar to almost all other funds, the Fund's performance was impacted by the
severe market downturn in 2008. The Board noted 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. 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, and taking into account the historic market events of 2008,
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 had noted that the advisory fee is not structured to pass the
benefits of any economies of scale on to the shareholders as the Fund's assets
grow. The Board concluded that the management fee reflects an appropriate level
of sharing of any economies of scale. The Board also considered the costs of the
services provided and profits realized by the Advisor from serving as investment
manager to closed-end funds for the twelve months ended December 31, 2008, 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
Page 25
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2009 (UNAUDITED)
Sub-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
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(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
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
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 24, 2009
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 24, 2009
By (Signature and Title)* /s/ Mark R. Bradley
--------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date August 24, 2009
* Print the name and title of each signing officer under his or her
signature.