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 811-21611
Name of Fund: S&P 500(R) GEARED(SM) 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,
S&P 500(R) GEARED(SM) Fund Inc., 4 World Financial Center, 5th Floor, New
York, New York 10080. Mailing address: P.O. Box 9011, Princeton, NJ
08543-9011
Registrant's telephone number, including area code: (212) 449-8118
Date of fiscal year end: 09/30/05
Date of reporting period: 10/01/04 - 09/30/05
Item 1 - Report to Stockholders
S&P 500(R) GEARED(SM) Fund Inc.
Annual Report
September 30, 2005
[LOGO] INVESTMENT [LOGO] Merrill Lynch Investment Managers
ADVISORS
S&P 500(R) GEARED(SM) Fund Inc.
Portfolio Information as of September 30, 2005
Percent of
Ten Largest Equity Holdings Net Assets
--------------------------------------------------------------------------------
Exxon Mobil Corp. .......................................... 3.5%
General Electric Co. ....................................... 3.1
Microsoft Corp. ............................................ 2.1
Citigroup, Inc. ............................................ 2.1
Johnson & Johnson .......................................... 1.6
Pfizer, Inc. ............................................... 1.6
Bank of America Corp. ...................................... 1.5
American International Group, Inc. ......................... 1.4
Altria Group, Inc. ......................................... 1.3
Procter & Gamble Co. ....................................... 1.3
--------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
--------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels ................................ 8.4%
Pharmaceuticals ............................................ 6.4
Commercial Banks ........................................... 5.2
Insurance .................................................. 4.4
Industrial Conglomerates ................................... 4.2
--------------------------------------------------------------------------------
Percent of
S&P Sector Weightings Total Investments
--------------------------------------------------------------------------------
Financials ................................................. 19.4%
Information Technology ..................................... 14.7
Health Care ................................................ 12.8
Industrials ................................................ 10.7
Consumer Discretionary ..................................... 10.5
Energy ..................................................... 9.9
Consumer Staples ........................................... 9.4
Utilities .................................................. 3.5
Telecommunication Services ................................. 3.0
Materials .................................................. 2.8
Other* ..................................................... 3.3
--------------------------------------------------------------------------------
* Includes portfolio holdings in options and short-term investments.
For Fund compliance purposes, the Fund's industry and sector
classifications refer to any one or more of the industry and sector
sub-classifications used by one or more widely recognized market indexes
or ratings group indexes, and/or as defined by Fund management. This
definition may not apply for purposes of this report, which may combine
industry and sector sub-classifications for reporting ease.
Proxy Results
During the six-month period ended September 30, 2005, S&P 500(R) GEARED(SM) Fund
Inc.`s shareholders voted on the following proposal. At a shareholders' meeting
on April 28, 2005, the meeting was adjourned until June 28, 2005, at which time
the proposal passed. A description of the proposal and number of shares voted
are as follows:
------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
------------------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors: Alan R. Batkin 3,694,890 707,645
Andrew J. Donohue 3,695,890 706,645
Paul Glasserman 3,694,137 708,398
Steven W. Kohlhagen 3,695,890 706,645
William J. Rainer 3,695,890 706,645
------------------------------------------------------------------------------------------------
2 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
A Letter From the President
Dear Shareholder
As you know, the investment objective of the S&P 500(R) GEARED(SM) Fund Inc.
(the "Fund") is to provide total returns, exclusive of fees and expenses of the
Fund, linked to the annual performance of the S&P 500(R) Composite Stock Price
Index (the "S&P 500(R) Index", or "Index"). When the Index has negative returns
for an annual period (approximately one year), the Fund seeks to provide annual
price returns that track the performance of the Index on a one-for-one basis
over the annual period. When the Index is positive for an annual period, the
Fund seeks to deliver a "geared" return equal to approximately three times the
annual price returns of the Index, up to a maximum index participation level.
The Fund will not participate in any Index returns in excess of the maximum
index participation and, as a result, the Fund's performance over an annual
period, will be subject to a maximum annual return cap. The maximum annual
return cap for the current annual period is 12.15%.
The S&P 500(R) Index is a capitalization-weighted index of 500 stocks. The Index
is designed to measure performance of the broad domestic economy through changes
in the aggregate market values of 500 stocks representing all major industries.
It is not possible to make a direct investment in the S&P 500(R) Index.
The total return of the S&P 500(R) Index was +10.53% from the inception of the
Fund (November 1, 2004) through September 30, 2005. Over the same period, and
after fees and expenses, the total return of the Fund was +11.90% (as measured
by change in net asset value plus dividend reinvestment). The Fund's performance
over this period is consistent with our expectations.
IQ Investment Advisors LLC continues to take a non-traditional approach to asset
management by seeking to identify specific economic or strategic investment
themes that aim to fulfill particular investor needs. We encourage you to
revisit your portfolio to ensure that your asset allocation strategy is
consistent with your specific investment needs. We thank you for trusting IQ
Investment Advisors LLC with your investment assets, and we look forward to
serving you in the months and years ahead.
Sincerely,
/s/ Mitchell M. Cox
Mitchell M. Cox
President, IQ Investment Advisors LLC
S&P 500(R) is a registered trademark of the McGraw-Hill Companies.
"GEARED" and "Geared-Equity Accelerated Return"are service marks of Merrill
Lynch & Co.
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 3
A Discussion With Your Fund's Portfolio Managers
We are pleased to provide you with this shareholder report for S&P 500(R)
GEARED(SM) Fund Inc. While the Fund is advised by IQ Investment Advisors LLC,
the following discussion is provided by Merrill Lynch Investment Managers, L.P.,
the Fund's subadviser.
How has the Fund performed since its inception?
The Fund seeks to provide total returns that are equal to three times the
performance of the S&P 500(R) Composite Stock Price Index (the "Index"), where
the value of the Index increases (up to a maximum return cap that is set each
year), and that generally correspond to the performance of the Index where the
Index decreases.
From its inception on November 1, 2004 through September 30, 2005, the Common
Stock of S&P 500(R) GEARED(SM) Fund Inc. had a total investment return of
+11.90%, based on a change in per share net asset value from $19.10 to $21.27,
and assuming reinvestment of all distributions. The S&P 500(R) Index had a total
return of +10.53% for the same period. The three-to-one upside of the Fund with
a maximum return cap of 12.15% is becoming evident as the options approach their
expiration date of November 2, 2005.
For a description of the Fund's total investment return based on a change in per
share market value of the Fund's Common Stock (as measured by the trading price
of the Fund's shares on the NYSE), 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 period.
Overall, the past 12 months were a positive period for U.S. equities, with the
S&P 500(R) Index posting a total return of +12.25%. For the fourth quarter of
2004, the S&P 500(R) Index posted a total return of +9.23%, supported by lower
oil prices, unwinding of the U.S. presidential election uncertainty, reasonably
good economic and corporate earnings news, reactions to the $32 billion
Microsoft Corporation dividend, and the beginning of the seasonally strong
year-end period. Much of the post-election market bounce was attributed to the
pro-business, pro-market legislative agenda, as well as an approximately 23%
decrease in the price of oil from its October high of $55.67 per barrel.
The strong returns from the end of 2004 did not continue into the early months
of 2005, with the S&P 500(R) Index returning -2.15% for the first quarter. The
market environment at this time was largely influenced by mixed market data,
increasing interest rates, disappointing earnings reports and climbing oil
prices. Oil prices exceeded $50 per barrel for the first time in several months,
reaching as high as $56 per barrel, and earnings revisions activity continued to
be more negative than positive.
The second quarter of 2005 brought a slight rebound, with the S&P 500(R) Index
posting a total return of +1.37%. Despite slowing profit growth, continually
higher oil prices, and inflation concerns, first quarter corporate earnings came
in strong and the market rebounded in May. The rally did not last into June,
however, as investors continued to worry about economic deceleration. In
addition, oil continued to pressure stock valuations, with the price climbing to
a record high of more than $60 per barrel.
4 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
U.S. equity markets regained momentum in the third quarter of 2005, even amid
terrorism overseas, two devastating hurricanes in the Gulf Coast, oil prices
reaching $70 per barrel, a strong dollar and increasing interest rates. For the
quarter, the S&P 500(R) Index posted a total return of +3.60%. Year-to-date
through September 30, 2005, stocks remained in one of the narrowest trading
ranges in history. The London terrorist attack in early July did little to shake
investors, as the S&P 500(R) Index recovered its immediate 4% loss only one day
later. In addition, improved profits in the energy sector counterbalanced the
negative impact that Hurricanes Katrina and Rita had on the retail,
transportation, tourism and insurance sectors in the final month of the period.
How have you managed the Fund since its inception?
To commence Fund operations, we purchased a basket of securities approximately
equal to the assets of the Fund's initial offering. Our initial investments
comprised all 500 members of the S&P 500(R) Index, in weights that closely
matched those of the Index. In addition, we negotiated over-the-counter option
transactions for the Fund, selling three "out of the money" call options and
purchasing two "at the money" call options. We utilize this options strategy to
provide the three-to-one upside potential to the annual maximum return cap,
which resulted in the first annual maximum return cap of approximately 12.15%.
How would you characterize the Fund's position at the close of the period?
The Fund is positioned to provide accelerated growth relative to the S&P 500(R)
Index, up to the annual maximum return cap. The S&P 500(R) Index provides
diversified exposure to the securities of the largest U.S. publicly traded
companies.
Jonathan Clark
Portfolio Manager
Vincent Costa, CFA
Portfolio Manager
Debra L. Jelilian
Portfolio Manager
October 14, 2005
--------------------------------------------------------------------------------
We are pleased to announce that Jonathan Clark has been named Portfolio Manager
of S&P 500(R) GEARED(SM) Fund Inc. and, as such, is responsible for the
day-to-day management of the portfolio along with Mr. Costa and Ms. Jelilian.
Mr. Clark has been a Vice President with Merrill Lynch Investment Managers since
1999.
--------------------------------------------------------------------------------
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 5
Schedule of Investments
Shares
Industry Common Stocks Held Value
=============================================================================================================================
Aerospace & Defense--2.2%
Boeing Co. 10,900 $ 740,655
General Dynamics Corp. 2,700 322,785
Goodrich Corp. 1,300 57,642
Honeywell International, Inc. 10,700 401,250
L-3 Communications Holdings, Inc. 1,578 124,772
Lockheed Martin Corp. 5,000 305,200
Northrop Grumman Corp. 4,900 266,315
Raytheon Co. 5,700 216,714
Rockwell Collins, Inc. 2,000 96,640
United Technologies Corp. 13,300 689,472
------------
3,221,445
-----------------------------------------------------------------------------------------------------------------------------
Air Freight & Logistics--0.9%
FedEx Corp. 3,900 339,807
Ryder System, Inc. 900 30,798
United Parcel Service, Inc. Class B 14,400 995,472
------------
1,366,077
-----------------------------------------------------------------------------------------------------------------------------
Airlines--0.1%
Southwest Airlines Co. 9,200 136,620
-----------------------------------------------------------------------------------------------------------------------------
Auto Components--0.2%
Cooper Tire & Rubber Co. 1,200 18,324
Dana Corp. 2,700 25,407
Delphi Corp. 6,100 16,836
The Goodyear Tire & Rubber Co. (a) 2,700 42,093
Johnson Controls, Inc. 2,300 142,715
Visteon Corp. (a) 1,000 9,780
------------
255,155
-----------------------------------------------------------------------------------------------------------------------------
Automobiles--0.4%
Ford Motor Co. 24,800 244,528
General Motors Corp. 7,600 232,636
Harley-Davidson, Inc. 3,800 184,072
------------
661,236
-----------------------------------------------------------------------------------------------------------------------------
Beverages--2.1%
Anheuser-Busch Cos., Inc. 9,800 421,792
Brown-Forman Corp. Class B 1,300 77,402
The Coca-Cola Co. 26,900 1,161,811
Coca-Cola Enterprises, Inc. 4,500 87,750
Constellation Brands, Inc. Class A (a) 2,500 65,000
Molson Coors Brewing Co. Class B 900 57,609
Pepsi Bottling Group, Inc. 2,300 65,665
PepsiCo, Inc. 21,700 1,230,607
------------
3,167,636
-----------------------------------------------------------------------------------------------------------------------------
Biotechnology--1.5%
Amgen, Inc. (a) 16,000 1,274,720
Applera Corp.--Applied Biosystems Group 2,200 51,128
Biogen Idec, Inc. (a) 4,400 173,712
Chiron Corp. (a) 1,700 74,154
Genzyme Corp. (a) 3,200 229,248
Gilead Sciences, Inc. (a) 5,700 277,932
Medimmune, Inc. (a) 3,200 107,680
------------
2,188,574
-----------------------------------------------------------------------------------------------------------------------------
Building Products--0.2%
American Standard Cos., Inc. 2,400 111,720
Masco Corp. 5,500 168,740
------------
280,460
-----------------------------------------------------------------------------------------------------------------------------
Capital Markets--2.8%
The Bank of New York Co., Inc. 9,700 285,277
The Bear Stearns Cos., Inc. 1,400 153,650
The Charles Schwab Corp. 14,200 204,906
E*Trade Financial Corp. (a) 4,400 77,440
Federated Investors, Inc. Class B 1,000 33,230
Franklin Resources, Inc. 2,100 176,316
Goldman Sachs Group, Inc. 6,000 729,480
Janus Capital Group, Inc. 2,500 36,125
Lehman Brothers Holdings, Inc. 3,600 419,328
Mellon Financial Corp. 5,300 169,441
Merrill Lynch & Co., Inc. (b) 12,000 736,200
Morgan Stanley 14,100 760,554
Northern Trust Corp. 2,700 136,485
State Street Corp. 4,600 225,032
T. Rowe Price Group, Inc. 1,400 91,420
------------
4,234,884
-----------------------------------------------------------------------------------------------------------------------------
Chemicals--1.4%
Air Products & Chemicals, Inc. 2,900 159,906
Ashland, Inc. 1,000 55,240
The Dow Chemical Co. 12,300 512,541
E.I. du Pont de Nemours & Co. 13,000 509,210
Eastman Chemical Co. 1,300 61,061
Ecolab, Inc. 2,800 89,404
Engelhard Corp. 1,200 33,492
Hercules, Inc. (a) 1,000 12,220
International Flavors & Fragrances, Inc. 1,000 35,640
Monsanto Co. 3,600 225,900
PPG Industries, Inc. 2,000 118,380
Praxair, Inc. 3,900 186,927
Rohm & Haas Co. 2,200 90,486
Sigma-Aldrich Corp. 1,000 64,060
------------
2,154,467
-----------------------------------------------------------------------------------------------------------------------------
Commercial Banks--5.2%
AmSouth Bancorp 4,000 101,040
BB&T Corp. 6,700 261,635
Bank of America Corp. 52,300 2,201,830
Comerica, Inc. 2,400 141,360
Compass Bancshares, Inc. 1,551 71,082
Fifth Third Bancorp 7,000 257,110
First Horizon National Corp. 2,000 72,700
Huntington Bancshares, Inc. 2,400 53,928
Keycorp 4,900 158,025
M&T Bank Corp. 1,200 126,852
Marshall & Ilsley Corp. 2,500 108,775
National City Corp. 7,800 260,832
North Fork Bancorporation, Inc. 6,000 153,000
PNC Financial Services Group, Inc. 4,000 232,080
Regions Financial Corp. 5,500 171,160
SunTrust Banks, Inc. 4,700 326,415
Synovus Financial Corp. 3,500 97,020
U.S. Bancorp 23,800 668,304
Wachovia Corp. 20,600 980,354
Wells Fargo & Co. 21,900 1,282,683
Zions Bancorporation 1,200 85,452
------------
7,811,637
-----------------------------------------------------------------------------------------------------------------------------
Commercial Services & Supplies--0.7%
Allied Waste Industries, Inc. (a) 3,400 28,730
Avery Dennison Corp. 1,500 78,585
Cendant Corp. 13,100 270,384
Cintas Corp. 2,100 86,205
Equifax, Inc. 1,400 48,916
Monster Worldwide, Inc. (a) 1,600 49,136
6 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
=============================================================================================================================
Commercial Services & Supplies (concluded)
Pitney Bowes, Inc. 2,600 $ 108,524
RR Donnelley & Sons Co. 2,400 88,968
Robert Half International, Inc. 2,000 71,180
Waste Management, Inc. 6,800 194,548
------------
1,025,176
-----------------------------------------------------------------------------------------------------------------------------
Communications Equipment--2.7%
ADC Telecommunications, Inc. (a) 1,128 25,786
Andrew Corp. (a) 2,300 25,645
Avaya, Inc. (a) 5,200 53,560
Ciena Corp. (a) 8,800 23,232
Cisco Systems, Inc. (a) 82,900 1,486,397
Comverse Technology, Inc. (a) 2,600 68,302
Corning, Inc. (a) 18,800 363,404
JDS Uniphase Corp. (a) 23,500 52,170
Lucent Technologies, Inc. (a) 55,300 179,725
Motorola, Inc. 32,100 709,089
Qualcomm, Inc. 21,200 948,700
Scientific-Atlanta, Inc. 2,000 75,020
Tellabs, Inc. (a) 6,500 68,380
------------
4,079,410
-----------------------------------------------------------------------------------------------------------------------------
Computers & Peripherals--3.6%
Apple Computer, Inc. (a) 10,600 568,266
Dell, Inc. (a) 31,200 1,067,040
EMC Corp. (a) 30,700 397,258
Gateway, Inc. (a) 3,900 10,530
Hewlett-Packard Co. 37,500 1,095,000
International Business Machines Corp. 20,700 1,660,554
Lexmark International, Inc. Class A (a) 1,700 103,785
NCR Corp. (a) 2,400 76,584
Network Appliance, Inc. (a) 4,400 104,456
QLogic Corp. (a) 1,300 44,460
Sun Microsystems, Inc. (a) 42,500 166,600
------------
5,294,533
-----------------------------------------------------------------------------------------------------------------------------
Construction & Engineering--0.1%
Fluor Corp. 1,300 83,694
-----------------------------------------------------------------------------------------------------------------------------
Construction Materials--0.1%
Vulcan Materials Co. 1,100 81,631
-----------------------------------------------------------------------------------------------------------------------------
Consumer Finance--1.3%
American Express Co. 16,100 924,784
Capital One Financial Corp. 3,600 286,272
MBNA Corp. 16,000 394,240
Providian Financial Corp. (a) 3,400 60,112
SLM Corp. 5,500 295,020
------------
1,960,428
-----------------------------------------------------------------------------------------------------------------------------
Containers & Packaging--0.1%
Ball Corp. 1,200 44,088
Bemis Co. 1,000 24,700
Pactiv Corp. (a) 1,500 26,280
Sealed Air Corp. (a) 1,100 52,206
Temple-Inland, Inc. 1,600 65,360
------------
212,634
-----------------------------------------------------------------------------------------------------------------------------
Distributors--0.1%
Genuine Parts Co. 1,900 81,510
-----------------------------------------------------------------------------------------------------------------------------
Diversified Consumer Services--0.2%
Apollo Group, Inc. Class A (a) 2,000 132,780
H&R Block, Inc. 4,400 105,512
------------
238,292
-----------------------------------------------------------------------------------------------------------------------------
Diversified Financial Services--3.4%
CIT Group, Inc. 2,800 126,504
Citigroup, Inc. 67,100 3,054,392
JPMorgan Chase & Co. 45,600 1,547,208
Moody's Corp. 3,400 173,672
Principal Financial Group 3,600 170,532
------------
5,072,308
-----------------------------------------------------------------------------------------------------------------------------
Diversified Telecommunication Services--2.2%
AT&T Corp. 10,700 211,860
BellSouth Corp. 23,300 612,790
CenturyTel, Inc. 1,800 62,964
Citizens Communications Co. 5,400 73,170
Qwest Communications International Inc. (a) 20,900 85,690
SBC Communications, Inc. 43,000 1,030,710
Verizon Communications, Inc. 35,900 1,173,571
------------
3,250,755
-----------------------------------------------------------------------------------------------------------------------------
Electric Utilities--1.6%
Allegheny Energy, Inc. (a) 1,900 58,368
American Electric Power Co., Inc. 4,700 186,590
Cinergy Corp. 2,400 106,584
Edison International 4,200 198,576
Entergy Corp. 2,900 215,528
Exelon Corp. 8,500 454,240
FPL Group, Inc. 5,200 247,520
FirstEnergy Corp. 4,600 239,752
PPL Corp. 5,000 161,650
Pinnacle West Capital Corp. 1,400 61,712
Progress Energy, Inc. 3,600 161,100
The Southern Co. 9,800 350,448
------------
2,442,068
-----------------------------------------------------------------------------------------------------------------------------
Electrical Equipment--0.4%
American Power Conversion Corp. 2,200 56,980
Cooper Industries Ltd. Class A 1,300 89,882
Emerson Electric Co. 5,200 373,360
Rockwell Automation, Inc. 2,100 111,090
------------
631,312
-----------------------------------------------------------------------------------------------------------------------------
Electronic Equipment & Instruments--0.3%
Agilent Technologies, Inc. (a) 6,200 203,050
Jabil Circuit, Inc. (a) 2,300 71,116
Molex, Inc. 2,100 56,028
Sanmina-SCI Corp. (a) 8,400 36,036
Solectron Corp. (a) 10,900 42,619
Symbol Technologies, Inc. 2,800 27,104
Tektronix, Inc. 900 22,707
------------
458,660
-----------------------------------------------------------------------------------------------------------------------------
Energy Equipment & Services--1.6%
BJ Services Co. 4,600 165,554
Baker Hughes, Inc. 4,200 250,656
Halliburton Co. 6,400 438,528
Nabors Industries Ltd. (a) 2,000 143,660
National Oilwell Varco, Inc. (a) 2,307 151,801
Noble Corp. 2,000 136,920
Rowan Cos., Inc. 1,600 56,784
Schlumberger Ltd. 7,500 632,850
Transocean, Inc. (a) 4,100 251,371
Weatherford International Ltd. (a) 1,900 130,454
------------
2,358,578
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 7
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
=============================================================================================================================
Food & Staples Retailing--2.2%
Albertson's, Inc. 4,900 $ 125,685
CVS Corp. 10,200 295,902
Costco Wholesale Corp. 6,100 262,849
The Kroger Co. (a) 8,900 183,251
Safeway, Inc. 6,300 161,280
Supervalu, Inc. 1,900 59,128
Sysco Corp. 7,800 244,686
Wal-Mart Stores, Inc. 32,400 1,419,768
Walgreen Co. 13,000 564,850
------------
3,317,399
-----------------------------------------------------------------------------------------------------------------------------
Food Products--1.1%
Archer-Daniels-Midland Co. 8,500 209,610
Campbell Soup Co. 2,900 86,275
ConAgra Foods, Inc. 6,100 150,975
General Mills, Inc. 4,400 212,080
HJ Heinz Co. 4,500 164,430
The Hershey Co. 2,600 146,406
Kellogg Co. 3,600 166,068
McCormick & Co., Inc. 1,400 45,682
Sara Lee Corp. 9,400 178,130
Tyson Foods, Inc. Class A 3,200 57,760
Wm. Wrigley Jr. Co. 2,500 179,700
------------
1,597,116
-----------------------------------------------------------------------------------------------------------------------------
Gas Utilities--0.0%
Nicor, Inc. 800 33,624
Peoples Energy Corp. 300 11,814
------------
45,438
-----------------------------------------------------------------------------------------------------------------------------
Health Care Equipment & Supplies--2.1%
Bausch & Lomb, Inc. 800 64,544
Baxter International, Inc. 7,800 310,986
Becton Dickinson & Co. 3,400 178,262
Biomet, Inc. 3,500 121,485
Boston Scientific Corp. (a) 8,000 186,960
CR Bard, Inc. 1,400 92,442
Fisher Scientific International (a) 1,500 93,075
Guidant Corp. 4,100 282,449
Hospira, Inc. (a) 1,800 73,746
Medtronic, Inc. 15,800 847,196
Millipore Corp. (a) 700 44,023
PerkinElmer, Inc. 1,300 26,481
St. Jude Medical, Inc. (a) 4,800 224,640
Stryker Corp. 4,000 197,720
Thermo Electron Corp. (a) 1,800 55,620
Waters Corp. (a) 1,300 54,080
Zimmer Holdings, Inc. (a) 3,100 213,559
------------
3,067,268
-----------------------------------------------------------------------------------------------------------------------------
Health Care Providers & Services--2.9%
Aetna, Inc. New Shares 3,900 335,946
AmerisourceBergen Corp. 1,500 115,950
Cardinal Health, Inc. 5,300 336,232
Caremark Rx, Inc. (a) 5,600 279,608
Cigna Corp. 1,800 212,148
Coventry Health Care, Inc. (a) 1,300 111,826
Express Scripts, Inc. (a) 2,000 124,400
HCA, Inc. 5,590 267,873
Health Management Associates, Inc. Class A 3,300 77,451
Humana, Inc. (a) 1,900 90,972
IMS Health, Inc. 2,600 65,442
Laboratory Corp. of America Holdings (a) 1,900 92,549
Manor Care, Inc. 1,200 46,092
McKesson Corp. 3,800 180,310
Medco Health Solutions, Inc. (a) 3,800 208,354
Quest Diagnostics 2,400 121,296
Tenet Healthcare Corp. (a) 5,300 59,519
UnitedHealth Group, Inc. 16,600 932,920
WellPoint, Inc. (a) 7,800 591,395
------------
4,250,283
-----------------------------------------------------------------------------------------------------------------------------
Hotels, Restaurants & Leisure--1.4%
Carnival Corp. 5,900 294,882
Darden Restaurants, Inc. 1,700 51,629
Harrah's Entertainment, Inc. 2,200 143,418
Hilton Hotels Corp. 4,800 107,136
International Game Technology 4,300 116,100
Marriott International, Inc. Class A 2,500 157,500
McDonald's Corp. 16,400 549,236
Starbucks Corp. (a) 5,200 260,520
Starwood Hotels & Resorts Worldwide, Inc. 2,700 154,359
Wendy's International, Inc. 1,600 72,240
Yum! Brands, Inc. 3,700 179,117
------------
2,086,137
-----------------------------------------------------------------------------------------------------------------------------
Household Durables--0.6%
Black & Decker Corp. 1,000 82,090
Centex Corp. 1,600 103,328
DR Horton, Inc. 3,300 119,526
Fortune Brands, Inc. 1,700 138,261
KB HOME 1,100 80,520
Leggett & Platt, Inc. 2,100 42,420
Maytag Corp. 1,200 21,912
Newell Rubbermaid, Inc. 3,700 83,805
Pulte Homes, Inc. 3,000 128,760
Snap-On, Inc. 800 28,896
The Stanley Works 1,200 56,016
Whirlpool Corp. 1,000 75,770
------------
961,304
-----------------------------------------------------------------------------------------------------------------------------
Household Products--1.9%
Clorox Co. 2,200 122,188
Colgate-Palmolive Co. 6,900 364,251
Kimberly-Clark Corp. 6,300 375,039
Procter & Gamble Co. 32,810 1,950,883
------------
2,812,361
-----------------------------------------------------------------------------------------------------------------------------
IT Services--1.0%
Affiliated Computer Services, Inc. Class A (a) 1,700 92,820
Automatic Data Processing, Inc. 7,200 309,888
Computer Sciences Corp. (a) 2,600 123,006
Convergys Corp. (a) 1,400 20,118
Electronic Data Systems Corp. 6,500 145,860
First Data Corp. 10,000 400,000
Fiserv, Inc. (a) 2,600 119,262
Paychex, Inc. 4,700 174,276
Sabre Holdings Corp. Class A 2,000 40,560
Unisys Corp. (a) 3,800 25,232
------------
1,451,022
-----------------------------------------------------------------------------------------------------------------------------
Independent Power Producers & Energy
Traders--0.7%
The AES Corp. (a) 8,100 133,083
Calpine Corp. (a) 9,700 25,123
Constellation Energy Group, Inc. 2,100 129,360
Duke Energy Corp. 11,700 341,289
8 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
=============================================================================================================================
Independent Power Producers & Energy
Traders (concluded)
Dynegy, Inc. Class A (a) 3,800 $ 17,898
TXU Corp. 3,100 349,928
------------
996,681
-----------------------------------------------------------------------------------------------------------------------------
Industrial Conglomerates--4.2%
3M Co. 9,900 726,264
General Electric Co. 137,500 4,629,625
Textron, Inc. 1,600 114,752
Tyco International Ltd. 26,300 732,455
------------
6,203,096
-----------------------------------------------------------------------------------------------------------------------------
Insurance--4.4%
ACE Ltd. 3,700 174,159
AMBAC Financial Group, Inc. 1,400 100,884
AON Corp. 4,200 134,736
Aflac, Inc. 6,800 308,040
The Allstate Corp. 8,500 469,965
American International Group, Inc. 33,700 2,088,052
Chubb Corp. 2,400 214,920
Cincinnati Financial Corp. 1,890 79,172
Hartford Financial Services Group, Inc. 3,700 285,529
Jefferson-Pilot Corp. 1,500 76,755
Lincoln National Corp. 2,100 109,242
Loews Corp. 1,900 175,579
MBIA, Inc. 1,900 115,178
Marsh & McLennan Cos., Inc. 7,100 215,769
Metlife, Inc. 9,500 473,385
The Progressive Corp. 2,500 261,925
Prudential Financial, Inc. 6,500 439,140
Safeco Corp. 1,700 90,746
The St. Paul Travelers Cos., Inc. 8,400 376,908
Torchmark Corp. 1,200 63,396
UnumProvident Corp. 4,200 86,100
XL Capital Ltd. Class A 2,000 136,060
------------
6,475,640
-----------------------------------------------------------------------------------------------------------------------------
Internet & Catalog Retail--0.4%
eBay, Inc. (a) 14,600 601,520
-----------------------------------------------------------------------------------------------------------------------------
Internet Software & Services--0.4%
Yahoo!, Inc. (a) 16,100 544,824
-----------------------------------------------------------------------------------------------------------------------------
Leisure Equipment & Products--0.2%
Brunswick Corp. 1,000 37,730
Eastman Kodak Co. 3,900 94,887
Hasbro, Inc. 1,800 35,370
Mattel, Inc. 4,700 78,396
------------
246,383
-----------------------------------------------------------------------------------------------------------------------------
Machinery--1.4%
Caterpillar, Inc. 9,000 528,750
Cummins, Inc. 600 52,794
Danaher Corp. 3,300 177,639
Deere & Co. 3,200 195,840
Dover Corp. 2,300 93,817
Eaton Corp. 2,000 127,100
ITT Industries, Inc. 1,300 147,680
Illinois Tool Works, Inc. 2,900 238,757
Ingersoll-Rand Co. Class A 4,400 168,212
Navistar International Corp. (a) 1,000 32,430
Paccar, Inc. 2,400 162,936
Pall Corp. 1,300 35,750
Parker Hannifin Corp. 1,600 102,896
------------
2,064,601
-----------------------------------------------------------------------------------------------------------------------------
Media--3.4%
Clear Channel Communications, Inc. 7,100 233,519
Comcast Corp. Class A (a) 28,500 837,330
Dow Jones & Co., Inc. 800 30,552
Gannett Co., Inc. 3,400 234,022
Interpublic Group of Cos., Inc. (a) 4,800 55,872
Knight-Ridder, Inc. 1,100 64,548
The McGraw-Hill Cos., Inc. 4,800 230,592
Meredith Corp. 400 19,956
New York Times Co. Class A 1,600 47,600
News Corp. Class A 32,700 509,793
Omnicom Group 2,400 200,712
Time Warner, Inc. 60,900 1,102,899
Tribune Co. 3,700 125,393
Univision Communications, Inc. Class A (a) 3,400 90,202
Viacom, Inc. Class B 20,800 686,608
Walt Disney Co. 26,300 634,619
------------
5,104,217
-----------------------------------------------------------------------------------------------------------------------------
Metals & Mining--0.7%
Alcoa, Inc. 10,900 266,178
Allegheny Technologies, Inc. 1,100 34,078
Freeport-McMoRan Copper & Gold, Inc. Class B 2,600 126,334
Newmont Mining Corp. 5,800 273,586
Nucor Corp. 2,200 129,778
Phelps Dodge Corp. 1,300 168,909
United States Steel Corp. 1,700 71,995
------------
1,070,858
-----------------------------------------------------------------------------------------------------------------------------
Multi-Utilities--1.1%
Ameren Corp. 2,400 128,376
CMS Energy Corp. (a) 3,000 49,350
Centerpoint Energy, Inc. 4,100 60,967
Consolidated Edison, Inc. 3,400 165,070
DTE Energy Co. 2,000 91,720
Dominion Resources, Inc. 4,400 379,016
KeySpan Corp. 1,900 69,882
NiSource, Inc. 2,900 70,325
PG&E Corp. 5,200 204,100
Public Service Enterprise Group, Inc. 3,100 199,516
Sempra Energy 3,100 145,886
TECO Energy, Inc. 2,100 37,842
Xcel Energy, Inc. 4,500 88,245
------------
1,690,295
-----------------------------------------------------------------------------------------------------------------------------
Multiline Retail--1.1%
Big Lots, Inc. (a) 1,000 10,990
Dillard's, Inc. Class A 800 16,704
Dollar General Corp. 3,900 71,526
Family Dollar Stores, Inc. 2,300 45,701
Federated Department Stores 3,483 232,908
JC Penney Co., Inc. 3,400 161,228
Kohl's Corp. (a) 4,300 215,774
Nordstrom, Inc. 3,100 106,392
Sears Holdings Corp. (a) 1,381 171,824
Target Corp. 11,300 586,809
------------
1,619,856
-----------------------------------------------------------------------------------------------------------------------------
Office Electronics--0.1%
Xerox Corp. (a) 12,000 163,800
-----------------------------------------------------------------------------------------------------------------------------
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 9
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
=============================================================================================================================
Oil, Gas & Consumable Fuels--8.4%
Amerada Hess Corp. 1,100 $ 151,250
Anadarko Petroleum Corp. 3,200 306,400
Apache Corp. 4,400 330,968
Burlington Resources, Inc. 4,800 390,336
Chevron Corp. 29,191 1,889,533
ConocoPhillips 18,100 1,265,371
Devon Energy Corp. 5,900 404,976
EOG Resources, Inc. 3,300 247,170
El Paso Corp. 8,000 111,200
Exxon Mobil Corp. 81,800 5,197,572
Kerr-McGee Corp. 1,626 157,901
Kinder Morgan, Inc. 1,400 134,624
Marathon Oil Corp. 4,936 340,238
Murphy Oil Corp. 2,200 109,714
Occidental Petroleum Corp. 5,000 427,150
Sunoco, Inc. 1,900 148,580
Valero Energy Corp. 3,900 440,934
Williams Cos., Inc. 7,100 177,855
XTO Energy, Inc. 4,533 205,436
------------
12,437,208
-----------------------------------------------------------------------------------------------------------------------------
Paper & Forest Products--0.4%
Georgia-Pacific Corp. 3,000 102,180
International Paper Co. 6,300 187,740
Louisiana-Pacific Corp. 1,800 49,842
MeadWestvaco Corp. 2,200 60,764
Weyerhaeuser Co. 3,000 206,250
------------
606,776
-----------------------------------------------------------------------------------------------------------------------------
Personal Products--0.6%
Alberto-Culver Co. Class B 1,000 44,750
Avon Products, Inc. 6,300 170,100
The Gillette Co. 12,300 715,860
------------
930,710
-----------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals--6.4%
Abbott Laboratories 20,200 856,480
Allergan, Inc. 1,700 155,754
Bristol-Myers Squibb Co. 24,800 596,688
Eli Lilly & Co. 14,700 786,744
Forest Laboratories, Inc. (a) 4,600 179,262
Johnson & Johnson 38,700 2,448,936
King Pharmaceuticals, Inc. (a) 3,000 46,140
Merck & Co., Inc. 28,900 786,369
Mylan Laboratories 3,000 57,780
Pfizer, Inc. 95,600 2,387,132
Schering-Plough Corp. 19,100 402,055
Watson Pharmaceuticals, Inc. (a) 1,500 54,915
Wyeth 17,400 805,098
------------
9,563,353
-----------------------------------------------------------------------------------------------------------------------------
Real Estate--0.7%
Apartment Investment & Management
Co. Class A 1,600 62,048
Archstone-Smith Trust 2,400 95,688
Equity Office Properties Trust 5,600 183,176
Equity Residential 4,000 151,400
Plum Creek Timber Co., Inc. 2,000 75,820
Prologis 2,900 128,499
Public Storage, Inc. 1,200 80,400
Simon Property Group, Inc. 2,600 192,712
Vornado Realty Trust 1,700 147,254
------------
1,116,997
-----------------------------------------------------------------------------------------------------------------------------
Road & Rail--0.6%
Burlington Northern Santa Fe Corp. 4,700 281,060
CSX Corp. 2,800 130,144
Norfolk Southern Corp. 4,900 198,744
Union Pacific Corp. 3,300 236,610
------------
846,558
-----------------------------------------------------------------------------------------------------------------------------
Semiconductors & Semiconductor
Equipment--3.2%
Advanced Micro Devices, Inc. (a) 5,000 126,000
Altera Corp. (a) 4,700 89,817
Analog Devices, Inc. 4,500 167,130
Applied Materials, Inc. 20,800 352,768
Applied Micro Circuits Corp. (a) 2,700 8,100
Broadcom Corp. Class A (a) 3,800 178,258
Freescale Semiconductor, Inc. Class B (a) 5,546 130,775
Intel Corp. 79,100 1,949,815
Kla-Tencor Corp. 2,500 121,900
LSI Logic Corp. (a) 4,400 43,340
Linear Technology Corp. 4,200 157,878
Maxim Integrated Products, Inc. 4,100 174,865
Micron Technology, Inc. (a) 7,500 99,750
National Semiconductor Corp. 4,100 107,830
Novellus Systems, Inc. (a) 1,900 47,652
Nvidia Corp. (a) 2,400 82,272
PMC-Sierra, Inc. (a) 2,700 23,787
Teradyne, Inc. (a) 2,600 42,900
Texas Instruments, Inc. 21,100 715,290
Xilinx, Inc. 4,400 122,540
------------
4,742,667
-----------------------------------------------------------------------------------------------------------------------------
Software--3.5%
Adobe Systems, Inc. 6,100 182,085
Autodesk, Inc. 3,000 139,320
BMC Software, Inc. (a) 2,500 52,750
Citrix Systems, Inc. (a) 2,200 55,308
Computer Associates International, Inc. 6,400 177,984
Compuware Corp. (a) 4,300 40,850
Electronic Arts, Inc. (a) 4,000 227,560
Intuit, Inc. (a) 2,400 107,544
Mercury Interactive Corp. (a) 1,200 47,520
Microsoft Corp. 119,500 3,074,735
Novell, Inc. (a) 6,000 44,700
Oracle Corp. (a) 49,500 613,305
Parametric Technology Corp. (a) 2,500 17,425
Siebel Systems, Inc. 6,700 69,211
Symantec Corp. (a) 15,183 344,047
------------
5,194,344
-----------------------------------------------------------------------------------------------------------------------------
Specialty Retail--2.1%
Autonation, Inc. (a) 2,900 57,913
Autozone, Inc. (a) 800 66,600
Bed Bath & Beyond, Inc. (a) 3,800 152,684
Best Buy Co., Inc. 5,400 235,062
Circuit City Stores, Inc. 2,600 44,616
The Gap, Inc. 8,000 139,440
Home Depot, Inc. 27,800 1,060,292
Limited Brands 5,000 102,150
Lowe's Cos., Inc. 9,900 637,560
Office Depot, Inc. (a) 3,800 112,860
OfficeMax, Inc. 1,200 38,004
10 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
Schedule of Investments (concluded)
Shares
Industry Common Stocks Held Value
=============================================================================================================================
Specialty Retail (concluded)
RadioShack Corp. 2,000 $ 49,600
The Sherwin-Williams Co. 1,500 66,105
Staples, Inc. 10,050 214,266
TJX Cos., Inc. 5,700 116,736
Tiffany & Co. 2,100 83,517
------------
3,177,405
-----------------------------------------------------------------------------------------------------------------------------
Textiles, Apparel & Luxury Goods--0.4%
Coach, Inc. (a) 4,700 147,392
Jones Apparel Group, Inc. 1,700 48,450
Liz Claiborne, Inc. 1,100 43,252
Nike, Inc. Class B 2,700 220,536
Reebok International Ltd. 800 45,256
VF Corp. 1,200 69,564
------------
574,450
-----------------------------------------------------------------------------------------------------------------------------
Thrifts & Mortgage Finance--1.4%
Countrywide Financial Corp. 7,900 260,542
Fannie Mae 12,300 551,286
Freddie Mac 8,700 491,202
Golden West Financial Corp. 3,600 213,804
MGIC Investment Corp. 1,100 70,620
Sovereign Bancorp, Inc. 4,200 92,568
Washington Mutual, Inc. 11,100 435,342
------------
2,115,364
-----------------------------------------------------------------------------------------------------------------------------
Tobacco--1.5%
Altria Group, Inc. 26,900 1,982,799
Reynolds American, Inc. 1,300 107,926
UST, Inc. 2,300 96,278
------------
2,187,003
-----------------------------------------------------------------------------------------------------------------------------
Trading Companies & Distributors--0.0%
WW Grainger, Inc. 1,000 62,920
-----------------------------------------------------------------------------------------------------------------------------
Wireless Telecommunication Services--0.8%
Alltel Corp. 4,700 306,017
Sprint Nextel Corp. 38,152 907,255
------------
1,213,272
-----------------------------------------------------------------------------------------------------------------------------
Total Common Stocks
(Cost--$133,073,289)--96.7% 143,888,306
Face
Short-Term Securities Amount
=============================================================================================================================
Time Deposits--0.9%
State Street Bank, 3.20% due 10/03/2005 $1,279,621 1,279,621
-----------------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$1,279,621)--0.9% 1,279,621
=============================================================================================================================
Number of
Options Purchased Contracts
=============================================================================================================================
Call Options Purchased
S&P 500(R) Index, expiring November 2005 at USD 1,130.51,
Broker BNP Paribas 136,717 13,771,296
S&P 500(R) Index, expiring November 2005 at USD 1,130.51,
Broker HSBC Securities 98,893 9,961,380
-----------------------------------------------------------------------------------------------------------------------------
Total Options Purchased (Premiums Paid--$0+)--15.9% 23,732,676
-----------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$134,352,910)--113.5% 168,900,603
=============================================================================================================================
Options Written
=============================================================================================================================
Call Options Written
S&P 500(R) Index, expiring November 2005 at USD 1,177.09,
Broker BNP Paribas 205,076 (11,684,040)
S&P 500(R) Index, expiring November 2005 at USD 1,176.86,
Broker HSBC Securities 148,340 (8,451,577)
-----------------------------------------------------------------------------------------------------------------------------
Total Options Written (Premiums Received--$60,000+)--(13.5%) (20,135,617)
=============================================================================================================================
Total Investments, Net of Options Written (Cost--$134,292,910*)--100.0% 148,764,986
Other Assets Less Liabilities--0.0% 21,585
------------
Net Assets--100.0% $148,786,571
============
+ Net premiums from purchased and written options.
* The cost and unrealized appreciation (depreciation) of investments, net of
options written, as of September 30, 2005, as computed for federal income
tax purposes, were as follows:
Aggregate cost ............................................ $134,299,212
============
Gross unrealized appreciation ............................. $ 40,162,624
Gross unrealized depreciation ............................. (25,696,850)
------------
Net unrealized appreciation ............................... $ 14,465,774
============
(a) Non-income producing security.
(b) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch & Co., Inc. 12,000 $8,488
--------------------------------------------------------------------------
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 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.
Financial futures contracts purchased as of September 30, 2005 were as
follows:
--------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Depreciation
--------------------------------------------------------------------------
2 S&P 500(R) Index December 2005 $622,209 $(5,058)
--------------------------------------------------------------------------
See Notes to Financial Statements.
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 11
Statement of Assets, Liabilities and Capital
As of September 30, 2005
===================================================================================================================
Assets
-------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$133,699,900) ............................... $144,431,727
Investments in affiliated securities, at value
(identified cost--$653,010) ................................... 736,200
Options purchased, at value (premiums paid--$0) ................ 23,732,676
Cash collateral on futures contracts ........................... 31,500
Receivables:
Dividends ................................................... $ 161,523
Investment adviser .......................................... 146,199
Variation margin ............................................ 1,250
Interest .................................................... 114 309,086
----------------------------
Total assets ................................................... 169,241,189
------------
===================================================================================================================
Liabilities
-------------------------------------------------------------------------------------------------------------------
Options written, at value (premiums received--$60,000) ......... 20,135,617
Payables:
Offering costs .............................................. 110,829
Securities purchased ........................................ 71,011 181,840
------------
Accrued expenses ............................................... 137,161
------------
Total liabilities .............................................. 20,454,618
------------
===================================================================================================================
Net Assets
-------------------------------------------------------------------------------------------------------------------
Net assets ..................................................... $148,786,571
============
===================================================================================================================
Capital
-------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per share, 100,000,000 shares
authorized .................................................... $ 6,995
Paid-in capital in excess of par ............................... 133,322,413
Undistributed investment income--net ........................... $ 744,715
Undistributed realized capital gains--net ...................... 245,430
Unrealized appreciation--net ................................... 14,467,018
------------
Total accumulated earnings--net ................................ 15,457,163
------------
Total Capital--Equivalent to $21.27 per share based on 6,995,236
shares of Common Stock outstanding (market price--$20.38) ..... $148,786,571
============
See Notes to Financial Statements.
12 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
Statement of Operations
For the Period November 1, 2004+ to September 30, 2005
===================================================================================================================
Investment Income
-------------------------------------------------------------------------------------------------------------------
Dividends (including $8,488 from affiliates) ................... $ 2,766,632
Interest ....................................................... 81,920
------------
Total income ................................................... 2,848,552
------------
===================================================================================================================
Expenses
-------------------------------------------------------------------------------------------------------------------
Investment advisory fees ....................................... $ 1,045,085
Interest expense ............................................... 80,757
Directors' fees and expenses ................................... 64,703
Professional fees .............................................. 63,102
Printing and shareholder reports ............................... 42,901
Tender offer fees .............................................. 32,406
Accounting services ............................................ 31,000
Transfer agent fees ............................................ 26,665
Listing fees ................................................... 19,975
Custodian fees ................................................. 17,175
Pricing fees ................................................... 1,115
Other .......................................................... 18,953
------------
Total expenses ................................................. 1,443,837
------------
Investment income--net ......................................... 1,404,715
------------
===================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net .............................. 245,430
Unrealized appreciation/depreciation on:
Investments--net ............................................ 34,547,693
Futures contracts--net ...................................... (5,058)
Options written--net ........................................ (20,075,617) 14,467,018
----------------------------
Total realized and unrealized gain--net ........................ 14,712,448
------------
Net Increase in Net Assets Resulting from Operations ........... $ 16,117,163
============
+ Commencement of operations.
See Notes to Financial Statements.
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 13
Statement of Changes in Net Assets
For the Period
November 1,
2004+ to
September 30,
2005
=======================================================================================================
Operations
-------------------------------------------------------------------------------------------------------
Investment income--net ............................................ $ 1,404,715
Realized gain--net ................................................ 245,430
Unrealized appreciation/depreciation--net ......................... 14,467,018
-------------
Net increase in net assets resulting from operations .............. 16,117,163
-------------
=======================================================================================================
Dividends to Shareholders
-------------------------------------------------------------------------------------------------------
Investment income--net ............................................ (660,000)
-------------
=======================================================================================================
Common Stock Transactions
-------------------------------------------------------------------------------------------------------
Proceeds from issuance of Common Stock ............................ 133,509,000
Offering costs resulting from the issuance of Common Stock ........ (279,600)
-------------
Net increase in net assets resulting from Common Stock transactions 133,229,400
-------------
=======================================================================================================
Net Assets
-------------------------------------------------------------------------------------------------------
Total increase in net assets ...................................... 148,686,563
Beginning of period ............................................... 100,008
-------------
End of period* .................................................... $ 148,786,571
=============
*Undistributed investment income--net ........................... $ 744,715
=============
+ Commencement of operations
See Notes to Financial Statements.
14 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
Financial Highlights
For the Period
November 1,
2004+ to
The following per share data and ratios have been derived September 30,
from information provided in the financial statements. 2005
=======================================================================================================
Per Share Operating Performance
-------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .............................. $ 19.10
-------------
Investment income--net** .......................................... .20
Realized and unrealized gain--net ................................. 2.10
-------------
Total from investment operations .................................. 2.30
-------------
Less dividends from investment income--net ........................ (.09)
-------------
Offering costs resulting from the issuance of Common Stock ........ (.04)
-------------
Net asset value, end of period .................................... $ 21.27
-------------
Market price per share, end of period ............................. $ 20.38
=======================================================================================================
Total Investment Return***
-------------------------------------------------------------------------------------------------------
Based on net asset value per share ................................ 11.90%@
=============
Based on market price per share ................................... 2.39%@
=============
=======================================================================================================
Ratios to Average Net Assets
-------------------------------------------------------------------------------------------------------
Expenses, excluding interest expense .............................. 1.07%*
=============
Expenses .......................................................... 1.13%*
=============
Investment income--net ............................................ 1.10%*
=============
=======================================================================================================
Supplemental Data
-------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) .......................... $ 148,787
=============
Portfolio turnover ................................................ 5.14%
=============
* Annualized.
** Based on average shares outstanding.
*** Total investment returns based on market price, 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.
+ Commencement of operations.
@ Aggregate total investment return.
See Notes to Financial Statements.
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 15
Notes to Financial Statements
1. Significant Accounting Policies:
S&P 500(R) GEARED(SM) Fund Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, closed-end management
investment company with a fixed term of existence. Prior to commencement of
operations on November 1, 2004, the Fund had no operations other than those
relating to organizational matters and the sale of 5,236 shares of Common Stock
on September 16, 2004 to Merrill Lynch Investment Managers, L.P. ("MLIM") for
$100,008. The Fund's financial statements are prepared in conformity with U.S.
generally accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from these
estimates. The Fund determines and makes available for publication the net asset
value of its Common Stock on a daily basis. The Fund's Common Stock shares are
listed on the New York Stock Exchange ("NYSE") under the symbol GRE. The
following is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available asked
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Directors of the Fund.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Directors of the Fund. Short positions traded in the OTC market are valued at
the last available asked price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued based upon quoted fair valuations
received daily by the Fund from a pricing service or counterparty. Financial
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sale price as of the close of such exchanges. Obligations with
remaining maturities of 60 days or less are valued at amortized cost unless the
Investment Adviser believes that this method no longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Fund's Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the NYSE. The values of such securities
used in computing the net asset value of the Fund's shares are determined as of
such times. Foreign currency exchange rates also are generally determined prior
to the close of business on the NYSE. Occasionally, events affecting the values
of such securities and such exchange rates may occur between the times at which
they are determined and the close of business on the NYSE that may not be
reflected in the computation of the Fund's net asset value. If events (for
example, a company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value of such
securities, those securities may be valued at their fair value as determined in
good faith by the Fund's Board of Directors or by the Investment Adviser using a
pricing service and/or procedures approved by the Fund's Board of Directors.
(b) Derivative financial instruments -- The Fund will engage in various
portfolio investment strategies both to enhance its returns or as a proxy for a
direct investment in securities underlying the Fund's index. Losses may arise
due to changes in the value of the contract or if the counterparty does not
perform under the contract.
o Options -- The Fund will purchase and write call options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market
16 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
Notes to Financial Statements (continued)
value of the option written. When a security is purchased or sold through
an exercise of an option, the related premium paid (or received) is added
to (or deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option expires
(or the Fund enters into a closing transaction), the Fund realizes a gain
or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction exceeds the
premium paid or received). When cash is received as collateral for
purchased options, the Fund may pay interest to the option writer.
Written and purchased options are non-income producing investments.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis.
(e) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(f) Offering expenses -- Direct expenses relating to the public offering of the
Fund's Common Stock were charged to capital at the time of issuance of the
shares.
(g) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
2. Investment Advisory 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 .82% of the average daily value of the
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 17
Notes to Financial Statements (concluded)
Fund's net assets plus borrowings for leverage and other investment purposes. IQ
has entered into a Subadvisory Agreement with MLIM pursuant to which MLIM
provides certain investment advisory services to IQ with respect to the Fund.
For such services, IQ will pay MLIM a monthly fee at an annual rate of .35% of
the average daily value of the Fund's net assets plus borrowings for leverage
and other investment purposes. There was no increase in the aggregate fees paid
by the Fund for these services.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to ML & Co. and its
affiliates, including Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), an affiliate of IQ. Pursuant to that order, the Fund may retain
Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of IQ, as the
securities lending agent for a fee based on a share of the returns on investment
of cash collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by MLIM
or its affiliates.
For the period November 1, 2004 to September 30, 2005, MLPF&S received gross
fees from underwriting of $6,056,489 in connection with the issuance of the
Fund's Common Stock. In addition, the Fund reimbursed MLPF&S $40,407 as a
partial reimbursement of expenses incurred in connection with the issuance of
the Fund's Common Stock.
In addition, MLPF&S received $9 in commissions on the execution of portfolio
security transactions for the Fund for the period November 1, 2004 to September
30, 2005.
Transactions in options written for the period November 1, 2004 to September 30,
2005 were as follows:
--------------------------------------------------------------------------------
Number of Premiums
Contracts Received
--------------------------------------------------------------------------------
Outstanding call options written,
beginning of period .......................... -- --
Options written ................................ 353,416 $60,000
-----------------------
Outstanding call options written,
end of period ................................ 353,416 $60,000
=======================
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, IQ, ML & Co., and/or MLIM, LLC.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period November 1, 2004 to September 30, 2005 were $139,923,831 and $7,091,484,
respectively.
4. Common Stock Transactions:
The Fund is authorized to issue 100,000,000 shares of capital stock, par value
$.001, all of which are initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued shares
of capital stock without approval of the holders of Common stock.
Shares issued and outstanding during the period November 1, 2004 to September
30, 2005 increased by 6,990,000 from shares sold.
5. Distributions to Shareholders:
The tax character of distributions paid during the period November 1, 2004 to
September 30, 2005 was as follows:
--------------------------------------------------------------------------------
11/01/2004+
to 9/30/2005
--------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ........................................ $660,000
--------
Total taxable distributions .............................. $660,000
========
+ Commencement of operations.
As of September 30, 2005, the components of accumulated earnings on a tax basis
were as follows:
-------------------------------------------------------------------------------
Undistributed ordinary income--net ........................ $ 990,690
Undistributed long-term capital gains--net ................ 698
-----------
Total undistributed earnings--net ......................... 991,388
Capital loss carryforward ................................. --
Unrealized gains--net ..................................... 14,465,775*
-----------
Total accumulated earnings--net ........................... $15,457,163
===========
* The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales and the
realization for tax purposes of unrealized gains (losses) on certain
futures contracts.
6. Subsequent Event:
As of September 30, 2005, the Fund changed its fiscal year end from September 30
to December 31.
On November 2, 2005, 1,748,809 shares (25% of the shares outstanding) were
purchased by the Fund from its shareholders at $21.45 per share, (subject to a
repurchase fee of 0.10% of the net asset value per share) for $37,476,977. In
total, 3,541,628 shares (approximately 50.63% of the Fund's outstanding shares)
were validly tendered and not withdrawn prior to the expiration of the Fund's
repurchase offer.
18 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
S&P 500(R) GEARED(SM) Fund Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of S&P 500(R) GEARED(SM) Fund Inc. as of
September 30, 2005, and the related statements of operations and of changes in
net assets, and the financial highlights for the period November 1, 2004
(commencement of operations) to September 30, 2005. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall overall financial statement presentation. Our procedures included
confirmation of securities owned as of September 30, 2005, by correspondence
with the custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of S&P
500(R) GEARED(SM) Fund Inc. as of September 30, 2005, the results of its
operations, the changes in its net assets, and its financial highlights for the
period November 1, 2004 to September 30, 2005, in conformity with U.S. generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, NJ
November 21, 2005
Fund Certification (unaudited)
In July 2005, the Fund filed its Chief Executive Officer Certification for the
prior year with the New York Stock Exchange pursuant to Section 303A.12(a) of
the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Controls and Procedures (unaudited)
During the Fund's most recent fiscal year, Fund management determined that the
value of the Fund's options positions (the "Options") generally had been
understated, and consequently the Fund's published net asset value ("NAV") had
been understated. These facts were reported to the public through a Form 8-K
filed on September 28, 2005 and a press release issued on September 29, 2005. In
addition, corrected NAVs were published on Bloomberg between the evening of
September 28, 2005 and the morning of September 29, 2005.
After reviewing the misstatement in connection with the Fund's financial
statements disclosed since the Fund's inception, and upon consulting with the
Fund's counsel, Chief Compliance Officer, auditors, Audit Committee and
Independent Directors' counsel, management decided that it was appropriate to
restate the unaudited schedule of investments contained in the Form N-Q for the
period ended June 30, 2005 to correct the understated value of the Fund's
options positions, and consequently the Fund's NAV. This filing was made on
October 25, 2005.
The origin of the NAV misstatement was traced to an inaccurate application of
pricing information for the Options by the fund accounting service provider of
the Fund. The Fund's disclosure controls and procedures as then in effect did
not detect and correct the error. The Fund's principal executive officer and
principal financial officer, after evaluating the relevant controls and
procedures, concluded that certain changes were appropriate and have implemented
those changes.
In connection with this filing, the Fund's principal executive officer and
principal financial officer have, within 90 days of this annual report,
evaluated the Fund's disclosure controls and procedures currently in effect,
including the changes discussed above, and concluded that the Fund's disclosure
controls and procedures are effective and operating properly.
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 19
Automatic Dividend Reinvestment Plan
The following description of the Fund's Automatic Dividend Reinvestment Plan
(the "Plan") is sent to you annually as required by federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects,
all dividend and capital gains distributions will be automatically reinvested by
The Bank of New York (the "Plan Agent"), as agent for shareholders in
administering the Plan, in additional shares of Common Stock of the Fund.
Holders of Common Stock who elect not to participate in the Plan will receive
all distributions in cash paid by check mailed directly to the shareholder of
record (or, if the shares are held in street or other nominee name then to such
nominee) by The Bank of New York, as dividend paying agent. Such participants
may elect not to participate in the Plan and to receive all distributions of
dividends and capital gains in cash by sending written instructions to The Bank
of New York, as dividend paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date; otherwise such
termination will be effective with respect to any subsequently declared dividend
or distribution.
Whenever the Fund declares an income dividend or capital gains distribution
(collectively referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized shares of Common Stock from the Fund ("newly issued shares") or (ii)
by purchase of outstanding shares of Common Stock on the open market
("open-market purchases") on the New York Stock Exchange or elsewhere. If on the
payment date for the dividend, the net asset value per share of the Common Stock
is equal to or less than the market price per share of the Common Stock plus
estimated brokerage commissions (such conditions being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares of
Common Stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If, on
the dividend payment date, the net asset value per share is greater than the
market value (such condition being referred to herein as "market discount"), the
Plan Agent will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. It is contemplated that the Fund
will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisitions of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date determined by dividing the
uninvested portion of the dividend by the net asset value per share.
20 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which hold shares
of others who are the beneficial owners, the Plan Agent will administer the Plan
on the basis of the number of shares certified from time to time by the record
shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
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.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. 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 at less than they could otherwise purchase them and
will have shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market price plus
commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient 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.
The value of shares acquired pursuant to the Plan will generally be excluded
from gross income to the extent that the cash amount reinvested would be
excluded from gross income. If, when the Fund's shares are trading at a premium
over net asset value, 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 such discount (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.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
All correspondence concerning 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.
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 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 & 2004 to Vice-Chairman, Kissinger Associates, Inc., a 6 Hasbro, Inc.;
Batkin Princeton, NJ Chairman of present consulting firm, since 1990. Overseas
08543-9095 the Board Shipholding
Age: 61 Group, Inc.;
Cantel
Medical
Corp.; and
Diamond
Offshore
Drilling,
Inc.
------------------------------------------------------------------------------------------------------------------------------------
Paul P.O. Box 9095 Director & 2004 to Professor, Columbia University Business School 6 None
Glasserman Princeton, NJ Chairman of present since 1991; Senior Vice Dean since July 2004.
08543-9095 the Audit
Age: 43 Committee
------------------------------------------------------------------------------------------------------------------------------------
Steven W. P.O. Box 9095 Director 2005 to Retired since August 2002; Managing Director, 6 None
Kohlhagen Princeton, NJ present Wachovia National Bank and its predecessors
08543-9095 (1992 -- 2002).
Age: 57
------------------------------------------------------------------------------------------------------------------------------------
William J. P.O. Box 9095 Director & 2004 to Retired since November 2004; Chairman and 6 None
Rainer Princeton, NJ Chairman of present Chief Executive Officer, OneChicago, LLC, a
08543-9095 Nominating designated contract market (2001 to November
Age: 59 and 2004); Chairman, U.S. Commodity Futures
Corporate Trading Commission (1999 -- 2001).
Governance
Committee
------------------------------------------------------------------------------------------------------------------------
* Each of the Non-Interested Directors is a member of the Audit Committee and the Nominating and Corporate Governance
Committee.
** Each Director will serve until the next annual meeting and until his successor is elected and qualifies, or his
earlier death, resignation or removal as provided in the Fund's Bylaws, charter or by statute.
====================================================================================================================================
Interested Director*
------------------------------------------------------------------------------------------------------------------------------------
Andrew J. P.O. Box 9095 Director 2005 to IQ Investment Advisors LLC, Chief Legal Officer 7 None
Donohue Princeton, NJ present since 2004; Global General Counsel, FAM and MLIM,
08543-9095 since March 2003; prior to 2003, General Counsel,
Age: 55 OppenheimerFunds, Inc.
------------------------------------------------------------------------------------------------------------------------
* Mr. Donohue is an Interested Director because of his position as an employee of the Advisor and its affiliates. Mr.
Donohue serves for a term of one year and until his successor is elected and qualifies, or his earlier death,
resignation or removal as provided by the Fund's Bylaws, charter or by statute.
22 S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005
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 M. P.O. Box 9011 President 2004 to IQ Investment Advisors LLC, President since April 2004; MLPF&S, First Vice
Cox Princeton, NJ present President, Head of Global Private Client Market Investments and Origination since
08543-9011 2003; MLPF&S, First Vice President, Head of Structured Products Origination and
Age: 39 Sales (2001 -- 2003); MLPF&S, Director, Head of Structured Products Origination
(1997 -- 2001).
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2004 to IQ Investment Advisors LLC, Treasurer and Secretary since December 2004; First Vice
Burke Princeton, NJ President, present President of MLIM and FAM since 1997 and Treasurer thereof since 1999; Senior Vice
08543-9011 Treasurer President and Treasurer of Princeton Services since 1999 and Director since 2004;
Age: 45 and Vice President of FAMD since 1999; Vice President of MLIM and FAM (1990 -- 1997);
Secretary Director of Taxation of MLIM (1999 -- 2001).
------------------------------------------------------------------------------------------------------------------------------------
Andrew J. P.O. Box 9011 Chief Legal 2005 to IQ Investment Advisors LLC, Chief Legal Officer since December 2004; Global General
Donohue Princeton, NJ Officer present Counsel, FAM and MLIM, since March 2003; prior to 2003, General Counsel,
08543-9011 OppenheimerFunds, Inc.
Age: 55
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to IQ Investment Advisors LLC, Chief Compliance Officer since 2004; Chief Compliance
Hiller Princeton, NJ Compliance present Officer of the MLIM/FAM-advised funds and First Vice President and Chief Compliance
08543-9011 Officer Officer of MLIM (Americas Region) since 2004; Global Director of Compliance at
Age: 54 Morgan Stanley Investment Management (2000 -- 2004); Managing Director and Global
Director of Compliance at Citigroup Asset Management (2000 -- 2002); Chief
Compliance Officer at Soros Fund Management in 2000; Chief Compliance Officer at
Prudential Financial (1995 -- 2000); Senior Counsel in the SEC's Division of
Enforcement in Washington, D.C. (1990 -- 1995).
------------------------------------------------------------------------------------------------------------------------------------
Justin C. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Vice President since 2005; MLPF&S, Vice President,
Ferri Princeton, NJ President present Global Private Client Group Market Investments & Origination since 2005; MLPF&S,
08543-9011 Vice President, Head Global Private Client Rampart Equity Derivatives (2004 --
Age: 30 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; MLIM, Director since 2000;
Fife Princeton, NJ President present MLPF&S, Director (2000) and Vice President (1997 -- 2000).
08543-9011 and
Age: 35 Assistant
Treasurer
------------------------------------------------------------------------------------------------------------------------------------
Colleen R. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Vice President since 2005; MLPF&S, Director, Global
Rusch Princeton, NJ President present Private Client Group Market Investment & Origination since July 2005; MLIM,
08543-9011 and Director from January 2005 to July 2005; Vice President of MLIM (1998 -- 2004).
Age: 38 Assistant
Secretary
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
The Bank of New York
101 Barclay Street -- 11 East
New York, NY 10286
NYSE Symbol
GRE
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
S&P 500(R) GEARED(SM) FUND INC. SEPTEMBER 30, 2005 23
S&P 500(R) GEARED(SM) Fund Inc. seeks to provide total returns, exclusive of
fees and expenses of the Fund, linked to the annual performance of the S&P 500
Composite Stock Price Index.
This report, including the financial information herein, is transmitted to
shareholders of S&P 500(R) GEARED(SM) 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,
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.mutualfunds.ml.com and (2) on the Securities and Exchange Commission's Web
site at http://www.sec.gov.
S&P 500(R) GEARED(SM) Fund Inc.
Box 9011
Princeton, NJ 08543-9011
#IQSP5G -- 9/05
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
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 September 30, 2005 - $30,600
Fiscal Year Ending September 30, 2004 - $N/A
(b) Audit-Related Fees - Fiscal Year Ending September 30, 2005 - $8,400
Fiscal Year Ending September 30, 2004 - $N/A
The nature of the services include assurance and related services
reasonably related to the performance of the audit of financial
statements not included in Audit Fees.
(c) Tax Fees - Fiscal Year Ending September 30, 2005 - $10,200
Fiscal Year Ending September 30, 2004 - $N/A
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending September 30, 2005 - $0
Fiscal Year Ending September 30, 2004 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending September 30, 2005 - $6,294,388
Fiscal Year Ending September 30, 2004 - $N/A
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $919,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
Alan R. Batkin
Steven W. Kohlhagen
Paul Glasserman
William J. Rainer
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors has delegated to IQ Investment Advisors
LLC, and/or any sub-investment adviser approved by the Board of Directors (the
"Investment Adviser") authority to vote all proxies relating to the Fund's
portfolio securities. The Investment Adviser has adopted policies and procedures
("Proxy Voting Procedures") with respect to the voting of proxies related to the
portfolio securities held in the account of one or more of its clients,
including a Fund. Pursuant to these Proxy Voting Procedures, the Investment
Adviser's primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its shareholders, and to
act in a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers the
interests of its clients, including the Funds, and not the interests of the
Investment Adviser, when voting proxies and that real (or perceived) material
conflicts that may arise between the Investment Adviser's interest and those of
the Investment Adviser's clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment Adviser
has formed a Proxy Voting Committee (the "Committee"). The Committee is
comprised of the Investment Adviser's Chief Investment Officer (the "CIO"), one
or more other senior investment professionals appointed by the CIO, portfolio
managers and investment analysts appointed by the CIO and any other personnel
the CIO deems appropriate. The Committee will also include two non-voting
representatives from the Investment Adviser's Legal department appointed by the
Investment Adviser's General Counsel. The Committee's membership shall be
limited to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research responsibilities for
the Investment Adviser's affiliates may serve as a member of the Committee or
participate in its decision making (except to the extent such person is asked by
the Committee to present information to the Committee, on the same basis as
other interested knowledgeable parties not affiliated with the Investment
Adviser might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes are
consistent with the best interests of those clients and are free from
unwarranted and inappropriate influences. The Committee establishes general
proxy voting policies for the Investment Adviser and is responsible for
determining how those policies are applied to specific proxy votes, in light of
each issuer's unique structure, management, strategic options and, in certain
circumstances, probable economic and other anticipated consequences of alternate
actions. In so doing, the Committee may determine to vote a particular proxy in
a manner contrary to its generally stated policies. In addition, the Committee
will be responsible for ensuring that all reporting and recordkeeping
requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring proxy
issue is not suitable for general voting policies and requires a case-by-case
determination. In such cases, the Committee may elect not to adopt a specific
voting policy applicable to that issue. The Investment Adviser believes that
certain proxy voting issues require investment analysis -- such as approval of
mergers and other significant corporate transactions -- akin to investment
decisions, and are, therefore, not suitable for general guidelines. The
Committee may elect to adopt a common position for the Investment Adviser on
certain proxy votes that are akin to investment decisions, or determine to
permit the portfolio manager to make individual decisions on how best to
maximize economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that the
Investment Adviser will generally seek to vote proxies over which the Investment
Adviser exercises voting authority in a uniform manner for all the Investment
Adviser's clients, the Committee, in conjunction with a Fund's portfolio
manager, may determine that the Fund's specific circumstances require that its
proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an independent
adviser that specializes in providing a variety of fiduciary-level proxy-related
services to institutional investment managers, plan sponsors, custodians,
consultants, and other institutional investors. The services provided to the
Investment Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also assist the
Fund in fulfilling its reporting and recordkeeping obligations under the
Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For instance,
under the Proxy Voting Procedures, the Investment Adviser generally will not
seek to vote proxies related to portfolio securities that are on loan, although
it may do so under certain circumstances. In addition, the Investment Adviser
will vote proxies related to securities of foreign issuers only on a best
efforts basis and may elect not to vote at all in certain countries where the
Committee determines that the costs associated with voting generally outweigh
the benefits. The Committee may at any time override these general policies if
it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies
in respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent fiduciary,
the powers of the Committee shall pass to a subcommittee, appointed by the CIO
(with advice from the Secretary of the Committee), consisting solely of
Committee members selected by the CIO. The CIO shall appoint to the
subcommittee, where appropriate, only persons whose job responsibilities do not
include contact with the Client and whose job evaluations would not be affected
by the Investment Adviser's relationship with the Client (or failure to retain
such relationship). The subcommittee shall determine whether and how to vote all
proxies on behalf of the Investment Adviser's clients or, if the proxy matter
is, in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee determines to
alter the Investment Adviser's normal voting guidelines or, on matters where the
Investment Adviser's policy is case-by-case, does not follow the voting
recommendation of any proxy voting service or other independent fiduciary that
may be retained to provide research or advice to the Investment Adviser on that
matter, no proxies relating to the Client may be voted unless the Secretary, or
in the Secretary's absence, the Assistant Secretary of the Committee concurs
that the subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties.
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring proxy
issues that are not expected to involve unusual circumstances. These policies
are guidelines only, and the Investment Adviser may elect to vote differently
from the recommendation set forth in a voting guideline if the Committee
determines that it is in a Fund's best interest to do so. In addition, the
guidelines may be reviewed at any time upon the request of a Committee member
and may be amended or deleted upon the vote of a majority of Committee members
present at a Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with respect
to the following proxy issues:
o Proposals related to the composition of the Board of Directors
of issuers other than investment companies. As a general
matter, the Committee believes that a company's Board of
Directors (rather than shareholders) is most likely to have
access to important, nonpublic information regarding a
company's business and prospects, and is therefore
best-positioned to set corporate policy and oversee
management. The Committee, therefore, believes that the
foundation of good corporate governance is the election of
qualified, independent corporate directors who are likely to
diligently represent the interests of shareholders and oversee
management of the corporation in a manner that will seek to
maximize shareholder value over time. In individual cases, the
Committee may look at a nominee's history of representing
shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the
interests of shareholders and provide an independent view on
the propriety of financial reporting decisions of corporate
management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the
Committee may look at an auditors' history of representing
shareholder interests as auditor of other companies, to the
extent the Committee deems relevant.
o Proposals related to management compensation and employee
benefits. As a general matter, the Committee favors disclosure
of an issuer's compensation and benefit policies and opposes
excessive compensation, but believes that compensation matters
are normally best determined by an issuer's board of
directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set
arbitrary restrictions on compensation or benefits will,
therefore, generally not be supported.
o Proposals related to requests, principally from management,
for approval of amendments that would alter an issuer's
capital structure. As a general matter, the Committee will
support requests that enhance the rights of common
shareholders and oppose requests that appear to be
unreasonably dilutive.
o Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the
Committee opposes poison pill provisions.
o Routine proposals related to requests regarding the
formalities of corporate meetings.
o Proposals related to proxy issues associated solely with
holdings of investment company shares. As with other types of
companies, the Committee believes that a fund's Board of
Directors (rather than its shareholders) is best-positioned to
set fund policy and oversee management. However, the Committee
opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective that
the Investment Company Act envisions will be approved directly
by shareholders.
o Proposals related to limiting corporate conduct in some manner
that relates to the shareholder's environmental or social
concerns. The Committee generally believes that annual
shareholder meetings are inappropriate forums for discussion
of larger social issues, and opposes shareholder resolutions
"micromanaging" corporate conduct or requesting release of
information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the
Committee is generally supportive of proposals to require
corporate disclosure of matters that seem relevant and
material to the economic interests of shareholders, the
Committee is generally not supportive of proposals to require
disclosure of corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of September 30, 2005
(a)(1) Messrs. Vincent J. Costa, CFA and Jonathan Clark and Ms. Debra L.
Jelilian are primarily responsible for the day-to-day management of
the registrant's portfolio ("Portfolio Managers").
Mr. Costa has been a Managing Director of MLIM since 2005 and was a
Director of MLIM from 1999 to 2005. He is the Subadviser's Head of
Quantitative Investments and has over 19 years' experience in
investing and in managing similar investments. He has been a
portfolio manager of the Fund since 2004.
Mr. Clark has been a Vice President of MLIM since 1999. He has been
the portfolio manager and a Vice President of the Fund since 1999.
Mr. Clark has 14 years' experience as a portfolio manager and
trader. He has been a portfolio manager of the Fund since 2004.
Ms. Jelilian has been a Director of MLIM since 1999. Ms. Jelilian
has 13 years' experience in investing and managing index
investments. She has been a portfolio manager of the Fund since
2004.
(a)(2) As of September 30, 2005, in Thousands
(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
Registered Other Pooled Registered Other Pooled
(i) Name of Investment Investment Other Investment Investment Other
Portfolio Manager Companies Vehicles Accounts Companies Vehicles Accounts
Vincent J. Costa,
CFA 22 27 23 4* 4 2
$17,819,912 $12,472,040 $26,483,531 $185,420 $1,877,699 $1,421,809
Jonathan Clark 22 27 23 4* 4 2
$17,819,912 $12,472,040 $26,483,531 $185,420 $1,877,699 $1,421,809
Debra L. Jelilian 22 27 23 4* 4 2
$17,819,912 $12,472,040 $26,483,531 $185,420 $1,877,699 $1,421,809
* A portion of the assets in the master fund of a master-feeder structure
is subject to a performance fee.
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities
with respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser and its affiliates, including other client
accounts managed by the Fund's portfolio management team. Investment
decisions for the Fund and other clients are made with a view to achieving
their respective investment objectives and after consideration of such
factors as their current holdings, availability of cash for investment and
the size of their investments generally. Frequently, a particular security
may be bought or sold for only one client or in different amounts and at
different times for more than one but less than all clients. Likewise,
because clients of the Adviser and its affiliates may have differing
investment strategies, a particular security may be bought for one or more
clients when one or more other clients are selling the security. The
investment results for the Fund may differ from the results achieved by
other clients of the Adviser and its affiliates. In addition, purchases or
sales of the same security may be made for two or more clients on the same
day. In such event, such transactions will be allocated among the clients
in a manner believed by the Adviser and its affiliates to be equitable to
each. The Adviser will not determine allocations based on whether it
receives a performance-based fee from the client. In some cases, the
allocation procedure could have an adverse effect on the price or amount
of the securities purchased or sold by the Fund. Purchase and sale orders
for the Fund may be combined with those of other clients of the Adviser
and its affiliates in the interest of achieving the most favorable net
results to the Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a
portfolio manager will need to divide his or her time and attention among
relevant accounts.
In some cases, a real, potential or apparent conflict may also arise where
(i) the Adviser may have an incentive, such as a performance-based fee, in
managing one account and not with respect to other accounts it manages or
(ii) where a member of the Fund's portfolio management team owns an
interest in one fund or account he or she manages and not another.
MLIM has adopted policies and procedures designed to address conflicts of
interest its portfolio managers may face.
(a)(3) As of September 30, 2005:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its affiliates is
critical to MLIM's ability to attract and retain the most talented asset
management professionals. This program ensures that compensation is aligned with
maximizing investment returns and it provides a competitive pay opportunity for
competitive performance.
Compensation Program
The elements of total compensation for MLIM portfolio managers are base
salary, annual performance-based cash and stock compensation (cash and stock
bonus) and other benefits. MLIM has balanced these components of pay to provide
portfolio managers with a powerful incentive to achieve consistently superior
investment performance. By design, portfolio manager compensation levels
fluctuate -- both up and down -- with the relative investment performance of the
portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms, base
salaries represent a relatively small portion of a portfolio manager's total
compensation. This approach serves to enhance the motivational value of the
performance-based (and therefore variable) compensation elements of the
compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent. To
that end, portfolio manager incentive compensation is derived on a discretionary
basis considering such factors as: products they manage, external market
conditions, MLIM's investment performance, financial results of MLIM, expense
control, profit margins, strategic planning and implementation, quality of
client service, market share, corporate reputation, capital allocation,
compliance and risk control, leadership, workforce diversity, technology and
innovation. MLIM also considers the extent to which individuals exemplify and
foster Merrill Lynch's principles of client focus, respect for the individual,
teamwork, responsible citizenship and integrity. All factors are considered
collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in a
combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based bonus
is paid in restricted shares of Merrill Lynch stock. Paying a portion of annual
bonuses in stock puts compensation earned by a portfolio manager for a given
year "at risk" based on Merrill Lynch's ability to sustain and improve its
performance over future periods. The ultimate value of stock bonuses is
dependent on future Merrill Lynch stock price performance. As such, the stock
bonus aligns each portfolio manager's financial interests with those of Merrill
Lynch shareholders and encourages a balance between short-term goals and
long-term strategic objectives. MLIM management strongly believes that providing
a significant portion of competitive performance-based compensation in stock is
in the best interests of investors and shareholders. This approach ensures that
portfolio managers participate as shareholders in both the "downside risk" and
"upside opportunity" of Merrill Lynch's performance. Portfolio managers
therefore have a direct incentive to protect Merrill Lynch's reputation for
integrity.
Other Benefits
Portfolio managers are also eligible to participate in broad-based plans
offered generally to employees of ML & Co. and its affiliates, including
broad-based retirement, 401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of September 30, 2005, Mr.
Costa does not beneficially own any stock issued by the Fund; Mr.
Clark does not beneficially own any stock issued by the Fund; and
Ms. Jelilian does not beneficially own any stock issued by the
Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. In connection
with this filing, the registrant's principal executive officer and
principal financial officer have, within 90 days of this amended report,
evaluated the registrant's disclosure controls and procedures currently
in effect, including the changes discussed below, and concluded that the
registrant's disclosure controls and procedures are effective and
operating properly.
During the Fund's most recent fiscal year, Fund management determined
that the value of the Fund's options positions (the "Options") generally
had been understated, and consequently the Fund's published net asset
value ("NAV") had been understated. These facts were reported to the
public through a Form 8-K filed on September 28, 2005 and a press
release issued on September 29, 2005. In addition, corrected NAVs were
published on Bloomberg between the evening of September 28, 2005 and the
morning of September 29, 2005. After reviewing the misstatement in
connection with the Fund's financial statements disclosed since the
Fund's inception, and upon consulting with the Fund's counsel, Chief
Compliance Officer, auditors, Audit Committee and Independent Directors'
counsel, management decided that it was appropriate to restate the
schedule of investments contained in the Form N-Q for the period ended
June 30, 2005 to correct the understated value of the Fund's options
positions, and consequently the Fund's NAV. This filing was made on
October 25, 2005.
The origin of the NAV misstatement was traced to an inaccurate
application of pricing information for the Options by the registrant's
fund accounting service provider. The Fund's disclosure controls and
procedures as then in effect did not detect and correct the error. The
Fund's principal executive officer and principal financial officer,
after evaluating the relevant controls and procedures, concluded that
certain changes, described in paragraph (b) below, were appropriate and
have implemented those changes.
11(b) - The registrant has implemented the following changes in its internal
control over financial reporting:
1. Management has discussed with the fund accounting service provider
the cause of the error discussed above and the provider's
implementations of procedures designed to prevent and/ or detect future
errors of this type.
2. The fund accounting service provider's communication process with
broker/counterparties will be formalized to ensure that option's prices
are reported in a manner that is compatible with the Fund's portfolio
accounting system.
3. The Fund's adviser and subadviser will create and maintain
independent NAV redundancy models to regularly verify the NAV reported
by the fund accounting service provider.
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.
S&P 500(R) GEARED(SM) Fund Inc.
By: /s/ Mitchell M. Cox
-----------------------
Mitchell M. Cox,
Chief Executive Officer of
S&P 500(R) GEARED(SM) Fund Inc.
Date: November 21, 2005
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
S&P 500(R) GEARED(SM) Fund Inc.
Date: November 21, 2005
By: /s/ Donald C. Burke
-----------------------
Donald C. Burke,
Chief Financial Officer of
S&P 500(R) GEARED(SM) Fund Inc.
Date: November 21, 2005