UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21787
Name of Fund: Enhanced S&P 500 Covered Call Fund Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Mitchell M. Cox, Chief Executive Officer,
Enhanced S&P 500 Covered Call Fund Inc., 4 World Financial Center, 6th
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 - 12/31/06
Item 1 - Report to Stockholders
Enhanced S&P 500(R)
Covered Call Fund Inc.
Annual Report
December 31, 2006
[LOGO] IQ INVESTMENT [LOGO] Oppenheimer Capital
ADVISORS
Enhanced S&P 500(R) Covered Call Fund Inc.
Portfolio Information as of December 31, 2006
Percent of
Ten Largest Equity Holdings Net Assets
- --------------------------------------------------------------------------------
Exxon Mobil Corp. .................................................. 2.7%
General Electric Co. ............................................... 2.4
Citigroup, Inc. .................................................... 1.7
Microsoft Corp. .................................................... 1.6
Bank of America Corp. .............................................. 1.5
The Procter & Gamble Co. ........................................... 1.3
Johnson & Johnson .................................................. 1.2
Pfizer, Inc. ....................................................... 1.1
American International Group, Inc. ................................. 1.1
Altria Group, Inc. ................................................. 1.1
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
- --------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels ........................................ 6.3%
Pharmaceuticals .................................................... 4.9
Diversified Financial Services ..................................... 4.4
Insurance .......................................................... 3.8
Commercial Banks ................................................... 3.2
- --------------------------------------------------------------------------------
Percent of
S&P 500(R) Index Sector Weightings Total Investments
- --------------------------------------------------------------------------------
Financials ......................................................... 17.5%
Information Technology ............................................. 11.9
Health Care ........................................................ 9.4
Industrials ........................................................ 8.5
Consumer Discretionary ............................................. 8.3
Energy ............................................................. 7.7
Consumer Staples ................................................... 7.3
Utilities .......................................................... 2.8
Telecommunication Services ......................................... 2.7
Materials .......................................................... 2.3
Other* ............................................................. 21.6
- --------------------------------------------------------------------------------
* 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.
S&P 500 and Standard & Poor's 500 are registered trademarks of the McGraw-Hill
Companies.
2 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006
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 Oppenheimer Capital LLC,
the Fund's subadviser.
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(SM) (the "BXM(SM) Index"), less fees and
expenses.
How did the Fund perform during the fiscal year?
For the 12-month period ended December 31, 2006, the Common Stock of the Fund
had a total investment return of +16.11%, based on a change in per share net
asset value from $18.37 to $18.99, and assuming reinvestment of distributions
paid during the period. During the fiscal year, the Fund paid semi-annual
distributions of $1.10 per share in June and December. These distributions
equate to an annualized distribution yield of 11.0% relative to the Fund's
initial offering price of $20 per share. During the same period, the Fund's
unmanaged reference index, the BXM Index, returned +13.33%. It is not possible
to make a direct investment in the BXM Index.
For more detail with regard to 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 fiscal year.
During the first half of the fiscal year, the broad market produced positive
single-digit returns across the major domestic equity indices, with the
exception of the technology-heavy Nasdaq 100 Index(R), which produced slightly
negative returns. The rebound continued in the latter half of the fiscal year as
most major domestic indices produced positive double-digit returns, with mid and
small cap stocks lagging large cap stocks. Market returns were steady and
consistent following the inflation concerns of the first half of the year, and
an overall bullish tone permeated the market as fears about consumer spending
and the housing market eased despite volatile energy prices. Corporate earnings
were strong and while the consensus view is for an economic slowdown as 2007
unfolds, the market has behaved in a manner that indicates that most view the
economy as strong enough to sustain growth without causing unexpected high
inflation. After experiencing one of its largest spikes in history during the
first half of the year, 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(R) Index")), slowly declined over the
second half of the year. Because, all else being equal, higher volatility
generally results in higher option prices, we were able to generate larger
option premiums from our monthly option sales during the months of May through
August, but lower premiums in subsequent months.
How did you manage the portfolio during the 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 the S&P 500 Index. The Fund also sells one-month,
at-the-money S&P 500 Index call options. Options are sold the third Friday of
every month and cash-settled at expiration. Because 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 retains the entire option premium. In addition to the option positions,
we 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. In addition, the Fund has entered into swap agreements to
deliver additional exposure to the BXM Index.
How would you characterize the Fund's position at the close of the period?
Given the Fund's investment process and current positions, we believe the Fund
is appropriately positioned to deliver its stated goal of providing leveraged
returns on the BXM Index.
Greg Tournant
Portfolio Manager January 16, 2007
CBOE, Volatility Index and VIX are registered trademarks and BXM is a service
mark of the Chicago Board Options Exchange.
Nasdaq 100, Nasdaq 100 Index and Nasdaq are trade or service marks of The Nasdaq
Stock Market, Inc.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006 3
Schedule of Investments as of December 31, 2006
Shares
Industry Common Stocks Held Value
====================================================================================================
Aerospace & Defense--1.9%
Boeing Co. 8,289 $ 736,395
General Dynamics Corp. 4,242 315,393
Goodrich Corp. 1,308 59,579
Honeywell International, Inc. 8,559 387,209
L-3 Communications Holdings, Inc. 1,310 107,132
Lockheed Martin Corp. 3,732 343,605
Northrop Grumman Corp. 3,621 245,142
Raytheon Co. 4,661 246,101
Rockwell Collins, Inc. 1,753 110,947
United Technologies Corp. 10,521 657,773
-------------
3,209,276
- ----------------------------------------------------------------------------------------------------
Air Freight & Logistics--0.7%
FedEx Corp. 3,214 349,105
United Parcel Service, Inc. Class B 11,253 843,750
-------------
1,192,855
- ----------------------------------------------------------------------------------------------------
Airlines--0.1%
Southwest Airlines Co. 8,300 127,156
- ----------------------------------------------------------------------------------------------------
Auto Components--0.1%
The Goodyear Tire & Rubber Co. (a) 1,860 39,041
Johnson Controls, Inc. 2,052 176,308
-------------
215,349
- ----------------------------------------------------------------------------------------------------
Automobiles--0.3%
Ford Motor Co. 19,800 148,698
General Motors Corp. 5,929 182,139
Harley-Davidson, Inc. 2,716 191,397
-------------
522,234
- ----------------------------------------------------------------------------------------------------
Beverages--1.6%
Anheuser-Busch Cos., Inc. 8,059 396,503
Brown-Forman Corp. Class B 826 54,714
The Coca-Cola Co. 21,374 1,031,295
Coca-Cola Enterprises, Inc. 2,905 59,320
Constellation Brands, Inc. Class A (a) 2,201 63,873
Molson Coors Brewing Co. Class B 477 36,462
Pepsi Bottling Group, Inc. 1,435 44,356
PepsiCo, Inc. 17,213 1,076,673
-------------
2,763,196
- ----------------------------------------------------------------------------------------------------
Biotechnology--1.0%
Amgen, Inc. (a) 12,228 835,295
Biogen Idec, Inc. (a) 3,534 173,837
Celgene Corp. (a) 3,904 224,597
Genzyme Corp. (a) 2,755 169,653
Gilead Sciences, Inc. (a) 4,820 312,963
Medimmune, Inc. (a) 2,507 81,152
-------------
1,797,497
- ----------------------------------------------------------------------------------------------------
Building Products--0.1%
American Standard Cos., Inc. 1,818 83,355
Masco Corp. 4,132 123,423
-------------
206,778
- ----------------------------------------------------------------------------------------------------
Capital Markets--3.0%
Ameriprise Financial, Inc. 2,536 138,212
The Bank of New York Co., Inc. 8,010 315,354
The Bear Stearns Cos., Inc. 1,230 200,219
The Charles Schwab Corp. 10,722 207,363
E*Trade Financial Corp. (a) 4,475 100,329
Federated Investors, Inc. Class B 946 31,956
Franklin Resources, Inc. 1,747 192,467
Goldman Sachs Group, Inc. 4,464 889,898
Janus Capital Group, Inc. 2,077 44,842
Legg Mason, Inc. 1,378 130,979
Lehman Brothers Holdings, Inc. 5,556 434,035
Mellon Financial Corp. 4,317 181,962
Merrill Lynch & Co., Inc. (b) 9,266 862,665
Morgan Stanley 11,096 903,547
Northern Trust Corp. 1,965 119,256
State Street Corp. 3,481 234,759
T. Rowe Price Group, Inc. 2,764 120,980
-------------
5,108,823
- ----------------------------------------------------------------------------------------------------
Chemicals--1.2%
Air Products & Chemicals, Inc. 2,310 162,347
Ashland, Inc. 598 41,370
The Dow Chemical Co. 10,013 399,919
E.I. du Pont de Nemours & Co. 9,642 469,662
Eastman Chemical Co. 863 51,185
Ecolab, Inc. 1,869 84,479
Hercules, Inc. (a) 1,190 22,979
International Flavors & Fragrances, Inc. 818 40,213
Monsanto Co. 5,695 299,158
PPG Industries, Inc. 1,732 111,212
Praxair, Inc. 3,385 200,832
Rohm & Haas Co. 1,488 76,067
Sigma-Aldrich Corp. 693 53,860
-------------
2,013,283
- ----------------------------------------------------------------------------------------------------
Commercial Banks--3.2%
BB&T Corp. 5,670 249,083
Comerica, Inc. 1,665 97,702
Commerce Bancorp, Inc. 1,966 69,341
Compass Bancshares, Inc. 1,361 81,184
Fifth Third Bancorp 5,850 239,440
First Horizon National Corp. 1,305 54,523
Huntington Bancshares, Inc. 2,491 59,161
KeyCorp 4,209 160,068
M&T Bank Corp. 811 99,072
Marshall & Ilsley Corp. 2,674 128,646
National City Corp. 6,620 242,027
PNC Financial Services Group, Inc. 3,080 228,043
Regions Financial Corp. 7,642 285,811
SunTrust Banks, Inc. 3,712 313,478
Synovus Financial Corp. 3,407 105,038
U.S. Bancorp 18,426 666,837
Wachovia Corp. 19,979 1,137,804
Wells Fargo & Co. 35,388 1,258,397
Zions Bancorp. 1,121 92,415
-------------
5,568,070
- ----------------------------------------------------------------------------------------------------
Commercial Services & Supplies--0.4%
Allied Waste Industries, Inc. (a) 2,662 32,716
Avery Dennison Corp. 990 67,251
Cintas Corp. 1,431 56,825
Equifax, Inc. 1,312 53,267
Monster Worldwide, Inc. (a) 1,346 62,777
Pitney Bowes, Inc. 2,326 107,438
RR Donnelley & Sons Co. 2,273 80,782
Robert Half International, Inc. 1,757 65,220
Waste Management, Inc. 5,608 206,206
-------------
732,482
- ----------------------------------------------------------------------------------------------------
4 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
====================================================================================================
Communications Equipment--2.1%
ADC Telecommunications, Inc. (a) 1,229 $ 17,857
Avaya, Inc. (a) 4,760 66,545
Ciena Corp. (a) 885 24,523
Cisco Systems, Inc. (a) 63,656 1,739,718
Comverse Technology, Inc. (a) 2,117 44,690
Corning, Inc. (a) 16,397 306,788
JDS Uniphase Corp. (a) 2,213 36,869
Juniper Networks, Inc. (a) 5,930 112,314
Motorola, Inc. 25,340 520,990
QUALCOMM, Inc. 17,322 654,598
Tellabs, Inc. (a) 4,631 47,514
-------------
3,572,406
- ----------------------------------------------------------------------------------------------------
Computers & Peripherals--2.9%
Apple Computer, Inc. (a) 8,915 756,349
Dell, Inc. (a) 23,812 597,443
EMC Corp. (a) 23,086 304,735
Hewlett-Packard Co. 28,710 1,182,565
International Business Machines Corp. 15,790 1,533,999
Lexmark International, Inc. Class A (a) 1,027 75,176
NCR Corp. (a) 1,868 79,876
Network Appliance, Inc. (a) 3,919 153,938
QLogic Corp. (a) 1,652 36,212
SanDisk Corp. (a) 2,359 101,508
Sun Microsystems, Inc. (a) 36,893 199,960
-------------
5,021,761
- ----------------------------------------------------------------------------------------------------
Construction & Engineering--0.0%
Fluor Corp. 923 75,363
- ----------------------------------------------------------------------------------------------------
Construction Materials--0.1%
Vulcan Materials Co. 990 88,971
- ----------------------------------------------------------------------------------------------------
Consumer Finance--0.8%
American Express Co. 12,629 766,201
Capital One Financial Corp. 4,365 335,319
SLM Corp. 4,285 208,979
-------------
1,310,499
- ----------------------------------------------------------------------------------------------------
Containers & Packaging--0.1%
Ball Corp. 1,092 47,611
Bemis Co. 1,099 37,344
Pactiv Corp. (a) 1,395 49,788
Sealed Air Corp. 847 54,987
Temple-Inland, Inc. 1,121 51,600
-------------
241,330
- ----------------------------------------------------------------------------------------------------
Distributors--0.1%
Genuine Parts Co. 1,788 84,805
- ----------------------------------------------------------------------------------------------------
Diversified Consumer Services--0.1%
Apollo Group, Inc. Class A (a) 1,467 57,169
H&R Block, Inc. 3,378 77,829
-------------
134,998
- ----------------------------------------------------------------------------------------------------
Diversified Financial Services--4.4%
Bank of America Corp. 47,073 2,513,227
CIT Group, Inc. 2,079 115,946
Chicago Mercantile Exchange
Holdings, Inc. 365 186,059
Citigroup, Inc. 51,506 2,868,884
JPMorgan Chase & Co. 36,363 1,756,333
Moody's Corp. 2,464 170,164
-------------
7,610,613
- ----------------------------------------------------------------------------------------------------
Diversified Telecommunication Services--2.3%
AT&T Inc. 40,282 1,440,081
BellSouth Corp. 19,120 900,743
CenturyTel, Inc. 1,203 52,523
Citizens Communications Co. 3,374 48,484
Embarq Corp. 1,567 82,362
Qwest Communications
International Inc. (a) 16,856 141,085
Verizon Communications, Inc. 30,603 1,139,656
Windstream Corp. 4,998 71,072
-------------
3,876,006
- ----------------------------------------------------------------------------------------------------
Electric Utilities--1.2%
Allegheny Energy, Inc. (a) 1,732 79,516
American Electric Power Co., Inc. 4,146 176,537
Edison International 3,415 155,314
Entergy Corp. 2,168 200,150
Exelon Corp. 7,033 435,272
FPL Group, Inc. 4,237 230,578
FirstEnergy Corp. 3,346 201,764
PPL Corp. 4,000 143,360
Pinnacle West Capital Corp. 1,047 53,072
Progress Energy, Inc. 2,665 130,798
The Southern Co. 7,786 286,992
-------------
2,093,353
- ----------------------------------------------------------------------------------------------------
Electrical Equipment--0.4%
American Power Conversion Corp. 1,772 54,205
Cooper Industries Ltd. Class A 953 86,180
Emerson Electric Co. 8,411 370,673
Rockwell Automation, Inc. 1,784 108,967
-------------
620,025
- ----------------------------------------------------------------------------------------------------
Electronic Equipment & Instruments--0.2%
Agilent Technologies, Inc. (a) 4,284 149,297
Jabil Circuit, Inc. 1,936 47,529
Molex, Inc. 1,486 47,002
Sanmina-SCI Corp. (a) 5,585 19,268
Solectron Corp. (a) 9,587 30,870
Symbol Technologies, Inc. 2,670 39,890
Tektronix, Inc. 865 25,232
-------------
359,088
- ----------------------------------------------------------------------------------------------------
Energy Equipment & Services--1.3%
BJ Services Co. 3,073 90,100
Baker Hughes, Inc. 3,362 251,007
Halliburton Co. 10,540 327,267
Nabors Industries Ltd. (a) 3,138 93,450
National Oilwell Varco, Inc. (a) 1,840 112,571
Noble Corp. 1,421 108,209
Rowan Cos., Inc. 1,158 38,446
Schlumberger Ltd. 12,350 780,026
Smith International, Inc. 2,091 85,877
Transocean, Inc. (a) 3,065 247,928
Weatherford International Ltd. (a) 3,561 148,814
-------------
2,283,695
- ----------------------------------------------------------------------------------------------------
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006 5
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
====================================================================================================
Food & Staples Retailing--1.7%
CVS Corp. 8,633 $ 266,846
Costco Wholesale Corp. 4,804 253,987
The Kroger Co. 7,520 173,486
SUPERVALU Inc. 2,158 77,149
SYSCO Corp. 6,479 238,168
Safeway, Inc. 4,647 160,600
Wal-Mart Stores, Inc. 25,777 1,190,382
Walgreen Co. 10,518 482,671
Whole Foods Market, Inc. 1,498 70,301
-------------
2,913,590
- ----------------------------------------------------------------------------------------------------
Food Products--0.8%
Archer Daniels Midland Co. 6,889 220,172
Campbell Soup Co. 2,283 88,786
ConAgra Foods, Inc. 5,341 144,207
Dean Foods Co. (a) 1,402 59,277
General Mills, Inc. 3,596 207,130
HJ Heinz Co. 3,454 155,465
The Hershey Co. 1,823 90,785
Kellogg Co. 2,631 131,708
McCormick & Co., Inc. 1,377 53,097
Sara Lee Corp. 7,828 133,311
Tyson Foods, Inc. Class A 2,641 43,444
Wm. Wrigley Jr. Co. 2,301 119,008
-------------
1,446,390
- ----------------------------------------------------------------------------------------------------
Gas Utilities--0.1%
Nicor, Inc. 469 21,949
Peoples Energy Corp. 403 17,962
Questar Corp. 900 74,745
-------------
114,656
- ----------------------------------------------------------------------------------------------------
Health Care Equipment & Supplies--1.2%
Bausch & Lomb, Inc. 564 29,362
Baxter International, Inc. 6,860 318,235
Becton Dickinson & Co. 2,585 181,338
Biomet, Inc. 2,567 105,940
Boston Scientific Corp. (a) 12,360 212,345
CR Bard, Inc. 1,079 89,525
Hospira, Inc. (a) 1,633 54,836
Medtronic, Inc. 12,066 645,652
St. Jude Medical, Inc. (a) 3,705 135,455
Stryker Corp. 3,116 171,723
Zimmer Holdings, Inc. (a) 2,502 196,107
-------------
2,140,518
- ----------------------------------------------------------------------------------------------------
Health Care Providers & Services--1.9%
Aetna, Inc. 5,472 236,281
AmerisourceBergen Corp. 2,014 90,549
Cardinal Health, Inc. 4,245 273,505
Caremark Rx, Inc. 4,470 255,282
Cigna Corp. 1,075 141,438
Coventry Health Care, Inc. (a) 1,670 83,583
Express Scripts, Inc. (a) 1,420 101,672
Health Management Associates, Inc.
Class A 2,522 53,239
Humana, Inc. (a) 1,742 96,350
Laboratory Corp. of America Holdings (a) 1,314 96,540
Manor Care, Inc. 775 36,363
McKesson Corp. 3,102 157,271
Medco Health Solutions, Inc. (a) 3,076 164,381
Patterson Cos., Inc. (a) 1,457 51,738
Quest Diagnostics, Inc. 1,677 88,881
Tenet Healthcare Corp. (a) 4,940 34,432
UnitedHealth Group, Inc. 14,120 758,668
WellPoint, Inc. (a) 6,499 511,406
-------------
3,231,579
- ----------------------------------------------------------------------------------------------------
Health Care Technology--0.0%
IMS Health, Inc. 2,080 57,158
- ----------------------------------------------------------------------------------------------------
Hotels, Restaurants & Leisure--1.3%
Carnival Corp. 4,664 228,769
Darden Restaurants, Inc. 1,539 61,822
Harrah's Entertainment, Inc. 1,950 161,304
Hilton Hotels Corp. 4,053 141,450
International Game Technology 3,558 164,380
Marriott International, Inc. Class A 3,523 168,118
McDonald's Corp. 12,964 574,694
Starbucks Corp. (a) 7,925 280,704
Starwood Hotels & Resorts Worldwide, Inc. 2,222 138,875
Wendy's International, Inc. 1,002 33,156
Wyndham Worldwide Corp. (a) 2,077 66,506
Yum! Brands, Inc. 2,779 163,405
-------------
2,183,183
- ----------------------------------------------------------------------------------------------------
Household Durables--0.5%
Black & Decker Corp. 713 57,019
Centex Corp. 1,244 70,000
DR Horton, Inc. 2,893 76,636
Fortune Brands, Inc. 1,587 135,514
Harman International Industries, Inc. 684 68,338
KB Home 823 42,203
Leggett & Platt, Inc. 1,876 44,836
Lennar Corp. Class A 1,445 75,805
Newell Rubbermaid, Inc. 2,906 84,129
Pulte Homes, Inc. 2,215 73,361
Snap-On, Inc. 612 29,156
The Stanley Works 852 42,847
Whirlpool Corp. 822 68,242
-------------
868,086
- ----------------------------------------------------------------------------------------------------
Household Products--1.7%
Clorox Co. 1,591 102,063
Colgate-Palmolive Co. 5,391 351,709
Kimberly-Clark Corp. 4,804 326,432
The Procter & Gamble Co. 33,216 2,134,792
-------------
2,914,996
- ----------------------------------------------------------------------------------------------------
6 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
====================================================================================================
IT Services--0.9%
Affiliated Computer Services, Inc.
Class A (a) 1,243 $ 60,708
Automatic Data Processing, Inc. 5,772 284,271
Cognizant Technology Solutions Corp. (a) 1,486 114,660
Computer Sciences Corp. (a) 1,800 96,066
Convergys Corp. (a) 1,444 34,338
Electronic Data Systems Corp. 5,422 149,376
Fidelity National Information Services, Inc. 1,699 68,113
First Data Corp. 8,027 204,849
Fiserv, Inc. (a) 1,815 95,142
Paychex, Inc. 3,549 140,327
Sabre Holdings Corp. Class A 1,388 44,263
Unisys Corp. (a) 3,612 28,318
The Western Union Co. 8,034 180,122
-------------
1,500,553
- ----------------------------------------------------------------------------------------------------
Independent Power Producers &
Energy Traders--0.3%
The AES Corp. (a) 6,962 153,442
Constellation Energy Group, Inc. 1,887 129,958
Dynegy, Inc. Class A (a) 3,968 28,728
TXU Corp. 4,814 260,967
-------------
573,095
- ----------------------------------------------------------------------------------------------------
Industrial Conglomerates--3.1%
3M Co. 7,719 601,542
General Electric Co. 108,052 4,020,615
Textron, Inc. 1,317 123,495
Tyco International Ltd. 20,848 633,779
-------------
5,379,431
- ----------------------------------------------------------------------------------------------------
Insurance--3.8%
ACE Ltd. 3,413 206,725
AMBAC Financial Group, Inc. 1,112 99,046
AON Corp. 3,246 114,714
Aflac, Inc. 5,184 238,464
The Allstate Corp. 6,551 426,536
American International Group, Inc. 27,251 1,952,807
Chubb Corp. 4,315 228,307
Cincinnati Financial Corp. 1,816 82,283
Genworth Financial, Inc. Class A 4,646 158,940
Hartford Financial Services Group, Inc. 3,322 309,976
Lincoln National Corp. 3,010 199,864
Loews Corp. 4,790 198,641
MBIA, Inc. 1,413 103,234
Marsh & McLennan Cos., Inc. 5,777 177,123
MetLife, Inc. 7,969 470,251
Principal Financial Group, Inc. 2,828 166,004
The Progressive Corp. 7,984 193,372
Prudential Financial, Inc. 5,000 429,300
Safeco Corp. 1,103 68,993
The St. Paul Travelers Cos., Inc. 7,233 388,340
Torchmark Corp. 1,028 65,545
UnumProvident Corp. 3,591 74,621
XL Capital Ltd. Class A 1,893 136,334
-------------
6,489,420
- ----------------------------------------------------------------------------------------------------
Internet & Catalog Retail--0.1%
Amazon.com, Inc. (a) 3,238 127,771
IAC/InterActiveCorp (a) 2,340 86,954
-------------
214,725
- ----------------------------------------------------------------------------------------------------
Internet Software & Services--1.0%
eBay, Inc. (a) 12,129 364,719
Google, Inc. Class A (a) 2,246 1,034,238
VeriSign, Inc. (a) 2,570 61,809
Yahoo!, Inc. (a) 12,832 327,729
-------------
1,788,495
- ----------------------------------------------------------------------------------------------------
Leisure Equipment & Products--0.1%
Brunswick Corp. 962 30,688
Eastman Kodak Co. 3,012 77,710
Hasbro, Inc. 1,665 45,371
Mattel, Inc. 3,998 90,595
-------------
244,364
- ----------------------------------------------------------------------------------------------------
Life Sciences Tools & Services--0.2%
Applera Corp.--Applied
Biosystems Group 1,920 70,445
Millipore Corp. (a) 560 37,296
PerkinElmer, Inc. 1,289 28,654
Thermo Electron Corp. (a) 4,278 193,751
Waters Corp. (a) 1,064 52,104
-------------
382,250
- ----------------------------------------------------------------------------------------------------
Machinery--1.1%
Caterpillar, Inc. 6,819 418,209
Cummins, Inc. 550 64,999
Danaher Corp. 2,484 179,941
Deere & Co. 2,423 230,355
Dover Corp. 2,140 104,903
Eaton Corp. 1,562 117,369
ITT Corp. 1,936 110,004
Illinois Tool Works, Inc. 4,397 203,097
Ingersoll-Rand Co. Class A 3,214 125,764
Navistar International Corp. (a) 647 21,629
PACCAR, Inc. 2,603 168,935
Pall Corp. 1,283 44,328
Parker Hannifin Corp. 1,236 95,024
-------------
1,884,557
- ----------------------------------------------------------------------------------------------------
Media--2.9%
CBS Corp. Class B 8,192 255,427
Clear Channel Communications, Inc. 5,176 183,955
Comcast Corp. Class A (a) 21,815 923,429
The DIRECTV Group, Inc. (a) 8,080 201,515
Dow Jones & Co., Inc. 682 25,916
EW Scripps Co. Class A 873 43,598
Gannett Co., Inc. 2,456 148,490
Interpublic Group of Cos., Inc. (a) 4,625 56,610
The McGraw-Hill Cos., Inc. 3,713 252,558
Meredith Corp. 407 22,934
New York Times Co. Class A 1,508 36,735
News Corp. Class A 24,536 527,033
Omnicom Group 1,791 187,231
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006 7
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
====================================================================================================
Media (concluded)
Time Warner, Inc. 41,849 $ 911,471
Tribune Co. 1,998 61,498
Univision Communications, Inc. Class A (a) 2,644 93,650
Viacom, Inc. Class B (a) 7,330 300,750
Walt Disney Co. 21,682 743,042
-------------
4,975,842
- ----------------------------------------------------------------------------------------------------
Metals & Mining--0.7%
Alcoa, Inc. 9,089 272,761
Allegheny Technologies, Inc. 1,056 95,758
Freeport-McMoRan Copper & Gold, Inc.
Class B 2,064 115,027
Newmont Mining Corp. 4,719 213,063
Nucor Corp. 3,167 173,108
Phelps Dodge Corp. 2,138 255,961
United States Steel Corp. 1,242 90,840
-------------
1,216,518
- ----------------------------------------------------------------------------------------------------
Multi-Utilities--1.1%
Ameren Corp. 2,162 116,164
CMS Energy Corp. (a) 2,332 38,944
CenterPoint Energy, Inc. 3,279 54,366
Consolidated Edison, Inc. 2,692 129,404
DTE Energy Co. 1,865 90,285
Dominion Resources, Inc. 3,708 310,879
Duke Energy Corp. 13,163 437,143
KeySpan Corp. 1,837 75,648
NiSource, Inc. 2,862 68,974
PG&E Corp. 3,656 173,038
Public Service Enterprise Group, Inc. 2,644 175,509
Sempra Energy 2,748 153,998
TECO Energy, Inc. 2,193 37,785
Xcel Energy, Inc. 4,265 98,351
-------------
1,960,488
- ----------------------------------------------------------------------------------------------------
Multiline Retail--0.9%
Big Lots, Inc. (a) 1,148 26,312
Dillard's, Inc. Class A 638 22,311
Dollar General Corp. 3,271 52,532
Family Dollar Stores, Inc. 1,589 46,605
Federated Department Stores 5,505 209,906
JC Penney Co., Inc. 2,358 182,415
Kohl's Corp. (a) 3,428 234,578
Nordstrom, Inc. 2,398 118,317
Sears Holdings Corp. (a) 871 146,267
Target Corp. 9,003 513,621
-------------
1,552,864
- ----------------------------------------------------------------------------------------------------
Office Electronics--0.1%
Xerox Corp. (a) 10,118 171,500
- ----------------------------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--6.3%
Anadarko Petroleum Corp. 4,819 209,723
Apache Corp. 3,453 229,659
Chesapeake Energy Corp. 4,360 126,658
Chevron Corp. 22,851 1,680,234
ConocoPhillips 17,251 1,241,209
Consol Energy, Inc. 1,914 61,497
Devon Energy Corp. 4,633 310,782
EOG Resources, Inc. 2,552 159,372
El Paso Corp. 7,394 112,980
Exxon Mobil Corp. 61,138 4,685,005
Hess Corp. 2,838 140,680
Kinder Morgan, Inc. 1,124 118,863
Marathon Oil Corp. 3,685 340,863
Murphy Oil Corp. 1,961 99,717
Occidental Petroleum Corp. 9,031 440,984
Peabody Energy Corp. 2,765 111,734
Sunoco, Inc. 1,291 80,507
Valero Energy Corp. 6,338 324,252
Williams Cos., Inc. 6,251 163,276
XTO Energy, Inc. 3,836 180,484
-------------
10,818,479
- ----------------------------------------------------------------------------------------------------
Paper & Forest Products--0.2%
International Paper Co. 4,769 162,623
MeadWestvaco Corp. 1,899 57,084
Weyerhaeuser Co. 2,479 175,141
-------------
394,848
- ----------------------------------------------------------------------------------------------------
Personal Products--0.1%
Avon Products, Inc. 4,660 153,966
The Estee Lauder Cos., Inc. Class A 1,335 54,495
-------------
208,461
- ----------------------------------------------------------------------------------------------------
Pharmaceuticals--4.9%
Abbott Laboratories 16,089 783,695
Allergan, Inc. 1,612 193,021
Barr Pharmaceuticals, Inc. (a) 1,115 55,884
Bristol-Myers Squibb Co. 20,616 542,613
Eli Lilly & Co. 10,320 537,672
Forest Laboratories, Inc. (a) 3,318 167,891
Johnson & Johnson 30,392 2,006,480
King Pharmaceuticals, Inc. (a) 2,548 40,564
Merck & Co., Inc. 22,757 992,205
Mylan Laboratories 2,221 44,331
Pfizer, Inc. 75,582 1,957,574
Schering-Plough Corp. 15,541 367,389
Watson Pharmaceuticals, Inc. (a) 1,074 27,956
Wyeth 14,116 718,787
-------------
8,436,062
- ----------------------------------------------------------------------------------------------------
Real Estate Investment Trusts (REITs)--0.9%
Apartment Investment & Management
Co. Class A 1,011 56,636
Archstone-Smith Trust 2,289 133,243
Boston Properties, Inc. 1,225 137,053
Equity Office Properties Trust 3,684 177,458
Equity Residential 3,062 155,397
Kimco Realty Corp. 2,369 106,487
Plum Creek Timber Co., Inc. 1,856 73,962
ProLogis 2,594 157,637
Public Storage, Inc. 1,284 125,190
Simon Property Group, Inc. 2,320 234,993
Vornado Realty Trust 1,354 164,511
-------------
1,522,567
- ----------------------------------------------------------------------------------------------------
Real Estate Management & Development--0.1%
CB Richard Ellis Group, Inc. (a) 1,937 64,308
Realogy Corp. (a) 2,247 68,129
-------------
132,437
- ----------------------------------------------------------------------------------------------------
Road & Rail--0.6%
Burlington Northern Santa Fe Corp. 3,765 277,895
CSX Corp. 4,562 157,070
Norfolk Southern Corp. 4,160 209,206
Ryder System, Inc. 637 32,525
Union Pacific Corp. 2,827 260,141
-------------
936,837
8 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
====================================================================================================
Semiconductors & Semiconductor
Equipment--1.9%
Advanced Micro Devices, Inc. (a) 5,751 $ 117,033
Altera Corp. (a) 3,793 74,646
Analog Devices, Inc. 3,585 117,839
Applied Materials, Inc. 14,559 268,614
Broadcom Corp. Class A (a) 4,916 158,836
Intel Corp. 60,441 1,223,930
Kla-Tencor Corp. 2,087 103,828
LSI Logic Corp. (a) 4,199 37,791
Linear Technology Corp. 3,134 95,023
Maxim Integrated Products, Inc. 3,362 102,944
Micron Technology, Inc. (a) 7,908 110,396
National Semiconductor Corp. 3,025 68,668
Novellus Systems, Inc. (a) 1,296 44,608
Nvidia Corp. (a) 3,727 137,936
PMC-Sierra, Inc. (a) 2,199 14,755
Teradyne, Inc. (a) 1,989 29,755
Texas Instruments, Inc. 15,554 447,955
Xilinx, Inc. 3,525 83,930
-------------
3,238,487
- ----------------------------------------------------------------------------------------------------
Software--2.6%
Adobe Systems, Inc. (a) 6,115 251,449
AutoDesk, Inc. (a) 2,429 98,277
BMC Software, Inc. (a) 2,150 69,230
CA, Inc. 4,305 97,508
Citrix Systems, Inc. (a) 1,893 51,206
Compuware Corp. (a) 3,692 30,754
Electronic Arts, Inc. (a) 3,234 162,864
Intuit, Inc. (a) 3,655 111,514
Microsoft Corp. 90,680 2,707,705
Novell, Inc. (a) 3,554 22,035
Oracle Corp. (a) 41,934 718,749
Symantec Corp. (a) 9,833 205,018
-------------
4,526,309
- ----------------------------------------------------------------------------------------------------
Specialty Retail--1.5%
AutoNation, Inc. (a) 1,568 33,430
AutoZone, Inc. (a) 531 61,362
Bed Bath & Beyond, Inc. (a) 2,963 112,890
Best Buy Co., Inc. 4,229 208,025
Circuit City Stores, Inc. 1,487 28,223
The Gap, Inc. 5,523 107,699
Home Depot, Inc. 21,393 859,143
Limited Brands 3,585 103,750
Lowe's Cos., Inc. 15,962 497,216
Office Depot, Inc. (a) 2,918 111,380
OfficeMax, Inc. 781 38,777
RadioShack Corp. 1,424 23,895
The Sherwin-Williams Co. 1,175 74,707
Staples, Inc. 7,575 202,253
TJX Cos., Inc. 4,770 136,040
Tiffany & Co. 1,419 55,682
-------------
2,654,472
- ----------------------------------------------------------------------------------------------------
Textiles, Apparel & Luxury Goods--0.3%
Coach, Inc. (a) 3,852 165,482
Jones Apparel Group, Inc. 1,156 38,645
Liz Claiborne, Inc. 1,076 46,763
Nike, Inc. Class B 1,971 195,188
VF Corp. 937 76,909
-------------
522,987
- ----------------------------------------------------------------------------------------------------
Thrifts & Mortgage Finance--1.2%
Countrywide Financial Corp. 6,510 276,349
Fannie Mae 10,221 607,025
Freddie Mac 7,264 493,226
MGIC Investment Corp. 870 54,410
Sovereign Bancorp, Inc. 3,767 95,644
Washington Mutual, Inc. 9,908 450,715
-------------
1,977,369
- ----------------------------------------------------------------------------------------------------
Tobacco--1.2%
Altria Group, Inc. 21,970 1,885,465
Reynolds American, Inc. 1,797 117,650
UST, Inc. 1,687 98,183
-------------
2,101,298
- ----------------------------------------------------------------------------------------------------
Trading Companies & Distributors--0.0%
WW Grainger, Inc. 767 53,644
- ----------------------------------------------------------------------------------------------------
Wireless Telecommunication Services--0.5%
Alltel Corp. 3,917 236,900
Sprint Nextel Corp. 30,345 573,217
-------------
810,117
- ----------------------------------------------------------------------------------------------------
Total Common Stocks
(Cost--$113,831,636)--77.4% 133,368,544
====================================================================================================
Face
U.S. Government Obligations Amount
====================================================================================================
U.S. Treasury Notes, 4.25%
due 10/31/2007 $33,485,000 33,267,883
- ----------------------------------------------------------------------------------------------------
Total U.S. Government Obligations
(Cost--$33,312,899)--19.3% 33,267,883
====================================================================================================
Short-Term Securities
====================================================================================================
Time Deposits--2.4%
State Street Bank & Trust Co.,
4.25% due 1/02/2007 4,259,722 4,259,722
- ----------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$4,259,722)--2.4% 4,259,722
====================================================================================================
Total Investments
(Cost--$151,404,257)--99.1% 170,896,149
====================================================================================================
Number of
Options Written Contracts
====================================================================================================
Call Options Written
S&P 500 Index, expiring
January 2007 at USD 1,435 960 (681,600)
- ----------------------------------------------------------------------------------------------------
Total Options Written
(Premiums Received--$1,447,776)--(0.4%) (681,600)
====================================================================================================
Total Investments, Net of Options Written
(Cost--$149,956,481*)--98.7% 170,214,549
Other Assets Less Liabilities --1.3% 2,167,184
-------------
Net Assets--100.0% $ 172,381,733
=============
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006 9
Schedule of Investments (concluded)
* The cost and unrealized appreciation (depreciation) of investments, net of
options written, as of December 31, 2006, as computed for federal income
tax purposes, were as follows:
Aggregate cost ............................................ $170,172,726
============
Gross unrealized appreciation ............................. $ 1,890,948
Gross unrealized depreciation ............................. (1,849,125)
------------
Net unrealized appreciation ............................... $ 41,823
============
(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:
--------------------------------------------------------------------------
Purchase Sales Realized Dividend
Affiliate Cost Cost Gains Income
--------------------------------------------------------------------------
Merrill Lynch & Co., Inc. $23,686 $121,797 $36,045 $ 10,663
--------------------------------------------------------------------------
o Financial futures contracts purchased as of December 31, 2006 were as
follows:
-------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Depreciation
-------------------------------------------------------------------------
40 E-MINI S&P 500 March 2007 $2,876,628 $ (19,628)
-------------------------------------------------------------------------
o Total Return Swaps outstanding as of December 31, 2006 were as follows:
------------------------------------------------------------------------------------------------------------------------------
Notional Unrealized
Counterparty Receive Total Return Pay Expiration Amount Appreciation
------------------------------------------------------------------------------------------------------------------------------
HSBC Bank USA NA CBOE S&P 500
BuyWrite Index 12-month LIBOR rate plus
(BXM(SM))--Total Return a negotiated spread October 2007 $50,000,000 $ 762,107
Deutsche Bank AG CBOE S&P 500
BuyWrite Index 12-month LIBOR rate plus
(BXM(SM))--Total Return a negotiated spread October 2007 $68,200,199 1,053,938
------------------------------------------------------------------------------------------------------------------------------
Total $ 1,816,045
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for the purposes
of this report, which may combine industry sub-classifications for
reporting ease. Industries are shown as a percent of net assets. These
industry classifications are unaudited.
See Notes to Financial Statements.
10 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006
Statement of Assets, Liabilities and Capital
As of December 31, 2006
===================================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$150,828,346) ... $ 170,033,484
Investments in affiliated securities, at value (identified cost--$575,911) ......... 862,665
Cash collateral on financial futures contracts ..................................... 112,000
Unrealized appreciation on swaps ................................................... 1,816,045
Receivables:
Interest ........................................................................ $ 235,125
Dividends ....................................................................... 189,396
Securities sold ................................................................. 21,071 445,592
-------------
Prepaid expenses ................................................................... 9,943
-------------
Total assets ....................................................................... 173,279,729
-------------
===================================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Options written, at value (premiums received--$1,447,776) .......................... 681,600
Payables:
Investment adviser .............................................................. 109,365
Variation margin ................................................................ 12,786 122,151
-------------
Accrued expenses ................................................................... 94,245
-------------
Total liabilities .................................................................. 897,996
-------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets ......................................................................... $ 172,381,733
=============
===================================================================================================================================
Capital
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, 100,000,000 shares authorized ....................... $ 9,078
Paid-in capital in excess of par ................................................... 168,968,364
Undistributed investment income--net ............................................... $ 1,911,324
Accumulated realized capital losses--net ........................................... (20,561,518)
Unrealized appreciation--net ....................................................... 22,054,485
-------------
Total accumulated earnings--net .................................................... 3,404,291
-------------
Total capital--Equivalent to $18.99 per share based on 9,078,347 shares of
Common Stock outstanding (market price--$20.31) ................................... $ 172,381,733
=============
See Notes to Financial Statements.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006 11
Statement of Operations
For the Year Ended December 31, 2006
===================================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends (including $10,663 from affiliates) ...................................... $ 2,653,572
Interest ........................................................................... 1,534,873
-------------
Total income ....................................................................... 4,188,445
-------------
===================================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ........................................................... $ 1,497,171
Accounting services ................................................................ 77,879
Professional fees .................................................................. 64,605
Directors' fees and expenses ....................................................... 63,143
Custodian fees ..................................................................... 44,974
Printing and shareholder reports ................................................... 33,906
Transfer agent fees ................................................................ 33,079
Repurchase fees .................................................................... 19,199
Listing fees ....................................................................... 16,572
Pricing fees ....................................................................... 1,222
Other .............................................................................. 15,455
-------------
Total expenses ..................................................................... 1,867,205
-------------
Investment income--net ............................................................. 2,321,240
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -----------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net (including $36,045 from affiliates) ............................ 2,468,325
Financial futures contracts and swaps--net ...................................... 8,159,286
Options written--net ............................................................ (2,978,898) 7,648,713
-------------
Change in unrealized appreciation on:
Investments--net ................................................................ 15,061,523
Financial futures contracts and swaps--net ...................................... 1,365,670
Options written--net ............................................................ (532,558) 15,894,635
-------------------------------
Total realized and unrealized gain--net ............................................ 23,543,348
-------------
Net Increase in Net Assets Resulting from Operations ............................... $ 25,864,588
=============
See Notes to Financial Statements.
12 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006
Statements of Changes in Net Assets
For the Period
For the September 30,
Year Ended 2005+ to
December 31, December 31,
Increase (Decrease) in Net Assets: 2006 2005
===================================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................................. $ 2,321,240 $ 577,974
Realized gain (loss)--net .......................................................... 7,648,713 (8,010,406)
Change in unrealized appreciation--net ............................................. 15,894,635 6,159,850
-------------------------------
Net increase (decrease) in net assets resulting from operations .................... 25,864,588 (1,272,582)
-------------------------------
===================================================================================================================================
Dividends & Distributions to Shareholders
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................................. (429,115) (577,974)
Realized gain--net ................................................................. (19,628,868) (570,957)
Tax return of capital .............................................................. -- (3,941,449)
-------------------------------
Net decrease in net assets resulting from dividends and distributions to
shareholders ...................................................................... (20,057,983) (5,090,380)
-------------------------------
===================================================================================================================================
Common Stock Transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Net proceeds from issuance of shares ............................................... -- 176,675,000
Net redemption of Common Stock resulting from a repurchase offer (including
$2,759 of repurchase offer fees) .................................................. (5,378,110) --
Offering costs resulting from the issuance of shares ............................... -- (370,000)
Value of shares issued to shareholders in reinvestment of dividends and
distributions ..................................................................... 1,911,192 --
-------------------------------
Net increase (decrease) in net assets resulting from common stock transactions ..... (3,466,918) 176,305,000
-------------------------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ....................................................... 2,339,687 169,942,038
Beginning of period ................................................................ 170,042,046 100,008
-------------------------------
End of period* ..................................................................... $ 172,381,733 $ 170,042,046
===============================
* Undistributed investment income--net ........................................... $ 1,911,324 $ --
===============================
+ Commencement of operations.
See Notes to Financial Statements.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006 13
Financial Highlights
For the Period
For the September 30,
Year Ended 2005+ to
The following per share data and ratios have been derived December 31, 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*** ................................ .25 .06
Realized and unrealized gain (loss)--net ................. 2.57++ (.20)
---------------------------------
Total from investment operations ......................... 2.82 (.14)
---------------------------------
Less dividends and distributions from:
Investment income--net ................................ (.05) (.06)
Realized gain--net .................................... (2.15) (.06)
Tax return of capital ................................. -- (.43)
---------------------------------
Total dividends and distributions ........................ (2.20) (.55)
---------------------------------
Offering costs resulting from the issuance on Common Stock -- (.04)
---------------------------------
Net asset value, end of period ........................... $ 18.99 $ 18.37
=================================
Market price per share, end of period .................... $ 20.31 $ 16.83
=================================
==============================================================================================================
Total Investment Return**
- --------------------------------------------------------------------------------------------------------------
Based on net asset value per share ....................... 16.11% (.73%)@
=================================
Based on market price per share .......................... 35.55% (13.14%)@
=================================
==============================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------
Expenses ................................................. 1.06% 1.36%*
=================================
Investment income--net ................................... 1.32% 1.32%*
=================================
==============================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ................. $ 172,382 $ 170,042
=================================
Portfolio turnover ....................................... 25.62% 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.
++ Includes repurchase offer fees, which are less than $.01 per share.
@ Aggregate total investment return.
See Notes to Financial Statements.
14 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 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 with a fixed term of approximately five years. The
Fund's financial statements are prepared in conformity with U.S. generally
accepted accounting principles, which may require the use of management accruals
and estimates. Actual results may differ from these estimates. The Fund
determines and makes available for publication the net asset value of its Common
Stock on a daily basis. The Fund's Common Stock shares are 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 Global 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 Capital
Market 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 or purchased are valued at the last sales price in the case of
exchange-traded options. Options traded in the OTC market are valued at the last
asked price (options written) and last bid price (options purchased). 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 Advisor
believes that this method no longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Fund's Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government securities,
money market instruments and certain fixed income securities, is substantially
completed each day at various times prior to the close of business on the NYSE.
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign currency exchange rates
will be determined as of 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
Advisor 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 due to an unfavorable change in the
price of the underlying security or index, or if the counterparty does not
perform under the contract.
o Options -- The Fund 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 value of the option
written. The Fund provides the purchaser with the right to potentially
receive a cash payment from the Fund equal to any appreciation in the cash
value of the index over the strike price on the expiration date of the
written option. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006 15
Notes to Financial Statements (continued)
gain or loss on the option to the extent of the premiums received (or gain
or loss to the extent the cost of the closing transaction exceeds the
premium received).
Written options are non-income producing investments.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such financial futures contracts.
Financial 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 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 receives a fee from the borrower. The Fund typically receives the income on
the loaned securities, but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
(h) Recent accounting pronouncements -- In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109."
FIN 48 prescribes the minimum recognition threshold a tax position must meet in
connection with accounting for uncertainties in income tax positions taken or
16 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006
Notes to Financial Statements (continued)
expected to be taken by an entity including mutual funds before being measured
and recognized in the financial statements. Adoption of FIN 48 is required for
the last net asset value calculation in the first required financial statement
reporting period for fiscal years beginning after December 15, 2006. The impact
on the Fund's financial statements, if any, is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, "Fair Value Measurements" ("FAS 157"), was issued and is effective for
fiscal years beginning after November 15, 2007. FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the implications of
FAS 157. At this time, its impact on the Fund's financial statements has not
been determined.
(i) Reclassification -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the current
year, $19,199 has been reclassified between paid-in capital in excess of par and
undistributed net investment income as a result of a permanent difference
attributable to nondeductible expenses. This reclassification has no effect on
net assets or net asset value per share.
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 excluding any net assets
attributable to leveraging transactions. In addition, IQ entered into a
Subadvisory Agreement with PEA Capital LLC ("PEA") pursuant to which PEA
provided, until November 1, 2006, certain investment advisory services to IQ
with respect to the Fund. For such services, IQ paid PEA a monthly fee at an
annual rate equal to .40% of the average daily value of the Fund's net assets
plus borrowings for investment purposes, but excluding any net assets
attributable to leveraging transactions.
Effective November 1, 2006, the Subadvisory Agreement continued on the same
terms with PEA's affiliate and successor, Oppenheimer Capital LLC
("Oppenheimer"), to which PEA had contributed all of its personnel and
resources. At a meeting held on June 5, 2006, the Fund's Board of Directors had
reviewed the change and determined that it would not change how the Fund is
managed or operated; would not harm the Fund in any manner; and that there would
not be an assignment of the Subadvisory Agreement within the meaning of the
Investment Company Act of 1940. There was no increase in the aggregate fees paid
by the Fund for these services.
On September 29, 2006, BlackRock, Inc. ("BlackRock") and ML & Co. combined ML &
Co.'s investment management business, Merrill Lynch Investment Managers, L.P.
and its affiliates, with BlackRock to create a new independent company. ML & Co.
owns up to a 49.8% economic interest and up to a 45% voting interest in the
combined company, and The PNC Financial Services Group, Inc. has approximately a
34% economic and voting interest. The new company operates under the BlackRock
name and is governed by a board of directors with a majority of independent
members. IQ remains an indirect subsidiary of ML & Co.
Effective October 2, 2006, IQ has entered into an Administration Agreement with
Princeton Administrators, LLC (the "Administrator"). The Administration
Agreement provides that IQ will pay the Administrator a fee from its investment
advisory fee at an annual rate equal to .12% of the average daily value of the
Fund's net assets for the performance of administrative and other services
necessary for the operation of the Fund. There is no increase in the aggregate
fees paid by the Fund for these services. The Administrator is an indirect
subsidiary of BlackRock.
Certain officers of the Fund are officers of IQ and/or ML & Co. Effective
September 29, 2006, certain officers of the Fund are officers of BlackRock or
its affiliates.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 2006 were $43,196,629 and $62,735,575, respectively.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006 17
Notes to Financial Statements (concluded)
Transactions in call options written for the year ended December 31, 2006 were
as follows:
- -------------------------------------------------------------------------------
Number of Premiums
Contracts Received
- -------------------------------------------------------------------------------
Outstanding call options written,
beginning of year .......................... 1,083 $ 1,645,294
Options written .............................. 12,930 21,361,195
Options closed ............................... (10,813) (17,633,715)
Options expired .............................. (2,240) (3,924,998)
-----------------------------
Outstanding call options written,
end of year ................................ 960 $ 1,447,776
=============================
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.
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.
Shares issued and outstanding for the year ended Decem- ber 31, 2006 increased
by 99,053 from dividend and distribution reinvestments and decreased by 275,942
as a result of a repurchase offer and during the period September 30, 2005 to
December 31, 2005 increased by 9,250,000 from shares sold.
5. Distributions to Shareholders:
The tax character of distributions paid during the fiscal year ended December
31, 2006 and for the period September 30, 2005 to December 31, 2005 was as
follows:
- --------------------------------------------------------------------------------
9/30/2005+ to
12/31/2006 12/31/2005
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ................................ $ 9,922,149 $ 577,974
Long-term capital gain ......................... 10,135,834 570,957
Tax return of capital .......................... -- 3,941,449
--------------------------
Total distributions .............................. $20,057,983 $ 5,090,380
==========================
+ Commencement of operations.
As of December 31, 2006, the components of accumulated earnings on a tax basis
were as follows:
- -------------------------------------------------------------------------------
Undistributed ordinary income -- net ............................ $2,111,324
Undistributed long-term capital gains -- net .................... 200,000
----------
Total undistributed earnings -- net ............................. 2,311,324
Capital loss carryforward ....................................... --
Unrealized gains -- net ......................................... 1,092,967*
----------
Total accumulated earnings -- net ............................... $3,404,291
==========
* The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the realization for tax purposes of unrealized
gains (losses) on certain financial futures contracts, and the realization
for tax purposes of unrealized gains (losses) on certain securities that
are part of a straddle.
18 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Enhanced S&P 500(R) Covered Call
Fund Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Enhanced S&P 500(R) Covered Call Fund
Inc. as of December 31, 2006, and the related statement of operations for the
year then ended, and the statements of changes in net assets and the financial
highlights for the year then ended and for the period September 30, 2005
(commencement of operations) through December 31, 2005. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2006, by correspondence with the
custodian and broker. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Enhanced S&P 500(R) Covered Call Fund Inc. as of December 31, 2006, the results
of its operations for the year then ended, and the changes in its net assets and
its financial highlights for the year then ended and for the period September
30, 2005 through December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, NJ
February 28, 2007
Important Tax Information (unaudited)
The following information is provided with respect to the taxable ordinary
income portion of the distributions paid by Enhanced S&P 500 Covered Call Fund
Inc. to shareholders of record on June 22, 2006 and December 19, 2006:
- --------------------------------------------------------------------------------
Federal Obligation Interest ...................................... 10.12%*
Interest-Related Dividends for Non-U.S. Residents ................ 2.46%**
Short-Term Capital Gain Dividends for Non-U.S. Residents ......... 95.67%**
- --------------------------------------------------------------------------------
* The law varies in each state as to whether and what percentage of dividend
income attributable to Federal Obligations is exempt from state income
tax. We recommend that you consult your tax adviser to determine if any
portion of the dividends you received is exempt from state income taxes.
** Represents the portion of the taxable ordinary income dividends eligible
for exemption from U.S. withholding tax for nonresident aliens and foreign
corporations.
Additionally, the Fund distributed long-term capital gains of $.555830 per share
to shareholders of record on June 22, 2006 and December 19, 2006.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006 19
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 (the "1940 Act"), as amended. As an interval fund, the Fund
will make annual repurchase offers at net asset value (less repurchase fee not
to exceed 2%) to all Fund shareholders. The percentage of outstanding shares
that the Fund can repurchase in each offer will be established by the Fund's
Board of Directors shortly before the commencement of each offer, and will be
between 5% and 25% of the Fund's then outstanding shares.
The Fund has adopted the following fundamental policy regarding the periodic
repurchases:
a) The Fund will make offers to repurchase its shares at annual (approximately
once every 13 months) intervals pursuant to Rule 23c-3 under the 1940 Act
("Offers"). The Board of Directors may place such conditions and limitations on
an Offer as may be permitted under Rule 23c-3.
b) The repurchase request deadline, 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 maturity date of the swap contracts that comprise
the Fund's leveraging transactions (as described in the Fund's prospectus) for
each annual period, and will be the fourteenth day prior to such maturity date;
provided that in the event that such day is not a business day, the repurchase
request deadline will be the business day subsequent to the fourteenth day prior
to the maturity date of the swap contracts (the "Repurchase Request Deadline") .
c) The maximum number of days between a Repurchase Request Deadline and the next
repurchase pricing date will be fourteen days; provided that if the fourteenth
day after a Repurchase Request Deadline is not a business day, the repurchase
pricing date shall be the next business day (the "Repurchase Pricing Date").
d) Offers may be suspended or postponed under certain circumstances, as provided
for in Rule 23c-3.
Under the terms of the Offer for the most recent annual period, the Fund offered
to purchase up to 2,313,809 shares from shareholders at an amount per share
equal to the Fund's net asset value per share, calculated as of the close of
business of the New York Stock Exchange on October 23, 2006, nine business days
after Tuesday, October 10, 2006, the Repurchase Request Deadline. As of October
23, 2006, 275,942 shares, or 2.98% of the Fund's outstanding shares, were
purchased by the Fund at $19.50 per share (subject to a repurchase fee of .06%
of the net asset value per share). The Fund's net asset value per share was
determined as of 4:00 p.m. EST, Monday, October 23, 2006.
Fund Certification
In May 2006, the Fund filed its Chief Executive Officer Certification for the
prior year with the New York Stock Exchange pursuant to Section 303A.12(a) of
the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
20 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006
Automatic Dividend Reinvestment Plan
How the Plan Works -- The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by The Bank of New York (the
"Plan Agent"). Under the Plan, whenever the Fund declares a dividend,
participants in the Plan will receive the equivalent in shares of Common Stock
of the Fund. The Plan Agent will acquire the shares for the participant's
account either (i) through receipt of additional unissued but authorized shares
of the Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
Common Stock on the open market on the New York Stock Exchange or elsewhere. If,
on the dividend payment date, the Fund's net asset value per share is equal to
or less than the market price per share plus estimated brokerage commissions (a
condition often referred to as a "market premium"), the Plan Agent will invest
the dividend amount in newly issued shares. If the Fund's net asset value per
share is greater than the market price per share (a condition often referred to
as a "market discount"), the Plan Agent will invest the dividend amount by
purchasing on the open market additional shares. If the Plan Agent is unable to
invest the full dividend amount in open market purchases, or if the market
discount shifts to a market premium during the purchase period, the Plan Agent
will invest any uninvested portion in newly issued shares. The shares acquired
are credited to each shareholder's account. The amount credited is determined by
dividing the dollar amount of the dividend by either (i) when the shares are
newly issued, the net asset value per share on the date the shares are issued or
(ii) when shares are purchased in the open market, the average purchase price
per share.
Participation in the Plan -- Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan, must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by writing to the Plan Agent.
Benefits of the Plan -- The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares acquired
pursuant to the Plan receive voting rights. In addition, if the market price
plus commissions of the Fund's shares is above the net asset value, participants
in the Plan will receive shares of the Fund for less than they could otherwise
purchase them and with a cash value greater than the value of any cash
distribution they would have received. However, there may not be enough shares
available in the market to make distributions in shares at prices below the net
asset value. Also, since the Fund does not redeem shares, the price on resale
may be more or less than the net asset value.
Plan Fees -- There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders will
pay a pro rata share of any such commissions.
Tax Implications -- The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that may
be payable (or required to be withheld) on such dividends. Therefore, income and
capital gains may still be realized even though shareholders do not receive
cash. Participation in the Plan generally will not affect the tax-exempt status
of exempt interest dividends paid by the Fund. If, when the Fund's shares are
trading at a market premium, the Fund issues shares pursuant to the Plan that
have a greater fair market value than the amount of cash reinvested, it is
possible that all or a portion of the discount from the market value (which may
not exceed 5% of the fair market value of the Fund's shares) could be viewed as
a taxable distribution. If the discount is viewed as a taxable distribution, it
is also possible that the taxable character of this discount would be allocable
to all the shareholders, including shareholders who do not participate in the
Plan. Thus, shareholders who do not participate in the Plan might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.
Contact Information -- All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at The Bank of
New York, Church Street Station, P.O. Box 11258, New York, NY 10286-1258,
Telephone: 800-432-8224.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006 21
Officers and Directors
Number of IQ
Advisors-
Affiliate
Advised Funds Other Public
Position(s) Length of and Portfolios Directorships
Held with Time Overseen Held by
Name Address & Age Fund Served** Principal Occupation(s) During Past 5 Years By Director Director
====================================================================================================================================
Non-Interested Directors*
- ------------------------------------------------------------------------------------------------------------------------------------
Alan R. P.O. Box 9095 Director & 2005 to Vice-Chairman, Kissinger Associates, Inc., a 7 Hasbro, Inc.;
Batkin Princeton, NJ Chairman of present consulting firm, since 1990. Overseas
08543-9095 the Board Shipholding
Age: 62 Group, Inc.;
Cantel
Medical
Corp.; and
Diamond
Offshore
Drilling,
Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Paul P.O. Box 9095 Director & 2005 to Professor, Columbia University Business School 7 None
Glasserman Princeton, NJ Chairman of present since 1991; Senior Vice Dean since July 2004.
08543-9095 the Audit
Age: 44 Committee
- ------------------------------------------------------------------------------------------------------------------------------------
Steven W. P.O. Box 9095 Director 2005 to Retired since August 2002; Managing Director, 7 Ametek, Inc.
Kohlhagen Princeton, NJ present Wachovia National Bank and its predecessors
08543-9095 (1992 - 2002).
Age: 59
- ------------------------------------------------------------------------------------------------------------------------------------
William J. P.O. Box 9095 Director & 2005 to Retired since November 2004; Chairman and 7 None
Rainer Princeton, NJ Chairman of present Chief Executive Officer, OneChicago, LLC, a
08543-9095 Nominating designated contract market (2001 to November
Age: 60 and 2004); Chairman, U.S. Commodity Futures
Corporate Trading Commission (1999 - 2001).
Governance
Committee
------------------------------------------------------------------------------------------------------------------------
* Each of the Non-Interested Directors is a member of the Audit Committee and the Nominating and Corporate
Governance Committee.
** Each Director will serve for a term of one year and until his successor is elected and qualifies, or his earlier
death, resignation or removal as provided in the Fund's Bylaws, charter or by statute.
22 ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 2006
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Mitchell P.O. Box 9011 President 2005 to IQ Investment Advisors LLC, President since April 2004; MLPF&S, Managing Director,
M. Cox Princeton, NJ present Head of Global Private Client Market Investments & Origination since 2003; MLPF&S,
08543-9011 Managing Director, Head of Structured Products Origination and Sales (2001 - 2003);
Age: 41 MLPF&S, Director, Head of Structured Products Origination (1997 - 2001).
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Treasurer and Secretary since December 2004; Managing
Burke Princeton, NJ President, present Director of BlackRock, Inc. since 2006; Managing Director of Merrill Lynch
08543-9011 Treasurer Investment Managers, L.P. ("MLIM") and Fund Asset Management, L.P. ("FAM") (2006);
Age: 46 and First Vice President of MLIM and FAM (1997 - 2005) and Treasurer thereof (1999 -
Secretary 2006); Vice President of MLIM and FAM (1990 - 1997).
- ------------------------------------------------------------------------------------------------------------------------------------
Martin G. P.O. Box 9011 Chief 2006 to IQ Investment Advisors LLC, Chief Legal Officer since June 2006; Merrill Lynch &
Byrne Princeton, NJ Legal present Co., Inc., Office of General Counsel, Managing Director since 2006, First Vice
08543-9011 Officer President (2002 - 2006), Director (2000 - 2002).
Age: 44
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Fund Chief 2005 to IQ Investment Advisors LLC, Fund Chief Compliance Officer since 2004; Managing
Hiller Princeton, NJ Compliance present Director of BlackRock, Inc. and Fund Chief Compliance Officer since 2006; Chief
08543-9011 Officer Compliance Officer of the MLIM/FAM-advised funds and First Vice President and Chief
Age: 55 Compliance Officer of MLIM (Americas Region) (2004 - 2006); Global Director of
Compliance at Morgan Stanley Investment Management (2000 - 2004); Managing Director
and Global Director of Compliance at Citigroup Asset Management (2000 - 2002);
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance Officer
at Prudential Financial (1995 - 2000); Senior Counsel in the Securities and
Exchange Commission's Division of Enforcement in Washington, D.C. (1990 - 1995).
- ------------------------------------------------------------------------------------------------------------------------------------
Justin C. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Vice President since 2005; MLPF&S, Director, Global
Ferri Princeton, NJ President present Private Client Market Investments & Origination since 2006; MLPF&S, Vice President,
08543-9011 Global Private Client Market Investments & Origination in 2005; MLPF&S, Vice
Age: 31 President, Head of Global Private Client Rampart Equity Derivatives (2004 - 2005);
MLPF&S, Vice President, Co-Head Global Private Client Domestic Analytic Development
(2002 - 2004); mPower Advisors LLC, Vice President, Quantitative Development (1999
- 2002).
- ------------------------------------------------------------------------------------------------------------------------------------
Jay M. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Vice President since 2005; BlackRock, Inc., Director
Fife Princeton, NJ President present since 2006; MLIM, Director (2000 - 2006); MLPF&S, Director (2000) and Vice
08543-9011 President (1997 - 2000).
Age: 36
- ------------------------------------------------------------------------------------------------------------------------------------
Colleen R. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Vice President since 2005; MLPF&S, Director, Global
Rusch Princeton, NJ President present Private Client Market Investments & Origination since July 2005; MLIM, Director
08543-9011 from January 2005 to July 2005; Vice President of MLIM (1998 - 2004).
Age: 39
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
The Bank of New York
101 Barclay Street -- 11 East
New York, NY 10286
NYSE Symbol
BEO
Contact Information
For more information regarding the Fund, please visit www.IQIAFunds.com or
contact us at 1-877-449-4742.
ENHANCED S&P 500(R) COVERED CALL FUND INC. DECEMBER 31, 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.
P.O. Box 9011
Princeton, NJ 08543-9011
#IQBEO -- 12/06
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-877-449-4742.
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Alan R.
Batkin and (2) Steven W. Kohlhagen.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending December 31, 2006 - $26,000
Fiscal Year Ending December 31, 2005 - $30,600
The nature of the services include fees for professional services
rendered in connection with seed audits.
(b) Audit-Related Fees - Fiscal Year Ending December 31, 2006 - $0
Fiscal Year Ending December 31, 2005 - $7,200
The nature of the services include fees for professional services
rendered in connection with issuance of the letters to the underwriters
in connection with the seed audits.
(c) Tax Fees - Fiscal Year Ending December 31, 2006 - $11,500
Fiscal Year Ending December 31, 2005 - $6,,500
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending December 31, 2006 - $0
Fiscal Year Ending December 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending December 31, 2006 - $1,961,000
Fiscal Year Ending December 31, 2005 - $5,034,771
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,110,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
Alan R. Batkin
Steven W. Kohlhagen
Paul Glasserman
William J. Rainer
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors has delegated to IQ Investment Advisors
LLC, and/or any sub-investment adviser approved by the Board of Directors (the
"Investment Adviser") authority to vote all proxies relating to the Fund's
portfolio securities. The Investment Adviser has adopted policies and procedures
("Proxy Voting Procedures") with respect to the voting of proxies related to the
portfolio securities held in the account of one or more of its clients,
including a Fund. Pursuant to these Proxy Voting Procedures, the Investment
Adviser's primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its shareholders, and to
act in a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers the
interests of its clients, including the Funds, and not the interests of the
Investment Adviser, when voting proxies and that real (or perceived) material
conflicts that may arise between the Investment Adviser's interest and those of
the Investment Adviser's clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The Committee is
comprised of the Investment Adviser's Chief Investment Officer (the "CIO"), one
or more other senior investment professionals appointed by the CIO, portfolio
managers and investment analysts appointed by the CIO and any other personnel
the CIO deems appropriate. The Committee will also include two non-voting
representatives from the Investment Adviser's Legal department appointed by the
Investment Adviser's General Counsel. The Committee's membership shall be
limited to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research responsibilities for
the Investment Adviser's affiliates may serve as a member of the Committee or
participate in its decision making (except to the extent such person is asked by
the Committee to present information to the Committee, on the same basis as
other interested knowledgeable parties not affiliated with the Investment
Adviser might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes are
consistent with the best interests of those clients and are free from
unwarranted and inappropriate influences. The Committee establishes general
proxy voting policies for the Investment Adviser and is responsible for
determining how those policies are applied to specific proxy votes, in light of
each issuer's unique structure, management, strategic options and, in certain
circumstances, probable economic and other anticipated consequences of alternate
actions. In so doing, the Committee may determine to vote a particular proxy in
a manner contrary to its generally stated policies. In addition, the Committee
will be responsible for ensuring that all reporting and recordkeeping
requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not to adopt
a specific voting policy applicable to that issue. The Investment Adviser
believes that certain proxy voting issues require investment analysis -- such as
approval of mergers and other significant corporate transactions -- akin to
investment decisions, and are, therefore, not suitable for general guidelines.
The Committee may elect to adopt a common position for the Investment Adviser on
certain proxy votes that are akin to investment decisions, or determine to
permit the portfolio manager to make individual decisions on how best to
maximize economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that the
Investment Adviser will generally seek to vote proxies over which the Investment
Adviser exercises voting authority in a uniform manner for all the Investment
Adviser's clients, the Committee, in conjunction with a Fund's portfolio
manager, may determine that the Fund's specific circumstances require that its
proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an independent
adviser that specializes in providing a variety of fiduciary-level proxy-related
services to institutional investment managers, plan sponsors, custodians,
consultants, and other institutional investors. The services provided to the
Investment Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also assist the
Fund in fulfilling its reporting and recordkeeping obligations under the
Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For instance,
under the Proxy Voting Procedures, the Investment Adviser generally will not
seek to vote proxies related to portfolio securities that are on loan, although
it may do so under certain circumstances. In addition, the Investment Adviser
will vote proxies related to securities of foreign issuers only on a best
efforts basis and may elect not to vote at all in certain countries where the
Committee determines that the costs associated with voting generally outweigh
the benefits. The Committee may at any time override these general policies if
it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote
proxies in respect of an issuer where an affiliate of the Investment Adviser
(each, an "Affiliate"), or a money management or other client of the Investment
Adviser (each, a "Client") is involved. The Proxy Voting Procedures and the
Investment Adviser's adherence to those procedures are designed to address such
conflicts of interest. The Committee intends to strictly adhere to the Proxy
Voting Procedures in all proxy matters, including matters involving Affiliates
and Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent fiduciary,
the powers of the Committee shall pass to a subcommittee, appointed by the CIO
(with advice from the Secretary of the Committee), consisting solely of
Committee members selected by the CIO. The CIO shall appoint to the
subcommittee, where appropriate, only persons whose job responsibilities do not
include contact with the Client and whose job evaluations would not be affected
by the Investment Adviser's relationship with the Client (or failure to retain
such relationship). The subcommittee shall determine whether and how to vote all
proxies on behalf of the Investment Adviser's clients or, if the proxy matter
is, in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee determines to
alter the Investment Adviser's normal voting guidelines or, on matters where the
Investment Adviser's policy is case-by-case, does not follow the voting
recommendation of any proxy voting service or other independent fiduciary that
may be retained to provide research or advice to the Investment Adviser on that
matter, no proxies relating to the Client may be voted unless the Secretary, or
in the Secretary's absence, the Assistant Secretary of the Committee concurs
that the subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties.
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring proxy
issues that are not expected to involve unusual circumstances. These policies
are guidelines only, and the Investment Adviser may elect to vote differently
from the recommendation set forth in a voting guideline if the Committee
determines that it is in a Fund's best interest to do so. In addition, the
guidelines may be reviewed at any time upon the request of a Committee member
and may be amended or deleted upon the vote of a majority of Committee members
present at a Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors
of issuers other than investment companies. As a general
matter, the Committee believes that a company's Board of
Directors (rather than shareholders) is most likely to have
access to important, nonpublic information regarding a
company's business and prospects, and is therefore
best-positioned to set corporate policy and oversee
management. The Committee, therefore, believes that the
foundation of good corporate governance is the election of
qualified, independent corporate directors who are likely to
diligently represent the interests of shareholders and oversee
management of the corporation in a manner that will seek to
maximize shareholder value over time. In individual cases, the
Committee may look at a nominee's history of representing
shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the
interests of shareholders and provide an independent view on
the propriety of financial reporting decisions of corporate
management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the
Committee may look at an auditors' history of representing
shareholder interests as auditor of other companies, to the
extent the Committee deems relevant.
o Proposals related to management compensation and employee
benefits. As a general matter, the Committee favors disclosure
of an issuer's compensation and benefit policies and opposes
excessive compensation, but believes that compensation matters
are normally best determined by an issuer's board of
directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set
arbitrary restrictions on compensation or benefits will,
therefore, generally not be supported.
o Proposals related to requests, principally from management,
for approval of amendments that would alter an issuer's
capital structure. As a general matter, the Committee will
support requests that enhance the rights of common
shareholders and oppose requests that appear to be
unreasonably dilutive.
o Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the
Committee opposes poison pill provisions.
o Routine proposals related to requests regarding the
formalities of corporate meetings.
o Proposals related to proxy issues associated solely with
holdings of investment company shares. As with other types of
companies, the Committee believes that a fund's Board of
Directors (rather than its shareholders) is best-positioned to
set fund policy and oversee management. However, the Committee
opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective that
the Investment Company Act envisions will be approved directly
by shareholders.
o Proposals related to limiting corporate conduct in some manner
that relates to the shareholder's environmental or social
concerns. The Committee generally believes that annual
shareholder meetings are inappropriate forums for discussion
of larger social issues, and opposes shareholder resolutions
"micromanaging" corporate conduct or requesting release of
information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the
Committee is generally supportive of proposals to require
corporate disclosure of matters that seem relevant and
material to the economic interests of shareholders, the
Committee is generally not supportive of proposals to require
disclosure of corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of December 31, 2006.
(a)(1) Messrs. Greg Tournant and Stephen Bond-Nelson are jointly
responsible for the day-to-day management of the registrant's
portfolio. Mr. Tournant is currently co-portfolio manager for the Fund
and since 2004 has been the portfolio manager for several other funds.
From 2001 to 2003, he was a Senior Research Analyst at the Subadviser.
Prior to joining the Subadviser in 2001, Mr. Tournant was a Senior
Research Analyst at Eagle Asset Management, a division of Raymond James
Financial from 1998 to 2001. Before that, Mr. Tournant spent three
years as a strategy consultant for McKinsey & Co. and two years as a
research analyst for Eagle Asset Management. Mr. Tournant has over ten
years of investment management experience. As of December 31, 2005, Mr.
Stephen Bond-Nelson is a co-portfolio manager for the Fund. From 1999
to 2004, Stephen was a Senior Research Analyst at PEA Capital LLC.
Prior to joining the firm, he was a Senior Research Analyst at
Prudential Mutual Funds. He has over thirteen years of investment
management experience.
(a)(2) As of December 31, 2006:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
-------------- --------------
Greg Tournant 4 2 1 0 2 0
$2,564,622,104 $ 38,840,153 $ 5,362,231 $ 0 $ 38,840,153 $ 0
Stephen
Bond-Nelson 2 0 0 0 0 0
$ 371,127,045 $ 0 $ 0 $ 0 $ 0 $ 0
(iv) Potential Material Conflicts of Interest
The Subadviser believes that each portfolio manager's simultaneous
management of the Fund and other accounts may present actual or
apparent conflicts of interest with respect to the allocation and
aggregation of securities orders placed on behalf of the Fund and the
other accounts. To address these conflicts, the Subadviser has adopted
a Trade Allocation Policy that is designed to ensure fair and equitable
allocation of investment opportunities among accounts over time and to
ensure compliance with applicable regulatory requirements. All accounts
are to be treated in a non-preferential manner, such that allocations
are not based upon account performance, fee structure or preference of
the portfolio manager. Under the Subadviser's Trade Allocation Policy,
pre-order indications received by the Subadviser's trading desk
involving the same investment style will be aggregated, as appropriate,
consistent with the Subadviser's obligation to seek best execution for
its clients and to reduce brokerage commissions or other costs. While
circumstances may require separate transactions, the Subadviser's
policy is to, whenever possible, aggregate trades to minimize
transactional costs and inconsistencies and to ensure that every
account receives equal treatment with regard to purchases of portfolio
investments.
(a)(3) As of December 31, 2006:
Compensation. Mr. Tournant's and Mr. Bond-Nelson's compensation
consists of the following elements:
Base salary. Each portfolio manager is paid a fixed base salary that is
set on an annual basis at a level determined solely by the Subadviser.
In setting the base salary for portfolio managers, the Subadviser's
intention is to be competitive in light of the particular portfolio
manager's experience and responsibilities. The Subadviser evaluates
competitive market compensation by reviewing compensation survey
results conducted by an independent third party of investment industry
compensation.
Annual bonus. Each portfolio manager is also eligible to receive an
annual bonus. The bonus forms the majority of Mr. Tournant's annual
cash compensation and is based on both the Subadviser's revenues and
assets under management, in addition to the performance of their
respective accounts on a pre-tax basis relative to other portfolio
managers with the same investment style. For these purposes, no
particular index or benchmark is utilized. The Subadviser believes that
this incentive aligns the interests of each portfolio manager and their
accounts, the portfolios of which they manage.
Participation in group retirement plans. Eligible employees may also
participate in a non-qualified deferred compensation plan, which
affords participating employees of the Sub-Advisor the tax benefits of
deferring the receipt of a portion of their cash compensation until
such time as designated by the non-qualified deferred compensation
plan.
(a)(4) Beneficial Ownership of Securities. As of December 31, 2006,
Mr. Tournant does not beneficially own any stock issued by the
Fund. As of December 31, 2006, Mr. Bond-Nelson does not
beneficially own any stock issued by the Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers
- -------------------------------------------------------------------------------------------------------------------
Period (a) Total (b) Average Price (c) Total Number of Shares (d) Maximum Number (or
Number of Paid per Share Purchased as Part of Approx. Dollar Value) of
Shares Publicly Announced Plans or Shares that May Yet Be
Purchased Programs Purchased Under the Plans or
Programs
- -------------------------------------------------------------------------------------------------------------------
June 1-30, 2006
- -------------------------------------------------------------------------------------------------------------------
July 1-31, 2006
- -------------------------------------------------------------------------------------------------------------------
August 1-31, 2006
- -------------------------------------------------------------------------------------------------------------------
September 1-30, 2006
- -------------------------------------------------------------------------------------------------------------------
October 1-31, 2006 275,942 19.50 275,942 2,037,867
- -------------------------------------------------------------------------------------------------------------------
November 1-30, 2006
- -------------------------------------------------------------------------------------------------------------------
December 1-31, 2006
- -------------------------------------------------------------------------------------------------------------------
Total:
- -------------------------------------------------------------------------------------------------------------------
On August 28, 2006, the repurchase offer was announced to repurchase up to 25%
of outstanding shares. The expiration date of the offer was October 10, 2006.
The registrant may conduct annual repurchases for between 5% and 25% of its
outstanding shares pursuant to Rule 23c-3 under the Investment Company Act of
1940, as amended.
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Enhanced S&P 500 Covered Call Fund Inc.
By: /s/ Mitchell M. Cox
---------------------------
Mitchell M. Cox,
Chief Executive Officer of
Enhanced S&P 500 Covered Call Fund Inc.
Date: February 20, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Mitchell M. Cox
---------------------------
Mitchell M. Cox,
Chief Executive Officer of
Enhanced S&P 500 Covered Call Fund Inc.
Date: February 20, 2007
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
Enhanced S&P 500 Covered Call Fund Inc.
Date: February 20, 2007