UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21787
Name of Fund: Enhanced S&P 500(R) 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(R) 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: 12/31/06
Date of reporting period: 01/01/06 - 06/30/06
Item 1 - Report to Stockholders
Enhanced S&P 500(R)
Covered Call Fund Inc.
Semi-Annual Report
June 30, 2006
[LOGO] IQ INVESTMENT [LOGO] PEA Capital
ADVISORS A company of Allianz Global Investors
Enhanced S&P 500(R) Covered Call Fund Inc.
Proxy Results
During the six-month period ended June 30, 2006, Enhanced S&P 500(R) Covered
Call Fund Inc.'s shareholders voted on the following proposal. The proposal was
approved at a shareholders' meeting on April 27, 2006. A description of the
proposal and number of shares voted are as follows:
- ---------------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- ---------------------------------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors: Alan R. Batkin 8,689,985 167,200
Andrew J. Donohue 8,696,585 160,600
Paul Glasserman 8,696,085 161,100
Steven W. Kohlhagen 8,695,053 162,132
William J. Rainer 8,696,085 161,100
- ---------------------------------------------------------------------------------------------------------------
Andrew J. Donohue gave notice to the Fund and the Advisor of his intention to
resign his positions as a Director and Officer of the Fund and as an Officer of
the Advisor in May 2006 in order to assume the role of director of the
Securities and Exchange Commission's Division of Investment Management.
Officers and Directors
Alan R. Batkin, Director and Chairman of the Board
Paul Glasserman, Director and Chairman of the Audit Committee
Stephen W. Kohlhagen, Director
William J. Rainer, Director and Chairman of the Nominating and Corporate
Governance Committee
Mitchell M. Cox, President
Donald C. Burke, Vice President, Treasurer and Secretary
Martin G. Byrne, Chief Legal Officer
Jeffrey Hiller, Chief Compliance Officer
Justin C. Ferri, Vice President
Jay M. Fife, Vice President
Colleen R. Rusch, Vice President
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
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.
Contact Information
For more information regarding the Fund, please visit www.IQIAFunds.com or
contact us at 1 (877) 449.4742.
2 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
Portfolio Information
As of June 30, 2006
Percent of
Ten Largest Equity Holdings Net Assets
- --------------------------------------------------------------------------------
Exxon Mobil Corp. .......................................... 2.6%
General Electric Co. ....................................... 2.4
Citigroup, Inc. ............................................ 1.7
Bank of America Corp. ...................................... 1.5
Microsoft Corp. ............................................ 1.4
The Procter & Gamble Co. ................................... 1.3
Pfizer, Inc. ............................................... 1.2
Johnson & Johnson .......................................... 1.2
Altria Group, Inc. ......................................... 1.1
American International Group, Inc. ......................... 1.1
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
- --------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels ................................ 6.5%
Pharmaceuticals ............................................ 5.1
Diversified Financial Services ............................. 4.3
Insurance .................................................. 3.7
Commercial Banks ........................................... 3.4
- --------------------------------------------------------------------------------
Percent of
S&P 500 Index Sector Weightings Total Investments
- --------------------------------------------------------------------------------
Financials ................................................. 17.0%
Information Technology ..................................... 11.8
Health Care ................................................ 9.7
Industrials ................................................ 9.3
Consumer Discretionary ..................................... 8.1
Energy ..................................................... 8.1
Consumer Staples ........................................... 7.7
Telecommunication Services ................................. 2.7
Utilities .................................................. 2.7
Materials .................................................. 2.4
Other* ..................................................... 20.5
- --------------------------------------------------------------------------------
* Includes portfolio holdings in options written, U.S. Government
Obligations and short-term investments.
For Fund compliance purposes, the Fund's industry and sector
classifications refer to 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.
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.
ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006 3
A Discussion With Your Fund's Portfolio Manager
We are pleased to provide you with this shareholder report for Enhanced
S&P 500(R) Covered Call Fund Inc. While the Fund is advised by IQ Investment
Advisors LLC, the following discussion is provided by PEA Capital LLC, the
Fund's subadviser.
How did the Fund perform during the six-month period?
The investment objective of 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(SM) Index"), less fees and
expenses. For the six-month period ended June 30, 2006, the Common Stock of the
Fund had a total investment return of +5.45%, based on a change in per share net
asset value from $18.37 to $18.23, assuming reinvestment of all distributions.
The Fund's unmanaged benchmark, the BXM Index, returned +4.89% 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 six-month period.
During the six-month period, the broad market produced positive single-digit
returns across the major domestic equity indexes, with the exception of the
technology-heavy Nasdaq 100 Index, which produced slightly negative returns.
There were, however, periods of extreme uncertainty in the marketplace due to
concerns about the significant growth in energy and commodity prices and their
potential impact on inflation measures. Concerns that inflation would rise more
quickly than expected left the Federal Reserve Board in the tenuous situation of
potentially needing to raise interest rates more quickly than expected, just as
the economy appeared to be slowing. As a result, the market had a sell-off of
almost 8% during the second quarter, with a rally of approximately 3% in the
last two weeks of the quarter. Volatility (as measured by the CBOE Volatility
Index(R) ("VIX(R)"), a broadly accepted measure of the anticipated volatility of
the Standard & Poor's 500(R) Index ("S&P 500 Index") experienced one of its
largest spikes in history, more than doubling during the sell-off and fading as
the Federal Reserve Board made comments indicating that inflation was under
control and that their multi-year rate increase program may be coming to an end.
Because higher volatility results in higher option prices, all else being equal,
we were able to generate larger option premiums from our monthly option sales
during May and June.
4 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
How did you manage the portfolio during the six-month period?
The Fund owns a portfolio of stocks invested to substantially replicate the S&P
500 Index and/or other investments that have economic characteristics similar to
the securities that comprise that 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. Since the options are written at the
money, any net upward move for the S&P 500 Index 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 matches its
weight in the S&P 500 Index. As an additional layer, the Fund has also entered
into a swap agreement to deliver additional exposure to the BXM Index.
How would you characterize the Fund's position at the close of the six-month
period?
We believe the Fund is appropriately positioned to deliver its stated goal of
providing leveraged returns on the BXM Index. 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
July 14, 2006
"CBOE"," Volatility Index" and "VIX" are registered trademarks and "BXM" is a
service mark 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. JUNE 30, 2006 5
Schedule of Investments
Shares
Industry Common Stocks Held Value
===================================================================================
Aerospace & Defense--1.9%
Boeing Co. 9,271 $ 759,388
General Dynamics Corp. 4,681 306,418
Goodrich Corp. 1,437 57,897
Honeywell International, Inc. 9,596 386,719
L-3 Communications Holdings, Inc. 1,415 106,719
Lockheed Martin Corp. 4,106 294,564
Northrop Grumman Corp. 3,986 255,343
Raytheon Co. 5,174 230,605
Rockwell Collins, Inc. 1,987 111,014
United Technologies Corp. 11,721 743,346
------------
3,252,013
- -----------------------------------------------------------------------------------
Air Freight & Logistics--0.9%
FedEx Corp. 3,538 413,451
United Parcel Service, Inc. Class B 12,576 1,035,382
------------
1,448,833
- -----------------------------------------------------------------------------------
Airlines--0.1%
Southwest Airlines Co. 8,189 134,054
- -----------------------------------------------------------------------------------
Auto Components--0.1%
Cooper Tire & Rubber Co. 712 7,932
The Goodyear Tire & Rubber Co. (a) 2,055 22,810
Johnson Controls, Inc. 2,261 185,899
------------
216,641
- -----------------------------------------------------------------------------------
Automobiles--0.3%
Ford Motor Co. 21,751 150,734
General Motors Corp. 6,557 195,333
Harley-Davidson, Inc. 3,115 170,982
------------
517,049
- -----------------------------------------------------------------------------------
Beverages--1.7%
Anheuser-Busch Cos., Inc. 8,960 408,486
Brown-Forman Corp. Class B 960 68,592
The Coca-Cola Co. 23,763 1,022,284
Coca-Cola Enterprises, Inc. 3,519 71,682
Constellation Brands, Inc. Class A (a) 2,306 57,650
Molson Coors Brewing Co. Class B 668 45,344
Pepsi Bottling Group, Inc. 1,555 49,993
PepsiCo, Inc. 19,160 1,150,366
------------
2,874,397
- -----------------------------------------------------------------------------------
Biotechnology--1.0%
Amgen, Inc. (a) 13,673 891,890
Biogen Idec, Inc. (a) 3,988 184,764
Genzyme Corp. (a) 3,018 184,249
Gilead Sciences, Inc. (a) 5,276 312,128
MedImmune, Inc. (a) 2,885 78,183
------------
1,651,214
- -----------------------------------------------------------------------------------
Building Products--0.1%
American Standard Cos., Inc. 2,051 88,747
Masco Corp. 4,606 136,522
------------
225,269
- -----------------------------------------------------------------------------------
Capital Markets--2.7%
Ameriprise Financial, Inc. 2,834 126,595
The Bank of New York Co., Inc. 8,949 288,158
The Bear Stearns Cos., Inc. 1,399 195,972
The Charles Schwab Corp. 11,963 191,169
E*Trade Financial Corp. (a) 4,944 112,822
Federated Investors, Inc. Class B 979 30,838
Franklin Resources, Inc. 1,779 154,435
Goldman Sachs Group, Inc. 5,010 753,654
Janus Capital Group, Inc. 2,454 43,927
Legg Mason, Inc. 1,532 152,465
Lehman Brothers Holdings, Inc. 6,208 404,451
Mellon Financial Corp. 4,795 165,092
Merrill Lynch & Co., Inc. (b) 10,713 745,196
Morgan Stanley 12,419 785,005
Northern Trust Corp. 2,148 118,784
State Street Corp. 3,854 223,879
T. Rowe Price Group, Inc. 3,080 116,455
------------
4,608,897
- -----------------------------------------------------------------------------------
Chemicals--1.2%
Air Products & Chemicals, Inc. 2,600 166,192
Ashland, Inc. 826 55,094
The Dow Chemical Co. 11,150 435,184
E.I. du Pont de Nemours & Co. 10,681 444,330
Eastman Chemical Co. 948 51,192
Ecolab, Inc. 2,111 85,664
Hercules, Inc. (a) 1,317 20,097
International Flavors & Fragrances, Inc. 917 32,315
Monsanto Co. 3,137 264,104
PPG Industries, Inc. 1,920 126,720
Praxair, Inc. 3,747 202,338
Rohm & Haas Co. 1,685 84,452
Sigma-Aldrich Corp. 773 56,151
------------
2,023,833
- -----------------------------------------------------------------------------------
Commercial Banks--3.4%
AmSouth Bancorp 4,012 106,117
BB&T Corp. 6,377 265,219
Comerica, Inc. 1,881 97,793
Commerce Bancorp, Inc. 2,135 76,155
Compass Bancshares, Inc. 1,498 83,289
Fifth Third Bancorp 6,453 238,438
First Horizon National Corp. 1,429 57,446
Huntington Bancshares, Inc. 2,844 67,062
KeyCorp 4,686 167,196
M&T Bank Corp. 918 108,251
Marshall & Ilsley Corp. 2,613 119,519
National City Corp. 6,290 227,635
North Fork Bancorp., Inc. 5,393 162,707
PNC Financial Services Group, Inc. 3,433 240,894
Regions Financial Corp. 5,288 175,139
SunTrust Banks, Inc. 4,216 321,512
Synovus Financial Corp. 3,742 100,211
U.S. Bancorp 20,637 637,271
Wachovia Corp. 18,649 1,008,538
Wells Fargo & Co. 19,479 1,306,651
Zions Bancorp. 1,230 95,866
------------
5,662,909
- -----------------------------------------------------------------------------------
6 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Commercial Services & Supplies--0.6%
Allied Waste Industries, Inc. (a) 2,804 $ 31,853
Avery Dennison Corp. 1,277 74,143
Cendant Corp. 11,597 188,915
Cintas Corp. 1,599 63,576
Equifax, Inc. 1,491 51,201
Monster Worldwide, Inc. (a) 1,488 63,478
Pitney Bowes, Inc. 2,574 106,306
RR Donnelley & Sons Co. 2,506 80,067
Robert Half International, Inc. 1,992 83,664
Waste Management, Inc. 6,321 226,797
------------
970,000
- -----------------------------------------------------------------------------------
Communications Equipment--2.2%
ADC Telecommunications, Inc. (a) 1,359 22,913
Andrew Corp. (a) 1,851 16,400
Avaya, Inc. (a) 4,765 54,416
Ciena Corp. (a) 6,814 32,775
Cisco Systems, Inc. (a) 70,779 1,382,314
Comverse Technology, Inc. (a) 2,343 46,321
Corning, Inc. (a) 18,058 436,823
JDS Uniphase Corp. (a) 19,535 49,424
Juniper Networks, Inc. (a) 6,559 104,878
Lucent Technologies, Inc. (a) 51,942 125,700
Motorola, Inc. 28,637 577,036
QUALCOMM, Inc. 19,434 778,720
Tellabs, Inc. (a) 5,196 69,159
------------
3,696,879
- -----------------------------------------------------------------------------------
Computers & Peripherals--2.7%
Apple Computer, Inc. (a) 9,861 563,260
Dell, Inc. (a) 26,338 642,911
EMC Corp. (a) 27,416 300,754
Gateway, Inc. (a) 3,064 5,822
Hewlett-Packard Co. 32,343 1,024,626
International Business Machines Corp. 17,977 1,380,993
Lexmark International, Inc. Class A (a) 1,222 68,224
NCR Corp. (a) 2,110 77,310
Network Appliance, Inc. (a) 4,338 153,131
QLogic Corp. (a) 1,870 32,239
SanDisk Corp. (a) 2,265 115,470
Sun Microsystems, Inc. (a) 40,553 168,295
------------
4,533,035
- -----------------------------------------------------------------------------------
Construction & Engineering--0.1%
Fluor Corp. 1,015 94,324
- -----------------------------------------------------------------------------------
Construction Materials--0.1%
Vulcan Materials Co. 1,167 91,026
- -----------------------------------------------------------------------------------
Consumer Finance--0.8%
American Express Co. 14,306 761,365
Capital One Financial Corp. 3,513 300,186
SLM Corp. 4,763 252,058
------------
1,313,609
- -----------------------------------------------------------------------------------
Containers & Packaging--0.1%
Ball Corp. 1,214 44,967
Bemis Co. 1,217 37,265
Pactiv Corp. (a) 1,637 40,516
Sealed Air Corp. 946 49,268
Temple-Inland, Inc. 1,281 54,916
------------
226,932
- -----------------------------------------------------------------------------------
Distributors--0.0%
Genuine Parts Co. 2,003 83,445
- -----------------------------------------------------------------------------------
Diversified Consumer Services--0.1%
Apollo Group, Inc. Class A (a) 1,625 83,964
H&R Block, Inc. 3,808 90,859
------------
174,823
- -----------------------------------------------------------------------------------
Diversified Financial Services--4.3%
Bank of America Corp. 52,910 2,544,971
CIT Group, Inc. 2,308 120,685
Citigroup, Inc. 57,638 2,780,457
JPMorgan Chase & Co. 40,285 1,691,970
Moody's Corp. 2,832 154,231
------------
7,292,314
- -----------------------------------------------------------------------------------
Diversified Telecommunication Services--2.1%
AT&T, Inc. 45,077 1,257,198
BellSouth Corp. 20,971 759,150
CenturyTel, Inc. 1,347 50,041
Citizens Communications Co. 3,768 49,172
Embarq Corp. (a) 1,728 70,831
Qwest Communications International
Inc. (a) 18,149 146,825
Verizon Communications, Inc. 33,823 1,132,732
------------
3,465,949
- -----------------------------------------------------------------------------------
Electric Utilities--1.2%
Allegheny Energy, Inc. (a) 1,894 70,211
American Electric Power Co., Inc. 4,567 156,420
Edison International 3,778 147,342
Entergy Corp. 2,411 170,578
Exelon Corp. 7,751 440,489
FPL Group, Inc. 4,687 193,948
FirstEnergy Corp. 3,824 207,299
PPL Corp. 4,412 142,508
Pinnacle West Capital Corp. 1,146 45,737
Progress Energy, Inc. 2,933 125,738
The Southern Co. 8,604 275,758
------------
1,976,028
- -----------------------------------------------------------------------------------
Electrical Equipment--0.4%
American Power Conversion Corp. 1,967 38,337
Cooper Industries Ltd. Class A 1,071 99,517
Emerson Electric Co. 4,760 398,936
Rockwell Automation, Inc. 2,058 148,197
------------
684,987
- -----------------------------------------------------------------------------------
Electronic Equipment & Instruments--0.2%
Agilent Technologies, Inc. (a) 4,938 155,843
Jabil Circuit, Inc. 2,065 52,864
Molex, Inc. 1,646 55,256
Sanmina-SCI Corp. (a) 6,178 28,419
Solectron Corp. (a) 10,602 36,259
Symbol Technologies, Inc. 2,942 31,744
Tektronix, Inc. 970 28,537
------------
388,922
- -----------------------------------------------------------------------------------
ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006 7
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Energy Equipment & Services--1.6%
BJ Services Co. 3,728 $ 138,905
Baker Hughes, Inc. 3,955 323,717
Halliburton Co. 5,985 444,147
Nabors Industries Ltd. (a) 3,600 121,644
National Oilwell Varco, Inc. (a) 2,029 128,476
Noble Corp. 1,597 118,849
Rowan Cos., Inc. 1,278 45,484
Schlumberger Ltd. 13,680 890,705
Transocean, Inc. (a) 3,766 302,485
Weatherford International Ltd. (a) 4,043 200,614
------------
2,715,026
- -----------------------------------------------------------------------------------
Food & Staples Retailing--1.9%
CVS Corp. 9,488 291,282
Costco Wholesale Corp. 5,467 312,330
The Kroger Co. 8,389 183,384
SUPERVALU Inc. 2,371 72,790
SYSCO Corp. 7,172 219,176
Safeway, Inc. 5,218 135,668
Wal-Mart Stores, Inc. 28,990 1,396,448
Walgreen Co. 11,712 525,166
Whole Foods Market, Inc. 1,624 104,975
------------
3,241,219
- -----------------------------------------------------------------------------------
Food Products--0.9%
Archer-Daniels-Midland Co. 7,587 313,191
Campbell Soup Co. 2,148 79,712
ConAgra Foods, Inc. 6,023 133,169
Dean Foods Co. (a) 1,577 58,649
General Mills, Inc. 4,127 213,201
HJ Heinz Co. 3,884 160,098
The Hershey Co. 2,060 113,444
Kellogg Co. 2,827 136,912
McCormick & Co., Inc. 1,532 51,399
Sara Lee Corp. 8,814 141,200
Tyson Foods, Inc. Class A 2,921 43,406
Wm. Wrigley Jr. Co. 2,574 116,757
------------
1,561,138
- -----------------------------------------------------------------------------------
Gas Utilities--0.0%
Nicor, Inc. 510 21,165
Peoples Energy Corp. 446 16,016
------------
37,181
- -----------------------------------------------------------------------------------
Health Care Equipment & Supplies--1.2%
Bausch & Lomb, Inc. 624 30,601
Baxter International, Inc. 7,592 279,082
Becton Dickinson & Co. 2,867 175,260
Biomet, Inc. 2,853 89,270
Boston Scientific Corp. (a) 14,088 237,242
CR Bard, Inc. 1,201 87,985
Hospira, Inc. (a) 1,811 77,764
Medtronic, Inc. 13,995 656,645
St. Jude Medical, Inc. (a) 4,185 135,678
Stryker Corp. 3,390 142,753
Zimmer Holdings, Inc. (a) 2,877 163,183
------------
2,075,463
- -----------------------------------------------------------------------------------
Health Care Providers & Services--2.1%
Aetna, Inc. 6,575 262,540
AmerisourceBergen Corp. 2,433 101,991
Cardinal Health, Inc. 4,843 311,550
Caremark Rx, Inc. 5,129 255,783
Cigna Corp. 1,389 136,830
Coventry Health Care, Inc. (a) 1,861 102,243
Express Scripts, Inc. (a) 1,705 122,317
HCA, Inc. 4,731 204,143
Health Management Associates, Inc.
Class A 2,792 55,030
Humana, Inc. (a) 1,909 102,513
Laboratory Corp. of America Holdings (a) 1,447 90,047
Manor Care, Inc. 917 43,026
McKesson Corp. 3,526 166,709
Medco Health Solutions, Inc. (a) 3,498 200,365
Patterson Cos., Inc. (a) 1,608 56,167
Quest Diagnostics, Inc. 1,880 112,650
Tenet Healthcare Corp. (a) 5,458 38,097
UnitedHealth Group, Inc. 15,618 699,374
WellPoint, Inc. (a) 7,391 537,843
------------
3,599,218
- -----------------------------------------------------------------------------------
Health Care Technology--0.0%
IMS Health, Inc. 2,316 62,185
- -----------------------------------------------------------------------------------
Hotels, Restaurants & Leisure--1.2%
Carnival Corp. 5,036 210,203
Darden Restaurants, Inc. 1,495 58,903
Harrah's Entertainment, Inc. 2,142 152,468
Hilton Hotels Corp. 3,836 108,482
International Game Technology 3,932 149,180
Marriott International, Inc. Class A 3,791 144,513
McDonald's Corp. 14,448 485,453
Starbucks Corp. (a) 8,899 336,026
Starwood Hotels & Resorts
Worldwide, Inc. 2,519 151,996
Wendy's International, Inc. 1,353 78,866
Yum! Brands, Inc. 3,153 158,501
------------
2,034,591
- -----------------------------------------------------------------------------------
Household Durables--0.5%
Black & Decker Corp. 882 74,494
Centex Corp. 1,407 70,772
DR Horton, Inc. 3,154 75,128
Fortune Brands, Inc. 1,701 120,788
Harman International Industries, Inc. 776 66,247
KB HOME 874 40,073
Leggett & Platt, Inc. 2,114 52,808
Lennar Corp. Class A 1,617 71,746
Newell Rubbermaid, Inc. 3,210 82,914
Pulte Homes, Inc. 2,469 71,083
Snap-On, Inc. 674 27,243
The Stanley Works 820 38,720
Whirlpool Corp. 904 74,716
------------
866,732
- -----------------------------------------------------------------------------------
Household Products--1.7%
Clorox Co. 1,749 106,637
Colgate-Palmolive Co. 5,968 357,483
Kimberly-Clark Corp. 5,331 328,923
The Procter & Gamble Co. 38,046 2,115,358
------------
2,908,401
- -----------------------------------------------------------------------------------
8 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
IT Services--0.8%
Affiliated Computer Services, Inc.
Class A (a) 1,375 $ 70,964
Automatic Data Processing, Inc. 6,683 303,074
Computer Sciences Corp. (a) 2,177 105,454
Convergys Corp. (a) 1,625 31,687
Electronic Data Systems Corp. 6,011 144,625
First Data Corp. 8,876 399,775
Fiserv, Inc. (a) 2,037 92,398
Paychex, Inc. 3,875 151,047
Sabre Holdings Corp. Class A 1,539 33,858
Unisys Corp. (a) 3,977 24,976
------------
1,357,858
- -----------------------------------------------------------------------------------
Independent Power Producers &
Energy Traders--0.4%
The AES Corp. (a) 7,633 140,829
Constellation Energy Group, Inc. 2,075 113,129
Dynegy, Inc. Class A (a) 4,280 23,412
TXU Corp. 5,362 320,594
------------
597,964
- -----------------------------------------------------------------------------------
Industrial Conglomerates--3.2%
3M Co. 8,742 706,091
General Electric Co. 120,561 3,973,691
Textron, Inc. 1,509 139,100
Tyco International Ltd. 23,613 649,357
------------
5,468,239
- -----------------------------------------------------------------------------------
Insurance--3.7%
ACE Ltd. 3,771 190,775
AMBAC Financial Group, Inc. 1,226 99,429
Aflac, Inc. 5,781 267,949
The Allstate Corp. 7,367 403,196
American International Group, Inc. 30,115 1,778,291
Aon Corp. 3,695 128,660
Chubb Corp. 4,811 240,069
Cincinnati Financial Corp. 2,010 94,490
Genworth Financial, Inc. Class A 4,230 147,373
Hartford Financial Services Group, Inc. 3,514 297,284
Lincoln National Corp. 3,329 187,889
Loews Corp. 4,708 166,899
MBIA, Inc. 1,562 91,455
Marsh & McLennan Cos., Inc. 6,370 171,289
MetLife, Inc. 8,795 450,392
Principal Financial Group, Inc. 3,212 178,748
The Progressive Corp. 9,073 233,267
Prudential Financial, Inc. 5,705 443,278
Safeco Corp. 1,382 77,876
The St. Paul Travelers Cos., Inc. 8,073 359,894
Torchmark Corp. 1,163 70,617
UnumProvident Corp. 3,472 62,947
XL Capital Ltd. Class A 2,091 128,178
------------
6,270,245
- -----------------------------------------------------------------------------------
Internet & Catalog Retail--0.1%
Amazon.com, Inc. (a) 3,585 138,668
- -----------------------------------------------------------------------------------
Internet Software & Services--1.1%
eBay, Inc. (a) 13,406 392,662
Google, Inc. Class A (a) 2,390 1,002,199
VeriSign, Inc. (a) 2,842 65,849
Yahoo!, Inc. (a) 14,538 479,754
------------
1,940,464
- -----------------------------------------------------------------------------------
Leisure Equipment & Products--0.1%
Brunswick Corp. 1,097 36,475
Eastman Kodak Co. 3,331 79,211
Hasbro, Inc. 1,996 36,148
Mattel, Inc. 4,516 74,559
------------
226,393
- -----------------------------------------------------------------------------------
Life Sciences Tools & Services--0.2%
Applera Corp.--Applied Biosystems
Group 2,146 69,423
Fisher Scientific International (a) 1,440 105,192
Millipore Corp. (a) 617 38,865
PerkinElmer, Inc. 1,468 30,681
Thermo Electron Corp. (a) 1,898 68,784
Waters Corp. (a) 1,200 53,280
------------
366,225
- -----------------------------------------------------------------------------------
Machinery--1.3%
Caterpillar, Inc. 7,765 578,337
Cummins, Inc. 539 65,893
Danaher Corp. 2,736 175,980
Deere & Co. 2,720 227,093
Dover Corp. 2,364 116,853
Eaton Corp. 1,742 131,347
ITT Corp. 2,145 106,177
Illinois Tool Works, Inc. 4,802 228,095
Ingersoll-Rand Co. Class A 3,814 163,163
Navistar International Corp. (a) 713 17,547
PACCAR, Inc. 1,934 159,323
Pall Corp. 1,443 40,404
Parker Hannifin Corp. 1,396 108,330
------------
2,118,542
- -----------------------------------------------------------------------------------
Media--2.7%
CBS Corp. Class B 8,956 242,260
Clear Channel Communications, Inc. 5,835 180,593
Comcast Corp. Class A (a) 24,497 802,032
Dow Jones & Co., Inc. 686 24,017
EW Scripps Co. Class A 983 42,407
Gannett Co., Inc. 2,758 154,255
Interpublic Group of Cos., Inc. (a) 5,058 42,234
McClatchy Co. Class A 1 10
The McGraw-Hill Cos., Inc. 4,149 208,404
Meredith Corp. 491 24,324
New York Times Co. Class A 1,677 41,154
News Corp. Class A 27,426 526,031
Omnicom Group 1,978 176,220
Time Warner, Inc. 49,648 858,910
Tribune Co. 2,539 82,340
Univision Communications, Inc.
Class A (a) 2,583 86,530
Viacom, Inc. Class B (a) 8,360 299,622
Walt Disney Co. 25,447 763,410
------------
4,554,753
- -----------------------------------------------------------------------------------
ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006 9
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Metals & Mining--0.8%
Alcoa, Inc. 10,089 $ 326,480
Allegheny Technologies, Inc. 1,012 70,071
Freeport-McMoRan Copper & Gold, Inc.
Class B 2,185 121,071
Newmont Mining Corp. 5,205 275,501
Nucor Corp. 3,613 196,005
Phelps Dodge Corp. 2,364 194,226
United States Steel Corp. 1,448 101,534
------------
1,284,888
- -----------------------------------------------------------------------------------
Multi-Utilities--1.1%
Ameren Corp. 2,381 120,240
CMS Energy Corp. (a) 2,564 33,178
CenterPoint Energy, Inc. 3,610 45,125
Consolidated Edison, Inc. 2,850 126,654
DTE Energy Co. 2,062 84,006
Dominion Resources, Inc. 4,030 301,404
Duke Energy Corp. 14,318 420,520
KeySpan Corp. 2,029 81,972
NiSource, Inc. 3,162 69,058
PG&E Corp. 4,026 158,141
Public Service Enterprise Group, Inc. 2,916 192,806
Sempra Energy 3,004 136,622
TECO Energy, Inc. 2,421 36,170
Xcel Energy, Inc. 4,701 90,165
------------
1,896,061
- -----------------------------------------------------------------------------------
Multiline Retail--0.9%
Big Lots, Inc. (a) 1,322 22,580
Dillard's, Inc. Class A 717 22,836
Dollar General Corp. 3,615 50,538
Family Dollar Stores, Inc. 1,801 43,998
Federated Department Stores 6,414 234,752
JC Penney Co., Inc. 2,723 183,830
Kohl's Corp. (a) 3,947 233,347
Nordstrom, Inc. 2,498 91,177
Sears Holdings Corp. (a) 1,125 174,195
Target Corp. 10,010 489,189
------------
1,546,442
- -----------------------------------------------------------------------------------
Office Electronics--0.1%
Xerox Corp. (a) 10,647 148,100
- -----------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--6.5%
Anadarko Petroleum Corp. 5,317 253,568
Apache Corp. 3,830 261,397
Chesapeake Energy Corp. 4,779 144,565
Chevron Corp. 25,700 1,594,942
ConocoPhillips 19,138 1,254,113
Consol Energy, Inc. 2,124 99,233
Devon Energy Corp. 5,104 308,333
EOG Resources, Inc. 2,813 195,053
El Paso Corp. 8,066 120,990
Exxon Mobil Corp. 70,149 4,303,641
Hess Corp. 2,796 147,769
Kerr-McGee Corp. 2,632 182,529
Kinder Morgan, Inc. 1,209 120,767
Marathon Oil Corp. 4,202 350,027
Murphy Oil Corp. 1,926 107,586
Occidental Petroleum Corp. 4,966 509,263
Sunoco, Inc. 1,539 106,637
Valero Energy Corp. 7,136 474,687
Williams Cos., Inc. 6,900 161,184
XTO Energy, Inc. 4,222 186,908
------------
10,883,192
- -----------------------------------------------------------------------------------
Paper & Forest Products--0.3%
International Paper Co. 5,715 184,594
Louisiana-Pacific Corp. 1,231 26,959
MeadWestvaco Corp. 2,101 58,681
Weyerhaeuser Co. 2,855 177,724
------------
447,958
- -----------------------------------------------------------------------------------
Personal Products--0.2%
Alberto-Culver Co. Class B 883 43,020
Avon Products, Inc. 5,221 161,851
The Estee Lauder Cos., Inc. Class A 1,377 53,249
------------
258,120
- -----------------------------------------------------------------------------------
Pharmaceuticals--5.1%
Abbott Laboratories 17,695 771,679
Allergan, Inc. 1,770 189,850
Barr Pharmaceuticals, Inc. (a) 1,231 58,706
Bristol-Myers Squibb Co. 22,798 589,556
Eli Lilly & Co. 13,103 724,203
Forest Laboratories, Inc. (a) 3,779 146,210
Johnson & Johnson 34,330 2,057,054
King Pharmaceuticals, Inc. (a) 2,808 47,736
Merck & Co., Inc. 25,305 921,861
Mylan Laboratories 2,437 48,740
Pfizer, Inc. 84,956 1,993,917
Schering-Plough Corp. 17,172 326,783
Watson Pharmaceuticals, Inc. (a) 1,184 27,564
Wyeth 15,605 693,018
------------
8,596,877
- -----------------------------------------------------------------------------------
Real Estate Investment Trusts (REITs)--0.8%
Apartment Investment & Management
Co. Class A 1,127 48,968
Archstone-Smith Trust 2,479 126,107
Boston Properties, Inc. 1,059 95,734
Equity Office Properties Trust 4,246 155,021
Equity Residential 3,377 151,053
Kimco Realty Corp. 2,456 89,619
Plum Creek Timber Co., Inc. 2,137 75,864
ProLogis 2,840 148,021
Public Storage, Inc. 960 72,864
Simon Property Group, Inc. 2,126 176,330
Vornado Realty Trust 1,380 134,619
------------
1,274,200
- -----------------------------------------------------------------------------------
Road & Rail--0.7%
Burlington Northern Santa Fe Corp. 4,228 335,069
CSX Corp. 2,569 180,960
Norfolk Southern Corp. 4,809 255,935
Ryder System, Inc. 708 41,368
Union Pacific Corp. 3,119 289,942
------------
1,103,274
- -----------------------------------------------------------------------------------
10 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Semiconductors & Semiconductor
Equipment--2.1%
Advanced Micro Devices, Inc. (a) 5,613 $ 137,069
Altera Corp. (a) 4,166 73,113
Analog Devices, Inc. 4,187 134,570
Applied Materials, Inc. 18,131 295,173
Broadcom Corp. Class A (a) 5,311 159,596
Freescale Semiconductor, Inc. Class B (a) 4,704 138,298
Intel Corp. 67,444 1,278,064
Kla-Tencor Corp. 2,305 95,819
LSI Logic Corp. (a) 4,600 41,170
Linear Technology Corp. 3,520 117,885
Maxim Integrated Products, Inc. 3,718 119,385
Micron Technology, Inc. (a) 8,407 126,609
National Semiconductor Corp. 3,915 93,373
Novellus Systems, Inc. (a) 1,476 36,457
Nvidia Corp. (a) 4,087 87,012
PMC-Sierra, Inc. (a) 2,394 22,504
Teradyne, Inc. (a) 2,299 32,025
Texas Instruments, Inc. 18,064 547,159
Xilinx, Inc. 3,983 90,215
------------
3,625,496
- -----------------------------------------------------------------------------------
Software--2.4%
Adobe Systems, Inc. (a) 6,942 210,759
Autodesk, Inc. (a) 2,687 92,594
BMC Software, Inc. (a) 2,468 58,985
CA, Inc. 5,290 108,709
Citrix Systems, Inc. (a) 2,112 84,776
Compuware Corp. (a) 4,376 29,319
Electronic Arts, Inc. (a) 3,550 152,792
Intuit, Inc. (a) 1,981 119,633
Microsoft Corp. 101,716 2,369,983
Novell, Inc. (a) 3,931 26,063
Oracle Corp. (a) 45,151 654,238
Parametric Technology Corp. (a) 1,291 16,409
Symantec Corp. (a) 12,001 186,496
------------
4,110,756
- -----------------------------------------------------------------------------------
Specialty Retail--1.6%
AutoNation, Inc. (a) 1,719 36,855
AutoZone, Inc. (a) 621 54,772
Bed Bath & Beyond, Inc. (a) 3,273 108,565
Best Buy Co., Inc. 4,668 255,993
Circuit City Stores, Inc. 1,746 47,526
The Gap, Inc. 6,378 110,977
Home Depot, Inc. 23,965 857,707
Limited Brands 3,978 101,797
Lowe's Cos., Inc. 8,996 545,787
Office Depot, Inc. (a) 3,336 126,768
OfficeMax, Inc. 825 33,619
RadioShack Corp. 1,570 21,980
The Sherwin-Williams Co. 1,292 61,344
Staples, Inc. 8,442 205,309
TJX Cos., Inc. 5,299 121,135
Tiffany & Co. 1,631 53,856
------------
2,743,990
- -----------------------------------------------------------------------------------
Textiles, Apparel & Luxury Goods--0.3%
Coach, Inc. (a) 4,463 133,444
Jones Apparel Group, Inc. 1,306 41,518
Liz Claiborne, Inc. 1,215 45,028
Nike, Inc. Class B 2,185 176,985
VF Corp. 1,018 69,143
------------
466,118
- -----------------------------------------------------------------------------------
Thrifts & Mortgage Finance--1.3%
Countrywide Financial Corp. 7,045 268,274
Fannie Mae 11,222 539,778
Freddie Mac 8,012 456,764
Golden West Financial Corp. 2,969 220,300
MGIC Investment Corp. 1,012 65,780
Sovereign Bancorp, Inc. 3,910 79,413
Washington Mutual, Inc. 11,139 507,716
------------
2,138,025
- -----------------------------------------------------------------------------------
Tobacco--1.2%
Altria Group, Inc. 24,210 1,777,740
Reynolds American, Inc. 994 114,608
UST, Inc. 1,872 84,596
------------
1,976,944
- -----------------------------------------------------------------------------------
Trading Companies & Distributors--0.0%
WW Grainger, Inc. 883 66,428
- -----------------------------------------------------------------------------------
Wireless Telecommunication Services--0.6%
Alltel Corp. 4,512 288,001
Sprint Nextel Corp. 34,540 690,455
------------
978,456
- -----------------------------------------------------------------------------------
Total Common Stocks
(Cost--$126,900,557)--79.0% 133,293,212
===================================================================================
===================================================================================
Face
U.S. Government Obligations Amount
===================================================================================
U.S. Treasury Notes, 2.50%
due 10/31/2006 $33,200,000 32,913,384
- -----------------------------------------------------------------------------------
Total U.S. Government Obligations
(Cost--$33,022,846)--19.5% 32,913,384
===================================================================================
ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006 11
Schedule of Investments (concluded)
Face
Short-Term Securities Amount Value
===================================================================================
Time Deposits--2.8%
State Street Bank & Trust Co., 4.25%
due 7/03/2006 $ 4,737,083 $ 4,737,083
- -----------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$4,737,083)--2.8% 4,737,083
===================================================================================
Total Investments
(Cost--$164,660,486)--101.3% 170,943,679
===================================================================================
Number of
Call Options Written Contracts Value
===================================================================================
S&P 500 Index, expiring
July 2006 at USD 1,250 1,071 $ (3,320,100)
- -----------------------------------------------------------------------------------
Total Call Options Written
(Premiums Received--$2,683,240)--(1.9%) (3,320,100)
===================================================================================
Total Investments, Net of Options Written
(Cost--$161,977,246*)--99.4% 167,623,579
Other Assets Less Liabilities--0.6% 1,062,720
------------
Net Assets--100.0% $168,686,299
============
- -----------------------------------------------------------------------------------
* The cost and unrealized appreciation (depreciation) of investments, net of
options written, as of June 30, 2006, as computed for federal income tax
purposes, were as follows:
Aggregate cost ........................................ $166,891,246
============
Gross unrealized appreciation ......................... $ 2,796,924
Gross unrealized depreciation ......................... (2,064,591)
------------
Net unrealized appreciation ........................... $ 732,333
============
(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. (192) $5,501
--------------------------------------------------------------------------
o Financial futures contracts purchased as of June 30, 2006 were as follows:
------------------------------------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Appreciation
------------------------------------------------------------------------------------------------------
43 E-MINI S&P 500 September 2006 $2,708,022 $42,688
------------------------------------------------------------------------------------------------------
o Swaps outstanding as of June 30, 2006 were as follows:
---------------------------------------------------------------------------------------------------------------------------
Notional Unrealized
Counterparty Receive Total Return Pay Expiration Amount Appreciation
---------------------------------------------------------------------------------------------------------------------------
BNP Paribas CBOE S&P 500
BuyWrite Index 12-month LIBOR rate plus
(BXM(SM))--Total Return a negotiated spread October 2006 $ 15,000,000 $ 385,239
Deutsche Bank AG CBOE S&P 500
BuyWrite Index 12-month LIBOR rate plus
(BXM(SM))--Total Return a negotiated spread October 2006 $101,500,006 2,851,516
---------------------------------------------------------------------------------------------------------------------------
Total $3,236,755
---------------------------------------------------------------------------------------------------------------------------
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.
See Notes to Financial Statements.
12 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
Statement of Assets, Liabilities and Capital
As of June 30, 2006
=============================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$163,995,005) $ 170,198,483
Investments in affiliated securities, at value (identified cost--$665,481) ..... 745,196
Cash collateral on futures contracts ........................................... 135,450
Unrealized appreciation on swaps ............................................... 3,236,755
Receivables:
Dividends ................................................................... $ 155,542
Interest .................................................................... 140,396
Securities sold ............................................................. 74,134 370,072
------------------------------
Total assets ................................................................... 174,685,956
-------------
=============================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------
Options written, at value (premiums received--$2,683,240) ...................... 3,320,100
Payables:
Dividends to shareholders ................................................... 2,315,868
Offering costs .............................................................. 125,059
Investment adviser .......................................................... 112,926
Securities purchased ........................................................ 8,616
Variation margin ............................................................ 7,485 2,569,954
-------------
Accrued expenses ............................................................... 109,603
-------------
Total liabilities .............................................................. 5,999,657
-------------
=============================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets ..................................................................... $ 168,686,299
=============
=============================================================================================================================
Capital
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, 100,000,000 shares authorized ................... $ 9,255
Paid-in capital in excess of par ............................................... 172,454,304
Accumulated distributions in excess of investment income--net .................. $ (9,111,012)
Accumulated realized capital losses--net ....................................... (3,592,024)
Unrealized appreciation--net ................................................... 8,925,776
-------------
Total accumulated losses--net .................................................. (3,777,260)
-------------
Total capital--Equivalent to $18.23 per share based on 9,255,236 shares of
Common Stock outstanding (market price--$17.25) ............................... $ 168,686,299
=============
See Notes to Financial Statements.
ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006 13
Statement of Operations
For the Six Months Ended June 30, 2006
=============================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------
Dividends (including $5,501 from affiliates) ................................... $ 1,306,392
Interest ....................................................................... 744,869
-------------
Total income ................................................................... 2,051,261
-------------
=============================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ....................................................... $ 767,360
Accounting services ............................................................ 45,623
Directors' fees and expenses ................................................... 36,549
Professional fees .............................................................. 35,698
Custodian fees ................................................................. 24,563
Printing and shareholder reports ............................................... 22,525
Repurchase offer fees .......................................................... 18,656
Transfer agent fees ............................................................ 16,858
Listing fees ................................................................... 9,662
Pricing fees ................................................................... 753
Other .......................................................................... 3,266
-------------
Total expenses ................................................................. 981,513
-------------
Investment income--net ......................................................... 1,069,748
-------------
=============================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -----------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments (including $2,315 from affiliates)--net ......................... 237,280
Futures contracts--net ...................................................... (101,325)
Options written--net ........................................................ 4,853,384 4,989,339
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ............................................................ 1,852,824
Futures contracts and swaps--net ............................................ 2,848,696
Options written--net ........................................................ (1,935,594) 2,765,926
------------------------------
Total realized and unrealized gain--net ........................................ 7,755,265
-------------
Net Increase in Net Assets Resulting from Operations ........................... $ 8,825,013
=============
See Notes to Financial Statements.
14 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
Statements of Changes in Net Assets
For the Period
For the Six September 30,
Months Ended 2005+ to
June 30, December 31,
Increase (Decrease) in Net Assets: 2006 2005
=============================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------------
Investment income--net ......................................................... $ 1,069,748 $ 577,974
Realized gain (loss)--net ...................................................... 4,989,339 (8,010,406)
Change in unrealized appreciation/depreciation--net ............................ 2,765,926 6,159,850
------------------------------
Net increase (decrease) in net assets resulting from operations ................ 8,825,013 (1,272,582)
------------------------------
=============================================================================================================================
Dividends & Distributions to Shareholders
- -----------------------------------------------------------------------------------------------------------------------------
Investment income--net ......................................................... (10,180,760) (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 .................................................................. (10,180,760) (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 (decrease) in net assets ........................................ (1,355,747) 169,942,038
Beginning of period ............................................................ 170,042,046 100,008
------------------------------
End of period* ................................................................. $ 168,686,299 $ 170,042,046
==============================
* Accumulated distributions in excess of investment income--net ............. $ (9,111,012) --
==============================
+ Commencement of operations.
See Notes to Financial Statements.
ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006 15
Financial Highlights
For the Period
For the Six September 30,
Months Ended 2005+ to
The following per share data and ratios have been derived June 30, December 31,
from information provided in the financial statements. 2006 2005
=============================================================================================================================
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ........................................... $ 18.37 $ 19.10
------------------------------
Investment income--net*** ...................................................... .12 .06
Realized and unrealized gain (loss)--net ....................................... .84 (.20)
------------------------------
Total from investment operations ............................................... .96 (.14)
------------------------------
Less dividends and distributions from:
Investment income--net ...................................................... (1.10) (.06)
Realized gain--net .......................................................... -- (.06)
Tax return of capital ....................................................... -- (.43)
------------------------------
Total dividends and distributions .............................................. (1.10) (.55)
------------------------------
Offering costs resulting from the issuance of Common Stock ..................... -- (.04)
------------------------------
Net asset value, end of period ................................................. $ 18.23 $ 18.37
==============================
Market price per share, end of period .......................................... $ 17.25 $ 16.83
==============================
=============================================================================================================================
Total Investment Return**
- -----------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ............................................. 5.45%@ (.73%)@
==============================
Based on market price per share ................................................ 8.91%@ (13.14%)@
==============================
=============================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
Expenses ....................................................................... 1.11%* 1.36%*
==============================
Investment income--net ......................................................... 1.21%* 1.32%*
==============================
=============================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ....................................... $ 168,686 $ 170,042
==============================
Portfolio turnover ............................................................. 3.97% 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.
16 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
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. 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. These unaudited financial statements reflect all adjustments,
which are, in the opinion of management, necessary to present a fair statement
of the results for the interim period. All such adjustments are of a normal,
recurring nature. 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.
Valuation of other short-term investment vehicles is generally based on the net
asset value of the underlying investment vehicle or amortized cost.
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 counterparty 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
ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006 17
Notes to Financial Statements (continued)
is purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent
of the premiums received or paid (or gain or loss to the extent the cost
of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
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 OTC contracts
in which the Fund and a counterparty agree to make periodic net payments
on a specified notional amount. The net payments can be made for a set
period of time or may be triggered by a 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 was 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
18 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
Notes to Financial Statements (concluded)
default or in the event of losses on investments made with cash collateral.
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 is no increase in the aggregate
fees paid by the Fund for these services.
Certain officers and/or directors of the Fund are officers and/or directors of
IQ, ML & Co. and/or MLIM.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including MLIM, to the
investment management business of BlackRock, Inc. The transition is expected to
close at the end of the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2006 were $6,819,411 and $11,139,341, respectively.
Transactions in call options written for the six months ended June 30, 2006 were
as follows:
- -------------------------------------------------------------------------------
Number of Premiums
Contracts Received
- -------------------------------------------------------------------------------
Outstanding call options written,
beginning of period .................... 1,083 $ 1,645,294
Options written .......................... 6,680 11,406,704
Options closed ........................... (4,452) (6,443,760)
Options expired .......................... (2,240) (3,924,998)
-----------------------------
Outstanding call options written,
end of period .......................... 1,071 $ 2,683,240
=============================
4. Common Stock Transactions:
The Fund is authorized to issue 100,000,000 shares of stock, all of which are
initially classified as Common Stock, par value $.001. 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 six months ended June 30, 2006 remained
constant and for the period September 30, 2005 to December 31, 2005 increased by
9,250,000 from shares sold.
The Fund will make offers to repurchase its shares at annual (approximately
12-month) intervals. The shares tendered in the repurchase offer will be subject
to a repurchase fee retained by the Fund to compensate the Fund for expenses
directly related to the repurchase offer.
ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006 19
Renewal of Current Investment Advisory and Management Agreements
The Board of Directors of each Fund, currently consisting solely of Independent
Directors, as defined in Section 2(a)(19) of the Investment Company Act of 1940
(the "Investment Company Act") has the responsibility under the Investment
Company Act to consider annually the Investment Advisory and Management
Agreement of each Fund (each, a "Management Agreement" and together, the
"Management Agreements"). Each Fund's Board of Directors receives, reviews and
evaluates information concerning the services and personnel of IQ Investment
Advisors LLC ("IQ Advisors") and its affiliates at each quarterly meeting of the
Board of Directors. While particular emphasis is placed on information
concerning profitability, comparability of fees, total expenses and a Fund's
investment performance at meetings at which a renewal of the Management
Agreement is considered, the process of evaluating IQ Advisors and a Fund's
investment advisory arrangements is an ongoing one. In this regard, the Board's
consideration of the nature, extent and quality of the services provided by IQ
Advisors under the Management Agreement is expected to include deliberations at
future quarterly meetings.
At a Board meeting held on June 5, 2006, all of the Directors present at the
meeting renewed the Management Agreement for each Fund for an additional
one-year term. Each Management Agreement was considered separately by the
relevant Fund's Directors. In considering whether to approve the Management
Agreements, the Directors reviewed a meeting book and other materials from
counsel to the Funds and from IQ Advisors which: (i) included information
concerning the services rendered to the Funds by IQ Advisors and IQ Advisors'
affiliates; (ii) contained information concerning the revenues and expenses
incurred by IQ Advisors and its affiliates from the operation of the Funds; and
(iii) outlined the legal duties of the Board under the Investment Company Act.
The Board also received information from Lipper Inc. ("Lipper") comparing each
Fund's fee rate for advisory and administrative services to those of other
closed-end funds chosen by Lipper. In voting to approve the renewal of each
Fund's Management Agreement, the Boards considered, in particular, the following
factors:
(a) The nature, extent and quality of services provided by IQ Advisors and its
affiliates -- The Directors reviewed the services that IQ Advisors has provided
to the Funds. The Board of each Fund considered the size, education and
experience of IQ Advisors' staff, its use of technology, and the degree to which
IQ Advisors exercises supervision over the actions of each Fund's subadviser. In
connection with the investment advisory services provided, the Board of
Directors discussed in detail with officers of IQ Advisors the management of
each Fund's investments in accordance with the Fund's stated investment
objective and policies and the types of transactions entered into on behalf of
each Fund. During this discussion, the Directors asked detailed questions of,
and received answers from, the officers of IQ Advisors regarding the
implementation of each Fund's investment strategy, its efficacy and risks.
In addition to the investment advisory services provided to the Funds, the
Boards of Directors considered that IQ Advisors and its affiliates also 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 Funds. In particular, the
Boards of Directors reviewed the compliance and administrative services provided
to the Funds by IQ Advisors, including its oversight of each Fund's day-to-day
operations and its oversight of Fund accounting. The Boards noted that IQ
Advisors has an administrative, legal and compliance staff that helps ensure a
high level of quality in the compliance and administrative services provided to
the Funds. The Boards also considered each Fund's compliance history. Based on
the presentations at the meeting and the Directors' experience as Directors of
other investment companies advised by IQ Advisors, the Boards of Directors
concluded that the services provided to the Funds by IQ Advisors under the
Management Agreements were of a high quality and benefited the Funds.
(b) Investment performance of the Funds and IQ Advisors -- The Directors
considered the history, experience, resources and strengths of IQ Advisors and
its affiliates in developing and implementing the investment strategies used by
each Fund. The Boards of Directors also considered the innovative nature of each
Fund. The Boards noted that each Fund uses a relatively unique investment
strategy and that comparisons of a Fund's investment performance to the
performance of other investment companies were generally not meaningful. The
Boards reviewed each Fund's investment performance and compared such performance
to the performance of a relevant reference index. The Directors discussed the
degree to which each Fund was achieving its investment objective, noting that
each Fund had been in operation for a relatively short period of time. In
particular, the Boards noted that all of the Funds generally performed as
expected relative to their respective reference index and met their respective
investment objectives. As a result of their discussions and review, the
Directors concluded that each Fund's performance was satisfactory.
20 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
Based on these factors, the Directors determined that IQ Advisors continued to
be an appropriate investment adviser for the Funds.
(c) Cost of the services provided and profits realized by IQ Advisors and its
affiliates from the relationship with the Funds -- The Directors reviewed and
considered a memorandum from IQ Advisors regarding the methodology used by IQ
Advisors in allocating its costs regarding the operations of the Funds and
calculating each Fund's profitability (if any) to IQ Advisors and its
affiliates. The Directors also reviewed and considered a report prepared by
independent consultants engaged by the Directors to review and evaluate IQ
Advisors' methodology in calculating profitability. After discussions with the
independent consultants, who participated in the meeting, and reviewing their
report, the Directors concluded that there was a reasonable basis for the
allocation of costs and the determination of profitability. The Directors
considered the cost of the services provided by IQ Advisors to each Fund and the
revenue derived by IQ Advisors and its affiliates. The Directors discussed with
representatives of IQ Advisors its general level of profitability (if any), and
the profits derived by its affiliates, including MLIM, from operating the Funds.
The Boards also considered the direct and indirect benefits derived by other IQ
Advisors affiliates, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), from the establishment of Funds, including the
underwriting arrangements relating to the initial distribution of Fund shares.
The Boards considered federal court decisions discussing an investment adviser's
profitability and profitability levels considered to be reasonable in those
decisions. The Boards concluded that any profits made by IQ Advisors and its
affiliates (including MLIM and MLPF&S) are acceptable in relation to the nature,
extent and quality of services provided. The Boards also concluded that each
Fund benefited from these services.
(d) The extent to which economies of scale would be realized as a Fund grows and
whether fee levels would reflect such economies of scale -- The Boards
considered the extent to which economies of scale might be realized if the
assets of the Funds increase and whether there should be changes in the
management fee rate or structure in order to enable a Fund to participate in
these economies of scale. The Boards noted that, because each Fund is a
closed-end fund, any increase in asset levels would have to come from the
appreciation of Fund assets. The Boards also noted that each Fund, except for
Dow 30(SM) Premium & Dividend Income Fund Inc. and S&P 500(R) Covered Call Fund
Inc., is an interval fund that periodically allows stockholders to tender their
shares to the Funds and that such tender offers reduce the amount of Fund
assets. In consideration of these and other factors, the Boards determined that
no changes were currently necessary to each Fund's fee structure. 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 fees after the one-year renewal term of the
Management Agreements.
(e) Comparison of services rendered and fees paid to those under other
investment advisory contracts, such as contracts of the same and other
investment advisers or other clients -- The Directors compared both the services
rendered and the fees paid under the Management Agreements to the contracts of
other investment advisers with respect to other closed-end registered investment
companies. In particular, the Directors evaluated each Fund's contractual fee
rate for advisory and administrative services as compared to the contractual fee
rate of other closed-end funds chosen by Lipper. In considering this
information, the Directors took into account the relatively unique nature of the
investment strategies of the Funds and the fact that the relevant peer group of
funds provided by Lipper for comparison might have investment strategies and
restrictions different from those of the Funds. The Boards did not consider
compensation paid with respect to accounts other than registered investment
companies because IQ Advisors utilizes each Fund's strategy in connection with
only its registered funds. In particular, the Boards noted that each Fund's
contractual management fee rate at a common asset level was lower than the
median fee rate of its peer funds.
Conclusion -- No single factor was determinative to the decision of the Boards.
Based on the foregoing and such other matters as were deemed relevant, all of
the Directors who were present at the June 5, 2006 meeting concluded that the
advisory fee rate of each Fund was reasonable in relation to the services
provided by IQ Advisors to the Funds, as well as the costs incurred and benefits
gained by IQ Advisors and its affiliates in providing such services, including
the investment advisory and administrative components. The Boards also found the
investment advisory fees to be reasonable in comparison to the fees charged by
advisers to other funds of similar size. As a result, the Board of Directors of
each Fund approved the Management Agreement for each Fund. The Directors were
represented by independent legal counsel who assisted them in their
deliberations.
"Dow 30" is a service mark of Dow Jones & Company, Inc.
ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006 21
Renewal of Current Investment Subadvisory Agreements
The Board of Directors of each Fund, currently consisting solely of Independent
Directors, at a meeting held on June 5, 2006 considered and approved the renewal
of the Current Investment Subadvisory Agreement of each Fund (each a
"Subadvisory Agreement" and together, the "Subadvisory Agreements"). Each
Subadvisory Agreement was considered separately by the relevant Fund's
Directors. At each quarterly meeting of the Board of Directors, each Fund's
Board receives, reviews and evaluates information concerning the services and
personnel of MLIM, as subadviser to each of S&P 500(R) GEARED(SM) Fund Inc. and
Small Cap Premium & Dividend Income Fund Inc., PEA Capital LLC ("PEA"), as
subadviser to each of S&P 500(R) Covered Call Fund Inc. and Enhanced S&P 500(R)
Covered Call Fund Inc., and Nuveen Asset Management ("Nuveen", and together with
MLIM and PEA, the "Subadvisers"), as subadviser to Dow 30(SM) Premium & Dividend
Income Fund Inc. While particular emphasis is placed on information concerning a
Fund's investment performance at meetings at which a renewal of the Subadvisory
Agreements is considered, the process of evaluating each Subadviser and the
Fund's subadvisory arrangements is an ongoing one.
(a) The nature, extent and quality of services provided by each Subadviser --
The Directors reviewed the services that each Subadviser provides to each of
their respective Funds. In connection with the investment subadvisory services
provided to the respective Funds, the Directors discussed in detail with
officers of IQ Advisors and members of each Subadviser's portfolio management
team, the management of each Fund's investments in accordance with the Fund's
stated investment objective and policies and the types of transactions that have
been entered into on behalf of the Funds. Drawing on their collective industry
experience, the Directors discussed each Fund's investment strategy with
representatives from each Subadviser, including discussions regarding the
premises underlying the Fund's investment strategy, its efficacy and potential
risks. The Directors also considered the favorable history, reputation and
background of each Subadviser and its personnel, and the substantial experience
of such Subadviser's portfolio management teams. With respect to Funds
subadvised by MLIM, the Directors discussed the fact that MLIM would be merging
with BlackRock to form a new advisory firm and considered the potential effects
such merger may have on such Funds before and after the merger. With respect to
Funds subadvised by PEA, the Directors discussed the fact that it was being
contemplated that PEA would be dissolved and all of its personnel and resources
would be transferred to its affiliate, Oppenheimer Capital LLC. The Directors
considered the potential effects such novation may have on the Funds subadvised
by PEA and determined that it would not result in any change in the way in which
the Funds are managed or operated and would not harm the Funds in any manner and
that there would not be an assignment of the Subadvisory Agreement within the
meaning of the Investment Company Act.
The Board of Directors of each Fund concluded that the services provided to the
Fund by each of the Subadvisers under the Subadvisory Agreement were of a high
quality and would continue to benefit the respective Funds.
(b) Investment performance of the Funds and each Subadviser -- The Board of
Directors of each Fund received and considered information about the Fund's
investment performance in comparison to the performance of its relative
reference index and also in light of its stated investment objective and made
the determinations discussed above under "Renewal of Current Investment Advisory
and Management Agreements." Based on these factors, the Directors determined
that each Subadviser continued to be appropriate for each of its respective
Funds.
(c) Cost of the services provided and profits realized by each Subadviser from
its relationship with the relevant Funds -- The Directors considered the
profitability to MLIM of serving as investment subadviser to two Funds and from
its relationship with IQ Advisors based on the information discussed above under
"Renewal of Current Investment Advisory and Management Agreements". Based on
such information, the Boards concluded that MLIM's profits are acceptable in
relation to the nature, extent and quality of services provided.
The Directors noted that profitability data was not provided with respect to the
unaffiliated Subadvisers of the Funds and concluded that such data was
unnecessary because such subadvisory arrangements were entered into at "arm's
length" between the Subadviser and IQ Advisors.
Each Fund's Board of Directors then considered the potential direct and indirect
benefits to each Subadviser and its affiliates from their relationship with the
Fund, including the reputational benefits from managing the Funds. The Board of
Directors of each Fund concluded that the potential benefits to each Subadviser
were consistent with those obtained by other subadvisers in similar types of
arrangements.
(d) The extent to which economies of scale would be realized as a Fund grows and
whether fee levels would reflect such economies of scale -- The Boards
considered the
22 ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006
extent to which economies of scale might be realized if the assets of the Funds
increase and whether there should be changes in the subadvisory fee rate or
structure in order to enable a Fund to participate in these economies of scale.
The Directors noted that each Subadviser's fees are paid by IQ Advisors out of
its fees and not by the Funds directly. The Boards noted that, because each Fund
is a closed-end fund, any increase in asset levels would have to come from the
appreciation of Fund assets. The Boards also noted that each Fund, except for
Dow 30(SM) Premium & Dividend Income Fund Inc. and S&P 500(R) Covered Call Fund
Inc., is an interval fund that periodically allows stockholders to tender their
shares to the Funds and that such tender offers reduce the amount of Fund
assets. 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 one-year renewal term of the
Subadvisory Agreements.
(e) Comparison of services rendered and fees paid to those under other
subadvisory contracts, such as contracts of the same and other investment
advisers or other clients -- The Boards discussed the services rendered by each
Subadviser and determined that such services were consistent with those provided
by subadvisers generally and sufficient for the management of the Funds. Taking
into account the totality of the information and materials provided to the
Boards as noted above, including the fact that the subadvisory fee for each Fund
was negotiated with IQ Advisors and not payable directly by the Fund, the Boards
concluded that the subadvisory fee for each Fund was reasonable for the services
being rendered.
Conclusion -- No single factor was determinative to the decision of the Boards.
Based on the foregoing and such other matters as were deemed relevant, all of
the Directors present at the June 5, 2006 meeting concluded that the relevant
subadvisory fee rate was reasonable in relation to the services provided by each
Subadviser. As a result, all of the Directors approved the Subadvisory Agreement
for each Fund. The Directors were represented by independent legal counsel who
assisted them in their deliberations.
"GEARED" is a service mark of Merrill Lynch & Co.
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 periodic
repurchases:
a) The Fund will make offers to repurchase its shares at annual (approximately
12-month) 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) The repurchase request deadline for each Offer, by which the Fund must
receive repurchase requests submitted by shareholders in response to the most
recent Offer, will be determined by reference to the exercise date of the call
spreads and written call options that comprise the Fund's transactions (as
described in the Fund's prospectus) for an annual period; and will be the
fourteenth day prior to such exercise 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 exercise date of the
call spreads and written call options (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.
ENHANCED S&P 500(R) COVERED CALL FUND INC. JUNE 30, 2006 23
[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 -- 6/06
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable to this semi-annual report
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 last 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 - Not Applicable to this semi-annual report
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(R) Covered Call Fund Inc.
By: /s/ Mitchell M. Cox
------------------------------------------
Mitchell M. Cox,
Chief Executive Officer of
Enhanced S&P 500(R) Covered Call Fund Inc.
Date: August 23, 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(R) Covered Call Fund Inc.
Date: August 23, 2006
By: /s/ Donald C. Burke
------------------------------------------
Donald C. Burke,
Chief Financial Officer of
Enhanced S&P 500(R) Covered Call Fund Inc.
Date: August 23, 2006