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 811-21787
Name of Fund: Enhanced S&P 500 Covered Call Fund Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Mitchell M. Cox, Chief Executive Officer,
Enhanced S&P 500 Covered Call Fund Inc., 4 World Financial Center, 5th
Floor, New York, New York 10080. Mailing address: P.O. Box 9011,
Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (212) 449-8118
Date of fiscal year end: 12/31/05
Date of reporting period: 01/01/05 - 12/31/05
Item 1 - Report to Stockholders
Enhanced S&P 500(R)
Covered Call Fund Inc.
Annual Report
December 31, 2005
[LOGO] IQ
INVESTMENT [LOGO] PEA Capital
ADVISORS A company of Allianz Global Investors
Enhanced S&P 500(R) Covered Call Fund Inc.
Portfolio Information as of December 31, 2005
Percent of
Ten Largest Equity Holdings Net Assets
- --------------------------------------------------------------------------------
General Electric Co. ................................................. 2.6%
Exxon Mobil Corp. .................................................... 2.4
Citigroup, Inc. ...................................................... 1.7
Microsoft Corp. ...................................................... 1.7
Procter & Gamble Co. ................................................. 1.4
Bank of America Corp. ................................................ 1.3
Johnson & Johnson .................................................... 1.2
American International Group, Inc. ................................... 1.2
Pfizer, Inc. ......................................................... 1.2
Altria Group, Inc. ................................................... 1.1
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
- --------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels .......................................... 6.0%
Pharmaceuticals ...................................................... 5.0
Commercial Banks ..................................................... 4.5
Insurance ............................................................ 3.9
Industrial Conglomerates ............................................. 3.5
- --------------------------------------------------------------------------------
Percent of
S&P 500 Index Sector Weightings Total Investments
- --------------------------------------------------------------------------------
Financials ........................................................... 16.6%
Information Technology ............................................... 11.8
Health Care .......................................................... 10.4
Industrials .......................................................... 8.9
Consumer Discretionary ............................................... 8.4
Energy ............................................................... 7.8
Consumer Staples ..................................................... 7.4
Telecommunication Services ........................................... 2.4
Materials ............................................................ 2.3
Utilities ............................................................ 2.1
Other* ............................................................... 21.9
- --------------------------------------------------------------------------------
* Includes portfolio holdings in options, U.S. Government Obligations and
short-term investments.
For Fund compliance purposes, the Fund's industry and sector
classifications refer to any one or more of the industry and sector
sub-classifications used by one or more widely recognized market indexes
or ratings group indexes, and/or as defined by Fund management. This
definition may not apply for the purposes of this report, which may
combine industry and sector sub-classifications for reporting ease.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
2 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
A Letter From the President
Dear Shareholder
The investment objective of the Enhanced S&P 500(R) Covered Call Fund Inc. (the
"Fund") is to seek leveraged returns on the Chicago Board Options Exchange
("CBOE(R)") S&P 500(R) BuyWrite Index (the "BXM Index(SM)"), less fees and
expenses. The Fund will seek to employ leverage to increase the volatility of
the Fund's investment portfolio to approximate the volatility of the Standard &
Poor's 500(R) Index ("S&P 500 Index"), subject to the limitation that the amount
of leverage employed by the Fund is not expected to exceed 60% of the Fund's net
assets.
The BXM Index is a passive, total return index that is based on buying the
common stocks of all of the companies included in the S&P 500 Index, weighted in
the same proportions as the S&P 500 Index (the "Stocks"), and writing (selling)
one-month call options on the S&P 500 Index. It is not possible to make a direct
investment in the BXM Index.
The total return of the BXM Index was -2.07% from the inception of the Fund
(September 30, 2005) through December 31, 2005. Over the same period, and after
fees and expenses, the total return of the Fund was -0.73% (as measured by
change in net asset value plus dividend reinvestment). The Fund's performance
over this period is consistent with our expectations.
IQ Investment Advisors LLC invites you to visit our new Web site at
www.IQIAFunds.com. Here you will find more information about IQ Investment
Advisers LLC and our products and services, including current market data and
fund statistics.
IQ Investment Advisors LLC continues to take a non-traditional approach to asset
management by seeking to identify specific economic or strategic investment
themes that aim to fulfill particular investor needs. We encourage you to
revisit your portfolio to ensure that your asset allocation strategy is
consistent with your specific investment needs. We thank you for trusting IQ
Investment Advisors LLC with your investment assets, and we look forward to
serving you in the months and years ahead.
Sincerely,
/s/ Mitchell M. Cox
Mitchell M. Cox
President, IQ Investment Advisors LLC
CBOE is a registered trademark and BXM is a servicemark of the Chicago Board
Options Exchange.
S&P 500 and Standard & Poor's 500 are registered trademarks of the McGraw-Hill
Companies.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 3
A Discussion With Your Fund's Portfolio Managers
We are pleased to provide you with this first shareholder report for
Enhanced S&P 500(R) Covered Call Fund Inc., a newly organized closed-end
investment company. While the Fund is advised by IQ Investment Advisors LLC, the
following discussion is provided by PEA Capital LLC, the Fund's subadviser.
How has the Fund performed since its inception?
Since inception (September 30, 2005) through December 31, 2005, the Common Stock
of Enhanced S&P 500(R) Covered Call Fund Inc. had a total investment return of
- -0.73%, based on a change in per share net asset value from $19.10 to $18.37,
assuming reinvestment of all distributions. The Fund's benchmark, the BXM Index,
returned -2.07% during the same period.
For a description of the Fund's total investment return based on a change in per
share market value of the Fund's Common Stock (as measured by the trading price
of the Fund's shares on the New York Stock Exchange), and assuming reinvestment
of dividends, please refer to the Financial Highlights section of this report.
As a closed-end fund, the Fund's shares may trade in the secondary market at a
premium or a discount to the Fund's net asset value. As a result, total
investment returns based on changes in the market value of the Fund's Common
Stock can vary significantly from total investment returns based on changes in
the Fund's net asset value.
Describe the market environment during the reporting period.
Since the Fund's inception on September 30, the broad market produced positive
low single-digit returns across the major domestic equity indices. Energy prices
retreated throughout the majority of the fourth quarter, and concerns about the
impact of these costs and their potential drag on economic growth abated
somewhat. The holiday shopping season was generally in line with expectations
and the economy seemed resilient despite energy concerns and fallout from the
hurricane season.
How have you managed the portfolio since its inception?
The Fund has been managed to deliver leveraged returns of the BXM Index by
investing a portion of its assets in Standard & Poor's 500 Index ("S&P 500
Index") stocks and writing at-the-money S&P 500 Index call options on 100% of
the value of the S&P 500 Index stocks in the portfolio. For the remaining BXM
Index exposure, the Fund entered into an over-the-counter swap contract. We have
been able to minimize our tracking error relative to the BXM Index in large part
due to the strength of our trading execution with regard to the monthly option
transactions.
The Fund owns a portfolio of stocks invested to mirror all issuers and weights
in the S&P 500 Index. The Fund also sells one-month at-the-money S&P 500 Index
call options. Options are sold the third Friday of every month and cash-settled
at expiration. The amount of the premium received is overwritten with E-MINI S&P
500 futures. Since the options are written at-the-money, any net upward move for
the S&P 500 Index between the initiation of the trade and the next expiration
(or, in other words, if the market closes above the strike price of the option),
will result in cash settlement. If the S&P 500 Index settles below the strike
price of the option, the Fund keeps the entire option premium. In addition to
the option positions, we actively rebalance our underlying S&P 500 Index
individual stock positions to ensure that the weight of each individual security
in the Fund continuously matches its weight in the S&P 500 Index. As an
additional layer, the Fund has also entered into a swap agreement to deliver 50%
incremental exposure to the BXM Index.
How would you characterize the portfolio's position at the close of the period?
We believe the Fund is well positioned to deliver its stated goal of providing
leveraged returns on the BXM Index. The BXM Index has historically provided
returns that generally track the returns of the S&P 500 Index with reduced
volatility. By providing additional exposure to the BXM Index, the Fund seeks
returns greater than the S&P 500 Index with a similar level of volatility. As a
result of the Fund's investment process and positions, we believe the Fund is
poised to meet its objectives.
Greg Tournant
Portfolio Manager
January 18, 2006
4 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Schedule of Investments
Shares
Industry Common Stocks Held Value
===================================================================================
Aerospace & Defense--1.8%
Boeing Co. 9,579 $ 672,829
General Dynamics Corp. 2,389 272,465
Goodrich Corp. 1,459 59,965
Honeywell International, Inc. 10,001 372,537
L-3 Communications Holdings, Inc. 1,426 106,023
Lockheed Martin Corp. 4,243 269,982
Northrop Grumman Corp. 4,212 253,183
Raytheon Co. 5,301 212,835
Rockwell Collins, Inc. 2,050 95,263
United Technologies Corp. 12,082 675,505
------------
2,990,587
- -----------------------------------------------------------------------------------
Air Freight & Logistics--0.8%
FedEx Corp. 3,596 371,790
Ryder System, Inc. 762 31,257
United Parcel Service, Inc. Class B 13,089 983,638
------------
1,386,685
- -----------------------------------------------------------------------------------
Airlines--0.1%
Southwest Airlines Co. 8,278 136,008
- -----------------------------------------------------------------------------------
Auto Components--0.1%
Cooper Tire & Rubber Co. 759 11,628
Dana Corp. 1,784 12,809
The Goodyear Tire & Rubber Co. (a) 2,093 36,376
Johnson Controls, Inc. 2,290 166,964
------------
227,777
- -----------------------------------------------------------------------------------
Automobiles--0.3%
Ford Motor Co. 22,033 170,095
General Motors Corp. 6,711 130,328
Harley-Davidson, Inc. 3,259 167,806
------------
468,229
- -----------------------------------------------------------------------------------
Beverages--1.7%
Anheuser-Busch Cos., Inc. 9,212 395,748
Brown-Forman Corp. Class B 986 68,350
The Coca-Cola Co. 24,551 989,651
Coca-Cola Enterprises, Inc. 3,596 68,935
Constellation Brands, Inc. Class A (a) 2,335 61,247
Molson Coors Brewing Co. Class B 675 45,218
Pepsi Bottling Group, Inc. 1,627 46,548
PepsiCo, Inc. 19,680 1,162,694
------------
2,838,391
- -----------------------------------------------------------------------------------
Biotechnology--1.2%
Amgen, Inc. (a) 14,640 1,154,510
Applera Corp.--Applied Biosystems Group 2,230 59,229
Biogen Idec, Inc. (a) 4,028 182,589
Chiron Corp. (a) 1,298 57,709
Genzyme Corp. (a) 3,064 216,870
Gilead Sciences, Inc. (a) 5,434 285,991
Medimmune, Inc. (a) 2,920 102,258
------------
2,059,156
- -----------------------------------------------------------------------------------
Building Products--0.1%
American Standard Cos., Inc. 2,164 86,452
Masco Corp. 5,029 151,826
------------
238,278
- -----------------------------------------------------------------------------------
Capital Markets--2.5%
Ameriprise Financial, Inc. 2,919 119,679
The Bank of New York Co., Inc. 9,140 291,109
The Bear Stearns Cos., Inc. 1,345 155,388
The Charles Schwab Corp. 12,235 179,487
E*Trade Financial Corp. (a) 4,854 101,254
Federated Investors, Inc. Class B 1,005 37,225
Franklin Resources, Inc. 1,762 165,646
Goldman Sachs Group, Inc. 5,349 683,121
Janus Capital Group, Inc. 2,560 47,693
Lehman Brothers Holdings, Inc. 3,179 407,452
Mellon Financial Corp. 4,962 169,948
Merrill Lynch & Co., Inc. (b) 10,905 738,596
Morgan Stanley & Co. 12,785 725,421
Northern Trust Corp. 2,201 114,056
State Street Corp. 3,891 215,717
T. Rowe Price Group, Inc. 1,551 111,719
------------
4,263,511
- -----------------------------------------------------------------------------------
Chemicals--1.2%
Air Products & Chemicals, Inc. 2,633 155,847
Ashland, Inc. 852 49,331
The Dow Chemical Co. 11,447 501,608
E.I. du Pont de Nemours & Co. 10,910 463,675
Eastman Chemical Co. 967 49,888
Ecolab, Inc. 2,187 79,322
Engelhard Corp. 1,423 42,903
Hercules, Inc. (a) 1,338 15,119
International Flavors & Fragrances, Inc. 958 32,093
Monsanto Co. 3,186 247,011
PPG Industries, Inc. 1,982 114,758
Praxair, Inc. 3,825 202,572
Rohm & Haas Co. 1,709 82,750
Sigma-Aldrich Corp. 798 50,505
------------
2,087,382
- -----------------------------------------------------------------------------------
Commercial Banks--4.5%
AmSouth Bancorp 4,136 108,405
BB&T Corp. 6,435 269,691
Bank of America Corp. 47,635 2,198,355
Comerica, Inc. 1,961 111,306
Compass Bancshares, Inc. 1,478 71,373
Fifth Third Bancorp 6,584 248,348
First Horizon National Corp. 1,495 57,468
Huntington Bancshares, Inc. 2,708 64,315
KeyCorp 4,834 159,184
M&T Bank Corp. 947 103,270
Marshall & Ilsley Corp. 2,482 106,825
National City Corp. 6,540 219,548
North Fork Bancorporation, Inc. 5,642 154,365
PNC Financial Services Group, Inc. 3,468 214,426
Regions Financial Corp. 5,434 185,625
SunTrust Banks, Inc. 4,289 312,068
Synovus Financial Corp. 3,706 100,099
U.S. Bancorp 21,544 643,950
Wachovia Corp. 18,426 973,998
Wells Fargo & Co. 19,834 1,246,170
Zions Bancorporation 1,239 93,619
------------
7,642,408
- -----------------------------------------------------------------------------------
Commercial Services & Supplies--0.6%
Allied Waste Industries, Inc. (a) 2,590 22,637
Avery Dennison Corp. 1,311 72,459
Cendant Corp. 12,150 209,587
Cintas Corp. 1,634 67,288
Equifax, Inc. 1,538 58,475
Monster Worldwide, Inc. (a) 1,461 59,638
Pitney Bowes, Inc. 2,707 114,371
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 5
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Commercial Services & Supplies (concluded)
R.R. Donnelley & Sons Co. 2,579 $ 88,228
Robert Half International, Inc. 2,021 76,576
Waste Management, Inc. 6,548 198,732
------------
967,991
- -----------------------------------------------------------------------------------
Communications Equipment--2.1%
ADC Telecommunications, Inc. (a) 1,382 30,874
Andrew Corp. (a) 1,928 20,687
Avaya, Inc. (a) 4,969 53,019
Ciena Corp. (a) 6,858 20,368
Cisco Systems, Inc. (a) 72,857 1,247,312
Comverse Technology, Inc. (a) 2,397 63,736
Corning, Inc. (a) 18,076 355,374
JDS Uniphase Corp. (a) 19,599 46,254
Lucent Technologies, Inc. (a) 52,720 140,235
Motorola, Inc. 29,543 667,376
QUALCOMM, Inc. 19,502 840,146
Scientific-Atlanta, Inc. 1,822 78,474
Tellabs, Inc. (a) 5,322 58,010
------------
3,621,865
- -----------------------------------------------------------------------------------
Computers & Peripherals--2.9%
Apple Computer, Inc. (a) 10,001 718,972
Dell, Inc. (a) 27,915 837,171
EMC Corp. (a) 28,356 386,209
Gateway, Inc. (a) 3,144 7,891
Hewlett-Packard Co. 33,982 972,905
International Business Machines Corp. 18,735 1,540,017
Lexmark International, Inc. Class A (a) 1,377 61,731
NCR Corp. (a) 2,179 73,955
Network Appliance, Inc. (a) 4,416 119,232
QLogic Corp. (a) 952 30,950
Sun Microsystems, Inc. (a) 40,496 169,678
------------
4,918,711
- -----------------------------------------------------------------------------------
Construction & Engineering--0.1%
Fluor Corp. 1,030 79,578
- -----------------------------------------------------------------------------------
Construction Materials--0.1%
Vulcan Materials Co. 1,210 81,977
- -----------------------------------------------------------------------------------
Consumer Finance--1.0%
American Express Co. 14,728 757,903
Capital One Financial Corp. 3,554 307,066
MBNA Corp. 14,887 404,182
SLM Corp. 4,952 272,806
------------
1,741,957
- -----------------------------------------------------------------------------------
Containers & Packaging--0.1%
Ball Corp. 1,235 49,054
Bemis Co. 1,250 34,837
Pactiv Corp. (a) 1,700 37,400
Sealed Air Corp. (a) 966 54,260
Temple-Inland, Inc. 1,336 59,920
------------
235,471
- -----------------------------------------------------------------------------------
Distributors--0.1%
Genuine Parts Co. 2,059 90,431
- -----------------------------------------------------------------------------------
Diversified Consumer Services--0.1%
Apollo Group, Inc. Class A (a) 1,722 104,112
H&R Block, Inc. 3,888 95,450
------------
199,562
- -----------------------------------------------------------------------------------
Diversified Financial Services--3.0%
CIT Group, Inc. 2,371 122,770
Citigroup, Inc. 60,004 2,911,994
JPMorgan Chase & Co. 41,502 1,647,214
Moody's Corp. 2,945 180,882
Principal Financial Group, Inc. 3,324 157,657
------------
5,020,517
- -----------------------------------------------------------------------------------
Diversified Telecommunication Services--1.7%
AT&T, Inc. 46,334 1,134,720
BellSouth Corp. 21,689 587,772
CenturyTel, Inc. 1,554 51,531
Citizens Communications Co. 3,962 48,455
Qwest Communications International
Inc. (a) 18,311 103,457
Verizon Communications, Inc. 32,795 987,785
------------
2,913,720
- -----------------------------------------------------------------------------------
Electric Utilities--1.2%
Allegheny Energy, Inc. (a) 1,933 61,179
American Electric Power Co., Inc. 4,672 173,284
Cinergy Corp. 2,367 100,503
Edison International, Inc. 3,866 168,596
Entergy Corp. 2,462 169,016
Exelon Corp. 7,918 420,763
FPL Group, Inc. 4,686 194,750
FirstEnergy Corp. 3,914 191,747
PPL Corp. 4,511 132,623
Pinnacle West Capital Corp. 1,150 47,552
Progress Energy, Inc. 2,986 131,145
The Southern Co. 8,799 303,829
------------
2,094,987
- -----------------------------------------------------------------------------------
Electrical Equipment--0.4%
American Power Conversion Corp. 2,040 44,880
Cooper Industries Ltd. Class A 1,087 79,351
Emerson Electric Co. 4,875 364,162
Rockwell Automation, Inc. 2,126 125,774
------------
614,167
- -----------------------------------------------------------------------------------
Electronic Equipment & Instruments--0.2%
Agilent Technologies, Inc. (a) 4,878 162,389
Jabil Circuit, Inc. (a) 2,065 76,591
Molex, Inc. 1,707 44,297
Sanmina-SCI Corp. (a) 6,237 26,570
Solectron Corp. (a) 10,841 39,678
Symbol Technologies, Inc. 2,978 38,178
Tektronix, Inc. 994 28,041
------------
415,744
- -----------------------------------------------------------------------------------
Energy Equipment & Services--1.4%
BJ Services Co. 3,825 140,263
Baker Hughes, Inc. 4,057 246,584
Halliburton Co. 6,086 377,089
Nabors Industries Ltd. (a) 1,875 142,031
National Oilwell Varco, Inc. (a) 2,068 129,664
Noble Corp. 1,625 114,627
Rowan Cos., Inc. 1,297 46,225
Schlumberger Ltd. 6,990 679,078
Transocean, Inc. (a) 3,917 272,976
Weatherford International Ltd. (a) 4,125 149,325
------------
2,297,862
- -----------------------------------------------------------------------------------
6 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Food & Staples Retailing--1.8%
Albertson's, Inc. 4,376 $ 93,428
CVS Corp. 9,662 255,270
Costco Wholesale Corp. 5,602 277,131
The Kroger Co. (a) 8,602 162,406
SUPERVALU Inc. 1,616 52,488
SYSCO Corp. 7,361 228,559
Safeway, Inc. 5,332 126,155
Wal-Mart Stores, Inc. 29,630 1,386,684
Walgreen Co. 12,004 531,297
------------
3,113,418
- -----------------------------------------------------------------------------------
Food Products--0.8%
Archer-Daniels-Midland Co. 7,751 191,140
Campbell Soup Co. 2,209 65,762
ConAgra Foods, Inc. 6,158 124,884
General Mills, Inc. 4,216 207,933
HJ Heinz Co. 3,971 133,902
The Hershey Co. 2,149 118,732
Kellogg Co. 3,048 131,735
McCormick & Co., Inc. 1,588 49,101
Sara Lee Corp. 9,013 170,346
Tyson Foods, Inc. Class A 2,987 51,078
Wm. Wrigley Jr. Co. 2,124 141,225
------------
1,385,838
- -----------------------------------------------------------------------------------
Gas Utilities--0.0%
Nicor, Inc. 522 20,520
Peoples Energy Corp. 453 15,887
------------
36,407
- -----------------------------------------------------------------------------------
Health Care Equipment & Supplies--1.7%
Bausch & Lomb, Inc. 638 43,320
Baxter International, Inc. 7,400 278,610
Becton Dickinson & Co. 2,991 179,699
Biomet, Inc. 2,956 108,101
Boston Scientific Corp. (a) 7,002 171,479
C.R. Bard, Inc. 1,244 82,004
Fisher Scientific International Inc. (a) 1,455 90,006
Guidant Corp. 3,937 254,921
Hospira, Inc. (a) 1,909 81,667
Medtronic, Inc. 14,347 825,957
Millipore Corp. (a) 618 40,813
PerkinElmer, Inc. 1,552 36,565
St. Jude Medical, Inc. (a) 4,350 218,370
Stryker Corp. 3,460 153,728
Thermo Electron Corp. (a) 1,924 57,970
Waters Corp. (a) 1,313 49,631
Zimmer Holdings, Inc. (a) 2,940 198,274
------------
2,871,115
- -----------------------------------------------------------------------------------
Health Care Providers & Services--2.5%
Aetna, Inc. 3,394 320,088
AmerisourceBergen Corp. 2,474 102,424
Cardinal Health, Inc. 5,082 349,388
Caremark Rx, Inc. (a) 5,337 276,403
Cigna Corp. 1,493 166,768
Coventry Health Care, Inc. (a) 1,928 109,819
Express Scripts, Inc. (a) 1,728 144,806
HCA, Inc. 5,030 254,015
Health Management Associates, Inc. Class A 2,933 64,409
Humana, Inc. (a) 1,932 104,966
IMS Health, Inc. 2,749 68,505
Laboratory Corp. of America Holdings (a) 1,577 84,921
Manor Care, Inc. 939 37,344
McKesson Corp. 3,651 188,355
Medco Health Solutions, Inc. (a) 3,650 203,670
Patterson Cos., Inc. (a) 1,641 54,809
Quest Diagnostics, Inc. 1,966 101,210
Tenet Healthcare Corp. (a) 5,570 42,666
UnitedHealth Group, Inc. 16,179 1,005,363
WellPoint, Inc. (a) 7,827 624,516
------------
4,304,445
- -----------------------------------------------------------------------------------
Hotels, Restaurants & Leisure--1.2%
Carnival Corp. 5,141 274,889
Darden Restaurants, Inc. 1,554 60,420
Harrah's Entertainment, Inc. 2,181 155,483
Hilton Hotels Corp. 3,893 93,860
International Game Technology 3,998 123,058
Marriott International, Inc. Class A 1,953 130,792
McDonald's Corp. 14,928 503,372
Starbucks Corp. (a) 9,119 273,661
Starwood Hotels & Resorts Worldwide, Inc. 2,602 166,164
Wendy's International, Inc. 1,379 76,204
Yum! Brands, Inc. 3,359 157,470
------------
2,015,373
- -----------------------------------------------------------------------------------
Household Durables--0.6%
Black & Decker Corp. 930 80,873
Centex Corp. 1,514 108,236
DR Horton, Inc. 3,230 115,408
Fortune Brands, Inc. 1,734 135,287
KB HOME 929 67,501
Leggett & Platt, Inc. 2,183 50,122
Lennar Corp. Class A 1,630 99,463
Maytag Corp. 951 17,898
Newell Rubbermaid, Inc. 3,269 77,737
Pulte Homes, Inc. 2,546 100,211
Snap-On, Inc. 687 25,804
The Stanley Works 863 41,459
Whirlpool Corp. 801 67,092
------------
987,091
- -----------------------------------------------------------------------------------
Household Products--1.8%
Clorox Co. 1,784 101,492
Colgate-Palmolive Co. 6,148 337,218
Kimberly-Clark Corp. 5,544 330,700
Procter & Gamble Co. 39,755 2,301,019
------------
3,070,429
- -----------------------------------------------------------------------------------
IT Services--0.8%
Affiliated Computer Services, Inc.
Class A (a) 1,479 87,527
Automatic Data Processing, Inc. 6,842 313,979
Computer Sciences Corp. (a) 2,195 111,155
Convergys Corp. (a) 1,661 26,327
Electronic Data Systems Corp. 6,189 148,784
First Data Corp. 9,067 389,972
Fiserv, Inc. (a) 2,189 94,718
Paychex, Inc. 3,958 150,879
Sabre Holdings Corp. Class A 1,557 37,539
Unisys Corp. (a) 4,050 23,611
------------
1,384,491
- -----------------------------------------------------------------------------------
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 7
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Independent Power Producers & Energy Traders--0.5%
The AES Corp. (a) 7,751 $ 122,698
Constellation Energy Group, Inc. 2,118 121,997
Duke Energy Corp. 11,007 302,142
Dynegy, Inc. Class A (a) 3,575 17,303
TXU Corp. 5,730 287,589
------------
851,729
- -----------------------------------------------------------------------------------
Industrial Conglomerates--3.5%
3M Co. 9,018 698,895
General Electric Co. 125,325 4,392,641
Textron, Inc. 1,571 120,936
Tyco International Ltd. 23,877 689,090
------------
5,901,562
- -----------------------------------------------------------------------------------
Insurance--3.9%
ACE Ltd. 3,825 204,408
AMBAC Financial Group, Inc. 1,248 96,171
AON Corp. 3,797 136,502
Aflac, Inc. 5,938 275,642
The Allstate Corp. 7,697 416,177
American International Group, Inc. 30,786 2,100,529
Chubb Corp. 2,372 231,626
Cincinnati Financial Corp. 2,073 92,622
Genworth Financial, Inc. Class A 4,469 154,538
Hartford Financial Services Group, Inc. 3,564 306,112
Jefferson-Pilot Corp. 1,591 90,576
Lincoln National Corp. 2,056 109,030
Loews Corp. 1,609 152,614
MBIA, Inc. 1,591 95,715
Marsh & McLennan Cos., Inc. 6,464 205,297
Metlife, Inc. 8,986 440,314
The Progressive Corp. 2,341 273,382
Prudential Financial, Inc. 5,993 438,628
Safeco Corp. 1,466 82,829
The St. Paul Travelers Cos., Inc. 8,217 367,053
Torchmark Corp. 1,231 68,444
UnumProvident Corp. 3,536 80,444
XL Capital Ltd. Class A 2,069 139,409
------------
6,558,062
- -----------------------------------------------------------------------------------
Internet & Catalog Retail--0.4%
Amazon.com, Inc. (a) 3,640 171,626
eBay, Inc. (a) 13,556 586,297
------------
757,923
- -----------------------------------------------------------------------------------
Internet Software & Services--0.3%
Yahoo!, Inc. (a) 14,977 586,799
- -----------------------------------------------------------------------------------
Leisure Equipment & Products--0.1%
Brunswick Corp. 1,146 46,596
Eastman Kodak Co. 3,408 79,747
Hasbro, Inc. 2,113 42,640
Mattel, Inc. 4,792 75,809
------------
244,792
- -----------------------------------------------------------------------------------
Machinery--1.1%
Caterpillar, Inc. 8,072 466,319
Cummins, Inc. 556 49,890
Danaher Corp. 2,815 157,021
Deere & Co. 2,862 194,931
Dover Corp. 2,405 97,378
Eaton Corp. 1,756 117,810
ITT Industries, Inc. 1,094 112,485
Illinois Tool Works, Inc. 2,430 213,816
Ingersoll-Rand Co. Class A 3,926 158,493
Navistar International Corp. (a) 727 20,807
PACCAR, Inc. 2,009 139,083
Pall Corp. 1,478 39,699
Parker Hannifin Corp. 1,421 93,729
------------
1,861,461
- -----------------------------------------------------------------------------------
Media--2.6%
Clear Channel Communications, Inc. 6,412 201,657
Comcast Corp. Class A (a) 25,756 668,626
Dow Jones & Co., Inc. 700 24,843
E.W. Scripps Co. Class A 1,009 48,452
Gannett Co., Inc. 2,847 172,443
Interpublic Group of Cos., Inc. (a) 5,109 49,302
Knight-Ridder, Inc. 823 52,096
The McGraw-Hill Cos., Inc. 4,449 229,702
Meredith Corp. 497 26,013
New York Times Co. Class A 1,717 45,415
News Corp. Class A 28,861 448,789
Omnicom Group 2,140 182,178
Time Warner, Inc. 55,303 964,491
Tribune Co. 3,107 94,018
Univision Communications, Inc. Class A (a) 2,653 77,972
Viacom, Inc. Class B (a) 18,330 597,558
Walt Disney Co. 22,816 546,900
------------
4,430,455
- -----------------------------------------------------------------------------------
Metals & Mining--0.7%
Alcoa, Inc. 10,325 305,340
Allegheny Technologies, Inc. 1,009 36,405
Freeport-McMoRan Copper & Gold, Inc.
Class B 2,184 117,499
Newmont Mining Corp. 5,302 283,127
Nucor Corp. 1,845 123,098
Phelps Dodge Corp. 1,205 173,363
United States Steel Corp. 1,347 64,750
------------
1,103,582
- -----------------------------------------------------------------------------------
Multi-Utilities--0.9%
Ameren Corp. 2,424 124,206
CMS Energy Corp. (a) 2,612 37,900
Centerpoint Energy, Inc. 3,680 47,288
Consolidated Edison, Inc. 2,907 134,681
DTE Energy Co. 2,110 91,131
Dominion Resources, Inc. 4,121 318,141
KeySpan Corp. 2,069 73,843
NiSource, Inc. 3,235 67,482
PG&E Corp. 4,071 151,116
Public Service Enterprise Group, Inc. 2,975 193,286
Sempra Energy 3,051 136,807
TECO Energy, Inc. 2,469 42,417
Xcel Energy, Inc. 4,781 88,257
------------
1,506,555
8 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Multiline Retail--0.9%
Big Lots, Inc. (a) 1,352 $ 16,238
Dillard's, Inc. Class A 731 18,143
Dollar General Corp. 3,757 71,646
Family Dollar Stores, Inc. 1,842 45,663
Federated Department Stores 3,230 214,246
JC Penney Co., Inc. 2,756 153,234
Kohl's Corp. (a) 4,091 198,823
Nordstrom, Inc. 2,594 97,016
Sears Holdings Corp. (a) 1,184 136,788
Target Corp. 10,433 573,502
------------
1,525,299
- -----------------------------------------------------------------------------------
Office Electronics--0.1%
Xerox Corp. (a) 11,391 166,878
- -----------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--6.0%
Amerada Hess Corp. 949 120,352
Anadarko Petroleum Corp. 2,815 266,721
Apache Corp. 3,908 267,776
Burlington Resources, Inc. 4,486 386,693
Chevron Corp. 26,628 1,511,672
ConocoPhillips 16,458 957,526
Devon Energy Corp. 5,272 329,711
EOG Resources, Inc. 2,867 210,352
El Paso Corp. 7,824 95,140
Exxon Mobil Corp. 73,804 4,145,571
Kerr-McGee Corp. 1,376 125,023
Kinder Morgan, Inc. 1,249 114,846
Marathon Oil Corp. 4,349 265,159
Murphy Oil Corp. 1,959 105,766
Occidental Petroleum Corp. 4,770 381,028
Sunoco, Inc. 1,615 126,584
Valero Energy Corp. 7,318 377,609
Williams Cos., Inc. 6,800 157,556
XTO Energy, Inc. 4,310 189,381
------------
10,134,466
- -----------------------------------------------------------------------------------
Paper & Forest Products--0.3%
International Paper Co. 5,821 195,644
Louisiana-Pacific Corp. 1,255 34,475
MeadWestvaco Corp. 2,153 60,349
Weyerhaeuser Co. 2,890 191,723
------------
482,191
- -----------------------------------------------------------------------------------
Personal Products--0.1%
Alberto-Culver Co. Class B 891 40,763
Avon Products, Inc. 5,440 155,312
------------
196,075
- -----------------------------------------------------------------------------------
Pharmaceuticals--5.0%
Abbott Laboratories 18,399 725,473
Allergan, Inc. 1,562 168,634
Bristol-Myers Squibb Co. 23,206 533,274
Eli Lilly & Co. 13,481 762,890
Forest Laboratories, Inc. (a) 4,010 163,127
Johnson & Johnson 35,286 2,120,689
King Pharmaceuticals, Inc. (a) 2,869 48,543
Merck & Co., Inc. 25,936 825,024
Mylan Laboratories, Inc. 2,594 51,776
Pfizer, Inc. 87,432 2,038,914
Schering-Plough Corp. 17,532 365,542
Watson Pharmaceuticals, Inc. (a) 1,203 39,110
Wyeth 15,920 733,434
------------
8,576,430
- -----------------------------------------------------------------------------------
Real Estate--0.6%
Apartment Investment & Management Co.
Class A 1,136 43,020
Archstone-Smith Trust 2,516 105,395
Equity Office Properties Trust 4,820 146,191
Equity Residential 3,420 133,790
Plum Creek Timber Co., Inc. 2,183 78,697
Prologis 2,860 133,619
Public Storage, Inc. 981 66,433
Simon Property Group, Inc. 2,211 169,429
Vornado Realty Trust 1,400 116,858
------------
993,432
- -----------------------------------------------------------------------------------
Road & Rail--0.5%
Burlington Northern Santa Fe Corp. 4,431 313,803
CSX Corp. 2,578 130,885
Norfolk Southern Corp. 4,823 216,215
Union Pacific Corp. 3,144 253,123
------------
914,026
- -----------------------------------------------------------------------------------
Semiconductors & Semiconductor Equipment--2.5%
Advanced Micro Devices, Inc. (a) 4,795 146,727
Altera Corp. (a) 4,301 79,698
Analog Devices, Inc. 4,353 156,142
Applied Materials, Inc. 19,244 345,237
Applied Micro Circuits Corp. (a) 3,545 9,111
Broadcom Corp. Class A (a) 3,432 161,819
Freescale Semiconductor, Inc. Class B (a) 4,870 122,578
Intel Corp. 71,510 1,784,890
Kla-Tencor Corp. 2,343 115,580
LSI Logic Corp. (a) 4,648 37,184
Linear Technology Corp. 3,617 130,465
Maxim Integrated Products, Inc. 3,890 140,974
Micron Technology, Inc. (a) 7,333 97,602
National Semiconductor Corp. 4,078 105,946
Novellus Systems, Inc. (a) 1,583 38,182
Nvidia Corp. (a) 2,031 74,253
PMC-Sierra, Inc. (a) 2,174 16,762
Teradyne, Inc. (a) 2,337 34,050
Texas Instruments, Inc. 19,192 615,487
Xilinx, Inc. 4,136 104,269
------------
4,316,956
- -----------------------------------------------------------------------------------
Software--2.8%
Adobe Systems, Inc. 7,134 263,673
Autodesk, Inc. 2,739 117,640
BMC Software, Inc. (a) 2,571 52,680
Citrix Systems, Inc. (a) 2,093 60,237
Computer Associates International, Inc. 5,445 153,495
Compuware Corp. (a) 4,598 41,244
Electronic Arts, Inc. (a) 3,567 186,590
Intuit, Inc. (a) 2,100 111,930
Mercury Interactive Corp. (a) 1,028 28,568
Microsoft Corp. 108,580 2,839,367
Novell, Inc. (a) 4,533 40,026
Oracle Corp. (a) 44,607 544,651
Parametric Technology Corp. (a) 3,231 19,709
Siebel Systems, Inc. 6,279 66,432
Symantec Corp. (a) 12,827 224,472
------------
4,750,714
- -----------------------------------------------------------------------------------
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 9
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Specialty Retail--1.7%
AutoNation, Inc. (a) 2,148 $ 46,676
AutoZone, Inc. (a) 651 59,729
Bed Bath & Beyond, Inc. (a) 3,523 127,356
Best Buy Co., Inc. 4,850 210,878
Circuit City Stores, Inc. 1,859 41,995
The Gap, Inc. 6,811 120,146
Home Depot, Inc. 25,196 1,019,934
Limited Brands, Inc. 4,132 92,350
Lowe's Cos., Inc. 9,279 618,538
Office Depot, Inc. (a) 3,665 115,081
OfficeMax, Inc. 840 21,302
RadioShack Corp. 1,598 33,606
The Sherwin-Williams Co. 1,332 60,499
Staples, Inc. 8,678 197,077
TJX Cos., Inc. 5,467 126,998
Tiffany & Co. 1,688 64,634
------------
2,956,799
- -----------------------------------------------------------------------------------
Textiles, Apparel & Luxury Goods--0.3%
Coach, Inc. (a) 4,510 150,363
Jones Apparel Group, Inc. 1,386 42,578
Liz Claiborne, Inc. 1,261 45,169
Nike, Inc. Class B 2,254 195,625
Reebok International Ltd. 625 36,394
VF Corp. 1,056 58,439
------------
528,568
- -----------------------------------------------------------------------------------
Thrifts & Mortgage Finance--1.3%
Countrywide Financial Corp. 7,086 242,270
Fannie Mae 11,480 560,339
Freddie Mac 8,200 535,870
Golden West Financial Corp. 3,024 199,584
MGIC Investment Corp. 1,077 70,888
Sovereign Bancorp, Inc. 4,238 91,626
Washington Mutual, Inc. 11,703 509,080
------------
2,209,657
- -----------------------------------------------------------------------------------
Tobacco--1.2%
Altria Group, Inc. 24,699 1,845,509
Reynolds American, Inc. 1,015 96,760
UST, Inc. 1,936 79,047
------------
2,021,316
- -----------------------------------------------------------------------------------
Trading Companies & Distributors--0.0%
WW Grainger, Inc. 902 64,132
- -----------------------------------------------------------------------------------
Wireless Telecommunication Services--0.7%
Alltel Corp. 4,544 286,726
Sprint Nextel Corp. 35,043 818,604
------------
1,105,330
- -----------------------------------------------------------------------------------
Total Common Stocks
(Cost--$129,037,313)--78.5% 133,546,748
===================================================================================
===================================================================================
Face
U.S. Government Obligations Amount
===================================================================================
U.S. Treasury Notes, 2.50%
due 10/31/2006 $35,200,000 34,656,864
- -----------------------------------------------------------------------------------
Total U.S. Government Obligations
(Cost--$34,735,930)--20.4% 34,656,864
===================================================================================
===================================================================================
Short-Term Securities
===================================================================================
Time Deposits--1.9%
State Street Bank & Trust Co., 3.60%
due 1/03/2006 3,209,634 3,209,634
- -----------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$3,209,634)--1.9% 3,209,634
===================================================================================
Total Investments (Cost--$166,982,877)--100.8% 171,413,246
===================================================================================
===================================================================================
Number of
Call Options Written Contracts
===================================================================================
S&P 500 Index, expiring
January 2006 at USD 1,275 1,083 (346,560)
- -----------------------------------------------------------------------------------
Total Call Options Written
(Premiums Received--$1,645,294)--(0.2%) (346,560)
===================================================================================
Total Investments, Net of Options Written
(Cost--$165,337,583*)--100.6% 171,066,686
Liabilities in Excess of Other Assets--(0.6%) (1,024,640)
------------
Net Assets--100.0% $170,042,046
============
10 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Schedule of Investments (concluded)
* The cost and unrealized appreciation (depreciation) of investments, net of
options written, as of December 31, 2005, as computed for federal income
tax purposes, were as follows:
Aggregate cost ......................................... $172,652,205
============
Gross unrealized appreciation .......................... $ 1,948,468
Gross unrealized depreciation .......................... (3,533,987)
------------
Net unrealized depreciation ............................ $ (1,585,519)
============
(a) Non-income producing security.
(b) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2 (a)(3) of the Investment Company Act of 1940, were
as follows:
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch & Co., Inc. 10,905 $2,378
--------------------------------------------------------------------------
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for the purposes
of this report, which may combine industry sub-classifications for
reporting ease. Industries are shown as a percent of net assets. These
industry classifications are unaudited.
o Swaps outstanding as of December 31, 2005 were as follows:
---------------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
---------------------------------------------------------------------------------
Receive (pay) a variable return based on the
change in the BXM Index Total Return and
pay floating rate based on 12-month
LIBOR, plus .80%
Broker, BNP Paribas
Expires October 2006 $ 15,000,000 $ 51,178
Receive (pay) a variable return based on the
change in the BXM Index Total Return and
pay floating rate based on 12-month
LIBOR, plus .45%
Broker, Deutsche Bank AG
Expires October 2006 $101,500,006 411,429
---------------------------------------------------------------------------------
Total $462,607
========
o Financial futures contracts purchased as of December 31, 2005 were as
follows:
---------------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Depreciation
---------------------------------------------------------------------------------
25 E-MINI S&P 500 March 2006 $1,600,298 $(31,860)
---------------------------------------------------------------------------------
See Notes to Financial Statements.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 11
Statement of Assets, Liabilities and Capital
As of December 31, 2005
===============================================================================================================================
Assets
- -------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$166,308,855) $ 170,674,650
Investments in affiliated securities, at value (identified cost--$674,022) ..... 738,596
Cash collateral on future contracts ............................................ 78,750
Unrealized appreciation on swaps ............................................... 462,607
Receivables:
Dividends ................................................................... $ 181,447
Securities sold ............................................................. 168,637
Interest .................................................................... 148,608 498,692
----------------------------
Total assets ................................................................... 172,453,295
-------------
===============================================================================================================================
Liabilities
- -------------------------------------------------------------------------------------------------------------------------------
Options written, at value (premiums received--$1,645,294) ...................... 346,560
Payables:
Dividends to shareholders ................................................... 1,491,175
Offering costs .............................................................. 292,019
Investment adviser .......................................................... 118,989
Securities purchased ........................................................ 41,205
Variation margin ............................................................ 6,562 1,949,950
-----------
Accrued expenses and other liabilities ......................................... 114,739
-------------
Total liabilities .............................................................. 2,411,249
-------------
===============================================================================================================================
Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
Net Assets ..................................................................... $ 170,042,046
=============
===============================================================================================================================
Capital
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par value, 100,000,000 shares authorized .................... $ 9,255
Paid-in capital in excess of par ............................................... 172,454,304
Accumulated realized capital losses--net ....................................... $(8,581,363)
Unrealized appreciation--net ................................................... 6,159,850
-----------
Total accumulated losses--net .................................................. (2,421,513)
-------------
Total capital--Equivalent to $18.37 per share based on 9,255,236 shares of
Common Stock outstanding (market price--$16.83) ............................... $ 170,042,046
=============
See Notes to Financial Statements.
12 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Statement of Operations
For the Period September 30, 2005+ to December 31, 2005
===============================================================================================================================
Investment Income
- -------------------------------------------------------------------------------------------------------------------------------
Dividends (including $2,378 from affiliates) ........................... $ 668,090
Interest ............................................................... 507,936
-------------
Total income ........................................................... 1,176,026
-------------
===============================================================================================================================
Expenses
- -------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ............................................... $ 394,833
Professional fees ...................................................... 119,582
Directors' fees and expenses ........................................... 26,875
Printing and shareholder reports ....................................... 15,938
Accounting services .................................................... 10,384
Transfer agent fees .................................................... 9,840
Custodian fees ......................................................... 8,260
Pricing fees ........................................................... 22
Other .................................................................. 12,318
-----------
Total expenses ......................................................... 598,052
-------------
Investment income--net ................................................. 577,974
-------------
===============================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments (including $5,442 from affiliates)--net ................. 375,977
Futures contracts--net .............................................. 208,133
Options written--net ................................................ (8,594,516) (8,010,406)
-----------
Unrealized appreciation on:
Investments (including $64,574 from affiliates)--net ................ 4,430,369
Futures contracts and swaps--net .................................... 430,747
Options written--net ................................................ 1,298,734 6,159,850
----------------------------
Total realized and unrealized loss--net ................................ (1,850,556)
-------------
Net Decrease in Net Assets Resulting from Operations ................... $ (1,272,582)
=============
+ Commencement of operations.
See Notes to Financial Statements.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 13
Statement of Changes in Net Assets
For the Period
September 30,
2005+ to
December 31,
Increase (Decrease) in Net Assets: 2005
================================================================================================================================
Operations
- --------------------------------------------------------------------------------------------------------------------------------
Investment income--net .............................................................. $ 577,974
Realized loss--net .................................................................. (8,010,406)
Unrealized appreciation--net ........................................................ 6,159,850
-------------
Net decrease in net assets resulting from operations ................................ (1,272,582)
-------------
================================================================================================================================
Dividends & Distributions to Shareholders
- --------------------------------------------------------------------------------------------------------------------------------
Investment income--net .............................................................. (577,974)
Realized gain--net .................................................................. (570,957)
Tax return of capital ............................................................... (3,941,449)
-------------
Net decrease in net assets resulting from dividends and distributions to shareholders (5,090,380)
-------------
================================================================================================================================
Common Stock Transactions
- --------------------------------------------------------------------------------------------------------------------------------
Net proceeds from issuance of Common Stock .......................................... 176,675,000
Offering costs resulting from the issuance of Common Stock .......................... (370,000)
-------------
Net increase in net assets resulting from Common Stock transactions ................. 176,305,000
-------------
================================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ........................................................ 169,942,038
Beginning of period ................................................................. 100,008
-------------
End of period ....................................................................... $ 170,042,046
=============
+ Commencement of operations.
See Notes to Financial Statements.
14 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Financial Highlights
For the Period
September 30,
2005+ to
The following per share data and ratios have been derived December 31,
from information provided in the financial statements. 2005
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ................................................ $ 19.10
-------------
Investment income--net*** ........................................................... .06
Realized and unrealized loss--net ................................................... (.20)
-------------
Total from investment operations .................................................... (.14)
-------------
Less dividends and distributions from:
Investment income--net ........................................................... (.06)
Realized gain--net ............................................................... (.06)
Tax return of capital ............................................................ (.43)
-------------
Total dividends and distributions ................................................... (.55)
-------------
Offering costs resulting from the issuance of Common Stock .......................... (.04)
-------------
Net asset value, end of period ...................................................... $ 18.37
=============
Market price per share, end of period ............................................... $ 16.83
=============
================================================================================================================================
Total Investment Return**
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .................................................. (.73%)@
=============
Based on market price per share ..................................................... (13.14%)@
=============
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses ............................................................................ 1.36%*
=============
Investment income--net .............................................................. 1.32%*
=============
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ............................................ $ 170,042
=============
Portfolio turnover .................................................................. 7.31%
=============
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
*** Based on average shares outstanding.
+ Commencement of operations.
@ Aggregate total investment return.
See Notes to Financial Statements.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 15
Notes to Financial Statements
1. Significant Accounting Policies:
Enhanced S&P 500(R) Covered Call Fund Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. Prior to commencement of operations on September
30, 2005, the Fund had no operations other than those relating to organizational
matters and the sale of 5,236 shares of Common Stock on September 15, 2005 to
Merrill Lynch Investment Managers, L.P. ("MLIM") for $100,008. The Fund's
financial statements are prepared in conformity with U.S. generally accepted
accounting principles, which may require the use of management accruals and
estimates. Actual results may differ from these estimates. The Fund determines
and makes available for publication the net asset value of its Common Stock on a
daily basis. The Fund's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol BEO. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments -- Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available asked
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Directors of the Fund.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Directors of the Fund. Short positions traded in the OTC market are valued at
the last available asked price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last ask price.
Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued based upon quoted fair valuations
received daily by the fund from a pricing service or counterparty. Financial
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sale price as of the close of such exchanges. Obligations with
remaining maturities of 60 days or less are valued at amortized cost unless the
Investment Adviser believes that this method no longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Fund's Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government securities,
money market instruments and certain fixed income securities, is substantially
completed each day at various times prior to the close of business on the NYSE.
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign currency exchange rates
also are generally determined prior to the close of business on the NYSE.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and the close of
business on the NYSE that may not be reflected in the computation of the Fund's
net asset value. If events (for example, a company announcement, market
volatility or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Fund's Board of Directors
or by the Investment Adviser using a pricing service and/or procedures approved
by the Fund's Board of Directors.
(b) Derivative financial instruments -- The Fund will engage in various
portfolio investment strategies both to enhance its returns or as a proxy for a
direct investment in securities underlying the Fund's index. Losses may arise
due to changes in the value of the contract or if the counter party does not
perform under the contract.
o Options -- The Fund purchases and writes covered call options. When the
Fund writes an option, an amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market
value of the option written. When a security is purchased or sold through
an exercise of an option, the related premium paid (or received) is added
to (or
16 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Notes to Financial Statements (continued)
deducted from) the basis of the security acquired or deducted from (or
added to) the proceeds of the security sold. When an option expires (or
the Fund enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid (or gain
or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Swaps -- The Fund will enter into swap agreements, which are
over-the-counter contracts in which the Fund and a counterparty agree to
make periodic net payments on a specified notional amount. The net
payments can be made for a set period of time or may be triggered by a
pre-determined credit event. The net periodic payments may be based on a
fixed or variable interest rate; the change in market value of a specified
security, basket of securities, or index; or the return generated by a
security. These periodic payments received or made by the Fund are
recorded in the accompanying Statement of Operations as realized gains or
losses, respectively. Gains or losses are also realized upon termination
of the swap agreements. Swaps are marked-to-market daily and changes in
value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments, failure of
the counterparties to perform under the contracts' terms and the possible
lack of liquidity with respect to the swap agreements.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(e) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates. A portion of the dividends paid by the
Fund during the period September 30, 2005 to December 31, 2005 are characterized
as a tax return of capital.
(f) Offering expenses -- Direct expenses relating to the public offering of the
Fund's Common Stock were charged to capital at the time of issuance of the
shares.
(g) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 17
Notes to Financial Statements (concluded)
2. Investment Advisory and Management Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory and Management Agreement with
IQ Investment Advisors LLC ("IQ"), an indirect subsidiary of Merrill Lynch & Co.
Inc. ("ML & Co.").
IQ is responsible for the investment advisory, management and administrative
services to the Fund. In addition IQ provides the necessary personnel,
facilities, equipment and certain other services necessary to the operations of
the Fund. For such services, the Fund will pay a monthly fee at an annual rate
equal to .90% of the average daily value of the Fund's net assets plus
borrowings for investment purposes but exclude any net assets attributable to
leveraging transactions. IQ has entered into a Sub-Advisory Agreement with PEA
Capital LLC ("PEA") pursuant to which PEA provides certain investment advisory
services to IQ with respect to the Fund. For such services, IQ will pay PEA a
monthly fee at an annual rate of .40% of the average daily value of the Fund's
net assets plus borrowings for investment purposes but exclude any net assets
attributable to leveraging transactions. There was no increase in the aggregate
fees paid by the Fund for these services.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to ML & Co. and its
affiliates, including Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), an affiliate of IQ. Pursuant to that order, the Fund may retain
Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of IQ, as the
securities lending agent for a fee based on a share of the returns on investment
of cash collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by IQ
or its affiliates.
For the period September 30, 2005 to December 31, 2005, MLPF&S received gross
fees from underwriting of $4,600,729 in connection with the issuance of the
Fund's Common Stock. In addition, the Fund reimbursed MLPF&S $33,350 as a
partial reimbursement of expenses incurred in connection with the issuance of
the Fund's Common Stock.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, IQ, ML & Co., and/or MLIM, LLC.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period September 30, 2005 to December 31, 2005 were $175,920,896 and
$12,650,811, respectively.
Transactions in call options written for the period September 30, 2005 to
December 31, 2005 were as follows:
- -------------------------------------------------------------------------------
Number of Premiums
Contracts Received
- -------------------------------------------------------------------------------
Options written ............................ 4,590 $ 5,383,806
Options closed ............................. (2,332) (3,682,112)
Options expired ............................ (1,175) (56,400)
----------------------------
Outstanding call options written,
end of period ............................ 1,083 $ 1,645,294
============================
4. Common Stock Transactions:
The Fund is authorized to issue 100,000,000 shares of Common Stock, par value
$.001, all of which are initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued shares
of Common Stock without approval of the holders of Common Stock.
Shares issued and outstanding during the period September 30, 2005 to December
31, 2005 increased by 9,250,000 from shares sold.
5. Distributions to Shareholders:
The tax character of distributions paid during the period September 30, 2005 to
December 31, 2005 was as follows:
- --------------------------------------------------------------------------------
9/30/2005+ to 12/31/2005
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ....................................... $ 577,974
Long-term capital gains ............................... 570,957
Tax return of capital ................................. 3,941,449
----------
Total distributions ..................................... $5,090,380
==========
+ Commencement of operations.
As of December 31, 2005, the components of accumulated losses on a tax basis
were as follows:
- ------------------------------------------------------------------------------
Undistributed ordinary income--net ...................... $ --
Undistributed long-term capital gains--net .............. --
-----------
Total undistributed earnings--net ....................... --
Capital loss carryforward ............................... --
Unrealized losses--net .................................. (2,421,513)*
-----------
Total accumulated losses--net ........................... $(2,421,513)
===========
* The difference between book-basis and tax-basis net unrealized losses is
attributable primarily to the realization for tax purposes of unrealized
gains/losses on certain futures contracts and certain securities that are
part of a straddle.
18 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Enhanced S&P 500(R) Covered Call
Fund Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Enhanced S&P 500(R) Covered Call Fund
Inc. as of December 31, 2005, and the related statements of operations and of
changes in net assets, and the financial highlights for the period September 30,
2005 (commencement of operations) through December 31, 2005. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2005, by correspondence with the
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Enhanced S&P 500(R) Covered Call Fund Inc. as of December 31, 2005, the results
of its operations, the changes in its net assets, and its financial highlights
for the period September 30, 2005 through December 31, 2005, in conformity with
U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, NJ
February 17, 2006
Fund Certification (unaudited)
In September 2005, the Fund filed its Chief Executive Officer Certification for
the prior year with the New York Stock Exchange pursuant to Section 303A.12(a)
of the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Important Tax Information (unaudited)
The following information is provided with respect to the taxable ordinary
income portion of the distribution paid by the Enhanced S&P 500 Covered Call
Fund Inc. to shareholders of record on December 20, 2005:
- -----------------------------------------------------------------------------
Federal Obligation Interest ........................................ 28.30%*
Interest-Related Dividends for Non-U.S. Residents .................. 43.19%**
- -----------------------------------------------------------------------------
* The law varies in each state as to whether and what percentage of dividend
income attributable to Federal obligations is exempt from state income
tax. We recommend that you consult your tax adviser to determine if any
portion of the dividends you received is exempt from state income tax.
** Represents the portion of the taxable ordinary income dividends eligible
for exemption from U.S. withholding tax for nonresident aliens and foreign
corporations.
Additionally, the Fund distributed long-term capital gains of $.061690 per share
to shareholders of record on December 20, 2005.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 19
Disclosure of Investment Advisory Agreement
Activities and Composition of the Board of Directors
All but one member of the Fund's Board of Directors is a non-interested director
as that term is defined in the Investment Company Act of 1940, whose association
is due to his position as an employee of the Adviser's affiliates. The Chairman
of the Board is a non-interested director. Director nominees are chosen by the
Board's Nominating and Corporate Governance Committee. The Directors are
responsible for the overall supervision of the operations of the Fund and
perform the various duties imposed on the directors of investment companies by
the Investment Company Act and applicable Maryland law. Each non-interested
Director is a member of the Fund's Audit Committee. Each non-interested Director
is a member of the Board's Nominating and Corporate Governance Committee. The
independent directors meet in executive session at each regular Board meeting.
Each Board and each Board's Audit Committee meet in person for one day each
quarter and conduct other in-person and telephone meetings throughout the year,
some of which are formal board meetings and some of which are informational
meetings. The independent counsel to the independent directors attends all
in-person Board and Audit Committee meetings and other meetings at the request
of the independent directors.
The management agreement between the Fund and the Adviser through which the
Adviser provides investment advisory, management and administrative services to
the Fund (the "Management Agreement") provides that, subject to the supervision
of the Fund's Board of Directors, the Adviser is responsible for management and
oversight of the Fund's portfolio. The Adviser has designed the investment
strategy for the Fund and provides certain oversight responsibility for the
implementation of the strategy by the Subadviser. The Adviser also provides
certain investment advisory, management and administrative services for the
Fund.
Initial Approval of Management Agreement
The Board of Directors of the Fund, including a majority of the non-interested
Directors of the Fund, has the responsibility under the Investment Company Act
to approve the Fund's proposed Management Agreement for its initial two-year
term and for one-year renewal terms thereafter at meetings of the Board called
for the purpose of voting on such initial approval or renewals. In addition, the
Fund's Board of Directors will receive, review and evaluate information
concerning the services and personnel of the Adviser and its affiliates at each
quarterly meeting of the Board of Directors. While particular emphasis will be
placed on information concerning profitability, comparability of fees, total
expenses and the Fund's investment performance at any future meeting at which a
renewal of the Management Agreement is considered, the process of evaluating the
Adviser and the Fund's investment advisory and administrative arrangements is an
ongoing one. In this regard, the Board's consideration of the nature, extent and
quality of the services to be provided by the Adviser under the Management
Agreement will include deliberations at future quarterly meetings.
At a Board meeting held on July 11, 2005, all of the Directors present at the
meeting, including the non-interested Directors, approved the Management
Agreement for an initial two-year term. In considering whether to approve the
Management Agreement, the Fund's Board of Directors reviewed an organizational
meeting book and other materials from counsel to the Fund and from the Adviser
which: (i) included information concerning the services that will be rendered to
the Fund by the Adviser and the Adviser's affiliates and the fees that will be
paid by the Fund to the Adviser and the Adviser's affiliates, and (ii) outlined
the legal duties of the Board under the Investment Company Act. The Board also
received information from Lipper, Inc. ("Lipper") comparing the Fund's fee rate
for advisory and administrative services to those of other closed-end funds
employing a covered call strategy, as defined by Lipper. In particular, the
Board considered the following:
(a) The nature, extent and quality of services to be provided by the Adviser --
The Directors reviewed the services that the Adviser would provide to the Fund.
In connection with the investment advisory services to be provided to the Fund,
the Board of Directors discussed in detail with officers of the Adviser the
management of the Fund's investments in accordance with the Fund's stated
investment objective and policies and the types of transactions that would be
entered into on behalf of the Fund. In addition to the investment advisory
services to be provided to the Fund, the Board of Directors considered that the
Adviser and its affiliates also will provide administrative services,
stockholder services, oversight of Fund accounting, marketing services,
assistance in meeting legal and regulatory requirements and other services
necessary for the operation of the Fund. In particular, the Board of Directors
reviewed the compliance and administrative services to be provided to the Fund
by the Adviser, including its oversight of the Fund's day-to-day operations and
its oversight of Fund accounting. The Board noted that the Adviser has an
administrative, legal and compliance staff to ensure a high level of quality in
the compliance and administrative services to be provided to the Fund. Based on
the presentations on July 11, 2005 and the Board members
20 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Disclosure of Investment Advisory Agreement (continued)
experience as Board members of other investment companies advised by the
Adviser, the Board of Directors concluded that the services to be provided to
the Fund by the Adviser under the Management Agreement were likely to be of a
high quality and would benefit the Fund.
(b) Investment performance of the Fund and the Adviser -- Because the Fund is
newly formed, the Directors did not consider the investment performance of the
Fund. The Board did consider the performance history of another fund that is
advised by the Adviser and subadvised by the Subadviser, and for which the
Directors also serve as members of the board of directors, and that employs a
non-leveraged, covered call strategy designed to approximate the performance,
less fees and expenses, of the BXM Index (the "BXM Fund"). The Board noted that,
although this fund had only three months of performance history, the BXM Fund's
performance, less fees and expenses, closely tracked the performance of the BXM
Index over this three-month period. The Board also considered the experience,
resources and strengths of the Adviser and its affiliates in managing other
investment companies that employ investment strategies similar to the Fund,
including the BXM Fund. The Board of Directors considered the innovative nature
of the investment product and the creativity of the Adviser in developing the
Fund's investment program. Based on these factors, the Directors determined that
the Adviser would be an appropriate investment adviser for the Fund.
(c) Cost of the services to be provided and profits to be realized by the
Adviser from the relationship with the Fund -- The Directors also considered the
anticipated cost of the services to be provided by the Adviser. Because the Fund
is newly formed, had not commenced operations as of July 11, 2005, and the
eventual aggregate amount of Fund assets was uncertain, the Adviser was not able
to provide the Directors with specific information concerning the cost of
services to be provided to the Fund and the expected profits to be realized by
the Adviser and its affiliates from their relationships with the Fund. The
Directors, however, did discuss with the Adviser its general level of
anticipated profitability and noted that the Adviser would provide the Directors
with profitability information from time to time after the Fund commences
operations.
(d) The extent to which economies of scale would be realized as the Fund grows
and whether fee levels would reflect such economies of scale -- Because the Fund
is newly formed and had not commenced operations as of July 11, 2005, and the
eventual aggregate amount of Fund assets was uncertain, the Adviser was not able
to provide the Directors with specific information concerning the extent to
which economies of scale would be realized as the Fund grows and whether fee
levels would reflect such economies of scale, if any. The Directors also
discussed the renewal requirements for investment advisory agreements, and
determined that they would revisit this issue no later than when they next
review the investment advisory fee after the initial two-year term of the
Management Agreement.
(e) Comparison of services to be rendered and fees to be paid to those under
other investment advisory contracts, such as contracts of the same and other
investment advisers or other clients -- As discussed above in (a) and (c), the
Directors compared both the services to be rendered and the fees to be paid
under the Management Agreement to other contracts of the Adviser and to other
contracts of other investment advisers with respect to other similar closed-end
registered investment companies. In particular, the Board of Directors evaluated
the Fund's proposed contractual fee rate for advisory and administrative
services as compared to the contractual fee rate of comparable closed-end funds
that employ covered call strategies, as defined by Lipper. The Board noted that
the BXM Fund (which has the same fee structure as the Fund) was excluded from
the Lipper fee comparison and was told that Lipper typically does not provide a
fund's directors with fee comparisons for similar funds that are advised by the
fund's adviser. The Board did not consider compensation paid with respect to
accounts other than registered investment companies since the Adviser only
utilizes the Fund's strategy in connection with registered investment companies.
In particular, the Board of Directors noted that the Fund's contractual advisory
fee rate at a common asset level placed it in the lowest quintile for the group
(that is, at least 80% of funds in the group had a contractual advisory fee that
was higher than the Fund's). The Board of Directors also considered that, both
including and excluding investment-related expenses and taxes, the Fund's
projected total expense ratio at a common asset level placed it in the highest
quintile for the group (that is, at least 80% of funds in the group had a total
expense ratio that was lower than the Fund's).
The Fund's Board of Directors then considered the potential direct and indirect
benefits to the Adviser and its affiliates from its relationship with the Fund,
including the underwriting arrangements relating to the initial distribution of
Fund shares. The Board of Directors concluded that the Fund would benefit from
those services.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 21
Disclosure of Investment Advisory Agreement (continued)
Conclusion
No single factor was determinative to the decision of the Board. Based on the
foregoing and such other matters as were deemed relevant, all of the Directors
who were present at the July 11, 2005 meeting, including all of the
non-interested Directors, concluded that the proposed advisory fee rate and
projected total expense ratio are reasonable in relation to the services to be
provided by the Adviser to the Fund, as well as the costs to be incurred and
benefits to be gained by the Adviser and its affiliates in providing such
services, including the investment advisory and administrative components. The
Board also found the proposed investment advisory fee to be reasonable in
comparison to the fees charged by advisers to other comparable funds of similar,
actual or anticipated size. As a result, all of the Directors present at the
July 11, 2005 meeting, including the non-interested Directors, approved the
Management Agreement. The non-interested Directors were represented by
independent counsel who assisted them in their deliberations.
Subadvisory Agreement
The Adviser has entered into a Subadvisory Agreement with the Subadviser,
pursuant to which the Adviser has delegated certain of its investment advisory
responsibilities to the Subadviser. The Subadvisory Agreement has been
structured to operate in the same manner as the Management Agreement and the
Subadviser will not be entitled to any fees unless and until the Adviser has
received the Management Fee from the Fund.
Unless earlier terminated as described below, the Subadvisory Agreement will
remain in effect for a period of two years from the date of execution and will
remain in effect from year to year thereafter if approved annually (a) by the
Board of Directors of the Fund or by a majority of the outstanding shares of the
Fund and (b) by a majority of the Directors who are not parties to such contract
or interested persons (as defined in the Investment Company Act) of any such
party. Such contract is not assignable and may be terminated without penalty on
60 days' written notice at the option of either party thereto or by the vote of
the stockholders of the Fund. The Subadvisory Agreement terminates automatically
if the Management Agreement terminates.
Initial Approval of Subadvisory Agreement
At a Board meeting held on July 11, 2005, all of the Directors present at the
meeting, including the non-interested Directors, approved the Subadvisory
Agreement for an initial two year term. In considering whether to approve the
Subadvisory Agreement, the Fund's Board of Directors reviewed an organizational
meeting book and other materials from counsel to the Fund, and, noting that the
Subadviser manages the BXM Fund's portfolio, took into account materials
previously provided to the Directors about the Subadviser and the services that
it provides the BXM Fund, which: (i) included information describing the
services of the Subadviser and the Subadviser's affiliates; (ii) included
information concerning the portfolio manager; and (iii) outlined the legal
duties of the Board under the Investment Company Act. As part of its review of
the selection of the Subadviser, the Board engaged in a detailed discussion with
the Adviser regarding its selection of the Subadviser, focusing on the benefits
of using the same subadviser as the BXM Fund. The Board considered the
Subadviser's experience in managing the portfolio of the BXM Fund and that the
Subadviser was one of only a few firms that could efficiently, in the Adviser's
judgment, implement both aspects of the Fund's investment strategy while abiding
by the Investment Company Act, tax and other constraints applicable to the Fund.
In particular, the Board also considered the following:
(a) The nature, extent and quality of services to be provided by the Subadviser
- -- The Directors reviewed the services that the Subadviser would provide to the
Fund. In connection with the investment subadvisory services to be provided to
the Fund, the Board of Directors discussed in detail with officers of the
Adviser the management of the Fund's investments in accordance with the Fund's
stated investment objective and policies and the types of transactions that
would be entered into on behalf of the Fund. The Board of Directors also
considered: the favorable history, reputation and background of the Subadviser
and the portfolio manager; the Board's experience with the Subadviser in
connection with the BXM Fund; and the Subadviser's experience in managing three
registered investment companies, including the BXM Fund, that employ covered
call writing strategies similar to that of the Fund and that together have net
assets in excess of $2.8 billion. The Board of Directors concluded that the
services to be provided to the Fund by the Subadviser under the Subadvisory
Agreement were likely to be of a high quality and would benefit the Fund.
(b) Investment performance of the Fund and the Subadviser's Quantitative
Investment Team -- Because the Fund is newly formed, the Directors did not
consider the investment performance of the Fund. The Board did consider the
performance history of the BXM Fund and noted that, although this performance
history was limited, the BXM Fund was successfully following its investment
strategy and, where applicable, tracking its benchmark indices (less fees and
22 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Disclosure of Investment Advisory Agreement (concluded)
expenses). The Board did not consider the Subadviser's performance with respect
to most other accounts it manages, because these accounts might have investment
objectives, policies or restrictions different from those of the Fund. The Board
further considered the experience, resources and strengths of the Subadviser,
its affiliates and the portfolio manager in managing the BXM Fund and other
investment companies that employ covered call waiting strategies similar to the
Fund. As a result, the Directors determined that the Subadviser would be an
appropriate subadviser for the Fund.
(c) Cost of the services to be provided and profits to be realized by the
Subadviser from the relationship with the Fund -- The Directors also considered
the anticipated cost of the services to be provided by the Subadviser. Because
the Fund is newly formed, the Board did not review and consider any information
relating to the Subadviser's anticipated profitability. Because the Board viewed
anticipated profitability as highly speculative given the early stage of the
relationship, the Board did not consider the anticipated profitability to the
Subadviser separately from its consideration of the appropriateness of the
overall fee being charged the Fund for the totality of services being provided.
(d) The extent to which economies of scale would be realized as the Fund grows
and whether fee levels would reflect such economies of scale -- Because the Fund
is newly formed and had not commenced operations as of July 11, 2005, and the
eventual aggregate amount of Fund assets was uncertain, the Adviser was not able
to provide the Directors with specific information concerning the extent to
which economies of scale would be realized as the Fund grows and whether fee
levels would reflect such economies of scale, if any. The Directors noted
generally that because the Subadviser implements similar investment strategies
for other funds, the Fund might benefit from any reduction in trading costs that
results from the increased scale of the Subadviser's trading operations. The
Directors also noted that the Subadviser's fees are paid by the Adviser out of
its fees and not by the Fund directly. The Directors also discussed the renewal
requirements for subadvisory agreements, and determined that they would revisit
this issue no later than when they next review the subadvisory fee after the
initial two-year term of the Subadvisory Agreement.
(e) Comparison of services to be rendered and fees to be paid to those under
other subadvisory contracts, such as contracts of the same and other investment
advisers or other clients -- The Board discussed the services that would be
rendered by the Subadviser, and, based on its experience overseeing other
subadvised funds, including the BXM Fund, determined that such services were
consistent with those provided by subadvisers generally and sufficient for the
management of the Fund. Taking into account the totality of the information and
materials provided to the Board as noted above, including the fact that the
subadvisory fee was negotiated with the Adviser on an arm's length basis, the
Board concluded that the subadvisory fee was reasonable for the services being
rendered. The Board also concluded that the subadvisory fees appeared reasonable
in relation to the fees charged by the Subadviser to other subadvised funds.
The Fund's Board of Directors then considered the potential direct and indirect
benefits to the Subadviser and its affiliates from its relationship with the
Fund, including the reputational benefits from managing the Fund. The Board of
Directors concluded that the potential benefits to the Subadviser were
consistent with those obtained by other subadvisers in similar types of
arrangements.
(f) Compliance Matters -- The Board of Directors also considered the
Subadviser's compliance history and compliance procedures, and took into account
its prior consideration of these matters in connection with the BXM Fund. The
Board discussed with the Fund's president his recent due diligence meeting with
executives of the Subadviser. The Fund's president reported that the information
provided to the Board several months previously in connection with the BXM Fund
remained accurate. Based on these discussions, the Board was of the view that
the Subadviser had articulated a commitment to maintaining its culture of
compliance.
Conclusion
No single factor was determinative to the decision of the Board. Based on the
foregoing and such other matters as were deemed relevant, all of the Directors
present at the July 11, 2005 meeting, including all of the non-interested
Directors, concluded that the proposed advisory fee rate and projected total
expense ratio are reasonable in relation to the services to be provided by the
Subadviser. As a result, all of the Directors who were present at the July 11,
2005 meeting, including the non-interested Directors, approved the Subadvisory
Agreement. The non-interested Directors were represented by independent counsel
who assisted them in their deliberations.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 23
Automatic Dividend Reinvestment Plan
How the Plan Works -- The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by The Bank of New York (the
"Plan Agent"). Under the Plan, whenever the Fund declares a dividend,
participants in the Plan will receive the equivalent in shares of Common Stock
of the Fund. The Plan Agent will acquire the shares for the participant's
account either (i) through receipt of additional unissued but authorized shares
of the Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
Common Stock on the open market on the New York Stock Exchange or elsewhere. If,
on the dividend payment date, the Fund's net asset value per share is equal to
or less than the market price per share plus estimated brokerage commissions (a
condition often referred to as a "market premium"), the Plan Agent will invest
the dividend amount in newly issued shares. If the Fund's net asset value per
share is greater than the market price per share (a condition often referred to
as a "market discount"), the Plan Agent will invest the dividend amount by
purchasing on the open market additional shares. If the Plan Agent is unable to
invest the full dividend amount in open market purchases, or if the market
discount shifts to a market premium during the purchase period, the Plan Agent
will invest any uninvested portion in newly issued shares. The shares acquired
are credited to each shareholder's account. The amount credited is determined by
dividing the dollar amount of the dividend by either (i) when the shares are
newly issued, the net asset value per share on the date the shares are issued or
(ii) when shares are purchased in the open market, the average purchase price
per share.
Participation in the Plan -- Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan, must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by writing to the Plan Agent.
Benefits of the Plan -- The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares acquired
pursuant to the Plan receive voting rights. In addition, if the market price
plus commissions of the Fund's shares is above the net asset value, participants
in the Plan will receive shares of the Fund for less than they could otherwise
purchase them and with a cash value greater than the value of any cash
distribution they would have received. However, there may not be enough shares
available in the market to make distributions in shares at prices below the net
asset value. Also, since the Fund does not redeem shares, the price on resale
may be more or less than the net asset value.
Plan Fees -- There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders will
pay a pro rata share of any such commissions.
Tax Implications -- The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that may
be payable (or required to be withheld) on such dividends. Therefore, income and
capital gains may still be realized even though shareholders do not receive
cash. Participation in the Plan generally will not effect the tax-exempt status
of exempt interest dividends paid by the Fund. If, when the Fund's shares are
trading at a market premium, the Fund issues shares pursuant to the Plan that
have a greater fair market value than the amount of cash reinvested, it is
possible that all or a portion of the discount from the market value (which may
not exceed 5% of the fair market value of the Fund's shares) could be viewed as
a taxable distribution. If the discount is viewed as a taxable distribution, it
is also possible that the taxable character of this discount would be allocable
to all the shareholders, including shareholders who do not participate in the
Plan. Thus, shareholders who do not participate in the Plan might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.
Contact Information -- All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at The Bank of
New York, Church Street Station, P.O. Box 11258, New York, NY 10286-1258,
Telephone: 800-432-8224.
24 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Officers and Directors
Number of IQ
Advisors-
Affiliate
Advised Funds Other Public
Position(s) Length of and Portfolios Directorships
Held with Time Overseen Held by
Name Address & Age Fund Served** Principal Occupation(s) During Past 5 Years By Director Director
====================================================================================================================================
Non-Interested Directors*
- ------------------------------------------------------------------------------------------------------------------------------------
Alan R. P.O. Box 9095 Director & 2005 to Vice-Chairman, Kissinger Associates, Inc., a 6 Hasbro, Inc.;
Batkin Princeton, NJ Chairman of present consulting firm, since 1990. Overseas Ship-
08543-9095 the Board holding Group,
Age: 61 Inc.; Cantel
Medical Corp.;
and Diamond
Offshore
Drilling, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Paul P.O. Box 9095 Director & 2005 to Professor, Columbia University Business School 6 None
Glasserman Princeton, NJ Chairman of present since 1991; Senior Vice Dean since July 2004.
08543-9095 the Audit
Age: 43 Committee
- ------------------------------------------------------------------------------------------------------------------------------------
Steven W. P.O. Box 9095 Director 2005 to Retired since August 2002; Managing Director, 6 None
Kohlhagen Princeton, NJ present Wachovia National Bank and its predecessors
08543-9095 (1992 - 2002).
Age: 58
- ------------------------------------------------------------------------------------------------------------------------------------
William J. P.O. Box 9095 Director & 2005 to Retired since November 2004; Chairman and 6 None
Rainer Princeton, NJ Chairman of present Chief Executive Officer, OneChicago, LLC, a
08543-9095 Nominating designated contract market (2001 to November
Age: 59 and 2004); Chairman, U.S. Commodity Futures
Corporate Trading Commission (1999 - 2001).
Governance
Committee
------------------------------------------------------------------------------------------------------------------------
* Each of the Non-Interested Directors is a member of the Audit Committee and the Nominating and Corporate
Governance Committee.
** Each Director will serve for a term of one year and until his successor is elected and qualifies, or his earlier
death, resignation or removal as provided in the Fund's Bylaws, charter or by statute.
====================================================================================================================================
Interested Director*
- ------------------------------------------------------------------------------------------------------------------------------------
Andrew J. P.O. Box 9095 Director 2005 to IQ Investment Advisors LLC, Chief Legal Officer 7 None
Donohue Princeton, NJ present since 2004; Global General Counsel, FAM and MLIM,
08543-9095 since March 2003; prior to 2003, General Counsel,
Age: 55 OppenheimerFunds, Inc.
------------------------------------------------------------------------------------------------------------------------
* Mr. Donohue is an Interested Director because of his position as an employee of the Advisor and its affiliates.
Mr. Donohue serves for a term of one year and until his successor is elected and qualifies, or his earlier death,
resignation or removal as provided by the Fund's Bylaws, charter or by statute.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 25
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Mitchell P.O. Box 9011 President 2005 to IQ Investment Advisors LLC, President since April 2004; MLPF&S, First Vice
M. Cox Princeton, NJ present President, Head of Global Private Client Market Investments & Origination since
08543-9011 2003; MLPF&S, First Vice President, Head of Structured Products Origination and
Age: 40 Sales (2001 - 2003); MLPF&S, Director, Head of Structured Products Origination
(1997 - 2001).
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Treasurer and Secretary since December 2004; First
Burke Princeton, NJ President, present Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
08543-9011 Treasurer Senior Vice President and Treasurer of Princeton Services since 1999 and
Age: 45 and Director since 2004; Vice President of FAMD since 1999; Vice President of MLIM
Secretary and FAM (1990 - 1997); Director of Taxation of MLIM (1999 - 2001).
- ------------------------------------------------------------------------------------------------------------------------------------
Andrew J. P.O. Box 9011 Chief Legal 2005 to IQ Investment Advisors LLC, Chief Legal Officer since December 2004; Global
Donohue Princeton, NJ Officer present General Counsel, FAM and MLIM, since March 2003; prior to 2003, General Counsel,
08543-9011 OppenheimerFunds, Inc.
Age: 55
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2005 to IQ Investment Advisors LLC, Chief Compliance Officer since 2004; Chief
Hiller Princeton, NJ Compliance present Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
08543-9011 Officer Chief Compliance Officer of MLIM (Americas Region) since 2004; Global Director
Age: 54 of Compliance at Morgan Stanley Investment Management (2000 - 2004); Managing
Director and Global Director of Compliance at Citigroup Asset Management (2000 -
2002); Chief Compliance Officer at Soros Fund Management in 2000; Chief
Compliance Officer at Prudential Financial (1995 - 2000); Senior Counsel in the
SEC's Division of Enforcement in Washington, D.C. (1990 - 1995).
- ------------------------------------------------------------------------------------------------------------------------------------
Justin C. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Vice President since 2005; MLPF&S, Director, Global
Ferri Princeton, NJ President present Private Client Market Investments & Origination since 2006; MLPF&S, Vice
08543-9011 President, Global Private Client Market Investments & Origination in 2005;
Age: 30 MLPF&S, Vice President, Head Global Private Client Rampart Equity Derivatives
(2004 - 2005); MLPF&S, Vice President, Co-Head Global Private Client Domestic
Analytic Development (2002 - 2004); mPower Advisors LLC, Vice President,
Quantitative Development (1999 - 2002).
- ------------------------------------------------------------------------------------------------------------------------------------
Jay M. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Vice President and Assistant Treasurer since 2005;
Fife Princeton, NJ President present MLIM, Director since 2000; MLPF&S, Director (2000) and Vice President
08543-9011 and (1997 - 2000).
Age: 35 Assistant
Treasurer
- ------------------------------------------------------------------------------------------------------------------------------------
Colleen R. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Vice President since 2005; MLPF&S, Director, Global
Rusch Princeton, NJ President present Private Client Market Investments & Origination since July 2005; MLIM, Director
08543-9011 and from January 2005 to July 2005; Vice President of MLIM (1998 - 2004).
Age: 38 Assistant
Secretary
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
The Bank of New York
101 Barclay Street -- 11 East
New York, NY 10286
NYSE Symbol
BEO
26 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005
Fundamental Periodic Repurchase Policy
The Board of Directors approved a fundamental policy whereby the Fund would
adopt an "interval fund" structure pursuant to Rule 23c-3 under the Investment
Company Act of 1940, as amended (the "1940 Act"). As an interval fund, the Fund
will make annual repurchase offers at net asset value (less repurchase fee not
to exceed 2%) to all Fund shareholders. The percentage of outstanding shares
that the Fund can repurchase in each offer will be established by the Fund's
Board of Directors shortly before the commencement of each offer, and will be
between 5% and 25% of the Fund's then outstanding shares.
The Fund has adopted the following fundamental policy regarding the periodic
repurchases:
a) The Fund will make offers to repurchase its shares at annual (approximately
once every 13 months) intervals pursuant to Rule 23c-3 under the 1940 Act
("Offers"). The Board of Directors may place such conditions and limitations on
an Offer as may be permitted under Rule 23c-3.
b) By reference to the maturity date of the swap contracts that comprise the
Fund's leveraging transactions (as described in the Fund's prospectus) for each
annual period, the repurchase request deadline, by which the Fund must receive
repurchase requests submitted by shareholders in response to an Offer, will be
the fourteenth day prior to such maturity date; provided, that in the event that
such day is not a business day, the repurchase request deadline will be the
business day subsequent to the fourteenth day prior to the maturity date of the
swap contracts (the "Repurchase Request Deadline").
c) The maximum number of days between a Repurchase Request Deadline and the next
repurchase pricing date will be fourteen days; provided that if the fourteenth
day after a Repurchase Request Deadline is not a business day, the repurchase
pricing date shall be the next business day (the "Repurchase Pricing Date").
d) Offers may be suspended or postponed under certain circumstances, as provided
for in Rule 23c-3.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
Contact Information
For more information regarding the Fund, please visit www.IQIAFunds.com or
contact us at 1 (877) 449.4742.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2005 27
[LOGO] IQ
INVESTMENT
ADVISORS www.IQIAFunds.com
Enhanced S&P 500(R) Covered Call Fund Inc. seeks to provide leveraged returns on
the CBOE S&P 500(R) BuyWrite Index(SM) less fees and expenses.
This report, including the financial information herein, is transmitted to
shareholders of Enhanced S&P 500(R) Covered Call Fund Inc. for their
information. It is not a prospectus. Past performance results shown in this
report should not be considered a representation of future performance.
Statements and other information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge at
www.IQIAFunds.com/proxyvoting.asp or upon request by calling toll-free
1-877-449-4742 or through the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies relating to
securities held in the Fund's portfolio during the most recent 12-month period
ended June 30 is available (1) at www.IQIAFunds.com/proxyvoting.asp; and (2) on
the Securities and Exchange Commission's Web site at http://www.sec.gov.
Enhanced S&P 500(R) Covered Call Fund Inc.
Box 9011
Princeton, NJ 08543-9011
#IQBEO -- 12/05
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-877-449-4742.
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Alan R.
Batkin and (2) Steven W. Kohlhagen.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending December 31, 2005 - $30,600
Fiscal Year Ending December 31, 2004 - N/A
(b) Audit-Related Fees - Fiscal Year Ending December 31, 2005 - $7,200
Fiscal Year Ending December 31, 2004 - N/A
The nature of the services include assurance and related services
reasonably related to the performance of the audit of financial
statements not included in Audit Fees.
(c) Tax Fees - Fiscal Year Ending December 31, 2005 - $6,500
Fiscal Year Ending December 31, 2004 - N/A
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending December 31, 2005 - $0
Fiscal Year Ending December 31, 2004 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending December 31, 2005 - $5,034,771
Fiscal Year Ending December 31, 2004 - N/A
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $919,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
Alan R. Batkin
Steven W. Kohlhagen
Paul Glasserman
William J. Rainer
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Proxy Voting Policies and Procedures
Each Fund's Board of Directors has delegated to IQ Investment Advisors
LLC, and/or any sub-investment adviser approved by the Board of Directors (the
"Investment Adviser") authority to vote all proxies relating to the Fund's
portfolio securities. The Investment Adviser has adopted policies and procedures
("Proxy Voting Procedures") with respect to the voting of proxies related to the
portfolio securities held in the account of one or more of its clients,
including a Fund. Pursuant to these Proxy Voting Procedures, the Investment
Adviser's primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its shareholders, and to
act in a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers the
interests of its clients, including the Funds, and not the interests of the
Investment Adviser, when voting proxies and that real (or perceived) material
conflicts that may arise between the Investment Adviser's interest and those of
the Investment Adviser's clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The Committee is
comprised of the Investment Adviser's Chief Investment Officer (the "CIO"), one
or more other senior investment professionals appointed by the CIO, portfolio
managers and investment analysts appointed by the CIO and any other personnel
the CIO deems appropriate. The Committee will also include two non-voting
representatives from the Investment Adviser's Legal department appointed by the
Investment Adviser's General Counsel. The Committee's membership shall be
limited to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research responsibilities for
the Investment Adviser's affiliates may serve as a member of the Committee or
participate in its decision making (except to the extent such person is asked by
the Committee to present information to the Committee, on the same basis as
other interested knowledgeable parties not affiliated with the Investment
Adviser might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes are
consistent with the best interests of those clients and are free from
unwarranted and inappropriate influences. The Committee establishes general
proxy voting
policies for the Investment Adviser and is responsible for determining how those
policies are applied to specific proxy votes, in light of each issuer's unique
structure, management, strategic options and, in certain circumstances, probable
economic and other anticipated consequences of alternate actions. In so doing,
the Committee may determine to vote a particular proxy in a manner contrary to
its generally stated policies. In addition, the Committee will be responsible
for ensuring that all reporting and recordkeeping requirements related to proxy
voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not to adopt
a specific voting policy applicable to that issue. The Investment Adviser
believes that certain proxy voting issues require investment analysis -- such as
approval of mergers and other significant corporate transactions -- akin to
investment decisions, and are, therefore, not suitable for general guidelines.
The Committee may elect to adopt a common position for the Investment Adviser on
certain proxy votes that are akin to investment decisions, or determine to
permit the portfolio manager to make individual decisions on how best to
maximize economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that the
Investment Adviser will generally seek to vote proxies over which the Investment
Adviser exercises voting authority in a uniform manner for all the Investment
Adviser's clients, the Committee, in conjunction with a Fund's portfolio
manager, may determine that the Fund's specific circumstances require that its
proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an independent
adviser that specializes in providing a variety of fiduciary-level proxy-related
services to institutional investment managers, plan sponsors, custodians,
consultants, and other institutional investors. The services provided to the
Investment Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also assist the
Fund in fulfilling its reporting and recordkeeping obligations under the
Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For instance,
under the Proxy Voting Procedures, the Investment Adviser generally will not
seek to vote proxies related to portfolio securities that are on loan, although
it may do so under certain circumstances. In addition, the Investment Adviser
will vote proxies related to securities of foreign issuers only on a best
efforts basis and may elect not to vote at all in certain countries where the
Committee determines that the costs associated with voting generally outweigh
the benefits. The Committee may at any time override these general policies if
it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote
proxies in respect of an issuer where an affiliate of the Investment Adviser
(each, an "Affiliate"), or a money management or other client of the Investment
Adviser (each, a "Client") is involved. The Proxy Voting Procedures and the
Investment Adviser's adherence to those procedures are designed to address such
conflicts of interest. The Committee intends to strictly adhere to the Proxy
Voting Procedures in all proxy matters, including matters involving Affiliates
and Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent fiduciary,
the powers of the Committee shall pass to a subcommittee, appointed by the CIO
(with advice from the Secretary of the Committee), consisting solely of
Committee members selected by the CIO. The CIO shall appoint to the
subcommittee, where appropriate, only persons whose job responsibilities do not
include contact with the Client and whose job evaluations would not be affected
by the Investment Adviser's relationship with the Client (or failure to retain
such relationship). The subcommittee shall determine whether and how to vote all
proxies on behalf of the Investment Adviser's clients or, if the proxy matter
is, in their judgment,
akin to an investment decision, to defer to the applicable portfolio managers,
provided that, if the subcommittee determines to alter the Investment Adviser's
normal voting guidelines or, on matters where the Investment Adviser's policy is
case-by-case, does not follow the voting recommendation of any proxy voting
service or other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies relating to the
Client may be voted unless the Secretary, or in the Secretary's absence, the
Assistant Secretary of the Committee concurs that the subcommittee's
determination is consistent with the Investment Adviser's fiduciary duties.
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring proxy
issues that are not expected to involve unusual circumstances. These policies
are guidelines only, and the Investment Adviser may elect to vote differently
from the recommendation set forth in a voting guideline if the Committee
determines that it is in a Fund's best interest to do so. In addition, the
guidelines may be reviewed at any time upon the request of a Committee member
and may be amended or deleted upon the vote of a majority of Committee members
present at a Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors
of issuers other than investment companies. As a general
matter, the Committee believes that a company's Board of
Directors (rather than shareholders) is most likely to have
access to important, nonpublic information regarding a
company's business and prospects, and is therefore
best-positioned to set corporate policy and oversee
management. The Committee, therefore, believes that the
foundation of good corporate governance is the election of
qualified, independent corporate directors who are likely to
diligently represent the interests of shareholders and oversee
management of the corporation in a manner that will seek to
maximize shareholder value over time. In individual cases, the
Committee may look at a nominee's history of representing
shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the
interests of shareholders and provide an independent view on
the propriety of financial reporting decisions of corporate
management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the
Committee may look at an auditors' history of representing
shareholder interests as auditor of other companies, to the
extent the Committee deems relevant.
o Proposals related to management compensation and employee
benefits. As a general matter, the Committee favors disclosure
of an issuer's compensation and benefit policies and opposes
excessive compensation, but believes that compensation matters
are normally best determined by an issuer's board of
directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set
arbitrary restrictions on compensation or benefits will,
therefore, generally not be supported.
o Proposals related to requests, principally from management,
for approval of amendments that would alter an issuer's
capital structure. As a general matter, the Committee will
support requests that enhance the rights of common
shareholders and oppose requests that appear to be
unreasonably dilutive.
o Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the
Committee opposes poison pill provisions.
o Routine proposals related to requests regarding the
formalities of corporate meetings.
o Proposals related to proxy issues associated solely with
holdings of investment company shares. As with other types of
companies, the Committee believes that a fund's Board of
Directors (rather than its shareholders) is best-positioned to
set fund policy and oversee management. However, the Committee
opposes granting Boards of Directors authority over certain
matters, such as changes
to a fund's investment objective that the Investment Company
Act envisions will be approved directly by shareholders.
o Proposals related to limiting corporate conduct in some manner
that relates to the shareholder's environmental or social
concerns. The Committee generally believes that annual
shareholder meetings are inappropriate forums for discussion
of larger social issues, and opposes shareholder resolutions
"micromanaging" corporate conduct or requesting release of
information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the
Committee is generally supportive of proposals to require
corporate disclosure of matters that seem relevant and
material to the economic interests of shareholders, the
Committee is generally not supportive of proposals to require
disclosure of corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of December 31, 2005.
(a)(1) Messrs. Greg Tournant and Stephen Bond-Nelson are jointly
responsible for the day-to-day management of the registrant's
portfolio. Mr. Tournant is currently co-portfolio manager for the Fund
and since 2004 has been the portfolio manager for several other funds.
From 2001 to 2003, he was a Senior Research Analyst at the Subadviser.
Prior to joining the Subadviser in 2001, Mr. Tournant was a Senior
Research Analyst at Eagle Asset Management, a division of Raymond James
Financial from 1998 to 2001. Before that, Mr. Tournant spent three
years as a strategy consultant for McKinsey & Co. and two years as a
research analyst for Eagle Asset Management. Mr. Tournant has over ten
years of investment management experience. As of December 31, 2005, Mr.
Stephen Bond-Nelson is a co-portfolio manager for the Fund. From 1999
to 2004, Stephen was a Senior Research Analyst at PEA Capital LLC.
Prior to joining the firm, he was a Senior Research Analyst at
Prudential Mutual Funds. He has over thirteen years of investment
management experience.
(a)(2) As of December 31, 2005:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
------------------- -------------
Greg Tournant 6 0 3 0 0 0
$ 2,849,883,976 $ 0 $ 21,072,483 $ 0 $ 0 $ 0
Stephen
Bond-Nelson 2 0 0 0 0 0
$ 376,587,158 $ 0 $ 0 $ 0 $ 0 $ 0
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities
with respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser and its affiliates, including other
client accounts managed by the Fund's portfolio management team.
Investment decisions for the Fund and other clients are made with a
view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally.
Frequently, a particular security may be bought or sold for only one
client or in different amounts and at different times for more than one
but less than all clients. Likewise, because clients of the Adviser and
its affiliates may have differing investment strategies, a particular
security may be bought for one or more clients when one or more other
clients are selling the security. The investment results for the Fund
may differ from the results achieved by other clients of the Adviser
and its affiliates. In addition, purchases or sales of the same
security may be made for two or more clients on the same day. In such
event, such transactions will be allocated among the clients in a
manner believed by the Adviser and its affiliates to be equitable to
each. The Adviser will not determine allocations based on whether it
receives a performance-based fee from the client. In some cases, the
allocation procedure could have an adverse effect on the price or
amount of the securities purchased or sold by the Fund. Purchase and
sale orders for the Fund may be combined with those of other clients of
the Adviser and its affiliates in the interest of achieving the most
favorable net results to the Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a
portfolio manager will need to divide his or her time and attention
among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise
where (i) the Adviser may have an incentive, such as a
performance-based fee, in managing one account and not with respect to
other accounts it manages or (ii) where a member of the Fund's
portfolio management team owns an interest in one fund or account he or
she manages and not another.
MLIM has adopted policies and procedures designed to address conflicts
of interest its portfolio managers may face.
(a)(3) As of December 31, 2005:
Compensation. Mr. Tournant's and Mr. Bond-Nelson's compensation
consists of the following elements:
Base salary. Each portfolio manager is paid a fixed base salary that is
set on an annual basis at a level determined solely by the Subadviser.
In setting the base salary for portfolio managers, the Subadviser's
intention is to be competitive in light of the particular portfolio
manager's experience and responsibilities. The Subadviser evaluates
competitive market compensation by reviewing compensation survey
results conducted by an independent third party of investment industry
compensation.
Annual bonus. Each portfolio manager is also eligible to receive an
annual bonus. The bonus forms the majority of Mr. Tournant's annual
cash compensation and is based on both the Subadviser's revenues and
assets under management, in addition to the performance of their
respective accounts on a pre-tax basis relative to other portfolio
managers with the same investment style. For these purposes, no
particular index or benchmark is utilized. The Subadviser believes that
this incentive aligns the interests of each portfolio manager and their
accounts, the portfolios of which they manage.
Participation in group retirement plans. Eligible employees may also
participate in a non-qualified deferred compensation plan, which
affords participating employees of the Sub-Advisor the tax benefits of
deferring the receipt of a portion of their cash compensation until
such time as designated by the non-qualified deferred compensation
plan.
Material Conflicts of Interest. The Subadviser believes that each
portfolio manager's simultaneous management of the Fund and other
accounts may present actual or apparent conflicts of interest with
respect to the allocation and aggregation of securities orders placed
on behalf of the Fund and the other accounts. To address these
conflicts, the Subadviser has adopted a Trade Allocation Policy that is
designed to ensure fair and equitable allocation of investment
opportunities among accounts over time and to ensure compliance with
applicable regulatory requirements. All accounts are to be treated in a
non-preferential manner, such that allocations are not based upon
account performance, fee structure or preference of the portfolio
manager. Under the Subadviser's Trade Allocation Policy, pre-order
indications received by the Subadviser's trading desk involving the
same investment style will be aggregated, as appropriate, consistent
with the Subadviser's obligation to seek best execution for its clients
and to reduce brokerage commissions or other costs. While circumstances
may require separate transactions, the Subadviser's policy is to,
whenever possible, aggregate trades to minimize transactional costs and
inconsistencies and to ensure that every account receives equal
treatment with regard to purchases of portfolio investments.
(a)(4) Beneficial Ownership of Securities. As of December 31, 2005, Mr.
Tournant does not beneficially own any stock issued by the Fund.
As of December 31, 2005, Mr. Bond-Nelson does not beneficially
own any stock issued by the Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Enhanced S&P 500 Covered Call Fund Inc.
By: /s/ Mitchell M. Cox
-------------------------------
Mitchell M. Cox,
Chief Executive Officer of
Enhanced S&P 500 Covered Call Fund Inc.
Date: February 21, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Mitchell M. Cox
-------------------------------
Mitchell M. Cox,
Chief Executive Officer of
Enhanced S&P 500 Covered Call Fund Inc.
Date: February 21, 2006
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
Enhanced S&P 500 Covered Call Fund Inc.
Date: February 21, 2006