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: 12/31/05
Date of reporting period: 01/01/05 - 12/31/05
Item 1 - Report to Stockholders
S&P 500(R) GEARED(SM) Fund Inc.
Annual Report
December 31, 2005
[LOGO] IQ
INVESTMENT [LOGO] Merrill Lynch Investment Managers
ADVISORS
S&P 500(R) GEARED(SM) Fund Inc.
Portfolio Information as of December 31, 2005
Percent of
Ten Largest Equity Holdings Net Assets
--------------------------------------------------------------------------------
General Electric Co. ................................................. 3.1%
Exxon Mobil Corp. .................................................... 3.0
Citigroup, Inc. ...................................................... 2.1
Microsoft Corp. ...................................................... 2.0
Procter & Gamble Co. ................................................. 1.7
Bank of America Corp. ................................................ 1.6
Johnson & Johnson .................................................... 1.5
American International Group, Inc. ................................... 1.5
Pfizer, Inc. ......................................................... 1.5
Altria Group, Inc. ................................................... 1.3
--------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
--------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels .......................................... 7.2%
Pharmaceuticals ...................................................... 6.1
Commercial Banks ..................................................... 5.5
Insurance ............................................................ 4.7
Industrial Conglomerates ............................................. 4.2
--------------------------------------------------------------------------------
Percent of
S&P 500 Index Sector Weightings Total Investments
--------------------------------------------------------------------------------
Financials .......................................................... 20.0%
Information Technology .............................................. 14.1
Health Care ......................................................... 12.4
Producer Durables ................................................... 10.6
Consumer Discretionary .............................................. 9.6
Energy .............................................................. 9.2
Consumer Staples .................................................... 9.0
Materials ........................................................... 2.8
Telecommunication Services .......................................... 2.8
Utilities ........................................................... 2.6
Auto & Transportation ............................................... 0.5
Other* .............................................................. 6.4
--------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments and options.
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.
S&P 500 and Standard & Poor's 500 are registered trademarks of the McGraw-Hill
Companies.
"GEARED" and "Geared-Equity Accelerated Return" are servicemarks of Merrill
Lynch & Co.
2 S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005
A Letter From the President
Dear Shareholder
As you know, the investment objective of 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 Standard & Poor's 500(R) Index (the "S&P
500 Index" or the "Index"). Where 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 approximately 13%.
The S&P 500 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 Index.
During the twelve months ended December 31, 2005, the total return of the S&P
500 Index was +4.91 % (including dividend reinvestment). Over the same period,
and after fees and expenses, the total return of the Fund was +10.91% (as
measured by change in net asset value plus dividend reinvestment). The Fund's
performance over this period is consistent with our expectations.
IQ Investment Advisors LLC invites you to visit our new Website at
www.IQIAFunds.com. Here you will find more information about IQ Investment
Advisers LLC and our products and services, including current market data and
fund statistics.
IQ Investment Advisors LLC continues to take a non-traditional approach to asset
management by seeking to identify specific economic or strategic investment
themes that aim to fulfill particular investor needs. We encourage you to
revisit your portfolio to ensure that your asset allocation strategy is
consistent with your specific investment needs. We thank you for trusting IQ
Investment Advisors LLC with your investment assets, and we look forward to
serving you in the months and years ahead.
Sincerely,
/s/ Mitchell M. Cox
Mitchell M. Cox
President, IQ Investment Advisors LLC
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 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, the
Fund's subadviser.
How did the Fund perform during the fiscal year?
The Fund seeks to provide annual total returns in excess of the performance of
the S&P 500 Index where the performance 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. We would like to note that
the Fund changed its reporting schedule from a fiscal year-end of September 30
to a fiscal year-end of December 31.
For the 12-month period ended December 31, 2005, the Common Stock of the Fund
had a total investment return of +10.91%, based on a change in per share net
asset value from $19.98 to $19.66, and assuming reinvestment of a $2.35
distribution in November. The Fund's unmanaged benchmark, the S&P 500 Index,
returned +4.91% (including dividend reinvestment) for the same period. The
Fund's options for its first year of operations expired on November 2, 2005. The
Fund's current options will expire on November 3, 2006. In addition, the Fund
experienced its first tender in the amount of 25% of the Fund's assets.
For a description of the Fund's total investment return based on a change in per
share market value of the Fund's Common Stock (as measured by the trading price
of the Fund's shares on the New York Stock Exchange), and assuming reinvestment
of dividends, please refer to the Financial Highlights section of this report.
As a closed-end fund, the Fund's shares may trade in the secondary market at a
premium or a discount to the Fund's net asset value. As a result, total
investment returns based on changes in the market value of the Fund's Common
Stock can vary significantly from total investment returns based on changes in
the Fund's net asset value.
Describe the market environment during the fiscal year.
U.S. equity markets, which "muddled through" 2005, finished the year with mid
single-digit growth. For most of 2005, stocks remained in one of the narrowest
trading ranges in history.
The year began with a slide after the strong fourth quarter of 2004, with
cyclical and small capitalization stocks performing the worst out of the gate.
January was characterized by mixed economic data, increasing interest rates,
disappointing earnings reports, and climbing oil prices. The markets were able
to reverse course in February, even as the productivity report showed a
continued slowdown in productivity growth and oil prices continued to climb. In
March, the markets resumed their downward slide experienced in January due to
the combination of the trade deficit, mixed economic news, high oil prices, and
rising interest rates.
April began on the heels of a March economic soft spot, as retail sales,
payrolls, and consumer and business sentiment weakened. For most of April,
equity markets were dogged by continuing inflation concerns as oil climbed above
$57 per barrel. April closed with the announcement that the Consumer Price Index
(CPI) rose 0.6% in March, one of the biggest jumps in several months. May
featured the announcement of slower-than-expected first quarter gross domestic
product growth of 3.1%. Despite concerns about economic deceleration, slowing
profit growth, and continued high oil prices, first quarter earnings reports
remained strong. June brought a slowdown in the equity market rally that began
in May as the specter of economic deceleration dampened markets.
4 S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005
July was an impressive month for equity markets, despite the drag from a strong
dollar, higher energy prices, and a major terror attack in London, which caused
an immediate 4% drop in the S&P 500 Index. Investors quickly rebounded however,
and the losses were recovered only one day later. August brought a reversal of
July's rally, as higher oil prices continued to fan the fears of economic
weakness, reaching a record high of $70 per barrel during the aftermath of
Hurricane Katrina. Despite the downturn of U.S. equity markets in August,
September turned slightly positive as improved profits in the energy sector
provided a counterbalance to lagging retail, transportation, tourism, and
insurance sectors.
Equity markets slid again in October amid continued signs of a slower economy
and renewed concerns about inflation. Despite a U.S. gross domestic product
growth rate of 4.1% for the third quarter, short-term interest rates rose, oil
prices remained historically high, and consumer confidence declined. In
November, equity markets were resilient in the face of Fed tightening, continued
concerns about energy prices, and the strength of the U.S. dollar; markets
rebounded because strong productivity and high margins resulted in good earnings
and oil prices fell to the mid-$50 per barrel range from $70 per barrel. After
posting gains for nearly six weeks, December saw equity markets finish on an
uninspiring note as thin volume led to volatile movements in stock prices.
Compounding the mixed results throughout the year and leaving investors
uncertain about the direction of the economy heading into 2006, the yield curve
inverted at the end of December as long-term yields fell below short-term
yields, historically a harbinger of an economic downturn.
As expected, interest rates moved considerably during the year as the yield
curve flattened dramatically and inverted at the close of 2005. The Federal
Reserve raised the Federal Funds rate 25 basis points eight times during the
year. This brought the Federal Funds rate to 4.25% at year end from 2.25%.
How did you manage the portfolio during the period?
On November 2, 2005, the Fund's options expired and were reset to November 3,
2006 expiration, bringing the maximum return cap to approximately 13%. At the
reset of the Fund, we negotiated over-the-counter option transactions, selling
three out-of-the-money call options and purchasing two at-the-money call
options. We utilized this options strategy to provide a total return that
fulfills the three-to-one upside potential to the annual maximum return cap.
How would you characterize the portfolio's position at the close of the period?
The Fund is positioned to provide accelerated growth relative to the S&P 500
Index, up to the annual maximum return cap. The S&P 500 Index provides
diversified exposure to the securities of the largest U.S. publicly traded
companies.
Jonathan Clark
Portfolio Manager
Vincent J. Costa, CFA
Portfolio Manager
Debra L. Jelilian
Portfolio Manager
Jeffrey L. Russo, CFA
Portfolio Manager
January 18, 2006
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005 5
Schedule of Investments
Shares
Industry Common Stocks Held Value
====================================================================================================
Aerospace & Defense--2.1%
Boeing Co. 7,100 $ 498,704
General Dynamics Corp. 1,700 193,885
Goodrich Corp. 1,200 49,320
Honeywell International, Inc. 7,300 271,925
L-3 Communications Holdings, Inc. 1,078 80,149
Lockheed Martin Corp. 3,100 197,253
Northrop Grumman Corp. 3,000 180,330
Raytheon Co. 4,100 164,615
Rockwell Collins, Inc. 1,700 78,999
United Technologies Corp. 8,900 497,599
------------
2,212,779
----------------------------------------------------------------------------------------------------
Air Freight & Logistics--1.0%
FedEx Corp. 2,600 268,814
Ryder System, Inc. 500 20,510
United Parcel Service, Inc. Class B 9,700 728,955
------------
1,018,279
----------------------------------------------------------------------------------------------------
Airlines--0.1%
Southwest Airlines Co. 6,300 103,509
----------------------------------------------------------------------------------------------------
Auto Components--0.1%
Cooper Tire & Rubber Co. 300 4,596
Dana Corp. 700 5,026
The Goodyear Tire & Rubber Co. (a) 1,300 22,594
Johnson Controls, Inc. 1,600 116,656
------------
148,872
----------------------------------------------------------------------------------------------------
Automobiles--0.3%
Ford Motor Co. 15,500 119,660
General Motors Corp. 4,800 93,216
Harley-Davidson, Inc. 2,300 118,427
------------
331,303
----------------------------------------------------------------------------------------------------
Beverages--2.0%
Anheuser-Busch Cos., Inc. 6,600 283,536
Brown-Forman Corp. Class B 800 55,456
The Coca-Cola Co. 18,100 729,611
Coca-Cola Enterprises, Inc. 2,900 55,593
Constellation Brands, Inc. Class A (a) 1,900 49,837
Molson Coors Brewing Co. Class B 600 40,194
Pepsi Bottling Group, Inc. 1,400 40,054
PepsiCo, Inc. 14,500 856,660
------------
2,110,941
----------------------------------------------------------------------------------------------------
Biotechnology--1.5%
Amgen, Inc. (a) 10,800 851,688
Applera Corp.--Applied
Biosystems Group 1,900 50,464
Biogen Idec, Inc. (a) 2,900 131,457
Chiron Corp. (a) 1,000 44,460
Genzyme Corp. (a) 2,200 155,716
Gilead Sciences, Inc. (a) 4,000 210,520
Medimmune, Inc. (a) 2,000 70,040
------------
1,514,345
----------------------------------------------------------------------------------------------------
Building Products--0.2%
American Standard Cos., Inc. 1,400 55,930
Masco Corp. 3,500 105,665
------------
161,595
----------------------------------------------------------------------------------------------------
Capital Markets--3.0%
Ameriprise Financial, Inc. 2,020 82,820
The Bank of New York Co., Inc. 6,600 210,210
The Bear Stearns Cos., Inc. 900 103,977
The Charles Schwab Corp. 9,300 136,431
E*Trade Financial Corp. (a) 3,400 70,924
Federated Investors, Inc. Class B 900 33,336
Franklin Resources, Inc. 1,200 112,812
Goldman Sachs Group, Inc. 3,900 498,069
Janus Capital Group, Inc. 2,200 40,986
Lehman Brothers Holdings, Inc. 2,300 294,791
Mellon Financial Corp. 3,800 130,150
Merrill Lynch & Co., Inc. (b) 8,100 548,613
Morgan Stanley 9,600 544,704
Northern Trust Corp. 1,500 77,730
State Street Corp. 2,800 155,232
T. Rowe Price Group, Inc. 1,200 86,436
------------
3,127,221
----------------------------------------------------------------------------------------------------
Chemicals--1.5%
Air Products & Chemicals, Inc. 1,800 106,542
Ashland, Inc. 600 34,740
The Dow Chemical Co. 8,300 363,706
E.I. du Pont de Nemours & Co. 7,800 331,500
Eastman Chemical Co. 600 30,954
Ecolab, Inc. 1,800 65,286
Engelhard Corp. 1,200 36,180
Hercules, Inc. (a) 1,000 11,300
International Flavors & Fragrances, Inc. 900 30,150
Monsanto Co. 2,300 178,319
PPG Industries, Inc. 1,400 81,060
Praxair, Inc. 2,900 153,584
Rohm & Haas Co. 1,100 53,262
Sigma-Aldrich Corp. 700 44,303
------------
1,520,886
----------------------------------------------------------------------------------------------------
Commercial Banks--5.5%
AmSouth Bancorp 3,300 86,493
BB&T Corp. 4,600 192,786
Bank of America Corp. 35,100 1,619,865
Comerica, Inc. 1,300 73,788
Compass Bancshares, Inc. 1,250 60,411
Fifth Third Bancorp 4,700 177,284
First Horizon National Corp. 900 34,596
Huntington Bancshares, Inc. 2,300 54,625
KeyCorp 3,800 125,134
M&T Bank Corp. 800 87,240
Marshall & Ilsley Corp. 1,900 81,776
National City Corp. 4,700 157,779
North Fork Bancorporation, Inc. 3,900 106,704
PNC Financial Services Group, Inc. 2,400 148,392
Regions Financial Corp. 4,200 143,472
SunTrust Banks, Inc. 3,100 225,556
Synovus Financial Corp. 2,900 78,329
U.S. Bancorp 16,100 481,229
Wachovia Corp. 13,600 718,896
Wells Fargo & Co. 14,700 923,601
Zions Bancorporation 900 68,004
------------
5,645,960
----------------------------------------------------------------------------------------------------
Commercial Services & Supplies--0.7%
Allied Waste Industries, Inc. (a) 2,200 19,228
Avery Dennison Corp. 1,100 60,797
Cendant Corp. 8,800 151,800
Cintas Corp. 1,300 53,534
Equifax, Inc. 1,300 49,426
Monster Worldwide, Inc. (a) 1,000 40,820
6 S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
====================================================================================================
Commercial Services & Supplies (concluded)
Pitney Bowes, Inc. 2,100 $ 88,725
RR Donnelley & Sons Co. 2,000 68,420
Robert Half International, Inc. 1,600 60,624
Waste Management, Inc. 4,700 142,645
------------
736,019
----------------------------------------------------------------------------------------------------
Communications Equipment--2.6%
ADC Telecommunications, Inc. (a) 828 18,498
Andrew Corp. (a) 1,600 17,168
Avaya, Inc. (a) 3,900 41,613
Ciena Corp. (a) 3,500 10,395
Cisco Systems, Inc. (a) 53,800 921,056
Comverse Technology, Inc. (a) 1,900 50,521
Corning, Inc. (a) 13,100 257,546
JDS Uniphase Corp. (a) 12,600 29,736
Lucent Technologies, Inc. (a) 37,600 100,016
Motorola, Inc. 21,500 485,685
QUALCOMM, Inc. 14,500 624,660
Scientific-Atlanta, Inc. 1,400 60,298
Tellabs, Inc. (a) 3,400 37,060
------------
2,654,252
----------------------------------------------------------------------------------------------------
Computers & Peripherals--3.5%
Apple Computer, Inc. (a) 7,300 524,797
Dell, Inc. (a) 20,500 614,795
EMC Corp. (a) 20,700 281,934
Gateway, Inc. (a) 3,400 8,534
Hewlett-Packard Co. 25,100 718,613
International Business Machines Corp. 13,900 1,142,580
Lexmark International, Inc. Class A (a) 900 40,347
NCR Corp. (a) 1,700 57,698
Network Appliance, Inc. (a) 3,100 83,700
QLogic Corp. (a) 700 22,757
Sun Microsystems, Inc. (a) 28,700 120,253
------------
3,616,008
----------------------------------------------------------------------------------------------------
Construction & Engineering--0.1%
Fluor Corp. 800 61,808
----------------------------------------------------------------------------------------------------
Construction Materials--0.1%
Vulcan Materials Co. 1,000 67,750
----------------------------------------------------------------------------------------------------
Consumer Finance--1.3%
American Express Co. 10,800 555,768
Capital One Financial Corp. 2,700 233,280
MBNA Corp. 11,100 301,365
SLM Corp. 3,700 203,833
------------
1,294,246
----------------------------------------------------------------------------------------------------
Containers & Packaging--0.2%
Ball Corp. 1,100 43,692
Bemis Co. 1,000 27,870
Pactiv Corp. (a) 1,500 33,000
Sealed Air Corp. (a) 800 44,936
Temple-Inland, Inc. 1,100 49,335
------------
198,833
----------------------------------------------------------------------------------------------------
Distributors--0.1%
Genuine Parts Co. 1,700 74,664
----------------------------------------------------------------------------------------------------
Diversified Consumer Services--0.1%
Apollo Group, Inc. Class A (a) 1,200 72,552
H&R Block, Inc. 3,000 73,650
------------
146,202
----------------------------------------------------------------------------------------------------
Diversified Financial Services--3.6%
CIT Group, Inc. 1,700 88,026
Citigroup, Inc. 44,300 2,149,879
JPMorgan Chase & Co. 30,500 1,210,545
Moody's Corp. 2,300 141,266
Principal Financial Group, Inc. 2,600 123,318
------------
3,713,034
----------------------------------------------------------------------------------------------------
Diversified Telecommunication Services--2.1%
AT&T, Inc. 34,689 849,534
BellSouth Corp. 15,700 425,470
CenturyTel, Inc. 1,100 36,476
Citizens Communications Co. 3,500 42,805
Qwest Communications
International Inc. (a) 13,900 78,535
Verizon Communications, Inc. 24,200 728,904
------------
2,161,724
----------------------------------------------------------------------------------------------------
Electric Utilities--1.5%
Allegheny Energy, Inc. (a) 1,500 47,475
American Electric Power Co., Inc. 3,200 118,688
Cinergy Corp. 1,900 80,674
Edison International 3,000 130,830
Entergy Corp. 1,700 116,705
Exelon Corp. 5,900 313,526
FPL Group, Inc. 3,300 137,148
FirstEnergy Corp. 2,700 132,273
PPL Corp. 3,500 102,900
Pinnacle West Capital Corp. 1,000 41,350
Progress Energy, Inc. 2,300 101,016
The Southern Co. 6,300 217,539
------------
1,540,124
----------------------------------------------------------------------------------------------------
Electrical Equipment--0.5%
American Power Conversion Corp. 1,700 37,400
Cooper Industries Ltd. Class A 900 65,700
Emerson Electric Co. 3,500 261,450
Rockwell Automation, Inc. 1,700 100,572
------------
465,122
----------------------------------------------------------------------------------------------------
Electronic Equipment & Instruments--0.3%
Agilent Technologies, Inc. (a) 4,118 137,122
Jabil Circuit, Inc. (a) 1,600 59,344
Molex, Inc. 1,500 38,925
Sanmina-SCI Corp. (a) 4,900 20,874
Solectron Corp. (a) 9,300 34,038
Symbol Technologies, Inc. 2,400 30,768
Tektronix, Inc. 900 25,389
------------
346,460
----------------------------------------------------------------------------------------------------
Energy Equipment & Services--1.6%
BJ Services Co. 2,900 106,343
Baker Hughes, Inc. 2,800 170,184
Halliburton Co. 4,500 278,820
Nabors Industries Ltd. (a) 1,300 98,475
National Oilwell Varco, Inc. (a) 1,607 100,759
Noble Corp. 1,100 77,594
Rowan Cos., Inc. 800 28,512
Schlumberger Ltd. 5,100 495,465
Transocean, Inc. (a) 2,800 195,132
Weatherford International Ltd. (a) 2,200 79,640
------------
1,630,924
----------------------------------------------------------------------------------------------------
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005 7
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
====================================================================================================
Food & Staples Retailing--2.3%
Albertson's, Inc. 3,000 $ 64,050
CVS Corp. 6,900 182,298
Costco Wholesale Corp. 4,000 197,880
The Kroger Co. (a) 6,500 122,720
SUPERVALU Inc. 1,300 42,224
SYSCO Corporation 5,300 164,565
Safeway, Inc. 4,100 97,006
Wal-Mart Stores, Inc. 21,800 1,020,240
Walgreen Co. 8,800 389,488
Whole Foods Market, Inc. 1,200 92,868
------------
2,373,339
----------------------------------------------------------------------------------------------------
Food Products--1.0%
Archer-Daniels-Midland Co. 5,500 135,630
Campbell Soup Co. 1,800 53,586
ConAgra Foods, Inc. 4,200 85,176
General Mills, Inc. 3,100 152,892
HJ Heinz Co. 2,800 94,416
The Hershey Co. 1,700 93,925
Kellogg Co. 2,400 103,728
McCormick & Co., Inc. 1,300 40,196
Sara Lee Corp. 7,200 136,080
Tyson Foods, Inc. Class A 2,500 42,750
Wm. Wrigley Jr. Co. 1,700 113,033
------------
1,051,412
----------------------------------------------------------------------------------------------------
Gas Utilities--0.0%
Nicor, Inc. 200 7,862
Peoples Energy Corp. 200 7,014
------------
14,876
----------------------------------------------------------------------------------------------------
Health Care Equipment & Supplies--2.1%
Bausch & Lomb, Inc. 400 27,160
Baxter International, Inc. 5,600 210,840
Becton Dickinson & Co. 2,300 138,184
Biomet, Inc. 2,000 73,140
Boston Scientific Corp. (a) 5,300 129,797
CR Bard, Inc. 1,000 65,920
Fisher Scientific International (a) 1,000 61,860
Guidant Corp. 2,900 187,775
Hospira, Inc. (a) 1,500 64,170
Medtronic, Inc. 10,500 604,485
Millipore Corp. (a) 500 33,020
PerkinElmer, Inc. 1,300 30,628
St. Jude Medical, Inc. (a) 3,300 165,660
Stryker Corp. 2,600 115,518
Thermo Electron Corp. (a) 1,600 48,208
Waters Corp. (a) 1,100 41,580
Zimmer Holdings, Inc. (a) 2,100 141,624
------------
2,139,569
----------------------------------------------------------------------------------------------------
Health Care Providers & Services--3.0%
Aetna, Inc. 2,500 235,775
AmerisourceBergen Corp. 1,600 66,240
Cardinal Health, Inc. 3,800 261,250
Caremark Rx, Inc. (a) 4,000 207,160
Cigna Corp. 1,100 122,870
Coventry Health Care, Inc. (a) 1,350 76,896
Express Scripts, Inc. (a) 1,200 100,560
HCA, Inc. 3,390 171,195
Health Management Associates, Inc.
Class A 1,900 41,724
Humana, Inc. (a) 1,300 70,629
IMS Health, Inc. 2,200 54,824
Laboratory Corp. of America Holdings (a) 1,300 70,005
Manor Care, Inc. 600 23,862
McKesson Corp. 2,800 144,452
Medco Health Solutions, Inc. (a) 2,600 145,080
Quest Diagnostics, Inc. 1,600 82,368
Tenet Healthcare Corp. (a) 4,400 33,704
UnitedHealth Group, Inc. 11,100 689,754
WellPoint, Inc. (a) 5,800 462,782
------------
3,061,130
----------------------------------------------------------------------------------------------------
Hotels, Restaurants & Leisure--1.4%
Carnival Corp. 3,600 192,492
Darden Restaurants, Inc. 1,200 46,656
Harrah's Entertainment, Inc. 1,500 106,935
Hilton Hotels Corp. 2,600 62,686
International Game Technology 3,100 95,418
Marriott International, Inc. Class A 1,400 93,758
McDonald's Corp. 10,700 360,804
Starbucks Corp. (a) 6,500 195,065
Starwood Hotels & Resorts
Worldwide, Inc. 1,800 114,948
Wendy's International, Inc. 900 49,734
Yum! Brands, Inc. 2,400 112,512
------------
1,431,008
----------------------------------------------------------------------------------------------------
Household Durables--0.7%
Black & Decker Corp. 600 52,176
Centex Corp. 1,100 78,639
DR Horton, Inc. 2,500 89,325
Fortune Brands, Inc. 1,200 93,624
KB HOME 600 43,596
Leggett & Platt, Inc. 1,800 41,328
Lennar Corp. Class A 1,097 66,939
Maytag Corp. 900 16,938
Newell Rubbermaid, Inc. 2,200 52,316
Pulte Homes, Inc. 1,900 74,784
Snap-On, Inc. 600 22,536
The Stanley Works 800 38,432
Whirlpool Corp. 600 50,256
------------
720,889
----------------------------------------------------------------------------------------------------
Household Products--2.2%
Clorox Co. 1,200 68,268
Colgate-Palmolive Co. 4,400 241,340
Kimberly-Clark Corp. 4,000 238,600
Procter & Gamble Co. 29,402 1,701,788
------------
2,249,996
----------------------------------------------------------------------------------------------------
IT Services--1.0%
Affiliated Computer Services, Inc.
Class A (a) 1,000 59,180
Automatic Data Processing, Inc. 4,900 224,861
Computer Sciences Corp. (a) 1,500 75,960
Convergys Corp. (a) 1,400 22,190
Electronic Data Systems Corp. 4,700 112,988
First Data Corp. 6,600 283,866
Fiserv, Inc. (a) 1,500 64,905
Paychex, Inc. 2,800 106,736
Sabre Holdings Corp. Class A 1,400 33,754
Unisys Corp. (a) 3,500 20,405
------------
1,004,845
----------------------------------------------------------------------------------------------------
8 S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
====================================================================================================
Independent Power Producers & Energy
Traders--0.6%
The AES Corp. (a) 5,900 $ 93,397
Constellation Energy Group, Inc. 1,700 97,920
Duke Energy Corp. 8,300 227,835
Dynegy, Inc. Class A (a) 3,200 15,488
TXU Corp. 4,000 200,760
------------
635,400
----------------------------------------------------------------------------------------------------
Industrial Conglomerates--4.2%
3M Co. 6,700 519,250
General Electric Co. 92,400 3,238,620
Textron, Inc. 1,100 84,678
Tyco International Ltd. 17,800 513,708
------------
4,356,256
----------------------------------------------------------------------------------------------------
Insurance--4.7%
ACE Ltd. 2,600 138,944
AMBAC Financial Group, Inc. 1,000 77,060
AON Corp. 2,800 100,660
Aflac, Inc. 4,500 208,890
The Allstate Corp. 5,600 302,792
American International Group, Inc. 22,700 1,548,821
Chubb Corp. 1,700 166,005
Cincinnati Financial Corp. 1,690 75,509
Genworth Financial, Inc. Class A 3,200 110,656
Hartford Financial Services Group, Inc. 2,500 214,725
Jefferson-Pilot Corp. 1,300 74,009
Lincoln National Corp. 1,600 84,848
Loews Corp. 1,200 113,820
MBIA, Inc. 1,300 78,208
Marsh & McLennan Cos., Inc. 4,800 152,448
Metlife, Inc. 6,500 318,500
The Progressive Corp. 1,700 198,526
Prudential Financial, Inc. 4,400 322,036
Safeco Corp. 1,200 67,800
The St. Paul Travelers Cos., Inc. 6,200 276,954
Torchmark Corp. 1,000 55,600
UnumProvident Corp. 2,800 63,700
XL Capital Ltd. Class A 1,400 94,332
------------
4,844,843
----------------------------------------------------------------------------------------------------
Internet & Catalog Retail--0.5%
Amazon.com, Inc. (a) 2,700 127,305
eBay, Inc. (a) 10,000 432,500
------------
559,805
----------------------------------------------------------------------------------------------------
Internet Software & Services--0.4%
Yahoo!, Inc. (a) 10,800 423,144
----------------------------------------------------------------------------------------------------
Leisure Equipment & Products--0.2%
Brunswick Corp. 700 28,462
Eastman Kodak Co. 2,300 53,820
Hasbro, Inc. 1,800 36,324
Mattel, Inc. 3,800 60,116
------------
178,722
----------------------------------------------------------------------------------------------------
Machinery--1.3%
Caterpillar, Inc. 5,800 335,066
Cummins, Inc. 400 35,892
Danaher Corp. 2,100 117,138
Deere & Co. 2,000 136,220
Dover Corp. 1,900 76,931
Eaton Corp. 1,400 93,926
ITT Industries, Inc. 700 71,974
Illinois Tool Works, Inc. 1,700 149,583
Ingersoll-Rand Co. Class A 3,100 125,147
Navistar International Corp. (a) 700 20,034
PACCAR, Inc. 1,600 110,768
Pall Corp. 1,300 34,918
Parker Hannifin Corp. 1,100 72,556
------------
1,380,153
----------------------------------------------------------------------------------------------------
Media--3.2%
Clear Channel Communications, Inc. 4,900 154,105
Comcast Corp. Class A (a) 19,100 495,836
Dow Jones & Co., Inc. 400 14,196
EW Scripps Co. Class A 700 33,614
Gannett Co., Inc. 2,000 121,140
Interpublic Group of Cos., Inc. (a) 3,200 30,880
Knight-Ridder, Inc. 500 31,650
The McGraw-Hill Cos., Inc. 3,400 175,542
Meredith Corp. 400 20,936
New York Times Co. Class A 1,100 29,095
News Corp. Class A 21,700 337,435
Omnicom Group 1,500 127,695
Time Warner, Inc. 41,201 718,535
Tribune Co. 2,100 63,546
Univision Communications, Inc.
Class A (a) 2,200 64,658
Viacom, Inc. Class B (a) 13,500 440,100
Walt Disney Co. 16,500 395,505
------------
3,254,468
----------------------------------------------------------------------------------------------------
Metals & Mining--0.7%
Alcoa, Inc. 7,400 218,818
Allegheny Technologies, Inc. 900 32,472
Freeport-McMoRan Copper & Gold, Inc.
Class B 1,500 80,700
Newmont Mining Corp. 3,700 197,580
Nucor Corp. 1,300 86,736
Phelps Dodge Corp. 800 115,096
United States Steel Corp. 900 43,263
------------
774,665
----------------------------------------------------------------------------------------------------
Multi-Utilities--1.1%
Ameren Corp. 1,600 81,984
CMS Energy Corp. (a) 2,200 31,922
Centerpoint Energy, Inc. 3,100 39,835
Consolidated Edison, Inc. 2,000 92,660
DTE Energy Co. 1,700 73,423
Dominion Resources, Inc. 2,900 223,880
KeySpan Corp. 1,700 60,673
NiSource, Inc. 2,600 54,236
PG&E Corp. 2,900 107,648
Public Service Enterprise Group, Inc. 2,200 142,934
Sempra Energy 2,400 107,616
TECO Energy, Inc. 2,100 36,078
Xcel Energy, Inc. 3,900 71,994
------------
1,124,883
----------------------------------------------------------------------------------------------------
Multiline Retail--1.1%
Big Lots, Inc. (a) 1,000 12,010
Dillard's, Inc. Class A 700 17,374
Dollar General Corp. 3,000 57,210
Family Dollar Stores, Inc. 1,200 29,748
Federated Department Stores 2,183 144,798
JC Penney Co., Inc. 1,900 105,640
Kohl's Corp. (a) 2,900 140,940
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005 9
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
====================================================================================================
Multiline Retail (concluded)
Nordstrom, Inc. 2,000 $ 74,800
Sears Holdings Corp. (a) 881 101,782
Target Corp. 7,600 417,772
------------
1,102,074
----------------------------------------------------------------------------------------------------
Office Electronics--0.1%
Xerox Corp. (a) 8,600 125,990
----------------------------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--7.2%
Amerada Hess Corp. 700 88,774
Anadarko Petroleum Corp. 2,000 189,500
Apache Corp. 2,800 191,856
Burlington Resources, Inc. 3,200 275,840
Chevron Corp. 19,691 1,117,858
ConocoPhillips 12,200 709,796
Devon Energy Corp. 4,000 250,160
EOG Resources, Inc. 2,000 146,740
El Paso Corp. 6,000 72,960
Exxon Mobil Corp. 54,400 3,055,648
Kerr-McGee Corp. 926 84,136
Kinder Morgan, Inc. 800 73,560
Marathon Oil Corp. 3,136 191,202
Murphy Oil Corp. 1,300 70,187
Occidental Petroleum Corp. 3,600 287,568
Sunoco, Inc. 1,100 86,218
Valero Energy Corp. 5,400 278,640
Williams Cos., Inc. 5,100 118,167
XTO Energy, Inc. 3,033 133,270
------------
7,422,080
----------------------------------------------------------------------------------------------------
Paper & Forest Products--0.3%
International Paper Co. 4,100 137,801
Louisiana-Pacific Corp. 1,100 30,217
MeadWestvaco Corp. 1,800 50,454
Weyerhaeuser Co. 2,000 132,680
------------
351,152
----------------------------------------------------------------------------------------------------
Personal Products--0.1%
Alberto-Culver Co. Class B 800 36,600
Avon Products, Inc. 4,000 114,200
------------
150,800
----------------------------------------------------------------------------------------------------
Pharmaceuticals--6.1%
Abbott Laboratories 13,500 532,305
Allergan, Inc. 1,100 118,756
Bristol-Myers Squibb Co. 16,700 383,766
Eli Lilly & Co. 9,900 560,241
Forest Laboratories, Inc. (a) 2,900 117,972
Johnson & Johnson 26,000 1,562,600
King Pharmaceuticals, Inc. (a) 2,300 38,916
Merck & Co., Inc. 19,100 607,571
Mylan Laboratories 2,100 41,916
Pfizer, Inc. 64,300 1,499,476
Schering-Plough Corp. 13,000 271,050
Watson Pharmaceuticals, Inc. (a) 800 26,008
Wyeth 11,700 539,019
------------
6,299,596
----------------------------------------------------------------------------------------------------
Real Estate--0.7%
Apartment Investment &
Management Co. Class A 700 26,509
Archstone-Smith Trust 2,000 83,780
Equity Office Properties Trust 3,400 103,122
Equity Residential 2,300 89,976
Plum Creek Timber Co., Inc. 1,800 64,890
Prologis 2,300 107,456
Public Storage, Inc. 800 54,176
Simon Property Group, Inc. 1,500 114,945
Vornado Realty Trust 900 75,123
------------
719,977
----------------------------------------------------------------------------------------------------
Road & Rail--0.6%
Burlington Northern Santa Fe Corp. 3,100 219,542
CSX Corp. 1,900 96,463
Norfolk Southern Corp. 3,400 152,422
Union Pacific Corp. 2,200 177,122
------------
645,549
----------------------------------------------------------------------------------------------------
Semiconductors & Semiconductor
Equipment--3.0%
Advanced Micro Devices, Inc. (a) 3,300 100,980
Altera Corp. (a) 3,000 55,590
Analog Devices, Inc. 3,100 111,197
Applied Materials, Inc. 13,800 247,572
Applied Micro Circuits Corp. (a) 1,100 2,827
Broadcom Corp. Class A (a) 2,500 117,875
Freescale Semiconductor, Inc. Class B (a) 3,646 91,770
Intel Corp. 52,900 1,320,384
Kla-Tencor Corp. 1,600 78,928
LSI Logic Corp. (a) 3,700 29,600
Linear Technology Corp. 2,500 90,175
Maxim Integrated Products, Inc. 2,700 97,848
Micron Technology, Inc. (a) 5,100 67,881
National Semiconductor Corp. 3,200 83,136
Novellus Systems, Inc. (a) 1,000 24,120
Nvidia Corp. (a) 1,600 58,496
PMC-Sierra, Inc. (a) 1,000 7,710
Teradyne, Inc. (a) 2,000 29,140
Texas Instruments, Inc. 14,300 458,601
Xilinx, Inc. 2,800 70,588
------------
3,144,418
----------------------------------------------------------------------------------------------------
Software--3.4%
Adobe Systems, Inc. 5,200 192,192
Autodesk, Inc. 1,900 81,605
BMC Software, Inc. (a) 2,100 43,029
Citrix Systems, Inc. (a) 1,300 37,414
Computer Associates International, Inc. 4,200 118,398
Compuware Corp. (a) 3,700 33,189
Electronic Arts, Inc. (a) 2,600 136,006
Intuit, Inc. (a) 1,500 79,950
Mercury Interactive Corp. (a) 700 19,453
Microsoft Corp. 80,300 2,099,845
Novell, Inc. (a) 3,000 26,490
Oracle Corp. (a) 32,500 396,825
Parametric Technology Corp. (a) 2,500 15,250
Siebel Systems, Inc. 4,800 50,784
Symantec Corp. (a) 9,483 165,952
------------
3,496,382
----------------------------------------------------------------------------------------------------
Specialty Retail--2.1%
AutoNation, Inc. (a) 1,800 39,114
AutoZone, Inc. (a) 400 36,700
Bed Bath & Beyond, Inc. (a) 2,500 90,375
Best Buy Co., Inc. 3,400 147,832
Circuit City Stores, Inc. 1,200 27,108
The Gap, Inc. 5,200 91,728
Home Depot, Inc. 18,700 756,976
Limited Brands 3,200 71,520
10 S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005
Schedule of Investments (concluded)
Shares
Industry Common Stocks Held Value
====================================================================================================
Specialty Retail (concluded)
Lowe's Cos., Inc. 6,700 $ 446,622
Office Depot, Inc. (a) 2,900 91,060
OfficeMax, Inc. 500 12,680
RadioShack Corp. 1,300 27,339
The Sherwin-Williams Co. 900 40,878
Staples, Inc. 6,150 139,666
TJX Cos., Inc. 3,800 88,274
Tiffany & Co. 1,100 42,119
------------
2,149,991
----------------------------------------------------------------------------------------------------
Textiles, Apparel & Luxury Goods--0.4%
Coach, Inc. (a) 3,400 113,356
Jones Apparel Group, Inc. 1,200 36,864
Liz Claiborne, Inc. 1,100 39,402
Nike, Inc. Class B 1,600 138,864
Reebok International Ltd. 500 29,115
VF Corp. 900 49,806
------------
407,407
----------------------------------------------------------------------------------------------------
Thrifts & Mortgage Finance--1.5%
Countrywide Financial Corp. 5,300 181,207
Fannie Mae 8,300 405,123
Freddie Mac 5,900 385,565
Golden West Financial Corp. 2,100 138,600
MGIC Investment Corp. 700 46,074
Sovereign Bancorp, Inc. 3,400 73,508
Washington Mutual, Inc. 8,461 368,053
------------
1,598,130
----------------------------------------------------------------------------------------------------
Tobacco--1.4%
Altria Group, Inc. 18,100 1,352,432
Reynolds American, Inc. 700 66,731
UST, Inc. 1,400 57,162
------------
1,476,325
----------------------------------------------------------------------------------------------------
Trading Companies & Distributors--0.0%
WW Grainger, Inc. 700 49,770
----------------------------------------------------------------------------------------------------
Wireless Telecommunication Services--0.9%
Alltel Corp. 3,200 201,920
Sprint Nextel Corp. 25,653 599,231
------------
801,151
----------------------------------------------------------------------------------------------------
Total Common Stocks
(Cost--$88,811,075)--95.1% 98,123,055
Face
Short-Term Securities Amount
====================================================================================================
Time Deposits--6.6%
State Street Bank & Trust Co., 3.60%
due 1/03/2006 $6,801,704 6,801,704
----------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$6,801,704)--6.6% 6,801,704
====================================================================================================
====================================================================================================
Number of
Options Purchased Contracts
====================================================================================================
Call Options Purchased--16.2%
S&P 500 Index, expiring
November 2006 at USD 1,214.76,
Broker HSBC Securities 32,994 3,292,211
S&P 500 Index, expiring
November 2006 at USD 1,214.76,
Broker BNP Paribas 131,985 13,355,008
----------------------------------------------------------------------------------------------------
Total Options Purchased
(Premiums Paid--$0)--16.2% 16,647,219
====================================================================================================
Total Investments (Cost--$95,612,779)--117.9% 121,571,978
====================================================================================================
====================================================================================================
Options Written
====================================================================================================
Call Options Written--(16.2%)
S&P 500 Index, expiring
November 2006 at USD 1,266.99,
Broker HSBC Securities 49,491 (3,323,133)
S&P 500 Index, expiring
November 2006 at USD 1,267.54,
Broker BNP Paribas 197,977 (13,372,003)
----------------------------------------------------------------------------------------------------
Total Options Written
(Premiums Received--$0)--(16.2%) (16,695,136)
====================================================================================================
Total Investments, Net of Options Written
(Cost--$95,612,779*)--101.7% 104,876,842
Liabilities in Excess of Other Assets--(1.7%) (1,734,610)
------------
Net Assets--100.0% $103,142,232
============
* The cost and unrealized appreciation (depreciation) of investments, net of
options written, as of December 31, 2005, as computed for federal income
tax purposes, were as follows:
Aggregate cost ............................... $ 95,617,347
============
Gross unrealized appreciation ................ $ 29,139,773
Gross unrealized depreciation ................ (19,880,278)
------------
Net unrealized appreciation .................. $ 9,259,495
============
(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. (3,900) $2,340
--------------------------------------------------------------------------
o Financial futures contracts purchased as of December 31, 2005 were as
follows:
--------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Depreciation
--------------------------------------------------------------------------
16 S&P 500(R) Index March 2006 $5,085,794 $(66,594)
--------------------------------------------------------------------------
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets. These industry
classifications are unaudited.
See Notes to Financial Statements.
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005 11
Statement of Assets, Liabilities and Capital
As of December 31, 2005
==================================================================================================================================
Assets
----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$95,174,285) $ 104,376,146
Investments in affiliated securities, at value (identified cost--$438,494) ..... 548,613
Options purchased, at value (premiums paid--$0) ................................ 16,647,219
Cash collateral on futures contracts ........................................... 252,000
Receivables:
Dividends ................................................................... $ 131,174
Securities sold ............................................................. 6,272
Interest .................................................................... 680 138,126
-------------
Prepaid expenses ............................................................... 67,862
-------------
Total assets ................................................................... 122,029,966
-------------
==================================================================================================================================
Liabilities
----------------------------------------------------------------------------------------------------------------------------------
Options written, at value (premiums received--$0) .............................. 16,695,136
Payables:
Dividends to shareholders ................................................... 1,832,319
Securities purchased ........................................................ 124,850
Investment adviser .......................................................... 55,251
Variation margin ............................................................ 21,200 2,033,620
-------------
Accrued expenses ............................................................... 158,978
-------------
Total liabilities .............................................................. 18,887,734
-------------
==================================================================================================================================
Net Assets
----------------------------------------------------------------------------------------------------------------------------------
Net assets ..................................................................... $ 103,142,232
=============
==================================================================================================================================
Capital
----------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per share, 100,000,000 shares authorized ......... $ 5,246
Paid-in capital in excess of par ............................................... 95,847,185
Accumulated realized capital losses--net ....................................... $ (1,907,668)
Unrealized appreciation--net ................................................... 9,197,469
-------------
Total accumulated earnings--net ................................................ 7,289,801
-------------
Total Capital--Equivalent to $19.66 per share based on 5,246,427 shares of
Common Stock outstanding (market price--$18.85) ............................... $ 103,142,232
=============
See Notes to Financial Statements.
12 S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005
Statements of Operations
For the Period
For the Period November 1,
October 1, 2005 2004+ to
to December 31, September 30,
2005 2005
==================================================================================================================================
Investment Income
----------------------------------------------------------------------------------------------------------------------------------
Dividends++ ............................................................ $ 548,356 $ 2,766,632
Interest ............................................................... 74,868 81,920
-------------------------------
Total income ........................................................... 623,224 2,848,552
-------------------------------
==================================================================================================================================
Expenses
----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ............................................... 248,869 1,045,085
Interest expense ....................................................... -- 80,757
Professional fees ...................................................... 50,153 63,102
Directors' fees and expenses ........................................... 46,277 64,703
Printing and shareholder reports ....................................... 19,439 42,901
Transfer agent fees .................................................... 11,366 26,665
Accounting services .................................................... 8,553 31,000
Listing fees ........................................................... -- 19,975
Custodian fees ......................................................... 5,115 17,175
Repurchase offer fees .................................................. 736 32,406
Pricing fees ........................................................... 85 1,115
Other .................................................................. 2,215 18,953
-------------------------------
Total expenses ......................................................... 392,808 1,443,837
-------------------------------
Investment income--net ................................................. 230,416 1,404,715
-------------------------------
==================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
----------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net .................................................... 22,288,883 245,430
Futures contracts--net .............................................. 199,758 --
Options written--net ................................................ (13,287,766) --
-------------------------------
Total realized gain--net ............................................... 9,200,875 245,430
-------------------------------
Change in unrealized appreciation/depreciation on:
Investments--net .................................................... (8,588,494) 34,547,693
Futures contracts--net .............................................. (61,536) (5,058)
Options written--net ................................................ 3,380,481 (20,075,617)
-------------------------------
Total change in appreciation/depreciation--net ......................... (5,269,549) 14,467,018
-------------------------------
Total realized and unrealized gain--net ................................ 3,931,326 14,712,448
-------------------------------
Net Increase in Net Assets Resulting from Operations ................... $ 4,161,742 $ 16,117,163
===============================
+ Commencement of operations.
++ Dividends from affiliates $ 2,340 $ 8,488
===============================
See Notes to Financial Statements.
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005 13
Statements of Changes in Net Assets
For the Period For the Period
October 1, November 1,
2005 to 2004+ to
December 31, September 30,
Increase (Decrease) in Net Assets: 2005 2005
==================================================================================================================================
Operations
----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ......................................................... $ 230,416 $ 1,404,715
Realized gain--net ............................................................. 9,200,875 245,430
Change in unrealized appreciation/depreciation--net ............................ (5,269,549) 14,467,018
-------------------------------
Net increase in net assets resulting from operations ........................... 4,161,742 16,117,163
-------------------------------
==================================================================================================================================
Dividends & Distributions to Shareholders
----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ......................................................... (975,131) (660,000)
Realized gain--net ............................................................. (11,353,973) --
-------------------------------
Net decrease in assets resulting from dividends and distributions to
shareholders .................................................................. (12,329,104) (660,000)
-------------------------------
==================================================================================================================================
Common Stock Transactions
----------------------------------------------------------------------------------------------------------------------------------
Net proceeds from issuance of Common Stock ..................................... -- 133,509,000
Offering costs resulting from the issuance of Common Stock ..................... -- (279,600)
Redemption of Common Stock resulting from a repurchase offer ................... (37,476,977) --
-------------------------------
Net increase (decrease) in net assets resulting from Common Stock
transactions .................................................................. (37,476,977) 133,229,400
-------------------------------
==================================================================================================================================
Net Assets
----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ........................................ (45,644,339) 148,686,563
Beginning of period ............................................................ 148,786,571 100,008
-------------------------------
End of period* ................................................................. $ 103,142,232 $ 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. DECEMBER 31, 2005
Financial Highlights
For the Period For the Period
October 1, November 1,
2005 to 2004+ to
The following per share data and ratios have been derived December 31, September 30,
from information provided in the financial statements. 2005 2005
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ................................... $ 21.27 $ 19.10
-------------------------------
Investment income--net*** .............................................. .04 .20
Realized and unrealized gain--net ...................................... .70 2.10
-------------------------------
Total from investment operations ....................................... .74 2.30
-------------------------------
Less dividends and distributions:
Investment income--net .............................................. (.19) (.09)
Realized gain--net .................................................. (2.16) --
-------------------------------
Total dividends and distributions ...................................... (2.35) (.09)
-------------------------------
Offering costs resulting from the issuance of Common Stock ............. -- (.04)
-------------------------------
Net asset value, end of period ......................................... $ 19.66 $ 21.27
===============================
Market price per share, end of period .................................. $ 18.85 $ 20.38
===============================
==================================================================================================================================
Total Investment Return**
----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..................................... 4.18%@ 11.90%@
===============================
Based on market price per share ........................................ 4.25%@ 2.39%@
===============================
==================================================================================================================================
Ratios to Average Net Assets
----------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding interest expense ................................... 1.29%* 1.07%*
===============================
Expenses ............................................................... 1.29%* 1.13%*
===============================
Investment income--net ................................................. .76%* 1.10%*
===============================
==================================================================================================================================
Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ............................... $ 103,142 $ 148,787
===============================
Portfolio turnover ................................................. .69% 5.14%
===============================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
*** Based on average shares outstanding.
+ Commencement of operations.
@ Aggregate total investment return.
See Notes to Financial Statements.
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 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. 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. Effective October 1, 2005, the
Fund changed its year end to December 31, 2005. 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
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
16 S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005
Notes to Financial Statements (continued)
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 Fund's net assets plus
borrowings for investment purposes, but exclude any net assets attributable to
leveraging transactions. IQ has entered into a Subadvisory Agreement with
Merrill Lynch Investment Managers, L.P. ("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 investment
purposes, but exclude any net assets attributable to leveraging transactions.
There was no increase in the aggregate fees paid by the Fund for these services.
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005 17
Notes to Financial Statements (concluded)
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to ML & Co. and its
affiliates, including Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), an affiliate of IQ. Pursuant to that order, the Fund may retain
Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of IQ, as the
securities lending agent for a fee based on a share of the returns on investment
of cash collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by IQ
or its affiliates.
In addition, MLPF&S received $198 in commissions on the execution of portfolio
security transactions for the Fund for the period October 1, 2005 to December
31, 2005.
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 October 1, 2005 to December 31, 2005 were $831,326 and $47,532,239,
respectively.
Transactions in options written for the period October 1, 2005 to December 31,
2005 were as follows:
--------------------------------------------------------------------------------
Number of Premiums
Contracts Received
--------------------------------------------------------------------------------
Outstanding call options written,
beginning of period ......................... 353,416 $ 60,000
Options written .............................. 247,468 --
Options closed ............................... (353,416) (60,000)
--------------------------
Outstanding call options written,
end of period ............................... 247,468 $ --
==========================
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 October 1, 2005 to December 31,
2005 decreased 1,748,809 as a result of a repurchase offer and during the period
November 1, 2004 to September 30, 2005 increased 6,990,000 from shares sold.
5. Distributions to Shareholders:
The tax character of distributions paid during the periods October 1, 2005 to
December 31, 2005 and November 1, 2004 to September 30, 2005 was as follows:
--------------------------------------------------------------------------------
10/01/2005 11/01/2004+
to 12/31/2005 to 9/30/2005
--------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ........................ $ 1,652,960 $ 660,000
Net long-term capital gain ............. 10,676,144 --
------------------------------
Total distributions ...................... $12,329,104 $ 660,000
==============================
+ Commencement of operations.
As of December 31, 2005, the components of accumulated earnings on a tax basis
were as follows:
-------------------------------------------------------------------------------
Undistributed ordinary income -- net ....................... $2,459,562
Undistributed long-term capital gains -- net ............... --
----------
Total undistributed earnings -- net ........................ 2,459,562
Capital loss carryforward .................................. --
Unrealized gains -- net .................................... 4,830,239*
----------
Total accumulated earnings -- net .......................... $7,289,801
==========
* The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales, the
tax deferral of losses on straddles, and the realization for tax purposes
of unrealized gains/losses on certain futures contracts.
18 S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 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
December 31, 2005, and the related statements of operations and of changes in
net assets, and the financial highlights for the periods October 1, 2005 through
December 31, 2005 and November 1, 2004 (commencement of operations) through
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
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2005, by correspondence with the
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of S&P
500(R) GEARED(SM) Fund Inc. as of December 31, 2005, the results of its
operations, the changes in its net assets, and its financial highlights for the
periods October 1, 2005 through December 31, 2005 and November 1, 2004 through
September 30, 2005, in conformity with U.S. generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, NJ
February 17, 2006
Fund Certification (unaudited)
In September 2005, the Fund filed its Chief Executive Officer Certification for
the prior year with the New York Stock Exchange pursuant to Section 303A.12(a)
of the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distribution paid by S&P 500(R) GEARED Fund Inc. to shareholders of record on
November 22, 2005:
------------------------------------------------------------------------------
Short-Term Capital Gain Dividends for
Non-U.S. Residents ......................................... 3.50%*
------------------------------------------------------------------------------
* Represents the portion of the taxable ordinary income dividends eligible
for exemption from U.S. withholding tax for nonresident aliens and foreign
corporations.
Additionally, the Fund distributed long-term capital gains of $2.034936 per
share to shareholders of record on November 22, 2005.
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005 19
Automatic Dividend Reinvestment Plan
How the Plan Works -- The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by The Bank of New York (the
"Plan Agent"). Under the Plan, whenever the Fund declares a dividend,
participants in the Plan will receive the equivalent in shares of Common Stock
of the Fund. The Plan Agent will acquire the shares for the participant's
account either (i) through receipt of additional unissued but authorized shares
of the Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
Common Stock on the open market on the New York Stock Exchange or elsewhere. If,
on the dividend payment date, the Fund's net asset value per share is equal to
or less than the market price per share plus estimated brokerage commissions (a
condition often referred to as a "market premium"), the Plan Agent will invest
the dividend amount in newly issued shares. If the Fund's net asset value per
share is greater than the market price per share (a condition often referred to
as a "market discount"), the Plan Agent will invest the dividend amount by
purchasing on the open market additional shares. If the Plan Agent is unable to
invest the full dividend amount in open market purchases, or if the market
discount shifts to a market premium during the purchase period, the Plan Agent
will invest any uninvested portion in newly issued shares. The shares acquired
are credited to each shareholder's account. The amount credited is determined by
dividing the dollar amount of the dividend by either (i) when the shares are
newly issued, the net asset value per share on the date the shares are issued or
(ii) when shares are purchased in the open market, the average purchase price
per share.
Participation in the Plan -- Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by writing to the Plan Agent.
Benefits of the Plan -- The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares acquired
pursuant to the Plan receive voting rights. In addition, if the market price
plus commissions of the Fund's shares is above the net asset value, participants
in the Plan will receive shares of the Fund for less than they could otherwise
purchase them and with a cash value greater than the value of any cash
distribution they would have received. However, there may not be enough shares
available in the market to make distributions in shares at prices below the net
asset value. Also, since the Fund does not redeem shares, the price on resale
may be more or less than the net asset value.
Plan Fees -- There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders will
pay a pro rata share of any such commissions.
Tax Implications -- The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that may
be payable (or required to be withheld) on such dividends. Therefore, income and
capital gains may still be realized even though shareholders do not receive
cash. Participation in the Plan generally will not effect the tax-exempt status
of exempt interest dividends paid by the Fund. If, when the Fund's shares are
trading at a market premium, the Fund issues shares pursuant to the Plan that
have a greater fair market value than the amount of cash reinvested, it is
possible that all or a portion of the discount from the market value (which may
not exceed 5% of the fair market value of the Fund's shares) could be viewed as
a taxable distribution. If the discount is viewed as a taxable distribution, it
is also possible that the taxable character of this discount would be allocable
to all the shareholders, including shareholders who do not participate in the
Plan. Thus, shareholders who do not participate in the Plan might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.
Contact Information -- All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at The Bank of
New York, Church Street Station, P.O. Box 11258, New York, NY 10286-1258,
Telephone: 800-432-8224.
20 S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005
Officers and Directors
Number of IQ
Advisors-
Affiliate
Advised Funds Other Public
Position(s) Length of and Portfolios Directorships
Held with Time Overseen Held by
Name Address & Age Fund Served** Principal Occupation(s) During Past 5 Years By Director Director
====================================================================================================================================
Non-Interested Directors*
------------------------------------------------------------------------------------------------------------------------------------
Alan R. P.O. Box 9095 Director & 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: 58
------------------------------------------------------------------------------------------------------------------------------------
William J. P.O. Box 9095 Director & 2004 to Retired since November 2004; Chairman and Chief 6 None
Rainer Princeton, NJ Chairman of present Executive Officer, OneChicago, LLC, a designated
08543-9095 Nominating contract market (2001 to November 2004); Chairman,
Age: 59 and U.S. Commodity Futures Trading Commission
Corporate (1999 - 2001).
Governance
Committee
------------------------------------------------------------------------------------------------------------------------
* Each of the Non-Interested Directors is a member of the Audit Committee and the Nominating and Corporate
Governance Committee.
** Each Director will serve for a term of one year and until his successor is elected and qualifies, or his earlier
death, resignation or removal as provided in the Fund's Bylaws, charter or by statute.
====================================================================================================================================
Interested Director*
------------------------------------------------------------------------------------------------------------------------------------
Andrew J. P.O. Box 9095 Director 2005 to IQ Investment Advisors LLC, Chief Legal Officer since 7 None
Donohue Princeton, NJ present 2004; Global General Counsel, FAM and MLIM, since
08543-9095 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.
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005 21
Position(s) Length of
Held Time
Name Address & Age with Funds Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
------------------------------------------------------------------------------------------------------------------------------------
Mitchell P.O. Box 9011 President 2004 to IQ Investment Advisors LLC, President since April 2004; MLPF&S, First Vice
M. Cox Princeton, NJ present President, Head of Global Private Client Market Investments & Origination since
08543-9011 2003; MLPF&S, First Vice President, Head of Structured Products Origination and
Age: 40 Sales (2001 - 2003); MLPF&S, Director, Head of Structured Products Origination
(1997 - 2001).
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 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, Director, Global
Ferri Princeton, NJ President present Private Client Market Investments & Origination since 2006; MLPF&S, Vice President,
08543-9011 Global Private Client Market Investments & Origination in 2005; MLPF&S, Vice
Age: 30 President, Head Global Private Client Rampart Equity Derivatives (2004 - 2005);
MLPF&S, Vice President, Co-Head Global Private Client Domestic Analytic Development
(2002 - 2004); mPower Advisors LLC, Vice President, Quantitative Development
(1999 - 2002).
------------------------------------------------------------------------------------------------------------------------------------
Jay M. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Vice President and Assistant Treasurer since 2005;
Fife Princeton, NJ President present MLIM, Director since 2000; MLPF&S, Director (2000) and Vice President
08543-9011 and (1997 - 2000).
Age: 35 Assistant
Treasurer
------------------------------------------------------------------------------------------------------------------------------------
Colleen R. P.O. Box 9011 Vice 2005 to IQ Investment Advisors LLC, Vice President since 2005; MLPF&S, Director, Global
Rusch Princeton, NJ President present Private Client Market Investments & Origination since July 2005; MLIM, Director
08543-9011 and from January 2005 to July 2005; Vice President of MLIM (1998 - 2004).
Age: 38 Assistant
Secretary
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
The Bank of New York
101 Barclay Street -- 11 East
New York, NY 10286
NYSE Symbol
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.
22 S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005
Fundamental Periodic Repurchase Policy
The Board of Directors approved a fundamental policy whereby the Fund would
adopt an "interval fund" structure pursuant to Rule 23c-3 under the Investment
Company Act of 1940, as amended (the "1940 Act"). As an interval fund, the Fund
will make annual repurchase offers at net asset value (less repurchase fee not
to exceed 2%) to all Fund shareholders. The percentage of outstanding shares
that the Fund can repurchase in each offer will be established by the Fund's
Board of Directors shortly before the commencement of each offer, and will be
between 5% and 25% of the Fund's then outstanding shares.
The Fund has adopted the following fundamental policy regarding periodic
repurchases:
a) The Fund will make offers to repurchase its shares at annual (approximately
12-month) intervals pursuant to Rule 23c-3 under the 1940 Act ("Offers"). The
Board of Directors may place such conditions and limitations on an Offer, as may
be permitted under Rule 23c-3.
b) The repurchase request deadline for each Offer, by which the Fund must
receive repurchase requests submitted by shareholders in response to the most
recent Offer, will be determined by reference to the exercise date of the call
spreads and written call options that comprise the Fund's transactions (as
described in the Fund's prospectus) for an annual period; and will be the
fourteenth day prior to such exercise date; provided, that in the event that
such day is not a business day, the repurchase request deadline will be the
business day subsequent to the fourteenth day prior to the exercise date of the
call spreads and written call options (the "Repurchase Request Deadline").
c) The maximum number of days between a Repurchase Request Deadline and the next
repurchase pricing date will be fourteen days; provided that if the fourteenth
day after a Repurchase Request Deadline is not a business day, the repurchase
pricing date shall be the next business day (the "Repurchase Pricing Date").
d) Offers may be suspended or postponed under certain circumstances, as provided
for in Rule 23c-3. (For further details, see Note 4 to the Financial
Statements.)
Under the terms of the Offer for the most recent annual period, the Fund offered
to purchase up to 1,748,809 shares from shareholders at an amount per share
equal to the Fund's net asset value per share calculated as of the close of
business of the New York Stock Exchange on November 2, 2005, ten business days
after Wednesday, October 19, 2005, the Repurchase Request Deadline. As of
November 2, 2005, 1,748,809 shares, or 25% of the Fund's outstanding shares,
were purchased by the Fund at $21.45 per share (subject to a repurchase fee of
0.10% of the net asset value per share), the Fund's net asset value per share
was determined as of 4:00 p.m. EST, Wednesday, November 2, 2005.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
Contact Information
For more information regarding the Fund, please visit www.IQIAFunds.com or
contact us at 1-877-449-4742.
S&P 500(R) GEARED(SM) FUND INC. DECEMBER 31, 2005 23
[LOGO] IQ
INVESTMENT
ADVISORS www.IQIAFunds.com
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 at
www.IQIAFunds.com/proxyvoting.asp or upon request by calling toll-free
1-877-449-4742 or through the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies relating to
securities held in the Fund's portfolio during the most recent 12-month period
ended June 30 is available (1) at www.IQIAFunds.com/proxyvoting.asp; and (2) on
the Securities and Exchange Commission's Web site at http://www.sec.gov.
S&P 500(R) GEARED(SM) Fund Inc.
Box 9011
Princeton, NJ 08543-9011
#IQGRE -- 12/05
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-877-449-4742.
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Alan R.
Batkin and (2) Steven W. Kohlhagen.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending December 31, 2005 - $19,000
Fiscal Year Ending December 31, 2004 - N/A
(b) Audit-Related Fees - Fiscal Year Ending December 31, 2005 - $0
Fiscal Year Ending December 31, 2004 - $0
(c) Tax Fees - Fiscal Year Ending December 31, 2005 - $6,500
Fiscal Year Ending December 31, 2004 - N/A
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending December 31, 2005 - $0
Fiscal Year Ending December 31, 2004 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending December 31, 2005 - $5,034,771
Fiscal Year Ending December 31, 2004 - N/A
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $919,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
Alan R. Batkin
Steven W. Kohlhagen
Paul Glasserman
William J. Rainer
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors has delegated to IQ Investment Advisors
LLC, and/or any sub-investment adviser approved by the Board of Directors (the
"Investment Adviser") authority to vote all proxies relating to the Fund's
portfolio securities. The Investment Adviser has adopted policies and procedures
("Proxy Voting Procedures") with respect to the voting of proxies related to the
portfolio securities held in the account of one or more of its clients,
including a Fund. Pursuant to these Proxy Voting Procedures, the Investment
Adviser's primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its shareholders, and to
act in a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers the
interests of its clients, including the Funds, and not the interests of the
Investment Adviser, when voting proxies and that real (or perceived) material
conflicts that may arise between the Investment Adviser's interest and those of
the Investment Adviser's clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment Adviser
has formed a Proxy Voting Committee (the "Committee"). The Committee is
comprised of the Investment Adviser's Chief Investment Officer (the "CIO"), one
or more other senior investment professionals appointed by the CIO, portfolio
managers and investment analysts appointed by the CIO and any other personnel
the CIO deems appropriate. The Committee will also include two non-voting
representatives from the Investment Adviser's Legal department appointed by the
Investment Adviser's General Counsel. The Committee's membership shall be
limited to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research responsibilities for
the Investment Adviser's affiliates may serve as a member of the Committee or
participate in its decision making (except to the extent such person is asked by
the Committee to present information to the Committee, on the same basis as
other interested knowledgeable parties not affiliated with the Investment
Adviser might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes are
consistent with the best interests of those clients and are free from
unwarranted and inappropriate influences. The Committee establishes general
proxy voting policies for the Investment Adviser and is responsible for
determining how those policies are applied to specific proxy votes, in light of
each issuer's unique structure, management, strategic options and, in certain
circumstances, probable economic and other anticipated consequences of alternate
actions. In so doing, the Committee may determine to vote a particular proxy in
a manner contrary to its generally stated policies. In addition, the Committee
will be responsible for ensuring that all reporting and recordkeeping
requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring proxy
issue is not suitable for general voting policies and requires a case-by-case
determination. In such cases, the Committee may elect not to adopt a specific
voting policy applicable to that issue. The Investment Adviser believes that
certain proxy voting issues require investment analysis -- such as approval of
mergers and other significant corporate transactions -- akin to investment
decisions, and are, therefore, not suitable for general guidelines. The
Committee may elect to adopt a common position for the Investment Adviser on
certain proxy votes that are akin to investment decisions, or determine to
permit the portfolio manager to make individual decisions on how best to
maximize economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that the
Investment Adviser will generally seek to vote proxies over which the Investment
Adviser exercises voting authority in a uniform manner for all the Investment
Adviser's clients, the Committee, in conjunction with a Fund's portfolio
manager, may determine that the Fund's specific circumstances require that its
proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an independent
adviser that specializes in providing a variety of fiduciary-level proxy-related
services to institutional investment managers, plan sponsors, custodians,
consultants, and other institutional investors. The services provided to the
Investment Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also assist the
Fund in fulfilling its reporting and recordkeeping obligations under the
Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For instance,
under the Proxy Voting Procedures, the Investment Adviser generally will not
seek to vote proxies related to portfolio securities that are on loan, although
it may do so under certain circumstances. In addition, the Investment Adviser
will vote proxies related to securities of foreign issuers only on a best
efforts basis and may elect not to vote at all in certain countries where the
Committee determines that the costs associated with voting generally outweigh
the benefits. The Committee may at any time override these general policies if
it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies
in respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent fiduciary,
the powers of the Committee shall pass to a subcommittee, appointed by the CIO
(with advice from the Secretary of the Committee), consisting solely of
Committee members selected by the CIO. The CIO shall appoint to the
subcommittee, where appropriate, only persons whose job responsibilities do not
include contact with the Client and whose job evaluations would not be affected
by the Investment Adviser's relationship with the Client (or failure to retain
such relationship). The subcommittee shall determine whether and how to vote all
proxies on behalf of the Investment Adviser's clients or, if the proxy matter
is, in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee determines to
alter the Investment Adviser's normal voting guidelines or, on matters where the
Investment Adviser's policy is case-by-case, does not follow the voting
recommendation of any proxy voting service or other independent fiduciary that
may be retained to provide research or advice to the Investment Adviser on that
matter, no proxies relating to the Client may be voted unless the Secretary, or
in the Secretary's absence, the Assistant Secretary of the Committee concurs
that the subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties.
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring proxy
issues that are not expected to involve unusual circumstances. These policies
are guidelines only, and the Investment Adviser may elect to vote differently
from the recommendation set forth in a voting guideline if the Committee
determines that it is in a Fund's best interest to do so. In addition, the
guidelines may be reviewed at any time upon the request of a Committee member
and may be amended or deleted upon the vote of a majority of Committee members
present at a Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with respect
to the following proxy issues:
o Proposals related to the composition of the Board of Directors
of issuers other than investment companies. As a general
matter, the Committee believes that a company's Board of
Directors (rather than shareholders) is most likely to have
access to important, nonpublic information regarding a
company's business and prospects, and is therefore
best-positioned to set corporate policy and oversee
management. The Committee, therefore, believes that the
foundation of good corporate governance is the election of
qualified, independent corporate directors who are likely to
diligently represent the interests of shareholders and oversee
management of the corporation in a manner that will seek to
maximize shareholder value over time. In individual cases, the
Committee may look at a nominee's history of representing
shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the
interests of shareholders and provide an independent view on
the propriety of financial reporting decisions of corporate
management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the
Committee may look at an auditors' history of representing
shareholder interests as auditor of other companies, to the
extent the Committee deems relevant.
o Proposals related to management compensation and employee
benefits. As a general matter, the Committee favors disclosure
of an issuer's compensation and benefit policies and opposes
excessive compensation, but believes that compensation matters
are normally best determined by an issuer's board of
directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set
arbitrary restrictions on compensation or benefits will,
therefore, generally not be supported.
o Proposals related to requests, principally from management,
for approval of amendments that would alter an issuer's
capital structure. As a general matter, the Committee will
support requests that enhance the rights of common
shareholders and oppose requests that appear to be
unreasonably dilutive.
o Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the
Committee opposes poison pill provisions.
o Routine proposals related to requests regarding the
formalities of corporate meetings.
o Proposals related to proxy issues associated solely with
holdings of investment company shares. As with other types of
companies, the Committee believes that a fund's Board of
Directors (rather than its shareholders) is best-positioned to
set fund policy and oversee management. However, the Committee
opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective that
the Investment Company Act envisions will be approved directly
by shareholders.
o Proposals related to limiting corporate conduct in some manner
that relates to the shareholder's environmental or social
concerns. The Committee generally believes that annual
shareholder meetings are inappropriate forums for discussion
of larger social issues, and opposes shareholder resolutions
"micromanaging" corporate conduct or requesting release of
information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the
Committee is generally supportive of proposals to require
corporate disclosure of matters that seem relevant and
material to the economic interests of shareholders, the
Committee is generally not supportive of proposals to require
disclosure of corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of December 31, 2005.
(a)(1) Messrs. 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 Director since 2006 and was a Vice President of MLIM
from 1999 to 2006. 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 December 31, 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
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
------------- -------------
Vincent J
Costa, CFA 15 27 34 1* 3 2
$ 6,666,116 $ 11,986,018 $ 39,080,035 $ 186,423 $ 1,214,547 $ 1,899,270
Jonathan Clark 15 27 34 1* 3 2
$ 6,666,116 $ 11,986,018 $ 39,080,035 $ 186,423 $ 1,214,547 $ 1,899,270
Debra L
Jelilian 15 27 34 1* 3 2
$ 6,666,116 $ 11,986,018 $ 39,080,035 $ 186,423 $ 1,214,547 $ 1,899,270
* 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 December 31, 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 December 31, 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 -
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Period (a) Total (b) Average Price (c) Total Number of Shares (d) Maximum Number (or
Number of Paid per Share Purchased as Part of Approx. Dollar Value) of
Shares Publicly Announced Plans Shares that May Yet Be
Purchased or Programs Purchased Under the Plans or
Programs
----------------------------------------------------------------------------------------------------------------------
June 1-30, 2005
----------------------------------------------------------------------------------------------------------------------
July 1-31, 2005
----------------------------------------------------------------------------------------------------------------------
August 1-31, 2005
----------------------------------------------------------------------------------------------------------------------
September 1-30, 2005
----------------------------------------------------------------------------------------------------------------------
October 1-31, 2005
----------------------------------------------------------------------------------------------------------------------
November 1-30, 2005 1,748,809 $21.45 per Share(1) 1,748,809(2) 0
----------------------------------------------------------------------------------------------------------------------
December 1-31, 2005
----------------------------------------------------------------------------------------------------------------------
Total: 1,748,809 $21.45 per Share(1) 1,748,809(2) 0
----------------------------------------------------------------------------------------------------------------------
(1) Subject to a repurchase fee of 0.10% of the net asset value per share.
(2) On September 16, 2005, the repurchase offer was announced to repurchase up
to 25% of outstanding shares. The expiration date of the offer was October 19,
2005. The registrant may conduct annual repurchases for between 5% and 25% of
its outstanding shares pursuant to Rule 23c-3 under the Investment Company Act
of 1940, as amended.
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
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: February 21, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Mitchell M. Cox
----------------------------
Mitchell M. Cox,
Chief Executive Officer of
S&P 500(R) GEARED(SM) Fund Inc.
Date: February 21, 2006
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
S&P 500(R) GEARED(SM) Fund Inc.
Date: February 21, 2006