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)
1001 Warrenville Road, Suite 300
LISLE, IL 60532
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
LISLE, IL 60532
(Name and address of agent for service)
registrant's telephone number, including area code: (630) 241-4141
Date of fiscal year end: DECEMBER 31
Date of reporting period: JUNE 30, 2008
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. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
JUNE 30, 2008
[LOGO] FIRST TRUST
ENHANCED EQUITY
INCOME FUND
CHARTWELL INVESTMENT PARTNERS
------------------------------------------
Institutional and Private Asset Management
[FIRST TRUST LOGO] [LOGO]
TABLE OF CONTENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2008
Shareholder Letter ....................................................... 1
At a Glance .............................................................. 2
Portfolio Commentary ..................................................... 3
Portfolio of Investments ................................................. 5
Statement of Assets and Liabilities ...................................... 12
Statement of Operations .................................................. 13
Statements of Changes in Net Assets ...................................... 14
Financial Highlights ..................................................... 15
Notes to Financial Statements ............................................ 16
Additional Information ................................................... 22
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 Sub-Advisor and their
respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. 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 regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST ENHANCED EQUITY INCOME FUND
SEMI-ANNUAL REPORT
JUNE 30, 2008
Dear Shareholders:
The first half of 2008 have been challenging for the financial markets and for
many investors. Yet, regardless of the market, First Trust Advisors L.P. ("First
Trust") believes that in order to be successful in reaching your financial
goals, you should be invested for the long term. We also believe that investors
should seek professional help from a financial advisor who has been through many
types of markets, knows the range of investments available, and is committed to
bringing you investments suitable to your particular situation.
Our goal at First Trust has always been to offer a wide range of investment
products, including our family of closed-end funds, to help us meeting the
challenge of maximizing our customers' financial opportunities. We have
continued to expand our product line to ensure that you have many choices to fit
your investment needs.
The report you hold contains detailed information about your investment in First
Trust Enhanced Equity Income Fund (the "Fund") for the period covered by this
report. 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 this 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 are always current 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, 2008 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FFA
Common Share Price $ 13.28
Common Share Net Asset Value ("NAV") $ 15.07
Premium/(Discount) to NAV (11.88)%
Net Assets Applicable to Common Shares $300,964,338
Current Quarterly Distribution per Common Share (1) $ 0.400
Current Annualized Distribution per Common Share $ 1.600
Current Distribution Rate on Closing Common Share Price (2) 12.05%
Current Distribution Rate on NAV (2) 10.62%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
[LINE CHART]
Market NAV
6/29/07 18.3 18.98
7/6/07 18.68 19.22
7/13/07 18.68 19.4
7/20/07 18.2 19.25
7/27/07 16.95 18.44
8/3/07 16.99 18.16
8/10/07 16.96 18.29
8/17/07 15.9 18.28
8/24/07 17.31 18.96
8/31/07 17.23 18.92
9/7/07 17.2 18.78
9/14/07 17.44 19.31
9/21/07 17.2 19.24
9/28/07 17.37 19.34
10/5/07 17.71 19.62
10/12/07 17.48 19.62
10/19/07 16.88 19.02
10/26/07 17.08 19.29
11/2/07 16.55 18.94
11/9/07 15.92 18.4
11/16/07 15.91 18.51
11/23/07 15.61 18.23
11/30/07 16.09 18.66
12/7/07 16.5 18.87
12/14/07 15.98 18.63
12/21/07 15.67 18.52
12/28/07 16.03 18.44
1/4/08 15.78 17.68
1/11/08 15.9 17.46
1/18/08 14.79 16.63
1/25/08 15.13 16.78
2/1/08 16.13 17.53
2/8/08 15.56 17.02
2/15/08 15.39 17.17
2/22/08 15.48 17.18
2/29/08 15.5 16.94
3/7/08 14.74 16.4
3/14/08 14.53 16.28
3/20/08 14.06 16.44
3/28/08 14.31 16.32
4/4/08 14.9 16.83
4/11/08 14.42 16.42
4/18/08 14.84 16.98
4/25/08 15 17.06
5/2/08 15.21 17.23
5/9/08 15.09 16.98
5/16/08 15.44 17.41
5/23/08 15.05 16.92
5/30/08 15.3 17.14
6/6/08 14.86 16.64
6/13/08 14.74 16.45
6/20/08 13.85 15.57
6/27/08 13.31 15.03
6/30/08 13.28 15.07
PERFORMANCE AS OF JUNE 30, 2008
Average Annual
Total Return
6 Months Ended 1 Year Ended Inception (8/26/04)
6/30/2008 6/30/2008 to 6/30/2008
Fund Performance
NAV (3) -13.24% -19.23% -1.62%
Market Value (4) -12.93% -11.63% 2.90%
Index Performance
S&P 500 Index -11.91% -13.12% 5.88%
% OF LONG-TERM
TOP 10 HOLDINGS INVESTMENTS
Exxon Mobil Corp. 5.2%
Emerson Electric Company 3.4
Chevron Corp. 3.0
Occidental Petroleum 3.0
JPMorgan Chase & Company 2.8
ConocoPhillips 2.8
Abbott Laboratories 2.6
Verizon Communications, Inc. 2.6
Caterpillar, Inc. 2.5
Intel Corp. 2.4
-------------
Total 30.3%
=============
% OF LONG-TERM
SECTOR CLASSIFICATION INVESTMENTS
Energy 19.3%
Financials 16.9
Information Technology 13.6
Industrials 11.4
Consumer Staples 9.5
Health Care 9.0
Telecommunication Services 8.5
Consumer Discretionary 5.3
Materials 4.7
Utilities 1.8
-----------
Total 100.0%
===========
(1) Most recent distribution paid or of record through 6/30/08. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or of record through the report date and then dividing
by Common Share price or NAV, as applicable, as of 6/30/08.
(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
Founded in 1997, Chartwell Investment Partners, L.P. ("Chartwell") is an
employee-owned investment firm focusing on institutional, sub-advisory and
private client relationships. The firm is a research-based equity and
fixed-income manager with a disciplined, team-oriented investment process.
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 36 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, he focuses on securities
in the Energy, Financials and Staples industries. He was employed as a Senior Portfolio Manager
at Delaware Investment Advisers from 1990 to 1997, managing two closed-end equity income funds.
These funds 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 10 years investment industry experience. His areas of focus include the Transportation and
Consumer Discretionary segments of the market. 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.
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 43 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. His
areas of focus are in the Automotive, Machinery, Office Electronics and REITs industries. 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 earned a Bachelor of Science degree in economics from St. John Fisher College.
FIRST TRUST ENHANCED EQUITY INCOME FUND
The investment objective of First Trust Enhanced Equity Income Fund ("FFA" or
the "Fund") is to provide a high level of current income and gains and, to a
lesser extent, capital appreciation. The Fund pursues its investment objective
by investing in a diversified portfolio of equity securities. Under normal
market conditions, the Fund pursues an integrated investment strategy in which
the Fund invests substantially all of its managed assets in a diversified
portfolio of common stocks of U.S. corporations and U.S. dollar-denominated
equity securities of foreign issuers. These securities are traded on U.S.
securities exchanges and 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.
Page 3
PORTFOLIO COMMENTARY - CONTINUED
MARKET RECAP
During the first six months of 2008, the stock market was very volatile. Among
the issues affecting the market, the most worrisome are rooted in the on-going
liquidity crises facing both the market and the overall economy. As we wrote in
our Market Recap in the Fund's 2007 Annual Report, the seizing of the credit
markets in mid to late-summer 2007 was the beginning of the end for the period
of "easy money" that had fueled the stock market and the economy. This was
induced by the significant decline in housing prices.
In addition to the housing problem, a broader economic malaise became apparent
as oil prices increased. This negatively affected consumer spending while
putting a severe crimp in the profit margins of many companies. The financials
sector has taken further substantial write-downs of not only mortgage debt but
also commercial credit and credit card debt. The upshot is added stress to a
financial system already stretched and willing to lend to only the strongest of
borrowers.
To counter this, the Federal Reserve lowered the Fed Funds rate by 225 basis
points in the first half of the year, allowed non-bank institutions to borrow
from their lending window and has started accepting non-traditional collateral
as backing for these loans. The Federal Government temporarily stimulated the
economy by issuing rebate checks to millions of households. The effects of these
stimulative actions were helpful, but the stock market continued to decline amid
a surge in write-offs by many banks and disappointing profit forecasts for many
other companies.
During the past six months, the income generation of the Fund's portfolio was
strengthened by purchasing stocks with higher-than-average dividend yields. In
addition, the Fund successfully sold call options on many holdings to supplement
the dividend stream and offset some of the losses experienced by the underlying
portfolio. While we believe this strategy of combining high dividend-paying
stocks and an option overwrite program is a solid long-term strategy, the market
for stocks that carry a higher-than-average dividend yield was not spared over
this time period as market participants sold out of stocks with higher yields
(such as financials and telecommunications), while flocking towards other stocks
with lower yields (such as energy and materials). In fact, the energy and
materials sectors were the only two sectors with positive performance in the S&P
500 Index for the first half of 2008. One common measure for the return on
higher-yielding stocks is the Dow Jones U.S. Select Dividend Index, which had a
negative -21.40% return for the first six months of 2008.
PERFORMANCE ANALYSIS
The Fund's NAV total return was -13.24%(1), while the market value total return
was -12.93%(2), for the six-month period ended June 30, 2008 (dividends
reinvested). The S&P 500 Index returned -11.91% with dividends reinvested during
the same period. The Fund's overall performance was helped by a high level of
option writing during this period, while relative performance was affected by
several factors. The information technology sector was the largest positive
contributor to relative performance as the Fund was underweight this
underperforming sector. On a stock selection basis, QUALCOMM Incorporated and
IBM were strong performers, while investments in Adobe Systems Incorporated and
Cisco Systems, Inc. lagged. The financials sector was the largest relative drag
on performance as the Fund was overweight this sector.
The Fund's investments in Annaly Capital Management Inc. and U.S. Bancorp
managed to buck the trend and outperform the sector. The consumer staples group,
which acted as somewhat of a safe haven during the period, outperformed the
overall market by about 450 basis points. We maintained a market weight in
staples during the period, holding Reynolds American, Inc., PepsiCo, Inc., Coca
Cola Company, Altria Group, Inc., Phillip Morris International, Inc. and Kraft
Foods, Inc.. The Fund's slight overweight in the energy sector was a positive,
as was the investment in Occidental Petroleum Corp., a leading oil producer.
Lastly, the portfolio had positive relative performance in the healthcare sector
due to strong performance from Abbott Laboratories, which helped offset a
decline in Bristol-Myers Squibb Company.
MARKET & FUND OUTLOOK
We expect continued volatility in the market for the remainder of 2008 as market
participants are likely to be challenged by the many cross currents in the
market and the economy. As the market digests various data points it will be
receiving over the next six months, it will be evaluating them to determine if
they contain signals that indicate a change in the outlook for the housing and
energy market, and the overall economy. Once the market begins to sense that an
economic bottom has been reached, we would expect it to begin a new up leg.
However, the major question is how long this process will take. While we do not
know the answer, we will be watching and observing the various signals and will
position the Fund's portfolio accordingly. Over the long term, we have found
that investing in higher-yielding stocks has been a solid strategy and we are
working diligently to uncover new investment opportunities.
----------
(1) Total return based on the NAV 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 NAV per
common 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, 2008 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------- ------------------------------------------------------------------ --------------
COMMON STOCKS (b) - 100.5%
AEROSPACE & DEFENSE - 4.3%
100,000 Honeywell International, Inc...................................... $ 5,028,000
85,800 Rockwell Collins, Inc............................................. 4,114,968
64,200 United Technologies Corp.......................................... 3,961,140
--------------
13,104,108
--------------
AIR FREIGHT & LOGISTICS - 0.6%
22,200 FedEx Corp........................................................ 1,749,138
--------------
BEVERAGES - 4.2%
100,000 Coca-Cola (The), Company.......................................... 5,198,000
45,000 Diageo PLC, SP ADR................................................ 3,324,150
66,025 PepsiCo, Inc...................................................... 4,198,530
--------------
12,720,680
--------------
CAPITAL MARKETS - 3.2%
120,000 AllianceBernstein Holding, LP (c)................................. 6,561,600
80,000 Lehman Brothers Holdings, Inc..................................... 1,584,800
72,800 Och-Ziff Capital Management Group, Class A........................ 1,383,928
--------------
9,530,328
--------------
CHEMICALS - 4.7%
100,000 Dow Chemical (The) Company........................................ 3,491,000
100,000 E. I. du Pont de Nemours and Company.............................. 4,289,000
110,000 PPG Industries, Inc............................................... 6,310,700
--------------
14,090,700
--------------
COMMERCIAL BANKS - 2.7%
40,000 PNC Financial Services Group, Inc................................. 2,284,000
60,000 U.S. Bancorp...................................................... 1,673,400
100,000 Wachovia Corp..................................................... 1,553,000
105,000 Wells Fargo & Company............................................. 2,493,750
--------------
8,004,150
--------------
COMMUNICATIONS EQUIPMENT - 2.3%
295,200 Cisco Systems, Inc. (d)........................................... 6,866,352
--------------
DIVERSIFIED FINANCIAL SERVICES - 4.4%
192,500 Bank of America Corp.............................................. 4,594,975
250,000 JPMorgan Chase & Company.......................................... 8,577,500
--------------
13,172,475
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 8.5%
300,000 Alaska Communications Systems Group, Inc.......................... 3,582,000
200,000 AT&T, Inc......................................................... 6,738,000
200,000 Citizens Communications Co........................................ 2,268,000
249,600 Consolidated Communications Holdings, Inc......................... 3,716,544
204,179 FairPoint Communications, Inc..................................... 1,472,130
221,620 Verizon Communications, Inc....................................... 7,845,348
--------------
25,622,022
--------------
See Notes to Financial Statements Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------- ------------------------------------------------------------------ --------------
COMMON STOCKS (b) - (CONTINUED)
ELECTRIC UTILITIES - 1.8%
160,000 Southern Company.................................................. $ 5,587,200
--------------
ELECTRICAL EQUIPMENT - 3.4%
206,100 Emerson Electric Company.......................................... 10,191,645
--------------
FOOD & STAPLES RETAILING - 1.2%
108,800 Walgreen Company.................................................. 3,537,088
--------------
FOOD PRODUCTS - 1.5%
160,000 Kraft Foods, Inc., Class A........................................ 4,552,000
--------------
HEALTHCARE PROVIDERS & SERVICES - 0.7%
100,000 Brookdale Senior Living, Inc...................................... 2,036,000
--------------
HOTELS, RESTAURANTS & LEISURE - 0.8%
75,000 Carnival Corp..................................................... 2,472,000
--------------
HOUSEHOLD PRODUCTS - 1.0%
52,000 Procter & Gamble (The) Company.................................... 3,162,120
--------------
INDUSTRIAL CONGLOMERATES - 1.7%
190,000 General Electric Company.......................................... 5,071,100
--------------
INSURANCE - 2.1%
97,400 American International Group, Inc................................. 2,577,204
60,000 Hartford Financial Services Group, Inc............................ 3,874,200
--------------
6,451,404
--------------
INTERNET SOFTWARE & SERVICES - 1.3%
145,700 eBay, Inc. (d).................................................... 3,981,981
--------------
IT SERVICES - 1.0%
100,000 Paychex, Inc...................................................... 3,128,000
--------------
MACHINERY - 2.5%
101,000 Caterpillar, Inc.................................................. 7,455,820
--------------
MARINE - 1.8%
323,051 FreeSeas, Inc..................................................... 2,028,760
140,000 Seaspan Corp...................................................... 3,362,800
--------------
5,391,560
--------------
MEDIA - 1.9%
350,000 Entercom Communications Corp., Class A............................ 2,457,000
200,000 GateHouse Media, Inc.............................................. 492,000
175,000 Regal Entertainment Group, Class A................................ 2,674,000
--------------
5,623,000
--------------
MULTILINE RETAIL - 1.6%
101,000 Target Corp....................................................... 4,695,490
--------------
OIL, GAS & CONSUMABLE FUELS - 19.4%
75,000 BP PLC, SP ADR.................................................... 5,217,750
90,800 Chevron Corp...................................................... 9,001,004
Page 6 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------- ------------------------------------------------------------------ --------------
COMMON STOCKS (b) - (CONTINUED)
OIL, GAS & CONSUMABLE FUELS - (CONTINUED)
90,000 ConocoPhillips.................................................... $ 8,495,100
100,000 Copano Energy, LLC................................................ 3,375,000
180,000 Exxon Mobil Corp.................................................. 15,863,400
100,000 Occidental Petroleum Corp......................................... 8,986,000
60,000 Total SA, SP ADR.................................................. 5,116,200
54,800 Valero Energy Corp................................................ 2,256,664
--------------
58,311,118
--------------
PHARMACEUTICALS - 8.4%
150,000 Abbott Laboratories............................................... 7,945,500
350,000 Bristol-Myers Squibb Company...................................... 7,185,500
80,000 Eli Lilly & Co.................................................... 3,692,800
373,100 Pfizer, Inc....................................................... 6,518,057
--------------
25,341,857
--------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 4.7%
230,000 Annaly Capital Management, Inc.................................... 3,567,300
502,500 CapitalSource, Inc................................................ 5,567,700
121,410 iStar Financial, Inc.............................................. 1,603,826
513,300 MFA Mortgage Investments, Inc..................................... 3,346,716
--------------
14,085,542
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 4.6%
334,800 Intel Corp........................................................ 7,191,504
120,000 Microchip Technology, Inc......................................... 3,664,800
110,000 Texas Instruments, Inc............................................ 3,097,600
--------------
13,953,904
--------------
SOFTWARE - 1.0%
110,000 Microsoft Corp.................................................... 3,026,100
--------------
TOBACCO - 2.7%
113,435 Altria Group, Inc................................................. 2,332,224
30,000 Philip Morris International, Inc.................................. 1,481,700
90,000 Reynolds American, Inc............................................ 4,200,300
--------------
8,014,224
--------------
TRADING COMPANIES & DISTRIBUTORS - 0.5%
200,000 Aircastle Ltd..................................................... 1,682,000
--------------
TOTAL COMMON STOCKS (b)........................................... 302,611,106
--------------
(Cost $382,442,660)
TOTAL INVESTMENTS - 100.5%........................................ 302,611,106
(Cost $382,442,660) (e)
CALL OPTIONS WRITTEN - (0.9%)..................................... (2,655,919)
(Premiums received $5,569,594)
NET OTHER ASSETS AND LIABILITIES - 0.4%........................... 1,009,151
--------------
NET ASSETS - 100.0% .............................................. $ 300,964,338
==============
See Notes to Financial Statements Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
----------
(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 are 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) Master Limited Partnership ("MLP")
(d) Non-income producing security.
(e) Aggregate cost for federal income tax and financial reporting purposes.
SP ADR Sponsored American Depositary Receipt
NUMBER OF
CONTRACTS DESCRIPTION VALUE
---------- ------------------------------------------------------------------ --------------
CALL OPTIONS WRITTEN - (0.9%)
Abbott Laboratories Call
1,500 @ 57.5 due Jul 08................................................. $ (15,000)
--------------
AllianceBernstein Holding, LP Call
1,200 @ 75 due Jul 08................................................... (24,000)
--------------
Altria Group, Inc. Call
634 @ 22 due Jul 08................................................... (4,438)
--------------
American International Group, Inc. Call
974 @ 30 due Jul 08................................................... (53,570)
--------------
Annaly Capital Management, Inc. Call
2,300 @ 17.5 due Jul 08................................................. (11,500)
--------------
AT&T, Inc. Calls
1,000 @ 37.5 due Jul 08................................................. (8,000)
400 @ 37.5 due Aug 08................................................. (10,000)
600 @ 35 due Aug 08................................................... (45,600)
--------------
(63,600)
--------------
Bank of America Corp. Calls
700 @ 30 due Jul 08................................................... (4,900)
925 @ 35 due Jul 08................................................... (2,775)
300 @ 27.5 due Jul 08................................................. (7,500)
--------------
(15,175)
--------------
BP PLC, SP ADR Calls
500 @ 75 due Jul 08................................................... (13,000)
250 @ 70 due Jul 08................................................... (41,250)
--------------
(54,250)
--------------
Bristol-Myers Squibb Company Call
3,500 @ 22.5 due Aug 08................................................. (77,000)
--------------
Brookdale Senior Living, Inc. Calls
391 @ 25 due Jul 08................................................... (7,820)
609 @ 22.5 due Jul 08................................................. (6,090)
--------------
(13,910)
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
---------- ------------------------------------------------------------------ --------------
CALL OPTIONS WRITTEN - (CONTINUED)
CapitalSource, Inc. Calls
2,675 @ 15 due Jul 08................................................... $ (13,375)
2,350 @ 17.5 due Jul 08................................................. (11,750)
--------------
(25,125)
--------------
Carnival Corp. Call
750 @ 35 due Jul 08................................................... (33,750)
--------------
Caterpillar, Inc. Calls
334 @ 80 due Jul 08................................................... (9,018)
676 @ 85 due Jul 08................................................... (4,056)
--------------
(13,074)
--------------
Chevron Corp. Calls
378 @ 105 due Jul 08.................................................. (11,340)
530 @ 100 due Jul 08.................................................. (90,100)
--------------
(101,440)
--------------
ConocoPhillips Calls
700 @ 95 due Jul 08................................................... (141,400)
200 @ 100 due Jul 08.................................................. (10,600)
--------------
(152,000)
--------------
Consolidated Communications Holdings, Inc. Call
2,496 @ 17.5 due Oct 08................................................. (87,360)
--------------
Diageo PLC, SP ADR Calls
200 @ 75 due Jul 08................................................... (21,000)
250 @ 80 due Jul 08................................................... (3,750)
--------------
(24,750)
--------------
Dow Chemical (The) Company Call
1,000 @ 40 due Jul 08................................................... (5,000)
--------------
E. I. du Pont de Nemours and Company Call
1,000 @ 50 due Jul 08................................................... (5,000)
--------------
eBay, Inc. Call
1,457 @ 32.5 due Jul 08................................................. (11,656)
--------------
Emerson Electric Company Calls
561 @ 50 due Jul 08................................................... (70,125)
1,500 @ 55 due Aug 08................................................... (82,500)
--------------
(152,625)
--------------
Exxon Mobil Corp. Calls
500 @ 90 due Jul 08................................................... (56,500)
1,300 @ 95 due Jul 08................................................... (20,800)
--------------
(77,300)
--------------
FedEx Corp. Call
222 @ 85 due Jul 08................................................... (8,880)
--------------
See Notes to Financial Statements Page 9
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
---------- ------------------------------------------------------------------ --------------
CALL OPTIONS WRITTEN - (CONTINUED)
General Electric Company Call
1,900 @ 28 due Jul 08................................................... $ (70,300)
--------------
Hartford Financial Services Group, Inc. Call
600 @ 75 due Jul 08................................................... (6,000)
--------------
Honeywell International, Inc. Call
1,000 @ 57.5 due Jul 08................................................. (20,000)
--------------
Intel Corp. Calls
1,848 @ 25 due Jul 08................................................... (9,240)
1,500 @ 25 due Aug 08................................................... (22,500)
--------------
(31,740)
--------------
JPMorgan Chase & Company Calls
1,200 @ 40 due Jul 08................................................... (31,200)
1,300 @ 37.5 due Jul 08................................................. (91,000)
--------------
(122,200)
--------------
Lehman Brothers Holdings, Inc. Call
800 @ 20 due Jul 08................................................... (209,600)
--------------
MFA Mortgage Investments, Inc. Call
1,600 @ 10 due Jul 08................................................... (8,000)
--------------
Microchip Technology, Inc. Calls
300 @ 35 due Aug 08................................................... (13,500)
900 @ 35 due Jul 08................................................... (13,500)
--------------
(27,000)
--------------
Microsoft Corp. Call
1,100 @ 30 due Jul 08................................................... (16,500)
--------------
Occidental Petroleum Corp. Calls
700 @ 90 due Jul 08................................................... (224,000)
300 @ 95 due Jul 08................................................... (39,000)
--------------
(263,000)
--------------
Och-Ziff Capital Management Group, Class A Call
728 @ 25 due Sep 08................................................... (12,740)
--------------
Paychex, Inc. Calls
500 @ 32.5 due Jul 08................................................. (16,000)
500 @ 35 due Aug 08................................................... (5,000)
--------------
(21,000)
--------------
Philadelphia Bank Index Call
400 @ 65 due Jul 08................................................... (24,000)
--------------
PNC Financial Services Group, Inc. Call
400 @ 62.5 due Aug 08................................................. (58,000)
--------------
Page 10 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
---------- ------------------------------------------------------------------ --------------
CALL OPTIONS WRITTEN - (CONTINUED)
S&P 500 Index Calls
100 @ 1,300 due Jul 08................................................ $ (159,000)
200 @ 1,360 due Jul 08................................................ (34,000)
100 @ 1,350 due Jul 08................................................ (28,000)
--------------
(221,000)
--------------
Seaspan Corp. Call
1,400 @ 30 due Aug 08................................................... (14,000)
--------------
Southern Company Calls
1,000 @ 40 due Aug 08................................................... (7,500)
500 @ 35 due Aug 08................................................... (42,500)
--------------
(50,000)
--------------
Target Corp. Calls
400 @ 50 due Jul 08................................................... (15,600)
610 @ 52.5 due Aug 08................................................. (49,410)
--------------
(65,010)
--------------
Texas Instruments, Inc. Calls
444 @ 32.5 due Jul 08................................................. (1,332)
656 @ 30 due Jul 08................................................... (12,464)
--------------
(13,796)
--------------
Total SA, SP ADR Calls
300 @ 85 due Jul 08................................................... (66,000)
300 @ 90 due Jul 08................................................... (13,500)
--------------
(79,500)
--------------
United Technologies Corp. Call
642 @ 75 due Jul 08................................................... (3,210)
--------------
US Bancorp Call
600 @ 32.5 due Aug 08................................................. (15,000)
--------------
Valero Energy Corp. Call
548 @ 50 due Aug 08................................................... (29,592)
--------------
Verizon Communications, Inc. Call
2,216 @ 37.5 due Jul 08................................................. (39,888)
--------------
Wachovia Corp. Calls
500 @ 15 due Jul 08................................................... (85,000)
500 @ 17.5 due Jul 08................................................. (30,000)
--------------
(115,000)
--------------
Walgreen Company Call
1,088 @ 37.5 due Jul 08................................................. (5,440)
--------------
Wells Fargo & Company Call
1,050 @ 25 due Jul 08................................................... (84,000)
--------------
TOTAL CALL OPTIONS WRITTEN........................................ $ (2,655,919)
==============
(Premiums received $5,569,594)
See Notes to Financial Statements Page 11
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2008 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $382,442,660)....................................................................... $ 302,611,106
Cash.......................................................................................... 2,873,127
Prepaid expenses.............................................................................. 18,659
Receivables:
Investment securities sold................................................................. 5,890,943
Dividends.................................................................................. 707,547
----------------
Total Assets.......................................................................... 312,101,382
----------------
LIABILITIES:
Options written, at value (Premiums received $5,569,594)...................................... 2,655,919
Payables:
Distributions payable...................................................................... 7,989,265
Investment advisory fees................................................................... 266,522
Investment securities purchased............................................................ 84,915
Legal fees................................................................................. 31,084
Audit and tax fees......................................................................... 27,911
Printing fees.............................................................................. 24,265
Administrative fees........................................................................ 23,275
Custodian fees............................................................................. 21,401
Transfer agent fees........................................................................ 2,599
Trustees' fees and expenses................................................................ 1,066
Accrued expenses and other liabilities........................................................ 8,822
----------------
Total Liabilities..................................................................... 11,137,044
----------------
NET ASSETS.................................................................................... $ 300,964,338
================
NET ASSETS CONSIST OF:
Paid-in capital............................................................................... $ 380,494,415
Par value..................................................................................... 199,732
Accumulated net investment income (loss)...................................................... (2,811,930)
Net unrealized appreciation (depreciation) on investments and options written................. (76,917,879)
----------------
NET ASSETS.................................................................................... $ 300,964,338
================
NET ASSET VALUE, PER COMMON SHARE (PAR VALUE $0.01 per Common Share).......................... $ 15.07
================
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)... 19,973,164
================
Page 12 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)
INVESTMENT INCOME:
Dividends .......................................................... $ 6,339,042
------------
Total investment income ....................................... 6,339,042
------------
EXPENSES:
Investment advisory fees ........................................... 1,675,883
Administrative fees ................................................ 152,636
Excise tax ......................................................... 59,938
Custodian fees ..................................................... 59,259
Printing fees ...................................................... 57,292
Legal fees ......................................................... 39,388
Audit and tax fees ................................................. 23,231
Transfer agent fees ................................................ 20,918
Trustees' fees and expenses ........................................ 20,013
Other .............................................................. 64,756
------------
Total expenses ................................................ 2,173,314
------------
NET INVESTMENT INCOME .............................................. 4,165,728
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ..................................................... (1,796,786)
Written option transactions ..................................... 10,927,279
------------
Net realized gain (loss) ........................................... 9,130,493
------------
Net change in unrealized appreciation (depreciation) on:
Investments ..................................................... (64,493,698)
Written option transactions ..................................... 1,130,853
------------
Net change in unrealized appreciation (depreciation) ............... (63,362,845)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ............................ (54,232,352)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .... $(50,066,624)
============
See Notes to Financial Statements Page 13
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
06/30/2008 ENDED
(UNAUDITED) 12/31/2007
------------- -------------
OPERATIONS:
Net investment income (loss) ....................................... $ 4,165,728 $ 2,884,989
Net realized gain (loss) ........................................... 9,130,493 30,931,417
Net change in unrealized appreciation (depreciation) ............... (63,362,845) (6,282,958)
------------- -------------
Net increase (decrease) in net assets resulting from operations .... (50,066,624) 27,533,448
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................................. (6,977,658) (2,884,989)
Net realized gains ................................................. (9,000,873) (30,214,538)
------------- -------------
Total distributions to shareholders ................................ (15,978,531) (33,099,527)
------------- -------------
Total increase (decrease) in net assets ............................ (66,045,155) (5,566,079)
NET ASSETS:
Beginning of period ................................................ 367,009,493 372,575,572
------------- -------------
End of period ...................................................... $ 300,964,338 $ 367,009,493
------------- -------------
Accumulated net investment income (loss) at end of period .......... $ (2,811,930) $ --
============= =============
Page 14 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR PERIOD
06/30/2008 ENDED ENDED ENDED ENDED
(UNAUDITED) (g) 12/31/2007 12/31/2006 12/31/2005 12/31/2004 (a)
--------------- ---------- ---------- ---------- --------------
Net asset value, beginning of period .......... $ 18.38 $ 18.65 $ 18.99 $ 19.97 $ 19.10 (b)
--------------- ---------- ---------- ---------- --------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .................. 0.21 0.14 0.02 0.01 (0.01)
Net realized and unrealized gain (loss) ....... (2.72) 1.24 1.24 0.61 1.46
--------------- ---------- ---------- ---------- --------------
Total from investment operations .............. (2.51) 1.38 1.26 0.62 1.45
--------------- ---------- ---------- ---------- --------------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ......................... (0.35) (0.14) (0.02) (0.01) --
Net realized gain ............................. (0.45) (1.51) (1.58) (1.59) (0.54)
--------------- ---------- ---------- ---------- --------------
Total distributions ........................... (0.80) (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 ................ $ 15.07 $ 18.38 $ 18.65 $ 18.99 $ 19.97
=============== ========== ========== ========== ==============
Market value, end of period ................... $ 13.28 $ 16.14 $ 18.41 $ 17.12 $ 20.00
=============== ========== ========== ========== ==============
TOTAL RETURN BASED ON NET ASSET
VALUE (c) (d) .............................. (13.24)% 8.19% 7.09% 3.48% 7.29%
=============== ========== ========== ========== ==============
TOTAL RETURN BASED ON MARKET VALUE (d) (e) .... (12.93)% (3.76)% 17.26% (6.85)% 2.62%
=============== ========== ========== ========== ==============
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .......... $ 300,964 $ 367,009 $ 372,576 $ 379,245 $ 395,024
Ratio of total expenses to average net
assets ..................................... 1.30% (f) 1.21% 1.24% 1.23% 1.26% (f)
Ratio of net investment income (loss) to
average net assets ......................... 2.49% (f) 0.76% 0.13% 0.04% (0.09)% (f)
Portfolio turnover rate ....................... 71% 174% 131% 266% 73%
----------
(a) Initial seed date of August 17, 2004. The Fund commenced operations on
August 26, 2004.
(b) Net of sales load of $0.90 per Common Share on initial offering.
(c) 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.
(d) Total return is not annualized for periods less than one year.
(e) 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.
(f) Annualized.
(g) On January 8, 2008, the Fund's Common Shareholders approved the
appointment of Chartwell Investment Partners, L.P. as the sub-advisor to
the Fund.
See Notes to Financial Statements Page 15
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2008 (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 name was changed to its current name effective
September 30, 2007, after the appointment of Chartwell Investment Partners, L.P.
("Sub-Advisor" or "Chartwell") as Sub-Advisor of the Fund.
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 dividends and
interest), 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 at market value, or in the absence of market
value with respect to any portfolio securities, at fair value according to
procedures adopted by the Fund's Board of Trustees. Portfolio securities listed
on any exchange other than the NASDAQ National Market ("NASDAQ") are valued at
the last sale price on the business day as of which such value is being
determined. If there has been no sale on such day, the securities are valued at
the mean of the most recent bid and asked prices on such day. Securities traded
on the NASDAQ are valued at the NASDAQ Official Closing Price as determined by
NASDAQ. Portfolio securities traded on more than one securities exchange are
valued at the last sale price on the business day as of which such value is
being determined at the close of the exchange representing the principal market
for such securities. Portfolio securities traded in the over-the-counter market,
but excluding securities trading on the NASDAQ, are valued at the closing bid
prices. Fixed income securities with a remaining maturity of 60 days or more
will be valued by the Fund using a pricing service. Short-term investments that
mature in less than 60 days 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. FAS 157 became effective
for the Fund as of January 1, 2008, the beginning of its current fiscal year.
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)
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2008 (UNAUDITED)
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 net assets as of June 30, 2008 is as
follows:
VALUATION INPUTS INVESTMENTS IN SECURITIES OTHER FINANCIAL INSTRUMENTS (a)
-------------------------------------------------- ------------------------- --------------------------------
Level 1 - Quoted Prices - Investments ............ $302,611,106 $ (2,655,919)
Level 2 - Other Significant Observable Inputs .... -- --
Level 3 - Significant Unobservable Inputs ........ -- --
------------ ------------
TOTAL ............................................ $302,611,106 $ (2,655,919)
------------ ------------
(a) Other financial instruments are call option contracts, which are valued at
the closing price on the exchange on which they are principally traded.
B. OPTION CONTRACTS:
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, 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 smaller.
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.
The writer (seller) of an option has no control over the time when it may be
required to fulfill its obligation as a writer (seller) of the option. 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 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2008 (UNAUDITED)
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 tax character of distributions paid during the fiscal year ended December
31, 2007 is as follows:
Distributions paid from:
Ordinary Income .............................................. $ 31,958,437
Long-Term Capital Gains ...................................... 1,141,090
As of December 31, 2007, the components of distributable
earnings on a tax basis were as follows:
Undistributed Ordinary Income ................................ $ 3,851,022
Net Unrealized Depreciation .................................. (14,538,544)
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.
In June 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes". FIN 48 establishes the minimum threshold for
recognizing, and a system for measuring, the benefits of tax-return positions in
financial statements, effective for the Fund's current fiscal year. Management
has analyzed the Fund's tax positions taken on federal income tax returns for
all open tax years (tax years ended December 31, 2004-2007) for purposes of
implementing FIN 48, and has concluded that no provision for income tax is
required in the Fund's financial statements.
F. EXPENSES:
The Fund pays all expenses directly related to its operations.
G. ACCOUNTING PRONOUNCEMENT:
In March 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS
161"). FAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about credit
risk-related contingent features in derivative agreements. The application of
FAS 161 is required for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. Management is currently evaluating
the impact the adoption of FAS 161 will have on the Fund's financial statement
disclosures, if any.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2008 (UNAUDITED)
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust Advisors L.P. ("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 ("Managed
Assets" 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 Investment Partners, L.P. ("Chartwell") serves as the Fund's
Sub-Advisor and manages the Fund's portfolio subject to First Trust's
supervision. The Sub-Advisor receives a monthly portfolio management fee
calculated at an annual rate of 0.50% of 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. ("PNC"), formerly known as PFPC
Inc., serves as the Fund's Administrator, Fund Accountant, Transfer Agent and
Board Administrator 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 added to 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
Chairman of the Audit Committee is paid $5,000 annually with such compensation
paid by the trusts in the First Trust Fund Complex and divided among those
trusts. Trustees are also reimbursed by the trusts in the First Trust Fund
Complex for travel and out-of-pocket expenses in connection with all meetings.
Effective January 1, 2008, each of the chairmen of the Nominating and Governance
Committee and Valuation Committee are paid $2,500 annually to serve in such
capacities with such compensation paid by the trusts in the First Trust Fund
Complex and divided among those trusts. Also, effective January 1, 2008, the
Lead Independent Trustee and each Committee chairman will serve two-year terms.
4. PURCHASES AND SALES OF SECURITIES AND OPTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the six months ended June 30, 2008, were
$247,958,992 and $238,240,340, respectively.
As of June 30, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $1,124,741
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $80,956,295.
Written option activity was as follows:
NUMBER
OF
CONTRACTS PREMIUMS
--------- ------------
WRITTEN OPTIONS
Options outstanding at December 31, 2007 .... 68,218 $ 5,622,371
Options written ............................. 468,051 46,873,096
Options expired ............................. (143,528) (9,842,189)
Options exercised ........................... (23,603) (2,276,547)
Options closed .............................. (303,546) (34,807,137)
--------- ------------
Options outstanding at June 30, 2008 ........ 65,592 $ 5,569,594
========= ============
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2008 (UNAUDITED)
5. COMMON SHARES
As of June 30, 2008, 19,973,164 of $0.01 par value Common Shares were issued and
outstanding. An unlimited number of Common Shares has been authorized under the
Fund's Dividend Reinvestment Plan.
6. 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.
7. CHANGES IN INVESTMENT STRATEGY AND CONCENTRATION POLICY
On December 10, 2007, the Board of Trustees approved a change in the Fund's
investment strategy, effective on or about April 30, 2008, whereby the Fund
intends to invest substantially all, but in no event less than 90%, of its
Managed Assets in common stocks and other equity securities such as Real Estate
Investment Trusts, Master Limited Partnerships and Investment Companies
(including exchange-traded funds and business development companies).
At a Special Meeting of Shareholders of the Fund held on January 8, 2008,
shareholders approved a change in the Fund's fundamental investment policy to
provide that the Fund may not invest 25% or more of its total assets in
securities of issuers in any single industry, provided there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The policy became effective on
January 8, 2008.
8. 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.
EQUITY SECURITIES RISK: The Fund invests in equity securities. An adverse event
affecting an issuer, such as an unfavorable earnings report, may depress the
value of a particular equity security held by the Fund. Also, the prices of
equity securities are sensitive to general movements in the stock market and a
drop in the stock market may depress the prices of equity securities to which
the Fund has exposure. Equity securities prices fluctuate for several reasons,
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, or when political
or economic events affecting the issuers or their industries occur.
OPTION RISK: The Fund may write (sell) covered call options on 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 primarily from the premiums it receives from writing (selling) call
options and, to a lesser extent, 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
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2008 (UNAUDITED)
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
or increase over time. 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.
Page 21
ADDITIONAL INFORMATION
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2008 (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 22
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2008 (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 the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and
Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen
Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First
Trust Strategic High Income Fund, First Trust Strategic High Income Fund II,
First Trust/Aberdeen Emerging Opportunity Fund, First Trust/Gallatin Specialty
Finance and Financial Opportunities Fund and First Trust Active Dividend Income
Fund and Shareholders of the Preferred Shares of First Trust Tax-Advantaged
Preferred Income Fund, was held on April 14, 2008. At the Annual Meeting,
Trustee Robert F. Keith was elected for a three-year term. The number of votes
cast in favor of Mr. Keith was 15,520,554, the number of votes against was
284,506 and the number of abstentions was 4,168,104. James A. Bowen, Richard E.
Erickson, Thomas R. Kadlec 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 "Agreement") between the Fund and First
Trust Advisors L.P. (the "Advisor") at a meeting held on March 3, 2008. The
Board determined that the terms of the Agreement are fair and reasonable and
that the Agreement continues 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 advisers 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 Agreement, the
Independent Trustees received a report from the Advisor in advance of the Board
meeting responding to a request for information from counsel to the Independent
Trustees. The report, among other things, outlined the services provided by the
Advisor (including the relevant personnel responsible for these services and
their experience); the advisory fees for the Fund as compared to fees charged by
investment advisors to comparable funds and as compared to fees charged to other
clients of the Advisor; 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; any fall out benefits to the Advisor; and information on the Advisor's
compliance program. The Independent Trustees also met separately with their
independent legal counsel to discuss the information provided by the Advisor.
The Board applied its business judgment to determine whether the arrangement
between the Fund and the Advisor is a reasonable business arrangement from the
Fund's perspective as well as from the perspective of shareholders.
In reviewing the Agreement, the Board considered the nature, quality and extent
of services provided by the Advisor under the Agreement. The Board considered
that the Advisor is responsible for the overall management and administration of
the Fund, including the oversight of Chartwell Investment Partners, L.P.
("Chartwell"), the Fund's sub-advisor. The Board considered that shareholders
had approved a new sub-advisory agreement with Chartwell on January 8, 2008, as
recommended by the Board. The Board considered the work that had been performed
by the Advisor in connection with the transition to Chartwell. The Board noted
the compliance program that had been developed by the Advisor and considered
that the compliance program includes policies and procedures for monitoring
Chartwell's compliance with the 1940 Act and the Fund's investment objectives
and policies. 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 under the Agreement have been and are expected to remain
satisfactory.
Page 23
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2008 (UNAUDITED)
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board reviewed 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 one peer group selected
by Lipper and a second peer group selected by the Advisor. The Board discussed
with representatives of the Advisor the differences between the two peer groups
and the limitations in creating a relevant peer group for the Fund. Based on the
information provided, the Board noted that the Fund's management fees were in
the fifth quintile of both the Lipper peer group and the Advisor peer group and
that the Fund's expense ratio was in the fifth quintile and fourth quintile of
the Lipper peer group and the Advisor peer group, respectively. The Board also
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 the Fund's performance for the one- and two year
periods ended September 30, 2007, as compared to a performance group selected by
Lipper. The Board considered the difficulty in creating a relevant performance
group for the Fund given its unique strategy and asset mix. The Board noted that
Chartwell became the sub-advisor for the Fund on September 14, 2007 and prior
thereto, another sub-advisor managed the Fund's portfolio. The Board also
considered performance data provided by the Advisor for the one-year and
since-inception periods ended December 31, 2007. 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
Lipper peer group, noting that the Fund's premium/discount was generally
indicative of the asset class and market events. The Board concluded that the
Fund's performance, particularly from Chartwell's transition plan, 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 fees were
reasonable and appropriate in light of the nature, quality and extent of
services provided by the Advisor under the Agreement.
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, 2007, 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 attenuated.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreement continue to be fair and reasonable and that the continuation of the
Agreement is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 24
[FIRST TRUST LOGO]
INVESTMENT ADVISOR
First Trust Advisors L.P.
1001 Warrenville Road
Lisle, IL 60532
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners, L.P.
1235 Westlakes Drive, Suite 400
Berwyn, PA 19312
ADMINISTRATOR,
FUND ACCOUNTANT,
TRANSFER AGENT &
BOARD ADMINISTRATOR
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 20, 2008
----------------------------------------------------------------------------
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 20, 2008
----------------------------------------------------------------------------
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 20, 2008
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.